Opposition Brief — Dickinson v. Burnham

October Term, 1952

> Supreme Court of the United States

¢

ALBERT G. DICKINSON,

Petitioner,

against

- KE. LEWIS BURNHAM and JAMES A. VAUGHAN, et al.,

Respondents.

| BRIEF IN OPPOSITION TO PETITION FOR WRIT

’ OF CERTIORARI TO THE UNITED STATES

+ COURT OF APPEALS FOR THE SECOND CIRCUIT

en AGT Pn en PO ag Rae See

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Asean ES

Myron Scort,

44 Wall Street,

New York, N. Y.,

Counsel for Respondents.

“James A. VAUGHAN,

of Counsel.

APPELLATE Press Corp., 41 Murray Street, N. Y., Cortanvt 7-7627

TABLE OF CONTENTS

IE canna Kuen awed vanes oabusnd’

ie Leg ee ae eULua nd awhhad eels Us execu ck

A. History of the Litigation ..................

MN Se ERDAS E REE iGA KA Saws becewands

SE a awkewbaschevencecedens

A re

Point 1—If important or novel questions actually

exist in Petitioners Class Action Argument their

determination is not required in solving any con-

troversy between the petitioners and respond-

DEPT SECACCCEVERC ENS RENAAAS RA WAR SOb RO SORE RK ES

Point L1—Questions now presented—as to (1)

) applicability of Section 48(5) of the New York

Civil Practice Act, (2) petitioner’s demand for

trial by jury of the issues raised by his answer

to the claims of the subsequently intervening

members of the class, (3) knowledge by Sub-

seribers of fraudulent payments out of the Rinke

Agency funds to petitioner (and Lloyd), (4) the

Rinke ‘‘release’’, and (5) Petroleum, not the

Subscribers, had the claim for the misappro-

priated Rinke Agency funds—were raised at the

trial, considered and determined by the trial

court, on all the faets and the law, in his ex-

haustive opinions which were unanimously af-

firmed by the Court of Appeals. Selected facts

and construction thereof most favorable to peti-

tioner should not serve as a basis for re-litiga-

EEE EES SO ay or a ora ar oe

il

Table of Cases Cited

PAGE

Dickinson v. Burnham, 197 F. (2) 973 .............. 1

Dickinson vy. Petroleum Conversion Corporation,

fee eS Fe ee Perrreeerr ser et re 28, 29

Statutes Cited

Wh BOD ciccewnccciavrdebacsieesiecdtsesreerces 25, 30

11 Fed. Rules Serv. 489; id. 885 .............0006. 1

New York Civil Practice Act, See. 48(5) ........... 25, 32

OT. Gis Wee. Bee GOD cae b csc seccccaves sate 1

IN THE

Supreme Court of the United States

October Term, 1952

4}

Vv

Apert G. Dickinson,

Petitioner,

agamst

E. Lewis Burnuam and James A. Vaveuany, et al,

Respondents.

ray

Vv

BRIEF IN OPPOSITION TO PETITION FOR WRIT

OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SECOND CIRCUIT

Opinions Below

The opinion of the Circuit Court of Appeals for the

Second Cireuit (R. 1069), filed on June 24, 1952, is reported

in 197 F. (2) 973. The opinion of the District Court

(R. 35-202) on the merits is in part reported at 11 Fed.

Rules Serv. 489; id. 885). The final judgment of the District

Court (R. 468-500) is not reported.

Jurisdiction

The jurisdiction of this Court is invoked under Title 28,

United States Code, Section 1254(1).

eae ANT aay B08 aN Marin Nt LOE AS ie

caus = Ss 2

STATEMENT OF THE CASE

Summary Statement

A. History of the Litigation

Pursuant to motion of counsel for Petroleum granted

by the District Court on October 25, 1943 Burnham &

Vaughan were permitted to intervene herein on condition

that other pending actions, set forth in a Stipulation (138,

141)' be discontinued. The order permitting intervention

of Burnham & Vaughan was entered December 3, 1943 (138-

9; 169) and they filed an answer to the complaint, and a

counterclaim on January 2, 1944 (170).

B. The Facts

The petitioner ‘‘ proffers * * * an exculpatorily innocent

interpretation of the events, skillfully woven from the docu-

mentary and uncontroverted evidence’’ (R. 1071). Inac-

curacies and omissions in petitioner’s statement make this

statement necessary. The record discloses the facts to be:

Knox and its successor, Petroleum, were patent-

holding companies.

