TYMKOVICH, Circuit Judge.
This case requires us to consider whether a plaintiff can split potential legal claims against a defendant by bringing them in two different lawsuits. We conclude that related claims must be brought in a single cause of action, and the district court properly dismissed the claim-splitting plaintiffs here. We also consider whether an investor who was forced to sell his shares as the result of a merger has standing to sue as a purchaser of securities under the 1933 Act. We find the Act applies only to purchasers of securities and not to forced sales resulting from a merger.
Jack P. Katz and Infinity Clark Street Operating were minority shareholders in a real estate investment trust owned by Archstone Smith Trust, a public company. Archstone entered into a merger agreement in which two investors acquired all of Archstone's outstanding public shares. As part of the merger, Katz and Infinity were squeezed out of the REIT and had the option of receiving either cash or stock in the newly formed entity in exchange for their shares. Katz opted for cash; Infinity chose stock. Claiming the offering documents associated with the merger contained false and misleading statements or omissions, Katz and Infinity separately sued.
In Colorado, Infinity filed a federal class action lawsuit alleging breaches of contract and fiduciary duty relating to the merger. The district court dismissed the complaint with prejudice except as to one claim, and the case was stayed pending arbitration of the surviving claim.
Meanwhile, Katz filed a class action lawsuit in Illinois state court asserting securities law claims arising from the merger. The case was removed to federal court and eventually transferred to Colorado. Katz then filed an amended complaint joining Infinity as a party plaintiff, even though Infinity's case was still waiting the outcome of arbitration. The district court dismissed Katz's complaint, ruling that by joining the case, Infinity was improperly splitting claims that should have been alleged in its earlier action. The court also found Katz lacked standing to bring his securities law claims since he was not a purchaser when he opted to sell his shares. Katz and Infinity challenge the district court's decision on appeal.
We find the district court did not err, and we therefore AFFIRM the district court's judgment.
Katz and Infinity, with others, owned 11% of the Class A Common Units of a real estate investment trust (REIT), the Archstone Smith Operating Trust (Archstone REIT). Archstone Smith Trust (Archstone), a publicly traded corporation, owned the remaining 89% of the Archstone REIT. Archstone was the Archstone REIT's sole trustee, controlling the management and administration of its properties.
Infinity and Katz had previously contributed properties to a different REIT — later acquired by Archstone — so as to gain certain tax and financial benefits. Katz and Infinity held their interest in the Archstone REIT in the form of "A-1 Units." The A-1 Units had special advantages — liquidity rights, dividend rights, and tax indemnification — that made them particularly valuable to Katz and Infinity. Archstone agreed not to sell, exchange, or dispose
In May 2007, Archstone announced a merger agreement in which Lehman Brothers and Tishman Speyer would acquire Archstone for approximately $22.2 billion. Lehman and Tishman would take Archstone private by acquiring all of its outstanding common stock for $60.75 per share, which represented a 22% premium over the common stock's pre-announcement price. There were several steps to the merger, but as it relates to the Archstone REIT, only Archstone's approval was needed for the merger because it owned a majority of the A-1 Units. The minority A-1 Unitholders (i.e., Katz and Infinity) had no voting rights and were not entitled to vote on the merger. The merger was approved and closed in October 2007.
In the merger, the minority A-1 Unitholders had the right to elect the form of consideration they would receive in exchange for their A-1 Units. They could receive either: (1) $60.75 per unit, as paid to Archstone's public shareholders, (2) new units in the private entity with the stated value of $60.75 per unit, or (3) a combination of cash and new units. In the Prospectus and Registration Statement for the merger, Archstone explained that the new units would be materially different, and possibly less favorable, than the now superceded A-1 Units.
Katz and Infinity found the options unappealing because they contend the cash-out price did not reflect the tax indemnification and liquidity benefits of the A-1 Units, and the new units had none of these features. Nonetheless, Katz elected to receive the $60.75 cash offer, and Infinity elected to receive the new units in the post-merger entity.
Katz and Infinity filed separate class actions alleging the Prospectus, Registration Statement, and other offering documents associated with the merger contained false and misleading statements and omissions. They claimed various aspects of the merger, including an analysis of its risks, were not disclosed. Katz represented the cash-out subclass of A-1 Unitholders who sold their A-1 Units for cash. Infinity represented the class of investors who exchanged their A-1 Units for new units.
