Opinion
CIVIL ACTION No. 98-2450-KHV.
January 11, 2001.
MEMORANDUM AND ORDER
For itself and on behalf of similarly situated class members, the Estate of John L. Flake brings suit against William K. Hoskins, Barrett Brady, Kay Nichols Callison, Mark C. Demetree, William V. Morgan, Clarence L. Roeder, Thomas J. Turner III, Highwoods Properties, Inc. and J.C. Nichols Company ("JCN"), for breach of corporate fiduciary duties and ERISA fiduciary duties and violation of federal securities law. On August 28, 2000, the Court sustained in part defendants' motion for summary judgment. See Memorandum And Order (Doc. #216) filed August 28, 2000 ("August 28 Order"). This matter comes before the Court on Plaintiff's Motion To Dismiss "Unocal" And Specific Securities Law Claims Without Prejudice Together With Memorandum In Support (Doc. #271) filed December 27, 2000 and Defendants' Motion To Reconsider (Doc. #226) filed September 12, 2000. For reasons set forth below, the Court overrules plaintiff's motion to dismiss and sustains in part defendants' motion to reconsider.
Procedural Background
On December 15, 2000, the Court ordered plaintiff to show cause in writing why the Court should not sustain Defendants' Motion To Reconsider (Doc. #226) filed September 12, 2000, which the Court construed as a supplemental motion for summary judgment, on the following claims:
(1) Misrepresentation that the reason for the Highwoods transaction was to further JCN's strategy for growth;
(2) Omission of the fact that defendants prevented JCN from entering into a more favorable transaction for JCN with Duke;
(3) Omission of the fact that Intell likely would have consummated a deal at $75.00 per share; and
(4) Omission of the fact that the JCN board refused to indemnify Duff Phelps for an appraisal of the ESOP stock.
Memorandum And Order And Order To Show Cause (Doc. #262) at 11. Plaintiff filed a substantive response on its claim that the proxy omitted the fact that Intell likely would have consummated a deal at $75.00 per share. With respect to the other three claims, plaintiff asks the Court to dismiss them without prejudice. Plaintiff also asks the Court to dismiss its fiduciary duty claim under Unocal Corp v. Mesa Petro. Co., 493 A.2d 946 (Del. 1985).
Discussion
I. Plaintiff's Motion To Dismiss Without Prejudice
Dismissal under Rule 41(a)(2) is within the sound discretion of the court. See Phillips USA, Inc., v. Allflex USA, Inc., 77 F.3d 354, 357 (10th Cir. 1996). In exercising that discretion, the Court considers the purpose of Rule 41(a)(2), which is designed primarily to prevent voluntary dismissals which unfairly affect the other side and to allow the Court to impose curative conditions. See id. (citing 9 C. Wright and A. Miller, Federal Practice and Procedure § 2364 at 279 (2d ed. 1994)). When considering a motion to dismiss without prejudice, "the important aspect is whether the opposing party will suffer prejudice in the light of the valid interests of the parties." Clark v. Tansy, 13 F.3d 1407, 1411 (10th Cir. 1993) (quotations omitted). "It is the prejudice to the [opposing party], rather than the convenience of the court, that is to be considered in passing on a motion for dismissal." Id. (citation omitted). To determine whether the non-movant will be prejudiced, the Court examines the following factors: "the opposing party's effort and expense of preparation for trial, excessive delay and lack of diligence on the part of the movant in prosecuting the action, insufficient explanation for the need to take a dismissal," and the present stage of the litigation. Id. (citations omitted); see Phillips, 77 F.3d at 358.
Both parties have relied on Rule 41(a)(2) and the cases interpreting that rule. Rule 41(a)(2) applies to dismissals of "actions," i.e. all remaining claims. The proper course to dismiss part of an action is to ask for leave to amend the complaint or the pretrial order depending on the stage of the litigation. See 8 James Wm. Moore et al., Moore's Federal Practice § 41.21[2] (3rd ed. 1997); In re Wyoming Tight Sands Antitrust Cases, 128 F.R.D. 121, 123 (D.Kan. 1989). The Court nevertheless finds that the standards for a Rule 15(a) motion to amend (which deletes claims asserted earlier) and a Rule 41(a)(2) motion are substantially the same. See Moore's Federal Practice § 41.21[2] at 41-33 (both motions are addressed to the discretion of the court, require that leave be granted freely unless defendant is prejudiced, and permit the court to impose curative conditions if leave is granted). In this case, the Court would reach the same result whether plaintiff's motion is construed as a Rule 15(a) motion or a Rule 41(a)(2) motion.
