# Petition — Mason v. City Investing Co.

> Briefs, arguments, decisions, and more.

URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1799%3A1

## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1977
- **Citation:** 434 U.S. 821

## Text

oom,

Soe eee

IN THE

Supreme Court of the United States ,

No. 96-1537

IRVING MASON, on behalf of himself and all others similarly
situated, and derivatively on behalf of C.l. REALTY INVESTORS,
Petitioner,

vs.

CITY INVESTING COMPANY, C.l. REALTY INVESTORS, C.L.
PLANNING CORPORATION, WILLIAM POLK CAREY, JOHN
L. GIBBONS, PETER C.R. HUANG, JAMES V. TOMAI, JR.,
ROBERT M. MORGAN, WILLIAM S. RENCHARD, FRED R.
SULLIVAN, JAMES R. WEBB and
REYNOLDS SECURITIES INC.,
Respondents.

Petrrion ror A Warr or CERTIORARI TO THE
Unrrep States Court or APPEALS FOR THE SECOND Crrncurr

PETITION FOR WRIT OF CERTIORARI

RICHARD D. GREENFIELD

STERLING H. SCHOEN, JR.

PHILIP STEPHEN FUOCO
Attorneys for Petitioner

Ricnarp D. Creenriecp, P.C.,
17 St. Asaphs Road,

Bala Cynwyd, Pennsylvania 19004
(215) 667-1700

Of Counsel

N.J. Appellate Printing Co. Inc., South Plainfield, New Jersey (20!) 753-0200

i

TABLE OF CONTENTS

Ne iu sest ness cupeasacercuas l
a aD ee eeecdeens 2
Es i cece cehckbecsaseneecees 2
Statutes and Rules Involved ...................... 3
EE ee me 3

REASONS FOR GRANTING THE Writ:

1.

The decision below is in direct conflict with the
decision of this court in J !. Case v. Borak, 377 U.S.
426 (1964) ............ AU RR 7

There exists a conflict in the law of the Circuits re-
garding the important issue raised herein ........ 7

State corporate law which conflicts with the over-
riding federal interest in the protection of the in-
vesting public cannot control litigation under the

RINE ccécuccnddcnvcnsucscopetecceses 13

This court should decide the question of whether
the rationale underlying Van Dusen v. Barrack, 376
U.S. 612 (1964) determines the interpretation of
federal law which the transferor district would

GET heccdecccocenccatccscstscaevecesetense 16

Cases Crrep:
Affiliated Ute Citizens of Utah v. United States,

Me PEO nn coi cvncc ce ccccsccs 14

Berry Petroleum Co. v. Adams & Peck,

518 F.2d 402 (2d Cir. 1975) ................ 17

TABLE OF CONTENTS

Cases CIrep:

Brody v. Chemical Bank,
482 F.2d Ill. (2d Cir.), cert. denied
RE ee en eudoteeues

Champion Home Builders Co. v. Jeffress,
490 F.2d 611 (6th Cir. 1974), cert. denied
416 US. 986 (1974) .... 6... eee eee cccccceeeee

Clement A. Evans & Co. v. McAlpine,
434 F.2d 100 (5th Cir. 1970), cert. denied
402 U.S. 988 (1971) ............... ie Poe

Columbia General Investing Corp. v. S.E.C.,
265 F.2d 559 (Sth Cir. 1959) ................

Crane v. Westin Air Brake Co.,
419 F.2d 787 (2d Cir. 1969). cert. denied
ee a i ck weade

David Steinberg, et al. v. William Polk Carey, et al.,
Pe TD a cenciceaWhecdesneies ses

Dopp v. American Electronics,
55 F.R.D. 151 (S.D. N.Y. 1972) ............ 8,

Drachman v. Harvey,
453 F.2d 722 (2d Cir. 1971), aff'd in part, rev'd in
part on other grounds, 453 F.2d :
Se Ce GD ce cawecwcs 8, 12,

Fielding v. Allen,
181 F.2d 163 (2d Cir. ), cert. denied sub nom..,

Ogden Corp. v. Fielding, 340 U.S. 817 (1950) 15,

Fields v. Fidelity Gen. Ins. Co.,
454 F.2d 682 (7th Cir. 1971)

Gilson v. Chock Full O’Nuts Corp.,
331 F.2d 107 (2d Cir. 1964)

PBSeeaeeedan8dé6e6ea3 8 a

oe eee ee eeeeeeeee ee @

16

16

16

ee

iii
TABLE OF CONTENTS

Cases CIrep:

Globus Inc. v. Law Research Service, Inc.,
318 F. Supp. 955 (S.D. N.Y. 1970) aff'd 442 F.2d
1346 (2d Cir.), cert. denied

hE oe cvcace peau bes enaecees 13
Hall v. American Cone & Pretzel Co.,

71 F. Supp. 266 (E.D. Pa. 1947) ............ 13
Halprin v. Babbitt,

303 PBe 198 (het Cir. 10GB) ...... 2.2 e eee: i)
Hawes v. City of Oakland,

104 U.S. 450 (1882) ........... ee eee ee eee 15

H. L. Green Co. v. MacMahon,
312 F.2d 650 (2d Cir. 1962), cert. denied

eo ce cae eeeees codecs 17
In re Air Crash Disaster at Boston Mass,

399 F. Supp. 1106 (D. Mass. 1975) .......... 17
In re Four Seasons Sec. Lit.,

370 F. Supp. 219 (W.D. i Ge er 17
In re Plumbing Fixtures Lit.,

342 F. Supp. 756 (JPML 1972) .............. 17
Jannes v. Microwave Communications,

57 F.R.D. 18 (N.D. Ill. 1972) ...... 8, ll, 15, 16
J. I. Case v. Borak,

te ED 5 sc ceksccesessscet 7, 10, 14
Jones v. The Equitable Life Assurance Society,

