Certiorari Denied June 8, 1970. See 90 S.Ct. 1870.
OPINION OF THE COURT
ADAMS, Circuit Judge.
This is an appeal from the order of the District Court for the District of Delaware dismissing the petition of plaintiff, Alexander Kahan, for counsel fees and expenses arising out of his individual and representative actions against defendants for violation of § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
The District Court dismissed plaintiff's petition for counsel fees on the grounds that: plaintiff had not filed a meritorious damage action which could survive a motion to dismiss, because he was not a purchaser or seller and because he failed to allege reliance on the deception; plaintiff failed to establish a proper class action, or benefit to the class; and plaintiff sought counsel fees from the defendants rather than from a fund created by his efforts. [Kahan v. Rosenstiel, 300 F.Supp. 447 (D.Del. 1969)]
Because the District Court disposed of the matter on a motion to dismiss, the facts alleged in plaintiff's petition for counsel fees and his amended complaint in the underlying suit must be accepted as true. See e. g. Walker Process Equipment, Inc. v. Food Machinery and Chemical Corp., 382 U.S. 172, 175, 86 S.Ct. 347, 15 L.Ed.2d 247 (1965); Frank Mashuda Co. v. Allegheny County, 256 F.2d 241, 242 (3d Cir. 1958), aff'd 360 U.S. 185, 79 S.Ct. 1060, 3 L. Ed.2d 1163; 2J Moore Federal Practice ¶ 12.08 (2d ed.1966). The essential allegations are as follows:
Plaintiff is a minority shareholder (owner of 750 shares) in Schenley Industries, a Delaware corporation. Defendants, in this proceeding and in the underlying suit, are the directors of Schenley at the time of the transaction alleged, including Lewis S. Rosenstiel, the controlling shareholder, the Dorothy H. & Lewis S. Rosenstiel Foundations, alleged to be dominated and controlled by Rosenstiel and to be his "alter ego", Glen Alden Corporation, the tender offeror, and Meshulam Riklis, the controlling shareholder of Glen Alden.
In March 1967, Schenley and P. Lorillard Company were engaged in negotiations for a merger between the two companies. As a condition of the merger Rosenstiel, Schenley's chairman and chief executive officer, demanded a premium for his stock and the stock he controlled. Because Lorillard refused to pay the premium, negotiations terminated with Lorillard, and commenced with Glen Alden which was willing to meet Rosenstiel's terms. In March, 1968, as a result of these talks and as part of a plan by Glen Alden to acquire control of or merge with Schenley, Rosenstiel sold 945,126 shares of Schenley common stock to Glen Alden for $80 per share, making Glen Alden the controlling shareholder of Schenley. This occurred although Lorillard's proposed overall offer to every shareholder of Schenley common stock was better than the offer to be made by Glen Alden to the other Schenley shareholders, and despite the fact that other corporations were ready and willing to make better overall offers to Schenley common stockholders.
Contemporaneously with Glen Alden's purchase of Rosenstiel's shares, it was publicly announced through various financial and news media that a tender offer by Glen Alden would be made to Schenley shareholders which would be equivalent to the $80 per share paid to Rosenstiel. This offer was to consist of $20 in cash, a six percent twenty-year subordinated debenture in the principal amount of $60, and three warrants to purchase Glen Alden's common stock at $15 per share for each share of Schenley common stock.
Plaintiff concluded that the value of this proposed offer had been misrepresented in that it was not equal to the sum paid to Rosenstiel for the shares controlled by him. He filed a class action in the District Court of Delaware on behalf of all Schenley common shareholders at the time of the alleged transaction except for those involved in it, and also filed a suit in the Delaware Court of Chancery. These actions charged defendants with violating § 10(b) of the 1934 Securities Exchange Act and Rule 10b-5, and with a breach of fiduciary
Plaintiff further alleged that as a result of this legal action and the efforts of his counsel, Glen Alden publicly announced in April, 1968, it would increase its offer. The new offer included $10 in cash and a six percent twenty-year subordinated debenture in the principal amount of $100. Although this represented a $17 increase over the original offer, plaintiff contended it was still not equal to the $80 per share paid to Rosenstiel and filed an amended complaint. In August, 1968, the offer was raised to include $13 in cash and a six percent sinking fund, twenty-year subordinated debenture in the principal amount of $100 for each 1.5 shares of Schenley common stock,
On February 20, 1969, plaintiff filed a petition for counsel fees, costs and expenses. The defendants promptly moved to dismiss both the complaint and the petition. Hearing was held on April 25, 1969, and on June 10th, Chief Judge Wright filed an opinion in support of his order dismissing plaintiff's petition. An order dismissing the complaint as moot was entered on July 8, 1969. Plaintiff then appealed the dismissal of his petition.
