Opposition — Frank v. United States Trust Co.

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Office- Supreme Court, U.S,

FILED

IN THE SUPREME COURT MAY 21 1981

OF THE UNITED STATES

ALEXANDER L. STEVAS,

October Term, 1980 ae CLERK

NO. 80-1873

DOUGLAS E. FRANK and MICHAEL H. FOLB,

Petitioners,

Vv.

UNITED STATES TRUST COMPANY OF

NEW YORK, and LAVENTHOL, KREKSTEIN,

HORWATH and HORWATH,

Respondents.

On Petition for a Writ of Certiorari to

The United States Court of Appeals for the

Ninth Circuit

Respondent United States Trust Company

of New York's Brief Opposing Certiorari

ALLEN L. FEINSTEIN

1840 First National Bank Plaza

100 West Washington Street

Phoenix, Arizona 85003

Counsel for Respondent United

States Trust Company of New York

Carter, Ledyard & Milburn

Daughtou Feinstein & Wilson

Jeffrey S. Leonard

Of Counsel

™

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1980

NO. 80-1873

DOUGLAS E. FRANK and MICHAEL H. FOLB,

Petitioners,

Vv.

UNITED STATES TRUST COMPANY OF

NEW YORK, and LAVENTHOL, KREKSTEIN,

HORWATH and HORWATH,

Respondents.

On Petition for a Writ of Certiorari to

The United States Court of Appeals for the

Ninth Circuit

Respondent United States Trust Company

of New York's Brief Opposing Certiorari

ALLEN L. FEINSTEIN

1840 First National Bank Plaza

100 West Washington Street

Phoenix, Arizona 85003

Counsel for Respondent United

States Trust Company of New York

Carter, Ledyard & Milburn

Daughton Feinstein & Wilson

Jeffrey S. Leonard

Of Counsel

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES ci Ri Colelaate ii

BTATeetn, OF. THE CASE k's ac'cc ccc vtes ceaum

ARGUMENT: cess ceteccecbotsicovecccccccee F

I. There is ro conflict in the

circuits on the question of

contribution from settling

GELTONGERED Sicccccvctecvcoececce F

II. With respect to contribution

by controlling persons,

petitioners meet none of the

criteria set forth in Rule

19 *e*seeeoeee7e#7#seeeneseeeenseseneeeneeeneeee 14

III. The Ninth Circuit has not,

with respect to the right to

indemnification under state

law, decided any question of

state law which should be

decided by this Court ........ 16

IV. The issues raised do not

demand this Court's

CORSTOOLOCEON accaddedmesessee AT

CONCLUS ION eeeeeee*eneeeseeseeenweeneseenseseneeeeneeee 19

ib i eae) aa a

TABLE OF AUTHORITIES

Page

Cases

Altman v. Liberty Equities

Corporation, 54 F.R.D. 620

(S.D.N.Y. 1972) eeeeveeeveeeee eevee eee ee @ 12

City of Detroit v. Grinnell Corp.,

495 F.2d 448 (2d Cir. 1974) .....-- 13

Globus, Inc. v. Law Research Service,

Inc., 318 F. Supp. 955 (S.D.N.Y.

1970), aff'd on opinion below,

442 F.2d 1346 (2d Cir.), cert.

denied, 404 U.S. 941 (1971) ....--- 12

Gomes v. Brodhurst, 394 F.2d 465

(3rd Cir. 1967) eeeeeeveeveeeeeee8e 029 13

Gould v. American-Hawaiian Steamship

Company, 387 F. Supp 163 (D.

Del. 1974) esceeveeveeeen ee ee eeeee202888 8 12

Herzfeld v. Laventhol, Krekstein,

Horwath & Horwath, 540 F.2d 27

(2nd Cit. 1976) eeeeveveveeae eee 8, 9, 10

Locafrance U. S. Corp. v. Intermodal

Systems Leasing, Inc., 558 F.2d

1953 (98 Cie’. 1977) -kvcoccuseccece 12

Marshall v. Holiday Magic, Inc.,

550 F.2d 1173 (9th Cir. 1977) .....- 13

Martello v. Hawley, 300 F.2d 721

(D.C. Cir. 1962) eeeeevneeee eee ee202008 13

ii

Sabre Shipping Corporation v.

