Petition — Bryner v. Security Pacific National Bank

bl

a) ben aneel ik

“~— APR 13 1984

RPEEKENTER L. STEVAS.

CLERK

In the Supreme Court

United States

Sescius Bayner and Francis Bryne, ét al.

Petitioners,

vs.

Security Pactric Nationa, Bank, CommerciaL Bank

or San Francisco, Caprrau Reserve Leasine

Corporation, C.1.T. Corporation, and Lzasco

Capita, EquipMent CorPOoRATION,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Arvin H. Gouperern, Jr.

COUNSEL OF RECORD

Lawrence A. CaLLaGHAN

Goipstzin & PHIiirs

A Professional Corporation

Three Embarcadero Center

Suite 2280

San Francisco, CA 94111

(415) 981-8855

Rosest R. ELLepos

Law OFrrFices or

Rosgrt R. ELLepcs

A Professional Corporation

P.O. Box 852

Modesto, CA 95353

Attorneys for Petitioners

QUESTIONS PRESENTED

1. Whether a magistrate, lacking the

essential attributes of an Article III

judge, may exercise the judicial powers of

the United States and enter judgment in a

case over which the federal court asserts

subject matter jurisdiction.

2. Whether a prevailing counterclaim-

ant, entitled to an award of contractual

attorneys fees on a counterclaim, can over-

ride the “American Rule” and Congress and

obtain attorneys fees that encompass not

only the counterclaim but also the defense

of Securities Act and other claims. |

(a) Whether petitioners were denied

due process of law when the magistrate

aborted a scheduled hearing and entered

judgment awarding respondent banks and

leasing companies $2 million dollars in

attorneys fees and non-statutory costs,

without a hearing of any kind whatsoever.

3. Whether jury verdicts were coerced

= 41 «

by the magistrate's call for numerical

division, followed by two supplemental

Allen-type charges.

4. Whether the magistrate took the neces-

sary steps to assure that jury verdicts

were unanimous and whether, having refused

to make appropriate inquiries of a question-

ing juror, the magistrate should have granted

the application for a post-trial hearing

on that issue.

5. Whether the discovery at trial that

material evidence had been reconstructed

or destroyed should have been the subject

of sanctions that: (a) would have affected

the entry of judgment, (b) would have denied

an award of attorneys fees and non-statutory

costs, and (c) should have been considered

on the merits before entry of judgment.

6. Whether the uncontradicted facts

establish a prima facie violation of the

Glass-Steagall Act.

(a) Whether the trial court should have a

- iii -

granted respondent banks directed verdict

motion.

(b) Whether a private party can assert

violation of the Act as an affirmative

defense.

PARTIES

The parties to the proceeding in the

court whose judgment is sought to be re-

viewed are:

Plaintiff and cross-defendant/appel-

lants and petitioners herein: Sergius and |

Francis Bryner, Calvin and Jacqueline Benton,

Clarence and Louise Copeland, Howard Daniel,

Alvin and Catherine Dill, John Duff, John

and Patricia Dumars, Gaar Edwards, Martin |

and Ruth Fish, Maurice and Ellen Fox, Gary

and Karen Fry, Jared and Elsie Haight, Roy

and Mary Hamaji, Robert and Betty Harrington,

Ronald and Marcia Haug, Richard Jackson, |

Pacific Wood Preserving Corporation, Shoge

and Janet Kimura, Leo and Osie Lawrence,

Bernard and Barbara Lewis, Eugene and Mary

Olga Liston, Lowell and Joan Lundell,

- iv-

William and Marsha. McKee, Philip and Rina

Milano, John and Margaret Moylan, James

and Nancy Ouye, Robert and Maria Pappas,

Kent and Claire Pearson, Robert and Alberta

Roth, Walden and Lois Alldrin, Billy Joe

and Virginia Purviance, Randol and Betty

Purviance.

Defendant and cross-claimant/appel-

lees and respondents herein: Commercial

Bank of San Francisco, Security Pacific

National Bank, Capital Reserve Leasing

Corporation, C.I.T. Corporation, Leasco

Capital Equipment Corporation and defen-

dant/appellees John Smith, William Sarsfield,

Robert Temp, Alaine C. Temp, and Richard

Freeman.

The individual defendant/appellees

are not included as respondents in this

petition.

- VYe-=

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ...cccccccccccccce i

PARTIES ccccccccccesscccececcscesece ALL

OPINIONS AND ORDERS OF COURTS BELOW.... 1

JURISDICTION cccccccccccccccccceccccce &

STATUTORY PROVISIONS INVOLVED ........ 3

STATEMENT OF THE CASE) ..ccccccccccceccs 5

District Court Jurisdiction ........ 5

Background of the Case) .....esseeeee 6

Reference to a Magistrate .......... 9

Destruction of Material Evidence .... 9

Jury Coercion and Lack of

Unanimity Pe eS ee ee

The Award of Contractual Attorneys

Fees Encompassed Respondents'

Defense of Securities Act and Other

Claims, and was Assessed Without a

BMOMEING cccccccecccccccccccccsesess 44

The Respondent Banks' Violations

of the National Bank Act .......... 24

-vi-

TABLE OF CONTENTS (CONTINUED)

Page

AUTHORITIES IN SUPPORT OF, AND

AMPLIFICATION OF REASONS RELIED

ON FOR, ALLOWANCE OF THE WRIT ....... 28

1. No person lacking the essential

attributes of an Article III judge

may exercise the judicial power of

the United States ......eee00506- 28

2. The magistrate's award of

attorneys fees and non-statutory

costs was contrary to law and

denied due process of law ........ 36

3. The jury verdicts were coerced ... 48

4. The verdict was not unanimous .... 52

5. Security Pacific National Bank's

destruction of files and records... 55

6. Assertion of violation of the

Glass-Steagall Act as an

affirmative defense to bank

GOUMESECLAIMS cocdvceassesosenccss OO

CONCLUSION *oeeeeeeeneneeneeneeneeeeeeeeeee 65

- vii -

TABLE OF AUTHORITIES CITED

Page

Cases

A.C. Frost & Co. v. Cour D'Alene

Mines Corp., 312 U.S. 38, 43

(1941) pa oe Oe 0 0060.060 6 0160 6S 050 60 ee eeee

Alliance To End Repression v.

The Rochford, F.R.D. 438

(N.D.I1ll. 1976) LS he er |

American Society of Travel

Agents v. = of America,

F.Supp. 1084,

SemeCOke BEF E) Soe cawe es crdecccosocaea

Atchison, Topeka & Santa Fe v.

Barrett, 246 F.2d 846, 849

(Sth Cir. 1957) ae weds 66080606060 60 oe

Board of Governors of the Federal

Reserve System v. Investment Co.

Institute, 450 U.S. 46 (1981) ......61

Bowmar Instrument Corp. v.

Texas Instruments, Inc.,

25 Fed.R.S. 20, 423, 427

(N.D.Ind. 1977) be pi edasé Cererenus ment

Brasfield v. United States,

Ss P 448 (1926) ob.6¢¢6006 s80nenee 51

272 ele at 450 e*enerieeneene#eee#fee#e#e#ee#ee#ee 48

Bruce v. Chestnut Farms-Che

ase Dairy, 126 F. 224,

ae Cir. 1942) Sceovnéiensecrcreeee

City of Detroit v. Grinnell Corp.,

5 F.2d 448 (2nd Cir. 1974) .......45

- viii -

TABLE OF AUTHORITIES CITED (CONTINUED)

Page

Cases (Continued)

Collins v. Foreman, 83-7938,

52 LW 2511 (2nd Cir. 2/22/84) .......29

Cook v. Ochsner Foundation

Hospital, 559 F.2d 270, 273

(5th Cir. 1977) errr rerrrrTeTiTrce

Crowell v. Benson,

285 U.S. 22 (1932) WerTririvrTT tT Tt

Davis v. Fletcher, 598 F.2d 469

Tn UC REPEE cc nceewbeecne ose eee

Ecco-Phoenix Electric Corp. v.

Howard J. White, 1 Cal.3d

266, 272 (

o+2e38, 40, 41, 42, 47

Evans v. Gore, 253 U.S. 245, 253

20) TTT TTreT TT TT Th rt ee

Farmer v. Arabian American Oil

Co., 379 Ucie 227 (1964) tak. cane ou

Fox v. United States,

417 F.2d 84, 89 (2nd Csr. 1969) ae ¢hnt Oe

General Life of Missouri Invest-

ment Co. v. Shamburger,

547 F.2a 746— 784 (ath th Cir. 1976) ...62

Glidden Co. v. Sdanok, |

370 U.S.530 (1962) als ae bie e000 6am ane

Goldstein v. Kelleher, 83-1411,

511 Tist Cir. 2/29/84) .......29

. ae

| ij

a, ae iy, S

- ix -

TABLE OF AUTHORITIES CITED (CONTINUED)

Page

Cases (Continued)

Hedla v. McCool,

~~476 F.2d 1223 1227

(9th Cee. 1973) Se ee ee

I.N.S. v. Chadha, 458 U.S. 1120

, 103 S.Ct. 2764, 2781

Cia es ee 6e6eeedee 34

International Industries, Inc. v.

Olen, 21 Cal.3da 218 (1978) ok dat een alives aha

Investment Sonbany Institute v.

