Appendix — Kalodner v. Webster Eisenlohr, Inc.

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IN THE

Supreme Court of the United States

Ocroper Term, 1944,

No. 1187.

IARRY Kk. KALODNER, Judge of the District Court of the

United States for the Eastern District of Pennsylvania,

Petitioner,

US.

WEBSTER EISENLOHR, INC.,

Respondent.

IN PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.

—

RIEF FOR THE RESPONDENT IN OPPOSITION.

——

Anprew M. Wiis,

Paut D. Minuer,

Joun WALLIs,

Attorneys for Respondent.

UDGE, STERN, WituiaMs & Tucker,

20 Pine Street,

New York 5, N. Y.

INKER, Bropte & Rearn,

1429 Walnut Street,

Philadelphia 2, Pa.

Of Counsel.

Pandick Press, Inc., 22 Thames St., New York 6, N. Y., U. S. A.

a

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PAGE

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SPM SIRTINORINIIN ;- etiivcaicxsechinvedicicn beseachuteditnpilendbaddinebaaanan Denial coke 1

OGORNOtR EOUOIIOEE wncs ic ce iininins 2

I NIITIIIT: scss\c\aristescncnaniasstcps pphicnsiaispnsasalDipaindaneetibeapiadiinbaaiaintehintatenh 2

ARGUMENT:

I. The petition was filed too late... 7

II. Wholly apart from the fact that the petition

was filed too late, this Court, in the exercise

of its discretion, should deny the same............ 9

CIOUCEANOIONE i siiccincncneiuiccccdceainnigguicintannndbbhecdaubbeniaias 14

eh! EE a Th ME VERNS FPPC GON LOPES ONY WUE HR Te STROM, wal 15

ii

TaBLE oF CasEs.

PAGE

Barnes v. Chicago &c. Ry., 122 U. 8. 1, 14 (1887)........ 12

Cahill v. Mayflower Bus Lines, Inc., 296 U. S. 629

(UGBE) veincnennnanncnnnssnecesenevannnnenersttentncssnnnnsnnnnamsnnsonanencenenns 8

Department of Banking v. Pink, 317 U. S. 264, 268

(1942) nnn naneenenneennsenenssnensenenstesensesenennncensnsensenensensecnmeannnes 7,8

Ex parte Northern Pacific Ry. Co., 280 U. S. 142

ANd 530 (1930)................--..--s-c-s-cecenceeeeesseenssesenseenenneeenes 12

Ex parte Peterson, 253 U.S. 300 | ar 12, 13

Ex parte State of Oklahoma, 37 F. (2d) 862 (C. C. A.,

10th, 1930) ; 45 F. (2d) 1019 (C. C. A., 10th, 1930)... 11, 12

Grable v. Killits, 282 Fed. 185 (C. C. A., 6th, 1922),

cert. den., 260 U. S. 735 (1928) -....---------------------e e+ 12

Heesch v. Pittsburgh Steel Co., 40 F. Supp. 248

(UMD) ann nnnan nanan ennnnessnsnneenenseeveneeseeeenennenswennnncmnsaennenconens 14

In re Winn, 213 U. S. 458 (1909) -.......--------------ceseeeeeenees 12

J. P. Jorgenson Co. v. Rapp, 157 Fed. 732 (C. C. A,

Otte, 1907). -n.w.nec-ccenssecensevenensenassnens 12

Los Angeles Brush Corp. v. James, 272 U. S. 701

(1927) .n.n.eaecesneceeseseesesetensnnseteesenenseneneensenenennsnsssseenenssnsamene 12

Malcolm v. Cities Service Co., 2 F. R. D. 405 (1942)... 14

Medhurst v. S. S. ‘‘South American’’, 264 U. S. 587

(1924) nea eceeneeeceeceececeesneeeentenenseesecensenensensesessnenateneneneananes 8

