Petition for Writ of Certiorari — Steele v. Guaranty Trust Co. of New York

me Bikes - Suc-ame Court,

CPY JAN 23 1948

CRARLIS ILUORE Roe

IN THE

SUPREME COURT OF THE UNITED STATES

Ocroser Term, 1947.

No, 246

GRACE W. YORK, et ai.,

—against—

GUARANTY TRUST COMPANY OF NEW YORK,

Defendant.

Plaintizs,

EDWARD M. STEELE and HENRY M. STEELE, as Executors of the

Estate of Emma W. Steele, GUS STERN, ELVA LAMBERSON,

FIRST NATIONAL BANK OF STILLWATER, OKLAHOMA, et al.,

Petitioners,

—against—

GUARANTY TRUST COMPANY OF NEW YORK,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT, AND BRIEF

IN SUPPORT OF PETITION.

{ MEYER ABRAMS,

134 N. LaSalle Street,

Chicago, Illinois,

and

BENNETT It. SCHLESSEL,

1450 Broadway,

New York 18, New York,

Attorneys for Petitioners.

SHULMAN, SHULMAN AND ABRAMS,

134 N. LaSalle Street,

Chicago, Illinois,

Of Counsel.

January 19, 1948.

Midwest Law Printing Co., 340 W. Huron St., Chicago

2 Lace nn en cernee egy

— 7

INDEX.

PAGE

Petition 1-6

A Statement of the Matter Involved 2-3

Questions Presented

Reasons for Granting the Writ... 5

Brief .. 7-39

Jurisdiction Invoked 7

Opinion Below 7-8

A Statement of the Case in 9-15

Argument 15-39

SumMMARY oF ARGUMENT.

1.

The defendant which obtained a decree sustaining

its plea of confession and avoidance, and which did

not appeal from the decision which overruled its

motion for summary judgment on jurisdicional

grounds, was in no position to raise the issue of

jurisdiction on the appeal taken by the plaintiffs 15-19

II.

The decision of the Second Circuit Court of Appeals

that in a spurious class suit where the original suit

is based on diversity of citizenship and the claim

is in excess of $3,000 the court is without jurisdic-

tion to permit intervention of claimants not having

the jurisdictional amount under Rule 23(a) (3) and

24(b) is in conflict with the decision of the Third

Cireuit Court of Appeals... 20-22

ii

ITI.

The rule in the Second Circuit that where a class ac-

tion was commenced by one who is a non-resident

in a diversity case that the court is without juris-

diction to permit the intervention of a resident

claimant under Rules 23(a){3) and 24(b) is in con-

flict with decisions of other courts and the writ

should be issued to harmonize the decisions............ 22-23

IV.

The District Court clearly erred when it held that the

action was barred by the Ten Year Statute of

Limitations .... 23-39

(a) The ten year statute did not begin to run until

the default on November 1, 1932, and the suit

was filed within the ten year period.................... 23-

(b) This suit was properly brought under Section

23 of the Civil Practice Act as construed by the

Court of Appeals of New York and the action

was not barred 24-28

(1) The dismissal was not on the merits and it

was proper to file the suit under Section 23

of the New York Civil Practice Act.......... 28-30

(2) The cause of action in this case is iden-

tical with the cause of action which was

asserted by York when she intervened in

the Hackner suit. 30-33

(c) The statute did not begin to run against the

existing trust until the repudiation of the trust

by the defendant

(d) The denial of the benefit of the Statute of

Limitations when it is inequitable is within the

iii

power of a Court of Equity even under the

z te A Oa

New York Law 34-35

(e) The action was based on actual fraud and the

bar of the statute did not commence until its

discovery 36-39

Conclusion

TABLE OF CasEs.

Allen v. Payson, 11 NYS (2) 28

Application of Assessor, 69 NYS (2) 702

Arkansas Fuel Oil Co. v. Leisk, 133 F. (2) 79, 81........

Bay Ridge Savings Bank v. Gussow, 68 NYS (2) 622

Bond v. Marat, 145 Neb. 780

Bucholtz v. U. S. Fire Ins. Co., 269 App. Div, 49......

Carpenter’s Mill, 40 NYS (2) 13........

Cochran v. M & M Transportation Co., 110 F. (2) 519

Devoe v. Lutz, 133 App. Div. 356

Dodds v. McColdan, 229 App. Div. 273

Doehler Metal Furniture Co. v. U. S., 149 F. (2) 130

Friedman v. Long Island R. Co., 55 NYS (2) 899........

Gaines v. City of New York, 215 NY ERS

Grand Rapids Electrotype Co. v. Powers-Tyson Corp.,

356 Mich. 311

Hackner v. Guarantee Trust Co., 117 F. (2) 95........

Heiser v. Woodruff, 327 U. S. 726

Manufacturers Trust Co. v. Kelby, 125 F. (2) 652......

39

19

34

iv

Miller v. Guarantee Trust Co., 67 NYS (2) 76............ 34

Morley v. Maryland Casualty Co., 300 U. S. 185.......... 16

Nagle v. Harold, 30 F. Supp. 905 24

Ostrander Seymour Co. v. Grand Rapids Fur. Co.,

50 F. (2) 567 16

Parmelee v. Chicago Eye Shield Co., 157 F. (2) 582 39

Reed v. International Container Corp., 43 F. Supp.

644 : 24

Sartor v. Arkansas Nat. Gas Co., 321 U. S. 620............ 39

Shipley v. Pittsburgh & L. E. R. Co., 70 E. Supp. 870 20

Southern Surety Co. v. Austin, 22 F. (2) 881..0.0......... 24

Stoll v. Gottlieb, 305 U. S. 105 17

Teich v. Lawrence, 265 App. Div. 974 . 36

Titus v. Poole, 145 NY 414... = 26

Topping v. Fry, 147 F. (2) 715, 717 16

Wechsler v. Bowman, 285 NY 284 36

York v. Guaranty Trust Co., 143 F. (2) 503 0000000. y

OruHer CITATIons.,

Bogert on Trusts, Sections 485 and 951 34

IN THE

SUPREME COURT OF THE UNITED STATES

: Ocroper Term, 1947. - 2

No.

GRACE W. YORK, et al.,

Plaintiffs,

—against—

GUARANTY TRUST COMPANY OF NEW YORK,

Defendant.

EDWARD M. STEELE and HENRY M. STEELE, as Executors of the

. Estate of Emma W. Steele, GUS STERN, ELVA LAMBERSON,

FIRST NATIONAL BANK OF STILLWATER, OKLAHOMA, et al.,

Petitioners,

—against—

GUARANTY TRUST COMPANY OF NEW YORK,

Respondent.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES CIRCUIT COURT OF APPEALS

FOR THE SECOND CIRCUIT.

To the Honorable Chief Justice and Associate Justices

of the United States:

Edward M. Steele and Henry M. Steele, as Executors

of the Estate of Emma W. Steele, deceased, Elva Lam-

berson, Gus Stern and First National Bank of Stillwater,

Oklahoma, in their own right and for the common use

and benefit of all noteholders of the class of $1,213,000

who were similarly situated, respectfully pray the issu-

ance of a writ of certiorari to the United States Cir-

cuit Court of Appeals for the Second Circuit to reverse

hate NaI SRE NEI es

2

its order and decision of December 8, 1947 which re-

versed the judgment of the United States District Court

for the Southern District of New York sustaining re-

spondent’s motion for a summary judgment because of

the bar of the action by the ten-year Statute of Limi-

tations with directions to dismiss the action on the ground

of lack of the jurisdictional amount and which denied a

rehearing on December 22, 1947.

Summary Statement of the Matter Involved.

On January 22, 1942, within one year after the denial

of certiorari by this court (313 U. S. 589) from the dis-

missal of Grace W. York as a party in the Hackner suit

(117 F. (2) 95) on jurisdictional grounds, she filed this

suit as owner of $6000 notes on behalf of the class of

noteholders aggregating $1,213,000 of the $30,000,000

note issue of Van Sweringen Corporation, for the breach

of trust of the respondent in consenting to and spon-

soring the offer made to noteholders in the name of

the corporation of October 29, 1931 whereby the class

of the $1,213,000 were deprived of their share of

the ‘‘assigned securities’? and the respondent bene-

fited therefrom to the extent of at least one-haif of the

amount. The trial court sustained respondent’s motion

for a summary judgment which was reversed on appeal

(143 F. (2) 503). Certiorari was sought on eight ques-

tions, and allowed only on one of the questions, whether

a federal court in an equity proceeding in a diversity case

is bound by a State Statute of Limitations held to govern

like cases by the State courts (323 U. S. 693). The ques-

tion was academic then, as no such plea was filed, and was

_answered here in the affirmative (326 U. S. 999). How-

ever, the judgment stood affirmed on the seven other

questions on which certiorari was denied. Because of

a

the opinion (143 F. (2) 503, 529) that all other note-

holders of the class of $1,213,000 might’ intervene ‘‘be-

fore’ or ‘‘after’’ trial and its suggestion to amend the

complaint (143 F. (2) 503, 519), plaintiffs intervened

the petitioners as additional plaintiffs and filed by leave

of court an amended complaint (R. 1-19).

