Opposition Brief — Downing v. Howard

FILA

ci&E COPY Cor 17 1s

IN THE

Supreme Court of the United States

OCTOBER TERM, 194 7

No. 365

EDWARD R. DOWNING, etc.,

Petitioner,

against

GEORGE H. HOWARD, et al.,

Respondents.

BRIEF IN BEHALF OF RESPONDENTS HOWARD, CHUBB,

STACY, STURGES, BURNS, LUCKETT, FERGUSON, BURR,

0. K. ANDERSON, DUMAINE, HICKEY AND SMITH, IN OP-

POSITION TO PETITION FOR WRIT OF CERTIORARI

AWILLIAM S. POTTER

Counsel for Respondents

Grorce H. Howarp, et al.

Delaware Trust Building

Wilmington, Delaware

INDEX

RES eR err ae ee ee eee a ee 1

ARGUMENT:

Pornt I—The Cireuit Court of Appeals correctly

decided that the amended complaint failed to

show a basis for recovery under the Public

Utility Holding Company Act and that, in

consequence, the claimed jurisdiction herein

based on Section 25 of the Act did not exist... 2

Point 1I—This case does not present any question

appropriate for this Court to review......... 6

The Petition Misstates the Questions decided

by the Circuit Court of Appeals............ 7

The Cireuit Court’s decision is not in conflict

with decisions of this Court or of other Circuit

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TaBLE oF Cases CITED

PAGE

American Power & Light Co. v. SEC, 329 U. 8. 90,

119, 123, 67 S. Ct. 133, 149, 151 (1946)..........-. 5

Commonwealth & Southern Corp. v. SEC, 134 F. (2d)

747 (C. C. A. 3rd, 1943)... 6... cee eee eee ee eee 5

Goldstein v. Groesbeck, et al., 142 F. (2d) 422

(C. C. A. 2nd, 1944) cert. denied 323 U. S. 737,

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Herrmann v. Edwards, 238 U. S. 107, 35 S. Ct. 839

(UBER) nncnncsvncsccncccssnccnsnaseedbnsencess 5

Meyer v. Kansas City Southern Ry. Co., 84 F. (2d)

411 (C. C. A. 2nd, 1936) cert. denied 299 U.S. 607,

57 &. Ct. 233 (1GSG) 2... cence cece cece ceececess 3

Texas & Pacific Ry. Co. v. Rigsby, 241 U. 8. 33, 36

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Sratutes CrTeD

Judicial Code:

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Public Utility Holding Company Act of 1939:

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Orner AvuTHorRITIES CITED

Federal Rules of Civil Procedure:

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Restatement of the Law of Torts:

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BOAO LIRR POST AREER OE ATER TS eT I RR ee eT, ——

IN THE

Supreme Court of the United States

OCTOBER TERM, 194__

Een

Epwarp R. Downrng, ete.,

Petitioner,

against

Grorce H. Howanrp, ef al.,

Respondents.

BRIEF IN BEHALF OF RESPONDENTS HOWARD, CHUBB,

STACY, STURGES, BURNS, LUCKETT, FERGUSON, BURR,

0. K. ANDERSON, DUMAINE, HICKEY AND SMITH, IN

OPPOSITION TO PETITION FOR WRIT OF CERTIORARI

Statement

This is a derivative action brought by a stockholder of

The United Corporation seeking to recover as against for-

mer and present officers and directors, and third persons

allegedly acting in conspiracy with them, damages for al-

leged waste of corporate assets and an accounting for

alleged profits.

Nore: All references to the record before the Court below, and

to the record of the further proceedings in the Court below, are

in page numbers. Unless otherwise noted, italics in quoted matter

are supplied.

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The amended complaint, filed August 14, 1945, alleged

three causes of action (R. lla, 39a, 48a). Federal jurisdic-

tion of the subject matter, as well as personal jurisdiction

of all but three of the individual defendants and the venue of

the action, was based and depends solely upon Section 25 of

the Public Utility Holding Company Act [15 U. S. C. A.

§ 79v] (R. 3a-8a, 12a, 39a, 48a). This is conceded by the

petitioner (Petition, p. 2),

As the record below shows (R. 71a-10la), the respond-

ents’ several motions to dismiss in the District Court raised

primarily the question as to the existence of the claimed

Federal jurisdiction under Section 25 of the Publie Utility

Holding Company Act. The District Court decided this

question against the petitioner’s claim and granted the

respondents’ motions to dismiss on the ground that the

Court lacked jurisdiction over the subject matter of the

action (R. 126a, 144a). The Circuit Court of Appeals in its

opinion, filed June 24, 1947, reported in 162 F. (2d) 654, like-

wise decided this question against the petitioner’s claim

and unanimously affirmed the judgment of dismissal en-

tered in the District Court (R. foll. 152a).