Camp, 01 U.S. 17 (1971) cotedeseweone

Iverson v. Pacific American Fisherie,

73 Wash.2d 973, 442 P.2d 243 (1968)...49

Juhnke v. E.I.G. Corp.,

P.2d-i3ss, Tsse

(9th Giz. 1971) iin <b bee CC nseee cone

Junker v. Crory,

650 F.2d 13 , 1364-5

(5th es 2. 1981) EEE re i

Kaiser MEE: Corp. v. Otis &

Co., 195 F.2d (2nd Cir. 1962)

cert. haahes 344 U.S. 856

(1962) ccc ceecccccresececssessceeseesO3

Kesley v. United States,

47 F.2a 453, 454

(5th Cir. 1931) ee oa de en ee a = hee

King v. McCord, 621 F.2d 205,

— 506 CS Ee eee

%,

*

TABLE OF AYJTHORITIES CITED (CONTINUED)

Page

Cases (Continued)

Krause v. Rhodes,

640 F.2d 214 +) 220

(6th Cir. 1981)

Senecescevcsesio 39, 42

Leeds v. Watson,

F.2d 674 (9th Cir. 1980)....ccccr. 44

Lindy Brothers Builders, etc. v.

American Radiators, etc.,

487 F.20 161 (Srd Cir. 1973) wceccccer44

Matisse v. Maryland casualty Co.

err se 233 50 lo-e Wask 1925) ....82

Minneapolis St. Paul and S.S.

Marie Rwy. ” ies Oa Moquin ;

283 U.S. 530, 521- Oro,

Morgan v. United States,

385 F.2d 93, 97 (5th Cir. 1968)

cert.denied 393 U.S. 1025

(1969) awa ea binees Ch be O00 66 Cec ke bt eee

National Hockey League v.

Metropolitan Hockey Club,

Bes Se es

Northern Pipeline Construction

Ges Fe Marathon on Pipeline

Sastruction to on ve—<

SOE Uels OO LADO SS ccwrcceccetBe 335-28

- xi -

TABLE OF AUTHORITIES CITED (CONTINUED)

Page

Cases (Continued)

Pacemaker Diagnostic Clinic, Inc.

v. Instromedix, inc.,

712 F.2a 1305 (9th Cir. 1983).

SP Pe ee

725 F.2d 537 (9th Cir. 1984)

er er rrr rT eT eR eT ETT Ul.

Pacific Oil & Cement Co. v. Food

Machine Chemical Corp.,

178 er 541, 552

ee Geen BT wb mewenecéscccesiadte am

People v. Superior Court,

Cal.2 , 32 (1967) ces ces eres

Perkins v. Standard Oil of

~~Califtornia, 399 U.S. 222 (1969)

itvaeedeosnrebrausent 45

Remmer v. United States,

ae ee om EY ee

Rozier v. Ford Motor Co.,

573 F.2d 1332, 1339

(Sth Cif. 1978) eC ebb ebe cet cor eoesvere

Russell v. Continental Illinois

National Bank & Trust Co.,

479 F.2d 131 (7th Cir. 1973) ........62

Schaulis v. C.T.B./McGraw Hill,

Inc., 496 F.Supp. , 680

(N.D.CaL.1980) ac o0tan tives awesetoasee

Sciarrotta v. Teeford Construction

Co., 110 Cal. App. 3d

ectoevevasbedoatnt 47

- xii -

TABLE OF AUTHORITIES CITED (CONTINUED)

Page

Cases (Continued)

Serzyvsco v. Chase Manhattan Bank,

556 F.Supp. 74, 90 (S.D.N.Y.

1968) aff'd 409 F.2d 1360

(2nd Csr. 1969) oeeereeeeeeeeeneevr een eee 64

Sincox v. United States,

~ S71 F.2d 876, Oe (ist Cir. 1978)..... 53

Stein v. Galitz, 478 F.Supp. 517

; ate Pee cls Peoneseseeese ban . 62

Toledo Scales Co. v. Computin

Sales Co., 261 U.S. 335

421 (1923) e*eneree enee#enreeee##ee#ee##e#e#e#* aioe outa

United States v. Allocco,

F.20 704 (2nd Cir. 1962) .ccceceedO

United States v. Freeman,

F.20 1112 (5th Cir. 1980),

cert.denied 450 U.S. 910 (1981) .......9

United States v. Morris,

F.20 463 (10th Cir. 1979) .......54

United States v. Mountai:. State

Construction Co., 555 F.

259, 263 (Sth Cir. 1978) Sieens).6ekececn ee

United States v. Noah,

504 F.2d 1303,

(9th Cir. 1979) hah os es ton eaweéneennee

United States v. Raddatz,

U.s. 667 (1580) bee sees mth 34, 35

- xiii -

TABLE OF AUTHORITIES CITED (CONTINUED)

Page

Cases (Continued)

United States v. Rogers,

(4th Cae. 1961) *enereieeeeee eee steceweane

United States v. Seawall,

F.2q 1159, 1163, n.8

(9th Cis. 1977) ce oases obs oases chose

United States v. Sexton,

F.2d 961, 967 (5th Cir. 1972)..... 53

United States v. Woodle

ad aie Ge.8750

(Sth Cif. 12/8/83) eevrescocecse esas 33, 35

Wagner v. Benson

Stet cai.kep td "27 (1980) ..... seek

Wilson v. Thompson,

638 F.2d sol 804 (Sth Cir. 1981).....56

Wharton-Thomas v. United States

F.2d 922 (3rd Cir. 1983) .cccce 229

Statutes and Rules

California Civil Code

Section 1636 seecec be peeecess Gees 37

Federal Rules of Civil Procedure

Rule. 26(e) (2) cccocccccscccccscechs OF

Rule 48 A a neseones eertviwan cle

Rule 59 in ead e6ec 66 ae Venere

Rule 60(b) (3) ......3, 10, 55, 56, 58

- xiv -

TABLE OF AUTHORITIES CITED (CONTINUED)

Page

Statutes and Rules (Continued)

United States Constitution

Fifth Amendment peeeeeeeeck teen

United States Code

12 U.S.C.

BOGESGR BE ccocteccvsesstecseSs an

Section 24(7) ceccceccesceoesese

Secession STS cccccccecsesscedye ae

15. ¥.8.6.

Section 77(c) (b) wrerrritirr. . 7.

18 U.S.C.

Section 1005 00606660884 6068 007

28 U.S.C.

Section 636(Bb) ccccccccssecseeed

Section 636(c) ...9, 28, 29, 32

Section 636(c) (1) wcccccccccecd

Section ZiGL(G) <cccccccccesssoss

United States Supreme Court

Rule 20.4 coccccccccccccccsccceseeed

Rule 17.1(a) cwcccccccccvcedds 49, $5

Rule 17.1(C) cecccccccceeed0, 36, 58

IN THE

SUPREME COURT OF

THE UNITED STATES

SERGIUS BRYNER and

FRANCIS BRYNER, et al.,

Petitioners,

vs.

SECURITY PACIFIC NATIONAL BANK,

COMMERCIAL BANK OF SAN FRANCISCO,

CAPITAL RESERVE LEASING CORPORATION,

C.I.T. CORPORATION, and

LEASCO CAPITAL EQUIPMENT CORPORATION,

Respondents.

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioners respectfully file this

Petition For Writ of Certiorari.

OPINIONS AND ORDERS OF

COURTS BELOW

Judgments favoring respondent banks

and leasing companies were entered Sep-

tember 18, 1981, nunc pro tunc June 23,

1981. During the pendency of the appeal

from those judgments, on August 5, 1984,

the Ninth Circuit held 28 U.S.C. 636(c),

of the Magistrates Act to be unconstitutional.

Pacemaker Diagnostic Clinic, Inc. v. Instro-

medix, Inc., 712 F.2d 1305 (9th Cir. 1983),

en banc hearing granted. On August 8,

1983, based upon Pacemaker, petitioners

moved to vacate the district court judgments

for lack of subject matter jurisdiction.

On October 31, 1983, the Ninth Circuit, by

memorandum (unpublished), affirmed the

judgments below and thereafter stayed decision

on the motion to vacate pending a decision

by the court sitting en banc in Pacemaker.

A petition for rehearing and suggestion

for rehearing en banc was denied on

January 17, 1984. On February 16, 1984,

the Ninth Circuit en banc reversed the

Pacemaker panel (725 F.2d 537), and on

March 6, 1984, petitioners’ motion to

vacate judgmints was denied. (See

Appendix for the above-referred to orders

and judgments. )

ey”

JURISDICTION

The dates of the Ninth Circuit judg-

ments or decrees sought to be reviewed are

October 31, 1983, and March 6, 1984.- The

Order denying rehearing on the appeal was

entered January 17, 1984. The jurisdiction

of this Court to review the judgments by

writ of certiorari is 28 U.S.C. §2101l(c),

and U.S.Sup.Ct.Rule 20.4.

STATUTORY PROVISIONS INVOLVED

The Fifth Amendment to the Constitu-

tion of the United States provides in per-

tinent part as follows: "nor shall any

person...be deprived of...property...with-

out due process of law...".

28 U.S.C. §636(c)(1) provides, inter

alia, that with the consent of the parties,

a magistrate may exercise the jurisdiction

of the federal court and enter judgment in

any civil matter. (Appendix)

F.R.Civ.P. 60(b) (3) provides that the

court may relieve a party from a final

judgment, order or proceeding for the fraud,

misrepresentation, or other misconduct of

an adverse party.