Respondent filed an answer which included as the

first defense the plea of the six-year Statute of Limi-

tations. and as a second defense the plea of the ten-

year Statute of Limitations (R. 51) and also moved

to dismiss the suit as to all petitioners except ‘‘Baseball’’

on the ground of lack of the jurisdictional amount (R.

85), and as to ‘‘Baseball’’ on the ground of want of

diversity of citizenship. The trial court did not dismiss

the suit because of lack of jurisdiction but sustained the

defense of the ten-year Statute of Limitations.

Petitioners, except Grace York, appealed. No cross

appeal was taken by respondent from the refusal of

the court to dismiss on jurisdictional grounds. The Court

of Appeals reversed the judgment on the merits based on

the bar of the Statute, with directions to dismiss the

action for want of jurisdiction, except as to York who

did not appeal. A petition for rehearing was filed which

called to the attention of the court that the jurisdic-

tional issue was raised below; that by the judgment on

the merits the court sustained its jurisdiction, and that

this became res judicata in the absence of an appeal by

the respondent, and while it had the right to urge any

reason in support of the judgment, it could not urge it

to reverse the order and that the Court of Appeals was

limited to determine the only issue upon which peti-

tioners prosecuted the appeal, the bar of the action by

the ten-year Statute of Limitations (R. 47). The rehear-

ing was denied on the same day the petition was filed

(R. 188).

4

QUESTIONS PRESENTED.

1. In a class action in which jurisdiction in the

original proceedings is based on diversity of citi-

zenship and the amount involved is in excess of

$3,000, does the court have jurisdiction to permit

the intervention of other claimants as new plaintiffs

who lack the jurisdictional amount under Rules 23

(a) (3) and 24(b) of the Federal Rules of Civil

Procedure.

2. In a class action in which jurisdiction is in-

voked on diversity of citizenship and the required

amount, does the court have jurisdiction to permit

intervention by other claimants of the class as plain-

tiffs under Rule 23 (a) (3) and 24 (b) of the Fed-

eral Rules of Civil Procedure, although there is no

diversity of citizenship between such intervenors

and the defendant.

3. Whether a decision in favor of jurisdiction

may be reversed on an appeal from a judgment on

the merits in the absence of an appeal on the juris-

dictional question, and whether the judgment on the

jurisdictional question became res judicata as to

remove the question from review on appeal.

4. Whether a defendant whose motion to dismiss

on jurisdictional grounds was denied and was suc-

cessful in obtaining a judgment on the merits can

relitigate the jurisdictional question on the appeal

of the plaintiffs from the judgment on the merits, in

the absence of an appeal or cross appeal by the

defendant.

5. Whether the decision reversing the judgment

on the merits below with directions to dismiss for

lack of jurisdiction in the absence of an appeal on

the decision in favor of the jurisdiction conflicts

with the views of this court in Stoll v. Gottlieb, 305

U. S. 165, 174 and Heise v. Woodruff, 327 U. S. 726,

732, and with decisions of other Circuits.

ee .

ee

5

REASONS FOR ALLOWING THE WRIT.

1. In holding that in the absence of an appeal

from the determination in favor of the jurisdiction

below the question of jurisdiction was open for re-

view and in reversing the judgment on the merits

with directions to dismiss for lack of jurisdiction

the court of appeals:

(a) conflicted with the decision of the Sixth

Circuit in Orlander-Seymour v. Grand Rapids,

50 F. (2) 567, certiorari denied here.

(b) disregarded the contrary decisions of

this court in Stoll v. Gottlieb, 305 U. S. 165, 174

and Hase v. Woodruff, 327 U. S. 726, 732.

2. In holding that in a class action in which

jurisdiction in the original proceedings is based on

diversity of citizenship and the amount is in excess

of $3,000 the court is without jurisdiction to permit

the intervention of other claimants in the case under

Rules 23 (a) (3) and 24 (b) of the Federal Rules of

Civil Procedure, the court of appeals:

(a) failed to follow its own decision in the

instant case (143 F. (2) 503, 529);

(b) conflicted with the decision of the third

Cireuit Court of Appeals as pointed out in the

opinion of the District Court in Shipley v.

Pittsburgh & L. C. R. Co., 70 F. Supp. 870,

872.

3. The decision that in a class suit in which juris-

diction in the original proceedings is based on di-

versity of citizenship the court is without jurisdic-

tion to permit intervention of a claimant in the

case under Rules 23 (a) (3) and 24 (b) where there

is a lack of diversity as to the new party the

decision is in conflict with decisions of other courts.

4. The decision below involves important ques-

tions of federal procedure under Rules 23 (a) (3) and

24 (b) on which there is conflict in the decisions and

the writ should be granted to harmonize important

federal procedure.

6

PRAYER.

For the foregoing reasons petitioners pray that a writ

of certiorari issue out of this court to the United States

Circuit Court of Appeals for the Second Cireuit direct-

ing said court to certify and send to the court on a

date to be determined, a full and complete transcript

of the record and of all proceedings there had in this

ease, to the end that the case may be reviewed and

determined by this court, that its judgment and de

cisions be reversed with proper directions; and that

your petitioner be granted such other and further relief

as may be proper.

Epwarp M. Sreete and Henry M. Sreete,

as Executors of the Estate of Emma W.

Steele, Gus Stern, Elva Lambertson,

First National Bank of Stillwater, Ok-

lahoma, e¢ al.,

Petitioners.

By Meyr AMS,

134 N. 2 @ee St,

Chicago, . .ols

and

Bennett I. ScHLEssEL,

1450 Broadway,

New York, New York,

Attorneys for Petitioners.

IN THE

SUPREME COURT OF THE UNITED STATES

Ocropgr Term, 1947.

No.

GRACE W. YORK, et ai.,

—against—

GUARANTY TRUST COMPANY OF NEW YORK,

Defendan

Plaintiffs,

t.

EDWARD M. STEELE and HENRY M. STEELE, as Executors of the

Estate of Emma W. Steele, GUS STERN, ELVA LAMBERSON,

FIRST NATIONAL BANK OF STILLWATER, OKLAHOMA, et al.,

Petitioners,

—against—

GUARANTY TRUST COMPANY OF NEW YORK,

Respondent.

BRIEF IN SUPPORT OF PETITION.

Jurisdiction of This Court.

The judgment of the Circuit Court of Appeals was

entered December 8, 1947 and the petition for rehearing

was denied on December 22, 1947 (R. 188). Jurisdiction

of this court is invoked under Judicial Code Section 240

(a), 28 U. S. C. A., See. 347 (a) as amended by the Act

of February 13, 1925.

Opinions Below.

The opinion of the District Court is not reported (R.

157, 165). The opinion pointed out that the defendant

raised the defenses of the six and ten-year Statute of

8

Limitations and moved for a summary judgment under

Rule 56, and to dismiss on jurisdictional grounds under

Rule 12(h), and the court concluded that the defense

of the ten-year Statute of Limitations was a bar to the

action. It held that the fact that the action was com-

menced within one year from the disposition of the

original York suit on jurisdictional grounds did not re-

move the bar of the Statute of Limitations under Section

23 of the New York code on the ground that the cause

of action in this suit was different from the cause of

action in the Hackner suit which York joined and from

which action she was dismissed.

The opinion of the Court of Appeals is not yet re-

ported (R. 173-176). The Court of Appeals went back

to its opinion in the Hackner case (which it rejected in

this suit) (143 F. (2) 508, 528), and stated that the proce-

dure under 23 (a) (3) ‘‘is in effect, but a congeries of sep-

arate suits’’ and that ‘‘each claim must’’ meet the juris-

dictiona] requirements and that the District Court improp-

erly decided the ‘‘merits’’ as it had no jurisdiction of

‘*Baseball’’ because of the absence of ‘‘diversity’’ and of

the other petition of the jurisdictional amount. It there-

fore reversed, without a cross appeal, the judgment on the

merits with directions to dismiss the action of the

petitioners. It held at first that the fact that respondent

did not raise the jurisdictional question in the District

Court was irrelevant. It was pointed out in the peti-

tion for rehearing that the court was in error when

it assumed that the jurisdictional issue was not raised

and that it was in fact raised below, and when the court

decided on the ‘‘merits’’ it necessarily held that it had

jurisdiction and in the absence of an appeal it was res

judicata and it struck out that part from the opinion (R.

