Opinion
01 Civ. 1893 (JGK)
December 24, 2003
OPINION and ORDER
The case arises out of a failed $3.6 billion merger between Consolidated Edison, Inc. ("Con Ed") and Northeast Utilities ("NU"). The plaintiff and counterclaim defendant, Con Ed, has moved to dismiss or, in the alternative, to stay, a counterclaim by NU. NU alleges that Con Ed repudiated and breached the Merger Agreement, and it seeks to recover a $1.2 billion "lost premium" on behalf of its current and future shareholders. In addition, Robert Rimkoski ("Rimkoski") has submitted a motion to intervene pursuant to Rule 24 of the Federal Rules of Civil Procedure. Rimkoski has already filed a breach of contract claim against Con Ed in the New York State Supreme Court, New York County, on behalf of the NU shareholders of record on March 5, 2001, the day that Con Ed allegedly repudiated the Merger Agreement. See Rimkoski v. Consol. Edison, Inc., No. 03/109095 (N.Y.Sup.Ct. filed May 16, 2003). Rimkoski has represented that he will promptly dismiss the action in New York State Court if he is permitted to intervene in this case. Concerned with the threat of double liability, Con Ed has supported Rimkoski's motion to intervene so that the claims of all those allegedly harmed by Con Ed's alleged breach can be decided by this Court. The intervention is opposed by NU, which argues that those who sold their NU shares no longer have standing to assert a claim.
I.
This Court previously denied Con Ed's motion for summary judgment dismissing the counterclaim. See Consol. Edison, Inc. v. Northeast Utils., 249 F. Supp.2d 387, 416-17 (S.D.N.Y. 2003). In an opinion dated March 21, 2003, this Court found that NU shareholders are intended third-party beneficiaries under the Merger Agreement, and, as a promisee, NU had standing to sue on behalf of its shareholders. Id. at 416 (citing Assoc. Teachers of Huntington, Inc. v. Bd. Of Educ., 306 N.E.2d 791, 794 (N.Y. 1973)). The decision, however, left open the question that has become central to the motions before the Court: Which class of shareholders is the appropriate third-party beneficiary-the shareholders of record at the time of Con Ed's alleged breach on March 5, 2001 (the "March 5 Class"), or the shareholders of record at the time that a judgment against Con Ed is entered or collected (the "Judgment Class'")?
Con Ed urges that NU's third-party beneficiary claim should be dismissed because a shareholder's breach of contract claim is personal to the shareholders at the time of the alleged breach of contract and NU cannot represent the March 5 shareholders. Rimkoski seeks to intervene to represent the March 5 Class of shareholders. NU responds that the right to recover the "lost premium" damages for the NU shareholders was automatically assigned to subsequent holders of the stock and that it can represent the interests of those shareholders. NU opposes the intervention of Rimkoski on the grounds that Rimkoski has no standing because he gave up his claim to the lost premium when he sold his shares. NU contends that only current holders of NU shares have any interest in the lost premium.
Although both Con Ed and NU have asserted that there is a clear answer to the question of which shareholders have the right to the alleged lost premium, they admit that there is no case or rule of law directly on point. Con Ed has argued that any right to sue vested in the March 5 shareholders, not those who purchased stock after the alleged breach. Analogizing to federal securities laws, Con Ed argues that the claim for the "lost premium" is personal to the shareholders at the time the claim accrued and that the right to sue for breach of contract does not inhere in the stock itself and is not automatically transferred with its sale. See, e.g., Bluebird Partners, L.P. v. First Fid. Bank, 85 F.3d 970, 974 (2d Cir. 1996) (prohibiting subsequent bondholder from suing for alleged violation of Trust Indenture Act because plaintiff itself was not injured and "federal securities law claims are not automatically assigned to a subsequent purchaser upon the sale of the underlying security"). Con Ed thus contends that NU's counterclaim for the alleged lost premium should be dismissed because NU cannot adequately represent and litigate the rights of former stockholders, nor can it receive any damage awards owed to them.
