# Petition — Gross v. Newburger > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0074%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1978 - **Citation:** 434 U.S. 1035 ## Text Supreme Court, U. S, FILED NOV 18 1977 IN THE Supreme Court of the United Beh 004%, sk. cLere Ocroser Term, 1977 No. .... UU-WM17 oe Cares Gross, Petitioner, —vVvV —_ Newsurcer, Lors & Co., a New York Limited Partnership, Anprew M. Newsunrcer, Ropert L. Newsuroer, Rickarp D. Srery, Warter D. Stern, and Roperr L. Srern as Executors of the Estate of Leo Stern, Ropert L. Sreay, Ricuarp D. Srern, Sanrorp Roccensure, Frep Kayne, Rosert Mun, Pavu Risuer, Cuaries Sioane, Roserrt 8. Persxy, and Fintey, Kumsiz, Waoner, Herne, Unver- perc & Grurman, a Partnership (formerly known as Finley, Kumble, Underberg, Persky & Roth and Finley, Kumble, Heine, Underberg & Grutman), Newsvunrcer, Lozs & Co., Lyo., Respondents. — — LL ————— — — —— PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT ___—_—_—_ Pru Manoet, Esq. 10 East 40th Street New York, New York 10016 (212) 679-3760 Attorney for Petitioner INDEX PAGE SN TD tictahnscsiseciihineciiiteinsecasiinensiaitindiiiniiaitliingienn 2 Jurisdiction 2.00... sichaaaiedatnbmmnatenennitamatvedn 2 ON 2 Constitutional Provisions, Statutes and Rules ................ 3 I ION ss cicisisntenaitidamnaniialaatinaasieiaianid 8 Reasons for Granting the Writ ..................:ccccccessesees 14 Point I This Court Should Now Decide the Fundamental Question Left Open by It in 1926 in Moore v. New York Cotton Exchange, 270 U.S. 593, Namely: What Is the Extent of Ancillary Subject Matter Jurisdiction Over “Permissive” Counterdlaims? Is Jurisdiction Over Such Counterclaims Limited OR CRIED . ccnisinstcctaesnststtlnnstiatanniaidbinsitatatittninteteineinhitamniainsinnian 14 Port II This Court Should Decide Whether the Federal Courts Have Inherent Power to Protect the In- tegrity and Dignity of Their Own Proceedings by Awarding Punitive Damages, Without Reference to State Law, Against Those Who Bring Baseless and Fraudulent Actions Before Them .................... 31 Conclusion 33 PAGE Appenpix A: Opinion of the United States Court of Appeals Bom Ge Bese GRIGG ccccresscsassccssssstcssnsnsenesstectibetecanice A-l Apprenpix B: Opinion after trial of the United States District Court for the Southern District of New York CE GD cncnstitecntnstennnsenctinecsiietentiniannaneenpas B-1 Appenpix C: Judgment of the United States Court of Appeals for the Second Circuit ey | Appenpia D: Judgment of the United States District Court for the Southern District of New York ......................00-. D-1 Appenpix E: Opinion of United States District Court for the Southern District of New York on motions to dis- miss and for summary judgment (Judge Ward) .... E-1 ili TaBLe or AUTHORITIES PAGE Cases: Great Lakes Rubber Corporation v. Herbert Cooper Co. Inc., 286 F’. 2nd 631 (3rd Cir. 1961) 19 Gumbel v. Pitkin, 124 U.S. 131 (1888) 32 Krippendorf v. Hyde, 110 U.S. 276 (1884) ..0.......ccccc00e 32 Moore v. New York Cotton Exchange, 270 U.S. 593 (1926) 14, 19, 27 Pipeliners Local #798 v. Ellerd, 503 F. 2nd 1193 (10th Cir. 1974) 19 Pueblo de Taos v. Archuleta, 64 F. 2nd 807 (10th Cir. 1933) Reid v. Prentice-Hall, 261 F. 2nd 700 (6th Cir. 1958) .. 32 United Mine Workers v. Gibbs, 383 U.S. 715 (1966) passim United States v. Heyward-Robinson Co., 430 F. 2nd 1077 (2nd Cir. 1970), cert. denied 400 U.S. 1021 ........ 15, 17 United States v. Powell, 379 U.S. 48 (1964) 32 Constitutional Provisions, Statutes and Rules: U. 8S. Constitution, Article 3, §2, cl. 1 22 28 U.S.C. §1331 23 28 U.S.C. §1337 23 28 U.S.C. §1441 (a) through (c) 23, 24 15 U.S.C. §77v (a) 8,9 15 U.S.C. §78aa 8,9 Federal Rule of Civil Procedure 13 (a) and (b) ....22, 27, 28 Federal Rule of Civil Procedure 11 32 iv IN THE PAGE Other Authorities: Supreme Cont of the United States Green, Federal Jurisdiction Over Counterclaims, 48 Ocroser Term, 1977 N.W.U.L. Rev. 271 (1953) 24 a vee Moore’s Federal Practice o.cccccccccccocseeceneeeeeeeneeeee 15, 16, 19, 20 Wright & Miller, Federal Practice and Procedure ........ 20 — Petitioner, Newsurcer, Lozs & Co., a New York Limited Partnership, Anprew M. Newsurcer, Ropert L. Newsurcer, Ricnarp D. Stern, Warrer D. Stern, and Ropert L. Stern as Executors of the Estate of Leo Stern, Roserr L. Stern, Ricuarp D. Srern, Sanrorp Roccensurc, Frep Kayne, Rosert Mun, Pauw Risuer, Coarites Sioane, Rosert 8. Persky, and Finutey, Kumsie, Wacner, Herne, Unper- perc & GrutTMan, a Partnership (formerly known as Finley, Kumble, Underberg, Persky & Roth and Finley, Kumble, Heine, Underberg & Grutman), Respondents. = — PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT Charles Gross, the above Petitioner, requests that a Writ | of Certiorari issue to review the judgment of the United States Court of Appeals for the Second Circuit entered in this case on August 24, 1977, insofar as said judgment (1) reversed on jurisdictional grounds the award of judg- ment to Gross for damages for conversion of his interest in certain warrants, and (2) reversed the award of $50,000 | of punitive damages awarded to Gross. Opinions Below The Opinion of the United States Court of Appeals for the Second Circuit has not yet been officially reported. A copy thereof is set forth as Appendix A. The Opinion of Judge Richard Owen in the United States District Court for the Southern District of New York, dated July 7, 1976, on which the judgment was based, has not been officially reported. A copy is set forth as Appen- dix B. The Opinion of Judge Robert J. Ward in the United States District Court for the Southern District of New York, dated October 16, 1973 is officially reported in 365 F. Supp. 1364 and a copy is set forth as Appendix E. Judge Ward’s Opinion granted in part and denied in part motions and cross-motions to dismiss and for summary judgment. Jurisdiction The judgment of the Court of Appeals was entered on August 24, 1977. This Court’s jurisdiction is invoked under 28 U.S.C. § 1254(1). Questions Presented 1. Did the Court of Appeals err in reversing the judg- ment granting damages fer conversion of Gross’ securities on the ground that no ancillary jurisdiction exists over “permissive” counterclaims except as to set-off? 2. Did the Court of Appeals err in reversing the judg- ment in Gross’ favor for punitive damages on the ground 3 that the same are not authorized by state law in this case? Do the federal courts have inherent power to protect the integrity and dignity of their own proceedings by awarding _ punitive damages, without reference to state law, against those who bring baseless and fraudulent actions before them? Constitutional Provisions, Statutes and Rules Article III, § 2, cl. 1 of the United States Constitution reads as follows: Section 2, Clause 1. Jurisdiction of Courts Section 2. The judicial Power shall extend to all Cases, in Law and Equity, arising under this Constitu- tion, the Laws of the United States, and Treaties made, or which shall be made, under their Authority ;—to all Cases affecting Ambassadors, other public Ministers and Consuls ;—to all Cases of admiralty and maritime Jurisdiction ;—to Controversies to which the United States shall be a Party ;—to Controversies between two or more States ;—between a State and Citizens of an- other State;—between Citizens of different States ;— between Citizens of the same State claiming Lands under Grants of different States, and between a State, or the Citizens thereof, and foreign States, Citizens or Subjects. 28 U.S.C. § 1331 reads as follows: § 1331. Federal question; amount in controversy ; costs (a) The district courts shall have original jurisdic- tion of all civil actions wherein the matter in contro- 4 versy exceeds the sum or value of $10,000, exclusive of interest and costs, and arises under the Constitution, laws, or treaties of the United States except that no such sum or value shall be required in any such action brought against the United States, any agency thereof, or any officer or employee thereof in his official capacity. (b) Except when express provision therefor is other- wise made in a statute of the United States, where the plaintiff is finally adjudged to be entitled to recover less than the sum or value of $10,000, computed with- out regard to any setoff or counterclaim to which the defendant may be adjudged to be entitled, and exclu- sive of interests and costs, the district court may deny costs to the plaintiff and, in addition, may impose costs on the plaintiff. 28 U.S.C. § 1337 reads as follows: § 1337. Commerce and anti-trust regulations The district courts shall have original jurisdiction of any civil action or proceeding arising under any Act of Congress regulating commerce or protecting trade and commerce against restraints and monopolies. 28 U.S.C. § 1441(a) through (c) reads as follows: § 1441. Actions removable generally (a) Except as otherwise expressly provided by Act of Congress, any civil action brought in a State court of which the district courts of the United States have original jurisdiction, may be removed by the defendant or the defendants, to the district court of the United 5 States for the district and division embracing the place where such action is pending. (b) Any civil action of which the district courts have original jurisdiction founded on a claim or right aris- ing under the Constitution, treaties or laws of the United States shall be removable withuut regard to the citizenship or residence of the parties. Any other such action shall be removable only if none of the par- ties in interest properly joined and served as defen- dants is a citizen of the State in which such action is brought. (c) Whenever a separate and independent claim or cause of action, which would be removable if sued upon alone, is joined with one or more otherwise non-remov- able claims or causes of action, the entire case may be removed and the district court may determine all issues therein, or, in its discretion, may remand all matters not otherwise within its original jurisdiction. 15 U.S.C. § 77v(a) reads as follows: §$77v. Jurisdiction of offenses and suits (a) The district courts of the United States, and the United States courts of any Territory, shall have juris- diction of offenses and violations under this subchapter and under the rules and regulations promulgated by the Commission in respect thereto, and concurrent with State and Territorial courts, of all suits in equity and actions at law brought to enforce any liability or duty created by this subchapter. Any such suit or action may be brought in the district wherein the defendant is found or is an inhabitant or transacts business, or in the district where the offer or sale took place, if the defendant participated therein, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defen- dant may be found. Judgments and decrees so rendered shall be subject to review as provided in sections 225 and 347 of Title 28. No case arising under this sub- chapter and brought in any State court of competent jurisdiction shall be removed to any court of the United States. No costs shall be assessed for or against the Commission in any proceeding under this ubehapter brought by or against it in the Supreme Court or such other courts. 15 U.S.C. § 78aa reads as follows: § 78aa. Jurisdiction of offenses and suits The district courts of the United States, and the United States courts of any Territory or other place subject to the jurisdiction of the United States shall have exclusive jurisdiction of violations of this chapter or the rules and regulations thereunder, and of all suits in equity and actions at law brought to enforce any liability or duty created by this chapter or the rules and regulations thereunder. Any criminal proceeding may be brought in the district wherein any act or trans- action constituting the violation occurred. Any suit or action to enforce any liability or duty created by this chapter or rules and regulations thereunder, or to en- join any violation of such chapter or rules and regula- tions, may be brought in any such district or in the 7 district wherein the defendant is found or is an in- habitant or transacts business, and process in such cases may be served in any other district of which the defendant is an inhabitant or wherever the defendant may be found. Judgments and decrees so rendered shall be subject to review as provided in sections 225 and 347 of Title 28. No costs shall be assessed for or against the Commission in any proceeding under this chapter brought by or against it in the Supreme Court or such other courts. Fed. R. Civ. P. 13(a) and (b) reads as follows: Rule 13. Counterclaim and Cross-Claim (a) Computsory Counterctams. A pleading shall state as a counterclaim any claim which at the time of serving the pleading the pleader has against any op- posing party, if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim and does not require for its adjudication the presence of third parties of whom the court cannot acquire jurisdiction. But the pleader need not state the claim if (1) at the time the action was commenced the claim was the subject of another pending action, or (2) the opposing party brought suit upon his claim by attachment or other process by which the court did not acquire jurisdiction to render a personal judgment on that claim, and the pleader is not stating any coun- terclaim under this Rule 13. (b) Permissive Counterciaims. A pleading may state as a counterclaim any claim against an opposing party not arising out of the transaction or occurrence 8 that is the subject matter of the opposing party’s claim. FRCP Rule 11 reads as follows: Rule 11. Signing of Pleadings. Every pleading of a party represented by an attorney shall be signed by at least one attorney of record in his individual name, whose address shall be stated. A party who is not represented by an attorney shall sign his pleading and state his address. Except when otherwise specifically provided by rule or statute, pleadings need not be verified or accompanied by affidavit. The rule in equity that the averments of an answer under oath must be overcome by the testimony of two witnesses or of one witness sustained by corroborating circumstances is abolished. The signature of an attorney constitutes a certificate by him that he has read the pleading; that to the best of his knowledge, information, and belief there is good ground to support it; and that it is not interposed for delay. If a pleading is not signed or is signed with intent to defeat the purpose of this rule, it may be stricken as sham and false and the action may proceed as though the pleading had not been served, For a wilful violation of this rule an attorney may be subjected to appropriate disciplinary action. Similar action may be taken if scandalous or indecent matter is inserted. Statement of the