UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 19)
First Union Real Estate Equity and Mortgage Investments
- ---------------------------------------------------------------------------
(Name of Issuer)
Shares of Beneficial Interest, $1.00 par value
- ---------------------------------------------------------------------------
(Title of Class of Securities)
337400105
--------------------------------------------
(CUSIP Number)
Stephen Fraidin, P.C.
Fried, Frank, Harris, Shriver & Jacobson
One New York Plaza
New York, New York 10004
(212) 859-8140
- ---------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized
to Receive Notices and Communications)
February 13, 1998
--------------------------------------------
(Date of Event which Requires Filing of this Statement)
If the filing person has previously filed a statement on Schedule 13G to
report the acquisition which is the subject of this Schedule 13D, and is
filing this schedule because of Rule 13d-1(b)(3) or (4), check the
following box |_|.
Check the following box if a fee is being paid with the statement |_|. (A
fee is not required only if the reporting person: (1) has a previous
statement on file reporting beneficial ownership of more than five percent
of the class of securities described in Item 1; and (2) has filed no
amendment subsequent thereto reporting beneficial ownership of five percent
or less of such class.) (See Rule 13d-7.)
NOTE: Six copies of this statement, including all exhibits, should be filed
with the Commission. See Rule 13d-1(a) for other parties to whom copies are
to be sent.
*The remainder of this cover page shall be filled out for a reporting
person's initial filing on this form with respect to the subject class of
securities, and for any subsequent amendment containing information which
would alter disclosures provided in a prior cover page.
The information required on the remainder of this cover page shall not be
deemed to be "filed" for the purpose of Section 18 of the Securities
Exchange Act of 1934 ("Act") or otherwise subject to the liabilities of
that section of the Act but shall be subject to all other provisions of the
Act (however, see the Notes).
SCHEDULE 13D
- ------------------------------ ------------------------------------
CUSIP NO. 337400105 PAGE 2 OF 5 PAGES
--------------- ----- -----
- ------------------------------ ------------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Gotham Partners, L.P.
- -------------------------------------------------------------------------------
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) |X|
(b) |_|
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3 SEC USE ONLY
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4 SOURCE OF FUNDS*
WC
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(D) OR 2(e) |_|
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York, U.S.A.
- -------------------------------------------------------------------------------
7 SOLE VOTING POWER
NUMBER OF 2,601,951 Shares
SHARES
------------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 0
------------------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING 2,601,951 Shares
------------------------------------------------------------------
PERSON 10 SHARED DISPOSITIVE POWER
WITH 0
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
2,601,951 Shares
- -------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
|_|
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
9.25%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
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* SEE INSTRUCTIONS
SCHEDULE 13D
- ------------------------------ ------------------------------------
CUSIP NO. 337400105 PAGE 3 OF 5 PAGES
--------------- ----- -----
- ------------------------------ ------------------------------------
- -------------------------------------------------------------------------------
1 NAME OF REPORTING PERSON
S.S. OR I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
Gotham Partners II, L.P.
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2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) |X|
(b) |_|
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3 SEC USE ONLY
- -------------------------------------------------------------------------------
4 SOURCE OF FUNDS*
WC
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5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEMS
2(D) OR 2(e) |_|
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6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York, U.S.A.
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7 SOLE VOTING POWER
NUMBER OF 30,449 Shares
SHARES
------------------------------------------------------------------
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY 0
------------------------------------------------------------------
EACH 9 SOLE DISPOSITIVE POWER
REPORTING 30,449 Shares
------------------------------------------------------------------
PERSON 10 SHARED DISPOSITIVE POWER
WITH 0
- -------------------------------------------------------------------------------
11 AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON
30,449 Shares
- ------------------------------------------------------------------------------
12 CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES*
|_|
- -------------------------------------------------------------------------------
13 PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11)
0.11%
- -------------------------------------------------------------------------------
14 TYPE OF REPORTING PERSON*
PN
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* SEE INSTRUCTIONS
This Amendment No. 19 amends and supplements the Statement on Schedule
13D (the "Schedule 13D") relating to the shares of Beneficial Interest, par
value $1.00 per share ("Shares"), of First Union Real Estate Equity and
Mortgage Investments, an Ohio business trust (the "Company") previously
filed by Gotham Partners, L.P. ("Gotham") and Gotham Partners II, L.P.
("Gotham II" and together with Gotham, the "Reporting Persons"), both New
York limited partnerships. Capitalized terms used and not defined in this
Amendment have the meanings set forth in the Schedule 13D.
Except as specifically provided herein, this Amendment does not modify
any of the information previously reported on the Schedule 13D.