NU distinguishes the federal securities cases because claims for fraud and misrepresentation, for example, are more personal in terms of causation and injury than a breach of contract claim. In contending that the right to sue is an interest in the stock and is automatically transferred to subsequent shareholders, NU relies on section 8-302(a) of the New York Uniform Commercial Code ("N.Y. U.C.C.") and section 13-107 of the New York General Obligations Law ("G.O.L."). Section § 8-302 (a) provides that a purchaser of a "security acquires all rights in the security that the transferor had or had power to transfer." N.Y. U.C.C. § 8-302(a) (emphasis added). But it is not clear that the right to sue a third-party for breach of contract — as opposed to rights relating to title and ownership — is a right "in the security." See Haber v. Fireman's Fund Ins. Co., No. 98 Civ. 1740, 2000 WL 943562, at *6 (S.D.N.Y. July 10, 2000) (interpreting N.Y. U.C.C. § 8-302(a), then codified as § 8-301). Similarly, G.O.L. § 13-107 explicitly provides that a transfer of any bond automatically vests in the transferee all claims that the transferor had against certain parties, such as the obligor, trustee, depository, and guarantor. But it is not clear what that statute means for any claims relating to stock. Moreover, Con Ed points to one New York State Court case that declined to apply the statute to claims against third parties who could not be characterized as the obligor of the bond, a trustee or depository, or a guarantor of the obligation. Licht v. Donaldson, Lufkin Jenrette Sec. Corp., No. 24560/82, slip op. at 4-5 (N.Y.Sup.Ct. Sept. 9, 1983). The statute does not, Con Ed argues, apply to a breach of contract claim that the corporate issuer has against a third party.
As Con Ed and NU were developing their competing theories, Rimkoski filed his motion to intervene. The proposed intervenor agrees with Con Ed and argues that the March 5 Class and not the Judgment Class has the right to sue for the alleged breach. The intervenor argues, however, that he is not suing for a "lost premium." Rimkoski claims to be seeking expectancy damages, measured by the difference between the price at which Con Ed promised to purchase the NU shares and the market price of NU stock the day after the repudiation. (See Rimkoski Counterclaim, attached at Aff. of Ira A. Schochet in Supp. of Robert Rimkoski's Mot. to Intervene ("Schochet Aff."), sworn to May 23, 2003, Ex. A.) Rimkoski contends that NU is misconstruing the nature of the contract claim and damages remedy, and he argues that those who purchased NU shares after the breach, unlike those who held stock on March 5, had no expectancy interest in the merger.
As this Court explained in its decision on the motions for summary judgment, Consol. Edison, 249 F. Supp. at 395, the "lost premium" reflects the fact that Con Ed, as part of the Merger Agreement, promised to purchase NU shares at the expected price of $26.50 per share. Prior to the time that rumors of the merger began to circulate, NU shares were trading at $18.56 per share. Con Ed was thus expected to pay a premium of more than forty percent over the "unaffected" price for each of NU's 137 million then outstanding shares. The cost of the premium would thus have been over $1 billion, a substantial portion of the $3.6 billion total cost for the stock.
Con Ed has supported Rimkoski's motion to intervene, while NU has opposed it primarily for the same reason it opposes Con Ed's motion to dismiss its counterclaim. Both Con Ed and NU, however, have used the motion to intervene as an opportunity to advance more analogies and arguments about which is the proper shareholder class. Despite very thorough research and thoughtful briefing by all parties, the parties have unearthed no case directly on point, and the issue is thusfar undecided.
As these motion have been pending, another suit against Con Ed was filed in this Court, seeking damages on behalf of March 5 shareholders.Siegel v. Consol. Edison, Inc., No. 03 Civ., 1893 (S.D.N.Y. filed Oct. 24, 2003). The plaintiff's claims in that case are duplicative of those raised by Rimkoski, and no responsive pleadings have yet been filed.
II.
There are thus two main motions before the Court. The first motion by Con Ed is to dismiss NU's "lost premium" counterclaim. It raises the substantive legal question of which class owns the right to sue Con Ed. The second motion is Rimkoski's motion to intervene. If Rimkoski has presented a meritorious motion to intervene, there is a substantial reason to grant that motion and defer consideration of the motion to dismiss. All parties have a substantial interest in a final and binding adjudication in a single court, which will determine whether it is the March 5 Class or the Judgment Class that has the right to sue Con Ed for damages based on the alleged breach of the Merger Agreement, Therefore, the Court will first address the Rimkoski motion to intervene.III.
NU urges the Court initially to deny Rimkoski's motion to intervene because Rimkoski and the March 5 Class allegedly lack "standing" to assert a claim against Con Ed for breach of contract. NU argues essentially that Rimkoski lacks "standing" because he, and other members of the March 5 Class, do not have the right to sue for the alleged lost premium.
Rimkoski has responded, correctly, that NU's argument concerns the merits of the claims by the Rimkoski Class rather than the Court's jurisdiction to hear them. In Bell v. Hood, the United States Supreme Court explained that "it is well settled that the failure to state a proper cause of action calls for judgment on the merits and not for a dismissal for want of jurisdiction." Bell v. Hood, 327 U.S. 678, 682 (1946). The Court of Appeals for the Second Circuit recently enforced that distinction while admitting that questions of jurisdiction and the legal merits of claim "are easily, and often, confused." Carlson v. Principal Fin. Group, 320 F.3d 301, 305-06 (2d Cir. 2003) (vacating decision where district court "essentially, and incorrectly, believed that its subject matter jurisdiction was contingent on [the plaintiff's] ability to state a claim under ERISA").
