Opposition Brief — Liberty National Bank & Trust Co. v. George

Office -Supreme Court, U.S.

i 3 FILED

GUN 24 1985

ALEXANDER L. STEVAR,

CLERK

No. 84-1830 ~~

In the Supreme Court of the United States

October Term, 1984

LIBERTY NATIONAL BANK & TRUST COMPANY OF

LOUISVILLE (f/d/b/a UNITED KENTUCKY

BANK, INC.),

Petitioner,

vs.

KENNETH R. GEORGE and ALBERTA W. GEORGE,

Respondents.

On PETITION FOR A Writ OF CERTIORARI TO THE

UNITED STATES Court or APPEALS

For THE SIXTH CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

Larry E. Parrisu, Esa.

(Counsel of Record)

Parrish & Mutrooney, P.C.

Twenty-First Floor

First Tennessee Building

165 Madison Avenue

Memphis, Tennessee 38103

(901) 526-7777

Attorney for Respondents

- BEST AVAILABLE COPY j

TABLE OF CONTENTS

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TABLE OF AUTHORITIES

Cases

Greenview Trading Company, Inc. v. Hershman and

Leicher, P.C., 473 N.Y.S. 2d 722, Docket No. 22790

UI ca Siege er on alt chat sigan deed ada icadaciaaiabsiatinn

Haroco v. American National Bank & Trust Company of

Chicago, 747 F.2d 384 (7th Cir. 1984), cert. granted

sub nom., American National Bank and Trust Com-

pany of Chicago v. Haroco, ........ SEDs shakin , 105 S.Ct.

ee CRI), Ce RO, GI ana aisc ssc sicsvsccscnccticcekcstcsccsccens

Kenneth R. George and Alberta W. George ». The

Liberty National Bank and Trust Company of Louis-

ville, United Kentucky, Inc. and Does 1-99, No. 84-

SNE ie edaistceaieetbas clatcasicnvai veslatecssichiolass teadancaint adel nasidailaliasnit

Luebke v. Marine National Bank of Neenah, 567 F.

I, Be CRs PUN, BD cnc castctditc ce snssanssececcentstacnanncs

Migra v. Warren City School District Board of Educa-

GIDE, ccna Se Shecnads , 79 Law. Ed. 2d 56 (1984) ............

Sedima, S.P.R.L. v. Imrex Co., Inc., 741 F.2d 482 (2d

Cir. 1984), cert. granted, ........ oe Tes , 105 S.Ct.

ee eg I Ts, CIID Sschtiitceninisiciicsnesininsinioticians

5, 7

II

Constitution

Constitution of the United States, Article VI, Cl.2.... 6

Statute

BE UE BRS, SED ei csenivnictsccctectesnvsscsccentondoctinaneias 6

Other

“The National Law Journal,” June 17, 1985, atp. 10... 7

No. 84-1830

In the Supreme Court of the United States

October Term, 1984

LIBERTY NATIONAL BANK & TRUST COMPANY OF

LOUISVILLE (f/d/b/a UNITED KENTUCKY

BANK, INC.),

Petitioner,

VS.

KENNETH R. GEORGE and ALBERTA W. GEORGE,

Respondents.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES CouRT OF APPEALS

For THE SIXTH CIRCUIT

RESPONDENTS’ BRIEF IN OPPOSITION

COUNTER-STATEMENT OF THE CASE

In the petition (pp. 3-8), Petitioner includes a mis-

represented statement of the case. Throughout this litiga-

tion, misstatements by Petitioner to various courts have

remained a continuing and serious problem. Because of

this, Respondents must include an accurate account of

the case in order for this court to know the context of

what is presented for review.

Because it cannot be improved, Respondents adopt and

incorporate here as their counter-statement of the case

the statement on pp. 3-8 of the case included in their pe-

tition for certiorari. For convenience, those pages are

included as Appendix A hereto.

rr. —C—“S

2

But, Respondents would particularly highlight mis-

statements of the case of critical significance to claims

made by Petitioner in this petition. On p. 4, third para-

graph, second line of the petition [also see petition pp. 8

(fn. 2), 12 (fn. 4) and 15] Petitioner states, and would

have this court believe, that Respondents, in the state

proceedings below, filed counterclaims. This simply is

not so, and Petitioner knows it is not true. Respondents,

in the state court action, filed affirmative defenses only.

