Schmidt v. Enertec Corp.

• Decision Date: 14 December 1984
• Docket Number: No. 84 Civ. 5428(RJW).,84 Civ. 5428(RJW).
• Citation: 598 F. Supp. 1528
• Parties: Robert C. SCHMIDT and Ingrid A. Schmidt, on behalf of themselves and all other persons similarly situated, Plaintiffs, v. ENERTEC CORPORATION, Energy Resources Corporation, Robert E. Aikman, David L. Baker, Kenneth H. Wanamaker and United States Trust Company of New York, Defendants.
• Court: U.S. District Court — Southern District of New York

598 F. Supp. 1528

Robert C. SCHMIDT and Ingrid A. Schmidt, on behalf of themselves and all other persons similarly situated, Plaintiffs, v. ENERTEC CORPORATION, Energy Resources Corporation, Robert E. Aikman, David L. Baker, Kenneth H. Wanamaker and United States Trust Company of New York, Defendants.

No. 84 Civ. 5428(RJW).

United States District Court, S.D. New York.

December 14, 1984.

Wolf, Haldenstein, Adler, Freeman & Herz, New York City, for plaintiffs; Fred T. Isquith, William A. Loeb, Jeffrey G. Smith, New York City, of counsel.

Anderson, Russell, Kill & Olick, P.C., New York City, for defendants Enertec Corp., Energy Resources Corp., Robert E. Aikman, David L. Baker and Kenneth H. Wanamaker; John H. Gross, Lisa D. Levey, C. Kirk Rhein, Jr., New York City, of counsel.

Wofsey, Certilman, Haft, Lebow & Balin, New York City, for defendant U.S. Trust Co. of New York; Evan L. Gordon, New York City, of counsel.

ROBERT J. WARD, District Judge.

This is an action for monetary and injunctive relief brought on behalf of a class of holders of convertible subordinated debentures for alleged violations of the federal securities laws and for breach of the trust indenture under which the debentures originally were issued. Jurisdiction is alleged under § 322 of the Trust Indenture Act of 1939 ("Trust Indenture Act"), 15 U.S.C. § 77vvv, § 27 of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. § 78aa, and § 22 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. § 77v. Plaintiffs moved pursuant to Rule 65, Fed.R.Civ.P., for a preliminary injunction staying a tender offer by Enertec Corporation to exchange shares of its preferred stock for certain convertible subordinated debentures issued by Energy Resources Corporation. Plaintiffs alleged that documents relevant to the instant exchange offer fail to disclose material facts in violation of § 14(e) of the Exchange Act, 15 U.S.C. § 78n(e).

On October 29, 1984, the Court held a hearing on the instant motion, after which the Court accepted additional submissions from the parties. Inasmuch as the exchange offer at issue was then due to expire on November 26, 1984, the Court determined it advisable to dispose of plaintiffs' motion by Summary Decision before the expiration of the exchange offer. On November 21, 1984, the Court issued a Summary Decision and Order, which is reproduced in part below, denying plaintiffs' motion for a preliminary injunction. The Opinion that follows sets forth in full the facts relevant to plaintiffs' motion and elaborates upon the Court's reasons for denying that motion.

SUMMARY DECISION

To persuade the Court that preliminary injunctive relief is appropriate in this case, plaintiffs must demonstrate "(a) irreparable harm and (b) either (1) likelihood of success on the merits or (2) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly toward the party requesting the preliminary relief." Jackson Dairy, Inc. v. H.P. Hood & Sons, Inc., 596 F.2d 70, 72 (2d Cir.1979); see also Buffalo Forge Co. v. Ampco-Pittsburgh Corp., 638 F.2d 568, 569 (2d Cir.1981); Condec Corp. v. Farley, 573 F.Supp. 1382, 1385 (S.D.N.Y.1983). However, plaintiffs have failed to show irreparable harm; moreover, plaintiffs have not established that the balance of hardships tips decidedly in their favor or that it is likely that plaintiffs would succeed on the merits of their § 14(e) claim.

Plaintiffs have not substantiated their contention that a finding of a material misstatement or omission in a tender offer prospectus itself establishes irreparable harm. In addition, the Court finds that injunctive relief is not necessary in the instant action because there exist adequate remedies at law for the specific injuries that plaintiffs do allege. Included among such legal remedies are damages in tort or in contract against one or more of the defendants; plaintiffs may also seek rescission of the exchange offer. Stated simply, the exchange offer at issue here will result in neither the liquidation nor merger of any of the corporate entities involved, and therefore this case does not present a situation that will be impossible to "unscramble" or "unravel" once the exchange offer has expired. Cf. Grumman Corp. v. LTV Corp., 527 F.Supp. 86 (E.D.N.Y.), aff'd, 665 F.2d 10 (2d Cir.1981) (preliminary injunction granted where tender offer involved takeover of offeree and possible liquidation of segments of offeree's business). Thus, there is no need for preliminary relief to preserve the status quo.

Even if plaintiffs could demonstrate injury for which monetary damages would not adequately compensate them, however, the Court would hesitate to enjoin the instant exchange offer, for it appears likely that even greater harm would result from the Court's intervention. There is evidence in the record to suggest that, faced with an injunction requiring Enertec to disclose certain representations it purportedly made to the trustee, Enertec might well withdraw its exchange offer rather than make such disclosures. As a result, debentureholders would lose the opportunity to exchange their debentures for Enertec preferred stock; debentureholders' rights under the indenture to convert their debentures into common stock would once again be in limbo; and debentureholders' prospects of realizing any interest on their investment would be left in serious doubt.

The Court's conclusion that substantially greater harm would result from the issuance of a preliminary injunction in this case, and that therefore the balance of hardships tips against plaintiffs, the moving parties here, is buttressed by the fact that the disclosures plaintiffs would have Enertec make are themselves inaccurate and misleading, or, at best, unnecessary. Plaintiffs would have Enertec disclose that the trustee has "agreed" to refrain from enforcing the indenture for the duration of the exchange offer, but there is no evidence that any such agreement was ever reached between the trustee and Enertec. Plaintiffs would further have disclosed Enertec's purported representation to the trustee concerning the right of debentureholders to convert nontendered debentures into Enertec common stock, but the substance of this disclosure is already contained in the exchange offer prospectus. Finally, plaintiffs would have Enertec disclose that Enertec represented to the trustee that, assuming at least sixty-five percent of the debentures were tendered, Enertec would "guarantee payment" of the nontendered debentures. Such a disclosure would be ambiguous, if not inaccurate and misleading, for it could be interpreted as a guarantee of payment of all interest and principal due on the debentures. However, even the trustee has testified that Enertec represented only that it would have sufficient funds to cure the existing default on the nontendered debentures if sixty-five percent of those debentures were exchanged.

In addition to failing to establish irreparable harm, then, plaintiffs have also failed to demonstrate a likelihood of success on the merits of their § 14(e) claim. Rather than curing alleged defects in the exchange offer prospectus, the disclosures plaintiffs would have the Court require might themselves mislead debentureholders. It would therefore be particularly improvident of the Court to grant the preliminary injunctive relief plaintiffs seek.

For the foregoing reasons, plaintiffs' motion for a preliminary injunction is denied. This Summary Decision and Order represents the final disposition of the instant motion by this Court, and therefore constitutes an appealable order within the meaning of Rule 54(a), Fed.R.Civ.P.

BACKGROUND

The instant action arises from a series of events traceable to a public offering in January 1980 of approximately $8 million of 9% convertible subordinated debentures (the "Debentures"). These Debentures, which are due January 15, 1985, were issued pursuant to an indenture dated January 15, 1980 (the "Indenture") between the issuer, Energy Resources Corporation ("Energy Resources") and the indenture trustee, United States Trust Company of New York (the "Trustee"). Under the terms of the Indenture, the Debentures were to be convertible into Energy Resources common stock; the Debentures are subordinated to certain bank debt of Energy Resources.

The Parties

Robert C. and Ingrid A. Schmidt, plaintiffs in the instant action, allege that they are holders of nine Debentures: six, plaintiffs allege, they hold as joint tenants, and three are held by Mr. Schmidt individually. Plaintiffs purport to represent two classes: one class consists of all persons who purchased Debentures during the period from July 1, 1982 through November 23, 1983 and were allegedly injured thereby; the other class comprises all Debentureholders who purportedly have been or will be injured by alleged breaches of the terms of the Indenture and alleged federal securities law violations.

Energy Resources, one of the defendants joined in this action, is a Nevada corporation engaged in oil and gas exploration and production. Another defendant, Enertec Corporation ("Enertec"), formerly Tectonic Energy Corporation ("Tectonic"), is a Delaware corporation involved in acquiring and developing oil and gas properties. Energy Resources is a wholly owned subsidiary of Enertec. Defendants Aikman, Baker and Wanamaker are present or past officers and/or directors of Enertec or Energy Resources.¹ Also named as a defendant in this action is the Trustee.

The Exchange Offer

Plaintiffs aver that sometime before July 1982, the management of Energy Resources decided to recommend to its stockholders that Energy Resources be liquidated to substantially satisfy its outstanding indebtedness. Under the contemplated plan of liquidation, plaintiffs contend, the Debentures were to be called and paid at a premium over the principal amount or, at the...