# Petition — Coleco Industries, Inc. v. Berman > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1108%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1978 - **Citation:** 439 U.S. 830 ## Text ~ $upreme Court, U.S, . { FILED \ JUN 2 1978 IN THE . > | Seasons Gent tt ti Cetet Gees October Term, 1977 No. i i ] 725 COLECO INDUSTRIES, INC., Petitioner, ABE BERMAN, JOSEPH RUBIN, IRVING COHEN, LEWIS M. COHEN, FREDERICK COHEN, ZELNICK, SOBELMAN & COMPANY, Respondents. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT JOSEPH A. YABLONSKI DANIEL B. EDELMAN Yablonski, Both & Edelman 1150 Connecticut Avenue, NW Suite 500 Washington, DC 20036 Attorneys for Coleco Industries, Inc. NT YN THE CASILLAS PRESS, INC. —1717 K Street N W —Westungton, 0. C.~223-1220 = -* (i) TABLE OF CONTENTS Page EY 6 o00nb.0n6ee0esbeGh ae entabacedanendens 1 EE ne eveneeneseenhennces 4b.400600 ke Cae tbs 2 ee oi ce deadccepeewdeeldeetes duces 2 ED cass cwnneddhéséeceheusontecues 2 EY SE. ik. vc cnesccccedctueudbeeousd a i ae inn J i TT i EE a tf aang 1S Finally, the decision below collides not only with other decisions of the Third Circuit noted above, supra n. S, but also with a growing number of decisions from other circuits which have reversed preclusion or dismissal orders on the grounds that the underlying pre-trial process was wholly in- consistent with Rule 16. In Peter Eckrich & Sons, Inc. v. Selected Meat Co., 512 F.2d 1158 (C.A. 7, 1975), the lower court had excluded the testimony of Plaintiff's expert wit- nesses because the witnesses had not been listed in the pre- trial order. The Seventh Circuit reversed, holding: “Rule 16 was never intended to be a trap for un- wary counsel and their litigants. The rule itself in- dicates that these conferences are held in order to produce agreement among the parties and the trial judge. . . . The order which follows such con- ferences is intended to be tailored to the par- ticular case and to reflect ‘agreements made by the parties.’”’ 512 F.2d at 1163-1164. There, as here, “the pretrial order was little more than boiler plate. . . .” /bid. Finally, the Seventh Circuit held that preclusion of Plaintiffs expert proof was “unreasonable and unfair’: “It is often said that a trial is not a game of tac- tics, but a proceedings designed to achieve sub- stantial justice among the parties. Here the trial was a game, and thus resulted in a denial of sub- stantial justice because it was essential to its case to have expert testimony.” /d. at 1164 More recently, the Fourth Circuit struck down a Local Rule which required submission of pretrial memoranda virtually identical to those required by the order entered by Judge Huyett.” McCargo v. Hedrick, 545 F.2d 393 (C.A. 4, 1976). "The Local Rules, as amended (146a-154a), exacerbate the in- consistency between pre-trial in the Eastern District of Pennsylvania and Rule 16. See n.1, supra. 16 In ruling that Local Rule 2.08 of the United States District Court for the United States District Court for the Northern District of West Virginia was inconsistent with Rule 16, F.R.C.P., the late Judge Craven noted that good pretrial practice “is always simple” — its purpose is to strip each case to its essentials. Then, speaking on behalf of the Four- th Circuit, he found: “Local Rule 2.08 is a distortion of such pur- poses. Simplicity has been forgotten. The theory seems to be that if two pages are good, four must be better, and ten or 13 or 21 may prevent a trial altogether, as happened here. Rule 16 was never meant to make lawyers try a case on paper instead of in a courtroom. In fact, it contemplates that the district judge himself will dictate the pretrial or- der. Of course, the court may seek the aid of counsel in preparing the order, but Rule 16 should not be implemented in such a manner that the pretrial procedure itself is more difficult and time consuming than the actual trial. Local Rule 2.08 subordinates the role of the lawyer to that of the administering magistrate, reducing counsel to the role of clerical assistants who are to anticipate imaginatively what other matters ought to be embraced within an endless pretrial order. The Federal Rules of Civil Procedure freed us from common law pleading. Under the guise of ‘implementing’ Rule 16, Local Rule 2.08 puts back into a pretrial order that which was so pain- fully removed from the complaint and the answer less than 40 years ago.’’ 545 F.2d at 401 (Em- phasis supplied). _— 17 The foregoing quotations place the Fourth and Seventh Circuits in irreconcilable conflict with the decision below as to the intent of Rule 16 as well as its application. See also Padovani v. Bruchhausen, 293 F.2d 546, 548-549 (C.A. 2, 1961). Review by this Court is essential to resolve this con- flict, to correct the abuses of the pretrial process embodied in many Local Rules and “standing orders’ of the in- dividual district judges and to restore pre-trial to the pur- poses envisioned by this Court and the framers of Rule 16 when it was initially adopted. CONCLUSION For the reasons stated herein, the Petition for Certiorari should be granted, the judgment of the Court of Appeals reversed and the cause remanded for further proceedings. Respectfully submitted, JOSEPH A. YABLONSKI DANIEL B. EDELMAN Yablonski, Both & Edelman 1150 Connecticut Avenue, NW Suite SOO Washington, DC 20036 Attorneys for Coleco Industries, Inc. la APPENDIX A UNITED STATES COURT OF APPEALS For toe Tump Crmcvir Nos. 76-2328, 76-2329, 76-2330, 76-2331 COLECO INDUSTRIES, INC., Appellant in No. 76-2328 v. ABE BERMAN; JOSEPH RUBIN; IRVING COHEN; LEWIS M. COHEN ; FREDERIC COHEN ; and ZEL- NICK, SOBELMAN & COMPANY Joseph Rubin, Irvin Cohen, Lewis M. Cohen, etc., appellants in No. 76-2329 Zelnick, Sobelman & Company, appellant in No. 76-2330 Abe Berman, appellant in No. 76-2331 On Appzat From tHe Unrrep Srares District Court For THe Eastern District oF PENNSYLVANIA C.A. No. 73-2790 Argued October 18, 1977 Before: Apams and Gartu, Circuit Judges, and Layton, District Judge.* * United States District Judge for the District of Delaware, sitting by designation. JosepH A. YaBLONSKI Cuar.es R. Boru Daniet B. Everman Yablonski, Both & Edelman Washington, D.C. 20036 Davip BEercer Ricuarp A. Spracve Micuakt K. Simon David Berger, P.A. Philadelphia, Pa. Attorneys for Appellant, Coleco Industries, Inc. 2a Daxret B. Prersoy, V. Pierson, Jones & Nelson, P.C, Philadelphia, Pa. 19107 Attorney for Appellant, Joseph Rubin THeEopore R. Mann Barry E. Uncar Larry H. Spector Mann and Ungar, Prof. Assoc. Philadelphia, Pa. 19103 Attorneys for Appellants Irvin Cohen, Lewis M. Cohen and Frederick Cohen Guzxn C. Egur Bruce D. Lomsarpo Rosert J. McKer, Jr. Harvey, Pennington, Hert- ing & Renneisen, Ltd. Or CounsEL: Harvey, Pennincton, Hert- nG & Rewveisen, Lrp., Philadelphia, Pa. 19103 Martin J. Resnick E. Harris Baum Zarwin, Baum, Arangio & Somerson, P.C. Philadelphia, Pa. 19107 Attorneys for Appellant, Abe Berman ———— 3a OPINION OF THE COURT (Filed November 25, 1977) Per Curmum: This factually-complex case arises out of the 1973 acquisition of Royal All-Aluminum Swimming Pool Corp. by a 100% stock purchase on the part of Coleco Industries, Inc. Royal’s shareholders were Abe Berman, Joseph Rubin, and Irvin, Lewis and Frederick Cohen. Berman acted as president and sales manager, Rubin functioned as vice president, design engineer and production manager, while the Cohens provided financial support to Royal. Berman, Rubin and the Cohens, along with Zelnick, Sobel- man and Co., Royal’s accountants, were the defendants in the $1.3 million securities fraud action which forms the nucleus of the complaint in this case. The trial court’s extensive opinion, reported at 423 F. Supp. 275-324 (E.D. Pa. 1976), sets forth the circumstances of this case in detail. We therefore present only a capsule review of the events giving rise to the lawsuit. I. Txe Facts A. History of the Case In 1971, Berman, Rubin and the Cohens incorporated Royal, with the objective of using Berman and Rubin’s ex- pertise in manufacturing and marketing above-ground aluminum swimming pools. Royal had a moderately suc- cessful year in 1972, making inroads on other pool sup- pliers’ markets, but sold 600 instead of an expected 900 pools, sustaining a net loss of $172,000.’ The combination of a potentially-successful product and a financial squeeze caused by under-capitalization at- tracted the attention of Coleco, a Connecticut corporation active in the swimming pool field. After initial inquiries in January of 1973, negotiations commenced regarding the 1. The initial capitalization of the firm was $84,000 and a bank loan pro- vided an additional $100,000. 