Petition — First Arabian Corp. v. Pharaon

83-109 :

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

NO.

THE FIRST ARABIAN CORPORATION, S.A.

Petitioner,

vs

GHAITH R. PHARAON

Respondent.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

AND APPENDIX

On .2 Gp nw

BUSHNELL, GAGE, DO ROFF & REIZEN

3000 Town Center, Suite 1500

Southfield, Michigan 48075

(313) 444-4848

Of Counsel:

WALTER, CONSTON & SCHURTMAN, P.C.

90 Park Avenue

New York, New York 10016

PAA EAS LS NES NESTLE, SLES

rr

THE INLAND PRESS, DETROIT, MICHIGAN

i

QUESTION PRESENTED

WHETHER FEDERAL ANCILLARY JURISDICTION

CAN BE ASSERTED OVER A CROSS-CLAIM BE-

TWEEN TWO ALIENS, SUBSEQUENT TO DISMIS-

SAL OF THE MAIN CLAIM GIVING RISE TO FED-

ERAL JURISDICTION, WHEN THAT CROSS-CLAIM

WAS ONLY TANGENTIALLY RELATED TO, AND

NOT LOGICALLY DEPENDENT UPON THE RESO-

LUTION OF THE MAIN CLAIM?

ii

TABLE OF CONTENTS

QUESTIONS PRESENTE occencvarepenseaastaees

TABLES OF CONTERIS 5655 shn00sesenkeeeeesaeeue

[NA UE AUSESOMISIED v6crechosucrnorsaxneene

OCP ENTONG BAe oss s sovn cv adevedecuseemeroee

PU RISIEC LE 6 50 ose x ckveeresedsleunaanearaaeeee

CONSTITUTIONAL PROVISIONS, STATUTES

AND RUG06 IN VOR Be. yy cesses actaccseeeee

STATEMENT OF THE CASE (ic cscccescesccvcanes

REASONS WHY THE WRIT SHOULD ISSUE .....

I. The Adjudication of the Cross Claim Sub Judice Vio-

lates Fundamental Principles of the Limited Nature

of Federal Court Subject Matter Jurisdiction Annun-

ciated Sy Tis Cowte 6s ecaesacsan veces eee

II. The “Logical Relationship” Test for Exercise of Fed-

eral Ancillary Jurisdiction Over the Cross Claim in

This Case, as Articulated by the United States Court

of Appeals for the Sixth Circuit, is in Direct Conflict

With Decisions of the United States Court of Appeals

for the Fifth and Eleventh Circuits ...........05

.Assuming Arguendo Ancillary Jurisdiction Existed

When the Purported Cross Claim Was Asserted,

This Court Has Never Addressed Whether Subse-

quent to Dismissal of the Main Claims the Incidental

Claim Must Be Dismissed .........cccccccccsees

I]

-_,

7-19

10-15

I,

iil

INDEX OF AUTHORITIES

CASE LAW, CONSTITUTION AND STATUTES

A. Case Authorities Page

1. Decisions of the Supreme Court of the United

States

Aldinger v Howard, #27 US 1 (1976) .......... 8-9

Freeman v Howe, 24 How. 450 (1860) ......... 8

Hodgson v Bowerbank, 5 Cranch 303 (1809) .... 7

Mansfield, C. & L.M. Ry. v Swan, 111 US. 379

(BOSE) i icsvecave a pkAa bee eee ka wae wares 9,12

Owen Equip. & Erec. Co. v Kroger, 437 US 365

+ eer ey 8-9, 10, 12, 13-14 & nn.&-9, 15

Turner v President, Dirs., & Co., of the Bank of

No. America, 4 Dall. 8 (1799) .......eeeeee. 7

United Mine Workers v Gibbs, 383 US 715

CRUE SiicaceN ec cendvereseestadavacnnn 16, 17n.13

Verlinden B. V. vy Central Bank of Nigeria, -US-,

51 LW 4567 (May 13, 1983) ........seceee. 7n.4

2. Decisions of the United States Courts of

Appeals

Amco Const. Co. v Mississippi State Building

Comm'n, 602 F.2d 730 (5th Cir. 1979) ..... 11, 13, 15

Atlantic Corp. vy United States, 311 F.2d 907 (1st

OW. TOUR) os idcvscocsancsakpevevesaneeyes 17n.12

Cenco Inc. v Seidman & Seidman, 686 F.2d 449

(7th Cir.), cert. denied, 103 S.Ct. 177 (1982).11, 16n.11,

17-18

Coleman v Casey County Bad. of Educ., 686 F.2d 428

ths Cir. BO ok 6.6 oe daterssu sa sswaeeeine 11, 12

Corporacion Venezolana de Fomento v Vintero

Sales Corp., 629 F.2d 786 (2d Cir.), cert. denied,

449 US 1080 (1980) .....cceccccccccccvens 14n.9

Eagerton v Valuations, Inc., 698 F.2d 1115 (11th

Ce; TORS) i iivcccncececduvacnieunkens 9, 10, 11, 13

Page

Fairview Park Excavating Co. vy Al Monzo Constr.

Co., 560 F.2d 1122 (3d Cir. 1977) .......00. 17n.12

Federman vy Empire Fire & Marine Ins. Co., 597

F.2d 796 @ad Cir. 1979) ....ccccseccs 12, 15, 16n.11

Joiner v Diamond M. Drilling Co., 677 F.2d 1035

CR EY is sae etay savy ens 9, 10-11, 16, 17, 18

Lasa Per L’ Industria Del Marmo Societa Per

Azioni v Alerander, 414 F.2d 143 (6th Cir.

SED tetees chee ee bUGN SES ake s ue eheaneess 1]

McDonald v Oliver, 642 F.2d 169 (Sth Cir.

MT eer sig Shs Rhee Naas ahaa e'e &n.5, 16n.4

Parris v St. Johnsbury Trucking, Co., 395 F.2d

PEO CSOD Svcs a naPewsovontccess cen 17n.12

Propps v Weihe, Black & Jefferies, 582 F.2d 1354

Pe PEE Ste ee aeamane ck anse bac de 16n.11

Putnam v Williams, 652 F.2d 497 (5th Cir.

SMES Se eA Fe Poet ene ie ee eee ee 16n.11

Revere Cooper & Brass Inc. vy Aetna Cas. & Sur.

Co., 426 F.2d 709 (5th Cir. 1970) ........... 13

Rosario vy American Exrport-Isbrandtsen Lines,

Inc., 531 F.2d 1227 (3d Cir. 1976) .......... 17n.11

Safeco Ins. Co. v Guyton, 692 F.2d 551 (9th

SOL ahaa ha tra hebehekasy adeaees'e 1]

Stamford Bd. of Educ. v Stamford Educ. Ass'n, 697

eo oe fs Gee ere 17n.12

Tinker v DeMaria Porsche-Audi, Inc.+ 632 F.2d

SC GL FO peavarcaeenapedscevcaes 16n.11

Travelers Ins. Co. v First Nat? Bank of Shreveport,

675 F.2d 633 (5th Cir. 1982) .........006. 10, 11, 14

Warren G. Kleban Engineering Corp. v Caldwell,

490 F.2d 800 (5th Cir. 1974) .......eeeeeees 12

Waste Systems, Inc. v Clean Land Air Water Corp.,

683 F.2d 927 (5th Cir. 1982)) ..... 10, 16 & n.11, 18

Weinberger v Kendrick, 698 F.2d 61 (2d Cir.

POE FAN Salen ocbe da Reednepisebaseeus 11

Page

Williams v Bennett, 689 F.2d 1370 (11th Cir.

BOER) ckbccccnedcckdeunassunsauweneumeee 11

3. Decisions of the United States District Courts

Federal Republic of Germany v Elicofon, 536

F.Supp 813 (E.D. N.Y. 1978), aff'd sub. nom.,

Kunstsammlungen Zu Weimar v Elicofon, 678

F290 1300 Ga Clr. 00D) cacics ss cxbeeean 15n.10

Gus T. Handge & Son Painting Co. v Douglass State

Bank, 543 F.Supp. 374 (D. Kan. 1982) ...11, 15n.10

B. Constitution, Statutes and Rules

1. Constitution

US. Constitution Art. ITT, §2 ........ccccwees 2,7,8

2. Statutes

ED SOO Ge occ sevavicnesevneees cues 4

SO UR GRIME) ive cncdvescavtccunseeue 2

SUG GOONS sii dtccvcacecucsenevusaanen 4

BT) SOG os soo 0. 0us sak nn eee eee 4

Judiciary Act of September 24, 1789, 1 Stat. 73,

ODD owe de ves csnuesctd ree s¥¥ une 7

3. Rules of Civil Procedure (also referred to some-

times as Fed. R. Civ. P.)

2B URC Ble TI) ci. cccicesnscamaecewe 5

28 USC Rule 13(g) ......... 2,5, 6, 10, 11, 15, 17n.11

SO Ue) SNe OE ak san vbavescavesendennee 10

4. Rules of this Court

US Supreme Court Rule 21.1(b) ............. In.]

US Supreme Court Rule 21.1(f) .............. 2

US Supreme Court Rule 28.1 .............4.. In.]

II. BOOKS, TREATISES AND ARTICLES

A. Books & Treaties

P. Bator, D. Shapiro, P. Mishkin & H. Wechsler,

Hart & Wechsler’s The Federal Courts & The

Federal System (2d. ed. 1973) ........200005 7

vi

Page

Wright, Miller & Cooper, Federal Practice & Pro-

cedure: Civil (Vol G6) $1410 ....cceccccccces 12

eer rere 16

EOE eer Jin

: Jurisdiction (Vol. 13) §3522 .........cceeeee 7

CE Si cdbe es edvaes & 14n.9

B. Law Review Articles

Fraser, Ancillary Jurisdiction and the Joinder of

Claims In the Federal Court, 33 F.R.D. 27 (1964)

(citing Note, 11 Okla. L. Rev. 326, 329 (1958)) .. 8n.5

Note, Ancillary Jurisdiction Rule 14 — Dispost-

tion of Third Party Claim When The Primary

Claim Has Been Dismissed, 23 S. Car. L. Rev.

EE Ceol auadue tw ioe Cbeeseceacuans 17n.11

IN THE

Supreme Court of the United States

OCTOBER TERM, 1982

NO.

THE FIRST ARABIAN CORPORATION, S.A.

Petitioner,

vs

GHAITH R. PHARAON

Respondent.'

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

AND APPENDIX

Petitioner prays that a Writ of Certiorari issue to review

the Order of the United States Court of Appeals for the Sixth

Circuit dated May 3, 1983, affirming the denial of a Motion to

‘As required by Supreme Court Rule 21.1(b), the following gives a history of

this case and lists all parties. In the United States District Court for the

Eastern District of Michigan, the matter was captioned Eli Broad &

Donald Kaufman, Plaintiffs vy James T. Barnes, Sr, James T. Barnes, Jr.

Ghaith R. Pharaon & The First Arabian Corporation, S.A. Defendants;

Ghaith R. Pharaon, Cross-Plaintiff » The First Arabian Corporation, S.A,

Cross- Defendant, No, 77-72757. The original dispute between Plaintiffs and

all Defendants being settled pursuant to dismissal of those claims (Appen-

dix, pp. 17a-18a), only the entry of Summary Judgment on the Cross-Claim

of PHARAON against FIRST ARABIAN was the subject of appellate

proceedings in the United States Court of Appeals for the Sixth Cireuit in

Case No, 82-1209. The case bore the same caption as in the District Court,

however, with the FIRST ARABIAN CORPORATION, S.A. being

designated Appellant.and GHAITH R. PHARAON, Appellee,

Also, pursuant to Supreme Court Rule 28.1, Petitioner, THE FIRST

ARABIAN CORPORATION, S.A. is a Luxembourg Corporation and

owns controlling interest in the Bank of the Commonwealth. The following

are subsidiaries or affiliates of FIRST ARABIAN: First Arabian Argibusi-

ness, S.A.E., First Arabian Investments, Inc, and 8.D.C, Financial Corp.

9

Dismiss for want of jurisdiction made by Petitioner and the

entry of Summary Judgment in favor of the Respondent by

the United States District Court for the Eastern District of

Michigan.

OPINIONS BELOW

The Order of the United States Court of Appeals for the

Sixth Circuit dated May 3, 1983 which affirmed the District

Court's entry of Summary Judgment in favor of the Respond-

ent and denial of Petitioner's Motion to Dismiss for want of

jurisdiction, is unreported and appears in the Appendix, pp. la-4a.

The Summary Judgment and Order Denying Motion to Dis-

miss entered by the United States District Court for the East-

ern District of Michigan, and the transcription of its oral rul-

ing regarding the same, are similarly unreported and are set

forth, respectively, in the Appendix, pp. 8a, 9a, 11a-17a.

JURISDICTION

The Order of the United States Court of Appeals for the

Sixth Circuit affirming Summary Judgment was entered May

3, 1983. A timely Petition for rehearing was denied on June 3,

1983, Appendix, p. 20a. The jurisdiction of this Court is

invoked pursuant to 28 USC §1254(1).

CONSTITUTIONAL PROVISIONS, STATUTES

AND RULES INVOLVED

Appendir Pege

US. Constitution Art. ITT, §2, ¢1.1. 44a

28 USC Rule 13(g) 44a

The above referenced provisions can be found in the Appen-

dix as permitted by Supreme Court Rule 21.1(f).

