Borg v. Santa Fe Industries, 647 N.E.2d 48 (N.Y. 1994)
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A prior judgment only bars a subsequent action if the parties are the same or in privity, and in the context of freeze-out mergers under Delaware law, minority shareholders are generally limited to appraisal remedies absent fraud or blatant overreaching.
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Summary
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The Borgs, minority shareholders of Kirby Lumber Corp., sued Santa Fe Industries after a freeze-out merger, alleging breach of fiduciary duty and violations of New York’s Martin Act. A similar federal case by other shareholders (the Greens) had been dismissed. The New York Court of Appeals held that the Borgs were not in privity with the Greens, so res judicata did not apply. However, the court ultimately affirmed the dismissal, finding that the Borgs had not demonstrated fraud or blatant overreaching under Delaware law that would allow them to circumvent the appraisal remedy typically available to minority shareholders in freeze-out mergers. The court clarified that the absence of a valid corporate purpose, on its own, does not constitute a breach of fiduciary duty in a short-form merger.
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Facts
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In 1974, Santa Fe Resources owned 95% of Kirby Lumber Corp. Santa Fe executed a short-form merger under Delaware law, making Kirby a wholly-owned subsidiary. Minority shareholders were offered $150 per share based on an appraisal by Morgan Stanley. Some shareholders, including the Borgs, were dissatisfied but accepted the offer. Others sought appraisal. The Borgs, along with the Greens, later sued in New York state court.
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Procedural History
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The Greens sued in federal court, alleging violations of federal securities law and breach of fiduciary duty. The Supreme Court reversed the Second Circuit’s decision in favor of the Greens on the federal securities claim in Santa Fe Industries, Inc. v. Green, 430 U.S. 462 (1977). The Greens amended their complaint to include a claim under New York’s Martin Act. The federal district court dismissed the amended complaint, and the Second Circuit affirmed. Subsequently, the Borgs and Greens brought an action in New York State Supreme Court. Special Term granted summary judgment to defendants, finding the Borgs were in privity with the Greens. The Appellate Division affirmed. The New York Court of Appeals granted leave to appeal.
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Issue(s)
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1. Whether the Borgs’ action is barred by res judicata or collateral estoppel due to the prior dismissal of the Greens’ federal court action.
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2. Whether the defendants’ actions constitute a basis for recovery under the Martin Act.
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3. Whether the defendants breached their fiduciary obligations to the minority shareholders under Delaware law.
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Holding
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1. No, because the Borgs were not in privity with the Greens in the prior federal litigation.
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2. No, because there is no implied private right of action for fraudulent acts under Section 352-c of the General Business Law.
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3. No, because the plaintiffs have not demonstrated fraud or blatant overreaching sufficient to circumvent the exclusive appraisal remedy in a freeze-out merger under Delaware law.
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Court’s Reasoning
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The court reasoned that res judicata only applies to parties in the prior action and those in privity with them. Privity requires that the non-party’s interests were represented in the prior proceeding. The Borgs and Greens owned separate blocks of stock, and the Greens did not represent the Borgs’ interests in a class action. Even though the Borgs were aware of the Greens’ lawsuit and shared the same counsel, there was no indication that the prior action was managed as the Borgs thought it should be. The court distinguished Watts v. Swiss Bank Corp., 27 N.Y.2d 270 (1970), because the claims and interests were not identical. Moreover, imposing the federal legal determination in a state court would hinder the state court’s ability to consider the applicable rule of law.
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Regarding the Martin Act claim, the court relied on its decision in CPC Intl. v. McKesson Corp., 70 N.Y.2d 268 (1987), holding that there is no implied private right of action for fraudulent acts under Section 352-c of the General Business Law.
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As for the breach of fiduciary duty claim under Delaware law, the court noted that under Delaware law at the time of the merger, no corporate purpose was required for a short-form merger. Minority shareholders were limited to their appraisal rights unless they demonstrated