Case The complaint alleged that defendants were guilty of “churning” the brokerage account of one Buckley in vio- lation of the Securities Act of 1933 and the Securities Exchange Act of 1934. Jurisdiction was based on 15 U.S.C. 9 § 77v(a), 15 U.S.C. § 78aa, and pendent jurisdiction. The complaint was asserted on behalf of Newburger, Loeb & Co., Inc., a new corporation, which had taken the claim by a purported assignment from Newburger, Loeb & Co., a partnership, which had, in turn, taken the claim by assign- ment from Buckley. The defendants were Gross & Co., Charles Gross, a former general partner of Newburger, Loeb & Co., his sister Jeanne Donoghue, a limited partner of Newburger, Loeb & Co., and Mabel Bleich, Gross’s former secretary, who was also a limited partner of Newburger, Loeb & Co. The defendants asserted various counterclaims, pri- marily based on the following allegations: That the com- plaint was brought in bad faith as part of a conspiracy to deprive defendants of their rights and property in con- nection with the Newburger, Loeb partnership; that the general partners, the promoters of the new corporation, the new corporation itself, and certain attorneys for the promoters and for the new corporation, all conspired to push through a sale of the assets of the Partnership to the corporation without the consent of defendants, in vio- lation of Section 98 of the New York Partnership Law, and further conspired to hold off defendants’ right to the return of their capital through the assertion of baseless and fraudulent litigation. The counterclaims were pleaded against the plaintiff corporation and also against the Part- nership, certain partners, promoters of the new corporation and their attorneys, all of whom were brought into the action as additional defendants on counterclaims. Many of the allegations in the answer were asserted as defenses against plaintiff’s claims, and also as part and 10 parcel of the counterclaims. For example, the allegation that the sale of the Partnership’s assets to the corporation was invalid under Section 98 of the Partnership Law was made defensively and offensively. This fact would defeat the plaintiff's churning claim, because plaintiff’s title to the claim depended upon the validity of the assignment to it. Illegality of the assignment under the Partnership Law was also asserted as a basis for defendants’ counter- claim that the Partnership’s assets had been wrongfully converted by the conspirators. Similarly, the allegation that the churning complaint was brought in bad faith was used defensively as an estoppel, and also was pleaded in the counterclaim as a breach of fiduciary obligations. All of the counterclaims, except one, were pleaded under state law, and it was alleged that ancillary and pendent juris- diction existed over them. In the Third Counterclaim, which is particularly germanc to this petition, defendant Gross alleged that he was the beneficial owner of certain securities held in the name of the Partnership, and that these securities were converted when they were transferred by the Partnership to the corporation, along with all of the other assets of the Part- nership, under the illegal Transfer Agreement of Feb- ruary 11, 1971. Judge Ward's Decision The plaintiff and additional defendants on counterclaims moved to dismiss defendants’ state law counterclaims for lack of subject matter jurisdiction, and each side also made motions for summary judgment. On the jurisdictional issues, Judge Ward held (Newburger, Loeb & Co., Inc. v. Gross, 365 F. Supp. 1364 (S.D.N.Y. 1973) (App. E)) ll that the First, Second and Fourth Counterclaims were “logically related” to the complaint and were thus com- pulsory counterclaims within the Court’s ancillary juris- diction. However, Judge Ward held that certain other counterclaims, including the Third Counterclaim, were not logically related to the complaint, and thus were merely permissive counterclaims. Judge Ward held that, there being no independent jurisdictional basis for these counter- claims, they could be maintained only as a set-off, to defeat or reduce any possible judgment on behalf of plaintiff (App. E2). Judge Ward granted partial summary judgment to de- fendants. He found that the sale of the partnership assets and business to the corporation, without the consent of Bleich and Donoghue, violated Section 98 of the New York Partnership Law. Judge Ward did not set aside the un- authorized transfer of assets, but held that the amount of damages should be left for trial (App. E4-5). Afier Judge Ward’s decision, plaintiff and additional defendants on counterclaims filed an answer and reply in which they asserted six additional claims against Gross, all alleging acts of wrongdoing while Gross was the man- aging partner of Newburger, Loeb & Co. Judge Owen’s Decision A seven week trial was held before Judge Owen in the summer of 1975, after which he issued an unpublished opinion (App. B), holding: (1) All of the claims asserted against defendants in the complaint and in the reply were dismissed as baseless. 12 (2) Judge Owen found that the plaintiffs and addi- tional defendants on counterclaims (except Aixala and Berkowitz) were guilty of a conspiracy, in breach of fi- duciary duties, to injure Gross, Bleich and Donoghue in their interests in the Partnership. Kayne, Risher, Sloan, Muh and Persky planned to take over the new corporation on a shoestring and directly enrich themselves, and they persuaded the controlling partners to go along with their plan by arranging unlawful forgiveness of about $500,000 of indebtedness owed by such partners to the firm. The conspirators knowingly violated Section 98 of the New York Partnership Law, when they transferred the Partnership’s business and assets to the corporation. This unauthorized transfer converted the partnership assets, including the interests of Gross, Bleich and Donoghue. Judge Owen also found that the conspirators used the baseless claims as- serted in the complaint, and in the reply, for the purpose of holding off payment to Gross, Bleich and Donoghue of the sums owed to them. Judge Owen awarded the sum of $76,868 each to Bleich and Donoghue, and the sum of $337,921 to Gross, representing their respective dollar cap- ital balances in the Partnership. Judge Owen also awarded $50,000 in punitive damages to Gross against certain of the conspirators. (3) The Third Counterclaim, for conversion of Gross’s warrants, which Judge Ward had ruled was merely per- missive and therefore available only as set-off, was tried in full. At the outset of the trial, defendants’ attorneys stated that at the close of the evidence, they would move to conform the pleadings to the proof with regard to this claim, and Judge Owen later granted this motion. The undisputed proof showed, and Judge Owen found, that 13 the warrants in question, issued by Geon Industries and National Computer Software, had been earned by the Part- nership in 1969. The warrants were kept in partnership name because they were not transferable, but bencficial ownership was vested in certain partners, including Gross, who owned about 16% per cent of the total. Gross’s war- rants were transferred to the new corporation along with all the assets of the Partnership under the unlawful Trans- fer Agreement of February 11, 1971, and the corporation eventually realized substantial profits on the warrants. Judge Owen found that Gross’s warrants were deliberately purloined (App. B20), and awarded Gross damages of $132,803. The Decision of the Court of Appeals The Court of Appeals partly affirmed and partly reversed Judge Owen’s judgment. Liability of plaintiff and addi- tional defendants on counterclaims was upheld for various wrongful acts, including conspiring to bring baseless ac- tions against defendants for the purpose of holding off payment of sums owed to them and conspiring to convert the capital assets of the Partnership, including capital interests of defendants, by selling the same to the corpo- ration in an agreement induced by self-dealing and made in violation of Section 98 of the New York Partnership Law. The Court of Appeals, however, reversed the award of punitive damages to Gross on the ground that the same were not authorized by state law in such a case, and re- versed the award of damages to Gross for conversion of his warrants on the ground that the Third Counterclaim was not a compulsory counterclaim, but merely a per- missive counterclaim, over which no jurisdiction existed 14 beyond set-off. The Court of Appeals also remanded to the District Court for more specific findings regarding computation of damages awarded to Gross, Bleich and Donoghue in connection with the other portions of their capital interests in the Partnership. REASONS FOR GRANTING THE WRIT This Court Should Now Decide the Fundamental Question Left Open by It in 1926 in Moore v. New York Cotton Exchange, 270 U.S. 593, Namely: What Ie the Extent of Ancillary Subject Matter Jurisdiction Over “Permissive” Counterclaims? Is Jurisdiction Over Such Counterclaims Limited to Set-Off? A. This petition raises an important and far-reaching ques- tion affecting jurisdiction of the federal courts with regard to counterclaims which lack independent grounds for fed- eral jurisdiction. In Moore v. New York Cotton Exchange, 270 U.S. 593 (1926), this Court said that it need not con- sider the scope of jurisdiction over permissive counter- claims because the counterclaim then before it arose out of the “transaction which is the subject matter of the suit,” and hence was compulsory. The Court held that ancillary federal subject matter jurisdiction exists over such com- pulsory counterclaims, but left open the question of juris- diction over other counterclaims. Since 1926, lower federal courts, in the large, have ruled that in the absence of independent grounds of jurisdiction, 15 ancillary jurisdiction over permissive counterclaims is limited to set-off, so that if the plaintiff’s case is dismissed on the merits, no jurisdiction extends to allowing an affirm- ative judgment on the counterclaim on behalf of defendant. See 3 Moore’s Federal Practice pp. 13-481 to 13-483. In the instant case, that rule was applied by the Court of Appeals to set aside, solely on jurisdictional grounds, a judgment on one of the counterclaims which the trial court had granted on the merits, on overwhelming evidence of wrong- doing, after a seven-week trial. Authoritative commentators have condemned the rule restricting jurisdiction over permissive counterclaims to set-off, pointing out that it is not justified by principle under the relevant constitutional and statutory provisions, that it wreaks havoc with judicial economy, and that it works injustice among litigants. The rule also runs counter to the policy favoring the broadest possible joinder of claims which permeates the Federal Rules of Civil Proce- dure and many decisions of this Court. See United Mine Workers v. Gibbs, 383 U.S. 715, 724 (1965). The rule has twice been questioned in judicial opinions of the Court of Appeals for the Second Circuit: once by Judge Friendly, in a concurring opinion in the case of United States v. Heyward-Robinson Co., 430 F.2d 1077 (2d Cir. 1970), cert. denied 400 U.S. 1021, and again by the decision in the instant case, wherein the Court stated (App. A25, 26) that it did not reconsider this rule because it had not been requested to do so by the parties.’ ‘We did not »rgue the scope of jurisdiction over permissive counterclaims because we thought that question would not be reached. We were convinced that all the counterclaims were com- pulsory, including the claim for conversion of Gross’s securities. However, when the Court of Appeals disagreed with us, and held 16 Professor Moore has said of the rule that it “... is supported by orthodoxy; and wholly undercut by practical needs.” 3 Moore’s Federal Practice, 13-483, 13.19[1]. Professor Moore has also stated: “The rule that there must be independent jurisdic- tional grounds to support a permissive counterclaim, except a defensive set-off, has been legitimately criti- cized. There is nothing expressly stated in the history of the Constitution or the jurisdictional statutes that demand this restriction on federal court jurisdiction. Thus the same procedural policies which favor dis- posal of all questions between the same parties in one suit should create federal jurisdiction over such per- missive claims as part of the wholc ‘case’. Indeed, the rule’s exception, which does allow federal jurisdiction over a defensive set-off, but not over an offensive set- off, may work unfairly at times. For the distinction can often be applied realistically only after a trial, and thus causes the defendant prematurely to choose whether to split his claim. If the federal court has initial jurisdiction to hear the defensive counterclaim then judicial economy ought to allow jurisdiction to utilize the same trial to give an affirmative recovery.” 3 Moore’s Federal Practice pp. 11-486 through 11-487, 913.19[1]. (Footnotes omitted). this counterclaim was merely permissive. we think it should have re-examined the rule that permissive counterclaims are available only as set-off. It is apparent that the Court itself entertains grave doubt as to the validity of the rule, and in the face of such doubt, we respectfully submit that the Court should not have applied the rule, without re-examination, to reverse the judgment of the trial court. It has long been recognized that an appellate court may, and should, raise sua sponte, any jurisdictional questions affecting the judgment before it. 17 In his concurring opinion, in United States v. The Hey- ward-Robinson Company, supra, Judge Friendly said, at 430 F.2d 1077, 1088: “I would now reject the conventional learning, which I followed too readily in O’Connell v. Erie Lackawanna R.R., 391 F.2d 156, 163 (1968), that the permissive counterclaim ‘needs independent jurisdic- tional grounds to support it, with one exception,’ to wit, set-off, 3 Moore, Federal Practice 913.19 at 53-54 (2d ed. 1968). The Supreme Court left this question open in Moore v. New York Cotton Exchange, 270 U.S. 593, 609, 46 S.Ct. 367, 70 L. Ed. 750 (1926).” “The reasons why the conventional view is wrong are set out in detail in an article by Professor Thomas F. Green, Jr., Federal Jurisdiction over Counter- claims, 48 N.W.U.L. Rev. 271 (1953), and nothing would be gained by repetition. I mention only two points. One is that for reasons there developed, id. at 277-81, Professor Moore’s sound recognition—perhaps more accurately creation—of the exception that set-off requires no independent jurisdictional basis, see 3 Moore, Federal Practice, 13.19 at 54-55 n. 3; Marks v. Spitz, 4 F.R.D. 348 (D.Mass. 1945); Fraser v. Astra S. S. Corp., 18 F.R.D. 240 (S.D.N.Y. 1955), carries the seeds of destruction of the supposed general rule. The other is that at least since United Mine Workers v. Gibbs, 383 U.S. 715, 86 S.Ct. 1130, 16 L.Ed.2d 218 (1966), it is no longer thought the heavens will fall if a federal court deals with a non-federal claim when it is convenient to do so.” The instant case provides a quintessential example of the mischief which can be wrought by this rule, and there- fore is a fitting vehicle for this Court’s consideration of the question. 