Source: https://casetext.com/case/eagle-v-american-tel-and-tel-co
Timestamp: 2019-10-14 14:11:08
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Matched Legal Cases: ['§ 167', '§ 167', '§ 1332', '§ 1332', '§ 5811', '§ 5812', '§ 800', '§ 5913', '§ 3704', '§ 3705', '§ 3704', '§ 3705', '§ 0', '§ 1332']

Eagle v. American Tel. and Tel. Co, 769 F.2d 541 | Casetext
Eagle v. American Tel. and Tel. Co.
769 F.2d 541 (9th Cir. 1985)
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Eaglev.American Tel. and Tel. Co.
United States Court of Appeals, Ninth CircuitAug 19, 1985
If not, the claims are separate and distinct.” 769 F.2d 541, 546 (9th Cir.1985).…
If not, the claims are separate and distinct.” Eagle v. Am. Tel. & Tel. Co., 769 F.2d 541, 546 (9th…
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Samuel L. Holmes, Angell, Holmes Lea, San Francisco, Cal., for plaintiff-appellant.
Gary L. Simms, Richard W. Odgers, Pillsbury, Madison Sturo, San Francisco, Cal., for defendant-appellee.
The sparring among Congress, CPUC and similar state regulatory commissions, and Telephone companies like Pacific took a number of twists and turns. At the risk of oversimplification, only a few of them will be related here. Pacific initially refused to use accelerated depreciation (thereby losing some tax savings) because CPUC's policy would have required those savings to be passed on to ratepayers. (Pacific also asserted other reasons for preferring straight-line depreciation) CPUC responded by ruling that it would set rates based on accelerated depreciation whether or not the telephone company elected it (thereby virtually forcing such an election whenever the company was free to make it). Congress in 1969 rejoined the battle by passing 26 U.S.C. § 167( l), which precluded companies from taking accelerated depreciation if they were forced to pass the tax savings on to ratepayers. CPUC subsequently adopted a number of differing positions, some induced by state court decisions reversing its rulings. At one point it permitted Pacific to elect accelerated depreciation and to retain the tax savings, and at another it required a flow-through, even retroactively.
A second result was that, because of CPUC's ultimate position that tax savings had to be passed through, Pacific became ineligible for accelerated depreciation tax treatment under 26 U.S.C. § 167( l). Accordingly, it accrued a federal tax liability of some $1.5 billion. That tax liability was still on Pacific's books when ATT, then a 90 percent shareholder of Pacific, proposed a stock-for-stock merger with Pacific in October of 1981.
ATT removed the class action to federal court pursuant to 28 U.S.C. § 1332 and 1441. After unsuccessfully petitioning for remand to state court, Eagle filed an amended complaint. The allegations remained essentially the same. Eagle, however, amended the damage allegation to state that the refund caused approximately $3.00 per share depreciation in the value of each share owned by minority shareholders and that Eagle individually was damaged by approximately $4,200. The complaint also alleged that after the initial complaint was filed, ATT offered to purchase the minority shares at a depressed price without compensating the minority shareholders for the damage caused by the refund. Eagle then filed a second motion for remand to state court that was denied.
Eagle contends that this class action was improperly removed from state court because Eagle's claim and the claims of some of the other shareholders that he represents do not satisfy the jurisdictional amount. The district court has original diversity jurisdiction in all civil matters where the parties are of diverse citizenship and the matter in controversy exceeds $10,000. 28 U.S.C. § 1332. The diversity of citizenship is not in issue. Jurisdiction in this case depends on the application of the aggregation rules used to determine the amount in controversy. The individual claims of the minority shareholders' can be aggregated if they share a common and undivided claim. If, however, their claims are separate and distinct, aggregation is not permitted and each plaintiff must exceed the $10,000 statutory minimum to maintain diversity jurisdiction. Snyder v. Harris, 394 U.S. 332, 89 S.Ct. 1053, 22 L.Ed.2d 319 (1969). Because we view the claims as common and undivided, we hold that the amount in controversy is the aggregated claims of the plaintiffs or $38 million and that the jurisdictional amount is satisfied. Thus, removal to the district court was proper.
Even though no class certification has yet been sought, we assume for purposes of determining whether the district court had jurisdiction that this suit is a class action. City of Ingelwood v. City of Los Angeles, 451 F.2d 948, 951 (9th Cir. 1971).
