Petitioners Brief — Ross v. Bernhard

‘, Iroewaserw

: ° _ : ; tide-sun v0 {

re) eee eee oe; t ot aa te >

. qxensemcersmereesemmte —— — ae

; ist ’ MAY 8 i969

IN THE

| Supreme Court of the oe Bitte OK .

OCTOBER TERM ow 9 é-

—_ yf os '

'. HOWARD ROSS and BERNARD ROSS, as- ‘Trustees for a3:

-LENA ROSENBAUM, - Cpe ne nn em

Petitioners, .

sa 8 te

ROBERT A. BERNHARD, et Pe

, , Respondents,

and

PAUL L. DAVIES, ef ak. ei

| _ Defendants.

ON W RIT ‘OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

®

” BRIEF FOR a

*

n) ».

Wiutuiam E. Havpex

Attorney for Petitioners anes

295 Madison Avenue

. New York, N. Y. 10017

Of Counsel . — | ure ,

_ ABRAHAM L. PoMERANTZ

Ricuarp M. Meyer

Pomerantz Levy Havpex & Buock

* 295 Madison Avenue

New York, N. Y. 10017

RosentHaL & GurKIN

19 West 44th Street

New York, N. Y. 10036

— st

Se a AEE

ie 320 (ase Pauss inc., 421 Hupsox st., NU¥.—ORegon 5-4540 -

TABLE OF CONTENTS, —

PAGE

Opinions Below ........ gui eaad voeane oe ey eee 1

er ere ere Pe rer Pere TT TT Pee ee 1

| Constitutional Provisions and Statutes ............ ees ae

_ Question Presented ..... Penta: erree ee ee

Statement of the Case ...... eo aes pore 3

“ARGUMENT: , |

I. Plaintiffs are constitutionally entitled to ‘a

jury trial in a derivative stockholders action

‘if a right to jury trial would exist were. the

underlying cause of action ne directly by

the corpor MN hides vitewecesuas Ye eee oe

II. The tinderlying causes of action in the present |

case assert substantial legal claims. giving rise

toa — to Jury ¢ Oriel . 65. eT e Pere ET eee 5

CONCLUSION .......... ee ene cv eccconvessetces ver 21

_AvtHoritiEs Cite

- Cases ©

Beacon Theatres, Ine. v. Westover, 359 U.S. 500

ee as iow cs PEE ER RUE POR ee ....4, 6,8; 9310

Dairy: Queen, Ine. v. Wood, 369 U.S. 469 (1962) . . 6, 7, 8,

14, passim

DePinto v. Prov ident Security. Life Insurance Co.,

*** 323 F.2d 826 (9 Cir. 1963), cert. den. 376 U.S. 950, i oe

reh. den. 383 U.S. 973 bkees Layne teen wet 16, 17

Fanchon & Marco, Ine. v. Paramount Pistaits. Inc.,

, 9

402 F. 2d 731 (2 Cir: 1953) ........5..... 0,18 13

ce |

; | _ (PAGE

Pleitmann v.W ddd Sireet Lighting Co., 240 U.S.

ERE Se Ri EOE ck She Ceariicaeae Cerne ie | 12, 13

Galloway v. United outa 319 ‘U. S. 372 (1943; ‘dis-

‘senting opinion) ..... EN CARR aes eee ees hes 18 |

Halladay v. V erschoor, 381 F. 2d 100 (8. Cir. 1967) . ore,

Kelly v. Dolan, 233 F. 635 (3 Cir. 1916) . ae é

Koster v. Lumbermens Mutual Cas. Co., 330 US. 518 rate

Cs eee eee ins Haak van ek es -- 5,9

“Meyer v. Fleming, 327 US. 161 (1946) Stoo eee So

Moore vy. New York Cotton Exchange, 270 XL. 8.593

WI <0 ese Pet ahaha wresas vebee. 10.

Parsons wv. Bedford, 28 U.S. (3 Bet.) 433 (1830) ae 4

Potter v. Walker, 276 N.Y. 15, 11 N.E. 2d 335 (1937). 11

Schultz v. Manufacturers & Traders Trast Co., 128.

F, 2d 889 (2 Cir. 1942), cért. den) 317 U:S. 674 .. 17

‘Simler-v. Conner, 372 U.S. 221 (1963) ............. 17:

Sioux City & Pacifie R.R. v. Stout, 84 U.S. 657 (1873) 19

Swofford @ B &W, Inc., 336 F.2d 406\ (5 Cir, 1964), aK

cert. den. 379 US. 962 ree Peer ety Srey ree 20 -

Travelers Insurance Co. v. Selden, 78 Fed. m4. °C

Cir. al HEEL bclth ie oe ryerr PE eas 19

| Statutes | i

15 USC §§ 80a-1, choos COTE TEEE Nor pe ed 2,3

15 USC § 80a-10(b) MD oodecesesee. eat ga

15 USC §B0e-B68)(8) -. fice ees ceecgeeoees.. 1B

15 USC § 80a-2(a)(9) ...... ‘Hisecs ee eee 15

28 USC § 1254(1) ...... Serre ecm ie

28 USC §1292(b) ....... Be any cia meee ia 3

Unite? States Constitution

Seventh Amendisioat ics wks wh euke a of ene 2, 3,4, passim.

a

iii ’

Miscellaneous wt

PAGE

Caldw ell, Trial by Judge and Jury, 33 Am, L. Rev. |

I crack jos ear aue ee ee 19

C rane, Judge and Jury, 15. A. B. A.J. 201 (1929) . 19

3 Elliott’s Debates, 324 (1836) rae vennien Saas 4

_ Hogan, Joseph Story on Juries, 37 Ore. L. Rev. 234

a (1958) Raa “‘—v>etrractacrery 2. ee 4 .

