Opposition Brief — Schuyt v. Rowe Price Prime Reserve Fund, Inc.

No. 87-1500

: —Supsame-Gourt, US,

| FILED

APR 6 1988

IN THE JOSEPH F. SPANIOL, UR, :

Supreme Court of the United

OCTOBER TERM, 1987

-

GERTRUDE BROOKS SCHUYT,

Petitioner,

ROWE PRICE PRIME RESERVE FUND, INC., T. ROWE PRICE

ASSOCIATES, INC., CARTER O. HOFFMAN, EDWARD A.

TABER, III and GEORGE J. COLLINS,

Respondents.

BRIEF IN OPPOSITION TO CERTIORARI

DANIEL A. POLLACK

61 Broadway (Suite 2500)

New York, New York 10006

(212) 952-0330

Attorney for Respondents

Of Counsel:

POLLACK & KAMINSKY

DANIEL A. POLLACK

MARTIN I. KAMINSKY

EDWARD T. MCDERMOTT

HENRY H. HOPKINS

BRIEF OF RESPONDENTS

Question presented for review:

Did the courts below err in

denying petitioner a jury trial

On equitable claims under

§ 20(a) and § 36(b) of the

Investment Company Act of 1940?

The parties to the proceeding in the

United States Court of Appeals for the

Second Circuit were:

Gertrude Brooks Schuyt

Rowe Price Prime Reserve Fund, Inc.

T. Rowe Price Associates, Inc.

Carter O. Hoffman

Edward A. Taber III

George J. Collins.

TABLE OF CONTENTS

Statement of the Case

Summary of the Argument.

The standard: Tull v. United States,

481 U.S. (1987)

Point I —

Point II —

Conclusion

There is no right to

jury trial for a claim

under § 36(b) of the

Investment Company Act

of 1940 .. oe

There is no right to

jury trial for a claim

under § 20(a) of the

Investment Company Act

Of 2940 . +4 * «

Page

14

ai

TABLE OF CASES AND AUTHORITIES

Page

Cases:

Amer. Met. Enterprises v.

Warner Bros. Records, 389

F.2@ 903 (24 Cir. 1968) .....-.- 10

Arber v. Essex Wire Co.,

490 F.2d 414 (6th Cir.),

cert. denied, 419 U.S. 830

PSPES Oak eke eee ee ee

Crews v. Central States SE

and SW Areas Pension Fund,

788 F.2d 332 (6th Cir. 1986) a 16

Curtis v. Loether, 415 U.S.

ee! | err reer ae Se

Daily Income Fund, Inc. v. Fox,

464.0.4.-308 (19003... 6 4 & + 5) x Oe

Dairy Queen, Inc. v. Wood,

369 U.S. 469 (1962) .« «© «© «© «© «© « «@ 11

Dasho v. Susquehanna Corp.,

461 F.2d 11 (7th Cir.),

cert. denied, 408 U.S. 925

er) a ee ee er ee eee ee

Gartenberg v. Merrill Lynch

Asset Management, Inc., 487

F.Supp. 999 (S.D.N.¥. 1980) ... 8, 11

In re Evangelist, 760 F.2d 27

(26t Cin. 1906) « «+ 8; 8, i2, 335.58

In re Gartenberg, 630 F.2d 16

(2d Cir. 1980), cert. denied,

451 U.S. 910 (1981) . 7, 9, 10, 12, 13

In re Seatrade Corp., 345

F.2d 785 (2d Cir. 1965) ...... #17

Jerozal v. Cash Reserve

Management, Inc., [1982-83

Transfer Binder) Fed.Sec.L.Rep.

(CCH) para. 99,019 (S.D.N.Y.

Dec. 29, 1982) oer eeeeewneewesne FY

Kalish v. Franklin Advisers,

Inc., 87 Civ. 6919 (S.D.N.Y.

Feb. 29, 1988) (unpublished

Opinion of Hon. Charles S.

Haight) .....++«+.-« +. e« «© 2 «2 B

Kamen v. Kemper Financial

Services, Inc., 659 F.Supp.

1153 (N.D. Ill. 1987), mandamus

denied No. 87-1455 (7th Cir.

April 13, 1987), cert. denied,

__ U.S. ___s- 556 «*U.S.L.W. 3606

(March 8, 1988) .........2.2.7

Krinsk v. Fund Asset Management,

Inc., 654 F.Supp. 1227 (S.D.N.Y.

1987) o 2 © © © © «© «© « 8, 15, 19, 20

Maldonado v. Flynn, 477 F.Supp.