Because it bears on our analysis below, a review of the procedural history of the two class actions is necessary to understand the reasons for the district court's dismissal of Infinity from this case.
In November 2007, Infinity and an individual investor, Steven A. Stender,
With the case still closed, Infinity sought leave to amend the complaint with additional claims of breach of contract and fiduciary duty, nearly identical to the previously dismissed claims. While Infinity had earlier informed the court it intended to add securities claims, it did not do so.
After this filing, the district court reopened the case. It modified its previous order, dismissing some of the breach of contract and fiduciary duty claims without prejudice, but affirming the dismissal with prejudice of the other claims. The court granted the motion to amend the complaint. It then stayed the case pending the completion of arbitration, at which point plaintiffs could file an amended complaint in compliance with the court's order. The court again administratively closed the case.
After these events, Infinity filed several additional motions asking the court to revisit its rulings. These were all denied and in May 2010, the court again administratively closed the case pending completion of arbitration.
In May 2008, Katz filed a class action in Cook County, Illinois state court asserting securities fraud claims in connection with the merger. That case was removed to federal court, where the defendants requested it be transferred to the District of Colorado. Katz opposed removal and the transfer. The district court remanded the case to state court, which defendants challenged.
On appeal, the Seventh Circuit vacated the district court's decision and remanded for a hearing on issues regarding removal. See Katz v. Gerardi, 552 F.3d 558 (7th Cir.2009). On remand to the district court, both parties sought to transfer the case to Colorado. The case was transferred in June 2009.
In August 2009, while Infinity's federal case was administratively closed, Katz filed an amended complaint which joined Infinity and Stender in his case as plaintiffs and asserted claims under the Securities Act of 1933 (1933 Act) (§§ 11, 12(a)(2) & 15), and the Securities Exchange Act of 1934 (1934 Act) (§§ 10(b), 20(a); Rule 10b-5).
In August 2010, the district court dismissed the amended complaint. It dismissed Infinity from the case because it asserted claims that could have been brought in its other, previously filed Colorado lawsuit. The court dismissed Katz's 1933 Act claims because he was not a purchaser of securities and therefore lacked standing under the statute.
After the district court's dismissal in this case, two additional developments occurred that bear on this appeal. In September 2010, Infinity moved to amend the complaint in its other lawsuit to include the same securities law claims asserted in this case. In April 2011, after briefing was submitted in this appeal, the district court granted Infinity's request to file an amended complaint including these claims.
Katz and Infinity argue the district court erred in dismissing the complaint. Infinity argues it did not improperly bring claims that could have been asserted in its other case. Katz contends the district court erred in finding he was not a purchaser of securities under the 1933 Act. Each of these theories are analytically distinct so we address them in order.
The district court dismissed Infinity from this case because the court concluded Infinity had improperly split its claims between this case and its action already pending in the District of Colorado.
The rule against claim-splitting requires a plaintiff to assert all of its causes of action arising from a common set of facts in one lawsuit. By spreading claims around in multiple lawsuits in other courts or before other judges, parties waste "scarce judicial resources" and undermine "the efficient and comprehensive disposition of cases." Hartsel Springs Ranch of Colo., Inc. v. Bluegreen Corp., 296 F.3d 982, 985 (10th Cir.2002). We review for abuse of discretion when a district court's "dismissal for claim-splitting was premised in significant measure on the ability of the district court to manage its own docket," id., and will reverse the district court only if we find its judgment "exceeded the bounds of the rationally available choices given the facts and the applicable law in the case at hand." Big Sky Network Canada, Ltd. v. Sichuan Provincial Gov't, 533 F.3d 1183, 1186 (10th Cir.2008).
Infinity argues the district court erred because no final judgment was entered in the other case. Without a final judgment, Infinity contends the prohibition against claim splitting does not apply.