Item 4 is hereby amended to add the following information:
"Item 4. Purpose of the Transaction
On February 12, 1998, counsel for the Reporting Persons filed a Motion
to Stay Until Resolution of Related Federal Case in the Court of Common
Pleas for Cuyahoga County, Ohio ("Court of Common Pleas"). A copy of such
Motion is attached as Exhibit 38 hereto and incorporated herein by this
reference.
On February 12, 1998, counsel for the Reporting Persons filed a Brief
in Support of their Motion to Stay Until Resolution of Related Federal Case
in the Court of Common Pleas. A copy of such Brief is attached as Exhibit
39 hereto and incorporated herein by this reference."
Item 7. Is hereby amended to add the following information:
"Item 7. Material to be Filed as Exhibits
38. Motion to Stay Until Resolution of Related Federal Case filed in
the Court of Common Pleas by counsel for the Reporting Persons on February
12, 1998.
39. Brief in Support of the Motion to Stay Until Resolution of Related
Federal Case filed in the Court of Common Pleas by counsel for the
Reporting Persons on February 12, 1998."
After reasonable inquiry and to the best of our knowledge and belief,
the undersigned certify that the information set forth in this statement is
true, complete and correct.
February 13, 1998
GOTHAM PARTNERS, L.P.
By: Section H Partners, L.P.,
its general partner
By: Karenina Corporation,
a general partner of Section H Partners, L.P.
By: /s/ William A. Ackman
------------------------------------
William A. Ackman
President
By: DPB Corporation,
a general partner of Section H Partners, L.P.
By: /s/ David P. Berkowitz
------------------------------------
David P. Berkowitz
President
GOTHAM PARTNERS II, L.P.
By: Section H Partners, L.P.,
its general partner
By: Karenina Corporation,
a general partner of Section H Partners, L.P.
By: /s/ William A. Ackman
------------------------------------
William A. Ackman
President
By: DPB Corporation,
a general partner of Section H Partners, L.P.
By: /s/ David P. Berkowitz
------------------------------------
David P. Berkowitz
President
EXHIBIT 38
IN THE COURT OF COMMON PLEAS
CUYAHOGA COUNTY, OHIO
FIRST UNION REAL ESTATE EQUITY ) CASE NO. 347063
AND MORTGAGE INVESTMENTS, )
) JUDGE TIMOTHY J. McGINTY
Plaintiff, )
v. ) DEFENDANTS AND COUNTERCLAIMANTS'
) MOTION TO STAY UNTIL RESOLUTION OF
) RELATED FEDERAL CASE
) ----------------------------------
)
) REQUEST FOR ORAL ARGUMENT
GOTHAM PARTNERS, L.P., et al., ) -------------------------
)
Defendants and )
Counterclaimants. )
Defendants and Counterclaimants Gotham Partners, L.P. and Gotham
Partners II, L.P. (together, "Gotham") move this Court to stay this action
until the determination of an action between the same parties pending in the
United States District Court for the Northern District of Ohio, styled GOTHAM
PARTNERS, L.P. ET AL. V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE
INVESTMENTS Case No. 1:98CV0272 (the "federal case"). Principles of comity
and judicial economy compel the entry of a stay pending the completion of
proceedings in the federal case, because the federal district court can enter
complete relief on behalf of all the parties, whereas this Court cannot.
As set forth more fully in the accompanying Brief, in the federal case,
Gotham has brought claims against First Union for violations of federal
securities laws as well as related state law claims based on First Union's
unlawful efforts to deprive Gotham of their proxy rights as shareholders of
First Union. First Union, meanwhile, has filed a Counterclaim in the federal
case including both state and federal claims. The federal district court can
enter complete relief between the parties because it has exclusive
jurisdiction over Gotham's and First Union's claims under Section 27 of the
Securities and Exchange Act of 1934, 15 U.S.C. ss. 78aa, and can exercise
supplemental jurisdiction over First Union's state law claims brought in this
action. SEE 28 U.S.C. ss. 1367. By contrast, this Court cannot exercise any
jurisdiction at all over the parties' federal securities law claims.
A stay is particularly appropriate here, because there exists almost
complete overlap between First Union's and Gotham's state law claims and the
parties' federal securities law claims. Moreover, any ruling by this Court on
First Union's motion for preliminary injunction risks creating a potential for
confusion and conflict with the federal court's rulings on the securities law
and supplemental state law claims. Finally, since First Union's state law
claims are directly related to the federal case, they can be heard in the
federal district court where First Union has already responded to Gotham's
declaratory judgment claims regarding the same state law claims that are
alleged by First Union here. It would be wasteful and potentially duplicative
for this Court to hear those claims.
