Opposition Brief — Rothenberg v. Amalgamated Sugar Co.

Suprema Court, US. * |

|: FIEDED |

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No. 87-697

NOV 25 060

JOSEPH F SPANIOL, JR.

IN THE OLERK

Supreme Court of the United States

OCTOBER TERM, 1987

RICHARD ROTHENBERG,

‘ Petitioner,

THE AMALGAMATED SUGAR COMPANY, LLC CORPORATION,

LN PARTNERSHIP, NL INDUSTRIES, INC., ROBERT A.

Bicks, NICHOLAS F. BRADY, MAURICE F. GRANVILLE,

WILLIAM A. MARQUARD, JAMES F. MATHIS, THEODORE

C. RoGers, IAN M. Ross, HERMAN J. SCHMIDT, ROBERT

G. SCHWARTZ, DONALD V. SEIBERT, ELEANOR B. SHEL-

DON AND THOMAS P. STAFFORD,

Respondents.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

BRIEF FOR THE AMALGAMATED SUGAR

RESPONDENTS IN OPPOSITION

JAMES K. LEADER THOMAS A. GOTTSCHALK

TOWNLEY & UPDIKE (Counsel of Record)

Chrysler Building FREDERICK M. ROWE

405 Lexington Avenue DANIEL F. ATTRIDGE

New York, New York 10174 JEFFREY A. ROSEN

(212) 682-4567 YOSEF J. RIEMER

KIRKLAND & ELLIS

655 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 879-5000

Attorneys for the Amalgamated Sugar Respondents

Dated: November 25, 1987

SEES

WILSON - EPES PRINTING Co., INC. - 789-O096 - WASHINGTON, D.C. 20001

ames

QUESTION PRESENTED

This case presents the unexceptional application of

settled state corporate law that the actions of a board

of directors are binding on the corporation and share-

holders in the absence of any breach of the directors’

fiduciary duty. The directors here lost a court challenge

to their action in adopting a discriminatory antitakeover

device. The petitioner, a shareholder who had notice of

the litigation and chose not to intervene, waited until the

District Court ruled against the directors. Petitioner

then brought a state court suit on the precise same issue

to have the directors’ action declared lawful. Before any

trial and any ruling on the merits in the state court

litigation, the District Court granted an injunction to

preserve and effectuate its prior judgment from reliti-

gation of the same claim resolved in that judgment.

In assessing the petition, the question is whether these

circumstances present an issue warranting review by

this Court where there is no challenge to the finding of

both courts below that petitioner did seek to relitigate

precisely the same claim previously resolved in the fed-

eral judgment, where both courts found that petitioner

had no interest in the earlier litigation that was not

vigorously represented by the directors, and where fed-

eral court precedent uniformly supports the rejection of

each of petitioner’s specific legal challenges.

(i)

ii

STATEMENT PURSUANT TO RULE 28.1

This brief in opposition to Richard Rothenberg’s peti-

tion for a writ of certiorari is filed on behalf of the

Amalgamated Sugar respondents: The Amalgamated

Sugar Company, LLC Corporation and LN Partnership.

Effective March 10, 1987, Valhi, Inc. succeeded by cor-

porate merger to the interests of the Amalgamated

Sugar respondents.

Valhi’s corporate parent is Valhi Group, Inc. At the

present time, Valhi’s non-wholly-owned subsidiaries or

direct affiliates are Contran Corporation, National City

Lines, Inc., Dixie Products, Inc. and NL Industries, Inc.

Valhi is also indirectly affiliated with those companies’

subsidiaries or affiliates, none of which is publicly traded

with the exception of Keystone Consolidated Industries,

Inc., Sybra, Inc. and T.I.M.E.-DC, Ince.

TABLE OF CONTENTS

8 sg | | ae

STATEMENT PURSUANT TO RULE 28.1 _--------

TABLE OF AUTHORITIES

COUNTER-STATEMENT OF THE CASE

REASONS FOR DENYING THE PETITION --_----

I. THE SECOND CIRCUIT’S UNANIMOUS AF-

II.

FIRMANCE OF THE DISTRICT COURT’S IN-

JUNCTION IS FULLY CONSISTENT WITH

DECISIONS OF THIS COURT AND OTHER

et se Be Sy Te

A. The Second Circuit Properly Found That The

District Court Exercised Its Statutory Au-

thority To Enjoin Relitigation Of The Precise

Claim Previously Adjudicated ___._________

B. Amalgamated’s Application For Injunctive

Relief Was Timely And In No Way Contrary

To The Sound Administration Of Justice___

HOLDING THE NL SHAREHOLDER BOUND

BY THE PRIOR JUDGMENT AGAINST HIS

CORPORATION AND ITS DIRECTORS WAS

FULLY CONSISTENT WITH SETTLED FED-

BE WEEE ene wccnacncnnsnnnnnne

A. Under The Circumstances Of This Case, It

Was Appropriate To Hold The NL Share-

holder Bound By The Court’s Prior Judg-

ment Invalidating Action Taken By NL’s

Board Of Directors

B. Termination Of The Appeal Pursuant To A

Settlement By The NL Directors Did Not

Render Their Representation Inadequate___

(iii)

