Opposition Brief — Muscat v. Norte & Co.

7

INDEX

Preliminary Statement ..................cccccece.

RN II 4 oa day Ca Ons Vane gos

Statement of the Case oo... oo. .scccccicccece.,..

Summary of the Argument ......................

| Pornt=I—The petition should be denied because the

questions posed by petitioners do not arise out of

the facts in the case or they involve issues of fact ..

wae me TE se sc secc. cae

The Third and Fourth Questions ..............

The Fifth Question ..............0............. :

CoNCLUSION ......... Ss REREN OED OEE AE bak Meat cue

‘

APPENDIX ..:..... Nis O46 Se wEW he Ree eee we dae here

li

be ,

TABLE oF AUTHORITIES (

Cases _~—

,

’

Appalachian Power Co. v. American Institute of

Certified Public Accountants, 361 U.S. 30, 4 L Ed

2d 30, 80 8; Ot. 16.(1950) oc svee sec ccce...

Berenyi v. Immigration Service, 385 U.S. 630, 17 L

_Ed 2d 656 ROMER eS vebeel 4s vane eye ee bee eee

Comstock v. Group of Institutional Investors, 335

U.S. 211, 92'L Ed 1911 (1947) ..................

Conway v. Adult Authority, US. ,24L Ed 245

(ARTO) BE Wh NO ae eee

e

de Haas v. Empire Petroleum Co., 300 F. Supp. 834,

or: SO, SOE 055 55 cde sine ee ete.

- Gallagher v. Perot, 112 Misc. 717,183 N.Y. Supp. 257

(Sup. Ct. 1918) aff’d 200A.D. 867, 191 N.Y. Supp

926 aff’d 234 N.Y. 516 (1922) ................... |

Giannone v. United States Steel Corporation, 238

Home Fire Ins. Co. v. Barber, 67 Neb. 644, 93 Nw,

ssciatath al fee SORT T EE Me ce oe

Hooper v. Mountain States Securities Corp., 282 F.,

2d 195 (5th Cir. 1960), cert. den. 365 U.S. 814,5 L

te BR OO BIN) ods os beeen ee ee

J. I. Case Co.-v. Borak, 377 U.S. 426, 12 L Ed 2d 423

Laird v. Carrier Engine Service Co., 263 F. 2d 948

ORE CUE SIO) sds cons cen sh see

PAGE

18, 22

9, 26

7,11

14,17

' ie “di i

pes ' PAGE

“Marin v. Kngland, 385 U.S. 99, 17 LEd 2d 197 (1966) 16

Mathews v. Heedley Chocolate Co., 130 Md. 523, 100

Atl, 645 (1917) .......... eee ee ee 16

May v. Midwest Refining Co., 121 F. 2d 431 (1st Cir. “

1941}, cert. den. 314 U:S. 668, 86 LEd 534 (1941) 16

McCarthy. v. Brunner, 323 U.S. 673, 89 L Ed 547 »

(SONS). sine oes vn bc dete es Op ee 10

Mills v. Electric Auto-Lite Co., 403 F. 2d 429 (2 Cir.

1968), judgment vacated, supra, U.S. , 24

" L Bd Sd 606 .... Sreryeresy Vee whee evieg we Cee 17, 25

Moor v. Texas & New Orleans R. Coz 297 U.S. i 5>

80 L Ed 509 (1935) ........ 5 as aa /..7, 11, 18

NLRB v. Pittsburgh S.S. Co., 340 U.S. 498, 95 L Ed

479 (1951) .. 1s Fe cesabes oP ¥EVER TART eeES fs veo SE 18

Perlman v. Feldman, 219 F. 2d 173 (2nd Cir. 1955) 16.

‘Potter v. Walker, 276 N.Y. 15 (19ST) oe. en en ees 19 °

Ross v. Bernhard, etal, US. ;.. Li Bd 2d

(Feb. 2, 1970) n De sib.t vein est eo een Savvis pan ‘14, 18

Simon v. New Haven Board & Carton Co., 250 F. ,

Supp. 297 (D. Conn. 1966) ....., ‘eaee aay 13

Southern Pacific R:R:-v: Bogart; 250 US. 478 (1919) 16

3 1, Ed 2d 723, reh. den. 359 U.S. 993, 3 L Ed 2nd

986 $1900)... oo. cise ae

re

Tyrrell v. District of Columbia, 243 U.S. 1, 61 L Ed

507 (1916). sve ee ee eee eds 10

\ é

iv.

Statutes and Rules j

| PAGE

Federal ‘Rules of Civil Procedure:

pm BUT) BOG IG(D) os. sooo hoo vende 2

‘Rules of the Supreme Court of the United States:

WR eee hen tera iksG coh oie ce ee 2

Securities Exchange Act of 1934: | |

dF” Deo teh Er oem imine 3, 8, 23, 24

§§ 10b-5 and 14a-9 weeeeee o EAD Eia ee tes’ ay bace 8 a 8, 24°

Miscellaneous

13 Fletcher, Cyclopedia of Corporations (1961, Rev.

volume) BA: Gee, aoe elena neee 15

2 Hornstein, Corporation Law and Practice (1959)

§ 731, pp. 246- pe BERTIE Oe or noe eae ane 15

Henn on Corporations (1961) See. 375, p. Rs 15

Stern & Gressman, Sup. Ct. Prac (4th Ed. 1969), :

S§ 6. a DO oS oh rsa ete e a tae Pe aubeaee 7,10

0

\

‘Supreme Court of the United States

October Term, 1969..

“N

7%

¥

Victor Muscat anv R. L. Hurrrinss, Jr.,

Petitioners,

—against—

Norte & Co. ' -

¢ ve Respondent.

7%

¥-

BRIEF IN OPPOSITION TO PETITION FOR )

WRIT OF CERTIORARI ;

Opinion Below

Petitioners have: omitted citation of the opinion of the

District Court rendered after trial, which is 304 F. Supp.

1096.

Preliminary Statement

Petitioners seek a writ of certiorari to review a judg-

ment of the United States Court of Appeals for the Second’

Circuit, unanimously affirming a judgment of the United

States District Court for the Southern District of New

York after a trial on the merits.

Petitioners pose five questions which they contend re-

quire review by this Court (Pet. pp. 2-3). None of the

questions raised presents a proper basis for certiorari be-

cause it is demonstrable that either (1) the questions pre-

sented are not involved’ in this case and are, therefore, en-

tirely hypothetical, or (2) they involve contested issues of

fact decided against petitioners by the District Court and

affirmed by the Court of Appeals.