18 The opinions in the District Court and in the Court of Appeals both recognized that this action was instituted in 1971 as part of a conspiracy unlawfully to keep the capital of defendants in the new corporate business owned bv the conspirators. Defendants were told bluntly that if they refused to approve the sale of the partnership business to the corporation, and refused to accept securities of the new corporation in lieu of their partnership interests, they still would not be paid the sums owing to them, but, instead, they would be subjected to many years of expensive and damaging litigation. In his opinion after trial, Judge Owen described the claims against defendants as follows: (App. B21) “All were baseless, see pp. 20-22, supra. These claims and attendant vilification were solely used as bargain- ing tools against Gross, which he had the personal courage, fortified by the courage and determination of his counsel, to oppose over long years.” If defendants were not to surrender to these tactics, their only alternative was to resist the false claims asserted against them, while simultaneously counterclaiming to en- force their own rights. The Court of Appeals agreed with Judges Owen and Ward that federal jurisdiction existed over the counter- claims in which defendants demanded return of their dollar capital converted by the conspirators. The Court of Ap- peals did not disagree with Judge Owen’s determination on the merits that the conspirators had also converted Gross’s warrants, but set aside the judgment ($134,171) for 19 conversion of these securities, solely on the ground that the Third Counterclaim was merely permissive, so that jurisdiction over it was limited to set-off. Since all of plaintiff’s claims were dismissed, no set-off was applicable and, hence, ‘he Court of Appeals held that the federal courts had no jurisdiction to redress the conversion of these securities. It is not realistic to say the claim for conversion of the warrants should have been brought in the state courts in the first instance. There was no possibility open to de- fendants of allowing the churning claim to proceed in the federal courts, while defendants pressed all their claims in a new action started by them in the state courts. Fed.R. Civ.P. 13(a), the Compulsory Counterclaim Rule, forced defendants to assert in the federal action all claims “aris- ing out of the same transaction,” which means all claims “logically related” to the subject matter of the complaint: Moore v. New York Cotton Exchange, 270 U.S. 593 (1926) ; Great Lakes Rubber Corporation v. Herbert Cooper Co. Inc., 286 F.2d 631, 634 (3d Cir. 1961); Pipeliners Local #798 vy. Ellerd, 503 F.2d 1193 (10th Cir. 1974); 3 Moore’s Federal Practice, § 13.13. Both Judge Ward, in his summary judgment decision in 1973, and the Court of Appeals, in its decision in 1977, recognized that the bulk of defendants’ claims fell into the category of compulsory counterclaims. We respectfully suggest that any practical analysis of the facts and legal theories, viewed from the standpoint of an attorney forced to make decisions at the time of drafting his answer and counterclaims, would indicate that no chance should be taken of omitting to plead in the federal action any claim which could later be argued was a compulsory counter- 20 claim.’ All of the respective claims and counterclaims were part of one dispute between the parties, and we suggest that at the time of drafting the answer, a practitioner in the field should not be required to make fine technical dis- tinctions to form the basis of pleading some of defendants’ claims as counterclaims in the federal action, and pleading other of these inter-related claims in a complaint in a sepa- rate state court action. Put into concrete terms, the practical implication of the Court of Appeals’ decision in this case is that at the time of pleading our counterclaims, we should have included in the federal answer a claim for the dollar capital of Gross, Bleich and Donoghue, but we should have drawn a fine line and excluded the claim for conversion of Gross’s warrants, and should have asserted that claim in a separate state court action. This line of separation between the dollar capital and the warrants was to be drawn—under the theory below—even though the dollar capital and the warrants were both being withheld from their true owners pursuant to the same conspiracy; were both held off by means of the same baseless claims and litigations; and even though both forms of assets had been transferred to the new cor- poration under the same unlawful Transfer Agreement, which was illegally induced, and which was executed in violation of Section 98 of the New York Partnership Law. * Professor Moore advises: “Of course, if defendant is in any doubt as to the nature of his counterclaim, whether permissive or compulsory, careful practice requires him to plead it in order to protect himself.” 3 Moore’s Federal Practice, Paragraph 13.12[1], page 13-272. Professors Wright and Miller have said: “Thus, the careful attorney can and usually will plead all of his client’s claims as counterclaims if he has any reason to believe that they might be considered compulsory.” 6 Federal Practice and Procedure, § 1417, page 100. 21 We are unapologetically critical of such a rule of law, which we feel to be pointless, unworkable, and mischie- vous. As we have previously indicated, we believe that the instant case may provide an extreme example of the dam- age which may be worked by this rule, but, as so often happens, the extreme example is the one most suited to highlight inherent flaws in a general rule. The conspirators threatened that if defendants did not yield to their demands, they would be embroiled in litiga- tion for many long years. This threat, the conspirators fulfilled in full measure and still actively pursue, with great help from the rule that permissive counterclaims are available only as set-offs. The result is disastrous from the point of view of justice between the parties, and equally disastrous from the point of view of judicial economy. The time and expense re- quired to reach judgment were enormous. The conspirators exercised every tactic to delay the trial. Dilatory motions were employed without mercy. At one point the trial court was forced to fine some of the additional defendants $750 for repeated failure to comply with orders regarding dis- covery. When the plaintiff corporation went into receiver- ship, that event was exploited to the full for further Gelay. The conspirators changed and switched attorneys again and again, causing still more delays. The trial, itself, took seven full weeks, and the joint appendix in the Court of Appeals consisted of eleven heavy volumes. The cost of the case, in terms of legal hours, was staggering. After all this travail, Gross succeeded in proving beyond any challenge on the merits that the conspirators had de- liberately converted his securities (App. B20). Yet, six 22 and one-half years after service of the summons, the rule that permissive counterclaims are available only as set-offs, operated to abort the judgment with regard to this conver- sion. True, as the Court of Appeals pointed out, Gross can still bring timely action on this claim in the state courts under a savings clause with regard to the statute of limi- tations provided by the New York Civil Practice Law and Rules. But this is rather incomplete solace under the circumstances. These unfortunate consequences do not stem from an unavoidable lack of federal jurisdiction. We will show below that the rule restricting jurisdiction over permissive counterclaims to set-off is not justified by the Constitution; is not justified by jurisdictional statutes; is inconsistent with the provisions of Fed.R.Civ.P. 13(b); and is incon- sistent with the reasoning of this Court in connection with related jurisdictional questions. C. The fundamental fact is that neither the Constitution nor the statutes which define the jurisdiction of the fed- eral courts mention counterclaims. Article III, Section 2, of the Constitution provides in part that: “he judicial power shall extend to all cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties... .” The Constitu- tion does not speak in terms of “causes of action” or “claims” which may involve federal questions, but, instead, confers jurisdiction upon “all cases” arising under the federal Constitution, statutes, or treaties. We suggest that 23 this language means that whenever the plaintiff bases the complaint upon the Constitution or a federal statute, the whole case falls within the Constitutional scope of judicial power and that the “case” comprehends all claims which may properly be joined therein. Nor does the Judicial Code confer jurisdiction over fed- eral questions, federal claims or federal issues; instead the operative statutes confer jurisdiction over the “action.” Good examples are 28 U.S.C. §4 1331 and 1337. Section 1331 gives the district courts original jurisdiction of “all civil actions” arising under the Constitution, laws, or treaties of the United States, wherein the matter in con- troversy exceeds the sum or value of $10,000. Section 1337 reads as follows: “§ 1337. Commerce and anti-trust regulations The district courts shall have original jurisdiction of any civil action or proceeding arising under any Act of Congress regulating commerce or protecting trade and commerce against restraints and monopolies.” (Emphasis added). Each of these statutes gives the district courts jurisdiction over the whole action. Nothing in these statutes restricts federal jurisdiction to the part of the action containing a federal question. 28 U.S.C. § 1441, the general removal statute, expressly recognizes that “civil action” means “entire case,” which may include non-federal claims and causes of action. Sec- tion 1441(a) provides that any civil action brought in a state court of which the district courts have original jurisdiction, may be removed to the district court. Section 1441(c) pro- vides as follows: 24 “(c) Whenever a separate and independent claim or cause of action, which would be removable if sued upon alone, is joined with one or more otherwise non-remov- able claims or causes of action, the entire case may be removed and the district court may determine all issues therein, or, in its discretion, may remand all matters not otherwise within its original jurisdiction.” (em- phasis added) Thus, the Constitutional and statutory provisions, alike, grant jurisdiction over the entire case, which must include a federal claim, and may also include separate non-federal claims or causes of action. Nothing in the Constitution or statutes distinguishes between non-federal claims asserted in the complaint and non-federal claims asserted in the an- swer. If the phrase “civil action” were defined to include only the plaintiff’s case, there would be no jurisdiction over counterclaims whatsoever. If counterclaims were to be con- sidered as separate civil actions, tried together with plain- tiff’s civil actions, then it would follow that there could be no federal jurisdiction over any counterclaim unless that counterclaim independently satisfied all of the requisites for federal jurisdiction. It is for these reasons, as Judge Friendly and Professor Green have pointed out, that all our doctrines of secondary jurisdiction over counterclaims must be perceived as based on the principle that an action includes not only the plain- tiff’s claims but defendant’s claims as well. See Green, F'ed- eral Jurisdiction over Counterclaims, 48 Nw.U.L. Rev. 271 (1953), and see the portion of Judge Friendly’s concurring opinion quoted on page 17 supra. The view that the entire action comprises the constitu- tional case also underlies this Court’s decision in United 25 Mine Workers v. Gibbs, 383 U.S. 715 (1966), which con- tains this Court’s definitive ruling with regard to pendent jurisdiction. The Court there said: “Pendent jurisdiction, in the sense of judicial power, exists whenever there is a claim ‘arising under [the] Constitution, the Laws of the United States, and Trea- ties made, or which shall be made, under their Au- thority ...,’ U. S. Const., Art. ITI, § 2, and the relation- ship between that claim and the state claim permits the conclusion that the entire action before the court com- prises but one constitutional ‘case.’” 383 U.S. 715, 725 (Footnote omitted; emphasis added). Although Unitea Mine Workers v. Gibbs directly con- cerned plaintiff’s claims, rather than counterclaims, the reasoning is equally applicable to counterclaims. Where a state counterclaim has the requisite relationship with a federal claim, then it, too, is part of the entire action be- fore the court, comprising but one constitutional case. Ac- cordingly it would seem that federal jurisdiction should extend to any such counterclaim. We pause for a moment to define certain phrases which we will use to facilitate further analysis. We will speak of claims having “primary” federal jurisdiction when those claims, standing alone, present federal subject matter juris- diction. Examples are claims posing a federal constitu- tional question or raising a federal statutory question, or claims satisfying the requisites for diversity jurisdiction. We will speak of claims having “secondary” jurisdiction when those claims, standing alone, would not fall within federal subject matter jurisdiction, but acquire jurisdic- tional status by reason of a relationship to other claims «s- 26 serted in the same action. Secondary federal jurisdiction is derivative in nature, rather than independent, since it exists only by reason of the relationship with another claim in the action. Thus, both “pendent” subject matter jurisdiction and “an- cillary” subject matter jurisdiction are forms of secondary subject matter jurisdiction. We believe that the use of these different terms has tended to becloud the issues. Are the constitutional and statutory limitations for sec- ondary jurisdiction with regard to plaintiff’s claims any different from the standards for determining secondary jurisdiction with regard to defendant’s claims? As we have shown, the Constitution and jurisdictional statutes make no such distinction. Since the test of secondary jurisdiction is comprehension within a constitutional case, it would seem that the test should be the same whether the state claim