4a purchase of Royal by Coleco. While the original proposi- tion discussed was a $1 million acquisition, the Coleco prin- cipals wished to defer consummating the arrangement in order to await the performance of a certified audit of Royal. The Royal officials pressed for an immediate purchase, contending that Royal’s current financial situation was so fragile that an immediate infusion of new capital was necessary. The difference was resolved by a purchase agreement which provided for a firm $500,000 to be paid in four in- stallments, and $500,000 of the purchase price to be made contingent upon the profitability of Royal in succeeding years. In addition, the Royal principals warranted the correctness of Royal’s financial statement for the first quarter of 1973 (April 30 statement). Rubin and Berman were to be retained to manage the company at specified salaries. The agreement of sale was signed on June 4, 1973. It is conceded that the April 30th statement underestimated the total inventory set forth by Royal by at least $49,922. By November 1973, Rubin had quit, Berman had been fired, Coleco had expended—by its estimates—$1.3 million on Royal, Royal had barely broken even, and Coleco was in the process of transferring what was left of Royal to its subsidiary ABCO. Coleco filed suit on December 4, 1973. The proceeding began as a jury trial, but halfway through the jury was dismissed. After the evidence was closed, Judge Huyett made extensive findings of fact and conclusions of law which are set forth in the course of his opinion. The interpretation of how matters advanced through each of the various stages is, of course, hotly contested. The first dispute centers on the representations which were made to Coleco before the sale. Coleco claims it was misled as to the profitability of Royal. It points out that on April 18, 1973 Rubin told a Coleco principal that Royal was realizing a gross profit of $500 per pool, and that the April 30, 1973 first quarter report showed a gross profit of $200,000 on the sale of 400 pools. Sa All parties agree that the April 30 statement was in error, underestimating the cost of the pools manufactured by $49,922, as a result of accounting errors. In addition, Coleco claims that by comparing the April 30 figures with the figures derived from a June, 1973 audit, the cost of the 400 pools was understated by an additional $80,272. Berman, Rubin and the Cohens (hereinafter the ‘‘ Royal defendants’’) respond that the April 18 representation re- garding the gross profit per pool was made in good faith. The trial court agreed, finding that the representation was that Rubin ‘‘believed’’ that he was making $500 per pool, and that such was in fact the state of Rubin’s belief (423 F. Supp. 285, 289). Moreover, the Royal defendants chal- lenge the plaintiff’s accounting methods, admitting only the $49,992 discrepancy, and argue that they were misled as much as the plaintiff by the errors of Zelnick, their ac- countant. The trial court did not pass on this contention explicitly, although it found Zelnick liable to the defendants for the $49,922 error, on the basis of Zelnick’s ‘‘obvious and mechanical’’ mistakes (423 F.Supp. 308-310, 310 n.59). The major factual disagreement between the parties regarding the various events following the purchase cor- cerns the cause of the business difficulties experienced by Royal. All admit that by the end of the summer, Royal was unable to meet the orders for which it had contracted, and that its operation was beginning to fall apart despite overtime work on the part of Rubin. Coleco claims that the operation was doomed from the start, given the underestimated profit margin. The Royal defendants contend that the root of the problems was mis- management by Coleco. While the trial court found that 2. Coleco also claimed at trial that one of the new lines of Is manu- factured in 1973 by Royal was defectively A ae and that ls hem was vered the warranties accom ing sa 7 The Royal defendants con that the subsequent failures in the pools were the result of shoddy workmanship by suppliers, and that Coleco had been informed of difficulties experienced in obtaining appropriate work from sup- pliers before the Coleco purchase. This dispute to the background on appeal, perhaps because the trial court found that even assuming that the pool failures were actionable, no damages had been proven as a result of such failures. 6a Rubin had informed Coleco that successful operation on the scale it contemplated would require immediate infusions of capital, along with personnel and materiel from Coleco, in fact the expenditures of money by Coleco on the Royal operation were delayed, and the men and materials never arrived. Moreover, Coleco’s management antagonized both Rubin and Berman, the lynchpins of the operation, to the point where one left and the other had to be discharged. The trial court supported the Royal defendants, finding that ‘‘Royal failed, we find it much more probable than not, because Coleco mismanaged it after the acquisition.’’* Berman and Rubin both assert that they were driven out—Berman that he was fired without cause, and Rubin that he was forced to resign by intolerable working condi- tions and lack of cooperation. Both seek to recover the salaries promised them under the contract. Coleco responds that Berman had been derelict in his duty, and that under New Jersey law Rubin’s resignation bars recovery on an employment contract. The trial court found for Rubin and against Berman. B. The Suit By the time this case reached trial, each of the parties, except Zelnick, had invoked a plethora of remedies. Zelnick, however, had settled with Coleco for $350,000 and had be- came a third-party defendant. In broad overview, the holdings of the trial court were as follows: (1) Coleco had no valid claim under 15 U.S.C. §78j}(b) and SEC Rule 10b-5. Whatever misrepre- sentations occurred were made in the belief of their truth or were not ‘‘studied.’’ Thus the scienter neces- sary for a securities violation was lacking. (2) Coleco had no valid common-law fraud claim. The scienter necessary for a 10b-5 violation is identical to that essential for fraud. Since the former was ab- sent, the latter was also lacking. 3. 423 F. Supp. at 293. a ee 7a (3) Coleco was entitled to recover for breach of warranty, but: (a) no damages were proved for the design defect contention (the court assumed without deciding that the warranty had been breached) ; (b) the disputed $80,272 discrepancy was not properly proved; (c) damages for breach of the warranty of correctness of the April 30 statement were limited to the actual discrepancy between the correct figures and the ones warranted, and recovery on this item was thus limited to $49,992. (4) Whatever recovery Coleco was entitled to on the breach of warranty was satisfied by the settlement with Zelnick, under the New Jersey ‘‘one settlement’’ rule. (5) The Royal defendants were entitled to recover the unpaid portion of the $500,000 non-contingent sales price and for the loans they had made to Royal, because the financial discrepancy was not a material breach and because to interpret the purchase agreement as barring recovery would be to read it as a penalty which would be unenforceable. The total amount awarded on this claim was $480,000. (6) The Royal defendants were not entitled to re- cover their share of future profits, since such profits could not be proved with sufficient certainty. (7) Rubin was entitled to his total remaining $70,506 salary, because he left after his position had been made intolerable by Coleco. (8) Berman was not entitled to his salary, since his discharge was with cause. (9) Zelnick was liable to the Royal defendants for the damages awarded on the basis of the breach of financial warranty (in fact, nothing). 8a (10) Coleco was entitled to only $15,000 of the claimed $410,550 counsel fees. With the exception of the design-defect finding and the award of counsel fees,‘ all the parties appealed from the determinations adverse to their contentions. The Royal defendants then moved to dismiss Zelnick’s appeal as moot, since under the district court’s order, Zelnick has no re- maining liability. We affirm the trial court’s decision on issues 1, 2 3, 4, 5, 6, and 8; remand for recomputation of damages on issue 7; and dismiss the appeal as moot on issue 9. II. Tue Issves In view of Judge Huyett’s extensive opinion, we shall canvass in summary fashion the areas of agreement with his holdings. A. Securities Fraud In evaluating the plaintiffs’ contentions that the Royal defendants had violated 10b-5, Judge Huyett held that ‘‘to establish the element of scienter in an action brought under section 10(b) and Rule 10b-5, a party must prove injury resulting from a conscious deception or from a misrepre- sentation so recklessly made that the culpability attaching to such reckless conduct closely approaches that which at- taches to conscious deception.’’ (423 F. Supp. at 796). The Supreme Court has recently announced, in Ernst & Ernst v. Hochfelder, that ‘‘scienter’’ is a necessary element of a violation of Rule 10-b(5).5 We agree with the trial judge, and the majority of the courts which have passed on the question since Hochfelder, that plaintiff may recover under Rule 10b-5 for misrepresentations that are recklessly made as well as those made with conscious 4. Coleco’s brief suggests that if damages are recomputed, then attorney's fees should also be re-examined. Since the court does not disturb the final damage award, we need not discuss the contention regarding counsel fees. 5. 425 U.S. 185 (1976). a ee eee 9a fraudulent intent. We need not precisely define the na- ture of the recklessness which might give rise to 10(b) (5) liability, however, for the finding by the trial court that the actions of the Royal defendants were not reckless is amply supported by the record under any of the standards which other courts have suggested. The trial court specifically determined that the Royal defendants represented to Coleco the condition of Royal as they believed it to be, and that they were ‘forthright in their dealings with . . . Coleco and did not deliberately misrepresent any aspect of Royal’s status or operation.’’* Judge Huyett found as a fact that Rubin ‘‘expected Zel- nick, Sobelman & Co. to be totally responsible for Royal’s accounting, including the costing of the various pool models.’’* He held that the proven errors in the April 30 financial statement could be traced to Zelnick’s failure properly to examine the statement, and that the Royal defendants were entitled to recover damages suffered as a result of their reliance on Zelnick in this regard.° Coleco has adduced no evidence which indicates that the reliance on Zelnick’s expertise by the Royal defendants was outside the bounds of commercial prudence. Indeed, the only information suggested which might have alerted Royal to inaccuracies was equally available to Coleco.’ 7 . Heiser Corp., (slip op. No. 76-1140, June 30, 1977, 7th Cir.); Bollty v. Meister Brow Inc. $36 F2d 982 (th Cir. 1977) ; Hersfeld . Laventhol, Krekstein, Horwath and Horwath, $40 F.2d 27 (2d Cir. 1 6); cf. Arthur Lipper Corp. v. SEC, $47 F.2d 171 (2d Cir. ~~ Ben J.) (subjective intent or knowledge not necessary to sustain plinary proceeding). 7. 423 F. Supp. at 285, 289. 8. Id. at 281. 9. Id. at 308-310. ates idle ss oa immediate ore an “examining to checked Royals books, aod found tat costs had been underestimated per pool. 423 F. Supp. at 286-87. This circumstance differentiates “face-to-face 10a Under these circumstances, we do not believe the trial court erred in finding no ‘‘reckless’’ behavior on the part of the Royal defendants. B. Common-Law Fraud and Breach of Warranty As alternative claims, the plaintiff maintained that it should be able to recover for defendants’ misrepresenta- tions on two state law theories: (1) that the representa- tions of profitability and competent design, particularly those contained in the contract, constituted common-law fraud under New Jersey law; and (2) that the failure of the April 30th financial statement and of the pool design to be in accord with the contractual representations of ac- curacy and soundness, respectively, were breaches of war- ranty. The trial court held that no actionable fraud had ac- curred inasmuch as the standard of scienter for common law fraud was identical with that necessary for 10b-5. On the warranty claim, the court found that the admitted $49,992 underestimation of inventory cost in the April 30 statement breached the financial warranty, and it awarded $49,992 as damages. However, it rejected plaintiffs’ claim for a recovery of all monies expended in buying and re- financing Royal. Judge Huyett also concluded that, assum- ing the design defects, if any, breached warranties, no damages had been proven as a result of such breaches. Plaintiff challenges the failure to find liability on the fraud count as well as the court’s calculation of damages on the warranty claim. (1) Liability As a matter of general common law, Judge Huyett’s findings of good faith and lack of recklessness negative the assertion of fraud on the part of the Royal defendants. And while common law standards in New Jersey may be read to extend the rubric of fraud beyond the bounds of commercial recklessness, Judge Huyett’s failure to recog- nize such a cause of action is not ultimately at issue here. There is no question but that the allegedly fraudulent assertions in the April 30 statement also constituted a breach of warranty. As we understand the law of New Jersey, on this record, the damages recoverable for fraud are identical to those recoverable for breach of warranty. A potential finding of fraud is, therefore, superfluous, and the only issue before us regarding the misrepresentations is the correctness of the damage calculations. (2) Damages (a) Proof It is necessary to review an evidentiary ruling made by Judge Huyett regarding evidence proffered by the plaintiff on the issue of proof of damages. In its pretrial memorandum, Coleco indicated that it intended to prove under-costing by comparing the cost sheets prepared for the June, 1973 inventory with cost figures contained in the financial statement for the quarter ending in April, 1973, the financial statement that the de- 1. The discussion of the parties focuses on the doctrine of Plimpton v. Friedberg. 110 N.J. 427, 166 A.2d 295 (1933) (mirsepresentation put as made on basis of personal knowledge is fraudulent, when in fact based on opinion of others). In our judgment, Zelif v. Sabbatino, 15 N.J. 70, 104 A.2d 54 (1954) and Palmiere v. Forte, 56 N.J. 155, 265 A.2d 539 (1970), are more In Zeliff the court upheld a finding of fraud grounded on the defendant realty sellers’ misrepresentation, in the contract of sale, ing the cost of oil used to heat a property. The trial court held, and Supreme Court affirmed the holding, that representation was false, and since defendants ithin their own know , it was actionable.” ee 3 Fh, gp - the defendants based on a ion in s produce. Although —_ Ty repre- based isrepresentation to a company bed them a8 innocent, they were held 10 be lable ! 12a fendants had warranted as accurate. The differential came to $80,272.00 more than the $49,992 by which the defendants admitted erring. At the hearing on the plaintiff’s summary judgment motion, which occurred before trial, defendants challenged the June, 1973 figures, on the ground that such figures could not be taken to represent the true costs as of the time of the April 30 statement. Defendants maintained that under Royal’s first-in-first-out accounting, the proper invoices to examine for costing would have been those for materials bought in 1972, and used in the first quarter of 1973. Since the price of aluminum, the material used to construct the pools, was rising rapidly during 1972-73, de- fendants argued, costing based on 1973 invoices could be used as neither proof of inaccuracy nor proof of damages. Without amending their pretrial statement, or notify- ing defendants’ counsel, Coleco thereupon commissioned a Philadelphia accounting firm to study 1972 supply invoices with regard to their similarity to 1973 prices. When Coleco attempted to introduce the findings of the new study by an expert witness, the defendants objected. The trial judge ruled that in light of the failure of plaintiff’s pretrial filings to disclose the study or its prospective use, to admit it would subject defendants to unfair surprise and prejudice. In view of the fact that plaintiff had been specifically ordered to notify counsel and the court of the substance of testimony by witnesses,"* and that no excuse was presented by Coleco’s counsel for its failure to advise the court earlier — Plaintiff argues that since no pretrial order was issued explicitly bind- ing them to reliance on 1973 invoices “in accordance with Local Rule 7(f),” became effective in July 1976, while the case was tried during the winter and ior Rule 7 made no explicit provision for a pretrial order, and indeed contemplated the required pretrial memorandum as having tnesses order requiring the plaintiff to file a pretrial memorandum including “plain- tiffs’ contentions as to disputed facts,” and “Plaintiffs’ final designation of witnesses to be called at trial. . . briefly identifying each witness and specify- ing the evidence which the witnesses will give. iven this order, it is not an abuse of discretion to prevent the plaintiffs from introducing a study of 1972 invoices which they neglected to mention before its introduction at trial. OAR he te ET ow ee ee 13a that the evidence would be offered, we do not believe it was an abuse of discretion to refuse to receive the plaintiff’s proffered proof."* We therefore must accept as correct the trial court’s conclusion that costs were underestimated in the April 30th statement by only $49,992. (b) Calculation At trial and before this Court, plaintiff’s counsel focused on the contention that the underestimation of costs struck at the heart of the bargain which Coleco had been led to expect; instead of buying a potential gross profit of 36%, plaintiff argues, under the facts as Judge Huyett found them gross profits were closer to 20%. Increased costs and lowered profits, Coleco asserts, meant that Royal was commercially worthless. Therefore, according to Coleco, it is entitled to the full $1.3 million in out-of-pocket expenditures which represents the costs of obtaining and operating Royal. “2 While = recognize that under New Jersey law dam- ages for fraud or breach of warranty seek to compensate a ili that to cure the prejudice; (3) the extent to which waiver ~ A A A * unlisted witnesses would disrupt the orderly and —y- FRG, A - in faili 14a plaintiff for his ‘‘loss of the bargain’’—the difference be- tween the worth of the article as represented and that as actually delivered **“—the record does not contain evidence which satisfactorily establishes the worth of Royal either as represented or as delivered. We agree with Judge Huyett’s conclusion that the allegation that Royal was worthless is insufficiently supported by the record.” Nor can we say that it was error to hold that the plaintiff failed to prove by a preponderance of evidence the degree to which Royal’s worth as delivered was less than as repre- sented. Indeed, we find little testimony in the record which bears on such a calculation. The only loss of the bargain actually proven was that which the trial court in fact awarded : the $49,992 by which the April 30 statement over- estimated the inventory. Likewise, we do not believe the trial court erred in rejecting Coleco’s demand for reimbursement for the out- of-pocket expenditures made on behalf of Royal. J udge Huyett held that Coleco had not proven by a preponderance of the evidence that the misrepresentation of the April 30 statement resulted in the $1.3 million out-of-pocket expendi- tures. We cannot say that this conclusion was reversible error, particularly in light of the fact that over $600,000 of the amount claimed was expended after Royal learned of the inaccuracies in the April 30 statement.’” (c) The ‘‘One Satisfaction’’ Rule Judge Huyett held that any recoveries due from the Royal defendants to Coleco should be offset by Coleco’s 15. Zeliff v. Sabbatino, 15 N.J. 70, 75, 104 A.2d 54, 56 (1954). Sce note 12 supra. 16. Judge Huyett chose not to credit the testimony of Edward Fialkowski, 's treasurer, that had Royal’s balance sheet showed a deficit, Royal would have had no value. 423 F. Supp. 366 at 52. We cannot say that Judge Huyett erred in finding that this testimony is unpersuasive. Indeed, the testimony of Coleco’s president, Arnold Greenburg, is that even had the costs been underestimated by $100,000 (rather than the $49,992 actually proved), he would still have purchased Royal, albeit at a lower price. (Transcript 250-251). 17. See Plaintiff's brief pp. 15-25. 15a $350,000 recovery from Zelnick."* That conclusion is not erroneous. The fact that the compensation from Zelnick was obtained on a different theory from that which Coleco asserts against Royal is not controlling under New Jersey law, so long as the damages recovered are the same. Like- wise, we believe that the trial court’s conclusion that the policy of the New Jersey courts of applying the ‘‘one satis- faction’’ rule only to obtain a ‘‘just result,’’ and not on behalf of wrongdoers,’” presents no bar to its use in the present action. C. Purchase Price and Loan Repayment Counter- claims, Future Profits The Royal defendants counterclaimed against Coleco for the balance of the $500,000 non-contingent purchase price which they had not yet received, as well as for cer- tain sums of money which they had loaned to Royal. Plain- tiff asserted as a defense to this counterclaim a clause in the purchase agreement that ‘‘obligations of Coleco under the agreement shall at all times be subject to the condi- tion precedent .. . [that] representations and warranties ... contained .. . shall be true on and as of the closing date.’’ 20 Ba Judge Huyett construed this condition precedent to apply only to the obligations under the purchase agree- ment to close the contemplated arrangement, and concluded that if a $49,992 inaccuracy could excuse payment of a $500,000 purchase price after the closing had occurred and Coleco had taken possession of Royal, such a clause would be unenforceable as a penalty. . While this ruling may not necessarily be compelled by the record, Judge Huyett’s decision is not without sub- stantial evidentiary support. The other paragraphs in the , 671 (1958); Dailey v. Sombery, BING. ee a2 “66 ea 1958). - — 19. Theobald v. Angelos, 44 N.J. 228, 208 A.2d 129 (1965). 20. Joint appendix at 231. l6a agreement concerning conditions precedent all refer clearly to conditions precedent to closing. In view of the refusal by the New Jersey courts to enforce contractual provisions which act as penalties, Judge Huyett’s interpretation will be affirmed.” Similarly, the trial court’s finding that the breaches of the contract were not so material as to entitle Coleco to retain Royal without tendering the contractual payments is not reversible error. Had Coleco attempted to rescind im- mediately upon learning of the misrepresentations, a dif- ferent situation might be presented. After Coleco ab- sorbed Royal into its subsidiary, however, we cannot say that Judge Huyett erred in holding that Coleco is required to pay the purchase price set forth in the contract less the damages that it established. We also uphold the trial court’s determination that the Royal defendants were not entitled to that portion of the purchase price which was made contingent upon profits. Royal was a fledgling business enterprise, and its future profits were not sufficiently certain so as to be susceptible of accurate determination. D. Salary Claims (1) Berman Mr. Berman counterclaims against Coleco for the sal- ary which he was to receive as president of Royal under the purchase and employment agreements. Coleco main- tains that the contractual breach was Berman’s, and that he was discharged for cause. In view of the evidence that ‘‘Berman’s office work was a disaster,’’*? and that Ber- man had at one point gone on vacation for several weeks without leave, Judge Huyett’s conclusion that Berman 21. See Barr & Sons, Inc. v. Cherry Hill Ctr. Inc., 217 A.2d 631, 90 N.J. Super. 358 (1966) (rebate of all rental paid triggered by breach of restrictive covenant) ; Westmount Country Club v. Kaceny, 197 A.2d 379, 82 N.J. Super. 200 (1964); Keller v. Architects Display Bldg. Inc., 148 A.2d 634, 54 N.J. Super. 205 (1959) (unconscionably high interest is penalty). 22. 423 F. Supp. at 314. 23. Id. 17a was dismissed for cause and therefore had no claim for future salary was neither factually or legally erroneous. (2) Rubm Similarly, we cannot overturn Judge Huyett’s conclu- sions regarding Mr. Rubin. Judge Huyett found that by making arrangements to move the bulk of Royal’s opera- tions out of New Jersey, in violation of a contractual pro- vision, as well as by making Rubin’s situation as vice- president of Royal untenable, Coleco breached its contract with Rubin. He further found that Rubin’s subsequent resignation was a mere acknowledgment of a contractual breach. We do not view these determinations to be er- roneous. The New Jersey cases in which resignation has been held to bar an action for breach of an employment ontract are factually distinguishable. ° At oral heme A counsel for Rubin admitted that his recovery should be reduced by any earnings which Rubin in fact received between the close of trial and the end of the contractual period. We suggested that counsel for Mr. Rubin submit a statement of these earnings to counsel for Coleco, and that the attorneys attempt to reach an agree- ment on the appropriate set-off. On this issue, the case will be remanded to the district court, and should no agree- ment eventuate, the district court is directed to offset Mr. Rubin’s recovery by the amount which he actually earned through November 1, 1976. E. Liability of Zelnick Since we hold that the district court did not err in its computation of damages, recovery by Coleco against the Royal defendants is offset entirely by the $350,000 settle- ment between Zelnick and Coleco. Since Zelnick is thus exposed to no liability as a result of the judgment against it, Zelnick ’s appeal becomes moot and must be dismissed. 18a ITI. Conrcivusion The judgment of the trial court will be affirmed except as it bears on Rubin’s wage claim. On the issue of Rubin’s wages, the case will be remanded for action in accordance with this opinion. A True Copy: Teste: Clerk of the United States Court of Appeals for the Third Circuit. (A.0.