2-

Additional Rules Involved

In addition to the statutes and regulations set forth in

the petition (A 72-76), the following rules are involved:

Rule 19 of the Rules of the Supreme Court of the United

States; and Rules 8(f) and 15(b) of the Federal Rules of

- Civil Procedure. : fae : .

f

Statement of the Case

The action is a derivative stockholder’s suit brought on

behalf of Defiance Industries, Inc. (‘‘Defiance’’) against its |

principal officers, directors and controlling stockholders.

The amended complaint asserts three causes of action. The

first, a common law cause of action, based on diversity of »

citizenship, aHeges that petitioners, together with one Ed-

ward Krock (named as a‘defendant, but not served), caused °

Defiance to issue a grossly excessive number of its shares

in exchange for shares of Insurance and Industrial Iinter-

prises, Inc. (‘‘ITK’’), a corporation 77% ‘owned by peti-

tioners and Krock (R 6a-12a).* ate

Liability on the second cause of action was conceded by

petitioners and is,.therefore, not involved on this applica-

tion.** ;

* References designated by the letter “R” refer to petitioners’

. appendix on their appeal to the Court of Appeals,

'** The second cause of action, likewise a common law claim based

"on diversity of citizenship, alleges that petitioners and Krock

. appropriated an opportunity belonging to Defiance to acquire -

l 10% of the stock of IIE at $20.94 per share at the very time

petitioners, and Krock were conspiring to sell these shares. to

Defiance at $70.51 per share (R 12a-13a). Judgment in the

sum of $206,357 was rendered against petitioners. on this cause .

of action. On their: appeal to the Court of Appeals, petitioners

conceded that they had appropriated this corporate opportunity

and that they should have tendered the shares in question to

Defiance at their cost.

.

fee .

. The third cause of action alleges that petitioners’ secured

~ stockholder approval of the exchange transaction between

Defiance and IIE on the basis of a false and misleading

proxy statement in violation of §¢ 10 and 14 of the Seeuri-

ties Exchange Act of 1934 (‘‘Act’’) and the: SEC rules

adopted thereunder (R 14a-18a).

The District Court awarded judgment with respect to

the first cause of action upon the ground that. petitioners

had violated ‘‘their state-law fiduciary obligation to’ Defi-

ance (first cause of action) by causing it to acquire all of

the stock of I1E, 77% owned by them and their associates,

at an inflated price’’ (A 35).* In this connection the Dis-

trict Court further held (A 32):

‘Plaintiff has established a clear case of gross and

deliberate fraud on the part of defendants Huffines.

and Muscat, knowingly participated in by Krock, in

breach of their fiduciary duties to Defiance’s” stock- a

, holders and with the purpose and effect of profiting

_at the expense of its stockholders. It is difficult to

conceive of more flagrant and callous breaches of

trust on the part of corporate fiduciaries than those

found here.’’

The District Court also awarded judgment with respect

to the third cause of action upon the ground that the proxy

Statement, on the basis-of which the Defiance-IIE exchange

was approved by the shareholders of Defiance, was false

and misleading in material respects (A 19-29). The Dis-

trict. Court expressly held (A 34- 36) that petitioners had

personal knowledge of the false representations made in

the proxy statement (A 34- “Py.

“

* Reference despise by ihe tétter “A” refer to petitioners’ ap-

pendix annexed to their petition.

ra

.

4

Petitioners thereafter moved for a oe trial on the

ground of alleged newly discovered evidence. On that mo-

tion petitioners contended for the first time that the Court,

in assessing damages, should have accepted the market

price of the stock of Defiance as its fair value, rather than

the fair value of $14.49 per share fixed by Hayden Stone &

Co., petitioners’ own expert (A 44), ee

In rejecting that contention, the District Court held

(A 44):

‘‘Review of that record reveals that defendants’

present contention to the effect that Defiance stock _

was over-valued is not only belated, but contrary to,

. and inconsistent with, the proof offered by the par-

ties and the position taken by the defendants both’

at pretrial and trial.’’»

The District Court, notwithstanding its view that peti,

*. tioners’ contention that the market price of Defiance’s

Stock should be equated to its fair value was belatedly

made, nevertheless, carefully explored petitioners’ conten-

tion and concluded that (A 20) ‘‘while market price is

properly considered as one of-the factors in arriving ata

value for Defiance stock, it is neither controlling nor con-

clusive’’.* After considering all of the élements usually

taken into account in arriving at fair value, the District

Court held that,‘‘The result of this process of valuation

was the determination of fair value of Defiance stock of

$14.49 per share * * *’’, (A 56)

* The District Court noted (A 63) “The unreliability of such

- _ prices,/in view of the extreme thinness of the market in Defiance

stock jand the fact that such lower prices may well have been

attriutable in part to defendants’ own unconscionable con-

aa

6 yap

45

ee }

Petitsoners, on their motion for a new’trial, also con-’

tended for the first time that the award of damages should.

have been made to the innocent shareholders of Defiance, ©

‘rather than to Defiance, itself (A 58). The District Court

_-rejected that contentiom,halding (A 58> that ‘‘The general

rule in a derivative action is that recovery is awarded to

the corporation on. behalf of which suit is brought * * *,””

In unanimously affirming the District Court, the Court

of Appeals held that ‘‘A study of the record shows ample

support of Judge Mansfield’s findings * * *’?, (A 3) The

Court of Appeals concurred with the District Court that

petitioners had ‘‘acted in violation of their fiduciary duties

as controlling officers and directors of Defiance’? (A 3) and

that their conduct was the result of ‘calculated fraud”’

(A 5). The,Court of Appeals also agreed that an award

of damages to Defiance was the appropriate form of relief :

(A 4).

Petitioners thereafter moved for a rehearing limited to

the question of prejudgment interest. The Court of Ap-

- peals remanded thé matter to the District Court ‘‘for fur-

ther consideration of prejudgment interest’? (A 7) but

‘affirmed in all other respects’? (A 8) the judgment of the

Distriet Court.

« The Court of Appeals directed the District Court to give

‘further consideration to whether the prejudgment interest

awarded was ‘‘compensatory”’ and ‘‘in accord with ‘funda-

mental fairness’ ’’.* (A 7) In that connection, the Court

of Appeals, among other things, directed the District Court |

to ‘‘make specific findings, first¥ on the personal wrong-

doings of Huffines and: Muscat’’. (A 7 ) Clearly, the Court’s

* The issue of prejudgment interest was settled by stipulation, ap- '

proved by the District Court (A 69-71).

6

direction did not, and was not intended to, as petitioners

imply (Pet. fn. p. 12); negate its prior finding that petition-

ers were guilty of.‘‘calculated fraud’’. (A 5)

: Summary of the Argument

None of the questions raised by ssllthonern present any |

basis for certiorari.

