Petition for Writ of Certiorari — Bryant v. Klein

Supreme Court brief1993

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No.

In the Supreme Court of the

United States

October Term, 1993

FRANK L. BRYANT, KEMPER SECURITIES, INC., a

Delaware Corporation (formerly known as BATEMAN

EICHLER, HILL RICHARDS, INC.), CHARLES R. HEMBREE,

and KINCAID, WILSON, SCHAEFFER & HEMBREE, P.S.C.,

a Kentucky Corporation,

PETITIONERS,

Vv.

CALVIN KLEIN, GEORGE E. LAYMAN, JR., GEORGE E.

LAYMAN, ZENYA YOSHIDA, DBA SHADAI FARMS,

KENNETH FRANZHEIM, II, BLAS R. CASARES, EARL H.

SHULTZ, RICHARD L. SCHULTZ, VIRGINIA M.

McGONIGLE, JOHN F. McGONIGLE, H. JAMES GRIGGS,

BARRY K. SCHWARTZ, FOREST ACRES PARTNERSHIP, a

Washington State General Partnership, BARRY K. SCHWARTZ

PARTNERSHIP, a New York Partnership and ROBERT D.

STRATMORE,

RESPONDENTS.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

THOMAS K. BOURKE* JAMES E. BURNS, JR. M. LAURENCE POPOFSKY

DAVID L. ARONOFF JOHN MISSING MICHAEL L. RUGEN

Turken, Melman & Bourke KEVIN P. MUCK RICHARD DeNATALE

A Law Corporation Brobeck, Phieger & Harrison Heller, Ehrman, White &

9300 Wilshire Blvd., Ste. 555 One Market Plaza McAuliffe

Beverly Hills, CA 90212 San Francisco, CA 94105 333 Bush St., Ste. 3100

(310) 859-7500 (415) 442-0900 San Francisco, CA 94104-2878

(415) 772-6000

Attorneys for Petitioner Attorneys for Petitioner

Frank L. Bryant Kemper Securities, Inc. Attorneys for Petitioners

(formerly known as Bateman Charles R. Hembree and

*Counsel of Record Eichler, Hill Richards, Inc.) Kincaid, Wilson, Schaeffer

& Hembree, P.S.C.

Westside Law Publishers * West Hollywood, Califormia 90069 * (310) 273-2887

QUESTIONS PRESENTED FOR REVIEW

1. Whether courts should enforce indemnity clauses

in stock purchase agreements in which buyers agree to

indemnify sellers for any losses, including attorneys’ fees,

arising from the untruth of any of the buyers’ representa-

tions?

2. Whether courts should apply normal state law

contractual standards to such indemnity clauses as was done

in Samuels v. Wilder, 871 F.2d 1346 (7th Cir. 1989), and

similar cases, or should they instead apply a special federal

standard of narrow construction against sellers of securities

whenever buyers allege federal securities Claims, as was

done in Zissu v. Bear, Stearns & Co., 805 F.2d 79 (2d Cir.

1986), and Layman v. Combs, 994 F.2d 1344 (9th Cir.

1993)?

3. Whether courts should enforce stock buyers’

representations and warranties that they have "received no

representations or warranties from the Sellers . . . other than

those contained in the [Private Placement] Memorandum"?

4. "May sophisticated, well-counselled parties, using

disposable assets, dealing at their leisure and from arms'

length, limit by contract what information they will consider

in making a major investment?", Layman v. Combs, 994

F.2d 1344, 1357 (9th Cir. 1993) (Kozinski, J., dissenting).

TABLE OF CONTENTS

PAGE

QUESTIONS PRESENTED FOR REVIEW ........ i

TABaas GP CARNES os sasnscdicaee eee il

TABLES GF AUTIAAEIGSS 3360 isanswaaeewes iv

REPORTS OF OPINIONS DELIVERED BELOW ... 2

STATEMENT OF JURISDICTION ............. 3

SIAC LES EO VUGNEE 6.4 ess ee een 3

CONCISE STATEMENT OF THE CASE ......... 3

A. Summary of the Proceeding Below ... 3

B. Statement OF FOCtS 2.560 ce ees 7

REASONS FOR GRANTING THE WRIT ....... 13

THE CIRCUIT COURTS CONFLICT IN

CONSTRUING INDEMNITY CONTRACTS

BY BUYERS OF SECURITIES AS TO

WHETHER TO (A) APPLY TRADITION-

AL STATE LAW CONTRACTUAL IN-

TERPRETATION PRINCIPLES, OR (B)

CREATE A FEDERAL RULE OF NAR-

ROW CONSTRUCTION AGAINST SELL-

BRS OF SRULMREASES “CA wna esee eee 13

A. The Majority of Federal Cases Apply

Traditional State Law Contract Inter-

ornteteel NE. ks eee 13

B. Zissu and Layman Create A Federal

Rule Of Narrow’ Construction

iii

Against the Sellers of Securities

Whenever Stock Fraud Is Alleged... 17

II.

THE FEDERAL RULE OF NARROW

CONSTRUCTION AGAINST THE SELL-

ERS OF SECURITIES CONFLICTS WITH

STATE LAW ENFORCING THE PLAIN

MEANING OF INDEMNITY CON-

ya age ee 18

THE FEDERAL RULE OF NARROW

CONSTRUCTION AGAINST THE SELL-

ERS OF SECURITIES LEADS TO UN.

FAIR, INCONSISTENT, ANOMALOUS ~

AND EXTREME RESULTS ..........__. 21

A. Unfair Favoritism of Stock Buyers

Over Stock Sellers. ............. 21

B Inconsistent Results in the Same

ae Er 22

ost Anomalous Results ..........._. 24

D. Extreme Results ............... 25

IV.

A CLEAR FEDERAL RULE ENFORCING

INDEMNITY CONTRACTS BY STOCK

BUYERS WOULD PROMOTE THE EFFI-

CIENT OPERATION OF THE NATION'S

CAPITAL MARKETS..............._.. 26

CONCLUSION ...°...................... 29

TABLE OF AUTHORITIES

CASES PAGE(S)

Alyeska Pipeline Service Co. v. The Wilderness Society,

ie ae kt. | er 6, 7

Atari Corp. v. Ernst & Whinney,

981 F.2d 1025 (9th Cir. 1992) ......... 16, 18

Barnebey v. E.F. Hutton & Co.,

715 F. Supp. 1572 (M.D. Fla. 1989) ...... 16

Blue Chip Stamps v. Manor Drug Stores,

BG Rens To. | a ae 22

Brownell Combs II v. Zenya Yoshida,

No. 90-131 (E.D. Ky. filed

SN i UR eae oy 2-3, 4, 20, 22

Carnival Cruise Lines, Inc. v. Shute,

cae Me Be EE cok a ob ke oe ee 21

Commercial Ins. Co. of Newark, New Jersey v.

Pacific-Peru Constr. Corp.,

sou © .a6 See (ome CH. DTI) «ww ee ee as 18

Finalco, Inc. v. Roosevelt,

235 Cal. App. 3d 1301,

> Ge. BE, Be ee CEE) ov hc eee 20

Hendrix v. Fireman's Fund Ins. Co.,

823 S.W.2d 937 (Ky. Ct. App. 1991) ...... 19

Hill v. Chrysler Corp.,

526 F.2d 350 (Sth Cir. 1976) ............ 18

In re Integrated Resources Real Estate Ltd.