Munday v. Vail, 34 N. J. L. 418 (1871)....-------------------- 12

Osage Oil & Refining Co. v. Continental Oil Co., 34

F. (2d) 585 (C. C. A., 10th, 1929) ...----------eeeeeeees 12

Osborn v. U. S. Bank, 9 Wheat. 738, 819 (1824).......... ll

Reynolds v. Stockton, 140 U. S. 254, 266, 270-271

(1891) .n..n.nessescnssnneesscnssnsenssnesnesnnsnensssneenesnsanassecnacsnenneenes 12

iii

PAGE

Toledo Co, v. Computing Co., 261 U. S. 399, 418

TA sean senpaieinspnaieoiilideaiimesipetishsaia tates chai Neate ne 7

U.S. v. Goldstein, 271 Fed. 838, 845 (C. C. A., 8th,

SUMUED . sestisdspentinsiapaceenlindlasthiaes oiatadin ie Oe eee i2

Warshauer v. Lloyd Sabaudo, 293 U.S. 610 (1934)... 8

Wayman v. Southerd, 10 Wheat. 1, 23 (1825)... 9

CoNsTITUTION.

at. 55n, Gems 2 eee Be 11

Ru tes or Crviz Procepure For

District Courts.

erent ee, TR NT OL FO TSF OMSL TIEN 13

AUTHORITIES.

Robertson & Kirkham, Jurisdiction of the Supreme

Court of the United States, p. 775, footnote ee 8

Simkins, Federal Practice, Sec. 498 (1938)................ 13

2 Story on the Constitution, Section 1646 (3rd Ed.

REO) <nnivicnccinmpiigipiavinchebiaheaubaniteaieniaate antes ‘ 12

2 Watson on the Constitution, 1088 (1910)................. 12

nw UE RS PS war oe Le

IN THE

Supreme Court of the United States

Ocroser Term, 1944.

No. 1187.

Harry EK. Katopner, Judge of the District Court of the

United States for the Eastern District of Pennsylvania,

Petitioner,

vs.

Wesster Eisentone, Inc.,

Respondent.

ON PETITION FOR WRIT OF CERTIORARI TO THE UNITED STATES

CIRCUIT COURT OF APPEALS FOR THE THIRD CIRCUIT.

BRIEF FOR THE RESPONDENT IN —

OPPOSITION.

Opinion Below.

The opinion of the Cireuit Court of Appeals (R. 120-

140), in an original proceeding in that Court, is reported

in 145 F, (2d) 316.

Jurisdiction.

The jurisdiction of this Court is invoked under Section

240(a) of the Judicial Code, as amended by the Act of

2

February 13, 1925, but the petition was not filed in time (see

page 7, fra).

The decree of the Circuit Court of Appeals was made

and entered December 28, 1944 (R. 140-141). The petition

was not filed until April 21, 1945, more than three months

thereafter.

Questions Presented.

The decree of the Circuit Court of Appeals directed

the issuance of (1) a writ of mandamus directing the Hon.

Harry E. Kalodner, District Judge, to vacate an order of

reference to a Special Master in a matter entitled Speese

v. Webster-Eisenlohr, Inc, and (2) a writ of prohibition

enjoining said Special Master from proceeding under the

order of reference. The questions here presented are:

1. Was the petition timely?

9. Did the District Court in the Speese case have

jurisdiction to deal with the matters it attempted to

refer to a Special Master?

3 Were mandamus and prohibition proper reme-

dies to prevent the District Court from exceeding its

jurisdiction by an interlocutory order of reference!

Statement.

This is an original proceeding which respondent, Web-

ster-Eisenlohr, Inc., instituted in the Cireuit Court of

Appeals for the issuance of (1) a writ of mandamus dirett-

ing the Hon, Harry E. Kalodner, District Judge, to vacate

an order of reference to a Special Master, dated June 9,

1943, in a matter pending before the District Court entitled

Speese v. Webster-Eisenlohr, Inc., and (2) a writ of

prohibition enjoining said Special Master from taking any

3

proceedings under said order of reference. These writs

were sought on the ground that the District Court was

wholly without jurisdiction of the matters covered by the

order of reference (R. la-1la).