ARGUMENT

POINT I

The Circuit Court of Appeals correctly decided that

the amended complaint failed to show a basis for recovery

under the Public Utility Holding Company Act and that,

in consequence, the claimed jurisdiction herein based on

Section 25 of the Act did not exist.

Despite the ‘‘highly unusual position’’ taken by the plain-

tiff in the Court below that ‘‘his general claim for misman-

agement does not state a cause of action at all’’ (R. foll.

152a, p. 2), the fact remains that the plaintiff’s claims

against the individual defendants are based essentially upon

3

express allegations of breach of common law ‘‘fiduciary”’

duties as officers and directors, or negligence in the per-

formance of those duties. The blanket allegations in the

amended complaint as to ‘‘violations’’ of the Public Utility

Holding Company Act by the Corporation are superim-

posed upon these essential allegations merely to give a

semblance of Federal jurisdiction in the matter. They

have no legal relation to the causes of action attempted to

be alleged in the amended complaint or to the relief therein

sought.

In the first cause of action alleged against former

officers and directors, the plaintiff, after reciting the failure

of the Corporation to register as a holding company under

the Act during the period from December 1, 1935 to March

28, 1938, and the retention by the Corporation of certain

portfolio securities during that period in ‘‘violation’’ of

Section 4(a) of the Act (R. 29a-30a), states in Paragraph

Turrtry-Ercut (R. 32a) that such acts and omissions——

‘‘were committed in furtherance of a fraudulent con-

spiracy by the defendants to waste and dissipate the

assets of United and to profit at the expense of United ;

by means of said acts and failures to act. In taking

part in said conspiracy and the fraudulent acts and

omissions pursuant thereto the directors of United ;

conducted themselves in wrongful violation of their

fiduciary duties to United and the other defendants

knowingly participated in and wrongfully induced

such breach of fiduciary duty.’’*

*The amended complaint (R. 32a-36a) then goes on to state

that the ‘‘conspiracy to profit at the expense of United included,

as an essential element thereof, the continued ownership and holding

by United of the aforesaid securities of the subsidiaries’’; to claim

certain relationships between the officers and directors of United

and certain third parties alleged to have acted in conspiracy with

them; and to claim damages measured by the difference between the

market value of the securities as of December 1, 1935 (when non-

exempt holding companies were required to register under the Act)

and the market value of the securities as of March 28, 1938 (when

United registered as a holding company under the Act).

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In the second cause of action alleged against former

officers and directors, the plaintiff, after referring to the

Corporation’s exchange of certain securities in 1937 in con-

nection with the Niagara Hudson Power Corporation-

Mohawk Hudson Power Corporation consolidation, in

‘‘violation’’ of Section 4(a) of the Act (R. 40a-42a), states

in Paragraphs Firty-rourtu-Firry-rirra (R. 43a) that such

acts and failures——

‘were committed in furtherance of a fraudulent con-

spiracy among the defendants to waste and dissipate

the assets of United and to profit at the expense of

defendant United, by means of said acts and failures

to act.’’

and that, by such acts and failures, the individual defend-

ants who were officers and directors of United——

‘‘committed a breach of their fiduciary duties to de-

fendant United, and were guilty of gross negligence

in the discharge of said duties.’’*

In the third cause of action alleged against all the de-

fendants, including the present officers and directors of the

Corporation and those individuals who became officers or

directors on and after March 28, 1938, when United regis-

tered as a holding company under the Act (R. 29a), the

plaintiff, after asserting that United retained certain port-

folio securities from January 1, 1936 to 1944 and failed to

file with the Securities and Exchange Commission a proper

plan for the divestment of securities in ‘‘violation’’ of See-

tion 11 of the Public Utility Holding Company Act (R. 5la-

55a), states in Paragraph Seventy-ricutH (R. 55a) that

such acts——

‘‘constituted gross negligence and a fraudulent

breach of their fiduciary duties as directors and

* The amended complaint (R. 48a-45a) attempts to spell out, on

the basis of a comparison of subsequent declines in the market value

of securities, alleged losses suffered by United as a result of the ex-

change of portfolio securities in connection with the aforesaid

consolidation.

