Opposition — Darneille v. Caro

| 79-1736 JUN 25 1980

WICHAEL RODAK, JR., CLERM

IN THE

Supreme Court of the United States

OCTOBER TERM, 1979

No. 1736

+

os

Georce J. Darneize et al,

Petitioners,

v.

MicHaen Caro,

Respondent.

—————_————————

BRIEF FOR RESPONDENT IN OPPOSITION

Le

Invincg MaLcHMAN

Attorney for Respondent

41 East 42nd Street

New York, New York 10017

(212) 682-7100

Of Counsel:

Rocer W. Kirsy

KaurMmMan TayLtor KIMMEL

& MiLer

Attorneys for Respondent

June 23, 1980

TABLE OF CONTENTS

PAGE

PRET cceeSeees she eee eee eco esees 3

REASONS FOR DENYING THE WRIT

I-The Time In Which To Review

The Correctness Of The Court

Of Appeals Prior Orders Of

January 17, 1979 and March 7,

1979 (Holding That The

Voluntary Dismissal Of The

Original Plaintiff's Appeal

Would Be Without Prejudice To

The Right Of Another

Plaintiff To Enter The Suit

Within Thirty Days) Has

MAEMO c ca ccecesrecicveccosece 10

II-In The Particular Circumstances,

It Was An Entirely Proper

Exercise Of Discretion For

The Court Of Appeals’ To

Permit Intervention By

Another Member Of The Class.

In Any Event, Such Particular

Exercise Of Discretion In A

Unique And Non-Recurring

Factual Situation Does Not

Warrant Review By This

COUT ee ccc ccc rcccccccecscccoes 13

Che oak 6 oa 06 'b 8 6800 06 6 be 17

ii

TABLE OF CASES

PAGE

Deposit Guaranty National

Bank v. Roper, 100 S.Ct.

A166 (L9GO) .ccccccccess evccecs eee 13, 14

Hamilton-Brown Shoe Co. v.

Wolf Brothers, 240 U.S.

251i, 257-258 @4 20 ) Pee eeeree 13

Hanover Shoe, Inc. v. United

States Shoe Machinery Co.,

392 U.S. 481, 488 n.6

(1968) ..0.. eceseocers TEETETTET 13

Mercer v. Theriot, 377 U.S.

152° 153-154 (1964) eeeeveeveee eeee 13

Philadelphia Electric Co.

v. Anaconda American

Brass Co., 43 F.R.D. 452,

460-61 (E.D. Pa. 1968)...... even 2a

Rothman v. Gould, 52 F.R.D.

Se Cie ts ROEM s Cee hoe KR o4 08 15

Shelton v. Pargo, Inc., 582

F.2d 1298, 1304-16 (4th

op Oo 1978) eeee#es eeeree#ee#egee#ese#ee#e#ee#8e#8##e#*¢ 15

Toledo Scale Co. v. Computing

Scale Co., 261 U.S. 399,

BB. (A923) cccccccvcccs os eee od coer a3

United Airlines, Inc. v.

McDonald, 432 U.S. 385,

0 es oe A ee .a 15

iii

STATUTES AND RULES CITED

Federal Rules of Appellate

Procedure Rule 42(b).......-. cose 15

Federal Rules of Civil

Procedure

DUIS ZSo cvccscovsicreseseveseieens 14

ye a) rere ee rarr ae te yy 10

Securities Exchange Act of 1934

Section 10(D) ..cccccccvccccccces 2

Section 13(d) wcccccccssvescceses 2,

Regulation lOD-5... cece ceececes 2

Regulation 13.....ceeeeeeecesees 2

28 U.S.C. $1292 (BD) -cccccccccccccsecs 3

OTHER AUTHORITIES

Note, "Developments-Class Actions",

89 Harvard Law Review

1318, 21546 (€1976) ci ceccccuccccess Me

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1979

No. 1736

GEORGE J. DARNEILLE et al.,

Petitioners,

Vv.

MICHAEL CARO,

Respondent.

BRIEF FOR RESPONDENT IN OPPOSITION

Statement

Petitioners herein (hereinafter

"defendants") seek a writ of certiorari

to review an interlocutory order of the

United States Court of Appeals for the

Second Circuit dated January 9, 1980

(la*) holding that the District Court,

* References to "a" are to the

Appendix to the petition for certiorari.

2

had violated the mandate of the Court of

Appeals (4a) as embodied in the Court of

Appeals prior interlocutory orders of

January 17, 1979 (14a) and March 7, 1979

(16a) in denying respondent's motion for

intervention in this federal securities

class action, . Defendants seek to

review the correctness of the Court of

Appeals' orders of January 17, 1979 and

March 7, 1979, though the time in which

to file a petition for certiorari to

review those orders has long. since

expired.

