decided as amended august 19 1980.: July 31, 1980.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 76-1002)
Before Seitz, Chief Judge, and Rosenn and Higginbotham, Circuit Judges.
The plaintiffs, Gilbert and Hervey Johnson, appeal from a judgment for the defendants, majority shareholders and directors of Penn Eastern Development Co., in this diversity suit charging the defendants with fraud and breach of fiduciary duty under Delaware law.
The present controversy centers on the conduct of the affairs of Penn Eastern, incorporated in June 1968 as a real estate development company. The plaintiffs, Gilbert and Hervey Johnson, owned a 47 percent interest in Penn Eastern. The defendants, Samuel and Arnold Trueblood and Harry Salwen, collectively owned the controlling 53 percent interest. At its inception, a major asset of Penn Eastern was land known as the "Red Caboose" property owned by the Truebloods and a man named Louis Siana. This property was originally purchased for $48,000 and sold by the Truebloods and Siana to Penn Eastern in exchange for $75,000 of its capital stock.*fn1
Penn Eastern was the sole general partner in a limited partnership called The Village Center, Ltd. This partnership was formed for the development of a shopping center which was to be Penn Eastern's sole major asset. Penn Eastern, however, began to develop severe cash flow problems in 1972. In November 1973, the Truebloods proposed acceptance of a loan to the corporation by a Frank Pierce. The plaintiffs opposed this loan, urging that it was not beneficial and that they had the financial resources to loan Penn Eastern the requisite capital. By its terms, however, the plaintiffs' loan would have resulted in a shift in control of Penn Eastern from the Truebloods to the plaintiffs. By a 4-2 vote, the Penn Eastern Board of Directors,*fn2 rejected the plaintiffs' proposal and accepted the Pierce loan.
The Pierce loan failed to solve Penn Eastern's cash flow problems, and the corporation ran into difficulties meeting the loan repayments. The defendants proposed an amendment to the Pierce loan agreement by which the Red Caboose property would be sold at absolute auction in May 1975. The plaintiffs opposed this action because the real estate market was depressed, and they feared Penn Eastern would sell one of its major assets at less than its full market value. The plaintiffs offered to tender the payments due on the Pierce loan to avoid auctioning off the Red Caboose property. This proposal was rejected and the property sold.
Penn Eastern's financial condition continued to deteriorate when in November 1975, to shore up Penn Eastern's treasury, the defendants proposed a sale of twenty-one shares of Penn Eastern stock to Arnold Trueblood at the price of $750 per share. The plaintiffs counterproposed that Penn Eastern sell twenty shares of the stock to them at $1,000 per share. This would have resulted in a shift in corporate control to the plaintiffs, and it too was rejected and the sale to Arnold Trueblood approved. Despite the new infusion of capital arising out of the sale of stock, Penn Eastern's financial condition continued to deteriorate.
The plaintiffs filed the present shareholders' derivative action in the district court alleging violation of the federal securities laws and Delaware corporate law.*fn3 The complaint sought rescission of the sale of stock to Arnold Trueblood and damages on behalf of Penn Eastern.
During the pretrial and discovery phases of the trial, Penn Eastern, as the general partner of The Village Center, Ltd., filed for reorganization under Chapter XII of the Bankruptcy Act. Penn Eastern attempted to reorganize The Village Center, Ltd. by soliciting additional investments from the limited partners. When this proved unsuccessful, the plaintiffs were notified that no plan would be presented to the Bankruptcy Court, and that court subsequently dismissed the reorganization petition on May 30, 1978, without prejudice. Mortgage foreclosure proceedings were thereafter commenced by the mortgagee of The Village Center's property because Penn Eastern failed to meet its mortgage obligations. The plaintiffs filed an emergency motion for the appointment of a receiver on June 23, 1978, but the motion was denied by the district court on June 26, 1978.
From approximately May 1977 onward, the trial judge assigned to the case made repeated efforts to have the parties reach a settlement. The trial was set to commence on August 21, 1978, but was postponed and a final settlement conference occurred. After it became apparent that a settlement could not be achieved, the trial judge reset the trial date for September 6, 1978. Meanwhile, the multi-million dollar shopping center owned by The Village Center, Ltd. was scheduled for a foreclosure sale on August 23, 1978. The foreclosure took place as scheduled. The plaintiffs had indicated during the summer that should the shopping center be lost, they would seek amendment of their complaint to include its loss as both grounds for liability and damages.
The parties returned to court for trial on September 6, 1978. Although represented by local counsel, the plaintiffs' active trial counsel had offices in Chicago, Illinois. The court did not commence trial, however, and instructed the parties to be available on twenty-four hours' notice. On September 18, 1978, the Johnsons tendered their proposed amendment to the complaint relating to the loss of the shopping center. This amendment was allowed but only on the issue of damages (the trial was bifurcated as to liability and damages). On September 19, 1978, trial began, but because of numerous interruptions the district court declared a mistrial once more and reset the case for trial. Trial was now fixed for February 20, 1979. The plaintiffs retendered their proposed amendment to the complaint as to liability shortly after the mistrial, but it remained without disposition for the next three months.
In the interval between the September 1978 mistrial and the new trial date, the plaintiffs, concerned over the trial judge's impartiality and his conduct of the trial, informally sought to have the Chief Judge of the Eastern District of Pennsylvania reassign the case. These efforts were unsuccessful. On February 7, 1979, the trial judge again rejected the proposed amendment to the complaint on the ground that it might delay the trial. Plaintiffs thereafter filed a motion on February 15, 1979, to have the trial judge recuse himself pursuant to 28 U.S.C. § 144 (1976), which was denied.