In the complaint in said case of Speese v. Webster-

Eisenlohr, Inc., the plaintiff alleges, in essence, that he is

the owner of ten shares of preferred stock of the defend-

ant (respondent in this Court), Webster-Kisenlohr, Inc.,

on which dividends have remained unpaid for a number

of years; that the action is brought on behalf of all the

preferred stockholders of defendant; the defendant’s out-

standing capital stock consists of 5,132 shares of preferred

stock and 409,313 shares of common stock; that under de-

fendant’s Charter and By-Laws the preferred stock was

not entitled to participate in the management unless two

quarterly dividends were in arrears, in which event ‘‘full

voting power shall be vested in the preferred stock’’; that

at the annual meeting of defendant’s stockholders on March

10, 1942, the preferred stock was allowed to vote along

with the common stock rather than to the exclusion of the

common stock; and that under the Charter and By-Law

provisions above quoted the preferred stockholders are en-

titled to exclusive voting power, to the exclusion of the com-

mon stock (R. 15a-19a). The complaint also contains con-

clusory allegations that defendant is dominated by The

Chase National Bank of the City of New York through its

ownership of a large block of common stock, and that the

control and management of the defendant have been usurped

by the holders of the common stock (R. 18a-19a). The

relief sought is a declaration that the preferred stock has

“exclusive voting power’’, so long as two quarterly divi-

dends remain unpaid, and the appointment of a receiver

pending ‘‘determination of the issues herein’’ (R. 19a).

Defendant’s answer put in issue plaintiff’s ownership

of preferred stock. It admitted the allegations as to the

provisions of its By-Laws, the non-payment of preferred

stock dividends, the voting procedure followed at the

annual stockholders meeting, its capitalization, assets and

liabilities, but denied the remaining allegations of the com-

plaint (R. 21a-25a).

The only issues thus before the District Court were (1)

plaintiff’s ownership of preferred stock and (2) the proper

construction of the quoted phrase ‘‘fyll voting power’’ as

used in defendant’s Charter and By-Laws.

The complaint, although verified October 15, 1942 (R.

20a) was not served until February 1, 1943 (R. ii), shortly

before the usual date for the annual meeting of respond-

ent’s stockholders.

At a preliminary hearing before Judge Kalodner on

March 2, 1943, plaintiff’s counsel, in open court, disclaimed

any charge of fraud or mismanagement against respond-

ent in these words: ‘‘Your Honor please, I am not press-

ing here, or saying, or alleging that I can prove at this

time any fraud or mismanagement”’ (R. 44a).

On March 26, 1943, during pendency of the action, re-

spondent, pursuant to discussions initiated before the com-

mencement of the suit, mailed to all holders of its preferred

stock a written offer to purchase their shares at $150 per

share, flat (R. 4a, 34a, 113a). This offer was mailed only

three days after respondent had mailed to all its stock

holders, both common and preferred, its annual report for

1942 (R. 4a). This annual report set forth, clearly and

in detail, the amount of preferred stock outstanding, its

par value, its redemption value and the accrued dividends,

and also respondent’s earnings for the year (R. 31a).

With this information before them, holders of 4,04!

out of 5,037 outstanding shares of respondent’s preferred

5

stock accepted said offer (R. 35a). Included in the shares

accepting the offer were plaintiff’s ten shares, which he

apparently had disposed of because they were turned in,

under the offer, by a third party (R. 4a).

Although respondent’s offer was made to all its pre-

ferred stockholders, not just to plaintiff, and was accepted

by more than 80% of them,’ including a Mr. Cullman, who,

for years, was respondent’s chief executive officer, and a

Mr. Cohen who, for years, was a director, and although the

offer was made after the commencement of the action and

was not referred to in or complained of by any pleadings

or other papers in the action or by any stockholder, creditor

or other person interested in respondent, Judge Kalodner

requested information concerning the offer. As a matter

of courtesy respondent’s counsel furnished such informa-

tion to him (R. 113a-118a). Upon the basis of this informa-

tion, and although no one had complained of the offer,

Judge Kalodner took occasion to charge, in open court,

upon a hearing on plaintiff’s application for a continuance,

that the offer was fraudulent (R. 53a, 55a, 58a, 62a-66a).

Thereafter, on May 24, 1943, when the matter came be-

fore Judge Kalodner upon a postponed hearing, plaintiff’s

counsel, in seeking a continuance advised Judge Kalodner

that plaintiff no longer owned any stock and was not pre-

pared to proceed with the case, that anyone else could be

substituted to prosecute the case ‘‘but nobody wants to, as

far as I know”’ (R. 74a-75a).

On June 9, 1943, Judge Kalodner, on his own motion,

appointed one David Bortin, Esq., Special Master to make

an investigation of respondent, its finances, and its offer to

its preferred stockholders, and also to investigate whether

1 Subsequently, the remaining outstanding preferred stock was

redeemed (R. 136-137), so that none of the preferred stock is now

outstanding.