Holmes, Law In Nilesiids and Science in Law,.i2 Harv.

Bs, BOW, GES (ROIS) 5 2 5 hive vvcvesenss rere te

, 9 Moore’s Fed. Pr. 113- 115 (1968) me Pee a rer mae

Restatement of Agency 24, Sees, 399 et seq. Peele oe ae

Towgue, In Defense of Juries ‘As Exclusive Judges

of the Facts, 35 Ore. L, Rev. 143 (1956) ...... ives _

WwW aterman, ‘Thomas Jefferson and Blackstone’ “eats ae

Commentaries, 27 il. L. Rev. 629 (1933) ae

IN THE/

Supreme Court ‘uf the uit States

October Term 1968’

me it i\

a&-;

; -Howarp. Sons AND Berwanp Ross, as Trusty ES FUR = f 7 \

ey coe, Lena’ Rosexsaun,- eet a at it eee j

ze <a a _ Petitioners,

—Vv.— .

Rovert A. Bernuarp, et al., ,

" | - — . Respondents,

and

t

Pan L. Davies, et x

aed Defendants,

. ; — ‘

*

BRIEF FOR PETITIQNERS ~~

Opinions. Below —

- The opinion of the Court of Appeals for the Second Cir-

cuit is reported at 403 F.2d 909. The opinion of the District

‘Court for the Southern District .of New York is reported at

- 270 F. Supp. 369. | a:

. Jurisdiction . A. ,

The judgment of the Court of Appeals herein was -en-

_ tered ‘oir. November 1, 1968 (A. 2). The. petition for’a.

_ writ of certiorari was filed on January 29, 1969 and was “" . *.

graited March 24, 1969. This Court ’s jurisdiction is based

-

Ja USC § . SOa- 43:

on 28 USC §1254(1). The jurisdiction of the ‘Court or

- Appeals’ was inand on 28 USC § 1292(b), that Court having

“aecepted al certification from the District Court. The Dis-

trict Court’s jurisdiction was. based Upo the five- thnent

Company: Act of 1940, ly U SC §§S0a-1, et hon. @

Constitutional Provisions and Statutes

Seventh Amendment to the Constitution:

“ttn Suits at common law, where. the value | In con-

trov ersy , shall’ exceed tweuty dollars, the right of |

trial by jary shall be preserved, and no fact tried by.

a. jury, shall- be otherwise re-examined in 2ny Court

‘ok the United States, than. according to the miles of

thecommon law.’ ; ae. , c

ao

- Section 44 of the Investnient aeee Act ‘of 1940, 1p o

~

“See, 44. The district courts of the United States

and the United, States courts ‘of any ‘Territory | O7

_other place subject to’ the jurisdiction at the U nited

States’ shall haye jurisdiction of violations of ‘this

in title or the; rules; regulations, or orders thereunder,

and, conenérently with State and Toryitorial’ courts,

of all stiits i in equity and actions at law brought to,

enforce ¢ any liability or’ duty created by, or to CHJOLD

any. violation of, this title or * the rules, regulations,

or orders thereunder aa a

I

\ co Sapetion Presentest. ie es

‘

W hea. a’ corporate action to recover money entitles all

é

*

yarties toa jury trial, is the: jury right lost where the

‘corporation is compelled to seck relief at the inStanec a

a stockholder in\a derivative action?

a> Vita Ke 2 | - . i 7 emt: \

Aco meteenenmape,

oe

Statement of the: Case

el

This j is an 1 action beagle by stockholders of The Lehman -

- Corporation in its right and on its behalf. It is brought

under the Investment Company Act of 1940, 15 USe &

SO. Tet seq. The amended complaint alleg es that the © ore

poration, under the control of its broker, Lehman brothers,

hi is paid illegal and unnecessary brokerage commissions to.

‘Lehman Brothers (A. *22-26). The’ plaintiffs ‘made. timely

demantl for a Jury trial (A. 20). Pre-trial discovery was

completed, plaintiffs filed.a note of issue and the action was

placed’ upon the ‘trial calendar (A, 31). Defendants then _

moved to trike plaintiffs’ demand for jury triad and to

‘transfér ‘the,case to the non- jury calendar (A. 28): The

District Court denied defendants’ motion, but certified the’

question to the Court of Appeals for the Second Circuit

_(A,..41-52}, which aedepted the certification (A. 57). The’

‘Second Cireuit, ina two-to- one - opinion, reversed the [is-

‘trict Court. 403 F.2d 909. Ae” se ‘Be

_ ARGUMENT

.

’ . .

s i. ° °

‘ 7 e -

Plaintiffs are olnatielttinallby entitled to a jury trial

‘in a derivative stockholders action if a right to jury |

‘trial would exist were the underlying cause of action

brought directly by the corporation.

The right to jury rial j In civil actions, guaranteed by the

Seventh Amendme nt, has been jealously safeguarded by

this ‘Court. : 7

. ‘Maintenance of ihe jury as a fact finding

eS ix-Of such ‘cata eaiaie oc ceupies so firm -a

+

Se

-

place in our history and jurisprudence that any seem-—

ing cur tailment of the right'to a jury trial should be

.Serutinized with the utmost ecare.’’’ Beae on Thea-

tres, lnc. v. Westover, 359 U.S.-500; 501. (1959).