Partnership Sec. Litig.,

815 F. Supp. 620 (S.D.N.Y. 1993) ...... 25, 26

Klaxon Co. v. Stentor Elec. Mfg. Co.,

Sis Sa EE NORE Ph ea aee weer eae ees 18

Layman v. Combs,

981 F.2d 1093 (9th Cir. es 2

Layman v. Combs,

994 F.2d 1344 (9th Cir. | passim

McGonigle v. Combs,

968 F.2d 810 (9th Cir.), cert. dismissed,

a> S. OL 900 (1992)... Fc cnc passim

Pacific Gas & Elec. Co. v. G.W. Thomas Drayage

& Rigging Co.,

69 Cal. 2d 33, 69 Cal. Rptr. 561,

rn Fae OA CEE ae eh cc. 20

Pavelic & LeFore v. Marvel Entertainment Group,

493 U.S. 120 (1989)..........7....... 19

Properties, Inc.,

974 F.2d 545 (4th Cir. Pe ok ec, 19

Reserve Ins. Co. v. Pisciotta,

30 Cal. 3d 800, 180 Cal. Rptr. 628,

640 P.2d 764 (1982) ................. 19

Samuels v. Wilder,

871 F.2d 1346 (7th Cir. 1989) ..... i, 14, 15, 18

Schultz v. Hembree,

975 F.2d 572 (9th Cir. | ae 2, 5, 6, 10

Shearson/American Express, Inc. v. McMahon,

482 U.S. 220 (1987).................. 21

Constr. Co.,

234 Cal. App. 3d 1724, 286

Cal. Rptr. 435 ctuty: RULES Teen 19

Stratmore v. Combs,

723 F. Supp. 458 (N.D.Cal. a 2

Stratmore v. State Bar of California,

14 Cal. 3d 887, 123 Cal. Rptr. 101,

i oR & yee a, | rr arene 8

Tartell v. Chelsea Nat'l Bank,

351 F. Supp. 1071 (S.D.N.Y. 1972) .. 14, 15, 18

Tartell v. Chelsea Nat'l Bank,

470 F.2d 994 (2d Cir. 1972) ............ 14

United Food & Commercial Workers Union v. |

Lucky Stores, Inc.,

806 F.2d 1385 (9th Cir. 1986) ........... 19

United States Fidelity & Guar. Co. v. Napier Elec.,

571 S.W.2d 644 (Ky. App. 1978) ........ 20

Zissu v. Bear, Stearns & Co.,

805 F.2d 75 (2d Cir. 1966) .......... passim

STATUTES

The Securities Exchange Act of 1934, § 29(a), 15

a. © POU (IRS eS) cvs ean eee ees 3

The Securities Act of 1933, § 11, 15 U.S.C. §

PPS NOOO 60s c 86 0 eee 3, 22

Be eas PORES AOE) 664-05 dR ee ee 3

ARTICLES AND BOOKS

Susan Antilla, A Battle Over Securities Fraud Cas-

es, The New York Times, July 4, 1993,

PE Se ee ee eee ee 27

Se f

Vil

Ellen L. Batzel, Continuing Education of the Bar,

Advising California Partnerships (2d ed..

a ahd) A ee :

Samuel Estreicher & John E. Sexton, A Managerial

Theory of the Supreme Court's Responsibili-

ties: An Empirical Study, 59 N.Y.U. L. Rev.

stride cise: MET EEE eT ee

California Continuing Education of the Bar, Califor-

nia Attorneys' Fees Award Practice (1982) ...

Henry Klehm II, Comment, Contractual Shifting of

Defense Costs in Private Placement Offering

Securities Litigation, 36 U. Pa. L. Rev. 971

Sicha. BRN Ee ee et TM

Janet C. Alexander, Do The Merits Matter? A Study

of Settlements in Securities Class Actions, 43

Stan. L. Rev. 497 {| Tiapar anata eae are

Richard Larson, Federal Court Awards of Attorneys’

NN nel ooo) FAT SE

Robert Bork, Litigation Explodes With Well-Told

Tale of Unleashing the Lawsuit, Washington

Times, April 29, 1991, atFl ......._._.

Marc H. Morgensterm, Private Placement Guidelines

-- A Lawyer's Letter to a First-time Issuer,

48 The Bus. Law. 257 lt: ra

Vill

Comment, Securities Laws - Disclosure Liability-

Ninth Circuit Declines to Rule on Whether

Investors may Indirectly Waive Misrepre-

sentation Claims Against Securities Issuers-

Layman v. Combs, 981 F.2d 1093 (9th Cir.

1992), 106 Harv. L. Rev.

1697 (1993)

Frederick Schauer, Statutory Construction and The

Coordination Function of Plain Meaning,

1990 Supreme Court Review 231 (1991) ... 19

Walter K. Olson, The Litigation Explosion - What

Happened When America Unleashed the

RE CIE bie ee a else a ees 27

No.

In the Supreme Court of the

United States

October Term, 1993

FRANK L. BRYANT, KEMPER SECURITIES, INC., a

Delaware Corporation (formerly known as BATEMAN

EICHLER, HILL RICHARDS, INC.), CHARLES R.

HEMBREE, and KINCAID, WILSON, SCHAEFFER &

HEMBREE, P.S.C., a Kentucky Corporation,

PETITIONERS,

CALVIN KLEIN, GEORGE E. LAYMAN, JR., GEORGE

E. LAYMAN, ZENYA YOSHIDA, DBA SHADAI

FARMS, KENNETH FRANZHEIM, II, BLAS R.

CASARES, EARL H. SHULTZ, RICHARD L. SCHULTZ,

VIRGINIA M. McGONIGLE, JOHN F. McGONIGLE, H.

JAMES GRIGGS, BARRY K. SCHWARTZ, FOREST

ACRES PARTNERSHIP, a Washington State General

Partnership, BARRY K. SCHWARTZ PARTNERSHIP, a

New York Partnership and ROBERT D. STRATMORE,

RESPONDENTS.

PETITION FOR A WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

S:cNS——————————

To the Honorable Chief Justice and Associate

Justices of the Supreme Court of the United States:

Petitioners FRANK L. BRYANT, KEMPER SECU-

RITIES, INC. (formerly known as BATEMAN EICHLER,

HILL RICHARDS, INC.), CHARLES R. HEMBREE, and

KINCAID, WILSON, SCHAEFFER & HEMBREE, P.S.C.,

respectfully pray that a writ of certiorari issue to review the

judgment and opinion of the United States Court of Appeals

for the Ninth Circuit, originally filed in the above-entitled

case on December 17, 1992, and amended on May 12,

1993.

REPORTS OF OPINIONS DELIVERED BELOW.

The amended opinion of the Ninth Circuit, Layman

v. Combs, 994 F.2d 1344 (9th Cir. 1993) ("Layman") and

the dissent of Circuit Judge Alex Kozinski are reprinted in

the appendix at A-1.

The original opinion of the Ninth Circuit and the

Kozinski dissent in Layman v. Combs were published at

981 F.2d 1093 (9th Cir. 1992). The underlying opinion and

order of the United States District Court for the Northern

District of California, Stratmore v. Combs, 723 F. Supp.

458 (N.D. Cal. 1989), are reprinted in the appendix at A-36.

The Ninth Circuit issued two other published

opinions in this case: McGonigle v. Combs, 968 F.2d 810

(9th Cir.) (deciding the case on the merits), cert. dismissed,

113 S. Ct. 399 (1992) ("McGonigle"), and Schultz v.

Hembree, 975 F.2d 572 (9th Cir. 1992) (reversing an

inadequate award of attorneys' fees under Florida and Ohio

fee-shifting statutes) ("Schultz").

The opinion ina related federal court case involving

the same issues and the same indemnity clause but coming

to a different result from the Layman majority, Brownell

Combs II v. Zenya Yoshida, No. 90-131 (E.D. Ky. filed

Kemper Securities, Inc. is a subsidiary of Kemper Corp., and

Kincaid, Wilson Schaeffer & Hembree, P.S.C. has no parent or

subsidiary.