Trial thereafter commenced and lasted seventy-two days. During the course of the trial, plaintiffs petitioned this court for a writ of mandamus pursuant to 28 U.S.C. § 1651 (1976) to compel the judge's recusal. Our court denied the petition on June 27, 1979. Trial concluded on July 3, 1979, with a verdict in favor of the defendants. The plaintiffs filed a notice of appeal. After the notice was filed, the district court, without holding a hearing or providing notice, revoked the pro hac vice status of the plaintiffs' Chicago counsel effective as of the date of the jury's verdict. The plaintiffs and their Chicago counsel filed another notice of appeal to challenge this action. That appeal is dealt with in our separate opinion filed today.
We turn first to the district court's denial of the plaintiffs' motion to recuse. Even a brief examination of the factual and procedural history of this case reveals the tension existing between the parties and especially between the plaintiffs and the trial judge. Unfortunately, this tension was exacerbated both by the numerous delays in bringing the case to trial, the necessity for counsel to stand by for days in expectation of being called for trial, and the length of the trial.
The plaintiffs filed a motion pursuant to 28 U.S.C. § 144, which requires the district judge to recuse himself if personal bias or prejudice against or in favor of any adverse party exists. The district judge also raised, sua sponte, whether he should recuse himself pursuant to 28 U.S.C. § 455(a), which requires recusal if the judge's "impartiality might be reasonably questioned." Although Congress has not indicated the precise parameters of the two provisions, we need not decide that here because both statutes require the same type of bias for recusal and it is not present in this case.
In this circuit, review by this court of a district court's action on recusal is by an abuse of discretion standard. See Mayberry v. Maroney, 558 F.2d 1159, 1162-63 (3d Cir. 1977). In general, it seems that § 455(a) was intended only to change the standard the district judge is to apply to his or her conduct; it does not alter the type of bias required for recusal. Thus the rule under § 144 continues that only extrajudicial bias requires disqualification. See id. at 1162 n. 16. See generally H.Rep.No. 93-1453, reprinted in (1974) U.S.Code Cong. & Admin.News, pp. 6351, 6354-55.
"Extrajudicial bias" refers to a bias that is not derived from the evidence or conduct of the parties that the judge observes in the course of the proceedings. See United States v. Grinnell Corp., 384 U.S. 563, 580-83, 86 S. Ct. 1698, 1708-1710, 16 L. Ed. 2d 778 (1966). Normally the judge's rulings at trial do not constitute grounds for recusal because they can be corrected by reversal on appeal. See Smith v. Danyo, 585 F.2d 83, 87 (3d Cir. 1978); United States v. Gallagher, 576 F.2d 1028, 1039 (3d Cir. 1978), cert. denied, 444 U.S. 1040, 100 S. Ct. 713, 62 L. Ed. 2d 675 (1979).
We have examined the affidavits and other evidence pointed to by the plaintiffs and find no extrajudicial bias in this sense. The plaintiffs first point to certain scheduling and other rulings by the district court. As noted, however, these are not a basis for recusal.
Second, the plaintiffs argue that statements made by the district court during the settlement negotiations show extrajudicial bias. For example, the judge made statements at the final settlement conference to the effect that the lawsuit had been a "personal tragedy for the defendants" who were "honest men of high character." He also questioned the plaintiffs' motives in bringing the lawsuit and stated that plaintiff Gilbert Johnson was unable to reason logically from A to B. The plaintiffs' claim that these comments manifest extrajudicial bias is partially predicated on the timing of these statements namely, at a pretrial settlement conference before any evidence had been adduced which could serve as a basis for the formulation of an opinion on the trial judge's part.
In his opinion denying the motion to recuse, the judge explained that the challenged comments did not constitute extrajudicial bias. He stated that his remarks at the settlement conference were based on his perception of the case and were an attempt to have the parties reach an agreeable settlement. Although admitting that many of the statements "may have been intemperate," he concluded that such statements were not sufficient to warrant recusal.
We do not believe that the challenged statements necessarily were rendered extrajudicial merely because they were made at pretrial settlement conference. See Fong v. American Airlines, Inc., 431 F. Supp. 1334, 1338-39 (N.D.Cal.1977). Such a rule would unduly hamper the judge's ability to effectuate settlement. Moreover, the judge often can get a feel for a case prior to trial, which means that his perceptions can be based on the conduct of the parties and the evidence. Thus feelings about a case are not necessarily "extrajudicial" solely because they are made during settlement negotiations.
The relevant inquiry is whether the trial judge's pretrial comments were linked to his evaluation of the case based on the pleadings and other materials outlining the nature of the case, or whether the comments were based on purely personal feelings towards the parties and the case. It is undeniable that statements such as the case has been a "personal tragedy" for the defendants who are "honest men" of "high character" may superficially connote an extrajudicial source of information or, as we are inclined to believe, it may have been a form of judicial coloration in an overzealous effort to settle what obviously would be a lengthy and complicated case to try. We agree with the judge's candid concession that many of his statements may have been "intemperate." Indeed, this experience points out the restraints and objectivity a judge must maintain in an effort to achieve a settlement and the need to refrain from comments which might lead one party to conclude that a personal bias may exist against him.
We have carefully reviewed the plaintiffs' recusal affidavit and although the allegations are indeed troublesome, we believe on balance that they add up more to settlement fever than personal bias warranting recusal under either § 144 or s 455(a). Thus we cannot say that the district court abused its discretion in this case. Nevertheless, we take this opportunity to caution the district judges of this circuit that they must not permit their role as a negotiator to obscure their paramount duty to administer the law in a manner that is both fair in fact and has the appearance of fairness. Although settlement is important given the rising caseload, it can lead to action that is not consistent with the judicial function.
Next, the plaintiffs argue that the district court improperly charged the jury on their burden in overcoming the business judgment rule. That rule, which admittedly is part of the law of Delaware, provides that directors of a corporation are presumed to exercise their business ...