F.R.Civ.P. 48 requires that receipt

of less than unanimous verdicts must be by

stipulation of the parties.

F.R.Civ.P. 26(e) (2) provides:

A party is under a duty seasonably

to amend a prior response if he

obtains information upon the

basis of which (A) he knows that

the response was incorrect when

made, or (B) he knows that the

response though correct when

made is no longer true and the

circumstances are such that a

failure to amend the response is

in substance a knowing concealment.

12 U.S.C. §§24 and 378 provide, inter

alia, that national banks shall exercise

only "such incidental powers as shall be

necessary to carry on the business of bank-

ing" and precludes commercial banks from

directly or indirectly dealing in securities

whether in the form of issuing, selling,

underwriting or participating in such

activities. (Appendix)

California Civil Code §1636 provides

that "a contract must be so interpreted as

to give effect to the mutual intention of

the parties as it existed at the time of

contracting, so far as the same is ascer-

tainable and lawful."

STATEMENT OF THE CASE

District Court Jurisdiction: Federal juris-

diction is based upon petitioners' (appel-

lants below) claims of multiple violations

of federal securities laws, the National

Banking Act, and the doctrine of pendent

jurisdiction. The counterclaims of re-

spondent banks and leasing companies are

for unpaid balances, interest and attorneys

fees on promissory notes and equipment

leases that facilitated unlawful sale of

unregistered securities.

* * *

Background of the Case: Petitioners were

investors in a program that collapsed de-

spite multi-million dollar financing made

possible by the respondent banks and leasing

companies. The respondent banks, using

the device of highly leveraged loans, linked

the success of their business acquisition

program to the sale of unregistered non-°

exempt securities. Petitioners were

solicited by the promoters (D.M.S.) and

referred to the respondent banks. Ordi-

narily, the petitioners were not customers

of the banks.

The facts are unprecedented. There

is no reported case in which a national

bank has teamed up with sellers of unregistered

securities to obtain new business. The

offer of 100% leverage, through unsecured

loans prearranged by the promoters was a

major inducement for investors to enter

the program. The banks, through the conduit

of promoter-recruited California borrowers,

provided capitalization for Texas operators

and they utilized promoters' income projec-

tions to structure investment loans.

Loan proceeds, earmarked for the Texas

operators, were disbursed from ad hoc special

accounts. Interest income to the banks

was maximized through a "roll-over" feature,

resulting in prepayment of 4-year notes

after one year and applying the "rule of

78s." |

The program's major financing was

offered by respondent Security Pacific

National Bank, which provided loan proceeds

totaling over $9.5 million dollars. In

their defense, the banks contended that

these were “ordinary commercial loans.”

At mid-trial it was learned that original

loan files (which were the most basic proof

of whether these were “ordinary commercial

loans") had either been destroyed or disas-

sembled and new files created for litigation

purposes. Similarly, it was learned that

all the originals of the most important

historical document in the bank file

(credit commitment reports) had been

destroyed and that the bank had altered

and used paste-ups to create copies and

obscure the destruction of originals.

In late 1974, with the program was in

a state of collapse, respondent Commercial

Bank of San Francisco, employing the iden-

tical officers who had operated the program

at Security Pacific, attempted to salvage

the program by providing fresh capital in

the form of new loans to old investors and

separate loans to the promoters/operators.

The respondent equipment leasing com-

panies had contracted to deliver equipment

to the site of oil and gas wells, but their

records do not establish delivery of such

equipment, or even its existence. Their

counterclaims hinged on the efficacy of

"receipts" executed by absentee investors

who relied upon representations of the

‘

‘

z

promoters. The fate of the promoter/opera-

tors of this program is set out in United

States v. Freeman, 619 F.2d 1112 (5th Cir.

1980), cert.denied 450 U.S. 910 (1981).

* * *

Reference to A Magistrate: Complaints and

cross-complaints were separately filed in

1976 and 1977 and, thereafter, consolidated

for trial. Prior to the 1979 enactment of

28 U.S.C. §636(c), the parties consented

to reference to a magistrate pursuant to

§636(b). Before trial commenced on July 28,

1980, the parties consented to the magis-

trate's exercise of jurisdiction under

636(c).

* ” *

Destruction of Material Evidence: In the

course of trial, it was learned that respon-

dent Security Pacific National Bank had

destroyed, altered, and otherwise mishandled

material evidence. The bank's misconduct

was a subject of post-trial motions for

= 10 <-

judgment n.o.v. and new trial. F.R.Civ.P. 59,

60(b) (3). ER 50, §V. The motions were

denied without a hearing on the merits.

ER 75, 78. The Court of Appeals memorandum

(Appendix) is silent on this point although

it is squarely raised. See Appendix, p.l,

infra, Issue No. 3.

The first disclosure of the banks'

misconduct was made on February 5, 1981,

seven months after the commencement of

trial when the bank's lead counsel told

the court “original files...don't exist

any more", and that the bank had “created

a file" purporting to consolidate

documents retrieved from throughout the

bank. RT 15714-15. Nine of sixteen main

office files had been destroyed and of the

seven produced, financial documents were

missing. The remaining loan files had

been disassembled and placed in a litigation

file with other documents characterized

after the trial as “reconstructed” files.

- ij] «=

ER 59. All were passed off as individual

loan files kept by the bank in the ordinary

course of business.

Original "credit commitment reports,”

the historical document setting out "what

actually happened" had been destroyed and

replaced with photocopies. RT 17070, 18237.

The bank altered original credit commit-

ment reports by whiting out, masking, and

utilizing "paste-ups", and then photocopying

the paste-up, a practice that makes the

photocopy appear to be a copy of an original

instrument, when it is not. RT 15529-30.

From early 1976, Security Pacific was

aware that its participation in the invest-

ment program was a subject of civil litiga-

tion and SEC scrutiny. As early as 1973,

the bank foresaw litigation. P1.Ex.95-2.

In 1976, when the first lawsuit was

filed, a vice president took charge of

collecting the original loan files

(RT 17064) “and gathering bank documents

e 1% «=

for production to attorneys for the plain-

tiffs." ER 59, RT 14988, 17065-70.

Over half the Main Office files could

not be produced during the 1980-81 trial

because they had been totally destroyed

and of the seven produced, important finan-

cial documents were missing. Insofar as

the San Mateo branch files were concerned,

Security Pacific, instead of ma.ntaining

those files in their original condition,

disassembled and "reconstructed" them.

ER 59, RT 17069. “We put this file together

on January 12, 1976." RT 17073. The bank

did this by removing the documents from

the loan file and creating a new file that

purported to include documents from other

departments of the bank without inventorying

what was in the original file, thereby

making it impossible to know whether the

"reconstructed" file contained everything

that was in the original loan file.

RT 17074-5.

» 13 «-

Throughout pre-trial and discovery

proceedings and for seven months into trial,

Security Pacific talked about individual

loan files without disclosing that, before

they had been produced for inspection and

copying, they had been "reconstructed."

On February 15, 1979, (CR 940) the bank's

attorney marked three credit commitment

reports as exhibits and, forestalling a

call for the original, stated:

I shall represent to you that

those were photocopied in our

office from the branch credit

file...of Security Pacific.

CR 940 at pp.659-660.

There were no originals. RT 17076, 18237.

In a request for production of docu-

ments, filed August 17, 1976, petitioners

demanded production, inter alia, of complete

loan files, etc. The bank's response was

that production would be burdensome but

there was no acknowledgement that “com-

plete loan files” did not exist.

In answers to interrogatories dated

@ 16 «

November 23, 1977, (CR 164) the bank re-

peatedly referred plaintiffs to "individual

loan files of the borrowers” for answers

to specific requests for information.

An exchange of interrogatories in

September, 1977, generated the following

Security Pacific responses:

Security Pacific has produced

the individual loan files of the

borrowers...the answers to these

interrogatories may be derived

or ascertained from an examina-

tion of the loan files... (Answer

to Interrogatory 1, 11/23/77, CR 164)

When the bank was asked to identify

and describe all documents received as a

result of the promoters efforts, the bank

responded by stating “see the individual

loan files" (Answer to 4E 11/23/77, CR 164)

Similarly, when the bank was asked to iden-

tify and describe the purpose of each loan,

the bank responded "see the individual

loan files". (Interrog. Answer 5B, 11/23/77,

CR 164)

Thus, the bank consistently parried

» 1% «

requests for specific information with the

rejoinder that petitioner should “see the

individual loan files which have been pro-

duced for inspection and copying", but

never bothered, until four years later,

late in the trial, to tell anyone that

"the individual loan files” had been

tampered with and that the files produced

had not been maintained in the ordinary

course of business. Rather, they were

assembled for a self-serving litigation

purpose. RT 17069.

On July 2, 1980, more than three weeks

prior t® commencement of trial, separate

trial subpoenas duces tecum were served on

Security Pacific's main office and the San

Mateo branch. CR 1275, 1346. The sub-

poenas required production at trial of

"all loan files", etc., and the subpoena

footnoted that summaries would be accept-

able: “except as to the complete original

loan files." But, it was not until

#7 °

» 16 -

February 5, 1981, seven months into trial

and five years after the first lawsuit had

been filed that Security Pacific acknowl-

edged that “complete original loan files"

no longer existed and the bank had "created

a file” which it had referred to throughout

as “the individual loan files." RT 15714-5.

