Source: https://law.justia.com/cases/federal/appellate-courts/F2/794/843/230754/
Timestamp: 2020-05-25 08:58:22
Document Index: 168242763

Matched Legal Cases: ['§ 1961', '§ 1', '§ 78', '§ 78', '§ 78', '§ 1', '§ 1962', '§ 78']

Michael M. Rand, John Costello, Steven J. Costello, Gregoryt. Frese, Edward Lavin, Peter A. Milano Andvincent F. Servello, Plaintiffs-appellants, v. Anaconda-ericsson, Inc., Ericsson, Inc., L.m. Ericssontelephone Company, Nordic American Bank, Citibank, N.a.,price-waterhouse & Co., Sullivan & Cromwell, Richard Howe,richard G. Lyon, L. Stanton Towne, Telecom Equipment Corp.and Stephen R. Cohen, Defendants-appellees, 794 F.2d 843 (2d Cir. 1986) :: Justia
Justia › US Law › Case Law › Federal Courts › Courts of Appeals › Second Circuit › 1986 › Michael M. Rand, John Costello, Steven J. Costello, Gregoryt. Frese, Edward Lavin, Peter A. Milano A...
Michael M. Rand, John Costello, Steven J. Costello, Gregoryt. Frese, Edward Lavin, Peter A. Milano Andvincent F. Servello, Plaintiffs-appellants, v. Anaconda-ericsson, Inc., Ericsson, Inc., L.m. Ericssontelephone Company, Nordic American Bank, Citibank, N.a.,price-waterhouse & Co., Sullivan & Cromwell, Richard Howe,richard G. Lyon, L. Stanton Towne, Telecom Equipment Corp.and Stephen R. Cohen, Defendants-appellees, 794 F.2d 843 (2d Cir. 1986)
U.S. Court of Appeals for the Second Circuit - 794 F.2d 843 (2d Cir. 1986) Argued March 31, 1986. Decided July 9, 1986
This case arises out of the relationship between Teltronics Services, Inc. ("Teltronics"), a now-bankrupt distributor of telephone equipment, and its principal creditor and supplier, L.M. Ericsson Telecommunications, Inc. ("Ericsson"). This action was brought by a number of Teltronics shareholders who allege that the company's collapse was caused by actions of the several defendants. These defendants include companies affiliated with Ericsson as well as other parties that are alleged to have aided Ericsson in its plan to force Teltronics into bankruptcy. The shareholders seek damages under a number of statutes: the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (1982); Section 1 of the Sherman Act, 15 U.S.C. § 1 (1982); Section 14(e) of the Williams Act, 15 U.S.C. § 78n(e) (1982); and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), and Rule 10b-5, 17 C.F.R. Sec. 240.10b-5 (1985). Judge Neaher granted summary judgment for defendants. Rand v. Anaconda-Ericsson, Inc., 623 F. Supp. 176 (E.D.N.Y. 1985). We affirm.
This action is only the latest in a series of cases arising out of the commercial demise of Teltronics. See Teltronics Services, Inc. v. Anaconda-Ericsson, Inc., 587 F. Supp. 724 (E.D.N.Y. 1984), aff'd, 762 F.2d 185 (2d Cir. 1985); L M Ericsson Telecommunications, Inc. v. Teltronics Services, Inc. (In re Teltronics Services, Inc.), 18 B.R. 705 (Bankr.E.D.N.Y. 1982); Teltronics Services, Inc. v. L M Ericsson Telecommunications, Inc., 486 F. Supp. 836 (S.D.N.Y.), on reargument, 491 F. Supp. 538 (S.D.N.Y. 1980), aff'd, 642 F.2d 31 (2d Cir.), cert. denied, 452 U.S. 960, 101 S. Ct. 3108, 69 L. Ed. 2d 971 (1981); Teltronics Services, Inc. v. L.M. Ericsson Telephone Co., No. 79 Civ. 1233, slip op. (S.D.N.Y. May 9, 1979).
Meanwhile, litigation began. A first action, filed by Teltronics in the United States District Court for the Southern District of New York, alleged that the default was engineered by Ericsson in order to take over Teltronics' business. The complaint was dismissed under Fed. R. Civ. P. 12(b) (6), Teltronics Services, Inc. v. L.M. Ericsson Telephone Co., No. 79 Civ. 1233, slip op. (S.D.N.Y. May 9, 1979), and no appeal was taken. Teltronics filed a second action in the Southern District three months after judgment was entered, based on the same course of conduct alleged in the first. The District Court for the Southern District dismissed Teltronics' second action on res judicata grounds. This court affirmed. Teltronics Services, Inc. v. L M Ericsson Telecommunications, Inc., 486 F. Supp. 836 (S.D.N.Y.), on reargument, 491 F. Supp. 538 (S.D.N.Y. 1980), aff'd, 642 F.2d 31 (2d Cir.), cert. denied, 452 U.S. 960, 101 S. Ct. 3108, 69 L. Ed. 2d 971 (1981).
