Savoie v. Merchants Bank
| Decision Date | 09 May 1996 |
| Docket Number | D,No. 953,953 |
| Citation | 84 F.3d 52 |
| Parties | Leon J. SAVOIE and Marion Savoie, Plaintiffs-Appellees, v. MERCHANTS BANK, Merchant Bancshares, Inc., The Merchants Trust Company, Dudley H. Davis, William K. Mulhern, Susan J. Moses, Bruce Butterfield, Raymond C. Pecor, Jr., Fred G. Smith, and Robert A. Skiff, Defendants-Appellants. ocket 95-7776. |
| Court | U.S. Court of Appeals — Second Circuit |
Norman Williams, Gravel and Shea, Burlington, VT, on the brief for defendants-appellants.
Dennis J. Johnson, South Burlington, VT (L. Randolph Amis, III, Burlington, VT, on the brief), for plaintiffs-appellees.
Before: NEWMAN, Chief Judge, KEARSE, Circuit Judge, and BURNS, * District Judge.
This appeal presents various questions relating to a district court's authority to enter a preliminary injunction aimed at restoring the status quo, after a party, aware that the injunction has been sought, has taken action that the injunction would have precluded. Defendants-appellants, the Merchants Bank and various related entities and corporate officials (collectively the "Bank"), appeal from the July 20, 1995, judgment of the District Court for the District of Vermont (T.F. Gilroy Daly, Judge, sitting by designation) granting a preliminary injunction in favor of plaintiffs-appellees Leon and Marion Savoie. The preliminary injunction requires the Bank to escrow $500,000 to facilitate an award of attorney's fees that might subsequently be made. We affirm the grant of the preliminary injunction and remand for further proceedings.
In 1993 the Savoies opened a trust account at The Merchants Trust Company, a wholly-owned subsidiary of The Merchants Bank. Later that year the Bank invested funds in the trust accounts of its customers, including the Savoies, in the Piper Jaffray Institutional Government Income Portfolio ("Piper Fund"), which soon suffered substantial losses.
The Bank's decision to invest in the Piper Fund led to an investigation by FDIC auditors, as well as numerous customer complaints. In September 1994 a trust customer filed suit in state court against the Bank, alleging that the Bank had violated its fiduciary duty in purchasing shares in the Piper Fund. In October 1994 the Savoies filed this lawsuit against the Bank, alleging violations of the federal securities laws and the Racketeer Influenced and Corrupt Organizations Act (RICO), and pendent state claims for negligent misrepresentation, breach of contract, and breach of fiduciary duty. The suit was filed as a class action, although no class was ever certified.
With respect to their claims under the securities laws, the Savoies principally alleged that the Bank fraudulently induced them to invest in the Piper Fund by sending false and misleading letters praising the investment as safe when it was actually highly speculative, and by failing to correct those misstatements, in violation of section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b). The Savoies also alleged that the Bank violated section 10(b) by "churning"--unnecessarily selling and buying back plaintiffs' shares in the Piper Fund in order to generate fees and payments for itself--and that the Bank violated section 12(2) of the Act, 15 U.S.C. § 771(2), by making false or misleading statements in selling securities by prospectus or oral communication.
On November 28, 1994, the Bank announced that it would reimburse its trust customers for their losses, in the amount of approximately $9 million, before the end of the year. At that point plaintiffs sought a temporary restraining order requiring the Bank to escrow $500,000 of the planned $9 million distribution for a possible award of attorney's fees, pending a determination of whether plaintiffs are entitled to such an award for providing a common benefit to the class.
The District Court referred the matter to a Magistrate Judge for a report and recommendation. The Magistrate Judge held a hearing on December 16, 1994, at which several witnesses testified. Since both sides had the opportunity to be heard, the Magistrate Judge treated the motion for a temporary restraining order as a motion for a preliminary injunction. At the end of the hearing, the Magistrate Judge issued an oral report and recommendation recommending the issuance of the injunction (the "December 16 Report").
On or about December 28, 1994, the Bank distributed approximately $9 million to its trust customers, without setting aside $500,000 for a possible award of attorney's fees. On January 4, 1995, the Bank filed objections to the December 16 Report.
