for their Interstate shares. Louis W. Biegler, a director of Interstate, and the Biegler Foundation, of which Biegler was the principal trustee, were major shareholders in Interstate and consequently received substantial amounts of NSMC stock.
Although the value of NSMC stock rose immediately after the merger, by February of 1970 its market price had plummeted. This triggered various lawsuits charging fraud and violations of the securities laws. The three class actions now before this Court were originally filed in the District Court for the Southern District of New York.
In early 1972 they were consolidated and Pomerantz Levy was appointed plaintiffs' general counsel for motion practice and pretrial proceedings. On December 1, 1972, these actions and other cases pending against Student Marketing were transferred by the Judicial Panel on Multidistrict Litigation to this Court for consolidated pretrial proceedings. The consolidated cases were certified as a class action in late 1973. Notice was sent to all class members, including the Bieglers. It provided that the opt-out period pursuant to Rule 23(c)(2) of the Federal Rules of Civil Procedure would expire November 30, 1973.
The Settlement Discussions
The potential liability of Student Marketing in the lawsuits was extremely high and careful consideration was given to the possibility that NSMC's financial foundation would be weakened, if not destroyed, by protracted litigation. Settlement was therefore considered an important element for the survival of the company.
Representatives of Student Marketing participated with Pomerantz Levy in negotiations toward that end.
During these discussions, especially as the opt-out date drew near, the negotiators feared that one of the recently acquired subsidiary companies of NSMC would withdraw from the class actions and assert an individual claim, possibly for rescission of its merger with NSMC.
If successful, a rescission action would further diminish Student Marketing's assets, which were already insufficient to meet the potential liability. All involved recognized that if one company attempted to withdraw from the class actions and bring a separate action, the other subsidiaries would be forced to follow in order to protect their chance for recovery. The unavoidable result would be the bankruptcy of Student Marketing, an event which would devastate the subsidiary companies, particularly the Interstate insurance companies which relied heavily upon public trust.
To forestall such a domino effect, those persons who had received substantial amounts of NSMC stock in exchange for their stock in companies acquired by Student Marketing executed a "sign-off" agreement.
The agreement provided, inter alia, that the signatories (1) would not elect exclusion from the class action; (2) would relinquish all claims against NSMC except those asserted in the class action; and (3) would try to reach a settlement of the class claims against NSMC in return for a pro-rata share in a settlement fund consisting of at least 1,500,000 shares of NSMC stock. Biegler executed this agreement for himself and the Biegler Foundation on November 20, 1973, ten days before the expiration of the opt-out period for the class.
On April 8, 1974, a Stipulation and Agreement of Compromise and Settlement was entered into by representatives of the class and Student Marketing, specifically by Pomerantz Levy for the class and by Olwine Connelly for NSMC. The settlement proposal basically tracked the sign-off agreement and provided for, among other things: (1) pro-rata distribution of a settlement fund consisting of 2,050,000 NSMC shares; (2) relinquishment of all claims against NSMC; and (3) assignment to the class of any derivative claims on behalf of NSMC. The Court ordered publication of the proposed settlement and scheduled a hearing on its approval. All class members were notified. The settlement was approved and an appropriate judgment was entered on June 25, 1974, In re National Student Marketing Litigation, 68 F.R.D. 151 (D.D.C. 1974), from which no appeal was taken.
The Biegler Counterclaim
Originally, the Bieglers were members of the plaintiff class. However, as a result of extensive pretrial discovery, the named plaintiffs, through class counsel, moved for leave to amend the complaint to join the Bieglers and other Interstate principals as additional defendants on claims under the securities laws.
The motion was granted and, in May of 1976, Louis W. Biegler responded by filing a two-count counterclaim against the named plaintiffs and Pomerantz Levy.
The counterclaim marked the first time that the Bieglers expressed any objection to the settlement. The first count purports to be a class action on behalf of former Interstate shareholders who were injured through inadequate representation by class plaintiffs and counsel. Although phrasing the counterclaim in terms of inadequate representation, the Bieglers clearly charge intentional and fraudulent misconduct on the part of the class representatives for their failure to seek rescission of the merger.