The Knox plant located at Texas City, Texas ‘‘was a

large scale pilot or test plant for the purpose of developing

certain advanced procedures in vapor-phase (oil) crack-

ing * * * it was not a commercial plant’’ (2983).?

Prior to Dickinson’s purchase of $20,000 par value Knox

bonds in September, 1923 he had been interested in a method

for the internal application of heat as applied to sub-

' Figures in parenthesis refer to folio numbers unless preceded

by the letter “‘R” indicating pages of the record.

* The first commercial plant built to operate under the Knox-

Petroleum patents was completed in 1930 (2988) and in 1937 Petro-

leum received $200,000 as a paid-up royalty on this plant alone

(3065).

————

stances other than oil (2952). Due to the alleged similarity

between that method and the method employed under the

Knox patents he took a ‘‘flyer’’ and bought the Knox bonds

in order ‘‘to be in * * * one of the big developments in the

oil industry’’ (2084-85).

Late in 1924 Dickinson met Lloyd, President of Knox,

in New York, where he told him ‘‘the condition the com-

pany was in, that it was bankrupt * * * and was in debt for

construction work’’ (2089) and fully disclosed the Knox rec-

ords to Dickinson (2860-63). Dickinson thereafter went with

Lloyd to Texas City, Texas, where they met the attorney rep-

resenting creditors holding approximately $168,000 liens

filed against the Knox pilot plant and 50 adjoining acres

(18, 2091-93). He testified that he did not on that visit, or

prior to his purchase of the Knox plant upon lien fore-

closure on December 21, 1925, have any correspondence or

personal conversations with the lienors (3003) ; that he did

not ‘‘at that time * * * bind ‘‘himself to the lienors or their

attorney’’ (2098) ; that he ‘‘didn’t make a firm commitment

to take up the liens at that time;’’ that he ‘‘didn’t put up

any money * * * at that time’’; that he ‘‘hadn’t guaranteed

any obligation of any kind’; that he ‘‘never agreed with

anyone to take up the liens’’; that he had not used his credit

in any way or legally obligated himself in connection with

Knox (3054-57; 303N); that he ‘‘wasn’t in a position to

furnish money to the company for men who were ten to

twelve times more able than (he) was to take care (of the

liens)’’ (3056).

Contemplating aid from Dickinson in connection with

a plan for the refinancing of the liens the Knox Board on

November 13, 1924 authorized Lloyd to make any contract

he deemed advisable with Dickinson. Nothing was ae-

complished under this proposal (642).

Dickinson, one of the largest owners of Knox bonds,

made thorough investigation of the condition and status

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of Knox late in 1924 and early in 1925, including confer.

ences with Lloyd in New York City and Grand Rapids

Michigan (2089-90) ; a visit with Lloyd to Texas City, Texa:

and interview with the attorney representing the lienor:

(18, 2091-93); interview with Knox Advisory Board ir

New York while Lloyd was in Europe and later met the

full Board with Lloyd (2447) ; personal investigation, with

his attorney and accountant, of Knox records (2860-63)

and to the knowledge of Rinke ‘‘spent days’? with Lloyd

(2478, p. 3 of Ex. 45-B).

What Dickinson and Llovd saw in the overall Knox

situation, as clearly revealed by their own records, was:

1) That responsible men of standing (2518-20;

2199-2214), whom Dickinson recognized as early as

December, 1924 ‘‘ were ten to twelve times more able

than I (Dickinson) to take care of (the liens)”

(3056), had already made a large cash investment

in Knox bonds and it was self-evident to Dickinson

and Lloyd (2452), and also to Rinke (2478, p. 3 of

Ex. 45-B), that these men would have to protect

the equity of their investment (2486; 3124) ;

2) That for this reason, as Lloyd advised Dick-

inson in writing as early as January 7, 1925 and

prior to creation of the Rinke Agency on February

26, 1925, there would be no enforced lien foreclosure

sale—‘‘the bondholders have a million dollar in-

vestment to protect’’ (2486) ;

3) That through a partnership arrangement with

Lloyd, Dickinson would be in a position to develop

and extend his claims of use of his Convector ap-

paratus in the oil refining industry (2085), to which

end Dickinson’s son, an engineer, early in 1925 be-

came, and continued as, a Knox employee ‘past

the middle of 1928’’ (708-9; 3006) located at Texas

City (2957-58) as Dickinson’s representative ‘‘re-

r adatcane toms . . ites A il he ilies Diasec eS OR DG PE CATR aR aT

porting constantly, daily writing of what progress

was being made’’ (708; 3005)—‘‘Ile was there for

that purpose’’ (3011) ;

4) That ‘‘in getting control of this property”

(Knox plant) there was ‘not only security but * * *

the gamble of great profit is really tremendous’

(3121-25). Dickinson agreed ‘‘perfectly * * * pro-

vided the work of the drive on the bondholders is

continued to success,’’ and proposed the purchase

of the liens ‘ton the basis of fifty cents on the dollar

(to) be paid for by the Company at face value with

interest’? (309-10).