Respondents, in the state court, sought no affirmative relief

from the state court, and all claims made by Respondents

were made in defense for no purpose other than to block

the effort of Petitioner in its attempt to be awarded

affirmative relief against Respondents.

Counsel for both sides and the court, in the state

court proceedings, from time to time, erroneously referred

to the affirmative defenses of Respondents as counter-

claims. However, the record clearly speaks for itself and

clearly reveals that Respondents never made any counter-

claims.

Petitioner also attempts to leave with this court the

false impression that the attempt of Respondents, in state

court, to amend its defensive pleading (falsely stated by

Petitioner to be a counterclaim) to include an affirmative

defense of fraudulent inducement was an afterthought and

an eleventh hour act of desperation in violation of a

previous order of the state court to close the pleadings.

In fact, both Petitioner and Respondents proceeded

on the assumption that the affirmative defenses pled by

Respondents in the state court included a defense of

fraudulent inducement. The memorandum of law filed

by Petitioner in support of its motion for summary

judgment includes a section devoted to an attempt to

overcome the affirmative defense of fraudulent induce-

3

ment included in Respondents’ responsive pleading. In

the memorandum of law filed by Respondents in opposition

to the motion for summary judgment, the thought that

the affirmative defenses pled by Respondents included

fraudulent inducement is unmistakable.

It was only in the context of argument before the

state court on the motion for summary judgment filed by

Petitioner that any question was raised concerning the

fraudulent inducement affirmative defense. In that hear-

ing, the court was stating its intention to enter a summary

judgment and attempting to justify that decision. Counsel

for Respondents noted, in response to the court, that Re-

spondents had raised an issue concerning fraudulent in-

ducement and, even if every other thing the court had

stated as justification were true, whether there had been

fraudulent inducement was indisputably a jury issue, and

that Respondents intended to exercise their right to a

jury determination.

Then, for the first time, the court stated that it did

not consider that fraudulent inducement had been pled by

the pleadings filed by Respondents. Therefore, the court

said, a right to a jury determination on the fraudulent

inducement issue was summarily pretermitted. Then, and

only then, did Respondents ask permission to amend their

responsive pleading so as to plead the affirmative defense

of fraudulent inducement in a manner consistent with

what the trial court seemed to think was necessary. The

trial court then fell back on its previous order that the

pleadings were closed, holding, therefore, that no amend-

ment would be allowed. The court then proceeded on the

assumption that Respondents had incurably failed to plead

fraudulent inducement in defense. This was the classic

Catch-22. This cleared the way for the court to enter the

summary judgment which, at the outset, it convened to do.

Rea CRM ene errr Tn ee

SUMMARY OF ARGUMENT

It should first be noted that Respondents join with

Petitioner in the belief that the decision by the Sixth

Circuit which Petitioner seeks to have reviewed is rife

with serious error of large magnitude and far-reaching

consequence. The fact that the case was remanded by

the Sixth Circuit to the district court for a trial restricted

to one of the issues raised by Respondents’ complaint,

because of the prior erroneous holdings of the district court

which were affirmed by the Sixth Circuit, provides little

more than a seed bed for continuing an unnecessary con-

troversy. Tried in its present state, one can be assured

that the trial will result in many additional] errors as per-

ceived from the perspective of both adversarial sides. In

other words, subsequent appeals and, most probably, sub-

sequent petitions for certiorari to this court are inevitable

if this case proceeds on the present state of the record.

Respondents have previously filed a petition for cer-

tiorari to this court in this case and earnestly believe, and

sought to persuade this court, that this is one of those

exceptional cases which demands review by this court.

However, this court saw fit to deny Respondents’ prior

petition for certiorari. Kenneth R. George and Alberta W.

George v. The Liberty National Bank and Trust Company

of Louisville, United Kentucky, Inc. and Does 1-99, No.

84-1392.

The only opposition Respondents have to the present

petition for certiorari is that it seeks to limit the issues

so as to avoid this court’s review of issues much more de-

manding of attention. Two of the issues which Petitioner

seeks to have reviewed will be pretermitted any day by

this court’s decisions in Sedima, S.P.R.L. v. Imrex Co., Inc.,

5

741 F.2d 482 (2d Cir. 1984), cert. granted, ........ 18 pene ,

105 S.Ct. 901 (1985), Case No. 84-648 and Haroco v. Ameri-

can National Bank & Trust Company of Chicago, 747 F.2d

384 (7th Cir. 1984), cert. granted sub nom., American Na-

tional Bank and Trust Company of Chicago v. Haroco, ........