—U. S. Courts, International Printing Co., Phila., Pa.) 19a APPENDIX B COLECO INDUSTRIES, INC. v. BERMAN Cite as 423 F Supp. 275 (1976) Reproduced with permission from 423 F Sapp. 275, Copyright ©1977 By West - ablishing (0 COLECO INDUSTRIES, IN¢., Plaintiff, Vv Abe BERMAN et al., Defendants, v ZELNICK, SOBELMAN & COMPANY, Third-Party Defendants. Civ. A. No. 73-2790. United States District Court, E. D. Pennsylvania. Aug. 9, 1976. As Amended Dec. 1, and Dec. 21, 1976. Litigation arose out of a contract for the purchase of a business by plaintiff from defendants. The District Court, Huyett, J., held that defendants breached a contract provision whereby they warranted certain financial statements. Under evidence, the more probable cause of immediate postac- qitisition difficulties of such business and its eventual disintegration was not problems arising from breaches of contract by de- fendants but from plaintiff’s miscalculation of kind and amount of assistance needed to enhance chances of success. Plaintiff failed to establish damages under its enterprise theory of liability. Notwithstanding lack of strict privity, accountants are liable in neg- ligence for careless financial misrepresenta- tions relied upon by actually foreseen and limited classes of persons. There was a breach by the plaintiff of its employment contract with one defendant but another 20a defendant breached his employment con- tract with the plaintiff. Though the con- tract provided for recovery of attorneys’ fees by the plaintiff the award would be limited to $15,000. Judgment for plaintiff against all de- fendants in amount of $15,000; judgme « We note, however, that Mann & Ungar’s post-trial work was of a very high quality. Since the Berger office claims 1324 and 4 hours post-trial of which 473 and ‘4 were logged by Berger’s own people, we will simply deny any recovery for the 850 and % hours logged by the Yablonski firm and conclude that 336 hours X $72.61 or $24,397 is a reasonable fee for Berger attorney hours post-trial. We will not quarrel with the claim of 2971 and % hours for pre-trial and trial hours logged amount- ing to $215,760.61. The case was filed al- most two years before it came to trial, and pre-trial discovery and motion filing were 74. Such a course of conduct is even more un- reasonable when one considers that plaintiff had two attorneys present and intimately famil- iar with the case each day during trial, and from December 11 or 12, 1975. to late January 1976 most trial days saw three attorneys at plaintiff's counsel table. 75. In doubling the 168 hours we are admittedly being generous to plaintiff since we credit plaintiff's representation that 85% of attorney effort post-trial was devoted to the contract claim. l3la substantial and steady. Since we credit the representation in the Berger Affidavit that 67% of attorney and non-attorney effort up to Dec. 10, 1975, and 80-85% thereafter, was devoted to the contract claim, we will, in arriving at the total below, multiply the total of fees and costs which we have thus far allowed by 70% to arrive at the total attributable to the contract claim. We con- clude, then, considering only the reasonable- ness of the rates charged and hours devoted to this litigation, that the following total is a reasonable one: Attorney hours pre-trial and trial $215,760.61 Attorney hours post-trial 24,397.00 Non-attorney hours 34,237.50 Peel Total $338,781.63 Preliminary Tota ,781. , Final Total $237,147.14 [33,34] Had plaintiff's recovery for breach of contract been in the general area of the more than $1 million it claimed under its enterprise theory of liability, we would have found plaintiff entitled to recover this total of $237,147.14 in attorneys’ fees and costs under 914 of the Purchase Agree- ment. The agreement was not an adhesion contract, and the sides, each represented by its own attorneys, were of roughly equal bargaining power. Furthermore, had plain- tiff succeeded on its enterprise theory, we would necessarily have found no validity to defendants’ counterclaims. Plaintiff has recovered $45,000, however, for the breach of one warranty; defendants, on the other hand, have recovered together more than 132a $500,000. Heeding, once again, what we believe a clear admonition from the Cohen court, we arrive at the admittedly drastic conclusion that plaintiff’s recovery of attor- neys’ fees and costs in this action, even though under contract, must be limited to $15,000. This conclusion is based on our conviction that to allow a greater recovery under the circumstances of this case would do violence to that which was in the reason- able contemplation of the parties at the time of contracting and unfairly impede defendants’ access to the courts. Although the precise import of the fees and costs provision before us is reached only by reading together {14.2 and 3 of the Purchase Agreemeni, we feel a fair ex- cerpting and combining of these subsections yields the following reading: The Stockholders jointly and severally in- demnify and hold Coleco harmless against legal fees and reasonable costs of investi- gation/ incident to/ breach . . . ofany . . . war- ranty. This language raises the following ques- tions: what, for present purposes, consti- tutes a breach and what are “legal fees and reasonable costs of investigation” “incident to” breach? In attempting to answer these questions to our satisfaction, we adopted the admittedly imperfect technique of pos- ing to ourselves and then resolving two hypothetical cases. First, if a plaintiff claims $1 million in damages for a single gy. © a ET” RO et EE OO ET 2. I =. 133a breach of contract and incurs legal expenses of $237,000 in attempting to prove that breach, yet after trial on the merits fails to prove any breach, to what amount of con- tractual fees and costs he is entitled? Our answer is none—based on a conclusion that the term “breach” as used in $14.2 and referred back to in {14.3 must mean a judicially established breach. If plaintiff proves no breach, then there is nothing for legal expenses to be “incident to” and therefore no legal expenses due under the contract. Second, if a plaintiff claims ten discrete breaches (breach A through breach J) of the same contract with discrete amounts of damage flowing from each breach and totaling $1 million and incurs legal expenses of $237,000 in attempting to prove the ten breaches, yet proves only breach A, a $50,000 breach, to what amount of contractual fees and costs is he entitled? We think there are two possible resolutions to this hypothetical case. If plaintiff is able to identify the portion of the $237,000 expended in legal fees and costs attributa- ble to proving the $50,000 breach, we would award as damages under the contract any figure presented that represented a fair percentage of the recovery, perhaps even more than 50% of the recovery if the breach proved were a particularly difficult one to establish. If plaintiff could not offer any guidance, we would have to determine and award a fair percentage of the recovery as reasonable legal expense. Again the princi- ple that we derive from this second hypo- thetical is that reasonable legal expense incident to breach is expense incident to 134a judicially determined breach only. In other words, a plaintiff both successful in proving some breaches and unsuccessful in proving others may recover only those legal ex- penses reasonably attributable to the judi- cially determined breaches. We think that the present case, although somewhat differ- ent, is not distinguishable from the case in our second hypothetical. Here, rather than suing for a series of separate breaches and proving only one, plaintiff sued for more than $1 million in damages for an alleged single but “total” breach and proved only a $50,000 partial breach. In short plaintiff gambled its case almost completely on its enterprise theory of liability, an ambitious but, upon the facts of this case some of which must have known to plaintiff early on, a risky and tenuous theory. The gam- ble failed. We simply do not believe it in the reasonable contemplation of the parties to the Purchase Agreement at the time of contracting that, in indemnifying Coleco against legal expense incident to breach, defendants assumed the risk that Coleco or its attorneys would view such indemnifica- tion as an invitation to “shoot for the moon” in developing and presenting legal theories with defendants’ underwriting le- gal expenses whether or not the shot was successful. Defendants assumed the risk only of plaintiff's success, not its failure. Since plaintiff was unsuccessful and absent any guidance from plaintiff, we conclude that the reasonable legal expense incident to the breach here established is $15,000. In settling on this figure, we were influ- enced by two considerations. First, we not- AS SE. oa eee 135a ed that had plaintiff been successful on its claim, it would have recovered somewhere between $1,000,000 and $1,250,000 in dam- . ages; the $237,000, which we earlier com- puted as the total of reasonable fees and costs attributable to the entire contract claim, would have amounted roughly to 20- 25% of the recovery. Second, we considered the ease with which plaintiff's attorneys must have uncovered the rather simple accounting errors amounting to approxi- mately $50,000 in the April 1973 financial statement and the defendants’ concession at trial of the breach which these errors repre- sented. [35,36] Aside from the