This action is brought as a class

action upon behalf of all persons who

owned the common. stock of Westates

Petroleum Corporation ("Westates") on

February 1, 1977, the record date for

determining the shareholders of

Westates who were entitled to share in

the proceeds of the liquidation of

Westates. The common stock of Westates

had been listed and traded on the

American Stock Exchange. The complaint

alleges violations of Sections 10(b)

and 13(d) of the Securities Exchange

Act of 1934 and Regulations 10b-5 and 13

thereunder, as well as a pendent claim

for common law breach of fiduciary

duty.

In essence, the complaint alleges a

scheme by the defendants (officers and

directors of Westates and tippees

acting in concert with them) to

purchase the common stock of Westates

upon the open market with the inside

information that Westates would be

liquidated at a much higher price per

Share of common stock. A mere seven

3

weeks after defendants had completed

purchasing 293,000 shares of Westates

stock at an average price of $3.24 per

share, Westates publicly invited offers

to buy substantially all of its assets

and thereafter Westates liquidated at

between $10.70 and $11.10 per share.

The profits realized by the defendants

through this fraudulent scheme were at

least $2,251,735.

The complaint’ seeks, in effect,

disgorgement by defendants of their

illegal profits to the thousands of

other persons who, exclusive of

defendants, owned Westates common stock

as of the record date for sharing in the

proceeds of Westates' liquidation.

Since all such stockholders of Westates

are similarly situated and since all

question of law and fact are common to

them, this iS a paradigmatic class

action.

In an opinion dated January 6, 1978

(48a), the District Court found that

the complaint stated a cause of action

under Sections 10(b) and 13(d) of the

1934 Act and denied the motion to

dismiss the complaint. Respecting

Section 10b, the District Court

determined that plaintiff and the other

members of the class were "forced

sellers". -

Thereafter, certain of the

defendants moved for reargument or,

alternatively, for certification,

pursuant to 28 U.S.C. §1292(b), of the

Order denying the motion to dismiss. In

an opinion dated March 22, 1978 (37a),

the District Court denied certification

4

Or reargument, except that the District

Court dismissed the Section 13(d)

claim.

However, the motion of plaintiff,

Samuel Weisman, for class certification

was denied by the District Court by

opinion dated April 19, 1978 (32a) upon

the ground that plaintiff was an

inadequate class representative.

Defendants thereafter tendered

plaintiff Weisman his individual

damages of $271.40 (inclusive of costs)

which tender was not accepted by

plaintiff. Instead, plaintiff continued

to litigate the action and sought to

commence discovery by moving for the

production of documents (23a-24a, 30a-

3la). Defendants then moved to dismiss

the action as moot. By opinion dated

July 14, 1978 (19a), the District Court

held that the action and also

Plaintiff's motion for production of

documents were moot- and judgment

dismissing the action as moot’ was

entered on July 27, 1978 (18a).

Plaintiff Weisman then appealed to

the Court of Appeals and briefs were

filed and oral argument duly had. The

question whether defendants’ could,

after denial of class certification,

moot this action by tendering Weisman

his individual damages of $271.40

(inclusive of costs) was fully briefed

and argued before the Court of Appeals

upon plaint: ff Weisman's appeal (Docket

No. 78-7422) from the judgment of the

District Court dismissing this action

as moot.

2

In addition to arguing that

defendants could not moot this class

action by tendering plaintiff Weisman

his individual damages, plaintiff

further argued in his briefs that the

decision of the District Court denying

class certification upon the ground

that plaintiff was an inadequate class

representative was erroneous and that,

in any event, provision should be made

for protection of the class by notice to

the class members (pl's brief, pp. 52-

54; pl's reply brief, pp. 25-27). In

this connection, plaintiff emphasized

that defendants' answers in this action

pleaded the defense of the statute of

limitations (pl's reply brief, pp. 8-9,

26). Defendants' brief (pp. 41-44)

opposed the giving of any notice to the

members of the class.

Subsequent to oral argument,

plaintiff Weisman, aged 77, requested

that the appeal be dismissed because of

the critical illness of himself and his

wife.* By order dated January 17, 1979

(14a) which was subsequently filed in

the District Court as the mandate, the

Court of Appeals dismissed the appeal,

with, however, the express proviso that

the “order [of dismissal] shall not

prejudice the right of another

plaintiff to enter the suit within 30

days." The Court of Appeals' order of

January 17, 1979 reads as follows:

*The letter of plaintiff's counsel

to the Court of Appeals (which enclosed

letters from plaintiff and plaintiff's

son) are set forth at pp. 57-59 of the

Joint Appendix in the Court of Appeal~.