American President Lines, 298.

F. Supp. 1339 (S.D.N.Y. 1969) ..... 13

Shea v. Ungar, CCH Fed. Sec. L.

Rep. 491,558 (S.D.N.Y. 1965) ...... 15

Stella v. Kaiser, 221 F.2d 115

(2d Cir. 1955) eeeeeveeeveaevoeeeeaeveeeee@ 12

Stratton Group Ltd. v. Sprayregen,

466 F. Supp. 1180 (S.D.N.Y.

1979) eeeeweeeeeeeeeeeeeeeeenee eo 12, 13

Wassel v. Eglowsky, 399 F. Supp.

1330 (D. Md. 1975), aff'd 542

F.24 1235 (4th Cir. 1976) wecccccce 12

Statutes

Securities Act of 1933 (15 U.S.C.

sections 77a-77bbbb):

Section 77k eeeeeeeeeeeeeeeeeneeeeeee@ 15

Section 77k(£) eeeeeeeeneeeeeneeneeeeee 15

Rules

Rules of the Supreme Court of the

United States:

Rule 19 eeeeeveeeneee eevee Ve ll, 14, 18

iii

IN THE SUPREME COURT

OF THE UNITED STATES

October Term, 1980

NO. 80-1873

DOUGLAS E. FRANK and MICHAEL H. FOLB,

Petitioners,

Vv.

UNITED STATES TRUST COMPANY OF

NEW YC2xX, and LAVENTHOL, KREKSTEIN,

HORWATH and HORWATH,

Respondents.

On Petition for a Writ of Certiorari to

The United States Court of Appeals for the

Ninth Circuit

Respondent United States Trust Company of

New York's Brief Opposing Certiorari

Respondent United States Trust

Company of New York respectfully requests

that this Court deny the petition for writ

of certiorari seeking review of the Ninth

Circuit's opinion in this case. That

opinion, Laventhol, Krekstein, Horwath &

Horwath v. Horwitch, is reported at 637

F.2d 672.

STATEMENT OF THE CASE

Petioners' statement of the case

is essentially correct, but it omits some

pertinent facts.

Plaintiffs' amended complaint

alleges that the Doug Frank Development

Corporation (Frank Corporation), through

its president Douglas E. Frank (Frank) and

its executive vice president Michael H.

Folb (Folb), intended to and did convert

the proceeds of an offering of limited

partnership interests in Western Properties

Limited Partnership (Western Properties)

to uses other than those stated in the

prospectus, and that at least $2,000,000

have been misappropriated. 637 F.2d at

674. The amended complaint alleges

further that the limited partnership

interests were purchased upon the recom-

mendation, investment advice, and through

the facilities of the United States Trust

Company of New York (U.S. Trust) (Record

on appeal (R.) 1566), and that U.S. Trust

failed to investigate the Frank Corporation

and Western Properties and was negligent

in failing to discover the misappropri-

ation, mismanagement, and fraud perpe-

trated by the Frank Corporation, its offi-

cers, and directors (R. 1572).

The amended complaint contains

three counts based upon the federal secur-

ities laws and two counts based upon state

common law (R. 1565-1574; Petition for

Writ of Certiorari, page 4). Two of the

three federal securities counts contain

allegations of wrongdoing against all

defeidants. including Frank and Folb,

while the third alleges wrongdoing against

all except Laventhol, Krekstein, Horwath &

Horwath (Laventhol), the accounting firm

employed by Western Properties to prepare

the registration statement. One common

law count is brought against U.S. Trust

only, while the other is brought against

all defendants.