Rimkoski seeks to intervene as a defendant in this action pursuant to the Court's supplemental jurisdiction. See 28 U.S.C. § 1367 (a). Thus, this is not a case where the Court lacks subject matter jurisdiction because a claim under a federal statute is so "insubstantial" or "frivolous" that there is no basis for federal jurisdiction. See Bell v. Hood, 327 U.S. at 682-83. It is possible that the thrust of NU's argument for lack of standing is that because the "lost premium" claim allegedly cannot, as a matter of law, belong to the March 5 Class, the March 5 Class has no interest in the lawsuit and Rimkoski's claim is nonjusticiable. There is, under NU's argument, no case or controversy under Article III, § 2 of the Constitution. To have standing to assert a claim that raises a sufficiently justiciable case or controversy, Rimkoski simply needs to allege a "minima of injury in fact: that the plaintiff allege that as a result of the defendant's actions he has suffered `a distinct and palpable injury.'" Havens Realty Corp. v. Coleman, 455 U.S. 363, 372 (1982) (quoting Warth v. Seldin, 422 U.S. 490, 501 (1975)), quoted by Fair Housing in Huntington Comm. v. Town of Huntington, 316 F.3d 357, 362 (2d Cir. 2003); see also United States v. Cambio Exacto, S.A., 166 F.3d 522, 527 (2d Cir. 1999) (emphasizing that "it is injury that is at the heart of the standing question").
Rimkoski seeks to assert a state law breach of contract claim against; Con Ed. Rimkoski is a citizen of New York, and thus there is no diversity between Rimkoski and Con Ed, a New York corporation with its principal place of business in New York. Under 28 U.S.C. § 1367(b), the Court may not exercise supplemental jurisdiction over "claims by plaintiff's against persons made parties" under Rule 24 if doing so would destroy complete diversity. However, the Court of Appeals has ruled that § 1367(b) does not prevent a non-diverse defendant-intervenor from pursuing claims against the plaintiff. See Viacom Int'l, Inc. v. Kearney, 212 F.3d 721, 727 (2d Cir. 2000).
The effect of this rule and its application to this case is illustrated by Merrill Lynch Co. v. Allegheny Energy, Inc., No. 02 Civ. 7689, 2003 WL 21254420 (S.D.N.Y. May 30, 2003). In that case, Allegheny Energy, Inc. ("Allegheny") and Allegheny Energy Supply Co. ("Supply") sued Merrill Lynch in state court. See id. at *1. Merrill Lynch subsequently sued Allegheny in federal court under diversity jurisdiction. Id. Although Supply and Merrill Lynch were not diverse, the court found that it would be possible for Supply to intervene under Rule 24(b) as a defendant and assert a claim against Merrill Lynch. Id. at *2-*3. Citing Viacom, the district court observed that the purpose of § 1367(b) was to prevent plaintiff's from sidestepping the diversity requirements and that the provision did not, therefore, prevent claims brought by an intervening defendant. Id. at *3; see Viacom, 212 F.3d at 726-27.
In this case, Rimkoski is intervening as a defendant in a case already pending, and Con Ed, as the plaintiff, is not asserting a claim against Rimkoski. Section 1367(b), therefore, does not bar Rimkoski's claim. Because Rimkoski's claim is part of the same case and controversy-namely, the claim already being asserted by NU against Con Ed-the Court may exercise jurisdiction over Rimkoski's claim under § 1367(a).
It is plain that Rimkoski and the March 5 shareholders have alleged a sufficient injury in fact: the distinct and palpable, concrete and particular financial harm that Con Ed would not purchase their shares at a premium and that the value of their shares dropped as a result of the Merger Agreement's failure. When Con Ed repudiated the Agreement, Rimkoski had a legal right to sue Con Ed. The legal issue is whether that right passed to subsequent transferees of the stock. The purpose of the Article III case or controversy requirement-along with concepts such as standing and ripeness-is to ensure that appropriate parties with a sufficiently concrete dispute and a sufficient stake in the outcome are litigating before the Court. See Baker v. Carr, 369 U.S. 186, 204 (1962) (describing "the gist of the question of standing" as: "Have the appellants alleged such a personal stake in the outcome of the controversy as to assure that concrete adverseness which sharpens the presentation of issues upon which the court so largely depends for illumination of difficult constitutional questions?"); Cambio Exacto, 166 F.3d at 526-27. Rimkoski has alleged a distinct and palpable injury and has a stake in the determination of which shareholder class can seek damages for its alleged injury. Rimkoski's March 5 Class is clearly an appropriate party to litigate whether the March 5 Class or the Judgment Class has the right to sue for Con Ed's alleged breach.