3

STATEMENT OF THE CASE

The Petitioner, THE FIRST ARABIAN CORPORATION,

S.A, purchased from the Respondent, GHAITH R, PHARAON

a controlling interest of common voting shares in a Michigan

Banking Corporation, the Bank of the Commonwealth, (The

foregoing are sometimes referred to hereafter as, respectively,

First Arabian, Pharaon and the Bank), This occurred pursuant

to negotiation and agreement transacted and consummated in

Jeddah, Saudia Arabia in January, 19762 The Respondent's

allegation that FIRST ARABIAN refused to make a final

installment payment of Seven Hundred Fifty Thousand

($750,000.00) Dollars on this contract formed the sole basis of

a cross-claim litigaged in an otherwise unrelated case, It was

solely that tangential cross-claim that was before the District

Court when summary judgment was entered (the claims that

had given rise to federal jurisdiction having long since been

dismissed pursuant to settlement) and solely that cross-claim

that was the subject of appellate review, It is this simple con-

tract dispute between two aliens, in all likelihood governed by

the laws of Saudi Arabia or Luxembourg, over which the

Petitioner submits the federal courts have no subject matter

jurisdiction,

The parties were in material dispute in the Courts below as to whether

their relationship was controlled by a series of documents executed on or

about December 31, 1975 and early January, 1976 or by an Agreement

dated November 12, 1976, despite the fact that Summary Judgment was

sustained in the face of such disputed issues of material fact, Primarily,

this had significance to Petitioner's contention that FIRST ARABIAN

Was improperly or fraudulently induced to enter into the earlier (December,

1975-January, 1976) Agreement through PHARAON's failure to reveal

outstanding bad loans of the Bank, comprising approximately one-third

(1/3) of its outstanding international loan commitments, At the same time

it granted Summary Judgment, the District Court refused to permit

FIRST ARABIAN to amend its pleadings to assert such defenses

(Appendix, p, 10a) and was sustained in this by the Court of Appeals

(Appendix, pp, 3a-4a), Due to the discretionary nature of the denial, Peti-

Hioner elects not to burden the Court with argument regarding this issue

but rather merely presents the issue of absence of jurisdiction,

4

In contrast to the contract claim, the claims originally

asserted by the Plaintiffs below which did properly invoke

federal jurisdiction were of a very different character — both

legally and factually, On June 30, 1977, ELI BROAD and

DONALD KAUFMAN (sometimes referred to hereafter as

Plaintiffs) commenced a civil action in the United States Dis-

triet Court for the Central District of California claiming they

had been frauduently deprived of dividends due them as

owners of preferred stock in the Bank of the Commonwealth,

They named as Defendants all persons in the chain of owner-

ship of the controlling interest of the Bank's common voting

shares, These included James T, Barnes, Sr, and James T,

Barnes, Jr, (sometimes referred to hereafter as the Barnes),

Respondent, PHARAON and Petitioner, FIRST ARABIAN,

The Barnes, as original owners of the controlling interest, had

sold their shares to PHARAON in February, 1975; PHARAON,

in turn, sold the shares to FIRST ARABIAN in 1976, as dis-

cussed supra,

Plaintiffs invoked the Securities and Exchange Act of 1934,

and subsumed regulations, as the substantive and jurisdictional

predicate for the relief prayed, There were also attendant Cali-

fornia State law claims, The District Court's jurisdiction was

said to be founded upon the Exchange Act, 15 USC 678aa, and

diverse citizenship, 28 USC $1332, Prior to answer the case

was transferred to the Eastern District of Michigan under 28

USC $1401, All Defendants thereafter answered, They all

denied the fraud, They said any detriment suffered by the

Plaintiffs resulted from the Bank's poor financial condition

and certain reorganization plans that the FDIC had mandated,

The case carried on without incident until February 13, 1980

when PHARAON prayed the Court permit it to amend its

pleadings, which was allowed by Order dated March 18, 1980, (Ap-

pendix, p. 19a, pp. 21a-24a). The Amendment included PHARAON’s

4

cross claim against FIRST ARABIAN, discussed supra, alleg-

ing the failure to make the final installment (due February 1,

1980) on the 1976 contract to purchase the common stock, over

which there was no independent basis for federal subject mat-

ter jurisdiction, FIRST ARABIAN answered the cross claim,

The remainder of the suit — i.e, the main claims asserted by

Plaintiffs which gave rise to federal jurisdiction — were

resolved on February 12, 1981 when Plaintiffs released all the

Defendants pursuant to settlement and an Order of partial

Dismissal to that effect was eventually entered on July 9,

1981, (Appendix, pp, 17a-18a), Only the contract cross-claim

between the two aliens remained in the case,

Thereafter, PHARAON'’s earlier filed Summary Judgment

Motion on the cross-claim was scheduled to be heard by the

trial court and was opposed by FIRST ARABIAN, Moreover,

FIRST ARABIAN made two defensive Motions, One sought

leave to amend the pleadings to assert a more specific defense

to the cross claim; the other, a Fed, R. Civ, P, 12(b)(1) Motion

to Dismiss, challenged the Court's subject matter jurisdiction

over the cross-claim,

The District Court, at a hearing conducted on October 22,

1981, ruled from the bench against FIRST ARABIAN on al!

Motions, (Appendix, pp, 11a-17a), Relative to the Motion to Dis-

miss it erroneously relied upon a citation from Moore's Federal

Practice in concluding that whether or not the suit continued

in federal court was a matter of “discretionary pendent juris-

diction,” (Appendix, pp, 13a, 16a), Summary Judgment and Orders

Denying Dismissal and to Amend, were then entered on Novem-

her 10, 1981, (Appendix, pp, 8a-10a), Timely Motions for

Reconsideration attempted, inter alia, to demonstrate that the

Court had completely misperceived the antecedent submission

made by FIRST ARABIAN, ie, that the cross-claim was not

sufficiently connected to the main claims to justify its being

litigated as a cross-claim under Fed, R, Civ. P. 13(g) or to per-

6

mit the corollary exercise of ancillary jurisdiction, The Motion

was denied,’

A Notice of Appeal to the United States Court of Appeals

for the Sixth Cireuit was filed by FIRST ARABIAN on

March 4, 1982, and the Appeal was thereafter perfected, briefed

and argued, In a cursory opinion and Order dated May 3, 1983,

the Sixth Cireuit held that the cross-claim was proper under

Fed, R, Civ, P. 13¢2) and that the Distriet Court therefore

had jurisdiction, The Court stated that "[t]his cireuit follows

that “logical relationship” test” (Appendix, p. 3a) and coneluded

that such a “logical relationship” existed between the Plain-

tiffs’ original claim for securities violations and the cross-claim

alleging breach of a contract regarding purchase of common

stock, primarily because both involved Bank stock, Other fac-

tors stated as evidencing this “logical relationship" were 1) the

fact that the sale of the common stock by PHARAON to

FIRST ARABIAN was alleged in both claims; and 2) FIRST

ARABIAN’s inclusion, in its Answer to the cross-claim, of a

boiler plate reference back to its defenses to the original suit,

Also the Court inexplicably stated “[t]he same factual back-

ground was necessary to resolve both claims,” A timely Motion

for Rehearing was denied on June 3, 1983, (Appendix, p, 20a),

‘FIRST ARABIAN’s Motion for Reconsideration actually was comprised

of two separate documents which were both timely filed on the same date,

The portion going to absence of jurisdiction was denied, by letter, dated

December 7, 1981, (Appendix, p. 7a). The other portion, seeking Reconsid-

eration of the Denial of Leave to Amend and of Entry of Summary Judg-

ment, Was denied Mareh 2, 1982. (Appendix, pp, Sa-éa),

REASONS WHY THE WRIT SHOULD ISSUE

I

THE ADJUDICATION OF THE CROSS-CLAIM

SUB JUDICE VIOLATES FUNDAMENTAL

PRINCIPLES OF THE LIMITED NATURE OF

FEDERAL COURT SUBJECT MATTER JURIS-

DICTION ANNUNCIATED BY THIS COURT.

It is axiomatic that the federal courts of this country have

limited subject matter jurisdiction. The parameters of that lim-

itation are dictated, in the first instance, by the Constitution

and thereafter by Acts of Congress, where permitted. Turner v

President, Dirs., & Co. of the Bank of No. America, 4 Dall, 8

(1799), See 13 Wright, Miller & Cooper, Federal Practice &

Procedure; Jurisdiction §3522. Nowhere within Art. TIT, §2

does the Constitution extend the judicial power of the United

States to the federal courts to adjudicate disputes of the var-

iety involved in the cross claim sub judice, ie. in an action between

two aliens, Indeed, an explicit attempt by the First Congress

to bestow such jurisdiction upon the federal courts, Judiciary

Act of September 24, 1789, 1 Stat. 73, ¢.20, was, explicitly,

rejected as not within their competence. Hodgson v Bowerbank,

5 Cranch 303, 304 (1809). See also P. Bator, D. Shapiro, P.

Mishkin & H. Wechsler, Hart & Wechsler's The Federal Courts

& The Federal System (2d.ed. 1973) 10614

‘This Court has just recently held that Congress, pursuant to “the arising

under” federal law clause of the Constitution (but not pursuant to the

diversity clause), can authorize federa] court jurisdiction over a suit between

an alien and a foreign «tele, Verlinden BV. v Central Bank of Nigeria,

--US--. 51 LW 4567, 4570 (May 24, 1983), Of course, there is absolutely no

issue involved in this cross-claim (which does not involve a foreign state)

that could be considered one of federal law “arising under” ‘the Constitu-

tion, the laws of the United States and treaties made under their authority’

to render that decision even remotely relevant here, In fact, the Court in

Verlinden found that the dispute was one “arising under” United States’

laws because a foreign sovereign was being sued in United States Courts

—a factor clearly absent from this suit between two private aliens,

§

Moreover, nowhere does Art. III, §2 discuss, much less

expressly authorize an exercise of “ancillary jurisdiction.” The

statutes of the United States are similarly silent on subject.

Such “jurisdiction” has arisen and crept into our law only as a

matter of logical necessity, so the Court might do complete

justice in a dispute that ts properly before it. Freeman v Howe,

24 How. 450 (1860). See 13 Wright, Miller & Cooper, Federal

Practice & Procedure: Jurisdiction §3523, at 58-59. Despite

expansionist views of “the doctrine” of pendant and ancillary

jurisdiction predicated upon extra-Constitutional notions of

“judicial economy,” this Court's latest excursions into the area

aptly demonstrate that both the Constitutional and statutory

limitations upon federal jurisdiction are imperatives in consid-

ering exercises of “ancillary jurisdiction.” Owen Equip. & Erec.

Co. v Kroger, 437 US 365, 371-72 (1978); Aldinger v Howard,

427 US 1, 16-17 (1976). The Eleventh Circuit most recently

expressed this idea in a case where the claims over which

ancillary jurisdiction had erroneously been asserted, had already

been tried:

Judicial economy also does not demand the exercise

of jurisdiction in this instance simply because the par-

ties already have tried the case. Although to decide the

case at this point would avoid the time and effort of an

identical trial in state court, such an exercise of juris-

diction would prove contrary to the jurisdictional lim-

itations of federal tribunals. Unlike state courts, which

are courts of general jurisdiction, federal courts are con-

strained by both the Constitution and the enactments

of Congress, See Owen, 437 U.S. at 372, 98 S.Ct. at 2401;

Aldinger v Howard, 427 U.S. 1, 16-17, 96 S.Ct. 2413,

2421-2422, 49 L.Ed.2d 276 (1976). Neither the conven-

“Tt has been stated that the doctrine of ancillary jurisdiction is the child of

necessity and the sire of confusion, Fraser, Ancillary Jurisdiction and the

Joinder of Claims in the Federal Court 33, F.R.D, 27 (1964) (citing, Note,

11 Okla. L, Rev, 326, 329 (1958)), After considerable research and study, we

agree.” McDonald v Oliver, 642 F.2d 169, 172 n4 (Sth Cir. 1981),

9

ience of the litigants nor general considerations of judi-

cial economy are sufficient to oversome these limita-

tions, 437 U.S. at 15, 96 S.Ct. at 2420; see Mansfield, C.

& LM. Ry. v Swan, 111 U.S. 379, 382, 4 S.Ct. 510. 511.

28 T..Fd, 462 (1884).

Eagerton v Valuations, Inc., 698 F.2d 1115. 1120 (11th Cir.

1983).

Notwithstanding these principles of limitation, the District

Court, as sustained by the Sixth Circuit, extended the concept

of federal ancillary jurisdiction (born of necessity) to adjudi-

cate this tangentially related cross-claim involving alien per-

sons and alien laws, Factually, it cannot be rebutted or rebuffed

that the foreign installment contract dispute need not have

been resolved in order to resolve the preferred shareholders’

action for alleged securities violations relative to their divi-

dends.6 The cross-claim was concedely “permissive” in that

sense, Nevertheless, the Sixth Circuit held there need only

exist a “logical relationship” between the two claims for “aneil-

lary jurisdiction” to exist over the alien contract claim. More-

over, it did this without even addressing the fact that this

“Flying Dutchman” of a cross-claim, drifting in “jurisdictional

limbo,” [Joiner v Diamond M. Drilling Co.. 677 F.2d 1035,

1043 (5th Cir, 1982)], was being adjudicated after the claims

which did bestow federal jurisdiction were resolved and dis-

missed! It is respectfully submitted that the Sixth Circuit's

sweepingly broad test of “logical relationship,” as applied to a

residual cross-claim involving a tangential dispute between

aliens, runs contrary to the imperative principles of limitation

upon federal jurisdiction announced by this Court,

'The Plaintiffs only needed to show, in the securities action, the ownership

of the stock by the Respondent and the Petitioner, At most, the occurrence

of the sale by Respondent to Petitioner (if that) was at issue. Certainly, the

terms, conditions, place of execution, understanding of the parties, pay-

ment, ete, regarding that sale agreement was naf at issue in the main

claim,

10

Il

THE “LOGICAL RELATIONSHIP” TEST FOR EXER-

CISE OF FEDERAL ANCILLARY JURISDICTION

OVER THE CROSS-CLAIM IN THIS CASE, AS

ARTICULATED BY THE UNITED STATES COURT

OF APPEALS FOR THE SIXTH CIRCUIT, IS IN

DIRECT CONFLICT WITH DECISIONS OF THE

UNITED STATES COURT OF APPEALS FOR THE

FIFTH AND ELEVENTH CIRCUITS,

The Sixth Cireuit began its jurisdictional analysis with a

reference to Fed, R. Civ, P. 13(g), stating that if that Rule was

satisfied as to whether a cross-claim could be asserted there-

under, then ancillary jurisdiction existed to adjudicate it.

(Appendix, pp. 2a-3a), This was a somewhat inartful statement

“since it is axiomatic that the Federal Rules of Civil Procedure

do not create or withdraw federal jurisdiction.” Owen Equip. &

Erec., Co. v Kroger, 437 US at 370 & n.7 citing Fed. R. Civ,

P, 82. Nevertheless and in fairness to the Sixth Circuit, the

Courts of Appeals have generally agreed that it is not critical

to ascertain whether a claim is proper under Rule 13(g) or

supported by ancillary jurisdiction since “[t]he analysis is

substantially the same”, Travelers Ins. Co. v First Nat? Bank

of Shreveport, 675 F.2d 633, 638 (Sth Cir. 1982), Where the

Sixth and the Fifth and Eleventh Circuits have differed is

with regard to those substantive criteria that are determina-

tive of the existence of a proper cross-claim and the methodol-

ogy by which those criteria are applied to a given fact pattern,

The Fifth and Eleventh Circuit decisions addressing the

propriety of a given permissive cross, counter, third party or

interpleader claim unsupported by independent jurisdiction,

have viewed the problem with the constitutional and congres-

sional limitations upon federal jurisdiction explicitly in mind.