Meanwhile, on September 18, 1979, while the second action in the Southern District was pending, creditors initiated an involuntary bankruptcy proceeding against Teltronics in the Eastern District. On April 30, 1980, Teletronics was adjudicated a bankrupt. A trustee in bankruptcy was appointed and sought to assert a claim for equitable subordination of Ericsson's claims against the bankrupt. After a twenty-day trial, Bankruptcy Judge Parente held in a detailed opinion that Ericsson had not engaged in misconduct and that equitable subordination was not warranted. In particular, he found that Ericsson "never represented to Teltronics that Teltronics would not be required to make a timely payment of the interest due to Nordic on February 18, 1979," and that the Teltronics management knew that the company was obliged to pay the interest to Nordic on that date. Anaconda-Ericsson, Inc. v. Hessen (In re Teltronics Services, Inc.), 29 B.R. 139, 157 (Bankr.E.D.N.Y. 1983). The trustee appealed, but a settlement was reached between the trustee and Ericsson before the appeal was argued. Other Teltronics creditors, including Rand and Frese, shareholder plaintiffs in the present action, challenged the settlement, which was nevertheless upheld by the bankruptcy court, the district court, and ultimately this court. See In re Teltronics Services, Inc., 762 F.2d at 188.
Meanwhile, on April 12, 1983, Edward Beagan, Chairman of Teltronics' Board, brought an action on behalf of himself and Teltronics against Ericsson in the Eastern District on grounds similar to those pressed in the instant case. Judge Neaher held that only the bankruptcy trustee could represent Teltronics and granted summary judgment against Beagan on his individual claims. Teltronics Services, Inc. v. Anaconda-Ericsson, Inc., 587 F. Supp. 724, 729, 734. Beagan's case was consolidated on appeal with the challenge to the settlement and was also affirmed. In re Teltronics Services, Inc., 762 F.2d at 193.
Defendants moved in November, 1983, to dismiss and for summary judgment. Before plaintiffs filed opposing papers, a conference was held at which the district court advised the parties that it was holding defendants' motion in abeyance pending the outcome of the appeal concerning the trustee's settlement and the Beagan action, eventually decided on March 22, 1985. In re Teltronics Services, Inc., 762 F.2d 185. On August 30, 1985, Judge Neaher granted defendants' motion for summary judgment in its entirety and dismissed the complaint. Rand v. Anaconda-Ericsson, Inc., 623 F. Supp. 176, 184 (E.D.N.Y. 1985). Plaintiffs and their attorneys were enjoined from pursuing any new or pending litigation that concerns Teltronics. Id. at 185. The district court also held that sanctions under Rule 11, Fed. R. Civ. P., were appropriate, but did not determine the actual amount to be paid. After the district judge denied plaintiffs' motion to reconsider, this appeal followed.
We disagree. To fall within Section 10(b), misrepresentations must have some direct pertinence to a securities transaction. In Chemical Bank v. Arthur Andersen & Co., 726 F.2d 930 (2d Cir.), cert. denied, --- U.S. ----, 105 S. Ct. 253, 83 L. Ed. 2d 190 (1984), for example, an auditor misrepresented the financial condition of a corporation seeking a loan from the bank. The loan was to be collateralized by the stock of the borrower's subsidiary. We noted that none of the alleged misrepresentations pertained to the pledged securities and that the incidental involvement of securities as collateral did not by itself implicate the anti-fraud provisions of the federal securities laws. In Securities and Exchange Commission v. Drysdale Securities Corp., 785 F.2d 38 (2d Cir. 1986), cert. denied, --- U.S. ----, 106 S. Ct. 2894, 90 L. Ed. 2d 981 (1986), however, we held that misrepresentations about the financial condition of a broker-dealer were "in connection with" a securities transaction where the broker-dealer's financial strength was directly related to its ability to carry out obligations under agreements calling for the repurchase or resale of government securities. The misrepresentations thus went to the consideration for a securities transaction. In the present case we do not have even the incidental involvement of securities that existed in Chemical Bank. Only the filing for bankruptcy in September, 1979, viewed in the most tortured fashion, purports to link the conduct of the defendants to the purchase or sale of a security.