is asserted in a complaint, an answer or a reply. In each situa- tion, the existence of secondary subject matter jurisdiction is governed by the existence of the requisite relationship between the state claim and some other claim in the action possessing federal jurisdiction. It is our view, therefore, that constitutional and statutory limits of secondary federal subject matter jurisdiction are the same for counterclaims and plaintiff’s claims. On the other hand, practical considerations relating to judicial economy and fairness between the litigants indicate that there should be a greater liberality in recognizing secondary jurisdiction with regard to counterclaims. It is the plain- tiff who initiated the action, and, in many cases, elected to employ the federal forum. The need to permit set-off has long been recognized as necessary to protect defendant’s rights, for set-off is akin to the defense of payment. As 27 commentators have pointed out, the fear of overburdening the federa] court system is more realistic when applied to plaintiff’s joinder options than to defendant’s options. Inso- far as Fed.R.Civ.P. 13(a) compels defendants to bring cer- tain counterclaims in the federal action, there ought to be a somewhat greater elasticity afforded to defendants’ claims in order to embrace those which might otherwise be doubtful or borderline cases. Unfortunately, the lower courts have failed to recognize the impact of this Court’s decision in United Mine Workers v. Gibbs upon the question of secondary jurisdiction over counterclaims. In confining the application of the liberal rule of United Mine Workers v. Gibbs to plaintiff’s claims, while continuing to apply the older rule announced in Moore v. New York Cotton Exchange, 270 U.S. 593 (1926) to counterclaims, the lower courts have produced a situation in which secondary jurisdiction over plaintiff’s claims is recognized mc~e liberally than over counterclaims. This is the reverse of what the situation ought to be. There can be no doubt that beginning with the union of law and equity, the thrust of modern jurisprudence has been to break down artificial barriers to the joinder of claims in the interest of justice and judicial economy. As this Court said in United Mine Workers v. Gibbs, supra, at page 724: “Under the Rules, the impulse is toward entertaining the broadest possible scope of action consistent with fairness to the parties; joinder of claims, parties and remedies is strongly encouraged.” Given the encouragement of liberal joinder of claims to avoid piecemeal litigation, it seems anomalous that under the conventional view of the lower courts, a defendant may 28 assert a counterclaim in an action only if he must assert the claim, Fed.R.Civ.P. 13(a) provides that a defendant must assert any counterclaim arising out of the transac- tion. Rule 13(b) provides that the defendant has an option with regard to any other counterclaim. It is clear from the history of the Rule that Rule 13(b) was intended to per- mit joinder of counterclaims wherever jurisdictionally pos- sible. However, the restrictive view of counterclaim sec- ondary jurisdiction taken by the courts below operates so that no permissive counterclaim can ever be asserted be- yond set-off under Rule 13(b), unless the claim possesses primary jurisdiction. We suggest that this anomaly can be corrected, and that this Court can harmonize the provisions of the Constitution, the statutes, the Federal Rules of Civil Procedure, and the practical requirements of economical litigation and justice between the parties. All this can be accomplished consis- tently with the prior decisions of this Court, if the Court will overrule the restrictive rule adopted by the lower courts with regard to jurisdiction over permissive counter- claims. We believe that full secondary jurisdiction should be accorded to permissive counterclaims, on the same basis as compulsory counterclaims. We believe this will best pro- mote judicial economy and fairness to the parties for the reasons advanced by Judge Friendly, Professor Moore and Professor Green. However, if this Court does not wish to go that far, it should at least recognize that the federal courts have power to take jurisdiction over ~ermissive counterclaims on ex- actly the same basis as defined in United Mine Workers v. Gibbs, supra, with regard to state claims set forth in the complaint : 29 “The state and federal claims must derive from a common nucleus of operative fact. But if, considered without regard to their federal or state character, a plaintiff’s claims are such that he would ordinarily be expected to try them all in one judicial proceeding, then, assuming substantiality of the federal issues, there is power in federal courts to hear the whole.” 383 U.S. 715, 725 (1965). This rule would work logically and practically to give the federal courts discretionary jurisdiction over permis- sive counterclaims. The application of judicial discretion can provide the same safeguards against inappropriate joinder as were mentioned in United Mine Workers v. Gibbs, 383 U.S. at pages 726, 727. In a case such as the instant case, where the counterclaim has, in any event, been tried as a possible set-off, the application of judicial discretion will undoubtedly avoid the pointless waste imposed by the rigid “conventional” view. Conversely, where a permissive state counterclaim appears too burdensome, for any reason, in the context of the entire action, the Court would have dis- cretion to decline secondary jurisdiction over it at the start of the case, even for purposes of set-off. No doubt, in the vast majority of cases the equity of permitting a defen- dant to assert a set-off would impel the trial court to exer- cise its discretion in favor of accepting jurisdiction over a permissive counterclaim, but the rule itself is sufficiently flexible to permit adaptation to whatever developments the future may bring with regard to the volume of traffic pre- sented to the federal judiciary and with regard to the re- sources made available to the judicial system. 30 D. In our opinion, it would make no difference with regard to the instant case whether the Court decides that permis- sive counterclaims satisfying the tests of United Mine Workers v. Gibbs are absolutely within federal jurisdiction, or whether it decides that such counterclaims are subject to the Court’s discretionary exercise of jurisdictional power. Under either variation of the rule, the Court of Appeals erred in reversing Judge Owen’s award of damages for the conversion of Gross’s securities. Under the facts of this case, the joinder of Gross’s claim regarding his securities was so inherently desirable that any exercise of discretion to deny jurisdiction would be abusive and erroneous. This is especially true in the posture of the case after the trial, when the issues had been tried in full and there was no doubt on the facts or the law that Gross was a victim of wil- ful wrongdoing, and entitled to substantial damages. Certainly, Gross’s claim for the conversion of his securi- ties satisfies every jurisdictional test imposed by United Mine Works v. Gibbs, supra. The common nucleus of operative fact from which it derives includes: (1) the part- nership relationship and Partnership Agreement, (2) the conspiracy to deprive defendants of their partnership rights and assets, (3) the unlawful Transfer Agreement of Febru- ary 11, 1971, under which the Partnership purported to transfer to the corporation the baseless churning claim, all of the other assets of the Partnership, and Gross’s se- curities held in partnership name. United Mine Workers v. Gibbs, supra, poses one further jurisdictional test: In the absence of any jurisdictional problem, would one ordinarily expect the challenged claim 31 to be asserted within the action? Applying that test to this case: Would one expect Gross to assert the counterclaim for conversion of his securities along with the counterclaim for conversion of his other partnership capital interest and along with the other counterclaims in this case? We believe the answer to this question is so plain that it requires no discussion. Given the choice, no practitioner would dream of bringing a separate action for the conversion of the se- curities. This Court Should Decide Whether the Federal Courts Have Inherent Power to Protect the Integrity and Dig- nity of Their Own Proceedings by Awarding Punitive Damages, Without Reference to State Law, Against Those Who Bring Baseless and Fraudulent Actions Before Them. Judge Owen awarded punitive damages in the amount of $50,000 against the conspirators, saying, in part, as fol- lows (App. B21): “Next, I turn to the subject of punitive damages. The new team and Persky—not only counsel thereto, but one of its actors and spokesmen—asserted numer- ous threats against Gross to coerce his acquiescence and that of his sister and colleague. These parties knowingly commenced baseless actions against him and Bleich and Donoghue to stand off payment. Persky, among others, made it clear to Gross that if he did not go along with the new team, he would be tied up in litigation for a long time and injured in his livelihood. Persky solicited claims from partner Ned Frank to 32 use as threats against Gross. All were baseless, see pp. 20-22, supra. These claims and attendant vilifica- tion were solely used as bargaining tools against Gross, which he had the personal courage, fortified by the courage and determination of his counsel, to oppose over long years.” Judge Owen found that the pleading of the dishonest claims violated Fed.R.Civ.P. 11 (App. B10). The Court of Appeals set aside the award of punitive damages on the ground that it was not authorized under New York law. Apparently, the Court of Appeals did not consider our argument that state law could not limit the inherent power of the federal courts to protect the integrity and dignity of their own proceedings by awarding punitive damages in a case such as this. While there is ample authority that the federal courts have inherent power to protect the dignity and integrity of their proceedings, whether such power extends to the imposition of punitive damages seems to be a question of first impression. We believe the denial of such power in this case raises a fundamental question which should be reviewed by this Court. Cases affirming that the courts of the United States have inherent power to take necessary steps to protect their integrity and dignity include: Gumbel v. Pitkin, 124 U.S. 131 (1888); United States v. Powell, 379 U.S. 48 (1964) ; Krippendorf v. Hyde, 110 U.S. 276 (1884); Reid v. Pren- tice-Hall, 261 F.2d 700 (6th Cir. 1958); Pueblo de Taos v. Archuleta, 64 F.2d 807 (10th Cir. 1933). In United States v. Powell, swpra, this Court said: “a court may not permit its process to be abused.” (379 U.S. 48, 58). 33 In Pueblo de laos v. Archuleta, supra, the Court said: “But all such objections m: be brushed aside with the statement that the court is the protector of the purity of its own process, and may take such steps as are necessary to protect against its abuse, on its own motion, or upon the suggestion of a stranger; and neither state statutes nor ordinary procedural rules can thwart a prompt and efficacious discharge of that paramount obligation. Gumbel v. Pitkin, 124 U.S. 131, 8 8.Ct. 379, 31 L.Ed. 374; Lord v. Veazie, 8 How. 251, 12 L.Ed. 1067; Cleveland v. Chamberlain, 1 Black, 419, 17 L.Ed. 93; Haley v. Eureka County Bank, 21 Nev. 127, 26 P. 64, 12 L.R.A. 815; In re Burdick, 162 IIl. 48, 44 N.E. 413; Consolidated Liquor Co. v. Scotello & Nizzi, 21 N.M. 485, 155 P. 1089.” 64 F.2d 807, 812. CONCLUSION For the reasons stated, the writ should be granted. Dated: November 17, 1977 Respectfully submitted, Puiuip Manpe., Esq. 10 East 40th Street New York, New York 10016 (212) 679-3760 Attorney for Petitioner Of Counsel: Ratpo WIeENSHIENK Howarp N. Goupen Bernarp RoTHMAN Marc Owen ManpeEL Appendices Al APPENDIX A OPINION OF UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT UNITED STATES COURT OF APPEALS For tHe Seconp Crovitr eo wn Se Nos. 897-904—September Term, 1976. (Argued May 11, 1977 Decided August 24, 1977.) Docket Nos. 76-7476, 76-7486, 76-7488, 76-7489, 76-7494, 76-7495, 76-7499, 76-7500 -_—_ = NewsurcerR, Loes & Co., Inc. as Assignee of Claims of David Buckley and Mary Buckley, Plaintiff-A ppellant-Cross-A ppellee, —Vv.— Cuartes Gross, Mase, Buieicu, Gross & Co., and JEANNE DonoGHUE, Defendants-A ppellees-Cross-Appellants, Newsurcer, Loes & Co., a New York Limited Partnership, Anprew M. Newsurcer, Ropert L. Newsurcer, Ricz- arp D. Stern, Waurer D. Srern, and Rosert L. Stern as Executors of the Estate of Leo Stern, Roserr L. Stern, Ricuarp D. Srern, Joun F. Setrrer, Harow J. Ricuarps, Saxnrorp Roccensurc, Harry B. Frank and Jerome Tarnorr as Executors of the Estate of Ned D. Frank, Frep Kayne, Rosert Mun, Pavu RisHer, Cuarves Sioane, Rosert S. Persxy, Fintey, Kuma xe, Wacner, Heine, Unperserc & Grutman, a Partnership (formerly known as Finley, Kumble, Underberg, Per- 5453 A2 Opinion of U.S. Court of Appeals sky & Roth and Finley, Kumble, Heine, Underberg & Grutman) and Lawrence J. Berxkowirz, Additional Defendants on Counterclaims- Appellants-Cross-Appellees. -wwn ee Before: Lumsarp and Mesxuu, Circuit Judges, and Jameson, District Judge.* -—_ = ™ Cross appeals from a judgment of the Southern District, Owen, Judge, which dismissed plaintiff’s churning claim under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), awarded judgment on certain of defendants’ counterclaims for civil conspiracy, violation of state partnership law, breach of fiduciary obligation, and conversion, and which dismissed the remaining state and federal counterclaims of the plaintiff, defendants, and additional defendants on the counterclaims. Affirmed in part; reversed and remanded in part. -—_ == Dowatp H. Saw, New York, N.Y. (Kantor, Shaw & Davidoff, P.C., New York, N.Y., on the brief), for Plaintiff-A ppellant-Cross- Appellee, Newburger, Loeb & Co., Inc. Purim Manpet, New York, N.Y. (Golden, Wien- shienk & Mandel, Ralph Wienshienk, Ber- nard Rothman, Mare Owen Mandel and Arthur Tarlow, New York, N.Y., on the brief), for Defendants-A ppellees-Cross-Ap- pellants. ° Sitting by designation. 