Ruskay v. Waddell

• Decision Date: 17 February 1977
• Docket Number: No. 213,D,213
• Citation: 552 F.2d 392
• Parties: Sophie RUSKAY et al., Plaintiffs-Appellants, v. Chauncey L. WADDELL et al., Defendants-Appellees. ocket 76-7270.
• Court: U.S. Court of Appeals — Second Circuit

Page 392

552 F.2d 392

Sophie RUSKAY et al., Plaintiffs-Appellants, v. Chauncey L. WADDELL et al., Defendants-Appellees.

No. 213, Docket 76-7270.

United States Court of Appeals Second Circuit.

Argued Nov. 24, 1976.

Decided Feb. 17, 1977.

Abraham L. Pomerantz, New York City (Pomerantz Levy Haudek & Block, William E. Haudek, New York City, of counsel), for plaintiffs-appellants.

Albert D. Jordan, New York City (Cole & Deitz, Martin S. Berglas, Robert M. Kerrigan, New York City, of counsel), for defendants-appellees Merriman, Roach, Valicenti and Waddell & Reed, Inc.

Marvin Schwartz, New York City (Sullivan & Cromwell, Susan J. McCone, New York City, of counsel), for defendant-appellee Chauncey L. Waddell.

Kelley Drye & Warren, New York City, on the brief, for defendant-appellee United Funds, Inc.

Before MANSFIELD, VAN GRAAFEILAND and MESKILL, Circuit Judges.

MESKILL, Circuit Judge:

This case arises out of the sale of the stock of an investment advisory company, a class of transaction that has spawned more than its share of unusually complex litigation. The instant appeal, the latest chapter in a series of class and stockholder actions concerning a large mutual fund, is no exception.

The mutual fund in question is United Funds, Inc. ("United"). Prior to 1969, the investment advisor of United was Waddell & Reed, Inc. ("W&R"). In that year, W&R sold 97 percent of its outstanding shares to Continental Investment Corporation ("CIC"). CIC then merged W&R into one of its wholly-owned subsidiaries, CWR Corporation, whose name was changed to Waddell & Reed ("New W&R").

The investment advisory contract was terminated by operation of law when the sale was made. 15 U.S.C. § 80a-15(a)(4). The sale was thus made conditional upon the reinstatement, by United's shareholders, of the contract with New W& R. In June, 1969, this approval was duly given.

Prior to this reorganization, two shareholder actions (the "Horenstein-Ruskay actions") were begun in federal court, one brought by Mrs. Ruskay, who is the plaintiff in the instant action as well. ¹ In substance, these actions alleged that W&R had illegally diverted the brokerage business of United to a wholly-owned subsidiary of W&R, Kansas City Securities Corporation ("KCSC"). They also alleged that United's account had been "churned" and that W&R had appropriated "give-ups" ² which properly belonged to United. The return of all these profits, allegedly amounting to several million dollars, was demanded. While this action was pending, the sale to CIC was announced. With that development, the theory of the action was changed by amending the complaint to allege that the price paid by CIC for W&R stock represented, in part, the profits realized from the breaches of fiduciary obligations set forth in the original complaints. The actions now sought recovery from W&R on a theory of constructive trust. In December, 1969, both The law governing the sale of an investment advisor's stock at that time was expressed in Rosenfeld v. Black, 319 F.Supp. 891 (S.D.N.Y.1970). In that case, it was held that the sale of such stock for whatever the market would pay, absent any specific wrongdoing by the advisor, was entirely proper, and did not render the selling stockholder accountable to the fund. See also SEC v. Insurance Securities, 254 F.2d 642 (9th Cir.), cert. denied, 358 U.S. 823, 79 S.Ct. 38, 3 L.Ed.2d 64 (1958).

of these actions were settled for $650,000. A release was executed in October, 1970.

The following year, the decision of the district court was reversed, Rosenfeld v. Black, 445 F.2d 1337 (2d Cir. 1971) (Friendly, J.), cert. dismissed under Rule 60, 409 U.S. 802, 93 S.Ct. 24, 34 L.Ed.2d 62 (1972). Shortly thereafter, Mrs. Ruskay brought a second derivative action. This time, the complaint alleged, in keeping with Rosenfeld, that the excess of the price paid for W&R over its net asset value, approximately $62,000,000, represented a sale of W& R's fiduciary position. The defendants moved for summary judgment on the grounds that the settlement of the prior actions barred these suits on grounds of res judicata and release. The district court, Metzner, J., granted the motion, 342 F.Supp. 264 (S.D.N.Y.1972), and this appeal followed. We affirm.