See, e.g. Eagerton v Valuations, Inc, 698 F.2d 1115, 1118-19

(11th Cir. 1983); Waste Systems, Inc. v Clean Land Air Water

Corp.,, 683 F.2d 927, 930-31 (Sth Cir. 1982); Joiner v Diamond

11

M. Drilling Co,, 677 F.2d 1035, 1041-44 (ith Cir, 1982): Trave?-

ers Ins, Co, v First Nat? Bank of Shreveport, 675 F.2d 633,

640-41 (Sth Cir, 1982); Ameo Const. Co. v Mississippi State

Building Comm'n, 602 F.2d 730, 732-33 (Sth Cir, 1979), See

also Cenco Inc, v Serdman & Seidman, 686 F.2d 449, 452, 458-

59 (7th Cir), cert, denied, 103 S.Ct. 177 (1982); Gus T. Handge

& Son Painting Co. v Douglass State Bank, 543 F.Supp. 374,

376-80 (D, Kan, 1982), Cf. also, relative to pendant party juris-

diction’ Weinberger v Kendrick, 698 F.2d 61, 76-77 (2d Cir.

1982); Safeco Ins, Co. v Guyton, 692 F.2d 551, 555-56 (9th Cir,

1982); Williams vo Bennett, 689 F.2d 1370, 1379 (11th Cir.

1982), Correspondingly, the Sixth Circuit decisions turn prim-

arily, if not solely upon the Court's own expansive view of

whether there has been satisfaction of the rules of procedure

relative to permissive incidental claims, in this instance a

cross-claim, with little more than an acknowledgement (if

that) of the more fundamental ramifications of, and nuances

relative to an exercise of limited federal court jurisdiction, See,

6.9. Appendix, p. 3a; Coleman v Casey County Ba. of Educ,. 686

F.2d 428, 429-30 (6th Cir. 1982); Lasa Per L’Industria Del

Marmo Societa Per Azioni v Alerander, 414 F.2d 143 (6th Cir,

1969),

More particularly and relative to ancillary jurisdiction over

eross-claims, the Sixth Circuit has interpreted the words of

Rule 13(g), “arising out of the same transaction or occurrence

that is the subject matter either of the original action or of a

counter claim therein,” to mean there need only exist a “logical

relationship” between the cross and main claim. This alone is

not objectionable in that even the Circuits strictly construing

the exercise of ancillary jurisdiction over such claims have, at

times, expressed their jurisdictional analyses in terms of this

“logical relationship” characterization (although they usually

speak of “logical dependence”), See Eagerton v Valuations, Inc,

698 F.2d at 1119-20, Travelers Inc. Co. v First Nat? Bank of

Shreveport, 675 F.2d at 637-40. Where the Fifth and Eleventh

12

Circuits do differ from the the Sixth, and what does make the

Sixth Cirenit’s approach objectionable, is the respective sub-

stantive definitions given to the phrase and the minimal fac-

tual indicia that must be present to create this telic relation-

ship between the claims that is rendered, talismanically,

“logical.”

The Sixth Circuit definition would appear to be, by far, the

most simplistic, In essence, there is no definition, nor has there

been any attempt at articulating one, “Logical relationship” is

ascertained on an ad hoe basis, contingent only upon a given

panel's subjective rendition of when the claim unsupported by

jurisdiction is, in their estimation, related “in logie” to a claim

that is jurisdictionally supported, See Appendix, p. 3a; Coleman

v Casey County Bd. of Education, 686 F.2d at 429-30, Such an

approach is unacceptable in a system of predictable laws, not

of men, See generally Federman v Empire Fire & Marine Ins. Co.,

597 F.2d 798, 812 n.21 (2d Cir, 1979); 6 Wright & Miller, Federal

Practice & Procedure; Civil S1410, It is particularly unacceptable

in a jurisdictional inquiry, a question going to the very competence

and ability of the judges rendering decision to entertain the

dispute before them, This subjective and ad hoe methodology

predictably leads to an expansive and overly broad understand-

ing of federal jurisdiction, often predicated upon what should

be irrelevant or marginally significant factors of “equity,”

“convenience” or “judicial economy” especially inappropriate in

jurisdictional inquiries, See Owen Elec, & Erec. Co. v Kroger,

437 US at 372; Mansfield, C. & L. M. Ry. v Swan, 111 US 379,

382 (1884), Petitioner submits that the decision of the Sixth

Cireuit Court of Appeals in this case evidences just such an

elusive exercise of an ad hoe subjectivism founded upon an

unarticulated, if not unconscious notion of judicial economy: a

notion to “mop up” the “straggler” cross-claim.

In sharp contrast are the detailed attempts of the Fifth and

Eleventh Circuits to give an objective definition to “logical

dependence” or “logical relationship.” As those Courts have

13

repeatedly asserted in relation to cross-claims, ancillary juris-

diction operates only “when there is a tight nerus with a sub-

ject matter properly in federal court.” Eagerton v Valuations,

Inc, 698 F.2d at 1119; Ameo Const. Co. v Mississippi State Build-

ing. Comm'n, 602 F.2d at 733; Warren G. Kleban Engineering

Corp. Vv Caldwell, 490 F.2d 800, 802 (Sth Cir, 1974) (emphasis

supplied), In fact, they have further refined and explicated the

parameters of the definition by stating that such a nexus or

logical relationship arises only when either the same aggregate

of operative facts serves as the basis for both claims or when

the core of facts supporting the origical claim activates legal

rights in favor of a party Defendant that would otherwise

remain dormant. Eagerton v Valuations, Inc, 698 F.2d at 1119:

Revere Cooper & Brass Inc, v Aetna Cas. & Sur. Co., 426 F.2d

709, 715 (Sth Cir, 1970)?

Moreover, this Court's decision in Owen Equip. sustained

the rationale of those cases’ definitions since it tied the exer-

cise of ancillary jurisdiction, at least in the diversity context, to

more than the existence of a “common nucleus of operative

facts”*; it also required the claims be not merely ‘factually sim-

"Tn this case, neither condition is met. First, the existence, terms and per-

formance of the installment contract formed only an incidental (if any)

portion of the preferred shareholders’ dividend main claims, hardly the

aggregate of operative facts to prove those claims, Secondly, the share-

holders’ action did not activate the cross-claim nor was it dormant prior to

the institution of the main action, Indeed, the legal rights existing relative

to the contract that is the subject of the cross-claim antedated the main

aetion!

*Petitioner would note that even under this minimal constitutional criterion,

the cross-claim and main claims involved sub judice do not arise under

such a “common nucleus.” Rather, there are two distinct and respective

“nuclei of fact.” One is centered about a contract betwe n two aliens that

Was negotiated and executed in Saudi Arabia in 1976, concerning a pur-

chase of common shares in the Bank, The other involves a preferred share-

holders’ action alleging a violation of securities laws due to their failure to

obtain proper dividends, partly as a result of a 1977 reorganization of the

Bank. The purchase of the common stock formed only one of many factual

occurrences constituting the reorganization and therefore rendered, at best.

the two “nuclei of fact” as intersecting ones, In no event were they “com-

mon” or “equivalent.”

14

ilar but logically dependent’ as well. Owen Equip. & Erec. v

Kroger, 437 US at 372-73, 376.2 Subsequent to Owen Equip..

the decisions from the Fifth and Eleventh Circuits extrapolate

upon it and the ground work laid in the earlier and harmo-

nious Fifth Cireuit decisions, by stating that a claim was not

ancillary to a main claim unless together they “constitute an

“entire, logically [emphasis in original] entwined lawsuit.” ...

fnot merely] a series of “independent and separate” claims,

albeit ones involving the same central factual inquiry.” See, e.g.

Travelers Ins. Co. v First Nat? Bank of Shreveport, 675 F.2d at

640 (emphasis supplied).

Certainly, under these criteria to establish “logical depend-

ence or relationship” the cross-claim on the installment con-

tract here cannot be considered so tied to the preferred share-

holders’ action, The most fitting description of this purported

cross-claim is that given by the Fifth Cireuit to the attempt at

"The Owen Equip. case gave as an example of “logical dependence” between

an original claim supported by independent jurisdietion and an ancillary

claim, the impleading by a Defendant of a third-party Defendant, Owen

Equip. & Eree, v Kroger, 437 US at 376. The Court stated such a third

party claim “depends at least in part upon the resolution of the primary

lawsuit.” Id. (emphasis supplied), “Its [the third-party complaint of a

defendant] relation to the original complaint is thus not mere factual sim-

ilarity but logieal dependence.” Id, Tt is apparent that “logical dependence”,

as expresed by this Court in Owen Equip, is not present in this case, if

only because the cross-claim was resolved without resolution of the prim

ary suit. Even if the main claims here had not been settled, Respondent

has never contended (nor could it contend) that it could not litigate the

installment contract without first resolving the preferred shareholders’

Claims. The cross-claim would (and should) be litigated alone in Saudia

Arabia or Luxembourg. At the very most, resolution of a portion of the

contract claim (i.e, to determine who were proper Defendants) might have

heen necessary to resolve the shareholders’ claims, however, that puts the

jurisdictional cart before the horse. Tt is presuppositional that ancillary

jurisdiction cannot ‘work in reverse’ to bootstrap unjusticable claims into

federal court, See Corporacion Venezolana de Fomenta v Vintera Sales

Corp, 629 F.2d 786 (2d Cir), cert, denied, 449 US 1080 (1980), 13 Wright,

Miller & Cooper, Federal Practices & Procedure: Cr] 3523, at 58.2 1971

& Cumm, Supp. 1982).

15

cross-claim involved in Ameo Const. Co. v Mississippi State

Building Comm'n, 602 F.2d at 733:

It would not have been necessary to decide the pro-

posed cross claim to protect the integrity of the original

claim or to insure that the disposition of the original

claim would not have been frustrated. Amco's proposed

eross claim stands apart; it is a cause of action wholly

independent and separate!

The foregoing demonstrates the radically different, and incon-

sistent orientations the Courts of Appeals have developed relative

to ascertaining when a proper Rule 13(g) cross-claim exists

warranting an exercise of ancillary federal jurisdiction. Only

this Court can resolve that split of authority, and this case

squarely presents it with the opportunity to do so, Moreover,

the approach adopted by the Sixth Cireuit so overlooks and

negates by implication the fundamental understanding of fed-

eral jurisdiction as limited jurisdiction, as to necessitate this

Court reiterating that fundamental. It also, simultaneously,

permits the Court to supplement Owen Equip. relative to par-

tienlars of ancillary jurisdiction that it has not vet addressed

but which are in contention here,

Ill

ASSUMING ARGUENDO ANCILLARY JURISDIC-

TION EXISTED WHEN THE PURPORTED CROSS

CLAIM WAS ASSERTED, THIS COURT HAS NEVER

ADDRESSED WHETHER SUBSEQUENT TO DISMIS-

SAL OF THE MAIN CLAIMS THE INCIDENTAL

CLAIM MUST BE DISMISSED.

The main claims in this case were dismissed pursuant to

See also Federman v Empire Fire & Marine Ins. Co, 597 F.2d at 813; Gus T.

Handqe & Son Painting Co. v Douglass State Bank, 543 F.Supp. 374 (D.

Kan. 1982); Federal Republic of Germany v Elicofon, 536 F.Supp. 813, 824

(E.D. N.Y. 1978), affd sub. nom, Kunstsammlungen Zu Weimar vy Elicofon,

678 F.2d 1150 (2d Cir, 1982), for cases denying ancillary jurisdiction rela-

tive to purported cross-claims factually analogous to this one,

16

settlement when the purported cross-claim, asserted well after

the pleading and well into the discovery stage of the case, was

in its infaney, Nevertheless, the District Court not only con-

tinued to entertain it but resolved it summarily. This fact alone

renders the case ripe for the Court to address important and

subsumed questions it has vet to consider: whether the dismis-

sal of a main claim prior to trial mandates dismissal of an

ancillary or pendent claim, and if not, what particular parame-

ters exist upon the District Court's discretion to allow it to

continue. 6 Wright & Miller, Federal Practice & Procedure:

Civil §1433, at 181. See also Waste Systems, Inc. v Clean Land

Air Water Corp., 683 F.2d 927, 930 (5th Cir, 1982).

(5th Cir, 1982).

Relying upon the statement, “if the federal claims are dis-

missed before trial, the state claims should be dismissed as

well” appearing in United Mine Workers v Gibbs, 383 US 715,

726 (1966), the Courts of Appeals have, for the most part, held that

“(gjenerally, when the primary federal claim has been settled

or dismissed before trial, the District Court should dismiss any

lingering ancillary state law claims.” See, e.g. Joiner v Dia-

mond M. Drilling Co.. 677 F.2d at 1041... A few have rejected

hi

"See also Cenco Inc. v Serdman & Seidman, 686 F.2d 449, 452, 458 (7th Cir.

cert, dented, 103 S.Ct. 177 (1982) (" [t]he rele in pendent jurisdiction is that

if the federal claim to which the state-law claim is pendent is dismissed

hefore trial. the court will decline jurisdietion over the state law claim and

remit the claimant to the state courts”); Waste Systems, Inc. v Clean Air

Land Water Corp, 683 F.2d at 930 & nA; Putnam v Williams, 652 F.2d 497,

502 (Sth Cir, 1981) (dieta) (*... the preferred practice, when no extensive

proceedings on the ancillary claim have begun in federal court, is to dismiss

... [the state-law claim] so that the case may be brought in state court

where it belongs.”); MeDonald v Oliver, 642 F.2d 169, 172 (Sth Cir, 1981)

(the district court “lost its ancillary jurisdiction when the underlying law:

suit was dismissed.”); Tinker v DeMaria Porsche-Audi, Inc, 632 F.2d 520,

523 (Sth Cir, 1980) (“[1]f the federal claims are dismissed before trial...

the state claim should be dismissed as well."); Federman v Empire Fire &

Marine Ins, Co,, 597 F.2d 798, 811 (2d Cir. 1979) (settlement of main federal

claim prior to trial necessitates dismissal of state law claims); Propps v

Wethe, Black & Jeffries, 582 F.2d 1354, 1356 (4th Cir, 1978) (district court

acted properly in dismissing ancillary third-party claims when main fed-

17

such reasoning on “judicial economy” grounds,? and therefore

create a discrepancy in the Circuit decisions on the point

which only this Court can resolve.

