Petitioners Brief — Ross v. Bernhard

ried,

nts

Mazur,

Palmar,

Ehrman,

as, Szold,

‘and

C. 10005.

IN THE

Supreme Court of the United

OCTOBER TERM 1968

No.oee 242-

HOWARD ROSS and BERNARD ROSS, as Trustees for

LENA ROSENBAUM,

Petitioners,

—

ROBERT A. BERNHARD, et al.,

Respondents,

and

PAUL L. DAVIES, et al.,

Defendants.

ON WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

BRIEF FOR PETITIONERS

nn

Wuuium E. Havupex

Attorney for Petitioners

295 Madison Avenue

New York, N. Y. 10017

Of Counsel

Asranam L. Pomerantz

Ricuarp M. Meyer

Pomerantz Levy Havupex & Biock

295 Madison Avenue

New York, N. Y. 10017

RosentHaL & GurRKIN

19 West 44th Street

New York, N. Y. 10036

Casz Pagss inc., 421 Hupsow St., N.¥.—ORegon 5-4540

ree

|i

PAGE

Opinions Below ....<++..--++0+--2ereeeeeeeeeeees 1

Jurisdiction GMs... ....-- 0. eee ee cece cece eeeeeeees 1

Constitutional Provisions and Statutes ............ 2

Question Presented .......---+++++sseeeseeessees 2

Statement of the Case ............-+eseeeeeeeeees 3

ARGUMENT:

L 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 brought directly by

the corporation ............+.0s-eeeeeeeee: 3

II. The underlying causes of action in the present

case assert substantial legal claims giving rise

to a right to jury trial ...............++-++: 14

Cases

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

PD Sccdbeddcncesdcsencsccessiscscccece 4, 6, 8,9, 10

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

14, passim

DePinto v. Provident Security Life Insurance Co.,

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

woh. dem. 6B UG. GIB .. 0. ccc cccccccccccccces 11, 16, 17

Fanchon & Marco, Inc. v. Paramount Pictures, Inc.,

202 F. 2d 731 (2 Cir. 1953) ..........-.+0-05- 10, 12, 13

li

Fleitmann v. Welsbach Street Lighting Co., 240 U.S.

Me MN -sabhbahuwnkadcanncduibedas éhadcddcs 10, 12, 13

Galloway v. United States, 319 U.S. 372 (1943; dis-

ON IID nn cccsncccdccecccdcencscccac. 18

Halladay v. Verschoor, 381 F. 2d 100 (8 Cir. 1967) .. 4g

Kelly v. Dolan, 233 F. 635 (3 Cir. DD Sek acen sin? = 2

Koster v. Lumbermens Mutual Cas. Co., 330 U.S. 518

Se Sid wcdudancasbadatcckoninisniacit. 2... 5,9

Meyer v. Fleming, 327 U.S. 161 ( SP Anbibcnemada 5,9

Moore v. New York Cotton Exchange, 270 U.S. 593

UNE ebh ahd by tin Gadaseandedl ke oebnéces ca. 10

Parsons v. Bedford, 28 U.S. (3 Pet.) 433 (1830) .... 4

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

UR, GI ee EIN OT Sod ccccdadccncncncececce 20

Travelers Insurance Co. v. Selden, 78 Fed. 285 (4

WE INE Wek ciibaieets thee casccasccoc 19

Statutes

15 USC §$§ 80a-1, et seq. ................000005.5., 2,3

Be Me OED oo sc ccccccnccacccesecess, 15

15 USC § 80a-2(a)(3) 2.2.2.0... eee cece cece, 15

ee ee I os cc cus cansheacaceceesence 15

IE 6c bine so dec dawsediceccecccescea, 2

ee id ain nn ince gb ciadidiedl die nie keaccaes 2

United States Constitution

Seventh Amendment ......................

—

iil

Miscellaneous

Caldwell, Trial by Judge and Jury, 33 Am. L. Rev.

Re Lory aces habe cscs avanancpcnes

Crane, Judge and Jury, 15 A.B.A.J. 201 (1929) ....

3 Blliott’s Debates, 324 (1836) ...........eeee sees

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

(1958)... sce e cece cece eee e ence cess eeeee eens

Holmes, Law In Science and Science in Law, 12 Harv.

Ty, Rev. 448 (1000) 2... ccccccccccccccccetecceees

5 Moore’s Fed. Pr. 113-115 (1968) .............44-

Restatement of Agency 2d, Secs. 399 et seq. ........