409 F. Supp. 370 (S.D. N.Y. 1975) .......... 8

Levitt v. Johnson,
334 F.2d 815 ( 1st Cir. 1964), cert. denied
CE cove cacbeecues bese. 8, 9, 16

iv

TABLE OF CONTENTS

Cases CITED:

McClure v. Borne Chemical,
292 F.2d 824 (3rd Cir.), cert. denied
368 U.S. 939 (1961) ................ 11, 15, 16

Myzel v. Fields,
386 F.2d 718 (8th Cir. 1967), cert .denied

390 U.S. 951 (1968)... 0... cece cee ee eeees 12-13
Ogden Corp. v. Fielding,
96D US. O87 (IUUDD ....cccceccsennchieeeee 15

Philadelphia Housing Auth v. American Radiator &
Standard Sanitary Corp.,

309 F. Supp. 1053 (E.D. Pa. 1969) .......... 17
Phillips v. Bradford,
62 F.R.D. 681 (S.D. N.Y. 1974) ............ 16

Pittsburgh & Lake Erie R.R. Co. Sec. &
Antit. Lit., In re,

543 F.2d 1058 (3rd Cir. 1976) ...... 8, 10, 16, 17
Rodgers v. American Can Co.,

305 F.2d 297 (3rd Cir. 1962) ................ BI
Scheinbart v. Certain-Teed Products Corp.,

367 F. Supp. 707 (S.D. N.Y. 1973) .......... 17
S.E.C. v. Capital Gains Research Bureau,

303 F.2d 214 (2d Cir. 1068) ................ 13
S.E.C. v. Capital Gains Research Bureau,

See US. GED (ORR) .. ccc cccesvensenemeneen 14
Tcherepnin v. Knight,

389 U.S. 332 (1067) ................ 7-8, 13, 14

Van Dusen v. Barrack,
See UD. GER CHRO) . vccccccesseneeuene 3, 16

TABLE OF CONTENTS

Cases Crrep:

Weiss v. Sunasco Inc.,
316 F. Supp. 1197 (E.D. Pa. 1970) ............ ll

Wolf v. Frank,
477 F.2d 467 (5th Cir. 1973), cert. denied
nd. ccc ccrcescerecess 12
Autuonties Crrep:

Bloomenthal, Securities & Federal Corporate Law,
EE ciceeoseseccsccececccce: 10

Bromberg, Fraud-SEC R. 10b-5, Sec. 11.7 (1975) .... 10

Carey, Cases on Corporation, 4th Ed. at 341 (1969) . 10
Loss, Securities Regulation, Vol. Il at 951 (1961) as

supplemented, Vol. V at 2920 (1969) .......
Note, 530 Va. L. Rev. 365 (1964) .................. 10
7A Wright & Miller, Federal Practice and Procedure:

Civil Sec. 1832 (1972) ..............455. 10, 15
78 Harv. L. Rev. 1476 (1965) ................... 10
13 Fletcher Cye. Corp. Sec. 5970 at 385 ( 1970

Revised Ed.) ..... i ies dee 10
Fepernat Statutes Crrep:
ee cecccccccccecces &
28 U.S.C. §§1404(a) & 1407 .......... 6... 4, 16
Securities Exchange Act of 1934,

§§10(b) & 14(a) ............ 2,3, 4,5, 11, 15

ere cee ccccccececescccss: . 8

Securities AND ExCHANGE COMMISSION
Rures [17 CFR §240.0-1 et seq.) Crrep:

Rule 10b-5 & 14a-9 ............. newes 66eeas 3, 4, 12
Se NEE. ‘savvesachedbuchisnsdneascscuetinaud 7
APPENDIX

Appendix — and Judgment of the Second
ED cecccnncndvausdsvebus tenstacentdiaeks la
Appendix B—Order and Final Judgment of the Dis-
Bee QE oc cncgcecncacchubbbuceiuedscvoes 3a
Appendix C—Statutes and Rules Involved .......... 5a
Appendix D—Order of the Second Circuit
SGI ncn. . Kbncvtcsceciavscesees 8a

IN THE
SUPREME COURT OF UNITED STATES

Ocroser Term, 1977
No.

IRVING MASON, on behalf of himself and all others

similarly situated, and derivatively on behalf of
C.l. REALTY INVESTORS,
Petitioner,

CITY INVESTING COMPANY, C.1. REALTY
INVESTORS, C.I. PLANNING CORPORATION,
WILLIAM POLK CAREY, JOHN L. GIBBONS, PETER
C.R. HUANG, JAMES V. TOMAI, JR., ROBERT M.
MORGAN, WILLIAM S. RENCHARD, FRED R.
SULLIVAN, JAMES R. WEBB and
REYNOLDS SECURITIES, INC.,

2 Questions Presented

JURISDICTION

The opinion and judgment of the Second Circuit were
filed on November 9, 1976. A timely petition for rehearing
was denied by order of February 18, 1977 ( Appendix D).

Jurisdiction of this Court is invoked pursuant to 28
U.S.C. section 1254(1).