Moreover, a third category of decisions appear to adopt an

intermediate position which recognize that the ancillary claims

generally should be dismissed after dismissal of the main claim

but which nevertheless acknowledge that there may be extra-

ordinary circumstances warranting a federal court to continue to

entertain the solitary claim as a matter of discretion, See, €.0s

Joiner v Diamond M. Drilling Co., 677 F.2d at 1041. But see,

Cenco Inc. v Seiderman & Seiderman, 686 F.2d at 452 (which

applies such a principle to an exercise of jurisdiction over

ancillary claims surviving dismissal of the main claims only if

eral action was settled pror to trial: Rosario vy American Export Ishrandtsen

Lines, Ine, 5381 F.2d 1227, 1233 0.17 (3d Cir, 1976) (dietay (where seaman's

claim against shipowner is settled prior to trial, ancillary state-law claim

against hospital should also be dismissed): 6 Wright & Miller, Federal

Practice Procedure: Cril AANA, at 237; Note, Ancillary Jurisdiction Rule 1

ome Disposition of Third Party Claim When the Primary Claim Has Bern

Dismissed, 238. Car. 1. Rev, 261, 267 (1971)

Compare Fairview Park Excavating Co. v Al Monzo Constr. Co, 560 F.2d

W22, 1125 3d Cir, 1977) Conee a district court judge has properly permit:

ted across-claim under FOR. Civ, Po13Gg)... the ancillary jurisdiction that

results should not be defeated by a decision on the merits adverse to the

Hlaintiff on the plaintiffs primary claim") and Parris vo St. Johnshury

Trucking, Co. 395 Fld 343, 44 (2d Cir 1968) Caneillary jurisdiction over

eross-claimis between nonediverse parties exists since diversity does exist

With respeet to the main claim whieh was settled during trial) and Atlantic

Corp. Vv United States, 311 F.2d 907, 910 Ost Cir, 1962) CTE... [the defend

ant} had a proper cross-claim against its co-defendants this gave the court

aneilary jurisdiction even though all the parties to the eross-clainy were

citizens of the same state... The termination of the original action would

not affect this.) with cases cited in mote 7] supra See also Stamford Bd of

Bdue. v Stamford Educ, Ass'n, 697 Fd 70,72 & 1.3 2d Cir, 1982),

Petitioner cannot refer this Court to any survey or statistical evidence, but

ios respectfully suggested that a significant mumber of attarneys and

iNdges in the federal court system: are of an opinion contrary te the above

quoted excerpt from Gibbs, supra; namely that there is a preference for

“cleaning up" ancillary state court claims rather than dismissing then

18

they have already been tried), Implicit in this approach, how-

ever, is the recognition that the idea of “discretionary jurisdic.

tion” is one that is at best attentuated. if not “illogical per se.”

and accordingly the “diseretion” is expressly characterized as

“limited.” See, e.g, Joiner v Diamond M. Drilling Co., 677 F.2d

at 1042 & n.19, Considerations of judicial efficiency and economy

no longer will Justify an exercise of federal Jurisdiction under

such circumstances, simply because the only claims with whieh

the District Court could properly be concerned in resolving

“efficiently and economically” (the main claims) have already

been resolved, Jd. at 1042-43. “Judicial poaching” of state law

claims and issues militate in favor of dismissal in view of con-

siderations of comity and federalism, particularly when the

state issues are complex or unresolved (not to mention issues

of foreign law such as are involved here), Id. at 1043-44; Waste

Systems, Inc, v Clean Land Air Water Corp., 683 F.2d at 931,

Put as succinctly as possible by the Fifth Cireuit, “if the

federal claim is dismissed prior to trial, there is a strong pre-

sumption in favor of dismissing any lingering ancillary state-

law claims.” Joiner v Diamond M. Drilling Co. 677 F.2d at

1044, Not only was such a presumption not applied by the

Sixth Cireuit in this case, where each of the noted considera-

tions pointed toward dismissal, but the fact that the dismissal

of the main claims antedated the resolution of the cross-claim

was not even mentioned or considered by the Court! Certainly

such an expansive exercise of “discretionary jurisdiction” ean.

not be tolerated by this Court, even if otherwise allowed,

19

CONCLUSION AND PRAYER FOR RELIEF

In view of the foregoing, Petitioner prays this Court. to

issue its Writ of Certiorari to the United States Court of

Appeals for the Sixth Cireuit to review its Order affirming the

District Court's denial of Petitioner's Motion to Dismiss and

entry of Summary Judgment in favor of Respondent,

RESPECTFULLY SUBMITTED.

BUSHNELL, GAGE, DOCTOROFF

& REIZEN

By:

GEORGE FE. BUSHNELL, JR. (P11472)

By:

CARL J. MARLINGA (P17102)

By:

JOHN K. PARKER (P29563)

Attorneys for Petitioner

3000 Town Center, Suite 1500

Southfield, Michigan 48075

(313) 444-4848

OF COUNSEL:

DAVID B. WOLF

WALTER, CONSTON & SCHURTMAN, PAC,

90 Park Avenne

New York, New York

DATED: July 20, 1983

I

INDEX TO APPENDIX TO PETITION

FOR CERTIORARI

Page

This Index is outlined pursuant to Supreme Court of the

United States Rule 21.1 (k).

1, Opinions or Orders Delivered Upon the Rendering of

the Judgment or Decree by the Court Whose Decision

is Sought to be Reviewed (R. 21.1 (k) (i))

Order of the United States Court of Appeals for the Sixth

Cireuit Affirming the District Court's Denial of Peti-

tioner’s Motion to Dismiss and Entry of Summary

Judgment in Favor of Respondent, dated May 3, 1983 ... la-4a

2. Opinions, Orders, Finding or Conclusions Rendered by

Courts if Reference Thereto is Necessary to Ascertain

the Grounds of the Judgment or Decree (R. 21.1 (k)

PP Raaebher teh abacemcsradaescestenateneenednes

a. Memorandum and Order Denying Cross-Defendant

First Arabian's Motion for Rehearing Entered by

the United States Distriet Court for the Eastern

District of Michigan, dated March 9, 1982 ......... 5a-fa

b. Letter Denying Motion for Reconsideration of Denial

of Petitioner's Motion to Dismiss Cross-Claim for

Lack of Jurisdiction Entered by the Distriet Court

and, dated December 7, 1981 .......ccccecceccecs Ta

c, Final Judgment and Order Granting Pharaon's

Motion for Summary Judgment Entered by the

District Court and, dated November 10, 1981 ...... Ra

d. Orders Denying First Arabian’s Motion to Dismiss

and Motion for Leave to Amend Entered by the

District Court and, dated November 12, 1981 ..... 9a-10a

e. Portions of Transcript of Proceedings before the

District Court Relative to Jurisdictional Issue

Conducted on October 22, 1981 ........ccc cee es la-17a

f. Stipulation and Partial Order of Dismissal Entered

by the District Court, and dated July 9, 1981 ....17a-18a

I]

Page

g. Order Granting Defendant Ghaith R. Pharaon's

Motion for Leave to File Supplemental and Amended

Pleadings Entered by the District Court, and dated

rere te HE a gl aR a A Sree are 19a

3. The Judgment or Decree Appealed From (R. 21.1 (k)

(iii))

a. Order of the United States Court of Appeals for the

Sixth Circuit Affirming the District Court's Denial

of Petitioner's Motion to Dismiss and Its Entry of

Summary Judgment in Favor of Respondent, dated

Se Serres caus kee cdnachcdunecies la-da

. Order of the United States Court of Appeals for the

Sixth Cirenit Denying Petitioner's Motion for Re-

hearing, dated June 3, 1983 .......cccccccecccee. 20a

', Order of the United States Court of Appeals for the

Sixth Circuit Staying Mandate, dated June 22, 1983 ..20a-21a

4. Other Appended Materials (R. 21.1 (k) (iv))

a.

Respondent's Motion for Leave to File Supplemental

and Amended Pleading, dated February 10, 1980,

and Cross-Claims Asserted Pursuant thereto as

Permitted by Order Dated March 18, 1980 (Appendix,

MRR CEA Bg en 2 saskae 2la-24a

. Plaintiffs’ Original Complaint filed in the United

States District Court for the Central District of

California, dated June 30,1977 ..........00005. 24a-43a

*. Constitutional Provisions. Statutes and Rules In-

ONO INT a 6 ct dein < dco dino oo \ ove vedoanes 44a

Order la

No, 82-1209

UNITED STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

ELI BROAD and DONALD KAUFMAN,

Plaintiffs,

Vs,

JAMES T. BARNES, SR. et al.,

Defendants,

GHAITH R. PHARAON,

Defendant,

Cross Plaintiff,

Appellee,

Vs,

THE FIRST ARABIAN CORPORATION,

Defendant,

Cross Defendant,

Appellant.

ORDER

(Filed May 3, 1983)

Before: MARTIN and CONTIE, Cireuit Judges; and

PHILLIPS, Senior Circuit Judge.

First Arabian Corporation appeals from the district court's

denial of First Arabian’s motion to dismiss Pharaon’s cross-

claim, the denial of First Arabian's motion to amend its

answer to the cross-claim, and the granting of Pharaon’s

motion for summary judgment on his cross-claim. We affirm.

The plaintiffs in this ease, Broad and Kaufman, were former

owners of preferred stock in the Bank of the Commonwealth

(BOC) in Detroit. They sold their stock to James Barnes, Sr.

and James Barnes, Jr. (the “Barnes”) but allegedly retained

certain preferred rights in. BOC stock. The Barnes then sold

the stock to Pharaon who in turn sold it to First Arabian on

4 Order

November 12, 1976. First Arabian assumed Pharaon's obligation

to pay the Barnes in annual installments of $750,000, On

December 21, 1976, BOC stockholders approved a recapital-

ization plan which allegedly extinguished the preferred rights

of Broad and Kaufman. In early 1977, the recapitalization was

accomplished aud the sale of BOC stock to First Arabian by

Pharaon was officially completed. On June 30, 1977, Broad

and Kaufman sued the Barnes, Pharaon and First Arabian for

conspiring to deprive them of their preferred rights. The

plaintiffs apparently viewed the successive sales of BOC stock

as related steps in a fraudulent scheme. After the filing of the 1977

suit, First Arabian made two more annual installment payments

to the Barnes. In February 1980, however, First Arabian

refused to make the final payment. Pharaon paid the Barnes

and unsuccessfully sought reimbursement from First Arabian.

In March 1980, the district court granted Pharaon’s motion

for leave to file his cross-claim against First Arabian. The

motion was unopposed, First Arabian’s answer to the cross-

elaim did not challenge the district court's jurisdiction nor did

it raise any defenses other than a broad assertion that it

refused to pay because the Broad and Kaufman suit may have

affected its obligation. In November 1980, Pharaon moved for

summary judgment on his cross-claim, In January 1981, a

week after the summary judgment response was due, First

Arabian filed a motion to dismiss the cross-claim for lack of

jurisdiction, Also, First Arabian made a motion to amend its

answer to the cross-claim in order to assert an affirmative

defense. All of the motions regarding the cross-claim were

argued in October 1981. At this time, only the cross-claim was

in issue because all other claims had been settled. The district

court denied both of First Arabian’s motions and granted

Pharaon's motion for summary judgment,

On appeal, First Arabian initially contends that the district

court erred in finding that it had ancillary jurisdiction over the

cross-claim. The parties agree that if Pharaon’s cross-claim

Order 3a

satisfied Rule 13(g) of the Federal Rules of Civil Procedure.

the distriet court properly asserted ancillary jurisdiction over

the claim. See Coleman v. Casey Cou nty Bd. of Education, 686

F.2d 428, 430 (6th Cir, 1982), Rule 13(2) provides in part that

“A pleading may state as a cross-claim any claim by one party

against a co-party arising out of the transaction or occurrence

that is the subject matter either of the original action or of at

counterclaim therein or relating to any property that is the

subject matter of the original action ...."

First Arabian contends that the cross-claim was only col-

laterally related to the original action and thus did not arise

out of the same transaction or occurrence. Under First

Arabian’s analysis, the cross-claim is a simple contract action

which has no connection with the original claim except that

both involve BOC stock. First Arabian further asserts that no

proof essential to one claim is also required to prove the other,

We disagree,

This circuit follows the “logical relationship” test in applying

Rule 13(g). Lasa Per L'Industrial Del Marmo Societa Per

Azioni of Lasa, Italy v. Alerander, 414 F.2d 143, 147 (6th Cir.

1969), In this case, we agree with the distriet court's conclusion

that there was a logical relationship between the cross-claim

and the original claim made by Broad and Kaufman. Both

claims involved BOC stock and the sale of that stock by

Pharaon to First Arabian was involved in both claims. The

same factual background was necessary to resolve both claims,

Finally, we note that First Arabian's sole defense to the cross-

claim involved the original suit. Under these circumstances.

the district court properly asserted ancillary jurisdiction over

the cross-claim.

First Arabian's second argument on appeal is that the

district court erred in denying its motion to amend its answer

to the counterclaim. It is undisputed that Pharaon’s summary

Judgment motion was valid unless First Arabian’s motion to

amend its answer was allowed.

4a Order

In general, leave to amend should be granted unless allowing

the amendment would result in substantial prejudice to the

opposing party. Hageman v. Signal L.P. Gas, Inc., 486 F.2d 479,

484 (6th Cir. 1973). “Delay by itself is not sufficient reason to

deny a motion to amend.” Jd. One basis for denving a motion

for leave to amend is that the new defense proposed in the

amendment is frivolous or based on legally insufficient grounds,

Banque de Depots v. National Bank of Detroit, 491 F.2d 753.

TAT (6th Cir, 1974).

The district court found that allowing the amendment would

prejudice Pharaon due to having to defend against a legally

doubtful defense after a substantial delay, We agree. First

Arabian’s new defense was that Pharaon had defrauded it by

withholding information as to the financial condition of the

BOC. It contends that such information should have been

disclosed in early 1976 when Pharaon orally agreed to sell the

stock. However, by the time that the sale was officially closed

in early 1977, First Arabian controlled the BOC and clearly

had access to all financial information. Furthermore. we note

that First Arabian did not raise this defense until 1981, long

after it knew or should have known of Pharaon’s alleged

fraud. We find that the district court did not abuse its discretion

in denving leave to amend.

Accordingly, the district court's judgment is AFFIRMED.

ENTERED BY ORDER OF THE COURT

‘s/ John P. Heleman

Clerk

Memorandum and Order Denying 5a

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

ELI BROAD and DONALD

KAUFMAN

Plaintiff,

v CIVIL ACTION

No. 77-72757

JAMES T. BARNES, SR, JAMES T.

BARNES. JR. GHAITH R.

PHARAON, and THE FIRST

ARABIAN CORPORATION, S.A.,,

jointly and severally,

Defendant.

MEMORANDUM AND ORDER

DENYING CROSS DEFENDANT FIRST ARABIAN'S

MOTION FOR REHEARING

Cross-defendant First Arabian’s motion for rehearing of

this Court's denial of its motion to amend its answer and the

grant of cross-plaintiff Ghaith Pharaon’s motion for summary

judgment came on to be heard on Mareh 5, 1982.

It appears that there is no good reason to alter this Court's

order of November 10, 1981. Therefore cross-defendant First

Arabian’s motion for rehearing must be denied.

Documents in the possession of First Arabian contained

obvious information as to the financial status of the Bank of

the Commonwealth. Thus, prior to the closing in January

1977, and prior to the execution of a new stock purchase

agreement in November 1976, First Arabian had sufficient

information as to the condition of the Bank.