The first four questions posed by petitioners for review

by this Court do not arise out of the facts of the case and

are, therefore, entirely hypothetical. It is well settled that

this Court will not render advisory opinions by reviewing

issues which are not presented by ms dacts of the case

.' béfore’ it.

The fifth question posed by petitioners involves an issue

of fact decided against the petitioners by the District Court

and unanimously affirmed by the Court of Appeals. It is

equally well settled that this Court will not review concur-

rent findings of fact by’ two lower courts. Furthermore,

since the judgment is also, based on common law diversity

grounds, any decision by this Court on federal grounds

would not disturb the judgment. f

tf

1. The First Question: ‘Petitioners contend (Pet. p. 18)

that in awarding judgment in favor of Defiance, rather than

to its innocent stockholders, the éourts below were ‘‘strait-

jacketed’’ by state law and further contend (Pet. pp. 21-22)

‘that there is a conflict among the Circuit Courts of Appeal

over whether, in a diversity case, federal courts are bound

to apply state court remedies.. These questions, advanced

for the first time on this application for a writ of certiorari,

do not arise from the actual facts of this case.

Neither the District Court nor the Court of Appeals in

awarding judgment eeu rather than to its share-

~ IE

e

eats . CO a

’ re ee ee ee ee ee ee ee ,

= .

|

?

:

holders, was constrained to do so by ‘any requirement of

state law. Neither court made any reference to state law

relating to the appropriate remedy, or to any possible con-

flict which. might exist among the Cireuit Courts of Appeal

on this question. Both courts, in the exercise of their dis-

cretion, in awarding judgment in favor of Defiance, followed

the traditional and generally accepted equitable principle

that in a derivative suit the award of damages goes to the

wronged corporation, not to its shareholders.* Accordingly,

since the question of state law versus federal law, ie., the

application of the doctrine of Erie R. Co. v. Tompkins, 304

U.S. 64 (1938), was neither ‘raised nor involved in the case,

the question of a conflict among the Courts of Appeal. on

the question was likewise neVer an issue in the case. It

may not, therefore, be raised now. (Stern & Gressman,

Sup. Ct. Practice, 4th ed. (1969) § 6.37 at p. 297)

The real complaint of petitioners is not based, as they

contend (Pet. p. 20), on any alleged erroneous application

of the Erie doctrine, or any conflict among the circuits, but

rather, that.the’courts below refused to exercise discretion

in petitioners’ favor and awarded judgment in favor of

Defiance, itself. This Court does not review the exercise

of discretion by, lower courts in the absence of a showing

of a clear abuse. (Moor v. Texas &: New Orleans R. Co., 297

U.S. 101, 105, 80°L Ed 509, 511 (1935))

2. The Second Question: Petitioners contend ( Pet.-p. 12)

that the courts below, in fixing the fair value of Defiance

at $14.49 per share, ignored a stipulation in the pre-trial

order that the shares had a market value of $11.625 per

* It would have been’ superfluous for the courts below to have

distinguished between the applicability of state or .federal law,

since the judgment was based on a violation of both state and

federal law. -

;

share. The District Court, however, did not ignore the

stipulation.

On the contrary, the District Court accepted the stipu-

lated market price of Defiance’s shares as the fact (A 53),

but held that ‘‘it is neither controlling nor conclusive’ (A

90) on the issue of the fair value of Defiance ’s shares. In

view of the ‘‘thin’’ market prevailing, the Court accepted

the report of Hayden Stone & Co., petitioners’ own expert,

that the fair value of Defiance’s shares was $14.49 per

share (A 44, 46-48, 54-55).

The stipulation in the pre-trial order as to ‘‘market

value’? was never intended to foreclose inquiry into the

‘fair value’’ of Defiance’s shares. By the terms of the

pre-trial order, that issue was reserved for the trial (R

147a, 148a). Indeed, throughout the trial, both sides accepted

Hayden Stone’s evaluation of Defiance at $14.49 per share,

and the entire case was tried on that theory (A 44).

Accordingly, petitioners’ contention that the courts below

ignored the pre-trial stipulation does not accord with the—

undisputed facts.

3. The Third and Fourth Questions: Petitioners contend

(Pet. pp. 12-14) (a) that this Court should review the ques-

tion of whether scienter must be proved to recover damages

for violations of §§ 10 and 14 of the Act and Rule 10b-5 and

14a-9; and (b) the extent to which reliance on the ‘‘clear-

ance”? by the SEC of a proxy statement negates fraud.

Neither of these issues arises out of the facts of this case.

The District Court expressly found that petitioners: had

knowingly misrepresented material facts in the proxy state-

‘ment and that they had ‘‘misled”’ the SEC by withholding

this information from it (A 34-35, 37). The Court of Appeals

a

&

»

9

unanimously affirmed. Accordingly, the issues thus raised

by petitioners are academic in this case and ought not be

reviewed by this Court. \

4. The Fifth Question: Petitioners contend (Pet. p. 3) -

that this Court should review the fairness of the Defiance-

IIE exchange transaction. The fairness of the exchange was

the principal issue upon the trial. On that issue of fact, the

District Court held that the ratio of exchange was grossly

unfair to Defiance, and the Court of Appeals unanimously

affirmed. This Court will not review an issue of fact de-

termined by the District Court and unanimously concurred

in by the Court of Appeals. (Berenyi v. I mmeagration Service,

385 U.S. 630, 635, 17 L Ed 2d 656, 661 (1966).

Finally, it may be observed that review by this Court of

the federal questions which petitioners purport to raise

(Questions ‘‘2’’, ‘3’? and ‘‘4’’) cannot affect the judgment

in this case. This is so because the judgment here is based

on common law diversity claims (as well as on federal

claims). The judgment against petitioners for breach of their

common law fiduciary duties would be unaffected, even as-

suming this Court believed that the courts below had er-

roneously construed, or applied, federal law. :

POINT I

The petition should be denied because the questions

posed by petitioners do not arise out of the facts in

the case or they involve issues of fact. |

This Court has consistently held that it will not grant cer-

tiorari to review hypothetical questions which are not pre-

sented by the facts of the particular case before it. As this

Court stated in Conway v. Adult Authority, we...3 Bh

L, Ed 245 (1970) at p. 298:

~..

aac RDS lek a Sic ae Te aaah a aa Se ec Se ee

Z - ) : er Aa es a tht EL i 5 OL ae

DOB AL MCI iba mht Micha sited od tS. ann te allie ot tet pA nw he. a eres

10

‘“* * * Thus, it now appears the State has docu-

mentary evidence that the actual facts simply do not

present the issue for which certiorari was granted by us.