In affidavits filed in response to

petitioners’ post-trial motions on this

point, respondent bank equated "original

loan files" with what they only then began

to refer to as reconstructed or Special

Asset Department files. The bank told the

court that plaintiffs’ counsel:

Were given an opportunity to

inspect all original loan files

which could be Toosted for each

plaintiff, i.e., the files as

reconstructed by Security Pacific's

special assets department when

t took over the plaintiffs'

loans from the lending branches.

(Cross Decl. ER 59, 42, emphasis

added. )

In petitioners’ post-trial motion

= 29 «

raising this point they attach several

declarations, including their former lead

counsel who superintended the discovery

process. He averred:

Throughout my participation as

an attorney of record in this

litigation, the bank maintained

in its defense to alleged securi-

ties law violations that i* had

made ordinary commercial loans

based upon the personal income

and net worth of individual bor-

rowers and not to enhance the

capitalization of the mineral

lease program. The loan files

purportedly confirmed this posi-

tion. Had I, as attorney for

plaintiffs, known that the loan

files had been ‘reconstructed’

by Security Pacific National

Bank, I would have insisted upon

seeing the loan files in their

original condition, as maintained

in the branch in order that I

could see exactly what the branch

had in its file, when it approved

the loan, and thereafter. The

apparent mixing of documents

from the branch loan file with

documents from other parts of

the bank, resulting in a recon-

structed or composite file,

changed the character of what

had been asked for and was led

to believe I was receiving.

(Brotsky Decl. ER 73, 49)

Five attorneys, who represented various

» 16 «

of the plaintiffs during the discovery

process, providec declarations, all of

which agree on the following points: (1)

That Security Pacific had purported to

produce original loan files; (2) That

Security Pacific had never referred to the

loan files as "Special Asset Department

files"; (3) That Security Pacific did not

disclose that any of the loan files had

been "reconstructed" or that several main

office loan files were missing; and (4)

That Security Pacific did not disclose

that the original credit commitment reports

had been destroyed. (See Brotsky, Mendelson,

Avansion, Logan, and Pedder declarations.

ER 73.)

On January 27, 1976, while the bank

was preparing for litigation, it circulated

a memorandum to employees (P1.Ex.95-23)

@irecting anyone with knowledge of inquiries

or transactions involving the program to

contact the same bank officer who had

» 19 «

collected the loan files. The memorandum

directed the recipient to “DESTROY” the

circular after reading and following its

instructions. The word "destroy" is capi-

talized. P1.Ex.95-23.+/

* * *

Jury Coercion and Lack of Unanimity: On

May 13, 1981, the jury sent a written com-

munication to the court:

We cannot agree on a number of

significant points and see no

possibil’ty that we will ever

agree. Request No. 7, CR 1703,

RT 21944.

The bank had no reluctance at all to falsify

documentation. In the Dole/Edwards transaction,

the bank backdated a promissory note to make

it appear that the original obligor on an

$110,000 loan was the promoters rather than

Dole and Edwards. As it turned out, the

$110,000 loan had been to Dole and Edwards

who had signed a promissory note. When Dole

and Edwards defaulted, the bank destroyed

their note and their loan file and substituted

the promoters as if they were the original

obligors. The vital credit commitment report,

SEiak ciate have sectent the Shete of the trans-

action and all other supporting documentation

relating to the granting of the original loan

destroyed. RT 16222, 16239-40. The backdating

of the note and re-writing of history with

respect to the 1973 Doie, ilwards loan is a

violation of 18 U.S.C. §1005, a felony.

= 36 «

The trial court, upon being advised

that the jury was deadlocked and could not

reach a verdict (RT 21944), inquired about

numerical division. RT 21945. When

advised by the foreman that the jury was

divided 4 to 2 on some issues and 5 to l

on others, the court sua sponte gave an

Allen-type charge, prefaced by remarks

concerning the length and cost of the

trial. RT 21946-51. Shortly thereafter,

the court was advised that there was one

"uncooperative" juror. RT 21959. Without

consulting counsel, the court gave a

second Allen-type instruction,

referring to, and rebuking, without identi-

fying, the hold-out juror. RT 21959-62.

The court then excused the jury for four

and one-half days to reflect on the im-

passe. RT 21961-2. Immediately after

reconvening, the jury began to return

verdicts. CR 1750.

After all thirty-three verdicts had

been read the jury was polled. RT 21982.

- 21-

The “hold-out" juror who had been upbraided

by the court stated that his "yes" vote

was “in order to get a unanimous vote."

Id. Without further inquiry, or requiring

further deliberations, the trial judge, in

open court, insisted upon a “yes” or "no"

answer. RT 21985. Despite three requests

from petitioners' counsel (RT 21984,

21985, 21986), the court refused to

inquire of the juror about the meaning of

his statement, or whether his ultimate

affirmation reflected a conscientious

conviction as to the weight and effect of

the evidence. Id.

The jury was discharged over the

objection of petitioners’ counsel.

RT 21986. Motions for new trial based on

coercion (ER 50) and for an evidentiary

hearing on juror unanimity (ER 64) were

denied (ER 75, 81).2/

3/ In its memorandum, the court of appeal er-

roneously states that the issue is raised for

the first time on appeal. Appendix.

» 32 «

When the magistrate excused the jury

for 4% days he told them that he "trusts

that I will have no more of this sort of,

what I classify as, nonsense." RT 21962.

After the jury had departed, he addressed

counsel:

Now, I'll state for the record.

I don't feel I need advice of

counsel to fuss at a jury, so I

didn't discuss this with you

ahead of time. I wanted to have

an opportunity to tell them what

I think, and to tell them unaf-

fected by the thoughts of attor-

neys. RT 21962

7 * *

The Award of Contractual Attorneys Fees

Encompassed Respondents’ Defense of

Securities Act and Other Claims, and was

Assessed Without A Hearing:

On July 9, 1981, Security Pacific National

Bank formally noticed a motion for at-

torneys fees for hearing on August 7,

1981. Petitioners had previously filed

post-trial motions for judgment n.o.v.,

and new trial, and, by letter dated July 6,

1981, requested a hearing on all post-

trial motions. CR 2037.

» 23 -

On July 10, 1981, the magistrate in-

formed counsel that he would "hear oral

argument...on August 28, 1981, commencing

at 9:30 a.m.” CR 1868, emphasis added.

On August 14, 1981, the court distri-

buted an agenda that included attorneys

fees as an item for the August 28 hearing,

reiterating that "motions...will be heard

at 9:30 a.m. on August 28, 1981..." CR 1871.

For unexplained reasons, when Court

convened on August 28, 1981, instead of

the promised hearing and oral argument,

the magistrate handed out orders that in-

cluded approximately $2 million dollars in

attorneys fees and non-statutory costs,

all without a hearing. MThe orders are

silent on California law which controlled.

See Orders 9, 10, 11 (Appendix). In the

course of the 8/28 proceeding, the magis-

trate told counsel that he had

communicated ex parte with “various

lawyers who authored parts of these

briefs" and had thereby resolved

a 94 =

"whatever the confusions there were."

Consequently, said the Court, “oral argument

3/

will not be either reguired or permitted."

RT 2, 8/28/81.

* * *

The Respondent Banks' Violations of The

National Bank Act Constitute An Affirmative

Defense To Bank Counterclaims and the Court

Should not Have Directed a Verdict for

Respondent Banks: Appellants’ interposed

affirmative defenses to bank counterclaims

alleging violation of the National Bank

Act (Glass-Steagall) 12 U.S.C. §§24, 378.

The banks' directed verdict motions were

granted. ER 39.

ay One result of the failure to conduct a hearing

is the disparity in attorneys fees awarded

arbitrarily on an undifferentiated basis with

punitive effect. Petitioner Moylan was sued

for $15,359, yet $47,578 was assessed against

him as attorneys fees. Petitioner Lawrence

was sued for $252,828 and he was assessed $47,578.

Petitioner Pappas was sued for $16,527 plus

interest, yet he was assessed $62,831 for fees

and costs. 75% of the judgment against Pappas

and others is allocated to attorneys fees and

costs while petitioners such as Lawrence, with

far more complex transactions, are in an opposite

position with less than 20% allocated to attorneys

fees and costs. There are numerous other such

examples.

» 95 -

The material facts are uncontradicted.

In each and every instance, the banks'

loans were "to make available funds for

investment and programs of D.M.S."

P1.Ex.95-2, (Appendix). According to an

affidavit prepared by a bank officer, all

D.M.S. loans were "with the understanding

that the proceeds of the loans would be

used by the customers to purchase and

re-work mineral leases as tax shelter in-

vestments." SP Exhib;t 1958.

The banks knew that the D.M.S.

program it was financing was a security.

RT 16792, 15047. A senior vice president

warned that the bank was facilitating in-

vestments and would one day be sued.

P1.Ex.95-2 (Appendix). Earmarked loan

proceeds provided 100% leverage for

the investment and also provided the

consideration for the unlawful sale of

unregistered securities. RT 16957;

P1.Ex.95-6. Security Pacific consummated

- 26 «

over $9 million dollars in unsecured bank

loans (P1.Ex.95-11) to non-customers

(RT 16295) over a two-year period.

The bank admits that the success of

its business acquisition program depended

upon the sale of securities. RT 15691.

P1.Ex.95-2. A Security Pacific memorandum

acknowledges that the bank's “willingness

to make available funds for investment and

programs of diversified monetary systems

connected [the bank] irrefutably in the

mind of the borrower with Diversified

Monetary Systems... protestations to the

contrary notwithstanding." P1.Ex.95-2,

emphasis added.