6

"Appeal from the United

States District Court for the

Southern District of New York.

This cause came on to be

heard on the transcript of

record from the United States

District Court for the Southern

District of New York, and was

argued by counsel.

ON CONSIDERATION WHEREOF, it

is now hereby ordered,

adjudged, and decreed that,

because the appellant, who has

been found by the _ District

Court to be an inadequate class

representative, has indicated

that he no longer wishes to be a

Plaintiff in this lawsuit, the

appeal be dismissed. This

order shall not prejudice the

right of another plaintiff to

enter the suit within 30 days”

(emphasis supplied).

On February 2, 1979 respondent,

Michael Caro, a mémber of the class,

moved to intervene in this’ action

pursuant to the leave’ specifically

granted in the Court of Appeals order of

January 17, 1979 (3a). Certain

defendants then moved in the Court of

Appeals on February 15, 1979 (3a, 16a)

for "modification of panel order" upon

the ground that, upon the withdrawal of

Weisman, the sole plaintiff-appellant,

no case or controversy existed which

would support intervention and that

accordingly the Court of Appeals order

of January 17, 1979 should be modified

7

to provide that the order was without

prejudice to the right of another

plaintiff to file suit based upon the

same facts.

By letter dated February 20, 1979,

plaintiff's counsel advised the Court

of Appeals that it was not filing an

answer to defendants' motion for

"modification" because it was in

reality an untimely petition for

rehearing. Defendants then moved the

Court of Appeals by motion dated

February 21, 1979 to have its motion for

"modification" be "deemed to be a

timely motion- for reconsideration,

should the Court deem that to be

appropriate". By order dated March 7,

1979, the Court of Appeals’ granted

defendants' motion to have its motion

for “modification" be deemed to be a

timely motion for reconsideration. By

separate order also dated March 7, 1979

(16a), the Court of Appeals denied

defendants’ motion to modify its order

of January 17, 1979 permitting

intervention by another member of the

class within 30 days, stating as

follows:

"It is hereby ordered that the

motion made herein by counsel

for the appellees Darneille and

Daum by notice of motion dated

February 15, 1979 to modify the

Court's decision of January 16,

1979 be and it hereby is

denied. Because class

certification has been denied,

‘it does not...follow that the

case must be treated as if

there never waS an action

brought on behalf of absent

Class members, ' United

Airlines, Inc. v. McDonald, 432

U.S. 385, 393 (1977), quoting

Philadelphia Electric Co. v.

Anaconda American Brass Co., 43

F.R.D. 452, 461 (E.D. Pa.

1968) ."

Notwithstanding the Court of Appeals

express decisions (set forth in its

orders of January 17, 1979 and March 7,

1979) specifically rejecting defendants'

contentions that no case or controvery

existed because of plaintiff Weisman's

withdrawal of his appeal and

specifically permitting intervention by

another member of the class, the

District Court denied the motion by

respondent, Michael Caro, a member of

the class, for intervention upon the

ground that there is "no action

pending". The memo endorsement of the

District Court, dated March 14, 1979

(9a), denying intervention reads as

follows:

"The motion of Michael Caro

to intervene in this action as

a party plaintiff is denied

without prejudice to his right

to commence a new. action based

on the acts alleged in this

action. Our dismissal of

Weisman's action has not been

appealed, and there is,

therefore, no action pending in

which Caro can intervene,

Tilley Lamp Co. v. Thacker, 454

F.2d 805 (5th Cir. 1972).

Additionally, Caro does. not

9

seek to intervene to appeal the

denial of Weisman's motion for

class certification, and, thus,

the Supreme Court's decision in

United Air Lines, Inc. Vv.

McDonald, 432 U.S., 385 (1977),

1s not applicable.

So ordered."

By petition dated April 10, 1979,

respondent Caro filed in the Court of

Appeals an application for a writ of

mandamus to compel obedience to the

mandate of the Court permitting timely

intervention in this class action by

another member of the class. Caro also

filed a notice of appeal from the order

of the District Court denying

intervention out of an abundance of

caution as a safeguard against’ the

contingency that the petition for

mandamus might fail. Defendants

opposed appellant's petition for

mandamus upon the ground, inter alia,

that mandamus will not issue where an

appeal lies. By order dated June 8,

1979, the Court denied appellant Caro's

petition for mandamus and_— granted

Caro's motion to reinstate this appeal

which had been dismissed for failure to

perfect it.