June 4, 1993) ("Combs"), is reprinted in the appendix at A-

51.

STATEMENT OF JURISDICTION.

The judgment in the Court of Appeals was originally

entered on December 17, 1992. and a timely petition for

rehearing was denied on May 12, 1993. The Ninth Circuit

filed an amended opinion on May 12, 1993. The jurisdiction

of this Court is invoked under 28 U.S.C. § 1254(1) (1992).

STATUTES INVOLVED.

(The text of each is set forth in the appendix.)

The Securities Act of 1933, § 11, 15 U.S.C. §

77k(e) (1993)

The Securities Exchange Act of 1934, § 29(a), 15

U.S.C. § 78cc(a) (1993).

CONCISE STATEMENT OF THE CASE.

A. Summary of the Proceeding Below

This petition emanates from the August 1983 private

placement of stock in Spendthrift Farm, Inc. (the "Farm"),

reputed to be the largest private placement to individuals in

United States history. The litigation spawned five reported

decisions, four in the Ninth Circuit, and one in the Northern

District of California”

As Judge Kozinski stated in his dissent in Layman, “Much is

at stake here for everyone involved. This litigation -- although it

resulted in a complete defense victory, mostly on summary judgment --

devoured a Staggering quantity of Productive resources. The record

consists of 50 cubic feet of paper and weighs over half a ton. There

were 4500 entries in the docket sheets below, including almost 400

orders and rulings by the district court. Fifty-seven briefs, consisting of

nearly 1800 pages, were filed on appeal... ." Layman, 994 F.2d at

1358, App. at A-32.

The same indemnity clause construed by the Ninth

Circuit in Layman was shortly thereafter interpreted

differently using normal state law principles in Brownell

Combs II v. Zenya Yoshida, No. 90-131 (E.D. Ky. filed

June 4, 1993). The Layman majority opinion generated a

strong dissent by Ninth Circuit Judge Alex Kozinski and a

Harvard Law Review Comment? criticizing the majority's

reasoning.

The Farm bred thoroughbred horses in Lexington,

Kentucky. At the time of the private placement, the Farm

was considered to be the "IBM" of horse breeding farms.

Triple Crown winner Seattle Slew was only one of the

Farm's stud horses.

This Petition relates to seven consolidated lawsuits

initially brought by some of the investors in the private

> Comment, Securities Laws - Disclosure Liability - Ninth

Circuit Declines to Rule on Whether Investors May Indirectly Waive

Misrepresentation Claims Against Securities Issuers - Layman v. Combs,

981 F.2d 1093 (9th Cir. 1992), 106 Harv. L. Rev. 1697 (1993).

placement.* In all, fifteen plaintiffs sued fifteen defendants

on over a dozen claims for relief.

The Petitioners are Frank L. Bryant (a Farm director

and financial consultant), Kemper Securities, Inc. (formerly

known as Bateman Eichler, Hill Richards, Inc.) (the Farm's

investment banker), Charles R. Hembree (the sellers’ and

Farm's attorney) and Hembree's law firm. All defendants

consistently denied wrongdoing and were vindicated below°

* Less than half the private placement investors sued. Most of

the investors, two of whom were Alger B. Chapman, the former head

of American Express, and Vern Winchell, the founder of Winchell's

Donuts and former Chariman of the Board of Denny's Inc., never sued

anybody for anything arising out of their purchases of Farm stock. The

cases involved in this petition were filed in 1986-87: the Stratmore

action, filed in February 1986; Layman, filed in March 1986: Griggs,

filed in June 1986; Yoshida, filed in July 1986; McGonigle, filed in July

1986; Schultz, filed in August 1986; and Casares, filed in July 1986.

These cases and several others were deemed related under the rules of

the Northern District of California and assigned to the Honorable

Charles A. Legge. The Schultz case, filed in the Southern District of

Ohio, and the Casares case, filed in the Southern District of Florida,

were transferred for pretrial Purpose to the Northern District of

California by the Judicial Panel on Multi-District Litigation. In October

1988, Judge Legge granted defendants’ motions for change of venue to

the Northern District of California in these actions. All of these cases

were ultimately tried before Judge Legge.

* Other defendants not Parties to this petition include the

following: Leslie Combs II, the founder of Spendthrift and one of two

sellers of stock in the private placement; Brownell Combs II, Leslie's

son and also a seller in the private placement; Garth Guy, who put

together the private placement on behalf of the Combses; Curtis Green

and Ronald C. Ewart who allegedly helped Guy sell the offering;

Richard F. Broadbent III and Bloodstock Research and Information

Services, Inc., whose appraisals of the Farm's equine assets appeared in

the Private Placement Memorandum; the Farm itself, which was sued

in several of the cases: and Central Bank & Trust Co. of Lexington,

. (continued...)

The plaintiffs sued a "stable full of defendants but lost on

every claim."° Defendants' success on the merits, however,

threatens to become only a Pyrthic victory. As Judge

Kozinski stated in his dissent,

The case of Frank Bryant, a Spend-

thrift consultant, is particularly alarming. His

defense was that he joined Spendthrift after

the sale of the shares and was not in any

way involved in the conception or drafting

of the PPM. Defending on this theory, and

winning summary judgment, Bryant was

nonetheless saddled with approximately

$900,000 in legal fees. If this is the face of

victory, how much uglier could defeat be?

Layman, 994 F.2d at 1358 n.3, App. at A-33 (emphasis |

added and citation omitted). )

The petitioners counterclaimed against plaintiffs

based on plaintiffs’ breaches of a stock subscription agree-

ment (the "Contract"), which is reprinted in the appendix at

A-71. Petitioners sought indemnification of all their expens-

es, including attorneys’ fees.’ Petitioner Bryant also sued for

°(...continued)

which lent money to various private placement investors for the purpose

of purchasing the Farm's stock and was sued in a few of the cases.

In Alyeska Pipeline Service Co. v. The Wilderness Society, 421

U.S. 240, 247 n.18 (1975), this Court recognized that for centuries "the

courts of England were authorized to award counsel fees to successful

plaintiffs in litigation." It also stated the general "American rule" that

“absent statute or enforceable contract, litigants pay their own attorneys’

fees." Id. at 257. Alyeska refused to judicially expand fee-shifting,

preferring the course of judicial restraint and deference to the voluntary

(continued...)

OE ee |

negligent misrepresentation based upon the plaintiffs’ untrue

representations.

Plaintiffs moved for Summary judgment on the

counterclaims. The district court granted the motions and

entered judgment for plaintiffs on the counterclaims. The

Ninth Circuit affirmed, construing the indemnity clause

against the sellers so as to avoid (what the majority termed)

an "absurd" result which would have resulted from enforc-

ing the plain meaning of the Contract. Layman, 994 F.2d at

1352, App. at A-18.

B. Statement of Facts

Plaintiffs were wealthy and sophisticated investors®

’(...continued)

agreements of parties and the enactments of legislators. Since Alyeska,

Congress and State legislatures have enacted hundreds of fee-shifting

Statutes. See Richard Larson, Federal Court Awards of Attorneys' Fees

(1981), and California Continuing Education of the Bar, California

Attorneys' Fees Award Practice (1982). Parties, of course, have entered

into thousands of voluntary fee-shifting agreements as Alyeska autho-

rized them to do.