5454 Tae] A3 Opinion of U.S. Court of Appeals Simon H. Rirxinp, New York, N.Y. (Paul, Weiss, Rifkind, Wharton & Garrison, New York, N.Y.; Finley, Kumble, Wagner, Heine & Underberg, New York, N.Y.; Mark H. Alcott, John M. Delehanty, Beryl A. Schatz, and Alan M. Gelb, on the brief), for Addi- tional Defendant on Counterclaims-Appel- lant-Cross-Appellee Finley, Kumbel, Wag- ner, Heine, Underberg & Grutman. Paut D. Risner, New York, N.Y., for Addi- tional Defendant on Counterclaims-A ppel- lant-Cross-Appellee Pro Se. Leon B. Borstrerx, New York, N.Y. (Shaw and Stedina, New York, N.Y., on the brief), for Additional Defendant on Counterclaims- A ppellant-Cross-Appellee Robert Muh. Martin E. Smren, Goip, Farrenn & Marks, THomas R. Farrevt and Leonarp M. Marks, New York, N.Y., on the brief, for Addi- tional Defendant on Counterclaims-A ppel- lant-Cross-Appellee Fred K ayne, Osmonp K. Fraenxet, New York, N.Y., for Additional Defendants on Counterclaims- Appellants -Cross- Appellees Newburger, Loeb € Co., Andrew M. Newburger, Rob- ert L. Newburger, Robert L. Stern, Richard D. Stern, Walter D. Stern and Robert L. Stern, as Executors Under the Last Will and Testament of Leo Stern, Deceased; and Sanford Roggenburg. Lawrence J. Berkowitz, New York, N.Y., on the brief, for Additional Defendant on Counterclaims-Cross-Appellee Pro Se. 5455 AG Opinion of U.S. Court of Appeals Evaine Piatt and Leon B. Borsterx, New York, N.Y., on the brief, for Additional Defendant on Counterclaims-Appellant-Cross-Appellee Charles Sloane. Rosert S. Persxy, New York, N.Y., on the brief, for Additional Defendant on Counterclaims- A ppellant-Cross-Appellee Pro Se. or LumBarp, Circuit Judge: These appeals and cross appeals from a judgment of the Southern District, Owen, Judge, are the latest chapter in the financial misfortunes of New York brokerage firm of Newburger, Loeb & Co. (hereinafter the “Partnership’’) and its successor, Newburger, Loeb & Co., Inc. (hereinafter the “Corporation”) during the years 1969-71, which re- sulted in the departure of the managing partner, Charles Gross, and the arrangements made by the survivors and others to reorganize and rescue the business. We affirm so much of the judgment of the district court which: (1) Dismissed, as lacking in merit, the Corporation’s churning claim, under section 10(b) of the Securities Ex- change Act of 1934, 15 U.S.C. § 78j(b), against defendants Charles Gross, Mabel Bleich, Jeanne Donoghue, and Gross & Co. (2) Awarded judgment to the defendants on their first, second and fourth counterclaims against the Corporation, and against the Partnership, individual members of the Partnership,’ the promoters of the Corporation,? and 1 Andrew M. Newhurger, Robert L. Newburger, Leo Stern, Robert L. Stern, Richard D. Stern, Harold J. Richards, Sanford Roggenburg, John F. Settel, and Ned D. Frank. 2 Fred Kayne, Paul Risher, Robert Muh, Charles Sloane and Lawrence Berkowitz were alleged by the defendants and found by the court to be 5456 A5 Opinion of U.S. Court of Appeals Robert S. Persky and his law firm, Finley, Kumble, Under- berg, Persky & Roth (which at the time of judgment was known as Finley, Kumble, Wagner, Heine, Underberg & Grutman), who were brought in as additional defendants on the counterclaims, for conspiracy to injure the defen- dants with respect to their interests in the Partnership. We hold that the district court properly exercised its ancillary jurisdiction over these counterclaims. (3) Dismissed, as lacking in merit, defendants’ ninth counterclaim under the federal antitrust laws for destruc- tion of Gross’ employment opportunity with Rafkind & Co., a New York brokerage firm. (4) Dismissed defendants’ fifth, sixth, seventh and eighth counterclaims for lack of subject matter jurisdiction. (5) Dismissed the six counterclaims of the Corporation and the additional defendants against Gross. We reverse those parts of the judgment which: (1) Awarded judgment to Gross on defendants’ third counterclaim for conversion of Gross’ interest in warrants to buy stock of Geon Industries, Inc., and Computer Soft- wear Systems, Inc. We hold that Judge Owen erroneously exercised jurisdic- tion over this claim after Judge Ward correctly held that it was not within the ancillary jurisdiction of the court. (2) Awarded $50,000 punitive damages to Gross. the promoters. The court dismissed defendants’ first, second and fourth counterclaims against Berkowitz on the ground that there was not suff- cient proof of his participation in the conspiracy. As the defendants bave failed to provide any substantial argument why the district court's findings of fact regarding Berkowitz are erroneous, we affirm the dis- missal of these claims against Berkowitz. The case against Alex Aixala was dismissed at the close of defendants’ proof and defendants have not argued that this was error. 5457 A6é Opinion of U.S. Court of Appeals Finally, although we affirm the finding of liability on defendants’ first, second and fourth counterclaims, we re- mand these counterclaims for recomputation of damages in light of our reversal of defendants’ third counterclaim and certain difficulties with the court’s computation of damages. To further discussion of the issues, we summarize the underlying facts. The partnership was an established Wall Street brokerage firm. From about May 1959 through De- cember 31, 1968 it acted as a clearing house for the partner- ship of Gross & Co., which consisted in part of Charles Gross, his sister, Jeanne Donoghue, his secretary, Mabel Bleich, and Charles Jordon; thus, the Partnership exe- cuted orders for Gross & Co. and sent confirmations and statements to its customers. Among these customers were David and Mary Buckley, who had an active account with Gross & Co. in 1962-66. In 1969 Gross & Co. liquidated and on January 1, 1969, Gross became a general partner in the Partnership with an initial investment of about $400,000. Bleich and Dono- ghue became limited partners, investing about $75,000 each. Gross soon thereafter became managing partner of the Partnership and invested another $400,000 in the firm. The Partnership began to experience the record-keeping prob- lems common on Wall Street in late 1969 and early 1970 caused by the greatly increased volume of transactions in the 1960’s, which have come to be known as the “back office crunch,” see, e.g., Hirsch v. du Pont, No. 76-7428, slip op. 2747 (2d Cir. April 7, 1977). By the summer of 1970 the firm was experiencing serious capital problems. A number of the partners expressed dissatisfaction with Gross’ man- agement, and he stepped down as managing partner. As he was not satisfied with the proposed new management, Gross gave notice of his withdrawal from the firm on August 31, 1970, which under the terms of the partnership 5458 A7 Opinion of U.S. Court of Appeals agreement became effective as of September 30, 1970. Gross also demanded the return of his “additional capital” (claimed to be $400,000) and fifteen per cent of his “com- mitted capital,” pursuant to the partnership agreement. The agreement provided that at least eighty-five per cent of the “partnership interest” of a withdrawn general part- ner remained in the firm, at the risk of the business, for twelve months from the effective date of withdrawal. On December 31, 1970, Bleich and Donoghue submitted notices of withdrawal from the firm. Fred Kayne became managing partner after Gross stepped down. Before joining the Partnership Kayne and Charles Sloane had been employed as registered represen- tatives of the firm at its California office. According to Kayne and Sloane, they were induced by Gross to join the firm and became general partners in late February, 1970, each investing $50,000. In the summer of 1970, after be- coming managing partner, Kayne brought in Robert Muh and Paul Risher as consultants. At about this time, the law firm of Finley, Kumble, Underberg, Persky & Roth began to handle legal matters for the Partnership, with Robert S. Persky as the partner in charge. Defendants allege that shortly after Kayne became man- aging partner he began to plot with Muh, Risher, Sloane, Lawrence J. Berkowitz (house counsel to the Partnership), and Persky to transform the Partnership into a corpora- tion and to gain control of its assets for a small investment. According to the testimony of Gross, early in September, 1970, he met with Persky and Kayne who attempted to persuade him not to withdraw from the Partnership and who told him that he would “be sorry” if he did not co- operate. The fortunes of the Partnership continued to dwindle, however, and in November, 1970, both Kayne and Sloane 5459 A8 Opinion of U.S. Court of Appeals withdrew. On November 17, 1970, the New York Stock Ex- change notified the firm that if it was not in compliance with the “required excess capital” provision of the Ex- change constitution by November 20, steps would be taken to suspend the firm. The Partnership was also directed to prepare for possible liquidation. Under continuing pressure from the Exchange, a re- organization was proposed by Risher and Muh as an al- ternative to the Partnership’s liquidation. The assets of the Partnership were to be transferred to a corporation; in return, the general and limited partners and the subor- dinated lenders were to receive a variety of securities in accordance with their capital positions. The corporation’s promoters were Berkowitz, Kayne, Muh, Risher and Sloane. See note 2, supra. In return for investments of $10,000 each, Kayne, Risher, and Muh would each receive sixteen per cent of the common stock. Kayne and Sloane were to participate in management along with Risher and Muh. An infusion of fresh capital was to come from Alex Aixala (in the form of $1,000,000 worth of Bacardi stock), an in- vestor brought in by Persky. After numerous negotiations, Gross, Bleich and Dono- ghue refused to consent to the proposed transfer of assets; apparently, Gross felt the proposed transfer was a plot by the promoters to gain contro] of the Partnership assets for a small investment. The Corporation and the additional defendants contend, on the other hand, that Gross had no legal right to object to the reorganization and was merely attempting to gain a special benefit for himself by demand- ing a cash return of part of his investment. Although it appears that the promoters did not believe that Gross’ consent (as a withdrawn general partner) was necessary to the reorganization, Gross contends they wished to dis- suade him from withdrawing his capital. In any event, 5460 Ag Opinion of U.S. Court of Appeals Bleich and Donoghue would not consent to the transfer without Gross’ approval, and the promoters believed that the transfer could not be legally completed under New York law without the consent of Bleich and Donoghue (who were withdrawn limited partners). According to the defendants, numerous attempts were made to “persuade” the defendants (particularly Gross) to consent to the transfer. The principal coercive tactic was the threat to tie up the defendants in lengthy litiga- tion, including (1) the threat to bring suit on a claim of churning the account of David and Mary Buckley, and (2) the threat to sue Gross for fraudulently inducing Kayne and Sloane to join the Partnership and for mismanaging the Partnership’s assets. David and Mary Buckley maintained an account with Gross & Co. from April, 1962, throngh August, 1966, which was handled by Charles Jordon. Although the account was extremely active, by August, 1966, it showed a deficit of $332,000, which was owed to the Partnership as the clear- ing house. Between 1966 and 1970 unsuccessful efforts were made to collect the amounts owing. The Buckleys threatened bankruptcy if the collection efforts were pressed. In 1970 the Partnership commenced an arbitration pro- ceeding under the rules of the Exchange. The Buckleys asserted one set-off and two counterclaims against the Partnership. The first counterclaim alleged that their ac- count had been churned by Gross & Co. during the years 1962-66, for which the Buckleys claimed $75,000 in damages. Richard Miles, director of compliance for the Partnership in 1969-70, testified that the Buckley account was referred to him in 1970 by Leo Stern, a general partner. Miles con- cluded that the churning claim was without merit and was asserted as a bargaining tool. Miles testified that he com- municated this evaluation to Robert Stern, the general partner to whom Miles reported, who agreed with this 5461 A10 Opinion of U.S. Court of Appeals evaluation. According to Persky’s testimony, the collec- tion file was turned over to him in November or December of 1970. On December 30, 1970, the Partnership’s $332,000 claim against the Buckleys was settled; the Buckleys agreed to pay the Partnership $50,000 and assign to it the churning claim against Gross & Co. in exchange for a re- lease. Risher testified that after the settlement Persky called him and stated that he thought it was a “guod idea” to get the assignment of the churning claim. Persky stated in his deposition that the idea of obtaining the Buckley claim originated with him, that before and after the settlement there were discussions as to how the claim might be used in negotiations with Gross, and that he believed the churn- ing claim might bring home to Gross “the reality of the situation.” Despite the fact that there is no evidence that the Buckleys ever dealt with Charles Gross personally, the complaint in this case, which was prepared by Persky, alleged that Cross was the customer’s man with whom the Buckleys dealt;* further, as the district court found, when this error was pointed out to Finley, Kumble, no attempt was made to correct it or to add Charles Jordon as a party. The amount of damages claimed by the Corporation was ¢250,000—more than three times the amount claimed by the Buckleys. 