Thus fortified, Dickinson negotiated a ‘* partnership”

agreement with Lloyd, knowing that Lloyd was a director

and the principal executive officer of Knox (3034-35). On

January 6, 1925 Lloyd *‘thought (he) had very clearly

explained to (Dickinson) when (they) talked in Grand

Rapids’’ what their arrangement was (2455, 2456, 2470),

but on February 20, 1925 Dickinson requested written con-

firmation specifying what he was to receive, including *‘one-

half of the amount of stock which is to be derived from the

protection of the liens’’ (20,600 shares) (2511-12). And

on March 2, 1925 they entered into an agreement in writing

(2374-82) the main purpose of which was to provide for

a division of their profits (648).

Immediately following Dickinson's request, the Knox

Board met on February 26, 1925 (Lloyd attending) and

passed resolutions* which in form provided for two meth-

ods to solve the Knox lien problem. By the first method

the Knox Board again contemplated the aid of Dickinson

* (2492-2505) erroneously purports to be the Minutes of a Special

Meeting of Knox Board held on February 26, 1925. That part of

the minutes of such meeting which are there omitted are supplied at

3082-88 ).

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(2492-2505); by the second method Rinke was to acquire

the liens with funds subscribed through Arthur W. Rinke,

Agent (the ‘‘Rinke Agency’’) (3082-88).

The intent and purpose of the Knox Board in passing

this resolution was to provide one method for solving the

lien problem whereby Dickinson would buy in all or part

of the liens for cash. ‘All advances or investments made

by Dickinson in or in connection with said liens (were to)

be liquidated by the company solely by the issuance of

stock at par therefor, upon surrender of the liens to the

company’? (645; 2502). Dickinson was to be reimbursed

in stock, not in cash (287-88, 294, 429), a fact which he

shortly thereafter complained about (317, 318).

The 20,600 shares were a gift to Dickinson (643; 307).

Prior to the Knox Board meeting and on February 7, 1925,

Lloyd in letter to Dickinson referred to this block as a

‘bonus of stock"? (304, 2489). Rinke, who prepared the Dick-

inson-Lloyd agreement of March 2, 1925, in letter to Dickin-

son dated February 27, 1925 likewise referred to such shares

as ‘fa bonus’’—but a bonus in which Lloyd was to have a one-

half interest (2775; 307). Lloyd had not used the credit

standing of Dickinson for the benefit of the company and

Dickinson had not rendered valuable services to Knox in

connection with the liens, the alleged reasons for the gift

as recited in the preamble to said resolutions (643-44; 2867-

70).

Thus five days prior to the Knox Board meeting on

February 26, 1925 and on February 20, 1925 (2511, 2512),

Dickinson had requested a written agreement with Lloyd

dividing such shares 50-50 between them and five days after

such board meeting, on Mareh 2, 1925 (2377), the Dickinson-

Lloyd profit-dividing agreement was exceuted. Writing

Dickinson on February 27, 1925 the details of his prepara-

tion of the Dickinson-Lloyd profit-sharing agreement of

March 2, 1925, Rinke stated he would “recite in the instru-

ment’* the use of Dickinson's ‘‘eredit in connection with

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he liens as the consideration for the (Knox) deal’? (2773-

9).

1. The method by which the Knox Board contemplated

he aid of Dickinson was mere scheme-scenery so far as

Jickinson and Lloyd were concerned. Both knew that

Jickinson would not make any money advance thereunder.

Jloyd repeatedly so assured Dickinson from time to time

308-9; 2467-68) and finally on February 17, 1920, upon

orwarding a copy of subscription agreements, Lloyd again

ssured Dickinson that ‘twhen there are sufficient sub-

criptions in hand to warrant the establishment of credit

o permit raising of additional funds when necessary, I

vill suggest to you then making the advances under our

igreement’’ (305-6) (emphasis supplied). Furthermore

Jickinson knew that it was ‘no new thought of (Lloyd’s)

hat a reorganization (of Knox) was inevitably necessary

and) the longer the lienors delay foreclosure proceedings,

he more the interest secondary to these liens will provide

o keep the wheels moving’’—Lloyd suggesting ‘‘the pur-

chase of an interest in some of these liens, * * * (to be)

ible to dictate the policy of reorganization” (3117-20).

