92 N.Y.2d 426 (1998)

Collateral estoppel bars relitigation of issues previously decided in federal court, and statutes should be interpreted according to their plain language, even if policy arguments favor a broader reading.

Summary

Pinnacle Consultants, a shareholder of Leucadia National Corporation, brought a derivative action alleging breach of fiduciary duty, corporate waste, and violation of Business Corporation Law § 612 concerning a merger. The New York Court of Appeals affirmed the dismissal of the complaint, holding that Pinnacle’s claims regarding warrants were barred by collateral estoppel because the Second Circuit had already ruled on their validity. The court also held that § 612, which restricts voting rights of subsidiary corporations, does not apply to partnerships, regardless of policy arguments suggesting it should.

Facts

Leucadia’s board approved warrants for Chairman Cumming and President Steinberg in 1985, 1991, and 1992. In 1990, Leucadia merged with Marks Investing Corporation (MIC). Leucadia owned 56% of MIC, and MIC owned 54% of TLC Associates, a partnership that owned approximately 58% of Leucadia. The merger gave Cumming, Steinberg, and director Jordan control of Leucadia. TLC intended to vote its Leucadia shares in favor of the merger. Pinnacle, a Leucadia shareholder, neither voted for nor against the merger.

Procedural History

Pinnacle initially sued Leucadia in federal court, alleging RICO violations based on the warrants and the proxy statement’s alleged failure to disclose that Business Corporation Law § 612 prohibited TLC from voting its shares. The District Court dismissed most claims but found a potential claim for breach of fiduciary duty and corporate waste, dismissing it for lack of federal jurisdiction. The Second Circuit affirmed, finding the warrants valid and holding it unnecessary to decide the § 612 issue. Pinnacle then sued in New York state court. The Supreme Court dismissed some claims based on collateral estoppel but found a valid claim for breach of fiduciary duty and waste. The Appellate Division dismissed the entire complaint. The New York Court of Appeals granted leave to appeal.

Issue(s)

1. Whether Pinnacle’s claims regarding the issuance of warrants are barred by collateral estoppel.

2. Whether Business Corporation Law § 612 prohibits TLC, a partnership, from voting its shares in favor of the merger.

Holding

1. Yes, because the Second Circuit previously determined that the warrants were validly issued, precluding relitigation of the issue in state court.

2. No, because § 612 explicitly applies only to corporations, not partnerships.

Court’s Reasoning

The Court held that collateral estoppel applied because the validity of the warrants was already decided by the Second Circuit when it dismissed Pinnacle’s RICO claim. The Second Circuit’s finding that there was “no fraud shown in the issuance of the warrants” (101 F.3d at 905) and that the directors’ business judgment was conclusive regarding valid consideration barred Pinnacle’s state law claims. The court emphasized that even though the state law claims were dismissed for lack of jurisdiction in federal court, the underlying issue had already been decided. The court also rejected Pinnacle’s argument that § 612 barred TLC from voting its shares. The court acknowledged the policy arguments for preventing cross-voting between parent companies and subsidiaries, but stressed that § 612 explicitly applies only to corporations. The Court stated, “[W]e must respect the legislative judgment that the prohibition on cross-voting between parents and subsidiaries applies only to corporations. This statute is unambiguous, and we must apply it as written.” The court contrasted New York’s law with Delaware law and the Model Business Corporation Act, which have broader provisions restricting cross-voting in situations where the subsidiary is not necessarily a corporation but is controlled by the parent.