Applying these factors, the Court notes that defendants have expended significant effort and expense in preparing for trial. Defendants filed extensive briefing on their motions to dismiss and for summary judgment and on plaintiff's motion for class certification. Moreover, due to the late timing of plaintiff's motion, defendants have been forced to prepare for trial on the claims which plaintiff proposes to dismiss. Plaintiff has not delayed in the prosecution of this action, but it has not adequately explained the need to dismiss some of its claims on the eve of trial. Plaintiff contends that dismissal is necessary to simplify issues for the jury. That may be so, and the Court cannot criticize any efforts to simplify the issues for trial, but plaintiff has not explained why it should be able to preserve these claims for future prosecution. Defendants state that they are prepared to try the entire case at this time. The present stage of the litigation — less than one week before the scheduled trial date — strongly counsels against dismissal without prejudice of a significant portion of plaintiff's claims.
With respect to the securities claims which plaintiff seeks to dismiss, the Court ordered plaintiff to show cause why the Court should not enter summary judgment in favor of defendants on these claims. Instead of responding to the Court's order, plaintiff filed the instant motion to dismiss the claims without prejudice. The Tenth Circuit has explained, however, that "a party should not be permitted to avoid an adverse decision on a dispositive motion by dismissing a claim without prejudice." Phillips, 77 F.3d at 358 (affirming district court's decision to overrule motion to dismiss without prejudice where plaintiff filed motion a few days before its response to defendant's motion for summary judgment was due). For this reason and based on the Phillips factors discussed above, the Court overrules plaintiff's motion to dismiss three of its securities claims without prejudice. In addition, because plaintiff did not respond to the Court's order to show cause on these claims and for the reasons set forth in defendants' motion to reconsider, the Court sustains defendants' motion for summary judgment and motion to reconsider on the following claims:
(1) Misrepresentation that the reason for the Highwoods transaction was to further JCN's strategy for growth;
(2) Omission of the fact that defendants prevented JCN from entering into a more favorable transaction for JCN with Duke; and
(3) Omission of the fact that the JCN board refused to indemnify Duff Phelps for an appraisal of the ESOP stock.
With respect to plaintiff's Unocal claim, this claim did survive defendants' motion for summary judgment, see Memorandum And Order (Doc. #216) filed August 28, 2000 at 7-41, but the Phillips factors discussed above favor defendants. Most importantly, defendants have expended significant effort and expense on this claim. Defendants would be prejudiced if they were forced to defend plaintiff's claims in two separate trials.
Plaintiff argues that any potential prejudice to defendants may be alleviated by the following conditions: (1) plaintiff or any class member may re-file the dismissed claims only in the District of Kansas and with the permission of the court based on an express finding that amending the pleadings to add such claims will not prejudice defendants; and (2) as a condition to reassertion of the Unocal claim, plaintiff or any other class member(s) shall be required to pay a sum equal to 50% of all litigation expenses incurred by defendants through December 27, 2000 — the date plaintiff's motion was filed. If plaintiff had asked the Court to dismiss the entire case without prejudice, the imposition of these or even less onerous conditions might be sufficient to alleviate any prejudice to defendants. But plaintiff seeks to dismiss only part of the case and in effect bifurcate it. Obviously, defendants will incur fewer expenses if plaintiff's claims are tried together. None of the proposed conditions assure that defendants will not have to prepare and defend the Unocal claim in a second trial with many of the same witnesses as the first trial. Even in cases where a plaintiff seeks to dismiss the entire case on the eve of trial, courts often impose a condition that the dismissal is with prejudice. See, e.g., Tolle v. Carroll Touch, Inc., 23 F.3d 174, 177-78 (7th Cir. 1994); Unida v. Levi Strauss Co., 986 F.2d 970, 974 (5th Cir. 1993). For these reasons, the Court overrules plaintiff's motion to dismiss its Unocal claim without prejudice. On or before January 12, 2001, plaintiff shall inform the Court and opposing counsel whether it prefers to try its Unocal claim or to have the Court dismiss it with prejudice. The Court realizes that this deadline is tomorrow, but trial is scheduled to begin on the next business day. Moreover, plaintiff has had ample opportunity to consider whether it wants to try the Unocal claim or have it dismissed with prejudice.
