Stella v. Kaiser

• Decision Date: 07 December 1954
• Docket Number: Docket 23107.,No. 60,60
• Parties: Michael STELLA, on behalf of himself and all other stockholders of Kaiser-Frazer Corporation, Plaintiff-Appellant, v. Henry J. KAISER, Joseph W. Frazer, Edgar F. Kaiser, G. G. Sherwood, E. E. Trefethen, Jr., Clay P. Bedford, W. A. MacDonald, O. B. Motter, Hickman Price, Jr., Walston S. Brown and Kaiser-Frazer Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

218 F.2d 64 (1954)

Michael STELLA, on behalf of himself and all other stockholders of Kaiser-Frazer Corporation, Plaintiff-Appellant, v. Henry J. KAISER, Joseph W. Frazer, Edgar F. Kaiser, G. G. Sherwood, E. E. Trefethen, Jr., Clay P. Bedford, W. A. MacDonald, O. B. Motter, Hickman Price, Jr., Walston S. Brown and Kaiser-Frazer Corporation, Defendants-Appellees.

No. 60, Docket 23107.

United States Court of Appeals, Second Circuit.

Argued October 7, 1954.

Decided December 7, 1954.

Lewis M. Dabney, Jr., New York City, for plaintiff-appellant.

H. Bartow Farr, New York City (Willkie, Owen, Farr, Gallagher & Walton, New York City, on the brief for defendant-appellee Kaiser-Frazer Corp. and Corbin, Bennett & Delehanty, New York City, on the brief for defendants-appellees Henry J. Kaiser, Joseph W. Frazer, Edgar F. Kaiser, G. G. Sherwood, E. E. Trefethen, Jr., Clay P. Bedford, W. A. MacDonald, O. B. Motter, Hickman Price, Jr., and Walston S. Brown), for defendants-appellees.

Before CLARK, Chief Judge, and L. HAND and FRANK, Circuit Judges.

Rehearing Granted.

CLARK, Chief Judge.

This appeal concerns the effect as res judicata and bar of a decree of settlement of a stockholders' derivative action entered by a federal court pursuant to Fed.Rules Civ.Proc. 23(c), and of the releases executed thereunder. Plaintiff-appellant is one of several stockholders bringing a variety of derivative actions on behalf of the Kaiser-Frazer Corporation against its officers and directors. By order of a United States District Court in Michigan, after due notice, all claims were there consolidated and a settlement was reached which purported to bind all stockholders and all officers of the corporation. Pergament v. Frazer, D.C.E.D.Mich., 93 F. Supp. 13-45. Despite vigorous protest by several stockholders, including plaintiff, the Court of Appeals affirmed the settlement, Masterson v. Pergament, 6 Cir., 203 F.2d 315-336, and the Supreme Court denied certiorari, 346 U.S. 832, 74 S.Ct. 33. When plaintiff thereafter sought to resume in the district court below the action he had begun before the institution of the Michigan proceedings, see Stella v. Kaiser, D.C. S.D.N.Y., 82 F.Supp. 301, defendants-appellees successfully pleaded the Michigan judgment in bar. In asking us to reverse the entry of summary judgment below, plaintiff attacks the conclusive nature of the Michigan settlement on a variety of grounds.

Plaintiff's complaint charged breach of fiduciary duty in defendants' attempted stabilization of the price of Kaiser-Frazer stock at the time of a public stock offering in February, 1948. There is apparently no claim of illicit personal gains made by defendants at the corporation's expense. The gravamen of the complaint is violation of the antimanipulation and antifraud sections of the Securities Exchange Act of 1934, 15 U.S. C. § 78a et seq., and the Securities Act of 1933, 15 U.S.C. § 77a et seq., together with negligent waste of Kaiser-Frazer's corporate assets. Cf. Kaiser-Frazer Corp v. Otis & Co., 2 Cir., 195 F.2d 838, certiorari denied 344 U.S. 856, 73 S.Ct. 89, 97 L.Ed. 664.

There is no doubt that this claim was one of those compromised and settled by the Michigan decree. See Pergament v. Frazer, supra, D.C.E.D.Mich., 93 F.Supp. 13, 33-35. Plaintiff was an active litigant in the proceedings there and is bound under the principles of res judicata at least with respect to those defendants who were parties of record in Michigan. Baldwin v. Iowa State Traveling Men's Ass'n, 283 U.S. 522, 51 S.Ct. 517, 75 L.Ed. 1244. Even without his active participation Stella would have been bound by the Michigan court's action, since it was a conclusive adjudication of a "true" class action, Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85 L.Ed. 22, 132 A.L.R. 741; 3 Moore's Federal Practice ¶ 23.11 (2d Ed. 1948); McLaughlin, Capacity of Plaintiff-Stockholder to Terminate a Stockholder's Suit, 46 Yale L.J. 421, 424, and since, moreover, there was adequacy of notice and representation as found by the Sixth Circuit, Masterson v. Pergament, supra, 6 Cir., 203 F.2d 315, 330. See Dickinson v. Burnham, 2 Cir., 197 F.2d 973, certiorari denied 344 U.S. 875, 73 S.Ct. 169, 97 L.Ed. 678, and proposed Rule 23(d) in Preliminary Draft of Proposed Amendments to Rules of Civil Procedure for the United States District Courts, May 1954, pp. 15-17, discussed in Wright, Amendments to the Federal Rules: The Function of a Continuing Rules Committee, 7 Vand.L.Rev. 521, 539-540.