Wa eats , 105 S.Ct. 902 (1985), Case No. 84-822. These

decisions are sure to be rendered before this court disposes

of this petition.

RESPONSE TO QUESTION 1

What is most notable about the statement of Ques-

tion 1 by Petitioner is that it is based on a false premise.

At first blush the argumentation seems persuasive. But,

when the straw man, built on Petitioner’s false statements

of factual predicates, is revealed, the underpinnings of the

argument collapse, and the facade by which Petitioner

seeks to mislead this court becomes evident.

Stated in a way consistent with the facts and record,

the issue sought to be raised by Petitioner must include

essential elements left out by Petitioner. That is, the

issue is: (1) when a person who lives in a state different

from another person against whom he wishes to make a

claim; (2) is sued in the home state of the person against

whom he wishes to make a claim by the person against

whom he wishes to make a claim; (3) joined with other

state court defendants whose residence is the same as

that of the person against whom the out of state person

wishes to make his claim; (4) and, before the out of state

person is required by the law of the state to answer the

state court claims; (5) he makes his claims in federal court

according to his right under federal law; (6) must that

person make those same claims as counterclaims in the

state court; (7) or suffer bar by res judicata if the state

court litigation concludes prior to the federal suit. This

Be ee

6

is precisely what happened at the trial court (both state

and federal) level in the instant case. The Sixth Circuit cor-

rected the error of the district court. Now, Petitioner seeks

to have this court reinstate the error cf the district court

as the law of the land. Respondents complained that the

Sixth Circuit erred in that it only corrected that portion

of the error of the district court which dealt with the

fraudulent inducement issue. The Sixth Circuit found that

there was a legally significant difference in whether the

state trial court intended to rule or, as was the case with

reference to the fraudulent inducement issue, explicitly

failed to rule.

Reduced to its essence, the issue is whether the fed-

eral statutory right under Title 28, United States Code

§1332 or state rules of procedure pertaining to counter-

claims, even in the face of a pending federal court claim

in a diversity case, holds sway one over the other. Peti-

tioner claims that state procedural rules concerning coun-

terclaims negate the federal statutory right to a federal

forum. Respondents claim that such an interpretation

would be a clear violation of the United States constitu-

tional protections of due process of law and the Supremacy

Clause. (Constitution of the United States, Article VI,

Cl. 2). This ccurt, purely by way of dicta and without

even a suggestion as to what the proper answer might be,

recognized the pertinency of the question late last year

in its opinion in Migra v. Warren City School District Board

of Education, ........ SEDs. esnsidase , 79 Law. Ed. 2d 56, 65 (1984)

RESPONSE TO QUESTION 2

It is true that the question of whether state courts have

jurisdiction over federal RICO suits is important. How-

ever, one question relative to this subject is beyond doubt.

7

If a claimant under the federal RICO statute files his

claim in federal court and does not waive entitlement

to a federal forum, it is impossible to force that federal

court plaintiff to give up his right to a federal forum

for resolution of the federal RICO question. This cannot

i be done via a state rule of procedure or by any other means.

{ The only case to clearly deal with the subject is

Greenview Trading Company, Inc. v. Hershman and

Leicher, P.C., 473 N.Y.S. 2d 722 which held that state courts

have jurisdiction over federal RICO claims made in state

court. However, on May 28, 1985, the Appellate Division,

First Department of the New York Supreme Court re-

versed that opinion in Greenview Trading Company, Inc.

v. Hershman and Leicher, P.C., ........ > Re een

Docket No. 22790 (1984). This was reported in “The

National Law Journal,” June 17, 1985, at p. 10. The

only other case known to have addressed the issue is

Luebke v. Marine National Bank of Neenah, 567 F. Supp.

1460 (E.D. Wis. 1983) which suggested that state courts

could exercise jurisdiction over the federal RICO statute.

However, in the instant case the federal RICO claims

were made in federal court by a federal court plaintiff

in a case where there was complete diversity between the

plaintiffs and the defendant. These claims were pending

in federal court before the federal court plaintiff was

required to answer a state court foreclosure suit. A federal

court plaintiff never waived or gave up in any way the

right to a federal forum to adjudicate the federal RICO’s

claims.

RESPONSES TO QUESTIONS 3 AND 4

These questions are pretermitted by the eminent de-

cision of this court in Sedima and Haroco.