Their own plan whereby Dickinson was to purchase

‘he liens at less than face value—‘our present plan’’ (dis-

cussed infra)—then being in progress, Dickinson on April

18, 1925 agreed with Lloyd ‘ perfeetly * * * in moving to get

control of the liens at this time, that is, provided the work

of the drive on the bondholders is continued to success.

These liens should be secured in such a manner so that they

can be paid for by the Company at face value with interest.

My suggestion is that they should be obtained by us on the

basis of fifty cents on the dollar, * * * (309-10).

Lloyd was fearful, and so advised Dickinson, that the

Rinke Agency Subscribers would ‘* provide much more

than necessary to take up the liens on the 50-50 basis, but

if this were done, there would be no use for you (Dickinson)

and me (Lloyd)** (329).

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Five months after ‘accepting’? the Knox resolution

Dickinson, having agreed to divide the ‘‘bonus stock’? with

Lloyd and disregarding his understanding with Knox,

decided he wanted cash, not stock. Writing Lloyd on July

21, 1925, he found ‘‘the resolution of (February 26, 1925)

enclosed inconsistent with our present plan,’’ that is, Dick-

inson’s proposed plan to purchase the liens at ‘50¢ on

the dollar,’ but expecting to be reimbursed by the com-

pany in cash at the face value of the liens (317-19). By

letter dated July 27, 1925 Rinke (not Lloyd) *‘endeavor(ed)

to answer the third paragraph’’ of Dickinson’s letter to

Lloyd. That paragraph relates exclusively to the Dickin-

son-Lloyd *‘present plan’? whereby they contemplated the

purchase of the liens at 50¢ on the dollar (320, 322; 2758-

63).*

By letter and by his testimony Rinke refuted Dickin-

son’s assertion of an agreement, suggestion or proposal

between him and Rinke whereby, if Dickinson had acquired

the liens at 50¢ on the dollar of their face value, that he,

Rinke, agreed to pay Dickinson the full face value of such

liens (320, 321; 326-27; 2870-71; 2872; 2832-35; 2826).

2. The second method for solving the Knox plant lien

problem was also provided at said Knox Board Meeting

on February 26, 1925 (3082-88). It was on this method

that Dickinson and Lloyd, with the connivance of Rinke,

wholly relied to mulet the Subscribers.

The purpose of the Rinke Agency was to provide funds

with which to acquire the liens (630-31). Under five Agency

Agreements, $597,542.50 was paid to Rinke, Agent, in cash

by over 100 subseribers (630-32, 639).

A sufficient number of shares to liquidate all of the liens

was reserved by Knox (3087). The intent of the resolu-

* This proposed scheme. “our present plan”. to purchase the liens

was in fact discarded but the same scheme was employed fve months

later in the Lloyd bid for the property (Knox plant) (2290-96).

9

tions was to give the subseribers par value in stock for

face value of any liens that were acquired by Rinke, Agent

(647).

The principal subscribers were the Knox bondholders

who had previously invested some $860,000 in Knox bonds.

They were being asked to protect their investments by sub-

scribing to the Rinke Agency Fund (330-31).

Lloyd formulated the plans to raise money through

the Rinke Agency and then discussed them with others of

his own choiée (2940-41; cf. 316-17). To meet the progres-

sively changing schemes of Dickinson and Lloyd the five

agreements were required, their respective provisions and

representations varying from time to time to meet such

schemes.

Under the First Agency Agreement (2723-27) $104,150.00

was subseribed and paid to Rinke during the period Jan-

uary 2, 1925 to August 8, 1925, $27,500.00 of which was

paid to Knox directly by the Subseribers (635). Rinke

was authorized to invest the money received in Knox stock,

or in liens, but Rinke failed to do either (2822-23).

Under the Second Agency Agreement (2728-33) $127,-

260.00 was subseribed and paid to Rinke Agent, during

the period May 29, 1925 to December 23, 1926 (635).

By an agreement between Knox and Rinke dated June

2, 1925, Rinke agreed to advance funds to Knox and pro-

tect it so far as possible in connection with the liens filed

against its plant. For such advances and for all liens

acquired and delivered by Rinke, Knox agreed inter alia

to deliver its stock (639-42; 312-16).