* Each investor represented that he had a net worth of five

million dollars at the time of the private offering, but several of them

including Calvin Klein, Kenneth Franzheim and Zenya Yoshida were

reputed to be worth over fifty million each. Plaintiffs gained their

wealth and sophistication in a variety of contexts. Plaintiff Calvin Klein

and his lifelong business partner Barry Schwartz made millions in jeans

and perfume before going into the thoroughbred horse business and they

hired a CPA with a masters in taxation from New York University law

school to evaluate the private offering for them. Blas Casares was on

the Central Intelligence Agency payroll in a top secret mission in Cuba

at the time of the Bay of Pigs and made his millions in commodities

trading in South America. Plaintiff Franzheim made a fortune in oil and

gas before being appointed United States Ambassador to New Zealand.

Plaintiff Schultz made tens of millions building one of the nation's

(continued...)

who alleged that the defendants misled them into buying

Farm stock. Some plaintiffs bought over $2,200,000 of

stock and their average investment was over $1,000,000 per

plaintiff. The plaintiffs included:

eo Calvin Klein, New York

y George E. Layman, Jr., Washington

State

a Zenya Yoshida, dba Shadai Farms,

Japan

4. Kenneth Franzheim, II, Texas and

Kentucky

4 a Blas R. Casares, Florida and Vene-

zuela

6. Earl H. Shultz,-California

7. Richard L. Schultz, Ohio

8. Virginia M. McGonigle, California

9. John F. McGonigle, California

10. H. James Griggs, California

11. | George E. Layman, Washington State

12. _ Barry K. Schwartz, New York

13. Forest Acres Partnership, a Washing-

ton State general partnership

14. Barry K. Schwartz Partnership, a

New York general partnership

15. Robert D. Stratmore, California

8. continued)

largest debt collection agencies. Plaintiff Griggs was financial advisor

to the pension plan of California's state employees. Plaintiff Stratmore

was an associate at Pillsbury, Madison & Sutro, one of California's

largest law firms before he was suspended from the practice of law by

the California Supreme Court for defrauding 11 New York law firms in

Stratmore v. State Bar of California, 14 Cal. 3d 887, 123 Cal. Rptr.

101, 538 P.2d 229 (1975).

The plaintiffs had substantial experience with horse

breeding. Most retained independent investment advisors

and lawyers and took their time considering the investment.

“Typical is Robert Stratmore, an attomey who specialized

in equestrian law and transactions, who grossed more than

$15 million in thoroughbred trading the year of the Spend-

thrift offering and who holds lifetime breeding rights to

Triple Crown winner Seattle Slew." Layman, (Kozinski

dissent), 994 F.2d at 1356 n.1, App. at A-28. Other plain-

tiffs "included international fashion mogul Calvin Klein:

Zenya Yoshida, Japan's biggest and most prominent horse

breeder; and the Layman family, who has been involved

with thoroughbred horses for thirty years." Id., App. at A-

29. Obviously, "[t]hese weren't mom and Pop investors. . .

." Id. at 1356, App. at A-28.°

The plaintiffs bought stock from Leslie Combs and

Brownell Combs (the "sellers") in the sellers' 1983 private

placement of Farm stock. In connection with the purchase

each plaintiff executed a Contract which promised:

to indemnify [defendants] against any losses,

claims, damages, liabilities, expenses (in-

cluding attorneys' reasonable fees and dis-

bursements) judgements and amounts paid in

settlement resulting from the untruth of any

of the warranties and representations con-

tained herein, or the breach . . . of the cove-

nants made by him herein.

Judge Kozinski noted these facts when he wrote in exas-

peration, "Under these circumstances, what on earth does it mean to say

the subscribers didn't have notice of the attorneys’ fee indemnity

Clause? . . . If these subscribers can't be held to the terms of the contract

they signed, who ever can? /d. at 1357, App. at A-29, A-30.

Contract, para. 5, App. at A-78 (emphasis added).

-_—

Each Contract contained a warranty and representa-

tion that the buyer had read the Private Placement Memo-

randum ("PPM") and that the buyer was not relying on any

representations other than those in the PPM.

Three years later, after a dramatic downturn in the

market for thoroughbred horses, the plaintiffs brought suit

against the defendants for common law tort claims and

violation of several state statutes, federal RICO, and federal

securities laws, including failure to register a public offering

(alleging that the sellers’ so-called "private offering" of

Farm stock was in reality a "public offering").'° The

defendants included the private placement's two sellers, the

lawyers for the sellers and the Farm, the sellers’ horse

appraisers, the private placement promoter, one of the

Farm's directors, the Farm's investment banking firm, the

Farm's commercial bank, and the Farm's outside accoun-

tants.

As the Layman panel stated in its related opinion,

Schultz v. Hembree, 975 F.2d 572, 576 (9th Cir. 1992):

We live in a society which, unfortu-

nately, sanctions the view that litigation is a

proper response to many of life's hard

knocks. Lawyers capitalizing on this phe-

nomenon often multiply unnecessarily the

number of legal theories under which suit is

brought. The result in many cases is shotgun

litigation: a barrage of claims, emanating

10 Marc H. Morgenstern, Private Placement Guidelines -- A

Lawyer's Letter to a First-time Issuer, 48 The Bus. Law. 257 (1992),

summarizes current federal securities law governing private placements.

from a point source and fanning out in the

hopes of wounding someone in the process.

Plaintiffs made numerous allegations concerning the

private placement which left no doubt that their own

representations and warranties were false. The following

examples are illustrative:

What Plaintiffs Said In Their Contract

1. Plaintiffs received no representations from the sellers

other than those in the PPM. ({4(n).)

2. Plaintiffs understood that the financial information in the

PPM is "unaudited" and "no provision has been made for

deferred taxes." (J4(v).).

3. Plaintiffs understood that there were restrictions on the

transferability of the stock, that there will be no market for

the shares, and it may not be possible to liquidate the

investment. (J4(h).)

What Plaintiffs Said In Their Com-

plaints’!

1. Plaintiffs relied on numerous untrue oral representations.

({9140, 51.)

2. Plaintiffs were misled because the financial information

in the PPM failed to conform to generally accepted ac-

counting principles and made no provision for deferred

taxes. ({36(a)(v).)

3. Plaintiffs were induced to purchase stock by oral

misrepresentations that they would have an Opportunity to

"cash out" of the deal. ({50.)

All paragraph references are to the First Amended Complaint

in the Layman action, which served as a model for the other plaintiffs’

complaints.

Plaintiffs freely admitted at trial that their represen-

tations and warranties were untrue. For example, as to their

reliance on oral representations:

. Plaintiff Calvin Klein's CPA financial

advisor and tax lawyer, Ralph

Finerman, testified that he relied

upon oral representations made by

defendants Guy and Hembree.

° Plaintiff Layman testified that he

relied on oral representations made

by defendants Hembree and Guy.

* Plaintiff Schultz testified that he

relied upon oral representations by

Luther Deaton of Central Bank.

. Plaintiff Griggs testified that he re-

lied upon oral representations made

by defendant Guy.

” Plaintiff Casares testified that he

relied heavily on oral representations

made to him by defendant Hembree.

Moreover, as is often true in high-stakes litigation,

defendants incurred large expenses. Defendants incurred

millions of dollars in attorneys' fees in successfully defend-

ing these suits.'* Through their counterclaims, defendants

'2 Judge Kozinski's dissent noted that "[t]he attorneys’ fees, for

the seven defendants who requested them, amounted to more than $3.5

million.” Layman, 994 F.2d at 1358, App. at A-32 (emphasis in

original). Attorneys’ fees were not, however, the only losses suffered:

Bryant alleged in his counterclaim that he suffered emotional distress

and loss of reputation as a result of plaintiffs’ untrue representations and

warranties.

sought reimbursement for the losses they incurred by reason

of the untruth of plaintiffs’ representations and warranties.