District courts have discretion to control their dockets by dismissing duplicative cases. See Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 817, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976) ("As between federal district courts... though no precise rule has evolved, the general principle is to avoid duplicative litigation."). Long ago, the Supreme Court captured the general principle regarding claim-splitting:
The Haytian Republic, 154 U.S. 118, 124, 14 S.Ct. 992, 38 L.Ed. 930 (1894) (quotation omitted); see also Curtis v. Citibank, N.A., 226 F.3d 133, 139 (2d Cir.2000) ("[P]laintiffs have no right to maintain two actions on the same subject in the same court, against the same defendant at the same time."). We have noted that "more recent cases analyze claim-splitting as an aspect of res judicata." Hartsel, 296 F.3d at 986 (collecting cases); see also Stone v.
Infinity claims that there can be no claim splitting as long as there is no final judgment in the other case. We disagree. While it is correct that a final judgment is necessary for traditional claim preclusion analysis, it is not required for the purposes of claim splitting.
The doctrine of claim preclusion, or res judicata, requires as one element a valid, final judgment on the merits. See Pelt v. Utah, 539 F.3d 1271, 1281 (10th Cir.2008); Wright & Miller, 18A FEDERAL PRACTICE & PROCEDURE JURISDICTION § 4432 (2d ed.2011).
To be sure, claim splitting and res judicata both serve the same interests of promoting judicial economy and shielding parties from vexatious concurrent or duplicative litigation. But claim splitting is more concerned with the district court's comprehensive management of its docket, whereas res judicata focuses on protecting the finality of judgments. See Wright & Miller, supra § 4406 (considering it an "exaggeration" to describe claim splitting as an aspect of res judicata). The difference also appears in our standards of review for claim splitting (abuse of discretion) and res judicata (de novo). Compare Hartsel, 296 F.3d at 985 (reviewing dismissal for claim splitting for abuse of discretion) with Wilkes v. Wyo. Dep't of Emp't Div. of Labor Standards, 314 F.3d 501, 503 (10th Cir.2002) (reviewing whether the doctrine of res judicata applies de novo).
With these different interests in mind, we have held that a final judgment is not a necessary component of the claim-splitting analysis:
Hartsel, 296 F.3d at 987 n. 1 (emphasis added). Otherwise, a defendant could "lie in wait silently until one of the two actions is brought to judgment to ambush the plaintiff and defeat the other action." Id.; see also Brady v. UBS Fin. Svc., Inc., 538 F.3d 1319, 1327 n. 10 (10th Cir.2008) ("The first suit need not reach final judgment before a motion to dismiss based on improper claim-splitting can be granted."); Wright & Miller, supra § 4406 ("In dealing with simultaneous actions on related theories, courts at times express principles of `claim splitting' that are similar to claim preclusion, but that do not require a prior judgment.").
Our precedent cannot be clearer: the test for claim splitting is not whether there is finality of judgment, but whether the first suit, assuming it were final, would preclude the second suit. This makes sense, given that the claim-splitting rule exists to allow district courts to manage
Also, different treatment is warranted because of the different results created by a dismissal under res judicata and claim splitting. A dismissal on res judicata grounds can stop a case in its tracks; a plaintiff is precluded from asserting a claim. In such a case, we leave a party without recourse for its claims, and thus we want to be sure such a decision stems from a previous valid, final judgment on the merits. But with a dismissal on claim-splitting grounds, by its nature, the dismissed party is involved in another pending suit regarding the same subject matter against the same defendants. Given the toll on a court's docket, the rule does not impose the more stringent requirement of a final judgment.
As a fallback argument in light of Hartsel, Infinity also contends the other lawsuit is still in the pleading stages, with very little being determined, and has been administratively closed. It argues in those circumstances nothing is to be gained by preventing it from bringing new claims in this lawsuit.
Infinity's argument is unpersuasive and misunderstands the prohibition against claim splitting. When we assess whether duplicative claims have been asserted, we assume the finality of the first suit for the purposes of the analysis. Infinity argues as if we engage in a conventional res judicata analysis that requires a valid, final judgment. We do not. The proper question is whether, assuming the first suit was already final, the second suit would be precluded under res judicata analysis. See Hartsel, 296 F.3d at 987 n. 1. Once we assume finality here, all of the requirements of claim preclusion are met.