“Tn this state of affairs we decline to adjudicate this

case. Were we to pass upon the purely artificial and

hypothetical issue tendered by the petition for certiorari

we would not only in effect be rendering an gdvisory

opinion but also lending ourselves to an unjustifiable

intrusion upon the time of this Court. Accordingly,

the writ of certiorari is dismissed as improvidently

granted.’’

Accord:

_ Stern & Gressman, Sup. Ct. Prac. (4th Ed. 1969),

§6.37, p. 297;

Tyrrell v. District of Columbia, 243 U.S. 1, 61

L Ed 557, 558, 559 (1916) ;

S. 8. Monrosa v. Carbon Black Export, 359 U.S.

180, 184, 3 L Ed 2d 723, 726, reh. den. 359 U.S.

993, 3 L Ed 2nd 986 ( 1959) ;

Dick v. New York Life Ins. Co., 359 U.S. 437, 444-

445, 3 L Ed 2d 935, 941 (1959) ;

McCarthy v. Brunner, 323 US. 673, 89 L Ed 547

(1944).

This well established rule applies to the first four ques-

tions presented by petitioners, We shall discuss each of the

questions raised by petitioners in the order presented in

the petition.

The First Question .

Petitioners contend (Pet. p.‘18) that in awarding judgment

to Defiance, rather than to its innocent shareholders, the courts

below were in a ‘strait jacket’’; that ‘‘Federal remedies do

not depend on State law even in diversity cases’? (Pet, p. 19);

and that in this case, ‘‘State law was erroneously applied’’

soA

a : ae

(Pet. p. 20). Petitioners also suggest (Pet. pp. 21-22) that

there is a conflict among the Courts of Appeal over whether

the Erie doctrine is applicable and obligates federal courts in

a diversity case to apply state court remedies, These conten-

tions were not advanced in the courts below and are made for

the first time on this application. This circumstance, alone,

warrants denial of petitioners’ application for a writ, of cer-

tiorari. (Moor v. Texas & New Orleans R. Co., 297 U.S. 101,

105, 80 L Ed 509, 511 (1935) ; NLRB v. Pittsburgh 8.8. Co.,

340 U.S. 498, 503, 95 L Ed 479, 483 (1951) ). e

It is clear, moreover, from the opinions below that neither

the District Court, nor the Court of Appeals, in awarding

“judgment to Defiance, rather than to its shareholders, was

constrained to do so by ‘‘state law’’. Indeed, neither court

made any mention of the requirements of state law, or of the

question of a conflict among the circuits with respect to the

applicability of state law. Petitioners did not raise, nor did

the courts below discuss, the applicability of the Erie doc-

trine.

In awarding judgment in favor of Defiance, the courts

below followed generally accepted equitable principles ap-

plicable to derivative actions in both federal and state courts

and were in no way ‘‘strait-jacketed’’ by requirements of

state law.* Accordingly, petitioners’ reference (Pet. p. 20)

to the court’s alleged erroneous application of Erie v. Tom p-

kus, supra has no relation to the facts of this case.

The District Court denied petitioners’ motion for a new

trial upon the ground that (A 58 to A o9) :

* Petitioners agree (Pet. fn. p. 22) that “neither the law of Ohio

nor the law of New York would prohibit recovery directly to

independent shareholders although the suit is brought deriva-

tiyely on behalf of the corporation”. Accordingly, since state law

permits the remedy petitioners now urge, the courts below were

not “straitjacketed” by state law. . ! n

eens

12

“The general ruletin a derivative action is that re-

covery is awarded to the egrporation on behalf of

which suit is brought, and that the corporation may

not be ‘by-passed’ by an award to individual stock-

holders on a pro rata basis, which would, in effect, ©

declare a dividend of the corporate recovery. See

Liken v. Shaffer, 64 F. Supp. 432 (N.D. Iowa 1946,

per Graven, J.); Keenan v. Eshleman,. 23 Del. 234, 2

A. 2d 904, 912-13 (1938); 13 Fletcher Cyclopedia of

- Corporations (1961) 64]-47 § 6028.

~ This case does. not fall: within the exceptions to

this rule which have occasionally been made to avoid

uhnecessary litigation * * * ’? (Emphasis ours).

In affirming, the Court of Appeals likew'se based its deci-

sion on generally accepted principles of equity and made no

distinction between state and federal court remedies in de-

rivative suits. The Court of Appeals held (A 4):

‘‘The corporation by issuing shares to its control-

ling officers and directors for less than their fair

value was obviously damaged to the extent of the

difference which was $2,992,940 because: it received

ITE shares worth only $40.58 per share in return for

its shares which were worth $70.51 per share. Under

such circumstances those fiduciaries who caused the

corporation to part with its assets for less than their

fair value must make up the difference to the cor-

poration.’’ (Emphasis ours)

Thus, the courts below, in the exercise of their discretion,

adopted the remedy they deemed most appropriate in the

circumstances, with regard to state law. It is clear that peti-

tioners seek review by this Court, of a principle not \pre-

’ sented by the facts.*

Stebicnenits

* Even in those cases cited by petitioners (Pet. pp. 21-22), where

the issue of state law versus federal law is alleged to have been

~ involved, this Court never deemed the question of sufficient

importance to grant certiorari. A fortiori, it should not be granted

here, where the question does not arise.

: 13

Nor can there be any doubt that the form of relief

awarded was altogether appropriate. It would seem to he

elementary that when a corporation issues shares to its

controlling officers and directors for less than: their fair

value, the corporation is damaged to the extent of the —

difference. (Hieoper v. Mountain States Securities Corp., 282

F’, 2d 195, 203. (5th Cir. 1960), cert. den. 365 U.S. 814, 5

L.Ed. 2d 693 (1960) ; Simon v. New Haven Board & Carton

Co., 250 F. Supp. 297 (D. Conn. 1966).) Obviously, if de-

_fendants had paid fair value to-Defiance, it would have in its

‘treasury the amount which they pocketed. Therefore, it is

a non sequitur for petitioners to compare (Pet. p. 5) De-

fiance’s damage with its prior net worth, |

Petitioners advance the novel contention (Pet. p. 15) that

Defiance*s issue of an excessive number of ics shares to

acquire ITE resulted only in giving ‘‘a disproportionate

equity in Defiance’? to the IIE shareholders; and that

‘*Defiance, itself, lost nothing’’ because it ‘gave up nothing

but pieces of paper’’ (Pet. p. 10). |

\s the District Court found, and the Court of Appeals

affirmed, the ‘‘pieces of paper”’’, which petitioners exacted

from Defiance, had a value of $14.49 per suare (A 25, 2-3).

It necessarily’ follows that Defiance was damaged when:

petitioners grossly ‘underpaid it for the ‘pieces of paper’?

which they received from it.