1007 (S.D.N.Y. 1979) (Weinfeld,

J.), mandamus denied and decision

adhered to, 671 F.2d 729 (2d Cir.

1982) . .. . . d1l, 15, 17, 18, 19, 20

Mallory v. Citizens Utilities

Co., 342 F.2d 796 (2d Cir. 1965) . . 17

Markowitz v. Brody, 90 F.R.D.

542 (S.D.N.Y. 1981)

Philips v. Kaplus, 764 F.2d

807 (llth Cir. 1985), cert.

denied, 474 U.S. 1059 (1986).

SCM Corp. v. Xerox Corp., 507

F.2d 358 (2d Cir. 1974)

Securities & Exchange Commis-

sion v. Commonwealth Chemical

Securities, Inc., 574 F.2d 90

(2d Cir. 1978) so 8© © @ 6 10,

Tarlov v. Paine Webber Cash-

fund, Inc., 559 F.Supp. 429

(D.Conn. 1983) oe ee e@

Tull v. United States, 481

U.S. , 95 L.Ed.2d 365

+. y) eee ee ee

Weissman v. Alliance Capital

Management Corp., [1985-86

Transfer Binder] Fed.Sec.L.Rep.

(CCH) para. 92,396 (S.D.N.Y.

Dec. 30, 1985), mandamus denied,

788 F.2d 5 (2d Cir. 1986) .

Statutes:

Section 20(a), Investment

Company Act of 1940, 15

U.S.C. Section 80a-20(a)

Section 36(b), Investment

Company Act of 1940, 15

U.S.C. Section 80a-35 ..

17

10

11, 15

14

Other Authorities:

5 Moore's Federal Practice

para. 38.23

5 Moore's Federal Practice

Tas SU6eeees »o 6 ss © é¢ » « « BM

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Statement of the Case

Plaintiff owned shares valued at

approximately $1,000 (at time of trial) in

a money-market fund called Rowe Price

Prime Reserve Fund, Inc.

She challenged the compensation

received for the years 1979 and 1980 by

the investment adviser, T. Rowe Price

Associates, Inc., as violative of § 36(b)

of the Investment Company Act of 1940. In

addition, she claimed that the proxy

statement by which the investment advisory

fee was approved by shareholders of the

Fund in 1981 was misleading. She also

asserted a common law claim under Maryland

law which is not germane here.

Shortly before trial, defendants

moved to strike plaintiff's jury demand on

the ground that the relief sought was

equitable, not legal. The District Court

granted the motion and that grant was

later affirmed by the Court of Appeals.

The case was tried on the merits in

1987 and all claims were dismissed in a

lengthy and detailed Opinion by the

District Court. That Opinion was affirmed

in all respects by the Court of Appeals

later in 1987.

Summary of Argument

Aa The question presented for

review by petitioner is not worthy of

review by this Court because the decision

of the Court of Appeals for the Second

Circuit is not in conflict with the

decision of any other federal court of

appeals on the point, i.e. the right to

trial by jury. Nor was the decision in

conflict with any decision of any state

court of last resort. Nor did the Court

of Appeals for the Second Circuit depart

from the accepted and usual course of

judicial proceedings in any way.

2 In any and all events, the

decision of the District Court denying a

jury trial, affirmed by the Court of

Appeals, was correct.

In a well-reasoned Opinion, dictated

into the record several weeks before the

trial, District Judge Robert J. Ward

granted defendants' motion to. strike

plaintiff's demand for a jury trial. On

appeal, plaintiff pressed her claim that

her Section 36(b) claim and her proxy

Claim were triable to a jury, and the

Court of Appeals rejected her contention.

The standard: Tull v. United States,

481 U.S. (1987)

In its most recent statement on the

right to jury trial, this Court stated:

To determine whether a

statutory action is more similar

to cases that were tried in

courts of law than to suits

tried in courts of equity or

admiralty, the Court must

examine both the nature of the

action and of the remedy sought.

First, we compare the statutory

action to 18th-century actions

brought in the courts of England

prior to the merger of the

courts of law and equity

[citations omitted]. Second, we

examine the remedy sought and

determine whether it is legal or

equitable in nature [citations

omitted].

Tull v. United States, 481 U.S. , 95

L.Ed.2d 365, 373 -(1987). This Court then

added an important caveat:

We reiterate our previously

expressed view that character-

izing the relief sought is

"(mjore important than finding a

precisely analogous common law

cause of action in determining

whether the Seventh Amendment

guarantees a jury trial" [cita-

tion omitted].