QUESTIONS PRESENTED

This petition arises from an order by Judge Wyatt of
the United States District Court for the Southern District
of New York, dismissing two counts of petitioner's com-
plaint which alleged, inter alia, violations of Sections 10(b )
and 14(a) of the Securities Exchange Act of 1934, deriva-
tively on behalf of C.1. Realty Investors. These derivative
—_ pap pr the we age eptheyrnd s- wly

on of the trust as Mas-
sachusetts law. ——

The broad issue raised here is the proper relationship
of state corporation law vis-a-vis the congressional policy
the federal securities laws. we

underlying

Whether the Courts below ened tn holding thet «
shareholder of a Massachusetts corporation or busi-
ness trust must first make a demand on all of the cor-
poration’s shareholders before being permitted to
assert derivative claims on behalf of the corporation
where:

(1) The derivative claims are grounded on the Se-
curities Exchange Act of 1934;

(2) Such a requirement would be

AS Se SAD GENS SE SSS Gey

Statement of the Case 3

(3) The law of the transferor forum, which must
be applied pursuant to Van Dusen v. Barrack, 376
et Agr yer le psd eye panan

i eaieduad corporation as a con-
precedent to bringing a derivative suit.
STATUTES AND RULES INVOLVED

The statutes and rules involved are:

Sections 10-b and 14-a of the Securities Exchange Act
of 0006 end Bakes DS end 1600 Gone on

Rule 23.1 Fed. R. Civ. P.
They are set forth in Appendix C.

STATEMENT OF THE CASE

13, 1972, public offering, C.1. Realty In-
approximately $65,000,000 by selling 2,600,
san Gate dl Ga Dah naman Go on 0 AS
per Unit. Each Unit contained one share of beneficial in-
terest in the Trust and one warrant to purchase an addi-
tional share at $25.00. On April 13, 1972, petitioner Irving
Mason purchased 1,000 units of the Trust for $25,000. The
market value of each of the Trust's shares has since declined
$5.63 per share. The warrants are generally regarded as
being worthless at this time.

On February 25, 1975, petitioner Mason filed a six
count derivative and class action complaint in the United
States District Court for the Eastern District of Pennsyl-
vania alleging violations of various provisions of the federal

_ BEST COPY AVAILABLE
'

4 Statement of the Case

securities laws, as well as pendent state law claims. On
March 20, 1975, the action was transferred by consent to
the Southern District of New York pursuant to 28 U.S.C.
Section 1404(a).

Respondent C.1. Realty Investors is a Rea! Estate In-
vestment Trust organized pursuant to Massachusetts law
under a declaration of trust dated November 10, 1971, as
amended on April 3, 1972. The shares of the Trust are
registered with the Securities and Exchange Commission
pursuant to Section 12 of the Exchange Act. The Trust's
shares have been traded on the over-the-counter market
and, since December 12, 1973, on the New York:Stoek Ex-
change.

The Amendment Complaint

Petitioner filed an amended complaint on November
19, 1975. The defendants named in the amended com-
plaint, in addition to the Trust, are: City Investing Com-
pany, a corporation that controls the Trust and the Trust's
advisor; C.1. Planning Corporation, an indirectly wholly
owned subsidiary of City Investing Company which served
as advisor to the Trust; eight individual trustees of the
Trust; and Reynolds Securities, Inc., one of the two man-
aging underwriters of the Trust's public offering of April
13, 1972.

Counts I, II and ILI of the amended complaint allege
class action claims for violations by the ts of Sec-
tions 10(b) and 13(a) of the Exchange Act and Rules 10b-
5, 13e-i, 13a-11, and 13a-13 promulgated thereunder, as
well as Sections 12(2) and 17(a) of the Securities Act of
1933 (“Securities Act”) in connection with the preparation
of the registration statement and issuance of the
for the public offering of the Trust's shares commencing
April 13, 1972. Count VI alleges class action claims for

Statement of the Case 5

violations of state law against all defendants except the
Trust and Reynolds Securities, ‘nc. Counts I, II, III and
VI are collectively referred to as the class action counts.

Count IV alleges violations of Sections 10(b) and
14(a) of the Exchange Act and Rules 10b-5 and 14a-9
promulgated t , derivatively on behalf of the
Trust against all of the defendants except Reynolds Secur-
ities, Inc. Count V alleged violations of the state fraud,
self-dealing, conflict of interest and breach of fiduciary duty
laws derivatively on behalf of the Trust against all of the
defendants except Reynolds Securities, Inc.

The Motions Below

On December 12, 1975, defendants moved to stay the
class action counts on the ground that they were duplicative
of those in David Steinberg, et al. v. William Polk Carey,
et al., 75 Civ. 1695 (IBW), a related action which was also
being actively litigated. Defendants also moved to dismiss
the derivative counts on the grounds that plaintiff had
failed to make demand upon the Trust's shareholders as
required by Massachusetts law and that plaintiff could not

rly maintain a derivative suit on behalf of the Trust
at the same time he was prosecuting a class action against
the Trust.

The District Court's Order

On May 3, 1976, the District Court issued an order
staying the class action counts pending a final determina-
tion of the Steinberg action, and dismissing the derivative
causes of action on the ground that petitioner had failed
to make a demand on the shareholders of the Trust as re-
quired by applicable Massachusetts law. The District Court
declined to hold that it was obligated to apply the law of
the Eastern District of Pennsylvania, the transferor court,

6 Statement of the Case

on this issue. The District Court also made an express de-
termination that there was no just reason for delay and
pursuant to Fed. R. Civ. P. Rule 54(b) entered final judg-
ment in favor of the defendants (Appendix B).

On May 27, 1976, petitioner filed a timely notice of
appeal to the Second Circuit from the District Court's

judgment.

_ me ~~

7

REASONS FOR GRANTING THE WRIT

l. The decision below is in direct conflict with the
decision of this Court in J.J. Case v. Borak, 377 US.
426 (1964).

