Wilmington Sec. v. WelchWilmington Sec. v. Welch
Before EBEL, KELLY, and BRISCOE, Circuit Judges.
This appeal arises out of one of several class action securities cases consolidated for pretrial purposes. Appellant Glen W. Barnard, a defendant in each of the consolidated cases, appeals various orders entered in one of those cases, Wilmington Securities et al. v. Welch et al., civil action No. 92-Z-1191. We affirm.
I.
A. Background of AHI
Alert Holdings, Inc., (AHI) is a Delaware corporation with its principal offices in Colorado. At all times relevant to this litigation, AHI was engaged in the business of providing remote electronic monitoring of business and residential security systems throughout the United States. Barnard is a former director and president of AHI.
In the late 1980‘s, AHI began contacting investors about the possibility of investing in AHI equity securities and loaning funds to AHI or its affiliated entities. One proposed opportunity was for investors to purchase interests in various limited partnerships which were established to purchase alarm monitoring accounts from small, local companies and collect revenues therefrom. AHI allegedly agreed to provide alarm monitoring services for the partnership accounts in return for approximately 20% of each
* This order and judgment is not binding precedent, except under the doctrines of law of the case, res judicata, and collateral estoppel. The court generally disfavors the citation of orders and judgments; nevertheless, an order and judgment may be cited under the terms and conditions of
To induce investors to purchase the partnership interests, AHI allegedly projected that investors would receive cash distributions of at least a 14-15% annual rate of return. AHI allegedly predicted it would eventually exercise purchase options and acquire the assets of the limited partnerships at a premium of 35% to 50% over what investors would pay for their partnership interests. Further, AHI allegedly predicted it would ultimately become a fully integrated company after exercising these purchase options, and purchasers of AHI securities would achieve even higher rates of return than purchasers of the limited partnership interests.
AHI offerings took place in 1989, 1990, and the first half of 1991. Among the many investors who took part in the offerings were a group of entities, including a company called Wilmington Securities, Inc., owned and/or controlled by Henry Hillman (hereinafter the Hillman Group). Between June 1989 and December 1990, the Hillman Group purchased thousands of shares of AHI stock and, between March 1990 and July 1991, the Hillman Group loaned millions of dollars to AHI and at least one of its related limited partnerships.
Due to their large investment in AHI, the Hillman Group sought and obtained representation on AHI‘s board of directors, as well as in AHI‘s management. Specifically, in June 1989, Steven Hutchinson, an individual associated with the Hillman Group, was appointed as a member of AHI‘s board. In December 1990, Frank “Terry” Savage, another individual associated with the Hillman Group, was appointed as Senior
During 1990, AHI lost approximately thirty million dollars. In November 1991, AHI notified investors in the limited partnerships that scheduled third-quarter cash distributions would not be made. In December 1991 and January 1992, AHI and its related partnerships filed Chapter 11 bankruptcy petitions in the Southern District of New York.
B. The securities lawsuits
A series of lawsuits were subsequently filed in California, Colorado, New York, and Delaware by investors with shares in AHI and/or partnership interests in AHI-related limited partnerships. The suits alleged violations of federal and state securities laws, and named as defendants various individuals, including Barnard, who were involved in the management of AHI and/or AHI-related entities. Also named in several of the suits were Coopers & Lybrand, the accounting firm that assisted AHI in the offerings, and Otten, Johnson, Robinson, Neff & Ragonetti (Otten, Johnson), a law firm that also assisted AHI in the offerings.
According to plaintiffs in the underlying actions, AHI‘s statements and promises to investors were simply a cover-up for an “elaborate Ponzi scheme.” In particular, plaintiffs alleged that, at the time of the offerings, AHI‘s basic business of monitoring alarm accounts was losing money. AHI offset those losses, plaintiffs alleged, by arranging the sale of limited partnership interests. Plaintiffs further alleged AHI‘s representations of potential profits, as well as its underlying assumptions and representations about the alarm monitoring business, were untrue and/or lacked any
In response to at least two of the lawsuits, Barnard filed counter and/or cross-claims, alleging others were responsible for the losses suffered by investors. In particular, Barnard alleged members of the Hillman Group were primarily responsible for the losses. According to Barnard, members of the Hillman Group intentionally precipitated the bankruptcy filings in order to obtain greater control over AHI and its related entities. Barnard sought indemnification from the Hillman Group, as well as damages arising from the alleged individual financial losses he suffered.