Tongue, In Defense of Juries As Exclusive Judges

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

Waterman, Thomas Jefferson and Blackstone’s

Commentaries, 27 Ill. L. Rev. 629 (1933) ........

17

19

—

Cee SRO

IN THE

Supreme Court uf the United States

October Term 1968

No. 992

ad.

ba

Howarp Ross anp Bernarp Ross, as TRUSTEES FOR

Lena RosenBaumM,

Petitioners,

—V i

Rosert A. BERNHARD, ef al.,

Respondents,

and

Pau. L. Davres, et al.,

Defendants.

>

_

BRIEF FOR PETITIONERS

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

275 F. Supp. 569.

Jurisdiction

The judgment of the Court of Appeals herein was en-

tered on November 1, 1968 (A. 2). The petition for a

writ of certiorari was filed on January 29, 1969 and was

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

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

Appeals was based on 28 USC § 1292(b), that Court having

accepted a certification from the District Court. The Dis.

trict Court’s jurisdiction was based upor the Investment

Company Act of 1940, 15 USC §$§ 80a-1, et seq.

Constitutional Provisions and Statutes

Seventh Amendment to the Constitution:

‘‘TIn Suits at common law, where the value in con.

troversy shall exceed twenty dollars, the right of

trial by jury shall be preserved, and no fact tried by

a jury, shall be otherwise re-examined in any Court

of the United States, than according to the rules of

the common law.’’

Section 44 of the Investment Company Act of 1940, 15

4 USC § 80a-43:

4 ‘‘Sec. 44. The district courts of the United States

and the United States courts of any Territory or

other place subject to the jurisdiction of the United

States shall have jurisdiction of violations of this

title or the rules, regulations, or orders thereunder,

and, concurrently with State and Territorial courts,

of all suits in equity and actions at law brought to

enforce any liability or duty created by, or to enjoin

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

or orders thereunder .. .’’

Question Presented

When a corporate action to recover money entitles all

parties to a jury trial, is the jury right lost where the

corporation is compelled to seek relief at the instance of

a stockholder in a derivative action?

—

3

Statement of the Case

This is an action brought by stockholders of The Lehman

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

under the Investment Company Act of 1940, 15 USC § 4

gOa-1, et seq. The amended complaint alleges that the Cor-

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

has paid illegal and unnecessary brokerage commissions to

Lehman Brothers (A. 22-26). The plairtiffs made timely

demand 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 strike plaintiffs’ demand for jury trial and to

transfer 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. 51-52), which accepted the certification (A. 57). The

Second Circuit, in a two-to-one opinion, reversed the Dis-

trict Court. 403 F.2d 909.

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

brought directly by the corporation.

The right to jury trial in civil actions, guaranteed by the

Seventh Amendment, has been jealously safeguarded by

this Court.

‘¢ | ¢Maintenance of the jury as a fact finding

body is of such importance and occupies so firm a

place in our history and jurisprudence that any seen.

ing curtailment of the right to a jury trial should be

scrutinized with the utmost care.’’’ Beacon Thea

tres, Inc. v. Westover, 359 U.S. 500, 501 (1959).

In so holding, the Court re-affirmed the importance of the

institution of the civil jury as a democratic check upon the

power of the judiciary. See Parsons v. Bedford, 28 US.

(3 Pet.) 433, 446 (1830) ; Waterman, Thomas Jefferson and

Blackstone’s Commentaries, 27 Ill. L. Rev. 629, 643 (1933),

Hogan, Joseph Story on Juries, 37 Ore. L. Rev. 234, 23)

(1958) ; 3 Elliott’s Debates, 324, 554 (1836).

Mr. Justice Holmes explained how the jury system’s

guarantee 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]

is what 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 I have observed—of

popular prejudice, and thus keep the administration

of the law in accord with the wishes and feelings of

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

Science in Law, 12 Harv. L. Rev. 443, 459-60 (1899);

interpolation added.)

In our ‘‘ People’s Capitalism’’ embracing 27 million stock-

holders of public corporations the applicability of the cor-

ception of popular control to the derivative action is es-

pecially compelling.

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

— |

derivative action is ‘‘a creature of equity’’ to which the

right of a jury trial does not apply. 403 F. 2d at 911.