- In so holding, the Court ré-affirmed the importance | of the

‘institution of the civil jury as a demoer ‘atic cheek upon ened

power of the judiciary. See Parsons v, Bedford, 28 U:

(3 Pet.) 433, 446 (1850) ; Waterman, Thomas Jefferson ane z

Blackstone's Comme ntarves, 27, Ill. La. Rev. 629, 648 (1953);

Hogan, Joseph Story on Juries, 37 Ore. Li. Rev, 254,255

(1958) ; 3 Lihott’s Debates, 324, 594 (1836). Gxt ras

Mr. Justice Holmes. explained low the jury systems

oui irantee of popular participation in the judicial process

operates: :

‘Indeed one reason why I believe in our practice of

leaving questions of negligence to them [the jury].

ix witut is precisely one of their gravest defects from

the point of view of their theoretical function: that

they will introduce into their verdict a certain amount

-a very large amount, so far as [have observed—of

the community.”’ (Holmes, Law In Science and

Science in Law, 12 Harv. L. Rev. H3, 459-60 nner’

interpolation added.) ,

Inour “People” s Capitalism” embr acing 27 million stock-

holders of public corporations the applicability of the con-

ception of popular control to the derivative action is es-

pecially compelling. i

The Seventh Amendment preserves: the right of trial

by jury ‘In Suits ‘at common law’’; not, to suits in equity.

| The Court of Appeals below held. that a stockholder’s

. .

popular prejudice, and thus keep the administration:

of the law in aecord with the wishes and feelings of .

ar

derivative action is ‘ta creature of equity’? to which the

right of a jury trial does not apply: 408 I. 2d at.911.

That tHe derivative stockholder’s action is an invention

oftequity may be conceded. Howeyer, the proposition states

ouly a half truth. A derivative action is constituted of two

parts. The first parf, concerns the shareholder's right tv

maintain the action on behalf of the corporation. This is

a procedural mechanism of equity. The second part bs the

underlying claim of the corporation asserted in the action.

This claim may be either legal or equitable depending =

its nature. Koster y. Launbermens Mutual Cas. Co., 330.08

918, 322-23 (1947) ; Meyer \ v. Fleming, 327 U.S. 161, 168

~ (1946). | | |

Prior to the union of law‘dnd equity, an equity: court,

onee having taken jurisdiction, would proceed to final ad-

judication of all issues, legal and equitable, in the suit.

“There was no practical alternative. Trying one half of the

ease (the right of the stockholders to hail the corporation

into Court) in equity, while sending the other half (the

corporation’s claims against. defendants) to another judge

sitting on the law side, had little appeal against considera~

tions: of litigative efficivney.

The adoption of the F ederal tele of Civil Procedure in

1938 worked an-historical change by merging law and equity ©

-intoa single unified system. The artificial’ restraints of the

old system were climinated. It now heeame possible fora

litigation to be tried before i au single, judge sitting at once

as a law court trying the +] legal] Issues with a jury if de-

manded, and an equity court trying ‘the. equity issues,

The Court of Appeals below reached. its result by utilizing

2 ~ & : : . . °

-- pre-merger concepts: It noted that a derivative ‘aetion.

under the. pre-unified sy “stein, would have had to be in-

‘stituted i in equity and an equity court would have decided

the entire Gase without reference to a jury, Theretore, it

held, no right to trial by jyry is ever presen{ in a stock-

holder’s derivative..action, even though the underlying

‘corporate claim be iegal. t

‘This Court, however, rejected: just such a test in Beacon

Theatres, Inc. v. Westover, 359 U S. 500. (1959)... There

plaintiff sought an injunction and defendant counterelaimed

for treble damages. under the antitrust laws. The lower

court held that the suit under the pre-merger system would:

have been c¢ ognizable i in equity and therefore denied a jury

‘on the counterclaim. This court reversed, holding that, if

legal claims were present, a jury was required; the blending

ef legal and equitable claims; which formerly would have

resulted in exclusively equity jurisdiction, does not now

destroy the right to a jury trial of the legal i issues

a Pear Since in the federal courts equity has always

acted only when legal remedies were inadequate, the -

expansion of adequate legal remedies:provided by the’

Declaratory Judgment Acti and the Federal Rules

necessarily affects’ the scope of equity. Thus,’ the

justification for equity’s deciding legal issues once

it obtains jurisdiction, and refusing to dismiss a ease,

merely because subseque thy a lowe tl remedy becomes

avidlable, must be re-evaluated in thé heht of the

liberal joinder provisions of the Federal-Rules which

allow legal and equitable causes to a brought and

resolved in one civil action.’’ (899 U. . at 509: foot-

note references eliminated, ‘

In Dairy Queen, Ine. WwW sak peo U S. 469 (1962), this

Court) emphatically saat ‘its holding in Beacon

Theatres. In Dairy. Queen, the car alleged that the

7

o

.

defendant was infringing the plaintiff’s trademark*and had

br eached a licensing agreement between the parties; it

as an injunction and’ an accounting. These were all.

raditionally, ‘‘equitable”’ ¢ lainis—just as the stoekholder’ s

io ative action is traditionally ‘“equitable”’ . Nonetheless,

this Court held that, since money recovery was ‘also sought,

the right’ to jury trial is not destroyed. The C ourt stated:

7s \5s5 eee holding: in Beacon T heatres was that where

hoth legal and equitable issues are presented in, a

single case, ‘only ‘under the most impor ative cireum-

stances, circumstances whiich-in view of the flexible

procedures of the Federal Rules we cannot now an-

ticipate, can the right to a jury trial of legal issues be

lost through-prior determination of equitable claimis.’