Counsel fees and expenses incurred in litigation are not ordinarily recoverable in the absence of a statute or contract authorizing them. Fleischmann Distilling Corp. v. Maier Brewing Company, 386 U.S. 714, 87 S.Ct. 1404, 18 L.Ed.2d 475 (1967). There is, however, a well established exception in situations where a party has by his own effort and expense created or preserved a fund which benefits others. Mills v. Electric Auto-Lite Company, 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (January 20, 1970); Sprague v. Ticonic National Bank, 307 U.S. 161, 59 S.Ct. 777, 83 L.Ed. 1184 (1939); Trustees v. Greenough, 105 U.S. 527, 26 L.Ed. 1157 (1881); 6J Moore Federal Practice ¶ 54.77  (2d ed. 1966). In such circumstances, it would be unjust to require one party to bear the entire expense which necessarily results in a benefit to
In Mills v. Electric Auto-Lite Company, supra, decided on January 20, 1970, the Supreme Court agreed with the decision of the Second Circuit in Smolowe v. Delendo Corp., 136 F.2d 231, 148 A.L.R. 300 (2d Cir. 1943) cert. denied, 320 U.S. 751, 64 S.Ct. 56, 88 L.Ed. 446 (1943) that attorney's fees could be awarded in private suits brought to enforce the Securities Exchange Act.
Mills was a suit brought by minority shareholders, both derivatively on behalf of the corporation and as representatives of the class of minority shareholders, to set aside a merger. The plaintiffs alleged that a proxy statement sent to the shareholders by the Auto Lite management to solicit votes in favor of a merger with Mergenthaler Linotype Company was misleading and in violation of § 14(a) of the Securities Exchange Act and Rule 14a-9 thereunder. The Court held inter alia that the officers of Auto Lite violated § 14(a) by issuing proxy solicitations which failed to disclose that the directors of Auto Lite who recommended approval of the merger were "under the control and domination" of Mergenthaler. Since the nondisclosed information was material to the shareholders, there was a violation of 14(a) even if the terms of the merger were fair. The Court said that the question of fairness was relevant to the relief plaintiffs could obtain on remand, but that the determination of fairness alone could not negate a finding of liability.
In Part IV of his opinion, Justice Harlan discussed the question of awarding counsel fees to the plaintiffs. He stated that "petitioners, who have established a violation of the securities laws by their corporation and its officials, should be reimbursed by the corporation or its survivor for the costs of establishing the violation." 396 U.S. at 389, 90 S.Ct. at 624. In the Mills opinion, Justice Harlan noted that the plaintiffs' suit conferred a benefit on all the shareholders although the ultimate question of relief was not yet decided. "[R]egardless of the relief granted, private stockholders' actions of this sort `involve corporate therapeutics,' and furnish a benefit to all shareholders by providing an important means of enforcement of the proxy statute." 396 U.S. at 396, 90 S.Ct. at 628. (footnotes omitted).
In Mills, the Supreme Court clearly extended the circumstances in which the award of attorney's fees is appropriate to situations where the "suit has not yet produced, and may never produce, a monetary recovery from which the fees could be paid". The Supreme Court stated that the award of attorney's fees is not limited to circumstances in which there is a monetary fund from which fees may be paid, but extends to any situation in which the litigation "has conferred a substantial benefit on the members of an ascertainable class." 396 U. S. at 393-394, 90 S.Ct. at 626. The rationale of the Court's decision, which held the corporation responsible for the attorney's fees, was that all those who
In order to recover attorney's fees, it is not necessary that suit be brought to successful completion, since such a requirement might discourage prompt settlements.