176, note 5). The rehearing however was promptly denied.

cg

A STATEMENT OF THE CASE.

The History.

Grace W. York intervened as a plaintiff in a suit

which was commenced by Elias Hackner against the

respondent in the year 1940 for a breach of trust and

fraud in causing him and other noteholders to accept an

‘‘offer’’ to exchange his gold notes for 50% in cash out

of ‘‘assigned securities’’ and 50% in stock which was

known to the respondent to have been worthless. York

as the owner of $6000 of the notes was a ‘“non-acceptor”’

of the ‘‘offer’’ and her loss included the 50% in cash of

the ‘‘assigned securities’? in which she did not partici-

pate. The offer was made on October 29, 1931 and the

suit was filed within the ten-year statutory period (R.

17). She was dismissed as a plaintiff on jurisdictional

grounds. (Hackner v. Guaranty Trust Co., 117 F. (2)

95) and certiorari was denied here on April 7, 1941 (313

U. S. 559) and pursuant to Section 23 of the New York

Code she filed this action on January 22, 1942 (R. 1).

A summary judgment was entered against her which

was reversed on appeal (143 F. (2) 503). Certeriori

was allowed (323 U. S. 693) upon a question which was

then academic, and which did not affect the reversal

order, on the question whether if and when the Statute

of Limitations be pleaded whether a Federal Court in

a diversity case is bound by the State Statute of Limi-

tations when it would be inherently inequitable to per-

mit the bar. The Court of Appeals held in the negative

and on this point its decision was reversed here (326

U. S. 999). The decision of this court did not affect the

reversal order, and upon the filing of the mandate leave

was obtained to file an amended complaint joining the

petitioners as additional plaintiffs (R. 2). The amended

ere RO

ee aad

a

10

complaint was filed on January 18, 1946 (R. 3-19). The

defendant filed its answer on February 1, 1946 (R. 2)

which included the defenses of the six-year Statute and

the ten-year Statute of Limitations (R. 51). It moved

for another summary judgment on August 20, 1946 (R.

83) and also moved to dismiss the action as to petitioners

on jurisdictional grounds (R. 84). On- March 28, 1947

the District Court rendered its opinion sustaining the

bar of the action by the ten-year Statute of Limitations

(R. 157-165). It entered judgment on April 14, 1947

(R. 165-166).

The Facts.

The Guaranty Company of New York, a wholly owned

subsidiary of respondent, participated in a syndicate

to sell the $30,000,000 note issue of the Van Sweringen

Corporation, dated May 1, 1930. The notes bore interest

at 6% per annum, payable semi-annually and matured

May 1, 1935, and respondent is the Trustee under the

Indenture dated May 1, 1930 (R. 92). The corporation

agreed to acquire and maintain, free from any lien,

incumbrance or pledge, 500,000 shares of the Allegheny

Corporation or other marketable securities of equal value

as ‘‘segregated assets’’ until at least $15,000,000 of the

notes were canceled. Its principal officers, the Van

Sweringens, guaranteed to maintain the ‘‘segregated

assets’’ in ‘‘liquid’’ condition and to make good any

deficiency within 20 days by supplying additional col-

lateral called ‘‘assigned securities’’ of ‘‘a current mar-

ket value of $15,000,000’’ (R. 93). The defendant was

vested with the exclusive power to enforce the terms of

the agreement, and the corporation agreed to hold the

‘‘segregated assets’’ for the ‘‘exclusive’’ benefit of the

noteholders (R. 30).

il

The 1930 Crisis:

On October 30, 1930, one day prior to the ‘‘due’’ date

of the first semi-annual] interest on the $30,000,000 note

issue, there was a crisis. No funds were available to

pay the interest maturing November 1, 1930. There was

‘‘a threatened breakdown”’ of the covenants to maintain

“segregated assets’’ and ‘‘assigned securities’. The de-

fendant was informed that on account of a declining

market, the Van Sweringens were unable to comply with

their agreement concerning the ‘‘assigned securities’’,

unless the bankers were willing to extend further credit.

It agreed to participate to the extent of $11,000,000 with

a group of bankers headed by ‘‘Morgan”’ in loans ag-

gregating $39,500,000 to save the note issue from de-

fault. The loan was divided into two parts, one of

$16,000,000 to the Vaness Company, the top holding

Company and ‘‘parent’’ of the Van Sweringen Cor-

poration; the other, in the amount of $23,500,000, to

the Cleveland Terminals Company, the Subsidiary of

the Van Sweringen Corporation. All of the common

stock of the corporation and other securities were pledged

under two collateral notes with ‘‘Morgan’’ for the

benefit of the defendant and the other bankers. Some

of the proceeds of the loans were used to supply ‘‘as-

signed securities’? to substitute $15,000,000 cash and

other securities for the ‘‘segregated assets’’ then con-

sisting of the Allegheny stock, and thereby the crisis

was overcome. The ‘‘Trustee’’ became a ‘‘creditor’’ to

the extent of its $11,000,000 share in the $23,500,000 note

of the subsidiary of which the Van Sweringen Corpora-

tion was also a creditor in excess of $27,000,000. The

defendant came to the ‘‘rescue’’ of the Van Sweringen

Corporation because the ‘‘Guaranty Company’’, its sub-

sidiary participated in the Syndicate to sell the $30,-

000,000 notes to the public (R. 94-97).

ARR LTE ELIE GRIT =D

The 1931 Crisis:

The crisis reoccurred the following year, when another

installment of interest was to mature on November 1,

1931. Again no funds were available to pay interest on

the $30,000,000 note issue. There were no prospects that

the defendant and the other bankers would themselves

receive interest on the $39,500,000 loan which matured

on November 1, 1931. Failure to pay interest on these

loans would have brought the collapse of the entire Van

Sweringen ‘‘empire’’. This would have affected the

reputation of the ‘“‘Guaranty Company’’ which sold the

$30,000,000 note issue to the public and the $11,000,000

debt created a year prior (R. 97-98).

Trustee’s Position:

Upon default in the interest payment on November 1,

1931, the Trustee could have accelerated the note issue,

could have taken action to appropriate the ‘‘segregated

assets’’ toward the partial satisfaction of the debt, could

have obtained a deficiency for the balance, and it could

have resorted to the satisfaction of the deficiency from

the other assets of the Subsidiary which was indebted

to its parent in the sum of $27,000,000. Such a procedure

would have clashed with its interests as a ‘‘creditor’’ of

the Subsidiary on the $23,500,000 note.

The defendant considered the problems, which included

the possibility of insolvency proceedings against the Van

Sweringens, the Vaness, and its Subsidiary, the Cleve-

land Terminals Building Corporation. Such proceedings

would have imperiled its interest and the interests of

other bankers as affecting the collateral held under the

$39,500,000 notes. Therefore, the defendant and the other

bankers, together with the Van Sweringens, worked out

13

‘‘general terms’’ of the proposed plan to the noteholders

whereby the default would be avoided and the insolvency

proceedings would be prevented (R. 98-99).

The Scheme:

To prevent insolvency it was necessary to eliminate

the creditors. To prevent the default it was necessary

to use the ‘‘assigned securities’? which could have only

been done by a cancellation of half of the $30,000,000

note issue. To accomplish such results, the defendant

actively participated in a plan whereby the corporation

would ‘‘offer’’ to purchase the notes by paying 50% in

cash and to exchange the other 50% of the notes for

the common stock. This common stock was in the pos-

session of the defendant and Morgan, as collateral, and

in order to make the exchange the common stock had

to be released. It was arranged that upon the purchase

of the notes, 50% would be canceled and the other 50%

would remain uncanceled and be substituted for the com-

mon stock. Thereby the defendant and the other bankers

would obtain 50% of the notes in exchange for the

common stock as collateral, and the ‘‘segregated assets”’

would be ‘‘released’’ and used as collateral. This plan

which was worked out by the defendant, was incorpor-

ated in a written agreement between the Van Sweringens

and ‘‘Morgan’’. The defendant and ‘‘Morgan’’ would

become the only creditors of the corporation under the

scheme so that no one could interfere with the recovery

of the claim due from the Subsidiary in excess of $27,-

000,000, which claim on the deficiency would have ‘‘ranked

equally’’ with the claim of the defendant on the collat-

eral note of the Subsidiary. These matters were consid-

ered by the defendant when it ‘‘consented’’ that- the ‘‘of-

fer’’ be submitted (R. 99-101).

