Appendix — Affiliated Fund, Inc. v. Papilsky
Supreme Court brief1974
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IN THE
Supreme Court of the United
OcToBER ~ eae D) 7 3
AFFILIATED FUND, INC., LORD, ABBETT & CO.,
ROBERT S. DRISCOLL aad ALVIN H. BERNDT,
Petitioners,
v.
PAULETTE PAPILSKY,
Respondent.
AFFILIATED FUND, INC., LORD, ABBETT & CO.,
ROBERT S. DRISCOLL onl ALVIN H. BERNDT,
\ Petitioners,
v.
HARRY LEVINE,
Respondent.
APPENDIX
Breep, Apsott & Morgan
Attorneys for Petitioner
Affiliated Fund, Inc.
Epwarp J. Ross One Chase Manhattan Plaza
JaMEs D. Zirtn New York, New York 10005
Of Counsel. (212) 944-4800
Dewey, BaLLantTINnE, Bususy,
Patmer & Woop,
Attorneys for Petitioners
\ Lord, Abbett & Co., Robert
\\ S. Driscoll and Alvin H. Berndt
140 Broadway
Epwarp N. SHEerry New York, New York 10005
Jupson A. Parsons, JR. (212) 344-8000
Of Counsel.
ow,
SETS he LA AT NERO try 3
_ APPENDIX
TABLE OF CONTENTS
Statutes and Rules Involved
Fed. R. Civ. P., Rule 11, 28 U.S.C. (1966) _____
Fed. R. Civ. P., Rule 23.1, 28 U.S.C. (1966) ____
Fed. R. Civ. P., Rule 41(b), 28 U.S.C. (1966) __
Judiciary and Judicial Procedure, § 1291, 28
Ee BI CEE icons ecm ieimeaslnteentoene
Sections of the Investment Company Act of
1940, as Amended, 15 U.S.C. 80a et seq.
GW ESe Tee Sate (EAT EE em Bae ae Oe
nn I
(3) ‘‘Affiliated Person’? _-_____.
yi. yh
(19) ‘‘Interested Person’? __.______
10 Affiliations or interests of directors, offi-
cers, and employees ____--____--___
15 Contracts of advisers and underwriters
Proceedings Below as to which Review is Sought
Transcript of proceedings before Honorable
Harold R. Tyler, Jr. (February 23, 1973) —-
Opinion of the District Court (March 16, 1973)
Orders of the District Court (April 16, 1973) _-
Opinion of the Court of Appeals (May 24, 1974)
Orders of the Court of Appeals (August 6, 1974)
PAGE
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Subsequent Proceedings of the District Court Relating
in Part to Issues Concerning which Review is Sought
Opinion of the District Court (July 19, 1973) _
Opinion of the District Court (January 7,
cee cmadiiate nn
Previous Opinions on _— Not Relevant to this
| Petition
Opinion of the District Court (November 17, |
i) LER ES EE EA
ora SE TTC Reto ond Ws SAM le OR
Denial of Petition for a ‘Writ of Certiorari
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STATUTES AND RULES INVOLVED
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Statutes and Rules Involved
Fed. R. Civ. P., Rule 11, 28 U.S.C. (1966) :
Rule 11. Signing of Pleadings
Every pleading of a party represented by an attorney
shall be signed by at least one attorney of record in his
individual name, whose address shall be stated. A party
who is not represented by an attorney shall sign his plead-
ing and state his address. Except when otherwise specif-
ically provided by rule or statute, pleadings need not be
verified or accompanied by affidavit. The rule in equity
that the averments of an answer under oath must be over-
come by the testimony of two witnesses or of one witness
sustained by corroborating circumstances is abolished. The
signature of an attorney constitutes a certificate by him
that he has read the pleading; that to the best of his knowl-
edge, information, and belief there is good ground to
support it; and that it is not interposed for delay. If a
pleading is not signed or is signed with intent to defeat
the purpose of this rule, it may be stricken as sham and false
and the action may proceed as though the pleading had not
been served. For a wilful violation of this rule an attorney
may be subjected to appropriate disciplinary action. Sim-
ilar action may be taken if scandalous or indecent matter
is inserted.
Fed. R. Civ. P., Rule 23.1, 28 U.S.C. (1966) :
Rule23.1. Derivative Actions by Shareholders
In a derivative action brought by one or more share-
holders or members to enforce a right of a corporation or
or of an unincorporated association, the corporation or
association having failed to enforce a right which may
properly be asserted by it, the complaint shall be verified
and shall allege (1) that the plaintiff was a shareholder or
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Statutes and Rules Involved
member at the time of the transaction of which he complains
or that his share or membership thereaiter devolved on
him by operation of law, and (2) that the action is not
a collusive one to confer jurisdiction on a court of the
United States which it would not otherwise have. The com-
plaint shall also allege with particularity the efforts, if
any, made by the plaintiff to obtain the action he desires
from the directors or comparable authority and, if neces-
sary, from the shareholders or members, and the reasons
for his failure to obtain the action or for not making the
effort. The derivative action may not be maintained if it
appears that the plaintiff does not fairly and adequately
represent the interests of the shareholders or members
similarly situated in enforcing the right of the corporation
or association. The action shall not be dismissed or com-
promised without the approval of the court, and notice of
the proposed dismissal. or compromise shall be given to
shareholders or members in such manner as the court directs.
Fed. R. Civ. P., Rule 41(b), 28 U.S.C. (1966) :
Rule 41. Dismissal of Actions
(b) Involuntary Dismissal: Effect Thereof. For failure
of the plaintiff to prosecute or to comply with these rules
or any order of court, a defendant may move for dismissal
of an action or of any claim against him. After the plaintiff,
in aii action tried by the court without a jury, has completed
the presentation of his evidence, the defendant, without
waiving iis right to offer evidence in the event the motion is
not granted, may move for a dismissal on the ground that
upon the facts and the law the plaintiff has shown no right to
relief, The court as trier of the facts may then determine
them and render judgment against the plaintiff or may
decline to render any judgment until the close of all the
evidence. If the court renders judgment on the merits
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against the plaintiff, the court shall make findings as
provided in Rule 52(a). Unless the court in its order for
dismissal otherwise specifies, a dismissal under this sub-
division and any dismissal not provided for in this rule,
other than a dismissal for lack of jurisdiction, for improper
venue, or for failure to join a party under Rule 19, operates
as an adjudication upon the merits,
Judiciary and Judicial Procedure, § 1291, 28 U.S.C. 1291
(1958) :
§ 1291. Final decisions of district courts
The courts of appeals shall have jurisdiction of appeals
from all final decisions of the district courts of the United
States, the United States District Court for the District of
the Canal Zone, the District Court of Guam, and the Dis-
trict Court of the Virgin Islands, except where a direct
review may be had in the Supreme Court.
Sections of the Investment Company Act of 1940 as
Amended, 15 U.S.C. 80a-1 et seq.
“é
2a Definitions
(3) ‘Affiliated person’ of another person means (A)
any person directly or indirectly owning, controlling, or
holding with power to vote, 5 per centum or more of the
outstanding voting securities of such other person; (B) any
person 5 per centum or more of whose outstanding voting
securities are directly or indirectly owned, controlled, or
held with power to vote, by such other person; (C) any
person directly or indirectly controlling, controlled by, or
under common control with, such other person; (D) any
officer, director, partner, copartner, or employee of such
other person; (E) if such other person is an investment
company, any investment adviser thereof or any member
at ewe ewerewosm
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of an advisory board thereof; and (F) if such other person
is an unincorporated investment company not having a
board of directors, the depositor thereof.
“é
eee
(9) ‘Control’ means the power to exercise a control-
ling influence over the management or policies of a company,
unless such power is solely the result of an official position
with such company.
Any person who owns beneficially, either directly or
through one or more controlled companies, more than 25
per centum of the voting securities of a company shall be
presumed to control such company. Any person who does
not so own more than 25 per centum of the voting securities
of any company shal! be presumed not to control such com-
pany. A natural person shall be presumed not to be a
controlled person within the meaning of this subchapter.
Any such presumption may be rebutted by evidence, but
except as hereinafter provided, shall continue until a deter-
mination to the contrary made by the Commission by order
either on its own motion or on application by an interested
person. If an application filed hereunder is not granted or
denied by the Commission within sixty days after filing
thereof, the determination sought by the application shall
be deemed to have been temporarily granted pending final
determination of the Commission thereon. The Commis-
sion, upon it own motion or upon application, may by order
revoke or modify any order issued under this paragraph
whenever it shall find that the determination embraced in
such original order is no longer consistent with the facts.
“ce
(19) ‘Interested person’ of another person means—
(A) when used with respect to an investment com-
pany—
(i) any affiliated person of such company,
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Statutes and Rules Involved
(ii) any member of the immediate family of any
natural person who is an affiliated person of such
company,
(iii) any interested person of any investment ad-
viser of or principal underwriter for such company,
(iv) any person oz partner or employee of any
person who at any time since the beginning of the last
two fiscal years of such company has acted as legal
counsel for such company,
(v) any broker or dealer registered under the Se-
curities Exchange Act of 1934 or any affiliated person
of such a broker or dealer, and
(vi) any natural person whom the Commission by
order shall have determined to be an interested person
by reason of having had, at any time since the begin-
ning of the last two fiscal years of such company, a
material business or professional relationship with
such company or with the principal executive officer of
such company or with any other investment company
having the same investment adviser or principal un-
derwriter or with the principal executive officer of
such other investment company :
Provided, That no person shall be deemed to be an inter-
ested person of an investment company solely by reason of
(aa) his being a member of its board of directors or ad-
visory board or an owner of its securities, or (bb) his
membership in the immediate family of any person spe-
cified in clause (aa) of this proviso; and
(B) when used with respect to an investment adviser
of or principal underwriter for any investment company—
(i) any affiliated person of such investment adviser
or principal underwriter,
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(ii) any member of the immediate family of any
natural person who is an affiliated person of such in-
vestment adviser or principal underwriter,
(iii) any person who knowingly has any direct or
indirect beneficial interest in, or who is designated as
trustee, executor, or guardian of any legal interest in,
any security issued either by such investment adviser
or principal underwriter or by a controlling person
of such investment adviser or principal underwriter,
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(iv) any person or partner or employee of any per-
son who at any time since the beginning of the last
two fiscal years of such investment company has acted
as legal counsel for such investment adviser or prin-
cipal underwriter,
(v) any broker or dealer registered under the Se-
curities Exchange Act of 1934 or any affiliated person
of such a broker or dealer, and
(vi) any natural person whom the Commission by
order shall have determined to be an interested person
by reason of having had at any time since the beginning
of the last two fiscal years of such investment company
a material business or professional relationship with
such investment adviser or principal underwriter or
with the principal executive officer or any controlling
person of such investment adviser or principal under-
writer.
For the purposes of this paragraph (19), ‘‘member of the
immediate family’’ means any parent, spouse of a parent,
child, spouse of a child, spouse, brother, or sister, and in-
cludes step and adoptive relationships. The Commission
may modify or revoke any order issued under clause (vi)
of subparagraph (A) or (B) of this paragraph whenever
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it finds that such order is no longer consistent with the
facts. No order issued pursuant to clause (vi) of sub-
paragraph (A) or (B) of this paragraph shall become
effective until at least sixty days after the entry thereof,
and no such order shall affect the status of any person for
the purposes of this subchapter or for any other purpose
for any period prior to the effective date of suci order.
“é
eee
10. Affiliations or interest of directors, officers, and em-
ployees
(a) No registered investment company shall have a
board of directors more than 60 per centum of tie members
of which are persons who are interested persons of such
registered company.
(b) No registered investment company shall—
(1) employ as regular broker any director, officer,
or employee of such registered company, or any person
of which any such director, officer, or employee is an
affiliated person, unless a majority of the board of di-
rectors of such registered company shall be persons
who are not such brokers or affiliated persons of any of
such brokers;
(2) use as a principal underwriter of securities is-
sued by it any director, officer, or employee of such
registered company or any person of which any such
director, officer, or employee is an interested person,
unless a majority of the board of directors of such reg-
istered company shall be persons who are not such prin-
cipal underwriters or interested persons of any of such
principal underwriters ; or
(3) have as director, officer, or employee any invest-
ment banker, or any affiliated person of an investment
banker, unless a majority of the board of directors of
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Statutes and Rules Involved
such registered company shall be persons who are not
investment bankers or affiliated persons of any invest-
ment banker. For the purposes of this paragraph, a
person shall not be deemed an affiliated person of an
investment banker solely by reason of the fact that he
is an affiliated person of a company of tie character de-
scribed in section 80a—12(d) (3) (A) (B) of this title.
(ec) No registered investment company shall have a
majority of its board of directors consisting of persons who
are officers, directors, or employees of any one bank, except
that, if on March 15, 1940, any registered investment com-
pany had a majority of its directors consisting of persons
who are directors, officers, or employees of any one bank,
such company may continue to have the same percentage of
its board of. directors consisting of persons who are direc-
tors, officers, or employees of such bank.
(d) Notwithstanding subsections (a) and (b) (2) of this
section, a registered investment company may have a board
of directors all the members of which, except one, are in-
terested persons of the investment adviser of such company,
or are officers or employees of such company, if—
(1) such investment company is an open-end com-
pany;
(2) such investment adviser is registered under
subchapter II of this chapter and is engaged principally
in the business of rendering investment supervisory
services as defined in subchapter II;
\
(3) no sales load is charged on securities issued by
such investment company ;
(4) any premium over net asset value charged by
such company upon the issuance of any such security,
plus any discount from net asset value charged on re-
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Statutes and Rules Involved
demption thereof, shall not in the aggregate exceed 2
per centum;
(5) no sales or promotion expenses are incurred by
such registered company; but expenses incurred in
complying with laws regulating the issue or sale of
securities shall not be deemed sales or promotion
4 expenses ;
(6) such investment adviser is the only investment
adviser to such investment company, and such invest-
ment adviser does not receive a management fee ex-
ceeding 1 per centum per annum of the value of such
z company’s net assets averaged over the year or taken
: as of a definite date or dates within the year;
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(7) all executive salaries and executive expenses
and office rent of such investment-company are paid
by such investment adviser ; and
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(8) such investment company has only one class of
securities outstanding, each unit of which has equal
voting rights with every other unit.
(e) If by reason of the death, disqualification, or bona
fide resignation of any director or directors, the require-
ments of the foregoing provisions of this section in respect
of directors shall not be met by a registered investment
company, the operation of such provisions shall be sus-
pended as to such registered company for a period of thirty
days if the vacancy or vacancies may be filled by action of
the board of directors, and for a period of sixty days if a
vote of stockholders is required to fill the vacancy or va-
eancies, or for such longer period as the Commission may
prescribe, by rules and regulations upon its own motion or
by order upon application, as not inconsistent with the pro-
tection of investors.
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Statutes and Rules Involved
(f) No registered investment company shall knowingly
purchase or otherwise acquire, during the existence of any
underwriting or selling syndicate, any security (except a
security of which such company is the issuer) a principal
underwriter of which is an officer, director, member of an
advisory board, investment adviser, or employee of such
registered company, or is a person (other than a company
of the character described in section 80a—12(d) (3) (A)
and (B) of this title) of which any such officer, director,
member of an advisory, board, investment adviser, or em-
ployee is an affiliated person, unless in acquiring such se-
curity such registered company is itself acting as a principal
underwriter for the issuer. The Commission, by rules and
regulations upon its own motion or by order upon applica-
tion, may conditionally or unconditionally exempt any trans-
action or classes of transactions from any of the provisions
of this subsection, if and to the extent that such exemption
is consistent with the protection of investors.
(g) In the case of a registered investment company
which has an advisory board, such board, as a distinct en-
tity, shall be subject to the same restrictions as to its mem-
bership as are imposed upon a board of directors by this
section.
(h) In the case of a registered management company
which is an unincorporated company not having a board of
directors, the provisions of this section shall apply as
follows:
(1) the provisions of subsection (a) of this section,
as modified by subsection (e) of this section, shall apply
to the board of directors of the depositor of such
company:
(2) the provisions of subsections (b) and (c) of this
section, as modified by subsection (e) of this section,
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Statutes and Rules Involved
shall apply to the board of directors of the depositor
and of every investment adviser of such company; and
(3) the provisions of subsection (f) of this section
shall apply to purchases and other acquisitions for the
account of such company of securities a principal under-
writer of which is the depositor or an investment ad-
viser of such company, or an affiliated person of such
depositor or investment adviser.
66
.