limitation on fees and costs we find imposed by the con- tractual language itself, we believe that to allow a greater recovery than we have in this action, which might well have been brought by defendants who had vindicated substantial claims here, would discourage access to the courts of parties in defend- ants’ positions. As a matter of policy we conclude that defendants, in contracting to indemnify plaintiff against attorneys’ fees and costs generated by legal disputes over defendants’ breach of the Purchase Agree- ment, accepted only the risk that fees and costs would be generated reasonably pro- portional to the amount of breach damage they had caused. Otherwise there would be added an unfair pressure on defendants to settle out of court even when they had substantial defenses or counterclaims. The Cohen court, quoting the Court of Appeals for the District of Columbia Circuit, warns explicitly: 136a In no event should the sum allowed be so large as to amount to an undue penalty for taking one’s grievance to court. To allow plaintiff's recovery of fees and costs beyond a reasonable amount based on the amount recovered for breach would con- stitute an “undue penalty” on defendants for bringing their claims to court. This, we infer from Cohen, would contravene the public policy of the State of New Jersey and would certainly shock the conscience of this court. We must limit plaintiff's dam- age recovery for fees and costs, therefore, to $15,000. We will not, however, set off the $350,000 Zelnick settlement against this figure of $15,000. Although the $45,000 warranty breach recovery ‘s identical to at least part of that which might have been recovered under the securities claim against Zelnick, Janigan v. Taylor, 344 F.2d 781 (1st Cir.), cert. denied, 382 U.S. 879, 86 S.Ct. 163, 15 L.Ed.2d 120 (1965), there was no claim for attorneys’ fees under the section 10(b) claim. Under these circumstances we do not think it proper to set off the settlement against defendants’ liability for contractual attorneys’ fees and costs. K. Interest To resolve the award of interest, we are concerned with two separate time periods: first, the period during which the parties provided for contractual interest on the bal- ance of the unpaid purchase price, and second, the period commencing with the date on which payment of the principal and interest was due under the Purchase Agree- ment until the date of the judgment order. 137a (37, 38] Under New Jersey law, contrac- tual interest “is the compensation fixed by the parties for the use, detention or for- bearance of money or its equivalent. Since it is grounded on contract being ‘part of the bargain that was struck when the loan was made,’ it is recoverable as of right along with principal.” Deerhurst Estates v. Meadow Houses, Inc., 64 N.J.Super. 134, 154, 165 A.2d 543, 554 (1960) (citations omit- ted). Under the Purchase Agreement, the parties provided that $135,000 of the $500,- 000 non-contingent purchase price was to be paid at closing and the balance was to be paid in 3 installments with interest on the unpaid balance from May 1, 1973 at the rate of 6% per annum payable with each installment. We find that the parties in- tended that interest accrue only until the dates set for payment of the installments under the Purchase Agreement, and we conclude that the defendants are entitled to 6% interest on the unpaid balance of the purchase price and this interest will accrue until the dates set for payment of the in- stallments in the Purchase Agreement. [39-41] The second time period runs from the date the installments were due under the Purchase Agreement until the 6. The Purchase Agreement provided for 4 ’ non-contingent purchase price of $500,000 with $135,000 to be paid on the settlement date of May 1, 1973. The balance of the purchase price was to be paid in installments according to the following schedule: $57,500 payable on January 2, 1974; $57,500 payable on January 2, 1975; and the final $250,000 was payable on January 2, 1976. Each installment was to be paid with 6% interest from May |}, 1973. 138a date judgment is entered. The issue here is whether defendants are entitled to prejudg- ment interest. Under New Jersey law, “the rule appears to be that, unless consid- erations of justice and fair dealing clearly demand a different result, [prejudgment] ‘interest should not be allowed where the damages are unliquidated and not capable of ascertainment by mere computation or where a serious and substantial controversy exists as to the amount due under the con- tract.’” Buono Sales, Inc. v. Chrysler Mo- tors Corp., 449 F.2d 715, 723 (8d Cir. 1971), quoting Jardine Estates, Inc. v. Donna Brook Corp., 42 N.J.Super. 332, 341, 126 A.2d 372, 377 (App.Div. 1956). If the amount is not disputed, then prejudgment interest may be awarded to the aggrieved party notwithstanding a good faith belief or colorable claim by the breaching party that an obligation did not exist to pay the liqui- dated amount.” See Jos. L. Muscarelle, Inc. v. Central Iron Mfg. Co., 379 F.2d 715 (3d Cir. 1967); Rova Farms Resort v. Inves- tors Insurance Co., 65 N.J. 474, 506, 323 A.2d 495, 512 (1974); Kamens v. Fortugno, 108 N.J.Super. 544, 262 A.2d 11 (Chanc.Div. 1970). It is clear that although there were numerous disputes as to legal liablility un- der the Purchase Agreement the amounts due the defendants under the Purchase 77. This proposition has been bolstered by the New Jersey Supreme Court's recent view that interest is not punitive, but rather should be viewed as compensation for the use of the money while it was withheld by the breaching party. Rova Farms Resort, Inc. v. Investors Insurance Co., 65 N.J. 474, 516, 323 A.2d 495, 572 (1974). — ———————eEeEOeeEeEeEeEeEeEeEeEeEeeeeeeeeeeeeee ee ee 139a Agreement were never contested. Accord- ingly prejudgment interest will be awarded on the balance of the unpaid purchase price. This interest will run from the dates on which the installments were payable pursu- ant to the Purchase Agreement until the date judgment is entered. Further we con- clude that the same rationale with regard to prejudgment interest should apply to the salary payable to Mr. Rubin and the loan repayments due all defendants. The inter- est due on these claims also will run from the dates they were payable to defendants to the date of judgment. [42] Also we must determine the inter- est rate for prejudgment interest. The New Jersey Rules of Civil Practice provide that judgments shall bear interest at the rate of 8% per annum.” N.J.Civ.Proc. R. 4:42-1(a). However, this rate is not man- datory, and the Court may deem it “proper to allow the contractual rate of interest to 78. It is not altogether clear whether Rule 4:42- l(a) was meant to provide the rate for prejudg- ment interest. The rule provides in pertinent part: Judgments, awards and orders for the pay- ment of money and taxed costs shall bear interest on the amount of the award at 8% per annum from the date of entry, except as otherwise ordered by the court. N.J.Civ.Proc. R. 4:42-11 (emphasis added). We conclude that the language “from the date of entry” makes it unclear whether the rule was meant to be applied to prejudgment inter- est. However, our holding that the parties con- tractual interest rate is the most appropriate interest rate makes it unnecessary for us to construe this language definitively. 140a continue in effect until judgment.” Mid- Jersey National Bank v. Fidelity Mortgage Investors, 518 F.2d 640, 645 (3d Cir. 1975). Under the Purchase Agreement the parties determined that 6% was an appropriate rate of compensation for use of the money, and thus we order that all prejudgment interest be calculated at 6%. [43] And finally we shall include pre- judgment interest and contractual! interest in the judgment for purposes of computing post-judgment interest. Magee v. Ford Mo- tor Co., 182 N.J. Super. 565, 334 A.2d 382 (Law Div. 1975).” ORDER NOW, December 21, 1976, pursuant to the remand from the United States Court of Appeals for the Third Circuit, IT IS ORDERED that our Order of August 9, 1976 is amended in accordance with revised paragraph K of our Opinion, to read as follows: 79. At the time of closing the Cohens and Rubin and Berman executed a side agreement (Ex. 397) by which Rubin and Berman indemnified the Cohens against damages for which defend- ants might become liable for breach of the financial warranty. Since we have concluded in section IIF(2) that the liability of all defend- ants for such breach reduces to zero when the Zelnick settlement is set off against it, we need not entertain the Cohen defendants’ request that we give effect to this side agreement in computing final damage liability. In addition, since indemnity contracts are strictly construed in favor of the indemnitor, we conclude that the agreement would not reach any attorneys’ fees awarded under the Purchase Agreement. - ——_ -—- er — oe Qew ac eee ee ® ee ee areee to date and a detailed siatement as to the loss - from future impairment of earning capacity, total medical expenses, property damage, and mis- cellancous expenses; a? 2 ee? An lS ee DF cet B® ADP a 145a E. estimated value of pain, suffering, etc. F. The names and addresses of all witnesses (except rebuttal) whom the plaintiff expects to call to testify at the time of crial. Failure to call at trial any listed witness shall not be a proper subject of jury argument unless justified by the record of the case exclusive of the pre-trial memorandum. G. Designation by counsel of any special comments regarding amendments to the pleadings or legal issues that might arise at trial. H. Stipulations, including designation of any docu- ments, for which plaintiff 's counsel seeks agree- ment or admissibility at the time of trial. 