The rulings below require the petitioner to make
demand upon the shareholders prior to instituting suit
in federal court to redress violations of federal securi-
ties laws. By imposing a burdensome and futile state pro-
cedural requirement as a prerequisite to this suit, the de-
cision conflicts with J.1. Case v. Borak, 377 U.S. 426, 434-35
(1964). This Court there discussed the relationship of
state corporation law vis-a-vis federally protected rights:

[W]e believe that the overriding federal law applica-
ble here would, where the facts required, control the
appropriateness of the redress despite the provisions
of state corporation law, for it “is not uncommon
for federal courts to tashion federal law where federal
rights are concerned.”

And if the law of the State happened to attach no
responsibility to the use of misleading proxy state-
ments, the whole purpose of the section might be
frustrated. Furthermore, the hurdles that the victim
might face (such as separate suits, as contemplated
by Dann v. Studebaker-Packard Corp., supra, security

for expenses statutes, bringing in all parties necessary
for complete relief, etc.) might well prove insuper-
able to effective relief. (emphasis added )

Here there can be no doubt that the shareholder de-
mand requirement will “prove insuperable” to a derivative
suit to redress violations of federal securities laws. Fed-
eral law, not state law, must govern the enforcement of
federal rights. See Tcherepnin v. Knight, 389 U.S. 332,
337-38 (1967); In re Pittsburgh & Lake Erie R.R. Co. Sec.

8 Reasons for Granting the Writ

& Antitr. Lit., 543 F.2d 1058, 1064-67 (3rd Cir. 1976);
Drachman v. Harvey, 453 F.2d 722, 727-30 (2d Cir. 1971)
aff d in part, rev'd in part on other grounds, 453 F.2d 736
(1972) (en banc); Levitt v. Johnson, 334 F.2d 815 ( Ist Cir.
1964), cert. denied 379 U.S. 961 (1965); Jannes v. Micro-
wave Communications, 57 F.R.D. 18 (N.D. Ill. 1972); Dopp
v. American Electronics, 55 F.R.D. 151, 155 (S.D.NLY.
1972).

2. There exists a conflict in the Law of the Circuits
regarding the important issue raised herein.

This petition raises the sensitive issue of the

role of state corporation regulations in the remedial scheme
of the federal securities laws. In the instant case, the de-
cision below requires a plaintiff, prior to filing suit in fed-
eral court to enforce a right conferred upon him solely by
the federal securities laws and exclusively lodged in the
federal courts, to abide by a state law requiring a demand
upon shareholders. This, no matter how burdensome or
futile the procedure may be.

In dismissing the derivative counts of petitioner's com-
plaint, the courts below relied on Brody v. Chemical Bank,
482 F.2d 1111 (2d Cir.), cert. den. 414 U.S. 1104 (1973)
and Jones v. The Equitable Life Assurance Society, 409
F. Supp. 370 (S.D.N.Y. 1975). These cases hold that
where, as here, a derivative action is instituted pursuant to
Federal Rule of Civil Procedure 23.1, the federal courts will
look to state law to determine whether a demand on stock-

holders is necessary. Brody, supra, at 1114; Jones, supra at
374.

A decision directly in conflict with these decisions was
rendered by the First Circuit Court of Appeals. There the
court which encompasses the Commonwealth of Massachu-
setts was presented with the identical issue of whether

Reasons for Granting the Writ )

plaintiffs in a derivative lawsuit were required, under Rule
23.1 of the Federal Rules of Civil Procedure, to make a
demand on the shareholders of a Massachusetts corporation
before bringing suit under the federal securities laws. The
court held that such demand was not required despite the
provisions of Massachusetts law. Levitt v. Johnson, 334
F.2d 815 (1st Cir. 1964), cert. denied 379 U.S. 961 (1965).

The Court in Levitt distinguishes its earlier decision of
Halprin v. Babbitt, 303 F.2d 138 (1st Cir. 1962) (holding
that the minority must demand upon the majority ), as fol-
lows: “In Halprin . . . 92% of the company’s stock was held
by one stockholder. We were not, in other words, speak-
ing in the context of 48,000 stockholders, or as to when
such a circumstance might constitute an excuse.” 334 F.2d
at 817. Most importantly, the court further stated that:
“Nor does Halprin, which was a diversity case, answer the
question of what law presently governs.” 334 F.2d at 817.

The court specifically disapproved of the lower court's
holding that state law applies “even if the claim which the
corporation has against the alleged wrongdoers is based on
a federal statute.” Indeed, the First Circuit in Levitt spe-
cifically held that Massachusetts state law was irrelevant:

“We need not pursue the inquiry of whether the
Massachusetts law is otherwise, because if it is, it
should not, in our opinion, be applied.” 384 F.2d at
819.

Recognizing the important congressional policy underly-
ing the securities laws, the Levitt court held that it could
“not see how it can be gainsaid that any substantial stiffen-
ing of the conditions precedent to the bringing of stock-
holders’ suits above normal requirements wou'!d conflict
with this broad declaration (of national policy ).” 334 F.2d
at 819. As the court continued:

10 Reasons for Granting the Writ

“The district court's reasoning that since the stock-
holder’s right is a derivative one, his right to bring
suit must be controlled by the local law of the state
of incorporation in the absence of an explicit congres-
sional direction to the contrary negates the intend-
ment of the act and underestimates the role to be
played by the federal courts in the implementation
of national regulatory legislation. See Note, 50 Va.
L. Rev. 365 (1964).” 334 F.2d at 819.

In so holding, the Levitt court relied on this Court's deci-
sion in J.1, Case Co. v. Borak, supra.