15. Contracts of advisers and underwriters
(a) It shall be unlawful for any person to serve or act
as investment adviser of a registered investment company,
except pursuant to a written contract, which contract,
whether with such registered company or with an invest-
ment adviser of such registered company, has been ap-
proved by the vote of a majority of the outstanding voting
securities of such registered company, and—
(1) precisely describes all compensation to be paid
thereunder;
(2) shall continue in effect.for a period more than
two years from the date of its execution, orly so long
as such continuance is specifically approved at least
annually by the board of directors or by vote of a
majority of the outstanding voting securities of such
company ;
(3) provides, in substance, that it may be termin-
ated at any time, without the payment of any penalty,
by the board of directors of such registered company
or by vote of a majority of the outstanding voting
securities of such company on not more than sixty
days’ written notice to the investment adviser ; and
(4) provides, in substance, for its automatic termin-
ation in the event of its assignment.
wer
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(b) It shall be unlawful for any principal underwriter
for a registered open-end company to offer for sale, sell,
or deliver after sale any security of which such company
is the issuer, except pursuant to a written contract with
such company, which contract— |
(1) shall continue in effect for a period more than
two years from the date of its execution, only so long
as such continuance is specifically approved at least
annually by the board of directors or by vote of a
_ Majority of the outstanding —— securities of such
company ; and
(2) provides, in substance, for its automatic ter-
mination in the event of its assignment.
(c) In addition to the requirements of subsections (a)
and (b) of this section, it shall be unlawful for any regis-
tered investment company having a board of directors to
enter into, renew, or perform any contract or agreement,
written or oral, whereby a person undertakes regularly to
serve or act as investment adviser of or principal under-
writer for such company, unless the terms of such contract
or agreement and any renewal thereof have been approved
by the vote of ‘a majority of directors, who are not parties
to such contract or agreement or interested persons of any
such party, cast in person at a meeting called for the pur-
pose of voting on such ‘approval. It shall be the duty of
the directors of a registered investment com, any to request
and evaluate, and the duty of an investment adviser to such |
company to furnish, such information as may reasonably
be necessary to evaluate tne terms of any contract whereby
a person undertakes regularly to serve or act as investment
adviser of such company.
(d) Inithe case of a common-law trust of the character
described in subsection (b) of section 80a—16 of this title,
‘A-14
Statutes and Rules Involved
either sevitien ipo by holders of a majority of the
outstanding shares of beneficial interest or the vote of a
majority of such outstanding shares cast in person or by
proxy at a meeting called for the purpose shall for the pur-
poses of this section be deemed the equivalent of the vote
of a majority of the outstanding voting securities, and the
provisions of paragraph (40) of section 80a—2(a) of this
title as to a majority shall be saniinale to the vote cast
at such a meeting.
(e) Nothing contained in this section shall be deemed
to require or contemplate any action by an advisory board
of any registered company or by any of the members of
such a board.
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PROCEEDINGS BELOW AS TO WHICH
REVIEW IS SOUGHT
tue aL AOD BPEL TA Bat
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3 Proceedings Below as to which Review is Sought
Transcript of Proceedings Before
Hon. Harold R. Tyler, Jr. (February 23, 1973).
UNITED STATES DISTRICT COURT,
: SourHeErn District or New York.
4 Harry Levine,
: Plaintiff,
i + 72 Civ. 3120
; Rosert 8S. Drisco., et al.,
; Defendants.
|
j Pav etre Papiusky,
7 Plaintiff,
* | 71 Civ. 2534
Atvin H. Brernopt, et al.,
: Defendants.
4
7
: Before:
Hon. Harotp R. Tyuer, Jz.,
District Judge
New York, February 23, 1973
Room 102—3:30 p.m.
APPEARANCES:
PomeEnantz, Levy, Haupex & Buock, Esqs.,
Attorneys for Plaintiffs,
Daniel W. Krasner, Esq., of Counsel.
McConne.1, ScoeverMann & Davis, Esgs.,
Attorneys for Plaintiff Harry Levine,
Wendell Davis, Jr., Esq., of Counsel.
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Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
Dewey, BatiantinzE, Bususy, PauMer & Woop, Esqs.,
Attorneys for Defendants,
Judson A. Parsons, Jr., Esq., of Counsel!
Breep, Assott & Morcan, Esgqs.,
Attorneys for Fund,
James Zirin, Esq., of Counsel.
The Court: Who speaks for the plaintiff?
Mr. Krasner: Mr. Pomerantz had to leave. He had
begun something iv front of another judge. He left me
holding the bag.
The Court: You don’t have to say a word. I have read
all your papers and I am going to tell Judson Parsons
unequivocally I see nothing offhand to his position whatso-
ever, so I have got to give him a chance to be heard.
I have read all these papers. I don’t see that you have
got a leg to stand on at this point. Maybe later, after we
get some discovery, yes, but you know, Judson Parsons,
that any district judge who will do anything like this would
get his head handed to him in a matter of hours on appeal,
and rightly so.
Mr. Parsons: May I hand up a reply memorandum?
It was in answer to a memorandum we received yesterday.
The Court: Of course you can. What good is it going
to do you? I know what you have already said.
Mr. Parsons: As you oem your Honor, we have made
two motions.
The Court: Right.
Mr. Parsons: One is a motion to dismiss and the other
is a motion to strike certain allegations. I want to talk
first about the motion to dismiss.
=: . 2 SNES 6 EMT emi
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Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
: (February 23, 1973).
The Court: You know that this complaint has been
upheld by the appellate courts. I don’t understand how in
the world you can ignore that.
Mr. Parsons: There are three cases recently decided,
one by Judge Pettine of the District of Rhode Island
sitting in Massachusetts; one by Judge Tauro of the Dis-
trict of Massachusetts, and one by Judge Devitt of the
District of Minnesota in the mutual fund industry, recently
decided, within the last six months, that went our way and
there are no contrary cases that I know of in the mutual
fund industry, at least that are reported. There may be
unreported ones I don’t know about.
As you know, one of the cases is attached to our previ-
ous memo.
The Court: I know, but with all due respect to Messrs.
Pettine, Tauro and Edward Devitt, this is not the law of
our circuit and this is where we are playing the games
which we call Levine versus Driscoll and Papilsky versus
Berndt.
Mr. Parsons: Your Honor, I don’t know of any cases
in this circuit having to do with mutual funds with the
statutory presumption of absence of control that have sup-
ported this kind of a pleading where the derivative suit is
brought on behalf of a mutual fund.
The Court: Wouldn’t you agree with me that this com-
plaint has been upheld by Judge Wyatt and Court of Ap-
peals and you have agreed with me before that the circuit—
Mr. Parsons: Your Honor, that motion was strictly a
res judicata motion. We reserved our rights to make other
motions, and the stipulations we entered into at the time.
The Court: The Court of Appeals referred to Moses v.
Bergen—
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Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
Mr. Parsons: It is just as if this was a larceny trial.
The Court of Appeals had said: Maybe if you find this
guy guilty he should go to jail. There is no dealing—there
was no argument whatsoever on any of these points in the
Court of Appeals. It was just a pleading motion.
The Court: We have got to get the show on the road.
We have been whiffling around with all these courts and I
just don’t think that you have got a very impressive set
of arguments. Those cases may be totally meritless. I
recognize that possibility. But we are not going to get in
where we go granting under 11—
Mr. Parsons: 23.11.
The Court: —and 23.1.
Mr. Parsons: If you do not make an appropriate de-
mand—you have to plead with particularity.
The Court: The plaintiffs have sued all the directors.
Mr. Parsons: In three cases that we have cited—in
one of them it is very clear in the opinion—that is the
one by Judge Tauro—it was people who sued, it was the
directors who sued that got the case thrown out. In the
other one by Judge Devitt, although it is not clear from
the opinion, we checked with counsel and in that case the
independent directors were named as defendants.
The Court: All right, but that isn’t the law in this circuit
and there are some cases in this circuit which suggest that
the courts here would reach a different result.
Mr. Parsons: Your Honor, the only cases that we have
found in this cireuit—
The Court: Were not mutual fund cases.
es - RESEDA eo SRN
A-20
Proceedings Below as to which Review is Sought
ov
;
:
:
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
: (February 23, 1973).
: Mr. Parsons: There is another ground for distinction
too. In those there was a basis for joining those people as
defendants. In this case we have done something—we have
found out, plaintiff has stated to us, that is Papilsky has
stated to us very clearly: This is all I have in this case. This
is all the lawyers have in this case. This is all the evidence
we have in this case to start this case with. That is what our
affidavit is about. They have nothing to show that these
j unaffiliated directors should be defendants.
The Court: I believe that the courts of this circuit, in-
cluding most importantly the circuit court, take a somewhat
; more liberal view, to use a word I hate to use, but you know
what I am trying to say.
Mr. Parsons: The courts of this circuit it has been said
: over and over again are overwhelmed with litigation.
The Court: Don’t give me that.
Mr. Parsons: It is very easy for us lawyers to say that
litigation—to say: Well, we ought to have a trial and so on.
The Court: Nobody said that here, but we have not
gotten these two cases off the ground. Nothing has happened
really except the complaint has been filed and you have been
given discovery of Mr. Pomerantz and plaintiffs and so on
because you wanted to make these motions. But nothing
else has happened.
Now, we all know that anybody commencing a suit like
this is not going to have all of the information in the world
because they are not privy to it, hence the courts in this cir-
cuit at least have taken a very dim view of the kind of motion
that you are here making whether we take your motion under
Rule 11 or a motion under 23.1. There just doesn’t seem to
A-21
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
me to be any doubt about that. You may not like it, I may not
like it, but that seems to be the way the game is played here.
Mr. Parsons: We have looked at the cases ourselves. We
have looked at the cases cited in brief in opposition and I
submit to your Honor that the cases do not hold that from
this circuit and that particularly, for example, one of the
cases that is relied on is the case that I think Judge Leibell
decided. There it was alleged in careful detail who the di-
rectors were upon whom demand was made, where they
lived, what it was they had not done, why it was they had not
done it, and so on, detailed allegations with particularity.
Another case that is referred to is one of Judge Wein-
feld’s cases. There the claim was control. There the com-
plaint laid it out in detail that these people—that the
corporation tbat was a partial owner of the derivative cor-
poration, that is of the corporation on whose behalf the suit
was brought, had control of the directors and the mechanism
of that was shown. None of that is involved in this case.
Here we just have boiler plate allegations designed to avoid
a demand rule. I submit to your Honor that the demand
rule is there for a purpose and that it is for two purposes.
One is for the intra-corporate remedies. It might be that
the man had saved the litigation. The other is that these
unaffiliated directors have a very special role in the mutual
fund industry and if they decide in their undominated way
that litigation should not be brought, I submit to your
Honor—and they exercise a business judgment in doing that,
right or wrong, I submit to your Honor that the suit should
not be brought.
What we are saying here is that they should go to the in-
dependent directors and find out what their reasons are. If
CNAs OBS 2 Fe DARA URS
RNa DTA A Sn el EM atti Bene ee
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iii itech ms dA ea Nl ta EIS
oe ” OM SAE DIP A BE LRA AAT Oe ERTS SRNR LNs AT SA OIE EO itis tise
A-22
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
they refuse a demand—maybe they won’t—but assuming
that they do refuse it, let’s find out what their reasons are.
Maybe their reasons are enough so that the case wouldn’t be
brought by the shareholder. I don’t know. But this rule is
not a pleading technicality to try to play games about draft-
ing a pleading. It is a rule of substance as to whether courts
should interject themselves into corporate affairs.
There is another thing here. This statute says it is pre-
sumed that these directors are not controlled. We have tried
very hard to find anything that makes it clear what the legis-
lative intent of that statute is, and it is unclear. There is not
much of it. It seems to me perfectly clear just from looking
at this statute that it is designed to make it possible for
these funds to gct independent directors and to give them a
role to play in this business where the claim is that somehow
or other the unaffiliated directors have been improperly com-
pensated, and that is exactly the role they have in the stat-
ute and unless you can show that there is something wrong
with the way they exercise judgment that is supposed to
be it.
The Court: Okay. Let’s here from the other side.
Mr. Krasner: I would like to turn first to Mr. Parsons’
argument on demand. Mr. Parsons suggests that there are
cases, and he says two cases, where directors were joined
as defendants and allegations made against them and
nevertheless the Court held that demand was not properly
excused.
The first case is the Lerman case, your Honor, decided
in Boston. In that case the opinion clearly points out,
your Honor, that the directors were not directors at the
time of the wrongs. They became directors at a later date.
- ws ERASED Sat We PTR TIER ee oe Se -
A-23
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
The wrongs were committed in 1968 and all of the un-
affiliated directors became directors at a later period, so
they clearly could not have participated in the wrong.
In our case the independent and unaffiliated directors
were all directors at the time of the wrong and they—
The Court: That is Judge Tauro’s case.
Mr. Krasner: I believe that is the Lerman case.
The Court: All right.
Mr. Krasner: The second case is very unusual, your
Honor. The opinion does not refer at all to any allegation
in the complaint with regard to the unaffiliated directors.
Instead we get a brief about an hour or half hour ago
saying that they talked to the lawyers in that case and the
lawyers informed them that these directors were joined as
defendants. I have no idea, your Honor, whether there
was any allegation in the complaint saying that because the
directors were joined as defendants they need not—that
demand was excused.
I would just like to point out, your Honor, that in fact
there has been a demand on these directors in the form of
the White litigation which we have all agreed alleges the
same claims. This complaint was filed in 1968 and ulti-
mately Mr. Parsons achieved a dismissal of this complaint
on a technicality. The directors of the Fund never lifted
one finger to protect the Fund and to protect the share-
holders. Instead they let the case be dismissed and were
it not for plaintiff Papilsky the case would have gone down
the drain, despite the fact that the Court of Appeals said
that this complaint alleges a good clainr because it is very
similar to the Moses against Bergen case, which brings me
A-24
Sieh CS Po Hires.
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
to my final point, your Honor, on the question of demand,
and that is simply this:
In the Moses against Bergen case the unaffiliated direc-
tors were ultimately exonerated because it was demon-
strated that the affiliated directors had kept them in the
dark about certain facts about recapture. Nevertheless,
the court awarded a substantial recovery to the plaintiffs
in that case and for the Fund, and then the unaffiliated
directors were exonerated, so business judgment has really
nothing to do with this.
2 AULA RRA PO BA lnc CALE Onl th bg hate RIM kA peste
Pea
The charter of the Fund here, just as the charter of the
Fidelity Fund provides that if moneys can be recaptured
there is a duty to recapture, so business judgment does not
even come into play. The directors had a duty under the
charter of the Fund to recapture and their failure to do
Sone
The Court: I think if I understand Mr. Judson Parsons
at all, he is claiming that there are not any specific allega-
tions in this complaint or these complaints which would
satisfy the obvious policy reasons which underlie the de-
mand and notice provisions which are the subject of Rule
23.1.
Now, as I have told him, it strikes me as being awfully
technical particularly in this circuit where I have thought
that it was more prudent to assume liberality more than
anything else when you are dealing with 23.1 or Rule 11,
for that matter, or both, as we are here. But what do you
say about that? I haven’t read these great cases of
Judges Pettine, Devitt and Tauro, so I must say I am in
the dark. I don’t know.
Si as iy $A clay ba si F
BG NEES Shea eter G
Some ph alae
ai tai Pi SA EOLA OT SS aise ‘ ieee ae nee ew en CST Tee
A-25
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
Mr. Krasner: Your Honor, as I pointed out, first of all
in the Kauffman case the directors were not joined as de-
fendants, so the court using the rule up in Massachusetts,
which is absolutely different from the rule in the Southern
District said allegations of domination and control were
not sufficient.
But here, your Honor, we have joined these directors as
defendants because they participated in the wrong. They
did recapture and we specifically allege that they partici-
pated in the wrong, but Mr. Parsons is a bit myopic about
this and he can only see—
The Court: What he wants to see.
Mr. Krasner: —the general allegation and he does not
see the specifics.
I would add, your Honor, that with respect to Rule 11
Mr. Parsons has made up allegations that didn’t even ap-
pear in our complaint.
The Court: I wouldn’t waste much time with Rule 11.
I am not going to grant his motion under Rule 11. I can
tell him and you that right now.
The only thing which I am a little puzzled about—mainly
because I have never heard of these cases which he has
come up with and perhaps I had better look at them, but
from what you tell me so far they do not sound very im-
pressive the way you describe them. They sounded much
better the way he described them, which is usually the way,
of course.
Mr. Krasner: I believe those two cases, the Kauffman
and the Lerman case are distinguished in our brief.
a
A-26
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
The third case Mr. Parsons talked about is the one where
he talked to the attorney and he put some kind of a state-
ment in his brief about it. There is nothing in the opinion
at all relating—
The Court: This is Judge Devitt’s case, yes, I believe
so.