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officers of said defendant, United. The other defend-

ants knowingly participated in and induced said

breach of fiduciary duty by said directors.’’*

Thus, a mere reading of the complaint shows that the

Cireuit Court of Appeals correctly decided that the plaintiff

had failed to show a basis for recovery under the Public

Utility Holding Company Act and that, in consequence, the

claimed jurisdiction of the subject matter based on Section

25 of the Act did not exist. Not only is there no basis

whatever for the plaintiff’s claim that the Corporation’s

failure to file a proper plan for divestment of securities

constituted a violation of Section 11(e) of the Act [15 U.S.

C. A. § 79k] (see American Power & Light Co. v. SEC, 329

U. S. 90, 119, 123, 67 S. Ct. 133, 149, 151 (1946) ; Common-

wealth & Southern Corp. v. SEC, 134 F. (2d) 747 (C. C. A.

3rd, 1943) ) ; but it is obvious, in view of the claims asserted

in the amended complaint, that the alleged ‘‘violations’’ of

Section 4(a) of the Act attributable to the Corporation’s

failure to comply with the registration provisions of the

Act, were not the proximate cause of the losses for which

the plaintiff seeks redress audygaccordingly, afford no ground

for federal jurisdiction herein (see Herrmann v. Edwards,

238 U. S. 107, 35 8. Ct. 839 (1915); Meyer v. Kansas City

Southern Ry. Co., 84 F. (2d) 411 (C. C. A. 2nd, 1936) cert.

denied 299 U.S. 607, 57 S. Ct. 233 (1936) ).

Moreover, with the failure of jurisdiction over the sub-

ject matter based on Section 25 of the Act, personal jurisdic-

tion based on the same Section is also lacking and the venue

:

of this action is clearly improper as to all of the individual e

defendants who were not served with process within the i

District of Delaware, and are not residents or inhabitants ,

* In this instance, the damages are vaguely stated (R. 60a) to be R

“‘at least in sums equal to the difference between the value of such '

shares of stock at the time when this court determines they should ¥

have been disposed of, and the present value thereof.’’

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of that District (see Rule 4, Federal Rules of Civil Pro-

cedure [28 U. 8S. C. A. foll. § 723(c)]; Section 51 of the

Judicial Code [28 U. 8S. C. A. § 112].

POINT II

This case does not present any question appropriate

for this Court to review.

As appears from Judge Goodrich’s opinion below (R.

foll. 152a), the Circuit Court of Appeals’ decision of affirm-

ance was based primarily upon its determination that the

allegations of the complaint were insufficient to establish a

causal relation between the damages for which recovery was

sought and the ‘‘violations’’ of the federal statute in ques-

tion. Thus, the Court’s decision involved merely a construe-

tion of this particular complaint rather than an interpreta-

tion in any fundamental sense of the Public Utility Holding

Company Act of 1939.

The Circuit Court of Appeals did not, as the petitioner

suggests throughout his petition and supporting brief, rule,

expressly or by implication, that the failure of a public

utility holding company to comply with the registration pro-

visions of the Act could not be made the basis of a private

right of action under the Act. On the contrary, this question

was left open and the existence of such private right of ac-

tion was assumed by the Court in determining whether or

not the amended complaint stated a basis for recovery under

the Act.

In the concluding paragraph of his opinion, Judge Good-

rich said (R. foll. 152a, p. 9):

‘‘Qur conclusion is, with regard to plaintiff's first

and second claimed causes of action, that we need not

commit ourselves on the question whether violation

of registration requirements may in some circum-

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stances be made the foundation of assertion of private

rights. We shall answer that question when a case

compels us to do so. It is sufficient to say that such

circumstances are not here presented by the plaintiff.

We think that here, even if the violation of the statute

could be made the basis of recovery, this plaintiff has

not, even when we take all his allegations as true,

brought himself into the area of recovery. * * *’’

The Petition Misstates the Questions decided by

the Circuit Court of Appeals

The principal defect in the petition for certiorari is in

its incorrect statement of the questions presented to the

Court. It will be noted that the petition (pages 10-11)

defines each of the three questions upon which review

is sought as involving ‘‘damages and profits resulting from

their [the individual defendants’] actions in wilfully causing

such company while unregistered * * * * to do or fail to

do certain things. Such phrasing, we think, may be caleu-

lated to circumvent the only issue considered and decided

by the Cireuit Court of Appeals. It was the confusion of

the allegations on the point of causation which led the Cir-

cuit Court of Appeals very carefully to limit its decision

in this ease. This confusion is now sought to be injected

into the pending petition. The Circuit Court held only

that the complaint contained no allegations which, if true,

would establish that the loss or damage complained of was

caused by or resulted from the claimed violations by the

Corporation of the Holding Company Act.