3 At a general meeting of the limited partners, general partners and subordinated lenders, held early in February, 1971, prior to the transfer, Persky circulated a complaint prepared for the Partnership similar to the Corporation's complaint in this case. It contained the same factual errors concerning Gross’ dealings with the Buckleys. Defendants allege that the complaint was circulated to convince the limited partners and sub- ordinated lenders that there were valid claims outstanding against Gross, Bleich and Donoghue, which could be used to prevent them from witb- drawing their capital. Persky admitted at trial that the limited partners and subordinated lenders would not have allowed the transfer to take place if Gross, Bleich, and Donoghue's demands for immediate payment of their capita) contributions bad been met. 5462 All Opinion of U.S. Court of Appeals Gross testified that at a meeting on January 15, 1971, attended by Risher, Muh, and Persky, be was told by Per- sky that he should go along with the proposed transfer and convince Bleich and Donoghue to consent. Persky told Gross that there were many claims that could be used against him if they “stood in the way of the deal,” includ- ing the Buckley claim and allegations of malfeasance and it was in Gross’ interest “not to be tied up in litigation for a long, long time, and to be free to work in the street.” Persky told Gross to take the Buckley claim “very, very seriously.” Gross refused to bend. He told Persky, Risher and Muh that they could keep their claims and that he thought the fairest solution was for the Partnership to liquidate. Shortly after this meeting concluded, Gross re- ceived a call from Kayne and Sloane in California. Sloane was extremely angry and told Gross that they had heard what had happened at the meeting and that, “If you kill this deal, we are going to sue you. You will be sued for a long time. You may never get out of the courts.” Similarly, on January 23, 1971, Kayne called Gross and arranged to meet him for lunch. Gross testified that at this meeting Kayne threatened him with litigation in Cali- fornia if he did not consent to the transfer. The district court credited Gross’ version of these meetings. In addi- tion to finding that various threats had been made against Gross, the court found, based on the testimony of Bleich, that Risher threatened Bleich with the Buckley claim to a point that made her cry. On February 3, 1971, eight days prior to the date set for the proposed transfer of assets, Kayne and Sloane sued Gross in the District Court for the Central District of California, charging that Gross had fraudulently in- duced them to join the Partnership and had mismanaged its assets. Eventually, this suit was dismissed after a. 5463 Ail2 Opinion of U.S. Court of Appeals NYSE arbitration, which found in favor of Gross. The present suit was commenced by the Corporation on Feb- ruary 17, 1971. Gross also claimed that an additional tactic used to coerce his consent was the destruction of a job opportunity. The Partnership articles, which were effective for a period of two years, provided that any general partner who volun- tarily withdrew from the Partnership (as did Gross) could not “engage in the business of broker or dealer in secur- ities and commodities whether for his own account or for others” until the expiration of the partnership agreement on December 31, 1971. After Gross left the Partnership, he was offered a job opportunity as a trader by Rafkind & Co. On January 19, 1971, Rafkind wrote the Partner- ship requesting clearance to employ Gross. Gross alleges that Berkowitz threatened Rafkind with suit, and in any case, Berkowitz sent a letter to Rafkind informing it of the Partnership covenant not to compete; the letter also indicated that the Exchange had been notified that Gross was subject to the restrictive covenant. Rafkind then dropped the job offer and so informed the Partnership. Gross claims that at a meeting on February 5, 1971, he was told by Risher that if an “accommodation” could be reached, he could have his job with Rafkind. However, despite these and other coercive tactics alleged by the defendants, Gross, Bleich and Donoghue refused to con- sent to the transfer. The closing date for the transfer of assets froin the Partnership to the Corporation had been set for February 11, 1971. The Exchange had advised the Partnership that if the required improvements in its capital position were not made, the Partnership would be suspended on Feb- ruary 12, 1971. The record indicates that at the January 15, 1971, meeting, attended by Persky, Risher and Muh, 0464 A13 Opinion of U.S. Court cf Appeals counsel for the defendants Philip Mandel, stated that the transfer could not legally take place without the consent of Gross, Bleich and Donoghue. A condition precedent to the Corporation’s obligation to execute the transfer agreement was the issuance of a letter of opinion from counsel to the Partnership, stating that the Partnership had the authority to make the trans- fer. Paul Burak, whose firm, Rosenman, Colin, Kaye, Pets- chek, Freund & Emil, had been retained to represent the Partnership, testified that a member of his firm researched the issue gnd concluded in a memorandum dated January 25, 1971, that under New York Partnership Law § 98, the transfer could not take place without the consent of all of the limited partners. Section 98(1)(b) provides, inter alia, that without the consent of all limited partners, a general partner or all of the general partners have no authority to “[d]o any act which would make it impossible to carry on the ordinary business of the partnership.” Burak con- veyed his firm’s position, that the transfer could not be conducted without the consent of all of the limited part- ners, to the Partnership; specifically, he testified that he discussed the matter with Andrew Newburger. Burak also conferred with Persky, who unsuccessfully attempted to persuade Rosenman, Colin to give a favorable opinion. On the day of the closing, Rosenman, Colin refused to issue the letter of opinion. However, Persky, whose firm now represented the Corporation, stated that his firm had done some research in the area and it was agreed that Persky would issue the opinion letter as special counsel to the Partnership. The letter was issued, examined by counsel for the parties, and the deal was closed. Under the transfer agreement the Corporation agreed to assume all liability for the claims of Gross, Bleich and Donoghue arising out of the transfer. The Corporation 5465 A14 Opinion of U.S. Court of Appeals set up a reserve fund of $300,000 for this purpose.t How- ever, no payments were or have been made to Gross, Bleich or Donoghue. On February 17, 1971, the Corporation commenced this action as an assignee of the Buckley claim. The complaint stated that the Buckleys had assigned their claims to the Partnership and that the Partnership had assigned these claims to the Corporation on February 11, 1971. Although the complaint states five “causes of action,” essentially it alleges that Gross, Bleich and Gross & Co. were liable for the churning of the Buckleys’ account under the federal securities law and state common law and that plaintiff was entitled to attorney’s fees. In their amended answer, which was joined in by Donoghue,’ defendants raised nine coun- terclaims against the Corporation, the members of the Partnership who participated in the transfer, the promoters of the Corporation, Robert S. Persky and his former law firm, Finley, Kumble.‘ The defendants’ nine counterclaims allege, in relevant part, the following: First counterclaim (and second defense): the transfer agreement (which includes the assignment of the Buckley 4 While the Corporation stayed solvent for over two years after the transfer, it appears the reorganization merely delayed the inevitable. In November, 1973, the Corporation filed a petition in bankruptey under Chapter XI, where, the litigants have informed us, it remains to date. 5 Although Donoghue was not named as a defendant in the original complaint, sbe was later officially granted leave to intervene by Judge Owen, apparently both as a defendant to the Buckley claim and as a plaintiff on the counterclaims. See Newburger, Loeb & Co., Inc. v. Gross, 62 F.R.D. 397 (S.D.N.Y. 1974). 6 Finley, Kumble and Persky were not named as additional defendants in the defendants’ original answer, filed on May 3, 1971. They were brought in by the amended answer, filed on February 28, 1972. Defen- dants explain that it was not until extensive discovery was had that they discerned Persky's rvle in the conspiracy. 5466 A15 Opinion of U.S. Court of Appeals claim to the Corporation) is ineffective because it was exe- cuted in violation of section 98 of New York Partnership Law; defendants demand the transfer be set aside and the counterclaim defendants be held liable for damages. Second counterclaim (and fifth defense): the settlement of the Buckley claim and its subsequent assignment to the Corporation was undertaken in bad faith in violation of the Partnership’s fiduciary obligations to the defendants as a means of resisting payment of the defendants’ capital in- terests in the Partnership; further, defendants allege that the transfer of the Partnership assets was itself a breach of fiduciary obligation. Defendants demand an accounting and the imposition of a constructive trust. Third counterclaim: the counterclaim defendants con- verted certain stock warrants, which were the property of Gross, when these warrants were transferred to the Corpo- ration as part of the Partnership’s assets. Fourth counterclaim: all of the counterclaim defendants engaged in a conspiracy to force the defendants to consent to the transfer agreement, which included manipulating the assignment of the Buckley claim and threatening the defendants with litigation. Fifth and sixth counterclaims: pursuant to the Partner- ship agreement, Bleich and Donoghue are entitled to the return of their capital investments. Seventh counterclaim: pursuant to the Partnership agreement, Gross is entitled to an accounting to determine his capital interest. Eighth counterclaim: the counterclaim defendants “ma- liciously” blocked Gross’ employment with Rafkind & Co. by informing it that his employment would violate the Partnership agreement. 5467 A16 Opinion of U.S. Court of Appeals Ninth counterclaim: the destruction of the Rafkind op- portunity violates the federal antitrust laws; Gross de- mands treble damages.’ Prior to trial, the Corporation and the additional defen- dants moved to dismiss defendants’ state law counterclaims for lack of subject matter jurisdiction. The parties also made cross motions for summary judgment. Judge Ward in his opinion of October 16, 1973, first held that the defendants’ first and second state law counter- claims were so closely linked to defenses to plaintiff’s churning claims “that they must be considered ‘logically related to the claim the opposing party is suing on,’” quoting C. Wright, Law of Federal Courts 346 (2d ed. 1970), and, thus, were compulsory counterclaims within the court’s ancillary jurisdiction. The court found that the fourth counterclaim asserted the same allegedly wrongful acts and should also be treated as a compulsory counter- claim. Newburger, Loeb & Co., Inc. v. Gross, 365 F. Supp. 1364, 1367 (S.D.N.Y. 1973). However, the court found that defendants’ third, fifth, sixth, seventh and eighth counterclaims were not “logically related” to the Corpora- tion’s claims and thus were not compulsory counterclaims; there being no independent jurisdictional basis for these state law claims, the court held they could be maintained only as a set-off to defeat or reduce any recovery on the 7 Although the ninth counterclaim refers to numerous allegations as the hasis for charging violation of the antitrust laws, the defendants’ brief on appeal confines itself to the argument that the circumstances sur- rounding the alleged destruction of the Rafkind opportunity violated the antitrust laws. 8 It appears that neither the Corporation nor any of the additional defendants made an attempt to pursue an interlocutory appeal from Judge Ward's finding of jurisdiction over these counterclaims by seeking certification pursuant to 28 U.S.C. $1292(b). 5468 A17 Opinion of U.S. Court of Appeals Corporation’s claims.’ See United States v. Heyward-Rob- i som Company, 430 F.2d 1077, 1081, n.1 (2d Cir. 1970), cert. denied, 400 U.S. 1021 (1971). Turning to defendants’ motion for summary judgment, Judge Ward found that the transfer of the Partnership assets to the Corporation without the consent of Bleich and Donoghue violated section 98(1)(b) of New York Partnership Law.’® However, since the only interest of Gross, Bleich and Donoghue in the Partnership was the right to be paid a certain sum of money, the court found that damages were an adequate remedy and, thus, that rescission would be inappropriate. 365 F. Supp. at 1370. Determination of the amount of damages was left for trial. Judge Ward also concluded that the Corporation’s churning claim presented triable issues and that under New York law, the Partnership was not prohibited from taking the assignment of the Buckley claim “if such an assignment is taken in good faith and does not breach the fiduciary duty owed to the partners being sued. The issue is that of the good faith of the Partnership and of Persky, the attorney representing it.”” 365 F. Supp. at 1370. Since the issue of good faith presented a question of fact, Judge Ward denied summary judgment on this issue. 9 Defendants’ ninth counterclaim, of course, rested upon an independent jurisdictional basis. Though Judge Ward found the claim “skeletal,” it was held sufficient to withstand a motion to dismiss for failure to state a claim. 365 F. Supp. at 1367-68. 10 As noted, supra, $98(1)(b) provides that general partners may not, without the consent of all of the limited partners, “[d]o any act which would make it impossible to carry on the ordinary business of the part- nership.” Although Bleich and Donoghue bad withdrawn from the Part- nership on December 31, 1971], prior to the transfer, as the district court noted, under the Partnership articles they retained their status as limited partvers for six months thereafter. Accordingly, the district court found that under §98, their consent to the February 11, 1971, transfer was required. 3469 A18 Opinion of U.S. Court of Appeals On January 16, 1974, the Corporation and the addi- tional defendants added six counterclaims against Gross, which alleged that he had committed various acts of mis- management as managing partner. Trial commenced before Judge Owen on June 16, 1975, and concluded on August 1, 1975. In his July 7, 1976 opinion, Judge Owen dismissed the Corporation’s first, second, fourth and fifth claims, based on the alleged churn- ing of the Buckley account.’ Although he noted that there were a large number of transactions in the account, he found that they were motivated by David Buckley’s desire to make a fortune in the market by speculation. The court found that Buckley was an experienced investor, that the account was non-discretionary and that Buckley had to and did authorize every transaction, and concluded that there was “no question that the churning claim has not been proved.” Turning next to defendants’ counterclaims, the court held that the promoters (except Berkowitz) as officers of the Corporation, guided by Persky, and the members of the Partnership had engaged in a conspiracy “to injure Gross, Bleich and Donoghue in their interests in the Partnership.” Specifically, the court found that the injury to the defen- dants was part of a plot instituted by Kayne, Risher, Sloane, Muh, and Persky, “to take over the new opera- tion on a shoestring and directly enrich themselves.” Judge Owen found that “in major measure” the consent of the general partners was obtained by arranging a “for- giveness” of some $500,000 of capital arrears owed to the Partnership by various partners. Gross, who owed no 11 The Corporation's third cause of action, which alleged that the churn- ing of the Buckley account violated section 15(c)(1) of the Securities Exchange Act of 1934, 15 U.S.C. §780(c)(1), and Rule 15C-1(7) pro- mulgated thereunder, had previously been dismissed by Judge Ward as time-barred. 365 F. Supp. at 1371-72. The Corporation has not appealed the dismissal of this claim. 