The law of the First Circuit then, is that a state law
requiring a shareholder demand does not control in deriv-
ative suits grounded on the federal securities laws. The
Levitt decision has received widespread acceptance by the
commentators.’

The Third Circuit, too, has taken a position in conflict
with the Courts below. In discussing the standing of a
trustee of bondholders to object to a settlement of a class
and derivative settlement, the Circuit stated:

We conclude that standing in a Rule 23.1 case to
assert a derivative claim based on federal law is a
federal law question, and that for the same reasons
standing to object to the settlement of such a claim
is a federal law question.

In re Pittsburgh & Lake Erie R.R. Co. Sec. & Antitr. Lit.,
supra, at 1067 (emphasis added).

1. E.g., Note, 78 Harv. L. Rev. 1476 (1965); Note, 50 Va. L. Rev. 365
(1964) (criticizing the lower court decision in Levitt since overturned by
the First Circuit). See also, Bromberg, Fraud-SEC Rule 10b-5 Section 11.7
(1975). Bloomenthal, Securities and Federal ate Law, Section 11.20(2)
(1974), 7A Wright & Miller, Federal Practice and Procedure: Civil Section
1832 (1972), 13 Fletcher Cye. Corp. Section 5970 at 385 (1370 Revised
Ed.); Loss, Securities Regulation, Vol. II at 951 (1961), as su ed,
Vol. ¥ at 2920 (1969), Carey, Cases on Corporations, 4th Ed. at 341 (1969)

~~ =-

_

Reasons for Granting the Writ 11

Such a position is in complete accord with that asserted by
petitioner. In a derivative suit asserting violations of the
federal securities laws, the Court should look to federal law
in determining the necessity for a demand on stockholders.

In a closely analogous situation, the Third Circuit has
held that a plaintiff in a derivative suit alleging violations
of Section 10(b) of the Securities Exchange Act of 1934,
15 U.S.C. Section 78j(b) did not have to comply with state
security for costs statutes. McClure v. Borne Chemical,
292 F.2d 824 (3d Cir.), cert. denied 368 U.S. 939 (1961).
Indeed, the Third Circuit in Rodgers v. American Can Co.,
305 F.2d 297 (3rd Cir. 1962) in perhaps the most exhaus-
tive analysis of the issue presented in this petition, held
that even though the shareholders of a ration had
refused to authorize a lawsuit after demand upon them,
such refusal could not stop a derivative plaintiff in his at-
tempt to correct violations of federal law. Clearly the
Third Circuit would not require a party to pursue a mean-
ingless formality prior to suit. See Weiss v. Sunasco, Inc.,
316 F. Supp. 1197 (E.D. Pa. 1970).

The prevailing view from a District Court in the
Seventh Circuit too, is in conflict with the rulings below.
Senior Judge Robson (then Chief Judge), was presented
with the same issue in Jannes v. Microwave Communica-
tions, Inc., 57 F.R.D. 18 (N.D, Ill. 1972). In Jannes the
parties disagreed as to whether Illinois law required a de-
mand on shareholders. The court refused to even consider
Illinois law, holding:

“The parties discuss at some length whether Illinois
law would require a demand on the shareholders
under the circumstances of this suit, but this court
is of the opinion that federal common law controls.
Although speaking of whether a federal cause of ac-
tion was created by violation of Section 14(a) of

12 Reasons for Granting the Writ

the Securities Exchange Act, the comment of the Su-
preme Court is that ‘. . . the overriding federal law
applicable here would, where the facts required, con-
trol the appropriateness of redress despite the provi-
sions of state corporation law, for it “is not uncommon
for federal courts to fashion federal law where fed-
eral rights are concerned.”’ J.J. Case Co. v. Borak,
377 U.S. 426, 434, 84 S. Ct. 1555, 1561, 12 L. Ed. 2d
423 (1964). Furthermore, one reason that federal
jurisdiction is necessary in order to effectuate the
Securities Exchange Act is to avoid state law hurdles
which ‘might well prove insuperable to effective re-
lief.” Id. at 435, 84 S. Ct. at 1561. In connection
with Sec. 14(a) there is authority that whether a
shareholder demand is necessary is ‘clearly’ a matter
of federal law. 2 Loss, Securities Regulation 951
(1961). This court can discern no reason why Sec-
tion 10(b) should be interpreted differently from
Section 14(a) of the same act.” 57 F.R.D. at 22
(emphasis added).

In addition to state shareholder demand requirements and
security for expenses laws, the federal courts have held
other provisions of state law to be inapplicable or irrelevant
to actions grounded on the federal securities statutes. Wolf
v. Frank, 477 F.2d 467 (5th Cir. 1973), cert. denied 414
U.S. 975 (1973) (allowance of prejudgment interest with
10b-5 damage award ); Fields v, Fidelity Gen. Ins. Co., 454
F.2d 682 (7th Cir. 1971) (dictum that a derivative 10b-5
action may be maintained despite the lack of authority to
sue from state court supervising corporate liquidation);
Drachman v. Harvey, 453 F.2d 722 (2d Cir. 1971), affd
in part and rev'd in part on other grounds, 453 F.2d 736
(1972) (en banc) (standing of an equitable stockholder
to bring a derivative LOb-5 action); Clement A. Evans &
Co. v. McAlpine, 434 F.2d 100 (5th Cir. 1970), cert. denied
402 U.S, 988 (1971) (10-b civil action does not require the
application of state substantive law of fraud); Myzel v.