The District Judge held a status conference on January 5, 1995, at which he indicated his extreme displeasure with the Bank for ignoring the Magistrate Judge's December 16 Report, and ordered the Bank immediately to escrow $500,000, pending the Court's consideration of the recommendation to issue the preliminary injunction. The District Judge subsequently referred to the Magistrate Judge the issue of the Court's subject matter jurisdiction to grant the preliminary injunction. On May 2, 1995, the Magistrate Judge issued a supplemental report and recommendation (the "May 2 Report"), in which he concluded that the Court had jurisdiction to enter the preliminary injunction and award attorney's fees, and also recommended holding a hearing on whether plaintiffs' lawsuit had caused the Bank to make the $9 million reimbursement.
On July 19, 1995, the District Court ruled that the claims alleged in the Complaint were moot, and that the only remaining issue was whether plaintiffs were entitled to attorney's fees (the "July 19 Order"). The District Court also stated that the plaintiffs' suit was a substantial cause of the Bank's reimbursement of its customers. The District Court then stated that it affirmed, approved, and adopted each report and recommendation of the Magistrate Judge, and ordered plaintiffs' counsel to promptly file a motion for attorney's fees.
The judgment of the District Court, entered on July 20, 1995, was in one respect narrower and in another respect broader than the Court's July 19 Order. The judgment first stated that pursuant to the July 19 Order "the report and recommendation of the Magistrate Judge (Court Paper No. 49) is ADOPTED as order of this court." Court Paper No. 49 is the Magistrate Judge's May 2 Report, in which the Magistrate Judge concluded that the Court had subject matter jurisdiction over the instant lawsuit and recommended a hearing on the issue of causation. The judgment did not recite that the Court was adopting the Magistrate Judge's earlier December 16 Report, which recommended granting the preliminary injunction, nor did it memorialize the provisions of the Court's July 19 Order that had (1) adopted both reports of the Magistrate Judge and (2) had stated that there was a causal connection between the lawsuit and the Bank's payment. The judgment then broadly stated, "Judgment is hereby entered in favor of the plaintiffs ...," a statement that could be read as an adjudication in favor of plaintiffs with respect to the underlying merits of the lawsuit.
Plaintiffs filed a motion for leave to file a supplemental complaint, 1 and subsequently served a motion to vacate the judgment, pursuant to Fed.R.Civ.P. 60(b). The Bank then filed a notice of appeal from the judgment and subsequently moved in this Court for an order staying any further District Court proceedings on the plaintiffs' motions to vacate and to supplement. We denied a stay.
On October 5, 1995, the Magistrate Judge conducted a hearing on plaintiffs' motions. In support of the motion to vacate, plaintiffs argued that the judgment in their favor had been entered in error, because there had been no findings with respect to the underlying merits of plaintiffs' claims, and indeed the Court had indicated in its July 19 Order that it considered plaintiffs' claims moot. Neither party pointed out to the Magistrate Judge that the judgment had expressly incorporated only his May 2 Report, thereby making no express adjudication of the motion for a preliminary injunction.
In an oral report and recommendation, the Magistrate Judge stated that the central issue on the forthcoming appeal would be whether the District Court had jurisdiction to order that the $9 million be considered a common fund for the benefit of the Bank's customers and then to award plaintiffs attorney's fees out of these funds. He concluded that even if the judgment was entered in error, the most expeditious course was to allow the appellate court to rule on the District Court's jurisdiction. Accordingly, the Magistrate Judge recommended denying the motion to vacate the judgment, and also recommended denial of the motion to supplement the complaint on the ground that the appeal deprived the District Court of jurisdiction to rule on the motion. The District Court subsequently adopted these recommendations.
Before this Court, the Bank contends that we should reverse the grant of the preliminary injunction and vacate the judgment.
As a threshold matter, we note that the judgment is unclear as to whether it grants a preliminary injunction. The first paragraph of the judgment adopted only the Magistrate Judge's recommendation on subject matter jurisdiction, and the second paragraph did not identify the matters with respect to which the Court was entering a judgment.
Nevertheless, we think that it is sufficiently clear that the District Court granted plaintiffs' motion for a preliminary injunction. 2 Both reports of the Magistrate Judge were in support of granting the preliminary injunction, and the District Court's July 19 Order expressly adopted both reports and stated that the preliminary injunction was granted. Moreover, all parties agree that the grant of the preliminary injunction is before this Court for review. Therefore, the judgment's recital that "[j]udgment is hereby entered...
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