Reply Brief — Green v. Santa Fe Industries, Inc.

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Office - Supreme Court, U.S.

FILED

OCT 9 1980

{ 3S

No. 84-303

ALEXANDER L. STEVAS.

CLERK

IN THE SUPREME COURT

OF THE UNITED STATES

OCTOBER TERM, 1984

S. WILLIAM GREEN, EVELYN GREEN and CYNTHIA

COLIN, as Executors of the Estate of Louis

A. Green, deceased and EVELYN GREEN, indi-

vidually, and as stockholders of Kirby Lumber

Corporation, suing on behalf of themselves

and for the benefit of said corporation and

for the penefit of said corporation and for

the class of all other stockholders of said

corporation similarly situated,

Petitioners,

SANTA FE INDUSTRIES, INC., SANTA FE NATURAL

RESOURCES, INC., KIRBY LUMBER CORPORATION.

Respondents.

REPLY BRIEF IN SUPPORT OF PLAINTIFFS'

PETITION FOR CERTIORARI

SIDNEY BENDER

Attorney for Petitioners

1205 Franklin Avenue

Garden City, NY 11530

(516) 742-4250

Of Counsel:

Janine L. Bender

TABLE OF CONTENTS

THE PETITION SEEKS TO CORRECT

BLATANT VIOLATIONS OF THE ERIE

DOCTRINE

CONTRA DEFENDANTS, THE LOWER

COURTS NULLIFIED DELAWARE‘S

REMEDY EXPLICITLY "PRESERVED"

FOR PLAINTIFFS IN CONTRAVENTION

OF ERIE V. TOMPKINS

DEFENDANTS CONCEDE THAT THE

FEDERAL COURTS BELOW APPLIED

THE LAW OF THE WRONG STATE,

NAMELY DELAWARE, TO A CLAIM

OF FRAUD UNDER NEW YORK'S

MARTIN ACT, CONTRARY TO ERIE

PLAINTIFFS' ISSUES WERE BOTH

RAISED BEFORE AND CONSIDERED

BY THE COURT OF APPEALS,

CONTRA DEFENDANTS (6-7)

DEFENDANTS’ CLAIM FOR DAMAGES

UNDER RULE 49.2 IS SHAM

CONCLUSION

TABLE OF AUTHORITIES

Cases

Adickes v. S.H. Kress & Co., 398 U.S.

ee et ee eee ke se ee

Bishop v. Commodity Exchange Inc.,

2708 F.Supp. i557 (S.D.N.Y. 1983).....

Day & Zimmerman v. Challoner 423 U.S.

i Parra ra

Erie R. Co. v. Tompkins, 304 U.S. 64

Dee ee Cece keh a eee kes eee cee sees s

Halle & Stieglitz v. Kolen, [1978-

1981 Transfer Binder] Blue Sky L.

Rep. (CCH) para. 71,435 (Sup. Ct.

N.Y. County 1978), aff'd on the

Opinion below, 71 A.D.2d 554, 418

Datumeee gene (286 Dep't 1979)... cece

Harris v. Atchison T. S.F. Ry. Co.,

Bae Beem Cee Leen Cis. 1976) .cccccese

Klaxon Co. v. Stenton Elec. Mfg. Co.,

BRS Wes SOF LEBEL) ccc ccocesevssccces

People v. Barysh, 95 Misc.2d 616, 408

N.Y.S.2d 190 (Sup. N.Y.Cty 1978).....

People v. Concord Fabrics, Inc., 83

Misc.2d 120, 371 N.Y.S.2d 550 (Sup.

Ct. N.Y. County) aff'd on opinion

below, 50 A.D.2d 787, 377 N.Y.S.2d

eg Er eer eee eee

PAGE

passim

11,13,

iii

Powell v. Charles Offutt Co., 576 F.Supp.