REASONS FOR GRANTING THE WRIT

THE CIRCUIT COURTS CONFLICT IN

CONSTRUING INDEMNITY CON.

TRACTS BY BUYERS OF SECURITIES

AS TO WHETHER TO (A) APPLY TRA-

DITIONAL STATE LAW CONTRACTU-

AL INTERPRETATION PRINCIPLES,

OR (B) CREATE A FEDERAL RULE OF

NARROW CONSTRUCTION AGAINST

SELLERS OF SECURITIES.

The prime reason certiorari is appropriate in this

case is the conflict between certain recent circuit court

decisions which "federalize" indemnity contract interpreta-

tion in stock fraud cases and the majority of federal cases

which apply state law to decide the plain meaning of such

contracts.

Federal cases are split in their approach to indemnity

provisions agreed to by buyers. The only "trend" surfacing,

however, is confusion. A new line of federal cases, while

acknowledging that indemnity provisions are generally

enforceable have refused to enforce them for want of

specificity.

A. The Majority of Federal Cases

Apply Traditional State Law Con-

tract Interpretation Rules.

Most federal courts apply traditional rules of

contract interpretation to indemnity clauses contained in

stock purchase agreements. In contrast, a seminal recent

case, Zissu v. Bear, Stearns & Co., 805 F.2d 75 (2d Cir.

1986), consciously refused to apply state law contractual

interpretation principles to indemnity contracts in securities

cases. Layman followed Zissu in creating a new federal rule

to apply against stock sellers in indemnity cases.

The traditional rule is best illustrated by Samuels v.

Wilder, 871 F.2d 1346 (7th Cir. 1989).

Samuels enforced a counterclaim for indemnity in a

securities fraud case. Samuels applied traditional contract

law principles to give meaning to the indemnity clause. The

indemnity clause obligated the buyer of stock to “hold

[seller] harmless from all liability, loss, expenses, damages,

costs and attorneys’ fees that [seller] may at any time incur

by reason of any type of inquiry, action or suit which may

be brought against him. . . by reason of the [relationship]."

Samuels v. Wilder, 871 F.2d at 1348. The court noted that

the sophisticated securities purchaser "should have insisted

upon other language" if he had "any reservations about the

scope of the indemnity clause." Jd. at 1352. The Seventh

Circuit squarely faced the public policy concerns which

troubled the majority in Layman:

Public policy does not intervene as plaintiffs

assert. This is not a loss created by [defen-

dant] that plaintiffs are forced to pay. Rath-

er, the loss (litigation expenses) resulted

from a successful defense of a suit brought

by plaintiffs."

Id. at 1352.

Another example of the traditional rule is Tartell v.

Chelsea Nat'l. Bank, 470 F.2d 994 (2d Cir. 1972), in which

the Second Circuit essentially adopted the opinion below,

Tartell v. Chelsea Nat'l Bank, 351 F. Supp. 1071 (S.D.N.Y.

1972), which held that a bank could collect attorneys’ fees

under a clause which stated: "The undersigned (Tartell) will

pay to the Bank all expenses (including expenses for legal

services of every kind) . . . incidental to the enforcement of

any of the provisions hereof... ." Jd. at 1079. The opinion

adopted by the Second Circuit specifically recognized that

“[tjhe federal statutes underpinning pfainufYs claims ‘n this

case do not specifically provide for counsel fees; indeed,

the usual rule is that in the absence of statutory authority or

an authorizing contract, federal courts do not award counsel

fees." Id. The opinion also rejected the argurnent that the

unsuccessful plaintiff should "not be unfairly penalized for

asserting claims, as was his right, under the applicable

federal statutes," since the "broad language of the demand

note in question" was something of which the plaintiff must

have been aware. /d.

Both Samuels and Tartell applied standard state law

contractual interpretation principles to the indemnity

provisions at issue. Zissu distinguished Tartell on the

grounds that the Tartell indemnity clause mentioned legal

expenses.

Layman conflicts with Samuels and Tartell and goes

beyond Zissu because Layman required an explicit statement

that "if the investor breaches a warranty in suing the sellers,

and loses, then the investor must pay the defendants’ fees."

Layman, 994 F.2d at 1352, App. at A-17, A-18. In dissent,

Judge Kozinski stated that his colleagues in the majority

refused to enforce the contract "under the guise of interpre-

tation" when their true motivation was that they found the

Contract unpalatable. Jd. at 1354, App. at A-24. According

to Judge Kozinski, "The clause in question says precisely

what the sellers claim: It entitles them to attorney's fees for

litigation arising out of misrepresentations by the subscrib-

ers as to what they did and did not rely on.” Jd. at 1354-55,

App. at A-24.

Layman also conflicts with two recent Ninth Circuit

decisions. It conflicts with Atari Corp. v. Ernst & Whinney,

981 F.2d 1025 (9th Cir. 1992), because Atari was a stock

traud case which enforced an indemnity clause which was

less specific than the indemnity clause in Layman. In Atari,

the counterclaim was based upon an indemnity claim which

merely said "[Atari] will indemnify all present and former

officers and directors of the company to the fullest extent

permitted by applicable law with respect to all acts and

Omissions arising out of such individuals’ services as

officers, directors or employees of the company. . . ." Jd. at

1031.

Ironically, in its opinion on the merits in this case,

McGonigle v. Combs, 968 F.2d 810, 827 (9th Cir.), cert.

dismissed, 113 S. Ct. 399 (1992), this same panel unani-

mously affirmed the district court's award of over $200,000

in attorneys’ fees to defendant Central Bank under an

indemnity clause no more specific than the indemnity

clause in the Contract. Jd. at 827 n.22. The Central Bank

counterclaim was based on a promissory note which

provided that "The Maker will pay on demand all costs of

collection and attorneys’ fees incurred or paid by the Holder

in enforcing this note on default."

Lower federal court cases applying traditional state

law rules to indemnity contracts in stock fraud contexts

include Barnebey v. E.F. Hutton & Co., 715 F. Supp. 1572

(M.D. Fla. 1989). In Barnebey, the court held an indemnity

clause similar to that in the Farm Contract could be

enforced because it did not violate public policy. The court

denied summary judgment and sent the case to the jury.

B. Zissu and Layman Create A Feder-

al Rule Of Narrow Construction

Against the Sellers of Securities

Whenever Stock Fraud Is Alleged.

Zissu v. Bear, Stearns & Co., 805 F.2d 75 (2d Cir.

1986), Layman, and their progeny have sought to create a

federal rule of narrow construction in interpreting indemnity

provisions. These courts have rejected traditional state law

interpretation of indemnity agreements and are in the

process of "federalizing" a new standard of interpretation.

Zissu was explicit about departing from established state

law:

although New York courts have held that

contractual indemnity provisions for

attorneys’ fees will be enforced, and broad

indemnification provisions like the one here

should be read to extend to such fees, a

higher level of specificity is required when

attorneys’ fees are being assessed against a

plaintiff suing for securities fraud.

Id. at 79-80 (citations omitted).

Zissu did not specify what it meant by “a higher

level of specificity," although it hinted that the indemnity

it dealt with should have specifically included the words

"attorneys' fees." The Layman majority, applying Zissu,

found an indemnity clause insufficient as a matter of law

even though it did specifically include the words "attorneys'

fees."

Layman held that even more specificity is required.

As Judge Kozinski stated:

Here we have just such a higher level

of specificity [as Zissu required]: Every

subscriber agreed to indemnify the sellers

"from and against any losses, claims, damag-

es, liabilities, /and] expenses (including

attorneys' reasonable fees and disburse-

ments). . . resulting from the untruth of any

of the warranties" (emphasis added). The

lack of notice that troubled the Second

Circuit in Zissu just isn't a problem here.