Mr. Krasner: Yes, the case in Minnesota. In that vase
there is nothing in the opinion at all that reflects the fact
that directors were joined as defendants or that there
was an allegation that they participated in the wrongs and
these are very specific allegations in our complaint.
Si A iA eS Sete 2c ae Sab urumnancaceme
| The Court: I suppose I ought to look at these cases
; because I am not familiar with them. It strikes me that
given the history of our cases here it is rather unlikely
that any court should be throwing out this complaint or
complaints on this kind of a showing, but you got to give
the defendants every benefit of the doubt, so I will reserve
3 decision.
I notice that two of these cases aren’t officially reported.
F I guess they are cited in the CCH.
Mr. Parsons: One is CCH, the other I don’t know if it
has appeared anywhere yet. We put it in our main brief.
The Court: Yes, that is right, you did. You did indeed.
As I say, I am almost certain that I am going to deny
the motion under Rule 11, but I want to think about the
Rule 23.1 motion, so I will reserve a decision.
Mr. Zirin: May I just note my appearance, your Honor?
I’m with Breed, Abbot & Morgan. We represent the Fund
aaa
A-27
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. 7 Jr.
(February 23, 1973).
and we wish to submit a brief memorandum setting forth
our views with respect to Mr.’ Parsons’ motion.
The Court: I take it, Mr. James Zirin that you have
given all of these great men copies of this.
Mr. Zirin: Yes, we have enlightened them as well, your
Honor.
The Court: All right.
Mr. Davis: My name is Wendell Davis, Jr., of the firm
of McConnell, Scheuermann & Davis. We are attornevs for
the plaintiff in the Levine case. ,
May I be heard?
The Court: Surely. You don’t join with Mr. Parsons
in this matter.
Mr. Davis: I do not. My position is identical with that
of the Pomerantz firm, your Honor. I thought that some
time could be saved if I could simply invite your Honor’s
attention to a particular paragraph that appears on page
7 of the decision of Judge Tauro in the Lerman case,
which is the decision that is annexed to the Dewey, Ballan-
tine brief, where Judge Tauro notes that the complaint
does not charge the trustees with antagonism, adverse in-
terest or even involvement in the 1968 externalization.
The Court: Hold on a minute. What page are we on?
Mr. Davis: Annexed to the very end there is folded into
the brief—
The Court: I have got the opinion. What page?
Mr. Davis: Page 7. The page numbers are on the top §
of the page.
4
aay aise tea tah Sealed A A AA A in deh
SLCC ID
A-28
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23,1973).
The Court: Okay.
Mr. Davis: This is the last full paragraph on that page.
The Court: Yes. The complaint doesn’t charge. the
trustees.
Mr. Davis: That is right. In other words, it is a mat-
ter of pleading in the complaint involved there that the
directors were not even alleged to have been involved in
the transaction. That, of course, is very different from
the allegations in both complaints that are involved here.
The Court: All right, yes. Well, I got that point.
Mr. Parsons: May I be heard further, your Honor?
The Court: I thought we had already heard you, but
I guess we can’t turn you off if you have soniething brief
to say.
\
Mr. Parsons: I will be brief, your Honor. I did want
to make one point about Rule 11 in spite of your Honor’s
feelings about that.
The Court: You have cited the cases. I told you this
the other day somewhere along the line. There are very
few Rule 11 cases where the relief you seek is granted
and where they happen they are so far removed from
this case that I just don’t see the point at all.
Mr. Parsons: Your Honor, the plaintiff: alleges some-
thing and you say to the plaintiff:. What heve you got
to support that?
And the plaintiff says: Nothing.
~The plaintiff alleges or if she says something that
amounts to nothing: like: Well, poor people tend to be
A-29
Proceedings Beiow us to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23,1973).
thieves and this man is poor, therefore we have got evi-
dence that he is a thief, or something equally obscure, I
think your Honor will see that he didn’t have a case, that
he shouldn’t be in the federal court and that he shouldn’t
be putting people through all the bother of litigating.
The Court: With that standard a huge portion of our
docket in this district would go out the window. That
doesn’t make any sense at all, not under Rule 11.
Mr. Parsons: Your Honor, we have both, of course, not
only Rule 11. We have also the verification requirement
of Rule 23.1. We submit, your Honor, that there is some
test here like a probable cause test or search warrant.
Otherwise every lawyer in the country just by virtue of
his being a lawyer has a right to put everybody through
any kind—
The Court: You just described the splendid American
system to a T, no doubt about it
Mr. Parsons: I suggest to your Honor that you deplore
that system just as much as I do and that this is the basis
where it can be changed.
The Court: That is not the question. Whether you
deplore it or I deplore it is totally beside the point. The
point is that it is the system and you and I, whatever
our views, are not about to change it.
Mr. Parsons: I have defied the plaintiffs by making
this motion for them to find a single authority that has
approached this problem from this point of view.
I submit to your Honor that it is necessary that it be
dealt with or with the way litigation is multiplying these
days, God help us.
A-30
Proceedings Below as to which Review is Sought
Transcript of Proceedings Before Hon. Harold R. Tyler, Jr.
(February 23, 1973).
The Court: Litigation is multiplying, you are quite right,
but not because of the problem you are attempting to
elucidate.
Mr. Parsons: I suggest it is exactly because of that
problem.
We are not talking about the summary judgment and I
want to make clear that—
The Court: No, I do know the difference vaguely be-
tween Rule 56 and Rule 11.
Please do this: I don’t mistake what you are saying.
Please don’t go out of the way to mistake what I am saying.
I am saying that there is no precise authority in any of
the cases you cite for this kind of a situation at all under
Rule 11. There just isn’t. You know that one of the cases
you cited is a case from Minnesota that has so little rela-
tion to these cases that, you know, it isn’t even within
artillery range of it. It really isn’t. I know what was
involved in that case and I know something of what is in-
volved in this case and it just don’t help.
I’m sorry I don’t agree, but I’m willing to give you a
little benefit of a doubt under Rule 23.1 so I am willing to
reserve decision.
Thank you.
SAIS Pe ERI Betas ee . —_ _
EE SC INO Reece NERNEY Man DRETE SAN SS
A-31
Proceedings Below as to which Review is Sought
Opinion of the District Court
UNITED STATES DISTRICT COURT
SourHERN District or New YorkK
om
Plaintiff,
PAULETTE Papmnsky,
_ against—
Auvin H. Brrnpt, Rosert S. Drisconz, | OPINION:
Gen A. Luoyp, James H. Porter, Paut {71 Civ. 2534 JXC
W. H. Trevor, Paut Winpets, Jr., Lorn,
Assett & Co. and AFFILIATED F unp, Inc.,
Defendants.
Harry LEvINE,
Plaintiff,
—against—
Rosert S. Driscout, ALBERT Huaues, JR.,
Paut W. H. Trevor, Arvin H. Bernor,
Cart W. Kwnosiocu, Guzen A. Lioyp, (79 Civ.3190HRT
James H. Porrer, Pau WInvELs, JR.,
Lorp, AsBett & Co., AMERIcAN BusINEss
Sxares, Inc., Lorp Appetr Bonp-DeEBEN-
TURE F'unp, Inc. and ArrimiatTep F'unp,
Inc.,
Defendants. —
Pomerantz Levy Haupex & Brock, Esas.
New York City, by Abraham L. Pomerantz
and Daniel W. Krasner, Esqs., Attorneys
for Plaintiff Papilsky.
McConneEL1, ScHEVERMANN & Davis, Esgs.
New York City, by Vincent M. McConnell, Esgq.,
Attorneys for Plaintiff Levine.
— SSL EON ETO PRN ERE er ITT RST
A-32
Proceedings Below as to which Review is Sought
Opinion of The District Court
Dewey, Batuantine, Bususy, Patmer & Woon, Esqs.,
New York City, by Judson A. Parsons, Jr.,
Keith E. McClintock, Jr., and Patricia N. Colloton,
Esqs., Attorneys for Defendants Lord, Abbett & Co.,
Alvin H. Berndt, and Robert S. Driscoll.
Breep, Assott & Moraan, Esas.,
New York City, by Edward J. Ross and
James D. Zirin, Esqs., Attorneys for Defendant
Affiliated Fund, Ine.
Tyuer, D. J.
We have at least temporarily consolidated these two
actions for the purpose of resolving the pre-trial motions
discussed below. Plaintiffs are shareholders of defendant
Affiliated Fund, Inc., and have brought these two actions
derivatively in the Fund’s behalf. Defendants are now and
were the directors of the Fund during the period under
challenge, its principal officers, and Lord, Abbett & Co., the
Fund’s investment adviser and underwriter. Put briefly,
the complaints charge violations of the Investment Com-
pany Act of 1940, 15 U.S.C. §§ 80a-1 et seq., the Securities
Exchange Act of 1934, 15 U.S.C. §§ 78a et seq., and the
Investment Advisers Act of 1940, 15 U.S.C. §§80b-1 et seq.
These violations principally concern the manner in which
the brokerage commissions generated from the Funu’s trad-
ing activities were allocated: it is alleged that certain prac-
tices, among them reciprocal brokerage, give-ups and inter-
positioning (as they are known in the trade), redounded
to the benefit of the investment adviser instead of the Fund,
and that the Fund suffered consequently, and that the Fund
could have recaptured some of its commissions had its di-
rectors not participated in or acquiesced in the challenged
practices.
RET SE CT LS LI Rte tee: -
rr TE ee Pal ae ar a Sh EAD ae
A-33
Proceedings Below as to which Review is Sought
Opinion of The District Court
The defendants in both cases have moved to dismiss the
complaints, on the grounds that they do not ‘‘allege with
particularity . . . the reasons for [plaintiffs’] failure to
obtain the action or for not making the effort’’ to obtain
the desired action from the directors of the company in
whose name the actions are being brought. Rule 23.1,
F.R.Civ.P. More specifically, defendants argue that plain-
tiffs’ allegations of domination and control of the unaffili-
ated directors by the minority affiliated directors are in-
sufficiently precise for purposes of Rule 23.1; they further
contend that these allegations are without evidentiary basis,
and seek to establish this by their submissions.
In general, the ‘‘particularity requirement’’ has as its
underpinning the policy of affording the corporation every
chance to bring suit in its own name, to vindicate the rights
which the plaintiffs seek to uphold derivatively. The con-
ditions excusing such demand must appear on the face of
the complaint, and there is no uniform principle for deciding
when the particularity requirement is met. As Professor
Moore states it: ‘‘There is no unanimity of opinion amongst
the courts, and probably the most straightforward approach
is to admit frankly that it lies within the sound discretion
of the court to determine the necessity for a demand.’’ 3B
Moore’s Federal Practice J 23.1.19 at 254 (2d ed. 1969). This
discretionary approach has been generally followed by the
courts. See, e.g., de Haas v. Empire Petroleum Company,
435 F. 2d 1223 (10th Cir. 1970) ; Herpich v Wallace, 430 F. 2d
792 (5th Cir. 1970); Fields v. Fidelity General Insurance
Company, 454 F.2d 682 (7th Cir. 1971).
At the same time, it can be safely stated that ‘‘[t]he
courts have dispensed with demand when it is clear that the
demand upon the directors would meet rejection by them.”’
Moore, supra at 255. More significantly, it is the rule in
this Circuit that ‘‘. . . where the directors and controlling
A-34
Proceedings Below as to which Review is Sought
Opinion of The District Court
shareholders are antagonistic, adversely interested, or in-
volved in the transaction attacked, a demand on them is
presumptively futile and need not be made.’’ Cathedral Es-
tates, Inc. v. Taft Realty Corporation, 228 F.2d 85, 88 (2d
Cir. 1955) (emphasis added). The most recent reported case
on this subject in this Circuit is Dopp v. American Electronic
Laboratories, Inc., 55 F.R.D. 151 (S.D.N.Y. 1972), where
Judge Weinfeld upheld a complaint under similar attack.
Even more directly in point is Liboff v. Wolfson, 437 F.2d
121 (5th Cir. 1971) (per curiam). There, the complaint
merely alleged that a majority of the directors ‘‘partici-
pated, approved of and acquiesced in said transactions and
are liable therefor.’’ The trial court dismissed the complaint
for failure to allege with particularity plaintiff’s reasons
for not making a demand on the directors; on appeal, the
Fifth Circuit summarily reversed, holding that the allega-
tions cited above met the requirements of Rule 23.1, ‘‘ wheth-
er or not the reasons may ultimately be found not to be fully
supported.’’ 437 F.2d at 122.
Defendants contend that a reading of the complaints here
reveals nothing more than allegations that the unaffiliated
directors (who comprise a majority of the board of the
Fund) were under the dominion and control of the minority
directors, who were partners of the management company.
And, defendants rightly cite Lerman v. ITB Management
Corporation. Civil Action No. 72-1363-T (D. Mass. 1973),
and the many cases noted therein, for the proposition that
the mere allegation of control over a majority of directors
- of a corporation is insufficient to meet the requirements of
Rule 23.1.
But, as can be readily seen from the complaints, de-
fendants’ contention that the complaints do no more than
allege control over the unaffiliated directors is a gross dis-
tortion. Although the Papilsky complaint is more precise
PES EAGT AIG CS ARDS HS en
_ _ PIES II Pees TAPS SI MEI Soe ee he ype a -
- SE TLE TINIE DRE i Sine ee EOI BRE
A-35
Proceedings Below as to which Review is Sought
Opinion of The District Court
than the Levine complaint, both allege in substance the fol-
lowing: the affiliated directors (or the ‘‘Manager’’, as the
complaint in Levine recites) control and dominate the Fund;
the three affiliated directors are the principal officers of
the Fund; the individual defendants are presently and
were at the time of the challenged actions the directors of
the Fund; ‘‘the directors participated or acquiesced in the
wrongs alleged and are liable therefor’’ (Papilsky com-
plaint). More than mere control is alleged; both complaints
assert that this control is due to the strategic positions of the
affiliated directors on the board of the Fund. Even if this
were not sufficiently particular for Rule 23.1, however, it
, should be noted that both complaints allege that all directors
participated in—or acquiesced in—the challenged transac-
tions, and that they were liable therefor. This, it seems to
me, brings the complaints squarely within the teachings of
Cathedral Estates and Liboff, supra.
Nor can defendants find solace in Judge Tauro’s opinion
in the Lerman case, supra. There, the complaint asserted
only that demand was not made because ‘‘those in control of
the Fund are alleged wrongdoers.’’ Moreover, only one of
the five trustees of the Fund in Lerman was affiliated with
the management company at the time of the suit; indeed,
only one was trustee at the time of the challenged transac-
tions. This, obviously, is a far cry from the complaints in
the instant actions.
Defendants have erected another smokescreen by at-
tempting to introduce voluminous documentary evidence to
attack the factual basis of the complaints. Although there
is no case directly on point, I think the better view is that
the Rule 23.1 requirement of particularity is directed solely
to the face of the complaint, and should not provide a forum
for resolution of factual issues however presented. As the
A-36
Proceedings Below as to which Review is Sought
Opinion of The ‘istrict Court
Tenth Circuit observed in de Raas v. Empire Petroleum
Company, supra:
‘«The allegations [of the complaint] may, of course,
become the subject of factual dispute (as here) but the
issue remains one for the court and its determination
lies within the sound discretion of the court. Courts
have generally been lenient in exercising demand.’’ 435
F.2d at 1228.
And Judge Weinfeld, in denying defendants’ motion to dis-
miss in Dopp v. American Electronic Laboratories, Inc.,
supra, said:
‘“These allegations, the verity of which must be ac-
cepted on this motion, support plaintiff’s claim that any
further demand upon Butler would be futile and are
sufficient to comply with the pleading requirements of
Rule 23.1.’’ 55 F.R.D. at 153-4 (emphasis added).
Judge Weinfeld specifically asserts in a footnote to this
passage that he did not consider the voluminous affidavits
which the parties had submitted in judging the adequacy of
the pleadings—although he noted that he could technically
have done so, citing DePinto v. Provident Security Life In-
surance Company, 323 F.2d 826 (9th Cir. 1963), cert. denied
sub nom. Garusch v. DePinto, 376 U.S. 950 (1964). But in
that case, the Ninth Circuit noted that it was ‘‘normal pro-
cedure’’ to consider only the allegations of the complaint.