It is necessary to determine, however, that where a suit is filed it is "meritorious" and that it is the plaintiff's effort which caused others to benefit. Levine v. Bradlee; Globus v. Jaroff; Chrysler Corporation v. Dann, 43 Del.Ch. 252, 223 A.2d 384 (1966). In several cases which became moot, courts have said suits were "meritorious" if they could have survived a motion to dismiss. See e. g., Chrysler Corporation v. Dann;
In the cases previously cited, including Mills v. Electric Auto-Lite Company, plaintiffs were awarded counsel fees from the fund created or from the class which benefited from their action. In the present case plaintiff seeks the highly unusual relief of having counsel fees paid by an adverse party. In derivative suits when a plaintiff sues corporate officers for breach of their fiduciary duties, the corporation which benefits from the suit — not the directors charged with mismanagement — is directed to pay. See Jones v. Uris Sales Corp., 373 F.2d 644 (2d Cir. 1967); c. f. Ballwanz v. Jarka Corp., 382 F.2d 433, 435 (4th Cir. 1967). In Mills, fees were awarded from the corporation in which the plaintiff was a shareholder. "To award attorneys' fees in such a suit to a plaintiff who has succeeded in establishing a cause of action," stated Justice Harlan, "is not to saddle the unsuccessful party with the expenses but to impose them on the class that has benefited from them and that would have had to pay them had it brought the suit." 396 U.S. 396, 90 S.Ct. 628. In exceptional circumstances, however, where the behavior of a litigant has reflected a willful and persistent "defiance of the law", a court of equity has the power to charge an adverse party with plaintiff's counsel fees as well as court costs. See e. g. Vaughan v. Atkinson, 369 U.S. 527, 530-531, 82 S.Ct. 997, 8 L.Ed.2d 88 (1962); Hill v. Franklin County Board of Education, 390 F.2d 583, 585 (6th Cir. 1968); Bell v. School Board of Powhatan County, Virginia, 321 F.2d 494, 500 (4th Cir. 1963) (en banc); Rolax v. Atlantic Coastline Railroad Co., 186 F.2d 473, 481 (4th Cir. 1951). Such awards, however, are clearly reserved for exceptional
In his brief, the plaintiff in the present case relies heavily on Taussig v. Wellington Fund, Inc., 187 F.Supp. 179 (D.Del.1960) aff'd, 313 F.2d 472 (3d Cir. 1963) cert. denied, 374 U.S. 806, 83 S.Ct. 1693, 10 L.Ed.2d 1031 (1963). Taussig was a declaratory judgment action filed by minority shareholders of Wellington Fund to determine the ownership of the name "Wellington". Wellington Fund, the nominal defendant in the derivative suit, was held to have the exclusive right to use the name; Wellington Company and Wellington Company, Ltd. were enjoined from using it. The District Court awarded plaintiffs attorney fees from Wellington Company and Wellington Company, Ltd. which stood the most to gain by misappropriating the "Wellington" name, stating that "[a]bsent a statutory provision, an equity court is not deprived of its inherent power to award attorney's fees to the prevailing party where the circumstances warrant", i. e. where the wrongdoers' actions "were unconscionable, fraudulent, willful, in bad faith, vexatious or exceptional." 187 F.Supp. at 222-223. In Taussig, the Court found as a fact "exceptional circumstances" to warrant the imposition of attorney's fees against the defendants.
In order to place himself within the scope of these cases, plaintiff here points to defendants' conduct in settling the suit without consulting plaintiff, his counsel or the court, and thus in plaintiff's words, "brazenly ignoring Rule 23(e)." If a court ultimately decides that a plaintiff created substantial benefit for others, it could find it inequitable to deprive plaintiff of counsel fees, merely because defendants prevented the physical creation of the fund by flagrantly ignoring Rule 23.
Defendants contend and the trial court found that plaintiff did not represent a proper class under Rule 23. Plaintiff attacks this point in two ways: first, he argues that he did in fact represent a proper class; second, he contends that the plaintiff's suit should have been treated by defendants and the court as a proper class action until a final determination to the contrary was made.
