Opposition Brief — Holt v. Alleghany Corp.

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I sg eS RTA ORE AEP SEAT

- IN THE

Office-Supreme Court, U.S.

FILED

JORN F. DAVTS, CLERK

ima Court of the United States

‘OCTOBER TERM, 1965

No. 132

' MARGARET L. HOLT and KATHLEEN L. McMAHON,

individually and on behalf of all other shareholders

of ° ALLEGHANY. CORPORATION. similarly situated,

"Petitioners,

against

ALLAN F. KIRBY, CHARLES T. IRELAND, JR.,.

' FRED M. KIRBY AND ALLEGHANY CORPORATION,

Respondents.

. a. 1

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF

APPEALS FOR THE SECOND CIRCUIT.

Statement in Opposition to Motion of Randolph

Phillips, dated February 4, 1966, for Leave to File a

Brief and to Make Oral Argument as Amicus Curiae

Water R.-.MAnNSFIELD, |

Attorney for Respondents,

Autan P. Kirspy, CuHartes T.

IRELAND, Jr. and Frep M. Kirsy.

Evucene V. Rostow,

JouHn J. McCann,

Of Counsel.

—_ <_~" > Peter aeons

ROT SE erry ee ¥

Statement i in Opposition nae ,

Conclusion

TABLE OF CONTENTS

The Background of Phillips’ Motion .

The Evolution of the Jurisdictional Issue

Argument

1. Phillips’ Motion-:and Brief do not completely or

correctly report the decisions on jurisdiction

made by the New York courts in Zenn ................

' 2. The litigated decision of a New York court on

- its subject matter jurisdiction is entitled to full

- faith and eredit, as the — of Appeals -held

here

3. Petitioners have sek abandoned eoniion 5 of

’ their Questions Presented

4, Kirby was made a party to the final judgment

in Zenn, and is entitled to the nin of that

judgment as res judicata

_5. Phillips’. Motion is untimely and. otherwise

objectionable

Table of Cases

PAGE

Anicrican Distilling Co. v. Brown, 295 N. Y. 36, 64

NE. 2d 347 (1945)

American Surety Co. v. Baldwin, 287 U.S. 156 (1932) |

Baldwin v. Iowa State Travelling Men’s Ass’n, 283

U. S. 522 (1931) soca

Berryhill v. United States, 199 F. 2d 217 (6th Cir.

1952) :

Caterpillar Tractor Ca. v. indeveubtionsl Horvestes

Co., 120 F. 2d 82 (3d Cir. 1941)

2, 20

Chicot County —_ Dist. v. Baxter State Basi,

ke Eee ee

Coe v. Coe, Sa4 U. S. S76 (1968) . ............................. ae vi

Cohen v. Beneficial Indus. Loan res i 337 U.S. ore ;

(1949) ......... LT EER. NOTE —16

Comstock v. Group of Institutional serene 339°

= ik). | eon a 6°

Cook v. Cook, 342 U. S. 126 (1951) iatibilial RES ane 11.

Curb & Gutter Dist. No. 37 V. Parrish, 110 F. od 902

(8th Cir. 1958) ....... 2

Dann vy. Studebaker Packard Corp., 288 R. 2d 201

ES | gE ean eer 12,13

Davis v. Davis, 305 U.S. 32 (1938) . Sa ye 11

Graver Mfg. Co. v. Linde, 336 U. S. 271 Sscueae nd

on rehearing, 339 U. S. 605 (1950) .. Riietnenaideess

Hanna Min..Co. v. Dist. 2, M.E.B.A., 86 8. Ct. 327

(Dec. 6, 1965) ......... = ES Soe 16

Hecht v. Farnsworth T.V. & Radio Corp., 39 N.Y.S.

+ 2d 724 (S. Ct., N. Y. Co. 1949) 0002... 14

Howard, v. Furst, 283 F. 2d 790 (2d Cir. — cert.. ~

denied, 353 U. s. 937 (1957) 13

3 I. Case Co. v. Borak, 377 U. 8.426 | Sena 12, 14

Kalb v. Feuerstein, 308 U. S. 433 (1940) 2.22... 16

. Kauder.v. United Board & Carton Corp., 199 F. 8

Supp. 420 (S.D.N.Y. 1961) ...... s eteladabeeandephpasntidisehs - 14

‘Levi ine V. Silve rman, 43 Mise. 2d 415, 251 aia ed

68 (S. ©. Monroe Co. 1964) LARTER AES SEO. He 14

Malkan v. General Transistor Corp. ., 27 Mise. od 677,

207 N.Y.S. 2d 345 (S. Ct., Queens Co. 1960) ............ 14

Mekrut v. Gould, 16 Mise. 2d. 326, 188 N.Y.S. 2d 6 . .

(S. Ct, N. Y. Co. 1959) ....... asia cieaasiciadiiiedabustath Gace cicety i414

O’Boyle v. Bevil, 259 F. 2d 506 (5th Cir. 1958) CPS =

Pick Mfg. Co. v. G.M. Corp., 299 U.S. 3 (1936) Seek 6

Reiter v. Universal Marion Corp., 299 F. 2d 449

seid Cir. 1962) 4

iii

“

Ripperger v. A. C. Allyn & Co., 113 F. 2d 332 (24

Cir.), cert. denied, 311 U. S. 695 (1940) ..........-2--2-+-+ 15 —

San Diego Building Trades Council v.,Garmon, 359

ma tT RT ee 16

Standard Power & Light Corp. v. Investment Ass’ n,.

29 Del. Ch. 593, 51 A. 2d 572 (1947, siienitidiieanddalaianiiien 14

Wyatt v. Armstrong, 186 Mise. 216, 59 N.Y.S. 2d 502

-(S. Ct., N.Y. Co. 1945) .......ceccecerneee B

Zenn v. Anzalone, 1 App. Div. 2d 662, 146, N.Y.S. 2d~

286 (1955) ; 1 App. Div. 2d 773, 149 N.Y.S.2d

213 (1956) . Ssnieitsin oh sicagldasiesieibinaiile ications .F

Zenn Vv. dinibas: 10 App. Div. 2d 912 (lst Dep’t

1960), 11 App. Div. 2d 938, 210 N.Y.S. 2d 748 cian

Dep't | pean pide eta 10

Table of Statutes and Rules

Fed. R. Civ. P. 52(a) «........: E- 6

‘Securities sed Act, §14(a), 15 U.S.C.A. §78n

(1963) sasadieaniialipaniininldssscirigiaas . 1,5,17

Securities Exchange Act 92, 15 USS. C. rs §78aa

(1963) sci cele aahldnhebiosisihenbaglaeasiachoaiadeiasiaide ferecnnsess 1,12

Securities Exchange Act §28, 15 U. S.C.A. §78bb .

(1963) Pay ee nar ne tat ene 12, 14

Sew. CES Bebe -AR6B) ciao | 19

| Textbooks | |

' 7 Moore, Federal Practice 633-34 (2d ed. 1955) ........ 2

| IN THE

Supreme Court of the United States

OCTOBER TERM; 1965

Nb. 132 Aas

Marcaret L. Hour and Karritern L. McManon, individu-

ally and on behalf of all other shareholders of Alleghany ;

a similarly situated,

Potitionete,

against |

Autan P. Kirpy, Cuartes T. [retanp, Jr., Frep M. Kirsy

and ALLEGHANY CoRPORATION, :

. : Respondents.

- ON WRIT OF CERTIORARI TO THE UNITED STATES. COURT OF

; APPEALS FOR THE SECOND CIRCUIT.

Statement in Opposition to Motion of Randolph

: Phillips, dated February 4, 1966, for Leave to File a

Brief'ard to Make Oral Argument as Amicus Curiae

Phillips’ motion rests on a misconstruction of petition-

ers’ brief, and an incomplete recital of the relevant pro-

ceedings below. It clarifies, however, the fact that this

proceeding is a true collateral attack on a state court

judgment, based on a claim of preemption, and not a bill

for relief from fraud. Both Phillips arid petitioners con-

tend in essence that the existence of the Securities -

Exchange Act, §§ 14(a) and 27, 15 U.S.C.A. §§ 78n, 78aa

(1963), deprived the New York court of jurisdiction over

the Zenn* stockholders’ suit, even though the court decided

that the cause of action was rooted in state law, not the

Securities Exchange Act (Ex. K-137, R. 1640-41; Ex. K-

138, R. 1720).** -

We oppose Phillips’ motion on five grounds:

(1) Phillips’ petition misstates the course of* the pro-

ceedings in Zenn, where the issue of the state court’s

_ jurisdiction in the light of § 27 of the Securities Exchange

Act was adjudicated not once but twice, rio review being

sought in this Court. “General counsel for the plaintiff

stockholders in Zenn, the draftsman of the complaint

there, expressly supported the decision of the New York

_ courts that Zenn was a suit to enforce state law, not

one to enforce liabilities and duties created by the Securi-

ties Exchange Act. |

(2) The Court of Appeals en bane was correct in its

view that the New York courts’ decisions on the jurisdie- |

* Zenn, et al. v. “Anasiow, et al., N. Y. Sup. Ct. N. Y. Co., Index

No. 7244/1954 (Ex. 1, R. 701, opinions, Ex. K-137, R. 1592-1716;

Ex. K-138, R. 1717-1720). . Two related proceedings in the District

Court for the Southern District of New York are linked in various

ways to this action, but are not directly involved in this appeal, or

‘this motion.

** In a diversity case dealing with a sitatiads found to be one of

state law, a federal court can set aside a New York judgment only on

grounds which would justify collateral attack if like proceedings had ~

been brought in a New York court. Reiter y. Universal Marion

Corp., 299 F. 2d 449, 453 (D.C Cir. 1962) ; Q’Boyle v. Bevil, 259

F. 2a 506, 511-12 (5th Cir. 1958) ; cf., ‘Curb & Gutter Dist. No. 37

v. Parrish, 110 F. 2d 902, 907, 910 (8th Cir. 1958) ; Caterpillar

Tractor Co. v. International Harvester Co., 120 F. 2d 82, 85-86 (3d

Cir. 1941) (rule applied between district courts sitting in different

* states) ; 7 Moore; Federal Practice 633-34 (2d ed. 1955) ; cf. Griffith

v. Bank of New York, 147 F. 2d 899 (2d Cir. 1945), cert. denied 325

U. S. 874 (1945) where, however, the court found compliance with

New York law in any event. Id at 903. .

=e . ®

tion of the court in Zenn are res judicata, and entitled

to full faith and credit.

