Justia U.S. 3rd Circuit Court of Appeals Opinion Summaries

Rahman filed a securities class action against KB, an importer of infant furniture and products, and individuals, alleging violation of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 and (2) and Section 20(a) of the Exchange Act. The complaint alleged that defendants misled investors by artificially inflating KB’s stock price by issuing deceptive public financial reports and press releases dealing with compliance with customs laws and overall financial performance. A second amended complaint specified failure to disclose product recalls, safety violations, and illegal staffing practices. The district court dismissed for failure to satisfy the heightened scienter pleading standard required by the Private Securities Litigation Reform Act, 15 U.S.C. 78u-4(b)(2). The Third Circuit affirmed. View "Rahman v. Kid Brands, Inc." on Justia Law

BDI elected under I.R.C. 1362(a) to be treated as an S-corporation, not subject to federal taxation because its profits and losses passed through to Barden, its sole shareholder. MSC owns the Majestic Star Casino and Hotel. BDI acquired MSC in 2005. BDI elected to treat MSC as a QSub (I.R.C. 1361(b)(3)(B), not as a separate tax entity. MSC, therefore, paid no federal taxes. In 2009, MSC and its affiliates filed voluntary bankruptcy petitions. Barden and BDI were not debtors. After the petition, Barden caused revocation of BDI’s status as an S-corporation; MSC’s QSub status automatically terminated because it was no longer wholly owned by an S-corp. Neither BDI nor Barden sought authorization from the debtors or from the Bankruptcy Court. MSC allegedly was unaware that it had a new obligation to pay income taxes. As of first date federal taxes would have been due, the debtors had paid no federal income taxes. The Bankruptcy Court permitted conversion of MSC to a limited liability company, so that MSC would no longer qualify for QSub status, even if the Revocation had not occurred. The debtors sought to avoid the Revocation, which, they alleged, caused an unlawful post-petition transfer of property. The Bankruptcy Court granted summary judgment to the debtors. The Third Circuit vacated and directed that the petition be dismissed for lack of jurisdiction. View "In Re:Majestic Star Casino LLC" on Justia Law

In the 1960s, the founder’s sons (plaintiff and his brothers) joined the business, later incorporated as MBP. The business grew to have annual sales of $60 million. Plaintiff served as vice-president, secretary, and a member of the board of directors, and was a shareholder. Plaintiff had a “spiritual awakening” in 1995. He claims that the change resulted in antagonism toward him. Plaintiff delivered a eulogy at his father’s 2009 funeral, which upset family members. Days later, plaintiff received notice of termination of his employment and that various benefits would cease. The letter explained that “[y]our share of any draws from the corporation or other entities will continue to be distributed to you.” Plaintiff continued on the board of directors until August, 2009, when the shareholders did not re-elect him. Plaintiff filed charges of religious discrimination under Title VII of the Civil Rights Act of 1964, 42 U.S.C. 2000e-2(a)(1) and of hostile work environment. The district court dismissed, finding that he was not an employee under Title VII and did not establish existence of a hostile work environment. The Third Circuit affirmed, stating that it was clear that plaintiff was entitled to participate in development and governance of the business. View "Mariotti. v. Mariotti Bldg. Prods., Inc." on Justia Law

Wiest worked in Tyco’s accounting department for 31 years, until his termination in 2010. Beginning in 2007, Wiest refused to process reimbursement claims that he believed were unlawful or constituted “parties” at resorts. Wiest sued Tyco and its officers and directors under the whistleblower protection provisions in Section 806 of the Sarbanes-Oxley Act, 18 U.S.C. 1514A, and under Pennsylvania law. The district court dismissed the federal whistleblower claims and declined to exercise supplemental jurisdiction. The Third Circuit reversed in part, holding that the court erred in requiring that Wiest allege that his communications to his supervisors “definitively and specifically relate to” an existing violation of a particular anti-fraud law, as opposed to expressing a reasonable belief that corporate managers are taking actions that could run afoul of a particular anti-fraud law. View "Wiest v. Lynch" on Justia Law