Reasons for Granting the Writ 13

Fields, 386 F 2d 718 (8th Cir. 1967), aert. denied 390 U.S.
951 (1968) (election of remedies doctrine); Gilson v.
Chock Full O’Nuts Corp., 331 F.2d 107 (2d Cir. 1964)
(en banc) (award of attorney fees for merely prompting
to bring an action under Section 16(b) of the
Act); Globus, Inc. v. Law Research Service, Inc.,
318 F. Supp. 955, 958 n.2 (S.D.N.Y. 1970) (contribution
and indemnification for violations of federal securities
laws), aff d 442 F.2d 1346 (2d Cir.), cert. denied 404 U.S.
941 (1971); Hall v. American Cone & Pretzel Co., 71 F.
Supp. 266 (E.D. Pa. 1947) (non-interference with foreign
doctrine). Similarly, the courts have also held
that the definition of the various terms used in the federal
securities statutes are dependent on federal law and the
policy underlying these statutes and not on the contrary
of state law. E.g., Tcherepnin v. Knight, 389
U.S. 332 (1967); Champion Home Builders Co. v. Jeffress,
490 F.2d 611 (6th Cir. 1974), cert. denied 416 U.S. 986
(1974); S.E.C. w. Sterling Precision Corp., 393 F.2d 214
(2d Cir. 1968).

Not only is the decision below in direct conflict with
the law of the First and Third Circuits, but it also ignores
ene oe aaany ene punpese
of the federal

securities laws.

3. State corporate law which conflicts with the over-
riding federal interest in the protection of the in-
vesting public cannot control litigation under the Ex-
change Act.

In discussing the intent of Congress in passing the var-
ious federal securities laws including the Exchange Act,’
upon which Count IV of appellant's Complaint is grounded,
this Court noted:

2. 48 Stat S81, as amended, 15 U.S.C. Section 78a et seq.

14 Reasons for Granting the Writ

[“All of these statutes were] designed to eliminate
certain abuses in the securities industry, abuses
which were found to have contributed to the stock
market crash of 1929 and the depression of the
1930's A fundamental purpose, common to
these statutes, was to substitute a philosophy of full
disclosure for the philosophy of caveat emptor and
thus to achieve a high standard of business ethics
in the securities industry. As we recently said in a
related context, ‘it requires but little appreciation***

S.E.C. v. Capital Gains Research Bureau, 375 U.S. 180,
186-7 (1963) (citations omitted). Accord, Affiliated Ute
Citizens of Utah v. United States, 406 U.S. 128 (1972). It
is thus well settled that, as with all remedial

the Exchange Act is to be construed to effectuate its pur-
poses, central of which is the protection of the investing
public through disclosure, as well as strong civil and crim-
inal penalties to prevent and punish fraud. E.g., Affiliated
Ute, supra; Tcherepnin v. Knight, 389 U.S. 332 (1967);
Crane v. Westinghouse Air Brake Co., 419 F.2d 787 (2d
Cir. 1969), cert. denied 400 U.S. 822 (1970); Columbia
General Investing Corp. v. S.E.C., 265 F.2d 559 (5th Cir.
1959).

In light of this overriding Congressional concern with
the protection of the investing , the federal courts
ites wort emo to effectuate this Con-

a ie doko contrary provisions of state
Soh eae eo Go eliee of cua,

an J.1. Case Co. v. Borak, 377 U.S, 426 (1964). In
holding that the Exchange Act authorizes a federal cause
of action for rescission or damages, the Court in J.1. Case

Reasons for Granting the Writ 15

Co. expressly stated that if victims of deceptive proxy state-
ments were obliged to seek relief in the state courts, the
purpose of Section 14 of the Exchange Act would be frus-
trated if the state either attached no responsibility to the

These reservations would apply vith even more force
if these state procedural or substantive hurdles (such as
demand on the stockholders in all cases) were
held to under Rule 23.1 to derivative suits in federal
court the federal securities laws. Indeed, the special
Congressional would be of no avail to derivative
plaintiffs, as the District Court's order would
one state or group of states could frustrate the purpose of
these statutes by enacting burdensome conditions prece-
dent to the maintenance of derivative suits.

Furthermore, it is unrealistic to claim that since a
stockholder’s right to sue derivatively on behalf of his cor-
arises from state law, that the “necessity” under

Rule 23.1 * of a demand on the body of stockholders would
also depend on state law. Rather, it is just the opposite.
The stockholder’s derivative suit and the limitations upon
its use were initially developed by the federal courts as
part of their powers as courts of equity. Fielding v. Allen,
181 F.2d 163, 167-8 (2d Cir.), cert. denied sub nom Ogden
Corp. v. Fielding, 340 U.S, 817 (1950). Accord, McClure
v. Borne Chemical Co., 292 F.2d 824, 832-34 (3d Cir.),
cert. denied 368 U.S. 939 (1961); see Hawes v. City of
Oakland, 104 U.S. 450 (1882). Indeed, a shareholder's

This “i

quut to Ge cuistantive tow eyes uttsh Ge on & ts federal
law

Miller, Federal Practice and Procedure.

16 Reasons for Granting the Writ

right to “maintain a derivative action on a corporate right
federal in nature is federally conferred.” Fielding, supra;
McClure, supra. Mindful of the federal interest
in obtaining a high standard of business in the secur-
ities industry as well as the equitable origin of the deriva-
tive suit in federal court, the overwhelming number of
courts which have decided this issue have held that the
demand on the stockholders requirement embodied in state
law will not control where that law would harm the fed-
eral interests receiving expression in the derivative right
sought to be enforced. Levitt v. Johnson, 334 F.2d 815
(Ist Cir, 1964), cert. denied 379 U.S. 961 (1965); Phillips
v. Bradford, 62 F.R.D. 681 (S.D.N.Y. 1974); Jannes ov. Mi-
crowave Communications, Inc., 57 F.R.D. 18 (N.D. IIL
1972); Dopp v. American Electronic Lab's, Inc., 55 Fi&.D.
151, 155 and n.10 (S.D.N.Y. 1972); see In re Pittsburgh &
Lake Erie R.R. Co. Sec. & Antitr. Lit., supra; Drachman
v. Harvey, supra; McClure v. Borne Chemical Co., 292
F.2d 824 (3rd Cir. 1961).

