Court Opinion

ID: 9464259
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:28:59.676858+00
Date Added: 2024-06-11T17:38:32.394148
License: Public Domain

HUFSTEDLER, Circuit Judge,
concurring and dissenting:
In order to grant summary judgment to Lee, the district court had to decide, as a matter of law, that (1) Lee was not liable for alleged misleading statements in the proxy materials, and (2) appellant and his fellow stockholders were not entitled to rescind the sale of the real property to Lee by reason of the misrepresentations in the proxy materials. I agree with my brothers that the district court correctly decided the first issue, but I cannot agree that the district court could eliminate equitable relief at this stage of the case. The majority opinion’s holding on this point is contrary to the Federal Rules of Civil Procedure and to the explicit teaching of the Supreme Court in Mills v. Electric Auto-Lite Co. (1969), 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 and J. I. Case Co. v. Borak (1964), 377 U.S. 426, 84 S.Ct. 1555, 12 L.Ed.2d 423.
If appellant stated a claim for equitable relief against the directors for violating Section 14(a) of the Securities Act of 1934, and if that claim was not destroyed by undisputed facts in the record which could be read into the complaint, Lee could not be dismissed from the case. The district court knew that Lee was an indispensable party in a suit to rescind the sale of the real property to him. (F.R.Civ.Proc., Rule 19(a).) Therefore, the district court removed the rescission thorn from Lee’s side by striking equitable relief from the complaint and, to complete the task, it also struck the ¡is pendens notice.
*1327The district court’s rulings cannot be sustained on the theory that appellant stated no equitable claim for relief. Equitable relief, including rescission, is unquestionably available to redress violations of Section 14(a). (E. g., Mills v. Electric Auto-Lite Co., supra 396 U.S. 375, 90 S.Ct. 616.) The complaint adequately averred a violation of Section 14(a), and nothing in the record before the district court defeated resort to equity.
The majority opinion recognizes that equitable relief is available to persons injured by Section 14(a) violations. The basis of its holding is that the district court has discretion to deny equitable relief before determination of the director’s liability, and no abuse of discretion has been shown. That holding would be unassailable if the liability case against the directors had been decided, because at that stage of the litigation, the district court has very broad discretion in fashioning an appropriate remedy. (Mills v. Electric Auto-Lite Co., supra, 396 U.S. at 386, 90 S.Ct. 616.) But this case has not been tried, and the district court has not decided the directors’ liability issue. There is not a scrap of authority to sustain the majority’s view that the district court has discretion to strike equitable relief before liability has been decided.
The district court’s rulings are not authorized by the Federal Rules of Civil Procedure. The directors moved for judgment on the pleadings pursuant to Rule 12(c).1 No judgment on the pleadings was permissible because the complaint stated a claim for both legal and equitable relief against the directors, and, hence a claim for rescission as to which Lee was an indispensable party. The ruling cannot be sustained by treating the Rule 12(c) motion as if it were a Rule 12(f) motion to strike because Rule 12(f) “is neither an authorized nor a proper way to procure the dismissal of all or a part of a complaint.” (5 Wright & Miller, Federal Prac. & Proc. § 1380, at 782 (1969).) The district court had no discretion to disregard the Federal Rules of Civil Procedure.
If there were any doubt about the impropriety of the district court’s eliminating equitable relief prematurely, it should be dispelled by the Supreme Court’s discussion in J. I. Case Co. v. Borak (1964), 377 U.S. 426, 435, 84 S.Ct. 1555, 1561, 12 L.Ed.2d 423:
“Our finding that federal courts have the power to grant all necessary remedial relief [in a securities fraud case] is not to be construed as any indication of what we believe to be the necessary and appropriate relief in this case. We are concerned here only with a determination that federal jurisdiction for the purpose does exist. Whatever remedy is necessary must await the trial on the merits." (Emphasis added.)
The formulation of appropriate equitable relief after liability is decided was reasserted in Mills v. Electric Auto-Lite Co., supra, 396 U.S. at 386, 90 S.Ct. 616 relying on J. I. Case Co. v. Borak. The Court held that the Court of Appeals “should have affirmed the partial summary judgment on the issue of liability.” (Id. at 389, 90 S.Ct. at 624.) Although misleading statements made in connection with obtaining proxies, in violation of Section 14(a), did not render the ensuing merger contract void, the contract was voidable at the option of the innocent stockholders. The Court pointed out that equitable relief of all kinds is available to the injured stockholders, once liability is established. The court can set aside the merger, but it does not have to choose that remedy if it is neither practical nor fair under all of the circumstances of the case.