After oral argument was duly had

upon respondent Caro's appeal from the

order of the District Court denying his

motion for intervention, the Court of

Appeals, by order dated January 9, 1980

(la), reversed the District Court's

order of denial and remanded the matter

to the District Court with instructions

to consider the application of Caro for

10

intervention in accordance with the

provisions of Rule 24 of the Federal

Rules of Civil Procedure. The express

ground for the Court of Appeals

reversal of the District Court was that

"the district court has’ failed to

comply with the mandate of this Court",

as embodied in the Court of Appeals

prior orders of January 17, 1979

(dismissing plaintiff Weisman's appeal

without prejudice to the right of

another plaintiff to enter the suit

within thirty days) and of March 7, 1979

(denying defendants' motion for

modification of such order of January

Av, &979) Finally, by order dated

February 27, 1980 (6a, 8a), the Court of

Appeals denied defendants' petition for

rehearing and rehearing in banc.

Reasons for Denying the Writ

I

The Time In Which To File A

Petition For Certiorari To

Review The Correctness Of

The Court Of Appeals Prior

Orders Of January 17, 1979

And March 7, 1979 (Holding

That The Voluntary Dismissal

Of The Original Plaintiff's

Appeal Would Be Without

Prejudice To The Right Of.

Another Plaintiff To Enter.

The Suit Within Thirty Days)

Has Expired.

It is clear beyond cavil that, in

denying respondent Caro's motion for

intervention upon the ground that there

is "no action’ pending" (9a), the

District Court had not followed the

mandate of the Court of Appeals as

1l

embodied in the Court of Appeals'

orders of January 17, 1979 and March 7,

1979. The Court of Appeals prior order

of Janua 17, 1979 specifically stated

that thé “order [of dismissal] shall

not prejudice the right of another

Plaintiff to enter the suit within 30

days" (15a); and in its order of March

7, 1979 denying defendants motion for

reargument, the Court’ of Appeals

further specifically stated that,

because class certification has been

denied, it does not follow that the case

must be treated as if there never was an

action brought on behalf of absent

Class members (16a-17a).

These orders of the Court of Appeals

Clearly ruled that this action is

sufficiently alive to permit timely

intervention by another member of the

Class and the District Court in effect

purported to overrule these orders by

denying a timely motion for

intervention upon the ground there is

"no action pending". The District

Court was obliged to obey the mandate of

the Court of Appeals whether it was

right or wrong.

The Court of Appeals' order dated

January 9, 1980 did not decide to permit

intervention by another member of the

class. That decision had already been

made in the Court of Appeals prior

orders of January 17, 1979 and March 7,

1979 (which defendants did not seek a

writ of certiorari to review).

Instead, the order of January 9,

1980 explicitly reversed the District

Court for failure to comply with the

12

Court of Appeals' mandate. "Because

the district court has failed to comply

with the mandate of this Court, we

reverse." (4a) The remainder of the

Court of Appeals order of January 9,

1980 (4a-5a) merely explains the

rationale of its prior orders’ of

January 17, 1979 and March 7, 1979

permitting intervention.

The only person with standing to

appeal the District Court's’ order

denying class certification upon the

ground that plaintiff Weisman was, for

reasons personal to Weisman, an

inadequate class representative was

Weisman himself. For this reason, the

Court of Appeals prior orders of

January 17, 1979 and March 7, 1979 did

not permit intervention for the purpose

of prosecuting plaintiff Weisman's

appeal but instead dismissed the appeal

without prejudice to the right of

another plaintiff to enter the suit

within thirty days.

Since the order of January 9, 1980,

holding that the District Court had

violated the Court of Appeals' mandate

is manifestly correct and since the

time in which petition for certiorari

to review the prior orders of January

17, 1979 and March 7, 1979 has long

Since expired, no basis whatsoever

exists for the issuance of a writ of

certiorari by this Court. When and if a

final judgment adverse to defendants is

entered in the District Court and is

affirmed by the Court of Appeals,

defendants may, if they are then so

advised, challenge the correctness of

the Court of Appeals prior

13

interlocutory orders of January 17,

1979 and March 7, 1979 (permitting

intervention by another member of the

class) upon petition for certiorari to

this Court for review of such final

judgment. Hanover Shoe, Inc. v. United

States Shoe Machinery Co., 392 U.S.

481, 488, n.6 (1968); Mercer v.

Theriot, 377 U.S. 152, 153-154 (1964);

Toledo Scale Co. v. Computing Scale

Co., 261 U.S. 399, 418 (1923);

Hamilton-Brown Shoe Co. Vv. wolf

Brothers, 240 U.S. 251, 257-258 (1916).