Page

12

iv

TABLE OF CONTENTS—Continued

Page

C. The Second Circuit Properly Applied This

Court’s Decisions To Hold That The District

Court Retained Jurisdiction To Enter The

Final Consent Judgment ...-.--.------__- 13

PUTTIN sits elsttecih-che exes sesah sph Siac nesahabesie duiebeehtedirt 15

Vv

TABLE OF AUTHORITIES

Cases: Page

Aerojet-General Corp. v. Askew, 511 F.2d 710 (5th

Cir.), cert. denied, 423 U.S. 908 (1975) ._-.---- 12

The Amalgamated Sugar Co. v. NL Industries, Inc.,

644 F. Supp. 1229 (S.D.N.Y. 1986) ---=-------- 2,5

The Amalgamated Sugar Co. v. NL Industries,

Inc., 667 F. Supp. 87 (S.D.N.Y. 1987) ~------- passim

The Amalgamated Sugar Co. v. NL Industries,

Ine., 825 F.2d 684 (2d Cir. 1987) ...........-- passim

Americana Fabrics, Inc. v. L & L Textiles, Inc.,

754 F.2d 1524 (9th Cir. 1985) ...........-.... 8

BGW Associates, Inc. v. Valley Broadcasting Co.,

582 F. Supp. 1115 (S.D.N.Y. 1982) ............ 9

Babbitt v. United Farm Workers Nat’l Union, 442

Te ee Ce ckbtlld dtideatinedktinuwkandins 14

Ballas v. Cladis, 167 Colo. 248, 447 P.2d 224

(1968), cert. denied, 395 U.S. 921 (1969)__-_-_-- 10

Bechtel Petroleum, Inc. v. Webster, 796 F.2d 252

(9th Cir. 1986), cert. denied, 107 S. Ct. 2455

eae LAR NE pare oS ed emcee ES Spee OY OORT 7

Bush v. Eastern Uniform Co., 356 Pa. 298, 51 A.2d

SR SET icin chen Ais sectotabcthanttinandeababande end tacnsuiedind dalattbsosh 10

CTS Corp. v. Dynamics Corp. of America, 107 S. Ct.

NE aaa Ga buvdndiesacns 5

Central R.R. Co. v. Neeld, 26 N.J. 172, 189 A.2d

110, cert. denied, 357 U.S. 928 (1958) _-------- 8

Chicago RI. & P. Ry. v. Schendel, 270 U.S. 611

SB EE SG ee alae 0 NL SE ne ERO 10

Delta Air Lines, Inc. v. McCoy Restaurants, Inc.,

706 F.24 S82 (11th Cir. 1968)_............... 13

Dudley v. Smith, 504 F.2d 979 (5th Cir. 1974) ___- 11

Ellentuck v. Klein, 570 F.2d 414 (2d Cir. 1978) __- 10

Expert Electric, Inc. v. Levine, 554 F.2d 1227 (2d

Cir.), cert. denied, 434 U.S. 903 (1977) ._------ 10

GTE Sylvania, Inc. v. Consumers Union, 445 U.S.

ee chelation cakie nisi claidsa Kees bia Sitenen 14

Gonzales v. Cassidy, 474 F.2d 67 (5th Cir. 1973) _- 13

Green v. ABC, Inc., 572 F.2d 628 (8th Cir. 1978) _- 9

Grossman v. Axelrod, 646 F.2d 768 (2d Cir. 1981) _ 10

vi

TABLE OF AUTHORITIES—Continued

Page

Hancock Nat'l Bank v. Farnum, 176 U.S. 640

CEDUE) . skscacnésweteabaddaadbekitiee 9

Hawkins v. Glenn, 131 U.S. 319 (1889) .__-__-_- 9

Horn v. Bennett, 253 App. Div. 630, 3 N.Y.S.2d 525

| Sap eae aT ENE ee) ST 10

In re Teltronics Services, Inc., 762 F.2d 185 (2d

i __) Epa ee eT nk) eee eRe 11

Kerrison v. Stewart, 93 U.S. 155 (1876) ._______- 10

Lawn v. United States, 355 U.S. 339 (1958) .____- 12

Lummus Co. v. Commonwealth Oil Refining Co.,

297 F.2d 80 (2d Cir. 1961), cert. denied, 368 U.S.

Pe. ROD. scchcicistandainmiescttsiasbcigih tate Matai till ia Seated 8

McNeese v. Board of Educ. for Comm. Unit Sch.

Dist. 187, 37? “5.8. 668 (1968)................ 5

Marin v. Augedahl, 247 U.S. 142 (1918) ________ 9

Mathews v. American Tobacco Co., 130 N.J. Eq.

470, 23 A.2d 301 (Ch. 1941), aff'd, 135 N.J. Eq.

Sap le ae Oe CI a tihaidete dn tatian. 10

Meredith v. City of Winter Haven, 320 U.S. 228

| AE aE See bel LY EE 5

Murphy v. Hunt, 455 U.S. 478 (1982)._...-___-__- 14

North Carolina v. Rice, 404 U.S. 244 (1971) .____- 14

Parsons Steel, Inc. v. First Alabama Bank, 474 U.S.

8 ee es 7

Pennzoil Co. v. Texaco, Inc., 107 S. Ct. 1519

SUITE. <sniscasthuoss abidedlidhaiittetiitin caida ddimcibebdineaeiins 6

Pope v. United States, 323 U.S. 1 (1944) _______-_ 13

Ritchie v. Landau, 475 F.2d 151 (2d Cir. 1973) __- 11

SEC v. Randolph, 736 F.2d 525 (9th Cir. 1984) ___ 13

Samuel C. Ennis & Co. v. Woodmar Realty Co., 542

F.2d 45 (7th Cir. 1976), cert. denied, 429 U.S.