NU's argument confuses "standing" as a constitutional issue of jurisdiction and justiciability with the merits of the legal claim. The Court's subject matter jurisdiction over Rimkoski's claim does not depend on a finding that Rimkoski will prevail on the merits of his claim that he suffered damages from Con Ed's alleged breach. Rimkoski has "standing" to bring his claim and the Court has jurisdiction to decide it even if he ultimately fails to prevail on the claim. See Flanigan v. Gen. Elec. Co., 242 F.3d 78, 86 (2d Cir. 2001) (determining on summary judgment that subclass of plaintiff's lacked "standing to pursue" breach of fiduciary duty claim under ERISA).
The recent case, In re Stock Exchs. Options Trading Antitrust Litig., 317 F.3d 134 (2d Cir. 2003), is instructive on the power of the district court to assert jurisdiction over a class action regardless of the ultimate merits of the underlying claims. In that case, the district court had dismissed claims brought in a class action suit. Based on the dismissal, the court found that it lacked jurisdiction to review and approve class settlements that were reached with certain defendants prior to the court's ruling. Id. at 143-44. The Court of Appeals affirmed the district court's decision to dismiss the claims but reversed the refusal to exercise jurisdiction over the proposed class settlements. Id. at 150. Citing Bell v. Hood and Baker v. Carr, the Court of Appeals held that once a plaintiff has asserted "jurisdiction-conferring claims [that] are not insubstantial on their face, "no further consideration of the merits of the claim is relevant to a determination of the court's jurisdiction of the subject matter.'" Id. (quoting Baker v. Carr, 369 U.S. at 199).
In this case Rimkoski has asserted a basis for jurisdiction based on the Court's supplemental jurisdiction. He has alleged sufficient injury to have his claim adjudicated whatever the ultimate merits of his claim under New York law.
III.
Rimkoski has satisfied the requirements to intervene as of right as a defendant in this action. To intervene as of right pursuant to Federal Rule of Civil Procedure 24(a)(2), the proposed intervenor must: "(1) timely file an application, (2) show an interest in the action, (3) demonstrate that the interest may be impaired by the disposition of the action, and (4) show that the interest is not protected adequately by the parties to the action." Catanzano v. Wing, 103 F.3d 223, 232 (2d Cir. 1996) (quoting N.Y. News, Inc. v. Kheel, 972 F.2d 482, 485 (2d Cir. 1992)). Each requirement must be satisfied.Farmland Dairies v. Comm'r of Agriculture Markets, 847 F.2d 1038, 1043 (2d Cir. 1988). NU, aside from the standing argument, has challenged Rimkoski's motion to intervene as of right on the first and fourth requirements, arguing that the motion is not timely and that NU can adequately represent the. interests of the March 5 Class.
The determination of the timeliness of an application is committed to the discretion of the district court. Id. at 1043-44. Courts are guided by four factors: (1) the length of time the applicant knew or should have known of his interest before making the motion; (2) prejudice to existing parties resulting from the applicant's delay; (3) prejudice to the applicant if the motion is denied; and (4) the presence of unusual circumstances militating for or against a finding of timeliness. Id. at 1044.
Although Rimkoski's motion to intervene was filed over two years after the alleged breach and filing of Con Ed's lawsuit, the motion is still timely under the circumstances. When the Merger Agreement was first repudiated and this suit began, NU announced that it was suing Con Ed on behalf of the company and its shareholders. (See Schochet Aff., Exs. F, G (providing news accounts of NU's promise to sue Con Ed to protect interests of shareholders damaged by repudiation).) Only after the argument on the motions for summary judgment before this Court did Rimkoski became aware of NU's intent to recover only on behalf of current and future shareholders, rather than the shareholders at the time of the alleged breach.
Moreover, the issue of which shareholder class is the appropriate beneficiary has only recently crystallized. On May 16, 2003, shortly after the Court's summary judgment opinion was announced, Rimkoski filed suit against Con Ed in state court. On July 1, 2003, Con Ed filed the motion to dismiss NU's counterclaim on the grounds that NU's current shareholders are not the proper beneficiaries. On July 16, 2003, NU responded to Con Ed's motion, and on July 24, 2003, Rimkoski filed his motion to intervene. Rimkoski's actions were responsive to the motions being briefed for the Court, and Rimkoski's motion was specifically tailored to arguments raised by NU in its July 16 submission.