5470 A19 Opinion of U.S. Court of Appeals capital arrears and had invested some $800,000 in the firm, specifically objected to the forgiveness in refusing to go along with the transfer. The court found that another “problem” faced by the promoters was to minimize any outflow of cash to Gross, Donoghue and Bleich. It was determined that the way to deal with Gross was to threaten him with prospective or actual litigation, which would either coerce his consent or provide a basis for refusing to pay him his capital in- terest. Thus, Persky manipulated the Buckley settlement, Kayne and Sloane instituted a $3,600,000 fraud suit in California (the court found the damages were an in ter- rorem figure), and Ned Frank (a general partner) pre- pared a list of alleged instances of malfeasance by Gross, six of which were asserted as counterclaims against Gross in this litigation. A further lever used against Gross was the denial of the Rafkind opportunity. Judge Owen found that the “direct and circumstantial proof is quite clear that all the foregoing was participated in by all [of the pro- moters, except Berkowitz,] acting out of the single mo- tive to force Gross into accepting [their] dictates.” Fur- ther, the court found that when the threats failed, the pro- moters decided to proceed with the transfer “in knowing violation of Section 98,” and “based upon Persky’s worth- less opinion letter.” The court found that Persky, Risher, Muh, Kayne and Sloane “were actively participating, know- ing what each was doing and hoping to reap substantial benefits from this joint conduct.” As for the general partners, the court found that, mo- tivated by the promise of debt forgiveness and the desire to salvage their interests in the firm, they “lent themselves to the goals of this conspiracy by affirmatively perwi‘ting the Partnership to transfer its assets to the Corporation in violation of Section 98 of the Partnership Law and in violation of their fiduciary duties to Gross, Bleich and 9471 A20 Opinion of U.S. Court of Appeals Donoghue as other partners, and by their knowing ac- quiescence in the use by the [promoters] of the various baseless litigation threats against Gross.” Accordingly, the court held the Corporation and the additional defendants on the counterclaims” jointly and severally liable on de- fendants’ first, second, and fourth counterclaims for the “wrongful conversion” of the capital of Gross, Bleich and Donoghue. The court awarded Donoghue and Bleich each $76,868, and awarded Gross $337,921."* Judge Owen also found for Gross on defendants’ third counterclaim, which Judge Ward had held could be as- serted only as a set-off. This claim alleged that in 1970 the Partnership had distributed to the partners as profits an interest in certain stock warrants, which the record indi- cates were earned by the Partnership in 1969. These war- rants were never physically distributed but were held in the Partnership’s name and were transferred to the Cor- poration as part of the Partnership’s assets. The court found that Gross did own an interest in the warrants and that the Corporation, Kayne, Risher, Persky and Finley, Kumble were liable in the sum of $58,368 and $75,803 for the willful conversion of Gross’ interest in the warrants." Although Judge Owen noted that Judge Ward had ruled that the third counterclaim could only be asserted as a set- ee 12 As noted, the court disinissed the counterclaims as to Berkowitz and Aixala, see text and notes at 1-2, supra, and as used here the terms “additional defendants” do not apply to them. 13 The sum of $76,868 represented the initial capital investments of Bleich and Donoghue of $75,000, plus $1,868 owing as interest as of December 31, 1970. The court found an accounting would have shown Gross’ capital interest on February J], 1971, to be $337,921. 14 The court found that Kayne, Risher and Iersky had conspired to “purloin” avd had accomplisbed the purloining of the securities by placing them in a secret vault to ensure they would be transferred to the Corporation. Since we dismiss the third counterclaim on jurisdic. tional grounds, we need not examine the merits of these findings. 472 A21 Opinion of U.S. Court of Appeals off, he held that this claim had been fully litigated and ordered that the pleadings be amended to conform to the proof. Further, Judge Owen awarded Gross $50,000 in punitive damages against the Corporation, Kayne, Risher, Persky and Finley, Kumble."* Although he indicated that the non- competition clause in the Partnership articles had been asserted against Gross without “economic justification,” he found that the Partnership “had the legal right to assert” the clause. Judge Owen concluded that the alleged destruc- tion of the Rafkind opportunity did not state a cause of action and dismissed the defendants’ ninth (antitrust) counterclaim. Finally, as for the six counterclaims as- serted against Gross, four were abandoned at trial and Judge Owen dismissed the remaining two claims on the merits.’* Final judgment was entered on September 1, 1976. The Corporation appeals from the dismissal of its churn- ing claims. Defendants appeal from the dismissal of their fifth, sixth, seventh, eighth and ninth counterclaims. The Corporation and most of the additional defendants on the counterclaims appeal from the judgments entered against 15 Muh and Sloane were listed among those parties held liable for con- version of the warrants and for punitive damages in the final judgment entered on September 1, 1976. However, in an order filed on November 18, 1976, Judge Owen stated that Sloane and Muh had heen added to that part of the judgment dealing with damages for conversion of the warrants and punitive damages by inadvertence and ordered their names deleted therefrom. See Fed. R. App. P. 10(e). 16 Although at one point the Corporation suggests that the court erred in dismissing the claim that Gross engaged im “secret trading” while managing partner, it concedes that the court's decision was not “plainly erroneous’—apparently in reference to Fed. R. Civ. P. 52(a). Neither the Corporation nor any of the additional defendants have stated any basis for disturbing the dismissal of their counterclaims against Gross; accordingly, this portion of the district court's opinion is affirmed. 5473 A22 Opinion of U.S. Court of Appeals them on defendants’ first, second, third’’ and fourth coun- terclaims and for punitive damages.” I. The Churning Claim The Corporation argues that Judge Owen’s finding that the Buckley account was not churned is clearly erroneous. “Churning” occurs when a securities dealer abuses his customer’s confidence for personal gain (e.g. to create com- missions) by inducing transactions in the customer’s ac- count which are disproportionate to the size and character of the account. Churning has been held to be a deceptive device within §10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, for which a private cause of action for damages will lie. See, e.g., Ruskay v. Waddell, 552 F.2d 392, 393 n.2 (2d Cir. 1977); Carras v. Burns, 516 F.2d 251, 258 (4th Cir. 1975); Landry v. Hemphill, Noyes & Co., 473 F.2d 365, 368 n.1 (1st Cir.), cert. denied, 414 U.S. 1002 (1973) ; Hecht v. Harris, Upham € Co., 430 F.2d 1202, 1206- 07 (9th Cir. 1970); Powers v. Francis I. DuPont & Com- pany, 344 F. Supp. 429, 431 (E.D. Pa. 1972); Moscarell v. 17 In the final judgment entered by Judge Owen on September 1, 1976, he found for Gross on the claim of conversion of the stock warrants but actually dismissed the third counterclaim for lack of jurisdiction. Apparently, Judge Owen found that the claim of conversion of the warrants was included in the second counterclaim; thus, in his opinion of July 7, 1976, Judge Owen stated that this claim was “arguably pleaded” in the second counterclaim. Since we have found that the court lacked jurisdiction over the claim, it makes little difference whether it is denominated the third counterclaim or part of the second counter- claim. We have used the term “third counterclaim” for purposes of clarity. 18 Three of the additional defendants on the counterclaims—John F. Settel, Harold J. Richards, and the estate of Ned D. Frank—who were held jointly and severally liable to Gross, Donoghue and Bleich for their capital interescs in the Partnership, bave not filed notices of appeal or participated in this appeal. Accordingly, the judgment of the district court insofar as it relates to these additional defendants is not before this court, see 28 USC $1291; Fed. R. App. P. 3, 4. 5474 A23 Opinion of U.S. Court of Appeals Stamm, 288 F. Supp. 453, 457 (E.D.N.Y. 1968) ; see gener- ally Note, Churning by Securities Dealers, 80 Harv. L. Rev. 869 (1967). In order to recover, the customer must show that the dealer effectively exercised control over trading in the account and manipulated the account to his benefit. Where, as here, the account is non-discretionary (i.e., the dealer may not make trades in the account without the customer’s authorization), the plaintiff must show that he relied extensively on his broker’s advice and that the broker abused the plaintiff’s trust. Thus, if a customer is fully able to evaluate his broker’s advice and agrees with the broker’s suggestions, the customer retains control of the account. See Carras v. Burns, supra, 516 F.2d at 258-59. In essence, the Corporation contends that the Buckley account was excessively traded by Jordon in order to gen- erate commissions and that, at least on one occasion, Jor- don gave Buckley false information. The short answer to this contention, however, is that the evidence in this area was conflicting and Judge Owen’s conclusion is amply sup- ported by the record. It is evident from David Buckley’s testimony that he is an intelligent, well-educated man with a Bachelor’s Degree from Cornell University, where he majored in Economics, and a post-graduate degree in International Marketing. When Buckley opened his account with Gross & Co. he was thirty-one years old and had prior experience in the mar- ket. He testified that he spent over $100 per month on investment advisory services, in addition to subscribing to various financial journals. Buckley frequently communi- cated with Jordon by telephone concerning his account and testified that he was “intensely interested” in the account. According to Buckley, as many as eighty or ninety per cent of the transactions in the account occurred as a result of Jordon’s suggestions; however, Jordon testified that 5475 A24 Opinion of U.S. Court of Appeals Buckley initiated at least as many transactions as he did. In any case, Buckley authorized every transaction that took place and he testified he frequently rejected Jordon’s recommendations. The Corporation contends that the turnover ratio—the ratio of the total cost of purchases to the amount invested —averaged seven times per year and that the total amount of commissions generated was approximately $75,000. While these factors may serve as useful indicators, sce, e.g., Carras v. Burns, supra, 516 F.2d at 258, they must be examined in light of the character of the account. As Judge Owen found, the evidence shows that Buckley was interested in speculation and a greater volume of activity will normally be expected in such an account. See, e.g., Landry v. Hemphill, Noyes € Co., supra, 473 F.2d at 374; Note, supra, 80 Harv. L. Rev. at 875. The expert testi- mony regarding the significance of this evidence was con- flicting. In sum, the determination of whether Buckley exercised control over the account involved a question of fact, which turned largely upon the court’s assessment of the wit- nesses’ credibility and its judgment regarding Buckley’s ability to evaluate the advice given to him by Jordon. Such issues are particularly the province of the trier of fact and Judge Owen’s conclusion was not clearly errone- ous. See Fed. R. Civ. P. 52(a). Il. The Counterclaims A. Jurisdiction The Corporation and the additional defendants on the counterclaims contend that the court erred in finding that the defendants’ first, second and fourth state law counter- claims were compulsory counterclaims within the court’s 5476 A25 Opinion of U.S. Court of Appeals ancillary jurisdiction. It is well-established that counter- claims that are “compulsory” within the meaning of Fed. R. Civ. P. 13(a) are within the district court’s ancillary jurisdiction and, thus, require no independent hasis of federal jurisdiction. See, e.g., Moor v. County of Alameda, 411 U.S. 693, 714-15 (1973); United States v. Heyward- Robinson Company, supra, 430 F.2d at 1080-81; United Artists Corp. v. Masterpiece Productions, 221 F.2d 213, 216 (2d Cir. 1955); further, if a counterclaim is compul- sory, the district court’s ancillary jurisdiction extends to third parties (in this case the additional defendants) whose presence is required for adjudication of the counterclaim. See Moor v. County of Alameda, supra, 411 U.S. at 714-15; United Artists Corp. v. Masterpiece Productions, supra, 221 F.2d at 216-17. On the other hand, the district court has no jurisdiction over a permissive ¢ unterclaim, see Fed. R. Civ. P. 13(b), unless it rests upon an independent jurisdictional ground. United States v. Heyward-Robinson Company, supra, 430 F.2d at 1080-81; O’Connell v. Erie Lackawanna R.R. Co., 391 F.2d 156, 163 (2d Cir. 1968), vacated as moot, 395 U.S. 210 (1969) ; Lesnik v. Public Industrials Corporation, 144 F.2d 968, 976 n.10 (2d Cir. 1944). Although there has been some criticism of the requirement of an independent jurisdictional ground for permissive counterclaims, see United States v. Heyward-Robinson Company, supra, 430 F.2d at 1087-88 (Friendly, J., concurring) ; Green, Federal Jurisdiction over Counterclaims, 48 N.W.U.L. Rev. 271 (1953), the cases have uniformly adhered to this require- ment. See Sue € Sam Mfg. Co. v. B-L-S Const. Co., 538 F.2d 1048, 1051 (4th Cir. 1976); Pipeliners Local Union No. 798, Tulsa, Okl. v. Ellerd, 503 F.2d 1193, 1198 (10th Cir. 1974); 6 Wright and Miller, Federal Practice and 5477 A26 Opinion of U.S. Court of Appeals Procedure, § 1414 (1971).’