That the derivative stockholder’s action is an invention

of equity may be conceded. However, the proposition states

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

parts. The first part concerns the shareholder’s right to

maintain the action on behalf of the corporation. This is

a procedural mechanism of equity. The second part is the

underlying claim of the corporation asserted in the action.

This claim may be either legal or equitable depending upon

its nature. Koster v. Lumbermens M utual Cas. Co., 330 U.S.

518, 522-23 (1947); Meyer v. Fleming, 327 U.S. 161, 168

(1946).

Prior to the union of law and equity, an equity court,

once 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

case (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 efficiency.

The adoption of the Federal Rules of Civil Procedure in

1938 worked an historical change by merging law and equity

into a single unified system. The artificial restraints of the

old system were eliminated. It now became possible for a

litigation to be tried before a 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

pre-merger concepts: It noted that a derivative action,

under the pre-unified system, would have had to be ip.

stituted in equity and an equity court would have decide

the entire case without reference to a jury. Therefore, it

held, no right to trial by jury is ever present in a stock.

holder’s derivative action, even though the underlying

corporate claim be legal.

This Court, however, rejected just such a test in Beacos

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

plaintiff sought an injunction and defendant counterclaimed

for treble damages under the antitrust laws. The lower

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

have been cognizable 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

of 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 issues:

6é

. . . 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 Act 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 case,

merely because subsequently a legal remedy becomes

available, must be re-evaluated in the light of the

liberal joinder provisions of the Federal Rules which

allow legal and equitable causes to be brought and

resolved in one civil action.’’ (359 U.S. at 509 ; foot-

note references eliminated.)

In Dairy Queen, Inc. v. Wood, 369 U.S. 469 (1962), this

Court emphatically reaffirmed its holding in Beacon

Theatres. In Dairy Queen, the complaint alleged that the

——

7

defendant was infringing the plaintiff’s trademark and had

preached a licensing agreement between the parties; it

sought an injunction and an accounting. These were all,

traditionally, ‘‘equitable’’ claims—just as the stockholder’s

derivative action is traditionally ‘‘equitable’’. Nonetheless,

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

the right to jury trial is not destroyed. The Court stated:

«| . The holding in Beacon Theatres was that where

both legal and equitable issues are presented in a

single case, ‘only under the most imperative cireum-

stances, circumstances which 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 claims.’

That holding, of 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 be a 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 being

no question of the timeliness or correctness 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

tule by quantitative considerations. They contended that

the equitable issues outweighed the legal issue, which was a

mere incident to the equitable one. Without disputing the

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

trial by the disintegrating erosion of particular exceptions.

8

‘**Tt is therefore immaterial that the case at ba

contains a stronger basis for equitable relief thay

was present in Beacon Theatres. It would make yo

difference if the equitable cause clearly outweighed

the legal cause so that the basic issue of the cage

taken as a whole is equitable. As long as any legal

cause is involved the jury rights it creates control,

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

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

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

U.S. at 473 0.8; emphasis added)

In the present case the Court of Appeals denied the right

to a jury because ‘‘the assertion of any ‘legal’ claim on

behalf of the corporation 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 Theatres 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 to a 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,

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

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

issues. Fat, however the legal issues be labeled, there is a

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

—

9

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

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

perative circumstances . . . can the right to a jury trial

of legal issues be lost through prior determination of

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

510-511).

If indeed the right to a jury trial should depend on such

elusive and unfunctional a concept as would require bal-

ancing the weight of the equity claim against that of the

law 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 corporation

and bring it to the courthouse should not deprive the cor-

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

to a jury trial.

Thus, this Court has recognized that the important issue

in stockholders’ 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 cause of action

which such a [derivative] plaintiff brings before 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 itself’;

Koster v. Lumbermens Mutual Cas. Co., 330 U.S. 518, 522-3

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

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

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

stance’; Meyer v. Fleming, 327 U.S. 161, 168 (1946).

10

Moreover, the emphasis of the Court below on the &

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 ‘‘yyj.

tary’’ (403 F.2d at 914) than the Beacon Theatres suit

Once the plaintiff in that case filed its bill in equity, th

anti-trust claim became completely dependent thereon, in.

capable of prosecution as a separate action, since it wa

a compulsory counterclaim. Moore v. New York Cotto

Exchange, 270 U.S. 593, 609-10 (1926).