There were unusual circumstances, however, that led the
trial court to hold a hearing: the original suit had been tried
and remanded on appeal to reconstitute the parties ; an inter-
vening plaintiff sought to join the successor to the defendant
fund as a party defendant; this successor in turn sought to
intervene as a party plaintiff, and resisted the intervening
A-37
Proceedings Below as to which Review is Sought
Opinion of The District Court
plaintiff’s motion on the basis that no demand upon its
directors had been made to intervene in the suit. The judge
justifiably concluded that in this situation additional evi-
dence would facilitate resolution of the issues. And in Ler-
man, supra, Judge Tauro received additional evidence, but
again with the purpose of attempting to discern the par-
ticular reasons why plaintiff had not made demand upon
the directors, since the complaint itself was obviously lack-
ing. ‘
Defendants have also moved to strike certain allegations
from the complaints, pursuant to Rule 11, F.R.Civ.P. These
allegations, according to defendants, charge them with in-
terpositioning, with failure to obtain best executions, with
failure to take full advantage of the Third and Fourth Mar-
kets, with use of give-ups after 1968, with the receipt of
excessive management fees or commissions, and with im-
proper diversion of Fund assets.
Rule 11 reads in relevant part:
‘‘The signature of an attorney constitutes a certification
by him that he has read the pleading; that to the best
of his knowledge, information and belief there is good ~
ground to support it; and that it is not interposed for
delay.”’
Rather than challenge the complaint in its entirety on this
basis, defendants assert that plaintiffs do not have ‘‘good
ground”’ for the allegations which are attacked, and that this
warrants striking these allegations. As a basis for their
motion, they have submitted the deposition of plaintiff’s
counsel, as well as certain other additional material.
These contentions can be disposed of briefly. First, it
is not denied here by defendants that the main thrust of the
A-38
Proceedings Below as to which Review is Sought
Opinion of The District Court
complaint, which alleges the use of ‘‘give-ups’’ and ‘‘recip-
rocals’’ by the Fund at the direction of the management
company, states a valid claim for relief. See Moses v. Bur-
gin, 445 F.2d 369 (1st Cir.), cert. den. sub nom. Johnson v.
Moses, 404 U.S. 994 (1971); Papilsky v. Berndt, 466 F.2d
251, 254 n. 3 (2d Cir. 1972). But even assuming that Rule 11
can be so utilized to strike certain allegations within a com-
plaint, which as a whole arguably states a claim, I cannot
agree with defendants that these allegations are ‘‘sham
and false and... devoid of factual basis....’’ Murchison v.
Kirby, 27 F.R.D. 14, 19 (S.D.N.Y. 1961). Indeed, as dis-
cussed above, defendants have sought by their characteriza-
tions of the pleadings to create a trial on paper as to the
sufficiency of the evidence which plaintiffs may or may not
be able to adduce, at what is essentially but the threshold of
litigation.
Defendants’ motions to dismiss the actions or in the
alternative to strike certain allegations in the complaints
are denied. In so denying these motions, I note also that
defendants have neither answered the complaints nor the
interrogatories of plaintiffs, even though the Papilsky ac-
tion was commenced on June 7, 1971, and the interrogatories
served more than seven months ago. Defendants must
answer the complaints within fifteen (15) days and the out-
standing interrogatories within thirty (30) days from the
date below.
It is so ordered.
Dated: March 16, 1973
H. R. Tyzer, Jr.
US.D.J.
A-39
Proceedings Below as to which Review is Sought
Orders of the District Court (April 16, 1973)
71 Civ. 2534
April 16, 1973
Despite the marvelous ingenuity of counsel, I find no
new matters of fact and law—or such matters heretofore
overlooked—as to support this motion for reargument.
Rule 9(m) General Rules.
Motion for reargument considered and denied. It is so
ordered. , .<
H. R. Tze, JR.,
ne US.D.J.
72 Civ. 3120
April 16, 1973
Despite the marvelous ingenuity of counsel, I find no
new matters of fact and law—or such matters heretofore
overlooked —as to support this motion for reargument.
Rule 9(m) General Rules.
Motion for reargument considered and denied. It is so
ordered.
H. R. Tver, JR.,
U.S.D.J.
A-40
Proceedings Below as to which Review is Sought
Opinion of the Court of Appeals
Dkt. Nos. 73-2187, 73-2188, 73-2189, 73-2190, 73-2506, 73-2510
United States Court of Appeals
FOR THE
Sreconp Circurr
Dkt. Nos. 73-2188, 73-2190
Pav.etre Parmsky,
Plaintiff-Appellee,
v.
Atvry H, Bernpt, er at,
Defendants-A ppellants,
Dkt. Nos 73-2187, 73-2189
Harry Levine,
Plaintiff-Appellee,
v.
Rosert 8. Driscou1, ET AL.,
ee ee
PER CURIAM OPINION
—=—_———————— oNNNoEoEoaoaDDaDqQaDaE=_—E——————
MansrFIE.p, C.J.
Timbers, C.J.
Davis, J.
SINT, renee 20 hey
A-41
{
Proceedings Below as to which Review is Sought
Opinion of the Court of Appeals
United States Court of siscleis
' FOR THE SECOND CIRCUIT
, Nos. 477-482 — September Term 1973
(Argued March 11, 1974 . Decided May 24, 1974)
Docket Nos. 73-2187, 73-2188, 73-2189, 73-2190,
73-2506, 73-2510
: PavuLEette Paprsky, )
Plaintiff-Appellee,
v. ; Docket Nos.
Auvin H. Bernvt, Rosert §.Driscorn, —_f 73-2188, 73-2190
Lorp, Assert & Co. and and 73-2506 |
AFFILIATED F'unp, Inc.,
Defendants-Appellants.
Harry Leving, i
Plaintiff-Appellee,
v. . Docket Nos.
Rosert §. Driscorz, Atvix H. Bernpt, _f 39-2187, 73-2189
Lorp, Assert & Co. and and 73-2510
AFFILIATED F'unp, Inc.,
Defendants-Appellants.
BEFORE:
MansFIELD AND Timbers, Circuit Judges, anv Davis, Judge.*
Appeal from an interlocutory order entered in the
Southern District of New York, Harold R. Tyler, District
* Hon. Oscar H. Davis, of the United States Court of Claims,
sitting by designation.
_ A-42
Proceedings Below as to which Review is Sought
Opinion of the Court of Appeals
t
Judge, denying motions by defendants in both actions to
dismiss the complaints or to strike certain allegations from
_ the complaints.
Dismissed for lack of appellate jurisdiction.
Asranam L, Pomerantz, New York, N. Y. (Mordecai Rosen-
feld, Daniel W. Krasner and Pomerantz Levy Haudek &
Block, New York, N. Y., on the brief), for plaintif-
‘ appellee in Nos. 73-2188 and 73-2190.
WENDELL Davis, Jr., New York, N. Y. (McConnell, Scheuer-
mann & Davis, New York, N. Y., on the brief), for plain-
tiff-appellee in Nos. 73-2187 and 73-2189.
Jupson A. Parsons, Jx., New York, N. Y. (Keith E, McClin-
tock, Jr. and Dewey, Ballantine, Bushby, Palmer &
Wood, New York, N. Y., on the brief), for defendants-
: appellants Alvin H. Berndt, Robert ‘8. Driscoll and
Lord, Abbett & Co. in both actions.
James D. Zirin, New York, N. Y. (Edward J. Ross and
Breed, Abbott & Morgan, New York, N. Y., on the
brief), for defendant-appellant Affiliated Fund, Inc.
in both actions.
- Per Curiam: ;
This is the second appeal from an interlocutory order
that has come before us during the three year life of this
litigation in the district court.
Two years ago we heard, pursuant to 28 U.S.C. § 1292(b)
(1970), an appeal by defendants in the Papilsky action,
which was commenced in June 1971, from an order of the
district court denying their motion for summary judgment
A-43
Proceedings Below as to which Review is Sought
Opinion of the Court of Appeals
on grounds of res judicata based on the dismissal of two
prior actions that had been commenced in January 1967
and February 1968, We affirmed the order of Judge Wyatt
denying summary judgment. Papilsky v. Berndt, 466 F.
2d 251 (2 Cir.), cert. denied, 409 U. S. 1077 (1972).
The instant appeal, as to which a § 1292(b) certification
was denied by the district court, seeks to bring up for re-
view an interlocutory order entered on March 16, 1973 in
the Southern District of New York by Harold R. Tyler,
District Judge, denying motions by defendants in both
aciicns to dismiss the complaints for failure to comply with
the particularity requirements of Fed. R. Civ. P. 23.1, or
in the alternative to strike certain allegations from the
complaints pursuant to Fed. R. Civ. P. 11. We dismiss the
appeal for lack of appellate jurisdiction.
The gravamen of defendants’ motions below to dismiss
was that the complaints do not allege with particularity the
reasons for plaintiffs’ failure ‘o obtain the action they
desired from the directors of the und or for not making
the effort to obtain the desired action trum the directors.
Defendants argued that the allegations of domination and
control of the unaffiliated directors by the minority affiliated
directors are insufficiently precise for purposes of Rule 23.1.
They also contended that these allegations are without
evidentiary basis and sought to establish this on the instant
motions by attempting to introduce voluminous documen-
tary evidence attacking the factual basis of the complaints.
In a reasoned opinion, Judge Tyler denied the motions
chiefly on the ground that plaintiffs’ allegations that the
unaffiliated directors were dominated by a minority of the
1We shall assume familiarity with the underlying allegations,
particularly in the Papilsky action, as summarized in our prior opinion.
466 F.2d at 253.
A-44
Proceedings Below as to which Review is Sought
Opinion of the Court of Appeals
affiliated directors, coupled with the allegations that all
directors had participated or acquiesced in the challenged
transactions, were sufficient as a matter of pleding to show
the futility of a demand. The judge also refused to consider
the evidence offered by defendants to show that the unaffili-
ated directors were not dominated.
In dismissing this appeal for lack of appellate jurisdic-
tion, we are not aware of, and counsel have not cited us to,
any case where federal appellate review of an order denying
a motion addressed to the pleadings has been permitted. We
believe that our decision in Gottesman v. General Motors
Corp. 268 F. 2d 194, 196-97 (2 Cir. 1956), refusing to permit
an appeal, although certified by the district court pursuant
to §1292(b), from the denial of a motion to dismiss for
failure to make a demand upon stockholders, is controlling
here.
Appellants place chief reliance on Cohen v. Beneficial
Industrial Loan Corp., 337 U.S. 541 (1949), in urging that
the interlocutory order in question is appealable. Of the
three requirements of Cohen that must be satisiied ‘‘lest
this exception swallow the salutary ‘final judgment rule’ ’’,
Weight Watchers of Philadelphia, Inc. v. Weight Watchers
International, Inc., 455 F.2d 770, 773 (2 Cir. 1972), we reject
out of hand appellants’ arguments with respect to two:
the order here clearly is not one ‘‘too important to be
denied review’’, see Gottesman v. General Motors Corp.,
supra, 268 F.2d at 196-97 ; and the delay in obtaining appel-
late review will not result in irreparable loss, but will simply
postpone determination of the question of whether the di-
rectors under all the circumstances should have decided
whether to bring the actions.
With respect to the collateral right requirement of
Cohen, we hold that it would be stretching that doctrine
De ee a ees TP ROT a CAO Bem ROR ON Ua . %
A-45
Proceedings Below as to which Review is Sought
Opinion of the Court of Appeals
entirely too far to hold that denial of a motion to dismiss
for non-compliance with the particularity requirements of
Rule 23.1 is appealable. The collateral right claimed to be
destroyed, i.e., the right to have the board of directors exer-
cise its independent business judgment on whether to sue
before permitting a stockholder to bring suit, is not of
sufficient magnitude to permit an interlocutory appeal. In
the first place, the right is not of great magnitude for the
reason that, if (as might well be anticipated) a majority
of the board refuses to sue, plaintiffs presumably would
then be permitted to reinstitute their present action.
Secondly, if plaintiffs should prevail on the merits, denial
of defendants’ motion to dismiss for non-compliance with
Rule 23.1 would be merged in the judgment and on appeal
the judgment could be set aside on the ground that plaintiffs
lack standing because they failed to meet the conditions of
Rule 23.1. In essence therefore the order here is not differ-
ent from the ordinary order denying a defendant’s motion
to dismiss or for summary judgment, from which an inter-
locutory appeal does not lie.
Cohen and its progeny are all distinguishable because
they represented denial of collateral rights which would be
forever lost unless the orders were immediately reversed.
In Cohen, for instance, the defendants, if they ultimately
had prevailed on the merits, would have been unable to
obtain the security for costs and attorneys’ fees to which
they would have been entitled prior to trial. In MacAlister
v. Guterma, 263 F.2d 65 (2 Cir. 1968), and in Garber v.
Randell, 477 F.2d 711 (2 Cir. 1973), which permitted appeals
from the grant or denial of consolidation orders, the rights
of the losing parties would have been mooted or destroyed
if they had been required to comply with the district court’s
decision.
A-46
Proceedings Below as to which Review is Sought
Opinion of the Court of Appeals
Finally, to the extent that appellants claim that under
Rule 23.1 defendants in a derivative action have a right
to a uniqte proceeding—something more than a motion to
dismiss the complaint on its face, but something less than
a full-fledged motion for summary judgment—we reject
their claim as untenable. The obligation imposed by the
second sentence of the Rule is neither so important nor
so unique that it calls for unusual procedural mechanisms.
In view of the ground of our decision dismissing the
appeal for lack of appellate jurisdiction, of course we do
not reach the merits.
Dismissed.
Papilsky v. Berndt Papilsky v. Berndt
Dkt. Nos. 73-2187, Dkt. Nos. 73-2187,
73-2188, 73-2189, 73-2188, 73-2189,
73-2190, 73-2506, 73-2190, 73-2506,
73-2510. - "73-2510 _
May 23, 1974 I Concur
I Concur OHD.
WRM. May 23, 1974
w SOO PRR PE tng. a ©
etree
AA47
Proceedings Below as to which Review is Sought
Orders of the Court of Appeals
UNITED STATES COURT OF APPEALS
Seconp Cracuit
At a Stated Term of the United States Court of Appeals,
in and for the Second Circuit, held at the United States
Court House, in the City of New York, on the sixth day
of August, one thousamd nine hundred and seventy-four.
Present:
Hon. Water R. MansFretp
Hon. WituuaM H. Trisers
Hon. Oscar H. Davis,
Circwit Judges.
Harry Levine,
Plaintiff-Appellee
v.
Rosert S. Driscott, ABert HucuHEs, Jz.,
Paut W. H. Trevor, At.vin H. Bernot,
Cart W. Kynostocs, Gren A. Luoyp,
James H. Porter, Pawt WrinxpeELs, JR.,
Lorp Ansett & Co., American Buswvess |
Suares, Inc., Lorp Amserr Bonp
DesentuRE Funp, Iyc., AFFILIATED
Funp, Inc., ~
Defendants
Rosert S. Driscott, Avis H. Bernpr,
Lorp Ansett & Co., A:-FFILIATED
Funp, Ino.,
Defendants-Appellants
Docket No.
73-2187
73-2188-90
A petition for a rehearing having been filed herein by
counsel for the appellants,
Upon consideratiom thereof, it is
Ordered that said petition be and hereby is DENIED.
A. Dantet Fusaro
Clerk
by Vixcent A. Cartiva
Chief Deputy Clerk
PORE ER 0 te pp a
2 ——se
re OF OS POET
ER POORER TA ‘
A-48
Proceedings Below as to which Review is Sought
Orders of the Court of Appeals
UMETED STATES COURT OF APPEALS
Seconp Cracvuit
At a stated term of the United States Court of Appeals,
in and for the Second Circuit, held at the United States
Court House, in the City of New York, on the sixth day
of August, one thousand nine hundred and seventy-four.
Harry Levine,
v.
Plaintiff-Appellee
Rosert S. Driscott, ALBERT Hucuss, JR.,
Paut W. H. Trevor, Arvin H. Bernor,
Cart W. Kwosiocn, Gren A. Liovp,
James H. Porrer, Paut WInvELs, JR.,
Lorp Ansett & Co., American Business |
Suares, Inc., Lonp Aspetr Bonn Desen-
TURE F'unp, Inc., Arrmiatep Funn, Inc.,
Defendants
Rosert S. Driscott, Arvin H. Bernor,
Lorp Aspett & Co., ArrmitTeD Funp,
Ino.
Defendants-Appellants
>
_
Docket No.
73-2187
73-2188-90
A petition for rehearing containing a suggestion that
the action be reheard en banc having filed herein by counsel
for the appellants, and no active judge or judge who was
a member of the panel having requested that a vote be taken
on said suggestion,
Upon consideration thereof, it is
Ordered that said petition be and hereby is DENIED.
Water R. Mansrretp
Acting Chief Judge
nee a
“hess;
A-49
SUBSEQUENT PROCEEDINGS OF THE DISTRICT
COURT RELATING IN PART TO ISSUES
CONCERNING WHICH REVIEW IS SOUGHT
EDIE, ENED! PORES DEPT RZ RD aN ‘UATE Ps Ea Sek NeNEGETEDENERAC PERE
= Ss “ “
A-50
Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
71 Civ. 2534
UNITED STATES DISTRICT COURT
Sourern District or New York
PavuLetTe Papisky,
Plaintiff,
against
Auvin H. Bernpr, Rosert S. Driscorz, | Memoranpum
Car. W. Kwosiocu, Guex A. Luoyn, f 71 Civ.