Eagle's initial complaint asserts a cause of action for breach of the majority shareholder's fiduciary duty to minority shareholders. Under California law, the majority shareholder breaches his fiduciary duty if he uses his ability to control a corporation to his own benefit and to the detriment of the minority shareholders. Smith v. Tele-Communication, Inc., 134 Cal.App.3d 338, 343, 184 Cal.Rptr. 571, 574 (1982); Jones v. H.F. Ahmanson Co., 1 Cal.3d 93, 100, 81 Cal.Rptr. 592, 599, 460 P.2d 464, 471 (1969); 12B Fletcher Cyclopedia Of The Law Of Private Corporations, § 5811 (1984). Eagle's complaint alleges: that ATT, Pacific's majority shareholder, used its control of Pacific to elect directors that implemented ATT policy; that ATT policy caused Pacific imprudently to forego adopting accelerated depreciation and investment tax credits before the 1968 cutoff date; that this imprudent policy resulted in Pacific's being ordered to refund $381 million in rate overcharges; and that "the refund reduced or will reduce the assets of Pacific and the amounts otherwise available to pay as dividends to shareholders or to enhance the net worth of the underlying value of the shares owned by plaintiff and the class he represents." The complaint prays for compensatory damages of at least $38 million and punitive damages of $20 million.
Normally, a shareholder cannot maintain an action in his individual capacity against a majority shareholder for the depreciation in the value of his stock resulting from a depletion of corporate assets because the depletion of corporate assets is a direct injury to the corporation and only an incidental injury to its shareholders. O'Hare v. Marine Electric Co., 229 Cal.App.2d 33, 39 Cal.Rptr. 799, 800 (1964); 12B Fletcher Cyclopedia Of The Law Of Private Corporations § 5812 at 173 (1984). The majority shareholder's duty must be enforced either directly by the corporation or through a shareholders' derivative suit. Eagle and the class that he represents, however, no longer own Pacific stock because of the ATT-Pacific merger and therefore cannot bring a derivative shareholders' suit on Pacific's behalf against ATT. Cal.Corp.Code § 800(b). See Watson v. Button, 235 F.2d 235, 236-37 (9th Cir. 1956). Because Pacific's recovery for its alleged injury would not compensate the former minority shareholders for any loss they may have suffered as a result of the injury to Pacific, we are willing to assume that California would permit Pacific's former minority shareholders to bring this class action in their individual capacities.
We note that Eagle's complaint prays for $38 million in damages or ten percent of the refund alleged to have injured Pacific. The class Eagle purports to represent owned approximately ten percent of Pacific's stock when the complaint was filed. Individual shareholder suits are not usually permitted when the shareholders share a common injury to their stock. 12B Fletcher Cyclopedia Of The Law Of Private Corporations § 5913 (1984). Eagle's prayer for relief indicates that all of Pacific's shareholders suffered a common injury, divisible in proportion to their ownership of Pacific stock.
We must now determine whether the minority shareholders' claims are separate and distinct or common and undivided within the meaning of the aggregation rules of Snyder v. Harris, 394 U.S. 332, 89 S.Ct. 1053, 22 L.Ed.2d 319 (1969). The dividing line is not clear. 14A C. Wright, A. Miller, E. Cooper Federal Practice And Procedure § 3704 (1985). Eagle contends that the shareholders' claims are separate and distinct because under California law the minority shareholders each have an individual cause of action even though they were injured by a single wrongful act. ATT, however, contends that the claims are common and undivided because the shareholders' claims derive from their common and undivided interest in Pacific's assets.
In Snyder, the Supreme Court preserved the character of interest analysis developed before the 1966 revision of Rule 23 of the Federal Rules of Civil Procedure to distinguish between spurious and true class actions. Claims of individual class members could only be aggregated in true class actions. 14B C. Wright, A. Miller, E. Cooper Federal Practice And Procedure § 3705 (1985).
We have previously held that the character of the interest asserted depends on the source of plaintiffs' claims. If the claims are derived from rights that they hold in group status, then the claims are common and undivided. If not, the claims are separate and distinct. Potrero Hill Community Action Committee v. Housing Authority, 410 F.2d 974, 978 (9th Cir. 1969). In Potrero, we held that the claims of tenants in a housing project were separate because their claims were derived from their own individual leases, not from rights that they held as a tenants' group. Id. Other courts have applied a property-based analysis to hold that plaintiffs making claims in their status as joint or co-tenants or under a single instrument share common claims. See, e.g., Broenen v. Beaunit Corp., 305 F. Supp. 688, 692 (E.D. Wisc. 1969) (action to enforce terms of trust indenture is a true class action), aff'd, 440 F.2d 1244 (7th Cir. 1970); Edgerton v. Armour Co., 94 F. Supp. 549, 553-54 (S.D.Cal. 1950) (action for an accounting is a true class action because right asserted under a single contract); See 14B C. Wright, A. Miller, E. Cooper, Federal Practice And Procedure § 3704 at 483-85 (1985) for more examples of common and undivided claims.
These cases suggest that the shareholders' claims here are common and undivided. Under California law, the source of the shareholders' claim for the wrongful depletion of corporate assets is the common and undivided interest each shareholder has in a corporation's assets and a right to share in dividends. Miller v. McColgan, 17 Cal.2d 432, 110 P.2d 419, 421 (1941). Because shareholders do not own the corporation's assets, the wrongful depletion of corporate assets is an injury to the corporation and only an indirect injury to the shareholders. For this reason, shareholders normally cannot recover in their individual capacities for a wrongful depletion of corporate assets. O'Hare v. Marine Electric Co., 229 Cal.App.2d 33, 39 Cal.Rptr. 799, 800 (1964).
It is true that we have assumed that California would permit the shareholders to sue individually in the circumstances of this case, in order to avoid the possibility of a wrong without a remedy. That permission, however, does not change the nature or source of the shareholders' claim, which is rooted in an injury to the assets of the corporation. The effect on the shareholders' stock value was indirect — a mere reflection of the alleged loss of corporate assets.
Insofar as the nature or source of their injury is concerned, the shareholders here are in the same position as shareholders bringing the more typical shareholders' derivative suit. Claims are aggregated in those cases because they are "favored with the fiction that plaintiffs' possible recovery is not the measure of the amount involved for jurisdictional purposes but that the test is the damage asserted to have been sustained by the defendant corporation." Koster v. Lumbermens Mutual Casualty Co., 330 U.S. 518, 523, 67 S.Ct. 828, 831, 91 L.Ed. 1067 (1947), 14B C. Wright, A. Miller, E. Cooper, Federal Practice And Procedure § 3705 at 95 (1985).
The Supreme Court's decision in Snyder v. Harris, 394 U.S. 332, 89 S.Ct. 1053, 22 L.Ed.2d 319 (1969), involved a different kind of claim. There minority shareholders brought a class action to recover the premium that certain majority shareholders received for the sale of their controlling stock. The Supreme Court did not permit aggregation. Under the applicable Missouri law, however, the minority shareholders had an individual and direct right to recover a share of the premium received by the majority controlling shareholders. No right accrued to the corporation and no injury was done to the corporation. The claim of the minority shareholders was in no way dependent upon or derivative of an injury to the corporation. Quite the contrary is true of Eagle's claim, which derives wholly from an alleged injury to the corporation's assets.
The shareholders intended division of the $38 million fund pro rate does not make their claims separate and distinct. It is proper to aggregate the value of jointly held rights when "several plaintiffs sue to enforce a common and undivided interest which is separate and distinct as between themselves." 1 Moore's Federal Practice § 0.97[3] at 962 (1984).
We conclude, therefore, that the minority shareholders' claims asserted in this case must be characterized as common and undivided. Therefore, the amount in controversy is the $38 million fund that Eagle sought in his initial complaint. The district court properly exercised jurisdiction after removal of this case from state court pursuant to 28 U.S.C. § 1332, 1441 because the district court had original diversity jurisdiction.
We review a grant of summary judgment de novo to determine whether there is a genuine issue of material fact and whether the substantive law was correctly applied. Greenfield v. Kootenai County, 752 F.2d 1387, 1388 (9th Cir. 1985). The material facts are set forth in two stipulations of fact filed by the parties and are not in dispute.
We reject Eagle's argument in his brief that there is a material issue of fact for trial on whether Eagle was damaged.
Eagle contends that the $381 million refund injured the minority shareholders by depreciating the value of their stock. The district court held that the refund did not injury the minority shareholders because if Pacific had avoided the refund by adopting accelerated depreciation, the tax benefit would have flowed through to the ratepayers and Pacific would not have collected an offsetting amount in utility rates. We agree with the district court that the minority shareholders were not injured by the $381 million refund. The district court properly entered summary judgment in favor of ATT on Eagle's refund claim because a plaintiff cannot state a claim in the absence of an injury.
We note that Eagle virtually abandoned this theory of liability on appeal in favor of his theory that the tax liability injured the minority shareholders.
At the oral argument on the cross-motions for summary judgment, Eagle attempted to articulate a new damage theory: namely, that the minority shareholders' shares were undervalued at the time of the ATT-Pacific merger because of a $1.5 billion tax liability then on Pacific's books that was reduced after the merger was completed. Eagle contended that the tax liability would not have accrued if Pacific had adopted accelerated depreciation in 1968. Eagle did not change its prayer for damages; it continued to request $38 million or ten percent of the refund (approximately $42 million with interest). The district court held that new theory was precluded by a pretrial Status Conference Order issued on January 10, 1983, pursuant to the parties' stipulation.
Of course, CPUC would presumably have required much or all of the saving to be passed on to ratepayers.
We agree with the district court that the pretrial Status Conference Order precluded Eagle from raising a new theory of relief at the summary judgment stage. The order provided that "[n]o further motions for leave to amend the complaint will be entertained except on showing of good cause based on new facts that have come into existence subsequent to the date of this order." A Rule 16(e) order controls the subsequent course of action in the litigation unless it is modified by a subsequent order. Fed.R.Civ.P. 16(e). Although we liberally construe pretrial orders, a theory will be barred if not at least implicitly included in the order. United States v. First National Bank of Circle, 652 F.2d 882, 886 (9th Cir. 1981).
Editors Note: The opinion of the United States Court of Appeals, Ninth Circuit in United States v. Magana, published in the advance sheet at this citation, 769 F.2d 549-553, was withdrawn from the bound volume at the request of the court. The opinion will be republished.