As stated in Hooper v. Mountain States Securities Corp., —

supra, (282 F. 2d at p. 203) :

‘*Kven in our remote position, we would be blind

to all we hear and read about were we to succumb

to the artificial contention that the issuance of this

stock made the corporation no poorer so that the

*.

14

4

only persons who suffered were the stockholders for

_ whom the suit cannot be brought by the Trustee.”’

%

66% & &

it would be unrealistic to say that a corporation

having the capacity to acquire $700,000 worth of

assets for its 700,000 shares of stock has suffered

no loss if what it gave up was $700,000 bit what. it

got was zero.”’ ;

Petitioners argue .(Ret: p. 16) that “it is inequitable

to take the rigid view that in every case where shares are

issued by the corporation there is damage to the corpora-

tion if the shares issued are excessive in number’’, The fact

is that the courts below did not take a ‘rigid view’? of the

relief to be awarded, but granted judgment in favor of

Defiance after a careful feview of all the circumstances.

We do not perceive how it is ‘‘unrealistie and unfair’’

(Pet. p. 17) to petitioners to require them to pay Defiance

the full fair value of the shares they exacted from it.

Upon defendants’ theory, the recovery in a derivative

action would rarely, if ever, go to the corporation. But it

is the award of damages directly to shareholders, which is

- the rare exception. ;

In J. I. Case Co. v. Borak, 377 U.S. 426, 432,.12 L Ed 2a

423, 427, this Court held:

RAG

‘The injury which a stockholder suffers from cor-

porate action pursuant to a deceptive proxy solicita-

tion ordinarily flows from the damage. done to the

corporation, rather than from the damage inflicted

directly upon the stockholder.’’ (Emphasis ours)

In Ross v. Bernhard, et al., US. eae L Ed 2d

(Feb. 2, 1970), this Court again affirmed the principle that

in a derivative suit

_

15

‘*Although named a defendant, it [the corporation]

is the real party in interest, the stockholders being

at least the nominal plaintiff. The proceeds of the

action belong to the corporation and it is bound by

the result of the suit.”

The consensus of the authorities is that:

‘‘Generally, where the action is a derivative one

brought for the benefit of a going corporation,

equitable principles demand that the theory of the

action be recognized and that the whole recoverable

amount be decreed to be paid to the corporation. ’’

(13 Fletcher, Cyclopedia of Corporations (1961, Rey,

volume) § 6028, » 641)

<

Accord:

2 Hornstein, Corporation Law and Practice

(1959) § 731, pp. 246-247 ;

Henn on Corporations (1961) See. 375, p. 592.

The District Court held (A 59), and the Court of ‘Appeals.

affirmed (A 3-4), the instant case does not fall within the

rare exceptions to the general rule that in a derivative suit

the recovery belongs to the corporation on whose behalf

the suit is brought. Accordingly, the District Court found

- that the cases cited to it by petitioners (Ret. pp. 17-19)

were iiapplicable. (A 60); and concluded that (A 60):

‘“ Accordingly, since none of the special cirecum-

stances in Which pro rata recovery has been awarded

exist here, the theory of the derivative action must

be recognized and recovery awarded to the corpo-

ration.’’

All of the cases cited by petitioners (Pet. pp. 17-20, 29-

23) are either cases where the corporation on whose behalf

j

|

ie

16

the suit was brought was bankrupt and the shareholders,

' therefore, had no standing to sue (Marin v. England, 385

U.S. 99, 17.L:ed 2d 197. (1966) ; or where a closely held cor-

‘poration was involved and the action was essentially one

rani galery (Gallagher v. Perot, 112. Mise. 717, 183

N.Y. Supp. 257 (Sup Ct. 1918) aff’d 200 A.D. 867, 191 N.Y.

‘Supp. 926, aff’d 234 N.Y. 516 (1922); or where the corpo-’°

ration was extinguished upon a merger* (Southern Pacific

R.R..v. Bogart, 250 U.S. 478 (1919); de Haas v. Empire

Petroleum Co., 300 F. Supp. 834 (D. Colo. 1969)) ; or where

_. the action was one for recovery by the suing stockholders

- individually or was an alternative to valuation proceedings,

when no damage to’ the corporation was charged (May v.

Midwest Refining Co.; 121 F. 2d 431 (1st Cir, 1941)

cert. den. 314 U.S. 668, 86 Led. 534. (1941); de Haas y.

Empire Petroleum Co., 300 F. Supp. 834 (D. Colo. 1969) ;

Perlman. v. Feldman, 219 F. 2d 173 (2nd Cir.. 1955), or

where the suing stockholders were disqualified because

they took their shares from the wrongdoers, or had ac-

quired their stock after the date of the commission of the

wrongs complained of (//ome. Fire Ins. Co. v. Barber, 67

Neb, 644, 93 N W, 1024 (1903); Mathews v. Heedley Choco- |

Co., 130 eee Atl, 645 (1917)).

late

| Fata contention really is that in a derivative suit,

inyolving the issue of corporate stock to fiduciaries for an

iterate consideration, the award must be made to the

innocent shareholders (Pet. pp. 17, 22). If sustained, such

a holding would seriously undermine the therapeutic utility

* Petitioners’ intimation \ (Pet. fn. ‘p. 19) that the merger of

Defiayce into El Tronics Inc. has some bearing on this case is.

' incorrect. Defiance “was \merged into El Tronics long after the

judgment was rendered ‘here.

“17

of derivative suits, particularly as a means of enforcing

the provisions of the Act.*

This. Court recently stated in Mills v. Electric Auto-Lite

Co, U.S. ,24 Lied. 2d 593, 609 (January 20, 1970), that

‘*private stockholders’ actions of this sort ‘involve corporate

therapeutics’ and furnish a benefit to all shareholders by

‘providing jan important means of enforcement of thé proxy

statute’’. Again, in J. J, Case Co. v. Borak, supra (377 US.,

p. 432) this Court held that ‘Private enforcement of the

proxy rules provides a necessary supplement to Commission az

action.”’

Petitioners’ reliance upon the decision of this: Court in

Mills v. Electric Auto-Lite Company, supra, is misplaced.