James H. Porrer, Paut W. H. TREVOR, 2534 JMC
Pavut Winozts, Jz., Lorp, Assert & Co,
and ArFiiatep F'pnp, Inc.,
Defendants.
J
Tyzer, D. J.
Defendants Paul Windels, Jr., Carl W. Knobloch, and
James H. Potter have moved for an order dismissing this
action against them, pursuant to Rules 41(b) and 23.1,
F-.R.Civ.P. Taking the Rule 41(b) motior first, the moving
parties assert that the lengthy delay between the initial
filing of the complaint and its service with summons upon
them constitutes a lack of due diligence in the prosecution
of the suit. Upon consideration of all of the circumstances,
I am inclined to agree.
The docket sheet indicates that the complaint in this
- action was filed on June 7, 1971; the summonses for these
defendants are all dated March 30, 1973, and were served
on Windels on April 6, on Knobloch on April 10 and on
Potter on April i9. Thus, almost two years elapsed be-
tween the initiation of the action and service upon these
RSS ORB ne oe awe atepe ewes os bine eee
A-51
Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
defendants. In the interim, a considerable amount of litiga-
tion ensued, with several rulings by this court and the
Second Circuit which might be considered adverse to these
parties’ interests, even though they might not be technically
bound thereby.
Plaintiff responds that this failure to effectuate prompt
service did not result in any prejudice to defendants, since
they were all, as directors of the Fund, aware of the suit
and, indeed, had collectively authorized Breed, Abbott &
Morgan, Esqs. to represent the Fund and, indirectly, them-
selves. And she argues that dismissal with prejudice is too
drastic a remedy under the circumstances, citing Lyford v.
Carter, 274 F.2d 815 (2d Cir. 1960).
There is some authority for the proposition that a rela-
tively lengthy delay in service is a sufficient ground for dis-
missal of an action for lack of prosecution pursuant to
Rule 41(b). Taub v. Hale, 355 F.2d 201, 202 (2d Cir.), cert.
den. 384 U.S. 1007 (1966); Messenger v. United States,
231 F.2d 328 (2d Cir. 1956); Durst v. National Casualty
Co., 452 F.2d 610 (9th Cir. 1972), infra. As J udge Medina
asserted in Messenger, ‘‘The operative condition of the
Rule is lack of due diligence on the part of the plaintiff—
not a showing by the defendant that it will be prejudiced
by a denial of its motion.’’ 231 F.2d a 331. But it was
recognized there that an order of dismissal is discretionary,
and the exercise of discretion would seem to be a product’
of many factors—including a showing of prejudice by
defendants or the demonstration of good reason for the
delay by plaintiff. Pearson v. Dennison, 353 F.2d 24 (9th
Cir. 1965).
The reason advanced by plaintiff why service was not
made was that ‘‘almost immediately’ after the commence-
i hang : 1
j pe STE a gy ramen SE SERS Berets PATE TTI Oi FS BMY MET re ela RT aA
A-52
Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
ment of the action, defendants moved for dismissal, and
upon losing that initial motion, moved for dismissal on
other grounds. Brief of plaintiff in opposition to defendant
Windels’ motion to dismiss, at p. 7. And the brief con-
tinues to recite: ‘‘Due to the serious nature of these mo-
tions, plaintiff concluded that it would not serve any pur-
pose to proliferate defendants until our right to bring this
action was finally adjudicated.’’ But the docket sheet indi-
cates that the first motion for dismissal was filed by de-
fendants on August 23, 1971—approximately two and one-
half months after the filing of the complaint. And this
concern with ‘‘proliferating’’ defendants is rather curious,
since all three moving parties were named as defendants
from the beginning,
No difficulties in service are apparent, either, which
might render the delay excusable in light of Lyford v.
Carter, supra. Indeed, on the designation form filed by
plaintiff’s counsel on June 8, 1971, the residence addresses
of defendants Knobloch and Windels are listed, and the
business address of defendant Potter. And, as these de-
fendants assert in their respective affidavits accompanying
their motions herein, all three regularly attended the
monthly meetings of the Board of Directors of the Fund,
a» well as the annual stockholders meetings, with but few
exceptions. In sum, what we have here is a decision, at the
initiation of the suit, by plaintiff or her counsel not to
direct the marshal to serve certain named defendants.
This apparently intentional decision not to direct serv-
vice upon the moving defendants (all of whom are inde-
pendent directors) is particularly troubling in a derivative
action such as this, where demand upon the board of direc-
tors is required by Rule 23.1 as a matter of policy unless
reasons are specified excusing such demand. Although the
RiGee aoe
“i eS SEE Ute eae
A-53
Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
undersigned ruled in a previous opinion that the complaint
met the requirements of Rule 23.1 as a pleading matter, it
does not follow that because demand might be excused,
service might also be ignored. In sum, failure to serve any
of the independent directors cannot be justified by any
attempt to avoid ‘‘proliferation’’ of defendants, where the
directors are named as defendants in a derivative action
and their presence as such is virtually a prerequisite to
maintaining the suit. There are also the obvious indicia
of prejudice to the individual defendants themselves, who
have not been able to participate in this active case over
the past two years. Since they are independent directors,
moreover, it cannot be said that their interests are coex-
tensive with the other (affiliated) directors who, along with
the Fund and the investment adviser, have been defending
the suit.
This should suffice for the purposes of the present mo-
tion, and this court might avoid ruling on the other half
of defendants’ motions brought pursuant to Rule 23.1, but
for the anomalous effect which this order has on the com-
plexion of the remaining action. This court denied‘a sim-
ilar Rule 23.1 motion brought by other defendants on
March 16, 1973, ruling, in effect, that demand upon the
directors was excused by virtue of the pleading that all of
the defendants had ‘‘acquiesced or participated’’ in the
alleged wrongs. But at the time of that writing, the court
was ignorant of the fact that the independent directors
had not yet been served with summons and complaint.
Although it could be argued that the instant ruling vitiates
the ‘‘reasons’’ adduced by plaintiff in excusing her failure
to make demand, I adhere to may previous opinion, despite
certain dicta in In re Kauffman Mutual Fund Actions,
#72-1288 (1st Cir. May 14, 1973).
RAL Rar ot hey treger Me gy EE OT SS ME LL EL CLEA ELS SPLINE SVN SINS Gt etn NOTE aE TSN rpms
~
A-54
Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
As for the attack upon the adequacy of representation,
counsel for plaintiff has proceeded vigorbusly and ably to
date, with the exception of the failure to serve the inde-
pendent directors. I do not believe that this one lapse is
sufficient grounds for disqualifying plaintiff at the present
time,
Accordingly, this action is dismissed with prejudice
against defendants Windels, Potter and Knobloch. In addi-
tion, it should be noted that defendant Lloyd was not
served effectively until May 17, 1973 (prior service on
April 2, 1973 was apparently withdrawn). Although Lloyd
has not joined in the instant motion (since he moved to
quash the second service and has just withdrawn same),
the failure to prosecute is equally obvious in his case, and
this action should therefore be dismissed as against Lloyd
as well.
; It is so ordered.
Dated: July 19, 1973
H. R. Tyzer, Jr.
U.S. D. J
2
WEAN OT i ge ee a ee a THC EO ULES? RA gE ree
A-55
Subsequent Proceedings of the District Court Relating
im part to Issues Concerning which Review is Sought
Opinion of the District Court
UNITED STATES DISTRICT COURT
SoutHern District or New York
Harry Levine,
Plaintiff,
—against— | Opinion
72 Civ.
Rosert 8. Driscot1, et al., : 3120 HRT
Defendants.
McConnett, Scurvermann & Davis, Esqs.,
New York City, by Wendell Davis, J oe
Attorneys for Plaintiff.
Sxappven, Arps, Siar, Meacuer & Fo, Esas.,
New York City, by Leslie H. Arps and William P.
Frank, Attorneys for Defendants Carl W. Knobloch
and James H. Potter. ~
Winpets, Merrrrr & Incranam, Ess.,
New York City, by Francis E. Koch,
Attorney for Defendant Paul Windels, Jr.
’ Dewey, Bauiatine, Bususy, Pater & Woon, Esgs.,
New York City, by Judson A. Parsons, Jr., and
Keith E. McClintock, Jr., Attorneys for Defendants
Albert R. Hughes, Jr. and Paul W.H. Trevor.
Cieary, Gorries, Steen & Haminron, Esos.,
New York City, by George Weisz,
Attorneys for Defendants American Business
Shares, Inc. and Lord Abbett Bond-Debenture
Fund Inc.
‘ VR maser TPP i) YE Loreena SPEDE NEI E IN TCE A OIN LE AIOMEN RS RC SE WAS, SRNR RRA
‘
—A56,
/
Subsequent Proceedings of the District Court Relating
"im part to Issues Concerning which Review is Sought
Opinion of the District Court
Tyuzr, D.J.
Various defendants have moved to dismiss this action
pursuant to Rules 12(b), 23.1 and 41(b) of the Federal
Rules of Civil Procedure.! Familiarity with the facts will
be assumed since the courts have already decided prior mo-
tions in this case and in related cases. Papilsky v. Berndt,
466 F.2d 251 (2d Cir.), cert. denied, 409 U.S. 1077 (1972);
Papilsky v. Berndt, 59 F.R.D. 95 (S.D.N.Y. 1973) ; Papilsky
v. Berndt, Civil No. 71-2534 (S.D.N.Y., filed July 20, 1973).?
For the reasons hereinafter stated, defendants’ motions
to dismiss pursuant to F.R.Civ.P. 41(b) are granted. In
addition, the case against defendants American Business
Shares, Inc. (‘‘ABS’’) and Lord Abbett Bond-Debenture
Fund Ine. (‘‘the Fund’’) is also dismissed for failure to
state a claim upon which relief cen be granted. Rules
12(b) (6) and 56, F.R.Civ.P.
Defendant Windels has urged this court to , dismiss
pursuant to F.R.Civ.P. 12(b)(6). In the related case of
Papilsky, Civil No, 71-2534, the action against defendants
Windels, Knobloch and Potter was dismissed pursuant to
F.R.Civ.P. 41(b). This court found there that the ‘lengthy
delay between the filing of the complaint and its service
with summons amounted to a lack of diligence in the pro-
secution of the suit.’’ It is argued that that decision should
operate as a bar to the present action on ‘the grounds of
res judicata, It is true that the instant complaint is, es-
sentially identical to the one asserted in Papilsky, the only
1 Not all defendants have joined in all these motions.
? These decisions will be referred to hereinafter as Papilsky. In
order to distinguish them, an abbreviated citation will be given each
time. The underlying case will be referred to as Papilsky with no
citation.
AAO YI ANTAL TY we tae
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Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
difference being that this derivative suit is brought by a
different plaintiff. Nevertheless, this court must deny the
motion for the reasons stated by the Court of Appeals in
Papilsky, 466 F.2d 251.
There a similar motion was made seeking res judicata
effect for a prior related suit, White and Bernstein v. Dris-
coll, Civil No. 67-98 (S.D.N.Y., filed Dee. 9, 1968). Judge
Timbers, writing for the appellate court, held that:
‘* .,. when notice of a proposed dismissal of a stock-
holder’s derivative suit for failure to answer interroga-
tories is not given to non-party stockholders, the judg-
ment of dismissal does not bar an identical cause of
action asserted by a different stockholder in a sub-
sequent derivative suit.’’ Jd. at 256.
Although this court dismissed the action in Papilsky v.
Berndt, Civil No, 71-2534, for lack of diligence in prosecut-
ing rather than for failure to answer interrogatories, the
court in Papilsky, 466 F.2d 251, recognized that a dismissal
for failure to prosecute should have the same effect as a
dismissal for failure to answer interrogatories. Jd. n. 5 at
256. This court’s decision in Papilsky, Civil No. 71-2534,
will not therefore be given res judicata effect.
Defendants Windels, Knobloch, Potter, Hughes and
Trevor have moved to dismiss this action under F.R.Civ.P.
23.1, alleging that plaintiff had failed to make a demand
on the board of directors before commencing this suit, and
that plaintiff has shown no excuse for such failure. This
court has denied a similar Rule 23.1 motion brought by
other defendants in this case, Papilsky v. Berndt, 59 F.R.D.
95° and denied the Rule 23.1 motion of Windels, Knobloch
3 Levine v, Driscoll was consolidated with Papilsky v. Berndt for
the purposes of that F.R.Civ. P 23.1 motion.
ee We mgt
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Subsequent Proceedings of the District Court Relating
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Opinion of the District Court
and Potter in Papilsky, Civil No. 71-2534. For the reasons
stated in those decisions, defendants’ motions under Rule
23.1 must be denied.
Defendant Windels has also moved to dismiss, again
under Rule 23.1, on other grounds. This motion is denied.
First under this motion, Windels argues that dismissal
should be warranted by the failure of plaintiff to verify his
complaint. In a non-frivolous case such as this one, it has
been held by at least one circuit court that the verification
of the complaint upon information and belief by plaintiff’s
attorney is sufficient. Hirshfield v. Briskin, 447 F. 24 694,
698 (7th Cir. 1971). As was pointed out by the Supreme
Court in a somewhat analogous case, ‘‘[t]he basic purpose
of the Federal Rules is to administer justice through fair
trials, not through summary dismissals as necessary as
they may be on occasion.’’ Surowitz v. Hilton Hotels Corp.,
383 U.S. 363, 373 (1966). Accordingly, this court will not
grant the motion on this basis. Nevertheless, it is difficult
to ignore the plain language of Rule 23.1 in this regard.
Hence, this ruling is conditioned upon a direction that
plaintiff submit a verification of his complaint within 10
days of the filing of this opinion. In light of this provision,
Windels’ argument that plaintiff’s failure to verify the
complaint makes him an unfit representative of the share-
holders is no longer relevant.
The other base for Windels’ motion under Rule 23.1
appears to come down to the argument that the fact that
plaintiff did not promptly effect service on certain de-
fendants is an indication that he is unable to properly
represent the interest of the shareholders in this litigation
—i.e. that his failure through his counsel to effect prompt
service is sufficient by itself to disqualify him. Though
9 A-59
Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
ingenious, this argument, in my view, is insufficient. The
failure to effect prompt service on certain defendants ad-
mittedly is a problem and will have adverse effects, but it
certainly is not a sufficient reason for dismissal under the
particular rule invoked by defendant Windels, particularly
when it is not at all clear but that the failure may have
been due not to plaintiff but his counsel. See Papilsky v.
Berndt, Civil No. 71-2534.
Defendants ABS and the Fund have moved this court,
pursuant to F.R.Civ.P. 23.1, to dismiss this action against
them on the ground that plaintiff has no standing to bring
a derivative action on their behalf. Their motion is based
on the fact that plaintiff was not a shareholder of those
companies at the time of the transactions of which he com-
plains. Plaintiff, however, conceding that he is not suing
derivatively for them in the classic sense, argued that ABS
and the Fund are properly joined as defendants in this
action for other reasons. He has alleged no wrong doing
on the part of these two defendants but complains that
Lord, Abbett & Co., the manager of Affiliated Fund, Ine.
(‘‘Affiliated’’) has used advantages which it secured as
manager for the benefit of defendants ABS and the Fund.
Plaintiff’s complaint 419. Plaintiff has also stated that
the fees charged Affiliated by Lord, Abett & Co. were ex-
cessive and that if the asset values of ABS and the Fund
had been added to the assets of Affiliated, the fees charged
by Lord, Abbett & Co. would have been reduced. Plaintiff
argues that Affiliated has a right, therefore, to have those
fees recomputed and that ABS and the Fund share in that
right. Plaintiff’s complaint § 23.
The joinder of ABS and the Fund is not necessary to
enable this court to decide whether the fees charged Affili-
t
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Subsequent Proceedings of the District Court Relating
in part to Issues Concerning which Review is Sought
Opinion of the District Court
ated by Lord, Abbett & Co. should be recomputed. Since
no claim is asserted against ABS or the Fund, plaintiff has
failed to state a claim upon which relief can be granted
and his cause of action as to these two defendants must be
dismissed pursuant to Rules 12(b) (6) and 56, F.R.Civ.P.4
All defendants presently moving have asked this court
to dismiss plaintiff’s action, pursuant to F.R.Civ.P. 41(b),
for failure of the plaintiff to prosecute. More specifically,
moving defendants focus their attack upon the lengthy
delay in the service of the complaint with summons on them.