The factual allegations in plaintiff's complaint would appear to be sufficient to state a class action at this stage of the proceedings. Plaintiff alleged he represented all the shareholders of Schenley's common stock at the time of the transaction in question, except, of course, for the Rosenstiel interest. Class actions have been held to be a proper and appropriate means of enforcing Section
The defendants contend that this was not a class action because plaintiff did not sell his stock and cannot therefore represent those shareholders who did. In Mills v. Electric Auto-Lite Company, the plaintiff who did not submit his proxy represented all the minority shareholders including those who did vote for the merger. 396 U.S. at 388, 90 S.Ct. at 623 n. 11. See also, Swanson v. American Consumer Industries, Inc., 415 F.2d at 1333. Defendants also state that the class consisting of all Schenley stockholders does not include those who sold their stock pursuant to the tender offer. Plaintiff, however, claimed to represent all persons who owned Schenley common stock at the time Glen Alden acquired Rosenstiel's interest, not merely those who presently own Schenley common stock or those who owned it when the petition was filed. The same alleged misrepresentations and nondisclosure by the defendants were addressed to this entire group. The position of the lower court that this was not a proper class because one must be a purchaser or seller to bring a § 10(b) suit is not consistent with the remaining parts of this opinion. The determination whether there is a proper class does not depend on the existence of a cause of action. A suit may be a proper class action, conforming to Rule 23, and still be dismissed for failure to state a cause of action. As the 10th Circuit said in Esplin v. Hirschi, supra, since the effectiveness of the securities laws may depend in large measure on the application of the class action device "the interests of justice require that in a doubtful case, such as was presented here when considered by the trial court, any error, if there is to be one, should be commited in favor of allowing the class action." 402 F.2d at 101.
In the present case, it is also appropriate to follow the view taken by a number of district courts, and acknowledged by Chief Judge Wright in a ruling in Rogasner v. American-Hawaiian Steamship, Civil Action No. 3707 (D.Del. Aug. 1, 1969), that a suit brought as a class action should be treated as such for purposes of dismissal or compromise, until there is a full determination that the class action is not proper. Gaddis v. Wyman, 304 F.Supp. 713, 715 (S.D.N.Y.1969); Philadelphia Electric Co. v. Anaconda American Brass Co., 42 F.R.D. 324 (E.D.Pa.1967).
By this decision we do not indicate whether Glen Alden's revised tender offers were in fact settlement offers made in response to plaintiff's suit so as to make Rule 23(e) applicable. The causal connection between plaintiff's suit and defendant's revised offer, if any, should be established at trial.
Chief Judge Wright's primary ground for dismissing plaintiff's petition was that the underlying 10(b) complaint was not "meritorious" in that it could not have withstood a motion to dismiss.
Section 10(b) of the Securities Exchange Act of 1934 states:
Rule 10b-5 states:
In Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957), the Supreme Court declared "that a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of this claim which would entitle him to relief." Chief Judge Wright decided that because plaintiff did not tender his shares or rely on the alleged misrepresentations, he did not state a claim under Section 10(b) of the Securities Exchange Act. Relying on Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952) cert. denied, 343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952), Chief Judge Wright's position was that an action under 10(b) could be maintained only by a purchaser or seller who had relied on the alleged misrepresentation or nondisclosure. In Birnbaum, the Second Circuit upheld the dismissal of a suit under Section 10(b) and Rule X-10B-5 brought by minority shareholders of a corporation who had not sold their stock pursuant to a tender offer. After reviewing the legislative history of Section 10(b) the Court stated that the rule "extended protection only to the defrauded purchaser or seller." 193 F.2d at 464. The words "in connection with the purchase or sale" were thus given a narrow meaning. Because Birnbaum was cited numerous times for the proposition that only a defrauded purchaser or seller could bring a civil action under Section 10(b), and because many courts began to question its vitality, and to distinguish it,
The Second Circuit considered this question more recently in Crane Co. v. Westinghouse Air Brake Company, 419 F.2d 787 (Dec. 10, 1969), which makes it clear that there is no longer a per se requirement that plaintiffs in a 10(b) suit be defrauded purchasers or sellers. In Crane, a unanimous panel, including Chief Judge Lumbard who had joined in the Iroquois decision, held that an action for injunctive relief could be brought by one who was not a purchaser or seller provided there was a causal connection between the alleged violation of 10b-5 and the injury suffered by the plaintiff. Judge Smith, who wrote the opinion in Crane, endorsed a broad interpretation of Rule 10b-5 so as to effectuate the policy of the Act.
