APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 80-0125 Erie)
Before Seitz, Chief Judge, and Aldisert and Rosenn, Circuit Judges.
Plaintiff Harry Lewis appeals from a final order of the district court dismissing his complaint and denying his motion for leave to amend. This court has jurisdiction under 28 U.S.C. § 1291 (1976).
It is undisputed that, in 1980, Carl C. Icahn sought by a proxy contest to obtain a seat on the board of directors of Hammermill Paper Company, a Pennsylvania corporation. Icahn abandoned his contest on July 29 after entering into a settlement agreement with Hammermill ending all the pending litigation between them; Hammermill agreed to pay Icahn $750,000 to cover his expenses in the proxy contest. On July 30, The Wall Street Journal, in a concise, two-column article, reported the settlement between Hammermill and Icahn. On August 1, Lewis verified the complaint in the present action, charging that the directors had violated their fiduciary duty to Hammermill because the payment to Icahn was a "waste and spoliation of Hammermill's assets" and demanding that the individual defendants be required to pay to Hammermill $750,000 for the damages sustained by it. The complaint was filed on August 4.
In December 1980, counsel for defendants deposed Lewis. Lewis testified that he read about the settlement agreement in The Wall Street Journal on July 30. He then called his attorney, Abraham Markowitz, and left the investigation of this matter entirely to him. Later during the deposition, however, Lewis testified that he verified the complaint only after Markowitz apprised him of the results of the investigation. Counsel for Hammermill asked questions concerning the facts upon which Lewis based his verification and, in each case, Markowitz instructed Lewis not to answer on the ground of the attorney-work-product protection. For example, the original complaint states that the president of Hammermill completely dominates the selection process of the board of directors. When asked the basis for verifying this allegation, Lewis testified only that he made the allegation upon "information given to me by my attorney" and, on Markowitz' advice, refused to disclose that information. At the deposition of Markowitz, he, too, refused to describe any facts developed in the course of investigation.
Defendants filed various motions, including a motion to dismiss the complaint on the ground that it failed to comply with rule 23.1 of the Federal Rules of Civil Procedure because: (1) the complaint failed to state with particularity the efforts, if any, Lewis made to require that the $750,000 be repaid to Hammermill, and the reasons for failing to obtain such action or for not making the effort; (2) Lewis does not fairly and adequately represent the interests of the Hammermill shareholders; and (3) Lewis' failure to investigate personally the underlying facts makes his verification of the complaint a sham. With these motions before it, the district court stayed all proceedings and ordered a preliminary hearing. Before the preliminary hearing, Lewis filed a motion to amend his complaint. The amended complaint attempts to set forth additional grounds why it would have been futile to request the board of directors to correct the alleged wrong in this case.
At the hearing, Lewis' local counsel, Michael Malakoff, asked: "Your Honor, may we have an offer of proof as to the purpose of this unusual proceeding?" The district court replied:
This is a court proceeding to see whether rule 23 has been (complied with) by counsel in this case.... I want to see what the facts of the situation were at the time it was drawn and when the information came to him and all that sort of thing and what was imparted to him. Fact, now. I'm not talking about any question here about privilege. So just sit down, will you?
Markowitz was called to the stand and examined by defendants' counsel. Markowitz accepted full responsibility for the investigation of the facts, but repeated the position he had taken at Lewis' deposition that he was not required to provide any information concerning his investigation. The district court did not consider the attorney-work-product protection applicable:
(O)n the face of this complaint and the way it was executed, lack of verification ..., it raises certainly a suspicion that the complaint may be just a strike complaint. It's subject to investigation by the Court, by me. I'm not going to let the thing go forward unless I'm satisfied that some investigation has been made.
The court subsequently asked Markowitz what documents he used to prepare the complaint.
The Court: What documents are you willing to submit, your file? You don't want to submit your file, do you?
Markowitz: That would be in violation of my refusal to answer.
Malakoff: May I ask the witness certain questions?
The Court: No. I'm examining him....
Markowitz: May I consult with Counsel, please, for just two minutes?
The Court: An experienced lawyer like you? Tell me the truth of the matter. Did you consult any document or didn't you?
Markowitz: I certainly did, ...