14

The Offer:

It was ‘‘against this background’’ that the defendant

made the ‘‘offer’’ in the name of the Van Sweringen

Corporation to purchase 50% of the notes for fifty cents

on the dollar, payable from the ‘‘segregated assets’’,

and to exchange the other 50% of the notes for its com-

mon stock. There was outstanding $26,234,000 in notes,

besides $3,766,000 in notes held in the treasury and ac-

quired with the funds from the ‘‘segregated assets’’.

There was $13,440,681.86 in the ‘‘segregated assets’’, and

only $13,117,000 were required to pay 50% on the out-

standing notes. There was therefore an ‘‘excess’’ of $337,-

681.86 which was available to the defendant and Morgan

under the arrangement. The ‘‘offer’’ stated (R. 40) that

the ‘‘Van Sweringen interests’’ would acquire the notes

and they would be free to use the balance of the ‘‘segre-

gated assets’’ for their purpose. It did not state that the

defendant and the other bankers would receive the freed

assets and that they would obtain the uncancelled notes

and substitute them in their portfolio in exchange for the

common stock, nor did it disclose that the corporation was

then insolvent. It did not disclose that after the release of

the ‘‘segregated assets’’ they would be used on the col-

lateral note of $23,500,000 which Morgan held for its own

use and benefit and for the benefit of the defendant. In

reality the defendant printed, mailed, telephoned and had

its ‘‘key’’ offices work on this offer a day before it was

announced, and used its entire organization to have the

offer transmitted and accepted and advanced the sum of

$7500 in order to accomplish its object (R. 67-69).

Personal Benefit:

On November 14, 1931, 50% of the notes were acquired

with the proceeds of the ‘‘segregated assets’? and re-

tired. Thereby, Vaness, the top holding Company with-

a nn tion |

15

drew the balance of the ‘‘assigned securities’’ which at

that time consisted of $3,482,877 in cash and $4,000,000

in Government securities. These funds were ‘‘withdrawn’’

and turned over to ‘‘Morgan’’ under the terms of the

written agreement of October 21, 1931 whereby it ap-

plied such funds towards the $39,500,000 loans in which

the defendant was personally interested to the extent of

$11,000,000. Morgan also acquired for its own benefit

and for the benefit of the defendant $13,784,000 of the

uneanceled notes which were purchased with the funds

derived from the ‘‘segregated assets’’ (R. 102-105).

Loss to the Investors:

Holders of $1,213,000 of the notes did not accept the

offer. There was at least available for these note-

holders $606,500 out of the ‘‘segregated assets’’. These

funds were ‘‘released’’ or ‘‘withdrawn’’ by the forego-

ing scheme, and were turned over to the defendant and

other banking groups and applied under the agreement

of October 29, 1931. These $1,213,000 notes are in default

since November 1, 1932, and the Company is wholly in-

solvent (R. 105).

I.

The defendant which obtained a decree sustaining its

plea of confession and avoidance, and which did not

appeal from the decision which overruled its motion for

summary judgment on jurisdictional grounds, was in no

position to raise the issue of jurisdiction on the appeal

taken by the plaintiffs.

Respondent moved: (1) for a summary judgment

under Rule 56 on the ground: (a) of the bar of the six

year statute, and (b) the bar of the ten year statute,

and it also moved (2) to dismiss the action under Rule

16

12 (h) on jurisdictional grounds. The summary judgment |

was entered under Rule 56, overruling the plea of the

six year statute of limitations and sustaining the plea

of the bar by reason of the ten year statute of limita-

tions (R. 165, 166), and the action was not dismissed

under Rule 12 (h). When the court sustained the plea

of the bar of the ten year statute of limitations, it neces-

sarily overruled the motion to dismiss on jurisdictional

grounds under Rule 12 (h), because a decision based on

the bar of the statute must be founded on the existence

of the jurisdiction. A decree on the merits of the plea

of ‘‘confession and avoidance’’ is a decision that the

jurisdiction existed (Grand Rapids Electrotype Co. v.

Powers-Tyson Corp., 356 Mich. 311, 313, certiorari de-

nied 286 U. S. 545; Ostrander Seymour Co. v. Grand

Rapids Fur. Co., 50 F. (2d) 567; Topping v. Fry, 147

F, (2d) 715, 717).

The defendant who sustained its defense of the bar

of the action by reason of the ten year statute of limita-

tions, may urge every reason available to it in swpport

of the judgment, and if the judgment of the court is

based on an erroneous reason, the defendant may in sup-

port of the judgment supply any other reason. This,

however, must be done in support of the judgment. It

may not supply reasons which tend to reverse the judg-

ment and obtain a different judgment inconsistent with

the one which was entered and from which it did not

appeal, and the judgment is res adjudicata upon it.

In Morley v. Maryland Casualty Co., 300 U. S. 185,

the Supreme Court said, at page 191:

‘¢Without a cross-appeal, an appellee ‘may urge

in support of a decree any matter appearing in the

record.’ * * * What he may not do in the absence

of a cross appeal is to ‘attack the decree with a

view either to enlarging his own rights thereunder

or of lessening the right of his adversary.’ * * *

The rule is inveterate and certain.’’ (Emphasis ours).

oo de eran ay

oe

17

A wealth of authorities are there cited.

In Cochran v. M & M Transportation Co., 110 F. (2d),

519, the Court said, at page 523:

‘“‘The situation is different where a judgment

grants a litigant only part of the relief sought, and

denies the rest. In such a case the party is aggrieved

in part by the judgment and may appeal or cross

appeal. If he fails to do so he can be heard only

in support of the judgment as rendered; such judg-

ment becomes res judicata as to the issues decided

against him.’’

The Court cited many decisions which sustain its view.

The same views were expressed in Arkansas Fuel Oul

Co. v. Leisk, 183 F. (2d) 79, 81. Many decisions are

cited in Note 7.

The court held in its opinion (R. 174) that the dis-

missal was on the ‘‘merits’’. This constituted an adjudi-

cation on the jurisdictional question in favor of the juris-

diction, and in the absence of an appeal the issue was

not open for review.

This was not a case where the issue of jurisdiction

was not raised below, as first stated in the opinion.

Here, it was expressly raised (R. 84). In deciding on

the merits the court necessarily overruled the defense

of lack of jurisdiction and no appeal was taken by the

defendant. This constitutes res judicata.

In Stoll v. Gottlieb, 305 U. S. 105, supra, the court ap-

plied the rule not only to jurisdiction of the person but

also to the subject matter, saying (p. 174):

‘*A few years later this Court had occasion to

examine again the question of the effect of a former

adjudication by a United States Circuit Court in a

case where this court assumed the Cireuit Court had

jurisdiction of the parties but not of the subject

matter. The earlier adjudication was pleaded in bar

to a suit to quiet title in a state court sitting in the

18

same state as the Circuit Court. The state courts

denied effect to the Cireuit Court decree. On writ

of error to the Supreme Court of Oregon this Court

answered the contention that the ground upon which

the Federal court assumed jurisdiction was insuffi-

cient in law to make this case one arising under the

laws of the United States’’ in these words:

‘***But that was a question which the Cireuit Court

of the United States was competent to determine in

the first instance. Jts determination of it was the

exercise of jurisdiction. Even if that court erred in

entertaining jurisdiction, its determination of that

matter was conclusive upon the parties before it, and

could not be questioned by them or either of them

collaterally, or otherwise than on writ of error or

appeal to this court.’’

This court further said (p. 176):

“Tt is frequently said that there are certain strictly

jurisdictional facts, the existence of which is essen-

tial to the validity of proceedings and the absence

of which renders the act of the court a_ nullity.

Examples with citations are listed in Noble v. Union

River Logging R. Co. For instance, service of pro-

cess in a common law action within a state, publica-

eation of notice in strict form in proceedings in rem

against absent defendants, the appointment of an

administrator for a living person, a court martial

of a civilian. Upon the other hand there are quasi-

jurisdictional facts, diversity of citizenship, majority

of litigants, and jurisdiction of parties, a mere find-

ing of which, regardless of actual existence, is suf-

ficient. As to the first group it is said an adjudica-

tion may be collaterally attacked, as to the second

it may not. We do not review these cases as we base

our conclusion here on the fact that in an actual

controversy the question of the jurisdiction over the

subject matter was raised and determined adversely

to the respondent. That determination is res adjudi-

cata of that issue in this action, whether or not power

to deal with the particular subject matter was strictly

or quasi-jurisdictional.”’