CONCLUSION

Respondents agree with Petitioner that the Sixth

Circuit erred in its decision, and that the error has grave

consequences. Therefore, Respondents do not oppose this

Court’s granting of a writ of certiorari, but oppose the

limitation of review to those issues sought to be reviewed

by the petition and would request review of the issues

raised in Respondents’ prior petition for certiorari.

Respectfully submitted,

LARRY E. PARRISH, Esq.

(Counsel of Record)

ParrisH & Mutrooney, P.C.

Twenty-First Floor

First Tennessee Building

165 Madison Avenue

Memphis, Tennessee 38103

(901) 526-7777

Attorney for Respondents

Al

APPENDIX A

STATEMENT OF THE CASE

[3] The appeal which produced the opinion which this

petition seeks to have reviewed was from a judgment on

the pleadings by the district court dismissing the complaint

by granting the Respondents’ motion to dismiss based on

Federal Rules of Civil Procedure, Rule 12(b) (6).

Because the chronology of pleading is important to the

application of controlling substantive law, Petitioners will

recite the order of relevant events in detail. The unfold-

ing of this chronology will reveal the inter-relationship

of the instant case and a separate state court proceeding

[now pending before this court in the form of a petition

for certiorari in Kenneth R. George and Alberta W. George

v. Liberty National Bank and Trust Co. of Louisville, No.

84-1253 considered by the district court to control the in-

stant case through collateral estoppel and res judicata.

On October 27, 1981, Respondent, United Kentucky

Bank, Inc. (hereafter “UKB”), filed a complaint against

Petitioners in the Jefferson County, Kentucky Circuit Court

initiating a case bearing Docket No. 81CI-09925. This com-

plaint alleged that Petitioners had breached alleged promis-

sory notes, mortgages, and a guaranty agreement. In short,

this state court complaint initiated a, more or less, routine

mortgage foreclosure suit.

On January 11, 1982, Petitioners filed the complaint in

the instant case. (App. D) Jurisdiction (a particularly

important point) by the district court was invoked both

on diversity and exclusive subject matter jurisdiction. The

complaint made affirmative allegations against Respondents

A2

alleging violation of Title 18, United States Code, §1962

(“RICO”), and Title 15, United States Code, $1 (Sherman

Antitrust Act).

[4] The context of the allegations in the instant case

was the relationship existing between Petitioners and Re-

spondents which resulted in events which occurred because

of those loans. This same relationship spawned the state

court suit. By the complaint filed in federal court, Peti-

tioners, in effect, pled that the notes and mortgages were

instruments of fraud used by Respondents to wrongfully

injure Petitioners. Petitioners alleged that Respondent's,

UKB, state suit was filed as a part of and in furtherance

of the mail fraud by Respondents. Whether Petitioners

are entitled to prevail in the district court is not controlled

by whether the instruments, viewed outside the context of

the mail fraud first charged in Petitioners’ federal suit,

are valid or invalid.

On January 13, 1982, Petitioners filed an answer stat-

ing: (1) the state complaint failed to state a claim; (2)

the mortgages had been released; (3) service of process was

insufficient; (4) the state court lacked jurisdiction; and (5)

a general denial of all factual allegations.

On March 1, 1982, Petitioners filed a supplemental an-

swer to the state complaint. The supplemental answer de-

scribed what was set out therein as follows:

[s]how as additional defenses to the claims of Plain-

tiff... particularly described in the copy of said Com-

plaint, attached hereto, incorporated by reference

herein, .... (emphasis added)

The complaint incorporated is the one filed in the in-

stant case on January 11, 1982.

A3

On June 10, 1982, the district court below entered an

order (App. E) overruling the motion of Respondents to

dismiss the January 11, 1982 complaint for failure to state

a claim.

[5] On August 20, 1982, Respondents filed a motion for

summary judgment (App. F) in the state court. The

motion for summary judgment sought nothing more than

a summary adjudication that Petitioners were liable for

breach of the notes, mortgages and guaranty.

On September 10, 1982, in the state case, Petitioners

filed a sworn affidavit by one of the Petitioners making

oath to numerous facts. (App. G)

On October 25, 1982, the state court entered a written

order granting the summary judgment. (App. H) It is

this summary judgment which the district court found to

have sufficient preclusive effect to bar further adjudication

in the instant case. (App. B, pp. A9-A19)

On June 15, 1983, Respondents, in the instant case, filed

a document entitled “Motion To Dismiss Plaintiffs’ Com-

plaint Upon Theory of Res Judicata, Collateral Estoppel

and/or The Full Faith and Credit Requirements of Title

28, United States Code, §1738.”

it was this motion which the district court granted by

its memorandum opinion and judgment entered September

30, 1983. (App. B, C)

The Sixth Circuit decided the appeal and fiied its opin-

tion (App. A) on January 22, 1985.