Plaintiff asserts, however, that the settlement itself was procured by fraud and that the Michigan decree is subject to attack for failure to decide this issue. But in this he is in error, for the fraud issue was in fact disposed of adversely to him by the Court of Appeals. Masterson v. Pergament, supra, 6 Cir., 203 F.2d 315, 330-331. Since this issue was repeatedly raised, it cannot now be made the basis for collateral attack. De Bobula v. Goss, 90 U.S.App. D.C. 28, 193 F.2d 35.

Plaintiff's further argument vigorously pressed that the Michigan proceedings are not res judicata because they were merely administrative borders on the fantastic. It can hardly be claimed that that ancient device of a court of equity, the class suit, is nonjudicial; and there is nothing in the substantive provisions of this rule — "A class action shall not be dismissed or compromised without the approval of the court" — to change its character. Actually, as is well settled, the federal district courts, as constitutional courts, have only judicial, and no administrative, jurisdiction, Keller v. Potomac Electric Power Co., 261 U.S. 428, 43 S.Ct. 445, 67 L.Ed. 731, and the Federal Rules do not and cannot change that jurisdiction. F.R.C.P. 83, 28 U.S.C. § 2072. In none of the cases or authorities dealing with this rule and cited supra is there any suggestion that its impact is other than completely judicial. Plaintiff places considerable reliance upon district court rulings departing from the usual conceptions of a trial such as refusal of examination before trial and admission of incompetent evidence. Those have not been reviewed on appeal; whether correct or not, they cannot negative district court jurisdiction any more than can certain expressions attributed to defendants, but quoted rather out of context.

Plaintiff's most cogent attack on the Michigan decree focuses on the lack of complete identity between the parties of record here and in Michigan. One of the defendants, Edgar F. Kaiser, although he was a party to the Michigan suit, was not named in that count of the Michigan complaint which dealt with plaintiff's particular claim. Nonetheless, his presence in that suit made him fully amenable to all claims which might be present by amendment or otherwise and hence subject to a decree specifically settling all such claims. Hence by familiar principles of mutuality of estoppel, Bigelow v. Old Dominion Copper Mining & Smelting Co., 225 U.S. 111, 32 S.Ct. 641, 56 L.Ed. 1009, plaintiff also is bound. All of the other defendants except Walston S. Brown were named as defendants both of the decree in general and of this particular count. Thus they satisfy all requirements of identity, and res judicata applies. This leaves only the case of Brown, to which we now turn.

At first glance plaintiff's contention that he should be allowed to pursue his claim against Brown seems to have considerable force. Brown was originally a party to the Michigan action, but was dropped because his presence would have destroyed the diversity jurisdiction of the Michigan court. His participation was thus limited to the giving of testimony. But even so, we think a more complete analysis requires the rejection of the contention.

Plaintiff relies heavily on Bigelow v. Old Dominion Copper Mining & Smelting Co., supra, 225 U.S. 111, 32 S.Ct. 641, 56 L.Ed. 1009. But this case decided only the effect which exoneration of one joint tort-feasor should have on a suit against another. The policy reasons against allowance of such exoneration as a bar to action against another, which have been much criticized, see, e. g., Riordan v. Ferguson, 2 Cir., 147 F.2d 983, 991-993; Bruszewski v. United States, 3 Cir., 181 F.2d 419; Note, Res Judicata: The Requirement of Identity of Parties, 91 U. of Pa.L.Rev. 467, have little relevance to the situation of settlement which is before us here. Even if we were to concede, arguendo, that an aggrieved party should have several opportunities to attain one recovery, that would not militate in favor of permitting a double remedy for a single wrong. Either the receipt of full satisfaction for a claim or the unconditional release of it bars the plaintiff from further prosecution of that particular cause of action against any one. Rushford v. United States, D.C.N.D.N.Y., 92 F.Supp. 874, affirmed per curiam, 2 Cir., 204 F.2d 831; Larabell v. Schuknecht, 308 Mich. 419, 14 N.W.2d 50; Prosser, Torts § 109 (1941).

The Michigan compromise was in fact both a satisfaction and a release of plaintiff's claim. The terms of the settlement were carried out and the release was wholly unconditional. No attempt was made in Michigan to reserve rights against the absent Brown; on the contrary, the compromise explicitly purports to release Brown. It may not be clear whether the Michigan findings on the adequacy and the sufficiency of the consideration offered by defendants are to be taken as a determination of the consideration for the release or of the fact of satisfaction of the claim itself. In either case, however, the only issue, as I see it, is whether a judicially effected compromise should have the same binding effect as a voluntary one would have. The writer of this opinion can see no reason why it should not. The judicial scrutiny contemplated by F.R.C.P. 23(c) gives to the parties a greater degree of protection than do many private settlements. The salutary effect of the rule would be seriously impaired if dissatisfied par...