272 (E.D.Tex. 1983) aff'd, 731 F.2d

SSG CSE CAF. LESS) ck ceca wesssvecssswcees 4

Santa Fe Industries, Inc. v. Green, 430

oo Mie Be es PPPS rrr eae rey eee 9

Shivers v. Amerco, 670 F.2d 826 (9th

Ca ee Ss Oe Ones ORR one haere Lk Pe

Singer v. Magnavox Co., 380 A.2d 969

[DRA DU. LOFT) ccc hee shee eee cease eee aaes passim

Sterling v. Mayflower Hotel Corp.,

DO@i. SURE. , 93 A. dG L107 (AFSSZ) occ cccscces 8

Vine v. Beneficial Finance Co., 374

Fue Gar tee SEs RT cate eee 4k hee he 13

Weinberger v. UOP, Inc., 457 A.2d 701

TOOL. SUSE. LIGA) sc crccevvevesessvsesseres passim

STATUTES AND OTHER AUTHORITIES

Martin Act, New York General Business

es SS er errr ee eer re passim

Rule 49.2, Rules of the Supreme Court

Of the United States. ...cccccvsscsssennes 17,18

Securities Exchange Act of 1934

Section 10(b), 15 U.S.C. 8 783 (b) 12

Wright, Federal Courts, 3a ed. (1976)

De EOS e ese ceases Gn seca eeeeeses east seeds 4

IN THE SUPREME COURT

OF THE UNITED STATES

OCTOBER TERM, 1984

S. WILLIAM GREEN, et al.,

Petitioners,

Vv.

SANTA FE INDUSTRIES, INC., et al.,

Respondents.

REPLY BRIEF IN SUPPORT OF PLAINTIFFS'

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

l. THE PETITION SEEKS TO CORRECT BLATANT

VIOLATIONS OF THE ERIE DOCTRINE

The petition raises "special and im-

portant reasons" for review, involving a

Gross misapplication of Erie v. Tompkins in

two instances.

(a). As to the Martin Act, defendants

concede that a New York State Court would

apply New York case law. Thus the District

Court sitting in New York, finding it "un-

necessary to address" New York case law,

blatantly violated Erie in dismissing plain-

tiffs' Martin Act claim on the sole "basis"

of Weinberger, a Delaware decision.* Since

the District Court's violation of Erie is

so clear, defendants simply ignore and thus,

concede this point.**

(b). As to the breach of fiduciary obli-

gation claim,*** the Federal District Court

engrafted a limitation onto the explicit

grandfather clause set forth in Weinberger,

thus nullifying the state created remedy

specifically preserved for these plaintiffs.

* It is undisputed that the Martin Act is

properly invoked because of the substan-

tial acts which occurred in New York.

This is not a conflicts-of-law question.

ee Reference to the District Court includes

the summary affirmance of the Court of

Appeals for the Second Circuit.

*** It is undisputed that Delaware law gov-

erns this breach of fiduciary obligation

claim.

ee et ei AER ae

<Aegate ~

Such abuse of power is in direct conflict

with the command of Erie as expressed by

this Court in Day & Zimmerman, Inc. v.

Challoner, 423 U.S. 3, 4 (1975):

"A federal court in a diversity

case is not free to engraft onto...

state rules exceptions or modifications

which may commend themselves to the

federal court, but which have not

commended themselves to the state...."*

Contra defendants (7), plaintiffs first

question presents an Erie issue. A federal

court cannot escape the command of Erie by

purporting to apply state law, yet create

its own exception to the unequivocal holding

of the recent decision by the states highest

court, directly on point. That is not a

matter of interpretation. A federal court's

mere claim that it is interpreting state law

cannot shield it from an improper abuse of

power in failing to apply the law "as it

finds it." Harris v. Atchison T. & S.F. Ry

* Emphasis supplied throughout unless other-

wise noted.

Co., 538 F.2d 682, 690 (5th Cir. 1976).

It is plain that the Federal District Court

did not have the power to "second guess the

highest court" of Delaware nor "inject itself

into the development of state substantive

law." Powell v. Charles Offutt Co., 576

F. Supp. 272, 278 (E.D.Tex. 1983), aff'd,

731 F.2d 886 (5th Cir. 1984) (citing Erie).

Contra defendants, the above Erie issues

have far-reaching effects. Erie “goes to

the heart of the relations between the fed-

eral government and the states." Wright,

Federal Courts, 3d ed. (1976) p. 255. fThis

petition, seeking to correct the federal abuse

of power in disregarding states' rights, has

Significance for all federal courts.