Security Pacific considered the

D.M.S. investment program a marketing

vehicle (RT 16108) and "a means to an

end." P1l.Ex.95-7. Bank officer Sarsfield

said that the program was “an interesting

way to obtain the accounts” of new

customers. RT 15690. Sarsfield had

advised Security’ Pacific's senior vice

» 27 «

president of the bank's participation in

the program "to make sure he was aware of

this potential way of developing the ac-

counts [for] the bank." RT 15722. The

bank saw it as an opportunity "to develop

contacts, particularly with the medical

profession by "financing...their...invest-

ments." RT 15722. As bank officer Sarsfield

testified:

What we are trying to do is get

in contact with doctors without

having to go out and knock on

every door of every physician in

the City of San Francisco. RT 15729.

Sarsfield found the sale of tax shelters

to be "an interesting vehicle to increase

{bank] business" (RT 15691) and the bank's

highest officers looked upon it as a “busi-

ness acquisition program." P1.Ex.95-2.

Its success was entirely dependent upon

the unlawful sale of unregistered securi-

ties.

- 28 «

AUTHORITIES IN SUPPORT OF, AND AMPLI-

FICATION OF F REASONS RELIED ON _ FOR,

ALLOWANCE OF THE WRIT.

No person lacking the essential

attributes of an Article III judge may

exercise the judicial power of the United

States: On August 5, 1983, a Ninth Circuit

panel held that consensual delegation of

powers to a magistrate, pursuant to 28

U.S.C. §636(c) was unconstitutional.

Pacemaker Diagnostic Clinic, Inc. v.

Instromedix, Inc., 712 F.2d 1305. On

August 8, 1983, petitioners, in reliance

upon Pacemaker, asked the Ninth Circuit to

vacate the instant judgments for lack of

subject matter jurisdiction. That motion

was taken under submission pending a

decision by the circuit sitting en banc.

On February 16, 1984, the Ninth Circuit

sitting en banc reversed the Pacemaker

panel. 725 F.2d 537, and on March 6,

1984, petitioners’ pending motion

«= 29 -

to vacate judgments was deniea.+/ It should

be noted that six of the fourteen votes

cast in the Ninth Circuit on this issue

favor a holding that Section 636(c) is

unconstitutional. (The unanimous Pacemaker

panel and three dissents on the en banc

court.)

The issue is now recurrent and will

persistently arise in the district courts

and courts of appeal until this Court re-

solves the question. This is particularly

so in view of Court's decisions in Crowell

v. Benson, 285 U.S. 22 (1932); United

States v. Raddatz, 447 U.S. 667 (1980);

and Northern Pipeline Construction Co. v.

Marathon Pipeline Co., 458 U.S. 50 (1982),

a trilogy that establishes an ineluc-

4Y/ Three other circuits, the First, Second and

Third, have upheld the constitutionality of

636(c). See Wharton-Thomas v. United States,

721 F.2d 922 (3rd Cir. 1983); Collins v. Foreman,

83-7938, 52 LW 2511 (2nd Cir. 2/22/84); Goldstein

v. Kelleher, 83-1411, 52 LW 2511 (lst Cir.

2/23/84) .

a

= 30 -

table constitutional principle.>’

The identical issue arises in any one

of several contexts. For example, in United

States v. Woodley, F.2d , Slip Op.5730

(9th Cir. 12/8/83) the same principles,

upon which the Pacemaker panel relied were

applied to a recess appointment to the

federal judiciary. The rationale sup-

porting Woodley is compromised by the

decision of the en banc court in

Pacemaker, and Woodley conflicts with a

1962 Second Circuit decision on the same

issue. United States v. Allocco, 305 F.2d

704 (2nd Cir. 1962). Allocco resolves the

issue on pragmatic, rather than jurispru-

o/ This constitutional question falls within

Supreme Court Rule 17.1(c) governing review

on certiorari, i.e., “when...a federal court

of appeals has decided an important question

of federal law which has not been, but should

be, settled by this court, or has decided a

federal question in a way in conflict with

applicable decisions of this court."

= 31 «-

dential, grounds.

In Woodley, supra, the court of ap-

peals put the question thusly:

Whether a person lacking the

essential attributes of an

Article III judge -- life tenure

and protection against diminution

of compensation -- may nonetheless

exercise the judicial power of

the United States..." Slip Op.5730.

Woodley is premised on the proposition

that Section 1 of Article III entitles

"only judges with Article III protection

[to] exercise the judicial power of the

United States." Slip Op.5732. Life tenure

and guaranteed compensation are "the essen-

tial attributes of an Article III judge"

(Slip Op.5731), and are indispensable to

judicial independence which is the hallmark

of an Article III judge. Clearly, a magis-

trate does not fit that description. Indeed,

the Woodley court, as did the Pacemaker

panel and the en banc dissent, rely en-

tirely upon decisions of this Court which

have consistently “emphasized the overriding

» $2 «

importance of an inaependent judiciary."

Slip Op.5736.

In Evans v. Gore, 253 U.S. 245, 253

(1920), this Court held:

Independence of action and judg-

ment is essential to the mainte-

nance of the guarantees, limita-

tions and pervading principles

of the Constitution and to the

administration of justice with-

out respect to persons and with

equal concern for the poor and 6/

the rich. =

The recent opinions of the First,

Second, Third and Ninth Circuits, supra

fn.4, upholding the constitutionality of

Section 636(c), tilt heavily toward prag-

matic concerns in order to sustain a practice

permitting a person who lacks the at-

tributes of an Article III judge to exer-

S/ This pronouncement seems particularly apt in

a case such as this in which a magistrate has

entered judgment against private litigants in

favor of the State's third largest bank (one

of the Nation's ten largest) without prior

review or supervision of an Article III judge,

after eschewing hearings on attorneys fees,

destruction of evidence and juror unanimity,

and on all post-trial motions.

2 eae

= 33 -

cise the judicial power of the United States

by entering judgment in cases over which

the federal courts have subject matter

jurisdiction.

In Glidden Co. v. Sdanok, 370 U.S.

530 (1962) and Northern Pipeline, supra,

458 U.S. 50, this Court held unconstitu-

tional statutory schemes designed to promote

judicial efficiency. Section 636(c) is an

expedient that, more often than not, is

forced upon litigants and should fall of

its own weight in accord with decisions of

this Court.

In I.N.S. v. Chadha, 458 U.S. 1120

(1983), 103 S.Ct. 2764, 2781, this Court

held that “convenience and efficiency are

not the primary objectives--or the hall-

marks of democratic government..." In

Woodley, supra, the Ninth Circuit found

that:

The teaching of Chadha is clear.

Historical acceptance and

governmental efficiency are not

unimportant. They will not,

however, “save [a practice] if

it is contrary to the Consti-

tution. " Slip Op.5741 quoting

Chadha, 103 S.Ct. at 2781.

The dissent to the Ninth Circuit en banc

decision in Pacemaker concludes that the

majority:

Disrupts the proper operation of

our constitutional system

including the independent exer-

cise of judicial power by indi-

viduals free of outside con-

straints... 725 F.2d 547.

The dissenters, as did the original

Pacemaker panel, 712 F.2d 1305, concluded

that the exercise of the judicial power of

the United States by Article III judges

cannot be allowed to depend upon stipula-

tions of the litigants. 725 F.2d 547,

548-553.

In United States v. Raddatz, 447 U.S.

667 (1980), this Court suggests the limits

of a magistrate's delegated authority holding

that delegation in that case (permitting a

magistrate to conduct an evidentiary

hearing on a suppression motion) did not

violate Article III "so long as the

- 35 -

ultimate decision is made by the district

court." 447 U.S. at 683, emphasis added.

Thus, in the instant case, the ultimate

decision on issues raised in the post-

trial motions which were threshold to the

entry of judgment, should have been made

by an Article III judge.’

The original Pacemaker decision, supra,

the dissent to the en banc decision, supra,

and Woodley, supra, decision are all in

accord with this Court's decisions in the

Crowell, Raddatz, Northern Pipeline

Petitioners do not agree with the additional

dissent of Judge Pregerson, 725 F.2d 556-557.

There is no justification for extending Article III

protections to magistrates. If we need more

Article III judges then they should be appointed,

but the assumption that magistrates are qualified

to exercise Article III powers is unsupportable.

The case below, for example, was a judicial

shambles, the magnitude of which is obfuscated

by a court of appeals “memorandum” that omits

most of the material facts (limited to two

paragraphs) and neglects to discuss in any

depth the issues raised on appeal. This Court

should see through that memorandum which im-

plicitly sanctions such “a departure by a lower

court from the usual course of judicial proceed-

ings” as to call for “an exercise of this Court's

power of supervision." Supreme Court Rule 17.1(a).

@ 36 -

trilogy. The Ninth Circuit's en banc decision

in Pacemaker is not. This Court has never

deviated from the constitutional principle

that Congress may not delegate power that

properly belongs with Article III judges

(even if Article III judges are willing to

permit that to happen). When the delegation

includes the ultimate power to make final

decisions, the Constitution mandates that

such delegation be annulled.

2. The magistrate's award of attorneys

fees and non-statutory costs was contrary

to law and denied due process of law: The

magistrate's award of $2 million dollars

attorneys fees and non-statutory costs

that paid for respondents' defense of se-

curities act claims. Such an award offends

controlling principles established by this

Court and the Supreme Court of California.