(3) Phillips* states that petitioners have abandoned |

question 5 of the Questions Presented in their Petition

for Certiorari. This is not so. Dressed in the language of

questions 1 and 2 of their Petition, question 5.is the

cornerstone of their argument.

(4) Kirby, although he had not theretofore been served

- or appeared, was made.a party to the Zenn eourt’s judg-

' ment approving the supplemental stipulation of settlement

(Ex. K-357, R. 2113), and is fully entitled to claim the

benefit of the Zenn judgment As res judicata. He in no

way “misled” the Court .of. Appeals below as to the deci-

sions on jurisdiction in Zenn. — :

(5) The. mation is not timely under this Court’s Rule

42(2), and is otherwise objectionable.

‘The Background of Phillips” Motion

The sole issue alleged, tried below and appealed in the

present proceeding (“Murchison”)* was whether respond-

_ ent Allan P. Kirby (“Kirby”) defrauded the Zenn court

by concealing “inside information” consisting of*favorable. .

income forecasts. of Investors Diversified Services, Ine.

(“IDS”), a Minnesota investment company, which he knew

or should have known at the time of a certain transaction

in 1949 and early 1950 (R. 174-75). The relief sought was

the setting aside of Kirby’s separate settlement in Zenn

(R.187-89).

* Murchison, et al. v. Kirby, et al., U. S. Dist. Ct., S.D.N.Y., 60

Civ. 3511 (R. 166). Opinions below, R. 2287-2388.

The District Court found after trial that the plaintiff

had failed to prove any wrongdoing by Kirby (R. 2325)...

On appeal with respect to ‘that issue—the only issue

pleaded and tried—the Court of Appeals unanimously

_ affirmed; finding, in the words of the dissenting opinion,

that “insofar as the plaintiff’s case here hinged upon estab-

lishing personal dereliction by-Kirby with respect to the

settlement hearings, this was not made out” (R. 2351).

The dissent, however, adopted a suggestion made for

the first time upon appeal, that two other Zenn defendants

(Robert R. Young and Robert W. Purcell) committed a

“fraud” upon the Zenn court, for which Kirby should be .

held responsible. The only support offered by the dissent

fer this theory was a statement of petitioners’ counsel

during the trial below, which the dissent truneated in such

a way as to make it appear to state the opposite of what

- the-record shows to have been said (R. 2351). The actual

statement’ of petitioners’ counsel (R.’ 6 06) was:

“Mr. Updike: Well, it seems to me, sir, that if

Mr. Kirby entrusts the responsibility to some extent .

of his being a. director of Alleghany, if he entrusts

some of that résponsibility to Mr. Young, then Mr.

Kirby cannot avoid accepting the consequences of

¢ whatever Mr. Young may have done, and I do not .

say that it was Mr. Young and I do not say for a

". moment that it was Mr. Purcell, and I do not know

who is responsible.” . (Italics added.)

The dissent (R. 2351) omitted the italicized portion

above, which showed that petitioners’ counsel was explicitly

disclaiming any frand by Young or Purcell,-and quoted

the first part as the sole basis for its theory that counsel

was claiming such liability.

No such claim against Kirby based on the conduct -of

Young’ or Purcell was alleged, suggested or tried before

Hs)

the District Court. On the contrary, petitioners specifi-

cally disclaimed any such wrongdoing by Young and

Purcell, or any claim that Kirby was jointly responsible

‘with them. Throughout the trial, petitioners’ counsel,

draftsinan of the amended complaint in Murchison, toak

the view that the. complaint raised no issues with respect .

to actions by Young, Purcell, or anyone except Kirby.*

Furthermore, the record. contradicts the dissent’s sugges-

tion that these parties acted jointly. o€ that there was

fraud on, the part of Young and Purcell.

The Evolution of the Jurisdictional Issue

In Zenn, plaintiffs and objectant stockholders (to whom

Phillips | was a consultant) claimed, inter alia, that the

transaction was fraudulent as a matter of common law

(Ex. 1, R. 702- 04) because Kirby, Young and Purcell

kept favorable: inside information from the stockholders

who ratified it. In addition, they claimed the transaction

‘was objectionable because ratified on the basis of a proxy |

statement which violated §14(a) of the Securities Ex-

change Act, 15 U.S. C. A. §78n (1963) (Ex. 1, R. 704-05).

The alleged concealment of this “inside information” was

pressed in Zenn by objecting stockholders as a reason for

not approving the settlement as fair and adequate. (Ex.

K-41, R. 1504-14, 1517-21, 1523-26, 1530-31). . The only dif-

ference in this respect hehe Zenn and Murchison turns

on the inferences to be drawn from the existence of 12

documents (not in evidence in Zenn) which petitioners’

* This was made doubly clear in plaintiffs’ successful-resistance to ~ :

Kirby’ s defense that indispensable parties had not been joined. (R.

206). Petitioners’ counsel said, “Far from being indispensable parties

the absent Zenn defendants are not even proper parties and would be

entitled to summary judgment were plaintiffs to have sought to join

them here.” ( sipmeen s Post-trial maply Br., p. 45).

counsel found in a new search of _the files of Kirby, ©

Alleghany and particularly of IDS (which was in the -—

control of the Murchisons during the pendency of Zenn.)

The courts below gave a short answer to the contentions

of petitioners’ counsel based on these documents. The 12

documents, they found, whether connected with Kirby,

‘Young, or Purcell, were at most_ cumulative of evidence

already before the Referee in Zenn. - ee

* Judge Dawson concluded that these documents, “which

were not called for at the hearings and most of which were

not in [Kirby’s] possession but were in the possession of

IDS” (R. 2325) were not “of such significance that they

would warrant the Court upsetting the decision. of. the

State court in any event” (R. 2324).

Judge Moore, for the majority of the Court of Appeals

panel below, concluded that at most, the documents

“would have been but cumulative evidence upon the. basic

issue of Kirby’s fraud” in Zenn (R. 2342). Judge Kauf- _

man, concurring below, found the documents basically

cumulative of information already before, the Referee in.

Zenn, and ‘not “sufficient to warrant upsetting the New

York judgment, as against Kirby” (R. 2349).

These concurrent findings of fact dominate the case.*

Faced with the force of Rule 52(a) as to their 12 docu-

ments, petitioners’ counsel attacked the jurisdiction of the

* Unless the Court reverses the: findings as “clearly erroneous”

- under Rule 52(a) Fed. R. Civ. P., it cannot and should not reach the

questions raised in one form by Phillips, and in another by petitioners.

This Court has always regarded itself as “concluded” by such con- .

current findings of fact by two courts below, in the absence of a “very

exceptional showing of error.” Comstock v. Group of Institutional |

Investors, 335 U. S. 211, 214 .(1948); Graver Mfg. Co. v. Linde,

336 U. S. 271, 275 (1949), aff'd on rehearing, 339 U.S. 605 (1950) ;

Pick Mfg. Co. v. G. M. Corp., 299 U. S. 3 (1936). Petitioners make

no attempt in their brief or their petition to challenge these findings

directly. °

state court in-Zenn. That attack was correctly rejected by

a unanimous opinion of the Court of Appeals for the

Second Circuit, sitting en bane.

Petitioners have re- presented their jurisdictional attack

in the form of an arguinent ‘based on preemption.

Randolph Phillips now seeks leave to present the jurisdic-

tional argument in the form in which it was unanimously

rejected by the Court of Appeals.

Phillips’ motion for leave to file a bricf amicus curiae

should be denied for the reasons set forth below.

~ Argument

me * Phillips’ Motion and Brief do not completely or

correctly report the decisions on jurisdiction |

made by the New York courts in Zenn.

With emphasis, Phillips’ brief (p. 6) states that the

1955-1956 decisions by the’ New York courts constitute

“the entire record on which the court below decided that

the jurisdictional issue was res judicata. PS

The record i is to the contrary.

On October 6, 1955, objectant Rosen moved in the New

York Supreme Court in Zenn to enjoin any further settle-

ment proceedings before the Referee on two grounds, one

of which was that the court lacked jurisdiction. over the

claimed violation. of §14(a) mentioned in the complaint

because of the “exclusive jurisdiction” provision of §27.

The.court denied the motion, and the Appellate Division,

First Department, affirmed and denied leave to appeal to

the Court of Appeals, Zenn v. Anzalone, 1 App. Div. 2d

662, 146 N.Y.S. 2d 286 (1955); 1 App. Div. 2d 773, 149

N.Y.S. 2d 213 (1956). No attempt was made to petition

for certiorari. — 3

_ The Appellate Division’s consideration of the problem

en objectant stockholders’ motion was far from perfune-

tory. The motion was most seriously contested. We attach

as an appendix the brief of Thomas F: Daly, Esq., counsel

for defendants* on the appeal to the Appellate Division,

First Department, from the denial of the motion by a Jus-

tice of the Supreme Court in New York. Phillips quotes

- a passage from pp. 15-16 of this brief (Br. p. 7). But

he neglects to point: out that from p. 3 to p. 15, Mr. -

Daly argued in most positive form for a conclusive de-

termination of jurisdiction. The passage Phillips quotes .

is obviously. an alternative, “fall-back” argument, in the

event the Court disagreed with his major’ contention.

Furthermoré, the fecord in Zenn shows that William

E. Haudek, Esq., a partner of Pomerantz, Levy and

Haudek, general counsel for the Zenn plaintiffs—the

draftsmen of the complaint—opposed Rosen’s jurisdic-

tional motion on the ground that the complaint stated “a

claim arising under the common law”, and that the refer-

ence to §14(a) was merely duplicative of the common law

aspects of the case, and, surplusage. His affidavit in

‘opposition, which was before both the New York Supreme

Court and its Appellate. Division, stated:.

«(2) The allegation of the complaint referring to

$14 of the Securities Exchange Act is but.a legal

conclusion. There is nothing in the complaint to

f suggest that the Securities Exchange Act was to be

the basis, let alone thé only basis, of the first cause

of action. The facts alleged in ‘the first causé of

action, including those relating to the false proxy

statement, clearly state a claim arising under the

common law; see In re.Scheuer, 50 N. Y. Supp. 2d .

500, 501 (S. Ct., N. Y. Co., 1942) ; Matter of R’ Hoe

* Mr. Daly’s representation did not include Kirby.

teak 9

& Co., 1387 N. Y. Supp. 2d 142, 148 (S. Ct., Bronx

Co., 1954). This Court has undoubted jurisdiction

to pass upon this common law-claim even if it be |

coterminous with a possible federal claim.” (p. 44*).