Significantly this Second Agency Agreement was put

into use when Dickinson and Lloyd were scheming to put

into effect ‘tour present plan,’* whereby Lloyd suggested

that Dickinson acquire some of the liens at less than their

face value and Dickinson countered with ‘50¢ on the

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dollar’’ in cash—18,000 of the 20,600 shares of Knox stock

received by Dickinson as ‘‘bonus stock’’ being included

later as a part of such plan (3119-20; 3122-23; 311; 309-10;

329; 318-19; 325-27).

The Second Agency Agreement recites that Rinke had

a license whereby he could operate under the Knox patents

‘in the event of his foreclosing any lien,’’ and Rinke agreed

under paragraph Fourrs thereof ‘‘to apply forty (40%)

per cent of the money received * * * for the acquisition of

liens * * * or so much thereof as may be required for that

purpose * * * ’’ (2728-29; 2731) (emphasis supplied). As

explained by Rinke to Dickinson the 40% reserve pro-

vision would secure Dickinson against any advance he

: might make to purchase the liens for Knox since 40% ‘‘of

the contemplated $500,000 of subscriptions will make avail-

able * * * an amount adequate to reimburse you (Dickinson)

as the new owner of the liens for all cash advanced’’ by

Dickinson (320-21). But the overriding scheme whereby

Dickinson would purchase the Knox plant property ‘‘at

d0¢ on the dollar,’’ im lieu of the liens, was meantime de-

veloped with such acceleration that an undated alleged

amendment to paragraph Fourru was added to a few of

the Second Agency Agreement forms after July 27, 1925

authorizing Rinke, in the alternative, to apply the money

received by him *‘in purchasing the Texas property * * *

2 by whomsoever the said property may have been or may

: hereafter be acquired * * *’’ (2734). Removal of the

40% restriction by the alleged amendment would enable

Rinke in his discretion to make available larger amounts

for Dickinson under ‘‘our present plan,’’ had Dickinson

purchased the liens, and also under the overriding scheme

should Dickinson purchase the Knox plant property upon

foreclosure of the liens. The formula and basis for both

schemes was the same, i.e., ‘Thru the proposed Lloyd deed

of trust and pay for them (the liens or the property) one-

half in cash and one-half in stock,’’ the stock being avail-

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able out of the 20,600 shares bonus stock ‘‘thru the reso-

lution’? and ‘‘the cash would be advanced by you (Dickin-

son) until * * * you (Dickinson) would turn the liens (or

property) over to me as Agent and I, as Agent, would pay

you (Dickinson) the cash that you had disbursed”’ (325-

27 ; 2290-97 ; 655-56). On December 5, 1925 Lloyd explained

to Dickinson that it was to avoid any ‘‘chance of anyone

antagonistic to our efforts being able to show collusion”

that their plan to acquire the liens was discontinued (339).

Thus when the Dickinson-Lloyd schemes changed the

Agency Agreement forms were correspondingly altered.

Rinke’s statement to Dickinson on July 27, 1925 that

‘‘the directors, and also the substantial Subscribers * niita

all thoroughly comprehend that someone is to buy up the

liens and then sell them to me as Agent at face amount’’

(320) was patently false and directly contrary to his

specific agreement ‘‘to apply forty (40%) per cent of the

money received * * * hereunder for the acquisition of liens

* * * or so much thereof ax may be required for that pur-

pose’’ (2731-33).

Caution was exercised in connection with the release

of the Second Subscription Agreement. A_ notice of its

method of financing the Company was to be sent to all

security holders but the form thereof was to be ‘*determined

by (Lloyd)’’ (316-17).

The Third Agency Agreement (2737-40) was put into

use November 11, 1925 and discontinued January 18, 1926

(632). $800.00 was received by Rinke, Agent, from Sub-

seribers under this Agreement and transferred to the

Fourth Agency Agreement, on Rinke’s accounts (638).

The Third Agency Agreement, the first to recite that

$600,000 was the Rinke Agency goal, provided that the first

application of money received thereunder was: ‘*1. For the

acquisition of liens in whole or in part, now or hereafter

filed against the plant of Knox Process Corporation at

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5 Texas City’ (2739, 2742) (emphasis supplied). Since

3 Dickinson had acquired fitle to the Knox plant on Decem-

q ber 21, 1925, in lieu of the liens, such representation was

; false and the use of the Third Agreement form was

i promptly terminated.

