Court Opinion

ID: 8877247
Source: CourtListenerOpinion
Date Created: 2022-11-26 19:29:24.055789+00
Date Added: 2024-06-11T17:06:26.099508
License: Public Domain

SEITZ, Circuit Judge
(dissenting):
Initially, I agree with the majority that we do not have before us any issue as to the right to require security for expenses with respect to the federal cause of action. That issue was decided in plaintiff’s favor by Judge Grim’s opinion and order of November 17, 1965. This appeal is solely from Judge Luongo’s order of June 13, 1966 which dealt only with security in connection with the state cause of action.
The majority opinion decides that a plaintiff’s claim for attorney’s fees, arising from a secondary action, is a direct and separate action against the corporation based on quantum meruit. From this premise they conclude that it is not within the purview of the Pennsylvania Security for Expenses statute because that statute applies solely to secondary actions.
As I see it, the question here is not whether under Pennsylvania law this plaintiff’s claim for an attorney’s fee would be characterized as “a direct and separate action based on quantum meruit” rather than “a reserved issue of the derivative suit”. Instead, I think the issue is whether such a fee claim when asserted in a secondary action is subject *626to the operation of the Pennsylvania security statute.
When this motion for security was first filed by GAC the secondary action was admittedly pending. At that time both GAC and certain of the individual defendants had appeared by counsel. Obviously at that point GAC had incurred attorneys’ fees and the appearing individual defendants had incurred attorneys’ fees for which GAC might become liable under the Indemnification Statute. Thus, when this motion was filed and first considered the Pennsylvania statute, properly invoked by the corporation, required the filing by Levine of appropriate security. Indeed, Judge Grim so recognized. His only reason for not immediately fixing the amount of security was that the record was insufficient for that purpose. In fact, his order directed discovery to that end. However, before the matter came on for consideration Judge Grim died. Thereafter, plaintiff filed a motion to dismiss the action and to award costs and attorneys’ fees against GAC. This motion and GAC’s previously-filed motion for security were argued before Judge Luongo. He first entered an order dismissing the action against the individual defendants as moot and a few days later entered the order for security now on appeal.
Certainly the dismissal of the derivative claims for mootness did not relieve GAC of the expenses of defending the action. Yet these are the very expenses embraced within the Pennsylvania security statute. If, therefore, the right to security did not survive the dismissal of the suit as to the individual defendants it is clear that the purpose and policy of the statute would be frustrated at least as to the period when the secondary action was admittedly extant. I believe the statute was applicable and did not become inapplicable because of the later “mootness” development.
My second reason for believing that the district court properly applied the Pennsylvania statute is found in the language of Paragraph B itself. It recites in pertinent part:
“In any such suit instituted or maintained by a holder [of stock or trust certificates] * * *, the corporation in whose right such action is brought shall be erititled at any stage of the proceedings, to require the plaintiff or plaintiffs to give security for the reasonable expenses, including attorneys’ fees, which may be incurred by it in connection with such suit, and by the other parties defendant in connection therewith, for which it may become liable pursuant to subsection C of this section 516 [indemnification of parties defendant], to which security the corporation shall have recourse in such amount as the court having jurisdiction shall determine upon the termination of such action.”
This statute applies only to secondary or derivative actions. Reifsnyder v. Pittsburgh Outdoor Advertising Co., 405 Pa. 142, 173 A.2d 319 (1961) ; Knapp v. Bankers Securities Corp., 230 F.2d 717 (3rd Cir. 1956). And as noted the majority agree with the plaintiff that once the action was dismissed against the “real” defendants there was left only a direct and not a secondary action, thus rendering the security statute inapplicable by its terms. I agree that a plaintiff’s right to reimbursement for counsel fees based on a benefit conferred on “his” corporation in a derivative action creates a claim against such corporation. But it does not follow that because the security statute is applicable only to secondary actions that it has no application to the fee claim asserted therein. Indeed, I think the statutory language calls for the opposite conclusion.
Paragraph B recites that the security issue may be raised “at any stage of the proceedings”. To suggest that “proceedings” does not embrace the attorney fee aspect of the litigation is to circumscribe the statutory purpose unduly. This is so because an explicit purpose of the statute is to provide the corporation with security for legal fees incurred by it directly. These expenses necessarily *627continue into the fee application phase, particularly when a plaintiff’s claim is contested. Thus, they are part of the “proceedings”. To exclude the statute from the fee phase of the proceedings frustrates in part the statutory objective.
Finally, there are policy considerations which dictate a construction of the statute which renders it applicable here. The corporation will incur substantial legal services in litigating plaintiff’s claim for fees. Indeed, these hearings could well constitute the equivalent of what would have been the trial on the merits. This is so because plaintiff, under one theory of recovery, must in effect prove that he filed meritorious claims. While there is no Pennsylvania authority on this point, it has been recognized elsewhere. Compare Rosenthal v. Burry Biscuit Corp., Del.Ch., 209 A.2d 459 (1949); Mintz v. Bohen, Del.Ch., 210 A. 2d 569 (1965); Dann v. Chrysler Corp., Del.Ch., 215 A.2d 709 (1965) affirmed, Chrysler Corp. v. Dann, Del.Ch., 223 A. 2d 384 (1966). The corporate expenses incurred in trying plaintiff’s claim for fees in this context are of the very types which the statute was designed to cover.
Furthermore, the purpose of the statute is to prevent “strike” suits. Shapiro v. Magaziner, 418 Pa. 278, 210 A.2d 890 (1965). The threat of a hearing amounting to a trial on the merits to see whether plaintiff conferred a “benefit” for fee purposes can create the same possibilities of abuse as are involved in the filing of a strike suit. Thus, the policy considerations behind the passage of the security statute also support the conclusion that “proceedings” as used in this statute applies to all facets of a secondary action from commencement to conclusion, including hearings on the right of plaintiffs to recover attorneys’ fees based on asserted benefits arising out of the secondary action.
I conclude that the Pennsylvania statute remained applicable to this case after the dismissal of the claim against the real defendants as moot. I therefore conclude that the trial court committed no error in applying it. No question is raised as to how he applied it in this case. I would affirm the district court’s judgment insofar as it stayed further proceedings on the state cause of action until the entry of security.