If, as Phillips claims (Br. p. 10), the party who brings

the suit really is master to decide what law he will rely.

upon, Mr. Haudek’s affidavit should end the matter. =

In addition, Phillips must have overlooked the fact that

when the issue was raised before the Referee, he ruled

upon it in his decision of November 17, 1958, (R. 1640-41)

in these terms: | ep

“Before diseussing the merits of these charges

and defenses, I must consider the objections which

have been made, particularly by the objectant

Rosen, to the jurisdiction of this-Court to pass upon

the settlement of this cause of action. __ |

“The objection is based on the contention that the

first cause of action rests in part at least upon the

Securities Exchange Act of 1934, and that See. 27

_ of ‘that Act vests in the Federal Court exclusive

jurisdiction of all claims based thereon.

_ “This jurisdictional question was raised by objec-.

tant Rosen at Special Term of this Court in the

form of a motion to vacate the order of reference

herein. This motion was denied by Mr. Justice

McGivern, and his decision was affirmed by the

Appellate Division, First Department (1 App.’ Div.

2nd 662, 146 N.Y.S. 2d 286, Exhibit 411). a

“While it is doubtful if anything remains of the

jurisdictional question after these decisions, even .

that doubt has been resolved by the recent decision

_ *“Papers on Appeal from Order” in Zenn before. the Appellate .

Division of the New York Supreme Court, 1st Department, October -

26, 1955, “Affidavit in Opposition to the application of Samuel R.

Rosen.” PAT Perm 5 © ‘

eB a Pe OE Pe eat ire 7

Ps “ :

of the United States Seite of ae for the eo-

ond Circuit, in Howard vs, Furst, 238 F. 2d 790

(1956). Upon substantially similar facts to those

at bar, the Court of Appeals with reference to a

‘cause of action based, as here, upon a false proxy

statement, held that ‘every essential element of

appellant’s case depends upon common law and the

statutes of the State of New. York,’ and: that

- ‘appellant’s claim is for violation of State created

rights, in no real or -substantial sense dependent

upon the provisions of the Securities Exchange Act

of 1934 relative to proxy statements;’ so that ‘the

_ allegations with reference to the proxy statement

constitute a mere excrescenee or superfluity tacked

on to what are otherwise sufficient allegations of a“ -

claim for relief under New York law.’

“Accordingly, the Court. of Appeals affirmed the

judgment of the District Court, which dismissed the

Complaint for lack of jurisdiction over the subject

matter.

“Since Howard v. Furst, supra, in all essential

respects is similar to the case at bar, it follows that

the provision of the Securities Exchange Act, con-

ferring exclusive jurisdiction upon the Federal

Courts, is inapplicable here, and that this Court

does have jurisdiction to pass. upon the fairness of

the settlement of this litigation, including the. first

cause of action in the Complaint.”

The Report of the Referce was confirmed by the Su-.

preme Court of New York, and “adopted as the decision”

of that court (Ex. K-138, R. 1720). The firal orders of.

-the Supreme Court approving the settlement in Zenn were

appealed to the Appellate Division, First Department, -

which dismissed the appeals without opinion. Zenn v.

Anzalone, 10 App. Div. 2d 912 (1st Dep’t 1960), 11 App.

Div. 2d 938, 210 N. Y..S. 2d.748 (1st Dep’t 1960).

The New York courts thus decided repeatedly that the

gravamen of Count I of the complaint in Zenn was rooted

in state law, not in §14(a) of the Securities Exchange

Act, and that the Zenn court therefore had jurisdiction of

the case. No effort was made by Phillips (who was

actively engaged in Zenn) or by any other’ stockholder or

stockholders’ group to obtain further appellate review, in

the Court of Appeals of New York or in: this Court, ,of

the Supreme Court’s decision.* |

2. The litigated decision of a-New York. court

on its subject matter jurisdiction is entitled

. to full faith and credit, as the Court of Appeals

held here. ——s. ;

The New York courts passed _on the jurisdictional:

‘questions not once, but. twice. Their decisions could

have been reviewed by: direct appeals to the Court of -

- Appeals of New York and to this Court. This was not

done. In this state of the record, the litigated decisions

of the New York court on its jurisdiction and on the

nature of the case before.it are entitled to full faith

and credit, and are res judicata. Durfee v. Duke, 375

U. S. 106, 111, 116 (1963); Cook v. Cook, 342 U. S. 126

(1951); Sherrer v. Sherrer, 334 U. S. 343, 350 (1948) ;

' Coe v.. Coe, 334 U. S. 378 (1948); Davis v. Davis, 305.

U. S. 32, 40 (1938); Treinies v. Stmshine Min. Co., 308

U. S. 66, 78 (1939); Baldwin v. Iowa State Travelling

Men’s Ass’n; 283 U. S:. 522, 525-26 (1931); American

_ Surety Co. v. Baldwin, 287 U. S: 156, 166-67 (1932).

* Phillips was an active pafticipant in Zenn, associated with coun-

sel for obiectant stotkholders who pursued the jurisdictional issue.

(R. 481-82). . His brief-does not explain why he is not now estopped

to attack objectant stockholders’ decision to make peace and consent

to the judgment approving the settlement. ‘

Thus petitioners are forced to invoke extreme doc-

trines of ‘preemption, and must claim now, as Phillips —

does frankly, that the existence of §27 of the Secur-

ities Exchange Act ‘would permit this Court to treat

as totally void the entire elaborate six-year proceeding in

Zenn—motions, hearings, settlements, judgments and all—

disregarding the jurisdiction expressly left in the states

under $28 of the same Act.* i.

There is no hint of support. in J. I. Case Co- v. Borak,

377 U. S. 426 (1964) for such a position. That case was a

direct review of one aspect of a federal court proceeding

found by the trial court to be based on the Securities Ex-

change Act. The Court could not and did not consider

the problem of collateral attack by federal courts on .

state court judgments—the sole issue in the present pro-

ceeding—and did not qualify or weaken the authority of

Durfee, American Surety Co. v. Baldwin and the other

cases mentioned aboye, in any way. The principle of

‘finality which those decisions représent is fundamental to

the orderly life of any judicial system, and particularly of

that. the Referee. was relying on cases ovérruled in Borak.

(Br.,. pp. 14-15). But Borak does not deal with the

‘status: of a state court judgment determining that the

_ our federal system. | aie ra

Phillips seeks to invoke Borak sag by inferring

‘ease before it was rooted in state. law, rather than: the.

Securities Exchange Act. In Borak the Court was at

pains carefully to distinguish Dann v. Studebaker Pack-

* Section 28 of the Securities Exchange .Act provides “(a) The

rights and remedies provided by this chapter shall be in addition to

any and all other .rights and remedies that may exist at law or in

equity .. .”. The jurisdiction of stat€ regulatory agencies is also

specifically preserved. 15 U.S.C.A. §78bb (1963). 7

ard Corp., 288 F. 2d 201 (6th Cir. 1961), where this

Court’ said, “it was ‘held that the - ‘preponderance of

questions o% state law which would have to be interpreted

and applied in order to grant the relief asst - is:

so great that the federal question involved ... is really

“negligible in comparison.’” 377 U. S. at 434, ‘This find- -

ing was parallel to that made by New York: courts in -

Zenn. The issue before this Court in Borak was whether

the federal courts: were limited under §27 to declar-

atory relief in civil suits to enforce the” Securities Ex-

change Act. Borak decided that in a ease whieh the

lower court found to be. one to enforce duties or liabilities

created by the Securities Exchange Act, the’ federal court

_ eould provide all- forms of judicial relief necessary te

resolve. the controversy before it-in the light of the

- policies of the Act.

The clarification of the Jaw of sensiian accomplished

by Borak defines another aspect of the problem of res

judicata raised by Phillips. Since the jurisdictional issue

raised in Zenn was decided in accordance with the state’

- of the law as it then existed, the final Zenn judgment. _

should not now be disturbed because of a change in deci-

sional law ‘made five years alter that judgment was

entered.

As movant Phillips points out (Br., p. 14), under the

- federal decisional law as it existed throughout the course

of the Zenn proceedings, -no private.or derivative right to

full remedial relief was recognized as generally available RS

for a violation of §14(a). See Dann v. Studebaker Packard

Corn., 288 F. 2d 201 (6th, Cir. 1961) ; Howard v: Furst, 283

F. 2d 790 (2nd Cir. 1956), cert. denied, 353 U. S. 937

(1957). It was in reliance on the law as it then existed

that the Zenn Referee, ir® his report,. rejected objectant

Rosen’s jurisdictional challenge (R. 1640-41). |

OS ae ee ae ee

. m é

14.

' Zenn was therefore not a case where the state court

- attempted to evade the effect of the federal jurisdictional

legislation. On the contrary, the state court applied the

federal decisional law as it then existed, and under. which

full relief could be had only under, state law. The law of

New York did,-and still does provide relief for injuries

resulting from the use-of falsé or misleading proxy state-

ments., E.g., Wyatt v. Armstrong, 186 Mise. 216, 59 N.Y.S.

2d 502 {S. Ct. -N: Y. Co. 1945); Hecht v. Farnsworth T.V.

& Radio Corp., 89 N.Y.S. 2d 724 (S. Ct, N. Y. Co. 1949).*

See’ Securities ‘Exchange Act §28, 15 U.S.C.A. §78bb

(Way. |

Some four’ years. after Zenn was finally decided, as

Phillips points out (Br. pp. 14-15), this Court clarified |

the remedial law of the Exchange Act. J.-J. Case Co. v.

Borak, 377 U. 8S. 426 (1964). But a change in_ the

decisional law,. after all proeeedings in an action have

been completed and a final judgment entered, is no ground

for collateral attack on the jurisdiction of the court which

rendered that judgment. Chicot County Drainage Dist. v.

* Movant’s cases at pp. 13 and ‘15 of his brief do not bear on the

problem. Thus only violations of the Securities Exchange Act were

eaded in American Distilling Co. v. Brown, 295 N.Y. 36, 64 N.E. 2d

7 (1945) (§$16(b) claim for short-swing profits) ; Mekrut v. Gould,

16 Misc. 2d 326, 188 N.Y.S. 2d 6 (S. Ct., N. Y. Co. 1959) (§8 claim for

_ failure to meet capital requirements ) ; Standard Power & Light Corp. v.