H Meantime, immediately after the Knox plant was pur-

I chased by Dickinson, Lloyd wrote Dickinson on December

3 30, 1925 advising of ‘the exact condition of affairs’? with

Rinke Agency and that there was ‘“‘available collectible

; funds’’ of $109,039.60, or ‘approximately $30,000 more

4 than it would take to see you (Dickinson) and me ( Lloyd)

on the cash profit side of this transaction’’ (3109-11). No

attempt was made to use these Agency funds to purchase

i the Knox plant or the liens thereon at the cash discount

3 to the advantage of the Subscribers who had no knowledge

of the Dickinson-Lloyd scheme (2914-15).

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The Fourth Agency Agreement (2746-51) was put into

use January 21, 1926 (632), one month after Dickinson

5 had acquired title to the Knox plant on December 21, 1925

(656-57) and the same day on which he ‘‘advanced’’ the

cash balance of $82,310.28 of his bid (657-58; 348; 454-55).

Under the Fourth Agency Agreement $169,625.00 (in-

5 cluding the $800.00 transferred from the Third Agency

4 Agreement) was subscribed and paid to Rinke, Agent,

during the period from January 26, 1926 to December 27,

1926.

Prior to the inception of the Fourth Agency Agreement

the representations of each agreement were directed to

‘‘the acquisition of the liens.’’ With the advent of Dick-

inson as owner of title to the Knox plant, new and different

representations to the Subscribers—not to disclose but to

conceal—were formulated. For the first time Rinke, as

Agent for the Subscribers, was identified in an Agency

Agreement form with the Bondholders’ Protective Com-

mittee. The Fourth Agreement announced Rinke’s ap-

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pointment as ‘‘Agent’’ also for the Bondholders’ Commit-

tee, the sale (but not to whom) under foreclosure of liens

of most of the physical assets of Knox, the ‘‘right” of

that committee to acquire property formerly of Knox and

to organize or co-operate in the organization of a new cor-

poration and to sell and convey property to such new cor-

poration (2746-48), thus inducing the belief that the rights

and interests of the Subscribers and the rights and inter-

ests of the Bondholders’ Committee had already become,

or were about to be, merged for the common benefit. And

to keep apace with the execution of the scheme Rinke of

course ‘‘agreed’’ under this Fourth Agreement to apply

the Subscribers’ money received by him for the acquisition

of property formerly of Knox or an interest therein (2748).

But no part of the moneys subscribed to the Rinke Agency

Fund was used by Rinke to purchase the plant and real

estate (50 acres) at Texas City, against which the me-

chanics’ liens had been filed (667). Nevertheless the fiction

of the ‘‘liens’? was continued for purposes of deception

(368-69) by Rinke (478-83), and by Dickinson as late as

January and February, 1937 in his protestations of inno-

cence (421-28) and assertion that he ‘‘furnish(ed) the

necessary money to take care of the liens’’ (422; 2782).

As of the effective date of the Fourth Agreement, Dick-

inson had ‘‘advanced’’ $87,310.28 cash, or one-half the

total liens of $174,620.56, and had been repaid $5,000 from

the Agency funds as the balance of a ‘‘loan’’ of $10,000

(ostensibly made as the full or part down payment with

Lloyd’s bid) (653-54; 657, 348).

Six months prior to the inception of the Fourth Agency

Agreement Rinke, in letter to Dickinson dated July 27,

1925, set forth the Dickinson-Lloyd scheme originally de-

vised in connection with the proposed purchase of the

liens (327) but in fact subsequently employed in the pur-

chase of the Knox plant property (2290-96), and advised

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Dickinson that with respect to any cash ‘‘advanced’’ by

Dickinson he, Rinke, would repay Dickinson (327).

Significantly the Fourth Agency Agreement is silent

with respect to the purchase of the Knox plant by Dickin-

son although the date of its inception and the date of such

purchase were approximately simultaneous. Dickinson

had ‘‘advanced”’ $87,310.28 on January 21, 1926 and held

title to the property. On January 30, 1926 Dickinson re-

quested Lloyd ‘‘in the next ‘conference’ to go into the

reorganization plans and plans for control.”? Dickinson

trusted that Lloyd was ‘‘holding to the determination to

see that the bondholders furnish all the money for the

payment of the property * * * before operations start’’

(357), and in repayment of his ‘‘advance’’ he was ‘‘not

particular where (the money) comes from”’ insisting ‘‘it

should be forthcoming at once”? (3107). Lloyd was sure

that Dickinson agreed with him “that we ought to have

the other fellows’ money and none of our own in it”’ (367).

On June 29, 1926 Lloyd advised Dickinson that he was

calling a meeting of the Directors to face ‘*the issue to

complete the $600,000 subscription * * * the full 100% in

money has got to be paid to us covering the total amount

of the liens * * * there is only one way that I have in mind

and that is for you and me to get ours and that we are

going to do’’ (485-86).