Layman, 994 F.2d at 1356, App. at A-28 (emphasis added

by Judge Kozinski).

IT.

The Federal Rule of Narrow Construction

Against the Sellers of Securities Conflicts

With State Law Enforcing The Plain

Meaning Of Indemnity Contracts.

The federal narrow construction rule now emerging

conflicts with well settled state law rules of contractual

interpretation. The local law of the state which has the most

significant relationship to the transaction applies to ques-

tions of contractual interpretation absent an effective choice

of law by the parties. Commercial Ins. Co. of Newark, New

Jersey v. Pacific-Peru Constr. Corp., 558 F.2d 948 (9th Cir.

1977). Cases specifically addressing indemnity clauses have

applied the law of the state in which the contract was

entered into. Hill v. Chrysler Corp., 526 F.2d 350 (Sth Cir.

1976); see also Klaxon Co. v. Stentor Elec. Mfg. Co., 313

U.S. 487 (1941) (holding that in interpreting a contract, a

court should apply the law of the state in which the parties

entered into the contract).

The Samuels, Tartell, Atari and McGonigle cases

enforcing the plain meaning of broadly worded attorneys’

fees and indemnity clauses are in the main stream of

contractual interpretation. "It is axiomatic that absent a

violation of public policy, a statute, or a constitutional

provision, the parties to a private agreement may allocate

risks in any manner they so choose." Reserve Ins. Co. v.

Pisciotta, 30 Cal. 3d 800, 814, 180 Cal. Rptr. 628, 636, 640

P.2d 764 (1982); Hendrix v. Fireman's Fund Ins. Co., 823

S.W.2d 937, 941 (Ky. Ct. App. 1991) ("The parties to a

private agreement may allocate risks in any manner they

choose, absent a violation of law."); Perpetual Real Estate

Servs., Inc. v. Michaelson Properties, Inc., 974 F.2d 545,

550 (4th Cir. 1992) ("Absent some evidence of misrepresen-

tation, ‘courts should not rewrite contracts or disturb the

allocation of isk the parties have themselves

established'.").'°

"[E]xpress indemnity rests on the contract of the

parties; it is the language of contract, rather than the

equities of the situation which govern. In an express

indemnity agreement, the parties may agree to results which

would not occur in absence of an express agreement. . . .”

Smoketree - Lake Murray, Ltd. v. Mills Concrete Constr.

Co., 234 Cal. App. 3d 1724, 1737, 286 Cal. Rptr. 435, 452

(1991); United Food & Commercial Workers Union v.

Lucky Stores, Inc., 806 F.2d 1385, 1386 (9th Cir. 1986)

("Wise or not, a deal is a deal.").

Judge Kozinski, in his dissent in Layman, noted that

the majority's summary judgment ruling conflicts with the

highest court of the state of California: "California law is

‘3 The plain meaning rule is rooted in common sense and judicial

restraint. See Frederick Schauer, Statutory Construction and The

Coordination Function of Plain Meaning, 1990 Supreme Court Review

231, 232 (1991) ("[Supreme Court Justices] know that when they ask

a law clerk for a tuna fish sandwich and the briefs in Roe v. Wade, what

they get is a tuna fish sandwich and the briefs in Roe v. Wade."),

Pavelic & LeFore v. Marvel Entertainment Group, 493 U.S. 120, 126

(1989) ("Our task is to apply the text, not to improve on it.").

NN EEE

just the opposite. If the language of a contract is susceptible

to two different meanings, each side is entitled to put in

evidence supporting its preferred construction. See, e.g.,

Pacific Gas & Elec. Co. v. G.W. Thomas Drainage &

Rigging Co., 69 Cal. 2d 33, 37, 69 Cal. Rptr. 561, 442 P.2d

641 (1968). Even if the language seems susceptible to only

one meaning, a party may still put on evidence that a

second meaning reflects the parties’ actual intent. Jd. at 39-

40." Layman, 994 F.2d at 1355, App. at A-25, A-26.

California's position on the issue is illustrated by Finalco,

Inc. v. Roosevelt, 235 Cal. App. 3d 1301, 1306, 3 Cal. Rptr.

2d 865, 867 (1991), which enforced an indemnity clause

obligating a buyer of stock "to pay all costs of collection,

. . Including . . . attorneys’ fees" incurred in successfully

defending against federal securities law claims arising out

of a private placement."*

Similarly, under Kentucky law the right to recover

under indemnity contracts is also well recognized. "[Indem-

nity] contracts are not against public policy and will be

enforced if the indemnitee has suffered loss." United States

Fidelity & Guar. Co. v. Napier Elec., 571 S.W.2d 644, 646

(Ky. App. 1978).

In Brownell Combs II v. Zenya Yoshida, No. 90-131

(E.D. Ky. filed June 4, 1993), the Kentucky district court

'* The State Bar of California even uses such agreements in a

form book and computer diskette of forms which it makes available to -

California lawyers. Ellen L. Batzel, California Continuing Education of

the Bar, Advising California Partnerships § 5.38 at 58-59 (2d ed., Supp.

1993) (“the undersigned [has] relied only on the information contained

in the Memorandum. .. . The undersigned agrees to indemnify [the

sellers] against any . . . expense . . . arising out of: (i) any inaccuracy

in the undersigned's . . . representations and warranties. . . ")

construed the same indemnity contract as the Ninth Circuit

did in Layman. Combs applied Kentucky law because the

Contract was entered into in Kentucky. Combs noted

"Kentucky's well recognized policy of upholding the nght

of recovery under indemnity contracts. . . ." Jd. at 7, App.

at A-58. The court went on to state that "the plain language

of the indemnity clause does not limit indemnification to

the situation where the registration exemption is lost... . "

Id, App. at A-58. (emphasis added).

This Court has upheld a wide variety of contracts

against claims that federal policies counseled against

enforcement. See, e.g., Shearson/American Express, Inc. v.

McMahon, 482 U.S. 220 (1987) (enforcing agreement to

arbitrate securities claims despite the historical judicial

hostility toward such contracts); Carnival Cruise Lines, Inc.

v. Shute, 111 S.Ct. 1522 (1991) (enforcing forum selection

clause contained in cruise line's passenger's ticket).

The Layman and Zissu rule of narrow construction,

in contrast, is an activist rule creating a federal preemption

which ignores the deference our system of federalism gives

to the states on issues of contractual interpretation.

Il.

The Federal Rule of Narrow Construction

Against Sellers of Securities Leads to

Unfair, Inconsistent, Anomalous and

Extreme Results.

A. Unfair Favoritism of Stock Buyers

Over Stock Sellers.

The Layman decision tips the scales of contractual

interpretation in favor of stock buyers and against stock

sellers. Ironically, Rule 10b-5 was promulgated in order to

equalize the remedies between defrauded sellers and buyers

of securities. Blue Chip Stamps v. Manor Drug Stores, 421

U.S. 723, 736 (1975), stated that "Rule 10b-5 was adopted

in order to close ‘a loophole in the protections against fraud

... by prohibiting individuals or companies from buying

securities if they engage in fraud in their purchase.""

By immunizing stock buyers against liability for

their untrue representations, Layman and Zissu turn Rule

10b-5 on its head.

In this case the Layman and Zissu rule also upset the

delicate bargain struck between the sellers and the plaintiffs

who paid only $7.50 per share for their Farm stock and

gave written representations and warranties. Only three

months later, the sellers scold Farm stock to the public at

$12 per share but received no representations and warran-

ties. McGonigle v. Combs, 968 F.2d 810, 815 (9th Cir.),

cert. dismissed, 113 S. Ct. 399 (1992). The private place-

ment buyers’ representations, warranties and indemnity

promises were clearly worth a portion of the $4.50 per

share differential to the sellers. The effect of the Layman

and Zissu line of cases is to nullify a portion of the bar-

gained-for consideration negotiated by sellers in private

placements.