Nothing in Mills, nor in any of the cases cited by the majority, remotely supports the majority’s conclusion that the district court has any discretion to deny equitable relief before the liability issue has been decided. (Swanson v. American Consumers Industries, Inc. (7th Cir. 1973) 475 F.2d 516 (judg*1328ment for defendants after full trial reversed; cause remanded for equitable relief); Klaus v. Hi-Shear Corp. (9th Cir. 1975) 528 F.2d 225 (reversal of preliminary injunction; equitable standing of shareholder who did not grant a proxy); Crane Co. v. Westinghouse Air Brake Co. (2d Cir. 1969) 419 F.2d 787 (judgment for defendant after full trial on Section 14(a) — Rule 14a-9 issue affirmed; judgment for defendant on Section 9(a)(2) claim reversed).)
Boggess v. Hogan (N.D.Ill.1971) 328 F.Supp. 1048, cited by the majority, correctly states the applicable principles. In denying defendants’ motion to strike equitable relief from the prayer of the complaint, the court said: “This is not the proper time to determine the appropriate form of remedy, should the plaintiffs prove their case. This court has broad powers of discretion in fashioning suitable relief in securities fraud cases, and to limit the court’s alternatives at this stage of the litigation [motion to dismiss the complaint] would be premature and unwise.” (Id. at 1054. The court relied upon and quoted J. I. Case Co. v. Borak, supra, 377 U.S. 426, 84 S.Ct. 1555.)
Despite the majority’s acknowledgement of the principles stated in Boggess, it chooses to disregard them because the circumstances of this case are “very unique,” selection of remedies after trial would have been “futile and wasteful” as “it is inconceivable that any court . . . could have, justly and fairly, ordered Dr. Lee to reconvey his building.” In the first place, unusual circumstances of a particular case supply no excuse for abandoning the Federal Rules of Civil Procedure or for ignoring the teachings of the Supreme Court. In the second place, as the facts recited in the majority opinion reveal, this case is a garden variety securities case, distinguished, if at all, by its simplicity in the proxy field. No more difficulty is involved in rescinding the sale to Lee than in unwinding any other sale of real property, a function routinely performed by the Chancellor in rescission suits.
The district court had no authority to undertake any equity balancing before deciding liability. The factors stated by the majority to support its view that the equities favored Lee are thus irrelevant. Even if the district court could have looked at the equities, it could not have weighed on the scales, as the majority implies, Lee’s litigation expenses or Lee’s potential damage claim against the wrongdoing directors. Litigation expenses are the unhappy concomitants of litigation; they fall no less heavily on the innocent stockholder than on the innocent vendee.2 Exposure of wrongdoing directors to liability if Lee were compelled to reconvey the property to the corporation is not a factor to be weighed in balancing the equities between the stockholders and Lee.3
Presumed inadequacy of the legal remedy to compensate for the loss of real property has been the foundation for equitable relief since the beginnings of Chancery. This record supplies no support for the majority’s abolishing that age-old presumption and concluding that, if “the plaintiffs ultimately prevail damages would be . . .a perfectly adequate remedy.”
I concur in Part IV of the majority opinion.
I would vacate the orders striking the prayer for equitable relief and the lis pen-dens notice.

. At the time the district court ruled, voluminous discovery had been completed. However, no matters outside the pleadings were presented with the Rule 12(c) motion and the extent to which the district court may have relied on the answers to interrogatories and depositions is unclear. We therefore cannot treat the district court’s disposition as one of summary judgment or partial summary judgment. (A. S. Abell Co. v. Chell (4th Cir. 1969) 412 F.2d 712.)

. I assume for the purpose of this discussion that Lee is innocent, as are the shareholders, because there is nothing in this fragmentary record indicating otherwise. That picture of innocence, of course, might change if the case were tried.

. The corporation might be a defendant in a future action by Lee if he were compelled to return the property to it; but, of course, the ultimate liability for the directors’ wrongs falls on the directors, not on the corporation.
The majority’s suggestion that Yamamoto may have had unclean hands is not supported by the record; the district court did not purport to rely on the unclean hands doctrine.