Salomon Bros., Inc. v. West Virginia State Bd. of Investments

• Decision Date: 24 April 1990
• Citation: 575 N.Y.S.2d 993,152 Misc.2d 289
• Court: New York Supreme Court
• Parties: SALOMON BROTHERS, INC., Morgan Stanley & Co., Inc., Goldman Sachs & Co., Greenwich Capital Markets, Inc., and County Natwest Government Securities, Inc., Plaintiffs, v. The WEST VIRGINIA STATE BOARD OF INVESTMENTS, and the State of West Virginia, each in its own capacity and as representative of the participants in the Consolidated Fund, and the Consolidated Fund, Defendants.

Page 993

575 N.Y.S.2d 993

152 Misc.2d 289

SALOMON BROTHERS, INC., Morgan Stanley & Co., Inc., Goldman Sachs & Co., Greenwich Capital Markets, Inc., and County Natwest Government Securities Inc., Plaintiffs, v. The WEST VIRGINIA STATE BOARD OF INVESTMENTS, and the State of West Virginia, each in its own capacity and as representative of the participants in the Consolidated Fund and the Consolidated Fund, Defendants.

Supreme Court, New York County IAS, Part 11.

April 24, 1990.

Wachtell, Lipton, Rosen & Katz, for Salomon Brothers, Inc., Sullivan & Cromwell, for Goldman, Sachs & Co., Davis Polk & Wardwell, for Morgan Stanley & Co., Inc., New York City.

Herzfeld & Rubin, P.C. (Herbert Rubin, of counsel), Wolff Adris (Mary Lee Wolff, of counsel), of the Tennessee Bar, admitted pro hac vice, and Roger Tompkins, Atty. Gen. of the State of W. Va. (Thomas J. Gillooly, of counsel), admitted pro hac vice, for defendants.

HAROLD BAER, Jr., Justice.

Plaintiffs, five prominent dealers in U.S. Government securities, brought this action seeking a declaratory judgment of non-liability to defendants on any cause of action within this Court's jurisdiction. Defendants now move to dismiss the action for failure to state a claim and on the basis of forum non conveniens. Since this matter was begun, two plaintiffs have settled, leaving Salomon Brothers, Inc., Morgan Stanley & Co., Inc. and Goldman, Sachs & Co. to carry on the fight. A related action is pending in the United States District Court for the Southern District of West Virginia.

The events that have given rise to this action can be succinctly stated. The West Virginia State Board of Investments ("Investment Board") directed the investment of State and local government funds through the Consolidated Fund. The Investment Board engaged in numerous transactions in U.S. Government securities through plaintiff dealers. Vast sums of money were involved. The staff of the State Treasurer's Office was designated by the Investment Board to serve as money managers for the Consolidated Fund. It appears that the Investment Board and its managers succeeded for a time in reaping large financial rewards for the Fund through their investments in U.S. Government securities. At a certain point, however, things went sour in dramatic fashion: it is claimed that over $100 million were lost, with the severity of the losses having been increased by a cover-up engaged in by State officials. A scandal erupted, which produced a bill of impeachment against the State Treasurer, his resignation just prior to his trial and a cleaning house among the money managers in the Treasurer's Office.

The upheaval also generated angry glances directed at plaintiffs and other dealers by State officials. The State began to consider instituting suit against plaintiffs and let the plaintiffs know that. The dealers, perhaps foreseeing and certainly worried about what the future held in store for them in West Virginia, decided upon a pre-emptive strike. They instituted this action for a declaratory judgment of non-liability before West Virginia was able to act. ¹ The State's anger at the dealers was transformed three days later into two actions in State court against the dealers. The State therein claims that the dealers misled the money managers, described as unsophisticated and inexperienced, into making highly speculative and unsound investments in violation of State investment policy. The State asserts securities law violations, breach of fiduciary duty, fraud and other wrongs. Later, the dealers brought another declaratory judgment action in the U.S. District Court for the Southern District of New York. At that point, the investment disaster in West Virginia had spawned four separate actions in two states. Subsequently, the West Virginia state actions were removed to federal court in that state. In March 1990, the New York federal action was transferred to West Virginia. In the wake of this most recent development, the dealers contend even more urgently than before that this Court should constitute the sole battleground for this controversy.

This Court has discretion whether or not to assume jurisdiction over an action for a declaratory judgment. CPLR § 3001; James v. Alderton Dock Yards, Ltd., 256 N.Y. 298, 305, 176 N.E. 401 (1931). I am called upon here to exercise my discretion in a context that is, so far as the research of the parties here disclosed, without precise precedent in this state.

In the long history of Anglo-American law, the declaratory judgment action is, comparatively speaking, new-born. The action was introduced in preliminary form only late in the 19th century and in New York in the Civil Practice Act in 1921. 3 J. Weinstein, H. Korn & A. Miller, New York Civil Practice p 3001.01 (1989). The federal Declaratory Judgment Act (now 28 U.S.C. § 2201) was enacted in 1934. 6A J. Moore, Federal Practice pp 57.01[2], 57.03 (2d ed. 1989). This form of action was felt to be necessary to provide a remedy in situations in which the traditional forms of action had proven to be inadequate, a fact which it is important to keep in mind.

The principal purpose of the declaratory judgment is to provide a means by which the parties to a legal relationship may obtain a resolution of uncertainties about current, continuing or prospective obligations between them. "The general purpose of the declaratory judgment is to serve some practical end in quieting or stabilizing an uncertain or disputed jural relation either as to present or prospective obligations." James v. Alderton Dock Yards, Ltd., supra, 256 N.Y. at 305, 176 N.E. 401. Referring to the federal act, one court said that "[i]t was the congressional intent to avoid accrual of avoidable damages to one not certain of his rights and to afford him an early adjudication without waiting until his adversary should see fit to begin suit, after damage had accrued." E. Edelmann & Co. v. Triple-A Specialty Co., 88 F.2d 852, 854 (7th Cir.), cert. denied, 300 U.S. 680, 57 S.Ct. 673, 81 L.Ed. 884 (1937). Other aims of the declaratory judgment likewise reflect this "potential, prophylactic character" of the remedy (6A J Moore, supra, at p. 57-22). See E. Borchard, Declaratory Judgments 280-89 (2d ed. 1941).

The situation with which I am presented, however, is quite different from the archetype. The dealers are not involved in a current relationship with the Investment Board or the State nor is there the prospect of one. There is no dispute between the parties over their respective duties now or in the future. Prior to the institution of this suit there were no damages accruing to plaintiffs because of action by the defendants. No claim asserted by defendants impaired any property right of plaintiffs. There was and is no group of persons or entities situated similarly to the dealers whose relationships with defendants might be clarified by a judgment in this case. This case simply involves on a grander scale what the average tort case does--a claim by a party injured in the past for damages for that injury. The liability, if any, is for past acts. Cf. Automated Ticket Systems, Ltd. v. Quinn, 90 A.D.2d 738, 455 N.Y.S.2d 799 (1st Dep't 1982), aff'd, 58 N.Y.2d 949, 460 N.Y.S.2d 533, 447 N.E.2d 82 (1983). This is not, in my judgment, the kind of situation for which the declaratory judgment was developed.

The dealers had a traditional remedy--to prepare and present their defenses in the anticipated suit by defendants. Given its origin and purpose, a declaratory judgment will usually not be granted when a full and adequate remedy can be afforded in a traditional form of action. Lawler v. Clinton Street Development Properties, Inc., 63 A.D.2d 827, 406 N.Y.S.2d 186 (4th Dep't), leave to appeal denied, 45 N.Y.2d 710, 409 N.Y.S.2d 1029, 381 N.E.2d 616 (1978). Although plaintiffs got to the courthouse a few days before defendants, the fact is that there is now pending in West Virginia a normal damages action in which the dealers may present, and apparently have presented, all the defenses and counterclaims they have. That is the appropriate forum for the resolution of this controversy. See Ithaca Textiles, Inc. v. Waverly Lingerie Sales Co., 24 A.D.2d 133, 264 N.Y.S.2d 581 (3d Dep't 1965), aff'd, 18 N.Y.2d 885, 276 N.Y.S.2d 624, 223 N.E.2d 34 (1966); Reynolds Metals Co. v. Speciner, 6 A.D.2d 863, 175 N.Y.S.2d 605 (1st Dep't 1958).

In arguing otherwise, the dealers rely upon several cases that do not, as I read them, support the conclusion they urge upon me. In Kalman v. Shubert, 270 N.Y. 375, 1 N.E.2d 470 (1936), the plaintiff, author, composer and owner of a group of operettas, sought a declaration about the relative rights in the works as between himself and the defendant, who claimed exclusive performance rights based upon a written instrument. The Court noted that no other form of relief was available to the plaintiff. The plaintiff, there, though, needed to take some kind of action because the claim by the defendant was causing him continuing damage. The defendant's claim was a cloud upon the titles of the operettas that barred plaintiff from selling rights in the works, while the value of the operettas perhaps diminished with the passage of time and the consequent changes in public tastes. In contrast with the case before me, "we have here a case where the plaintiff must have affirmative relief to quiet a disputed jural relation as to both present and prospective obligations, and existing forms of action, aside from that of declaratory judgment, are not reasonably adequate." 270 N.Y. at 378, 1 N.E.2d 470. New York Foreign Trade Zone Operators, Inc. v. State Liquor Authority, 285 N.Y. 272, 34 N.E.2d 316 (1941) presented a comparable situation. At issue there were only narrow questions of law relating to whether an operator of a certain kind of business required a license. There was a continuing jural relation over which there was more than a continuing...