1. An estimate of the number of trial days required for the case. Defendant's counse! in his pre-trial memorandum shall note, with the same degree of particularity as,required by | plaintiff, under correspondingly lettered paragraphs, signifi- cant comments indicating areas of agreement or disagree- ment regarding iie material in plaintiff's memorandum. ' Where there is disagreement with respect to items in paragraphs A, B,C, D, or E, counsel should briefly set forth his client's contentions or position on such matters. Defend- ant’s counsel shall also include in his pre-trial memorandum the same material pertaining to defendant's case as required of plaintiff in paragraphs F, G, H and I. (b) Except for witnesses called on rebuttal or surrebuttal, a witness neither (1) named in any pretrial memorandum or supplements thereto of any party, nor (2) authorized by the court in order to prevent manifest injustice, may not testify at the trial if timely objection is made by opposing counsel. (c) The judge to whom the case is assigned may require more or less elaborate pre-trial memoranda and may publish his own standing order with respect to the manner in which he intends to hold pre-trial conferences and his requirements of counsel in respect of pre-trial procedures. 146a LOCAL RULES UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA Effective July 1, 1976 to Present, As Amended Rule 7 Pretvial Procedure (a) Introduction eee This Local Rule is intended to set forth the basic pretrial procedure for use by the Judges of the United States District Court, Eastern District of Pennsylvania, and where appli- cable, by each United States Magistrate, in all civil proceed- ings brought before the Court. The judge to whom a case is assigned may require more or less elaborate pretrial information and documents during pretrial proceedings, but it is expected that each judge will use some or all of the various provisions included in this rule in formulating pre- trial orders and conducting pretrial proceedings. It is also contemplated that variations and substitutions to the pro- cedure will be necessary on occasion by reason of the application of special rules, such as those for multidistrict and complex litigation, admiralty, and the like. Except for these and similarly compelling reasons, however, this rule will govern in the interest of uniformity. This rule envisions six basic pretrial steps: (1) A preliminary pretrial conference, as provided in Section (b). (2) The submission of pretrial memoranda prepared and submitted in accordance with the instructions con- tained in Section (c). (3) Such interim status calls or reports as the judge may direct. (4) Such interim pretrial or settlement conferences as the judge may direct. (5) The submission of a final pretrial order, prepared in accordance with the instructions contained in Section (e), and DP me cM cm LOR Gc! ee OTD? Prt a 1 147a (6) A final pretrial conference as discussed in Sec- tion (d). The judge may determine that one or more of these six basic steps will not be required. In such event, appropriate notice shall be given to counsel. Each judge may schedule status calls or reports and pre- trial or settlement conferences in the manner he deems appropriate. Attendance at such proceedings shall be gov- erned by Local Rule 16(b) and (c). (b) Preliminary Pretrial Conference Within forty-five days following the filing of the com- plaint, the judge (or a United States Magistrate) shall hold a preliminary pretrial conference. The purpose of such con- ference may be to: (1) Review the status of tne pleadings; (2) Formulate a discovery completion schedule; (3) Set dates for the exchange of exhibits and the qualifications of experts; (4) Set dates for the filing of pretrial memoranda prepared in accordance with the provisions of Section (c) of this order; (5) Set dates for any further pretrial conferences; (6) Set date for trial; (7) Explore the possibilities of settlement; (8) Consider such other matters as may be relevant. (c) Instructions for Preparation of Pretrial Memoranda Unless the judge (or a United States Magistrate) orders otherwise, a pretrial memorandum shall be filed by plaintiff within thirty days (or such longer period as directed by the judge) following the preliminary conference, and a pretrial memorandum shall be filed by defendant and third-party defendant within fifteen days of the filing of plaintiff's pre- trial memorandum, or in respect to the third-party defen- dant within fifteen days ef the filing of its answer. Provided, however, that if the judge does not hold a preliminary pre- 148a trial conference that the pretrial memorandum of plaintiff shall be filed within ninety days after commencement of the action, and the pretrial memorandum of all other parties shall be filed within thirty days thereafter. The pretrial memorandum shall contain the following: (1) A brief statement of the nature of the action and the basis on which the jurisdiction of the court is invoked. (2) A brief statement of the facts as contended by the party preparing the pretrial memorandum. (3) A list of each item of monetary damages claimed, including a summary of the special monetary damages, to include a detailed statement of loss of earnings to date and a detailed statement as to the loss from future impair- ment of earning capacity, total medical expenses, prop- ' erty damages, and miscellaneous expenses. If other than monetary damages are claimed, the exact form of relief sought with precise designations as to persons, places, and things to be included in any order providing relief. (4) Under separate headings for liability and dam- ages, the names and addresses of all witnesses that the party preparing the memorandum expects to call at trial. (5) A schedule of all exhibits to be offered at trial. (6) Special comments regarding the legal issues or any amendments to the pleadings that are not otherwise set forth in the pretrial memorandum. (7) An estimate of the number of trial days required. (d) Final Pretrial Conference A final pretrial conference shall be scheduled by the judge a short time prior to the date it is estimated that the case will be reached for trial. This section (Section (d)) deals with that conference. The next section (Section (¢)) deals with the preparation of a final pretrial order, which will be considered at the final pretrial conference, and which will govern the conduct of the trial. Trial counsel shall attend the final pretrial conference. At the final pretrial conference, the judge will consider the simplification of the issues, the necessity or desirability 149a of amendments to the pleadings, the separation of issues, the desirability of an impartial medical examination, the limitation of the number of expert witnesses, the probable length of the trial, the desirability of trial briefs, eviden- tiary questions, the submission of points for charge, and such other matters as may aid in the trial or other disposi- tion of the action. The prospects of settlement will be ex- plored and therefore, counsel who attend the pretrial confer- ence shall be authorized to enter into a settlement agree- ment or shall have available by telephone such persons who are empowered to enter into a settlement agreement. (e) Instructions for Preparation of Proposed Pretrial Order The proposed pretrial order shall consist of one docu- ment signed by all counsel, reflecting the efforts of all counsel. It is the obligation of plaintiff's counsel to initiate the procedures for its preparation, to assemble, and to sub- mit the proposed pretrial order to the judge. Counsel may find it advantageous to prepare the pro- posed pretrial order jointly in one conference, or each attorney may prepare his section which will then be circu- lated with other counsel for review and approval. No explicit directions covering the mechanics of preparation are included in these instructions. However, after each counsel has submitted his respective proposed pretrial order suggestions to other counsel, all counsel must have a con- ference to attempt to reconcile any matters on which there is disagreement. Counsel are expected to make a diligent effort to prepare a proposed pretrial order in which will be noted all of the issues on which the parties are in agreement and all of those issues on which they disagree. The pro- posed pretrial order shall be submitted by counsel for the plaintiff at chambers at least three days prior to the sched- uled final pretrial conference, unless another date is speci- fied by the judge. The proposed pretrial order, if accepted by the judge, will be ome a final pretrial order and shal! govern the con- duct of the trial and shall supersede all prior pleadings in the case. Amendments will be allowed only in exceptional circumstances to prevent manifest injustice. 