Defendants in the present case interpret the Crane case as one involving a "forced seller" under Vine v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.
It may be worth noting that it was not the ultimate sale of stock by Crane which caused its alleged damage. Crane claimed that the misrepresentation and manipulation by Westinghouse caused the shareholders of Westinghouse to reject Crane's tender offer, and it was this that injured Crane.
The Crane decision was relied on by the District Court for the Southern District of New York in Butler Aviation International, Inc. v. Comprehensive Designers, Inc., 307 F.Supp. 910 (S.D.N.Y. Dec. 24, 1969). The Court in Butler granted plaintiff's motion for a preliminary injunction enjoining defendant, Comprehensive Designers, Inc., from consummating an outstanding tender offer. Butler was the target corporation of the tender offer and it alleged violations of Rules 10b-5, 10b-6 and 13d-1 by the defendant. Judge Cannella stated: "[I]t is not required under Rule 10b-5 that plaintiff be a buyer or seller of stock as those terms are normally understood. The phrase `in connection with the purchase or sale of any security' was intended by Congress to mean only `that the device employed, whatever it might be, be of a sort that would cause reasonable investors to rely thereon, and, in connection therewith, so relying, cause them to purchase or sell a corporation's securities. [SEC v. Texas Gulf Sulfur Co., 401 F.2d 833 at 860 (2d Cir. 1968)] See Crane Co. v. Westinghouse Air Brake Co."
The Second Circuit affirmed the decision in Butler, but declined to pass on the question of standing under Rule 10b saying, "Inasmuch as we agree that standing exists under § 14(e), * * * we need not pass on standing under Rule 10b-5. But cf. General Time Corp. v. Talley Industries, Inc., 403 F.2d 159, 164 (2d Cir. 1968), cert. denied, 393 U.S. 1026, 89 S.Ct. 631, 21 L.Ed.2d 570 (1969); Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 796-799 (2d Cir. Dec. 10, 1969)." Butler Aviation International, Inc. v. Comprehensive Designers, Inc., 425 F.2d 842, 843 n. 1 (2d Cir. Jan. 8, 1970).
In General Time Corp. v. Talley Industries, Inc., supra, referred to by the Second Circuit in Butler, Judge Friendly said: "[W]e would not wish to place our approval on a holding that under no circumstances can an issuer have standing to seek an injunction. There are many practical advantages, well summarized in a note, Private Enforcement under Rule 10b-5: An Injunction for the Corporate Issuer? 115 U.Pa.L.Rev. 617, 628-29 (1967), in allowing a corporation in certain cases to enjoin manipulation of its stock. * * * While we leave that point open, it may be useful to say that we do not consider Birnbaum v. Newport Steel Corp. * * * to have ruled out such a suit despite phrases which, if taken out of context, might seem to support such a view." 403 F.2d at 164.
The present case represents the first time this Circuit has addressed itself to the question whether Section 10(b) may be enforced by a private party who is neither a purchaser nor seller. The Circuits which have decided the issue are divided. The Seventh and Eighth Circuits require that plaintiffs be purchasers or sellers even where injunctive relief is sought. Greater Iowa Corporation v. McLendon, 378 F.2d 783 (8th Cir. 1967) (following Birnbaum); Jachimiec v. Schenley Industries, Inc., No. 15024 (7th Cir. 1965) cert. denied, 382 U.S. 841, 86 S.Ct. 46, 15 L.Ed.2d 82 (1965). The Second Circuit has construed the statute more broadly at least where an injunction is sought. The Sixth Circuit has also indicated that in a suit for injunctive relief the requirements may be liberalized. In Britt v. Cyril Bath Co., 417 F.2d 433, 436 (6th Cir. 1969), that court stated that in a suit under § 10(b), the necessary causal connection between the fraud alleged and the resultant purchase or sale of a security might be relaxed.