The timing of Rimkoski's motion is not unduly prejudicial to NU or Con Ed. The motion was made soon after it became plain that there were issues in this litigation as to which class of shareholders had the right to pursue the claim for the alleged lost premium. Moreover, the intervention by Rimkoski will allow the issue of Con Ed's liability to the March 5 Class to be decided in this litigation, and it will avoid the risk of conflicting determinations and double liability for Con Ed to the March 5 Class and the Judgment Class. Under the circumstances, the motion is timely.
Rimkoski is clearly an interested party asserting a claim that is central to the litigation. The breach of contract claim and request for damages plainly satisfy the Rule 24(a)(2) requirement that the intervenor show a "direct, substantial, and legally protectable interest in the subject matter of the action." United States v. City of New York, 198 F.3d 360, 365 (2d Cir. 1999) (internal quotations omitted) (distinguishing between direct and collateral issues raised by intervenors and examining whether court has the power to provide requested relief). The intervenor's rights could be impaired by any obligations or judgments reached in this litigation, as, for example, by rulings that found that Con Ed owed damages to the Judgment Class rather than the March 5 Class. See Mortgage Lenders Network, Inc. v. Rosenblum, 218 F.R.D. 381, 384 (E.D.N.Y. 2003) (identifying risk of inconsistent rulings as potential impairment of intervenor's rights). Moreover, NU has presented nothing-aside from its "standing" argument-to suggest that Rimkoski has not satisfied the second and third requirements in the Rule 24(a)(2) analysis.
Finally, despite NU's assertions that its only concern is to prove Con Ed's breach and recover the lost premium, NU cannot adequately protect the interests of Rimkoski and the March 5 shareholders. While NU claims that it and Rimkoski have the same ultimate objective in proving that Con Ed breached the Merger Agreement, NU and Rimkoski have conflicting objectives in determining who should receive any damages. NU has affirmatively argued that the Judgment Class and not the March 5 Class has the right to any "lost premium" damages. Furthermore, NU faces possible liability to Con Ed, and its litigation strategy may be influenced by the possibility of negotiating all of the claims in this case. Rimkoski and the March 5 Class, meanwhile, would have no interest in reducing any liability of NU. Rimkoski and the March 5 shareholders should be joined in this case so that all interested parties have an opportunity to be heard. Rimkoski's motion to intervene as of right is granted.
IV.
Even if there were no right to intervene, the Court would grant permissive intervention under Rule 24(b)(2). Permissive intervention is allowed when the applicant's claim or defense and the main action have "a question of law or fact in common." Fed.R.Civ.P. 24(b)(2). In determining whether to exercise its discretion and grant the motion to intervene, a court must "consider whether the intervention will unduly delay or prejudice the rights of the original parties." Id.
There are plainly common issues of law and fact, and, as explained above, there would be no undue prejudice or delay. The intervention will not prejudice Con Ed and, in fact, will relieve Con Ed of the risk of duplicative litigation and double liability. NU will not be unduly prejudiced and will benefit from not having to litigate Rimkoski's state court action. Allowing Rimkoski to intervene will promote judicial efficiency, fairness, and finality. After all parties are brought into the litigation, they will be able to refine their positions and address questions raised by the Court in the earlier argument of the motions.
V.
Con Ed's pending motion to dismiss NU's alleged "lost premium" counterclaim should be dismissed without prejudice to renewal after Rimkoski has filed, and the Court has decided, the motion for class certification of the March 5 shareholders. Rimkoski has already agreed that he will dismiss his state court action, and Con Ed has represented that it will not oppose the class action motion. Thus, it should be possible to bring all interested parties into this litigation and to decide the conflicting claims promptly.
While NU urges the Court to deny Con Ed's motion to dismiss NU's "lost premium" counterclaim, there is no assurance that any such decision, in the absence of representatives of the March 5 Class, would be binding on the March 5 Class or protect Con Ed from conflicting double liability. Moreover, any such decision that plainly affects the interests of the March 5 Class should only be made after the March 5 Class has had an opportunity to be fully heard on the issue of which class of shareholders has the right to such a claim.
Conclusion
Rimkoski's motion to intervene is granted, and Rimkoski should file his answer and counterclaim by January 5, 2004. Con Ed's motion to dismiss NU's counterclaim is denied without prejudice to renewal. Rimkoski is directed to file his motion for class certification by January 15, 2004.
SO ORDERED.