—

19

In Heiser v. Woodruff, 327 U. S. 726 the court said

(p. 732):

‘‘But we are aware of no principle of law or

equity which sanctions the rejection by a federal

court of the salutary principle of res adjudicata,

which is founded upon the generally recognized pub-

lic policy that there must be some end to litigation

and that when one appears in court to present his

case, ts fully heard, and the contested issue is de-

cided against him, he may not later renew the litiga-

tion in another court. Baldwin vy. Traveling Men’s

Assn., 283 U. S. 522, 525-6."

After citing Stoll v. Gottleib, supra, the court said,

(p. 736):

“Pepper v. Litton, supra, lends no support to a

different view. Undoubtedly, since the Bankruptcy

Act authorizes a proof of claim based on a judg-

ment, such a proof may be assailed in the bank-

ruptey court on the ground that the purported judg-

ment is not a judgment because of want of juris-

diction of the court which rendered it over the per-

sons of the parties or the subject matter of the suit,

or because it was procured by fraud of a party. Pep-

per v. Litton, supra, 306; Chandler v. Thompson, 120

F. 940; In re Continental Engine Co., 234 F. 58: In

re Stucky Trucking € Rigging Co., 243 F. 287;

In re Rubin, 24 F. 289. But it is quite another mat-

ter to say that the bankruptcy court may reexamine

the issues determined by the judgment itself. It has,

from an early date, been held to the contrary’? (Em-

phasis ours).

The decision of this court was called to the attention of

the Court of Appeals in the original reply brief as well

as in the petition for rehearing (R. 181). The court,

however, dismissed the rehearing on the day the petition

was filed without comment.

Sa

20

I.

The decision of the Second Circuit Court of Appeals

that in a spurious class suit where the original suit is

based on diversity of citizenship and the claim is in ex-

cess of $3,000 the court is without jurisdiction to permit

intervention of claimants not having the jurisdictional

amount under Rule 23 (a) (3) and 24 (b) is in conflict

with the decision of the Third Circuit Court of Appeals.

Even if this were a suit for ‘‘individual’’ fraud as the

one involved in the Hackner suit which was distinguished

on the prior appeal from the suit which involved a ‘‘com-

mon breach of trust’’ and where the fraud was ‘‘not indi-

vidualized’’ (143 F. (2) 503) the decision that other

noteholders who lacked the requisite amount were im-

properly intervened is not only contrary to its own

decision in the instant case (143 F. (2) 503) but is con-

trary to the decision of the Third Circuit Court of Ap-

peals.

In Shipley v. Pittsburgh € L. FE. R. Co., 70 E. Supp.

870, p. 872, the Court discussed the following:

‘‘There are two questions involved:

1. Where a class action has been filed, in which

jurisdiction in the original proceeding is based on

diversity of citizenship and the amount involved is

in excess of $3,000, does the Court have jurisdiction

to permit the intervention of other claimants in the

class as new plaintiffs under the provisions of Rules

23(a) Paragraph (3) and 24(b) of the Federal Rules

of Civil Procedure, although there is no diversity of

citizenship between the intervenors and the defend-

ant, and the intervenors’ claims are less than $3,000

in each instance?

2. In a class action brought on a contract en-

tered into between the bargaining representative of

the class and a railroad, may other members of the

—-

21

class not possessing both of the jurisdictional re-

quirements of diversity of citizenship and a claim

in excess of $3,000 exclusive of interest and costs

intervene on the ground that the Railway Labor

Act, regulating interstate commerce, is involved?

After referring to an earlier decision where the Court

answered the questions in the negative, and in conclud-

ing that it erred, the Court said (p. 874):

‘‘In reaching the conclusion that intervention of

the 58 additional plaintiffs should not be granted

on the basis of Rule 23(a) (3) or Rule 24(b) of

the Federal Rules of Civil Procedure, 7] do not be-

lieve that proper consideration was given the law

in the Third Judicial Circuit. I am, therefore, ap-

proaching the problem de novo, so to speak, or

considering the same in the nature of a petition for

rehearing.

It appears that the correct conclusion to be reached

depends on the type of class action which is involved

in the proceeding now before this Court. There has

been considerable trouble and difficulty experienced

by the courts in determining under a given set of

facts whether an action filed by a group of plain-

tiffs is a true class suit, a hybrid class suit or a

spurious class suit.’’

The Court further said:

‘Our Cireuit Court has said ‘We have strug-

gled with these distinctions on previous occasions.’

Pentland et al., v. Dravo Corp., 3 Cir. 152 F. 2d

851, 852; Pennsylvania Co. et al. v. Decker, 3 Cir.

123 F. 2d 979.

The Court thereafter discussed the various types of

Class Suits: (a) Hybrid Class, and (b) Spurious Class,

and in holding that in the latter class parties that do not

have the jurisdictional amount may join with one of the

parties who has the jurisdictional amount, and that this

was the rule of the Third Circuit, the Court said, p. 874:

a

ne eA LOE

aan

22

‘*A permission joinder device. The presence of

numerous persons interested in a common question

of law or fact warrants its use by persons desiring

to clear up a litigious situation. The example is

given of a fire negligently started by a railroad which

inflicts widespread damage upon many property

owners. Their only common interest is to get money

from the tort-feasor. The tort-feasor’s obligation

certainly is a separate matter as to each plaintiff.

But if the lawsuit does not grow too bulky, there

may be economy of time and effort hearing all the

claims in the same proceeding. In a spurious class

action each of the original plaintiffs must have a

diversity of citizenship with the defendant, since

only jurisdiction was founded in the original plain-

tiffs, others who have a common question of law or

fact may be allowed to intervene to clean up a liti-

gious situation. Any judgment rendered would bind

the origina] plaintiffs, all who had intervened, and

the defendant, but would not bind others beyond the

principle of stare decisis. Moore’s Federal Practice,

Vol. 2, pp. 2241 to 2245, inclusive; Pentland et al.

v. Dravo Corp., 3 Cir. 152 F. 2d 851; Pennsylvania

Co. et al. v. Deckert, 3 Cir. 123 F. 2d 979.’

In order to settle the important question upon which

the General Circuits are not in accord the writ should |

be issued.

ITI.

The rule in the Second Circuit that where a class action

was commenced by one who is a non-resident in a diver-

sity case that the court is without jurisdiction to permit

the intervention of a resident claimant under Rules 23

(a) (3) and 24 (b) is in conflict with decisions of other

courts and the writ should be issued to harmonize the de-

cisions.

The opinion deciding the dismissal of ‘‘Baseball’’ on

the ground that it was not a non-resident, is squarely

in conflict with the decision of the Third Circuit as

—

pointed out in Shipley v. Pittsburgh € L. E. R. Co., 70 F.

Supp. 870, 872 supra and with the authorities cited there

(Portland et al. v. Drover Corp., 152 F. (2) 851; Penn.

Co. v. Deket, 123 F. (2) 979). The writ would be granted

in order to harmonize the conflicting views.

IV.

The District Court clearly erred when it held that the

action was barred by the Ten Year Statute of Limitations.

Respondent pleaded the six and ten year Statutes

of Limitations. The District Court held that the six year

Statute was inapplicable but that the ten year Statute

applied as this was strictly a suit in equity (R. 162).

The Court also held that (R. 164) the ‘‘cause of action

occurred in December, 1931’’, and that this suit was not

filed until January 20, 1942 and was therefore barred.

It clearly erred when it determined that the cause of

action occurred in December, 1931 and it was its duty

to hold that the cause of action did not occur until

November 1, 1932 and that the suit was filed within the

ten vear statute.

(a) The ten year statute did not begin to run until the

default on November 1, 1932, and the suit was filed

within the ten year period.

It was alleged in the amended complaint (R. 4) that

the default on plaintiff’s bonds occurred on November

1, 1932. This was admitted by the defendant (R. 119).

Prior to the default, no cause of action was available

to any of the noteholders who did not accept the terms

of the offer. It is true that the defendant obtained the

‘‘assigned securities’? in December, 1931; however, i

continued to pay interest to the non-acceptors until No-

—— ie

CA AONE a

a

24

vember 1, 1932 (R. 119). No action was therefore avail-

able to such noteholders until the default day, November

1, 1932 (Bay Ridge Savings Bank v. Gussow, 68 N. Y. 8.

(2) 662, 623) and the ten year statute did not expire un-

til November 1, 1942 and this action was filed January

20, 1942. The ‘‘accrual of a cause of action means the

right to maintain and institute a suit’’ and for the pur-

poses of the Statute of Limitations ‘‘the cause of action

arises when, and only when, the aggrieved party has a

right to apply to the proper tribunal for relief’’ (Bond

v. Marat, 145 Neb. 780, 785; Allen v. Payson, 11 N. Y. §.