In the instant situation, federal law should determine
the necessity for shareholder demand.

4. This court should decide the question of whether
the rationale underlying Van Dusen v. Barrack, 376
U.S. 612 (1964) determines the interpretation of fed-
eral |aw which the transferor district would apply.

It is well settled that if a case is transferred
to 28 U.S.C. Section 1404(a), the state law of the trans-
feror forum, not the transferee forum, must apply. Van
Dusen v. Barrack, 376 U.S. 612, 639 (1964):

“We conclude. . . that in cases such as the present
where the defendants seek transfer, the transferee
district court must be obligated to apply the state

Reasons for Granting the Writ 17

law that would have been applicd if there had been
no change of venue. A change of venue under Sec-
tion 1404(a) generally should be, with respect to
state law, but a change of courtrooms.”

The question raised by this petition, however, is
whether this same rationale should apply to mandate that
the interpretation of federal law which exists in the trans-
feror forum, should be binding on the transferee court.
Compare, Berry Petroleum Co. v. Adams & Peck, 518 F 2d
402, 408 and n.7 (2d Cir. 1975); In re Air Crash Disaster
at Boston, Mass., 399 F. Supp. 1106, 1108 (D. Mass. 1975);
In re Four Seasons Sec. Lit., 370 F. Supp. 219 (W.D. Oke.
1974); In re Plumbing Fixtures Lit., 342 F. Supp. 756
(JPML 1972); Philadelphia Housing Auth. v. American
Radiator & Standard Sanitary Corp., 309 F. Supp. 1053
(E.D. Pa. 1969) with Scheinbart v. Certain-Teed Products
Corp., 367 F. Supp. 707, 711 (S.D.N.Y. 1973); H.L. Green
Co. v. MacMahon, 312 F.2d 650 (2d Cir. 1962), cert. de-
nied 372 U.S. 928 (1963).

With the widespread practice of transfers under Sec-
tions 1404 and 1407 and the increased frequency of invol-
untary consolidations and transfers by the Judicial Panel on
Multidistrict Litigation, this Court should decide this issue.
See In re Pittsburgh & Lake Erie R.R. Co. Sec. & Antitr.
Lit., 543 F.2d 1058, 1065, n.19 (3rd Cir. 1976).

APPENDIX A
UNITED STATES COURT OF APPEALS

18

CONCLUSION | for the
For the reasons set forth above, Petitioner respectfully Second Circuit
prays that this Court issue its Writ of Certiorari so as to 76-7258

bring before it for briefing and argument the questions of
federal law presented.

IRVING MASON, on behalf of himself and all others

me. = similarly situated, and derivatively on behalf of
/s/ Richard D. Greenfield C. I. Realty Investors,
RICHARD D. GREENFIELD Plaintiffs-Appellants,
STERLING H. SCHOEN, Jr.
PHILIP STEPHEN FUOCO ™
PT Coe CITY INVESTING COMPANY, et al.,
Of Counsel: Defendants-Appellees.
Ricnarp D. Greenriecp, P.C.
17 St. Asaphs Road
Bele Cyuwye, Fenneytvenia 18006 APPEAL FROM THE UNITED STATES
aaey Soares DISTRICT COURT OF THE

SOUTHERN DISTRICT OF NEW YORK
(Filed November 9, 1976)

This cause came on to be heard on the transcript of
record from the United States District Court for the South-
ern District of New York, and was argued by counsel.

. ON CONSIDERATION WHEREOF, it is now hereby
ordered, adjudged, and decreed that the order of said Dis-
trict Court be and it hereby is affirmed on the ground that
plaintiff has failed to make a demand pursuant to Fed. R.
Civ. P. 23.1 upon the shareholders of defendant C.1. Realty
Investors as required by Massachusetts law. See Brody v.

la

2a Appendix A

Chemical Bank, 482 F.2d 1111 (2d Cir. 1973); Jones v.
Equitable Life Assurance Society, 409 F. Supp. 370 (S.D.

N.Y. 1975).

/s/ Paul R. Hays
PAUL R. HAYS

/s/ Robert P. Anderson
ROBERT P. ANDERSON

/s/ William H. Timbers
WILLIAM H. TIMBERS
Circuit Judges

3a

APPENDIX B

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
75 Civ 1811 (IBW)

IRVING MASON, on behalf of himself and all others
similarly situated, and derivatively on behalf of
C.l. REALTY INVESTORS,

Plaintiff,

vs.

CITY INVESTING COMPANY, et al.,
Defendants.