DE IRENTET .ccctccdtlancantaacdicdinabiaied 7

Scarbourough v. Briggs, 81 Cal. App. 2d 161, 183

ee ED UTED" antnnisdbhididicndews crasactbencseabinataeles musta: 10

Schein v. Caesar’s World, Inc., 491 F.2d 17 (5th

Cir.), cert. denied, 419 U.S. 838 (1974) _.____-_ 11

Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573

EROUE? cdincdnncunnndehdtidineddkeeeee 10

vii

TABLE OF AUTHORITIES—Continued

Page

Selig v. Hamilton, 234 U.S. 652 (1914) ---------- 9

Sileox v. United Trucking Service, Inc., 687 F.2d

RD Be ee HD hcrncsdicietnmdincccatetapsaimion 7

Solimine v. Hollander, 128 N.J. Eq. 228, 16 A.2d

BR GLEE, cciccicndnacdcuusabinhekinanne 10

Southwest Airlines Co. v. Texas Int'l Airlines, Inc.,

546 F.2d 84 (5th Cir.), cert. denied, 434 U.S.

8. eR eee ee eee 6, 10

Union Ins. Society v. William Gluckin & Co., 353

is % & Le SS etna 10

United Copper Securities Co. v. Amalgamated Cop-

ger Gh, BEE Ga Be CORED swccncwssnccnsone 11

United States v. E.I. DuPont de Nemours & Co.,

BARE Fee yee 11

United States v. Estate of Donnelly, 397 U.S. 286

SI ciaiascthiieaaancsinhtetiisicpinasnachcesainentssthiahibinemcisetinenaiialibns 12

United States v. Geophysical Corp., 732 F.2d 693

GE Gs SED <cthinotenatecsscnpemadaiiemeementsbees 10

United States Parole Comm'n v. Geraghty, 445 U.S.

REE Dn ee eee ee 14

Van Gemert v. Boeing Co., 590 F.2d 433 (2d Cir.

1978), aff’d, 444 U.S. 472 (1980) .__----------- 13

Williams v. Green Bay & W.R.R., 326 U.S. 549

RS RS Te Le re 4-5

Willoughby v. Chicago Junction Rys. & Union

Stockyards Co., 50 N.J. Eq. 656, 25 A. 277 (Ch.

EE -hcnsisicitciecenetdh: dtniadhadicivasercedsintnentninuntecaientnansiitesies 10

Zenith Radio Corp. v. Hazeltine Research, Inc., 395

IEIN anise cn cnctinisnnesnsnteincietemmeeeniineis 11

Statutes & Regulations:

Anti-Injunction Act, 28 U.S.C. § 2283 (1982)_-.. 3,6

Other Authorities:

Restatement (Second) of Judgments § 13 comment

OO I wide Nancie cn lschleemetnepnteinnliniehiapebiliiids 8

H. Henn & J. Alexander, Law of Corporations

5 DER, 26 Gee (SE GE. BUGS) cncccecccccenacsces 11

Dh, GE Te Bese scelindacuncesecccntascanensen 3

=e ag . 4

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IN THE

Siuprenve Court of the United States

OCTOBER TERM, 1987

No. 87-697

RICHARD ROTHENBERG,

- Petitioner,

THE AMALGAMATED SUGAR COMPANY, LLC CORPORATION,

LN PARTNERSHIP, NL INDUSTRIES, INC., ROBERT A.

BickKs, NICHOLAS F. BRADY, MAURICE F. GRANVILLE,

WILLIAM A. MARQUARD, JAMES F. MATHIS, THEODORE

C. Rocers, IAN M. Ross, HERMAN J. SCHMIDT, ROBERT

G. SCHWARTZ, DONALD V. SEIBERT, ELEANOR B. SHEL-

DON AND THOMAS P. STAFFORD,

Respondents.

On Petition for a Writ of Certiorari to the United States

Court of Appeals for the Second Circuit

RESPONDENTS IN OPPOSITION

Rothenberg’s petition for a writ of certiorari raises

no issue meriting this Court’s attention. The unanimous

Second Circuit panel properly applied well-established

principles of law to affirm the District Court’s carefully

documented factual findings. Both Courts held that an

injunction against petitioner’s state court relitigation

was a permissible exercise of the District Court’s au-

thority to preserve and effectuate its prior judgment in-

|

BRIEF FOR THE AMALGAMATED SUGAR

2

validating the discriminatory Poison Pill antitakeover

device that petitioner seeks to revive. The rulings of the

Courts below neither conflict with the decisions of this

Court or any other federal court nor present any sig-

nificant federal questions which call for this Court to

grant certiorari. The petition, therefore, should be

denied.

COUNTER-STATEMENT OF THE CASE

Petitioner’s statement of the case distorts the record

and relies on innuendo and irrelevancies to distract at-

tention from the Second Circuit’s unanimous affirmance

of the District Court’s meticulous factual findings. An

accurate, unbiased statement of the case is found in the

Second Circuit’s opinion. See The Amalgamated Sugar

Co. v. NL Industries, Inc., 825 F.2d 634, 636-38 (2d Cir.

1987).