In that case, Electric Auto-Lite was acquired on terms

which were inadequate and unfair to its shareholders. The

corporate existence of Electric Auto-Lite was extinguished

upon the merger. As this Court pointed out in Muls, *‘ Peti-

tioners asserted the right to complain of this alleged vio-

lation both derivatively, and as representatives of the class

of all minority shareholders’’. (Emphasis ours) Plaintiffs

- in Mills sought to either void the merger, or to recover

the fair value of their shares. Even under those cirecum- °

stances, this Court did not determine the form of the relief,

but left the selection of the proper remedy to ‘‘the sound

* To “by-pass” the corporation would inevitably ledd to a hornet’s

nest of future litigation. The Court would be called on to de-

termine whether stockholders at the date the vote approving

the exchange was adopted, or at the date when the, exchange

was consummated, should share in the award. Also, the Court

would be required to determine the amount of each- share-

holder's damage and whether the right’ to participate in the

award passed with a sale of the shares. Undoubtedly, it: would °

be also necessary for the Court to appoint a Master to‘adjudi-

cate the claims and to supervise distribution. ;

\S

°

18

discretion which guides the determination of courts of

equity’’.

‘The instant ease represents the ‘reverse of the situation

in Mills. Here, Defiance. paid excessive consideration to

acquire the outstanding stock of IE, which was largely |

owned by petitioners and Krock. fiance continued in

existence thereafter. Obviously, Defiance itself could have

maintained an action for damages against its faithless

fiduciaries, and would have done so, were it not under their

control. Had Defiance, itself, brought the action, any re-

covery it obtained would, necessarily, have belonged to it.

Apparently the real complaint of petitioners is that in

“‘molding’’ the equitable remedy in this case, the courts

below did not exercise their diseretion as petitioners would

have liked. But it is well established that this Court will

not review the manner in which the courts below have

exercised their discretion. (Moor v. Texas & New Orleans -

R. Co., 297 U.S. 101, 105,.89 L ed 909, 511 (1935) ; Appala-

chian Power: Co. v. American Institute of Certified Public

Accountants, 361 U.S. 30, 4 L ed 2d 30, 80S. Ct. 16 (1959) ;

N.L.R.B. v. Pittsburgh S.S. Co., 340 US. 498, 502-503,

95 L ed 479, 482-483 (1950).)

In any event, petitioners’ contention that equity should

“‘mold its deeree’’ (Pet. p. 17) is beside: the point. In a

derivative suit, the stockholder plaintiff ordinarily stands in

the shoes of the corporation and can enforce against its

fiduciaries only those claims which the corporation itself

could have asserted. As this Court declared in Ross v. Bern.

hard, supra, in sustaining the right of a derivative plaintiff

to a jury trial:

19

‘The heart of the action is the corporate claim. If it

presents a legal issue, one entitling the corporation

io a jury trial under the Seventh Amendment, the

right td a jury‘is not forfeited merely because the

stockholder’s right to sue must first be adjudicated

as an equitable issue triable to the court.’’

In the case at bar, the cause of action against petitioners

is essentially an action at law to recover money damages.

This, in fact, was the only relief awarded by the District

Court. There should be no doubt that, in the instant case,

plaintiff is entitled to enforce the legal claim of Defiance

to recover money damages, precisely as Defiance could have

done, had it been in a position to sue in its own name,*

q

The Second Question

Petitioners contend (Pet. p. 12) that ‘‘both the District

Court and the Court of Appeals completely ignored a stipu-

lation incorporated into the pre-trial order that the shares

of Defiance had a market value of $11.625 per share on

the date the proxy statement was issued’’. Petitioners sug-

gest (Pet. p. 26) that this alleged violation of F.R.C.P. 16

‘‘should be remedied by this Court in its supervisory ca-

pacity’’.

The fact-is that the courts below did not ignore the pre-

trial order. The pre-trial order merely stipulated the market

quotations of Defiance’s shares based on ‘the average

between the bid and asked prices’’ on May 8, 1962 (R 139a).

* The doctrine that a derivative suit, though equitable in form, is

in fact legal, if the corporate claims which the suit seeks to

enforce are legal in nature, is well established. (Potter v. Walker,

276 N.Y. 15 (1937); Dunlop's Sons, Inc. y. Spurr, 285 N.Y.

* 333 (1941)).

20

There was no actual sale of any shares of Defiance on that

date (R 122a).

The District Court accepted the stipulated market price

of Defiance’s shares ‘‘as one of the factors in arriving at a

value for Defiance stock’’, but held that ‘‘it is neither con-

trolling nor conelusive’’ (A 50). As petitioners would have

it, the effect of the stipulation in the pre-trial order was to

preclude the District Court from entertaining any other

evidence of the fair value of the stock of Defiance. We sub-

mit that the pre-trial order does not provide, and was never

intended to accomplish, any such result,

The purpose of a pre-trial order is to limit the issues and

to avoid proof as to facts which can readily be proved. The

market price of Defiance’ s shares was a fact that could readily

have been established and was, therefore, stipulated. The

materiality and relevance of this fact was expressly reserved

for the trial (R 132a). It is absurd for petitioners to attempt

to stretch this stipulated fact relating to market price into a

concession, binding of the Court, that $11.625 was the fair

value of Defiance’s shares and that no other evidence on this

issue was admissible.

Indeed, it is clear from the stipulation itself that the issue

of the fair value of the Defiance stock was reserved for the

trial. Thus, the stipulation provided that among ‘‘the issues

to be tried’’ was whether the shares issued by Defiance on the

exchange constituted ‘‘excessive and exorbitant consideration

for the 999998 shares of the stock of ITE acquired in exchange’”’,

(R 148a) Moreover, the pre-trial order seman’ noted that

‘*plaintiff claims that such excess is approximately in the sum

of $3,335,000’? (R 147a), a figure which could not have been

, remotely achieved if the market price of $11.625 were to be

~ deemed final and controlling.

21

Moreover, throughout the trial petitioners and respondent

both accepted the finding of Hayden Stone & Co., petitioners’

own expert, that the fair value of Defiance’s shares at the

time of the exchange was $14.49 per share. This valuation

was not put in issue by petitioners.* It was not until after

the District Court had rendered its opinion accepting the

finding of Hayden Stone and holding petitioners liable that

petitioners for the first time on their motion for a new trial

contended that the District Court should have accepted the

lower market price of the Defiance shares as conclusive evi-

dence of value.

In denying that motion, the District Court held (A 49):

‘Throughout the trial defendants accepted as au-

thoritative the Hayden Stone report, including its

valuation of the stock to be issued by Defiance at

$14.49 per share and although they were given ample

opportunity to challenge it or to offer any evidence

tending to show a lower value for the Defiance stock,

they chose not to do so. The report therefore con-

stitutes probative and convincing evidence, partic-

ularly since it represents the results of an indepen-

dent appraisal by recognized experts in the evalu-

ation of corporate properties, who were eminently

well qualified. Repeatedly the defendants pointed

to the fairness of the report, Muscat going so far

as to testify that the effect of the report was to ren-

der the Defiance transaction an arm’s-length one.’’