(c). Defendants misrepresent the facts

(5) by asserting that plaintiffs “were in

the virtually unique position of still liti-

gating a pre-1977 merger at the time the

Weinberger decision was announced." Defen-

dants fail to mention that shareholders other

than plaintiffs, who held 2,403 shares of

Kirby, have two separate actions pending

involving this 1974 merger: one in the South-

ern District of New York and another in

the Supreme Court, New York County.*

2. CONTRA DEFENDANTS, THE LOWER COURTS

NULLIFIED DELAWARE'S REMEDY EXPLICITLY

"PRESERVED" FOR PLAINTIFFS IN CONTRAVENTION

OF ERIE V. TOMPKINS

Defendants misrepresent the holding in

Weinberger, stating (5):

"The opinion in Weinberger clearly

indicated that the rule there

announced is not retroactive as to

* Loengard et al. v. Santa Fe et al., 82

Civ. 7919 (KTD). The case in New York

State Supreme Court involves the Borg

plaintiffs in addition to the petitioners,

herein, contra defendants (5).

persons who, like the plaintiff

in that case, had relied on the

Singer decision in deciding to

forego appraisal."

There is absolutely nothing said or indi-

cated in Weinberger that the grandfather

clause applied only to persons "who had

relied on the Singer decision." Rather,

Weinberger unequivocally stated (457 A.2d

714) that the “right to challenge the el-

ement of fair value must be preserved" in:

"(4) any case challenging a cash-out

merger, the effective date of which

is on or before February 1, 1983."

Notwithstanding the explicit language above,

the District Court transformed category (4)

by inserting the following underlined words:

"any case instituted after the decision

in Singer v. Magnavox, 380 A.2d 969

(Del. Supr. 1977) challenging a cash-

out merger, the effective date of

which is on or before February 1, 1983."

That significant qualification by the District

Court is not simply "interpretation", contra

defendants (8-9). By nullifying the Delaware

remedy for all persons who instituted such

Suits before Singer, the lower courts invent-

ed a "policy consideration" and revoked

Delaware's explicit policy. The proper

function of a federal court in a diversity

case “is to ascertain what the state law

is, not what it [thinks it] ought to be."

Klaxon Co. v. Stenton Elec. Mfg. Co., 313

U.S. 487, 497 (1941).

To demonstrate the District Court's blind

spot, it stated "plaintiffs would reap a

windfall that the Delaware Supreme Court

could not have intended." (A 13). Weinberger

clearly provides a remedy here since the

fiduciary fleeced its cestui stockholders

in a self deal by paying them $150 per share

where the established asset value is $456

per Kirby share.*

In addition to the quasi-appraisal remedy

"preserved" under the grandfather clause,

Weinberger also explicitly stated that the

Chancellor may fashion "any form of equit-

able and monetary relief" (457 A.2d at 714)

where:

"(t]he appraisal remedy we approve

may not be adequate...particularly

where fraud,...self-dealing,...or

gross and palpable overreaching

are involved."

Thus, under Weinberger, appraisal is not the

exclusive remedy in a cash-out merger; contra

defendants (4-5) and the District Court (All-

12).

* Weinberger citing Sterling v. Mayflower

Hotel Corp., Del. Supr., 93 A.2d 107,

110 (1952) held: "The requirement of

fairness is unflinching in its demand

that where one stands on both sides of a

transaction, he has the burden of estab-

lishing its entire fairness, sufficient

to pass the test of careful scrutiny by

the courts." Thus Weinberger confirms the

fact that the 1952 rule of Mayflower is

still the law in Delaware and has been at

least since 1952.

The District Court abrogated Delaware's

remedy for "fraud" and “gross and palpable

overreaching." It has effectively converted

a “fraud" against plaintiffs into a “wind-

fall" for defendants, not plaintiffs. That

unconscionable result is clearly not the

command of Weinberger and no federal court

has the power to change Delaware law.