As both Courts below found, the Amalgamated Sugar

respondents brought a diversity suit in 1986 in the

Southern District of New York against NL Industries,

Inc. and its directors to invalidate the directors’ adoption

of a discriminatory “Poison Pill” antitakeover device.

825 F.2d at 637; The Amalgamated Sugar Co. v. NL

Industries, Inc., 644 F. Supp. 1229, 1230-33 (S.D.N.Y.

1986). A fierce litigation battle ensued, and the District

Court held that the Poison Pill was ‘an unlawful device”’

and “ultra vires as a matter of New Jersey Business

Corporation law.” 644 F. Supp. at 1234. Based upon

the recommendations of experienced independent legal

and financial advisors, NL’s directors then negotiated

an arms-length settlement with Amalgamated, which

provided, inter alia, for a permanent injunction against

the Poison Pill. 825 F.2d at 637-38; The Amalgamated

Sugar Co. v. NL Industries, Inc., 667 F. Supp. 87, 90, 92

(S.D.N.Y. 1987). The District Court approved and en-

tered that final consent judgment. 825 F.2d at 638.

3

Petitioner Rothenberg, an NL shareholder, had notice

of and chose not to intervene in the vigorously litigated

suit. 825 F.2d at 637; 667 F. Supp. at 95. His interests

were well represented in both the litigation itself and the

settlement thereof by NL’s directors, whom even peti-

tioner concedes committed no breach of fiduciary duty.

825 F.2d at 640; 667 F. Supp. at 95-96. But as soon as

the District Court struck down the Poison Pill, petitioner

raced into New Jersey state court with a new suit seek-

ing to nullify the federal court judgment. 825 F.2d at

637. When petitioner continued to shop for another opin-

ion in state court, the District Court exercised its au-

thority under 28 U.S.C. § 2283 to protect and effectuate

its judgment by enjoining him from further duplicative

litigation. 667 F. Supp. at 96. The Second Circuit

unanimously affirmed that injunction. 825 F.2d at 636.

REASONS FOR DENYING THE PETITION

Review by this Court is “not a matter of right” but

“will be granted only when there are special and impor-

tant reasons therefor.” Sup. Ct. R. 17.1. Petitioner does

not identify any issue meriting this Court’s attention.

Instead, referencing the Second Circuit opinion only

three times in a twenty-five page petition, he reprints

almost verbatim a diatribe presented below. Both the

District Court and the Second Circuit carefully con-

sidered every objection petitioner raises and rejected

them as without foundation in fact and contrary to well-

settled federal precedent. This Court should not disturb

those rulings.

As the Second Circuit found, both the District Court’s

1986 decision to reach the illegality of the Poison Pill

and its 1987 injunction were fully consistent with ab-

stention principles. Petitioner’s challenge to those find-

ings is contrary to decisions of this Court and the over-

riding federal interest in protecting the integrity and

efficacy of federal judgments. See Part I.A, infra. The

4

injunction was also consistent with “the sound adminis-

tration of justice” since it was entered only after the

state court refused to rule on the res judicata effect of

the 1286 decision. See Part I.B, infra.

Similarly, petitioner has no valid basis for disputing

the Second Circuit’s fact-specific holding that he was

bound by the judgment against his corporate fiduci-

aries—NL’s directors. First, accepted res judicata doc-

trine mandates that a shareholder be bound where, as

here, a corporation’s directors represent the shareholder

in defending a corporate act. See Part II.A, infra. Sec-

ond, there was overwhelming evidence that the directors

vigorously protected petitioner’s interests in the 1986

litigation—a fact confirmed by petitioner’s disclaimer of

any breach of fiduciary duty by the directors. See Part

II.B, infra. Finally, the great weight of the evidence

supported the finding below that the litigants had ad-

verse legal interests at the time of the consent judgment.

See Part II.C, infra.

I. THE SECOND CIRCUIT’S UNANIMOUS AFFIRM-

ANCE OF THE DISTRICT COURT’S INJUNCTION

IS FULLY CONSISTENT WITH DECISIONS OF

THIS COURT AND OTHER COURTS OF APPEALS.

A. The Second Circuit Properly Found That The Dis-

trict Court Exercised Its Statutory Authority To

Enjoin Relitigation Of The Precise Claim Previously

Adjudicated.

Although petitioner contends that the District Court

erred in the initia! federal litigation in 1986 by reaching

the invalidity of the Poison Pill, that issue is not appro-

priately raised by petitioner who never appealed that

judgment. In any event, the District Court’s exercise of

its diversity jurisdiction was well grounded in this

Court’s decisions. In Williams v. Green Bay & W.R.R.,

326 U.S. 549 (1946), this Court held that where, as

5

here, diversity jurisdiction is invoked, federal courts may

not decline to exercise it solely because of an asserted

difficulty in ascertaining state corporation law:

The fact that the corporation law of another State

is involved does not set the case apart for special

treatment. The problem of ascertaining the state

law may often be difficult. But that is not a suffi-

cient ground for a federal court to decline to exer-

cise its jurisdiction to decide a case properly before

it... .. So long as diversity jurisdiction remains,

the parties may not be remitted to a state court

merely because of the difficulty of making a decision

in the federal court.

Id. at 553-54.1 Moreover, the predicate for petitioner’s

abstention theory—the supposedly “unsettled” nature of

state law—is absent here because New Jersey law was

plain as to the invalidity of NL’s Poison Pill.?