The nursing care facility faced financial difficulties and ceased to admit new patients; it filed a Chapter 11 bankruptcy petition in 2005. The Bankruptcy Court appointed a Committee of Unsecured Creditors, approved closure, and authorized the Committee to commence adversary proceedings against officers and directors. The Committee did so, alleging breach of fiduciary duties of care and loyalty. The district court granted defendants summary judgment, based on the business judgment rule and the doctrine of in pari delicto. On remand, the court scheduled a jury trial. Before pretrial conference, the parties identified 400 proposed exhibits. The Committee intended to call up to 51 witnesses; defendants intended to call up to 34 witnesses. Descriptions of intended testimony were similar. Frustrated with the failure to “streamline [the] case,” the court limited each side’s witness testimony to 7.5 hours and limited opening and closing statements. Defendants sought to appeal under 28 U.S.C. 1292(b) and a writ of mandamus. The Third Circuit dismissed the appeal because the district court did not certify that the time-limit order “involve[d] a controlling question of law as to which there is substantial ground for difference of opinion” and denied mandamus, holding that direct appeal was an adequate means of challenge. View "In Re: Baldwin" on Justia Law

Atlantic, a New Jersey pipe foundry, and four of its managers were convicted of conspiring to commit environmental pollution and worker safety violations, attempting to cover up or impede federal investigation of those violations, and violations of the Clean Water Act (33 U.S.C. 1251) and the Clean Air Act (42 U.S.C. 7413(c)). Defendants illegally pumped contaminated water into storm drains that drained into the Delaware River; unlawfully burned 50-gallon drums of paint waste in a cupola and emitted the fumes into the air; and attempted to cover up work-related accidents at its facility, one of which resulted in the death of an employee who was run-over by a forklift. The district court imposed sentences of 70, 41, 30 and six months’ imprisonment on the managers and applied the Alternative Fines Act, 18 U.S.C. 3571(c)(1), rather than the CWA and CAA, and fined Atlantic the maximum penalty of $500,000 per violation on conspiracy, four counts of obstruction, eight CWA counts, and one CAA count for a total fine of $8 million. It also sentenced Atlantic to 4 years’ probation, with a court-ordered monitor to ensure regulatory compliance. The Third Circuit affirmed, rejecting challenges to evidentiary rulings, jury instructions, and the sentences. View "United States v. Maury" on Justia Law

ABC is a dissolved corporation. Doe 1 was the company’s President and sole shareholder. Doe 2 is his son. LaCheen represents ABC and Doe 1; Blank represents Doe 2. The law firms have a joint-defense agreement covering the three. Investigating tax implications of ABC’s acquisition and sale of closely held companies, the government issued a grand jury subpoena to ABC’s former vice president as custodian of records. The documents are in custody of Blank. ABC refused to accept service of the subpoena issued to its former employee. The government issued subpoenas to LaCheen and Blank. The firms withheld documents listed on a privilege log. The government sought to compel ABC, Blank, and LaCheen to produce documents identified on the privilege logs, citing cited the crime-fraud doctrine, which provides that evidentiary privileges may not be used to shield communications made for purposes of getting advice for commission of a fraud or crime. The district court entered the order. The Third Circuit dismissed for lack of appellate jurisdiction. To obtain immediate appellate review, a privilege holder must disobey the order, be held in contempt, then appeal the contempt order. That route is available to ABC, which can obtain custody of the documents from its agent. View "In Re: Grand Jury" on Justia Law

Harold and his son William started a corporation, operated by William. Harold made loans to the corporation. When the corporation ceased operating William and his wife formed PCI-2 to take its place; despite an agreement, Harold's loans were not repaid and Harold made loans to PCI-2, lending about $300,000 to PCI-1 and PCI-2. William and his wife acquired other corporations and substantial real estate holdings. One business, WEL, issued one share of stock to Harold and nine shares to Harold as custodian for William's infant son, L.L. Harold was a director of WEL. William and his wife divorced. In 2004, Harold filed a loan repayment lawsuit against WEL and PCI-2; William did not defend, asserting there was no money. Harold obtained default judgments of $1,107,550 and $1,204,439, commenced execution proceedings against property that WEL owned, and obtained approximately $320,000 in proceeds. In the Bankruptcy Court, a custodian for shares owned by L.L. sought to recover $345,000 from Harold, claiming that Harold breached his fiduciary duties owed to L.L. The Bankruptcy Court and the district court rejected the claim. The Third Circuit reversed. Harold breached his duties as a WEL director and as a custodian for L.L.'s shares. View "In re: Lampe, Jr" on Justia Law

Shareholders implemented a plan to obtain majority ownership and buy out non-participating shareholders. Among other claims, non-participants allege that the participant-directors influenced a special committee formed to consider the fair value of shares held by non-participants. A state appraisal action is ongoing. The federal district court dismissed a suit alleging breach of fiduciary duty and unjust enrichment. The Third Circuit reversed and remanded. The Pennsylvania Supreme Court has not address whether a statute providing for appraisal of the value of shares of minority shareholders who are "squeezed out" in a cash-out merger precludes all other remedies; the court predicted that it would hold that the statute does not exclude the possibility of other claims.