Investment Ass’n, 51 A. 2d 572, 579, 29 Del. Ch. 593 (1947)

(X-14A-1 claim for failure to include proxy statement when soliciting

proxy). In Levine v. Silverman, 43 Misc, 2d 415, 251 N.Y.S. 2d 68

(S. Ct., Monroe Co. 1964), the New York court struck a §10(b)

claim for lack ofjurisdiction, but nonetheless allowed the complaint to

stand on the same facts insofar as it stated a claim under New York

law. Malkan v. General Transistor Corp., 27 Misc. 2d 677 207 N.Y.S.

2d 345 (S. Ct., Queens Co. 1960), was an anticipation by a New York

court of what Borak thereafter held. For a similar anticipation by a

federal court, also after Zenn, see Kauder v. United Board & Carton

Corp., 199 F. Supp. 420, 421 (S.D.N.Y. 1961).

= antl

Baxter State. Bank, 308 U.:S. sf (1940); Ripperger v.

' A.C. Allyn & Co., 113 F. 2d 332, 333 (2d Cir.), cert. denied,

311 U. S. 695 (1940). “If such was the rule, so-called

final judgments would lose most of their finality.” Berry-

hill vy, United States, 199. F.2d 217, 219 (6th Cir. 1952).

3. Petitioners have not abandoned question 5 ‘of

their Questions Presented.

The sole ground ady anced to justify Phillips’ appear-

ance as amicus curiae is that petitioners have “abandoned”

question 5 of the Questions Presented in their Petition for

Certiorari.* But Phillips’ position rests 6n a misappre-

hension of petitioners’ brief. - Petitioners’ entire legal

argument here rests on the substance of: question 5.

Petitioners’ brief recognizes that their collateral attack

on the jurisdiction of the New York court in terms of the

theory of question 5 faces insuperable obstacles, by reason \

of the New York courts’ decisions on jurisdiction. Cases

like Durfee and American Surety Co. v. Baldwin, supra,

bar any attempt to urge question 5 in the. form in which

it was framed. ;

Petitioners are likewise aware .that the plan of the

Securities Exchange Act is not one, of wholesale pre--

emption of state law. It is not the federal incorporation

‘law which Congress has often considered, but never

passed. It does not supersede state blue-sky laws, state

corporation laws for companies doing interstate business,

or state court, jurisdiction in stockholders suits and other

suits in which state corporation laws, and laws against

“* “5. Did the state court have jurisdiction to authorize the settle-

ment of the exclisive federal claim being assérted here? If not, can .

that court’s approval of the setflement bar prosecution of that claim

which is ‘still pending in the federal district court?” Petition for

Certiorari, p. 4.

i | [i , ‘en 4 mys

Hay SRR]

fraud, are interpreted. Cohen v. Beneficial Indus. Loan

Corp., 337 U. 8. 541 (1949). On the contrary, its plan is to:

superimpose federal rights and duties on those created by ©

state law, as §28 of the Act makes clear, with peaceful co-

existence contemplated for both. In this respect, the

Congressional. purpose in passing the Securities Exchange

Act was altogether different from the approach it adopted

in seeking to bring the chaotic and dangerous strife be-

tween labor and managenient under the control of law in

‘its basie labor legislation of 1935 and .1937, San Diego

_ Building Trades Council v. Garmon, 359 U. S. 236, 240,

244-46 (1959); Hanna Min. Co. v. Dist. 2, M. E. B. A., 86

S. Ct. 327, 331-32 (Dee. 6, 1965)*

Conscious of these hurdles, petitioners’ counsel present

‘the issue of question 5 indirectly in the language of ques-

_ tions 1 and 2 of the Questions Presented.** They seek a

* Nor is the problem of the Zemn court’s jurisdiction in the light |

of §27 ar. in any way to that considered in Kalb v.°

Feuerstein, 308 U. S. 433 (1940), where the court carried out the

express purposes of ‘Congress i in passing the Frazier-Lemke Act, 11

U.S.C.A. 203 (1946) for the relief of farmer debtors during the

- depression of the ‘Thirties. There the Congressional purpose was to

protect farmers completely against mortgage foreclosure once a farmer

filed his petition under the Frazier-Lemke Act.

** “1 Where federal statutes (Section 14(a) of the Securities

Exchange Act of 1934 and Rule X-14A-9) impose upon corporate

directors standards, of disclosure deemed necessary for the protection

of the interests of minority shareholders, must a federal district court

apply a comparable federal standard of disclosure in determining

whether derivative actions alleging violation of those statutes have

been fraudulently settled?

“2. If application of a comparable federal standard of disclosure

requires that the settlement be set aside, should the fact that such

settlement had been approved by a state court judgment prevent a

federal district court from. barring, the use of such judgment in a

pending parallel federal action or from setting that settlement aside

because of (a) the doctrine of Erie v. Tompkins, (b) the principles.

of res judicata, or (c) considerations of comity, even though the *

fraud leading to the settlement has been committed on the federal as

well as the state court: ?” Petition for certiorari, p. 3.

review of the New York courts’ jurisdiction by claiming

that Zenn can be treated as a case under §14(a). of the

Securities Exchange Act—despite the New York courts’

final determination that it wasn’t—for two purposes:

(1) to-determine What constituted a. “fraud” on the state

court in Zenn, and (2) to invoke the “fraud” so described

as a ground justifying collateral attack by a federal court

on a state court judgment.

_ Petitioners use this circuitous route to seek a review

of the Court of Appeals’ unanimous en bane decision re-

jecting the position advanced hy Phillips because a frontal

attack is barred by the force of the law on which the Court.

of Appeals based its determination. Petitioners there-

fore argue that §14(a) of the Securities. Exchange Act,

dealing with the process of soliciting stockholder votes,

should be interpreted to establish a- special burden of

enquiry and of coming forward which the New York court

should have required Kirby to meet; equally, that it should

be read to establish a special senidard ‘defining the avail-

ability of collateral attack on state court judgments for

“fraud.” A new. team of lawyers in this proceeding ‘has

gone over the files of Kirby, Alleghany and especially of

IDS (under the control of the Murchisons while Zenn was

_ pending) and found some 12 documents which stockholders’

counsel in Zenn either missed or decided not to use. Peti-

tioners now- say that §14(a) required .Kirby to have

’ offered these 12 cumulative documents ,in evidence in

‘ -Zenn. They add that the New York court’s failure to

enforce such a burden on Kirby in Zenn was not error,

but something more, converting its judgment into a nullity,

and justifying collateral attack in the name of “fraud.”

Thus petitioners argument would achieve the same result

advocated by Phillips—complete preemption.

Since the substance of Phillips’ argument runs through

- the petitioners’ brief, there is no need for an additional

brief.

4 Kirby was made a party to the final judgment

in Zenn, and is entitled to the protection of

that judgment as res judicata.

Phillips cannot be heard to urge that Kirby be estopped —

to claim the benefit of the state judgment. as res judi- -

eata on the jurisdictional issue. Kirby expressly con-

sented to the jurisdiction of the Zenn court for the purpose

of its entry of the judgment approving the settlement,

which is here under collateral attack (R. 2112).

No settlement of litigation would ever be undertaken

if the parties did not believe that a court’s judgment

approving that settlement after a full hearing was pro-

tected by the principle of res jiidicata, and entitled to

full faith and credit. Indeed, one of. the principal pur-

poses of the Zenn court’s decision was “to bring an end to

.* this protracted litigation with its attendant expenses and .

-constant demands upon the time of Alleghany’s officers.”

(Ex. K-138, R. 1719)

5. Phillips’ Motion is untimely and otherwise

objectionable. .

Phillips protests that his motion is timely because made

within anly ‘two weeks of thte time he learned of petition-

ers’ “abandonment” of their question’5 on the jurisdiction.

of the Zenn court. He claims “a double interest in this -

eage,” both as a holder of 100 shares of Alleghany stock

since November. 1954, and as “a representative of the

stockholders’ gr eup” from. whom “the suppressed docu-

-ments described by petitioners’ brief herein were withheld”

(Motion, p. 2; Br. p. 2).

Phillips’ claims here are dubious.’ His acquisition of

Alleghany stock in November 1954 (shortly after the Zenn

action was commenced by others, and long after the

1949-50 exchange complained of therein) gives him no

special standing in equity. Phillips was present and par-

ticipated as a defendant throughout the trial below, during |

which ‘petitioners’ counsel repeatedly charged that the’

Zenn court had been defrauded by the concealment ef vari- -

ous documents marked in evidence. At no time did Phillips

indicate or express any opinion that he or-his “group” had

been defrauded by the failure of anyone to adduce evi-

dence, nor did. he so testify below when this charge was

presented. As a “representative” of the stockholders

group who “negotiated the Kirby settlement at issue here”

(Motion, p. 2), Phillips was one of the foremost “pro-

ponents” of the settlement wlien it was finally submitted

to and approved by the New York Supreme Court. His

concern at this late date because of his disagreement with

the approach in petitioners’ brief is hardly ground for an

eleventh hour motion made. two. weeks after the time for

filing a brief amicus had expired (Sup. Ct. Rule 42(2)).*

* The brief also contains several baseless charges of personal wrong-

doing (R. 183-84). Thus, at p. 3 of his brief, Phillips asserts that

Pomerantz, attorney for the: Zenn plaintiffs, was found guilty of

“ ‘unconscionable conduct’ ” ‘by the federal court in 1955. How-

ever, a reading of the opinion cited and quoted by. Phillips fails to

reveal any such finding, and none was in fact made. Breswick & Co.

v. Briggs, 135 F. Supp. 397, 403, 406 (S.D.N.Y. 1955).

. Again, at p. 21, Phillips refers to what Judge Moore “stated with

respect to the transaction ‘whitewashed’ by the Referee.” One may

search Judge Moore’s opinion in vain for the quoted characterization

. supplied by Phillips. Judge Moore did say that “as long as there are

lawyers there will be expressions of honest belief that- better settle-

ments could have been obtained had subsequent counsel been in charge

initially.” (R. 2343).

We do not remark on the comments of like character coricerning

the payment of the Referee’s fee and-attorney Pomerantz’s fee ( Br.

p. 21). ~

* 20

Phillips ‘accepted the jurisdiction of the Zenn court in

1959, and is collaterally estopped from attacking it here.

Caterpillar Tractor Co, v. International Harvester Co., 120

F. 2d 82, 84 (3rd Cir. ipl).

Conclusion

Recognizing their failure of proof on the case against

Kirby, which was the only one pleaded and tried (R. 174-

75), and their equal failure of proof on their new case —

against Young and Purcell, first asserted before the Court

of Appeals and now presented (without benefit of plead-

‘ings or trial) on the strength of a dissent below, petition-

ers have turned to their argument based on §14(a)

of the Securities Exchange Act, raised in this Court for

the first time, in a final effort to reopen this bitter episode

in the corporate war between Allan P. Kirby and the

- Murchison brothers. |

' Since petitioners’ argument is the functional equivalent

of Phillips’ contention under question 5 of the Questions

Presented in the Petition for Certiorari, there is no need

here for an additional brief on the point.