"Rule 41(a)(2) implicitly permits the district court to dismiss an action with prejudice in response to a plaintiff's motion for dismissal without prejudice." Jaramillo v. Burkhart, 59 F.3d 78, 79 (8th Cir. 1995). When a plaintiff requests dismissal without prejudice and the district court intends to dismiss with prejudice, however, the district court must give the plaintiff notice of its intention and a chance to withdraw the request and proceed with litigation. Id. "Otherwise, the district court would deny the plaintiff the option of trying the case on the merits, because unlike a dismissal without prejudice, a dismissal with prejudice operates as a rejection of the plaintiff's claims on the merits and res judicata precludes further litigation." Id.
II. Defendants' Motion For Reconsideration / Supplemental Motion For Summary Judgment
Plaintiff alleges that in the proxy discussing the Highwoods transaction, and the letters from JCN to employee stock ownership plan ("ESOP") participants and JCN shareholders, defendants made misrepresentations and omissions which violated federal securities laws, Section 14(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78n; Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k; and Section 12(a)(2) of the Securities Act of 1933, 15 U.S.C. § 77l. Each statute requires plaintiff to show that the underlying fact was false and that defendants were negligent in not discovering otherwise. See Wilson v. Great Am. Indus., Inc., 855 F.2d 987, 995 (2d Cir. 1988); Gould v. Am.-Hawaiian Steamship Co., 535 F.2d 761, 777-78 (3d Cir. 1976) (Section 14(a) only requires negligence); Herman MacLean v. Huddleston, 459 U.S. 375, 382 (1983) (Section 11 only requires negligence); Wertheim Co. v. Codding Embryological Scis., Inc., 620 F.2d 764, 767 (10th Cir. 1980) (Section 12(a)(2) only requires negligence). In the instant motion, the Court considers only plaintiff's claim that the proxy omitted the fact that Intell likely would have consummated a deal at $75.00 per share.
A. Summary Judgment Standards
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c); accord Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247 (1986). The moving party bears the initial burden of showing that there is an absence of any genuine issue of material fact. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). Once the moving party meets its burden, the burden shifts to the nonmoving party to "set forth specific facts showing that there is a genuine issue for trial." Anderson, 477 U.S. at 256. A "genuine" factual dispute requires more than a mere scintilla of evidence. Id. at 252.
In considering a summary judgment motion the Court must view the evidence in the light most favorable to the nonmoving party. See Tom v. First Am. Credit Union, 151 F.3d 1289, 1291 (10th Cir. 1998). Summary judgment may be granted, however, if the nonmoving party's evidence is merely colorable or is not significantly probative. See Anderson, 477 U.S. at 250-51. Thus, "`[w]here the record taken as a whole could not lead a rational trier of fact to find for the nonmoving party,' summary judgment in favor of the moving party is proper." Thomas v. IBM, 48 F.3d 478, 484 (10th Cir. 1995) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986)).
B. Uncontested Facts
The following facts are uncontested, deemed admitted or, where disputed, viewed in the light most favorable to plaintiff.