B. Inconsistent Results in the Same

Case.

Inconsistent results are no better illustrated than by

the fact that two different district courts have reached

diametrically different results about the same indemnity

clause in the same Contract, about attorneys’ fees in the

same private offering litigation. In Brownell Combs II v.

Zenya Yoshida, No. 90-131 (E.D. Ky. filed June 4, 1993),

- the Eastern District of Kentucky construed the same

indemnity provision in the same Contract as the instant

iaaeiaeeenimaiacinmaaaiaiamaiaiiiiiliia aa

case. On summary judgment, Combs refused to follow

Layman's narrow construction against sellers in interpreting

the Contract. Instead, Combs held that the Kentucky jury”

was entitled to decide the plain meaning of the Contract.

Combs rejected both the arguments raised by

plaintiffs in Layman, namely, that the indemnity should be

limited solely to untrue representations that result in loss of

the private placement exemption, and that the Securities Act

of 1933, § 11, 15 U.S.C. § 77k(e) (1993), provides the sole

mechanism for obtaining attorneys’ fees in a stock fraud

suit. Combs, slip op. at 5, App. at A-55, A-56, A-57.

With respect to plaintiffs’ arguments as to the

Securities Act of 1933, § 11, 15 U.S.C. § 77k(e) (1993),

Combs refused to read new words into the statute:

Nowhere in § 77k(e) does the word only

appear, and this Court will not add the word

only by judicial fiat. Absent any explicit

Statutory language or any supportive case

law ... , the Court cannot conclude that

'S One of the sellers, Brownell Combs, was denied leave to file

his counterclaim in the Northern District of California, so he took his

case to Kentucky. By virtue of the fact that Mr. Combs brought his

action in Kentucky, he is now going to trial. In their monumental study

of this Court's certiorari practices, Samuel Estreicher & John E. Sexton,

A Managerial Theory of the Supreme Court's Responsibilities: An

Empirical Study, 59 N.Y.U. L. Rev. 681, 725 (1984), concluded that "an

intolerable conflict occurs when litigants are able to exploit conflicts

affirmatively through forum shopping, or when the planning of primary

behavior is thwarted by the absence of a nationally binding rule."

Private placements offer great opportunity for forum shopping because

investors and potential defendants often reside in different states and

offerings are permitted to cross state borders. Advance planning

becomes pointless when there is an existing conflict between a half-

dozen circuit court decisions.

assessment of costs is only proper upon a

finding that the defendant's prior claims

lacked merit.

Combs, slip op. at 5, App. at A-55, A-56 (emphasis added).

In rejecting plaintiffs’ narrow interpretation of the

indemnity clause, Combs stated:

This Court has reviewed the record

and the documents under dispute and cannot

find as a matter of law that the indemnifica-

tion clause is limited to situations where

Spendthnift looses [sic] its registration ex-

emption.

Combs, slip op. at 6, 7, App. at A-57.

Combs alluded to the uncertainty prevailing in

federal courts as to indemnity in stock fraud cases: "other

jurisdictions are split as to their conclusions regarding the

enforceability of the indemnity clauses, and it cannot be

said that any clear majority rule exists . . . ." Combs, slip

op. at 7, App. at A-57.

inl Anomalous Results.

A federal rule of narrow construction against sellers

of securities leads to anomalous results, such as the Layman

majority terming irrational those who would interpret an

indemnity clause according to its plain meaning, a class

which includes all the petitioners here, Judge Kozinski, the

Eastern District of Kentucky, and the Harvard Law Re-

view.'° Judge Kozinski noted in his Layman dissent that:

Circuit Declines to Rule on Whether Investors May Indirectly Waive

(continued...)

"The majority thus holds that a trier of fact would have to

be drunk or crazy to construe the contract to mean what it

says." Layman, 994 F.2d at 1355, App. at A-25 (emphasis

added). Judge Kozinski further observed that: "[The

majority twists] the law of contract beyond recognition,"

and "categorically reject[s] the plain language of the

contract." Id., App. at A-24, A-26. "I'd just read the

disputed language as written." Jd. at 1356, App. at A-27.

D. Extreme Results.

The increasing hostility with which some federal

courts treat indemnity clause in stock fraud cases is reflect-

ed in In re Integrated Resources Real Estate Ltd. Partner-

ship Securities Litigation, 815 F. Supp. 620 (S.D.N.Y.

1993). There, the district court considered a broad indem-

nity provision promising that the stock buyers would:

indemnify the defendants for any and all

expense, including costs and reasonable

attorneys’ fees . . . in connection with any of

his warranties or his failure to fulfill any of

his covenants or agreements under this

agreement... .

Id. at 657 (emphasis added).

Despite the specific language in this indemnity

clause, Integrated Resources followed the Layman and

'6(__ continued)

Misrepresentation Claims Against Securities Issuers - Layman v. Combs,

981 F.2d 1093 (9th Cir. 1992), 106 Harv. L. Rev. 1697 (1993),

criticized Layman's narrow interpretation of the Contract. The author

instead endorsed Judge Kozinski's reading of the plain meaning of the

Contract, stating: "Judge Kozinski properly rejected the majority's

interpretation of Spendthrift's Agreement." Jd. at 1700.

Zissu line of cases and held that the indemnity clause was

not sufficient to put the investors on notice. No hint was

found within the four corners of the opinion as to what

further notice could ever be deemed sufficient.

Zissu, Layman and Integrated Resources have

required an ever increasing specific threshold for enforce-

ment of indemnity clauses. None of these decisions points

out what more is actually required. The only hint given in

Zissu was that indemnity clauses should clearly refer to

"attorneys' fees." However, in Layman and Integrated

Resources even the specific recitation of "attorneys' fees" in

the indemnity clause proved insufficient. Stock sellers are

left to wonder how much more specific such an indemnity

clause must be.

IV.

A Clear Federal Rule Enforcing Indemni-

ty Contracts By Stock Buyers Would

Promote The Efficient Operation Of The

Nation's Capital Markets.

An unambiguous federal rule enforcing indemnity

clauses in stock purchase agreements would have a salutary

effect upon the nation's capital markets. Judge Kozinski

termed the indemnity clause in question a "perfectly

acceptable and useful provision in a private placement

agreement." Layman, 994 F.2d at 1357, App. at-A-30. The

majority termed enforcing or agreeing to such a provision

as “absurd." Jd. at 1352, App. at A-18. This dispute is,

according to Judge Kozinski, "the meat of the coconut --

the difficult policy question at the heart of this dispute." Jd.

at 1357, App. at A-30.

The enforceability and construction of indemnity

clauses have taken on increased significance in this age of

hugely expensive "strike suits."'’ Scholars have addressed

the importance and the use of indemnity clauses in private

placements,'* while a recent article in The New York

Times’ discussed proposed legislation aimed at protecting

sellers of stock from meritless securities fraud suits.

The popular press has expressed alarm at the burden

modern litigation places on parties and society. Walter K.

Olson, The Litigation Explosion - What Happened When

America Unleashed the Lawsuit 337 (1991) ("Full two-way

fee-shifting is the single most important and constructive

legal reform that ordinary citizens can fight for over the

long term. It is memorably simple, and fair, and not easily

subverted once put into effect.")