Gotham respectfully requests that this Court schedule oral argument on
this motion.
Respectfully submitted,
/s/ Michael J. Garvin
--------------------------
OF COUNSEL: David C. Weiner (0013351)
Michael J. Garvin (0025394)
HAHN LOESER & PARKS LLP
3300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2301
(216) 621-0150
Attorneys for Defendants and
Counterclaimants
OF COUNSEL:
Alexander R. Sussman (FN1)
FRIED, FRANK, HARRIS SHRIVER
& JACOBSON
25th Floor
One New York Plaza
New York, New York 10004-1980
(212) 859-8000
[FN]
- --------
1 Application for admission PRO HAC VICE to be submitted.
</FN>
CERTIFICATE OF SERVICE
----------------------
I hereby certify that a copy of the foregoing was served by
messenger upon Frances Floriano Goins, Squire, Sanders & Dempsey L.L.P., 4900
Key Tower, 127 Public Square, Cleveland, Ohio 44114-1304, attorneys for
Plaintiff, this 12th day of February, 1998.
/s/ Michael J. Garvin
-----------------------------------
One of the Attorneys for Defendants
and Counterclaimants
EXHIBIT 39
IN THE COURT OF COMMON PLEAS
CUYAHOGA COUNTY, OHIO
FIRST UNION REAL ESTATE EQUITY ) CASE NO. 347063
AND MORTGAGE INVESTMENTS, )
) JUDGE TIMOTHY J. McGINTY
Plaintiff, )
v. ) BRIEF IN SUPPORT OF DEFENDANTS AND
) COUNTERCLAIMANTS' MOTION TO STAY
) UNTIL RESOLUTION OF RELATED FEDERAL
) CASE
) -----------------------------------
)
GOTHAM PARTNERS, L.P., et al., ) REQUEST FOR ORAL ARGUMENT
-------------------------
)
Defendants and )
Counterclaimants. )
PRELIMINARY STATEMENT
---------------------
Defendants and Counterclaimants Gotham Partners, L.P. ("Gotham
I") and Gotham Partners II, L.P. ("Gotham II") (collectively "Gotham")
submit this brief in support of Gotham's motion for a stay of this
action in light of pending parallel proceedings in the United States
District Court for the Northern District of Ohio (Eastern Division).
That federal litigation encompasses all of the state law claims and
underlying facts alleged by plaintiff First Union Real Estate Equity
and Mortgage Investments ("First Union," or the "Company") in this
proxy contest case,(FN1) as well as federal securities and proxy law
claims asserted by both parties, over which the federal court has
exclusive jurisdiction.
The federal litigation, captioned Gotham Partners, L.P., et al.
v. First Union Real Estate Equity and Mortgage Investments, 1:98CV0272
(N.D. Ohio) (Judge Nugent/Magistrate Judge Hemann),(FN2) can be
expected to resolve all of the state law claims raised in the instant
action as either necessary to adjudicating the exclusive federal
claims or pendent to the federal claims. Moreover, the federal court
is the only forum in which the parties' federal proxy claims --
central to the proxy contest that prompted these actions -- can be
adjudicated. Furthermore, pending in the federal action are several
motions, including Gotham's motion for a preliminary injunction, as
well as First Union's Answer and Counterclaim and an exchange of
discovery requests.(FN3)
In these circumstances, principles of judicial economy and
estoppel, well settled in Ohio cases, clearly favor staying the
instant state action and facilitating adjudication of all of the
parties' federal and state claims in federal court. Finally, whereas
Gotham, First Union shareholders, and the courts would be prejudiced
by the time and expense required by duplicative litigation, First
Union management will suffer no prejudice if this action is stayed in
favor of the federal action; given the federal court's supplemental
jurisdiction, First Union can litigate ALL of its claims there.
- -----------------
[FN]
1 A copy of First Union's Complaint in this action (hereinafter
"FUR Compl.") is Exhibit A of the accompanying Appendix to this
Motion; all exhibits described in this brief are contained in the
Appendix. A copy of Gotham's Amended Answer and Counterclaims
(hereinafter "Gotham Am. Answer and Countercl.") is Exhibit B.
2 A copy of Gotham's Complaint in the federal court action is
Exhibit C of the Appendix. A copy of First Union's Answer and
Counterclaim is attached as Exhibit D of the Appendix.
3 Gotham's motion for preliminary injunction in the federal action,
filed January 30, 1998, is Exhibit E of the Appendix. Gotham's
motion for expedited discovery, filed January 30, 1998, is
Exhibit F of the Appendix. Gotham's motion for reassignment to
the federal judge who was assigned the instant action upon
removal, the Hon. Ann Aldrich, is Exhibit G of the Appendix,
along with the parties' papers regarding this motion. First
Union's February 3, 1998 motion to strike portions of Gotham's
Complaint is attached as Exhibit H. The parties' discovery
requests in the federal court action are contained in Exhibit I
of the Appendix.