150a After the proposed pretrial order has been designated as the final pretrial order, the case will be considered ready for trial. (f) Form of Proposed Pretrial Order The proposed pretrial order shall be in the following form: (CAPTION) (1) Jurisdiction. A statement as to the nature of the action and the cases under which the jurisdiction of the court is invoked. (2) Facts. A comprehensive written stipulation of all uncontested facts in such form that it can be read to the jury as the first evidence at trial. (A) These facts should include all matters capable of ascertainment, such as ownership, agency, dimensions, physical characteristics, weather conditions, road surfaces, etc. Approximations and estimates which are satisfactory to counsel will be accepted by the judge. (B) No facts should be denied unless opposing counsel expects to present contrary evidence on the point at trial, or genuinely challenges the fact on credibility grounds. (C) The facts relating to liability and to damages are to be separately stated. (D) The parties shall reach agreement on uncon- tested facts.even though relevancy is disputed; if such facts are ruled admissible, they need not be proved. (E) The parties shall also set forth their respective statements as to the facts which are in dispute, separating those referring to liability from those referring to damages. (3) Damages or Other Relief. A statement of dam- ages claimed or relief sought. ~~ aiid 1Sla (A) A party seeking damages shall list each item claimed under a separate descriptive heading (personal injury, wrongful death, survival, loss of profits, loss of wages, deprivation of civil rights, false imprisonment, libel, slander, prop- erty damage, pain, suffering, past and future medical expense, balance due under a contract, performance due under a contract, interest, etc.), shall provide a detailed description of each item, and state the amount of damages claimed. (B) A party seeking relief other than damages shall list under separate paragraphs the exact form of relief sought with precise designations of the persons, parties, places, and things expected to be included in any order providing relief. (4) Legal Issues. Under separate paragraphs, each legal issue that must be decided and the principal consti- tutional, statutory, regulatory, and decisional authorities relied upon. (5) Witnesses. Under separate headings, and undei separate headings for liability and damages, the names and addresses of all witriesses whom the plaintiff, defen- dant, and third-parties actually intend to call at trial. (A) Witnesses shall be listed in the order they will be called. Each witness shall be identified and there shall be a brief statement of the evidence which the witness will give. , (B) A detailed summary of the qualifications of each expert witness shall be submitted. This sum- mary shall be in such form that it can be read to the jury when the expert takes the stand to testify. (C) Only those witnesses listed will be permitted to testify at trial, except to prevent manifest in- justice. (D) Failure to call at trial any listed witness shall not be a proper subject of jury argument unless justified by the record of the case exclusive of pre-trial memoranda or the pre-trial order. 152a (6) Exhibits. A schedule of all exhibits to be offered im evidence at trial, together with a statement of those agreed to be admissible and the grounds for objection to any not so agreed upon. (A) The exhibits shall be serially numbered, with- out any designation as to whether they are being offered by plaintiff or defendant. The exhibits shall be physically marked before trial in accordance with the schedule. (B) Where testimony is expected to be offered as to a geographical location, building, structure, waterway, highway, road, walkway, or parcel of real estate, plaintiff shall furnish an exhibit in such form that it can be used in the courtroom as an aid to oral testimony. (i) Except in those cases where the issues re- quire the use of exact scale, the exhibit may be a simple single-line, hand-drawn sketch. (ii) In most instances, it will not be necessary that the exhibit be to scale or contain other than reasonably accurate features of the geographical characteristics involved. (iii) If of adequate size and clarity, this exhibit may be an existing drawing, plan, or blue- print. (C) Except for unusual circumstances, it is expected that the authenticity or genuineness of all ex- hibits, including non-documentary items, docu- ments, photographs and data from business records from sources other than parties to the litigation, will routinely be stipulated to and will be received in evidence if relevant. Counsel likewise are expected to agree upon the use of accurate extracts from or summaries of such records. Life expectancy tables, actuary tables, and other similar statistical and tabular data routinely and regularly used in litigation in the Federal Courts should also normally be stipu- lated. ed - ee ee eS ee Le eS Ee Te Seen, > ana 153a (D) At trial counsel shall furnish a copy of each exhibit to the judge. (7) Legal Issues and Pleadings. Special comments regarding the legal issues or any amendments to the pleadings not otherwise set forth. (8) Trial Time. An estimate of the number of trial days required, separately stated for liability and damages. (9) Discovery Evidence and Trial Depositions. Each discovery item and trial deposition to be offered into evidence. (A) Where the videotape or deposition of a witness is to be offered in evidence, counsel shall re- view it so that there can be eliminated irrele- vancies. side comments, resolved objections, and other matters not necessary for considera- tion by the trier of fact. Counsel shall designate by page the specific portions of deposition tes- timony and by number the interrogatories which shall be offered in evidence at the trial. (B) Depositions and interrogatories to be used for cross-examination or i..speachment need not be listed or purged. (10) Miscellaneous. Unless otherwise ordered, all issues relating to liability shall be severed and tried to verdict; thereafter, if necessary, a separate trial shall be had on the issues of damages. (g) Miscellaneous Instructions Pertaining to Trial In all non-jury trials, requests for findings of fact and conclusions of law shall be filed in duplicate at chambers prior to the commencement of trial. Such requests shall be filed when the judge may direct, but in the absence of any specific direction, not later than the day trial commences. In all jury trials, requests for instructions to the jury, together with citations to legal authorities in support thereof, proposed voir dire questions, and jury interroga- tories, shall be submitted in duplicate at chambers. Such materials shall be filed when the judge may direct but in 154a the absence of any specific direction, not later than the day when trial commences. Except upon stipulation by affected counsel or by order of the judge, no statement contained in preliminary pretrial memoranda or the pretrial order shall be made the subject of comment to the jury by any party at the trial of the case. Any counsel needing special equipment, device, person- nel, or court room arrangements, shall be responsible for assuring that such items are available at the time they are needed. Personnel assigned to the judge shall not be ex- pected or depended upon to provide service for any party or counsel in the absence of a notation contained in the final pretrial order. Arrangements for daily copy shall be made at least two weeks in advance of trial with the judge's court reporter. Trial shall not be continued because of the unavailability of a witness, particularly an expert witness. If the witness's ability to appear is at all doubtful, counsel shall consider taking the trial deposition of such witness by videotape. Note. Rule 7 amended June 17, 1976, effective July 1, 1976; further amended August 9, 1976, effective immediately. It should be noted that this Rule is not a command that each judge utilize it in its entirety. Its use by some judges may be minimal. It is only designed to achieve as much uniformity as possible in the content of those portions which are used by individual judges. --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1108%3A1. Public record. Not legal advice.