(95 L.Ed.2d at 375). This Court in Tull

upheld the defendant's right to a jury

Since the remedy sought there (a statutory

penalty for money damages) was more

analogous to a suit for damages than to

one for "disgorgement of improper profits,

traditionally considered an equitable

remedy" (95 L.Ed.2d at 377). Here, of

course, quite the reverse is true.

Point I —

There is no right to jury

trial for a claim under

§ 36(b) of the Investment

Advisory Act of 1940

This Court, several weeks ago, denied

certiorari on the precise issue presented

here: Kamen v. Kemper Financial Services,

Inc., 659 F.Supp. 1153 (N.D. Ill. 1987),

mandamus denied No. 87-1455 (7th Cir.

April 13, 1987), cert. denied, __ U.S.

56 U.S.L.W. 3606 (March 8, 1988).

The Second Circuit, from which

certiorari is sought in the instant case,

had already passed upon this precise issue

and held that there is no jury right ina

Section 36(b) claim. In re Gartenberg,

630 F.24 16, 18 (24 Cir. 1980), cert.

denied, 451 U.S. 910 (1981), aff'g,

7

Gartenberg v. Merrill Lynch Asset Manage-

ment, Inc., 487 F.Supp. 999 (S.D.N.Y.

1980).

Every other court which has passed

upon the issue of whether a claim under

Section 36(b) of the Investment Company

Act is triable to a jury has also con-

cluded that such a claim is equitable in

nature, affording the plaintiff no right

to a jury trial. In re Evangelist, 760

F.2d 27, 29-30 (ist Cir. 1985); Kalish v.

Franklin Advisers, Inc., 87 Civ. 6919

(S.D.N.Y. Feb. 29, 1988) (unpublished

Opinion of Hon. Charles S. Haight); Krinsk

v. Fund Asset Management, Inc., 654

F.Supp. Laai, 1236 (5 .D.N.Y¥. 1987);

Weissman v. Alliance Capital Management

Corp., [1985-86 Transfer Binder] Fed.Sec.

L.Rep. (CCH) para. 92,396 at 92,439-40

(S.D.N.Y. Dec. 30, 1985), mandamus denied,

8

788 F.2d 5 (2d Cir. 1986); Tarlov v. Paine

Webber Cashfund, Inc., 559 F.Supp. 429,

441 (D.Conn. 1983); Jerozal v. Cash

Reserve Management, Inc., (1982-83

Transfer Binder] Fed.Sec.L.Rep. (CCH)

para. 99,019 at 94,827 (S.D.N.Y. Dec. 29,

1982); Markowitz v. Brody, 90 F.R.D. 542,

547-48 (S.D.N.Y. 1981).

The reasoning in these cases, and, in

particular, in the Second Circuit's

Opinion in In re Gartenberg, was clear and

unassailable. There is no reason or

justification for this Court to review

this question. 1+

1 None of the cases cited by

petitioner involves a jury right under

Section 36(b). Curtis v. Loether, 415

U.S. 189 (1974) merely recognized that a

statutory claim may be subject to a jury

trial if Congress so intended; here, as

the Second Circuit and the First Circuit

recognized in In re Gartenberg and In re

Evangelist, Congress intended otherwise

(viz., that a Section 36(b) claim is

9

Plaintiff's self-styling of her

remedy as "damages", of course, does not

make her Section 36(b) claim a "bona fide

claim for damages" within the meaning of

In re Gartenberg. As the late Chief Judge

Friendly explained in Securities &

Exchange Commission v. Commonwealth

Chemical Securities, Inc., 574 F.2d 90, 95

(24 Cir. i976):

(NJot all money claims are

triable to a jury. A historic

equitable remedy was the grant

of restitution "by which the

defendant is made to disgorge

ill-gotten gains or to restore

equitable, not legal). SCM Corp. v. Xerox

Corp., 507 F.2d 358 (2d Cir. 1974), and

Amer. Met. Enterprises v. Warner Bros.

Records, 389 F.2d 903 (2d Cir. 1968) had

nothing to do with jury rights; they

involved only the question whether

equitable relief will be granted where

there is an adequate remedy at law, a

question not involved at bar. Daily

Income Fund Inc. v. Fox, 464 U.S. 523

(1984), involved the issue of director

demand, not the right to jury trial.

10

the status quo, or to accomplish

both objectives." And "({wjhen

restitution is sought in the

form and in the situations

allowed in equity prior to the

rules or authorized by valid

statutes there is no right to

jury trial." Disgorgement of

profits zn an action brought by

the SEC[? } to enjoin violations

of the securities laws appears

to fit this description; the

court is not awarding damages to

which plaintiff is legally

entitled but is exercising the

chancellor's discretion to

prevent unjust enrichment.

