The opinion of the court was delivered by: CAHN
This litigation involves complex issues related to the Employee Stock Option Plan ("ESOP") of Psychiatric Hospitals of America ("PHA").
On December 4, 1984, Robert M. Cohen pleaded guilty to Medicare fraud before the Honorable J. William Ditter, Jr. of this court. Because Cohen owned more than five percent of the stock in PHA, PHA would no longer be entitled to Medicare reimbursements after the imposition of sentence which was scheduled for February 1, 1985.
In order to ensure that PHA would continue to receive Medicare funds, Cohen and certain other stockholders (the "Cohen Group") transferred 56.2% of the outstanding shares in PHA to the trustees of the ESOP. The parties agree that the trustees of the ESOP are independent persons not controlled directly or indirectly by Cohen.
The trustees were to begin the appraisal process by submitting an independent appraisal to the Cohen Group. If the Cohen Group was not satisfied with the value set by that appraisal, the Cohen Group could procure a second appraisal. If the value set by the second appraisal exceeded the value set by the first by more than 10 percent, then the ESOP trustees could, at their option, purchase the shares at the price determined by the Cohen Group's appraisal. Finally, if the trustees declined to purchase at that price, the Cohen Group could seek a third-party purchaser with the trustees retaining a right of first refusal.
The following events transpired with respect to the stock purchase agreement:
(a) The trustees obtained an appraisal from Marshall & Stevens setting the value for the 56.2% majority block of stock as of January 31, 1985, at $ 13,072,232;
(b) The Cohen Group obtained an appraisal from Poole and Associates setting the value of the 56.2% majority block of stock as of January 31, 1985, at $ 38,790,000;
(c) The Cohen Group entered into a purchase agreement dated February 27, 1987, wherein the 56.2% majority interest was to be sold to the Ramsay Hospital Corporation of Pennsylvania at a price of $ 28,015,000;
(d) The ESOP trustees filed this suit against the Cohen Group seeking to enforce the trustees' rights under the stock purchase agreement.
The claims of the trustees are based upon the Employee Retirement Income Security Act of 1974 ("ERISA") 29 U.S.C. §§ 1001-1461 (1982 & Supp. I 1983 & Supp. II 1984 & Supp. III 1985), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982), common law fraud and breach of contract. The defendants filed counterclaims including claims based upon the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1961-1968 (1982 & Supp. III 1985 & Supp. IV 1986), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) and various common law causes of action.
The parties are interested in a prompt disposition of the controversy. A number of minority shareholders have filed suits assigned to my docket based upon allegations of securities fraud, RICO, and common law causes of action.
After three weeks of testimony and several days of deliberation, the jury answered "Yes" to interrogatory number 1, "No" to interrogatory number 2, and determined the fair market value of the 56.2% majority interest as of January 31, 1985, to be $ 15,800,000.
After the jury verdict and after extensive discussion on the record with the lawyers, I entered a final order which declared the Poole appraisal to be invalid, declared the Marshall & Stevens appraisal to be invalid, and set the fair market value of the Cohen Group's stock as of January 31, 1985, at $ 15,800,000. In addition, the final order dismissed all of the other claims with prejudice. A copy of this order is attached to this Memorandum Opinion as Addendum "A".
The defendants appealed from this order and filed a motion before the United States Court of Appeals for the Third Circuit seeking injunctive relief pending the outcome of the appeal. Following a hearing before an emergency panel of the Court of Appeals, at which defendants' motion was denied, the defendants made an application for similar relief in this court in the form of a Motion to Alter, Amend or Grant Relief from Judgment. In addition to repeating arguments previously rejected, the motion requested that I permit the Cohen Group to sell their stock to the Ramsay Group unless the plaintiffs tendered payment by October 10, 1987. I held hearings on this motion on October 9 and October 21, 1987, during which counsel set forth their respective positions.