Two days after Lloyd's letter to Dickinson and on

July 1, 1926 Rinke, the fiduciary, aiding Dickinson and

Lloyd to attain their fraudulent ends, addressed a letter

to the Subscribers (478-80, N5). In the light of the sub-

sequently discovered facts it is the epitome of double talk,

replete with false and deceiving statements, significantly

concealing and misleading (481-88). It served its sole

intended purpose—the solicitation of additional funds from

the Subscribers from whom the truth was withheld. It did

not inform the Subscribers of any facts which would ap-

prise them of the frauds (738).

ee

pe

15

Under the Fifth Agency Agreement (2752-57) $186,082.56

was subscribed and paid to Rinke as Agent, during the

period from July 26, 1926 to December 20, 1926. Subse-

quent to December, 1926, Rinke received $10,425.00 on sub-

scriptions which he did not assign to any particular agree-

ment but listed under the heading, ‘‘Free Subscriptions’?

(638, 639).

With a letter dated July 14, 1926, Rinke, as Agent of

the Bondholders’ Committee, transmitted to the bond-

holders the form of the fifth subscription (2595). Again

significantly neither the letter nor the subscription form

disclosed Dickinson’s purchase of the Knox plant on De-

cember 21, 1925 (2752, 2757).

The form of the Fifth Agency Agreement announced

the sale (but not to whom) of the Knox physical assets;

the ‘‘organization’’ of Petroleum;* that $410,000 had been

raised; the desirability and necessity that $190,000 addi-

tional be raised to complete the $600,000 goal, and that

upon completion thereof Rinke was authorized to accept

two shares of Petroleum stock for each $5.00 paid by Sub-

seribers, past and present, in order that the Subscribers

should participate on a parity with the bondholders.

Pursuing his custom to keep Dickinson informed from

time to time ‘‘regarding money with the agent (Rinke)”’

Lloyd on August 16, 1926 wrote Dickinson giving a list

of ‘‘unsigned subscriptions.’’ This list included ‘‘Dickin-

son * * * $25,000’? (3135). Although Dickinson testified

to the contrary (3044-45), nevertheless he did publicly at

a dinner meeting of Knox bondholders and Subscribers

make such subscription but never paid any part of it (389;

2614; 2061; 372-73).

® Petroleum was incorporated March 25, 1926, but its organiza-

tion meetings were not held until December 14 and 15, 1926 (668;

2218; 2278) immedisicly following the final cash “profit” payment

to Dickinson and Lloyd on December 10, 1926 (659-62).

pmanidan $: Pe Soa

SOMA Ope LR His QD RED BE OR enoe AeA

SOULE BOT 4

Baws

16

A restriction in the Fifth Agency Agreement forbade

use of funds until the goal of $600,000 subscriptions had

been reached (2754-55). To enable him to obtain ‘a bal-

ance of $25,310.28 and interest on the whole amount’’ of

$87,310.28 at once, Dickinson authorized Lloyd ‘‘to sub-

scribe for the Eighty-seven Thousand Dollars, or the bal-

ance of the lien money * * * the subscription to be replaced

by cash subscriptions as procured”? (2633-34).

Dickinson was fully informed from time to time as to

the Rinke Agency financial conditions. As of August 20,

1926 he knew that ‘‘more than four hundred thousand

dollars have been in hand’? (361). Dickinson was no less

sure than Lloyd of their cash ‘‘profit.””. In advance of its

collection they planned its use (361-2).

On September 7, 1926 there was paid to Dickinson from

the Rinke Agency funds, by direction of Lloyd (639;

3136-37), the balance of the $87,310.28 ‘‘advanced”’ by

Dickinson for the Knox plant, together with interést at

6% thereon (659-60; 45-46; 366-67). Dickinson was thus

made whole (367). Dickinson had escaped from his fear

of ‘holding the bag’’ (367) since he received one-half of

Rinke’s payments to Lloyd of $15,000 on September 14,

1926; $15,000 on September 28, 1926; $30,000 on October

11, 1926, and on December 10, 1926 Rinke paid Lloyd

$27,310.28. By agreement between Dickinson and Lloyd

this $27,310.28 was used in market operations in Petroleum

stock (660-61; 2614).