The cases were consolidated for pretrial purposes under
C. The Wilmington Securities case
The Wilmington Securities case was originally filed sometime in 1992 (the exact date is unknown because the record on appeal does not include a copy of the original complaint). Plaintiffs included various individuals and entities related to the Hillman Group. Barnard was one of four individuals named as defendants.
1. The partial settlement
In 1993, a settlement between the proposed class of plaintiffs (including plaintiffs from the other consolidated lawsuits) and a number of defendants was achieved in
Four sections of the settlement agreement are relevant here. Paragraph 65 of the agreement provided that, in the event class plaintiffs obtained a payment from a non-settling defendant and the non-settling defendant successfully maintained a “claim over” against the settling defendants, class plaintiffs would pay the settling defendants the amount of the “claim over,” provided such amount did not exceed the payment obtained by class plaintiffs. Paragraph 67 of the agreement provided that, prior to settling their claims with the non-settling defendants, class plaintiffs would obtain a release from the non-settling defendants in favor of the settling defendants. Paragraph 68 of the agreement required the settling defendants to obtain the consent of the class plaintiffs prior to settling any “claim over” with the non-settling defendants. Finally, a section of the agreement entitled “Protection of Settling Defendants Against Claims Over from Non-Settling Defendants and/or Third Parties” provided that the class plaintiffs and the settling defendants would jointly apply to the district court for a bar order prohibiting, among other things, cross-claims made by non-settling defendants against settling defendants.
On June 22, 1993, the court approved the settlement agreement. The settlement agreement, in conjunction with the order of approval, enjoined the non-settling defendants (including Barnard) from filing contribution and/or indemnity claims, except for claims based upon a specific written agreement of indemnity. The court also approved the proportionate bar order proposed by the settling defendants. Under that bar
2. Barnard‘s attempt to join additional parties
On October 30, 1992, Barnard filed a motion to join additional parties as counterclaim defendants. Although the motion was granted on November 23, 1992, Barnard did not obtain service on the additional proposed counterclaim defendants (Hillman Company, Henry Hillman, Steven Hutchinson, Frank Savage, and three other individuals) until mid-1994. Specifically, Barnard officially served Hutchinson on May 16, 1994, Savage on July 30, 1994, and the remaining counterclaim defendants on July 14, 1994. After receiving service from Barnard, these “new” counterclaim defendants moved to dismiss Barnard‘s counterclaims as untimely. In reviewing the motions to dismiss, the magistrate judge found no good cause for extending the 120-day time period provided by
3. Motions for partial summary judgment
On October 13, 1994, various members of the Hillman Group who were plaintiffs and counterclaim defendants in the Wilmington Securities case filed a motion for partial summary judgment with respect to three types of individual counterclaims asserted
On August 30, 1995, the magistrate judge recommended that the motion for partial summary judgment concerning Barnard‘s derivative claims be granted, and that the motion for partial summary judgment concerning Barnard‘s individual claims be granted in part and denied in part. On October 24, 1995, the district court adopted the magistrate‘s recommendation, dismissing all of Barnard‘s derivative counterclaims and dismissing all but one of Barnard‘s individual counterclaims (the only counterclaim not dismissed pertained to the Hillman Group‘s alleged agreement to purchase 50,000 shares of AHI stock from Barnard).
4. Enforcement of settlement agreement and bar order
On November 22, 1994, approximately seventeen months after the district court approved the settlement agreement, Barnard filed a motion to set aside the settlement agreement. In his motion, Barnard argued paragraphs 65, 67, and 68 of the settlement agreement were contrary to public policy, and the agreement was therefore void.
On August 31, 1995, the magistrate judge denied Barnard‘s motion to set aside the settlement agreement. In so doing, the magistrate emphasized that Barnard could not rely upon
On October 30, 1995, Barnard and the Hillman Group filed a joint stipulation of dismissal and a joint motion for certification of issues for review on appeal. In the joint stipulation of dismissal, both sides agreed to dismiss without prejudice their remaining claims pending resolution of Barnard‘s proposed appeal.1 Both the stipulation and the motion were granted by the district court on November 1, 1995. On November 30, 1995, Barnard filed his notice of appeal.
D. The AC case
AC, a California limited partnership, filed suit against Barnard and his wife in California state court on February 5, 1993. On December 6, 1993, Barnard filed a first amended cross-complaint in the AC case, asserting cross-claims against a number of cross-claim defendants, including each of the counterclaim defendants he had attempted to include in the Wilmington Securities case (i.e., Hillman Company, Henry Hillman, Steven Hutchinson, Frank Savage, etc.). Presumably, Barnard timely served each of these cross-claim defendants.
