Roth v. Bank of the Com.

• Decision Date: 01 September 1978
• Docket Number: No. 77-1539,77-1539
• Citation: 583 F.2d 527
• Parties: Lawrence ROTH et al., Plaintiffs-Appellees, v. BANK OF THE COMMONWEALTH, Defendant-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 527

583 F.2d 527

Lawrence ROTH et al., Plaintiffs-Appellees, v. BANK OF THE COMMONWEALTH, Defendant-Appellant.

No. 77-1539.

United States Court of Appeals, Sixth Circuit.

Argued Dec. 9, 1977.

Decided Sept. 1, 1978.

Sheldon S. Toll, Honigman, Miller, Schwartz & Cohn, Detroit, Mich., for defendant-appellant.

Russell J. Martin, Berkey, Erickson, Rentrop & Martin, Bloomfield Hills, Mich., for plaintiffs-appellees.

Before PHILLIPS, Chief Judge, and WEICK and ENGEL, Circuit Judges.

ENGEL, Circuit Judge.

The principal and, we hold, controlling issue in this appeal is whether the Anti-Injunction Act, 28 U.S.C. § 2283 (1976), prevents a federal district court from enjoining the prosecution by the federal court defendant of In personam state actions where those actions were commenced after the institution of the federal suit but before the preliminary injunction was issued and where it is held that none of the three express exceptions in the Anti-Injunction Act applies. In granting the preliminary injunctive relief, the trial judge relied primarily upon Barancik v. Investors Funding Corp., 489 F.2d 933 (7th Cir. 1973). We decline to follow Barancik and accordingly reverse.

The individual plaintiffs in the district court action were purchasers of certain investment contracts for the ownership and maintenance of polled Hereford cattle from the defendant Calderone-Curran Ranches, Inc. ("the ranch"). Between August 1970 and late 1973 investments in the cattle were publicly offered by the ranch pursuant to four separate registrations with the Securities and Exchange Commission and accompanying prospectuses. The four offerings were similar in nature except that the cost of the cattle and maintenance charges for the animals varied under each investment contract. Under the investment scheme the notes to the ranch, which were themselves secured by the animals purchased, were in turn pledged or assigned to the defendant Bank of the Commonwealth ("the bank") by the ranch as collateral for substantial loans advanced by the bank to the ranch between 1969 and 1973.

The ranch filed a petition for an arrangement under Chapter XI of the Bankruptcy Act on August 8, 1975 and was adjudicated a bankrupt on August 5, 1976. The bank is the principal secured creditor of the ranch.

On July 23, 1976 the plaintiffs commenced an action in the District Court for the Eastern District of Michigan under the Securities Act of 1933, 15 U.S.C. §§ 77a-77aa (1976), the Securities Act of 1934, 15 U.S.C. §§ 78a-78kk (1976), Rule 10b-5 of the Securities and Exchange Commission, and the security laws of the various states in which the securities were sold. Class relief for persons similarly situated was also sought.

Plaintiffs primarily contended that the numerous defendants, including the ranch and bank, utilized, in connection with the offer and sale of the investment contracts, misleading prospectuses that omitted material facts concerning the ranch's financial condition, its operating practices, and the activities of certain insiders and that they engaged in certain other fraudulent practices.

Plaintiffs alleged that the bank itself participated in the scheme by concealing the true financial state of the ranch in order to keep the plaintiffs paying on the notes. Plaintiffs claimed in their complaint that the bank knew or should have known about the material omissions of fact in the prospectuses and that its knowledge of and participation in the allegedly illicit financing scheme deprived it of its status as a holder in due course of the notes. The complaints requested compensatory and punitive damages and an injunction restraining the defendant bank and others from enforcing the notes against the investors.

On August 26, 1976 certain of the defendants, but not the bank, filed a motion to stay all proceedings instituted by the plaintiffs in view of the pendency of a similar action in the United States District Court for the Western District of New York.