The compaint in this action was filed on July 21, 1972.
Service on Knobloch was made on August 13, 1973, and on
all the other moving defendants four days earlier on August
9, 1973.5
‘In their motion papers defendants ABS and the Fund did not
move to dismiss pursuant to Rules 12(b) (6) or 56. In their brief,
however, and in oral argument they did argue that the complaint
should be dismissed as to them pursuant to Rule 12(b) (6). Plaintiff
has also addressed his arguments to this issue. This court therefore
does not hesitate to dismiss on this ground. Cf. Dodd v. Spokane
County, 393 F. 2d 330, 334 (9th Cir. 1968) ;
5 Plaintiff claims that defendants Trevor, ABS and the Fund
were served in July, 1972. On August 14, 1972, however, it was
stipulated that the attempt to serve Trevor was “null and void” and
it was so ordered by this court on August 29, 1972. Since plaintiff's
action against ABS and the Fund has already been dismissed, the date
of their service is not really important. Plaintiff claims that service
on the officers, directors or managing agent of these defendants is
enough to constitute service on the two corporations. It should be
noted, however, that the directors, officers and managing agent were
served in their individual rather than their representative capacity.
While it is true that ABS and the Fund may have had practical notice
of this suit, they also may have justifiably assumed that plaintiff had
decided not to bring them into this case. The July, 1972 service of
others, therefore, should not be considered proper service upon them.
Cf. Sunbeam Corporation v. Windsor-Fifth Avenue, 124 F. Supp.
547 (S.D.N.Y. 1954) ; Port Chester Electrical Company v. Ronbed
Corporation, 28 App. Div. 2d 1008, 284 N.Y.S. 2d 9 (2d Dept. 1967).
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Subsequent Proceedings of the District Court Relating
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Opinion of the District Court
In support of their 41(b) motions, defendants rely on
the related case of Papilsky, Civil No. 71-2534, in which
this court dismissed the complaint against defendants
Windels, Knobloch and Potter because of a delay of almost
two years in service. Plaintiff in that case had unsuccess-
fully argued against dismissal on the grounds that the
moving defendants were aware of the suit and had collec-
tively authorized Breed, Abbott & Morgan, Esqs. to directly
represent Affiliated and indirectly themselves. Plaintiff here
seeks to distinguish Papilsky, Civil No. 71-2534, on the
grounds that there was nine months less delay in the instant
case and that the intervening proceedings here were not
dispositive of any of the rights of the moving defendants.
Before the summons and complaint had been served on
movants in Papilsky, Civil No. 71-2534, the following events
had occurred: a motion for summary judgment; an appeal
from its denial; a petition for certiorari; and an examina-
tion before trial. It should be noted that in the instant case,
on September 14, 1972, plaintiff and the defendants who
were served in July, 1972, in this (Levine) action stipulated
that they would be bound by the proceedings concerning
the motion for summary judgment in the Papilsky case.
Furthermore, on February 5, 1973, the served defendants
in Levine joined the served defendants in Papilsky and
moved unsuccessfully to dismiss the complaint or strike
certain allegations contained therein. In Papilsky, the
served defendants responded to two series of interroga-
tories; in the instant action, the served defendants have
filed responses to plaintiff’s first request for admissions.
It would seem, therefore, that the moving defendants
here have been just as prejudiced as those in Papilsky,
Civil No. 71-2534, and that the single distinction of less
aa ne Sf ee See itn ate a ee
“ONES ELE DETER IONE Cn a Ea, .
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Subsequent Proceedings of the District Court Relating
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Opinion of the District Court
delay in months is not a real difference. Although the
focus in the Second Circuit has been on lack of due diligence
rather than on prejudice to the defendant, it has been
recognized that the prejudice to the defendant and the lack
of any good reason for delay are proper factors to be
considered. Messenger v. United States, 231 F.2d 328, 331
(2nd Cir. 1956).
For the reasons set forth by this court in Papilsky,
Civil No. 71-2534, defendants’ motions to dismiss pursuant
to F.R.Civ.P. 41(b) for failure to prosecute are granted,
and the action shall he dismissed against these defendants.
Settle order accordingly on notice.
Dated: January 7th, 1974
H. R. Tyzzr, Jr.
U.S.D.J.
® It is true that Trevor and Hughes do not seem to be “indepen-
dent directors”. It has not been shown, however, that their interests
are necessarily coextensive with those of the other affiliated directors.
Moreover, a delay of some thirteen months is of itself sufficient to
warrant dismissal in this case.
TRATES ta eee, li Reet a eer tat PERN Ns Seri ye POS eh doses
PREVIOUS OPINIONS IN THE CASE ON ISSUES
NOT RELEVANT TO THE PETITION
ane ae
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Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the District Court
UNITED STATES DISTRICT COURT
Sournern District or New Yorx
—,
Pavtetre Papmsxy,
Plaintif,,
—against—
Autvin H. Bernprt, Roser S. Drisco.u,
Cant W. Kwosiocu, Guzen A. Luoyp, f
James H. Porrer, Pau, W. H. TREVOR,
Paut Winpvzzs, Jz., Lonp, Aspetr & Co,
and Arritiatep F unp, Ino.,
Defendants.
71 Civ. 2534
APPEARANCES:
Morpgcar Rosenretp, Esq,
Attorney for Plaintiff
233 Broadway
New York, New York 10007
Pomerantz Levy Haupex & Buocx, Esas.,
Counsel to Plaintiff
295 Madison Avenue
New York, New York 10017
ApraHam L, Pomerantz, Eso.
MorpEcar RosEnFELp, Esq.
Danret W. Krasner, Esq.
Of Counsel
Dewey, Ba.anting, Bususy, Patmer & Woon, Esas.,
Attorneys for Defendants Lord, Abbett & Co.,
Alvin H. Berndt and Robert S. Driscoll
140 Broadway
New York, New York 10005
Jupson A. Parsons, Jz., Esq.
Gznatp E. Ross, Esq.
Of Counsel
PERM THe Cam See eet RET: ec ie oe ae PEN ELM ES Sy NT AD BASIE LER ARM TES aR R Cue DY tee wig aT Itt MR LESX
cme |
A-65
Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the District Court
Wyatt, District Judge,
This is a motion by three of the named defendants—
Lord, Abbett & Co., Alvin H. Berndt and Robert S. Driscoll
—for summary judgment in their favor. Fed. R. Civ. P.
56(c)
The action was commenced on June 7, 1971. Plaintiff
brings the action as the owner of stock of defendant Affili-
ated Fund, Inc. (Fund), a Delaware corporation, and the
action is a derivative one to enforce a right of Fund. Fed.
R. Civ. P. 23.1
Fund is an open-end diversified investment company,
said to be registered under the Investment Company Act
of 1940 (15 U.S.C. § 80a-1 and following). Lord, Abbett &
Co. (Lord) is a partnership. Berndt and Driscoll are
partners of Lord and are officers and directors of Fund.
Lord is employed by Fund as investment manager of Fund
under an agreement.
The claim asserted in the case at bar is that Lord, in
connection with transactions for Fund, uses ‘‘reciprocal
brokerage, give-ups and interpositioning’’ and has received
additional compensation by so doing. It is moreover charged
that Lord, by its use of such techniques, has paid dealers
which sell shares of Fund to the public and that Lord has
been thus relieved of the necessity to compensate such
dealers,
Fund, it is claimed, has been damaged because the use
of reciprocal brokerage, give-ups and interpositioning has
resulted in excessive compensation to Lord. Demand is
made that Lord and the individual defendants pay $6,000,000
in damages to Fund.
On January 10, 1967, Vera G. White commenced an
action in this Court (67 Civ. 98) against all the defendants
he By
fect ic toe BUSS ey
iin. SERED AEDT WASH 52 BNET ONO IEF NRE I ie
|
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Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the District Court
in the case at bar and other defendants not named in the
case at bar.
On March 28, 1968, Anne Bernstein commenced an action
in this Court (68 Civ. 1252) against all the defendants in
the case at bar and other defendants not named in the case
at bar.
By order filed August 30, 1968, the White and Bernstein
actions were consolidated. Plaintiffs thereafter served a
‘‘consolidated complaint’’ which was filed on September 26,
1968. The consolidated action will be referred to as the
‘*White action’’.
Fund was a defendant:in the White action but was the
nominal defendant for whose benefit the action was brought.
Fund was represented by separate counsel who represented
only Fund in the White action.
It is undisputed that the claims in the White action are
the same as those now asserted in the case at bar.
By order in the White action filed on J anuary 14, 1969,
plaintiffs were directed to answer certain interrogatories
served by defendants. Plaintiffs White and Bernstein did
not answer the interrogatories.
In the White action and on February 3, 1971, defendants
Lord, Driscoll and Trevor obtained an order that ‘‘the
plaintiffs show cause’’ (emphasis supplied) why the action
should not be dismissed for failure to answer the interroga-
tories. The order to show cause was returnable on February
11, 1971, and it is assumed that a copy of the order was
served on counsel for Fund.
In the White action, defendants J ohnston, Knoblock,
and James H. Potter by notice of motion brought on a
motion to dismiss the action for the same reason, failure
of plaintiffs to answer the interrogatories. The notice of
motion was addressed, among others, to counsel for Fund.
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Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the District Court
The two motions—one made by order and one by notice
—were heard by me on February 11, 1971. Fund took no
position on these motions and submitted no papers.
The two motions were referred to Honorable Gregory J.
Potter as Special Master. The report of the Special Master
was dated March 4, 1971, and advised that the White action
be dismissed for failure to answer the interrogatories. The
Special Master concluded that plaintiffs ‘‘are not serious
in prosecuting this action’’,
The motions were then granted by me and the Clerk was
directed to enter judgment dismissing the White action as
to the moving defendants. Judgment, filed on March 22,
1971, was that ‘he moving defendants ‘‘have judgment
against plaintiff Anne Bernstein dismissing the complaint
as to the said defendants only’’. By order filed March 31,
1971, the decretal paragraph of the judgment was amended
‘*to include plaintiff Vera G. White’’.
lt appears that outside of the moving defendants, the
only defendant served in the White action was Fund, the
nominal defendant for whose benefit the action was brought.
The White action remained pending against Fund, the
nominal defendant, and no other defendants weie served
after the judgment of dismissal as to the moving defendants.
The White action was called by the Chief Judge on the
Review Calendar on December 8, 1970 and plaintiffs were
given until May 14, 1971 to file a note of issue for trial, ete.
By order filed June 14, 1971, the Chief Judge dismissed the
action ‘‘for lack of prosecution, without prejudice and
without costs’’.
The question on the present motion in the case at bar
is whether the judgment in the White action was an ‘‘ad-
judication on the mertis’’ (Fed. R. Civ. P. 41(b)) so as to
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Previous Opinions in the Case on Issues not Relevant
be Se to the Petition
' Opinion of the District Court
bar the present claim: This question is not without diffi-
culty. No decision on the precise point has been cited by
counsel and none has been turned up by independent
research.
The conclusion I reach is that dismissal of the White
action was not an ‘‘adjudication on the merits’ of the
claim of Fund and that the present motion must be denied.
On the other hand, granting the motion would end the
litigation. The situation thus seems appropriate for re-
view by the Court of Appeals under 28 U.S.C. § 1292(b).
Preliminarily it should be noted that in the White
action there was no ‘‘notice of the proposed dismissal’’ to
shareholders. Fed. R. Civ. P. 23.1, Probably this was be-
cause counsel then concerned believed that the cited Rule
was not applicable; possibly it was due to inadvertence.
By its wording, Rule 23.1 requires notice of any dis-
missal. There are no exceptions. -
Able counsel for movants argue that notice is required
only for ‘‘voluntary”’ dismissals. There is language in at
least one case which gives some support to this view. Some
support is found in Hutchinson v. Fidelity Inv. Ass’n, 106
F.2d 431, 436 (4th Cir. 1939) but in that case the action
was dismissed ‘‘after hearing on the merits’? (106 F.2d at
436). A law review author has flatly stated that the notice
Tequirement ‘fapplies only to voluntary, not to involuntary
dismissals’’, Simeone, Procedural Problems of Class Suits,
60 Mich. L. Rev. 903, 934 (1962). Judge Tenney has held
that notice is not required where dismissal is for lack of
jurisdiction over the person. Marcus v. Teztile Banking
Corp., 38 F.R.D. 185 (S.D.N.Y. 1965). In Daugherty v. Ball,
_ 43 F.R.D. 329, 334-336 (C.D.Cal. 1967) the question is dis-
cussed in respect of dismissals on the merits.
‘ .
* *, -_ “ —<
aT Se Ree A NAS AE HRS NE SETS martin Ie enn by SALON R LL AES -
BARE ver PERSE AND REMC EN oon, PO OITA MEE BIE: oa OG BOWS ort trer Ante
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Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the District Court
There are good reasons for not requiring notice when
dismissal is on the merits. In such a ease, there is a judicial
determination that the real defendants are not liable. When,
however, the dismissal is for some reason personal to
plaintiff and there is no judicial exoneration of the real
defendants, there is less reason for dispensing with notice.
An example of such a situation is seen in Saylor v. Linds-
ley, 391 F.2d 965 (2d Cir. 1968) where plaintiff in an earlier
action failed to post a required bond and there was dis-
missal of that action; it was not discussed whether notice
should have been given.
I am inclined to believe that notice to shareholders was
required in connection with dismissal of the White action.
For purposes of the present motion, however, it will be
assumed that no notice was required.
Analysis of the nature of a derivative suit by a stock-
holder shows that dismissal of the White action does not
bar the present action.
The derivative suit contains two claims: (1) a claim by
the corporation in which plaintiff is a stockholder, and (2)
a claim by the stockholder against his corporation fer its
failure to enforce the claim belonging to it ((1) above).
Ballantine, Private Corporations, 612
This analysis was made by the Supreme Court last year
in Ross v. Bernhard, 396 U.S. 531, which dealt with the
right to a jury trial in derivative actions. The Supreme
Court said (396 U.S. at 534-5) :
‘*As elaborated in the cases, one precondition for the
suit was a valid claim on which the corporation could
have sued, another was that the corporation itself had
refused to proceed after suitable demand, unless ex-
cused by extraordinary conditions. Thus the dual
a Sa ah el ah 4
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Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the District Court
nature of the stockholder’s action: first, the plaintiff’s
right to sue on behalf of the corporation and, second,
the merits of the corporation claim itself.’
and again (396 U.S. at 538):
‘“We have noted that the derivative suit has dual
aspects: first, the stockholder’s right to sue on behalf
of the corporation, historically an equitable matter;
second, the claim of the corporation against directors
or third parties on which, if the corporation had sued
and the claim presented legal issues, the company
could demand a jury trial.’’
The policy and purpose of Rule 41(b) is accomplished
by giving effect to the dismissal of the White action as an
“adjudication upon the merits’’ of the claim of the White
plaintiffs against Fund, that is to say, their claim to sue
on behalf of Fund. There is a reluctance, however, to
treat tha‘ dismissal as adjudicating the second aspect of
the claim in the White action, that is, the claim of Fund
against the other defendants. That claim has never been
heard on its merits (and of course no opinion is here im-
plied that it has, or has not, any merit). Fund took no part
in the motions to dismiss in the White action. That action
was not dismissed as to Fund until Chief J udge Sugarman
entered his order of dismissal and that order was ‘without
prejudice’’.
A further policy consideration may be noted. There is
not the slightest suggestion of any impropriety in the
motions to dismiss and in the dismissal of the White ac-
tion; the Court at the time was fully advised in the
premises. Nevertheless, a rule which would permit such a
dismissal to bar the claim of the corporation beneficiary
would in some future time afford opportunities for collusion
A-71
Previous Opinions in the Caze on Issues not Relevant
to the Petition
Opinion of the District Court
in procuring the dismissal of derivative actions. For a
thoughtful discussion of a somewhat similar problem in-
volving class actions, see Judge Decker’s opinion in Yaffe
v. Detroit Steel Corp., 50 F.R.D. 481 (N.D. Ill. 1970).
Careful attention has been paid to Costello v. United
States, 365 U.S. 265 (1961). The Supreme Court there dis-
cussed Rule 41(b) and emphasized that dismissals which
are ‘‘adjudications upon the merits’? under that Rule are
primarily those involving ‘‘situations in which the defen-
dant must incur the inconvenience of preparing to meet
the merits because there is no initial bar to the Court’s
reaching them’’ (365 U.S. at 286). I am prepared to as-
sume that such was the situation in the White action; the
movants show an impressive amount of preparation by
them in that action. The decision on the present motion
is not that Rule 41(b) does not apply. On the contrary,
Rule 41(b) does apply and its application bars the claim
which belonged to the White plaintiffs. Rule 41(b), how-
ever, does not require that the claim be barred which
belonged to Fund.