The Court summarized this basic defect of the complaint

as follows (R. foll. 152a, pp. 7-8):

« ** * Tt [United] would still have held the shares.

The plaintiff does not, nor could he, allege that the

shares would necessarily have been disposed of had

the company registered since the statute gave no man-

date to a registered company that it must divest itself

of the securities. The loss to shareholders ina declin-

ing market would have been just exactly the same

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whether the company was registered or whether the

company was not registered. Plaintiff does not al-

lege that the loss in value in United’s securities was

due to failure to register. We do not see how, in the

nature of things, there could be any possible connec-

tion between the mere failure to register and the de-

cline in value in United’s shares in other companies,

The only possible theory on which any such respon-

sibility could be imposed is, we think, the proposition

that the statute-violator becomes an insurer against

loss of every kind. This, as already pointed out, is

not the law.’’

And so, the Court also stated its conclusion on the matter

as follows (R. foll. 152a, p. 10):

«©*** We think plaintiff, although he has presented

his case with great skill, has failed to show any legal

connection between the violation of the Act and the

loss. * * 89)

The phraseology of the petition is much too oblique in

the presentation of questions claimed to be involved in this

case. The basic question presented may be summarized

much more directly and succinctly as follows:

May a minority stockholder whose essential grievance

relates to a claimed breach of fiduciary duty by corporate

officers hoist himself into a federal court by alleging a con-

comitant, but logically unrelated, violation of a federal

statute?

Both the District Court and the Cireuit Court of Ap-

peals answered this question in the negative; an answer

which, upon the face of this particular complaint seems

elementary and obvious, and most certainly involves no

broad and significant interpretation of law or statute suf-

ficient to warrant a further review by this Court.

It may be observed, moreover, that the petitioner himself

now seems to recognize that the gist of his complaint is

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the fancied breach of a common law duty of corporate of-

ficers. Faced with the undeniable fact, with respect to

the third cause of action in the complaint, that no pri-

mary duty is imposed upon corporate officers under Sec-

tion 11 of the Act, the petitioner now argues (Petition

and Brief, pages 40-41) that the statute, by conferring privi-

leges which might have been availed of, ‘‘enlarged the fidu-

ciary obligations of the defendants and required that they

act for the best interests of security holders, as envisaged

by the act rather than in the interests of the affiliated bank-

ing interests who dominated and controlled United.”’

If the petitioner’s argument means anything at all, it

means merely that the failure to file a voluntary plan under

Section 11(e) might be considered a factor in weighing a

charge of corporate mismanagement. But the action, if it

existed at all, would be a common law action and not one

“ereated’’ by the statute or one as to which a federal court

has jurisdiction under Section 25 of the Holding Company

Act.

The Circuit Court’s decision is not in conflict with

decisions of this Court or of other Circuit Courts

As bearing upon the petitioner’s further suggestion

(Petition, pp. 12-13) that the decision below is in probable

conflict with the decision of this Court in Texas & Pacific

Ry. Co. v. Rigsby, 241 U. S. 33, 36 S. Ct. 482 (1916), and

the decision of the Second Cireuit Court of Appeals in

Goldstein v. Groesbeck, et al., 142 F. (2d) 422 (C. C. A.

Ind, 1944), cert. denied 323 U. S. 737, 65 S. Ct. 36, it is to

be noted that, in the opinien below, Judge Goodrich not only

recognized the doctrine of the Rigsby case by his reference

to Section 286 of the Restatement of the Law of Torts

(R. foll. 152a, p. 5), but also recognized the decision in the

Groesbeck case as authority for the proposition that a pri-

vate right of action may exist for acts done in violation of

Section 4(a) (2) of the Act (R. foll. 152a, p. 7, n. 16).

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Indeed, in this latter connection, Judge Goodrich specifi-

eally stated (R. foll. 152a, p. 7):

‘*We are unwilling to take the position urged by

the defendants that the violation of the registration

provisions of the statute will never bring about in-

dividual liability. Violation has been held liability

creating in one situation. It may or may not be in

others. This case is decided on a narrower ground.

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CONCLUSION

The decision of the Circuit Court of Appeals on the

narrow issue presented to it was clearly correct. It in-

volved no broad interpretation of the Statute in question

and it is not in conflict with any other decisions of this

Cwurt or of other Circuit Courts. Accordingly, the petition

for a writ of certiorari herein should be denied.

Respectfully submitted,

WituuaM S. Porter,

Counsel for Respondents

George H. Howard, et al.