Court Opinion

ID: 8911889
Source: CourtListenerOpinion
Date Created: 2022-11-27 03:19:21.307873+00
Date Added: 2024-06-11T17:08:36.123932
License: Public Domain

OAKES, Circuit Judge
(dissenting):
I dissent.
Judge Sweet’s first order on the subject of security, pursuant to a motion by defendants, required Haberman to post $100,000 in security under both N.Y.Bus.Corp.Law § 627 and Local Civil Rule 2. Haberman responded by purchasing $50,000 in Alleghany stock, which he contended relieved him from the obligation to post security as to the state claims under the provisions of § 627. Judge Sweet disagreed that Haber-man could avoid the New York security provision by a purchase of stock after the action had commenced and dismissed plaintiff’s state claims. Even though the first order imposing the $100,000 security requirement was also intended to cover the federal claims under Rule 2, the judge nevertheless did not dismiss the federal claims on condition that Haberman post $10,000 bond under Rule 2 within fifteen days. Haberman then moved the district court to reinstate his state claims and retain his federal claims if he deposited as security $100,000 in “United States obligations.” The district court granted this motion in an order requiring “deposit by plaintiff of $100,000” and payment by plaintiff of defendants’ attorneys’ fees in connection with the dismissal proceedings following Haberman’s perceived lack of compliance with the first security order. When the deadline for complying with this latest order passed, Haberman withdrew his offer. The district court then dismissed all of Haberman’s state and federal claims, imposed $2,150 in attorneys’ fees against Haberman for having “acted vexatiously” in connection with his belated offer to post $100,000, and set a deadline for notice to and intervention by other shareholders.
I would reverse the dismissal because I believe Judge Sweet misinterpreted New York law with respect to Haberman’s purchase of the $50,000 worth of Alleghany shares. Since this misinterpretation precipitated all of the subsequent moves and countermoves, both the federal and state claims should be reinstated.
The relevant portions of § 627 provide that a corporation on whose behalf a derivative action is brought is entitled to security for expenses, including attorneys’ fees, “if the plaintiff or plaintiffs hold less than five percent” of any class of shares or voting trust certificates or beneficial interest, and if the plaintiffs’ shares, certificates, and beneficial interest do not “have a fair value in excess of fifty thousand dollars.” The statute is silent as to when these criteria must be met for a plaintiff to avoid having to post security. It is undisputed that Haberman never before suit owned five percent or more of Alleghany stock or certificates. But in my view his purchase of $50,000 worth of stock after the district *1106court’s first order requiring security was sufficient under § 627 to relieve him of the obligation of posting security for the state law claims. I find authoritative Purdy v. Humphrey, 187 Misc. 40, 60 N.Y.S.2d 535 (Sup.Ct.1946), and Richman v. Felmus (I), 8 A.D.2d 985, 190 N.Y.S.2d 920 (2d Dep’t 1959), despite the fact that Tyler v. Gas Consumers Association, 34 Misc.2d 947, 229 N.Y.S.2d 169 (Sup.Ct.1962), is in the majority’s words “the most recent case.” In Purdy, which is closely on point, the New York Supreme Court ordered the plaintiff to post $15,000 security under the predecessor to § 627. The plaintiff thereafter purchased sufficient stock so that he held more than five percent of the shares. The court, upon motion by the defendant to dismiss, vacated its order requiring security and held, based on this purchase of stock, that plaintiff was “entitled to proceed without furnishing any security.” Purdy, supra, 60 N.Y.S.2d at 537.
Purdy was cited with approval in Rich-man, supra — the only appellate court decision cited by either side on this issue. It is true that Richman is not directly applicable to our case since it dealt with the rights of intervenors who wished to join an action and aggregate their holdings for purposes of avoiding the security requirement. The Appellate Division in Richmandid, however, cite Purdy for the analogous principle that the intervenors, who were required to have held some stock at the time the cause of action accrued, could count all of their stock acquired in the interim “for the purpose of making up the total statutory requirements to avoid providing security.” Richman, supra, 8 A.D.2d at 985, 60 N.Y.S.2d at 537.
The cases relied on by the majority are not as closely on point, and none is an appellate case. In Noel Associates v. Merrill, 184 Misc. 646, 53 N.Y.S.2d 143, 153 (Sup.Ct.1944), the New York Supreme Court clearly stated: “[A]fter the action is instituted the plaintiff may not go out and buy additional stock to enable him to proceed without depositing security.” This rule, however, was stated by the court as a natural consequence of the immediately preceding language which held that intervenors could not aggregate their holdings after commencement of the suit to avoid posting security. Id. As all parties and the district court here agree, this ban on aggregation after the commencement of the suit was erroneous and the law of New York now permits a plaintiff to aggregate his holdings with intervenors to meet the § 627 minima. See Sorin v. Shahmoon Industries, Inc., 30 Misc.2d 408, 220 N.Y.S.2d 760, 790 (Sup.Ct.1961). Thus, with its predicate reasoning erroneous, the Noel language that a plaintiff may not avoid posting security by increasing his holdings after institution of the action cannot be deemed reliable.