The District Court could have arrived at a value other

than $14.49 for the shares of Defiance only by disregarding

petitioners’ (and respondents’) consistent position through-

* Upon the trial petitioners contended only that Hayden Stone’s

evaiuation of ITE at $70.51 per share was also correct. This was

disputed by respondent and was the central issue’ at the trial,

“ORS ORR

22

out the trial, a position which petitioners abandoned only

after the trial was concluded and judgment had been ren-

dered against them. To belatedly give the pre-trial order

the effect now contended for by’. petitioners would be to

change ex post facto ‘‘the whole course of the trial, the

whole tenor of it’’. (Laird y. Carrier Engine Service Co.,

263 I’, 2d 948, 952 (5th Cir. 1959).)

The language of Mr. Justice Brennan, in an opinion in

Chambers, in the case of Appalachian Power/Co. v. Amer-

ican Institute of Certified Public Paes f 361 U.S. 30,

4 L Kd 2d 30, 32 (1959), aptly applies to the ease at bar:

‘‘But ordinarily an application by a District Court

of the Rules of Civil Procedure when affirmed by the

Court of Appeals will not be reviewed by this Court.

This is particularly true where, as here, the question

is one that concerns the judgment of the District

Judge in relation to a particular set of facts.”?

We submit that the question here raised by the petition-

ers has no application to the facts of the case, and the deci-

sion of the District Court ‘‘made in relation to the particular

set of facts’’ before it should not be reviewed by this Court.

Petitioners further contend (Pet. p. 25) that the alle- .

gation of the complaint that the Defiance’s stock had a fair —

and reasonable value of $11.50 per share ‘‘should be bind<

ing on the plaintiff’’.* FRCP, Rule 8(f) expressly declares

that ‘‘all pleadings shall be so construed as to do substan-

tia justice’. Rule 15(b) further provides that the allega-

tions of a complaint do not preclude a court from rendering

judgment in accgrdance with the facts as found by it after

trial. This should be especially so in a derivative suit where

* See: Giannone v. United States Steel Corporation, 238 F.2d 544,

547-548 (3rd Cir., 1956).

23

the rights of many absentee stockholders are involved, The

District Court was fully justified in fixing the value of the

Defiance stock at $14.49 per share, particularly since both

sides accepted that vatnation throughout the trial.

The Third and Fourth Questions

Petitioners contend (Pet. p. 27) that ‘‘no Court of Ap- -

peals has ruled on the requirement for scienter in an action

for damages where §§ 10 and 14 overlap * * * ” and peti-

tioners urge (Pet. p. 29) that this Court should grant re-

were not disclosed in the proxy statement, on the Pasis of

which the Defiance-I1E exchange of stock vas’ appipved.

The issue raised by petitioners is irrelevant in the ‘case

at bar. The District Court found as a fact that petitioners

had personal knowledge of at least two materiaLfacts which

were not disclosed in the proxy, on the basis of which the

Defiance-IIE exchange of stock was approved.

The principal issue on the trial was the fraud of peti-

tioners in inflating the earnings of IIE’s principal sub-

sidiary, Nablico, and thereby inflating the value ascribed .

to ILE. The proxy statement represented the earnings of

Nablico to be $2,098,013 for the period 1958-1961, inclusive.

However, an audited report by the eminent accounting firm

of Peat, Marwick, Mitchell & Co. certified Nablico’s earn-

ings for the same years to be only $1,501,882.* The District

Court found as a fact (A 34) ‘‘that Huffines and Muscat,

~~ two knowledgeable and experienced business executives in

' charge of Nablico’s affairs were aware of its true earnings’’,

* In evaluating ITE, Hayden Stone had multiplied the inflated

earnings of Nablico by 14 and 15 times and used the average of

such multiplied earnings, plus a 25% premium for control, as

the basis for its evaluation of Nablico. The impact of this method

of evaluation upon the value of Nablico and. therefore, upon the

‘value of IIE, needs no elaboration.

‘

i

/

24

Again, it is undisputed that prior to the circulation of

the proxy statement, two of Nablico’s policy holders had

instituted suit against it, claiming they were entitled to

dividends equal to those paid to shareholders. Long be-

fore the proxy statenyent was mailed to Defiance’s share-

holders, those plaintiffs recovered judgment against Nablico

in the sum of $5,500 on a motion for summary judgment

(A 28).

Petitioners knew of this judgment before the proxy state-

ment was issued (A 35). Moreover, they were fully aware

that this judgment, in favor of two, out of many, policy

holders, was a portent of more claims to come. As the

District Court found (A 35), petitioners “knew of the ad-

verse judgment and of the probability of substantial addi-

tional claims, facts which should have been disclosed in the .

proxy statement’’.* We submit that since the courts below

found on the facts that petitioners had personal knowledge

of the falsity of the proxy statement, the issue of scienter

as a condition precedent to recovery under $$ 10 and 14 of

the Act and Rules 10b-5 and 14a-9 is not an issue in this case.

Similarly, petitioners’ contention (Pet. p. 30) that the

‘‘elearance’’ of the proxy statement by the staff of the

SEC ‘‘negates fraud and shows due diligence’’, does not

relate to the circumstances of this case. Petitioners seek

to create the impression that the finding of fraud against

them was based merely on an ‘‘alleged misclassification of

the figures’’ (Pet. p. 31) and an improper arrangement ‘of

the disclosed figures’’ (Pet. p. 32).

* Up to March 1965 the amount paid in settlement of these claims

was $162,000 (A 28) and, as the District Court held, the amount

of “additional claims remains undetermined”. (A 28)’

However, the finding below that the proxy statement was

false and misleading was not based, as petitioners would

have it, merely on the arrangement in the proxy statement

of disclosed facts. As noted aboye, supra, pp. 23-24, the find-

ing of fraud in the proxy statement was based, in large

part, on undisclosed facts. As the Distrie¢ Court held,

these facts were known. to the petitioners, but withheld

from the SEC (A 37).* |

Petitioners agree (Ret. p. 31) that ‘‘There may be cases

of material omissions or misstatements, where scant com-

fort can be found in the clearance by the SEC”. This ease

is surely one of them. In the instant case, the District

Court expressly found (A 37) that ‘here is no indica-

tion that the SEC was aware, as were the defendants, of

the inflation in the Nablico earnings figures used in the

_ proxy solicitation material * * * .”’ This is, therefor, a clear

case of knowingly withholding material information from

the SEC.