On January 7, 1994, the Hillman Group and Coopers & Lybrand filed a joint motion to enforce the bar order issued by the district court, asserting the cross-claims filed against them by Barnard in the AC case violated the terms of the bar order previously entered in connection with the approval of the settlement agreement. More specifically, they argued all cross-claims asserted against them by Barnard in AC were in fact claims
On March 17, 1994, the district court issued an order granting in part and denying in part the motion to enforce bar order. The court found the first two causes of action asserted in Barnard‘s cross-complaint were claims for indemnification and thus fell within the scope of the bar order. As for the remaining twelve cross-claims, the court was unable to determine whether they were “independent claims or disguised requests for indemnification and contribution.” Append. 2 at 184.
On April 11, 1994, Barnard filed a motion asking the district court to assert jurisdiction over the claims in the AC lawsuit. On June 10, 1994, the magistrate judge recommended that the claims in AC be transferred to Colorado and consolidated with the multi-district litigation for coordinated pretrial and discovery proceedings. On August 16, 1994, the district court adopted the magistrate‘s findings and recommendations. Subsequently, AC filed a motion to dismiss its claims, which was granted by the district court on September 15, 1995. Although the court‘s order is not entirely clear, it appears the court intended that Barnard‘s cross-claims in AC be dismissed as well.
E. The AHI bankruptcy proceedings
As a final matter, it is necessary to briefly review the procedural history of the AHI bankruptcy proceedings. AHI filed its Chapter 11 bankruptcy petition on December 11, 1991. AHI filed its second amended plan of reorganization on May 6, 1993. Contained in the second amended plan of reorganization was AHI‘s broad release of all claims and potential claims against Wilmington. On June 24, 1993, the bankruptcy court confirmed AHI‘s Chapter 11 reorganization plan, finding the AHI bankruptcy petition had been filed
II.
1. Did the district court err in granting summary judgment in favor of the Hillman Group on two of Barnard‘s individual counterclaims?
As outlined above, Barnard filed three individual counterclaims against the Hillman Group in the Wilmington Securities case. In the first individual counterclaim, Barnard alleged the Hillman Group breached a contract to purchase 50,000 shares of AHI common stock from him. In the second, Barnard alleged the Hillman Group fraudulently induced him to loan $500,000 to AHI in order to deplete his personal financial resources. In his third individual counterclaim, Barnard alleged the Hillman Group fraudulently induced him to resign from AHI and also caused AHI to breach a severance agreement with him. Barnard alleged these three instances of the Hillman Group‘s conduct were “part of a tortious conspiracy to squeeze [him] out of [AHI], take over [AHI] and destroy [his] financial interest in [AHI].” Append. 4 at 912-13.
In response to these counterclaims, the Hillman Group filed a motion for partial summary judgment. On October 24, 1995, the district court granted summary judgment in favor of the Hillman Group with respect to plaintiff‘s second and third individual counterclaims. The only individual counterclaim not dismissed was the first one (i.e., the Hillman Group‘s alleged agreement to purchase 50,000 shares of AHI stock from
On appeal, Barnard contends the district court erred in granting summary judgment in favor of the Hillman Group on his second and third individual counterclaims. In support of this contention, Barnard asserts the affidavit he submitted in opposition to the Hillman Group‘s motion was specific and created genuine issues of material fact which were sufficient to preclude summary judgment. Barnard also claims the court did not properly review the Hillman Group‘s motion, but instead simply relied upon the magistrate judge‘s recommendation.
We review de novo the district court‘s grant of summary judgment, applying the same standard used by the district court. Panis v. Mission Hills Bank, 60 F.3d 1486, 1489-90 (10th Cir. 1995), cert. denied, 116 S.Ct. 1045 (1996). In so doing, we must view the factual record and make reasonable inferences therefrom in the light most favorable to the party opposing summary judgment. Deepwater Investments, Ltd. v. Jackson Hole Ski Corp., 938 F.2d 1105, 1110 (10th Cir. 1991). We will uphold summary judgment only if “there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law.”