GBPS SAC eS ERB! RIOR BARNS RARE PT a RN

LRN SBN CE AN AREA GI IBS SI CLIO A ATL NE AT ESA oO TAS Rat OE,

6

there had been any violation of Rule X-10B-5 of the Securi-

ties and Exchange Commission relating to fraudulent and

manipulative devices. The Master was directed to report

not only to the District Court but also to the Securities and

Exchange Commission and to the parties, and also to sub-

mit a summary of his report to respondent’s creditors and

stockholders (R. 18a-15a).

It will be seen that Judge Kalodner did not appoint a

Special Master in the usual sense to take testimony and re-

port, but that he ordered an investigation, rather than a

judicial hearing, by the Special Master, as an arm of the

Court. Moreover, said investigation was directed to mat-

ters which were not within the issues of the case before

Judge Kalodner, and of which xo com plaint had then or has

since been made by anyone other than Judge Kalodner.

Respondent moved to vacate the order of reference on

the grounds, among others, that the matters referred were

not within the issues of the case, that the investigation or-

dered was not a judicial function, and that no dismissal or

compromise of the action was sought within Rule 23(c) of

the Rules of Civil Procedure (R. 38a-39a, 85a). This mo-

tion was denied by Judge Kalodner (R. 97a).

Respondent then petitioned the Circuit Court of Appeals

for writs of mandamus and prohibition directing the Dis

trict Court to vacate the order of reference and prohibiting

the Special Master from proceeding thereunder (R. 1la-

12a). The matter was argued before three judges of the

court below, and subsequently, by direction of the court,

was reargued before the court sitting en banc (R. 119). On,

September 27, 1944, the Circuit Court filed its opinion (R.

120-127), two judges dissenting (R. 128-149), holding that

the matters referred to the Special Master were not within

the issues of the action (R. 124-126); that the District

te wail

7

Court could not do through a Special Master what it could

not do directly (R. 124-125) ; that the investigation ordered

was not the exercise of a judicial function (R. 126); that

no dismissal or compromise of the action was involved

under Rule 23(¢) of the Rules of Civil Procedure (R. 126-

127) ; and that respondent was entitled to the writs sought

(R. 123). The Court stated in its opinion that it was

“unlikely that the formal issuing of the writs prayed for

will be necessary’’ (R. 127).

On December 28, 1944, the Cireuit Court of Appeals

made and caused to be entered its decree directing the issu-

ance of the writs prayed for (R. 140-141).

On January 24, 1945, pursuant to said decree, the Clerk

of the Circuit Court of Appeals issued said writs (R. 141-

144). On March 3, 1945, within the time for filing a peti-

tion for certiorari, the Circuit Court of Appeals entered

an order staying the execution of the writs of mandamus

and prohibition pending application for certiorari (R. 145).

ARGUMENT.

I.

The petition was filed too late.

The decree of the Circuit Court of Appeals, directing

the issuance of writs of mandamus and prohibition, was

made and entered December 28, 1944 (R. 140-141). The

petition for certiorari was not filed until April 21, 1945,

more than three months after entry of said decree. This

Court is therefore without jurisdiction. Department of

Banking v. Pink, 317 U. S. 264, 268 (1942); Toledo Co. v.

Computing Co., 261 U. S. 399, 418 (1923).

8

Petitioner has apparently assumed that the time for

filing the petition did not begin to run until the issuance

and service of the writs of mandamus and prohibition on

January 24, 1945. But said writs were not, snd do not

purport to be, judgments or decrees of the court below.

They were mere ministerial acts performed by the Clerk

of that Court pursuant to the Court’s final determination,

set forth in its decree of December 28, 1944, that respond-

ent’s right to such writs had been established.2 It is the

correctness of this determination of the court below which

petitioner seeks to have this Court review, not the acts of

the Clerk of that Court in issuing the writs.

In Department of Banking v. Pink, 317 U. S. 264 (1942),

the New York Court of Appeals, on June 18, 1942, affirmed

a judgment and issued its remittitur to that court, which

entered judgment on said remittitur on June 25, 1942.

