D.C. Civil Action No. 4023 APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF DELAWARE.
Kalodner, Aldisert and Adams, Circuit Judges.
Did the district court err in holding that it had "pendent jurisdiction" with respect to intervening defendants' counterclaim, presenting state claims, in the instant action of Frederick Beach and Vincent Di Rubbio against KDI Corporation for rescission of a "Reorganization Agreement," grounded on alleged violations of the federal laws pertaining to securities transactions?
That is the primary question presented by these cross-appeals from the June 30, 1972 Final Judgment of the district court which granted in part, and denied in part, the various state claims asserted in the counterclaim of KDI, Ordnance Products, Inc. ("OPI") and Edward J. Eggart, chairman of the trustees of the OPI Employees' Profit-Sharing Plan ("Plan").
Although it has not been presented by the appellants, we raise, sua sponte, the critical primary question as to existence of "pendent jurisdiction." It is settled that "the issue whether pendent jurisdiction has been properly assumed is one which remains open throughout the litigation,"*fn1 and that we may raise it sua sponte.*fn2
The relevant facts gleaned from the record may be highlighted as follows:
The plaintiffs Beach and Di Rubbio are citizens of North East, Maryland.
The defendant KDI Corporation ("KDI") is a Delaware corporation with principal offices in Cincinnati, Ohio.
The intervening defendant OPI is a Delaware corporation with principal offices in North East, Maryland.
The intervening defendant Edward J. Eggart is president of OPI and trustee of the Plan.
Under a Reorganization Agreement, effective May 20, 1969, Beach and Di Rubbio transferred to KDI the capital stock of OPI, which they owned in equal shares, in exchange for 92,407 shares of KDI, valued in the Agreement at $2,525,000.00. The Agreement provided that KDI would issue additional shares of KDI stock to plaintiffs on January 31, 1971, based on certain specified formulae. It also provided in Section 3A that plaintiffs would reimburse KDI with respect to any liability of OPI incurred by reason of "renegotiation or adjustment on government contracts . . . relating to the period from November 1, 1967 to the Transfer Date" (May 20, 1969).
The Agreement also specified that plaintiffs would be employed as officers of OPI for a two-year term expiring May 20, 1971 at a salary of $64,500.00 each, and that they could purchase at their cash surrender value policies which OPI had taken out on their lives, on delivery to OPI of their two-year 7 1/2% promissory notes.
Plaintiffs filed an action against KDI on November 27, 1970, for rescission of the Agreement, return of their OPI stock, and damages. They alleged in their 6-count complaint that KDI had violated the Securities Act of 1933,*fn3 and the Securities and Exchange Act of 1934,*fn4 in effecting the Agreement. The complaint was later amended by adding as additional defendants some of the officers of KDI.
On December 30, 1970, KDI filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C.A. § 701 et seq., in the United States District Court for the Southern District of Ohio, and in connection therewith obtained a general stay order which operated to halt further prosecution of plaintiffs' November 27, 1970 action in the court below.
On May 21, 1971, a day after plaintiffs' two-year employment contract expired, they were removed as officers and directors of OPI by a new board of directors elected by KDI as sole stockholder of OPI.
On May 24, 1971, plaintiffs filed a motion in the court below for a preliminary injunction to effect their reinstatement as officers, directors and employees of OPI.
On May 28, 1971, the Ohio bankruptcy court, on plaintiffs' application, entered an order modifying its general stay order of December 30, 1970 so as to permit plaintiffs to proceed in the court below with their May 24, 1971 motion for a preliminary injunction.
On June 4, 1971, OPI notified plaintiffs that they were removed as trustees of the Plan.
On June 7, 1971, KDI filed a motion in the court below for a restraining order and preliminary injunction prohibiting plaintiffs from continuing to act as two of the three authorized trustees of the Plan.
On June 9, 1971, the court below denied KDI's June 7, 1971 motion, and further ordered plaintiffs (1) to file a supplemental complaint relating to their May 24, 1971 motion for a preliminary injunction, and (2) to apply to the Ohio bankruptcy court for authorization to do so.
On June 24, 1971, an order was entered by the Ohio bankruptcy court authorizing the filing of a supplemental complaint relating to the plaintiffs' May 24, 1971 motion for a preliminary injunction.
On June 29, 1971, plaintiffs filed an Amended and Supplemental Complaint. It added to their original 6-count complaint, seeking rescission of their Reorganization Agreement with KDI, a Count VII which alleged events occurring after the filing of their original complaint. Count VII alleged in relevant part that KDI had ousted plaintiffs as directors of OPI as part of a scheme to compel them to withdraw their rescission action, and prayed for a preliminary injunction ordering KDI to reinstate the plaintiffs as directors of OPI and to further reconstitute the OPI board of directors as it existed on May 21, 1971.
On July 23, 1971, KDI and the individual defendants filed an Answer to the Amended and Supplemental Complaint which denied any wrongdoing and asserted certain affirmative defenses. KDI alone therein prayed for an order declaring as valid plaintiffs' removal as officers, directors and employees of OPI, and as trustees of the Plan; and for further orders requiring plaintiffs (1) to account to OPI and to the Plan for all distributions made to them; (2) to surrender to the trustees of the Plan all of the latter's assets, books and records; and (3) to restrain plaintiffs from acting as trustees of the Plan or as officers, directors or employees of OPI.
On August 2, 1971, plaintiffs filed an answer to the KDI counterclaim in which they challenged its allegations ...