A broad view of the requirements for stating a claim for injunctive relief is particularly appropriate. In SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 at 193, 84 S.Ct. 275 at 283, 11 L.Ed.2d 237 (1963), the Supreme Court said, "It is not necessary in a suit for equitable or prophylactic relief to establish all the elements required in a suit for monetary damages."
Neither the language of § 10(b) and Rule 10b-5 nor the policy they were designed to effectuate mandate adherence to a strict purchaser-seller requirement so as to preclude suits for relief if a plaintiff can establish a causal connection between the violations alleged and plaintiff's loss. We agree with the Second Circuit in Crane that a strict interpretation of the Securities Exchange Act is not warranted under the circumstances present here. The Act was designed to eliminate deceptive and unfair practices in security trading and to protect the public from inaccurate, incomplete and misleading information. The thrust of the Act and the decisions interpreting it is to give the investing public the opportunity to make knowing and intelligent decisions regarding the purchase or sale of securities. A suit which seeks to enjoin deceptive practices which if continued would lead to completed purchases or sales that give rise to a cause of action under § 10(b) is not inconsistent with this policy and will in fact promote free and open public securities markets.
The District Court found plaintiff's pleadings deficient in that they failed to allege reliance on the defendants' misrepresentations. Proof of reliance is not an independent element which must be alleged to establish a cause of action. In the recent Mills case, the Supreme Court ruled that reliance on false or misleading proxy statements is not required in order to set forth a cause of action under § 14(a) of the Securities Exchange Act. Judge Harlan stated:
A further reason for the Supreme Court's decision was that "Proof of actual reliance by thousands of individuals would * * * not be feasible * * * and reliance on the nondisclosure of a fact is a particularly difficult matter to define or prove * * *." 396 U.S. at 382, 90 S.Ct. at 620 n. 5.
Since Rule 10b-5 also prohibits only misrepresentations which are "material", the reasoning of the Supreme Court in Mills applies with equal force to suits brought for violation of that Rule. This is in accord with the view of the Second and Sixth Circuits in Crane Co. v. Westinghouse Air Brake Co., 419 F.2d at 797 and Britt v. Cyril Bath Co., 417 F.2d at 436.
Defendants contend that even if a more liberal interpretation of the statute is appropriate for injunctive relief the plaintiff here failed to request such relief and hence the complaint may not be so construed. Plaintiff's complaint does not specifically ask for equitable relief; it contains only the general request for "further relief as may be just." Nonetheless, under Rule 54(c) of the Federal Rules of Civil Procedure, a court may have awarded any relief appropriate under the circumstances. See United States for Use and Benefit of Bergen Point Iron Works v. Maryland Casualty Company, 384 F.2d 303, 304 (2d Cir. 1967); Arley v. United Pacific Insurance Company, 379 F.2d 183, 187 (9th Cir. 1969); Whittaker v. Wall, 226 F.2d 868, 872 (8th Cir. 1955); Fanchon & Marco, Inc. v. Paramount Pictures Inc., 202 F.2d 731, 734, 36 A.L.R.2d 1336 (2d Cir. 1953).
Plaintiff has set forth sufficient allegations of misrepresentations, manipulations and nondisclosures of material facts "in connection with the sale or purchase of securities" so as to entitle him to the opportunity to prove a violation of the Act. If the allegations of the complaint are taken in the light strongest for the plaintiff, as we are obligated to do on a motion to dismiss, then it is conceivable that plaintiff's pleading has alleged such misconduct by the defendants. Of course, nothing in this opinion should be construed as suggesting what in fact actually did occur.
In consideration of the foregoing, it is our view that plaintiff's pleadings state a cause of action which may be the basis for an award of counsel fees, and therefore the order dismissing his petition will be reversed. The case will be remanded to the district court where plaintiff has the burden of proving the allegations set forth in his complaint and petition.
OPINION SUR PETITION FOR
In the Petition for Rehearing, defendants other than Glen Alden and Riklis ask that the 1969 District Court order be affirmed as to them in view of the statements in the first full paragraph on page 168. We believe that it is a more orderly procedure for the District Court to consider such a contention.