Court Opinion

ID: 9463686
Source: CourtListenerOpinion
Date Created: 2023-08-04 23:13:13.875714+00
Date Added: 2024-06-11T17:38:13.974805
License: Public Domain

MANSFIELD, Circuit Judge
(dissenting):
I must dissent for the reason that in my view the record is clear that in settling and releasing the earlier Horenstein-Ruskay stockholders’ derivative claims based on alleged improper brokerage activities the parties to those actions did not settle or release claims that were first asserted years later to the effect that defendants sold their investment advisory office in violation of principles outlined in Rosenfeld v. Black, 445 F.2d 1337 (2d Cir. 1971).
The two claims are entirely separate and distinct from each other. Indeed the facts giving rise to the sale-of-office claim did not occur until some two years after the brokerage accounting action had been instituted. The sale-of-office claim could not, therefore, have been asserted in the settled action without court permission, see F.R. C.P. 15(d), which was never sought or obtained for such a claim. Nor did the parties to the earlier suits, in settling the brokerage claims, indicate that sale-of-office claims were contemplated, much less settled, probably for the reason that the principles of Rosenfeld v. Black were yet to be finally established. Indeed, in seeking court approval of the settlement and release of claims for an accounting for illegal brokerage profits estimated at a few million dollars, they did not advise the court, United’s stockholders, or anyone else, that they were also settling a sale-of-office claim amounting to some $62,000,000. Had they done so, it is clear that, in view of the possibility that the defendants’ sale of advisory office would violate basic principles being advanced in Rosenfeld, neither the district court nor United’s stockholders would have authorized settlement of a claim that might be worth $62,000,000 for a mere $535,000 to $650,000. Indeed, in approving the settlement, Judge Lasker noted that when considered against the plaintiffs’ claim of $2,064,000 damages the proposed settlement figure appeared to be a “respectable” one.
In short, the court, parties and United stockholders, thought they were settling brokerage claims, not a sale-of-office claim, which was never mentioned. In my view the expansive interpretation (to me a misinterpretation) given by the majority to the earlier settlement and court approval not only ignores the limited powers and purpose of the parties but it strips United and its stockholders of a valuable claim and confers an unjustifiable windfall upon the defendants.
The original Horenstein-Ruskay actions, commenced in 1967 on behalf of the investment fund United against W&R, which was investment advisor to United, and W&R’s directors, claimed that the defendants channeled United’s portfolio securities transactions to a W&R subsidiary, Kansas City Securities Corporation (KCSC), as the stockbroker for United and that in the handling of these United transactions on a brokerage basis the defendants engaged in various improper practices (e.g., “churning,” self-dealing, improper diversion of customer-di*399rected “give-ups,” etc.) which yielded illegal profits to W&R and to its subsidiary, KCSC. The Horenstein plaintiffs sought injunctive relief, impressment of a trust, and an accounting for the profits thus alleged to have been illegally diverted by the defendants.
Following the 1969 agreement by the defendants to sell control of W&R, which had a net asset value of $18,000,000 or $18 per share, to Continental Investment Corporation (CIC) for $80,000,000, the Horenstein plaintiffs, fearing that the individual defendants would thereby escape with the alleged ill-gotten gains realized as a result of their brokerage activities in the handling of the United account, sought leave in May, 1969, to amend their complaint by adding two new causes of action. One of the proposed new counts (the Second) claimed that the sale would deprive KCSC of its seat on the Pacific Stock Exchange, as a result of which United would incur a substantial loss, since under the investment advisory contract certain portions of KCSC’s fees were remitted to United. The other proposed new count (the Third) alleged that at least part of the premium paid for the W&R shares above the net asset value of $18 per share was attributable to the illegal profits realized by W&R as a result of its improper brokerage practices in the management of the United investment fund. In short, the Horenstein plaintiffs claimed that, since the premium represented a capitalization of the illegal brokerage profits, the sale should be enjoined or the proceeds be impounded in trust for United pending the outcome of the derivative suits. At no time did the Horenstein plaintiffs claim that the defendants had violated their fiduciary duty by selling their investment advisory position; their claims were directed solely against brokerage abuses and they sought relief limited to preventing the defendants from retaining the profits (realized directly or through capitalization and sale) attributable to those abuses.
The distinct and discrete nature of the Horenstein claims was recognized by Judge Harold R. Tyler, who granted the plaintiffs’ motion for leave to add the claim requesting a tracing of the allegedly ill-gotten profits, which he viewed as “substantially a request for an alternative basis for relief on the claims already stated in the complaint.” Horenstein v. Waddell & Reed, Inc., 13 Fed. R.Serv.2d 330, 333 (S.D.N.Y.1969). The only difference the addition of this request would make, he stated, “will be on legal argument and, perhaps, an additional motion for a preliminary injunction against the tender offer and sale.” Id.