Nor was abstention required in 1987 when Amal-

gamated sought an injunction against petitioner’s reliti-

1 See also Meredith v. City of Winter Haven, 320 U.S. 228, 236

(1943) (no congressional policy to exclude cases from “jurisdic-

tion merely because they involve state law or because the law is

uncertain or difficult to determine”); McNeese v. Board of Educ.

for Comm. Unit Sch. Dist. 187, 373 U.S. 668, 673 n.5 (1963)

(“difficulties and perplexities of state law are no reason for referral

of the problem to the state court’).

2 See Amalgamated, 644 F. Supp. at 1234-37 (citing decisions for-

bidding discrimination among shareholders in payment of dividends

and striking down discriminatory antitakeover devices as ultra

vires under New Jersey law).

Petitioner’s reliance on this Court’s decision in C7'S Corp. v.

Dynamics Corp. of America, 107 S. Ct. 1637 (1987), is similarly

misplaced. That decision addressed whether an Indiana statute was

preempted by federal law or violative of the Commerce Clause. The

Court’s reference to the traditional role of state corporation law in

regulating corporations in no way detracts from the power of

federal courts to apply that state law (as the District Court did

here) when diversity jurisdiction is invoked.

6

gation. It was petitioner’s attempt to relitigate a federal

judgment in state court that raised the specter of incon-

sistent judgments and fomented conflict between federal

and state courts. To prevent such clashes, Congress

authorized federal courts to enjoin relitigation in state

courts where needed to preserve and effectuate federal

judgments. See 28 U.S.C. § 2283 (1982). Any rule which

nullifies that power solely because the relitigation pre-

sents a question of state law “would destroy diversity

jurisdiction.” Southwest Airlines Co. v. Texas Intl Atr-

lines, Inc., 546 F.2d 84, 92 (5th Cir.), cert. denied, 434

U.S. 832 (1977).

Petitioner’s abstention argument is also defeated by

his concession that federal, not state, law controls the res

judicata effect of the prior federal judgment. (P.B. 20.)

The proceedings below represent the converse of the situa-

tion in Pennzoil Co. v. Texaco, Inc., 107 8. Ct. 1519, 1527

(1987). There, the Court held that a federal injunction

barring a successful state court litigant from enforcing

its final state court judgment intruded impermissibly on

the state’s special interest in the execution of its judg-

ments. In contrast here, federal interests override any

state interest in deciding the res judicata effect of a prior

federal judgment.

B. Amalgamated’s Application For Injunctive Relief

Was Timely And In No Way Contrary To The

Sound Administration Of Justice.

Amalgamated never had “two bites at the apple” on

the res judicata effect of the prior federal judgment.

Rather, Amalgamated sought to enjoin the state court

relitigation following the state court’s express refusal at

the preliminary pleading stage to address the res judicata

issue and to decide it one way or the other.* Federal

8 Promptly after being sued in New Jersey, Amalgamated moved

for summary judgment solely on res judicata grounds. (App.

44-45.) The state court denied the motion without prejudice and

7

courts have consistently held that applications for injunc-

tions against relitigation are timely where presented and

granted before any final state court adjudication of res

judicata issues.*

This Court’s decision in Parsons Steel, Inc. v. First

Alabama Bank, 474 U.S. 518 (1986), is fully consistent

with the finding below that Amalgamated’s application

for an injunction was timely. In Parsons Steel, no injunc-

tion against relitigation was sought until after a state

court jury verdict on the underlying merits. Jd. at 522.

Because the state proceedings had reached that advanced

stage, this Court held that federal courts were required

to consider the res judicata effect of the state court ver-

dict, consistent with the “last in time” rule. But a liti-

gant cannot be precluded from seeking a federal injunc-

tion unless and until the “state court has finally rejected

a claim of res judicata.” Id. at 524 (emphasis supplied).

In this case, the state court had not reached the merits

and no definite ruling on the res judicata issue had been

rendered. (App. 107.) Thus Parsons Steel did not pre-

clude an injunction. See Bechtel Petroleum, Inc. v.

Webster, 796 F.2d 252, 253 n.8 (9th Cir. 1986), cert.

denied, 107 S. Ct. 2455 (1987).5

deferred final consideration of the issue until an eventual trial on

the merits. (App. 107.)

4 See Silcozx v. United Trucking Service, Inc., 687 F.2d 848, 853

(6th Cir. 1982) (injunction affirmed although not sought “until

after the state court had indicated that it would not afford the prior

federal judgment the res judicata effect to which it was entitled’”’) ;

Samuel C. Ennis & Co. v. Woodmar Realty Co., 542 F.2d 45, 48

(7th Cir. 1976) (rejecting argument that by filing dispositive

motion in state court, party seeking injunction had waived or was

estopped from seeking injunction from federal court), cert. denied,

429 U.S. 1096 (1977).

5 Moreover, even if the res judicata effect of the state court’s deci-

sion not to resolve the res judicata effect of the federal judgment

need be considered, neither federal nor state law would give res

judicata etiect to such an “avowedly tentative” ruling. See, e.g.,

8

Petitioner is really arguing that having been sued in

state court, Amalgamated was forever after barred from

asking a federal court to enjoin relitigation. But it

would serve no interest of federalism or the “sound ad-

ministration of justice” to hold that pleadings setting up

the defense of a prior federal judgment in the early

stages of a state court proceeding bar a federal court’s

exercise of its statutory authority to protect its judg-

ments. On the contrary, such a rule would require vastly

expanded use of injunctions—an intrusive remedy at

best—at the outset of every state court action presenting

a threat of relitigation. As the District Court explained,

the sensitive relations of federal and state courts made

it “entirely appropriate and in the interest of comity”

for Amalgamated to raise and present its res judicata

defense in a pretrial context. Amalgamated, 667 F. Supp.

at 92.