(citations omitted].

Accord: Dair ueen, Inc. v. Wood, 369

U.S. 469, 477-78 (1962) ("the consti-

2 As the late Judge Weinfeld noted

with regard to Commonwealth Chemical

Securities, Inc., "{t]he fact that the

action in that case was an SEC enforcement

action was considered by the Court of

Appeals but was not a factor essential to

its holding which turned simply on

recognizing the relief sought as restitu-

tionary in nature and on the finding that

restitution was an equitable remedy."

Maldonado v. Flynn, 477 F.Supp. 1007, 1011

n.14 (S.D.N.Y. 1979), mandamus denied and

decision adhered to, 671 F.2d 729, 732 (2d

Cir. i982). Accord: Gartenberg, supra

(487 F.Supp. at 1007).

tutional right to trial by jury cannot be

made to depend upon the choice of words

used in the pleadings"); Arber v. Essex

Wire Co., 490 F.2d 414, 423 (6th Cir.),

cert. denied, 419 U.S. 830 (1974) (denying

jury trial in 10b-5 action where relief

requested by plaintiff, though denominated

damages, was the "monetary equivalent of

rescission").

The purported distinction from In re

Gartenberg which petitioner here argues

(i.e. that she asked for money damages in

her Third Amended Complaint) was expressly

argued to and rejected by the First

Circuit in In re Evangelist:

-.- (T)he right to a jury trial

cannot turn on the simple

substitution of a different word

[citations omitted]. Otherwise,

any equitable action for money,

say for restitution, could

become a legal action by the use

of the word "damages" in place

12

of “restitution".

(760 F.2d at 31).2

In short, irrespective of how

plaintiff seeks to describe her claim, it

is an equitable claim which is triable to

the Court, not to a jury.

3 petitioner acknowledged that the

relief she sought in this action was

a repayment to the Fund of the excessive

advisory fees paid", which she denominates

"legal restitution" (Appellant's Brief to

the Second Circuit, p. 41). The cases

which have dealt with this question have

recognized that this remedy is, in truth,

a remedy for restitution, which is an

equitable remedy, not a legal remedy.

See, e.g. In re Evangelist, supra (760

F.2d at 29-30):

‘ [Tjhe remedy Congress

created - the payment of any

excess fee to the company - is

similar to the traditional

equitable remedy of an "“account-

ing". Like other remedies of

restitution, that remedy

requires one owing a fiduciary

duty ... to "“disgorge” ... money

taken in derogation of the duty.

Accord: In re Gartenberg, supra (630 F.2d

at 18).

13

Point II —

There is no right to jury

trial for a claim under

§ 20(a) of the Investment

_._Company Act of 1940

Petitioner claimed a proxy violation

in connection with the approval of the

Investment Advisory Agreement for 1981.

Petitioner sought, as relief, a declara-

tion that the Investment Advisory Agree-

ment was void and repayment to the Fund of

"the Fund's damages", including "all of

the payments made by the Fund to the

defendants" under the agreement and "all

of the profits earned by the defendants"

under the agreement (Appendix in the

Second Circuit : A-2q — A-2r).

In essence, petitioner sought

rescission and restitution on her proxy

14

clain. Such a claim is equitable in

nature, and is not analogous to a claim

for legal relief, regardless of whether

plaintiff asked (in her pleading) for

"damages". Krinsk, supra (654 F.Supp. at

1236); Maldonado v. Flynn, 477 F.Supp.

1007, 1011 (S.D.N.Y. 1979) (Weinfeld, J.),

mandamus denied and decision adhered to,

671 F.2d 729, 732 (2d Cir. 1982).4

The remedies sought on petitioner's

proxy claim are clearly analogous to

historically equitable, not legal reme-

dies. For example, the "damages" sought

4 Following the late Judge

Friendly's reasoning in Commonwealth

Chemical Securiti -, quoted above,

ee Weinfeld also held in Maldonado,

upra (a proxy case), that “the fact that

Saunas of 'money damages' is sought does

not change the basic nature of the claims"

for purposes of analyzing whether there is

a right to a ~~ trial (477 F.2d at

1011). Accord: In re Evangelist, supra

(760 F.2d at 31); Krinsk, supra (654

F.Supp. at 1236).