The trustees argued that they should not effectively be denied the benefits of the judgment and the jury verdict and that they were entitled to a reasonable time period within which to exercise their rights under the contract. They suggested that it would be reasonable to expect them to secure the necessary financing within three to four months after the appeal process was completed. The defendants argued that if the Ramsay offer were allowed to lapse they might be irreparably injured and therefore asked this court to set a date after which, if the trustees have not tendered payment, they can sell their shares to a third party. The defendants suggested that it would be reasonable to require the trustees to tender payment by November 6, 1987, or at the latest, sometime in December, 1987.
The concerns of both parties were well taken. I therefore entered a final order on October 26, 1987, modifying my earlier order and setting a date certain of March 31, 1988, after which, if the trustees have not consummated the purchase of the 56.2% majority block of stock, the Cohen Group may sell their stock to a third party. For the protection of the beneficiaries of the ESOP, my October 26, 1987, order contained two additional requirements: first, that any sale to a third party be for an amount greater than $ 15,800,000 plus applicable interest from January 31, 1985, and second, that from the proceeds of any sale to a third party, $ 15,800,000 plus applicable interest from January 31, 1985, be put in escrow pending a final resolution of this case.
A copy of this order is attached to this Memorandum Opinion as Addendum "B".
Ordinarily, extensive post-trial motion practice would have occurred in litigation of this type. However, the Cohen Group is concerned that the Ramsay Hospital Corporation of Pennsylvania will withdraw its offer to purchase in the near future. Therefore, I felt it advisable to enter a final order promptly. This Memorandum Opinion is filed for the purposes of explaining my reasoning in regard to the legal and equitable issues in this case.
Diversity of citizenship between the plaintiffs and the defendants in this case is not complete. Jurisdiction is proper, however, based upon this court's jurisdiction over federal questions, 28 U.S.C. § 1331 (1982), as well as upon Section 502 of ERISA, 29 U.S.C. § 1132(e) (1982). The trustees' complaint contained allegations of violations of the federal securities laws and ERISA requirements. Although the issues submitted to the jury are related to state law rather than ERISA, the ERISA allegations provided the court with subject matter jurisdiction over the entire controversy.
A federal court may exercise pendent jurisdiction over related state law claims "when the state and federal claims derive from a common nucleus of operative fact such that a plaintiff would ordinarily be expected to try them all in one judicial proceeding, and when the federal claims have sufficient substance as to confer subject matter jurisdiction on the court." Amalgamated Cotton Garment & Allied Indus. Fund v. J.B.C. Company of Madera, 608 F. Supp. 158, 167 (W.D. Pa. 1984) (ERISA claim and claim under § 301 of LMRA support pendent jurisdiction) (citing United Mine Workers v. Gibbs, 383 U.S. 715, 725, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966)). In the present case, it is clear that the state and federal claims "derive from a common nucleus of operative fact" in that the plaintiffs' ERISA claim as well as their state law claims arise out of the same transaction -- the sale of the 56.2% majority block of stock by the Cohen Group to the ESOP.
It is also clear that the plaintiffs' federal claim has sufficient substance to confer subject matter jurisdiction on this court. A claim is insubstantial only if prior decisions render it frivolous. Hagans v. Lavine, 415 U.S. 528, 537-39, 39 L. Ed. 2d 577, 94 S. Ct. 1372 (1974). Despite the fact that I dismissed, after trial, all of the federal claims, plaintiffs' federal claims were non-frivolous and sufficiently substantial to confer subject matter jurisdiction on this court. See Kerry Coal Co. v. United Mine Workers, 637 F.2d 957, 965 (3d Cir.), cert. denied, 454 U.S. 823, 70 L. Ed. 2d 95, 102 S. Ct. 109 (1981); Amalgamated Cotton, 608 F. Supp. at 167; Mitchell v. Hendricks, 68 F.R.D. 569, 571 (E.D. Pa. 1975); see also Walsh v. Great Atl. & Pac. Tea Co., 96 F.R.D. 632, 638 (D. N.J.) (ERISA claim supports pendent jurisdiction over claims based on breach of contract, detrimental reliance and wrongful seizure), aff'd, 726 F.2d 956 (3d Cir. 1983). I exercised my discretion to adjudicate the state law claims in this case because a resolution of this matter will be of substantial assistance in resolving several related minority stockholder suits pending on my docket.
IV. A Jury Trial Was Appropriate