For the reasons indicated, the motion is denied.
I am of the opinion that this order involves a controlling
question of law as to which there is substantial ground for
difference of opinion and that an immediate appeal from
the order may materially advance the ultimate termination
of the litigation. 28 U.S.C. § 1292(b)
So Ordered.
Dated: New York, New York
November 17, 1971
Inzer B. Wyatt
United States District Judge
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Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the Court of Appeals
UNITED STATES COURT OF APPEALS
For tHe Seconp Circuit
e oe 2
No. 759—September Term, 1971.
(Argued May 24, 1972
Decided August 1, 1972.)
Docket No. 72-1052
o * e
Pavterte Papitsky,
Plaintiff-Appellee,
v.
Atvin H. Bernprt, Rosert S. Drisconn and Lorp,
Ansett & Co.,
Defendants-Appellants,
and
Cart W. Knostocu, Guzen A. Lion; James H. Potter,
Paut W. H. Trevor, Pavn Winvets, Jk. and ArFiuiaTep
Funp, Inc.,
Defendants.
e @ @
Before:
LEVENTHAL,* FEINBERG and TIMBERS,
Circuit Judges.
® * eo
Appeal pursuant to 28 U.S.C. § 1292(b) (1970) from an
order of the District Court for the Southern District of
New York, Inzer B. Wyatt, District Judge, 333 F.Supp.
* Of the United States Court of Appeals for the District of
Columbia Circuit, sitting by designation.
§
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Previous Opinions in the Case on Issues not Relevant
to the Petition
Opinion of the Court of Appeals
1084, denying defendants’ motion for summary judgment
based on res judicata.
Affirmed.
e oe «€
AsraHaM L, Pomerantz, New York, N.Y. (Mor-
decai Rosenfeld, William E. Haudek, Dan-
iel W. Krasner and Pomerantz, Levy, Hau-
dek & Block, New York, N.Y., on the brief),
for plaintiff-appellee.
Jupson A. Parsons, Jz., New York, N.Y. (Hugh
N. Fryer, Keith E. McClintock, Jr., Pa-
tricia A. Nelson and Dewey, Ballantine,
Bushby, Palmer & Wood, New York, me
on the brief), for defendants-appellants.
e ca e
TruBeErs, Circuit Judge:
The essential issue on this appeal is whether dismissal
of a stockholder’s derivative suit, without notice to non-
party stockholders, under Fed. R. Civ. P. 37(b)(2)(C),
for failure to answer interrogatories, operates as a bar to
an identical cause of action asserted by another stockholder
in a subsequent derivative suit.
Plaintiff Paulette Papilsky is a shareholder of defen-
dant Affiliated Fund, Inc. and brought this action deriva-
tively on behalf of Affiliated, a diversified open-end in-
vestment company registered under the Investment Com-
pany Act of 1940. Defendant Lord, Abbett & Co. serves
as Affiliated’s investment adviser and as its principal
underwriter. Defendants Driscoll and Berndt are part-
ners in Lord, Abbett and officers and directors of Affiliated.
Papilsky’s complaint alleged that these defendants failed
to recapture, and to credit Affiliated with, allegedly re-
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capturable portions of brokerage commissions paid on
portfolio transactions and asserted that this has resulted
in the payment of higher management fees to Lord, Abbett,
all in violation of the federal securities laws. Shortly
after the complaint was served, defendants Driscoll, Berndt
and Lord, Abbett served and filed a motion seeking summary
judgment on the ground of res judicata. They alleged
that the claims asserted by Papilsky were identical to
those asserted in a previous derivative suit against Driscoll,
Berndt, Lord, Abbett and other defendants entitled White
and Bernstein v. Driscoll, et al., S.D.N.Y. 67 Civ. 98 (the
“‘White action’’), which had been dismissed for failure to
answer interrogatories. Judge Wyatt on November 17,
1971 denied defendants’ motion for summary judgment,
333 F. Supp. 1084, but granted the necessary certification
to appeal pursuant to 28 U.S.C. ¢ 1292(b) (1970), as did we
on December 6, 1971. For the reasons stated below, we
affirm the denial of the motion for summary judgment.
I,
The White action was a consolidation of two separate
stockholders’ derivative actions, the first commenced in
January of 1967 and the second in February of 1968. As
the district court found, ‘‘ [i]t is undisputed that the claims
in the White action are the same as those now asserted in
the case at bar.’’ 333 F. Supp. at 1085. There is no sug-
gestion, however, that the White plaintiffs or their attor-
neys are in any way connected with the instant case.
* §§ 1(b)(2), 2(a) (3), 2(a) (9), 10, 15, 17(e), (h) and (i),
36 and 37 of the Investment Company Act of 1940, 15 U.S.C. §§ 80a-
1(b)(2), 80a-2(a)(3), 80a-2(a)(9), 80a-10, 80a-15, 80a-17(e),
(h) and (i), 80a-36 and 80a-37 (1970); §§10(b) and 15(c) (1)
and (2) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78) and
780(c)(1) and (2) (1970); and § 206(4) of the Investment Ad-
visers Act of 1940, 15 U.S.C. § 80b-6(4) (1970).
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On January 14, 1969, the district court entered orders
directing the White plaintiffs to answer interrogatories on
February 15, 1969, which date was extended to March 4,
1969. The interrogatories ordered to be answered requested
the White plaintiffs to specify the claimed violations of law
and sought details as to each claimed violation. On March
31, 1970, more than a year after the deadline for answering
the interrogatories, the White plaintiffs filed their answers.
The defendants considered these unsigned and unverified
answers to be unacceptable and returned them to pla‘x
tiffs. Threafter, on December 10, 1970, the White plaintiffs
served by mail purported answers to the interrogatories.
The defendants also found these responses to be inadequate.
On February 3, 1971, the White defendants brought on
by order to show cause a motion pursuant to Fed. R. Civ.
P. 37(b)(2)(C) seeking dismissal of the action on the
ground of the plaintiffs’ failure to answer the interroga-
tories as required by the district court’s order of January
14, 1969.2 The White plaintiffs opposed the granting of
this motion.
2 Fed. R. Civ. P. 37(b)(2)(C) provides as follows:
“If a party or an officer, director, or managing agent of a
party or a person designated under Rule 30(b) (6) or 31(a)
to testify on behalf of a party fails to obey an order to provide
or permit discovery, including an order made under sub-
division (a) of this rule or Rule 35, the court in which
the action is pending may make such orders in regard to
‘he failure as are just, and among others the following:
(C) An order striking out pleadings or parts thereof, or
staying further proceedings until the order is obeyed,
or dismissing the action or proceeding or any part
thereof, or rendering a judgment by default against the
disobedient party.”
Stk MATA
rn EOL TENS AR Eee AE SONS NE Reo paste ragte pee
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Judge Wyatt referred the motion to a Special Master.
The Master concluded that plaintiffs’ long delayed answers
to the interrogatories were ‘‘totally inadequate’’ and that
‘‘[t]he deficiency of the answers to interrogatories and the
delay in serving them demonstrates that plaintiffs are not
serious in prosecuting this action.’’ Accordirgly, the Mas-
ter recommended that the White action be dismissed.
In March 16, 1971, Judge Wyatt entered an order grant-
ing defendants’ motion and dismissing the action as to all
defendants served other than the nominal defendant, Af-
filiated. Notice of the dismissal was not given to nonparty
stockholders. On March 22, 1971, a judgment was entered
dismissing the action as *: ine moving defendants, which
judgment was amended bv endorsement on March 30, 1971
to include both plaintiffs. ivcither the judgment nor the
orders provided that the dismissal was without prejudice.
As a result of the judgment, there continued pending on
the district court’s docket a derivative action in which
Affiliated, the nominal defendant, was the only remaining
defendant which had been served. Or. June 12, 1971, Chief
Judge Sugarman entered a routine calendar order of dis-
missal, stated to be without prejudice.
Plaintiff Papilsky filed her complaint in the instant ac-
tion on June 7, 1971.5
3 ee 4, 1971, three days before Papilsky filed her complaint,
the First Circuit held that claims similar to those asserted in Papilsky’s
complaint did constitute violations of the Investment Company Act
of 1940. Moses v. Burgin, 445 F.2d 369 (1 Cir.), cert. denied sub
nom. Johnson v. Moses, 404 U.S. 994 (1971). The First Circuit
thereby reversed in part a district court judgment of August 18,
1970 which had dismissed on the merits a derivative suit brought on
behalf of a mutual fund involving claims similar to those asserted in
White. Moses v. Burgin, 316 F.Supp. 31 (D. Mass. 1970). In oppos-
ing the White defendants’ motion for dismissal pursuant to Rule
37(b)(2)(C), the White plaintiffs tried to excuse their delay in
POS N ar eu arcs. .
a Ss Ce ee ae et a
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II.
It is now well established that Fed. R. Civ. P. 41 (b) states
the effect to be accorded a dismissal under Fed. R. Civ.
P. 37.4 Stebbins v. State Farm Mutual Automobile Insur-
ance Co., 413 F.2d 1100, 1102 (D.0. Cir.), cert. denied,
396 U.S. 895 (1969); Nasser v. Isthmian Lines, 331 F.2d
124, 127 (2 Cir. 1964). Rule (41b) provides in relevant
part that:
‘Unless the court in its order for dismissal otherwise
specifies, a dismissal under this subdivision and any
dismissal not provided for in this rule, other than a
dismissal for lack of jurisdiction, for improper venue,
or for failure to join a party under Rule 19, operates
as an adjudication upon the merits.”’
The order and judgment dismissing the White action were
not stated to be without prejudice. A strict application of
Rule 41(b) would seem to require a holding that the dis-
missal of the White action operated as an adjudication
upon the merits and hence as a bar to the present derivative
suit. Indeed, the Supreme Court has made it more than
clear in dicta that dismissals coming within the literal terms
of Rule 41(b) generally do have res judicata effect. Costello
v. United States, 365 U.S. 265, 286 (1961). Moreover, we
have held that a dismissal pursuant to Rule 37 for failure
answering the interrogatories by arguing that it was reasonable for
them to wait for the First Circuit’s decision in Moses before framing
their answers to the interrogatories.
‘ There is nothing to the contrary in Societe Internationale Pour
Participations Industrielles et Commerciales, S.A. v. Rogers, 357
U.S. 197, 207 (1958). There the Court merely indicated that the
standards for granting or denying a motion to dismiss for failure to
comply with discovery orders are governed by Rule 37, not Rule
= 41(b). That opinion did not suggest, however, that the effect of a
Rule 37 dismissal was not to be determined by Rule 41.
< [ex ie,
“e sity she PP a ccm
FEE TIRED INE IE ENE MARIA INS OREN poten tele Rate
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to answer interrogatories is an adjudication upon the mer-
its and bars an identical cause of action asserted in a
subsequent suit. Nasser v. Isthmian Lines, supra, 331 F.2d
at 128. Nasser, however, was neither a class action or a
stockholder’s derivative action. Rather, Nasser involved
a plaintiff asserting a cause of action which belonged
solely to him as an individual. Papilsky strongly urges
that a different result is required where the plaintiff is a
stockholder suing on behalf of a corporation.
The district court agreed with Papilsky and refused to
accord res judicata effect to the White action. The court
stated:
‘The derivative suit contains two claims: (1) a claim
by the corporation in which plaintiff is a stockholder
and (2) a claim by the stockholder against his corpora-
tion for its failure to enforce the claim belonging to
it ((1) above).’’ 333 F.Supp. at 1087.
While conceding that Rule 41(b) applies to dismissals
under Kule 37, the conrt concluded that the dismissal of
the White action barred oniy the claim of the White plain-
tiffs agaiust Affiliated, and net Affiliated’s cause of action
against the defendants.
III.
While we agree with the district court’s holding that the
judgment in the White action is not binding on nonparty
stockholders, we do so without accepting the court’s analy-
sis of the nature of a stockholder’s derivative action.
A stockholder’s derivative action is a suit to enforce a
corporate cause of action against officers, directors or third
parties. Such an action consists of only one claim—the
corporate claim against the alleged wrongdoers. The al-
leged injury inflicted upon the corporation is regarded as
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affecting only the corporation. The fact that the injury
may indirectly harm a stockholder by diminishing the value
of his corporate shares does not bestow upon him a right
to sue on his own behalf to recover damages. Kauffman v.
Dreyfus Fund, Inc., 434 F.2d 727, 732 (3 Cir. 1970), cert.
denied, 401 U.S. 974 (1971) ; Hodge v. Meyer, 252 Fed. 479,
483 (2 Cir.), cert. denied, 248 U.S. 565 (1918). See also
McLaughlin, Capacity of Plaintiff-Stockholder to Termi-
nate a Stockholder’s Suit, 46 Yale L.J. 421, 421 n. 2 (1936).
Rather, assuming that a stockholder has satisfied the pre-
requisites of Fed. R. Civ. P. 23.1, he merely has a right
to bring a derivative action on behalf of the corporation.
As Justice Frankfurter stated in his dissenting opinion
in Smith v. Sperling, 354 U.S. 91, 99 (1957):
‘‘The contrasting difference between a stockholder’s
suit for his corporation and a suit by him against it, is
crucial. In the former, he has no claim of his own;
he merely has a personal controversy with his cor-
poration regarding the business wisdom or legal basis
for the latter’s assertion of a claim against third
parties. Whatever money or property is to be recov-
ered would go to the corporation, not a fraction of it
to the stockholder. When such a suit is entertained,
the stockholder is in effect allowed to conscript the
corporation as a complainant on a claim that the
corporation, in the exercise of what it asserts to be
its uncoerced discretion, is unwilling to initiate.’’
Accord, Kauffman v. Dreyfus Fund, Inc., supra, 434 F.2d
at 734-35. This right ‘‘to conscript the corporation as a
complainant’’ cannot be equated with a cause of action
against the corporation. A corporation cannot be held liable
to a plaintiff-stockholder for failing to prosecute an al-
PEER TSE LIN RE ESOT NY PORN CE MISE st ee aA ac i a Ue
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legedly valid corporate claim. Rather than initiating a
cause of action against the corporation, the plaintiff-stock-
holder in a derivative suit is seeking to enforce, for the
benefit of the corporation, a corporate claim which the
corporation, for whatever reason, is unwilling to prosecute.
The district court’s reliance on Ross v. Bernhard, 396
U.S. 531 (1970), for the proposition that a stockholder’s
derivative suit consists of two claims, is misplaced. There
the Court merely recognized ‘‘the dual nature of the stock-
holder’s action: first, the plaintiff’s right to sue on behalf
of the corporation and, second, the merits of the corpora-
tion’s claim itself.’’ 396 U.S. at 534-25. There is nothing
in the opinion which elevates a stockholder’s right to sue
on behalf of the corporation to the level of a stockholder’s
claim against the corporation for failure to enforce 4 cor-
porate cause of action. To the contrary, the Court’s analy-
sis of the nature of a stockholder’s derivative suit is en-
tirely consistent with our conclusion that such an action
consists of only one claim—the corporate claim:
‘‘The claim pressed by the stockholder against directors
or third parties ‘is not his own but the corporation’s.’
Koster v. Lumbermens Mut. Cas. Co., 330 U.S. 518, 522
(1947). The corporation is a necessary party to the
action; without it the case cannot proceed. Although
named a defendant, it is the real party in interest, the
stockholder being at best the nominal plaintiff. The
proceeds of the action belong to the corporation and it
is bound by the result of the suit. The heart of the
action is the corporate claim.’’ 396 U.S. at 538-39.
Accordingly, the district court’s dismissal of the White
action encompassed the corporate claim which a different
stockholder is now asserting in the present derivative snit.
The question which we must now consider is whether the
CPR SN » Acaty, EIR LI EC ANE WL Ra ai set Wey se
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judgment in the White action should be given res judicata
effect, even though notice of the proposed dismissal of the
White action was not given to nonparty stockholders.
We hold that, when notice of a proposed dismissal of a
stockholder’s derivative suit for failure to answer inter-
rogatories is not given to nonparty stockholders, the judg-
ment of dismissal does not bar an identical cause of action
asserted by a different stockholder in a subsequent deriva-
tive suit. As previously indicated, the order and judgment
dismissing the White action were not stated to be without
prejudice and hence the effect of the dismissal normally
would be to preclude the initiation of a suit based on the
same cause of action. See Costello v. United States, supra,
365 U.S. at 286; Nasser v. Isthmian Lines, supra, 331 F.2d
at 128. Accordingly, our decision in this case carves out
an exception to the general principles of Rule 41(b) for
derivative suits dismissed for failure to answer interroga-
tories.’ While we have been unable to find a case precisely
* Appellants contend that Saylor v. Lindsley, 391 F.2d 965 (2
Cir. 1968), indicated that no such exception should be created. That
case involved the effect to be given a derivative action dismissed for
failure to post a security bond. Tiis Court refused to accord res
judicata effect to the juagment of dismissal, as the stockholder had
merely failed to satisty a precondition for bringing the suit. 391
F.2d at 969. Cf. Costello y. United States, supra, 365 U.S. at 286.