In the event, however, that this Court should grant

Phillips’ motion, we respectfully request (1) permission to

file a reply brief with the, Court and (2) fifteen (15) min-

utes additional time for oral argument in reply thereto.

Respectfully submitted,

Wa ter R. MANSFIELD,

Attorney for Respondents,

‘Attan P. Kirsy, Cuartes T.

IRELAND, Jr. and Frep M. Kirsy. |

_Evcene V. Rostow,

Joun J. McCann,

(Of Counsel.

;

: .

To be argued by -

THomas F. Day

«Supreme Court

OF THE STATE OF NEW. YORK,

AppaLLaTe Drvision—Fmst DePaRTMENT.

\ .

Sapre Zann, et al.,

' + Plaintiffs-Respondents,

against |

J. J. Anzacone, et al.,

Defendants-Respondents.

Samuet R. Rosen,

Petitioner-A ppellant.

-BRIEFSFOR DEFENDANTS-RESPONDENTS

° YOUNG, ET AL.

This is an appeal from an order of the Supreme

Court, New York County (by Mr. Justice McGiv-

‘ern), denying appellant’s motion to vacate an or-

der of reference previously entered in this action. —

This action arises from the consolidation of ten

stockholders’ derivative suits brought on behalf

of defendant Alleghany Corporation (“Alleghany”

hereinafter). The actual defendants aré present

_and past directors of Alleghany and other per-

sons allegedly associated with them.

The parties agreed to settle the action subject

to court approval. Upon Alleghany’s application’

+ (229), the ine below (by Mr. J ustice McGiver n)

| entered its order of August 18, 1955 appointing a

‘Referee to, hear and report on the fairness of

the proposed settlement and directing that all

stockholders of. Alleghany be notified of the hear- _

ing (211). A notice approved by the Court and

_ setting forth the full terms ‘of the: settlement

agreement was sent to the stockholders (223, 244).

The hearings before the Referee commenced on

- ‘September 19, 1955 (127) and have heen regularly

e ontinued. Their transcript comprises more than

2,000 pages to date and close to 400 exhibits have

heen marked i ‘in evidence. - ;

Appellant i is one of a group who have announced

their intention of conducting a proxy fight to oust:

the present management of -Alleghany, including

-. gome. of the present defendants, see Rosen v..

Alleghany, 133 F. Supp. 858 (S. D. N. Y., 1955),

and the instant action is a part of their campaign.

Appellant Rosen, not a party to this action, is

a. stockholder of Alleghany and has, as such, ac-

tively participated in the hearings (127-8). After

two unsuccessful attempts by appellant’s attorneys.

‘to.stay these hearings in the federal court (124-"

6), he moved in the Court below on September

15, 1955 for a stay of the settlement hearings and

for an order directing Alleghany to issue a supple-

mental notice to stockholders advising them of the

" pendericy of a companion action in the federal .

court (21-3). The Court below. (by Mr. Justice

McGivern) denied this. motion on September 28, .

‘1955 (126-7) ; and no —_ has been taken from

this ~~

.. Thereupon, on October 6, 1955, appellant Rosen

moved to vacate the order of reference altogether

(13). Appellant made this motion seven weeks

rane

after the order of*reference and long after the

commencement of the settlement hearings. «He |

offers no excuse for this delay. His asserted

grounds are (1) that the Court lacks jurisdiction

of one of the numerous claims involved in this

action; (2) that the proponents of the settlement .

have “unclean hands” because. they did ot inform

Mr. Justice McGivern.of the BS¥aRe'6f b related -

action in the federal court; and (3) that the notice

of hearing sent to the stockholders was inadequate

(26-7; App. Br. 2). From the order of Mr. Justice

McGivern denying this motion .(7), Rosen has —

taken this appeal.

| POINT'I =

The Court below has jurisdiction to deter-

mine the fairness of the proposed settlement

_’ because none of the causes of action herein

_ is subject to exclusive federal: jurisdiction.

- Appellant contends that the Coyrt. below lacks

jurisdiction to.pass upon the proposed settlement -

because, ‘so he claims, the first cause of action of |

the complaint hereivi is based upon the Securities

Exchange Act of 1934 whose § 27 provides ,for

exclusive federal jurisdiction. Concededly, the -

other ‘seven causes of action (alleging an even

greater nufnber of charges’ of wrongdoing) are

within the Court's undisputed jurisdiction.

7 - Appellant’s~ contention is predicated = the

allegation of the complaint that a proxy statement

issued by Alleghany violated the Exchange Act

(313). That allegation, however, must be read in

the context of the factual allegations set forth in

the first cause of action. Appellant carefully re-

frains from summarizing those facts. Upon-con-

a of those facts it will be seen that:

\ : pee | |

* te ree aoe

Se ‘.

(a): The first cause of action states facts

constituting ordinary common law fraud and

deceit (and states a cause of action sounding

in conspiracy and another for failure of. the

defendants to conform to the terms -of the

board resolution authorizing the transaction *

attacked) as to which the Court’s a

_ is unquestioned;

(b) The sufficiency of the cause of action

‘ would not be impaired if the allegation of

.° violation. of the Exchange Act were elimi-

nated from the complaint; accordingly

(e) Upon identical facts the federal court

has held not only that it lacks exclusive jur-

_ isdiction of a claim of this character, but that -—

~it has no jurisdiction at all.. Lapchak v.

Sisto, C. C. H: Fed. Securities Law Reporter,

No. 90721 (D. C., S. D. N. Y., opinion of July

20, 1955, by Dimoek,.D. J.). A copy of the Lap-:-

chak opinion is set forth in the ~ecord (148-

162). Judge Dimock held that the plea of:

violation of the Exchange Act was “either

mere surplusage or a mere pretext for asser-

tion of federal jurisdiction” (161).

Although the ‘Lapchak opinion was forcefully |

called'to appellant’s attention in the Court below

- (130), appellant passes it over in silence—appar-

ently in the hope of having the last word. in an

attempt to distinguish that case in his reply brief.

We proceed: to show the complete analogy of

the first cause of action at bar to the claim al-

leged in Lapchak v. Sisto, supra. .

The first cause of action here alleges, in “hort

(290-316): In 1949 Alleghany owned substantial

amounts of the stock of a corporation known as

‘Investors Diversified Services, Inc. (“IDS” here-

inafter)- (297-9). In. mber 1949 Alleghany’s

board of directors resolved ta permit Alleghany’s

.. officers to exchange preferred stock of. Alleghany

* held by them for some of the IDS stock owned by

Alleghany: the exchange was to be subject to

stockholder approval (299-300). Two of ‘Alle- -

ghany’s officers, the defendants Young and Kirby, .

accepted’ that offer and tendered a large amount

of Alleghany preferred stock to be exchanged for

IDS stock (300-2). Alleghany thereupon solic-

ited stockholder approval of this exchange by

~ means of a proxy statement which was false and

misleading in that it failed to reveal various facts

indicating that the IDS. stock to be surrendered

by Alleghany had much greater value than the ~

preferred stock which Alleghany was to receive

(302-4, 309-13). On the strength of the proxies

‘procured through this proxy: statement, ‘Alle-

ghany’s management secured stockholder ap-

proval of the exchange (314) which was there-

upon consummated (305-7).

In addition ‘to these factual averménts, the

complaint states as a conelnsion of law that the —

proxy statement violated § 14(a) of the Exchange

Act, 15 U. S. C..§ 78n(a).

Compare these semetions with those in Lap-

chak v. Sisto, supra.. That was a stockholder’s

derivative action brought on behalf of Barium

Steel Corporation. The complaint alleged that

some of Barium’s officers, together with their

associates, owned the stock of a corporation

known as Republic Industries, Inc. , The direc-

tors of Barium resolved to acquire the Republic

stock and to issue new Barium stock in exchange .

therefor. In order to carry out the plan, it was -

necessary to increase Barium’s authorized capital

stock. Barium’s management solicited the stock-

a ; ; ; 6 <

_ holders’ approval of the capital increase ” means —

of a proxy statement which was false and mislead- |

ing in that it failed to set forth various facts in-

dicating that the stock to be issued by Barium had

much greater value than the Republi stock which

Barium was to receive. On the strength of the

proxies procured through this proxy statement,

Barium’s management -obtained the necessary

stockholders’ approval of the capital increase;

and the exchange of Barium stock for —

stock was thereafter carried out.

In addition to these factual allegations, the

‘Barium complaint stated the legal conclusion that

the proxy statement violated 4 14(a) of the Ex-

‘ change Act; and it invoked federal jurisdiction on

the basis of § 27 of the Exchange 7 15 U.S. C.

-_ 78aa.

~ Such being the allegations ye ae —

plaint, Judge Dimock held (153, 159-62) :

“T am convinced that this court has no jur-

isdiction over the subject matter of this ac-

ao" ;.

“Even plaintiffs concede that if the proxy

\. statement were followed by a fair exchange

the directors would not be liable to the corpo-

ration. Also, it is clear that, had the proxy

statement been- perfectly lawful but followed

by an unfair exchange, the directors would be

liable for damage sustained and profits real-

-ized in violation of their fiduciary duties.

“The common plan, as plaintiffs allege it, >

was to foist a less valuable block of stock of

Republic upon Barium in exchange for a more

valuable block of stock of Barium. The -in-

creased authorization and related false proxy

statements were merely incidental to the plan.

Since the liability asserted by plaintiffs may -

be proved without regard to the proxy state-

ee | of ia

ments and cannot be proved without regard to

the alleged breach of fiduciary duty it is im-

possible to say that plaintiffs are asserting

a right under or created by a federal law. The

allegations as.to the proxy statements are

either mere surplusage or a mere Foitine for.

assertion of federal jurisdiction.

Citing au-

. thorities.]

“The motions to dismiss are granjed on the

ground of lack of federal jurisdiction.”