As to that part of Horenstein’s proposed supplementation that alleged direct losses to United from the sale, however, Judge Tyler denied the motion. The proposed count, he stated, had nothing to do with the churning, self-dealing, diversion of give-ups and other brokerage activities alleged in the original complaint; it arose merely out of the sale of W&R stock and the investment advisory contract between W&R and United. He held, therefore, that the court lacked the power to entertain the suit under the doctrine of pendent jurisdiction and that, even if the court did have the power, “I find that the interests of judicial economy and fairness to litigants would not be served by adding this claim to either the Horenstein action or the consolidated actions.” Id. at 336. Thus Judge Tyler was unwilling to allow the Horenstein plaintiffs to add a claim that was not based on the alleged brokerage improprieties.
On June 4, 1969, Horenstein amended his complaint to request the tracing of profits, and plaintiff Ruskay followed suit in early July.' On July 2, however, the tender offer was consummated. No trust was imposed on the proceeds. In December 1969 both suits were settled.
In the latter part of 1971, following our decision in Rosenfeld v. Black, 445 F.2d 1337 (2d Cir. 1971), cert. dismissed, 409 U.S. 802, 93 S.Ct. 24, 34 L.Ed.2d 64 (1972), Ruskay and three stockholders who had not been involved in the Horenstein-Ruskay actions brought the present suits, alleging that the sale of the W&R stock constituted a sale of fiduciary office in violation of the principles established in Rosenfeld v. Black, *400supra. Their claim is based not merely on the defendants’ transfer of ownership of W&R to CIC at a premium but on the parties’ agreement that the sale at such a premium would not become effective unless the selling defendants succeeded in obtaining for the purchaser the reinstatement of the United investment fund’s advisory agreements, which would require the approval of United’s directors. The defendants were alleged to have violated their fiduciary duty by accepting the premium in exchange for successfully influencing the selection of W&R’s successor. Plaintiffs here appeal from the district court’s order granting partial summary judgment and dismissing this claim on the grounds of res judicata.
DISCUSSION
A stockholder-plaintiff in a derivative suit represents his company and its stockholders in a limited capacity only. He generally may settle only those disputes which are or could have been asserted by him with respect to the transactions alleged in his complaint on the company’s behalf. He may not use his claims or lawsuit as the basis for releasing the defendants generally or as a means of releasing claims which could not have been advanced by him.1
The essential question before us, therefore, is whether the sale-of-office claim was or could have been asserted in the Horenstein-Ruskay suit. The record answers this question in the negative. The claim was never asserted in the settled lawsuit. Nor could it have been asserted, since the facts giving rise to it did not occur until long after that suit was begun, and Judge Tyler’s ruling makes it clear that permission would not have been granted to add it.
The majority seek to remedy this glaring deficiency by taking the position that since the sale of W&R stock was described in the supplemental Horenstein-Ruskay complaint and the sale-of-fiduciary office claim arises out of that sale, the present plaintiffs are precluded from asserting the sale-of-office claim. The majority’s analysis, however, proves too much. The claim Horenstein unsuccessfully attempted to add in the original actions — that the sale would deprive a W&R subsidiary of its exchange seat and would thereby injure United — also arose out of the sale. Thus, under the majority’s analysis, that claim would similarly be barred, even though it clearly did not form and could not have formed any part of the subject matter of the Horenstein-Ruskay actions. The sale-of-office claim asserted here stands in the same position as the loss-of-exchange-seat claim which Judge Tyler refused to add to the Horenstein-Ruskay complaint. Both claims are completely unrelated to the breaches of fiduciary duty alleged in the original complaint. Both are related to the Horenstein-Ruskay action only to the extent that the sale was mentioned in the amended complaint in that action as the basis for tracing the illegal brokerage profits and the claims for loss-of-exchange seat and for sale-of-fiduciary-office also arose out of that sale. Neither could have been alleged at the time the lawsuit was filed. Both involved little additional factual proof but many additional legal problems.
Thus it is readily apparent that Judge Tyler would have denied a motion to add a Rosenfeld claim to the original complaint and, under such circumstances, we have held that it must be assumed that he would have refused to add the claim. Burns Bros. v. Central Railroad of New Jersey, 202 F.2d 910 (2d Cir. 1953). In essence, what the majority has done is to hold that the representatives in the original actions settled *401disputes as to which they had no authority to act as representatives. In this I cannot concur.