</FN>
FACTUAL AND PROCEDURAL BACKGROUND
---------------------------------
First Union is an Ohio real estate investment trust ("REIT")
whose shares are publicly traded on the New York Stock Exchange. FUR
Compl. P. 1; Gotham Am. Answer and Countercl. P. 68. First Union is
one of only a few REITs in the United States known to have what is
called a "paired-share" structure. Gotham Am. Answer and Countercl. P.
74. Both Gotham I and Gotham II are New York limited partnerships that
engage in the buying and selling of securities for investment for
their own accounts. Among its other investments, Gotham owns
approximately 9% of First Union's outstanding common shares. Id. P. P.
67, 69.
On January 8, 1998, Gotham I gave notice to First Union that in
anticipation of the Company's April 1998 annual shareholder meeting,
it was nominating three individuals for election to replace three
First Union trustees whose terms were expiring. Additionally, Gotham I
notified First Union that it would solicit shareholder support for a
proposal to expand the Company's Board of Trustees by adding six new
positions, and would nominate six individuals to be elected to these
new seats. In its January 8 Notice, Gotham I enumerated several
reasons for its proposal, including its view that current management
had failed to maximize the value of First Union's unique stapled-stock
structure. Id. P. 85.
Eight days later, on January 16, 1998, First Union sent a letter
to Gotham I asserting that management would not allow shareholders to
consider the nominations and proposal contained in Gotham's January 8
Notice. First Union claimed that the Notice did not satisfy the
informational requirements of the Company By-Laws, and was therefore
deficient. First Union did not specify any deficiency in the Notice,
however. Letter from Paul Levin to Gotham I of 1/16/98 (Exhibit J).
On the same day, notwithstanding the five-day deficiency cure
provision in the By-Laws' informational requirements for proposals and
nominations,(FN4) First Union brought suit against Gotham in this
Court seeking, inter alia, a declaratory judgment that Gotham I's
"purported nominations of Trustees and Proposal are unlawful, null and
void." FUR Compl. P. 53.
Because there appeared to be federal diversity jurisdiction over
this action, Gotham removed it to federal court on January 20, 1998.
Removal also appeared to promote principles of comity and judicial
economy, because it would facilitate adjudication of the parties'
federal proxy claims and other federal securities law claims in the
same forum as all state law claims. The removed case was assigned to
the Hon. Ann Aldrich, United States District Judge. On the same day as
the removal, Gotham filed its Answer and Counterclaims, including
proxy contest claims against First Union under the federal Securities
and Exchange Act of 1934 (the `34 Act). Gotham also filed a motion for
preliminary injunction seeking, among other relief, an order
forbidding First Union from interfering with Gotham's proxy rights in
connection with the annual meeting.(FN5)
- -----------------
[FN]
4 See FUR Compl. Ex. A, Art. I, Section 7(d).
5 Shortly after Gotham removed this case to federal court, First
Union filed its motion for preliminary injunction before this
Court.
</FN>
When it appeared that, contrary to Gotham's original belief,
there might not be complete diversity of citizenship between the
parties, Gotham determined to file a separate Complaint against First
Union in federal court asserting the claims Gotham had raised as
counterclaims in the action removed to Judge Aldrich, including `34
Act claims. That Complaint was filed on January 30, 1998, and was
assigned to the Hon. Donald C. Nugent, United States District Judge.
Gotham filed a motion for preliminary injunction in the action before
Judge Nugent seeking the same relief as the counterpart motion filed
before Judge Aldrich.
On February 5, 1998, First Union filed an Answer and Counterclaim
in the federal court action before Judge Nugent. First Union's
Counterclaim includes three '34 Act claims against Gotham, as well as
state law tortious interference and commercial disparagement claims.
This Counterclaim is inextricably intertwined with the state law
claims First Union asserted in the Complaint it filed in this Court.
Significantly, to a substantial degree First Union bases its
exclusively federal '34 Act claims on allegations about events that
predate its January 16 filing of its Complaint in this Court; in other
words, First Union could have brought these exclusively federal claims
in federal court at or before the time it filed this action, and
joined its state law claims in that action.
On February 11, 1998, this action was remanded to this Court
pursuant to a Memorandum and Order (Exhibit K). The action before
Judge Nugent, in which both parties' exclusively federal claims as
well as all of their state law claims are before the federal court, is
proceeding.
ARGUMENT
--------
The issues presented in the federal court action before Judge
Nugent completely encompass those raised by the parties in this
action, and the federal action also includes '34 Act claims over which
the federal court exercises exclusive jurisdiction. See Securities and
Exchange Act of 1934, Section 27 (15 U.S.C. Section 78aa).(FN6) Thus,
the federal court offers an economical and comprehensive forum for the
full resolution of all the issues surrounding the proxy contest
between First Union and Gotham. Hearing First Union's claims in this
action would duplicate effort needlessly, and would risk confusion and
conflict in the rulings of this Court and the federal court. Moreover,
further state proceedings would provide only incomplete resolution of
the issues, as this Court is jurisdictionally barred from considering
both parties' federal securities law claims. Finally, there can be no
prejudice to the parties in this Court's staying this action while the
federal court adjudicates the parties' respective claims.
- ---------------
[FN]
6 The `34 Act provides: "The district courts of the United States .
. . shall have exclusive jurisdiction of violations of this title
or the rules and regulations thereunder, and of all suits in
equity and actions at law brought to enforce any liability or
duty created by this title or the rules and regulations
thereunder." 15 U.S.C. Section 78aa (Exhibit L).
</FN>
I. JUDICIAL ECONOMY SUPPORTS STAY OF THE PRESENT ACTION
A. A STAY SHOULD BE GRANTED WHERE, AS HERE, THE FEDERAL
COURT CAN GRANT THE PARTIES COMPLETE RELIEF, BUT THE
COURT OF COMMON PLEAS CANNOT
The Ohio Supreme Court has left no doubt that considerations of
comity, orderly procedure and judicial economy can demand a stay of
state court proceedings to facilitate comprehensive adjudication of a
given dispute in federal court. In State ex rel. Zellner v. Board of
Education of City of Cincinnati, 34 Ohio St. 2d 199, 297 N.E.2d 528
(Oh. 1973), the Ohio Supreme Court held that when such a stay is
sought, "consideration is pertinent to whether IT IS IN THE STATE OR
FEDERAL FORUM THAT A MORE COMPLETE DISPOSITION OF THE ISSUES MAY BE
OBTAINED AND WHETHER IT IS THE FEDERAL OR THE STATE COURT THAT
POSSESSES A GREATER FAMILIARITY AND EXPERTISE WITH THE TRIAL OF SUCH
ISSUES." Id. at 200-201, 297 N.E.2d at 529-30 (emphasis added)
(quoting General Aniline & Film Corp. v. Bayer Co., 113 N.E.2d 844,
847 (N.Y. 1953)). Where the federal court is better equipped to
deliver "a final answer," the Zellner Court instructed, a stay is
required.
In Zellner, a school desegregation case, the Cincinnati Board of
Education filed an action in federal court against the Ohio Board of
Education challenging the constitutionality of an order by the state
board requiring the city board to transfer certain territory in its
school district to an adjoining district. The Cincinnati Board claimed
that the Ohio Board's directive constituted illegal gerrymandering and
race-based discrimination in violation of the Federal Civil Rights Act
and the Equal Protection Clause of the Fourteenth Amendment to the
United States Constitution. Id. at 199-200, 297 N.E.2d at 529.
Subsequently, voters in the adjoining district, including Zellner,
filed an action in mandamus against the city board, seeking to compel
the board to abide by the state board's ruling. The Court of Appeals
granted the writ of mandamus. Id.
The Supreme Court reversed the Court of Appeals, holding that it
erred in not staying the action.(FN7) On the facts before it, the
Supreme Court found that federal courts are the proper forum for
resolving school desegregation disputes, and have more experience in
that field. Id. It also found that granting the writ of mandamus would
not forestall the federal court from invalidating the state board's
action. Id. at 201-02, 297 N.E.2d at 530. Finally, it noted that the
federal court could resolve the whole controversy and provide a final
answer. Id. at 202, 297 N.E.2d at 530. Accordingly, the Court held
that "[c]onsiderations of orderly procedure, comity, ultimate judicial
economy, and the desire to avoid a `collision course,' demand that a
state court action dealing with federal civil rights be heard first in
the federal forum where a similar action had been previously
instituted." Id. at Syllabus.
- ---------------
[FN]
7 Significantly, the Supreme Court reached this holding even though
Zellner was not a party to the federal action.
</FN>
The principle developed by the Ohio Supreme Court in Zellner --
that a state court action should be stayed where a "more complete
disposition of the issues" can be achieved in federal court -- has,
not surprisingly, been applied in cases like this one in which a
companion case in federal court included federal securities law
claims. In Barron v. Bluhdorn, 414 N.Y.S.2d 15 (N.Y. App. Div.
1979)(citing General Aniline at 847), for example, a New York
appellate court ordered a stay of three shareholder derivative actions
pending resolution of a federal court action including the same
derivative claims as in the state actions as well as '34 Act claims.
The appellate court held:
The federal court would provide a more complete disposition of
the claims and furthermore there is no question that it possesses
greater familiarity with violations of securities laws, and
exclusive jurisdiction with respect to those arising under the
Securities Exchange Act of 1934. The federal court can exercise
pendent jurisdiction over the state law claims. Although
plaintiffs allege defendants would not be prejudiced if the state
actions were to proceed, the prejudice caused to defendants by
duplication of effort is obvious.
Id. at 15 (internal citations omitted) (Exhibit M).(FN8)
- ---------------
[FN]
8 See also Reliance Ins. Co. v Tiger Int'l, Inc., 457 N.Y.S.2d 813
(N.Y. App. Div. 1983) (affirming stay of state court action in
favor of "broader in scope" federal action including '34 Act
claims such as false and misleading SEC filings) (Exhibit N);
Issen v. GCS Enters., Inc., Civ. A. No. 5452, 1981 WL 15131, at
*3-*5 (Del. Ch. Dec. 7, 1981) (noting, in course of denial of
motion to vacate stay of state court action, that federal action
included several federal securities law violations over which
federal court had exclusive jurisdiction) (Exhibit O); cf. Green
Tree Acceptance, Inc. v. Midwest Federal Savings & Loan Ass'n.,
433 N.W.2d 140, 142 (Minn. Ct. App. 1988) (denying writ of
mandamus to overturn state court's decision to stay action
pending resolution of subsequently filed federal court action
where, among other things, there was no physical inconvenience to
the parties in proceeding in federal court, the state court
action would require duplicate discovery, and the state court
action would not fully dispose of all of the issues pending in
the federal action) (Exhibit P).
</FN>
As in Zellner, here the federal court has jurisdiction to
determine the whole controversy, because in addition to having
exclusive jurisdiction over the federal securities law claims, it has
supplemental jurisdiction to hear the state law claims First Union has
raised in this case, the mirror-image state law declaratory judgment
claims asserted by Gotham in the federal action, and the additional
state law claims alleged by First Union in its Counterclaim in the
federal action. 28 U.S.C. Section 1367 (Exhibit Q); see, e.g., In re
Donald J. Trump Casino Securities Litigation, 7 F.3d 357, 366 (3d Cir.
1993) (Exhibit R). By contrast, this Court simply cannot resolve the
entire proxy contest litigation dispute between the parties, because
it lacks jurisdiction to hear either Gotham's or First Union's '34 Act
claims.
B. ABSENT A STAY BY THIS COURT, DUPLICATIVE PROCEEDINGS
ARE INEVITABLE
The federal court's exclusive jurisdiction over the parties' `34
Act claims makes it virtually inevitable that, absent this Court's
granting the present motion, two largely identical proceedings will
proceed simultaneously. The federal court would likely decline to stay
its own proceedings on matters for which Congress has made it the
exclusive decision-maker. As the Supreme Court stated in Moses H. Cone
Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983):
Abstention from the exercise of federal jurisdiction is the
exception, not the rule. The doctrine of abstention, under which
a District Court may decline to exercise or postpone the exercise
of its jurisdiction, is an extraordinary and narrow exception to
the duty of a District Court to adjudicate a controversy properly
before it. Abdication of the obligation to decide cases can be
justified under this doctrine only in the exceptional
circumstances where the order to the parties to repair to the
State court would clearly serve an important countervailing
interest.
Id. at 14 (quoting Colorado River Water Conservation Dist. v. United
States, 424 U.S. 800, 813 (1976)).(FN9) Thus, this Court's denial of a
stay would likely result in a waste of resources. Conversely, if this
Court grants the motion to stay, both parties will have an expeditious
adjudication of all potential claims in one, rather than two,
proceedings.
- --------------
[FN]
9 See also Medema v. Medema Builders, Inc., 854 F.2d 210 (7th Cir.
1988) ("[A] stay is not appropriate where some claims involve
exclusive federal jurisdiction") (Exhibit S).
</FN>
C. PROCEEDINGS IN THIS COURT WOULD DISSERVE PRINCIPLES
OF JUDICIAL ECONOMY, BECAUSE THEY WOULD BE UNLIKELY
TO HAVE PRECLUSIVE EFFECT ON THE FEDERAL ACTION
Among the bases for the Ohio Supreme Court's decision in Zellner
was that a judgment by the Ohio state courts granting the writ of
mandamus would effectively be nullified by a SUBSEQUENT decision by
the federal court that the underlying state board of education
decision was unconstitutional. Similarly, it is unlikely in this case
that the federal court would, or even COULD, give any issue preclusive
effect to any injunctive order by this Court, particularly since such
an order would inevitably touch on the parties' exclusively federal
proxy claims. See Kalk v. Village of Woodmere, 27 Ohio App. 3d 145,
148-49, 500 N.E.2d 384, 389 (Ohio Ct. App. 1985) (Cuyahoga Cty.)
(holding that order granting a temporary or preliminary injunction
does not have res judicata or collateral estoppel effect because it is
not a judgment).(FN10) Thus, absent a stay, not only would there be
duplicative proceedings, but any decision by this Court would probably
not carry any preclusive effect. To the extent that this Court would,
for instance, be required to interpret and apply the provisions of the
Trust or By-Laws, the federal district court would likely have to
engage in a similar inquiry in adjudicating the federal and state
claims in the federal action. Especially given Ohio precedent strongly
favoring stays of lawsuits in favor of the forum that can accord
parties complete relief, it is unreasonable for First Union to call on
this Court to devote its energies to a duplicative lawsuit unlikely to
carry any preclusive effect.
- --------------
[FN]
10 Accord Zion Lighthouse Spiritual Church v. Reid, 1988 WL 81827
(Ohio Ct. App. Aug. 2, 1988) (holding that application of res
judicata and collateral estoppel to preliminary injunction
previously issued in another case would be inappropriate);
Gregory Woods v. Ohio High School Athletic Ass'n., 1981 WL 6063
(Ohio Ct. App. Nov. 9, 1981) (dictum) (grant or denial of
preliminary injunction by one court should not serve to bind
another court); see also, e.g., Will v. Calvert Fire Ins. Co.,
437 U.S. 655 (1978) (Court declining to reach the issue of
whether state court proceeding where federal securities claim was
raised as a defense would have any res judicata effect on
concurrent federal proceeding where the federal securities claim
was brought as a primary claim). Moreover, a ruling by this Court
would not prevent the federal court from determining that First
Union's filing of this action furthered, or was predicated on, a
violation of the '34 Act or the Securities Act of 1933, thereby
rendering this Court's decision a nullity. See Int'l Controls
Corp. v. Vesco, 490 F.2d 1334, 1348-49 (2d Cir. 1974)
(prosecution of state lawsuit may further violation of securities
laws) (Exhibit T); Studebaker Corp. v. Gittlin, 360 F.2d 692, 698
(2d Cir. 1966) (same) (Exhibit U).
</FN>
D. FIRST UNION SHOULD NOT BE REWARDED FOR COURT-SHOPPING
First Union may argue that this Court should not stay this action
because it was filed first. This argument is without merit,
particularly because it is now clear that First Union was
court-shopping in bringing this action in this Court in the first
place: First Union has now asserted `34 Act counterclaims subject to
exclusive federal jurisdiction in the federal action, which it could
have brought at or before the time it filed this action. First Union
should not be rewarded for fragmenting its federal and state law
claims in the interest of court-shopping, especially since it violated
its own By-Laws by filing suit before allowing Gotham five days to
cure the alleged information deficiencies on which this action is
premised.
The Ohio Supreme Court has made clear that "where only partial,
or possibly ineffective, relief may be granted in one action, while
full relief may be granted in a subsequent action, the trial court in
the original case may stay proceedings in that case pending outcome of
the subsequently filed action." State ex. rel Smith v. Friedman, 22
Ohio St. 2d 25, 27, 257 N.E.2d 386, 388 (Ohio 1970) (affirming stay of
partition action in deference to later-filed divorce action). Here, as
in Smith, only partial relief could be granted in the first-filed
action, while full relief can be granted in the subsequently-filed
action. Accordingly, a stay of the first-filed action is warranted.
In a decision upholding a stay of a state court action in
deference to a federal court action, an Ohio appellate court has
instructed:
An essential condition of the application of the rule as to
priority of jurisdiction is that the first suit shall afford the
plaintiff in the second an adequate and complete opportunity for
the adjudication of his rights, for the rule that the court first
acquiring jurisdiction retains it to the end must yield to the
higher principle which accords to every citizen the right to have
a hearing before a court of competent authority [i.e., a court
with the broadest scope of subject matter jurisdiction.]....This
principle is particularly applicable to the situation presented
in the instant case wherein the United States court is compelled
to entertain jurisdiction and grant complete relief, whereas the
state court is merely empowered to entertain jurisdiction.
Barnett v. Baltimore & Ohio R.R. Co., 119 Ohio App. 329, 342-43, 200
N.E.2d 473, 481 (Ohio Ct. App. 1963). In the case at bar, similarly, a
"first-filed" notion must yield to principles of judicial economy and
efficiency enunciated by the Ohio courts.