The consequences of the Court of Appeals holding lead

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

is sued by a corporation to recover a sum of money, he is

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

recover the same sum of money by the same corporation,

but the corporation is propelled by a shareholder in «

derivative action, 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 sucha

defendant a jury trial on the legal issues comports 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 of law and equity.

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

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

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

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

equitable issues. See Fanchon & Marco, In:. v. Paramount Pictures,

Inc., 202 F. 2d 731 (2 Cir. 1953), discussed infra, pp. 12-13.

11

« . . [T]he essential character of a cause of action

belonging to a corporation remains the same, whether

the suit to enforce it be brought by 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 equitable causes

of action, as to limitations, ete., because a share-

holder has brought suit in equity to enforce it on

behalf of the company.’’ Potter v. Walker, 276 N.Y.

15, 27, 11 N.E. 2d 335 (1937).

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

cided in 1963 by the Ninth Circuit in DePinto v. Provident

Security Life Insurance Co., 323 F.2d 826 (9 Cir. 1963), cert.

den. 376 U.S. 950, reh. den. 383 U.S. 973. In DePinto, the

Court held that the right to a jury trial must be preserved

in a stockholder’s derivative action where such right would

have existed had the suit been brought by the 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

not now be denied to a federal litigant on the ground

that the case reached court only through equity, or

because equitable rights are involved, or because

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

or because substantive equitable remedies are sought,

or by the device of trying the equitable issues first.

‘*4 stockholder’s derivative action is an invention

of equity to supply the want of an adequate remedy

at law to redress breaches of fiduciary duty. Koster

vy. 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 right

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

v. Paramount Pictures, Inc., 2 Cir., 202 F. 2d 731,

12

734, 36 A.L.R. 2d 1336. But the claim set up is that

of the corporation.

‘*In order to determine whether appellants were

entitled to a jury trial in this derivative action, it js

therefore necessary to ascertain whether any of the

claims asserted against them on behalf of the cor.

poration are of a kind which, if asserted by the

corporation, would be cognizable in a suit at common

law. 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 trial by jury

as guaranteed by the Seventh Amendment and ap.

pellants have been aggrieved thereby.’’ (323 F. 2d at

836-37 ; footnote references eliminated)

In Fanchon & Marco, Inc. v. Paramount Pictures, Inc.,

202 F.2d 731 (2 Cir. 1953), the Court of Appeals held that

in a derivative action where the underlying cause of action

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

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

action is brought derivatively:

‘*. . . The two major issues of right of the share-

helder to sue and of violation of the antitrust laws

causing damage to the corporation can be tried side

by side or otherwise as may be convenient; that one

may go to the jury while the other does not causes no

difficulty.’’ (202 F. 2d at 735)

The Court of Appeals here thought that the holding in

Fanchon was dictum. Clearly, it was not. The defendants

there had successfully obtained dismissal of the action by

the District Court. They argued that they were entitled to

a jury trial and that under the rationale of Fleitmann v.

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

prior to the merger of law and equity, a jury trial was not

a i a Nt

13

available in a derivative stockholders’ action. This, it was

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

peals in Fanchon held, however, that the Fleitmann ra-

tionale did not apply to a merged system of law and equity

since the derivative action could be maintained while still

preserving defendants’ right to a jury trial.

The Court below sought to distinguish Fanchon in that

the underlying claim there was for treble damages under

the antitrust laws. Thus, said the Court of Appeals, the

jury trial right was statutory in Fanchon whereas here it

‘< constitutional. This attempt at distinction misses the

mark. In the first place, the right to a jury in an antitrust

action is not provided by the statute but results simply from

the fact that — as in the present case — a money judgment

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

ment means that the statute contemplates a jury trial, then

it must be said that § 44 of the Investment Company Act,

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

liabilities created by the Act, similarly confers a jury right.

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

torily created right relating to the underlying cause of

action could achieve greater sanctity than a similar con-

stitutionally provided one. In short, the Fanchon case is

not distinguishable from the present one.

A legal claim of a corporation, even though advanced in

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

consistently rejected a variety of efforts to permit for-

malism to triumph over the substantive constitutional right

to trial by jury.

14

The underlying causes of action in the present case

assert substantial legal claims giving rise to a right to

jury trial.