Thereafter, on July 29, 1942, the Court of Appeals amended

its remittitur and on December 16, 1942, the lower court

entered its judgment on the amended remittitur. A peti-

tion for certiorari filed October 20, 1942,—more than three

months after the Court of Appeals issued its original remit

titur—was denied as too late. This Court there said that

the time for filing the petition ran from the entry of the

judgment of the Court of Appeals which finally determined

the case, leaving nothing to be done by the lower court

‘cexcept the ministerial act of entering judgment on the

remittitur’’;? and that the motion to amend the original

remittitur did not extend the time for filing the petition

2], .hould be noted that the writs of mandamus and prohibition

which were issued on January 24, 1945, themselves recite that they

were issued pursuant to order of the Circuit Court of A

“entered” on December 28, 1944 (R. 142, 144).

8 Cf., Medhurst v. S. S. “South American”, 264 U. S. 587 (1924);

Warshauer v. Lloyd Sabaudo, 203 U. S. 610 (1934) ; and Cahill ¥.

Mayflower Bus Lines, Inc., 306 U. S. 629 (1935) ; also discussion

of Poregoing cases in Robertson & Kirkham, “Jurisdiction of the

Supreme Court of the United States”, page 775, footnote 29.

9

since said motion did not seek ‘‘a reargument or rehearing

of any part of this case.’’

Writs of mandamus and prohibition are no more judg-

ments or decrees than are writs of execution. Like writs

of execution, they do not finally determine anything. They

merely reflect and implement a prior determination of the

court that the right to the writ involved has been estab-

lished. Cf. Wayman v. Southerd, 10 Wheat. 1, 23 (1825).

The only judgment or decree of the Court below which

is involved here was that entered December 28, 1944. Peti-

tioner’s time to apply for a writ of certiorari ran from

that date. Accordingly, the petition was filed too late.

Il.

Wholly apart from the fact that the petition was

filed too late, this Court, in the exercise of its discre-

tion, should deny the same.

No clearer case of an untimely petition could be pre-

sented. However, in view of the unfounded charges of fraud

made against respondent by Judge Kalodner, it is appro-

priate to point out that, apart from the jurisdictional de-

fect, the petition should be denied because the decision

of the court below is clearly correct, there is no conflict

of decisions, and the petition presents no issue of general

importance.*

* Judge Kalodner’s unfounded charges of fraud against respondent

are in no way germane to the issues before this Court and hence will

not be discussed in the body of this brief. Since, however, such charges

of fraud were made by a District Judge, although no alleged victim,

or in fact anyone other than the District Judge has asserted any fraud,

and since a minority of the court below took cognizance of such

charges despite the fact that said court had refused to hear respond-

ent's counsel thereon (see R. 126), we deem it appropriate, and a

matter of simple justice to respondent, to demonstrate to this Court

that such charges of fraud are wholly groundless. We do this in the

Appendix, pp. 15-20, infra.

10

The sole issue before the District Court in the Speese

case (aside from the question of plaintiff’s ownership of

preferred stock) was whether the preferred stockholders

were entitled, under respondent’s Charter and By-Laws,

to exclusive voting power so long as two quarterly divi-

dends remained unpaid. Pending the action, respondent

made an offer to all the holders of its preferred stock, not

merely to plaintiff, to purchase the same; and pursuant to

such offer respondent acquired 4,047 of its outstanding

5,037 shares of preferred stock, including the 10 shares

which had been registered in the name of the plaintiff,

Speese. When Judge Kalodner was advised of these facts,

through information made available, at his request, by

respondent, Judge Kalodner charged in open court that the

offer to purchase said stock was fraudulent (R. 53a, 58a,

62a-66a), although no such charge had been made by any

preferred stockholder or anyone else; and thereafter, on

June 9, 1943, on his own motion, J udge Kalodner referred

the case to a Special Master to make an investigation of

respondent, its finances and its offer to its preferred stock-

holders, and also as to whether there had been any violation

of Rule X-10B-5 of the Securities and Hxchange Commis-

sion relating to fraudulent and manipulative devices. The

Master was directed to report not only to the District Court

but to the Securities and Exchange Commission and to the

parties and to submit a summary of his report to respond-

ent’s creditors and stockholders (R. 13a-15a).