In choosing to complete the transaction, First Arabian

waived any objections it may have had as to the nature of its

6a Memorandum and Order Denying

dealings with Pharaon in late December 1975 or early January

1976. First Arabian clearly had access to the Board of the

Bank of the Commonwealth, and First Arabian placed its

nominee on the Board weil in advance of the closing in

January 1977, First Arabian’s amended answer is therefore of

doubtful legal sufficiency,

This Court is persuaded that First Arabian's motion to

amend its answer was properly denied. In seeking amendment,

First Arabian sought to establish a fraud or misrepresentation

defense to Pharaon’s summary judgment motion, The Court

finds the prayed-for amendment of doubtful legal sufficiency,

and further finds that amendment at this late date would

cause cross-plaintiff Pharaon substantial prejudice, and ma-

terially delay the ultimate resolution of this case. Foman vy.

Davis, 371 U.S. 178, 9 L.Ed. 2d 222 (1962),

For all of the aforementioned reasons, IT IS ORDERED

that the motion for rehearing be, and the same hereby is,

DENIED.

HORACE W. GILMORE

United States District Judge

DATED: March 9, 1982

(A True Copy)

Clerk, U.S. District Court

Fastern District of Michigan

By: /s/

Deputy Clerk

Letter Denying Motion la

UNITED STATES DISTRICT COURT

FOR THE EASTERN DISTRICT OF MICHIGAN

802 U.S, COURTHOUSE

DETROIT, MICHIGAN 48296

December 7, 198]

Chambers of

HORACE W. GILMORE

District Judge

Noel A. Gage, Esq, Brian Sullivan, Esq.

Carl J. Marlinga, Esq. 100 Renaissance Center

3000 Town Center, Suite 1500 35th Floor

Southfield, MI 48075 Detroit, MT 48243

Robert L. Wevhing, Esq. Wolfgang Hoppe, Esq,

100 Renaissance Center 2500 Detroit Bank & Trust Building

34th Floor Detroit, MI 48226

Detroit, MI 48243

Re; Broad and Kaufman v. Barnes, et al,

Civil Action No, 77-72757

Gentlemen:

Defendant First Arabian's motion for reconsideration of its

motion to dismiss for lack of jurisdiction has heen considered,

The motion for reconsideration is denied,

Yours very sincerely,

‘s/ HORACE W, GILMORE

United States District Judge

HWGimp

Ra Final Judgment and Order

(Title of Court and Cause)

FINAL JUDGMENT AND ORDER GRANTING

PHARAON’S MOTION FOR SUMMARY JUDGMENT

At a session of said Court, held in the Federal

Building, in the City of Detroit, County of Wayne, on

November 10, 1981,

PRESENT: The Honorable Horace W. Gilmore, U.S.

District Judge.

Defendant Ghaith R. Pharaon, having filed his Motion for

Summary Judgment dated November 20, 1980, and

The Court having reviewed the briefs filed by the parties,

and

The Court having heard oral arguments on the motion on

October 22, 1981,

NOW THEREFORE, IT [8S HEREBY ORDERED that

the Motion for Summary Judgment be, and it hereby is

granted,

IT IS FURTHER ORDERED that final judgment is

hereby entered in favor of Defendant PHARAON and against

Defendant THE FIRST ARABIAN CORPORATION, S.A.

in the amount of $854,913 (consisting of $750,000 and statutory

interest thereon from February 13, 1980 to May 31, 1981 in the

amount of $104,913) plus statutory interest thereon at the rate

of 12% per vear, compounded annually, from June 1, 1981

until the judgment is paid,

s/ HORACE W. GILMORE

U.S, District Judge

APPROVED AS TO FORM ONLY:

‘s/ CARL J. MARLINGA

(A True Copy)

Clerk, U.S, Distriet Court

Eastern District of Michigan

BY: /s

Deputy Clerk

Order 9%

(Title of Court and Cause)

ORDER DENYING FIRST

ARABIAN’S MOTION TO DISMISS

At a session of said Court, held in the Federal

Building, in the City of Detroit, County of Wayne, on

November 12, 1981,

PRESENT: The Honorable Horace W. Gilmore, U.S,

District Judge.

Defendant The First Arabian Corporation, having filed its

motion, entitled “Motion of Cross-Defendant, The First Arabian

Corporation, S.A. To Dismiss The First Cross-Claim Of

Defendant Ghaith Pharaon For Lack Of Subject Matter Jur-

isdiction” dated January 5, 1981, and

The Court having reviewed the briefs filed by the parties,

and

The Court having heard oral arguments on the motion on

October 22, 1981,

NOW THEREFORE, IT IS HEREBY ORDERED that

the Motion To Dismiss be, and hereby is denied.

‘ss’ HORACE W. GILMORE

US. District Judge

APPROVED AS TO FORM ONLY:

s/ CARL J. MARLINGA

(A True Copy)

Clerk, U.S, Distriet Court

Eastern District of Michigan

BY: /s/

Deputy Clerk

Oa Orde r

(Tithe of Court and Cause)

ORDER DENYING FIRST ARABIAN'S

MOTION FOR LEAVE TO AMEND

At a session of said Court, held in the Federal

Building, in the City of Detroit, County of Wayne, on

November 12, 1981,

PRESENT: The Honorable Horace W. Gilmore, U.S,

District Judge.

Defendant The First Arabian Corporation, having filed its

motion entitled “Motion To Permit The First Arabian Corpo-

ration, S.A. To File First Amended Answer And Cross-Claim”

dated January 6, 1981, and

The Court having reviewed the briefs filed by the parties,

and

The Court having heard oral arguments on the motion on

October 22, 1981,

NOW THEREFORE, IT IS HEREBY ORDERED that

the Motion For Leave To Amend be, and it hereby is denied.

‘'s/ HORACE W. GILMORE

U.S. District Judge

APPROVED AS TO FORM ONLY:

s/ CARL J. MARLINGA

(A True Copy)

Clerk, U.S. District Court

Eastern District of Michigan

BY: 's

Deputy Clerk

Tran script lla

(Title of Court and Cause)

BEFORE THE HONORABLE HORACE W. GILMORE

Detroit, Michigan — Thursday, October 22, 198]

APPEARANCES:

Mr. Wolfgang Hoppe

Appearing on behalf of the Defendant Pharaon

Mr. Car] Marlinga

Appearing on behalf of the Defendant The First Arabian

Corporation

REPORTED BY;

Elizabeth A. Higdon

Official Court Reporter

(Tr-2)

Detroit, Michigan

Thursday, October 22, 198]

THE COURT: Broad versus Barnes.

MR. MARLINGA: For the record, my name is Car] Marlinga

from the firm of Bushnell, Gage, Doctoroff, Reizen & Byington.

As an introductory matter, I believe there are three motions

before the Court,

THE COURT: The Plaintiff has filed a motion for summary

Judgment, vou have filed a motion to amend vour Answer, and

you filed a motion to dismiss for lack of jurisdiction.

MR. MARLINGA: That is correct, your Honor.

THE COURT; Let's take any one vou want to. It’s been a

long day, Please remember that as you argue,

MR. MARLINGA: Mr. Hoppe suggested that we take the

jurisdictional motion first since that might dispose —

THE COURT; (Interposing) That's his motion,

MR. MARLINGA: Oh, excuse me. We are both Defendants

in the original action,

(Tr-3)

THE COURT: I know that. Who do vou represent?

MR. MARLINGA: First Arabian.

12a Transeript

THE COURT: You represent First Arabian. I am sorry,

Mr. Hoppe represents Pharaon, right?

MR. HOPPE: That is correct, vour Honor,

THE COURT: I want to be sure who is who.

Go ahead. You have got two motions, vou have got the

motion to dismiss and leave to amend.

MR. MARLINGA: On the jurisdictional matter, the situation

before the Court is that vou have a citizen of Saudi Arabia as a

cross-plaintiff as a Defendant.

THE COURT: The original case was gone and we have this

ancillary proceeding between vou and Pharaon. What vou are

saving is the original case having been disposed of, I should

dump this one.

MR. MARLINGA: That is exactly it, and T was just going

to point out —

THE COURT: (Interposing) Why should I dump it? Some-

one is going to start it all over again. It is going to be litigaged.

(Tr-4)

MR. MARLINGA: Well, it ought to be litigated in a Court

that has jurisdiction over the matter.

THE COURT: Why don't I have jurisdiction, having juris-

diction over the original cause of action?

MR. MARLINGA: It is a Federal Court having limited

jurisdiction, and there is no federal claim being asserted. The

claims that were originally asserted were proper if ancillary to

that cause of action,

THE COURT: It was ancillary to it, wasn’t it?

MR. MARLINGA: Yes, but the claims were permissive in

that they were not necessarily tied up with a determination of

the original suit by Broad and Kaufman against Barnes.

THE COURT: How do you deal with — I hate to keep

interrupting vou; I want to zero right in — how do vou deal

with what Moore's says, pretty good authority,

“In the compulsory counterclaim cases, however,

where the original bill was dismissed on the merits or

Transeript 13a

the opposing party did not proceed to hearing on his

bill, jurisdiction over the counterclaim was sustained

even though independent jurisdictional facts did not exist

for its support. These same principles should apply te

sustain jurisdiction over the cross claim under similar

circumstances, even though the cross claim is permissive,

since there is jurisdiction over the main action and the

cross claim is auxiliary or related to the main action.

The question should be considered one of discretionary

pendent jurisdiction.”

MR. MARLINGA: Okay.

THE COURT: That is pretty good authority, isn't it?

MR. MARLINGA: That is mght, your Honor, so we get

down to an exercise of discretion, and that is the point that we

rely on.

THE COURT: Why should I exercise my discretion to

throw Mr. Hoppe out?

MR. MARLINGA: Because this matter could be litigaged

in anv State Court. Most importantly, it might even be more

proper to be litigated in a Court in Luxembourg or Saudi

Arabia because you have two people that are strangers to the

State of Michigan in this Court.

THE COURT: I was going to say you could say any State

Court. If this matter were — if he started a suit against you in

Wayne County Cireuit Court, I think vou would be in there

(Tr-6)

screaming he had no jurisdiction over you, wouldn't you? Not

screaming. I realize, but you wold be arguing that they had no

jurisdiction.

MR. MARLINGA: We could take that position, your Honor,

but Wayne County is not the premiere Court in the entire

world to try a case.

THE COURT: How about the Supreme Court of New

York or the Common Pleas Court of Ohio? You name your

l4a Transcript

state. Anyplace you go into vou are going to say no jurisdiction,

aren't vou?

MR. MARLINGA: No, your Honor. I would think that

jurisdiction would exist in any Court of proper jurisdiction in

Luxembourg or in Jeddah, Saudi Arabia, where the contract

was negotiated and entered into. There are plenty of places.

THE COURT: I believe there is jurisdiction properly in

Luxembourg or Saudi Arabia, but why should I exercise my

discretion now? Why should I say to Mr. Hoppe. “Go to Saudi

Arabia and file your lawsuit?”

MR. MARLINGA: Because you are not telling Mr. Hoppe,

you are telling Dr. Pharaon, who is a resident of Saudi Arabia.

It is a breach of contract action, When we get into this, it may

be that the law of Saudi Arabia should apply to this

(Tr-7)

transaction because of where it was negotiated,

THE COURT: Perhaps we would all learn a little bit about

the law of Saudi Arabia.

MR. MARLINGA; What better place to apply the law of

Saudi Arabia than in Jeddah, Saudi Arabia, or in Luxembourg.

That is basically our argument, your Honor.

The case started out in California. It was brought here

because of the other parties in the lawsuit. Now all that is

shaken out. You are left with people who are strangers to the

State of Michigan. Mr. Hoppe and I both benefit from litigating

the matter here because it is business to us, but aside from

that, there is no real contact with Michigan. Pharaon is a

citizen of Saudi Arabia; First Arabian Corporation certainly

has offices in Saudi Arabia; Luxembourg is closer to where

Pharaon lives than the State of Michigan. The State of Michi-

gan and the Federal Court sitting in Michigan just is really too

far removed from where this matter really ought be be litigaged,

especially when you get into the question of laws, which is

necessarily going to have to come up if this matter is litigaged.

THE COURT: You may have to have some translators

Tran seript

(Tr-8)

here,

MR. MARLINGA: That is right. Why shouldn't we then,

in the exercise of discretion, have it in a place where we don't

need translators?

THE COURT: Before we go to the other two motions, let's

here [sic] what Mr. Hoppe has to sav on this. If T grant this

one, I don't have to rule on the other two,

MR. HOPPE: Well, your Honor, T am surprised to hear

Mr. Marlinga even suggest about foreign law, and I think we

should be clear, both the Court and all the parties, on what we

are talking about. We are talking about a purchase agreement

of the controlling stock of the Bank of the Commonwealth.

This is what we are talking about. Our client, Mr. Pharaon.

sold Bank of the Commonwealth stock under a very simple

agreement drafted in the United States, attached as Exhibit A

to our motion for summary judgment, which is called stock

purchase agreement. It says we hereby sell you the stock of

the Bank of the Commonwealth in Detroit, Michigan, and vou

agree to pay, Everybody signed it, and then they paid & million

some dollars in accordance with this purchase agreement, but

refused to pay the last 750 slug. That's it.

THE COURT: You are suing for 750?

(Tr-9)

MR. HOPPE: Right.

Your Honor, I respectfully submit that what we are really talking

about here, or at least we believe what we are talking about

here, is that everyday that goes by, First Arabian is saving

about 200 in the differential in the interest rate because we are

only entitled to 12 per cent on the &750,000, There is no

defense to this.

THE COURT: This case is kind of old too, isn't it?

MR. HOPPE: Yes, vour Honor, and you know the prime

rate is 18 or 20, and so that is a difference of 8 or 6 per cent

per vear on $750,000, The more delay ean occur, the better off

16a Transcript

First Arabian is. That is our perception of it.

THE COURT: Anything else?

MR. HOPPE: Well, vour Honor, it seems to me it is

perfectly clear that the Court has jurisdiction, and it would be

an injustice —

THE COURT: (Interposing) He agrees T have jurisdiction.

I think Moore quotes the state of the law,

MR. HOPPE: Yes, vour Honor.

THE COURT: Do vou have anything more?

(Tr-10)

MR. HOPPE: Not on the jurisdictional point.

THE COURT: Then IT want to, if T deny this motion to

dismiss for lack of jurisdiction, which T am going to do, then

he has got another motion to amend, which T will hear, and

then we will hear your summary judgment, but let me give

just a very brief opinion.

Tam going to deny the motion to dismiss because T do think

as Moore points out, at the present posture, this is discretionary

pendent jurisdiction, and the original case clearly was — there

was jurisdiction in the United States Distriet Court for the

Eastern District of Michigan. The whole main case has been

settled and what is left is this cross claim between the two

parties here, I] think there is no basis that IT can think of to

exercise my discretion to throw them out, throw the Plaintiffs

out at this point,

Obviously, as pointed out by T think implicitly, if not

explicitly in argument, if the Plaintiff started suit in any State

Court in the United States of America, the Defendant would

he moving to dismiss, and properly so, and the case would have

to be litigated in the Courts of Saudi Arabia or maybe in

Luxembourg, Tam not sure, but anyway, we are here, it has

(Tr-11)

heen here for four vears, itis properly here, it is diseretionary

pendent jurisdiction, soit will remain. T will deny the motion

to dismiss.