Il. HOLDING THE NL SHAREHOLDER BOUND BY

THE PRIOR JUDGMENT AGAINST HIS CORPO-

RATION AND ITS DIRECTORS WAS FULLY CON-

SISTENT WITH SETTLED FEDERAL PRECE-

DENT.

The Second Circuit considered and rejected as without

merit petitioner’s arguments that despite his status as an

NL shareholder, he remains free to relitigate a claim

identical to that decided against his corporate fiduci-

aries—the NL directors. Amalgamated, 825 F.2d at 639-

42. That ruling fully comports with decisions of this

Court and other federal courts of appeals, as well as state

courts, and is fully supported by the circumstances of

this case.

Lummus Co. v. Commonwealth Oil Refining Co., 297 F.2d 80, 89

(2d Cir. 1961), cert. denied, 368 U.S. 986 (1962); Americana

Fabrics, Inc. v. L & L Textiles, Inc., 754 F.2d 1524, 1530 n.3 (9th

Cir. 1985); Central R.R. Co. v. Neeld, 26 N.J. 172, 1389 A.2d 110,

113, cert. denied, 357 U.S. 928 (1958); Restatement (Second) of

Judgments §13 comment g (1980).

9

A. Under The Circumstances Of This Case, It Was

Appropriate To Hold The NL Shareholder Bound

By The Court’s Prior Judgment Invalidating Ac-

tion Taken By NL’s Board Of Directors.

The Second Circuit emphasized four circumstances in

holding that res judicata barred petitioner’s effort to

relitigate the prior federal judgment invalidating the NL

Board of Directors’ adoption of the Poison Pill: (1) the

NL Board acted in its “fiduciary capacity” in defending

the initial litigation; (2) petitioner alleged no breach of

fiduciary duty in conducting that litigation; (3) the

directors “vigorously represented” the shareholders’ in-

terests in validating the legality of a corporate act osten-

sibly taken to benefit the shareholders; and (4) petitioner

sought to relitigate the precise claim at issue in the prior

proceedings. Amalgamated, 825 F.2d at 640-41.

The decision below is consistent with decisions of this

Court * and the lower federal courts‘ as well as numerous

6 See, e.g., Marin v. Augedahl, 247 U.S. 142, 150 (1918) (“‘a

stockholder is so far an integral part of the corporation that, in

the view of the law, he is privy to the proceedings touching the

body of which he is a member’”) (citation omitted); Selig v.

Hamilton, 234 U.S. 652, 660 (1914) (shareholder “must be deemed,

by virtue of his relation to the corporation ... to be represented by

it in the proceeding”) ; Hancock Nat’l Bank v. Farnum, 176 U.S.

640, 644 (1900) (“‘[E]very stockholder in a corporation is so far

privy in interest in an action against the corporation that he is

bound by the judgment against it.’”) (citation omitted) ; Hawkins

v. Glenn, 131 U.S. 319, 329 (1889) (“[T]he stockholder is bound by

a decree of a court of equity against the corporation in [the]

enforcement of a corporate duty, although [the stockholder was]

not a party [to the previous action] as an individual.’’).

7 Green v. ABC, Inc., 572 F.2d 628, 630 (8th Cir. 1978) (“[T]he

individual plaintiffs were in privity with [the corporation] for

claim preclusion purposes.”) ; BGW Associates, Inc. v. Valley Broad-

casting Co., 532 F. Supp. 1115, 1118 (S.D.N.Y. 1982) (“sharehold-

ers of [the corporation] are barred from relitigating the issues that

were or should have been presented to the federal court [in prior

action against corporation] under res judicata because they are

privies”’).

10

state courts * holding that shareholders may not relitigate

the validity of corporate actions in such circumstances.

It also comports with settled federal precedent precluding

nonparties from relitigating matters adjudicated against

their fiduciary representatives® or against parties who

“adequately represented” the nonparties’ interests." The

decision below reflects the central principle of corporate

governance: management of the business and affairs of

8 See, e.g., Scarbourough v. Briggs, 81 Cal. App. 2d 161, 183 P.2d

683, 686 (1947) (“[S]hareholders of a corporation are in privity

with it and, in the absence of fraud, are bound by all judgments

rendered against the corporation.) ; Ballas v. Cladis, 167 Colo. 248,

447 P.2d 224, 228 (1968) (“[A] decree against a corporation is

binding on its stockholders because there is a privity between a

corporation and its stockholders.”), cert. denied, 395 U.S. 921

(1969) ; Solimine v. Hollander, 128 N.J. Eq. 228, 16 A.2d 203, 238

(Ch. 1940) (“In the absence of fraud stockholders of a company

are bound by the decision of litigation in which their company sues

or defends.”) ; Mathews v. American Tobacco Co., 130 N.J. Eq. 470,

23 A.2d 301, 311 (Ch. 1941), aff'd, 135 N.J. Eq. 11, 37 A.2d 99

(1944); Willoughby v. Chicago Junction Rys. & Union Stockyards

Co., 50 N.J. Eq. 656, 25 A. 277, 280 (Ch. 1892) (“[E]very member

of a corporation is so far privy in interest in a suit against the

corporation that he is bound by the judgment against it.”); Hern

v. Bennett, 253 App. Div. 630, 3 N.Y.S.2d 525, 527 (1938) (“A

judgment against the corporation, unless impeached, is conclusive

against the corporation and its stockholders.”); Bush v. Eastern

Uniform Co., 356 Pa. 298, 51 A.2d 731, 732 (1947) (“A shareholder

is deemed privy to proceedings, touching the corporation of which

he is a member.).