As this Court held in Dairy Queen, Inc. v. Wood, 369

U.S: 469, 473n.8 (1962), ‘‘As long as any legal cause is

involved the jury rights it creates control.’’ In the present

case the District Court found much more than the minimal

requirement. It found ‘‘that this complaint states on behalf

of the corporation a claim which is fundamentally legal

rather than equitable.’’ 275 F. Supp. 569, 571. The Court

of Appeals decision makes no finding to the contrary.

The Complaint seeks a money recovery: brokerage com-

missions illegally paid by the Corporation, most of it to

Lehman Brothers, which dominated the Corporation. In

1964 the Corporation paid brokerage commissions of

$531,724. Of this sum $442,903 w*s paid to Lehman Brothers.

Similarly, in 1965, the Corporation paid brokerage commis-

sions of $538,622, of which $334,685 went to Lehman

Brothers. Similar payments for 1966 were $405,772 and

$351,640, respectively (A. 33). The defendants include, in

addition to the directors of the Corporation, the partners

of Lehman Brothers (A. 21).

The claims may be broken down as follows:

(1) Failure to utilize the third market. In order to gen-

erate commissions for themselves, Lehman Brothers caused

the Corporation to execute transactions in listed securities

on the New York Stock Exchange. These transactions

could have been executed instead on the third market at

more favorable prices, but such executions would not have

resulted in commissions to Lehman Brothers (A. 23).

15

(2) Payment of unnecessary commissions to Lehman

Brothers on over-the-counter transactions. When effecting

transactions in unlisted securities, Lehman Brothers caused

the Corporation needlessly to interpose themselves and to

pay them unnecessary commissions. Instead, the Corpora-

tion could have dealt directly with principals and avoided

those gratuitous payments for which no service of value was

rendered (A. 23-24).

(3) Reciprocal brokerage. The Corporation has been

caused to pay brokerage commissions to brokers who sup-

plied information to Lehman Brothers. This effectively

caused the Corporation to pay third parties for advice for

which the Corporation had already paid Lehman Brothers

(A. 24-25).

Several theories are asserted by which recovery may be

had. It is asserted that, by virtue of the domination and

control of the Corporation by Lehman Brothers, all bro-

kerage commissions paid by the Corporation to Lehman

Brothers are illegal under § 4 10(b) (1), 2(a) (3) and 2(a)

(9) of the Investment Company Act, 15 USC 4§ 80a-10(b)

(1), 2(a) (3), 2(a) (9) (A. 25-26). It is also asserted that

the reciprocal brokerage constitutes compensation to Leh-

man Brothers as investment adviser to the Corporation in

excess of the amount specified in its investment advisory

eontract, thus breaching the investment advisory éontract

and violating the Investment Company Act (A. 25).

It is further asserted that the payment of brokerage

commissions to Lehman Brothers and other brokers has

constituted an unlawful and willful conversion by Lehman

Rrothers of the assets of the Corporation in violation of

§37 of the Act (A. 26). The payment of these brokerage

commissions is also alleged to constitute gross abuse of

rust, gross misconduct, willful misfeasance, bad faith,

16

gross negligence and a reckless disregard of fiduciary duties

by the Corporation’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 the Corpo.

ration‘s assets (A. 26).

The prayer for relief demands that the defendants be

required ‘‘to account for and pay to the Corporation fo;

their profits and gains and its losses.’’ 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 and viola.

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 negligence . . . for violation of |

.. Statutes ... trover to recover damages for conversion

of personal property ... and special assumpsit — to —

recover damages on a simple contract.’’ (5 Moore’s Fed.

Pr. 113-115 (1968), footnotes omitted).

In DePinto, supra, the Court heid as follows:

‘¢. . . One ground for the judgment, applicable to

all of the appellants, is gross negligence. Another

ground, applicable to all appellants except Landoe,

is breach of fiduciary duty.

‘*An action brought by the corporation to recover

damages against former officers or directors on the

ground of negligence would be cognizable in a suit at

common law. Kelly v. Dolan, 3 Cir., 233 F. 635. Thus

all appellants were denied a jury trial on an issue

cognizable in a suit at common law. Landoe was nec-

essarily aggrieved by this denial since, as to him,

this was the only vasis of the judgment.