The decision in Sorin, supra, also cited by Alleghany, is totally inapplicable. There, the defendants argued that the plaintiffs should be required to post security, even though they initially complied with the $50,000 criterion, because the value of their stock had dropped below $50,000 during the course of the suit. In holding that the determination of whether security is required should be made at the beginning of the action, the court, quoting Dalva v. Bailey, 158 F.Supp. 204, 207 (S.D.N.Y.1957), stated: “ ‘There is no indication that the legislature intended that the right to security should depend upon the vagaries of the stockmarket.’ ” Sorin, supra, 220 N.Y.S.2d at 790-91. Thus, Sorin simply stands for the proposition that plaintiffs who have a sufficient initial stake in the suit need not post security just because the stock goes down.
The majority’s strongest case is Tyler v. Gas Consumers Association, supra. In Tyler, the plaintiff purchased stock in excess of five percent after a security order similar to that in this case had been issued. The New York Supreme Court dismissed the case because the plaintiff had not complied with the express terms of the security order which only gave him the two options of either filing the security or finding additional shareholders with whom to aggregate claims. 229 N.Y.S.2d at 170. The court in Tyler said that it had “not overlooked” Purdy v. Humphrey, supra, but implicitly de*1107dined to follow it, rating Noel Associates, supra, instead. Id. 229 N.Y.S.2d at 171.
While these cases certainly create a cloudy picture, I believe that Haberman has the better argument since Purdy was approved by the Appellate Division in Rich-man and since Tyler not only seemed more preoccupied with whether the court’s precise order was followed than with the requirements of § 627 but also relied almost exclusively on Noel Associates, the reasoning of which was faulty. This view is bolstered by the purpose behind § 627. As stated in Isensee v. Long Island Motion Picture Co., 184 Misc. 625, 54 N.Y.S.2d 556, 559 (Sup.Ct.1945):
A fair reading of the statute discloses an intent not to discourage derivative stockholders’ actions generally but to impose conditions designed to secure more substantial representation among complaining stockholders as some measure of insurance against the abuses attending the maintenance of such actions by persons whose financial stake in the corporation is slight. The mischief against which the statute is directed, is the prosecution of so-called “strike suits” by irresponsible persons bent upon capitalization of a nuisance value.
Regardless of Haberman’s motivation, his investment of $50,000 in the stock of Alleghany made him a substantial shareholder in the corporation even though the purchase was made after he was ordered to post security. Thus, he was no longer a shareholder with merely a “slight” financial stake in the corporation and should be treated as any other substantial shareholder for purposes of the security requirement. Of course, on remand, the district court could require Haberman to deposit his stock certificates with the court so that defendants have some protection. See Purdy v. Humphrey, supra, 60 N.Y.S.2d at 537.
There was nothing improper, standing alone, about the district court’s imposition of security under Local Civil Rule 2 for the federal claims — first as part of the $100,000 required for all claims and later as a separate $10,000. And it is true that imposition of security under Rule 2 is reversible only for an abuse of discretion. Leighton v. Paramount Pictures Corp., 340 F.2d 859, 860 (2d Cir.), cert. denied, 381 U.S. 925, 85 S.Ct. 1560, 14 L.Ed.2d 683 (1965); Farmer v. Arabian American Oil Co., 285 F.2d 720, 722 (2d Cir. 1960). See Hawes v. Club Ecuestre El Comandante, 535 F.2d 140, 143-44 (1st Cir. 1976). Unlike Farmer, supra, where this court held that there was an abuse of discretion, plaintiff here was clearly able to post the amount of the Rule 2 security, he had not come close to establishing a prima facie case, and the motion for security was filed within two months after Haberman was substituted as plaintiff. Moreover, there was nothing improper, in and of itself, about the district court’s order imposing attorneys’ fees for “vexatious” conduct regarding Haberman’s refusal to post security even after he belatedly agreed to do so. See Alyeska Pipeline Co. v. Wilderness Society, 421 U.S. 240, 258-59, 95 S.Ct. 1612, 1622, 44 L.Ed.2d 141 (1975). There is no support for Haberman’s view that the district court’s order of November 8, 1978, required him to deposit cash rather than United States obligations, as he proposed, and no indication that Haberman ever sought a clarification of the order.
Nevertheless, in my view the federal claims as well as the state claims should be remanded to the district court since the erroneous ruling on § 627 likely had a major impact on the subsequent proceedings. If the district court had correctly held that Haberman’s $50,000 stock purchase relieved him from posting security under § 627, then Haberman might well have complied with the Rule 2 order to post $10,000 to cover the federal claims.
I would thus reverse.