The "forced sale" doctrine is of no aid to appellants, however, because its application has been limited to securities transactions resulting in an intra-firm freeze-out of one group of investors by another. Mayer v. Oil Field Systems Corp., 721 F.2d 59 (2d Cir. 1983) (buyout of limited partners with artificially overvalued stock); Coffee v. Permian Corp., 434 F.2d 383 (5th Cir. 1970) (fraud on minority shareholders in a liquidation), cert. denied, 412 U.S. 920, 93 S. Ct. 2736, 37 L. Ed. 2d 146 (1973); Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.) (fraud in scheme involving purchase of one class of securities, followed by tender offer for another class, followed by short-form merger), cert. denied, 389 U.S. 970, 88 S. Ct. 463, 19 L. Ed. 2d 460 (1967). These cases involve conventional transactions in the capital market where the transaction allegedly involves fraud, and some securities holders are forced by other investors in the same firm to trade their investments for cash.
Plaintiffs claim that a December 5, 1978 letter from Ericsson to Beagan constitutes a "tender offer," and that the Ericsson press release announcing the Teltronics default was thus a false or misleading communication "in connection with" this tender offer prohibited by Section 14(e) of the Williams Act, 15 U.S.C. § 78n(e).
The present case is directly controlled by Hanson Trust PLC v. SCM Corp., 774 F.2d 47 (2d Cir. 1985). We held there that several private purchases of securities did not constitute a tender offer under the Williams Act. We noted generally that
The district court correctly held that plaintiffs' claim under Section 1 of the Sherman Act, 15 U.S.C. § 1, failed for lack of standing. 623 F. Supp. at 184; see also 587 F. Supp. at 730. In Associated General Contractors of California, Inc. v. California Council of Carpenters, 459 U.S. 519, 103 S. Ct. 897, 74 L. Ed. 2d 723 (1983), the Supreme Court noted favorably the decision in Loeb v. Eastman Kodak Co., 183 F. 704 (3d Cir. 1910), stating that Loeb "held as a matter of law that neither a creditor nor a stockholder of a corporation that was injured by a violation of the antitrust laws could recover." Associated General, 459 U.S. at 533, 103 S. Ct. at 906. In Loeb, as in the instant case, a stockholder/creditor sued under the antitrust laws, alleging that his stock was rendered worthless and that his claim against the company was only partially satisfied because defendants' alleged antitrust violation drove the company into bankruptcy. See 183 F. at 706-07. The court held that only the bankruptcy trustee could assert the claims set forth in the complaint, and, therefore, that the plaintiff lacked standing. Plaintiffs' antitrust claim is without merit.
Plaintiffs assert that defendants violated the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1962(a), (b), (c), 1964(c) (1982). As predicate felonies to support a pattern of racketeering activity, they allege securities fraud, bankruptcy fraud, wire fraud, mail fraud, obstruction of justice, and obstruction of a criminal investigation by the Securities and Exchange Commission. 623 F. Supp. at 180. The district court dismissed the RICO claim on two grounds. First, it held that the complaint properly alleged only one predicate act--wire fraud arising from the Ericsson press release--and therefore did not meet the RICO requirement of two predicate acts. 623 F. Supp. at 182. As a second basis for dismissal, the district court held that plaintiffs' rights are merely derivative of those of Teltronics, and that plaintiffs therefore lack standing to sue under RICO. Id.
Warren v. Manufacturers National Bank of Detroit, 759 F.2d 542, 544 (6th Cir. 1985) (quoting Stevens v. Lowder, 643 F.2d 1078, 1080 (5th Cir. 1981)); see also Carter v. Berger, 777 F.2d 1173, 1176 (7th Cir. 1985) (In RICO case, "an indirectly injured party should look to the recovery of the directly injured party, not to the wrongdoer, for relief."). The RICO action, like plaintiffs' Section 10(b) claim, is a corporate asset, and shareholders cannot bring it in their own names without impairing the rights of prior claimants to such assets.
The imposition of costs and attorney's fees under Rule 11, Fed. R. Civ. P., is not before us at this time, although appellants chose to brief the issue. When appellees moved to adjourn the briefing and argument of this appeal until the amount of such costs and fees was finally determined by the district court, appellants opposed on the ground that an appeal from such a determination might not be taken. Because we denied appellees' motion, the Rule 11 issue is clearly not before us.
The relevant text of Section 10(b), 15 U.S.C. § 78j(b), provides: