UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SCHEDULE 13D
UNDER THE SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. 20)
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 23, 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 PERSONS
Gotham Partners, L.P.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [X]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS*
WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York, U.S.A.
NUMBER OF 7 SOLE VOTING POWER
SHARES 2,601,951 Shares
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY EACH 0
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON WITH 2,601,951 Shares
10 SHARED DISPOSITIVE POWER
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)
8.24%
14 TYPE OF REPORTING PERSON*
PN
*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 PERSONS
Gotham Partners II, L.P.
2 CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP* (a) [X]
(b) [ ]
3 SEC USE ONLY
4 SOURCE OF FUNDS*
WC
5 CHECK BOX IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED
PURSUANT TO ITEMS 2(d) or 2(e) [ ]
6 CITIZENSHIP OR PLACE OF ORGANIZATION
New York, U.S.A.
NUMBER OF 7 SOLE VOTING POWER
SHARES 30,449 Shares
BENEFICIALLY 8 SHARED VOTING POWER
OWNED BY EACH 0
REPORTING 9 SOLE DISPOSITIVE POWER
PERSON WITH 30,449 Shares
10 SHARED DISPOSITIVE POWER
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)
0.10%
14 TYPE OF REPORTING PERSON*
PN
*SEE INSTRUCTIONS
This Amendment No. 20 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 23, 1998, counsel for the Reporting Persons filed a
Memorandum of Law in Opposition to the Company's "Motion to Dismiss"
and on Other Matters in the United States District Court for the
Northern District of Ohio, Eastern Division ("U.S. District Court"). A
copy of such Memorandum is attached as Exhibit 40 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
40. Memorandum of Law in Opposition to the Company's "Motion to
Dismiss" and on Other Matters filed in the U.S. District Court by counsel
for the Reporting Persons on February 23, 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 25, 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 40
TABLE OF CONTENTS
I. GOTHAM HAS STANDING TO ASSERT THE CLAIMS IN COUNTS I - IV..............7
II. FIRST UNION'S ABSTENTION ARGUMENT IS BASELESS.........................10
III. GOTHAM'S FEDERAL PROXY CONTEST CLAIMS ARE RIPE........................11
IV. FIRST UNION'S DUE PROCESS AND PREEMPTION ARGUMENTS ARE ENTIRELY
UNFOUNDED.............................................................14
V. GOTHAM HAS PROPERLY PLED THAT FIRST UNION VIOLATED FEDERAL PROXY
RULES BY JUMPING THE GUN..............................................14
VI. GOTHAM HAS PROPERLY PLED THAT FIRST UNION VIOLATED FEDERAL PROXY
RULES BY MAKING FALSE AND MISLEADING STATEMENTS.......................17
VII. COUNT VI ALLEGES DIRECT INJURY TO GOTHAM AND THUS IS
NOT A DERIVATIVE CLAIM................................................17
VIII. COUNT VII IS PROPERLY BEFORE THIS COURT...............................19
IX. THE AUTOMATIC STAY DOES NOT APPLY HERE................................21
A. The Automatic Stay Does Not Apply................................21
B. The Automatic Stay Does Not Preclude Gotham From Obtaining A
Preliminary Injunction...........................................22
i. The Automatic Stay Does Not Apply To Proceedings For A
Preliminary Injunction...........................................22
ii. To The Extent The Automatic Stay Applies To Proceedings For A
Preliminary Injunction, This Court Should Lift The Stay..........23
C. Gotham Should Be Permitted To Conduct Particularized Discovery
Related To The Preliminary Injunction........................... 24
X. GOTHAM'S EXPEDITED DISCOVERY MOTION SHOULD BE
GRANTED...............................................................25
IN THE UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF OHIO
EASTERN DIVISION
GOTHAM PARTNERS, L.P., et al., ) CIVIL ACTION NO. 98 CV 0272
)
) JUDGE NUGENT
Plaintiffs, )
)
v. )
)
FIRST UNION REAL ESTATE EQUITY )
AND MORTGAGE INVESTMENTS, )
)
Defendant and Counterclaimant. )
GOTHAM'S MEMORANDUM OF LAW
IN OPPOSITION TO FIRST UNION'S
"MOTION TO DISMISS" AND ON OTHER MATTERS
----------------------------------------
Plaintiffs Gotham Partners, L.P. ("Gotham I") and Gotham Partners
II, L.P., ("Gotham II" and collectively with Gotham I, "Gotham") submit
this memorandum of law (1) in opposition to the motion for judgment on the
pleadings submitted by Defendant and Counterclaimant First Union Real
Estate Equity and Mortgage Investments ("First Union" or the "Company");
(2) in reply to First Union's opposition to Gotham's motion for expedited
discovery; and (3) in support of Gotham's position that no automatic stay
exists, or alternatively, in support of Gotham's motion to lift the
automatic stay.
PRELIMINARY STATEMENT
---------------------
On January 8, 1998, in exercise of its rights under federal
securities and Ohio law and in full compliance with both First Union's
Declaration of Trust (the "Trust" or the "Declaration of Trust") and First
Union's By-Laws (the "By-Laws"), Gotham, one of First Union's largest
shareholders, notified First Union, a publicly traded company that is
registered on the New York Stock Exchange, of Gotham's proposal to expand
First Union's Board of Trustees and Gotham's nominees at the 1998 Annual
Meeting to be held in about 7 weeks, on April 14, 1998. Fearful that
shareholders will adopt Gotham's proposal and elect Gotham's nominees
because First Union's management and trustees have demonstrated
incompetence and ineptness at maximizing the Company's value and return for
shareholders, First Union has engaged in a continuing scheme to deprive
Gotham of the opportunity to present its proposal to all shareholders.
As Gotham's Complaint clearly and plainly alleges, in furtherance
of its scheme, First Union has engaged in the following illegal conduct:
. Soliciting proxies before filing preliminary proxy
materials, as required by federal law and the Securities
and Exchange Commission (the "SEC") proxy rules;
. Issuing materially false and misleading press
releases and other public statements that have
disparaged the proposal and Gotham's nominees in an
attempt to poison shareholders against Gotham and its
nominees and in an attempt to condition shareholders to
ignore Gotham's proxy materials, in violation of federal
law and SEC proxy rules;
. Interfering with the proxy contest by, among other
things, refusing Gotham's request under SEC Ru1e 14a-7
that First Union either provide a list of its
shareholders or mail Gotham's proxy materials, in
violation of federal law and SEC proxy rules;
. Interpreting unfairly and unreasonably its Trust and
By-Laws to retaliate against Gotham for exercising its
right to present proposals and nominations to First
Union shareholders; and
. Depriving Gotham of its stockholder rights in
violation of the Trust and in conflict with federal and
Ohio law. See Compl. P. P. 1, 50-77.
First Union has filed its baseless "motion to dismiss" in a
misguided effort to delay these proceedings. However, First Union's motion
is actually a motion for judgment on the pleadings, since First Union has
already answered Gotham's Complaint. The reason for First Union's
mischaracterization of the motion is its attempt to delay these proceedings
and hinder plaintiff's discovery by improperly invoking the automatic stay
in the Private Securities Litigation Reform Act (the "PSLRA"), even though
the explicit language of that act applies only to a "motion to dismiss" and
not to a motion for judgment on the pleadings.
On the merits, First Union's motion must be denied because Gotham
has properly pled claims for violations of federal securities and Ohio law
and for breach of contract. First Union has failed in its voluminous motion
papers to demonstrate that Gotham's Complaint is deficient as a matter of
law or that no triable issues of fact exist as to any element in the
Complaint. Each of First Union's eight grounds for dismissal is without
merit.
First, the standing argument is fatally flawed because it fails
to accept as true, as it must, all of the well pled factual allegations in
Gotham's Complaint, including that Gotham is a record and beneficial
shareholder of First Union and is entitled to make nominations and
proposals. Compl. P. P. 5, 11, 18-20, 24, 40-44, 60(a), 64-67, 84-87. In
contrast, all of First Union's arguments are premised on First Union's bald
assertion that Gotham is not a shareholder with voting rights, which
improperly seeks to contest the Complaint's allegations and also errs in
attempting illegally to strip Gotham of its stockholder rights.
Critically, as the Complaint and First Union's Answer reflect,
and as First Union's motion accepts, First Union has not communicated any
knowing determination by First Union's Trustees, or the basis of any such
determination, that Gotham's proposal and nominations are void allegedly
because First Union has no stockholder rights. Moreover, the Complaint
affirmatively alleges, as a factual and legal matter, that since First
Union is an SEC-registered, NYSE-listed corporation, with nationwide
operations and stock-ownership, any such determination would be a violation
of the Trustees' fiduciary obligations and "in derogation of federal law,
federal proxy rules, and Ohio law" and would be "invalid and of no force or
effect." Compl. P. P. 5, 11, 18-20, 24, 40-44, 84-87.
[FN]
1 Among other things, First Union has failed to show that any
determination as to "Excess Securities" could operate retroactively or
otherwise so as to invalidate a proposal made pursuant to the Trust's
By-Laws.
</FN>
Second, First Union's abstention argument is meritless because
the Pullman abstention doctrine applies only when interpretation of an
unclear state law would remove a federal constitutional issue. Here, not
only is there no unclear state law but there is also no federal
constitutional issue presented.
Third, contrary to First Union's bald assertions, Gotham's claims
are ripe for review because a real controversy concerning First Union's
violations of federal securities and Ohio law exists between the parties
and must be resolved sufficiently in advance of April 14, 1998 to permit an
orderly and fully informed vote at First Union's April 14 Annual Meeting.
First Union's fourth through eighth grounds for dismissal are
similarly without merit.
Finally, after denying First Union's "motion to dismiss" or,
alternatively, pending its ruling on that motion, the Court should grant
Gotham's expedited discovery motion and rule that no automatic stay is in
effect as First Union has claimed. As demonstrated below, no automatic stay
has been imposed here because First Union, having served and filed an
Amended Answer and Counterclaims, cannot move to dismiss this action.
Instead, First Union's motion is, in fact, a motion under Federal Rule of
Civil Procedure 12(c) -- a motion for judgment on the pleadings. As the
PSLRA applies only to a "motion to dismiss," no automatic stay has been
imposed and First Union has wrongly refused to comply with Gotham's
discovery requests. Alternatively, should the Court find the existence of
an automatic stay, Gotham hereby moves to lift the stay to avoid undue
prejudice for other reasons discussed below.
THE COMPLAINT'S ALLEGATIONS OF FACT
-----------------------------------
According to the Complaint and the documents it references,
Gotham first commenced purchasing First Union shares in November 1996.
Compl. P. 11. By June 1997, Gotham had acquired over 5% of First Union's
shares, and, consequently, filed a Schedule 13D (the "13D") pursuant to
Rule 13-d of the Securities and Exchange Act of 1934 (the "Exchange Act").
See Exhibit A to Complaint ("Exh. A"), at 9-10. The 13D stated, among other
things, that Gotham acquired shares in First Union for "investment
purposes," and that Gotham "believe[s] that [First Union] has significant
unrealized equity potential . . . [and Gotham is] concerned that existing
management may not have the requisite background and experience to
implement such a value-maximizing strategy." Id.
The 13D further disclosed that Gotham was not a "group" under
Regulation 13D and that Gotham might "seek to actively influence the
management and affairs of [First Union], including, without limitation, by
making proposals and taking other actions as to . . . new management" or a
"new slate of directors." Id. In accordance with securities regulations,
Gotham provided to First Union a copy of its 13D, a document that is also
filed with the SEC and is available to the general public.
On July 14 and 23, 1998, Gotham sent letters directly to First
Union's Trustees indicating concern about First Union's strategic plan, and
requesting a meeting with First Union to discuss its concerns. Compl. P. P.
12, 14, 15; Exh. A, at 11-20, 22-23. First Union failed to respond to these
letters. Rather than agreeing to Gotham's request, on August 20, 1997,
First Union sent Gotham a letter requesting that Gotham disclose "the
nature of all such actual, 'constructive' (as defined under the Internal
Revenue Code) and 'beneficial' (as defined under Section 13(d) of the
Securities Act of 1934) ownership" of its First Union securities. Compl. P.
P. 16, 17; Exh. A, at 24. Gotham provided additional ownership information
to First Union in a September 8, 1997 letter which included the fact that
Gotham was a limited partnership. Compl. P. 18; Exh. A, at 25. The letter
also disclosed that neither Gotham's principals "nor any entity under
[their] control, actually, constructively . . . or beneficially own[ed] any
other equity interests in First Union." Compl. P. 18; Exh. A, at 25.
As of January 8, 1998, Gotham believed it had complied with all
reasonable requests for information and had been a recognized major
shareholder for more than one year as evidenced by its receipt of quarterly
dividends on all of its shares. Compl. P. P. 37, 43, 44. On that date,
Gotham mailed to First Union a notice of a proposal to expand the Board by
six Trustees, as authorized by the Declaration of Trust, and nominations
for candidates to fill those new positions (the "Notice"). Compl. P. P.
23-25; Exh. A, at 27-41. This Notice included twelve pages of information
required under First Union's advance notice provision, By-Law Section 7.
Immediately thereafter, on January 9, 1998, First Union issued a
press release denouncing Gotham's 13D filings -- Gotham having filed six
amendments to its 13D since June, 1997 -- as "inaccurate, misleading, and
notably silent as to [Gotham's] intended use of [First Union's] unique tax
structure," and accusing Gotham of "never express[ing] an interest in
understanding [First Union management's] strategic plan" while operating
under an "undisclosed agenda." Compl. P. P. 26, 28-30.
On January 16, 1998, First Union filed its complaint against
Gotham in Ohio state court. Compl. P. 35. Notably, First Union initiated
that litigation without providing Gotham advance warning or opportunity to
cure any alleged deficiency as required under the By-Laws. Compl. P. 41.
Article I, Section 7(d) of the By-Laws, which governs the making of
proposals and nominations, provides that if the Board of Trustees
determines that a Beneficiary's notice "does not satisfy the informational
requirements [contained in the By-Laws,]" "[s]uch Beneficiary shall have
the opportunity to cure such deficiency by providing additional
information. . . ."
The very same day First Union filed its complaint, First Union
issued a press release announcing that it had filed suit against Gotham "to
protect the integrity of [First Union's] Declaration of Trust and [to]
minimize any potential damage which may have been created[,]" without
stating any basis for claiming that Gotham posed any threat to First Union.
Compl. P. 31. Significantly, First Union has never stated how, if at all,
Gotham's purported violation of the By-Laws jeopardizes First Union's tax
status as a real estate investment trust ("REIT").
Also on January 16, 1998, First Union sent Gotham a letter that
purported to notify Gotham of the alleged "deficiencies" in the Notice.
Compl. P. 41; Exh. A, at 42. However, it failed to identify a single item
that was missing from the required disclosure. Compl. P. P. 42-44. This
letter further claimed to address "only those deficiencies in the Notice
that are capable of being cured." First Union added that it might later
point to "other requirements" of the Declaration of Trust or By-Laws that
"are not curable."
On January 20, 1998, after Gotham had sent a detailed letter
providing additional information about Gotham, First Union responded that
Gotham's notice of proposal "continues to be deficient in not identifying
limited partners and other Beneficiaries and beneficial owners who support
Gotham's proposal and nominations." Accordingly, by letter of January 21,
1998, Gotham provided, among other things, the names of its limited
partners that Gotham knew were supporting the proposal and stated that
other than those limited partners, Gotham had no knowledge whether other
limited partners supported the proposal. Compl. P. 43; Exh. A, at 49-51.
Accordingly, as demonstrated below, First Union's motion for
judgment on the pleadings must fail.
I. GOTHAM HAS STANDING TO ASSERT THE CLAIMS IN COUNTS I - IV
Although Gotham agrees with First Union that this Court should
address the application of Art. XI, Section 11.7 of the Trust and Art. VI,
Section VI of the By-Laws, First Union is wrong in suggesting that its
defense can be adjudicated in a motion for judgment on the pleadings.
First, it is well-settled that "[i]n reviewing a dismissal on the
pleadings all allegations in the complaint are taken as true and the
complaint is construed liberally in favor of the party opposing the motion
to dismiss." Westlake v. Lucas, 537 F.2d 857, 858 (6th Cir. 1976); see also
Emmons v. Merrill Lynch, Pierce, Fenner & Smith, 532 F. Supp. 480, 482
(S.D. Oh. 1982) (same). A court will not grant a 12(c) motion for judgment
on the pleadings "unless it appears beyond doubt that the plaintiff can
prove no set of facts in support of his claim which would entitle him to
relief." Ellis v. Target Stores, Inc., 842 F. Supp. 965, 969 (W.D. Mich.
1993).
Gotham has pled sufficient facts that it is a shareholder in good
standing; that it was a shareholder in good standing at the time it
submitted its proposal and nominations; and that it is now and was at all
times authorized to vote under the By-Laws and the Trust. Compl. P. P.
18-19, 37-38, 44, 60, 70-72, 74-77. First Union, in contrast, points to
nothing in the record that shows that its Board of Trustees, management, or
counsel has made a determination that all shares beneficially owned by
Gotham are to be deemed Excess Securities. Nor has it shown when such a
determination was made, the bases for the determination or how such
determination could protect the interest of the Trust. In the absence of
pleading and proof of these facts, First Union's asserted defense can not
be sustained.(FN1) Moreover, the Complaint affirmatively alleges, as a factual
and legal matter, that since First Union is an SEC-registered, NYSE-listed
corporation, with nationwide operations and stock-ownership, any such
determination would be a violation of the Trustees' fiduciary obligations
and "in derogation of federal law, federal proxy rules, and Ohio law" and
would be "invalid and of no force or effect." Compl. P. P. 5, 11, 18-20,
24, 40-44, 84-87.
Second, in connection with its motion for a preliminary
injunction, Gotham will show that any invocation of First Union's
Declaration of Trust or By-Laws to purportedly limit any of Gotham's rights
as a record and beneficial owner would be manifestly unlawful for multiple
reasons:
(a) Gotham has complied with the By-Law that First Union has invoked
because Gotham has provided "definitive written information respecting [its]
ownership" of First Union Securities. By-Laws Art. VI, ss. 6(c); see
Compl. P. P. 18, 19, 37. Indeed, the Court need look no further than Gotham's
Schedule 13D and its amendments to see the detailed information that Gotham
has provided. In addition, Gotham has provided plenary disclosure of its
constructive ownership and certified that its plans and purposes concerning
First Union include protecting the status of the Trust under the tax laws.
(b) First Union's Trust would authorize limitations on Gotham's
ownership rights, if at all, only if such limitations were necessary to
prevent the "Trust [from] becoming disqualified for taxation as a real estate
investment trust under the Internal Revenue Code." Decl. of Trust,
Section 11.7; see also By-Laws Art. VI, ss. 6(a) (authorizing restrictions on
transfer right, where a beneficiary owns more than 9.8% of the outstanding
shares). First Union has not shown and cannot show that stripping Gotham of
all of its rights as a beneficiary is allowable, let alone necessary, under
this standard. See San Francisco Real Estate Inv. v. Real Estate Inv. Trust
of America, 701 F.2d 1000, 1003-04 (1st Cir. 1983) (invalidating REIT by-law
on ownership restriction for overbreadth).
(c) The position that First Union is urging is repugnant to
well-settled principles of corporate and fiduciary law, federal securities
law, contract interpretation, and Ohio public policy. In essence, First
Union is invoking the By-Law and seeking a forfeiture of Gotham's contractual
and other rights, not to protect the tax status of the Trust but with the
purpose and effect of subverting a fundamental right of investors to choose
the trustees who govern the Trust. Gotham has pleaded and, in connection
with its motion for preliminary injunction, Gotham will prove that First
Union's actions thus violate state and federal law. See, E.G., NCR Corp. v.
AT&T Co., 761 F. Supp. 475, 500 (S.D. Ohio 1991) (concluding that board's
adoption of employee stock ownership plan constituted "attempt by [the board]
to impede corporate democracy and to perpetuate its control of the company"
and, therefore, such plan was "invalid and unenforceable"); Blasius Indus.,
Inc. v. Atlas Corp., 564 A.2d 651, 660 n.2 (Del. Ch. 1988) (observing that
"Delaware courts have long exercised a most sensitive and protective regard
for the free and effective exercise of voting rights" and an abiding "concern
for corporate democracy"); Danaher Corp. v. Chicago Pneumatic Tool Co., Nos.
86 Civ. 3499 & 3638, 1986 WL 7001 at *13 (S.D.N.Y. June 19, 1986) ("'Special
scrutiny' is to be given where directors, bent on entrenchment, allegedly use
their powers to restrict the ability of shareholders to replace them."
(citation omitted); Garrett v. Brown, Nos. 8423 & 8247, 1986 WL 6708 at * 8-9
(Del. Ch. June 13, 1986) (interpretation of contract as "inequitable
. . . where it would result in a partial or total forfeiture" of shares;
"Forfeitures are not favored and contracts will be construed to avoid such a
result"), aff'd, 511 A.2d 1044 (Del. 1986).
Finally, First Union's theory that Gotham's standing to bring
federal proxy violation claims depends upon its right to vote shares is
incorrect in any case. The rulings cited by First Union (Br. at 4-5)
involve entirely distinguishable facts concerning the plaintiff's stock
interest and alleged injury. The proposition that Gotham has no federal
standing to assert violations under Section 14(a) and the SEC proxy rules
that affect its $30 million investment in First Union, NYSE-listed,
SEC-registered voting securities is simply untenable, regardless of the
resolution of First Union's state law claims.
Accordingly, there is not now and there will not be any basis for
judgment on the pleadings concerning the defense of lack of standing.
II. FIRST UNION'S ABSTENTION ARGUMENT IS BASELESS
First Union mistakenly asserts that the Pullman doctrine requires
that this Court should abstain from hearing Gotham's claims for injunctive
relief under the Exchange Act. On the contrary, Railroad Commission of
Texas v. Pullman Co., 312 U.S. 496 (1941), does not even apply here and
Colorado River Water Conservation Dist. v. United States, 424 U.S. 800
(1976), commands that this Court not abstain because of the overlap of
federal and state issues.
The Supreme Court has stressed that abstention from the exercise
of federal jurisdiction under Article III of the Constitution is the
exception, not the rule. Moses H. Cone Mem'l Hosp. v. Mercury Constr.
Corp., 460 U.S. 1, 14 (1983) (citing Colorado River at 813). "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." Id. (quoting Colorado River at 813). Consequently, the
Supreme Court and Sixth Circuit have emphasized, "[a]bdication 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.
(quoting Colorado River at 813).
First Union argues that in this case, this Court should eschew
its duty "to adjudicate a controversy properly before it" under what is
known as the Pullman abstention doctrine. The Pullman doctrine, however,
does not apply. Pullman abstention is appropriate only "in cases presenting
a federal constitutional issue which might be mooted or presented in a
different posture by a state court determination of pertinent state law."
Colorado River at 814 (emphasis added). Stated differently, "Pullman
abstention is applicable where state interpretation of an unclear law would
remove the federal issue [in a given case] by making unnecessary a
constitutional decision." Traughber v. Beauchane, 760 F.2d 673, 682 (6th
Cir. 1985) (emphasis added). In this case, the Pullman abstention doctrine
is simply inapplicable, because "[n]o such uncertain state law exists in
this case, and there is no federal constitutional issue which could be
presented in a different posture." Ada-Cascade Watch Co. v. Cascade
Resource Recovery, Inc., 720 F.2d 897, 903 (6th Cir. 1983).
Given that First Union's Pullman argument is inapposite in the
present case, it is not surprising that defendant's own cases do not
support its position. See Pullman at 498-502 (given that complaint at issue
"undoubtedly tendered a substantial constitutional issue" which "touches a
sensitive area of social policy upon which the federal courts ought not to
enter unless no alternative to its adjudication is open," district court
should enter a stay pending resolution of "far from clear" issue of
interpretation of state statute and decisions); Reetz v. Bozanich, 397 U.S.
82, 86-87 (1970) (involving "unsettled questions of state law" and
"underlying federal constitutional questions"); Hawaii Housing Authority v.
Midkiff, 467 U.S. 229, 236-37 (1984) (holding abstention was unnecessary
because there was "no uncertain question of state law").
Accordingly, as the prerequisites for the Pullman abstention
doctrine simply are not applicable here, First Union's baseless argument
must fail.
III. GOTHAM'S FEDERAL PROXY CONTEST CLAIMS ARE RIPE
First Union's naked assertion that Gotham's claims of federal
securities violations by the defendant are not yet ripe is belied by the
fact that Gotham and all First Union shareholders have already been harmed
and continue to be harmed by First Union's multiple violations of federal
securities law, with respect to a stockholder vote that is to occur on
April 14, 1998. Moreover, First Union has waived its challenge to the
ripeness of Gotham's claims by acknowledging this Court's exclusive subject
matter jurisdiction over these claims and by itself setting forth what it
deems to be "compulsory counterclaims" alleging proxy violations by Gotham.
The ripeness doctrine relates to the timing of the litigation of
a given matter; "[i]t asks whether the case has been brought at a point so
early that it is not yet clear whether a real dispute to be resolved exists
between the parties." 15 James Wm. Moore et al., Moore's Federal Practice
ss. 101.70[2] (1997). The ripeness concept was developed by the Supreme
Court in the context of judicial review of administrative agency action.
See McCoy -Elkhorn v. U.S. E.P.A., 622 F.2d 260, 264 (6th Cir. 1980). As a
general matter, "[r]ipeness properly should be understood as involving the
question of when may a party seek pre-enforcement review of a statute or
regulation." Erwin Chemerinsky, Federal Jurisdiction ss. 2.4 (1994). In
very limited circumstances, the ripeness doctrine has been applied in
litigation between private parties.
In the Sixth Circuit, a district court must weigh several factors
in deciding whether to address the issues presented for review. First, the
court is to examine the "likelihood that the harm alleged by [the]
plaintiffs will ever come to pass." Adult Video Ass'n v. Dep't of Justice,
71 F.3d 563, 568 (6th Cir. 1995) (quoting United Steelworkers, Local 2116
v. Cyclops Corp., 860 F.2d 189, 194 (6th Cir. 1988)). Second, the court
considers whether the factual record is sufficiently developed to produce a
fair adjudication. Id. Finally, the court must assess the hardship to the
parties if judicial relief is denied at this stage. Id.
In the present case, each of the factors clearly favor a
determination that Gotham's claims are ripe. First, the harm alleged by
Gotham has already come to pass, and is continuing and irreparable. First
Union cannot deny that it has already issued a number of statements which
Gotham alleges are premature and misleading proxy solicitations meant to
sway shareholders toward management. At this stage of the litigation, these
allegations must be accepted as true. Second, the factual record at issue
in Gotham's proxy claims is well-developed; Gotham has not rendered
speculative or hypothetical claims. Moreover, the hardship to Gotham if
this Court declined to hear its proxy claims and to consider injunctive
relief would be substantial; Gotham is in the middle of a proxy contest
with First Union, and would be severely disadvantaged if First Union could
continue to violate the federal proxy rules with impunity on the eve of its
Annual Meeting. Furthermore, Gotham would be left without a remedy as this
Court alone can hear Gotham's proxy claims.
First Union's argument that Gotham's Section 14(a) claims "are
contingent on the outcome of the Original State Court Action" and thus "not
yet ripe" is, in fact, belied by the defendant's own Section 14(a) and
other counterclaims in this litigation. First Union has deemed its "federal
law based counterclaims" in this action to be "compulsory counterclaims."
First Union's Brief in Opposition to Motion to Stay, First Union Real
Estate Equity and Mortgage Investments v. Gotham Partners L.P. er al.,
Court of Common Pleas, Cuyahoga County. Fed. R. Civ. P. 13(a), governing
compulsory counterclaims, states that "[a] pleading shall state as a
counterclaim any claim which at the time of serving the pleading the
pleader has against any opposing party, if it arises out of the transaction
or occurrence that is the subject matter of the opposing party's claim . .
. ." (emphasis added). A claim that has not yet matured -- i.e., that is
not yet ripe -- may be presented as a counterclaim by supplemental pleading
once it has matured. By filing "compulsory" Section 14 counterclaims in
this action, in other words, First Union has certified that these claims
are ripe. Indeed, First Union asserts in its counterclaims that as a result
of alleged violations of the proxy rules and other federal securities laws
by Gotham, the Trust and its beneficiaries have been and will continue to
be irreparably harmed.
First Union's additional ripeness argument -- that Gotham's
federal claims "are also prudentially unripe based on notions of comity" --
is similarly meritless. First Union cites no authority for the proposition
that a court should deem a claim unripe based on an effort at comity, and
neither of the decisions cited by First Union support its position. See
Crane v. Fauver, 762 F.2d 325 (3d Cir. 1985) (taking no position regarding
district court's dismissal of civil rights action in deference to related
state proceedings regarding discharge of correctional officers); Dodd v.
Hood River County, 59 F.3d 852 (9th Cir. 1995) (determining that district
court erred in dismissing plaintiff landowners' federal taking claim for
lack of ripeness).
Consequently, the Court should reject First Union's request that
Gotham's federal claims should be deemed unripe. A real controversy
presently exists between Gotham and First Union regarding the latter's
violation of federal securities laws, and Gotham's proxy claims are by no
means premature.
IV. FIRST UNION'S DUE PROCESS AND PREEMPTION ARGUMENTS ARE ENTIRELY
UNFOUNDED
Similarly, the Court should reject out of hand First Union's
specious allegation that Counts III and IV of Gotham's Complaint seek to
"preempt" state law and violate First Union's "due process rights." In
support of its position, First Union argues that it is a "creature of state
law," but it is also, without question, wholly subject to the federal
securities laws, since the Trust is a registered public company with the
SEC and its stock is listed on the New York Stock Exchange. Moreover, the
federal securities laws -- designed to protect the investing public which
otherwise might be unable to protect itself from precisely the type of
tactics First Union has employed against Gotham -- can hardly be classified
as "procedural" and therefore trumped by state law as First Union claims.
As courts have held, the filing of lawsuits for the purpose of
frustrating a shareholder's corporate suffrage rights violates the federal
securities laws. See, e.g., 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); Studebaker Corp. v. Gittlin, 360 F.2d 692, 698 (2d
Cir. 1966) (same). Moreover, despite First Union's claim that it is
entitled to violate the federal proxy rules unless and until an Ohio state
court finally affirms Gotham's voting rights, the federal proxy rules --
specifically the federally protected right to wage a proxy contest --
cannot be ignored. See, e.g., Reserve Life Ins. Co. v. Provident Life Ins.
Co., 499 F.2d 715, 725-26 (8th Cir. 1974) (observing that under the proxy
rules, an atmosphere of "fair play" must pervade solicitation of proxies);
Greater Iowa Corp. v. McLendon, 378 F.2d 783, 797 (8th Cir. 1967)
("dissenting security holders have an absolute right to challenge
management and to question entrenched management's stewardship").
V. GOTHAM HAS PROPERLY PLED THAT FIRST UNION VIOLATED FEDERAL PROXY RULES
BY JUMPING THE GUN
Gotham's Complaint describes in detail each of the various press
releases and statements to the press that First Union has issued as part of
its campaign to solicit shareholders before filing proxy materials with the
SEC and to prejudice shareholders against Gotham, Gotham's proposal and its
nominees. The Complaint in particular alleges that "beginning on or before
January 9, 1998" First Union "launched a concerted campaign . . . to
solicit shareholders by issuing press releases and by making other
statements to the press that attack the proposal and the nominees, and that
defend management's entrenchment tactics." Compl. P. 26. Gotham further
stated in the Complaint that "[a]t the time of these press releases and
statements to the press, First Union had not . . . filed any proxy
solicitation materials with the SEC." Compl. P. 27. The Complaint
specifically recounts the dates and content of various press releases,
statements to the press, or quotes by First Union management and/or First
Union's counsel, and indicates how each statement either constitutes a
solicitation of the shareholder vote or attempts to prejudice shareholders
against Gotham. SEE Compl. P. P. 28-33, 59-60(a)-(e).
For example, the day after receiving Gotham's January 8, 1998
notice of nominations and proposal, First Union falsely stated that
Gotham's proposal was "inaccurate, misleading, and notably silent as to
[Gotham's] intended use of [First Union's] unique tax structure" and that
"Gotham has never expressed an interest in understanding [First Union's]
strategic plan and apparently is operating under a different and
undisclosed agenda." In the same press release, First Union lauded current
First Union management and the Board of Trustees, all in an effort to
solicit proxies in favor of First Union. (FN2)
[FN]
2 In the press release, First Union stated:
Management and our board have operated First Union with the interests
of all shareholders in mind. We have charted a clear path for revenue
and profit growth that our long-term shareholders support. . . . Our
performance speaks for itself. We have consistently hit our targets.
We set ambitious but realistic goals and we have the right management
team in place. . . . Our existing Board of Trustees includes only one
insider and is comprised of experienced and highly regarded individuals
who have worked diligently on behalf of all shareholders.
FIRST UNION ANNOUNCES RECEIPT OF 13D FILED BY GOTHAM PARTNERS, PR
Newswire, Jan. 9, 1998.
</FN>
Furthermore, in a press release issued on January 16, 1998,
shortly after it had commenced its state action against Gotham, First Union
stated that it had filed suit "to protect the integrity of [First Union's]
Declaration of Trust and [to] minimize any potential damage which may have
been created" by Gotham's proposal and nominees. The next day the
coordinated campaign continued with Mary Ann Jorgenson, an attorney for
First Union, stating to the Cleveland Plain Dealer that "[Gotham] had not
given [First Union] ownership information that had been requested of them
in the fall. So one of the questions is whether [Gotham is] a qualified
owner eligible to make a proposal in the first place." (FN3)
[FN]
3 Since the filing of the Complaint in this action, First Union has
continued its illegal campaign to solicit proxies.
</FN>
Each of these public statements was intended either to sway
shareholder opinion regarding First Union management's performance or to
mislead shareholders into believing that Gotham had not complied with First
Union's informational requests and therefore was not eligible to make
proposals and nominations. As such, these statements are prohibited
"solicitations" under the federal proxy rules because they were "reasonably
calculated to influence the shareholders' votes." Long Island Lighting Co.
v. Barbash, 779 F.2d 793, 796 (2d Cir. 1985) (internal quotation omitted)
(holding that district court erred in holding that proxy rules could not
cover communications in publications of general circulation that are
addressed to shareholders indirectly).
Kaufman v. Cooper Cos., Inc., 719 F. Supp. 174, 185 (S.D.N.Y.
1989), is particularly instructive here. In Kaufman, a management group
claimed that the insurgent group had engaged in premature proxy
solicitation, which included 1) statements made by an insurgent to the
press regarding the contest, including a statement that the former chief
executive officer of the company was "in favor" of the insurgents' efforts,
and 2) a press release stating that proxies would be solicited by the
insurgents when the applicable law permitted. Id. at 184. The Court held
that these communications were in fact premature solicitations because
while they "do not directly or indirectly request proxies," they "clearly
express an intent to solicit proxies" and "speak critically of the
incumbent management and clearly express some of the reasons why the
[insurgent group] was formed and would seek to solicit proxies." Id. at
185. As in Kaufman, First Union is using press releases and other public
statements here to influence shareholders against Gotham and to solicit
proxies for First Union.
Contrary to First Union's assertions, these various statements in
the press go far beyond the mere conveyance of information to shareholders;
they were intended to dissuade First Union shareholders from seriously
considering Gotham's proposal and its nominees to the Board.
VI. GOTHAM HAS PROPERLY PLED THAT FIRST UNION VIOLATED FEDERAL PROXY RULES
BY MAKING FALSE AND MISLEADING STATEMENTS
Gotham also has alleged sufficient facts regarding First Union's
false and misleading public statements to state a claim for relief under
federal proxy rules barring false and misleading statements. For instance,
the Complaint notes First Union's public assertions that Gotham has a
hidden "agenda" despite the fact that Gotham's public SEC filings and its
January 8, 1998 proposal fully disclosed any intentions Gotham had for
First Union. Compl. P. P. 30.60(c). The Complaint further indicates that
Gotham on several occasions had requested to meet with First Union's
management, first in its July 14 letter and then again in its July 23
letter, Compl. P. P. 14-15, and that First Union failed to respond to these
requests. When a meeting between representatives for Gotham and First Union
finally was scheduled for December 29, 1997, it was First Union's
management -- not Gotham -- that canceled. Compl. P. 21.
Gotham has adequately alleged that these statements, singularly
and together, violate federal proxy rules because they are materially false
and misleading in that "there is a substantial likelihood that a reasonable
shareholder would consider the [misstatements] important in deciding how to
vote." See Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991) (quoting
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)).
VII. COUNT VI ALLEGES DIRECT INJURY TO GOTHAM AND THUS IS NOT A DERIVATIVE
CLAIM
Contrary to First Union's assertions, Count VI of the Complaint
pleads a direct breach of fiduciary duty claim and direct injury to Gotham.
It is well-settled that the general principle limiting shareholders to
derivative actions has no application when a shareholder is injured in a
way that is "separate and distinct" from an injury to the business entity
in question. Crosby v. Beam, 47 Ohio St.3d 105, 107, 548 N.E.2d 217, 219
(1989); Medina v. Perumeti, No. 66732 1994 WL 716539 at *2 (Ohio Ct. App.
1994) (["W]hen a shareholder claims that he has sustained injuries which
are not in common with other shareholders, he may bring an individual
action rather than a derivative action").
In determining whether Gotham's complaint states a derivative or
a direct claim, the Court must examine the nature of the injury alleged and
give broad construction to the pleading. Crosby, 47 Ohio St.3d at 107.
Among Gotham's allegations -- detailed in the "Factual
Background" section of the Complaint and incorporated by reference into
Count VI -- are that First Union has:
. "pursu[ed] ill-timed, poorly executed and dilutive equity
offerings" aimed at entrenching the position of First
Union's current officers and management, P. 80;
. "interpreted unfairly and unreasonably its Declaration of
Trust and By-Laws to retaliate against the Gotham
Partnerships and to penalize them for exercising their
right to present proposals and nominations to First Union
shareholders," P. 1;
. "sued the Gotham Partnerships to seek to apply First
Union's By-Laws in a discriminatory manner that would
operate as a forfeiture of the Gotham Partnerships' voting
and stockholder rights and right to dividends," P. 1; and
. "attack[ed] Gotham I's nominations and proposal through
unlawful proxy solicitations and through a baseless notice
of deficiency in response to Gotham I's nominations and
proposal," P. 80.
As can be seen, the gravamen of Gotham's breach of fiduciary duty
claim clearly is that Gotham is suffering distinct and direct injury at the
hands of a discriminatory entrenchment scheme by First Union's management
and Trustees. The cases cited by First Union do not compel a different
result here. For example, in Palmer v. Fox Software, 107 F.3d 415 (6th
Cir.), cert. denied, 118 S. Ct. 162 (1997), the Sixth Circuit in fact
construed one of the counts of the complaint there "broadly" to allege a
claim of separate injury to plaintiff, even though on its face the count,
which alleged attorney malpractice, "claims no injury to [plaintiff]
separate and distinct from that to the corporation." The claims found to be
derivative as pled in Palmer were allegations of misappropriation of
corporate opportunity -- quite distinct from the breach of fiduciary duty
claim Gotham has pled. The other two cases cited by defendant are similarly
of no help to its argument here where Gotham has alleged a direct injury to
itself. See NBD Bank N.A. v. Fulner, 109 F.3d 299, 301 (6th Cir. 1997)
(determining claim to be derivative because "it merely asserts loss to them
as shareholders for diminution in value of their shares"); Grand Council of
Ohio v. Owens, 86 Ohio App. 3d 215, 219-21, 620 N.E.2d, 234, 237-39 (Ohio
Ct. App. 1993) (finding claims derivative where wrongs alleged affected all
shareholders). The claims found to be derivative in these cases are a far
cry from Gotham's well-pled claim of entrenchment-driven, discriminatory
breaches of fiduciary duty.
Indeed, the core of Count VI is that First Union has singled
Gotham out for harassing treatment and withholding of the right to even
submit a proxy on any one of its more than 2 million shares. Consequently,
Gotham's breach of fiduciary duty claim should be considered a direct
claim, and First Union should be denied judgment on this pleading.
VIII. COUNT VII IS PROPERLY BEFORE THIS COURT
First Union's argument that this Court should dismiss Count VII
of Gotham's Complaint, which seeks a declaratory judgment on the
interpretation of the Trust and the By-Laws, fails because it is premised
on the erroneous contention that the litigation in the Court of Common
Pleas, if not stayed, will resolve the litigation between the parties in
this Court. Moreover, First Union's argument should be rejected because it
would actually undermine principles of comity and judicial economy by
breaking up the disputes between the parties into separate cases in federal
and state court, when they could otherwise be fully decided in this action.
In Brillhart v. Excess Ins. Co. of America, 316 U.S. 491 (1942),
the Supreme Court reasoned that a federal court should decline to entertain
a declaratory judgment action when there is pending litigation between the
same parties involving some of the same issues if the pending state
proceeding would adequately resolve the dispute between the parties. Id. at
495. Here, any determinations by the Court of Common Pleas will not resolve
the issues before this Court because they would not be binding on this
Court. It is well-settled under Ohio law that a decision on a motion for
preliminary injunction does not have res judicata or collateral estoppel
effect because it is not a judgment see Kalk v. Village of Woodmere, 27
Ohio App. 3d 145, 148-49, 500 N.E.2d 384, 389 (Ohio Ct. App. 1985). (FN4)
[FN]
4 ACCORD ZION LIGHTHOUSE SPIRITUAL CHURCH V. REID, No. 88AP-34, 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., Case No. 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).