In dictum, the Court did say:
“Although neglect to prosecute would normally provide an
appropriate occasion for the invocation of Rule 41(b)... .”
391 F.2d at 969.
This dictum is not necessarily inconsistent with our decision today.
We agree that dismissal for failure to prosecute, when not stated to
be without prejudice, would normally preclude the bringing of
another suit based on the same cause of action. Assuming that a
dismissal for failure to prosecute should be treated the same as a
dismissal for failure to answer interrogatories, our decision simply
carves out an exception to the general rule in the case of a stock-
holder’s derivative suit.
ae EP EE TT ET ANNE AS
a a aeatl DAB MEY
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in point,’ principles enunciated in analogous situations do
lend support to our holding. In short, our decision today
marks no new departure in the law.
Courts traditionally have exhibited understandable cau-
tion in according res judicata effect to a prior derivative
action in which the present plaintiff-stockholder did not
participate. Such caution is warranted in the context of
derivative actions in view of the fact that the plaintiff-
stockholder is affecting a right which belongs to the corpo-
ration. To discourage the plaintiff from sacrificing the
corporate cause of’ action to further his own self interest,
notice of proposed dismissals to nonparty stockholders is
6 The able District Judge below indicated that he was “inclined
to believe that notice to shareholders was required in connection with
dismissal of the White action.” 333 F. Supp. at 1086-87. However,
because of his view of the nature of a stockholder’s derivative suit, he
assumed for the purposes of his decision that notice was not required.
In an analogous situation, the Eighth Circuit has held that notice
of a proposed dismissal of a class action for lack of prosecution was
not required “under the circumstances pen presented.” Partridge
v. St. Louis Joint Stock Land Bank, 130 F. 2d 281, 286 (8 Cir. 1942).
The circumstances of that case were unusual, as the suit had been
pending for nine years and no other members of the class had sought
to intervene. Moreover, the Partridge decision said nothing about the
effect to be given the dismissal in the event a subsequent suit were
- brought by a diffrent member of the class. Furthermore, the Part-
ridge decision has met with critical comment: '
“This result can be criticized, however, since a failure to prose-
cute may reflect the fact that the representatives have lost
interest in the suit because their own goals have been satisfied
or for a number of reasons unrelated to the merits of the action
or the rights of the other class members.’ Should this be the
case, the representatives might refuse to pursue the action and
not seek the court’s approval of a dismissal, thereby intentionally
or unintentionally evading the safeguards provided by subdivision
(e) [notice and court approval].” 7A Wright & Miller, Federal
Practice and Procedure 236 (1972).
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ea, 02 TENN STOIC aio HD ite ice a SR PO |
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required in a variety of situations. Where notice is a pre-
requisite to a dismissal of a derivative action, a judgment
of dismissai will not be accorded res judicata effect unless
such notice was given. Winkelman v. General Motors Corp.,
39 F.Supp. 826, 831 (S.D.N.Y. 1940). Cf. Smith v. Alleghany
Corp., 394 F.2d 381, 391 (2 Cir.), cert. denied, 393 U.S. 939
(1968) ; Stella v. Kaiser, 218 F.2d 64, 65 (2 Cir. 1954), cert.
denied, 350 U.S. 835 (1955).
In general, notice of a proposed dismissal of a derivative
suit must be given to nonparty stockholders when the cor-
porate claim has not been adjudicated upon the merits.
Fed. R. Civ. P. 23.1. Rule 23.1 provides in relevant part
that a stockholder’s derivative action ‘‘shau not be dis-
missed or compromised without the approval of the court,
and notice of the proposed dismissal or compromise shall be
given to shareholders or members in such manner as the
court directs,’’”? The notice requirements of Rule 23.1 have
been construed to apply to more than just dismissals of
derivative suits following settlements. It is clear, for
example, that voluntary dismissals under Fed. R. Civ. P.
41(a)(1) are within the scope of the notice requirements
of Rule 23.1.2 3B Moore’s Federal Pratice 23.1.24[2]
? Prior to 1966, the last sentence of Rule 23.1, which is quoted
above, was covered by Rule 23(c). When stockholders’ derivative
suits were accorded separate treatment by the 1X6 amendment, the
notice and court ws prerequisites for derivative actions were
preserved unchanged in Rule 23.1. Thus, cases involving derivative
suits decided prior to 1966 are controlling for the purposes of apply-
ing the notice requirements of Rule 23.1. See 7A Wright & Miller,
Federal Practice and Procedure 427 (1972).
8 As Professor Moore writes:
“Although voluntary dismissal by the plaintiff or by stipula-
tion under Rule 41(a)(1) is wy made subject to the
provisions of Rule 23(e), and Rule 4i(a)(1) fails to make
a comparable exception for Rule 23.1 and Rule 23.2, this is
i
¥
oo —— ENEMY LEE AEST NI TE TRG KN NS OMe ALANIS Wty
oe
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(1969); 7A Wright & Miller, Federal Practice and Proce-
dure 435 (1972). Moreover, in order to prevent simple
evasion of the safeguards of the Rule 23.1 notice provisions,
we have held that a plaintiff-stockholder’s consent to the
entry of summary judgment against him is analogous to a
voluntary dismissal and triggers the notice requirements
of Rule 23.1. Certain-Teed Products Corp. v. Topping, 171
F.2d 241, 243 (2 Cir. 1948). See also Goldfarb v. Ehlers,
CCH Fed. Sec. L. Rptr. 193,382 (E.D.N.Y. 1972) ; Brendle
v. Smith, 7 F.R.D. 119, 120 (S.D.N.Y. 1946) ; Winkelman v.
General Motors Corp., supra, 39 F.Supp. at 830-31.
There are cogent reasons for requiring notice of pro-
posed voluntary dismissals and settlements of derivative
actions. Notice is essential in these situations to ensure
that the dimissal of the derivative suit is in the best inter-
ests of the corporation and the absent stockholders. See
Norman v. McKee, 431 F.2d 769, 774 (9 Cir. 1970), cert.
denied, 401 U.S. 912 (1971) ; Cohen v. Young, 127 F.2d 721,
726 (6 Cir. 1942), cert. denied, 321 U.S. 778 (1944). More
specifically, notice and court approve! of settlements under
Rule 23.1 discourage private settlements under which the
plaintiff-stockholder and his attorney profit to the exclu-
sion of the corporation and nonparty stockholders. See
Wolf v. Barkes, 348 F.2d 994, 996 (2 Cir.), cert. denied, 382
U.S. 941 (1965); Birnbaum v. Birrell, 17 F.R.D. 409, 411.
(S.D.N.Y. 1955) ; Craftsman Finance & Mortgage Co., Inc.
v. Brown, 64 F.Supp. 168, 178 (S.D.N.Y. 1945). Without
the requirements of notice and court approval, there would
be a greater incentive for stockholders to bring strike suits,
an inadvertent omission. The specific requirement in Rule
23.1 for notice and court approval controls over the general-
ity of Rule 41(a)(1) and must be observed in cases where
it applies.” 3B Moore’s Federal Practice { 23.1.24[2] (1969).
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and it would be easier for alleged wrongdoers to ‘‘buy off’?
the corporation’s representative. Moreover, the notice pro-
visions of Rule 23.1 have been interpreted to apply to a
voluntary dismissal and to a dismissal following consent
to the entry of summary judgment in order to prevent such
dismissals from being a cloak for a collusive settlement
between the plaintiff-stockholder and the defendants. See
7A Wright & Miller, Federal Practice and Procedure 435
(1972).
Aside from limiting the opportunities for collusion, there
are persuasive reasons for requiring notice to nonparty
stockholders of a proposed voluntary dismissal. Assuming
that the plaintiff-stockholder is attempting to enforce a
valid corporate claim, the Rule 23.1 safeguards will protect
the corporation and absent stockholders from a plaintiff
who becomes ‘‘fainthearted’’ prior to the completion of liti-
gation and wishes to settle the derivative suit even though
such a disposition would not be in the best interests of the
corporation. See Webster Eisenlohr, Inc. v. Kalodner, 145
F.2d 316, 320 (3 Cir. 1944), cert. denied, 325 U.S. 867
(1945) ; Marcus v. Textile Banking Co., 38 F.R.D. 185, 187
(S.D.N.Y. 1965). Similarly, notice to nonparty stockholders
of voluntary dismissals protects against prejudice to the
corporation from discontinuance of a derivative suit after
the plaintiff-stockholder has already secured an advantage
or when the statute of limitations precludes the institution
of a new suit. See McLaughlin, Capacity of Plaintiff-
Stockholder to Terminate a Stockholder’s Suit, 46 Yale
L.J. 421, 428 (1936). In these situations, notice enables
other stockholders to intervene to protect the corporate
claim and to continue the litigation if that seems advisable.
The policy considerations which svpport requiring no-
tice of a proposed voluntary dismissal are not applicable
SIP TIMES, SOBA GEIS, Prag wet werent OVE RE OR S TSae
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when the corporate claim is dismissed after a hearing on
the merits. Litigation upon the merits substantially re-
duces the opportunities for collusion between the plaintiff-
stockholder and the defendants. A contest upon the merits
is presumed to indicate that the plaintiff-stockholder vig-
orously prosecuted the claim on behalf of the corporation.
Accordingly, the Rule 23.1 notice provisions do not apply
to dismissals following litigation upon the merits. See
Daugherty v. Ball, 43 F.R.D. 329, 335 (C.D. Calif. 1967) ;
3B Moore’s Federal Pratice 23.1.24[2] (1969) ; 7A Wright
& Miller, Federal Practice and Procedure 436 (1972).
See also Pelelas v. Caterpillar Tractor Co., 113 F.2d 629,
633 (7 Cir.), cert. denied, 311 U.S. 700 (1940) (class ac-
tion); Hutchinson v. Fidelity Inv. Ass’n., 106 F.2d 431,
436 (4 Cir. 1939) (class action) ; Dolgow v. Anderson, 53
F.R.D. 664, 690 (E.D.N.Y. 1971) aff’d, —— F.24 —— (2
Cir. 1972), slip op. 3615 (June 20, 1972) (class ection).
Even without notice, a dismissal after a hearing on the
merits is a binding adjudication of the corporate claim and
precludes nonparty stockholders from bringing a subse-
quent derivative suit based on the same cause of action.
Ratner v. Paramount Pictures, Inc., 6 F.R.D. 618, 619-20
(S.D.N.Y. 1942).
A dismissal for failure to answer interrogatories can-
not accurately be characterized as either a voluntary dis-
missal or a dismissal following a hearing on the merits.
True, it has some attributes of a dismissal following liti-
gation upon the merits. The plaintiff-stockholder does
oppose the dismissal.’ Moreover, as there is no initial bar
* Of course, if the White plaintiffs had consented to the dismissal
for failure to answer interrogatories, the dismissal would have been
voluntary and notice clearly would have been required. See Certain-
Teed Products Corp. v. Topping, supra, 171 F. 2d at 243; Winkelman
v. General Motors Corp., supra, 39 F. Supp. at 830-31. Here the
White plaintiffs did not consent to the dismissal.
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to reaching the merits, the defendants may be put to the
inconvenience of preparing to defend on the merits. See
Costello v. United States, supra, 365 U.S. at 286. Further-
more, dismissals for failure to answer interrogatories are
based in part upon the presumption that the plaintiff’s
alleged cause of action is without merit. See Hammond
Packing Co. v. Arkansas, 212 U.S. 322, 349-54 (1909).
Nevertheless, on balance, we believe that dismissals of
derivative suits for failure to answer interrogatories are
more analogous to voluntary dismissals. Thus, if prior
dismissals for failure to comply with discovery orders
are to be given res judicata effect, notice of the proposed
dismissal must be given to nonparty stockholders.
The policy considerations which compel the giving of
notice prior to voluntary dismissals are equally applicable
to dismissals for failure to answer interrogatories. Similar
to the reasons for extending the notice provisions of Rule
23.1 to a dismissal following consent to the entry of sum-
mary judgment, a dismissal for failure to answer inter-
rogatories could easily disguise a collusive settlement.’
To permit dismissal without notice for failure to comply
with a discovery order would provide a simple technique
whereby fraudulent directors or officers could avoid future
liability by having a complaint stockholder sue and with-
draw at an appropriate moment. Moreover, notice of a
proposed dismissal for failure to answer interrogatories
will protect the corporation and absent stockholders from
a plaintiff-stockholder who, for reasons unrelated to the
10 We do not suggest that in the instant case there was any
collusion between the White plaintiffs and the defendants. The district
court specifically noted: “There is not the slightest suggestion of any
impropriety in the motions to dismiss and in the dismissal of the
White action ; the Court at the time was fully advised in the premises.”
333 F. Supp. at 1087.
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Opinion of the Court of Appeals
merits of the corporate claim, chooses not to comply fully
with a discovery order. For example, it must be remem-
bered that a plaintiff-stockholder generally finances the
prosecution of the derivative suit out of his own pocket
and will not be reimbursed unless successful. Such a per-
son may decide that the financial risk is too great to jus-
tify expending large sums of money to supply complete
answers to interrogatories. Requiring notice under Rule
23.1 in these situations affords nonparty stockholders an
opportunity to intervene to prosecute the suit to its com-
pletion.
Even aside from the Rule 23.1 notice provisions, there
is an additional reason for our reluctance to accord res
judicata effect to the judgment in the White action. If
we were to apply the general principles of Rule 41(b)°
and hence to bar the present suit, a serious due process
question would arise. The rationale for binding nonparty
stockholders to a judgment in a derivative action is that
a plaintiff-stockholder represented their interests in that
litigation. If nonparty stockholders are to be conclusively
bound by the results of an action prosecuted by a stock-
holder ostensibly representing their interests, however,
fundamental considerations of fairness and justice demand
that the representation be adequate. Cf. Hansberry v.
Lee, 311 U.S. 32, 44-46 (1940). One of the principal cri-
teria for adequacy of representation is that the represen-
tation must be of such character as to insure the vigorous
prosecution of the claim. Cf. Eisen v. Carlisle & Jacquelin,
391 F.2d 555, 562-63 (2 Cir. 1968) (class action); Fogel
v. Wolfgang, 47 F.R.D. 213, 216 (S.D.N.Y. 1969) (class
action) ; Dolgow v. Anderson, 43 F.R.D. 472, 494 (E.D.N.Y.
1968), rev’d on other grounds, 438 F.2d 825 (2 Cir. 1970)
(class action). As the court said in Mersay v. First Re-
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Opinion of the Court of Appeals
public Corp. of America, 43 F.R.D. 465, 470 (S.D.N.Y.
1968) (class action) : .
‘(T]he primary criterion is the forthrightness and
vigor with which the representative party can be ex-
pected to assert and defend the interests of the mem-
bers of the class, so as to insure them due process.”’
The fact that the White action was dismissed for failure
to answer interrogatories raises some doubt as to whether
the White plaintiffs provided the type of representation
necessary to satisfy the dictates of due process. The un-
certainty about the adequacy of the representation is in-
creased somewhat by the Special Master’s conclusion that
the White plaintiffs were ‘‘not serious in prosecuting this
action ...’’ and by the First Circuit’s decision in Moses
v. Burgin, supra, note 3, which held that claims similar
to those asserted in the White action could constitute vio-
lations of the Investment Company Act of 1940. Since
we hold that failure to givé notice to nonparty stockholders
precludes according res judicata effect to the White action,
we do not have to decide whether the White plaintiffs failed
to provide adequate representation.
Affirmed.
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erapinns Opinions in the Case on Issues not Relevant
to the Petition
~ Denial of Petition for Writ of Certiorari
Supreme Court of the United States
OFFICE OF THE CLERK
Wasurneron, D. C. 20543
Jupson A. Parsons, Jr., Esq.
Dewey, Ballantine, Bushby,
Palmer & Wood
140 Broadway
New York, N.-Y. 10005
RE: Bernor, er au. v. Papitsky,
~ No. 72-651,
Dear Sir:
The Court today denied the petition for a writ of cer-
tiorari in the above-entitled case.
Very truly yours,
~ Micwaex Ropax, Jr., Clerk
By aw x
~ Hetren Tayzor, (Mrs.)
Assistant Clerk
Wuuiam E. Havnex, Esa.
Pomerantz, Levy, Haudek & Block
295 Madison Avenue —
New York, N. Y. 10017
a he es
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