Summarizing the significant events occurring below

for present purposes, Petitioners will direct the attention

of this court to the crucial facts. Petitioners filed a com-

plaint against Respondents in federal court alleging vio-

lations of RICO and the Sherman Act seeking remedy un-

\

A4

der Title 18, United States Code, §1964 and Title 15, United

States Code, §15. The RICO claims essentially amount to

allegations that Respondents overcharged interest, delib-

erately and intentionally, by inducing Petitioners into a

borrower relationship and, in furtherance of the scheme

[6] and device accomplished by mail fraud, engaged in

various specific acts including, but not limiting to, filing

the state suit instituted by Respondent, UKB. In addition,

the federal suit filed by Petitioners alleges pendent claims

seeking relief under the common law for breach of fiduciary

duties, breach of confidence, breach of contract and other

such claims.

Petitioners filed suit in federal court relying on the

provisions of Title 28, United States Code, §1332(a) be-

cause of complete diversity of citizenship.

Thereafter, Petitioners answered the state suit with

general denials. In addition, by incorporation of Peti-

tioners’ federal complaint, Petitioners supplemented their

answer with affirmative defenses.

In the state court suit, Respondent, UKB, filed

a motion for summary judgment in accordance with

the very ordinary provisions of Kentucky Rules of Civil

Procedure, Rule 56, and Petitioners routinely filed a writ-

ten memorandum in opposition and a sworn affidavit of one

of the Petitioners and, thereby, offered proof on virtually

every issue material to the claimed right to summary

judgment including, but not limited to, the amount owed.

The state trial court entered a summary judgment pre-

cisely as requested by Respondent, UKB, and more. The

state court went beyond the relief sought by the summary

judgment and included in the summary judgment a finding

that Respondent, UKB, had not been guilty of fraud and

had not breached any fiduciary duty to Petitioners.

A5

The motion for summary judgment did not seek a

finding on the issue of fraud or fiduciary duties and, if

Petitioners had failed to produce competent proof that

there was a genuine issue in dispute on a material fact

essential to the summary judgment sought, the summary

[7] judgment could have been entered without any refer-

ence to or finding concerning fraud or fiduciary duties. Re-

spondent, UKB, did not move for a summary judgment

ruling that it did not defraud Petitioners nor breach any

fiduciary duties. The summary judgment motion did not

put Petitioners on notice that Petitioners were expected

to defend against entry of a summary judgment adjudicat-

ing that Respondent, UKB, was not guilty of fraud and

had not breached fiduciary duties. Petitioners conceded

that these were matters of fact that could only be resolved

after a plenary hearing and consideration of proof by the

jury demanded by Petitioners.

In the federal suit filed by Petitioners, Respondents,

United Kentucky, Inc. and Does 1-99, were parties-defen-

dant. In the state suit, these Respondents were not parties

in any capacity. The district court held that the state

summary judgment in favor of Respondent, UKB,

precluded the entire federal case and dismissed it in its

entirety, including the claims against Respondents, United

Kentucky, Inc. and Does 1-99.

The district court, after entry of the state sum-

mary judgment, dismissed the entire federal complaint

filed by Petitioners because the state court included lan-

guage in the summary judgment concluding the absence

of fraud and that there had been no breach of fiduciary

duty. The Sixth Circuit decision agreed with the district

court except as to the specific allegations by Petitioners’

federal suit relative to fraudulent inducement both as a

matter of common law and, if the mails were used, as

predicate offenses supporting RICO.

A6

The district court was affirmed by the Sixth Circuit

in holding that, although the RICO claims in the federal

suit, being exclusive to federal jurisdiction, were not sub-

ject to preclusion by res judicata, the doctrine of collateral

estoppel created a bar to further consideration. The dis-

trict [8] court reached this conclusion because of the “no

fraud” language by the state court.

As to the pendent claims, the district court was af-

firmed by the Sixth Circuit in the conclusion that the

state court had concurrent jurisdiction to adjudicate the

common law claims and, since the state court either did

or “could have” ruled on those claims, the entry of the

summary judgment in state court precluded the district

court from further consideration of them because of the

doctrine of res judicata.