</FN>
Indeed, ALL of the factors articulated in Aetna Casualty Surety
Co. v. Sunshine Corp., 74 F.3d 685 (6th Cir. 1996), on which First Union
relies, counsel against this Court declining to entertain Count VII of the
Complaint. First and foremost, the declaratory judgment would settle the
controversy at issue in this action and would serve a useful purpose in
clarifying the parties' rights and duties. First Union claims that whether
Gotham has standing to bring its exclusively federal securities claims
depends on whether it is entitled to vote its shares under the terms of the
Trust and By-Laws. Plainly, this contention can be resolved by a
declaratory judgment.
Moreover, a declaratory judgment in this Court would actually
decrease the potential friction between this Court and the Court of Common
Pleas over this litigation. Gotham brought this action to avoid having
litigation of its disputes with First Union proceeding in two separate
forums. First Union's accusation of procedural fencing is not only wrong,
but hypocritical. First Union's By-Laws provide for a five-day cure period
with respect to any proposals deemed by First Union to be deficient.
However, on the very same day that First Union advised Gotham that its
proposal to expand First Union's Board and Board nominations were deficient
(without identifying the alleged deficiencies), it filed the action in
state court prematurely, solely for forum shopping purposes.
Finally, there is no better or more effective alternative remedy.
This Court has supplemental jurisdiction over First Union's state law
claims. There is no reason to believe that this Court cannot resolve those
claims as expeditiously as the Court of Common Pleas. The only difference
is that this Court can, contrary to First Union's argument, resolve all
claims between the parties, having a complete picture of the context in
which they are being litigated, whereas the Court of Common Pleas cannot.
IX. THE AUTOMATIC STAY DOES NOT APPLY HERE
A. The Automatic Stay Does Not Apply
---------------------------------
The automatic stay does not apply here because First Union's
motion is not properly characterized as a "motion to dismiss."
The Exchange Act provides that in any private action filed under
the Act, "all discovery and other proceedings shall be stayed during the
pendency of any motion to dismiss, unless the Court finds upon motion of
any party that particularized discovery is necessary to preserve evidence
or to prevent undue prejudice to that party." 15 U.S.C. ss. 78u-4(b)(3)(B)
(emphasis added). Here, Gotham filed its Answer and Counterclaim on
February 5, 1998. It did not file its purported Motion to Dismiss until
February 17. However, a motion to dismiss under Federal Rule of Civil
Procedure 12(b)(6) "shall be made before pleading." Fed. R. Civ. P. 12(b).
Courts have unanimously agreed that a motion to dismiss filed after an
answer is filed should be treated as a motion for judgment on the pleadings
pursuant to Rule 12(c). See, e.g., Scheid v. Fanny Farmer Candy Shops,
Inc., 859 F.2d 434, 436, n.1 (6th Cir. 1988); Lanigan v. Village of East
Hazel Crest, Ill., 110 F.3d 467, 470 n.2 (7th Cir. 1997); see also 5A
Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure ss.
1367 (2d ed. 1990).
By the plain language of the statute, the automatic stay applies
only to motions to dismiss; it does not apply to motions for judgment on
the pleadings. Put simply, by answering the complaint, First Union has
waived its right to file a motion to dismiss and to take advantage of the
automatic stay. It cannot resurrect that right by styling its motion for
judgment on the pleadings as a "Motion to Dismiss." Therefore, the
automatic stay does not apply to this case.
B. The Automatic Stay Does Not Preclude Gotham From Obtaining
A Preliminary Injunction
----------------------------------------------------------
Even if the automatic stay does apply to this case, it does not
apply to Gotham's Motion for a Preliminary Injunction. Congress' purpose in
enacting the automatic stay was to prevent plaintiffs from rummaging
through all of defendants' files and forcing them to settle frivolous
lawsuits due to the high costs of discovery. See Galaxy Investment v.
Fenchurch Capital Management, Ltd., No. 96 C8098, at 2 (N.D. Ill. Mar. 19,
1997) ("In passing the Reform Act, Congress sought to prevent the
unreasonable burdens which often result on defendants who are forced to
respond to discovery in abusive class action securities litigations"); S.
Rep. No. 104-98, at 14 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 693. It
was not to prevent courts from enjoining violations of the securities laws.
In this case, the automatic stay does not preclude Gotham from obtaining a
preliminary injunction for two reasons: (1) it does not apply to
proceedings for a preliminary injunction; and (2) to the extent it does
apply, this Court should lift the stay.
i. The Automatic Stay Does Not Apply To Proceedings For A
Preliminary Injunction.
As an initial matter, the automatic stay does not preclude this
Court from deciding Gotham's Motion for a Preliminary Injunction.
Obviously, the Motion for a Preliminary Injunction is not "discovery." Nor
is a motion for a preliminary injunction "other proceedings" within the
meaning of the Act. As the Ninth Circuit has recognized, "[g]iven the
context and legislative history of the Act, it appears that the term was
intended to include litigation activity relating to discovery, which would
certainly include [initial] disclosures and would not . . . include all
litigation activity in general." Medhekar v. United States Dist. Court for
the Northern Dist. of Cal., 99 F.3d 325, 328 (9th Cir. 1996) (emphasis
added). Because Gotham's Motion for a Preliminary Injunction is not
"litigation activity relating to discovery," it does not fall within the
terms of the automatic stay.
In this regard, this case is analogous to In re Diamond
Multimedia Systems, Inc., 1997 WL 773733 (N.D. Cal. 1997). In Diamond, the
plaintiff sought to delay the court's determination of the class
certification issue on the ground that the action was subject to the
automatic stay. Id. at * 3. Applying Medhekar, the district court held that
the automatic stay only applied to proceedings related to discovery. Id.
Accordingly, it did not bar the plaintiff from seeking class certification.
Id. Significantly, the court reached this conclusion even though
duplicative litigation had been filed in state court prior to the filing of
the federal action. Id. at *3 & n.1. Like the class certification issue in
Diamond, Gotham's Motion for a Preliminary Injunction is not related to
discovery, and is not affected by the automatic stay.
The reasoning behind Medhekar and Diamond is well-grounded in the
language and history of the automatic stay. As the Diamond court noted, the
Act provides that the Court may grant relief from the stay if it finds that
"particularized discovery is necessary." 15 U.S.C. ss. 78u-4(b)(3)(B)
(emphasis added). Thus, other proceedings must mean other proceedings which
relate to discovery matters. See Diamond, 1997 WL 773733 at *3. Otherwise,
the statute makes no sense. Likewise, in enacting the stay, Congress stated
that "discovery should be permitted . . . only after the court has
sustained the legal sufficiency of the complaint." S. Rep. No. 104-98, at
14 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 693. Congress did not
mention injunctive relief. It is clear that Congress intended for the stay
to apply only to discovery proceedings and not to requests injunctive
relief. Therefore, it does not apply to Gotham's Motion for a Preliminary
Injunction.
ii. To The Extent The Automatic Stay Applies To Proceedings
For A Preliminary Injunction, This Court Should Lift The
Stay.