The issue falls within Supreme Court Rule

17.1(c) in that a federal court of appeals

has decided an important question of law

» 37 «

which has not been, but should be, settled

by this Court, and has decided a federal

question in a way that appears to conflict

with applicable decisions of this Court.

Attorneys fees may not be awarded in

securities act litigation absent a finding

that such litigation was undertaken in bad

faith, or was meritless. Junker v. Crory,

650 F.2d 1349, 1364-5 (5th Cir. 1981) .2/

An award of contractual fees requires that

a court ascertain the intent of the parties

when they entered the contract. Pacific

Oil & Cement Co. v. Food Machinery Chemical

Corp., 178 F.2d 541, 552 (9th Cir. 1949);

Calif.Civ.C. §1636. A trial court shall

exercise its discretion in accord with

equitable principles United States v.

Mountain State Construction Co., 588 F.2d

259, 263 (9th Cir. 1978); Krause v. Rhodes,

640 F.2d 214, 218, 220 (6th Cir. 1981);

8/ No such contention has been or could be rea-

sonably asserted in this case.

= 38 «

shall consider national policy Farmer v.

Arabian American Oil Co., 379 U.S. 227

(1964), and the public policy of the State

of California. Ecco-Phoenix Electric Corp.

v. Howard J. White, 1 Cal.3d 266, 272

(1969) .2/

In the instant case, the trial court

and the court of appeals ignore all of the

above, pushing to one side threshold questions

of contract interpretation, equitable con-

siderations, public policy, pertinent pro-

visions of the securities acts, and due

process of law. In lieu of the exercise

of discretion, staggering attorneys fees

and non-statutory litigation costs, amount-

ing to punitive damages, have been awarded

the banks and leasing companies without a

hearing.

2/ The Ninth Circuit memorandum concedes that

this is the law, but does not apply it to the

magistrate's refusal to conduct a hearing or

to exercise discretion under California law.

The magistrate's post-trial Orders 9, 10, ll

(Appendix) are silent on California law and

ignore what the Ninth Circuit memorandum refers

to as California's “flexible approach”.

= 39 «

Under California law, it is the

parties' intent, at the time they enter

into a contract, that controls:

It is the aim of courts, in inter-

preting a written contract, to

give the effect to the mutual

intention of the parties as it

existed at the time of the exe-

cution of the contract. Pacific

Oil & Cement Co. v. Food Machinery

& Chemical Corp., 178 F.2 ,

552 (Sth Cir. 1949).

The standard, says the Ninth Circuit quoting

Judge Learned Hand, is “what a normally

constituted person would have understood

[the words] to mean, when used in their

actual setting." Id.

In Krause v. Rhodes, supra, the Sixth

Circuit emphasizes the "broad equity powers"

fees authorized by contract and holds:

That what was in the first

instance a fair contract becomes

unfair in its enforcement" and

that “however reasonable and

appropriate, the instant fee

contracts were, when signed, the

situation now existing differs

drastically from that which the

contractin arties originall

contemplated. 640 F.2d at 550,

emphasis added.

' i

= 40 «

The magistrate ignored opinions of

California's highest court interpreting

contracts in accord with public policy and

recognizing "the oppressive nature of a

literal interpretation” of a fee provision.

Ecco-Phoenix Electric Corp. v. Howard J.

White, Inc., supra, 1 Cal.3d at 272.

In International Industries, Inc. v.

Olen, 21 Cal.3d 218 (1978), the California

Supreme Court reaffirmed that equitable

principles and policy considerations that

underlie judicial interpretation of at-

torneys fees clauses. 21 Cal.3d at 223-4.

In Sciarrotta v. Teeford Construction Co.,

110 Cal.App.3d 444 (1980), the California

Court of Appeals, citing International

Industries, Inc., supra and Ecco-Phoenix,

supra, noted:

The Supreme Court has taken a

more narrow View of attorneys

fee clauses precisely because of

the possibility that litigation

might ensue for its own sake if

a simplistic and inflexible con-

» 4) «

struction of attorneys fees clauses

is followed. 110 Cal.App.3d at

451, emphasis added.

The instant case reveals the other side of

the same coin, i.e., that a "simplistic

and inflexible construction of attorneys

fee clauses" has a chilling effect on bona

fide litigation. See Schaulis v.

C.T.B./McGraw Hill Inc., 496 F.Supp. 666,

680 (N.D.Cal. 1980). "To do so in this

context could only chill individual

litigants..."

The central holding of Sciarrotta is

that "an attorneys fee provision in a form

contract must be limited to the actions

included in that clause" 110 Cal.App.3d at

450. California does not permit an interpre-

tation of a fee clause “that could not

have been reasonably contemplated or intended

by the parties at the time of

=

., ‘

Fi i

-? a = 4

- 42 -

contracting." 110 Cal.App.3d at 452,

accord Krause v. Rhodes, supra, 640 F.2d

at 218, 220. No attempt was made by the

Magistrate to interpret the fee clause or

even consider the contemplation of the

parties at the time they entered the con-

tract.

To cast upon petitioners the burden

of compensating respondents banks' and

leasing companies' attorneys for conduct-

ing a defense against bona fide securities

act claims is against federal policy and

will unquestionably chill private

litigants who have bona fide securities

act claims involving economically powerful

financial institutions.

(a) The award of attorneys fees and

non-statutory costs, without a hearing,

denied petitioners due process of law:

This point is raised on appeal (see Appendix,

p.l1) but is ignored in the Ninth Circuit

ie

@ 43 -

memorandum. 22/

Appellants requested

a hearing on all post-trial motions.

CR 2037. (Respondent Security Pacific's

fee application set a hearing date of

August 7, 1981. ER 54. The Court reset a

hearing for August 28, 1981, on all post-

trial motions and circulated an agenda

that included attorneys fee motions.

However, on August 28, the magistrate stated

that he had communicated ex parte with

"various lawyers" (not including petitioners)

and had resolved "the confusions". RT 2,

8/28/81. He then entered judgment noting

that "oral argument will not be either

required or permitted." Id.

The controlling principle is set out

by this Court in Perkins v. Standard Oil

of California, 399 U.S. 222 (1969) holding

10/

The Ninth Circuit states that it does not dis-

cuss certain points on appeal because, though

“not lacking in merit", they are “not pivotal."

(Memorandum, Appendix) How can an award of

$2 million dollars constituting 40% of the

total judgment awarded without a hearing and

applying an erroneous standard; be “not pivotal"?

» 44 <

that attorneys fees should be "fixed in

the first instance by the district court,

after hearing evidence as to the extent

_ and nature of the services rendered." 399

U.S. at 223, and, in this case we would

add, interpreting the contract in accord

with federal policy and California law.

In Leeds v. Watson, 630 F.2d 674 (9th Cir.’

1980), the Ninth Circuit applied the Perkins

principle by remanding the attorneys fee

issue to the district court "for the purpose

of determining the appropriate counsel fee

to be awarded, subsequent to an evidentiary

hearing." 630 F.2d at 677, emphasis added.

In Cook v. Ochsner Foundation Hospital,

559 F.2d 270, 273 (5th Cir. 1977), the

court of appeals refers to the necessity

for a "due process" hearing followed by

"specific findings and conclusions” which

set forth the basis of the trial court's

ruling. Emphasis added. In Lindy Brothers

Builders, etc. v. American Radiators,

etc.,

@ 45 «

487 F.2d 161 (3rd Cir. 1973), citing this

Court's dictum in Perkins, supra, the Third

Circuit concludes that the failure of the

trial court to hold an evidentiary hearing

was “inconsistent'with the sound exercise

of discretion." 487 F.2d at 170.

In City of Detroit v. Grinnell Corp.,

495 F.2d 448 (2nd Cir. 1974), the Court of

Appeals, also citing Perkins, holds that a

fee award should be fixed by the district

court "after hearing evidence as to the

extent and nature of services rendered."

495 F.2d at 472,14/

In King v. McCord, 621 F.2d 205, 206

(Sth Cir. 1980), the Fifth Circuit, also

citing Perkins, holds that "appellants

11/ in Grinnell, the trial court had followed a

procedure strikingly similar to what occurred

in the instant case. After notifying the parties

that a hearing was to be held, the Court limited

the hearing to oral argument, not allowed by

the trial court in the instant case. 495 F.2d

at 472. The court characterizes an evidentiary

hearing “complete with cross-examination [as]

imperative.” 495 F.2d at 473.

« 66 «

should have been provided an evidentiary

hearing to resolve the disputes and supple-

ment its insufficient affidavits." Unim-

pressed with the trial court's order as

"nothing more than a ceremonial obedience

to Johnson,” The court held that the

manner in which these elements influenced

the attorneys fee award must be elucidated

by the trial court."

Attorneys fee awards should not

be based on the arbitrary and

conclusionary predispositions of

the trial judge. The failure of

the district court ¢ 59 hold an

evidentiary hearin n this case

was inconsistent =e exer-

cise of sound judicial discre-

tion. 621 F.2d 20 emphasis

added.