* * * * *

3

17

‘‘Having in mind the necessity of scrutinizing, with

utmost care, any seeming curtailment of the right to

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

fiduciary duty is predicated upon underlying conduct,

suck as negligence, which is actionable in a direct

suit at common law, the issue of whether there has

been such a breach is, subject to appropriate instruc-

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 to the jury.’’ (323 F. 2d at

836-37 ; footnote references eliminated)

In the DePinto case, the claim involved the diversion of

corporate assets in the purchase of allegedly worthless

stock. Grounds for the judgment were gross negligence and

breach of fiduciary duty. In the instant case the amended

complaint asserts that assets of the Corporation have been

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

missions, which are paid to Lehman Brothers and other

brokers. As in DePinto, the diversion is caused by gross

negligence and breach of fiduciary duty.

The present case seeks not only to charge the directors

of the Corporation, but also asks for recovery from the

Corporation’s principal broker. In Simler v. Conner, 372

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

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

lawyer, whom he charged with overreaching, raised legal

issues creating a right of jury trial. Clearly a controversy

with a broker concerning the propriety of commissions paid

to him is also a legal cause of action. Schultz v. Manufac-

turers & Traders Trust Co., 128 F. 2d 889 (2 Cir. 1942),

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

et seq.

18

The mere fact that the defendants are fiduciaries dog

not mean that the causes of action against them must hk

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

Circuit held in Kelly v. Dolan, 233 F. 635, 637 (3 Cir. 1916):

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

jury to his corporation, and that the right to recover

for such negligence is a legal as contrasted with an

equitable right, and that the corporation is vested

with the right to recover for such injury, is estab.

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

serted in equity; in some at law, according to cir.

cumstances; but in whatever form it is litigated the

right to recover for negligence is a legal right.’

See also, Halladay v. Verschoor, 381 F. 2d 100, 109 (8

Cir. 1967).

Nor does the possibility that the transactions may be

numerous 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 considerably simpler than those involved

in antitrust litigation, patent suits and a large variety of

truly complex matters where juries are called upon to ex-

amine numerous transactions constituting the wrongs com-

plained of. There is no justification for ereding the right to

a jury trial here.

The mainstream of American political and jurispruden-

tial thought has not shared the doubts of Alexander Han-

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

response to widespread demands from the various State Constitutional

Conventions, the first Congress adopted the Bill of Rights containing

the Sixth and Seventh Amendments, intended to save trial in both

criminal and common law cases from legislative or judicial abridge-

ment.” Galloway v. United States, 319 U.S. 372, 396, 398 (1943;

dissenting opinion).

19

Sioux City & Pacific R.R. 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 little

education, men of learning and men whose learning

consists only in what they have themselves seen and

heard, the merchant, the mechanic, the farmer, the

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

arate experience of the affairs of life to the facts

proven, and draw a unanimous conclusion. This

average judgment thus given it is the great effort

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

know more of the common affairs of life than does

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. v. Selden, 78 Fed. 285,

987 (4 Cir. 1897) ; Crane, Judge and Jury, 15 A.B.A.J. 201,

202 (1929) ; Caldwell, Trial by Judge and Jury, 33 Am. L.

Rev. 321, 329-38 (1899); Tongue, In Defense of Juries As

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

(1956).

What is sought by way of relief here is a judgment for a

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

this is the determinative factor. No extraordinary relief for

which courts of law are inadequate is required, notwith-

standing the fact that the prayer uses the word account.

‘‘The respondents’ contention that this money

claim is ‘purely equitable’ is based primarily upon

the fact that their complaint is cast in terms of an

‘accounting,’ rather than in terms of an action for

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

trial by jury cannot be made to depend upon the

choice of words used in the pleadings. The necessary

prerequisite to the right to maintain a suit for a

equitable accounting, like all other equitable ren».

dies, is, as we pointed out, in Beacon Theatres, the

absence of an adequate remedy at law. Consequent.

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

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

must be able to show that the ‘accounts between the

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

a court of equity can satisfactorily unravel them. Ip

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 complicated for the jury ade.

quately to handle alone, the burden of such a shov-

ing is considerably increased and it will indeed be a

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

may, this is certainly not such a case. A 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. ¥.

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

eliminated)

See also, Swofford v. B &W, Inc., 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,

Wruum E. Havpex

Attorney for Petitioners

295 Madison Avenue

New York, N. Y. 10017

Of Counsel

Asranam L. Pomerantz

Ricuarp M. Meyer

Pomerantz Levy Haupex & Biockx

295 Madison Avenue

New York, N. Y. 10017

RosentHaL & GuRKIN

19 West 44th Street

New York, N. Y. 10036