Even if this Court were to determine that the automatic stay did
apply to Gotham's Motion for a Preliminary Injunction, this Court should
grant relief from the automatic stay. This Court should grant relief from
the stay where necessary to avoid undue prejudice. 15 U.S.C. ss.
78u-4(b)(3)(B). Transcript of Civil Cause for Motion Before the Hon.
Charles P. Sifton at 42, Minzer v. Keegan, (CCV-97-4077) (concluding that
it was "appropriate to grant the application of the plaintiff to lift the
stay, on a finding that some particularized discovery is necessary to
prevent undue prejudice to the plaintiffs."). Here, Gotham would suffer
undue prejudice if this Court were to stay ruling on its Motion for a
Preliminary Injunction. First Union's shareholders' meeting is scheduled
for April 14, 1998. Gotham needs several weeks in advance of that meeting
in order to solicit proxies.
If this Court stays proceedings on the preliminary injunction,
Gotham will not be able to get injunctive relief in time to solicit proxies
from First Union's shareholders, and will lose an opportunity to take
control of First Union. Federal courts have long recognized that loss of an
opportunity to control a company constitutes irreparable harm. San
Francisco Real Estate Inv. v. Real Estate Investment Trust of America, 701
F.2d 1000, 1003 (1st Cir. 1983); Martin-Marietta Corp. v. Bendix Corp., 690
F.2d 558, 568 (6th Cir. 1982); Beztak Co. v. Bank One Columbus, Inc., 811
F. Supp. 274, 283-84 (E.D. Mich. 1992). Suffering irreparable harm is
self-evidently unduly prejudicial. Therefore, Gotham will be unduly
prejudiced if this Court stays proceedings on the preliminary injunction.
C. Gotham Should Be Permitted To Conduct Particularized
Discovery Related To The Preliminary Injunction
----------------------------------------------------
To the extent the automatic stay applies to this case, this Court
should lift it to allow Gotham to conduct particularized discovery relevant
to Gotham's Motion for a Preliminary Injunction. As discussed above, ss.
78u-4(b)(3)(B) authorizes this Court to lift the stay where "particularized
discovery is necessary to . . . prevent undue prejudice to that party."
In this case, Gotham will suffer such undue prejudice if it is
not permitted to engage in discovery prior to the preliminary injunction
hearing. First Union claims that Gotham's shares in First Union are "Excess
Securities" under the provisions of the Declaration of Trust and the
By-Laws because Gotham has not complied with requests for information from
First Union. Gotham is entitled to test this claim by obtaining First
Union's requests for information from other shareholders and the other
shareholders' responses.
Similarly, First Union's position that Gotham's shares are
"Excess Securities" was purportedly made by First Union's trustees. Gotham
is entitled to depose at least one of First Union's trustees to inquire
into the basis for this decision. Likewise, Gotham needs to depose First
Union's CEO, James Mastandrea, to inquire as to First Union's reasons for
requesting the disputed information from Gotham. In addition, First Union
claims that Gotham's proposed trustees are not qualified by virtue of their
outside business interests. Gotham is entitled to test this claim by
obtaining documents relating to the outside business interests of current
trustees and inquiring as to those interests on deposition.
If Gotham is not able to obtain this discovery, its ability to
state its case at the preliminary injunction hearing will be unduly
prejudiced. Significantly, First Union has itself recognized the need for
discovery in this case by serving discovery requests on Gotham.
Accordingly, this Court should lift the automatic stay in order to permit
Gotham to conduct this discovery.
X. GOTHAM'S EXPEDITED DISCOVERY MOTION SHOULD BE GRANTED
First Union's specious opposition to Gotham's Motion for
Expedited Discovery should be rejected. The baselessness of First Union's
position is illustrated by its argument that Gotham has no discovery
pending in this action because its requests were served under the caption
of the action remanded to state court, even though Gotham attached those
discovery requests as exhibits to its motion for expedited discovery. First
Union's argument is the epitome of form over substance. However, to allay
First Union's concerns over the use of appropriate case captions on
discovery requests, Gotham has re-served its document requests and
deposition notices under the caption of this case.
There is simply not enough time for silly arguments about
discovery requests. This Court has scheduled Gotham's Motion for
Preliminary Injunction for hearing on March 11, 1998, and the parties need
discovery to be prepared for that hearing. Therefore, Gotham reiterates its
prior request that this Court order the parties to provide each other with
the following expedited discovery:
1. The parties shall exchange documents in response to
each other's pending document requests immediately;
2. First Union shall produce for deposition during the
week commencing February 23, 1998, or as soon thereafter as the Court orders,
its Chairman, James C. Mastandrea, and a Trustee of its choosing; and
3. Gotham shall produce for deposition during the week
commencing February 23, 1998 two representatives of Gotham, to be selected by
First Union.
CONCLUSION
----------
For all the foregoing reasons, First Union's "motion to dismiss"
must be denied, and Gotham's motion for expedited discovery should be
granted. In the event the Court concludes an automatic stay exists,
Gotham's motion to lift the stay should be granted to avoid undue prejudice
pending this Court's ruling on the "motion to dismiss."
Alternatively, Gotham respectfully requests leave to submit an
amended Complaint and a motion to amend should the Court conclude
otherwise. See Fed. R. Civ. P. 15(a) (leave to amend "shall be freely given
when justice so requires"); Foman v. Davis, 371 U.S. 178, 182, 83 S. Ct.
227, 230 (1962) (same).
Dated: February 23, 1998
Cleveland, Ohio
OF COUNSEL: /s/ Michael J. Garvin
------------------------------
David C. Weiner (0013351)
HAHN LOESER & PARKS LLP Michael J. Garvin (0025394)
3300 BP America Building
200 Public Square
Cleveland, Ohio 44114-2301
(216) 621-0150
- and -
OF COUNSEL: /s/ Alexander R. Sussman
------------------------------
FRIED, FRANK, HARRIS, SHRIVER Alexander R. Sussman (FN5)
& JACOBSON
(A Partnership Including 25th Floor
Professional Corporations) One New York Plaza
New York, New York 10004-1980
(212) 859-8000
Attorneys for Plaintiffs
[FN]
5 Application to appear pro hac vice pending.
</FN>
CERTIFICATE OF SERVICE
----------------------
A copy of the foregoing Memorandum of Law In Opposition to First
Union's "Motion to Dismiss" And On Other Matters was sent by messenger to
Frances Floriano Goins, Squire, Sanders & Dempsey L.L.P., 4900 Key Tower, 127
Public Square, Cleveland, Ohio 44114-1304, attorneys for Plaintiff, this 23rd
day of February, 1998.
/s/ Michael J. Garvin
-----------------------------------
One of the attorneys for Plaintiffs