In Davis v. Fletcher, 598 F.2d 469

(Sth Cir. 1979), the court emphasizes the

necessity for assuring that fee awards are

"based upon appropriate standards" and are

not simply “a meaningless exercise in

parroting and answering each of Johnson's

twelve criteria." 598 F.2d at 470-71,

emphasis added.

fo

» 49 «

In the instant case, "appropriate

standards” for the award of contractual

attorneys fees were ignored and the Ninth

Circuit's reliance upon Wagner v. Benson,

101 Cal.App.3d 27 (1980) in its memorandum

Opinion is misplaced. Wagner, decided by

an intermediate appellate court does not

cite Ecco-Phoenix, supra, or International

Industries, supra, and either totally ig-

nores the principles enunciated by the

California Supreme Court in those cases or

sub silentio followed those cases by

determining that the action against a

note-holding bank was meritless. Otherwise,

Wagner v. Benson is inconsistent with

Ecco-Phoenix and International Industries .22/

32/ The Wagner opinion suggests as much by implying

that plaintiffs did not have a prima facie

claim. 101 Cal.App.3d at 35. Sciarrotta,

supra, decided nine months after Wagner cites

both Ecco-Phoenix and International Industries

and exercises discretion against a ee

and inflexible interpretation of “atto

fee clauses” where the result would be Eeead

to | lic policy. --" 110 Cal.App.3d at m=.

s .

- 48 -

It is noteworthy that Wagner does not cite

Ecco-Phoenix or International Industries.

3 The jury verdicts were coerced:

Inquiry about the numerical division of a

deliberating jury is plain error. United

States v. Noah, 594 F.2d 1303, 1304 (9th

Cie. i079). In Brasfield v. United

States, 272 U.S. 448 (1926):

Such procedure serves no useful

purpose...its effect upon a divided

jury will often depend upon circum-

stances which cannot properly be

known to the trial judge or the

appellate courts and may vary

widely in different situations,

but in general its tendency is

coercive. 272 U.S. at 450.

In Brasfield, this Court held that “the

inguiry itself should be regarded as

ground for reversal.” Id., emphasis

@ 49 «-

added .23/ This question falls within the

purview of Supreme Court Rule 17.1(a), and

(c).

Even without an inquiry about numer~

ical division of the jury, the giving of a

single Allen charge, without more, stands

at the brink of "impermissible coercion."

United States v. Seawall, 550 F.2d 1159,

1163, n.8 (9th Cir. 1977) and it has been

the law of the Ninth Circuit (ignored here)

since Seawall that having given it once,

the trial judge "may not repeat the Allen

charge or ask minority jurors to re-examine

their standing.” 550 F.2d at 1163-4,

n.1ll. See also Iverson v. Pacific

American Fisherie, 73 Wash.2d 973, 442

P.2d 243 (1968).

The Ninth Circuit said in Seawall

that “problems arising from the inherently

43/ The Ninth Circuit memorandum implies, without

holding, that a different test may apply in a

civil case. No court has so held and no reason-

ing will support such a conclusion.

- 50 -

coercive effect of the Allen charge have

caused other courts of appeal and state

courts to prohibit or to restrict severely

its use", and that, given a second time,

"it becomes a lecture sounding in reproof."

550 F.2d at 1162-3. In the instant case,

the “reproof" explicit in the magistrate's

remarks to a minority juror is striking.

RT 21961-2.

In United States v. Rogers, 489 F.2d

433, 436 (4th Cir. 1961), the court found

that the kind of procedure the magistrate

utilized here "may readily be construed by

those jurors in the minority as requiring

a deferential surrender to the views, however

unreasoned, of the majority." In Kesley

v. United States, 47 F.2d 453, 454 (5th

Cir. 1931), the court holds that “comments,

not upon the evidence but reflecting on

the jurors, are not permissible”:

Because of the impatation of

stubbornness or worse which is

likely to arise if the numerical

division of the jury is publicly

e Bi «

revealed, to require disclosure

of it is held error per se in

the courts of the United States.

Brasfield v. United States, 272

pi S. 448. much more serious is

imputation by the e fo that

some of the Le Fe forget ise

ting nei? oaths. 14/

ist emphasis ba —

The Ninth Circuit memorandum incorrectly

states that the coercion issue was raised

for the first time on appeal. (Appendix)

The issue was squarely raised in the trial

court in motions for judgment n.o.v. and

new trial, and as the record reflects, the

magistrate provided no opportunity to object.

"I don't...need advice...so I didn't discuss

this with you ahead of time", and that he

wanted to talk to the jury “unaffected by

the thoughts of attorneys." RT 21962.

Attorneys are not required to engage in

futile exercises. The bell had already

been rung and the issue was raised at the

first meaningful opportunity prior to appeal.

2f/ That very “imputation” is compelled from the

magistrate's remarks here: “Whoever is re-

sponsible for that kind of conduct [is] not

being observant of the oath that you took to

discharge your responsibility.” RT 21961-2.

° §2 «-

4. The verdict was not unanimous: Unless

otherwise stipulated, a verdict in a civil

case must be unanimous. Fox v. United

States, 417 F.2d 84, 89 (2nd Cir. 1969);

Rule 48 Fed.R.Civ.P. An "affidavit of a

juror is admissible to show the true verdict

or that no verdict was reached at all."

Fox v. United States, supra, 417 F.2d at

89. The Ninth Circuit memorandum is

contra (see Appendix) and is wrong.

It is appropriate for the trial court

on motion for new trial to set aside the

verdict where it appears that a juror, who

seemingly agreed to the verdict before it

was signed, in fact dissented therefrom.

Id., see also Matisse v. Maryland Casualty

Co., 5 F.2d 233, 234 (D.C.Wash. 1925).

In Fox, a juror was silent when polled.

In the instant case, the juror expressly

stated during the jury poll that “in order

to get a unanimous vote” he had voted "yes".

RT 21982. The Second Circuit held that

» $3 «

the trial judge had a duty to "eliminate

all doubt as to whether the verdict of the

jury is unanimous." 417 F.2d at 89. This

is precisely what petitioners' counsel

asked the magistrate to do on three

occasions and he refused. RT 21984,

21985, 21986.

Where there is uncertainty or contin-

gency as to the finality of a jury verdict,

the legal effect is the same as if there

had been no verdict. Sincox v. United

States, 571 F.2d 876, 878 (lst Cir. 1978).

The California Supreme Court has stated:

Acquiescence simply because the

verdict has been reached by the

majority is not an independent

judgment, and if permitted, would

undermine the right to a unanimous

cuss a? Cao 925, SIE 11867) .

It is error to require a juror, after an

ambiguous response, to make up his mind in

open court. United States v. Sexton, 456

F.2d 961, 967 (Sth Cir. 1972); see also

Bruce v. Chestnut Farms-Chevy Chase Dairy,

@ 84

126 F.2d 224, 225 (D.C. Cir. 1942) "The

jury should be required to retire and give

further consideration."

In United States v. Morris, 612 F.2d

483 (10th Cir. 1979), the court held:

[I]n any case upon the appearance

of any uncertainty or contin-

ency in a jury's verdict, it

a the det of the trial judge

to resolve that doubt, for "there

is no verdict as long as there

is any uncertainty or contingency

to the finality of the jury's

determination." 612 F.2d at

489, emphasis added.

The magistrate had the opportunity to re-

solve the ambiguity at a later point by

conducting a hearing on that subject.

Petitioners’ motion for an evidentiary

hearing (ER 64) was denied (ER 75). Pc *t-

trial evidentiary hearings requiring the

attendance of jurors are allowed. Morgan

v. United States, 399 F.2d 93, 97 (5th

Cir. 1968) cert.denied 393 U.S. 1025 (1969);

Remmer v. United States, 347 U.S. 227,

230-231 (1954).

= §§ «

S. Security Pacific National Bank's

destruction of files and records: Security

Pacific destroyed, altered and otherwise

mishandled material evidence .42/ The Ninth

Circuit memorandum ignores this issue

although expressly raised. (See Appendix,

p.l, Issue No. 3) .28/

The point was also

raised in the trial court in motions for

judgment n.o.v. and new trial but a

scheduled hearing on post-trial motions

was annulled. F.R.Civ.P. 59, 60(b) (3).

A court may relieve a party from a

final judgment, order, or proceeding for

the fraud, misrepresentation, or other

misconduct of an adverse party.

3/ This is within the purview of Sup.Ct.

Rule 17.1(a) in that a federal court of

appeals has so far departed from the accepted

usual course of judicial proceedings, or so

far sanctioned such a departure by a lower

court, as to call for an exercise of this

Court's power of supervision.

The point is presumably encompassed in the

memorandum's closing paragraph. This issue,

not lacking in merit, is pivotal, as the cited

cases indicate.

16/

- 56 -

Rule 60(b) (3) Fed.R.Civ.P., Rozier v. Ford

Motor Co., 573 F.2d 1332, 1339 (5th Cir.

1978); Atchison, Topeka & Santa Fe v. Barrett,

246 F.2d 846, 849 (9th Cir. 1957); Toledo

Scales Co. v. Computing Scales Co., 261

U.S. 399, 421 (1923).

The application of Rule 60(b) (3) does

not require that the information withheld,

or destroyed, be of such nature as to alter

the result in the case and "a litigant who

has engaged in misconduct is not entitled

to the benefit of calculation, which can

be little better than speculation, as to

the extent of the wrong inflicted upon his

opponent.” Rozier v. Ford Motor Co., supra,

573 F.2d at 1346, citing Minneapolis St.

Paul and S.S. Marie Rwy. Co. v. Moquin,

283 U.S. 530, 521-522 (1931). A party may

prevail without showing that the alleged

fraud affected the outcome of the trial. i

Wilson v. Thompson, 638 F.2d 801, 804 (Sth ;

Cir. 1981) |

A defendant who destroys documents in

» §7 «

anticipation of litigation thereby rendering

useless plaintiffs' attempt to obtain meaning-

ful discovery is subject to sanctions.