(2) 28, 32). The cause of action did not occur until the

debt or the interest was due on November 1, 1932 (South-

ern Surety Co. v. Austin, 22 F. (2) 881, 882). This is the

law of New York (Nagle v. Harold, 30 F. Supp. 905,

907) and the law of New York is controlling on this

question (Reed Co. v. International Container Corp., 43

F. Supp. 644, 645).

(b) This suit was properly brought under Section 23 of

the Civil Practice Act as construed by the Court of

Appeals of New York and the action was not barred.

After determining that the ten year Statute of Limita-

tions applied and erroneously concluding that it expired

in December, 1941, instead of November, 1942, the trial

court said (R. 162):

‘*But, says the plaintiff, 423 of the New York

Civil Practice Act has extended the plaintiff’s time

to sue one further year. That section reads:

‘ $23. Effect of reversal of judgment or term-

ination of action. If an action is commenced with-

in the time limited therefor, and a judgment there-

in is reversed on appeal without awarding a new

trial, or the action is terminated in any other man-

ner than by a voluntary discontinuance, a dismissal

of the complaint for neglect to prosecute the ac-

tion, or a final judgment upon the merits, the plain-

tiff, or, if he dies and the cause of action survives,

his representative, may commence a new action for

the same cause after the expiration of the time so

limited and within one year after such a reversal

or termination. This section also applies to the

workmen’s compensation law.’’

25

After reviewing the previous litigation leading up to

the dismissal of York as a party in the Hackner litigation,

the District Court said (R. 163):

‘‘The order and judgment on that mandate was

filed on April 30, 1941. Hackner v. Guaranty Trust

Co., 117 F. (2) 95, cert. denied April 7, 1941, 313

U. S. 559, Judge Clark in his opinion affirming that

dismissal, said that the court had no jurisdiction be-

cause the amount in controversy as to each plain-

tiff, except Eastman, was $3,000 or less. The claim

there asserted was for misrepresentation whereby

each of the plaintiffs was induced to make a sale of

his or her notes for less than their true value. A mo-

tion for summary judgment was later made against

the plaintiff Eastman and granted on March 23, 1942.

That judgment was affirmed on August 4, 1942, 130

F. (2) 300, and certiorari was denied, 317 U. S. 691.’’

The Court further said (R. 164):

‘‘It is to be noted that, with some limitation not

important here, $23 permits the commencement of

a new action ‘for the same cause’ within one year

after the termination of a previous action. Here, the

present claim is clearly not for the same as that

stated in the Hackner suit. The opinion of the Cir-

cuit Court of Appeals in this case, which I am di-

rected to follow, expressly so helds. Judge Frank

wrote, ‘That decision on the pleadings in such an ac-

tion (the Hackner case) was not an adjudication

that, in a suit based on a different theory—i. e., the

defendant’s breach of its fiduciary obligations in not

causing the debtor’s liquidation—her claim was not

; —

26

for the requisite amount.’ 143 F. (2) at page 519.

And there can be no doubt that that is true. The

Hackner case was brought by noteholders who had

accepted the offer. This action was clearly based on

fraud, there having been in the complaint charges of

misrepresentation. Here the claim is based on a

breach of trust. There it was held there was no

trust res; here the contrary is determined. Under

such circumstances, the one year extension would

not apply. Harris v. Tams, 258 N. Y. 229; Goldstein

v. Tri-Continental Corp., 282 N. Y. 21, 30.’’

The Court concluded (R. 164):

‘“Under the last two cited cases, the time when the

plaintiff asserts her new claim will determine whether

or not the statute of limitations applies. Here the

cause of action accrued in December 1931, and this

suit was not begun until January 20, 1942. It is,

therefore, barred by the ten year statute.’’

Even if it be conceded arguendo that the original suit

of York was for fraud and not for a breach of trust, and

that the present suit is for a breach of trust, the narrow

construction placed on the statute by the District Judge

is squarely contrary to the decision of the Court of Ap-

peals of New York in Titus v. Poole, 145 N. Y. 414. There,

a cause of action was asserted for fraud and after the

dismissal of the cause of action, a new suit was filed based

on the same state of facts but on a warranty. It was

contended as here that the second suit was not for the

same cause of action. In holding against the contention,

the court of appeals said (p. 422):

‘‘The first action was terminated by non-suit, was

not voluntarily discontinued, was not dismissed for

neglect of prosecution, nor was there any final judg-

ment therein on the merits, and the present action

was brought within a year after the termination of

the former action. The second action also was an

action for the same cause as the first action, within

the meaning of section 405. According to the nomen-

-

27

elature of actions the first was an action for fraud

and the second on warranty—one ex delicto and the

other ex contractu. It is often important to observe

the distinction. But the same facts may often give

a plantiff the right to bring the one action or the

other at his election and when dealing with remedies

with a view to determine whether remedies applic-

able to actions of the one kind or the other are to

be administered, it is common and proper to speak

of the two remedies as based upon distinct and dif-

ferent causes of action, although the right in both

eases is founded upon the same transaction. But it

cannot be supposed that the words ‘same cause’ in

section 405 were intended to have this narrow mean-

ing. Such a construction of a beneficial provision, in-

tended to preserve and continue the rights of parties,

would be very inconvenient, and would often defeat

the purpose of the statute. The words were intended,

we think, to remove the disability whereever a new

suit was brought within the year, based upon the

same transaction as the former one, without regard

to its technical form, and was intended in part to pre-

vent mere mistakes as to the form of the remedy

from concluding the party from subsequently pursu-

ing his real right under a more appropriate form of

action.’’ (Emphasis ours.)

The tendency of the New York courts to construe

liberally Section 23 of the Civil Practice Act appears

from the decision in Gaines v. City of New York, 215 N.Y.

533, where the court said (p. 539):

‘‘The statute is designed to insure to the diligent

suitor the right to a hearing in court till he reaches

a judgment on the merits * * * the important con-

sideration is that, by invoking judicial. aid, a litigant

gives timely notice to his adversary of a present pur-

pose to maintain his rights before the courts * * *

A suitor who invokes in good faith the aid of a court

of justice, and who initiates a proceeding by the

- —

28

service of process, must be held to have commenced

an action within the meaning of this statute, though

he has mistaken his forum.”’

In holding in that case that the dismissal on the juris-

dictional ground entitled the plaintiff to commence a new

action under Section 23, the court further said:

‘*The conclusion to which we are thus led has sup-

port in many well considered cases. It is the rule in

most of the state courts * * * in all these cases the

statute was held suspended though the earlier action

was dismissed for lack of jurisdiction either of the

subject matter or of the person. It is the rule adopted

by the judges of high authority in federal courts.”

(1) The dismissal was not on the merits and it was

proper to file the suit under Section 23 of the New

York Civil Practice Act.

The liberal construction of Section 23 of the New York

Civil Practice Act was adopted in Buchholz v. United

States Fire Insurance Co., 269 App. Div. 49, 53 NYS (2)

608, where the court said (p. 610):

‘*We find that section 23, Civil Practice Act, ap-

plies and that the present suit was timely. It is for

the same cause, in that it is to enforce the same loss

on the same policy as in the first action, but after ful-

fillment of the conditions precedent. The one year

provision contained in section 23 begins to run from

the termination of the first suit. Here the termina-

tion was the decision of the Court of Appeals (or

entry of judgment on remittitur) in the earlier ac-

tion. Wooster v. Forty-Second St. & G. St. Ferry R.

Co., 71 N. Y.'471; Richard v. Anderson Union: Bank,

225 App. Div. 634, 234 NYS 177, affirmed 253 NY

166, 170 N.E. 532, 69 A.L.R. 667.”

29

The court further said:

‘‘The prior action terminated in a judgment which

was a final determination ‘upon the merits’ within

section 482 Civil Practice Act, in that it would affect

an estoppel to the extent that no other action could

be maintained on the same facts, i. e., without a prior

appraisal. But the term ‘merits’ as used in sec-

tion 23 has a broader connotation than it has as used

in section 482, Civil Practice Act. Section 23, in

effect, contemplates that a suitor have one adjudica-

tion of the substance or merit of his cause where he

has wmitiated a suit in time.’’ (Emphasis ours.)

York was dismissed as a party plaintiff for misjoinder

and for lack of the jurisdictional amount (Hackner v.