The complaint in Lapchak v. Sisto, supra, is in

ail essential respects analogous to the first cause ©

of action at bar. There, as here, the corporation

was to exchange stock owned by it for stock owned

hy. its directors. There, as here, the exchange re-

_ quired stockhalder approval. There, as here,

stockholder approval was secured by a proxy state-

ment alleged to have been false and misleading in

that it failed to-set- forth various facts showing the

disproportion between the value of the stock to

be surrendered and the value of the stock to be.

acquired by the corporation. There, as here, the

~ proxy statement was.alleged to violate § 14(a) of

the Exchange Act. There, as here, the approval

.of the stockholders thus secured was followed by

the actual consummation of the exchange. The

federal court’s holding that it was without_juris—

diction under § 27-of the Exchange Act compels

the conclusion that the first cause of action at bar

is likewise outside the scope of federal jurisdic-

tion—and certainly not subject to the exclusive .

jurisdiction provided by § 27.

We submit that this decision .of the federal -

court concerning its own jurisdiction carries more

than the ordinary weight in this Court. Just as

federal courts yield to the construction of state law

by state courts (Erie R. Co. v. Tompkins, 304 U. S.

64), so the state courts yield to the delimitations

SS —

- of federal jurisdiction announced by federal court

decisions.

In this case, Judge Dimock’s decision in the

. Lapchak.case gains added weight from the recent.

decision of the Court of Appeals: for the Second

- Circuit in Subin v. Goldsmith, 224 F. 2d 753 (C. A.

2, 1955). The complaint there, like the first cause. °

of action at bar, stated a claim based upon a proxy _

statement alleged to have been false and violative

of §14(a) of the Exchange Act.: The majority

of the Court said (224 F. 24, at 774): |

“In imine it 38 at least doubtful that it was

the intention of the Congress to create any

substantive rights by the provisions of Sec-

tions .14(a) and 29(b) of the Security Aet.”

—~ We submit that the Court hee jertndicthen: -

-approve the settlement of the first cause of action -

herein and that § 27 of the Exchange Act in no

wise impairs that jurisdiction.

Appellant’s brief (pp. 12-13) charges that we:

- have elsewhere expressed the belief that the claim

alleged: in the first cause of action could be predi-

cated on the Exchange Act. A careful reading.

~~. will show that our own statements said only that

the complaint alleges a violation of the Securities

Act of 1934. This is patently true. We have

never conceded that there is a cauge of action

which arises from such a violation. The Lapchak

and Subin cases now establish that there is no

such cause of action.

POINT II

Even if (contrary to the Lapchak case, supra)

the Securities Exchange ‘Act aspects of the

first cause of action were cognizable in the

federal court, the state court would still have

jurisdiction to pass upon the common law

fraud claim alleged in the first cause of action.

We shall assume, for argument under this point-

head, that the first cause of ‘action, so far as it

alleges a violation of the Exchange Act, is cogniz-

able in the federal court pursuant to § 27 of that

Act. The first cause of action alleges, however,

facts sufficient to constitute a claim for common. °

law fraud and deceit.” We shall show-that the

Court below is not-prevented by § 27 of the Ex-

change Act from approving a settlement: of that

common law claim. a

1. The dllegation of the complaint that Al-

leghany’s proxy, statement violated the Exchange

Act is a bare conclusion of law. Stripped of that

' legal conclusion, the ‘first cause of action clearly.

alleges facts constituting a claim for common law.

fraud. §28(a) of the ‘Exchange Act, 15 U.S. C.

§78bb(a), expressly preserves plaintiffs’ right to

prosecute that claim in the state court, unham-

pered by the jurisdictional limitations of § 27. So

far as. here pertinent, § 28(a) of the Exchange. ,.

Act provides: rss

“The. rights and remedies provided by this

‘chapter shall be in addition.to any-and all

_ other rights and remedies that may exist at

law or in equity; but io person permitted to

maintain a suit for damages under the provi-

sions of this chapter shall recover, through

'- satisfaction of judgment in one or more ac: .

Riise Neil saiersidtiersiee se

—_—

tions, a fotal amount in excess “of his actual,

_.—@amages on account of the act complained -f.

e® @ @)»)

The impact, of this provision upon. the case at

"bar is plain. To the extent that ( contrary to the

_Lapchak ease, supra). the claim) may be said to

rest upon a violation of the Exchange Act,’it is .-

subject to the exclusive federal jurisdiction. But

to the extent that the same facts spell out a claim |

for common law fraud, plaintiffs are free to assert

it in the state court, and the state court has un-

questionable jurisdiction to approve the settlement ;

of that claim.

nik different conclasion would lead te intoler-

Able results. For illustration we refer to $ 10(b)

“of the Exchange Act, 15 U. S. C. § 78)(b), which:

forbids fraud in the-sale of securities. It is well

settled that a defrauded purchaser of securities

‘may sue the seller for damages under this provi- -

sion; Apemaagh v. Raytheon.Mfg. Co., 188 F. 2d

783, 787 (C. A. 2, 1951); Fratt v. Robinson, 203 F.

2d 627 (C. A:.9,-1953). If the defrauded pur-

chaser asserts his claim under the Exchange Act_

he must, of course, ‘proceed in the federal -court.

> But that possibility does not preclude him from

‘asserting a claim for common law fraud; and if

he asserts that claim in the state court, $ 28 of the

. Act clearly preserves: for him that state court

remedy. As was held:-in Abraham v. Selig, N. Y.

L. J. 1939, p. 2709, col..3 (Sup. Ct., N. Y..Co., not

- otherwise reported ; opinion quoted in. full) :

“The complaint contains 61 causes of action

on behalf of 33 plaintiffs. Thirty-eight of the

causes, which are substantially identical, are

alleged against the defendants comprising the ~

firm of Homes & Davis, who move to strike.

certain allegations from each of the 38 causes,

or, in | the alternative, to require an amended

complaint separately stating and nunibering

the two distinct causes stated in each of the 38

causes. It is contended. that each cause al-

.. leges a common-law action in fraud and de- -

‘” ceit and a statutory action under the provi-

sions of the Securities Exchange Act of 1934,

and that the allegations relating to that act

- should be stricken. The act, however, spe-

cifically provides that all. remedies created by

it and enforceable in the federal. jurisdiction

_- only, shall be in addition to all other existing

- rights and'remedies. Thus plaintiffs are not

precluded from praceeding upon the common-

law cause for fraud and deceit. They ‘may

also rely upon incidental violations of the act

as constituting part of the alleged wrong. The

motion is therefore denied. Order signed.”

The decision demonstrates these propositions —

relevant to the case at bar: |

(a) The same facts may give rise to a

‘Statutory claim under the Exchange Act and

to a common-law claim for fraud. |

(b) Although the statutory claim is subject

to exclusive federal jurisdiction, the concomi-

tant common law claim is cognizable in the

state court. |

(e) The state court does not lose jurisdic-

tion of the common law claim even though the .

complaint contains an jncidentai allegation

that the Exchange Act-was violated.

The first cause of action at bar states facts con-

stituting a common law claim for fraud and is .

therefore cognizable in the state court. Even if

the same facts should be,held-to give rise to a

statutory claim which would be subject to. ex--

clusive federal jurisdiction, § 28 of the Act-would —

nevertheless preserve the state court’s jurisdic-

. i .

tion over the common law claim. The allegation

that the proxy statement violated the Exchange

Act is at most conclusory and incidental and_.does |

not destroy the jurisdiction of the state court.

The same. conclusion was reached in two Dela-

ware cases, both entitled Kaufman v. Shoenberg,

one decided by the Court of Chancery and the ~~

other by the federal District Court. In both cases

a stockholder attacked the same stock option plan

upon the ground, among others, that the. stock- -

holders” approval of-the plan had been secured by

a false proxy statement. In the state court action

the plaintiff based his claim upon the common |

law, in the federal court upon the alleged viola-

‘tion of the Exchange Act. The state court action. .

was the first to go to trial; the Chancellor enter-

-. tained jurisdiction and dismissed the claim on the

merits because the proxy statement was not false.

Kaufman v. Shoenberg, 91 A: 2d 786,’790-1 (Del.

Ch., 1952). The defendants then moved for:sum-

“mary judgment in the federal court on the ground

of res judicata. The court’s attention was called _

to an earlier Delaware decision (Investment ‘Asso-

ciates v. Standard Power & Light Corp., 29 Del.

Ch.’ 225; 48: A. 24-501, aff’d 20 Del? Ch. 593, 51 A.

2d 572) .which’ had held that the state court —

could not pass upon violations of ‘the Exchange

Act. But since the state court’s decision in Kauf-

_ man -was based only upon the common law, the

federal court recognized it as. valid and binding.

It also sustained the defense of res judicata on

the ground that the federal claim under the Ex-

- change Act was coterminous with .the common

law claim for fraud and that “the gist of the two

actions [was] the same.’

A copy. of the unreported opinion of the federal “ee

court in Kaufman v. Shoenberg (D.. -C.. Del., Civil

” Action 1413; February 15, “1954. ‘by - Bodney,

D. J.), will a submitted at, the asin of this

appeal. -

We submit that the Court labess has Jurisdic-

‘tion of the common law claim for. fraud alleged

in the first cause of action. It has power,'there- .

- fore, to pass upon the fajrness of the settlement.

' of all causes of action herein, including the first.

And if, as we are confident they will, the Referee

and: Mr. Justice McGivern find on the full record |

that the proxy statement was not false or mis-

leading, that finding arid/or the Court’s judgment

| will conclude . the federal question, if any.

2. None of the ‘authorities cited i in appellant’ 8

brief (pp.:10-11) militates. against our position.

_ American Distilling Co. v. Brown, 295 N. 7. 36

(1945), was an action to recover so-called short-

_ swing profits of corporate insiders. under 4§ 16(b)

of the Exchange Act, 15 U.S. C. §$ 78p(b). Claims

- ofthis character have their sole basis in the Ex-

_ change Act; they are created by statute and have

no ‘couriterpart in the common law. The Court of

Appeals was therefore clearly right in dismissing

the action as being subject to the exclusive juris-

- dietion of the federal courts. The question here

. presented—whether, the state court may retain

_ jurisdiction of a concomitant common law claim

_ . for fraud—could. not arise in the American Dis- *

tilling case for the simple reason that, upon the

facts there alleged, no bse eommon | law claim

existed. ;

Equally inapposite is einai 4 &é Light

‘Co. v. Investment Associates, 20 Del. Ch. 593, $1."

- A. 2d:°572 (1947). The plaintiffs there attacked -

an election of, corporate directors on the ground

that their opponents had solicited stockholders’,

proxies without furnishing a written proxy state

ment as required by SEC Rule X-14A-1. Again

the requirement to furnish a written proxy state-

ment rested exclusively upon the Exchange Act

and the regulations issued thereunder; it had no

counterpart at common law. The Delaware court

was therefore clearly right in refusing to pass

upon the alleged violation of the Exchange Act. .