15

en

by plaintiff were, in truth, a disgorge-

ment or repayment of monies which Price

Associates, as an allegedly faithless

fiduciary, had improperly taken and

allegedly should have been compelled to

return to Prime Reserve Fund. AS ex-

plained by Professor Moore:

[T]he common law remedies,

particularly debt and account,

were often inadequate, and

equity early assumed jurisdic-

tion to compel the payment of

— money, especially by but not

limited to fiduciaries, the

restoration or return of a

specific thing

5 Moore's Federal Practice para. 38.24[2]

at 38-194. See also: Crews v. Central

States SE and SW Areas Pension Fund, 788

F.2d 332, 338 (6th Cir. 1986) ("histori-

cally, an action for restitution seeks an

equitable remedy for which there is no

Seventh Amendment right to a jury trial");

16

In re Seatrade Corp., 345 F.2d 785, 787

(2a Cir. 1965) ("Restitutionary remedies

are basically equitable in nature ...").

Similarly, a declaration that the

Investment Advisory Agreements were void

is essentially an equitable remedy. Thus,

Professor Moore has explained:

An action for rescission or

cancellation of a contract

is traditionally equitable.

5 Moore's Federal Practice para. 38.23 at

38-187. See also: Philips v. Kaplus, 764

F.2d 807, 812-13 (lith Cir. 1985), cert.

denied, 474 U.S. 1059 (1986); Arber, supra

(490 F.2d at 422); Mallory v. Citizens

Utilities Co., 342 F.2d 796, 797 (2d Cir.

1965); Maldonado, supra (477 F.Supp. at

1011) (restoration to status prior to

wrongdoing is a "historic equitable

17

remedy").

In Maldonado, supra (477 F.Supp.

1007), Judge Weinfeld struck plaintiff's

jury demand on a proxy claim. Plaintiff

there contended that a proxy solicitation

in connection with the election of

directors was tainted, so that the

election should be nullified and damages

awarded to the corporation (477 F.Supp. at

1011). Judge Weinfeld stated:

Each claim, whether for printing

and mailing expenses or recap-

ture of compensation and

expenses paid to directors,

basically seeks restitution for

the benefit of the corporation.

Despite plaintiff's reiterated

assertion that the claims are to

recover "money damages", they

are essentially equitable in

nature. The fact that recovery

of "money damages" is_ sought

does not change the basic nature

of the claims.

* * *

18

In the event that plaintiff

prevails, it is clear that to

the extent it is established

that the corporation was

damaged, restitution would be

the remedy.

(477 F.Supp. at 1011). Like the plaintiff

in Maldonado, plaintiff here also sought

damages which were, in effect, merely

restitution of the profits and payments

made under the Investment Advisory

Agreement. > Such a claim is equitable and

is not triable to a jury. Judge Ward

correctly followed this reasoning (at A-4

and A-5), as did the District Court in

Krinsk, supra (654 F.Supp. at 1236) ("a

5 Significantly, the factual core of

petitioner's proxy claim is basically the

same as that of her Section 36(b) claim.

Indeed, by incorporating the allegations

of her Section 36(b) and state law

fiduciary duty allegations into her proxy

claim (Third Amended Complaint, para. 34

at A-2k of Appendix in the Second Cir-

cuit), plaintiff effectively conceded that

the proxy claim is equitable.

19

proxy misrepresentation that results in

the continuation of a contract for

advisory fees ... would lead to equitable

TOLIGE 2.57}.

The authority principally relied on

by plaintiff, Dasho v. Susquehanna Corp.,

461 F.2d 11 (7th Cir.), cert. denied, 408

U.S. 925 (1972), was also cited to the

courts in Maldonado and Krinsk, and to

Judge Ward in this case. All three judges

rejected Dasho, a corporate merger case,

as inapposite, on the grounds explained by

Judge Weinfeld in Maldonado, supra (477

F.Supp. at 1010-1011). Indeed, Judge

Weinfeld stated: "It is not altogether

clear that a definitive holding was made

[in Dasho) that a Section 14(a) [proxy]

Claim entitled one to a jury trial." (477

F.Supp. at 1011, n.i2). Dasho, decided

over 15 years ago, is also of doubtful

20

validity today since it is devoid of any

remedy-based analysis, as is now clearly

required by this Court in Tull, supra (95

L.Ed.2d at 375).

Conclusion

The Petition should be denied.

Respectfully submitted,

Daniel A. Pollack

Attorney for Respondents

61 Broadway (Suite 2500)

New York, New York 10006

(212) 952-0330

Of Counsel:

Pollack & Kaminsky

Daniel A. Pollack

Martin I. Kaminsky

Edward T. McDermott

Henry H. Hopkins

aa