That holding, 6f course, applies whether the ‘trial

judge chooses to characterize the legal issues pre-

sented as ‘incidental’ to equitable issues or not. Con- -

sequently, in a case such as this where there cannot

‘even: bea contention of such ‘imperative circum-

stances,’ Beacon Theatres requires . that any legal

‘issues for which a trial by jury is timely and prop--

. .° erly demanded be submitted to a jury. There hei ing

| no question of the timeliness or-corr ectness of the de-

mand involved here, the sole question which we must

decide is whether the action now pending before the

District Court contains legal issues.’’ (369 U.S. at

472-73; footnote references eliminated.) —

»°

The Dairy Queen respondents attempted to qualify: the

rule, by quantitative considerations. They contended that

~ the equitable iSsues outweighed the legal i issue, Which was it

mere incident to the equitable ‘one. * Without disputing -the

premise, this Court refused. to weaken the right to a jury

tr ial by the disintegrating erosion of particul: ur exceptions.

“<<‘Tt is therefore immaterial that the case at bar

contains a stronger basis for equitable. relief than | °

was present’ in Beacon’ Theatres. It would make no

difference if the equitable cause clearly outweighed

the legal cause so that the basic issue of the case

taken as a whole is equitable. «As long as avy legal

cause is involved the jury rights it creates control.

This is the teaching of Beacon Theatres, as we con-

strue it.’ Thermo-Stitch, Ine. v. Chemi-Cord process-

ing, Corp. (CA5 Fla.) 294 F. 2d 486, 491. 7" _ (369

w

U me at 473 0.8; emphasis adde “d)

In the present cise the Court of Appeals Seti the. right

tq a jury because “the assertion -of any ‘legal’ claim on

behalf of the cor poration, is totally dependent upon plain-

tiffs’ successfully establishing their capacity to sue at

equity. Thus in applying the Seventh Amendment the two |

_ portions of the complaint cannot be regarded as separable

and divisible.’’ (403 F. 2d at 914} emphasis supplied).

But ‘this effort .to distinguish this Court’s holdings in. |

Beacon dpi and Dairy.Queen does not withstand anal-

ysis. For the holding of these cases is that, where both

* legal and equitable issues are presented in a single case,

“the right toa jury trial: must not be lost’ by the way in

which “the. trial judge chooses to characterize. the legal -

issues’? (Dairy Queen, supra, 369 U.S. at 473). In Dairy

Queen, the trial court denied. a jury, denigrating the legal -

issue by. characterizing it as merely ‘‘incidental’’ to the

equitable. issue (369 U.S. 469, 470). In the present case,

ihe Court of Appeals rationalizes denial of a jury by re-

ferring to the legal issues as ‘‘dependent”’ on the equitable .

issues. But, however the legal issues be labeled, there isa

legal issue here. This is not questioned by the Court below. —

\ 3 ? : ‘ o

And this Court has laid down the rule in’ terms so broad

us‘ to reject semantic erosion: ‘only. under the ‘most im-

perative circumstances. . . can the right ‘toa jury. trial

of legal issues be lost through prior determination of

equitable claims”’ Beacon Theatres, supra (359 U.S. at

510-511). © |

lf indeed the right to a jury re ial shout depend on ‘such

élusive and unfunctional ‘a concept as would -require bal-

acing the weight of the equity claim against that of the

-Jaw claim, it is nevertheless plain that the dominant claims

‘in this case as in most derivative cases are the ‘underlying

corporate claims. The fact that equity, has fashioned a

remedy which enables. any shareholder of a corporation,

immobilized by recreant directors, to’rescue the cor poration

and. bririg it to the courthouse should not deprive the cor-

poration or, for that matter, the defendants, of their right

to ajury trial |

Thus, this Court has recognized that the important issue

in stockholder s’ derivative actions‘ is. not the equitable ques- —

‘tion of whether the particular stockholder is, entitled to -

maintain the action but. rather, the underlying’ substan-

tive claim against the defendants. ‘The eause of: act ion

whieh such a [derivative] plaintiff brings hefore the Court

is not his own but the corporation’s. - It, is the ‘real party

in interest and he is allowed to act in protection of its

interest somewhat as a ‘next friend’ might do for an indi-

vidual, because it. is disabled from protecting itsclf’’:

- Koster vy. ‘Lewibermons Mutual Cas. Co., 330 U Sz 518, 522-3

(1947). ‘‘The fact that- [in a stockholder’s derivative ac-:

tion] the corporation is nominally a defendant :-. . gives

Ahe suit only a difference in form, not a difference in sub-

_ stance’’; Weyer v: sree 227 U.S. 161, 168 (1946).

.

Moreover, the ‘emphasis of the Court bulow on the. de-

_ pendence of the legal claim is misplaced, for the underlying

legal cause of action could have been ‘brought directly by

the corporation. The action is thus no more or less ‘‘uni-

| tary?’ (403 F.2d at 914) than the Beacon T heatres suit.

Onde the plaintiff in that case filed its bill in equity, the

anti-trusg claim becamg completely dependent thereon, in-

capable of prosecution as a separate action, since it was

a compulsory counterclaim.* Moore v. Néew York Cotton

| Exchange, 270 US. 593, 609-10 (1926). ree 1

The consequences of the Court of Appeals boiding ‘lead.

to.intolerable results. If a director, broker or ogher person

is sued bya cor poration. to recover a sum of money, he is

entitled to.a jury trial. If the same’defendant is sued to .

recover the same stim of money by the same corporation,

but the eorporation is propelled by a shareholder in a

derivative aetion, two possible ‘alternatives result from the

‘ Court of Appeals holding: Either the. defendant has lost,

his right to a jury trial, or, by insisting upon it, he’ can

*

_ defeat the action altogether.” Either result. is logically -

_ untenable and procedurally uncalled for. Granting such’a

defendant a jury trial on the legal i issues eomports not only

‘ with logic, but with precedent as well. For the rights of”

_ the parties cannot be made to ‘depend on the procedural -

question of how the corporation came to sue the defendant :’

* The latter result occurred prior to the merger of —~ and equity. ;

Fleitmann v. Welsbach Street Lighting Co., 240 U.S. 27 (1916),

discussed infra, pp. 12-13. The Court of Appeals would return sé

to that era, ignoring the solution provided hy the Federal Rules in

' permitting legal issues to be tried to*the jury while the court decides

equitable issues. See Fanchon & Marco, Inc. v. Paramount. Pictures, »

Inc., We ¥, 2d 73k (2 Cir. se discussed infra, PP 12- 13.