ORDER AND FINAL JUDGMENT
(Filed May 3, 1976)

Defendants City Investing Company, C.1. Realty Inves-
tors, C.I. Planning Corporation, John L. Gibbons, Peter C.
R. Huang, James V. Tomai, Jr., William S. Renchard, Fred
R. Sullivan and Reynolds Securities Inc. having moved
this court for an order staying Counts I, II, III and VI of
the Amended Complaint on the grounds that the prosecu-
tion of the instant case concurrently with that of Steinberg
v. Carey 75 Civ 1695(IBW) results in needless expenditure
of the resources and time of defendants and the Court since
both actions are virtually identical and dismissing Counts
IV and V of the Amended Complaint on the grounds that
Plaintiff has failed to make upon the security holders of
defendant C.I. Realty Investors as required by Massa-
chusetts law and on the grounds that Plaintiff cannot prop-

4a Appendix B

erly maintain a suit derivatively on behalf of defendant
C.1. Realty Investors at the same time he is prosecuting
direct claims against such defendant, and oral argument on
these motions having been heard, IT IS HEREBY
ORDERED, Adjudged and Decreed:

A. That all proceedings and in connection
with Counts I, II, III and VI of the Amended Complaint
herein (the direct claims) are stayed until final determina-
tion of the related case of Steinberg v. Carey, 75 Civ 1695
(IBW) and

B. That Counts IV and V of the amended complaint
herein (the derivative claims) are dismissed on the grounds
that Plaintiff has failed to make demand upon the share
holders of defendant C.1. Realty Investors as required by
Massachusetts law.

The Court having made an express determination that
there is no just reason for delay, IT IS FURTHER
ORDERED that pursuant to Rule 54(b) of the Federal
Rules of Civil Procedure entry of a final judgment in favor
of defendants is hereby expressly directed as to Counts
IV and V (the derivative claims).

/s/ Inzer B. Wyatt
INZER B. WYATT, U.S.D_J.

DATED: New York, N.Y.
May, 3, 1976

~~¢ te

Se Ree oe

—

oa

APPENDIX C
STATUTES AND RULES INVOLVED

FEDERAL RULES OF CIVIL PROCEDURE
Rule 23.1
DERIVATIVE ACTIONS BY SHAREHOLDERS

In a derivative action brought by one or more share-
holders or members to enforce a right of a corporation or
of an unincorporated association, the corporation or asso-
ciation having failed to enforce a right which may properly
be asserted by it, the complaint shall be verified and shall
allege (1) that the plaintiff was a shareholder or member
at the time of the transaction of which he com or
that his share or membership thereafter devolved on him
by operation of law, and (2) that the action is not a
collusive one to confer j on a court of the United
States which it would not otherwise have. The complaint
shall also allege with particularity the efforts, if any, made
by the plaintiff to obtain the action he desires from the
directors or comparable authority and, if necessary, from
the shareholders or members, and the reasons for his failure
to obtain the action or for not making the effort. The
derivative action may not be maintained if it appears that
the plaintiff does not fairly and adequately represent the
interests of the shareholders or members similarly situated
in enforcing the right of the tion or association. The
action shall not be dismissed or com without the
approval of the court, and notice of the proposed dismissal
or compromise shall be given to shareholders or members in
such manner as the court directs.

6a Appendix C

SECURITIES EXCHANGE ACT OF 1934
15 USC Secs, 78a-78jj as amended

REGULATION OF THE USE OF MANIPULATIVE
AND DECEPTIVE DEVICES

Sec. 10. It shall be unlawful for any person, directly
or indirectly, by the use of any means or instrumentality
of interstate commerce or of the mails, or of any facility
of any national securities exchange—

(b) To use oh employ, in connection with the purchase
or sale of any security registered on a national securities
exchange or any security not so registered, any manipula-
tive or deceptive device or contrivance in contravention of
such rules and regulations as the Commission may pre-
scribe as necessary or appropriate in the public interest
or for the protection of investors.

15 USC Sec. 78).

PROXIES

Sec. 14. (a) It shall be unlawful for any person, by
the use of the mails or by any means or instrumentali
of interstate commerce or of any facility of a national
securities exchange or otherwise, in contravention of such
rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the
protection of investors, to solicit or to permit the use of his
name to solicit any proxy or consent or authorization in
respect of any security (other than an exempted security )
registered pursuant to section 12 of this title.

15 USC Sec. 78n.

Appendix C Ta

SECURITIES AND EXCHANGE COMMISSION
Rules under the Securities Exchange Act of 1934

Rule 10b-5

Employment of Manipulative and Deceptive Devices

It shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate
commerce, or of the mails, or of any facility of any national
securities exchange,

(1) to employ any device, scheme, or artifice to defraud,

(2) to make any untrue statement of a material fact or
to omit to state a material fact necessary in order to make
the statements made, in the light of the circumstances
under which they were made, not misleading, or

(3) to engage in any act, practice, or course of business
which operates or would operate as a fraud or deceit upon
any person, in connection with the purchase or sale of any
security.

17 CFR §240.10b-5

Rule 14a-9
False or Misleading Statements

(a) No solicitation subject to this regulation shall be
made by means of any proxy statement, form of proxy,
notice of meeting or other communication, written or oral,
containing any statement which, at the time and in the
light of the circumstances under which it is made, is false
or misleading with respect to any material fact, or which
omits to state any material fact necessary in order to make
the statements therein not false or misleading or necessary
to correct any statement in any earlier communication with
respect to the solicitation of a proxy for the same meeting
or subject matter which has become false or misleading.
17 CFR §240.14a-9

8a

APPENDIX D

UNITED STATES COURT OF APPEALS
for the
Second Circuit
77-7258

IRVING MASON, on behalf of himself and all others
similarly situated, and derivatively on behalf of
C. I. Realty Investors,
Plaintiff-Appellants,

vs.

CITY INVESTING COMPANY, et al.,
Defendants-Appellees.

A petition for a rehearing having been filed herein by
counsel for the PLAINTIFF-APPELLANT,

Upon consideration thereof, it is

Ordered that said petition be and hereby is denied.

/s/ A. Daniel Fusaro
Clerk

(Filed February 18, 1977)

---

Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385004_1799%3A1. Public record. Not legal advice.