# Appendix — Kalodner v. Webster Eisenlohr, Inc.

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Appendix
- **Published:** January 1, 1945
- **Citation:** 325 U.S. 867

## Text

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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.

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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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~ ™ SNL RE RIN

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386416_0092%3A4. Public record. Not legal advice.