* At their core, the compulsory counterclaim doctrine and the parallel doctrine of ancillary jurisdiction both seek to further the same policy, which is to avoid piecemeal litigation in the federal courts. See, e.g., United States v. Heyward-Robinson Company, supra, 430 F.2d at 1082; Great Lakes Rubber Corporation v. Her- bert Hoover Company, 286 F.2d 631, 633-34 (3rd Cir. 1961) ; United Artists Corp. v. Masterpiece Productions, supra, 221 F.2d at 216-17. Since a compulsory counterclaim is by definition closely related to the subject matter of the op- posing party’s claim, common sense and judicial economy compel the conclusion that such claims should be tried together and the extension of ancillary jurisdiction to com- pulsory counterclaims is consistent with Article ITI’s grant of jurisdiction over “cases” arising under the Constitution and federal laws. See Aldinger v. Howard, 427 U.S. 1, 6-16 (1976); 6 Wright and Miller, supra, at § 1414. Fed. R. Civ. P. 13(a) provides, inter alia, that a counter- claim is compulsory, “if it arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” In interpreting this language we have adopted what has been termed the “logical relation” test. See 6 Wright and Miller, supra, at § 1410. Thus, in United Artists Corp. v. Masterpiece Productions, supra, 221 F.2d at 216, Chief Judge Clark said, “In practice this criterion has been broadly interpreted to require not an absolute identity of factual backgrounds for the two claims, but only a logical relationship between them.” *° . 19 The parties are in agreement with respect to the applicability of this rule and bave not asked us to examine its continuing validity. Accord- ingly, we refrain from undertaking such an examination. 20 In United Artists we relied on our earlier holding in Lesnick v. Public Industrials Corporation, supra, which relied, in turn, upon Moore v. New York Cotton Exchange, 270 U.8. 593 (1926). There, in interpreting the scope of Equity Rule 30, the Supreme Court stated, “ ‘Transaction’ 5478 A27 Opinion of U.S. Court of Appeals Applying this standard, Judge Ward found that the controversy surrounding the sale of assets to the Corpora- tion had “become inextricably intertwined” with the Cor- poration’s churning claims. Newburger, Loeb & Co., Inc. v. Gross, supra, 365 F. Supp. at 1367. He concluded that defendants’ first and second counterclaims were so closely tied to its defenses to the Corporation’s claims that they were “logically related” to those claims and that since the fourth counterclaim asserted the same allegedly wrongful acts, it too should be considered a compulsory counter- claim. We agree with Judge Ward’s findings and note that the evidence at trial demonstrates the soundness of his ruling. Essentially, the defendants asserted two defenses to the Corporation’s churning claims. First, they contended that the February 11 transfer, which included the transfer of the Buckley claim from the Partnership to the Corporation, was ineffective because conducted in violation of New York Partnership Law $98; accordingly, they contended that the Corporation could not press the Buckley claim because it did not own it. Second, the defendants claimed that the Corporation was estopped from asserting the claim be- cause it was brought as part of a conspiracy against them in violation of the fiduciary duties owed to them; thus, the defendants alleged, inter alia, that the Buckley claim was taken by the Partnership in bad faith for the sole purpose of creating a colorable claim against them, that the transfer of assets was induced by “fraudulent special consideration” as part of a plot by Kayne, Muh and Risher to gain control of the Partnership’s assets, and that the transfer itself was a violation of fiduciary duty. is a word of flexible meaning. It may comprebend a series of many occurrences, depending not so much upon the immediateness of their connection as upon their logical relationship.” Id. at 610. 5479 A28 Opinion of U.S. Court of Appeals It is obvious that there was a substantial overlap be- tween the defendants’ defenses and their first. second, and fourth counterclaims; indeed, proof of these defenses was tantamount to establishing defendants’ case on their coun- terclaims. To require the defendants to ass*rt these de- fenses against the Corporation and then bring a separate action on their counterclaims in state court would amount to considerable duplication of judicial time and effort and could lead to mutually inconsistent results. Thus, in a similar situation this court held that where the plaintiff brought suit upon a note and the defendant counterclaimed on the ground that the suit was part of a broader con- spiracy to injure its business, the counterclaims should be viewed “as arising out of the occurrence, and surely out of the transaction, by which [plaintiff] took the note upon which his complaint was based.” Lesnik v. Public Indus- trials Corporation, supra, 144 F.2d at 975. Further, Judge Clark, speaking for the court, found that “proof of the conspiracy bears directly upon [plaintiff's] allegation of due and proper assignment of the note to him and should be here tried, to avoid multiplicity of suits and secure economy of judicial action.” Id. at 975. See United Artists Corp. v. Masterpiece Productions, supra, 221 F.2d at 216. In sum, we find that defendants’ first, second and fourth counterclaims arose out of the series of assignments upon which the Corporation’s claims are based and that “the pleadings disclose a sufficient logical relationship so that, in the interest of avoiding circuity and multiplicity of ac- tion, [these counterclaims] should be considered compul- sory.” United Artists Corp. v. Masterpiece Productions, supra, 221 F.2d at 216. We further conclude that defendants’ fifth, sixth and seventh counterclaims were correctly dismissed for lack of subject matter jurisdiction. These claims alleged that 5480 A29 Opinion of U.S. Court of Appeals under the terms of the Partnership agreement Gross, Bleich and Donoghue were entitled to the return of their capital interests; apparently, these claims were based on the theory that the Partnership had effectively dissolved. We can find no significant relationship between these con- tract claims and the substance of the Corporation’s claims or the assignment of the churning claim to the Corporation. In any case, the successful assertion of defendants’ first, second and fourth counterclaims has effectively made moot any claim for damages on the fifth, sixth and seventh coun- terclaims. Judge Ward’s holding that the court lacked ancillary jurisdiction over defendants’ eighth counterclaim (which was followed by Judge Owen), presents a somewhat closer question. This claim alleged that the Corporation and the additional defendants had “wrongfully and maliciously brought about the destruction of Gross’ opportunity for employment with Rafkind & Co. by informing it of the re- strictive covenant in the Partnership agreement. Essen- tially, this claim presented a state law issue of whether the restrictive covenant was reasonable as to time and area and necessary to protect legitimate interests. See Gelder Medical Group v. Webber, 41 N.Y.2d 680, 683 (1977). Un- like defendants’ first, second and fourth counterclaims, resolution of this issue was largely unrelated to the validity of the assignment of the Buckley claim to the Corporation; indeed, even if the restrictive covenant was exercised solely as a coercive tactic, as defendants’ alleged, it is not clear that this would affect the validity of the covenant if it was otherwise enforceable under state law. See id. at 684. Al- though the use of the restrictive covenant against Gross tended to support the defendants’ claim of breach of fidu- ciary duty, we conclude that Gross’ claim that the exercise of the clause was an independent violation of state law was 5481 A30 Opinion of U.S. Court of Appeals not sufficiently related to the Corporation’s claims to ren- der it a compulsory counterclaim. The Corporation and certain of the additional defen- dants argue that Judge Owen erroneously granted Gross relief on defendants’ third counterclaim after Judge Ward had held that this claim was not within the ancillary juris- diction of the court and could be asserted only as a set-off. We agree. The third counterclaim presented the issue of whether an interest in certain stock warrants had been distributed as profits to Gross under the Partnership agreement and, thus, whether this interest was converted when the war- rants were transferred to the Corporation as part of the Partnership assets. It is undisputed that the warrants were at all times held by the Partnership, in the Partner- ship’s name, and were never physically distributed. The basic issue was simply whether the Partnership could (con- sistently with the Partnership agreement) and did distrib- ute to the general partners interests in the warrants. There was simply no logical relation, either in law or in fact, between proof of this counterclaim and proof of the Corporation’s churning claim; indeed, had the transfer of assets never taken place, this would not have affected the basic nature of Gross’ claim for possession of the warrants. Further, we fail to see how Judge Owen’s amendment of the pleadings to conform to the proof could overcome this basic jurisdictional defect. See Fed. R. Civ. P. 82. Accord- ingly, we reverse the judgment insofar as it grants relief on defendants’ third counterclaim.” 21 We note that under the tolling provisions applicable to the state stat- ute of limitations, it would appear that defendants are free to bring a separate action on their third and eighth counterclaims in state court, without fear of the limitations period having run during the pendency of this suit. See CPLR §205. 5482 A31 Opinion of U.S. Court of Appeals Finally, defendants claim that irrespective of the doc- trine of ancillary jurisdiction, all of their counterclaims were properly before the court because their first eight counterclaims were pendent to their ninth counterclaim, which rests upon the federal antitrust laws. With the ex- ception of defendants’ eighth counterclaim, discussed infra, we think defendants’ reliance on the doctrine of pendent jurisdiction is without merit. The test for the presence of pendent jurisdiction was formulated by the Supreme Court in United Mine Workers v. Gibbs, 383 U.S. 715 (1966) as follows: The state and federal claims must derive from a com- mon nucleus of operative fact. But if, considered without regard to their federal or state character, a plaintiff’s claims are such that he would ordinarily be expected to try them all in one judicial proceeding, then, assuming substantiality of the federal issues, there is power in federal] courts to hear the whole. Id. at 725 (footnote omitted). The operative facts of the antitrust claim were simply whether the enforcement of the restrictive covenant vio- lated the federal antitrust laws. In contrast, defendants’ first through seventh counterclaims involved issues of state partnership and tort law, and interpretation of the part- nership agreement and the distribution of profits under it, all of which were dependent upon proof of facts that were entirely irrelevant to the antitrust claim. Such claims would not ordinarily be tried together and the only com- mon link between these claims—the allegation that en- forcement of the restrictive covenant was part of a larger conspiracy involving the transfer agreement—simply does not provide the “common nucleus of operative fact” essen- tial to the exercise of pendent jurisdiction. 9483 A32 Opinion of U.S. Court of Appeals B. Defendants’ First, Second and Fourth Counterclaims Liability. The Corporation and the additional defendants raise numerous claims of error regarding Judge Owen’s finding that they were each liable on defendants’ first, second and fourth counterclaims for conspiring “to injure Gross, Bleich and Donoghue in their interests in the Part- nership,” which may be summarized as follows: first, the Corporation and the additional defendants claim that under New York law there is no tort of “conspiracy” and it was incumbent upon defendants to prove that each in- dividual sought to be held liable knowingly participated in some actionable wrong; second, they claim that no ac- tionable wrong was suffered by Gross, Bleich or Donoghue; and, third, that if any such wrong was committed, they did not knowingly participate in it. At the outset, the significance of an allegation of con- spiracy under New York law is to charge that an action- able wrong was committed jointly by the defendants so that the acts of one may be imputed to the others because of their common purpose and intent. See Original Ballet Russe v. Ballet Theatre, Inc., 133 F.2d 187, 189 (2d Cir. 1943); A. S. Rampell, Inc. v. Hyster Co., 3 N.Y.2d 369, 379 (1957) ; Green v. Davies, 182 N.Y. 499, 504 (1905) ; Dalury v. Rezinas, 183 App. Div. 456, 459-60 (1st Dept. 1918), aff'd, 229 N.Y. 513 (1920). “The allegation of conspiracy carries no greater burden, but also no less, than to assert adequately common action for a common purpose by com- mon agreement or understanding among a group, from which common responsibility derives.” Goldstein v. Siegel, 19 App. Div. 2d 489, 493 (1st Dept. 1963) (Breitel, J.). Judge Owen found that Kayne, Risher, Sloane and Muh, guided by Persky, had engaged in a plot to gain control of the assets of the Partnership in the course of which they participated in at least two separate wrongs to the de- 5484 A33 Opinion of U.S. Court of Appeals fendants: (1) the “knowing” violation of Donoghue and Bleich’s rights as limited partners under section 98, which he found to be a conversion of their capital interests in the Partnership; and, (2) the violation by the members of the Partnership of the fiduciary obligations owed to Gross, Bleich and Donoghue. Thus, Judge Owen found that the partners had lent themselves to the goals of the promoters’ plan by “affirmatively permitting” the transfer to take place in violation of section 98, and by their “know- ing acquiescence” in the promoters’ use of “various base- less litigation threats.” We hold that these findings are supported by the record and are sufficient in law to im- pose liability upon the Corporation and the additional de- fendants, both on a conspiracy theory and on the related principle that one who knowingly participates with a fidu- ciary in a breach of trust is liable to the beneficiary for any damage caused thereby. See Wechsler v. Bowman, 285 N.Y. 284, 291, modified, 286 N.Y. 582 (1941); 5 Scott on Trusts, §506 (3rd ed. 1967). Turning first to the claims of Donoghue and Bleich, we agree with Judges Ward and Owen that the transfer of the Partnership assets without the consent of Donoghue and Bleich was a violation of section 98 of New York Partnership Law. See, e.g., Executive Hotel Associates v. Elm Hotel Corporation, 41 Misc. 2d 354 (Civ. Ct. City of New York), aff'd, 43 Misc. 2d 153 (App. Term, 1st Dept. 1964). The February 11 transfer effectively terminated the Partnership and funneled its assets into a new entity. It is difficult to conceive of an act that would make it more “impossible to carry on the ordinary business of the partnership.” Partnership Law, §98(1)(b). Relying on Mist Properties, Inc. v. Fitzsimmons Realty Co., 228 N.Y.S. 2d 406 (Sup. Ct. Kings County 1962), Persky argues that the transfer did not violate section 98 because the part- nership agreement prov [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_0074%3A1. Public record. Not legal advice.