‘The court indicated however that it would have

been willing to pass upon the merits of the plain-

tiff’s contention if it had been based at state

law (51 A.°2d, at 579):

“The solicitation, the proxy, and the voting

of the same have not been challenged under

the provisions of the General —,

Law of this State.”

_ Since the first cause of action at bar states fact:

‘constituting a common law claim under the laws

of this State, the Standard Power & Taght case

is clearly beside the point, as appears from Kau f-

man v. Shoenberg, supra. —

- - Eliasberg v. Standard Oil Co., 23 N. J. ‘So.

431, 92 A. 2d 862, 868-9 (1952), aff'd 12 N. J. 467,

97 A. 2d 437 (1953), is authority for our position

rather than appellant’s. - A stockholder there at-

tacked a stock option plan on the ground that the

approval of the plan by stockholders had been .

procured by a misleading proxy statement. The

court held that it could not pass upon the alleged

violation of the Exchange Act since that was a

matter of exclusive federal jurisdiction. But since

the claim was-also maintainable at common law,

the. court proceeded to consider it on the merits

- and dismissed it, not for lack of jurisdiction, but”

for lack of factual foundation. By the same token,

the Court below may.pass upon the common law

fraud claim alleged herein even though the viola-

15 |

on of the Exchange Act _— be dena’ to be

beyend. its jurisdiction.

Appellant’s last authority is /n re R. Hoe & Co.,

137 N. Y. S. 2d 142 (Sup. Ct., Bx. Co., 1954). That

case involved a petition to set aside the election of

corporate directors upon the principal ground

that false proxy. material had been used. The

_ court, far from rejecting jurisdiction, determined

the claim on its merits. The only issue upon |

which the court refused to pass was the peti-

tioner’s contention that three items used in the

. solicitation of proxies had not been cleared with

the SEC, as required by SEC Rule. X-14A-6(d).

Since that requirement was of purely statutory

_ origin, without any counterpart in the common

law, we have no quarrel with the decision. ‘For

the reasons we have repeatedly stated it has

meueny no application to the case at bar.

. 3. We submit that for all the reeons stated in .

this and the preceding point of this brief, appel-

' lant’s attack upon the jugjsdiction of the Court

below is unfounded. We «dd, however, the final

observation that appellant’s attack on the ond .

ings below is in any event premature.

Alleghany has applied to the Court below for

- an inquiry into and the approval of the proposed’

settlement. The Court below has, so far, neither

granted nor denied the application. What it did

_ do was to appoint a Referee in order to assemble

and report on all relevant facts and considerations

bearing upon the requested approval of the settle-

ment. Among the matters thus to be considered

. by the Referee and by the Court below are the

extent to which the Court has power to approve

the settlement. If the Referee or the Court below

should conclude that any part of the proposed

settlement cannot be passed upon’ by the’. state

court, they will doubtless so advise the parties and

notify them either to. limit their settlement. or to

eliminate from the complaint the reference therein

to the Exchange Act. If such a suggestion should

be made and if it should be adopted by the parties,

the issue presented by appellant would become |

moot. We submit, therefore, that appellant’s

present jurisdictional attack is premature and.

that this Court should defer consideration thereof

until such time as a judgment of the Court:below

approving the proposed settlement may be pre-

sented to this Court for review.

POINT iil

Appellant’s charge of “unclean hands’ is

unfounded and should, in ‘any event, be ad-

dressed to the Referee (before whom appel-

lant is making the very charges he is now

pressing upon .this Court).

After. the parties had entered into the stipula-

tion of settlement it became the duty of the at-

torney for Alleghany to submit it to the Court

‘below for its approval or disapproval. He did

precisely that: By motion of July 27, 1955. (229)

he moved “for judicial inquiry into and determina-

tion on the merits of the fairness, reasonableness

and adequacy of said stipulation of settlement and

the settlement of the action provided for therein,

and for the approval thereof.” His moving affi-

davit (235) set forth the complete terms of the

stipulation of settlement; it summarized the na-—

ture of the action and the pleadings; it referred

to the extensive discovery proceedings and depo-

sitions had in this and a companion action in the.

= Nea oe > . .

nate a eternal ae hy nj Wana we ns CRY ei ciettinvs MiG Ret eta bss og

federal court; and it stated that extended negotia-

tions had preceded the settlement agreement. The

Court below thereupon entered its order of refer.

ence (211). |

We submit that Alleghany’s procedure was al-

together proper’ and in accordance with familiar

practice long established in the settlement of

stockholders’ derivative actions.

The gist of appellant’s attack on this procedure

‘is his claim that “the proponents of the settle-

ment concealed from the Court below material

facts with regard to actions pending in the Fed-

_ eral Court on behalf of Alleghany” (App. Br., p:

2). Itis thus necessary to give a brief descrip-

tion of the proceedings in the Supreme. Court and.

in the: federal court.

The varidus* stockholders’ suits consolidated

herein were, for the most part, commenced in or

about April 1954 and were consolidated in June

1954. Simultaneously a number of similar actions

were commenced in the federal District Court for

Southern New York and were there likewise con-

solidated under the caption Zennm et al. v. Anza-

lone et al. (Civil No. 92-205). In both actions the

firm of Pomerantz, Levy & Haudek was desig-

nated as general counsel for the plaintiffs. This

firm conducted extensive depositions and discovery .

proceedings (240). It was this firm which nego-

tiated the set*lement with defendants. ,

In February 1955 two other stockholders -of

Alleghany commenced a derivative action in the

same federal court entitled Breswick & Co. et al.

v. Briggs et al. (Civil No. 98-371). This was some

ten months after the commencement of the Zenn

case-and eight months after the orders of consoli-

dation were entered both in the federal and state

wha Seat Ly SLES aa

. .

18 .

courts. The plaintiffs in the Breswick action -

were represented by Rosston,. Hort & Brussel,

Esqs., which firm also acts as co-attorneys for ap-

pellant Rosen in the hearings before the Referee

‘herein (123-4). The amended:complaint in the

Breswick action alleges some, but not all; of the »

claims which are being asserted herein (24).

On June 6, 1955 Breswick & Co. and ‘one Ran-

dolph Phillips commenced another action in the

federal court—not a derivative suit—in which

Alleghany and the Interstate Commerce Commis-

sion were named as defendants. That action was

brought to set aside certain orders of the Inter-

state Commerce:-Commission which, among other

things, continued Alleghany under I.C.C..regula-

class of preferred stock in exchange for its out-

standing Series A Preferred stéck.. A temporary

injunction was issued in that case by a statutory

three-judge court on July 21, 1955, the, court say-

ing that Alleghany had become an investment

company subject to S.E.C. rather than I.C.C.

jurisdiction ; Breswick & Co. v. United States, 134

F. Supp. 132. (The report omits the. dissenting

opinion of Judge Hincks. )

These were the proeeedings pending at the time.

Alleghany applied for the settlement ; re on

July_27, 1955.

_ We turn.to a consideration of the inequities and

“frauds which were allegedly perpetrated by the

proponents of the settlement and which are said

to contaminate the proposed settlement to. such

an extent that this Court should bar the Trial

Court from receiving any evidence on. the fairness

of. the settlement. :

LLL LLL a eT

1. The three-judge court action.

Appellant argues that our settlement, if ap-

proved by the Court, would barter away the

claimed Breswick victory before the three-judge

court. He wholly omits to inform this Court that

the settlement herein, in express terms, excludes

from its scope all the issues litigated before the

three-judge court. Thus the stipulation of settle-

ment. which was. before Mr. Justice McGivern

when he ordered the reference defines with meticu-

lous precision the issues which were not to be in-

cluded. in the settleément—and they are precisely ~

the issues before the three-judge court ( 258-260): .

notices and acts connected therewith shall

- without prejudice to:

(a) Any judicial or administrative decision, .

ruling or determination concerning Alle-

ghany’s obligation, if any, to register under

and otherwise conform to the Investment

Company Act of 1940; United States: Code, -

Title 15, Sees. 80a-1, et seq. ; “fs

(b) The Claim alleged in the complaint for

an injunction against the proposed exchange

by Alleghany of its 514% Series A $100 Par.

Value Cumulative Preferred Stock’ against

its new 6% $10 Par Vaiue.Convertible Pre-

ferred Stock.” at

The stipulation of settlement, with these quali-

fications, was part of the notice sent to the stock-

holders.

What, then, is left of appellant’s contention?

He argues, or at least asserts, that the impact of

the interlocutory decision of the three-judge

‘court materially enhanced the value of the deriva-

tive claims assertéd in this Court; and that the

failure to disclose that decision to Mr. Justice

McGivern,.in applying for the order of reference, _

constituted ‘the withholding of a material -fact..

Appellant’s - exgraniat is shot oe with fal-

lacies. “eae | pa aa |

(a) Let us assume,” arguendo (but see infra),

_appellant’s premise that the three-judge decision

did enhance the value of the claims being settled.

Even so, that decision was but one among a great

number of factors which might either strengthen

--‘or weaken the claims herein. It has never been

the practice—and it would be a senseless pro-

cedure—in an: application for a settlement hear-

ing to inform the Court, in advance of the hearing |

requested, of all the material facts which may tend

to’ support or to negate the liability of. the de-

_ fendants. The very purpose of the hearing re-

quested is to afford a forum to ascertain the ma-

terial facts. If, as appellant, contends, the inter-

locutory three-judge‘decision has a material bear-

ing on the merits of this case, then the time so to .

argue is at the hearing—not in connection with

the application for the hearing. .

The rule contended for by appellant—that facts

bearing on the’ pros-and cons of the proffered

settlement must be made known to the Court in .

connection with an application for a settlement

hearing—misconstrues the nature of the. appli-

cation. The application for a hearing or refer-

ence is not designed to persuade the Court that

the settlement is fair and adequate. It-merely

asks the Court to set in,motion the ‘machinery by

. which the adequacy or {inadequacy of the settle-

ment may be.determined. -Both common’ sense

and uniform procedure. rebel at the suggestion

(implicit in appellant’s charge) that a motion to

_ hear the evidence of: the material facts must set .

forth those facts themselves. |

Ee WN EE Cr ar wee

a AG AAI

aw a SE A IN Ee BTN ON LIS Be « SOAR nL os AAO

In fact, the decision of the ‘three-judge court

was placed in evidence before the Referee at the

very opening of the hearings. Counsel for ap-

pellant has been strenuously arguing to the Ref-

eree that that decision furnishes strong support .

for the claims sought to be settled. ‘The Referee,

the Court below and, upon review, this Court will

thus have every o ortunity to-Bive that decision

such weight ‘as it may be entitled to in conjunction

with all other facts bearing upon the merits or: .

demerits of this litigation and the adequacy of the

‘proposed settlement. But it is fatuous to claim

that the three-judge decision had any, material

bearing upon the granting, of. the reference as

such. . a

(b) We. have thus far assumed that the three-

judge decision—as appellant asserts—materially

enhanced. the value of the claims to be settled.