These criticisms and suggested remedies are not

limited to the popular press, but have gained support from

legal scholars and judges. Robert Bork stated that The

Litigation Explosion "correctly analyzed the sickness of our

litigation system" and provided "prescriptions for at least a

partial cure that are worth trying." Robert Bork, Litigation

'7 Janet C. Alexander, Do The Merits Matter? A Study of Settle-

ments in Securities Class Action, 43 Stan. L. Rev. 497, 513 (1991)

("[The data] strongly suggest that suits alleging securities violations

were filed whenever the stock price declined sufficiently following the

IPO to support an award of attorneys’ fees that would make it worth-

while to bring a case.").

'§ Henry Klehm III, Comment, Contractual Shifting of Defense

Costs in Private Placement Offering Securities Litigation, 36 U. Pa. L.

Rev. 971 (1988).

Susan Antilla, A Battle Over Securities Fraud Cases, The New

York Times, July 4, 1993, Section "D" at 14.

Explodes With Well-Told Tale of Unleashing the Lawsuit,

Washington Times, April 29, 1991, at F1.

As Judge Kozinski points out in his dissent, we may

assume "that our national interest is served when financial

markets function efficiently, unbeclouded by the risk of

kamikaze litigation." Layman, 994 F.2d at 1358, App. at A-

33. By limiting the circumstances in which indemnification

provisions may be enforceable, the Zissu and Layman courts

necessarily affect the operation of those markets. Like

Judge Kozinski, petitioners believe that "a clear statement

that [federal courts] will enforce a subscriber's warranty he

hasn't considered matters outside the offering materials

would have an entirely salutary effect [on the efficient

operation of the nation's financial markets.]" Jd. at 1358,

App. at A-33, A-34 (emphasis in original).

Enforcing indemnity provisions allows courts to

control litigation abuses. As Judge Kozinski documents in

his dissent, the litigation the plaintiffs instituted consumed

"a staggering quantity of productive resources." Jd. at 1358,

App. at A-32. Millions of dollars were spent defending

claims which were judged to be without merit. The amount

of judicial resources expended was equally alarming. These

costs were directly attributable to the plaintiffs' untrue

representations. If the provisions of the Contract -- and

contracts like it -- are not given effect, one would expect to

see those same litigation techniques employed again by

other investors. Shifting the costs where they belong -- to

parties who have agreed to accept them -- will enable

courts to strike a blow against abusive litigation without

engaging in judicial activism.

Moreover, indemnification provisions in subscription

agreements enable sellers to limit and contro] the informa-

a TT

tion provided to investors. Documents such as the Farm's

PPM are carefully drafted and reviewed for accuracy and

legal sufficiency. The purpose of this process is to provide

accurate information to prospective investors. This goal is

thwarted if investors disregard the offering materials and

base their decisions on other purported information -- which

may not be subject to the same scrutiny and controls as the

written offering materials.

Enforcement cf indemnification contracts will have

the beneficial effect of allowing sellers and others to rely

upon the information provided to them by investors. Put

another way:

The purpose of the contractual in-

demnification provision is to hold a wealthy

and sophisticated investor to her warranties

and to insure that she has read and under-

stands, the precise disclosures with which

the law requires she be provided. To hold

that such a provision is "contrary to the Act”

makes disclosure the futile and expensive

exercise many fear. After all, who is better

situated to understand the mandated disclo-

sure than the knowledgeable and experienced

investor?

Henry Klehm [II], Comment, Contractual Shifting of

Defense Costs in Private Placement Offering Securities

Litigation, 36 U. Pa. L. Rev. 971, 988 (1988).

: CONCLUSION

For these reasons and those stated in Judge

Kozinski's dissent, Petitioners urge this Court to grant a writ

of certiorari. Doing so will resolve a festering conflict

celal

among the circuits, prevent forum shopping, and inject

needed clarity and certainty into federal law.

Dated: August 9, 1993

Respectfully submitted,

THOMAS K. BOURKE*

DAVID L. ARONOFF

Turken, Melman & Bourke

Attorneys for Petitioner Frank L. Bryant

*Counsel of Record

JAMES E. BURNS, JR.

JOHN MISSING

KEVIN P. MUCK

Brobeck, Phleger & Harrison

Attorneys for Petitioner Kemper Securities, Inc. (formerly

known as Bateman Eichler, Hill Richards, Inc.)

M. LAURENCE POPOFSKY

MICHAEL L. RUGEN

RICHARD DeNATALE

Heller, Ehrman, White & McAuliffe

Attorneys for Petitioners Charles R. Hembree and

Kincaid, Wilson, Schaeffer & Hembree, P.S.C.

No.

In the Supreme Court of the

United States

October Term, 1993

FRANK L. BRYANT, KEMPER SECURITIES, INC., a

Delaware Corporation (formerly known as BATEMAN

EICHLER, HILL RICHARDS, INC.), CHARLES R.

HEMBREE, and KINCAID, WILSON, SCHAEFFER &

HEMBREE, P.S.C., a Kentucky Corporation,

PETITIONERS,

CALVIN KLEIN, GEORGE E. LAYMAN, JR., GEORGE

E. LAYMAN, ZENYA YOSHIDA, DBA SHADAIT

FARMS, KENNETH FRANZHEIM, II, BLAS R.

CASARES, EARL H. SHULTZ, RICHARD L. SCHULTZ,

VIRGINIA M. McGONIGLE, JOHN F. McGONIGLE, H.

JAMES GRIGGS, BARRY K. SCHWARTZ, FOREST

ACRES PARTNERSHIP, a Washington State General

Partnership, BARRY K. SCHWARTZ PARTNERSHIP, a

New York Partnership and ROBERT D. STRATMORE,

RESPONDENTS.

PROOF OF SERVICE BY MAIL

State of California

SS.

County of Los Angeles

I, the undersigned, say: I am and was at all times

herein mentioned, a citizen of the United States and a

resident of the County of Los Angeles, over the age of

eighteen (18) years and not a party to the within action or

proceeding; that my business address is 9105 Sunset

Boulevard, West Hollywood, California 90069; that on

August 9, 1993, I served the within Petition For A Writ Of

Certiorari To The United States Court Of Appeals For The

Ninth Circuit in said action or proceeding on all parties

required to be served by depositing true copies thereof,

enclosed in sealed envelopes with first-class postage thereon

fully prepaid, in the United States mail at Los Angeles,

California, addressed as follows:

Clerk, United States Supreme Court Clerk, United States Court of Appeals

One First Street, N.E.

Washington, D.C. 20543

(By Express Mail: Original

and Forty Copies)

John I. Alioto, Esq.

Alioto & Alioto

505 Montgomery St., 10th Floor

San Francisco, California 94111

Counsel for Calvin Klein,

George E. Layman, Jr.,

George E. Layman, Kenneth

Franzheim, II, Earl H. Shultz,

Richard L. Schultz, Virginia

M. McGonigle, John F.

McGonigle, H. James

Griggs, Barry K. Schwartz,

Forest Acres Partnership, Barry

K. Schwartz Partnership, and

Robert D. Stratmore

(Three Copies)

Ninth Judicial Circuit

121 Spear Street

San Francisco, California 94119-3939

(Three Copies)

Richard M. Trautwein, Esq.

Alagia, Day & Mintmeir

325 W. Main Street

2000 Waterfront Plaza

Louisville, Kentucky 40202

Counsel for Blas R. Casares

(Three Copies)

Michael J. Bettinger, Esq.

Pillsbury, Madison & Sutro

P.O. Box 7880

San Francisco, California 94120-7880

Counsel for Zenya Yoshida, dba

(Three Copies)

I declare under penality of perjury that the foregoing

is true and correct. Executed on August 9, 1993, at Los

Angeles, California.

Betty J. Malloy

(Original Signed)

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