On January 26, 1995, Gary Barnett of Intell Management and Investing Company ("Intell") first expressed interest in investing in JCN. After the announcement of the Highwoods transaction and opposition to the announced $65 price from some JCN shareholders, JCN allowed Intell some access to due diligence materials. By January 28, 1998, Intell made a bid to the board to acquire all JCN stock for $75 per share. Barnett testified that counsel for JCN told him that if Intell wanted to proceed with a transaction, it would first have to escrow the $17,200,000 termination fee for Highwoods. By letter of February 10, 1998, Intell advised the JCN board that it determined not to proceed with its offer. Intell stated:
In the event the proposed merger with Highwoods does not receive the prerequisite 66-2/3% approval of the shareholders of the Company, it is Intell's current intent to pursue an Acquisition of the Company pursuant to conditions similar to those contained in the Proposal Letter including the provision contained in paragraph 2 thereof which provides for the holders of the Company's outstanding common stock to receive $75 per share in cash, as adjusted, and to consider other alternative proposals for the Acquisition of the Company whereby the current shareholders could retain an interest in the Company in addition to the receipt of a substantial cash payment.
Letter of February 10, 1998 at 1, attached as Exhibit 2 to Appendix [3] To Defendant's Motion For Summary Judgment (Doc. #158) filed April 24, 2000.
Intell's management, accountants and attorneys spent a lot of time analyzing the due diligence information provided by JCN and personally inspected the JCN real properties in Kansas City. Barnett testified that he would have proceeded with a $75 per share offer if the Highwoods transaction had been voted down and that Intell had the assets and access to financing necessary to make an acquisition of JCN at that price. By March 20, 1998, Barnett again contacted Brady to reiterate Intell's interest.
On June 2, 1998, JCN and Highwoods issued a joint proxy/prospectus ("the proxy") to JCN shareholders. The proxy described Intell's interest as follows:
On January 9, 1998, JCN received a letter from Intell in which it expressed the presumption that the value of JCN Common was "in the range of $65-75 per share." At that time, neither Duke/Simon nor Intell had undertaken a detailed review of the books and records of JCN. The JCN Board of Directors agreed to permit both Duke/Simon and Intell to conduct a thorough investigation of JCN to confirm their assessments of value and determine their willingness to propose an alternative transaction to the Merger. Both Duke/Simon and Intell then proceeded to conduct a due diligence investigation of JCN. On January 28, 1998, JCN received a letter from Duke/Simon indicating that they had elected not to propose a transaction with JCN. Also on January 28, 1998, Intell expressed an interest in a merger with JCN pursuant to which JCN Shareholders would receive $75 per share in cash. In a February 11, 1998 letter to JCN, Intell indicated it did not feel it appropriate to pursue a transaction with JCN until such time as JCN shareholders had an opportunity to vote on the Merger. Intell further indicated its then-current intent, in the event the Merger was not approved by JCN Shareholders and subject to a number of conditions, to pursue an acquisition of JCN that would provide to JCN Shareholders $75 per share in cash, less an adjustment that would include any amounts due to Highwoods pursuant to the Original Merger Agreement.
Proxy at 30.
On June 8, 1998 and June 16, 1998, the board sent letters which the proxy incorporated. The June 8 letter to ESOP participants, and the June 16 letter to all shareholders, included a statement of Intell's interest:
A little known company called Intell has said that if shareholders don't approve the merger with Highwoods that Intell might consider making an offer for JC Nichols. Intell would have no obligation to make an offer — at any price.
* * *
9. Q: How do I know that $65 is a fair price? Were other offers received that were higher than $65?
A: Morgan Stanley Co., J.C. Nichols' independent financial advisor, has advised the Board that this is a fair price. The price represents a tripling in value of J.C. Nichols shares since our new management team arrived.
It is also important to understand that there are no higher offers. Two solid, highly respected companies did ask to look at our books after expressing their interest in making an offer. We invited them to examine our records. After doing so, they chose not to make any offer. Intell, a little known company, has hinted that it might make a higher offer. If the Highwoods offer is voted down, Intell would be under no obligation to make an offer at any price.
We also understand that a company called Bosfield made its interest know to the ESOT Trustee, however, we do not know how the Trustee responded. No offer was ever made to the Company or its Board of Directors.
10. Q: I have read that Intell will not make an offer because of the so-called "break up fee."
A: "Break up fees" are customary in merger agreements. Therefore, we would not expect this provision to impede a serious bidder from making a higher offer.