As the Court of Appeals noted,

the nature of the claims against the de-

fendants was such that each defendant

‘would, if found liable, be liable to the

plaintiffs for the same payment, that is,

"payment for the same harm suffered by the

purchasers resulting from the direct

action of Frank and Folb, and from the

negligence or oversight of the Bank [U.S.

Trust] and the accountants [Laventhol] in

failing to discover the harmful conduct of

Frank and Folb." 637 F.2d at 675.

After issue was joined, the class

representative, Jay Herman, entered into a

settlement agreement with Frank, Folb,

freee”

Western Properties, and the Frank Corpo-

ration, wherein, in consideration of Frank

and Folb's agreeing to cooperate with

plaintiffs in their case and to pay shaien,

tiffs the sum of $8,000, plaintiffs agreed

to deliver a release of all claims against

Frank, Folb, and Western Properties, and a

covenant not to execute on any judgment

against the Frank Corporation (R. 2571-

2572; Appendix A to Petition for Writ of

Certiorari, pages 5-6).

With leave of the district court,

U.S. Trust subsequently filed its cross-

1 y.s. Trust, as a non-settling defendant

without standing to object, did not oppose

the settlement on the merits. lLaventhol

did oppose the settlement on the merits

(R. 2683-2688). In response, plaintiffs

took the position, supported by author-

ities, that, as a non-settling defendant,

Laventhol did not have standing to object

(R. 2700-2701).

Claim against the Frank Corporation,

Frank, and Folb.* The cross-claim alleges

that Frank and Folb made representations

to U.S. Trust concerning the operations

and finances of the Frank Corporation and

that to the extent U.S. Trust may be

liable to plaintiff, such liability is the

result of the representations, acts, omis-

sions, negligence, breach of duty, and

other tortious conduct on the part of the

Frank Corporation, Frank, and Folb, with-

out similar contributing acts of U.S.

Trust (R. 2735-2736). The cross-claim

seeks contribution or indemnification from

the Frank Corporation, Frank, and Folb.

2 At the time of the hearing on the

settlement, all parties were aware of U.S.

Trust's claims against the cross-claim

defendants as U.S. Trust had, by that

time, filed its motion for leave to file a

cross-claim.

oy

ARGUMENT

Petitioners have demonstrated

none of the grounds which constitute the

special and important reasons specified in

Rule 19 of the Rules of the Supreme Court

for the granting of review on certiorari.

I. There is no conflict in the circuits

on the question of contribution from set-

tling defendants.

While petitioners may, as they

assert in their petition, "believe that

the Ninth Circuit has incorrectly decided

the issue" (petition, page 10), their

assertion that this issue “has not re-

ceived consistent treatment in the cir-

cuits" (petition, pages 9-10) is not cor-

rect and they, in fact, fail to cite any

circuit opinion on point.

Respondent is aware of only two

circuit courts which have considered the

|

3

i

4

issue: the Second Circuit, in Herzfeld v.

Laventhol, Krekstein, Horwath & Horwath,

540 F.2d 27 (2nd Cir. 1976), not discussed

or mentioned by petitioners in their argu-

ment on this point, and the Ninth Circuit,

in the instant case, 637 F.2d 672. The

results in the two cases are not in con-

flict.

In Herzfeld, the plaintiff sought

$510,000 in damages against Laventhol and

other defendants for federal securities

law violations and common law fraud.

Plaintiff settled the action with, and

released, all of the defendants other than

Laventhol, for $357,000. The district

court approved the settlement with the

proviso that Laventhol could bring a

third-party action against the settling

defendants. 540 F.2d at 37. Laventhol

did so, seeking contribution and indemni-

fication from the settling defendants.

Certain defendants, the "Allen" defen-

dants, against whom Laventhol was awarded

contribution, appealed from the final

judgment.