Defendants flatly ignore pages 19-20 of

plaintiffs petition; thus thev have abandoned

the District Court's "first" ground for re-

fusing to apply the explicit grandfather

clause, namely that plaintiffs "did not ab-

jure an appraisal" within the language of

Weinberger (Al6). It is unrefuted that the

District Court's conclusion is directly con-

trary to this Court's determination that

"respondents [petitioners herein] .. . did

not pursue their appraisal remedy in the

Delaware Court of Chancery." 430 U.S. at 466-

467. Not pursuing an appraisal remedy is

plainly ecuivalent to an abjural of ap-

praisal.

3. DEFENDANTS CONCEDE THAT THE FEDERAL

COURTS BELOW APPLIED THE LAW OF THE

WRONG STATE, NAMELY DELAWARE, TO A

CLAIM OF FRAUD UNDER NEW YORK'S MARTIN

ACT, CONTRARY TO ERIE

Defendants abandon, as they must, the

District Court's reason for dismissing plain-

tiffs' Martin Act claim, namely that it was

based solely on the Delaware decision in

Weinberger. *

* The District Court simply stated (A5-A7):

"Defendants now move for summary judgment

on both causes of action on the basis of

the recent holding in Weinberger v. UOP,

Inc. Defendants argue that Weinberger is

binding on all cases sub judice and, there-

fore, acts as a bar to the plaintiffs'

action. For the following reasons, sum-

Mary judgment is granted in the defendants'

favor. Accordingly, it is unnecessary

to address the arguments asserted under

the Martin Act."

In fact, defendants agree with plaintiffs

that the claim under New York's Martin Act

is governed only "by the applicable New York

authorities" (9), without reference to Del-

aware case law. Defendants, simply ignoring

the Erie issue in plaintiffs' second question,

concede that the answer should be in the

affirmative.

Plaintiffs' claim under New York's Martin

Act is for fraud. Contra defendants, the

forced purchase of Kirby's minority shares,

without prior notice of the merger, at a

price of $150 per share where the undispu-

ted asset value is $456 per share, consti-

tutes a fraud.

Section 352-c l(a) of the Martin Act ex-

plicitly prohibits "any fraud" (A21). The

Court in Halle & Stieglitz v. Kolen* stated:

* Blue Sky L. Rep. (CCH) Para. 71,435 (N.Y.

Sup. Ct. 1978) aff'd 71 A.D.2d 544, 418

N.Y.S.2d 552 (lst Dept. 1979). :

"The private right of action under

General Business Law 8 352-c is

essentially a fraud action."

Shivers v. Amerco, 670 F.2d 826, at 831-832

(9th Cir. 1982) held:

"New York's blue sky law does not

parallel Rule 10b-5. N.Y. Gen. Bus.

Law § 352-c prohibits fraud or

misrepresentation...."

See also Bishop v. Commodity Exchange Inc.,

564 F.Supp. 1557, 1565 (S.D.N.Y¥. 1983).

Unlike § 10(b) of the Securities Exchange

Act of 1934, $ 352-c of the Martin Act ex-

pressly prohibits "fraud", and is not con-

fined to "deception" or "manipulation".

This Court in 1977 held that the Kirby

freeze-out at an unconscionable price was

not actionable under 8 10(b) because it did

not involve "deception" or "manipulation".

Since "fraud" is expressly included in

§ 352-c, plaintiffs clearly state a Martin

Act claim.

Ce Ahem

Defendants trifle with this Court in

stating (9): “deception and reliance .

are essential elements of any private damage

action under the Martin Act." In People v.

Barysh 95 Misc.2d 616, 620, 408 N.Y.S.2d

190, 193 (Sup. N.Y.Cty 1978), the Court

stated that the Martin Act "clearly does

not require several of the common law ele-

ments of fraud, namely, reliance and sci-

enter". It is plain that in a forced sale

Situation, where the wrongdoers preempt

plaintiffs from acting, reliance is “un-

necessary". Vine v. Beneficial Finance Co.,

af8 F.420 627, 635 (2a Cir. 1965).

Defendants (9-10) attempt to convert

plaintiffs' "fraud" claim into one of

"deception". In so doing, defendants dis-

tort the New York authorities. Shivers,

Supra, cited Halle & Stieglitz, supra, for

the "'fraud or deception' requirement".