On July 1, 1998, approximately 76 per cent of the JCN shareholders voted to approve the merger between Highwoods and JCN. The merger closed on July 13, 1998.
C. Analysis
Defendants argue that plaintiff cannot show that defendants knew or should have known that if the Highwoods transaction was voted down, a $75.00 per share transaction with Intell likely would have been consummated. See Bertoglio v. Texas Int'l Co., 488 F. Supp. 630, 653 (D.Del. 1980) (no liability under Rule 14a-9 where resignation of directors was not "planned or contemplated" at the time of the proxy solicitation); Gould v. Am. Hawaiian Steamship Co., 351 F. Supp. 853, 868 (D.Del. 1972) (under § 14(a), directors must satisfy themselves that as best they know or can "reasonably ascertain," the proxy materials are complete and accurate), vacated on other grounds, 535 F.2d 761 (3d Cir. 1976); see also August 28 Order at 58 n. 45 (plaintiff must show that the underlying fact was false and that defendants were negligent in not discovering otherwise). Because defendants did not raise this argument in their original motion for summary judgment, the Court construed defendants' motion to reconsider as a supplemental motion for summary judgment and ordered plaintiff to specifically respond to defendants' argument. See Memorandum And Order And Order To Show Cause (Doc. #262) filed December 15, 2000 at 11-12.
Defendants point out that the proxy disclosed Intell's stated reasons for not going forward with the $75 per share offer in February 1998. The Court agrees, but plaintiff now bases its claim on the board's description of Intell's interest in the letter to ESOP participants on June 8, 1998, and the letter to all shareholders on June 16, 1998. Plaintiff argues that in these letters, the Board "deliberately downplayed the seriousness of Intell's interests by emphasizing only that Intell `might' make an offer for JCN at a higher price and was under no obligation to do so." Plaintiff's Response To December 15 Order To Show Cause (Doc. #269) filed December 27, 2000 at 10. Plaintiff concludes that the Board had an obligation "to state that Intell's intent had not changed" and that "Intell still intended to offer $75 a share if the Highwoods merger was defeated." Plaintiff's Reply Memorandum In Response To December 15 Order To Show Cause (Doc. #280) filed January 5, 2001 at 2.
Plaintiff refers only to the June 8, 1998 letter to ESOP participants, but the letter of June 16, 1998 to JCN shareholders is nearly identical. Moreover, in its statement of facts, plaintiff refers to material which is in an attachment to the letter of June 16, "frequently asked questions and answers."
Plaintiff also argues that defendants' statements in the solicitation letters of June 8 and 16 were materially different from the proxy statement description. See Plaintiff's Reply Memorandum in Response To December 15 Order To Show Cause (Doc. #280) filed January 5, 2001 at 1. To the extent plaintiff attempts to convert its omission claim to a misrepresentation claim, the Court rejects it. To date, plaintiff has alleged only that defendants omitted the fact that Intell likely would have consummated a transaction with JCN at $75 per share. See August 28 Order at 5; Plaintiff's Memorandum Of Law In Opposition To Defendants' Motion For Summary Judgment (Doc. #182) filed June 2, 2000 at 60.
Initially, the Court must reject plaintiff's arguments because they do not support its claim that the proxy materials should have disclosed that Intell likely would have consummated a deal at $75 per share. At most, plaintiff has shown that if the Highwoods transaction was voted down, Intell intended to pursue such a deal. Plaintiff's evidence is a far cry from its claim that defendants knew or should have known that Intell likely would have completed a deal at $75 per share. Even Barnett did not know whether additional due diligence would have impacted Intell's decision to proceed with a $75 per share offer. See Barnett Depo. at 104, 173-76, 187-89, 195-96. Based on the language of the Intell letter of February 10, 1998, the Board certainly had no obligation to state that if the Highwoods transaction was voted down, Intell was likely to consummate a transaction at $75 per share. See Intell Letter To JCN Board Of February 10, 1998 at 1 (Intell stated that its "current intent" was to "pursue" an acquisition of JCN under conditions "similar" to its prior $75 per share proposal); id. at 2 (if Highwoods agreement is terminated, please contact us "to begin negotiations" for the purpose of a "possible" acquisition of JCN by Intell). The Court concedes that Intell's intent to go forward was necessary for the consummation of any future deal, but no reasonable jury could find that such intent establishes (1) that Intell likely would have completed the future deal at $75 per share, or (2) that the JCN Board should have known of this information. Accordingly, the Court sustains defendants' motion to reconsider this claim, which it construes as a supplemental motion for summary judgment.