Nor does the majority’s reliance on the release executed between United and the Horenstein-Ruskay defendants, rather than on other elements of the settlement, change this analysis. The release was effective only to the extent that the Horenstein plaintiffs acted within the limits of their representation, as part of the settlement of their suits. A company cannot, as a general matter, bar derivative actions on its behalf by release.
Even if the Horenstein plaintiffs might have been permitted to assert a Rosenfeldtype claim, the language of the settlement documents should not be construed to bar such a claim. The release was not, as the majority contends, a general release — indeed, such a release would not ordinarily have been approved.2 It released the defendants only from “all claims, demands or causes of action arising . . .for or by reason of any of the matters or transactions recited or described in the complaints, supplemental complaints and/or other pleadings.” Although Judge Lasker referred to the release as a “general” one in his order, it is clear from the context that he meant only that it released the defendants generally from any claims arising out of the churning and self-dealing transactions forming the basis of the claims. The transactions which were the focus of the Horenstein-Ruskay actions were churning and self-dealing transactions allegedly undertaken by W&R prior to the institution of the lawsuits in 1967. The sale of W&R stock was relevant to the suits only because plaintiffs demanded that the proceeds of those churning and self-dealing transactions be traced through to the selling stockholders. No allegation was made that the defendants had breached their fiduciary duties by selling their advisory positions on condition that they would influence United to validate the purchaser (CIC) as adviser. Judge Tyler, in granting in part Horenstein’s motion to supplement his complaint, viewed the tracing request simply as a remedy designed to recover the illegal brokerage profits. Although defendants’ attorneys, in a passing reference, derided the possibility of a Rosenfeld claim in their briefs, Judge Lasker made no mention of any such claim, much less of its merit, in his order approving the settlement, even though he painstakingly and exhaustively discussed the chances of plaintiffs’ success on all of the grounds alleged in their original complaints. The reason is clear: the district court did not intend to authorize settlement of such a claim. Nor did the stockholders, who were given absolutely no notice of it in the settlement notice sent to them as mandated by F.R.C.P. 23.1.
While I agree with the majority that “the settlement of complex lawsuits is a welcome development,” it should not be expanded beyond the parties’ intent, particularly in representative or derivative suits where the effect is to injure innocent stockholders. Because a representative shareholder acts within a limited grant of authority when settling a dispute on behalf of all stockholders and because of the dangers inherent in representative settlements, I *402would construe such settlement agreements narrowly, limiting their effect to the dispute clearly before the court at the time of settlement. We have stretched the effect of representative and derivative actions far enough by allowing nonparties to be precluded merely by receipt of a notice of settlement. It is asking too much to require, as the majority apparently would here, that each stockholder consult a lawyer as to possible subtleties of language and law not set forth on the plain face of the notice and its related documents.
For these reasons I would reverse the order of the district court.

. If claims beyond the bounds of the complaint are to be settled, the ordinary course of action is to seek amendment of the complaint to include those claims as part of the settlement. See, e.g., Masterson v. Pergament, 203 F.2d 315 (6th Cir.), cert. denied, 346 U.S. 832, 74 S.Ct. 33, 98 L.Ed. 355 (1953); Cherner v. Transitron Electronic Corp., 221 F.Supp. 48, 50 (D.Mass.1963); Heddendorf v. Goldfine, 167 F.Supp. 915, 921, 928 (D.Mass.1958). Such a procedure is appropriate only where the new claims have been adequately and explicitly considered by the parties and the court. Winkelman v. General Motors Corp., 48 F.Supp. 490, 495-96, modified, 48 F.Supp. 500 (S.D.N.Y.1942).

. As the court stated in Heddendorf v. Goldfine, 167 F.Supp. 915, 928 (D.Mass.1958), when it explicitly considered and approved a general release under the circumstances of the case:
“While, in general, this Court has some doubt whether it is desirable for a tribunal to release defendants from liability not only for specific items of disclosed wrongdoing but also for any undisclosed wrongdoing during a defined period, the Court has no scruples in approving in this case such a general release. Here we have had the benefit of the most intensive investigation by one of the country’s foremost specialists in this type of litigation. We have had an abundance of depositions. There has been a thorough canvas [sic] by a committee of Congress. This Court itself has conducted a number of hearings and has even gone so far as to open up a suggested line of evidence. On the special facts of this case, a general release is appropriate. But the special facts may not be paralleled in other litigation. And so this case may not serve as a broad precedent.”
Where, as here, there is no indication that the district court which approved the settlement even considered the possibility of a general release, it is wholly inappropriate for this court to infer one.