The Circuit Court of Appeals held that the order of

reference was wholly beyond Judge Kalodner’s jurisdic-

tion, stating (R. 123-124):

“The fundamental proposition which probably

no one would dispute is that a couri’s power is judi-

cial only, not administrative nor investigative. A

judgment may only be properly given for something

prcremnnssien seiietal | g

11

raised in the course of a litigation between the par-

ties [Footnote, citing cases, omitted], Now, what

was the litigation in this case? The complaint pre-

sents the question of the legal effect of the provision

that preferred stockholders, under given circum-

stances, shall have full voting power. Whether full

voting power means that they may vote along with

holders of shares of the common stock or whether

‘full’ as used in the certificate of incorporation means

‘exclusive’ is a question of interpretation of lan-

guage to be made with such help as the Pennsylvania

decisions give, since the corporate litigant is a

Pennsylvania corporation. * * *

‘If the plaintiff’s contentions on voting rights

are upheld as a matter of law, the preferred stock-

holders are .entitled to determine who shall manage

the corporation, and other questions which may be

determined by stockholders. They are entitled to

court help to get those rights if they need it.

On the other hand, if the plaintiff’s contentions as

to the meaning of the phrase are incorrect, they

have alleged no legal grounds for complaint. While

a receiver was asked for, it was simply in connection

with the relief to be given the plaintiff, based on the

correctness of this theory of his voting rights. No

one disputed the solvency of the corporation.”

“The directions given the Master went far be-

yond anything involved in the issues presented in the

litigation, * * *.’’ (Italics supplied.)

This decision is clearly correct. It is firmly established

that under Article III, Sections 1 and 2, of the Constitution,

district courts are limited to the exercise of ‘‘judicial

power’’, and that such judicial power extends only to cases

or controversies, and is capable of application only when a

question is submitted by a party who asserts his rights in

the form prescribed by law. Osborn v. U. S. Bank, 9

Wheat. 738, 819 (1824) ; Ex parte State of Oklahoma, 37 F.

12

(2d) 862 (C. C. A., 10th, 1930) ; 45 F. (2d) 1019 (C. C. A,

10th, 1930) ; 2 Story on the Constitution, Section 1646 (3rd

Ed., 1858) ; and 2 Watson on the Constitution, 1088 (1910),

In line with this principle it is settled that district courts

cannot adjudicate matters which are not tendered by the

pleadings before them, and that any attempt on their part

to do so is without legal effect and is void. Reynolds v.

Stockton, 140 U. S. 254, 266, 270-271 (1891); Barnes v.

Chicago é&c. Ry., 122 U. 8. 1, 14 (1887); U. S. v. Goldstein,

971 Fed. 838, 845 (C. C. A., 8th, 1921) ; Osage Oil & Refining

Co. v. Continental Oil Co., 34 F. (2d) 585 (C. C. A., 10th,

1929) ; J. P. Jorgenson Co. v. Rapp, 157 Fed. 732 (C. C. A,

9th, 1907) ; Munday v. Vail, 34 N. J. L. 418 (1871).

Petitioner asserts, however, that the order of reference

was an interlocutory and discretionary order and that

mandamus does not lie to control a discretionary order.

That is generally true when the exercise of discretion is

within the limits of the court’s jurisdiction; but mandamus

and prohibition are always available to prevent a lower

court from exceeding its power or jurisdiction, without re

gard to the manner in which such excess of power or juris-

diction is attempted. Thus, in Jn re Winn, 213 U. S. 458

(1909), this Court said (p. 467):

‘“The respondent, however, insists that mandamus

will not lie to control the judgment or judicial dis

eretion of the court to which the writ is proposed to

be directed. This is true where the judgment or

judicial discretion is within the limits of jurisdiction,

but not otherwise.”’

It has been specifically held that mandamus is appli

cable to orders of reference which exceeded the Court's

jurisdiction. Ex parte Northern Pacific Ry. Co., 280 U.8

142 and 530 (1930) ; Grable v. Killits, 282 Fed. 185 (C. C. A,

6th, 1922), cert. den., 260 U. S. 735 (1923); see also: Los

Angeles Brush Corp. v. James, 972 U. S. 701 (1927); Be

ER NSESAY ’

13

parte Peterson, 253 U. S. 300 (1920); Simkins, Federal

Practice, Sec. 498 (1938).