”

: s

/ 11%

ae _ [T]he essential. dinates of a cause of action |

belonging to a corporation remains the same, whether

_ the suit to enforce it be broughtsby the corporation

or by a share-holder. Thus a legal right of action

would not be treated ‘as an equitable one, -or become

governed by the rules applicable to eqhitable Causes

_ of action, as to limitations, ete., becauke a share-

holder has brought suit in equity te, enforce it ‘on

ee of the company.’’ Potter v. W alker » 276 N.Y.

15, 27, 11 N.E. 2d. 335 (891).

The exact issue ar upon by the Court below was de-

cided i in 1963 by the Ninth Cireuit in DePinto v. Provident risa

Security Life ‘Insibauce Co., 323 F.2d 826 (9 Cir. 1964), cert. »

den. AiG U.S. 950, reh. ‘den. 383 U ‘S. 973. In DePinto, the

Court held that ttie right to a jury. trial must be preserved

--jn a.stockholder’s derivative action where such tight would

have existed had the suit been brought by tle corporation |

in the first instance. ‘The Court stated: '

“Thus; except ‘under most imperative circum-

stances, a right to a jury trial on legal issues may

hot now be denied to a federal litigant on the: ground

“that the ease reached court only through equity, or

because equitable rights are involved, or because

the legal issues aré ‘incidental’ to the equitable issues,

or becatise-substantive equitable remedies are sought,

*-or by the device of trying the equitable issues first.

‘* \ stockholder’s derivative action ix an invention

of equity to supply the want of an adequate remedy.

at law to redress breaches of fiduciary duty. Koster

v..Lumbermens Mutual Casualty Co., 330° U.S. 518,

522, 67 S.Ct. 828, 91 L. Ed. 1067. The aid of equity is:

needed in order to establish the shareholder's: righ’ .

to sue in the corporate stead. Fanchon & Marco, Ine.

vy. Paramount Pictures, Ine., 2 ’ Cir.,.202 F. 2d 731,

. ee

Pare en,

734, 26 v L.R: 2d 1336, B ut the ¢ latin set up is that

- of the corporation. ae ae

- ‘tn order to determine whether appellants were

‘entitled to a jury_trial in this derivative aetion, 4a.”

therefore necessary to ascertain whether r any of the

.¢laims asserted against them on behalf of the vor-

poration are of a kind which, if asserted by the

corpofation, would be coghigable i in a suit-at commoay

daw. If so, and if the judgment which has been

entered, insofar as can be determined rests on claims

of that kind, there has-been a denial of Arial hy jury”

as guaranteed by the Seventh Amendment and. ap-

“pellants have been aggries ved thereby.’? (523 F, 2d ad

836-37 ; footnote references eliminated) -

lw Fanchon rb Marco, Tne. v. Paramount Pictures, lne.,

“202 F.2d 731 (2 Cir, 1953), the Court of Appe: Ws held that

in i derivativ ¢ action where the underlying cause of action

charges violation of the ahtitrust laws, there is a right to

a jury trial which is not destroyed by the fact “that thie

action is ‘brought derivatively :

.

‘

ie . The two major issues of ld of the hikes.

hivede i sue and of violation of the antitrust laws

oe causing damage to the corporation can he tried side’

by side or otherwise as may be convenient; that one

may go to the jury while the otherdoes not causes no

difficulty.’’ (202 F. 2d at 735) .

“The Court of Appeals To thought that the holding in

Fauchou was di@ym. Clearly, it: was not. The de Fondants

there had snecessfully stolid hea of the. actfon by

the District Court. T hey argued that they wWeLe entitled to

\ jury trial ana that under the degrassi T Kleitmanun vy.

Welsbach Streei Lighting C'o,, 240 Us (1916), decided

pri ior to the merger of Taw junc equity, a jury trial was not

|

\"

4

\

p-

oe pre meee es eh

Ret : ers ™

available in a deriv: alive stockholders’ action. This, it was

urged, required dismissal of: the action. The Court of Ap-

peals in Fanchon held, however, .that: the leitmann ya-

law: and equity

‘since the derivative action could be maintained while. still

tionale did not apply to.a merged system

_ preserving defendants’ right to a jury trial.

“The Court below sought to distinguish Fanchan in that

the underlying’ claim there was for treble damages under

ite autitrust laws. Thus, said hag Sie of Appeals, the

jury trial right Was statutory in wuclron whereas here it

ix constitutional, This attempt at distinction” MISSes ; the

nutrk. Ti the first place, the mtght to a jury in an antitrust -

wetion ix not provided by the statute but results simply from

‘the fact that — as in the present case — a money judguie it

for dafiages may result. If the availability of such. a judg-

nent means that the statute contemplates a jury trial, then

it must be said ‘that § 44 of the Investinent Company _Act,

"15 USC §&80a-43, which authorizes actions at law to enforce ©

| liabilities er eated by the Act, similarly confers a jury right.