The Court of Appeals, after re-

viewing the evidence and noting factual

differences between the liability of

Laventhol and that of Allen to the plain-

tiff, concluded that the liability of

Allen to the plaintiff had been extin-

guished by the $357,000 settlement, 540

F.2d at 38, and that even if the liability

of Laventhol and Allen to the plaintiff

was equal, on the pari delicto theory

utilized by the district court, each would

be liable for $255,000, or one-half of the

total $510,000 claim of plaintiff. Allen, :

the Court of Appeals concluded, had by the

settlement paid plaintiff $357,000, which

was more than its share, and “far more

than half of Herzfeld's [plaintiff's] :

v

loss." 540 F.2d at 39. Allen, by paying

more than its share to plaintiff, “had

removed itself from the category of a

tort-feasor defendant," 540 F.2d at 38,

and Laventhol was not entitled to con-

tribution from Allen.

The Ninth Circuit, addressing in

the instant case petitioners' contention

that a policy favoring settlement must

override any policy favoring contribution,

noted that "Congress has expressed its

preference between the sometimes conf lict-

ing values of settlement and contribu-

tion. A right of contribution is enunci-

ated clearly there; the statute is silent

as to the encouragement of settlements."

637 F.2d at 675. The court, citing

Herzfeld, obgerved that "[iJf it could be

said that appellees' settlement with the

plaintiff class had resulted in their

bearing their proper share of damages, the

case might be different." 637 F.2d at

675. The court continued:

"Clearly, however, the set-

tlement did not accomplish

this. In paying $8,000 on

account of costs, and agree-

ing to cooperate with plain-

tiffs in their case against

the remaining defendants,

appellees [Frank and Folb]

have not borne their fair

share of what is due to the

plaintiff class, if the

allegations of the complaint

are to be believed. It is

not enough for appellees

[Frank and Folb] to earn

their freedom from liability

by assisting the plaintiff

class in recovering from

these appellants [U.S. Trust :

and Laventhol] for their

alleged error in placing

faith too blindly in Frank

and Folb." 637 F.2d at 675.

Because none of the criteria set

forth in this Court's Rule 19 is met,

petitioners devote most of their argument

to the contention that "the appropriate

analysis is to determine the policy of the

appropriate state concerning contribution,

+

and then to determine whether a contribu-

tion action against the settling defendant

is consistent with that policy... ."

(petition, page 1l).

The right to contribution in

cases involving the federal securities

laws, however, is governed by federal, not

state, law.

Further, petitioners' cited lan-

guage from Stratton Group Ltd. v.

Sprayregen, 466 F. Supp. 1180 (S.D.N.Y.

1979), concerning a "balance" between

3 Locafrance U.S. Corp. v. Intermodal

Systems Leasing, iInc., 558 F.2d 1113 (2d

Cir. 1977); Stella v. Kaiser, 221 F.2d 115

(24 Cir. 1955); Wassel v. ByLowsky 399 PF.

Supp. 1330, 1367 (D. Md. 1975), aff'd 542

F.2d 1235 (4th Cir. 1976); Gould v.

American-Hawaiian Steamship Company, 387

F. Supp. 163, n.? (D. Del. 3

Altman v. vip he Equities = pepor ac ten. 54

F.R.D. ’ S.D.N.Y. 3; Globus

Inc. v. Law Research Service, Inc., 318 F.

Supp. 955, 958 n.2 (S.D.N.Y. 1970), aff'd. -

on opinion below, 442 F.2d 1346 (2d Cir.),

cert. denied, 404 U.S. 941 (1971).

oy

ee

federal and state policies (petition,

pages 12-13), is from a footnote which

constitutes pure dictum, the footnote

being to a sentence in the text in which

the district judge concludes that he “need

not reach this interesting, albeit thorny,

question for determination of the instant

motion." 466 F. Supp. at 1189.

Gomes v. Brodhurst, 394 F.2d 465

(3rd Cir. 1967); Sabre Shipping

Corporation v. American President Lines,

298 F. Supp. 1339 (S.D.N.Y. 1969); and

Martello v. Hawley, 300 F.2d 721 (D.C.

Cir. 1962), cited by petitioners, are all

non-securities cases, which do not in-

volve, as does the instant case, a statu-

tory right to contribution.