Petitioner further asserts that the decree of the court

below violates Rule 23(c) of the Rules of Civil Procedure,

which provides that ‘‘A class action shall not be dismissed

or compromised without the approval of the Court’’. That

rule was intended to prevent one member of a class from

prejudicing the rights of other members of a class by com-

promising or dismissing an action without notice to them.

No such situation is presented here. The case of Speese v.

Webster-Eisenlohr, Inc. has not been dismissed (R. 6a)

and, as pointed out by the court below (R. 127), it cannot

be dismissed without approval of the District Court. Nor

has said case been compromised. Respondent made no

arrangements whatever with the plaintiff Speese looking

to the termination or settlement of said action. Its offer

to purchase the preferred stock was made to all holders

of preferrd stock, and the persons then owning plaintiff’s

stock merely took advantage of such offer.

Furthermore, nothing was done to change in any way

the rights of any members of the class (7. e., the preferred

stockholders). The question as to whether, under respond-

ent’s Charter and By-Laws, the preferred stock had the

right to vote together with the common stock, or whether

it had the exclusive right to vote, was still pending before

the District Court after, as well as before, respondent

made its offer to its preferred stockholders. Any other

preferred stockholder could have intervened in the action

(and respondent stipulated not to oppose any such inter-

vention—R. 127), and continued the litigation. The pre-

ferred stockholders who had not accepted the offer and

turned in their stock were so advised (R. 35a-36a), but none

has ever sought to intervene.

Whenever the point has arisen, the District Courts have

held that a purchase of stock does not constitute a ‘“‘com-

14

promise”’ of the action within the meaning of Rule 23(c),

Malcolm v. Cities Service Co., 2 F. R. D. 405 (1942); and

that until application is made to the court for compromise

or dismissal there is nothing for the court to act on, Heesch

v. Pittsburgh Steel Co., 40 F. Supp. 243 (1941).

Finally no statute or rule can confer on district courts

the investigatory powers sought to be bestowed by the

order of reference. As heretofore indicated, under the

Constitution district courts are limited to the exercise of

judicial powers.

It is unnecessary to refer to any of the cases cited by

petitioner because mere inspection thereof will show that

none of them is in any way in conflict with the decision of

the court below.

Conclusion.

The petition for a writ of certiorari should be denied

because it was filed too late. Apart from this jurisdictional

defect, the petition should be denied because the decision

of the court below is clearly correct, and there is no confli

of decisions or other ground justifying certiorari. Mo

over, the petition arises on peculiar facts which in no even!

can involve issues of general application.

Dated: May 10, 1945.

Respectfully submitted,

Anprew M. WiL.iaMs,

Pau D. MILier,

Joun WaAxLIs,

Attorneys for Respondent,

Muper, Stern, WituiaMs & Tucker,

20 Pine Street,

New York 5, N. Y.

Darnxker, Brppte & Reatu,

1429 Walnut Street,

Philadelphia 2, Pa.

Of Counsel.

a

15

Appendix.

Judge Kalodner’s charges of fraud are groundless.

Had they been made by one holding a less responsible posi-

tion than his they might well be ignored.

Respondent, a Pennsylvania corporation, engaged in

the manufacture of cigars, had outstanding 5,037 shares of

7% cumulative Preferred Stock (R. 27a, 31a).

During the years of the depression, respondent’s opera-

tions were unprofitable and no dividends were paid on its

preferred stock after April, 1931 (R. 16a). At the end of

the year 1942, the accumulated dividend arrears amounted

to $82.25 per share (R. 31a).

By 1940 an opérating deficit of approximately $921,000

had accumulated and while respondent had an earned sur-

plus applied to preferred stock retirements (such retire-

ments having been made prior to the depression) of over

$1,000,000, respondent, because of charter restrictions, could

not use this surplus to offset the deficit.

Beginning with 1940, respondent’s operations began to

be profitable and by the end of 1942 its deficit had been

reduced to $268,955.15 (R. 31a).

In May, 1942, almost a year prior to the commencement

of the Speese suit, respondent’s directors appointed a com-

mittee to consider ways of funding or otherwise retiring

he preferred stock and accumulated dividends. Several

plans were considered, one of which was to offer new $5

preferred shares for the old shares in the ratio of 134 new

hares for each old share plus accumulated dividends, but

when this plan was taken up with Mr. Cullman, who for

any years had been respondent’s chief executive officer

and a director, and with Mr. Cohen, a director for a number

f years, who, together, owned more than one-half of re-

spondent’s preferred stock, they indicated that for tax

easons they could not accept it (R. 69a-70a, 113a-114a).