This action was essentially identical except that the putative plaintiff class was somewhat smaller because the suit focused upon only one of the four groups of allegedly misleading prospectuses. On August 27, the plaintiffs themselves filed a motion for a preliminary injunction to restrain the bank from instituting any suits in state or federal courts to collect on the promissory notes connected with the litigation. Upon the bank's representation that it did not intend to initiate any suits for some time, that motion was adjourned from September to November 1, 1976. On September 23, the court granted the defendants' motion for a stay pending determination by the United States District Court for the Western District of New York of the companion case. The order did not, however, stay any contemplated actions by the bank for deficiency judgments on the promissory notes. The bank thereafter notified the court that it did not plan to initiate suits for some time beyond November 1, and upon the agreement of the parties, the hearing date for the preliminary injunction motion was postponed indefinitely.

In early March 1977, the plaintiffs, having been informed by the bank that collection suits would be initiated in the near future, sought an Ex parte temporary restraining order against the institution of the suits, their basis for temporary relief being their perceived need to conduct discovery necessary to support their previous motion for a preliminary injunction.

The court denied this application but scheduled an in-chambers conference on March 14, 1977. Plaintiffs do not dispute the bank's representation that it informed both the court and opposing counsel during that conference that it would commence suits unless immediately restrained. However, the court denied injunctive relief at that time because the bank suggested that the previous stay order precluded such relief. It granted the parties two weeks within which to file briefs concerning this issue and the possible application of the Anti-Injunction Act and scheduled a second hearing for March 28, 1977. After the chambers conference in early March, but before the adjourned hearing on March 28, the bank commenced approximately 70 suits in state and federal courts for the balances due on the numerous promissory notes.

The scheduled hearing was held on March 28 and on April 4, 1977 the court issued a temporary restraining order enjoining the bank from proceeding in the state court actions. On July 8, 1977 the district court issued a memorandum opinion which was followed by a preliminary injunction prohibiting the defendant bank from prosecuting any separate civil actions against the named plaintiffs for recovery of deficiencies on any of the notes involved in the securities suit. This appeal followed.

The trial judge applied a balancing test in determining whether the traditional requirements for the issuance of preliminary injunctive relief had been met. With respect to the likelihood of success on the merits, the court observed:

While plaintiffs have not shown that they are certain to prevail on the merits of their defenses in the state court actions, or even that they are likely to prevail in such actions, they have established that the issues they have raised are "fair ground for litigation," in light of the other considerations previously adverted to in this Opinion. This Court concludes then that the balance of equities clearly favors the issuance of the injunction prayed for. ¹

As to the claim that injunctive relief was barred by the Anti-Injunction Act, the district judge adopted the rationale of the Seventh Circuit in Barancik v. Investors Funding Corp., supra. In the alternative he held that even if Section 2283 were applicable to such an injunction it would not act as a bar because the restraining order was necessary "in aid of this court's jurisdiction." The reason assigned for granting the temporary restraining order was a desire to avoid duplicative proceedings and inconsistent judicial rulings which he concluded might result by permitting the federal action to proceed independently of the state actions commenced by the bank:

To allow the defendant bank to continue in its efforts to prosecute the defaults on these promissory notes would compel the plaintiffs to raise their federal securities law action as a defense and the question of defendant's liability under the Securities Acts of 1933 and 1934 would be dispersed throughout the state court system. This would essentially nullify the underlying purpose of this Court's order.

In granting preliminary relief, the court further observed:

Plaintiffs argue that having to defend the numerous state actions contemplated by the Bank would inflict irreparable harm upon them. If the state courts suits were permitted to proceed, defense counsel in those cases (individuals representing plaintiffs here) would be forced to engage in time-consuming and costly duplication of discovery. In view of the similarity of legal issues that would arise in each of the suits (assuming that each maker would raise securities issues as a defense to the notes), much of the discovery would be clearly multiplicitous and duplicitous. Apart from the infliction of significant time and monetary expense on the plaintiffs if they are compelled to defend individual actions in state courts, the Court sees numerous other difficulties that are not remediable by money damages. Stays already issued by this Court and the Bankruptcy Court significantly complicate the issue. As defendants in the state courts, plaintiffs here would necessarily have to engage in the kind of discovery currently prohibited by the various stay orders. It might well defeat the purpose of those stays to permit such discovery, yet it is clearly necessary to a proper defense. Affirmative relief for violations of the Securities Exchange Act of 1934 is not available in state court, thus duplicitous litigation is unavoidable. 15 U.S.C. §...