Morgan et al., 117 F. (2) 95), and the action was properly

filed (Friedman v. Long Island R. Co., 65 N.Y.S. (2) 899,

901). The court did not hold in the Hackner case that

her suit was not for a breach of trust, nor was it held

there that there was no trust and no res. The decision

that there was no trust and no res was first made by

Judge Bright in the Eastman case, to which York was not

a party (43 Fed. Supp. 637). This court affirmed that

decision (130 F. (2) 300) which was not an adjudication

on the cause of action of York, to which action she was

not a party. In the York case, this court held that there

was a trust and there was a res (143 F. (2) 503, 512).

Her cause of action was, therefore, the same, and the

merits were not determined when she was dismissed as a

party on jurisdictional grounds.

The respondent who urged on the prior appeal that

“in the Eastman case the plaintiff asked the court to

find such a breach of trust and hold Guaranty Trust

Company liable for damages caused to the noteholders as

a result thereof’’ is, of course, not in position to take

an inconsistent position even if York were a party to

the Eastman suit. However, she having commenced her

EEO

a

30

suit under the same instrument which was first con-

strued by this court not to have constituted a trust, and

later changing its views to the effect that it was a trust,

does not prevent her from maintaining a new action based

on the same notes which are secured by the same Trust

Instrument. In the original opinion of the court which

was then unanimous, it said (p. 1090):

‘Plaintiff alleges in her complaint that she did not

learn of the trustee’s participation in the offer plan

until ‘the middle of 1940’ when she joined in the

Hackner v. Morgan action. She was dismissed as

plaintiff from that action by this court in 117 F. (2)

95, and that action terminated as to her on April 7,

1941, when certiorari was denied, 311 U. S. 559. She

began the present suit on January 22, 1942. On the

facts as they appear on the record before us, the

suit was timely begun.”’

The striking out of this part from the opinion did not

change the facts.

(2) The cause of action in this case is identical with the

cause of action which was asserted by York when she

intervened in the Hackner suit.

The determination of the Disrict Court that the action

was barred because Section 23 of the New York Civil

Practice Act permits the commencement of a new action

‘‘for the same cause’’ within one year after determina-

tion and that here the suit of York is not for the same

cause as stated in the Hackner suit, is clearly unsound.

Whether or not York sued fer the same cause of action

must be determined from the allegations in the Hackner

complaint insofar as they applied to her. While Hackner

and the others who accepted the exchange sued for loss

which they sustained by reason of the exchange, York,

who did not exchange, sued for a different cause of action.

She intervened in the Hackner suit by an amendment .

which alleged that she owned $6,000 of the notes described

in the complaint and that she ‘‘never exchanged her

A neem a

|

31

notes for the stock but was still the owner of the notes

and has not received anything in payment of principal

and interest since November 1, 1931’’ (R. 36, in Hackner

ease). The complaint in the Hackner suit, insofar as it

was applicable to her, alleged (| 8) that in order to pre-

vent the acceleration of the notes and the application of

the ‘‘assigned securities’? in payment of the $30,000,000

notes and to maintain the note issue in good standing

so that no action could be taken by the note holders, the

defendants, including the Guaranty Trust Company,

secretly entered into an agreement to make the offer of

exchange and that the Guaranty Trust Company, together

with Morgan, used the segregated assets and assigned

securities in order to acquire $11,227,000 of the notes.

It was alleged (| 12) that if the real information had

been disclosed the note holders would have received in

excess of $13,000,000 to apply on the $26,000,000. indebted-

ness and that they would have participated in all other

assets of the company to satisfy any deficiency. It

prayed among other relief that Morgan and the Guaranty

Trust Company ‘‘be required to account for all funds

and properties received by them as a result of the ex-

change of the Gold notes for the common stock, or in the

alternative, that they be held jointly and severally liable

for the damage caused to the note holders’’ and it asked

that the Guaranty Trust Company of New York, as Trus-

tee, be decreed to be ‘‘liable for its breach of trust duty”’

to protect the noteholders.

In disposing of the Hackner case, the court said (117

F. (2) 95):

‘“‘The proffered amendment added one plaintiff,

York, who has never transferred her bonds; seem-

ingly, therefore, she sustained no damage, but at any

event, the possible loss of 50 per cent of her invest-

ment of $6,000 would be just under the requirred

32

amount. As to York, there cannot exist jurisdiction

any more than as to the original plaintiffs, and it

cannot be supplied for her or for them by adding

a plaintiff who can show jurisdiction. Rich v. Lam.

bert, 12 How. (53 U. S.) 347; Stewart v. Dunham, 115

U. S. 61; Gibson v. Shufeldt, 122 U. S. 27; Clark y.

Paul Gray, Inc., supra, 306 U. S. at 590.”

The brief of the defendant filed in this cause best serves

to illustrate the fallacy of the statement in the opinion of

Judge Bright that the two causes are different. It urged

here (p. 12):

‘*In both cases it is charged that by means of the

agreement of October 29, 1931 and the exchange offer

a default in the payment of the November 1, 1931

interest, which the Van Sweringen Corporation would

have been unable to pay, was avoided, thereby pre-

venting an acceleration of the note issue which the

trustee or 25% of the noteholders could have in-

sisted upon under the terms of the indenture; that if

there had been such a default and resulting accelera-

tion the noteholders would have received 50 cents on

the dollar on their notes out of the segregated assets

and assigned securities, then held for their protec-

tion, and also would have been able to apply all

the other available assets of the Van Sweringen Cor-

poration toward any deficiency.’’

Defendant also urged:

‘In both suits it is further claimed that after

$15,000,000 of the notes had been retired under the

offer through the use of a portion of the segregated

assets and assigned securities, the defendants were

enabled by the agreement of October 29, 1931 and the

exchange offer, to, and did actually appropriate the

remainder of the assigned securities and the available

assets of Van Sweringen Corporation to their own

purposes as creditors, to the detriment of the note-

holders, and in addition obtained the notes exchanged

under the offer, which were not cancelled, in place

-of worthless common stock of Van Sweringen Cor-

poration.’”’

33

It said:

‘*In the Hackner complaint and also in the present

complaint, this is charged as a breach of trust on the

part of Guaranty Trust Company as trustee. In

each case the plaintiff asks the court to find such a

breach of trust and hold Guaranty Trust Company

liable for the damages caused the noteholders as the

result thereof (R. 9; Tr. 12).’’ (Emphasis ours.)

The statement in the opinion of Judge Bright (R. 164),

in contrasting the two actions, that: ‘‘There it was held

there was no trust res; here the contrary is determined”’

is fundamentally erroneous for the reason that the trust

instrument and res are the same in both cases. It was

Judge Bright who determined that the trust instrument

was a ‘‘peculiar’’ document but not a trust (43 F. Supp.

637), which the court affirmed (130 F. (2) 302). How-

ever, it reversed itself in this case (143 F. (2) 503) and

held that it was a trust. It was the same trust imstru-

ment upon which the cause of action was asserted in both

cases. When the court concluded (143 F. (2) 503, 512)

that there was a res and (p. 518) that the document was

a trust and, even if the statement in former appeal were

the ‘‘law of the case’’, it ‘‘would not be obliged to stand

by it when convinced of their error’’, it did not speak of

a different trust agreement but of the same instrumeni.

The statement of Judge Bright that in the former suit

of York there was ‘‘no trust res’’ and in this suit ‘‘the

contrary is determined’’ that it is a trust and a res is

therefore clearly unsound.

The fact that in the Hackner suit to which York was

misjoined as a party the court erroneously held that there

was no res and no frust, does not affect her right to as-

sert a cause of action on the basis of her claim which was

always consistent that there was a trust and a res.

i

34

(c) The statute did not begin to run against the existing

trust until the repudiation of the trust by the de.

fendant.

The court having determined that there was a res and

an express trust on the main appeal, it follows that the

statute did not commence to run until the termination of

the trust and the time when the defendant began to re-

pudiate his obligation (Devoe v. Lutz, 133 App. 356, 359;

Miller v. Guaranty Trust Co., 67 N.Y.S. (2) 76, 77 ;Manu-

facturers Trust Co. v. Kelby, 125 F. (2) 652, 665). The

statute operates as a bar from the time the trustee noti-

fies the cestui of its treachery’’ (4 Bogert on Trusts and

Trustees, sec. 951). In the instant case the defendant con.

tinued its treachery when it paid the interest up to No.

vember 1, 1932 and concealed from the noteholders that

there was in fact no money available for them and that

the Van Sweringens advanced the money (R. 109). The

trial court failed to follow the opinion of the court on

this point (143 F. (2) 525, 524, note 41).