As part of the settlement of the 1969 actions approved by Judge Lasker pursuant to the requirements of Rule 23.1, ³ a release was executed in favor of W&R and the individual defendants. In relevant part, it read:

United Funds, Inc., a Delaware corporation having its principal office and place of business at 20 West 9th Street, Kansas City, Missouri, for good and sufficient consideration, the receipt and adequacy of which is hereby acknowledged, does hereby release and forever discharge Waddell & Reed, Inc., a New York corporation having its principal office and place of business at 20 West 9th Street, Kansas City, Missouri, and Kansas City Securities Corporation, a Missouri corporation having its principal office and place of business at 20 West 9th Street, Kansas City, Missouri, their respective directors, officers, agents and employees and all individual defendants in the above entitled actions, including Chauncey L. Waddell, Cornelius Roach, Joe Jack Merriman and Robert W. Wagner and their respective heirs, executors, administrators and assigns of and from any and all claims, demands or causes of action arising at any time from the beginning of the world to the date of these presents the undersigned, its successors or assigns, had, now has or may hereafter have against the aforementioned released parties, or any one or more of them, for or by reason of any of the matters or transactions recited or described in the complaints, supplemental complaints and/or other pleadings filed by the plaintiffs in the above entitled actions saving and reserving, however, the obligations of the defendants as set forth in the Stipulation of Settlement in these actions. (emphasis added)

Appellants vigorously urge that, despite the clear language of this release, it is operative only as to the specific claims they were pressing at the time of settlement. This contention is devoid of merit. ⁴

In executing this release and paying out a substantial amount of money, the appellees sought more than relief from the particular allegations involving KCSC which were the focus of the lawsuit. The affairs of W&R and CIC had already given rise to a flood of litigation in the Southern District and the state courts of Delaware and New York. It was certainly reasonable and businesslike to seek finally to settle any allegations of wrongdoing arising out of the sale of W&R, in order that there would no longer be a cloud over the transaction. As the district court found, this was the precise intent of the settling parties. 342 F.Supp. at 271. This is the clear import of the language "any and all claims, demands or causes of action . . . for or by reason of any of the matters or transactions recited or described in the complaints, supplemental complaints, and/or other pleadings . . . ." Appellants have not advanced any reason for a narrow construction of this broad language. ⁵

Advised by highly competent counsel, the plaintiffs made an informed decision to grant repose to the defendants in return for a substantial sum. ⁶ In hindsight, the bargain appears to have been a bad one for the plaintiffs. Had they known then what they know now, it is likely that more money would have been demanded before a compromise was reached. However, the understandable desire of the plaintiffs for a larger recovery in no way limits the scope of the release they gave in an arms-length transaction. As Judge Pollack has recently stated, in determining the scope of a release similar to this one:

Plaintiffs' claims herein, arising as they do out of a controversy pre-dating the execution of the release, might have been adjudicated at the time of its execution. Instead, plaintiff made an intelligent and knowledgeable choice to forego litigation in favor of compromise. His execution of a valid release bars his claims herein.

Mittendorf v. J. R. Williston & Beane, 372 F.Supp. 821, 836 (S.D.N.Y.1974).

In construing the scope of this release, we are to give effect to the intent of the parties. Zenith Radio Corp. v. Hazeltine Research, 401 U.S. 321, 342-48, 91 S.Ct. 795, 28 L.Ed.2d 77 (1971). Any fair reading of that intent, as demonstrated by the language of the release itself and the circumstances There can be no question that the sale of W&R to CIC was one of the transactions recited in the pleadings, and that the current claim arises out of it. See First Nat. Bank of Cincinnati v. Pepper, 547 F.2d 708, 716 (2d Cir. 1976) (Friendly, J.); Panichella v. Pa. R. R., 268 F.2d 72, 74-75 (3d Cir. 1959), cert. denied, 361 U.S. 932, 80 S.Ct. 370, 4 L.Ed.2d 353 (1960). It would have been a simple matter to except the claim now asserted from the blanket language of release. ⁷ Cf. United States v. Allegheny-Ludlum Industries, 517 F.2d 826, 852 (5th Cir.), cert. denied, 425 U.S. 944, 96 S.Ct. 1684, 48 L.Ed.2d 187 (1976). The absence of any such reservation leads us to the conclusion that none was intended. The case is similar to Dura Elec. Lamp Co. v. Westinghouse Elec. Corp., 249 F.2d 5 (3d Cir. 1957), which concerned the scope of a similar release. In that case, Judge Goodrich stated:

surrounding its execution, supports the conclusion that the plain meaning of the release bars the instant action.

It is to be noted that the language of the release is as general as language can be. There is nothing by which it may be interpreted as a covenant not to sue. There is nothing which even hints at a reservation of rights. There is nothing in the facts here which looks to a reexamination of the release based upon fraud or mutual mistake or anything of the sort. The transaction was one conducted between lawyers so we do not have an instance where a court may strive to extricate an uninformed layman from the...