Again, it is clear from the record that the petitioners

failed to disclose to the SEC the Judgment which had been

rendered against Nablico in favor of two of many similarly

situated policy holders (A 28). It is obvious that that

information, too, was withheld from the SEC, since it is

inconceivable that, had it been disclosed, the SEC would

* It may be noted thai in Mills vy. Electric Auto-Lite Co., 403

F. 2d 429, 433 (2 Cir. .968), judgment vacated, supra, U.S.

24 L Ed 2d 593 the Court's finding that the proxy statement

was misleading was »ased on the failure to give “the same em-

phasis” to the recommendation of. the board of directors sup-

porting the merger, as to the relationship of Electric Auto-

Lite’s directors with the principal corporate <efendant. The

Court in Jills noted that the disclosure of their “close relation-

ship” came “‘many pages later”. Thus. the falsity of the proxy

statement in Mills was a matter only of the arrangement of the

facts. :

* 26 :

not have insisted upon the inclusion of this important fact

in the proxy material. Accordingly, the District Court con-_

cluded that the SEC had been ‘‘misled’’ (A 37) by peti-

tioners. Petitioners would hardly contend that the ‘‘clear-

ance’’ of a proxy statement, where vital information has

béen withheld from the SEC, negates fraud. .

The issues raised j in questions 3 and 4, therefore, of the

necessity of scienter as a condition to liability for a false

proxy and as to whether a fully informed SEC ‘‘clearance’’. -

should insulate from such liability, is not present in this

case. It would be a futile exercise for this Court to grant

certiorari to discuss a principle applicable to a ease, unlike

the‘vase at bar, in which all of the material facts were fairly

disclosed. ‘

The Fifth Question |

_ What the petitioners really seek is a new hearing in

this Court on the factual issues in this ease. This Court, in

‘“‘repeated pronouncements’’, has held that it ‘cannot un-

dertake to review concurrent findings of fact by two courts

below, in the absence of a very obvious and exceptional

showing of error’. E.g., Graver Mfg. Co. v. Linde, 336 U.S.

271, 275, 93 L Ed 672, 676, 677, 69 S. Ct. 535’. (Berenyi v.

Immigration Service, supra, (385 U.S. at p. 635); Graver

Mfg. Co. v. Linde, 336 U.S. 271, 275, 93 L Ed 672, 676, 677,

69 S. Ct. 5385 (1948); Comstock v. Group of Institutional

Investors, 335 U.S. 211, 213-214, 230, 92 L Ed 1911, 1915,

1924 (1947).)

Petitioners contend (Pet. p. 32) that ‘‘without arguing

the fairness of the exchange’’, if this Court ‘*grants the

instant petition on any of the previous points, to do sub-

stantial justice, it should review the finding that the ex-

27

change was grossly unfair’, We submit that since the

‘previous points’? raised by petitioners do not warrant

review by this Court, the factual question of the fairness

of the /Defiance-IIE exchange certainly does not.

The) fairness of the exchange ratio was the. principal

issue ee fact litigated upon the trial. Upon the trial, both

sides) accepted the’ Hayden Stone evaluation of Defiance

at $14.49 per share as proper. Petitioners’ sole contention

was that Hayden Stone’s evaluation of IIE at $70.51 per

share was also correct and that, therefore, the exchange

ratio adopted was reasonable.

The District Court found, however, that with respect

to IIE, Hayden Stone had been ‘misled’? (A 45) because

the purported earnings of Nablico .(1IE’s principal asset),

supplied to Hayden Stone, had been substantially inflated

(A 25). Accordingly, the District Court rejected Hayden

Stone’s evaluation of 11K and held that petitioners had

caused Defiance ‘‘to pay $70.51 per share for IIE shares

worth $40.58, or an excess of $29.93 per share’ (A 34).

In these circumstances, the District Court necessarily

concluded that the exchange invplved ‘‘gross unfairness”’

(A 18) to Defiance. It is difficult to understand on what

basis petitioners believe that this Court should review this

issue of fact as decided by the District Court and affirmed

“by the Court of Appeals.*

* We are at a. loss to understand petitioners’ statement (Pet. a.

32) that the SEC found that the income figures for Nablico

stated in the proxy statement “were not false and misleading”.

As noted above, supra p. 26, the District Court found that the

SIC was unaware of the gross inflation of Nablico’s income

figures.

28

_ CONCLUSION

The petition for a writ of certiorari should be

denied since petitioners make no showing of any basis

for such relief (Supreme Court Rule 19),

Respectfully submitted,

Miron Pautson

Attorney for Respondent

Simon RosENZWEIG

of counsel

a con

APPENDIX

Federal Rules of Civil Procedure ra

Rule 8. General Rules of Pleading.

* * *

(f) Construction of Pleadings. All pleadings shall be so

construed as to do substantial justice.

Rule 15. Amended and Supplemental Pleadings.

* * *

(b) Amendments ,to Conform to the Evidence.’ When

issues not raised by the pleadings are tried by express or

implied consent of the parties, they shall be treated in all

respects as if they had been raised in the pleadings. Such

amendment of the pleadings as may be necessary to cause

them to conform to the evidence and to raise these issues

may -be made upon motion of any party at any time, even

after judgment; but failure so to amend does not affect the

result of the trial of these issues. If evidence is objected to

at the trial on the ground that it is not within the issues

made by the pleadings, the court may allow the pleadings to

be amended and shall do so freely when the presentation of

the merits of the action will be subserved thereby and the

objecting party fails to satisfy the court that the admission

of such evidence would prejudice kim in maintaining his

action or defense upon, the merits. The court may grant a

continuance to enable the objecting party to ‘meet such

evidence.

30

Appendix—Federal Rules of Civil Procedure

Supreme Court Ruues

Rule 19. Considerations governing review on certiorari.

1. A review on writ of certiorari is not a matter of right,

but of sound judicial discretion, and will be granted only

Where there are special and important reasons therefor. The

* following, while neither controlling nor fully measuring the

court’s discretion, indicate the character of reasons which

i'l be congidered :

(a) Where a state court has decided a federal ques-

tion of substance not theretofore determined by this

court, or has decided it in a way probably not in accord

with applicable decisions of this court.

(b) Where a court of appeals has rendered a decision

in conflict with the decision of another court of appeals

on the same matter; or has decided an important state

or territorial’ question in a way in conflict with appli-

cable state or territorial law; or has decided an impor-

tant question of federal law which has not been, but

should be, settled by this court; or has decided a federal

question in a way*in conflict with applicable decisions of

this court; or has so far departed from the accepted and

usual course of judicial proceedings, or so far sanc-

tioned such a departure by a lower court, as to call for

an exercise of this court’s power of supervision.

2. The same general considerations outlined above will

control in respect of petitions for writs of certiorari to re-

view judgments of the Court of Claims, of the Court ‘of Cus-

toms and Patent Appeals, or of any other court whose deter-

minations are by law reviewable on writ of certiorari.

*.