Discussions were then had looking toward a purchase

bf respondent’s preferred stock for cash and Messrs. Cull-

man and Cohen advised that they and certain interests

ffiliated with them, which owned preferred shares, would

REGS ore ae

16

accept $150 per share, flat, for their stock. Respondent then

consulted its own bankers and other bankers and was ad-

vised that in view of respondent’s progressive business

improvement, arrangements for such a purchase could be

made without impairing respondent’s capital position or

bank credit. Thus assured of the cooperation of the largest

holders of its preferred stock, and of the feasibility of the

proposal, respondent arranged that Messrs. White, Weld

& Co. would acquire all shares which were offered at this

price, taking care of the uecessary checking of transfer

papers and the like, and would hold the shares for 120 days,

by the end of which time, respondent would acquire them

at the same price. For its services, Messrs. White, Weld

& Co. were to be paid $10,000 plus actual carrying charges

not exceeding 1% per annum on monies expended (R. 69a-

70a, 114a).

Respondent and Messrs. Cullman and Cohen all felt that

if any such purchase of preferred shares was to be made,

each preferred stockholder should have the opportunity of

disposing of his shares at the same price (R. 114a).

While these discussions and negotiations were under

way, plaintiff Speese, on February 1, 1943, served his com-

plaint in the Speese action. Bertram K. Wolfe, Esq.,

attorney for plaintiff Speese, advised that he also rep-

resented other holders of preferred stock with holdings

aggregating about 1,200 shares. Thereupon, Mr. Wolfe

was invited to consider the aforesaid plan which respond-

ent had worked out for the purchase of preferred shares.

Mr. Wolfe was advised fully of how the proposed plan

had originated and developed and was asked to say whether

he considered the price offered a fair one. He said he

considered the price fair and would advise those share-

holders he represented to accept it and would assist in sub-

mitting the offer to them, but that he wanted the price of

$150 per share to be net to them, 2.¢., he wanted respondent

to pay his compensation for his services in submitting the

offer and in representing plaintiff in the Speese suit

(R. 114a).

17

The figure Mr. Wolfe first mentioned for his compensa-

tion was considered much too high by respondent, which

pointed out that it had nothing except Mr, Wolfe’s state-

ment to show he represented anyone other than Speese.

Mr. Wolfe met this point by agreeing to supply a list show-

ing the names, addresses and holdings of the preferred

stockholders he represented, and it was finally arranged

that respondent would pay him at the rate of $7.50 per

share for each share on that list which accepted the offer.

Such compensation was to be in lieu of any other compensa-

tion to Mr. Wolfe and of any allowance to him by the Court

in the Speese suit (R. 112a-118a).

Respondent considered _ this arrangement with Mr.

Wolfe advantageous. In the course of the Speese suit,

although no evidence had been received and no argument

on the merits of that suit had been heard, Judge Kalodner

had stated that he thought plaintiff’s position as to the

meaning of ‘‘full voting power’’ sound. Although subse-

quently he had stated that his expression of opinion was

uot to be taken as final,’ nevertheless, respondent and its

counsel could not ignore this evidence of J udge Kalodner’s

initial impression in the matter and were aware that if the

Speese suit was decided in favor of plaintiff’s contentions,

a substantial allowance to Mr. Wolfe would undoubtedly

be made by the Court. The aforesaid arrangement relieved

respondent from the risk of a large allowance to Mr. Wolfe.

There was no agreement or understanding with Mr.

Wolfe as to plaintiff’s shares or the shares of any other

stockholder represented by Mr. Wolfe except that Mr.

Wolfe was to submit the offer to them and advise them that

in his opinion it was fair and should be accepted.

After the foregoing arrangements, the offer in question

was made to all respondent’s preferred stockholders on

March 26, 1943.

Judge Kalodner’s charge of fraud appears to be based

primarily on a statement contained not in respondent’s

"Although the statements referred to are not included in the

abbreviated record before this Court, a reference to them will be found

at page 67a of the record.

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