After carefully reviewing the record on appeal, we conclude Barnard failed to present sufficient evidence to create a genuine issue of material fact with respect to his second and third individual counterclaims. The primary piece of evidence relied upon by Barnard was his own affidavit, the majority of which contains little more than conclusory allegations of wrongdoing on the part of the Hillman defendants. With respect to the counterclaims at issue, the affidavit contains few, if any, facts that would be admissible at trial and that are supportive of Barnard‘s allegations of wrongdoing. See Hall v. Belmon,
2. Did the cumulative effect of the district court‘s orders deprive Barnard of his right to due process?
Barnard contends the district court violated his procedural due process rights by improperly denying certain of his discovery requests and making other erroneous rulings. Specifically, Barnard asserts the court erred in (1) refusing to order the Hillman Group to produce deposition testimony taken in the AHI and AHI-related bankruptcy proceedings; (2) ruling, allegedly sua sponte, that his cross-claims in the AC case were prohibited by the bar order; and (3) ruling that service of certain members of the Hillman Group in the AC case was not sufficient to constitute service of those same entities/individuals in the Wilmington Securities case. According to Barnard, “[t]he cumulative effect of the foregoing procedural and due process errors is to deny [him] the right to a trial on the merits of his claims against third party tort feasors.” Appellant‘s br. at 34.
a. Refusing to order production of bankruptcy deposition transcripts
Generally speaking, “discovery rulings are within the broad discretion of the trial court” and will not be disturbed “‘unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.‘” Cole v. Ruidoso Mun. Schools, 43 F.3d 1373, 1386 (10th Cir. 1994) (quoting United States v. Ortiz, 804 F.2d 1161, 1164 n. 2 (10th Cir. 1986)). Here, the magistrate judge rejected Barnard‘s request for production of certain
b. Holding that Barnard‘s claims are prohibited by the bar order
Barnard alleges the district court erred when it issued a sua sponte order in 1995 holding his cross-claims in the AC case were prohibited by the bar order. Barnard also appears to be asserting that, because he was not a party to the settlement agreement entered into between the class plaintiffs and most of the other defendants, certain provisions of that agreement should not be enforced because they will impede his ability to pursue or settle his cross-claims in AC.
We conclude that we are without jurisdiction to consider this issue. Barnard is attempting to appeal an order entered by the district court in the AC case when, in fact, the instant appeal arises solely out of the Wilmington Securities case. Apparently, Barnard believes consolidation of the two cases for pretrial purposes allows him to file a single appeal and obtain review of orders issued in both cases. However, he has cited no cases in support of this proposition and we have found none that would allow such a
In passing, we note that Barnard has, in fact, filed a separate appeal in the AC case. Although Barnard‘s counsel stated at oral argument that no such appeal had been filed, and no reference to a separate appeal was made in Barnard‘s appellate pleadings, counsel for Coopers & Lybrand indicated at oral argument that such an appeal had been
As for Barnard‘s challenge to the settlement agreement, we conclude it is untimely and without merit. Under
c. Where two or more cases have been consolidated for pretrial activities by the panel on multi-district litigation, does service of a defendant in one case constitute service of the same defendant in another consolidated case?
We reject Barnard‘s argument. Barnard has cited no cases, and we have found none, holding that service of process in one action is sufficient to constitute service of process on the same defendant in a separate action, even if the two actions are consolidated for pretrial purposes. Although Barnard relies heavily on the fact that the AC and Wilmington Securities cases were both part of the same multi-district litigation, it is clear the purpose of such consolidation is to expedite and streamline the discovery process in those instances where cases share common, yet complex, factual backgrounds. See
d. Summary
Because we find no merit to any of the above-alleged errors, we find it unnecessary to address Barnard‘s contention that the cumulative effect of the above-alleged errors violated his due process rights.
3. Did the district court err in characterizing certain of Barnard‘s claims as derivative, rather than individual, and by dismissing those counterclaims?
As previously noted, the Hillman Group filed a motion for partial summary judgment with respect to certain of Barnard‘s counterclaims (i.e., counterclaims 1-5) that appeared to be derivative rather than individual. On August 30, 1995, the magistrate judge recommended that the motion be granted in its entirety. The magistrate noted that, under both Delaware and Colorado law, a shareholder could not maintain an individual lawsuit for alleged wrongs against a corporation. Further, the magistrate reviewed the substance of the challenged counterclaims and concluded they arose out of a wrong allegedly perpetrated by the Hillman Group against AHI (i.e., orchestrating a takeover scheme). Accordingly, the magistrate judge concluded the allegations did not impart Barnard “with individual claims or damages which are separate and distinct from the general class of AHI shareholders.” Append. 5 at 1286. Further, the magistrate concluded that, even if the claims could be classified as individual, Barnard had failed to
On appeal, Barnard contends the magistrate judge and the district court erred in characterizing these counterclaims as derivative. Instead, Barnard contends, his counterclaims are individual. In support of this assertion, Barnard alleges he
has alleged harms unique to himself: inability to participate in class recovery, loss of business employment opportunities because of interference with his relationship with [AHI], fraud regarding the [Hillman Group‘s] willingness or ability to finance on-going acquisitions (which would have translated into continued employment for [him]) and fraud to disproportionately devalue his stock.