Stipulation and Partial Order 17a

All right. Mr. Marlinga. you want to amend vour Answer

now that T kept the case here.

(Title of Court and Cause)

PARTIAL ORDER OF DISMISSAT,

At a session of said Court, held in the Federal

Building, in the City of Detroit, County of Wayne,

State of Michigan this 9th day of July, 198),

PRESENT: Honorable Horace W. Gilmore. Distriet

Judge,

Upon the consent of the parties, by their respective attorneys,

and upon the records of this Court, and the Court being fully

advised in the premises:

IT IS HEREBY ORDERED that Plaintiffs’ Complaint

filed in this action, he and the same is, hereby dismissed with

prejudice and without costs to any party; however, the eross-

claims of Ghaith R. Pharaon against The First Arabian Corpo-

ration, S.A. are not hereby dismissed, and the Court shall retain

Jurisdiction of this case. Which case shall remain on the

Court's docket in order to adjudicate all claims or cross-claims,

HORACE W. GILMORE

Distriet Judge

(A True Copy)

Clerk, U.S. Distriet Court

Eastern District of Michigan

By: /s

Deputy Clerk

18a Stipulation and Partial Order

STIPULATION

IT IS HEREBY STIPULATED AND AGREED by and

among the parties hereto, by their respective attorneys, that

the above Order be entered

Clark, Klein & Beaumont

By: s

1600 First Federal Building

Detroit, Michigan 48226

Attorneys for Plaintiffs

Dated:

Dykema, Gossett, Spencer, Goodnow & Trigg

By: /s

400 Renaissance Center

Detroit, Michigan 48243

Attorneys for Defendants and Cross- Defendants

Estate of James T. Barnes, Sr. and James T. Barnes, Jr.

Dated:

Miller, Canfield, Paddock & Stone

By: ‘s/

9500 Detroit Bank & Trust Building

Detroit, Michigan 48226

Attorneys for Defendant and Cross-Plaintiff Ghaith R. Pharaon

Dated:

Bushnell, Gage, Doctoroff, Reizen & Byington

By: /s

3000 Town Center Building

Suite 1500

Southfield, Michigan 48075

Attorneys for Defendant and Cross-Defendant

The First Arabian Corporation, S.A.

Dated:

Order 19a

(Title of Court and Cause)

ORDER GRANTING DEFENDANT GHAITH R.

PHARAON’S MOTION FOR LEAVE TO FILE

SUPPLEMENTAL AND AMENDED PLEADINGS

At a session of said Court, held in the Federal

Building, Detroit, Michigan on March 18, 1980,

PRESENT: Honorable Horace W. Gilmore, District

Judge.

Upon Motion of Defendant, Ghaith R. Pharaon, for Leave to

File Supplemental and Amended Pleadings, and the Court

being advised that there is no opposition to the Motion:

IT IS ORDERED, that Defendant Ghaith R. Pharaon’s

Motion for Leave to File Supplemental and Amended Pleadings

be and the same hereby is granted.

HORACE W. GILMORE

District Judge

(A True Copy)

Clerk, U.S. District Court

Eastern District of Michigan

By: /s/ Anice Micallef

Deputy Clerk

20a Orde r

No, 82-1209

UNITD STATES COURT OF APPEALS

FOR THE SIXTH CIRCUIT

ELI BROAD and DONALD KAUFMAN,

Plaintiffs,

VS,

JAMES T. BARNES, SR. et al.

Defendants,

GHAITH R. PHARAON,

Defendant,

Cross Plaintiff,

Appellee.

V8,

THE FIRST ARABIAN CORPORATION

Defendant,

Cross Defendant,

Appellant.

ORDER

(Filed June 3, 1983)

Before: MARTIN and CONTIE, Circuit Judges; and

PHILLIPS, Senior Circuit Judge.

Before the court is the appellant's motion for rehearing.

Upon consideration, we find no cause for rehearing and the

motion is hereby DENIED,

ENTERED BY ORDER OF THE COURT

s/ John P. Hehman

Clerk

John P. Hehman, Clerk

(Title of Court and Cause)

ORDER STAYING MANDATE

(Filed June 22, 1983)

ORDERED, That motion to stay mandate herein pending

application to the Supreme Court for writ of certiorari is

Respondent's Motion Ya

hereby granted and the mandate is stayed for thirty days from

this date; provided that, if within such thirty days, the applicant

shall file with the Clerk of this Court the certificate of the

Clerk of the Supreme Court that the certiorari petition, record,

and brief have been filed, the stay shall continue until the final

disposition of the case by the Supreme Court. Unless this

condition is complied with within such thirty days or any

extension thereof made by the Court or any judge thereof, or if

the condition is complied with, then upon the filing of copy of

an order denying the writ applied for, the mandate shall issue.

ENTERED BY ORDER OF THE COURT

s/ John P. Hehman

Clerk

UNITED STATES DISTRICT COURT

EASTERN DISTRICT OF MICHIGAN

SOUTHERN DIVISION

ELI BROAD and

DONALD KAUFMAN,

Plaintiffs,

¥. No. 7177-72757

JAMES T. BARNES, SR. JAMES

T. BARNES. JR. GHAITH R. Hon. Phillip Pratt

PHARAON, and THE FIRST

ARABIAN CORPORATION, S.A.

Jointly and Severally,

Defendants,

MOTION FOR LEAVE TO FILE SUPPLEMENTAL

AND AMENDED PLEADINGS

Defendant Ghaith R. Pharaon moves the Court for an order

granting him leave to file a Supplemental and Amended Ong-

inal Answer and Cross-Claim, pursuant to rules 13(g), 15(a)

and 15(d) of the Federal Rules of Civil Procedure, on the

Re sponde nt’s Motion

22a

grounds that since plaintiff filed his Original Complaint new

events have occurred that are material to this action, as is

more fully shown in a copy of the proposed Supplemental

First Amended Original Answer and Cross-Claim and defend-

ant’s memorandum in Support of its Motion for Leave to File

Supplemental and Amended Pleadings, which are attached

hereto.

On February 11, 1980, counsel for defendant Pharaon con-

ferred with counsel for co-defendants First Arabian Corporation

and James T. Barnes, Jr. and the estate of James T. Barnes,

Sr. as well as counsel for the plaintiffs. Counsel for the

plaintiffs do not oppose this Motion. Counsel for the Barnes do

not oppose this Motion. Counsel for First Arabian Corporation

opposes the Motion,

MILLER, CANFIELD, PADDOCK and

STONE

By: /s/ RICHARD B. GUSHEE (P-14474)

And /s/ WOLFGANG HOPPE (P-15117)

2500 Detroit Bank & Trust Building

Detroit, Michigan 48226

Telephone: (313) 963-6420

Attorneys for Defendnat Ghaith R. Pharaon

Of Counsel:

Scott, Douglass & Keeton

2526 One Houston Center

Houston, Texas 77002

Dated: February 13, 1980

CROSS-CLAIMS

First Cross-Claim Against First Arabian

This is an action for breach of contract.

1. On November 12, 1976, Pharaon and defendant First

Arabian Corporation executed a stock purchase agreement by

which First Arabian bought all of Pharaon’s interest in the

Bank of Commonwealth. In connection with this purchase,

Re sponde nt's Motion I39

First Arabian agreed to “assume all obligations of Pharaon

under the Barnes Stock Agreement and under any agreement

relating to the Bank or ownership of the Subject Shares

entered into by Pharaon prior to the date of purchase with the

FDIC or any other state or federal regulatory authority.”

Further, First Arabian stated in this agreement, “{T]}t is

expressly agreed that... Pharaon is under no obligation to

continue to perform the conditions of the Barnes Stock Agree-

ment.” A copy of the stock purchase agreement is attached

hereto as Exhibit “A” and is incorporated herein for all

purposes,

5. [sic] Pharaon has fully perfi med all his obligations pursuant

to the stock purchase agreement with First Arabian. In fact.

in an agreement subsequent to the November 12, 1976 agreement,

First Arabian acknowledged Pharaon’s full performance, In

such agreement, First Arabian expressly stated, “Pharaon

performed all his obligations pursuant to the Barnes Stock

Agreement and received the Subject Shares free and clear of

all liens and encumbrances.” First Arabian further stated:

First Arabian hereby assumes the remaining obli-

gations of Pharaon under the Barnes Stock Agreement

and under any agreement relating to the Bank or

ownership of the Subject Shares entered in by Pharaon

prior to the date of purchase with the FDIC or any

other state or federal regulatory authority.

3 One of the obligations First Arabian agreed to assume

from Pharaon was Pharaon’s obligation, pursuant to his stock

purchase agreement with the Barnes, to pay the Barnes $750,000

on February 1, 1980 as the final payment for the stock pur-

chased by Pharaon from the Barnes and sold to First Arabian.

4. First Arabian has failed and refused to assume this obh-

gation to pay the Barnes #750,000, and such refusal const

tutes a breach of the stock purchase agreement het ween

Pharaon and First Arabian.

24a Respondent's Motion

5. As a result of First Arabian’s breach of its agreement,

Pharaon has become obligated to and has paid the Barnes

$750,000 for which he has not been reimbursed by First

Arabian.

Second Cross-Claim Against First Arabian

This is a claim for contractual indemnity and/or contribution.

6. Pharaon realleges and incorporates the allegations stated

in paragraphs 1-5 above of his Cross-Claims.

7. Pursuant to the terms of its stock purchase agreement

with Pharaon, First Arabian became obligated to assume all of

Pharaon’s obligations relating to the Bank of the Common-

wealth stock, including the obligations plaintiffs alleged are

owing to them, Accordingly, Pharaon is entitled to full in-

demnifieation or reimbursement from First Arabian for any

amount Pharaon may be found to be owing to. plaintiffs.

Further, Pharaon is entitled to recover from First Arabian all

its costs of suit, including reasonable attorneys’ fees expended

in defense of this suit,

8. Alternatively, if Pharaon should become liable to plain-

tiffs, and if he should have to pay any such amount to plain-

tiffs as the result of a judgment entered in this case or any

settlement of such claims, he is entitled to contribution from

First Arabian.

UNITES STATES DISTRICT COURT

CENTRAL DISTRICT OF CALIFORNIA

ELI BROAD and DONALD KAUFMAN,

Plaintiffs,

Vs,

JAMES T. BARNES. SR.

JAMES T. BARNES, JR.

GHAITH R. PHARAON, and THE FIRST

ARABIAN CORPORATION SA.

Jomtly and severally,

Defendatts.

Plaintiff's Original Complaint Oa

No, 77-2430-AAH

COMPLAINT FOR VIOLATION OF THE SECURI-

TIES EXCHANGE ACT OF 1934: FOR VIOLATION OF

THE CALIFORNIA CORPORATIONS CODE; FOR

BREACH OF CONTRACT; FOR CONSPIRACY TO IN-

DUCE BREACH OF CONTRACT; FOR CONVERSION,

FOR MONEY HAD AND RECEIVED.

(Filed June 30, 1977)

Eli Broad (“Broad”) and Donald Kaufman (“Kaufman”)

(hereinafter collectively referred to as “Plaintiffs”) allege as

follows:

PARTIES

1. Plaintiff Broad resides at 1 Oakmont Drive, Los Angeles,

California 90046, and has been a citizen of the State of Califor-

nia continuously since 1964.

2. Plaintiff Kaufman resides at 3100 Mandeville Canyon

Road, Los Angeles, California 90049, and has been a citizen of

the State of California continuously since 1964,

3. Defendants James T. Barnes, Sr. (“Barnes, Sr.”) and

James T. Barnes, Jr. (“Barnes, Jr.”) (hereinafter collectively

referred to as the “Barnes”) are citizens of the State of Michi-

gan, and have their offices at 300 First National Building,

Detroit, Michigan 48226,

4. Plaintiffs are informed and believe and thereupon allege

that Defendant Ghaith R. Pharaon (“Pharaon”) is a citizen

and resident of Saudi Arabia.

5. Plaintiffs are informed and believe and thereupon allege

that Defendant The First Arabian Corporation S.A. (“First

Arabian”) is a foreign corporation organized under the laws of

Luxembourg.

JURISDICTION AND VENUE

6. This Court has jurisdiction of and over the subject matter

of the First and Second Claims for Relief and of and over the

person of each of the Defendants by reason of the provisions

of Section 27 of the Seeurities Exchange Act of 1934 (the

Ga Plaintiff's Original Complaint

“Exchange Act"), 15 U.S.C. S7S8aa, in that said claims are based

upon and arise out of the conduct of Defendants in violation of

Sections 100b) and 14(a) of the Exchange Act. 15 U.S.C, §78j(b)

and 7Sn(a) (hereinafter “Section 100b)" and “Section 14(a)",

respectively) and Rule 10b-5, 17 CLF.R.240.10b-5 (hereinafter

“Rule 10b-5"), and Rule 14a-9, 17 CLF.R.240.14a-9 (hereinafter

“Rule 14a-9"), promulgated thereunder, Such conduct) was

effected by Defendants using the means and instrumentalities

of interstate transportation and commerce and of the mails.

7. This Court has pendent jurisdiction of the California

State claims stated herein.

8. The jurisdiction of this Court of and over this action and

of and over the person of each of the Defendants is also based

upon diversity of citizenship. Plaintiffs are citizens of the

State of California. The Barnes are citizens of the State of

Michigan. Pharaon is a citizen of Saudi Arabia. First Arabian

is a foreign corporation organized under the laws of Luxem-

hourg. The matter in controversy exceeds, exclusive of inter-

ests and costs, the sum of ten thousand dollars,

9, Many of the acts, practices, course of business and trans-

actions described herein, constituting violations of Sections

10(b) and 14(a) of the Exchange Act and Rules 10b-5 and 14a-9

and of California State law, have occurred within the Central

District of California.

COMMON ALLEGATIONS

10. Each of the Defendants is a controlling person of the

other and a controlling person of the Bank of the Common-

wealth, a Detroit, Michigan banking corporation (the “Bank”)

under Section 20 of the Exchange Act, 15 U.S.C. §78t.

11. In March 1972, Plaintiffs each owned 50,000 shares of

5.82 Cumulative Preferred Stock, par value $25 per share of

the Bank (the “Preferred Stock”). Their combined holdings of

100,000 shares (the “Broad and Kaufman Preferred Stock”)

represented approximately 32° of the total of 304,465 shares

of the Bank's outstanding Preferred Stock.

Plaintiff's Original Complaint Ta

12. Holders of Preferred Stock were entitled to cumulative

preferred dividends at the annual rate of 5,82 per share, pay-

able quarterly on the first days of March, June. September and

December of each vear (hereinafter sometimes referred to as

the “preferred dividend claim”),

13. On or about February 1972, Barnes, Jr. initiated negotia-

tions with Plaintiffs in Los Angeles County, California, to

purchase the Broad and Kaufman Preferred Stock.