Alliance To End Repression v. The Rochford,

75 F.R.D. 438 (N.D.I11. 1976)

It has long been recognized that

sanctions may be proper where a

party, before a lawsuit is insti-

tuted, willfully places himself

in such a position that he is

unable to comply with a subsequent

discovery order. Bowmar Instrument

Corp. v. Texas Instruments, Inc.,

25 Fed.R.S. 2d, 423, 427 (N.D.Ind.

1977). See also National Hockey

Leaque Vv. Metropoittan Hockey

= ’ 427 U.S. 6) 7

Rule 26(e) (2) Fed.R.Civ.P. requires that

when interrogatory responses are incorrect,

there is a duty “seasonably to amend."

None of the interrogatory responses were

amended. See "Statement of Case,” supra.

It was an abuse of discretion for the

district court not to conduct a hearing on

this issue and, having failed to do so,

the court of appeals should have examined

= 88 -

the uncontradicted evidence and provided

relief pursuant to Rule 60(b) (3).

Fed.R.Civ.P.

6. Assertion of violation of the Glass-

Steagall Act as an affirmative defense to

bank counterclaims: First, the trial

court should not have directed a verdict

on the issue. ER 39. There was substan-

tial uncontradicted evidence of a viola-

tion, accompanied by the bank's own ad-

missions. See P1.Ex.95-2. Appendix.

Second, private litigants are entitled to

assert a violation of Glass-Steagall as an

affirmative defense. The latter is an

"important question of federal law, which

has not been, but should be, settled by

this Court.” Sup.Ct. Rule 17.1l(c). A

directed verdict should be granted only

when the court can say “as a matter of law

the evidence was capable of only one

interpretation." Juhnke v. E.I1.G. Corp.,

@ §9 -

444 F.2d 1323, 1325 (9th Cir. 1971). The

opposite was true here.

The purpose of the National Bank Act

is to confine national banks to the exercise

of only “such incidental powers as shall

be necessary to carry on the business of

banking." 12 U.S.C. §24(7). Investment

Company Institute v. Camp, 401 U.S. 617

(1971) In Camp, this Court citing the

congressional record notes:

Senator Glass made it plain that

it was ‘the fixed purpose of

Congress' not to see the facilities

of commercial banking diverted

into speculative operations by

the aggressive and promotional

character of the investment bank-

ing business. 401 U.S. at 632.

* + +

Our great banking system was

diverted from its original pur-

poses into investment activi-

ties...the purpose of the regula-

tory provisions of this bill is

to call back to the service of

agriculture and commerce and

industry the bank credit and the

bank service designed by the

» 66 «

framers of the Federal Reserve 17/

Act. 401 U.S. at 633, n.29. —

Although “lending” is directly

related to a national bank's express

powers, it violates the act when it is

integral to a relationship with a

securities promoter and designed to

increase bank profits by facilitating the

17/

Security Pacific's internal memorandum

(P1.Ex.95-2) admits that the bank was engaged

in acts prohibited by Glass-Steagall. The

Security Pacific officer who prepared that

document viewed the dangers of the bank's partici-

pation in the program in the same way as Congress

and the Supreme Court perceived them, 401 U.S.

at 633, but the bank for profit went ahead

anyway and advanced another $9 million. The

memorandum sets out three hazards that this

Court considered the very evils prohibited by

Glass-Steagall: (1) identification of the

bank with the promoter in the mind of the bor-

rower; (2) loans intended to “facilitate” a

particular investment; and (3) loss of confi-

dence, with the result that "disenchanted"

customers would become litigants. The

memorandum tracks this Court's recitation of

congressional purpose as expressed in Camp:

"There was also perceived the danger that

when commercial banks were subject to the

promotional demands of investment banking,

they might be tempted to make loans to cus-

tomers with the expectation that the loan

would facilitate the purchase of stocks

securities.” 401 U.S. at 631-632, emphasis

added.

B

= 61 «

sale of securities to the general public,

"notwithstanding that it may be convenient

and useful in attracting customers who may

also become depositors and borrowers."

American Society of Travel Agents v. Bank

of America, 385 F.Supp. 1084, 1087 (N.D.Cal.

1974), emphasis added.

In Board of Governors of the Federal

Reserve System v. Investment Co.

Institute, 450 U.S. 46 (1981), this Court

reviewed the congressional purpose for

Glass-Steagall and noted that the kind of

bank services the Court was considering in

that case were not significantly different

from the traditional fiduciary functions

of commercial banks, i.e., to manage the

investment portfolio of customers in the

form of trusts, estates, and agency

accounts. 450 U.S. at 55. However, the

extension of unsecured bank loans to

promoter recruited customers for

speculative investment purposes is not one

i

pally shee .

e 62 «

of the “traditione! fiduciary functions of

commercial banks".

This Court has not ruled upon the

efficacy of either a private claim under

Glass-Steagall or an affirmative defense

to a Glass-Steagall violation. The sparse

legal authority to date is to the effect

that the Act does not give rise to a private

damage claim. See Stein v. Galitz, 478

F.Supp. 517 (N.D.I11. 1978); Russell v.

Continental Illinois National Bank & Trust

Co., 479 F.2d 131 (7th Cir. 1973). Here,

however, the violation is asserted as an

affirmative defense to enforcement of bank

promissory notes. The notes facilitated

the unlawful sale of unregistered securities

and were integral to the banks' promotion

of new business. See P1.Ex.95-2, Appendix.

It is a general rule that a court

will not allow recovery on an illegal con- |

tract. Hedla v. McCool, 476 F.2d 1223, %

1227 (9th Cir. 1973). Where violative F

J

conduct undermines the purpose of legisla- ‘

@ 63

tion and congressional intent, the contract

will not be enforced.

{[F])ederal public policy requires

such annulment in order to secure

observance, effectuate the legis-

lative purpose, and prevent noxious

consequences. General Life of

Missouri Investment Co. v.

Shamburger, 546 F.2d 746, 784

(8th Cir. 1976).

In Kaiser Frazier Corp. v. Otis &

Co., 195 F.2d 838 (2nd Cir. 1962)

cert.denied 344 U.S. 856 (1962), the court

of appeals voided a contract which would

not itself have been illegal because it

was closely related to acts that were.

[A] contract which violates the

laws of the United States and

contravenes the public policy as

expressed in those laws is unen-

forceable...this is so, regard-

less of the equities as between

the parties, for ‘the very mean-

ing of public policy is the

interest of others than the parties,

and that interest is not to be

at the mercy of the defendant

alone'...(Wle are Satistied that

the contrac was | so closely close pany

& te he per rformance © of oA forbidde

by Taw as to egal."

5 F.2d at 844, we te otis,

The promissory notes here were central to

the banks' violation of Glass-Steagall. <

@ 64 «

Enforcement of these notes defeats

congressional purpose and permits the

banks to profit from their wrongdoing. A

contractual obligation arising in the

course of securities violations is

"“voidable when the purposes of the

[securities] acts are thereby furthered."

Byrnes v. Faulkner, Dawkins & Sullivan,

550 F.2d 1303, 1313 (2nd Cir. 1977).

Conversely, if non-enforcement of a

contract would frustrate legislative

purpose, the contract will be enforced.

A.C. Frost & Co. v. Cour D'Alene Mines

Corp., 312 U.S. 38, 43 (1941):

The ultimate issue is whether

the result in the particular

case would effectuate SE frus-

trate the se of the act.

Emphasis adted Dai

See also Serzysco v. Chase Manhattan Bank,

290 F.Supp. 74, 90 (S.D.N.Y. 1968) aff'd

409 F.2d 1360 (2nd Cir. 1969) wherein the

court barred the bank's enforcement of

promissory notes because of violation of

“

4. «*%

|

Zo »

» 65 -

Regulation U, margin requirements .22/

CONCLUSION

For the reasons set forth above, the

Petition for Writ of Certiorari should be

granted.

DATED: April ll, 1984.

Respectfully submitted,

GOLDSTEIN & PHILLIPS

A Professional Corporation

LAW OFFICES OF ROBERT R. ELLEDGE

A Professional Corporation

By ALVIN H. GOLDSTEIN, JR.

Attorneys for Petitioners

8/ Had these investment contracts been listed

securities, all of the bank loans would have

violated Regulation U. A suit to collect on

the promissory notes would have been barred

by illegality. "Under the provisions of 15

U.S.C.A. §77(c) (b)...contracts which are in

violation of Regulation U are declared void.”

Serzysco v. Chase Manhattan Bank, 290 F.Supp.

74, 90 (S.D.N.Y¥. 1968), aff'd 409 F.2d 1360

(2a Cir. 1969). Regulation U was promulgated

pursuant to the Securities Exchange Act of

1934, in part, to protect investors from excessive

trading and relates to listed (and, therefore,

registered) securities. It is illogical to

hold t Congress intended to penalize commercial

banks that illegally finance the purchase of

listed securities, but gave carte blanche to

banks that facilitate the sale of unlisted

(and, here unregistered) securities. The former

is within the purview of the securities acts,

the latter within the purview of the National

Bank Act.