II

In The Particular Circumstances, It

Was An Entirely Proper Exercise Of

Discretion For The Court Of Appeals

To Permit Intervention By Another

Member Of The Class. In Any Event,

Such Particular Exercise Of Discretion

In A Unique And Non-Recurring Factual

Situation Does Not Warrant Review

By This Court

The Court of Appeals orders of

January 17, 1979 and March 7, 1979,

permitting intervention by another

member of the class, represents, in the

particular circumstances in which they

were entered, an entirely proper

exercise of discretion.

The prior orders of January 17, 1979

and March 7, 1979 correctly anticipated

this Court's subsequent decision in

Deposit Guaranty National Bank vv.

Roper, 100 S.Ct. 1166 (1980), holding

that defendants could not moot a class

action, after denial of class

certification by the District Court, by

tendering the named class

14

representative (Weisman) his individual

damages where, as here, the named class

representative refused to accept such

tender of individual damages. Instead,

plaintiff Weisman continued to litigate

this action, making, for example, a

motion for production of documents and

arguing strenuously that a dismissal

for mootness would undermine the

policies behind Rule 23 Fed. R. Civ. P.

(23a-24a); and when the District Court

dismissed the action for mootness,

Weisman appealed such dismissal to the

Court of Appeals.

However, after oral argument,

Weisman, aged 77, requested that the

appeal be dismissed because of the

Critical illness of himself and his

wife. At that point, the Court of

Appeals was confronted with the

question of what, if anything, should

be done to protect the interests of

absent class members, particularly in

view of the statute of limitations

problems involved (4a). The action was

not mooted by defendants' tender of

individual damages because, as stated,

plaintiff Weisman had not, and has

never, accepted such tender. Plaintiff

Weisman desired to discontinue as the

representative of the class because of

the critical illness of himself and his

wife. Plaintiff Weisman's desire to

discontinue was thus completely

unrelated to defendants' tender of

individual damages and therefore this

action is controlled by this Court's

decision in Deposit Guaranty National

Bank v. Roper, supra.

15

In these circumstances, it was not

an abuse of discretion for the Court of

Appeals to condition the voluntary

dismissal of the appeal with’ the

proviso that the dismissal would be

without prejudice to the right of

another plaintiff to enter the suit

within thirty days. Rule 42(b) of the

Federal Rules of Appellate. Procedure

specifically provides that the..Court

may fix terms or conditions’ for

voluntary dismissal by an appellant.

See, in this connection, the decisions

cited by the Court of Appeals in its

Order of Janaury 9, 1980, namely,

United Airlines, Inc. v. McDonald, 432

U.s. 385, 392 (1977) (permitting

intervention by another class member

where, after Genial of €lass

certification, the named class represen-

tatives settled their individual

Claims, after which a judgment of

dismissal was entered); Shelton v.

Pargo, Inc., 582 F.2d 1298, 1304-16

(4th Cir. 1978) (district court may, in

its discretion, require notice to

absent putative class members if it

determines proposed settlement of

individual claims of named class

representatives prior to class

certification is collusive Or

prejudicial); Rothman v. Gould, 52

P.B.0; 494 (8.0.8s3. 1972) (notice

required to be given to absent members

of putative class where named class

representative settled his individual

Claim before class’ certification) ;

Philadelphia Electric Co. v. Anaconda

American Brass Co., 43 F.R.D. 452, 460-

61 (E.D. Pa. 1968) (because class

certification has been denied "it does

»- « »« not follow that the case must

16

be treated as if there never was an

action brought on behalf of absent

Class members"). See, additionally,

Note, "Developments - Class Actions",

89 Harvard Law Review 1318, 1546 (1976)

("where dismissal is based on a problem

of inadequacy of representation which a

different plaintiff might be able to

correct, notice should normally be

Ordered to protect possible reliance.")

(emphasis supplied).

Here, the Court of Appeals did not

require, or even permit, notice to

absent class members. Instead, the

Court of Appeals took the more modest

step of merely permitting timely

intervention by another class member.

Such exercise of discretion, in the

particular circumstances, certainly was

not arbitrary or capricious. In any

event, such an exercise of discretion

in a unique and non-recurring factual

Situation plainly does not’ warrant

review by this Court.

17

CONCLUSION

For the foregoing reasons, it is respect-

fully submitted that the petition for certiorari

should be denied.

~Dated: June 23, 1980

Respectfully submitted,

IRVING MALCHMAN

Attorney for Respondent

41 East 42nd Street

New York, New York 10017

(212) 682-7100

Dated: June 23, 1980

Of Counsel:

ROGER W. KIRBY

KAUFMAN TAYLOR KIMMEL & MILLER

Attorneys for Respondent