° 14

People v. Concord Fabrics, Inc., 83 Misc.2d

120, 371 N.Y.S.2d 550 (Sup. Ct. N.Y.Co ),

aff'd on opinion below, 50 A.D.2d 787 (lst

Dept. 1975), involved a proposed freeze-out

merger, on notice to the sharenolders, with

full disclosure, at an unconscionable price.

It was enjoined under the Martin Act. On

the facts, our case is a fortiori.*

4. PLAINTIFFS' ISSUES WERE BOTH RAISED BEFORE

AND CONSIDERED BY THE COURT OF APPEALS,

CONTRA DEFENDANTS (6-7)

The proper legal standard is that the

issue be either raised or considered by the

Court of Appeals before this Court will con-

* Although the Court in Halle & Stieglitz,

distinguished Concord Fabrics, the fact

is that Halle & Stieglitz did not involve

a freeze out merger transaction; there,

plaintiffs accepted a tender offer which

they later claimed had unfair terms and

was coercive.

it. Adickes v. S.H. Kress & Co., 398 U.S.

144, 147 n.2 (1970). Plaintiffs satisfy

this standard.

Defendants fail to point out that they

themselves contended in the Court of Appeals:*

"The District Court correctly applied

Erie v. Tompkins in ascertaining how

the Delaware Supreme Court would have

decided the summary judgment motion."

Accordingly, the Court of Appeals had the

Erie question before it.** Plaintiffs' two

arguments below were the District Court's

(i) creation of an exception to the unambi-

guous grandfather clause set forth in Wein-

berger; thus destroying the state remedy

explicitly preserved for plaintiffs and

* Heading of Point I of Defendants' Ans‘ver-

ing Brief, p. 15, dated March 2, 1984.

** Moreover, the District Court's decision

specifically referred to "Erie v. Tompkins,

304 U.S. 64 (1938)" (AS).

(ii) erroneous application of Weinberger, a

Delaware decision, to New York's Martin Act.

The ground for both arguments was Erie.

Defendants obviously considered that to be

the issue inasmuch as they defended on that

ground in the first point of their argument.

Defendants erroneously assert (6) that

plaintiffs "did not argue, or even remotely

suggest, that the District Court had refused

to follow state law..." (original empha-

Sis). In fact, the very first sentence of

plaintiffs' "Point I", (p. 14) in their main

brief in the Court of Appeals (dated Feb-

ruary 10, 1984), asserted that the District

Court had failed to follow state law:

We submit that analysis of Weinberger

demonstrates that the District Court

misunderstood and failed to follow

its holdings applicable to our case,

thereby committing reversible error

or law."

Moreover, with respect to New York's Martin

Act, plaintiffs argued in their main brief

(p. 22) in the Court of Appeals:

"The Court simply stated that ‘it is

unnecessary to address the arguments

asserted under the Martin Act,'

(388a) apparently because it erron-

eously believed that Weinberger, a

Delaware decision, barred claims under

New York's Martin Act. That is clear

error of law."

That is precisely the same issue plaintiffs

raise in their second question in this Court.

Accordingly, defendants’ arguments that

the issues herein were never raised below

are without merit.

5. DEFENDANTS CLAIM FOR DAMAGES UNDER RULE

49.2 IS SHAM

The petition and this brief demonstrate

that the petition should be granted. Even

if it is not granted, it clearly is not

frivolous, where defendants fail to refute

the fact that the District Court applied the

law of the wrong state to plaintiffs' Martin

Act claim. Moreover, the District Court's

nullification of plaintiffs' state-created

remedy explicitly granted to them under Del-

aware law, is a plain violation of Erie v.

Tompkins. Thus, this case is clearly not

one of those highly unusual instances where

it can be said that plaintiffs are guilty of

bad faith. Accordingly, defendants' claim

under Rule 49.2 should be denied.

CONCLUSION

For the reasons stated in the Petition

and in this brief, The Petition for Writ of

Certiorari should be granted.

Dated: October 9, 1984

Respectfully submitted,