Indeed, it is a well-settled principle in both federal and state
case law that the subsequent federal forum should be favored where, as
in the present case, "the whole of the war" is in the federal court
exclusively. See, e.g., Kerotest Mfg. Co. v. C-O-Two Fire Equip., 342
U.S. 180, 183 (1952) (holding that, where two separate federal actions
had been filed, it was appropriate to stay the first-filed action when
the second-filed action would afford more complete relief); Data Gen.
Corp. v. SCI Sys., Inc., Civ. A. No. 5662, 1979 WL 25722 (Del. Ch.
Mar. 22, 1979) (court stayed first-filed trade secrets suit in
deference to subsequently filed antitrust suits in California federal
court; court reasoned, inter alia, that federal action would require
determination as to issues in the state court action) (Exhibit V);
Research Corp. v. Singer-General Precision, Inc., 320 N.Y.S.2d 818
(N.Y. App. Div. 1971) (staying first-filed state court action by
patent owner against licensee for breach of agreement in favor of
subsequently filed federal declaratory judgment action) (Exhibit W).
II. A STAY OF THIS CASE WILL NOT PREJUDICE FIRST UNION
Not only do principles of comity and judicial economy weigh
heavily in favor of a stay, but First Union plainly will suffer no
prejudice if its claims here are heard within the federal court's
supplemental jurisdiction. In its motion for preliminary injunction,
First Union vaguely claims that it needs injunctive relief
"significantly" in advance of the April 14 annual meeting so that it
can avoid an "inevitable proxy fight" that would take place absent an
injunction. FUR Mot. for Prelim. Inj. (Exhibit X). Assuming for
purposes of argument that First Union may have a right to injunctive
relief, there is every reason to be confident that the federal court
could grant that relief well in advance of First Union's annual
meeting.
Before remanding this case, Judge Aldrich had scheduled both
First Union's and Gotham's motions for preliminary injunctions for
hearing on March 5, 1998. 1/28/98 Sched. Order (Exhibit Y). If this
action is stayed, it is highly likely that the parties' respective
motions for preliminary injunction will be rescheduled to be heard in
federal court by that date. A hearing by March 5 would be sufficiently
in advance of First Union's annual meeting to allow First Union to
avoid the irreparable harm it alleges.
Moreover, this Court cannot resolve all of First Union's claims;
only the federal court can. A stay of this action would actually
benefit First Union by allowing it to litigate all of its claims -
both its state claims and its exclusively federal '34 Act claims -- in
the federal action, without the time and expense involved in
duplicative litigation.
CONCLUSION
----------
For all of the above reasons, Gotham respectfully requests that
this Court grant its motion for a stay. Absent such relief, the
parties and the state and federal courts will inevitably be saddled
with duplicative litigation. The discovery that would take place in
this action would be virtually identical to the discovery that has
already begun in the federal court proceeding. Moreover, the parties
and the courts would face a distinct possibility of inconsistent
determinations as to certain essentially identical issues raised in
both the federal and state actions. In short, it would be a waste of
the courts' and the parties' resources to proceed simultaneously with
both the federal and state actions. Conversely, this Court's grant of
a stay would facilitate the adjudication of ALL of the parties' claims
- -- their state law claims as well as their exclusively federal '34 Act
claims -- in one forum. Gotham respectfully requests that this Court
schedule an oral argument on this motion.
Respectfully submitted,
/s/ Michael J. Garvin
---------------------------
OF COUNSEL: David C. Weiner (0013351)
Michael J. Garvin (0025394)
HAHN LOESER & PARKS LLP
3300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2301
(216) 621-0150
Attorneys for Defendants and
Counterclaimants
OF COUNSEL:
Alexander R. Sussman(FN11)
FRIED, FRANK, HARRIS SHRIVER
& JACOBSON
25th Floor
One New York Plaza
New York, New York 10004-1980
(212) 859-8000
- --------------
[FN]
11 Application for admission pro hac vice to be submitted.
</FN>
CERTIFICATE OF SERVICE
----------------------
I hereby certify that a copy of the foregoing "Defendants and
Counterclaimants' Brief in Support of Motion to Stay Until Final
Resolution of Related Federal Case" was served by messenger upon
Frances Floriano Goins, Squire, Sanders & Dempsey L.L.P., 4900 Key
Tower, 127 Public Square, Cleveland, Ohio 44114-1304, attorneys for
Plaintiff, this ___ day of February, 1998.
/s/ Michael J. Garvin
-----------------------------------
One of the Attorneys for Defendants
and Counterclaimants