14. On or about March 14, 1972, at Los Angeles County,

California, Broad entered into a written stock Purchase

Agreement with Barnes, Jr. for the sale of his Preferred Stock

to Barnes, Jr. on the terms and conditions therein set forth. A

true and correct copy of the Stock Purchase Agreement is at-

tached hereto as Exhibit A, and made a part hereof by refer-

ence as though fully set out at length herein.

15. On or about March 14, 1972, at Los Angeles County,

California, Kaufman entered into a written Stock Purchase

Agreement with Barnes, Jr. for the sale of his Preferred Stock

to Barnes, Jr. on terms and conditions identical to those of

Exhibit A hereto. (Broad's and Kaufman's Stock Purchase

Agreements are hereinafter collectively referred to as the

“Stock Purchase Agreements”),

16. Pursuant to the terms of the Stock Purchase Agree-

ments, Bares, Jr. agreed to pay to Broad and Kaufman each

the principal amount of $2,825,000, plus:

“3. (b) All cash dividends on the Preferred Stock

Which have not been paid prior to the date hereof and

all future cash dividends payable with respect to the

period from date hereof through June 30, 1973. plus

(¢) One-half (1/2) of all eash dividends payable

With respect to the Preferred Stock by its existing terms for

the period July 1, 1973 through January 31, 1977,

except that Buyer's obligation to pay the purchase

price, as herein defined, does not inelude an obligation

'o pay an amount measured by that portion of dividends

28a Plaintiff's Original Complaint

received by Buyer on Preferred Stock released to Buyer

from Escrow, to the extent that such dividends are paid

With respect to an acerual period subsequent to the date

of such release.”

17. In partial payment of the purchase price for the Broad

and Kaufman Preferred Stock, Barnes, Jr. delivered a letter of

credit to Broad and Kaufman each in the principal amount of

$500,000, The balance of the purchase price was to be paid as

follows:

(a) The joint and several promissory notes of the Barnes

payable to Broad and Kaufman, respectively, in the princi-

pal amount of $2,325,000; and,

(b) All cash dividends payable pursuant to paragraphs

3(b) and 3(¢) of the Stock Purchase Agreements imme-

diately upon payment by the Bank.

18, Pursuant to these terms, the Barnes executed promis-

sory notes dated June 30, 1973 payable to Broad and Kaufman.

respectively, at Los Angeles, California, whereby the Barnes

jointly and severally promised to pay to Broad and Kaufman

each the principal amount of $2,325,000. A true and correct

copy of the promissory note is attached hereto as part of

Exhibit A (Exhibit 1 thereto), and made a part hereof by ref-

erence as though fully set forth at length herein,

19, Plaintiffs are informed and believe and thereupon allege

that the Stock Purchase Agreements were assigned by Barnes,

Jr. to Barnes, Sr. on or about September 1972, and then re-

assigned by Barnes, Sr. to an entity controlled by the Barnes.

20. Plaintiffs are informed and believe and thereupon allege

that on or about February 3, 1975, the Barnes and/or an entity

controlled by them entered into an agreement (the “Agree-

ment”) with Pharaon wherein they agreed to sell to Pharaon

and Pharaon agreed to purchase the Barnes’ stock interest in

the Bank, including the Barnes’ interest in the Stock Pur-

chase Agreements and the Broad and Kaufman Preferred

Stock. Pursuant to said Agreement, Pharaon assumed the

Plaintiff's Original Complaint 29a

obligations owing to Broad and Kaufman under the Stock

Purchase Agreements,

21. By a letter dated April 19, 1976, Plaintiffs gave formal

notice to Pharaon of their continuing rights under the Stock

Purchase Agreements. A true and correct copy of said letter is

attached hereto as Exhibit B, and made a part hereof by refer-

ence as though fully set forth at length herein.

22. Pursuant to the Stock Purchase Agreements and the

promissory notes, the Broad and Kaufman Preferred Stock

Was deposited with an escrow agent in accordance with the

terms and conditions of written escrow agreements entered

into by and between Barnes, Jr. with Broad and Kaufman,

respectively, concurrently with the execution of the Stock

Purchase Agreements (the “Escrow Agreements”). A trie and

correct copy of the Escrow Agreement is attached hereto as

part of Exhibit A (Exhibit 2 thereto), and made a part hereof

by reference as though fully set forth at length herein.

23. Pursuant to the terms of the Stock Purchase Agree-

ments, the Escrow Agreements and the promissory notes,

Defendants made the following payments on the promissory

notes and the following number of shares of Broad and Kauf-

man Preferred Stock were released from escrow and assigned

and delivered to Defendants on the following dates:

Principal Shares

Date Amount Paid Conve yed

December 31,1975 First Installment Payment 45,000

$775,000

January 31,1976 — Second Installment Payment 27,500

875,000

January 31,1977 Third Installment Payment 27,500

$775,000

24. Beginning in 1972, dividends on the Preferred Stock

Were in arrears, and as of on or about June 30, 1976, arrearages

aggregated $9,745,924 ($32.01 per share). As a result of such

dividend arrearages, since 1972 the shareholders of the Pre-

20a Plaintiff's Original Complaint

ferred Stock were entitled under the Bank's Articles of Incor-

poration to elect a majority of the Board of Directors of the

Bank and the holders of the Common Stock of the Bank were

entitled to elect the remaining members of the Board of

Directors.

25. The Barnes’ acquisition of the Broad and Kaufman Pre-

ferred Stock and their contemporaneous acquisition of 1,780,435

shares of Common Stock representing 39° of the Bank's out-

standing Common Stock and 65,000 shares of Preferred Stock

representing 21% of the Bank's outstanding Preferred Stock

gave the Barnes possession, directly and/or indirectly, of the

power to direct or cause the direction of the management and

policies of the Bank from at or about March 1972.

26. From at or about March 1972 through 1976, the Barnes

were members of the Board of Directors of the Bank. Barnes,

Sr. was a member of the Executive Committee of the Board of

Directors. By virtue of their positions and their stock holdings,

the Barnes exercised the power to direct the Bank's operations

and affairs.

27. As aresult of the Agreement by and between the Barnes

and Pharaon, from at or about February 1975, Pharaon was

the beneficial owner of and had the right to vote 1,424,348

shares (31%) of the Common Stock of the Bank and 165,000

shares (54%) of the Preferred Stock of the Bank. By virtue of

such stock holdings, Pharaon possessed, directly and/or indi-

rectly, the power to direct or cause the direction of the man-

agement and policies of the Bank, and through his nominees

on the Board of Directors of the Bank and as a controlling

shareholder in the Bank, Pharaon exercized [sic] the power to

direct the Bank's operations and affairs.

FIRST CLAIM FOR RELIEF

(Violation By Defendants of Section 10(b) of the

Exchange Act and Rule 10b-5)

28. Plaintiffs reallege and incorporate herein by reference as

Plaintiff's Original Complaint 31a

though fully set forth each and every allegation of Paragraphs

I through 27 of this Complaint,

29, At all times complained of herein, Defendants possessed,

directly and/or indirectly, the power to direct or cause the

direction of the management and policies of the Bank and

exercised this power to completely direct the Bank's opera.

tions and affairs,

30, In effecting the unlawful eonduet complained of here.

inafter, Defendants acted knowingly, intentionally, purpose-

fully or willfully and did so act in concert and in conspiracy

with each other,

31, The Barnes induced Plaintiffs to enter into the Stock

Purchase Agreements by offering and agreeing to pay as part

of the purchase price for the Broad and Kaufman Preferred

Stock the amounts set forth in paragraphs 3(b) and (¢) of the

Stock Purchase Agreements in consideration of the preferred

dividend claim of the Broad and Kaufman Preferred Stock,

32. Plaintiffs agreed to sell the Broad and Kaufman Pre.

ferred Stock to the Barnes in. reliance upon the Barnes’

representation and covenant that, inter alia:

(a) "8. (c) Neither Buyer [Barnes, Jr, and his succes.

sors or assigns, Barnes, Sr. and Pharaon]* nor any per-

son or entity controlled by Buyer will cause or permit

any adverse change in existing dividend rights of the

Preferred Stock without Seller's [Broad or Kaufman,

respectively]* written consent,”

*Brackets added,

(b) “10, Assignment; succession. The rights and obli-

gations of Seller hereunder shall inure to and oblige

Seller, his suecessors and assigns, The rights and obli-

gations of Buyer hereunder shall inure to and oblige

Buyer, his successors and assigns, except that no

assignment of Buyer's obligation shall be made by

Buyer without the prior written consent of Seller,

Which shall not be unreasonably refused,”

2% Plaintiff's Original Complaint

33, By virtue of the Agreement between the Barnes and

Pharaon, the obligations owing to Broad and Kaufman under

the Stock Purchase Agreement were assumed by Pharaon as

successor and/or assignee thereto,

34. At all times complained of herein, the Stock Purchase

Agreements were executory contracts for the sale or exchange

of securities, in that Defendants’ covenant not to cause or

permit any adverse change in the existing dividend rights of

the Preferred Stock set forth at paragraphs 8(c) and 10 of the

Stock Purchase Agreements was a continuing covenant and

representation of the Defendants.

35. The staggered release from escrow and the assignment

and delivery to Defendants of the Broad and Kaufman Pre-

ferred Stock upon payment of each principal installment on

the promissory notes, constituted a continuing sale or exchange

of the Broad and Kaufman Preferred Stock,

36, On or about June 30, 1976, the preferred dividend claim

of the Broad and Kaufman Preferred Stock amounted to

approximately $3,201,000 and the liquidation preference right

of the Broad and Kaufman Preferred Stock amounted to

approximately $10,000,000, Pursuant to paragraphs 3(b) and

(c) of the Stock Purchase Agreements, Defendants had agreed

to pay and/or cause to be paid by the Bank to Broad and

Kaufman approximately 71% of the preferred dividend claim

of the Broad and Kaufman Preferred Stock. On or about June

30,1975, such obligation amounted to approximately $2,262,500,

37, Plaintiffs are informed and believe and thereupon allege

that during 1976 Defendants devised and carried out a plan,

scheme, practice and course of business which operated as a

fraud and deceit upon the Plaintiffs as follows:

(a) Defendants entered into an agreement with the

Federal Deposit Insurance Corporation (the “FDIC")

and caused the Bank to enter into this agreement with

the FDIC, whereby the entire capitalization of the

Bank would be restructured (the “recapitalization plan”),

Plaintiff's Original Complaint 33a

(b) Defendants caused the recapitalization plan to be

recommended and proposed to the FDIC, the Board of

Directofs of the Bank and the shareholders of the

Bank, and secured the adoption of the recapitalization

plan under the pretext that the recapitalization plan

presented the sole alternative available to the Bank for

repayment of certain notes to the FDIC (the “FDIC

Notes”) and for the infusion of additional equity capital

to the Bank.

(c) The effect of the recapitalization plan and the

primary objective of Defendants’ scheme to recapitalize

the Bank was to increase Pharaon's controlling interest

and equity position in the Bank and increase the

revenues and security available to the Barnes.

(d) In order to accomplish these objectives, the recap-

italization plan:

(i) extinguished the preferred dividend claim of the

Preferred Stock;

(ii) converted the existing two classes of capital

stock of the Bank into a single class of New Common

Stock on the basis of five shares of New Common Stock

for each then outstanding share of Preferred Stock and

one share of New Common Stock for each ten then

outstanding shares of Common Stock; and,

(iii) provided for the sale of 2,500,000 additional

shares of New Common Stock at a price of $4.00 per

share to First Arabian.

(e) By virtue of the adoption of the recapitalization

plan, Pharaon through his affiliated entity First Arabian

was able to acquire 77.4% of the shares of New Com-

mon Stock outstanding of the Bank and the Barnes

received payment in respect of their Agreement with

Pharaon,

38. Plaintiffs had sold their Broad and Kaufman Preferred

Stock to Defendants in reliance upon Defendants’ continuing

34a Plaintiff's Original Complaint

representations and covenant that they would not cause or

permit nor cause or permit any entity or person controlled by

them to cause or permit any adverse change in the existing

dividend rights of the Preferred Stock. Defendants knew that

said representations were false and intended that the aforesaid

unlawful acts would extinguish the rights of these Plaintiffs

to receive payment in respect of the preferred dividend claim

on the Broad and Kaufman Preferred Stock without any com-

pensation therefor being paid to these Plaintiffs,

39, By engaging in the aforesaid transactions and activities,

Defendants have each individually and in knowing concert and

conspiracy violated, or knowingly and materially aided the vio-

lation of Section 10(b) of the Exchange Act and Rule 10b-5 as

follows;

(a) By intentionally or knowingly emploving schemes,

devices, and artifices to defraud Plaintiffs:

(b) By intentionally or knowingly making untrue

statements of material facts and omitting to state mate-

rial facts necessary in order to make the statements

made, in the light of the cireumstances under which

they were made, not misleading:

(c) By intentionally or knowingly engaging in acts,

practices, and courses of business which have operated

as a fraud and deceit upon Plaintiffs.

40. In effecting the aforesaid unlawful acts, Defendants

employed the United States mail to and from the State of Cali-

fornia and caused letters and proxy materials to be sent

through the mails to the Central District of California. and

made interstate telephone calls to the Central District of

California.

41, As a result of the aforesaid unlawful acts of Defendants

in Violation of Section 10(b) of the Exehange Act and Rule

10b-5, the preferred dividend claim of the Broad and Kaufman

Preferred Stock was extinguished and Plaintiffs’ rights to

such preferred dividend claim became and are now wholly

Plaintiff's Original Complaint 35a

without value and are utterly worthless and Plaintiffs have

been damaged in an amount in excess of $2,262,500,

SECOND CLAIM FOR RELIEF

(Violation By Defendants of Section

14(a) of the Exchange Act and Rule 14a-9)

42. Plaintiffs reallege and incorporate herein by reference as

though fully set forth each and every allegation of Paragraphs

1 through 27 of this Complaint and Paragraphs 29 through 40

of the First Claim for Relief to this Cornplaint.

43. The adoption of the recapitalization plan required the

affirmative vote of the shareholders of two-thirds of the out-

standing shares of Preferred Stock, voting as a separate class,

and the shareholders of two-thirds of the outstanding shares

of Common Stock, voting as a separate class.

44. As part of Defendants’ scheme to defraud and deceive

Plaintiffs and in order to secure the requisite affirmati, > vote

of the shareholders of the Bank, on or about November 12,

1976, Defendants caused the Bank to mail a proxy solicitation

to its shareholders,

45. At the time the proxy solicitation was made, Plaintiffs

owned of record 27,500 shares of Preferred Stock of the Bank.

46. Said proxy solicitation gave less than a full and fair dis-

closure and was false or misleading in that it contained

material misrepresentations and omitted material facts in that:

(a) The proxy statement failed to disclose that the

purpose and effect of the adoption of the recapitaliza-

tion plan was to increase Pharaon’s controlling interest

and equity position in the Bank, and increase the

revenue and security of the Barnes.