More importantly, however, it is diffieult to see -how a statu-

forily created right relating to the’ underlying cause ‘ol

action ‘could achieve xreater sanctity than a similar con-

stitutionally prov ided one. In short, the Kanchow casé is

* not distinguishable from. the prexe; nt one,

ih legal claim of a corporation, even though advanced in

v ' ‘

a derivative action, is triable before a jury. This Court has

cousistently rejected a’ variety of efforts to perniit, for-

malism to tv iumph. over the substantive’ ‘constitutional rishi ¢

to trial by jury.

n

ie

ae on : I ‘ Pd

rT : “The wnderiving causes ‘of action in the present. case»

ree. OF Bre, assert substantial legal claims giving. rise to’a right to

jie ae See 2 jury-teials« ease! / Saar: reer aie oc: ae

aa a ¢ es . ee }

“7 : ai, ahA Xs he Pet hele 3 in | Dairy ‘Queen We, ta v. Wood, 369°

eo Yes a6 0), VAs (1062)3 44 As! long at any Tegal cause Is

- arg ivghred the juryer ights it/ creiitts control. ~ In-the present

Shes ae NL, oF “axe “Ab¢ District « ‘our foul mntich MATE thi un, the minima!

> ih . ‘

“* f FO" aL! ahent. It. fornid “thal this cen in “ti ies an) behi lf

Eat Re hea Zuhy

apie 8 eee {Lhe corporation. a “elaim which i A: “fenetanient lly togal ~

apo ee "pl that equitable: Be yl, supp. 519), a7, The, { ‘ourt os

Sate SA a a i \ppeals: ge’ ision makes no » findings 40. the! contiyity, .

op eae arr The’ ( ‘ompfaint. See ks av money: HeCOV ery broker age Com.

,° ires eS & = . /, q

Fe 2 Mog Reo ‘nrissions illegally’ “paid hy The Corporation. most. of ‘it of. Es

ee i a ashigneyt ‘Brothyrs, vacich! dominated. the. orporation. In-

ree , : Ais ANE Cory ‘Ation. paid ., brokerage | commissions |, of.

f “ ee s

Pee eri ang + Pr Of ‘this sty sHe2, 90.3 wats. paid to Lelia’ Dot ters

to oe ac dS ppihilayhy, i, 1905, ilie c O} por ats paid br okerage commis:

é ‘ we 5 i ‘

| sap ' Seer +YOUs 7 at S): BS,622,, of whieli : 44,080 awe ni to. Ive han eet

3 Bo gecey” “difothsis: ‘Similar. payne nits for L6G - we ro sft I, ieee “dan 3

NT “af : ws 1, G40, respectively ie. CS. as) ee The. det eudanis 3 inclade, sn

ioe OR te ~gildigion to, the divcetors of. the Ro ae ation, the partners

se; j . ‘ oe ees

wa of Rehman Brotters a A Bt) a ee a a aie

\ cary The: ainsi may be bvokh ajo follows

‘ 4 “3. wd i AY \ ‘ ° ‘ ele ed aaa

Pat, Cope ts (hy wl ‘ails ‘to utilize the third tharket. In order to gen-

‘fe ORS Lee ate continissions for tlre mselvesy Lelimnanel Br others s caused

oe % .. » “ +. es - . ‘

oa ee a5 the Corpor: ation: to. excel transactions in listed Sec urities. =,"

Y ay eek “" .

ih Cees: . “on “Aue Xv ww! York “Stock “PMCHiitige. Tlrese- transactions .

| tes ~ os a a r ;

2S, RE ee VE ‘ould. have Been exetnted inst? mad on the third market vat

ne ee ‘\ Ve, tavoruble prices, “but: sich yecutions: would nol have: ot

+ resdl ten Gonnissions to. Lehrian- Brothers (A. 23). et sae

i ae) of Nea beeen é ; ;

. ek Mie ee Neh Cc ee OA RN FT oe ge! ie : ,

: a : 1. im ~. “a? - a. +: * ms Lay ; -

- , ; ’ ae o) “ : ‘ ; ad : oe

ine ‘4 ez t*: Wy 3

< : Pe —_; ogt Dy “ - “A .

» = * b ‘ @ 7 -* Hi, s

\ ‘ Pad La

-~*

in

co

oes tiogis in unlisted se cur ities, Lehman Brothe ws CAUSE “« ‘

thie ¢ ‘orporation ne codbessly to interposc’ the niselyes, and to:

i ‘ 500 15

; ; s .

(2) P ayment of WNNECEssary, comiiussions to Lehman

Brothe Vs on vover-the- counter transactions, When elfecting

pay them unnec ‘ssary COMMISSIONS: Tustead, the C orpora-

tion eeuld have dealt dirgetly with principals and avoided

those gratuttous payments for which no serv ice of value avas

rendered. (A. 23-24). ; G3

3). Re ‘ciprocal brokerage. The’. ‘Corporation. has hoon

caused to pay broker rage commissions to brokers who sup

plied information to Lehman ° Brothers. Thrin po feetively

caused the C orporation topay third parties for adv) ice for

whicli the ( Corporation hii vd already paid Lehman Brothers , |

( A. 24- 25), : ey - of"

Several thesries: are asserted be: whieh regovery may: she

hh; id. Ht is Sse ted that, by virtue. of the domination gil

-control.of the Cor poration by Lehman srothers, all bro-

kerage Commissions paid by the. Corporation to Lehman

Brothers: are iewal under © t(D) (1). 2(a) (3) and 26a)

Yo of the. — pee Net, 15 1 “SC 2 80a-100b) »

WD. 2(a) (3), 2 2(i) (9) °(.A. 25-26). It is also asserted that

the se ae broke rage constitutes compensation: to Leh- \

man Brothers as investment adviser to the. Corporation in

“OXCESS of the amount specified in. its investment advisory.

contract, thas breaching the investment adyisory contract

and violating the Investment Comp: ahiy Act (A a)