4

/

(d) The denial of the benefit of the Statute of Limita

tions when it is inequitable is within the power of a

Court of Equity even under the New York law.

This Court did not adjudicate that under the New York

law a court of equity may not deny to a defendant the

benefits of the statute when it is inherently inequitable,

and merely held that the New York law controls. The

New York Courts themselves have recognized the rule

of the Federal Courts that equity may deny the benefits

of the Statute when it would be inherently inequitable to

permit its defense, and this court held that it would be

‘inherently inequitable to sustain the bar of the statute.

In Dodds v. McColgan, 229 App. Div. 273 (1930) the

court said (p. 277):

35

‘‘The denial to the defendant of the benefit of the

Statute of Limitations is within the power of a Court

of Equity. As stated by the Court in Clarke v. Gil-

more, (149 App. Div. 445, 450): ‘Where one has ob-

tained an advantage by fraud, equity will not permit

him to hold it by resorting to the Statute of Limita-

tions.’ The conclusion there reached is in accordance

with the judgment for plaintiff in Lightfoot v. Davis,

(198 N.Y. 261), where though an action of conversion

was barred by the Statute of Limitations, the Court

allowed recovery in equity for bonds stolen many

years before by defendant’s testator, who had fraud-

ulently concealed his possession of them, until the

Statute had run. Like relief has been granted in cases

nearly parallel where equity has prevented the Stat-

ute becoming an instrument in aid of fraud.’’ (Em-

phasis ours.)

The Court cited as authority the decision in Bailey v.

Glover, 88 U. S. 342, which is the leading case on the right

of a Federal Equity Court to disregard the Statute of

Limitations when inherently inequitable.

This case is cited with approval by the Appellate

Division in Application of Assesso, 69 N. Y. S. (2) 702,

where the court said (p. 706) :

‘It is an affirmative defense and equity, in proper

case, may enjoin or deny the right to enforce it.

Dodds v. McColgan, 229 App. Div. 273, 277; 241

N. Y. S. 584, 587. If interposed it may be met with

proof not here shown sufficient to toll or overcome

te

The dismissal] of the cause of action because of the bar of

the Statute cannot be sustained on the theory that equity

must enforce a Statute of Limitations when it is inher-

ently inequitable as was held by this court.

(e) The action was based on actual fraud and the bar of

the statute did not commence until its discovery.

In Teich v. Lawrence, 265 App. Div. 970, 975, the court

applied the statutory provision to an equitable proceed-

ing on facts almost identical as here. The decision was

reversed (291 N. Y. 24) but not on the ground that it

was not an action for ‘‘fraud’’, but on the ground that

the action was ‘‘derivative’’ in the name of the corpora-

tion and no fraud was alleged against it. Here, the action

was not derivative and it was founded on fraud. The rule

that the bar of the statute does not commence until the

discovery of the fraud was applied to ‘‘fraud”’ in the

equitable sense in Wechsler v. Bowman, 285 N. Y. 284,

294 and Jn Re Carpenter’s Mill, 40 N.Y.S. (2) 13, 20).

In opposition to defendant’s motion for a summary

judgment plaintiff filed an affidavit calling attention that

the complaint charged ‘‘actual fraud’’. The affidavit re

ferred to the provision of the Trust Agreement which

vested the power in the defendant to protect the notehold-

ers in the event of any emergency (R. 109-111). It showed

that in addition to ‘‘assigned securities’? there was an

asset consisting of a claim of $27,154,584.03 against the

Terminal Company and those who would accept the offer

would be eliminated as creditors and would not partici-

pate in this asset (R. 115), and that ‘‘non-acceptors”

would lose everything in the ‘‘assigned asset’’ and the de-

fendant would be a competitor with them as to this asset.

The defendant knew that the Vaness Company would be

in position to withdraw $7,500,000 from the ‘‘assigned se-

eurities’’ and make them available to it and to the other

bankers in discharge of the obligations due them to the

detriment of the non-acceptors. It knew that the ac-

ceptors would receive from the ‘‘assigned securities’’ in

37

cash 53% and the non-acceptors would receive only 3%

(R. 115). The defendants knew (R. 116) that the non-

acceptors would not be in position to take any action be-

cause of the provision which required 25% of the out-

standing notes to demand action from the trustee and

that by the scheme there would remain less than 25%

who would not accept and the noteholders would be help-

less.

Actual fraud was shown in that (R. 116) the defend-

ant actively participated in the submission of the offer,

and the defendant ‘‘expended $7,562.80’’ in printing the

offer, in making it and ‘‘carrying on a campaign to per-

suade the noteholders to accept the terms of the offer’’.

While the ‘‘offer’’ was made in the name of the cor-

poration ‘‘it was actually made by the defendant, but its

name and its participation was not disclosed.’’

The defendant trustee did not furnish to the note-

holders any information concerning the foregoing offer

(R. 116). It ‘‘did not inform them of the conferences

which it held, the information which it obtained, the

threatened bankruptcy and the attempt to prevent it for

the benefit of the defendant and the other bankers’’. As

a result the $606,500 which was available to the $1,213,000

outstanding notes of the noteholders who did not accept

the offer was used by the defendant for its own benefit

and the benefit of the other bankers (R. 117) under the

secret agreement of October 29, 1931. Because of its

“adverse’’ position the defendant ‘‘actively participated’’

in the ‘‘offer’’ whereby the ‘‘assigned securities’’ were

taken away from the non-acceptors and ‘‘were appropri-

ated for its personal use’’ (R. 118). The defendant was

in duty bound to disclose all of the material facts which

it failed to do because of its adverse position, and con-

cealed the facts, and the appellants did not discover

POOLE SORT IE TAIN 8 0

- pee 98

them until the publication of the opinion of the court in

November, 1944 (R. 119).

The facts were relied on in opposition to defendant’s

motion for a summary judgment and to the defense of

the statute of limitations (R. 121). These facts were

not denied, and for the purpose of the motion must be

deemed admitted. On a motion for a summary judgment

every doubt must be resolved against the movant. This

court has admonished the lower courts not to favor sum-

mary judgments.

In Doehler Metal Furniture Co. v. United States, 149

F. (2) 130, the court said at page 135:

‘*We take this occasion to suggest that trial judges

should exercise great care in granting motions for

summary judgment. A-litigant has a right to a trial

where there is the slightest dowbt as to the facts, and

a denial of that right is reviewable; but refusal to

grant a summary judgment is not reviewable. Such

a judgment, wisely used, is a praiseworthy time-

saving device. But, although prompt despatch of ju-

dicial business is a virtue, it is neither the sole nor

the primary purpose for which courts have been es-

tablished. Denial of a trial on disputed facts és worse

than delay. Cf. Arenas v. United States, 322 U. &.

419, 429, 433, 64 S. Ct. 1090, 88 L. Ed. 1363. The dis-

trict courts would do well to note that time has often

been lost by reversals of summary judgments im-

properly entered. Sartor v. Arkansas Natural Gas

Corporation, 321 U. S. 620, 624, 64 S. Ct. 724, 88 L.

Ed. 967, tells us that, especially where, as here, dam-

ages are in question, the courts should go slow about

making haste by a summary judgment; there the Su-

preme Court said that ‘at least a summary disposi-

tion of issues of damage should be on evidence which

a jury would not be at liberty to disbelieve and which

require a directed verdict for the moving party.’”

39

A summary judgment cannot be entered if there be any

issue of fact sustaining the claim of the adversary (Sar-

tor v. Arkansas Natural Gas Co., 321 U. S. 620).

In Parmelee v. Chicago Eye Shield Co., 157 F. (2) 582

the court pointed out that a summary judgment cannot

be entered where there are genuine issues of fact. The

‘‘hurden’’ is on the ‘‘movant’’ to show an absence of

issues of fact and all doubt must be resolved against the

movant,

In the face of these facts and of the opinion on the prior

appeal which called for a trial on the merits, the judgment

in this case for the defendant cannot stand and it should

be reversed, and the judgment of the Court of Appeals

to dismiss for lack of jurisdiction should also be reversed.

CONCLUSION.

The Court of Appeals was without jurisdiction to di-

rect the dismissal of the action for want of jurisdiction

in the absence of any appeal on the jurisdictional ques-

tion which was determined below and it then became res

judicata. The decision of the District Court that the

action was barred by the ten-year Statute of Limitations

is without any foundation. It follows that the writ should

be granted.

Respectfully submitted,

Meyer ABRAMS,

Bennett I. ScHLESSEL,

Attorneys for Petitioners.

SHutman, SHutMan & ABRaMs,

134 N. LaSalle St.,

Chicago, Illinois

Of Counsel

January 19, 1948.