® See, e.g., Sea-Land Services, Inc. v. Gaudet, 414 U.S. 573, 593

(1974) ; Chicago RI. & P. Ry. v. Schendel, 270 U.S. 611, 620 (1926) ;

Kerrison v. Stewart, 93 U.S. 155, 160 (1876); United States v.

Geophysical Corp., 732 F.2d 693, 698 (9th Cir. 1984); Union Ins.

Society v. William Gluckin & Co., 353 F.2d 946, 953 (2d Cir. 1965).

10 See, e.g., Grossman v. Axelrod, 646 F.2d 768, 769 (2d Cir.

1981); Ellentuck v. Klein, 570 F.2d 414, 425-26 (2d Cir. 1978);

Expert Electric, Inc. v. Levine, 554 F.2d 1227, 1233 (2d Cir.),

cert. denied, 434 U.S. 903 (1977); Southwest Airlines Co. v. Texas

Int'l Airlines, Inc., 546 F.2d 84, 98 (5th Cir.), cert. denied, 434

U.S. 832 (1977).

11

any corporation, including the defense or settlement of

litigation challenging corporate conduct, is entrusted to

its board of directors."

Petitioner’s broad theory that res judicata never binds

stockholders is without precedential support. Zenith

Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100

(1969), described by petitioner as “conclusive,” did not

present any res judicata issue. Instead, Hazeltine ad-

dressed whether personal jurisdiction over a subsidiary

also afforded personal jurisdiction over a parent corpora-

tion. As for the lower court opinions cited by petitioner,

those cases all hold shareholders to be in privity with

their corporations notwithstanding dicta adverting to the

possibility shareholders might not be bound in some

unspecified situations.”

Petitioner also seeks to avoid the binding effect of the

final federal judgment against NL by positing, for the

first time, that a “class” of shareholders he purports to

represent might include individuals who sold their stock

just prior to that judgment. (P.B. 22-23.)'* But having

11 See, e.g., United Copper Securities Co. v. Amalgamated Copper

Co., 244 U.S. 261, 263 (1916); Schein v. Caesar’s World, Inc., 491

F.2d 17, 20 (5th Cir.), cert. denied, 419 U.S. 838 (1974); United

States v. El. DuPont de Nemours & Co., 13 F.R.D. 487, 489 (N.D.

Ill. 1953); H. Henn & J. Alexander, Law of Corporations § 242, at

662 (3d ed. 1983).

12 See In re Teltronics Services, Inc., 762 F.2d 185, 191 (2d Cir.

1985) (judgment against “corporation bars later litigation on the

same cause of action” by shareholder) ; Dudley v. Smith, 504 F.2d

979, 982-83 (5th Cir. 1974) (stockholder held “in privity with his

corporation”); Ritchie v. Landau, 475 F.2d 151, 155 n.2 (2d Cir.

1973) (stockholder may invoke protection of judgment as he would

be bound by judgment). The insignificance of the dicta is under-

scored by the fact that all the supporting authorities cited also hold

shareholders to be bound by privity.

13 The state court never reached the question of class certification.

(App. 109.)

12

failed to make that argument below, petitioner may not

do so now. See, e.g., United States v. Estate of Donnelly,

397 U.S. 286, 295 n.5 (1970); Lawn v. United States,

355 U.S. 339, 362-63 n.16 (1958). In any event, the new

argument proves nothing. The NL directors represented

and bound all shareholders who had any interest in vali-

dating the Poison Pill regardless of when they acquired

or sold their ownership rights.

B. Termination Of The Appeal Pursuant To A Settle-

ment By The NL Directors Did Not Render Their

Representation Inadequate.

Petitioner’s argument that the NL directors’ decision

to accede to a consent judgment rather than pursue an

appeal somehow rendered them inadequate representatives

of NL’s shareholders raises, at most, a factual issue, see

Aerojet-General Corp. v. Askew, 511 F.2d 710, 719 (5th

Cir.), cert. denied, 423 U.S. 908 (1975), and wholly

ignores the factual findings below.

In unanimously affirming the District Court’s findings

that NL’s directors had been “vigorous” representatives

of NL’s shareholders and had conducted the litigation

“directly in the interests of [NL] shareholders other

than Amalgamated,” 667 F. Supp. at 95, the Second Cir-

cuit noted that: (a) the directors were “faced with a

substantial likelihood of ultimate defeat” after the Dis-

trict Court’s ruling that the Poison Pill was unlawful;

and (b) continuation of the litigation would have “seri-

ously impeded” the conduct of NL’s business affairs.

Amalgamated, 825 F.2d at 637-38, 640. The Second Cir-

cuit concluded that there was “every indication in the

record that the settlement represented [the NL direc-

tors’] informed judgment that the interests of NL and

its shareholders would be served best by settlement.” /d.

at 640.