\

It is: firthe ‘W asserted that the yaymrent of hrokerage\

- -COTMMISSIONS | to Lehman B rothers and 6ther brokers lr: Is

| “constatuted an unlawful and willful conversion by Lehman

Brothers-of the assets of the 4" orporation in viol: ition of

C87 of the Act CA. 26). The payment of these broker: age

COMMISSIORS- wa also alleged to constitute gr Oss abuse of

"trust, gross misconduct, willful misfeasance, “bad faith,

ae v

r

16

gross negligence and a reckless dist egard of fiduciary duties

by the C orporation’s officers, directors and brokers in vio-’

lation of the Act (A. 26). Finally, it is asserted: that the.

payments amount to a waste and spoliation of thie ae

“rations axsets -( \. 26). |

The prayer Lor relief demands ‘that the defendants be

required “to. account for and-pay to the Corporation for

their profits and gains and? its losses.7?> No injunctive or

other extraordinary relief-is sought (A: 27). — ‘

That causes of action seeking money recovery such as

breach of contract, conversion, gross negligence an Vidia-

tion of statutory provisions are legal rather than equitable’

in nature. is beyond question. Professor Moore. states:

* Actions which at common law ...are jury actions... are:

_ suits for damages for nevligenee .. . for Violation of

: stattHes .. otrover ‘to recover damages for conversion

of personal property... and special assumpsit +- fo

ia damages on ‘. simple contract.” (5 Moore's - Fed.

Pr TS -115 -(1968), footnotes omitted).

hh Dh Pi. fo, supra, the Conrt held-as follows:

“One ground for the judgement, applicable to

-all of the appellants, is gross: negligence, Another

ae applicable to all appellants except Landoe,

is breach of fiduciary duty.

‘*An action brought by the corporation to reéover

damages against former officers or directors, ow ‘the

ground of negligence would be cognizable in a‘suit at

common law. Nelly v. Dolan, a-Cir., 255 FF. 685. Thus

all appellants were denied a jury trial on an issue

cognizable bya suit at conmmon law. Landoe was neée-

essarily aggrieved by this denial sinee, as to him,

this was the only basis of the judgment.

* Me * * are

.

‘Having im mind the necessity of scrutinizing, with

utmost care, any seening curtailment of the right to

a jury trial, we hold that where a claim of breach*of-

fiduciar y duty is predicated upon underly ng conduct,

such as negligence, which is actionable in a direet

sult at common law, the issue of whether the Ve hay”

been such a breach is, subject te appropr inte iustruc-

tions, a jury question. We therefore conclude that,

in the context of this case, the question concerning

breach of fiduciary duty, as well as negligence, should

have been submitted te the jury.’’..(323 F. 2d at

. 836-37; footiuote references eliminated)

In the De Pinto case, the claim involved the dive ‘vsiou of.

corporate assets in the purchase of allegedly worthless

stock. Groyinds for the judgment were gross negligence and

breach of fiduciary.duty. In the instant case the amended

compjaint asserts that assets of the Corporation have been

diverted. The diversion is in the form. of brokerage com- -

-uissions, Which are paid-to Lehman Brothers and other

bro%Sers. As in DePinto, the diversion is caused by gross

negligence and breach of fiduciary duty.

The present case seéks not only: to charge the, directpr~

of the Corp oration, but. also asks for recovery from the

C orporationi’ s principal broker. In Siler v. Conver. B72

U.S. 221 (1963), this Court held that‘a case éwticiien

the amount of fees which-a client was obligated to pay his

lawyer, whom he charged with overreaching, raised legal

_issnes creating a right ef jury trial. Clearly a controversy

with a broker concerning the propriety of commissions paid

to hini is also a leg: il cause: of. action. Schultz v. Manutac-

turers & Traders Trust Co.. 128 F. 2d S889 (2 Cir. 1942),

cert. den. 317 U.S. 674; Restatement of Agenéy. 2d, Sees. 399

et seq.

— oss oo"

18:

The. meré fact. that the defendapits are fiduciaries does

not mean th: it the causes of action against them ,must be~

‘equitable. Thus, as the Court ‘of Appeals, for the Third

Cirenit heid in Kelly v, Dolan, 233 F. 635, 637. (3 Cir. 1916) ;

‘. . .. That the negligence of a director is an in-

Jury to ie corporation, and that the right to recover.

‘for such’ negligence is a leg: il as contrasted wifli an:

equitable righi, and: that the corporation is vested

with the right-t6-recover for such injury. is .extal-

lished by authority. In some cases this right is as-

serted im equity; in-some at daw, according to cir-

cumstances; but in whatever form it is litigated the

right to recover for negligence is a legal right.”"|

See tse, Talladay \. Verschoor, 381. ¥. 2d 100, 109 (8

Cir. 1967). . | |

Nor does the possibility that the transactions: may be

humerous require a ‘denial: of the Jury right. There is no

reason to believe that the jury would not be equal to its role,

The issues are cousider: ably sunpler than those involved

‘in antitrust litigation, patent suits and ‘a large \ variety of

‘rtilyeomptex tatters where juries are called upoii to'ex-

- amine yumerous transactions. constituting the wrongs eom-

plained of, There i is ho justification for ereding the right to

al Jury trial here.

The mainstreanr of ‘aad: politic: l and jurisprnden-

‘ial thought hi is not shared the doubts of Alexander Ilam-

ilton as. to the competence of, juries, relied upon by

respondents (Br. in Opp. to Pet. for Cert. ‘p. 7). Thus, in

“Hamilton's view, that constitutional protection of jury trial -in

civil cases was undesirable, did not prevail. On the contrary, in

- TEsponse to errr ad demands from the various State ( ‘onstitutional

.* Conventions, the first Congress adopted the Bill-of Rights containing

the Sixth and Seyenth Amenédments, intended to save trial in iaatls

erimifal and common law cases from legislative or judicial abridge-

ment.” Galloway v. weet” States, 3I9 US. 372, se 398 (1943;

- .* dissenting opinion).