An additional reason supports this outcome. The district court in the other action has allowed Infinity to amend its complaint and file additional claims. See Stender v. Cardwell, No. 07-cv-2503, Doc. 150, at 8, 2011 WL 1235414 (D.Colo. Apr. 1, 2011). In its amended complaint, Infinity asserts the same securities law claims under the 1933 and 1934 Acts that it asserts here. In fact, Infinity essentially admits to claim splitting with this case. Infinity states it brings the securities law claims "to preserve the claims of the [investors in the new units] in the event that the relief sought from the Tenth Circuit... is not granted." Id., Doc. 151, at 79 (§ 11 claim); see also id. at 83 (same) (§ 12(a)(2) claim); id. at 86 (same) (§ 15 claim). And at oral argument in this case Infinity even conceded the securities law claims can be litigated in its other lawsuit.
Infinity has filed two cases in the same district court, involving the same subject matter, seeking the same claims for relief against the same defendants. The district court did not abuse its discretion by dismissing Infinity from this case for claim splitting.
Infinity also requests that, if we affirm the dismissal, we remand the case and permit it to substitute a plaintiff who could represent the interests of those shareholders who opted to receive the new units. Infinity argues it could not have foreseen any claim-splitting problems when it joined this suit and the class of investors in the new units should not be prejudiced by its actions. But Infinity's amended complaint — with the same securities law claims — has now been accepted in the other lawsuit. Any concern that the new unitholders would not be represented is unfounded.
In sum, we affirm the district court's decision to dismiss Infinity from this case for improper claim splitting.
The district court dismissed Katz's 1933 Act claims because it concluded he was not a purchaser of securities and therefore lacked standing to bring those claims. Katz contests this conclusion, arguing he, in fact, was a purchaser under the securities laws for a single reason: the merger caused a fundamental change of his A-1 units that so altered the nature of his investment as to transform them into "new" A-1 Units. In his view, the A-1 Units lost their valuable liquidity, dividend, and tax indemnification features upon the announcement of the merger. The merger effectively forced him to purchase the "new" A-1 Units, which lacked the advantageous characteristics of the "old" units, for purposes of the 1933 Act.
We reject this argument. The merger did not force him to purchase new securities, but only to sell his A-1 Units for cash or new units. Since Katz's 1933 Act claims only give standing to purchasers of securities, which Katz is not, his claims were properly dismissed.
Katz brought two substantive claims under §§ 11 and 12(a)(2)
In the merger, Katz elected to receive $60.75 in exchange for each of his A-1 Units. That is, he sold each A-1 Unit for $60.75. From a plain view of the transaction, Katz was a seller, not a purchaser. Undeterred, Katz contends that, in fact, he was a purchaser and has standing. He argues that under the so-called fundamental
To evade the problem that Katz did not purchase securities in the merger, he asks us to apply the fundamental change doctrine. The fundamental change doctrine — also known as the forced seller doctrine — has been applied in securities fraud cases when "the shareholder is faced with the choice of either holding stock in a nonexistent corporation or exchanging his shares for value as is the case in liquidations and certain types of mergers." Anderson v. Dixon, No. 95-4119, 1996 WL 276183, at *2 (10th Cir. May 24, 1996) (quotation omitted); see also Hazen, supra § 12.7[3][A] (6th ed.) ("When a shareholder is frozen out of a corporation or otherwise put in the position of a `forced seller,' Rule 10b-5 standing ordinarily will exist even though there was no voluntary investment decision.").
The doctrine enables a shareholder, whose investment has been fundamentally changed, to meet the causation and reliance requirements of the securities laws even though the shareholder has not made an actual purchase or sale of securities. See Loss & Seligman, SECURITIES REGULATION 3740 (3d ed. 2004) ("The forced seller doctrine has been expanded to a variety of transactions ... where a defendant's fraud results in a fundamental change in the nature of the plaintiff's investment without the plaintiff's consent."). Several circuits have adopted the doctrine,
As we noted, Katz argues a fundamental change occurred "the minute the Archstone board accepted the Merger, creating de facto new A-1 units" that lacked the advantageous liquidity, dividend, and tax characteristics of the original A-1 units. Aplt. Br. at 35. He contends his only choice was to either accept the new units, which lacked the same benefits of the A-1 units, or cash out his interest without the tax indemnification the A-1 Units had provided. Katz claims that the "choice," either way, was "irrelevant" because the unitholders were forced to accept inferior new units or cash-out without tax indemnification. Aplt. Br. at 35.