Appellant‘s br. at 36.
As an initial matter, we conclude Colorado law is applicable to the relationships of AHI, the Hillman Group, and Barnard. Although AHI is a Delaware corporation, it is uncontroverted that its principal place of business was in Colorado. Accordingly, under Colorado choice of law principles, Colorado law governs “the rights and duties between the corporation‘s directors and shareholders and the corporation‘s creditors.” Ficor v. McHugh, 639 P.2d 385, 391 (Colo. 1982) (en banc).
Under Colorado law, “[a]n individual stockholder cannot maintain a direct action in his or her own capacity against a director or third party unless such stockholder has sustained an injury which is separate and distinct from that of other shareholders.” River Management Corp. v. Lodge Properties, 829 P.2d 398, 403 (Colo. App. 1991). Generally speaking, “claims of waste and mismanagement of corporate assets are claims which allege injury to the corporation and, thus, can only be raised by the corporation itself or by
We now turn to the allegations set forth in counterclaims at issue. Counterclaims 1-5 allege members of the Hillman Group committed fraud, breached their fiduciary duties, negligently misrepresented facts, were negligent in their management of AHI, and engaged in a civil conspiracy to obtain control of AHI. Unfortunately, the allegations of wrongdoing, as well as the allegations concerning how Barnard was damaged thereby, are extremely vague and conclusory. Nevertheless, it appears the essence of these claims is that the Hillman Group‘s alleged misconduct directly injured AHI, thereby indirectly injuring Barnard by diminishing the value of his AHI stock. Barnard‘s alleged injury, i.e., his loss of stock value, appears to be no different than that of any other AHI shareholder. Viewed in this manner, we conclude the counterclaims are, in fact, derivative. See River Management, 829 P.2d at 403.
Even assuming, for purposes of argument, that the counterclaims are individual, we conclude Barnard failed to present sufficient evidence to survive summary judgment. In his response to the motion for partial summary judgment, Barnard submitted various items of evidence, including his own affidavit. None of this evidence, however, was sufficient to allow a reasonable trier of fact to find in favor of Barnard on his “takeover” theory. In fact, the only piece of evidence which actually touches on the “takeover” theory is Barnard‘s affidavit. As previously noted, that affidavit is vague and conclusory and wholly insufficient to create genuine issues of material fact.
For these reasons, we conclude the district court did not err in granting summary judgment with respect to Barnard‘s derivative counterclaims.
4. Did Barnard preserve his right to sue third-party wrongdoers?
This argument is without merit. Barnard initially objected to AHI‘s proposed plan of reorganization filed with the bankruptcy court. He later withdrew this objection under the stipulation with the Hillman Group that he could continue to pursue his claims against them in another forum. For Barnard to now assert that this stipulation affords him the opportunity to pursue derivative claims otherwise unavailable to him is without merit. The general terms of the stipulation do not purport to, nor could they, provide any such result. In any event, as part of the reorganization plan, AHI released the Hillman Group from any liability for wrongdoing. Thus, any potential derivative claims were “wiped away” as a result of the bankruptcy court‘s approval of the reorganization plan and are no longer available.
5. Will Barnard‘s due process rights be violated if he is not allowed to pursue his derivative counterclaims?
In his final issue on appeal, Barnard contends that, as a defendant equity holder who was excluded from the class of plaintiffs, he must be permitted to sue the wrongdoers directly or else he will be deprived of his property rights without due process of law.
This argument is meritless. To the extent that any of Barnard‘s counterclaims are derivative, they belong to the corporation, not to him. A plaintiff stockholder in a derivative action is “at best the nominal plaintiff.” Ross v. Bernhard, 396 U.S. 531, 538
III.
The judgment of the district court is AFFIRMED.
Entered for the Court
Mary Beck Briscoe
Circuit Judge