In fact, on the record, such a statement would itself have been misleading.
Even if plaintiff's claim could be read to allege that defendants omitted to state that Intell "intended" to consummate a deal at $75 per share, the Court would reach the same result. Plaintiff argues that defendants were required to disclose Intell's intent to make a $75 per share offer because the Board attempted to summarize the proxy statement in the solicitation letters of June 8 and 16. Plaintiff asserts that because the Board stated in the letters of June 8 and 16 that the proxy statement was "long and complicated," the letters supplanted the earlier proxy statement. The Court disagrees. First, before its reply brief on the order to show cause, plaintiff did not assert this theory. Indeed, while plaintiff specifically referred to the shareholder letters in other claims, it stated only that the "proxy" omitted the likelihood of a transaction with Intell. See Plaintiff John Flake's Responses And Objections To Defendants' First Set Of Interrogatories at 7-10 (referring to at least six claims based on misrepresentations or omissions in the letters of June 8 and 16 while omitting any reference to the shareholder letters in its claim that the proxy omitted the likelihood of a transaction with Intell), attached as Exhibit 1 to Appendix [3] To Defendant's Motion For Summary Judgment (Doc. #158) filed April 24, 2000. In any case, the Court has found that the letters were incorporated into the proxy. See Memorandum And Order (Doc. #216) filed August 28, 2000 at 3. Plaintiff cites no authority which states that supplemental letters which summarize a proxy should be held to the same standard with respect to omissions as a new proxy. Moreover, the proxy adequately disclosed Intell's intent as stated in the letter of February 10, 1998. Even if the Board had an obligation to ascertain Intell's intent as of June 1998, plaintiff has not shown that at that time, Intell intended to complete a $75 per share offer or that such information was reasonably ascertainable to the JCN Board. Barnett did testify that if the Highwoods transaction had been voted down, Intell intended to proceed with such an offer. See Bartlett Depo. at 127. Barnett apparently was confirming Intell's intent as expressed in the letter of February 10, 1998. See id. at 126-27 (comment immediately after questions on letter of February 10, 1998); id. at 126-31 (referring to January to February 1998 time frame). Based on this testimony, no reasonable jury would find that in June 1998, Intell intended to complete a deal with JCN at $75 per share. Moreover, even if a reasonable jury could so find, plaintiff has not shown that the JCN Board through the exercise of reasonable diligence could or should have discovered Intell's intent. See supra text at 6 (violation of sections 11, 12(a)(2) and 14(a) requires negligence).
IT IS THEREFORE ORDERED that Plaintiff's Motion To Dismiss "Unocal" And Specific Securities Law Claims Without Prejudice Together With Memorandum In Support (Doc. #271) filed December 27, 2000 be and hereby is OVERRULED. On or before January 12, 2001, plaintiff shall inform the Court and opposing counsel whether it prefers to try its Unocal claim or to have the Court dismiss it with prejudice.
IT IS FURTHER ORDERED that Defendants' Motion To Reconsider (Doc. #226) filed September 12, 2000 be and hereby is SUSTAINED on the following claims:
(1) Misrepresentation that the reason for the Highwoods transaction was to further JCN's strategy for growth;
(2) Omission of the fact that defendants prevented JCN from entering into a more favorable transaction for JCN with Duke;
(3) Omission of the fact that Intell likely would have consummated a deal at $75.00 per share; and
(4) Omission of the fact that the JCN board refused to indemnify Duff Phelps for an appraisal of the ESOP stock.
With respect to these claims only, the Court construes defendants' motion to reconsider as a supplemental motion for summary judgment.