We have previously declined to adopt the fundamental change doctrine and we decline to do so again here for several reasons. First, the doctrine only applies to claims under the 1934 Act, where Katz's claims here arise under the 1933 Act. Second, even assuming the doctrine did apply to Katz's 1933 Act claims, the doctrine does not make him a "purchaser" of securities.
The fundamental change doctrine does not apply to Katz's 1933 Act claims because
In 7547 Corporation, the Fifth Circuit confined its application of the forced seller doctrine to its analysis of whether plaintiffs had standing to assert claims under § 10(b) and Rule 10b-5 of the 1934 Act. 38 F.3d at 226-29. Notably, the court also considered plaintiff's standing under §§ 11 and 12(a)(2) of the 1933 Act — the same sections Katz asserts here — and made no mention of the forced seller doctrine. Id. at 222-25. The case does not support Katz's argument. Actually, it undermines his position because the court applied the forced seller doctrine only to the 1934 Act claims, even though 1933 Act claims were also at issue in the case.
In Union Exploration Partners, the court cited the forced seller doctrine and concluded plaintiffs could bring their claims under § 10(b). 1992 WL 203812, at *3. It also applied the forced seller doctrine to plaintiff's § 12(a)(2) claims, finding the plaintiffs had satisfied § 12(a)(2)'s causation requirement. Id. at *5. The court's focus was on whether plaintiffs had demonstrated a causal connection between the fraud and the purchase of securities. Because the argument about causation was "essentially the same" one asserted in connection with the § 10(b) claims, the court decided to apply the forced seller doctrine to the § 12(a)(2) claims as well. Id.
Even though the court applied the forced seller doctrine to claims under the 1933 Act, the case does not help Katz. The court's reasoning was solely focused on the causation requirement of § 12(a)(2), not the purchaser requirement at issue here. Because the causation argument was similar to the causation argument for § 10(b), the court applied the doctrine. There is no such similarity here. Section 12(a)(2)'s strict purchaser requirement has no analogue in the broad provisions of § 10(b) and Rule 10b-5.
Reviewing these two cases with a critical eye reveals they do not support Katz's argument that the fundamental change doctrine should apply to claims under the 1933 Act. We have also located no other cases that apply the doctrine to the 1933 Act. From our review of the case law, courts only apply the fundamental change doctrine in relation to the 1934 Act's anti-fraud provisions (i.e. § 10(b) and Rule 10b-5) and we see no reason to disturb this interpretation.
Katz argues as if the 1933 and 1934 Acts are the same, such that an application of the doctrine to the 1933 Act would not be a significant extension. But this argument ignores the fundamental differences between the 1933 and 1934 Acts. Restricting the doctrine to the 1934 Act comports with § 10(b)'s expansive anti-fraud provision, covering fraud "in connection with the purchase or sale" of a security. 15 U.S.C. § 78j(b). By contrast, the narrow provisions of §§ 11 and 12(a)(2) of the 1933 Act only apply to an individual "purchasing" or "acquiring" a security. See id. §§ 77k(a), 771(a). This narrower focus weighs heavily against extending the fundamental change doctrine to the 1933 Act.
Ultimately, Katz is simply trying to repackage claims under the 1933 Act that he brought below under the 1934 Act. But the district court dismissed these claims because Katz failed to adequately plead loss causation. See Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 345-46, 125 S.Ct. 1627,
Further, even if we adopted the fundamental change doctrine and applied it to Katz's 1933 Act claims, it is still no help. In a forced sale, he is still a seller, not a purchaser. To find that Katz has standing, we would still have to assume he purchased the "new" A-1 Units, which he never did. In fact, Katz owned the same A-1 Units both before and after the merger was announced. Nothing can convert the sale of his A-1 units for cash into a purchase of shares he never acquired.
Finally, it is worth noting the Seventh Circuit considered these same arguments during the appeal regarding removal to federal court. Katz v. Gerardi, 552 F.3d 558 (7th Cir.2009). Like us, the court found the claim unpersuasive:
Id. at 560 (citations omitted). This assessment of Katz's argument captures its flaws and lack of merit. To say the merger made Katz a purchaser of "new" A-1 Units is verbal alchemy unsupported by the text of the 1933 Act or the case law.
The district court properly dismissed Katz's 1933 Act claims for lack of standing.
For the foregoing reasons, we AFFIRM the district court's judgment.