Finally, Marshall v. Holiday

Magic, Inc., 550 F.2d 1173 (9th Cir.

1977), and City of Detroit v. Grinnell

Corp., 495 F.2d 448 (2d Cir. 1974), cited

a

by petitioners, concern the fairness of a

settlement as to the plaintiff class, in

the face of objections made by members of

that class. They have nothing to do with

the effect of settlement on the right of a.

non-settling defendant to contribution

under the federal securities laws.

II. With respect to contribution by con-

trolling persons, petitioners meet none of

the criteria set forth in Rule 19.

The Court of Appeals rejected

petitioners' contention that one held

liable under the securities laws as a

"controlling person" cannot be liable for

contribution. The Ninth Circuit stated

that:

"Had Frank and Folb not

settled with the plaintiffs,

the separate suit brought

against them would have

proceeded, and they would

have been exposed to liabil-

ity under §77k to make the

same payment for the same

-14-

injury for which appellants

may be held liable." 637

F.2d at 675.

As a result, the court concluded, Frank

and Folb would be subject to liability for

contribution under 15 U.S.C. section

77k(£) of the Securities Act of 1933. 637

F.2d at 675.

Petitioners argue that, in reach-

ing this conclusion, "the court of appeals

overlooked federal case law precisely on

point." (petition, page 21). The only

federal case law cited by petitioners,

however, is a 1965 district court case,

Shea v. Ungar, CCH Fed. Sec. L. Rep.

991,558 (S.D.N.Y. 1965), unreported offi-

cially, which did not, in any event,

involve a claim under section 77k at all.

The decision of the Court of

Appeals is not tn conflict with decisions

either of this Court or of other courts of

appeal. It is, as noted by the Ninth

ai S.

Circuit, 637 F.2d at 675, fully supported

by the language of the securities acts

themselves.

III. The Ninth Circuit has not, with

respect to the right to indemnification

under state law, decided any question of

state law which should be decided by this

Court.

There is no dispute that in cer-

tain limited situations respondents may be

entitled to indemnity under whichever

state's law is ultimately applied to the

common law counts of plaintiff's com-

plaint. The Court of Appeals simply held

that "there are unresolved factual issues

which must be decided before an entitle-

ment to indemnity can be established under

the law of either [New York or Arizona] ."

637 F.2d at 676.

-16-

b ‘ ee.

ed ane

aRS wig oss .

As the appeal to the Ninth

Circuit followed the district court's

granting of summary judgment, there has

been no determination of those factual

issues, no determination of whether indem-

nity is or is not available, and, as a

result, no decision on a matter of state

law which is ripe for adjudication by this

Court.

IV. The issues raised do not demand this

Court's consideration.

The issues raised by petitioners

are not issues that “should be...

settled by the Supreme Court" (petition,

page 26) as petitioners assert. This

action has not yet been tried, and the

Court of Appeals has simply determined

that the district court was in error in

granting summary judgment.

Of the three issues raised by

petitioners, one is a question of federal

securities law concerning which there

have, to date, been only two circuit level

decisions, neither in conflict with the

other; one is a question of federal secur-

ities law concerning which there have been

no prior circuit level decisions; and one

is a question of state law concerning

which no conclusion has yet been reached

in this case.

Petitioners' assertion of the

urgency of the issues is belied by the

dearth of circuit decisions. It is sub-

mitted that the considerations set forth

in Rule 19 are not met and that the issues

raised by petitioners should not be con-

sidered by this Court.

ay

CONCLUSION

It is urged that the petition for

writ of certiorari should be denied.

Respectfully submitted,

ALLEN L. FEINSTEIN

1840 First National Bank Plaza

100 West Washington Street

Phoenix, Arizona 85003

Counsel for Respondent United

States Trust Company of New York

Carter, Ledyard & Milburn

Daughton Feinstein & Wilson

Jeffrey S. Leonard

Of Counsel

May, 1981

—tOs