"19 | as oa e.

Sioux City & Pacific BLR. v. Stout, 84 U.S. 657, 664 (1873),

‘the Court said: ; :

“*. . . Twelve men of the average of the commu-

nity, comprising men of education and men of tittle

educat@n, mén of lear ning and men whose learning

consists only in wliat they have themselves seen-and

heard, the merchant, the mechanie, the farmer, the

laborer ; ; these sit together, consult, apply their sep-

arate expericnce of the offsixn of life to the facts

/ proven, and draw a; unanimodus conclusion. This

average judgment thus given it is the great effort

of-the law to obtain. It is assumed that twelve men

1

ne one man;.that they can draw wiser and safer conclu--

sions from admitted facts thus occurring, than can

a single judge.”’ . ’

See also Travelers Insurance Co, vy. Selden, 78 Fed. 285,

287, (4 Cir, 1897) , Crane, Judge and Jury.15 A.B. A.J). 201,

202 (1929) ; Caldwell, Trial hy Judge and Jury. 33° Am. 1h.

Rey. 321,-329-38 . (1899) : Tongue, Jn Defense of Juries As

Exelusive Judges of the Facts, 35 Ore. L. Rev. 143, 161-66

(1956).

‘What is sought byway, of relief here i is a judgment for a

sum of money. As this Court held in Dairy Queen, supra,

thix is the iApidiaiive factor: No extraordinary relief for

which courts of law are adequate is required, notwith-

standing the fact that. the prayer uses the word account.

‘The respondents’ conténtion that, this money

a claim is ‘purely equitable’ is hased. primarily upon

the fact that their complaint is cast in terms of an

reine’ rather than.in terms of an action for.

‘debt’ or ‘damages.’ But the constitutional right to

trial wy jiry caimot he “made to depend upon the

.

know more of the common affairs of life than does .

bo

20.

choice of Words used in the pleadings. The necessary

‘prerequisite to the right to maintain a suit for an.

equitable accounting, like atl other equitable reme-

dies, is, as we, pointed ott; in Beacon Theatres, the

| absence of an adequate remedy aut law. Consequent-

Jy, in order to maintain such a suit on a cause of

action cognizable at law, as this one is, the plaintiff

_ must be able to show that the ‘accounts between Sa

parties’ gre of such a ‘complicated nature’ that ‘only

* a court a equity can satisfactorily unravel thenn In

view of the powers given-to District Courts by Fed-

eral Rule of Civil Procedure 53(b) to appoint-masters

_to assist the jury in those exceptional cases ‘where

_the legal issues are too eoniplicated forthe jury ade-

quately to handle alone, the- burden of such a. shéw-

ing is considerably increased and it will indeed be a

vare case in which it can be met. But be that.as it

may, this is certainly not such a®*case., .\ jury,/under

proper instructions from the court, could readily de-

termine the recovery, if any, to be-had here, whether |

the theory finally settled upon is that of breach of

contract, that of trademark infringement, or any

combination of the two. The ‘legal remedy cannot be-

characterized -as inadequate merely because the

measure of damages may necessitate a look into pe-

- tioner’s. business records.’’? (Dairy Queen, Inc. v.

Wood, 369 U.S. 469, 477- 79; footnote references ©

eliminated) . :

Fics also, Swofford vy. B gi, Tne., 336 F.2d 406. 410- 11

(5 Cir. 1964), cert. den. 379 U.S..962.

" 21

CONCLUSION

For the foregoing reasons, the judgment of the Court

* of Appeals for the Second Circuit should be reversed.

Respectfully submitted,

Wituiam E. Haupex

Attorney for Petitioners

295 Madison Avenue

‘New ¥ork, N. Y. 10017

Of Counsel _

ABRAHAM L. PoMERANTz

Ricuarp M. Meyer ~

Pomerantz Levy Haupex & ne K

295 Madison Avenue

~ New York, N. Y. 10017

-Rosextuat & GurKIN

- 19 West 44th Street

“New York, N. Y. 10036

>

IN THE JOHN F. DAB, ERK

Pen Cnuri of the United

fates

. OCTOBER. TERM, mp )7¢

os pity © . |

vn

No. wath “AP. |

-

Ha, ARD ROSS and B [2 RN ARD ROSS: ax Trustees for

; a LENA ROSENBAUM,

~

ROBERT A

Petitioners

against—

/ BERNHARD; et ai..

ON, WRIT OF Cr!

' Respondents.

‘

TION AKI TO THE UNITED STATES COURT OF- APPEALS’

ron THE SECOND CIRCUIT

a «

: , —, | .

= . Be - : a

. B

RIEF FOR RESPONDENTS

.Manrvrs Scuwarrz

; Roger I

. ;

» Watpman ~

SuLLIvAY & CRroMWELI

,

{fhorucys hor Respondents

Clark. ft al..

48 Wall Street

New #¥ork, N.Y

MayNine.

Siupsox Tracner & Barrett.

Attorneys for Re sponde nts

Be ruhard. ct al..

120 Broadway

Wissas

"10005.

P 8

| New York. N.Y. 10005

E. Rocer Frise iH, ‘

| Warsu & Friscu.

Aftorue ux tor Re wad ni

7 The Lehinan Corporation,

“4 250 Park Avenue

June 6, 1969

New YorkN. Y. 10017