Petitioner failed below to make any showing that these

findings were clearly erroneous. There, as here, he re-

il

13

sorts to innuendo, asserting that the settlement was some-

how the product of an effort by NL’s management to

obtain “substantial benefits for themselves and .. . the

preservation of their jobs.” (P.B. 12-13.) To the con-

trary, the record establishes that the settlement decision

was made by the NL directors. All but one of the thir-

teen directors was independent of NL’s management and

the settlement agreement “did not provide any benefit to

the independent NL directors.” Amalgamated, 825 F.2d

at 637. In fact, the settlement provided that the directors

were apt to be replaced, rather than continue. Jd. In

short, there is no record support for petitioner’s challenge

to the settlement process; there plainly is no significant

issue presented worthy of this Court’s attention."

C. The Second Circuit Properly Applied This Court’s

Decisions To Hold That The District Court Retained

Jurisdiction To Enter The Final Consent Judgment.

This Court has held that federal courts retain jurisdic-

tion to enter a consent judgment after the parties agree

to settle their dispute,’ where as here, (1) the litigants

14 Petitioner’s citation of the Fifth Circuit’s decision in Gonzales

v. Cassidy, 474 F.2d 67 (5th Cir. 1973), does not aid his argument.

Gonzales did not hold that a decision not to appeal per se establishes

inadequate representation. Rather, that decision turned on a class

representative’s desertion of other class members when he alone

obtained ali the relief sought. Gonzales, 474 F.2d at 75-76; see

also Van Gemert v. Boeing Co., 590 F.2d 433, 440 n.15 (2d Cir.

1978) (Gonzales establishes that “the attorney [for a class] is not

free to advocate the interests of the named plaintiffs alone”), aff'd,

444 U.S. 472 (1980). Delta Air Lines, Inc. v. McCoy Restaurants,

Inc., 708 F.2d 582 (11th Cir. 1983), also has no bearing on this

case as it involves no issue of a failure to appeal. Indeed, petition-

er’s counsel so acknowledged in the District Court: “[L]et’s forget

the Delta case.” (App. 521.)

15 Pope v. United States, 323 U.S. 1, 12 (1944); see also SEC

v. Randolph, 736 F.2d 525, 528 (9th Cir. 1984).

14

have adverse legal interests ** and (2) a judicial decision

would affect the plaintiffs’ rights..7 Professing no dis-

agreement with this standard, petitioner raises at most

a factual challenge to the findings below that these re-

quirements were satisfied here.

First, the adversity requirement was clearly satisfied.

Although Amalgamated acquired 51% of NL’s stock on

August 8, 1986, Amalgamated was powerless to obtain

control by replacing a majority of NL’s directors for two

years. Amalgamated, 667 F. Supp. at 89. The settlement

was considered and approved on August 13th by the in-

cumbent NL directors, whose legal interests were plainly

adverse to Amalgamated. Jd.**

Second, at the time judgment was entered, “Amal-

gamated had a legally cognizable interest in securing

16 See GTE Sylvania, Inc. v. Consumers Union, 445 U.S. 375,

382-83 (1980); Babbitt v. United Farm Workers Nat'l Union, 442

U.S. 289, 298 (1979).

17 See Murphy v. Hunt, 455 U.S. 478, 481 (1982); United States

Parole Comm’n v. Geraghty, 445 U.S. 388, 396-97 (1980); North

Carolina v. Rice, 404 U.S. 244, 246 (1971).

18 No change of control actually occurred until August 25th, eleven

days after entry of the final judgment. (App. 468-69.) Petitioner

seeks to avoid that fact by alleging that Amalgamated acquired the

“immediate right to name a majority of NL’s directors” before

entry of the consent judgment. (P.B. 24.) But his reliance on settle-

ment documents demonstrates that any such right could only have

been the product of the settlement negotiated by adverse parties

and embodied in the consent judgment.

Moreover, the documents petitioner relies upon do not establish

Amalgamated had any such right prior to the entry of the consent

judgment on August 14. (See App. 275.) The August 8, 1986 date

on the first document cited refers not to the date of each event

discussed therein but rather to the “|djate of [the] earliest event

reported”—Amalgamated’s purchase of additional stock. (App.

274.) The second document cited barred Amalgamated’s appoint-

ment of any directors until nine of NL’s thirteen incumbent direc-

tors had resigned and specifies that those resignations were not

required until “August 18, 1986.” (App. 292.)

15

protection against . . . the potentially devastating finan-

cial effects” of the Poison Pill. Amalgamated, 825 F.2d

at 640. Had the litigation been terminated without en-

joining the Pill, Amalgamated would have been faced with

the possibility of enormous discriminatory dilutions of

its equity and voting power.

CONCLUSION

For the foregoing reasons, the Petition for a Writ of

Certiorari should be denied.

Respectfully submitted,

JAMES K. LEADER THOMAS A. GOTTSCHALK

TOWNLEY & UPDIKE (Counsel of Record )

Chrysler Building FREDERICK M. ROWE

405 Lexington Avenue DANIEL F. ATTRIDGE

New York, New York 10174 JEFFREY A. ROSEN

(212) 682-4567 Yoser J. RIEMER

KIRKLAND & ELLIS

655 Fifteenth Street, N.W.

Washington, D.C. 20005

(202) 879-5000

Attorneys for the Amalgamated Sugar Respondents

Dated: November 25, 1987