The opposite, however, is true.

The very intricate question of the impact, if

ne any, of the three-judge decision on the claims now

heing settled is not and was not before the three-

judge court. In its final opinion of November 18.

195%, that court states in passing :

“There is not before us the question

whether Alleghany may be _liable to Pre-

ferred stockholders for any loss that they

may suffer.” 2

This comment plainly suggests that Alleghany is

more likely to incur liabilities than to acquire -

rights against others if it~was subject to the

‘Provisions of the Investment Company Act re-

‘garding unregistered investment companies.

Appellant’s. argument runs into -another diffi. -

eulty. The interlocutory three-judge decision on

which he relies has now been superseded by the

te .

final decision, of November 18, 1955. That. deci-

sion renders it, to say the least, extremely doubt-

ful whether Alleghany was subject to the Invest-

ment..Company Act at the time of any of the

transactions (other than the exchange offer) al-

leged in the complaint. :

Moreover, the various retreats and indications |

of uncertainty in the RSSEMIpinion of the three-

judge court (which includes Judge Walsh)-.lend

support to our belief that, when all the facts are —

known, the. defendants will be found. to have a

complete defense to all liability under the Invest-

ment Company Act by virtue of the good faith

provision of Section 38(c) of that Act.

These considerations cannot, of course, be fully

expounded within the confines of this brief. They.

concern the merits of the settlement which are not -

in‘issue upon this appeal. They confirm, however,

our position that the three-judge court procee@

ings had no bearing whatever upon the granting

of the reference as such-and that, in any case, the

_,issue is now sub. judice before the Referee at

Special Term.

‘2. The Breswick derivative: action in the Pedaeel |

Court.

Again appellant a that the order of ref-

erence is vitiated because, in applying for it, Al-

leghany failed to disclose to Mr. Justice McGivern .

that “thé Breswick action was being actively pros-

ecuted in the United States District Court for

the Southern District of New York, and that a

motion for summary judgment for plaintiffs had

been made and was pending therein” (App. Br.

16).

The argument is nothing short of captious.

- ° . . iat . , . — —— _ ne

face : ‘ abetaned os 5 i 2 ers ni lias a TN Se deca a needa AEES FA RA cans | 5

Fae aR abl em RRR: “samen ieee” js a Pibatin cath pretsea hata abet loses ahah ‘enna. veidenmctte sine taahigud putative TAS oe

———

: 3 .

To begin with, the “active” prosecution of the

Breswick derivative action consisted of a motion’

Wfor-a temporary injunction which was denied -

(Breswick v. Briggs, 130 F. Supp. 953), and a mo-

tion ‘for summary judgment which was likewise

" denied (87). On the other hand, it was general

counsel for the plaintiffs herein who conducted

depositions and discoveries and amassed the docu-

mentation which is currently being ‘placed before

the Referee in staggering volume.

Secondly, the Breswick derivative action. was

‘commenced .ten months after the action at bar.

It alleges some, but not all of the causes of action

set forth in the present suit. So did other stock-

holders’ actions, also not consolidated with the

‘Zenn action, which like Breswick asserted over-

lapping claims. Since the Court below was ap-

prised of the issues in the suit at bar, no useful

purpose would ‘have been served by enumerating

the various duplicatory actions pending in another |

forum. | : “t Bier

Thirdly, the very order of reference required

that notice of the settlement hearings be sent to

all stockholders. .The Breswick‘ plaintiffs were

thus notified of the hearings and given an oppor-

tunity to present all their evidence and arguments.

Of this opportunity, counsel for Breswick have —

availed themselves to the hilt:

‘Appellant’s contention that the pendency of the

Breswick action and its vigorous prosecution

were “material” facts which were withheld from

Mr. Justice McGivern when a settlement refer-

ence was requested necessarily implies that, had °

Mr. Justice: McGivern been informed of these

facts, he might have refused to. order an inquiry

into the fairness of the settlement. A mere state-

24 ae

ment of the proposition would : seenr sufficient to

refute it. . an

| 3. The charge that the settlement. was reached with 7

undue haste. |

‘ — next argues that ‘the settlement was

‘announced only four days after the decision of

- the three-judge court. The implication seems to

be that the settlement was reached hastily in an .

attempt to escape the effects of that decision.

This argument of appellant seeks to impugn the

fairness and good faith of the settlement.. But

that very question is now pending before the Ref-

eree where counsel for.the appellant has cross- |

examined at great length on that issue. One of

the factors bearing upon the fairness of the set-

reached. If it should develop at the hearings that

the proposed settlement was reached with undue

haste and in an inequitable manner, the Referee

and the Court. below will take that fact, if it be —

one, into account. But appellant would have this

Court condemn the settlement in total disregard

of the evidence, which is being assembled before

the Referee on this very issue. Such procedure

would put. the cart before the horse. Our courts a

render their judgments after trial, not before.

The record here shows that the settlement was

not reached hastily but‘ after “extended negotia-

-tions” (240). We expect to show before the Ref-

eree that discussions cominenced in the summer —

of 1954 and proceeded on and off, until an oral |

agreement for settlement was reached on April -

18, 1955—long before the three-judge court .pro-

ceedings were even commenced. If the Referee

and the Court below accept our. evidence, it will

——— ee —

refute appellant’s biceps that the settlement. was

reached ae undue haste and in an inequitable

manner. , oe, :

4. The claimed inadequacy of the settlement.

Appellant’s final contention is that the amount

of the settlement is inadequate and that-the de-

‘fense of good faith interposed by defendants is

that the sufficiency of the settlement and the merits

of the defenses are the very subjects to be deter-

mined, in the*first place, by the Referee, then -by

the Court below and, finally, upon appeal, by this

- Court. "Those matters are to be determined upon

evidence, not on the mere say-so of appellant.

We submit that | appellant’s charge that the pro-

ponents of the settlement came into ‘the Court be- *

low with “unclean hands” is utterly ifounded and

should be rejected. ‘Far from suppressing: any

- material facts, the proponents instituted the pro- |

cedure best designed to place all the material facts

before the Court. Appellant’s motion, if granted, ~

would have suppressed the truth. The Court be-'

--low was-clearly right in denying the motion.

_ POINT. IV

_ The netics to ‘stockholders was area ;

" ‘Kppellant’s brief attacks the adequacy of the

notice ‘sent to the stockholders mainly because the.

_ notice summarized the nature of plaintiffs’ charges

- instead of setting forth a detailed: summary cf

the various allegations of wrongdoing aileged in

the complaint. No such objection to the notice

\ was ever presented to the Court below (50-52).

It should therefore vas | out of hand.

In any event, appellant omits to inform the

_ Court that the notice expressly invited the stock-

holders to inspect the pleadings which were open

for inspection at.the office of general counsel for

the plaintiffs and of the attorney for Alleghany

(227-8). Any stockholder wishing to acquaint

himself with the detailed nature of the contro-

versy was this placed in a position to do so; and’

a great many availed themselves of that oppor-

tunity. The effectiveness of the notice is con-

firmed by the fact that, at the opening of the set-

tlement hearings, the large Byrne Room of the

Association of the Bar of the City of New York

was filled to capacity by —_— shareholders

and their counsel.

Any attempt to summarize the complaint in the

notice to stockholders in greater detail than was

_ done would have obscured rather than illuminated.

The copy of the complaint set forth in this record .

covers 65 printed pages (289-482). More impor- |

tant, however, than its length is the extreme com-

plexity of the transactions set forth therein. Any

effort at a more détailed summary would but have . |

invited criticism of the paraphrase.

_If the purpose of a notice of settlement is to

ferret.out all the potential opposition that resides

in the ranks of the shareholders, may we submit

as a practical matter that this notice has been ex-

. traordinarily effective. The hearings that are pres-

ently going on and have been going on over the

past two months have elicited the most militant

opposition that we have ever seen in a hearing of __

this character. Counsel for appellant, who cor- .

rectly characterizes himself as leader of the oppo-

sitior, has been granted and has availed himself —

of .a virtually complete discovery and inspection

of Alleghany’s files. The major portion of the

_ transcript of hearings now comprising more than

2,000 pages consists of the cross-examination con.

ducted by counsel for appellant and other objec-

tants and of their offers of documentary and other

evidence. Under these circumstances it is rather

ironic for appellant to complain that the notice to

stockholders might have been inadequate to af-

ford complete protection to the stockholders.

Appellant next complains that the notice to

. Stockholders did not mention the Breswick deriva.

tive suit and the three-judge court proceedings.

The charge has been answered in a previous por-

tion of this brief. The notice to’stockholders did

not purport to set forth any of the grounds which

might tend to support or to defeat the liability

of the defendants. There was-no more reason to

inform thé shareholders of those two litigations

than to inform them of the fact that in the course

of the deposition of defendants taken by general

counsel certain important admissions or denials °

were made by one or another witness. In-accord-

ance with usual procedure, Alleghany informed - ;

the shareholders of the broad issues sought to be

_ settled, of.the precis ms and conditions of the

settlement agreeent ant right and privi-

* lege to ask for and secure the voluminous plead-

ings herein and whatever other supporting detail

they might wish.

To accept the proposed innovation of this appel-

lant by requiring the notice to shareholders to

set forth the pros and cons which tend to augment

or diminish recovery, would invite prolixity and

confusion in’a notice which should be simple and

clear. Moreover, no lawyer preparing sych a

notice, however careful, would be exempt from a_

~harge that one or another of the many attorneys

in the twenty or more companion litigations had

— 28

indeed done something of great importance which

should be communicated to the shareholders.

Down the road proposed by this appellantlies

nothing but mischief. We submit that Alleghany’s

notice to the shareholders was fair and honest and

in acvordance with well cotntianed procedure in

this type of case. a ,

a - |

“CONCLUSION |

It is respectfully submitted that the order

appealed from should be affirmed.

| Dated, November 25, 1955. |

Respectfully submitted,

: a

Lorp Day & Lorp,

Attorneys for Defendants-Respondents

Young, et al.

- Tuomas F. Daty,

Sau L. SHERMAN,

Of Counsel.

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.