According to them, rescission would have given Interstate shareholders the benefit of restitution of the Interstate companies, rather than the much less valuable pro-rata share of the damage settlement.
By foregoing rescission as a remedy, the class representatives assured the inclusion of the substantial Interstate assets in the assets of Student Marketing, thereby making available a much larger pot for both the settlement fund and counsel fees. The Bieglers seek an accounting to determine the damages resulting from the misconduct of plaintiffs and Pomerantz Levy, as well as exemplary damages, costs and attorney fees.
On February 7, 1977, the Bieglers, with leave of the Court, amended their counterclaim to join Student Marketing's counsel, Olwine Connelly, as an additional counterdefendant to the first count. They charge that Olwine Connelly acted in collusion with plaintiffs and class counsel in perpetrating the fraud on the Interstate shareholders and on the Court.
The second count of the counterclaim, brought against the named plaintiffs and Pomerantz Levy, alleges misconduct in joining the Bieglers as defendants. The gist of the charge is that plaintiffs and counsel had in fact decided to join the Bieglers as defendants prior to execution of the sign-off agreement and approval of the settlement, but consciously concealed the intention to sue so as to obtain their acquiescence in the agreement and settlement. As a result of the omission, the Bieglers gave up off-setting defenses to the charges now brought against them by plaintiffs. Actual and exemplary damages, costs and attorney fees, and other relief are sought.
In order to clarify the scope and res judicata effect of the Court's decision, initial consideration must be given to the Bieglers' motion for class certification of the first count of the counterclaim. The Court will then discuss the motions for summary judgment filed by plaintiffs, Pomerantz Levy, and Olwine Connelly, since those motions involve issues relevant to the other motions before the Court. Finally, the remaining motions will be considered.
Motion for Class Certification
The Bieglers have moved for class certification of the first count of their counterclaim pursuant to Rule 23(a), (b)(1) and (b)(3) of the Federal Rules of Civil Procedure.
The purported class consists of former Interstate shareholders who received NSMC stock through the merger and who suffered damage as a result of the inadequate representation afforded by the class representatives. Plaintiffs, Pomerantz Levy, and Olwine Connelly oppose class certification because, inter alia, the Bieglers' early knowledge of the fraud by NSMC makes them subject to defenses which may be inapplicable to the remaining members of the purported class. For reasons more fully discussed in the section on summary judgment, infra, the Court agrees and concludes that the Bieglers cannot fairly and properly represent the interests of the class since their individual claims are barred by their failure to seek rescission promptly. Rule 23(a)(4), Fed. R. Civ. P.; see Zenith Laboratories, Inc. v. Carter-Wallace, Inc., 530 F.2d 508, 512 (3d Cir.), cert. denied, 429 U.S. 828, 50 L. Ed. 2d 91, 97 S. Ct. 85 (1976); Koos v. First National Bank of Peoria, 496 F.2d 1162, 1164-65 (7th Cir. 1974). The motion for class certification of the first count of the counterclaim must be denied.
Motions for Summary Judgment -- The First Count
The first count of the Biegler counterclaim alleges a right to recover under various legal theories, including common law fraud, violations of the securities laws, and breach of fiduciary duties.
The gravamen of their charges, however, is that plaintiffs and class counsel failed to seek rescission of the merger. In response, the plaintiffs and the two law firms contend that, as a matter of law, the Bieglers had no right to rescission of the merger and, accordingly, summary judgment should be granted in favor of the counterdefendants. The Court agrees.
Rescission is an equitable remedy which must be asserted promptly after discovery of fraud. McLean v. Clapp, 141 U.S. 429, 432, 35 L. Ed. 804, 12 S. Ct. 29 (1891). In Baumel v. Rosen, 412 F.2d 571 (4th Cir. 1969), cert. denied, 396 U.S. 1037, 90 S. Ct. 681, 24 L. Ed. 2d 681 (1970), a leading and frequently cited case dealing with rescission in a securities context, the Court stated:
Rescission is a radical move, and the law exacts the election of that course to be asserted without wait. The demand is that advice of the determination be given within a reasonable time after discovery of the ground for rescission.