(b) The proxy statement failed to disclose that Pharaon

had caused First Arabian to expressly condition its

willingness to provide equity capital to the Bank upon

the approval of the recapitalization plan in order to

coerce the Bank and its shareholders into approving

the recapitalization plan.

36a

Plaintiff's Original Complaint

(c) The proxy statement failed to disclose that Pharaon

had conditioned his obligation to complete the Agree-

ment between the Barnes and Pharaon, including

Pharaon’s obligation to pay Barnes, upon the approval

of the recapitalization plan and that said condition

influenced or may have influenced management opin-

ions issued in connection with the recapitalization plan.

(d) The notice of meeting urged the shareholders to

adopt the recapitalization plan on the basis that disap-

proval of the recapitalization plan would block the

FDIC's assistance and jeopardize the Bank's future by

virtue of the purported fact that the Bank would have

been unable to repay the FDIC Notes on their maturity

date without terminating operations and liquidating the

assets of the Bank, but failed to disclose that the FDIC ~

had not advised the Bank that the FDIC would demand

payment or take any other action,

(e) The proxy statement failed to disclose that the

FDIC would have supported other reorganization alter-

natives other than the recapitalization plan.

(f) The proxy statement failed to disclose that De-

fendants’ actions were a breach of their Stock Purchase

Agreements with Plaintiffs.

47. As part of the scheme to defraud and deceive Plaintiffs,

Defendants have each individually and in knowing concert and

conspiracy violated, or knowingly and materially aided the vio-

lation of Section 14(a) of the Exchange Act and Rule 14a-9 by

causing the aforesaid proxy statement and notice of meeting to

contain statements which, at the time and in the light of the

circumstances under which they were made, were false and

misleading with respect to material facts, or which omitted to

state material facts necessary in order to make the statements

therein not false or misleading.

48. As a proximate result of the aforesaid unlawful acts of

Defendants, the preferred dividend claim of the Broad and

Plaintiff's Original Complaint 37a

Kaufman Stock was extinguished and Plaintiffs’ rights to

such preferred dividend claim became and are now wholly

without value and are utterly worthless and Plaintiffs have

been damaged in an amount in excess of $2,262,500,

THIRD CLAIM FOR RELIEF

(Violation By Defendants of California

Corporations Code Section 25401)

49. Plaintiffs reallege and incorporate herein by reference as

though fully set forth each and every allegation of Paragraphs

1 through 27 of this Complaint and Paragraphs 29 through 40

of the First Claim for Relief to this Complaint and Para-

graphs 43 through 47 of the Second Claim for Relief to this

Complaint.

50. By engaging in the aforesaid transaction and activities

described in the First and Second Claims for Relief, the

Defendants, each individually and in knowing concert and

conspiracy, have violated Section 25401 of the California Cor-

porations Code by offering to buy, or by buying, in this State

securities by means of written and oral communications which

included untrue statements of material facts and which omit-

ted to state material facts necessary in order to make the

statements made, in the light of the cireumstances under

which they were made, not misleading.

51, As a result of the aforesaid unlawful acts of Defendants,

the preferred dividend claim of the Broad and Kaufman Pre-

ferred Stock was extinguished and Plaintiffs’ rights to such

preferred dividend claim became and are now wholly without

value and are utterly worthless and Plaintiffs have been dam-

aged in an amount in excess of $2,262,500,

FOURTH CLAIM FOR RELIEF

(Against Defendants For Breach of Contract)

52. Plaintiffs reallege and incorporate herein by reference as

though fully set forth each and every allegation of Paragraphs

1 through 27 of this Complaint.

38a Plaintiff's Original Complaint

53. Pursuant to the Stoek Purchase Agreement, Barnes, Jr.

agreed to pay as part of the purchase price for the Broad and

Kaufman Preferred Stock the following amounts in considera-

tion of the preferred dividend claim of the Broad and Kaufman

Preferred Stock:

“3. (b) All cash dividends on the Preferred Stock

which have not been paid prior to the date hereof and

all further cash dividends payable with respect to the

period from date hereof through June 30, 1973, plus

(ec) One-half (1/2) of all cash dividends payable

with respect to the Preferred Stock by its existing terms for

the period July 1, 1973 through January 31, 1977,

except that Buyer's obligation to pay the purchase

price, as herein defined, does not include an obligation

to pay an amount measured by that portion of dividends

received by Buyer on Preferred Stock released to Buyer

from Escrow, to the extent that such dividends are paid

with respect to an accrual period subsequent to the date

of such release,

54. To protect Broad’s and Kaufman's preferred dividend

claim, Barnes, Jr. agreed as follows:

“8, (©) Neither Buyer nor any person or entity con-

trolled by Buyer will cause or permit any adverse

change in existing dividend rights of the Preferred

Stock without Seller's written consent.”

It was further agreed that:

“10, Assignment; Succession. The rights and obliga-

tions of Seller hereunder shall inure to and oblige Seller,

his suecessors and assigns. The rights and obligations

of Buyer hereunder shall inure to and oblige Buyer, his

successors and assigns, except that no assignment of

Buyer's obligation shall be made by Buyer without the

prior written consent of Seller, which shall not be

unreasonably refused.”

55. On or about June 30, 1976, the preferred dividend claim

Plaintiff's Original Complaint 39a

of the Broad and Kaufman Preferred Stock amounted to

approximately $3,201,000 and the liquidation preference right

of the Broad and Kaufman Preferred Stock amounted to

approximately $10,000,000, Pursuant to paragraphs 3(b) and

(e) of the Stoek Purchase Agreement, Defendants had agreed

to pay and/or cause to be paid by the Bank to Broad and

Kaufman approximately 71° of the preferred dividend claim

of the Broad and Kaufman Preferred Stock. On or about June

30, 1976, such obligation amounted to approximately $2,262,500,

56. Defendants initiated and/or developed and/or imple-

mented a recapitalization plan for the Bank which became

effective on or about December 20, 1976, and which plan

extinguished all dividend rights of the Preferred Stock with-

out Plaintiffs’ written consent,

57. Defendants by their acts thus caused and/or permitted

an adverse change in the existing dividend rights of the Pre-

ferred Stock in contravention of the specific prohibition of

Paragraphs &(¢) and 10 of the Stock Purchase Agreements,

58. As a result of said actions on the part of Defendants, the

rights of these Plaintiffs to receive payment in respect of the

preferred dividend claim on the Broad and Kaufman Preferred

Stock were extinguished without any compensation therefor

being paid to these Plaintiffs and Plaintiffs have been dam-

aged in an amount in excess of $2,262,500,

FIFTH CLAIM FOR RELIEF

(Against Defendants For Breach of Contract)

59. Plaintiffs reallege and incorporate herein by reference as

though fully set forth each and every allegation of Paragraphs

1 through 27 of this Complaint and Paragraphs 53 through 57

of the Fourth Claim for Relief to this Complaint.

60. Plaintiffs are informed and believe and thereupon allege

that the Agreement between the Barnes and Pharaon pur-

ported to sell to Pharaon all of the preferred dividend claim

which had accrued upon the Broad and Kaufman Preferred

40a Plaintiff's Original Complaint

Stock and contained no limitations restricting any efforts or

plans by Pharaon to alter or abrogate or extinguish Plaintiffs’

dividend rights relative to the Preferred Stock.

61. The conduct of the Barnes constitutes a breach of para-

graph &(c) of the Stock Purchase Agreements and, similarly

the conduct of Pharaon, as successor and/or assignee of the

Barnes pursuant to paragraph 10 thereof, also constitutes a

breach of the Stock Purchase Agreements.

62. As a result of said actions on the part of Defendants, the

rights of these Plaintiffs to receive payment in respect of the

preferred dividend claim on the Broad and Kaufman Preferred

Stock were extinguished without any compensation therefor

heing paid to these Plaintiffs and Plaintiffs have been dam-

aged in an amount in excess of $2,262,500,

SIXTH CLAIM FOR RELIEF

(Against Defendants For Damages for Conspiracy

to Induce a Breach of Contract)

63. Plaintiffs reallege and incorporate herein by reference as

though fully set forth each and every allegation of Paragraphs

1 through 27 of this Complaint.

64. Pharaon at all times herein complained of, had notice

and knowledge of the Stock Purchase Agreements,

65. Plaintiffs are informed and believe and thereupon allege

that Pharaon willfully and maliciously conspired to deprive

Plaintiffs of the benefits of their Stock Purchase Agreements

by inducing the Barnes to breach said contracts,

66. Plaintiffs are informed and believe and thereupon allege

that during 1976, the Defendants had various conferences in

which they conspired and laid plans to wrongfully breach the

Stock Purchase Agreements and in furtherance of their con-

spiracy the Barnes acted by virtue of their position with the

Bank to secure the adoption and implementation of a recapital-

ization plan which extinguished all dividend rights assured the

Plaintiffs by the Stock Purchase Agreements, and that

Plaintiff's Original Complaint dla

Defendants, through their nominees on the Board of Directors

of the Bank and as controlling shareholders in the Bank voted

to approve said plan.

67. As a direct and proximate result of the conspiracy be-

tween Defendants herein alleged, Defendants violated, repu-

diated and breached the Stock Purchase Agreements and

Plaintiffs have thereby suffered damage in excess of $2,262,500,

68. In committing the acts herein alleged, Defendants, and

each of them, acted with malice toward Plaintiffs, and Plain-

tiffs are therefore entitled to recover exemplary damages from

them, and each of them, in the sum of $3,000.00,

SEVENTH CLAIM FOR RELIEF

(Against Defendants for Conversion)

69. Plaintiffs reallege and incorporate herein by reference as

though fully set forth each and every allegation of Paragraphs

1 through 27 of this Complaint and Paragraphs 53 through 57

of the Fourth Claim for Relief to this Complaint and Para-

graphs 60 and 61 of the Fifth Claim for Relief to this

Complaint.

70. On or about December 20, 1976, the Bank adopted a

recapitalization plan under the direction of the Barnes and

Pharaon which, among other things, (i) extinguished the Pre-

ferred Stock and the preferred dividend claims thereon, and (ii)

provided for the issuance of 5 shares of a new common stock

of the Bank for each share of Preferred Stock outstanding.

This new common stock was valued at approximately $4.00

per share,

71. Pursuant to this recapitalization plan, the Broad and

Kaufman Preferred Stock then held by Pharaon became trans-

formed by said plan into 500,000 shares of the new common

stock of the Bank.

72. Plaintiffs are informed and believe and thereupon allege

that approximately 24% of the 500,000 new common shares

exchanged for the Broad and Kaufman Preferred Stock were

42a Plaintiff's Original Complaint

attributable to the preferred dividend claim thereon.

73. Pursuant to the Stock Purchase Agreements, Plaintiffs

were entitled to payment from Pharaon and/or the Barnes

with respect to the preferred dividend thereon and, accord-

ingly, Plaintiffs have a property interest in said 500,000 shares

of new common stock in an amount subject to proof.

74. Plaintiffs have not consented to said exchange and

Pharaon has unlawfully withheld said new common shares

and converted the full value thereof to his own use,

EIGHTH CLAIM FOR RELIEF

(Against the Barnes for Money Had and Received)

75. Plaintiffs reallege and incorporate herein by reference as

though fully set forth each and every allegation of Paragraphs

1 through 27 of this Complaint.

76. Pursuant to the Agreement between the Barnes and

Pharaon, the Barnes sold to Pharaon 1,424,348 shares of the

common stock of the Bank and 165,000 shares of the Bank’s

Preferred Stock, including the Broad and Kaufman Preferred

Stock.

77. Plaintiffs are informed and believe that pursuant to said

Agreement, Plaintiffs’ rights to the aecrued and unpaid divi-

dends on the Broad and Kaufman Preferred Stock were pur-

chased by Pharaon and the Barnes accordingly have received

payment in consideration for Plaintiffs’ preferred dividend

claim.

78. Within the last four vears, the Barnes thus became

indebted to Plaintiffs in an amount subject to proof for money

had and received by the Barnes for the use and benefit of

Plaintiffs.

79, Neither the whole nor part of said sum has been paid,

although demand therefor has been made, and there is not due,

owing and unpaid that portion of the consideration fairly

attributable to Broad’s and Kaufman's preferred dividend claim

paid to the Barnes by Pharaon.

Plaintiff's Original Complaint 43a

WHEREFORE, Plaintiffs Eli Broad and Donald Kaufman

pray for judgment against Defendants James T. Barnes, Sr.,

James T. Barnes, Jr. Ghaith R. Pharaon, and The First

Arabian Corporation S.A., and each of them, jointly and sever-

ally, as follows:

1. As to the First, Second, Third, Fourth and Fifth Claims

for Relief, the sum of $2,262,500, plus a further sum in an

amount subject to proof, plus interest thereon,

2. As to the Sixth Claim for Relief, the sum of $2,262,500,

plus a further sum in an amount subject to proof, plus interest

thereon, and exemplary damages in the sum of $3,000,000,

3. As to the Seventh Claim for Relief, the sum of $480,000,

plus a further sum in an amount subject to proof, plus interest

thereon.

4. As to the Eighth Claim. for damages in an amount not

presently known,

5. For the cost of suit herein; and

6. For such other and further relief as may be just and

equitable under the circumstances,

DATED: June 30, 1977.

MUNGER, TOLLES & RICKERSHAUSER

RONALD L. OLSON, ESQ.

SIMON M. LORNE, ESQ.

MICHAEL D. MILLER, ESQ.

By: /s/ MICHAEL D. MILLER

Attorneys for Plaintiffs

ELI BROAD and DONALD KAUFMAN

44a

Constitutional Provisions

CONSTITUTIONAL PROVISIONS, STATUTES

AND RULES INVOLVED

U.S. Constitution Art. ITT, 62, el.

The judicial Power shall extend to all Cases, in Law

and Equity, arising under this Constitution, the Laws

of the United States, and Treaties made, or which shall

be made, under their Authority; —to all Cases affecting

Ambassadors, other public Ministers and Consuls; —to

all Cases of admiralty and maritime Jurisdiction; —to

Controversies to which the United States shall be a

Party; —to Controversies between two or more States;

—between a State and Citizens of another State; —

between Citizens of different States; —between Citizens

of the same State claiming Lands under Grants of

different States, and between a State, or the Citizens

thereof, and foreign States, Citizens or Subjects,

28 USC Rule 13(g)

Cross-Claim Against Co-Party. A pleading may state

as a cross-claim any claim by one party against a co-

party arising out of the transaction or occurrence that

is the subject matter either of the original action or of a

counterclaim therein or relating to any property that is

the subject matter of the original action, Such cross-

claim may include a claim that the party against whom

it is asserted is or may be liable to the cross-claimant

for all or part of a claim asserted in the action against

the eross-claimant.