Thus in the private arrangement of Dickinson and

Lloyd to reorganize Knox for their own personal gains

(648-49) Dickinson’s and Lloyd’s own records disclose

that during the lien problem period, after Dickinson’s

advent, Dickinson and Lloyd operated under three distinct

schemes which for their secret purposes required changes

from time to time in the Rinke Agency subscription agree-

ment forms and brought about the several Rinke Agency

agreements, viz.:

uit

RFT MK AND Sa OR OD COSI REA A ”

17

1. An initial common understanding between

them, prior and subsequent to February 26, 1925,

that no money advance would be made by Dickinson

as contemplated by the Knox Board in resolutions

passed at meeting on that date as affecting Dickin-

son (2492-2504; 305-6; 3115-16; 308-9; 3117-20).

Nevertheless Dickinson was voted ‘‘a bonus of stock”’

of 20,600 shares, as forecaster Lloyd advised Dickin-

son on February 7, 1925 (2489).

2. Disregarding the Knox resolutions of Feb-

ruary 26, 1925 contemplating the aid of Dickinson,

and at least as early as April, 1925, Dickinson and

Lloyd schemed to purchase the liens, Lloyd sug-

gesting the purchase of an interest in some of the

liens in order ‘‘to dictate the policy of reorganiza-

tion’’ (3117-20). He was sure the liens could be

bought for ‘‘less than 100% on the dollar’’ (3121-24)

and whatever they could be bought for less than

their face value would be ‘‘cold profit’? (311). Dick-

inson agreed perfectly ‘‘provided * * * the drive on

the bondholders is continued to success’? and the

liens ‘‘be paid for by the Company at face value with

interest (and) they should be obtained by us on the

basis of fifty cents on the dollar’? (309-10). Lloyd

was sure that on the ‘‘fifty cents on the dollar’’

basis the liens would be bought by the bondholders-

subscribers and ‘‘there would be no use for you

(Dickinson) and me (Lloyd)’’ (329), but the Sub-

scribers never had such an opportunity.

Discarding the scheme to purchase the liens late

in 1925 Dickinson and Lloyd conspired to acquire

title to the property (Knox plant) in the name of

Dickinson by purchasing same at lien foreclosure

sale at the cash price of ‘‘fifty cents on the dollar”’

of the face amount of the liens, or $87,310.28, plus

18,000 shares of Knox stock, and thereafter to pay

0 lOO LE St SW A RY HBS

Pdr engi D LS eee Makes sy 8g 3

o

ey

to themselves in cash from Rinke Agency funds

through the connivance of Rinke, $174,620.56, the

full face amount of the liens, such payments to be

falsely designated as payments on account of ‘‘ad-

vances”’ for liens and property (651; 3097-4000; 454-

55; 594-96).

“In this manner,’’ Lloyd advised Dickinson on De-

cember 5, 1925, ‘‘we will get the title properly cleared and

there can be no possible chance of anyone antagonistic to

our efforts being able to show collusion’’ (339) (emphasis

supplied).

Thus Dickinson’s and Lloyd’s own records reveal that

the Rinke Agency Agreement forms were moulded to fit

the Dickinson-Lloyd schemes to mulct secret cash profits

from the Subscribers and that the varying representations

therein respectively were made concurrently from time

to time wholly to screen the aforesaid three distinct

schemes perpetrated by Dickinson and Lloyd in their over-

all objective ‘‘to get ours.’’

No accounting for the $597,542.50 subscribed and paid

to Rinke, Agent, was ever made by Rinke to the Subscribers

(633; 639 ; 2820-22).

Rinke did not use any of the Rinke Agency funds to

acquire or liquidate the liens on the Knox plant. In dis-

bursing the funds of the Rinke Agency, Rinke was com-

pletely dominated and controlled by Lloyd (633).

Rinke did not produce at the trial records to support

his disbursements but described and estimated most of

them except some $70,000 for which he could not give any

explanation (1394-95).

At least as early as April, 1925 Dickinson and Lloyd

were scheming to reorganize Knox for their personal

‘*profit’’ and ‘‘control’’ (3117-25; 307-10).

ce hey POP tay LOE 10 BAL SOE A LEIP EAP AME Se 9 ERED

On April 15, 1925 Lloyd wrote Dickinson that he was

‘perfectly satisfied that less than 100% on the dollar any

time would settle any of these claims, if the creditors were

properly educated as to their position’? (3121-22). An

employee of Knox, one Steenman, had been active among

the lien creditors under direction of Lloyd, with the knowl-

edge of Dickinson, prior to the lien foreclosure sale (2088;

2447 ; 2484; 3003-04).

Dickinson was fully informed of the lien foreclosure

proceedings prior to his bid being made for the Knox plant

(2780-83).

On December 5, 1925 Lloyd fully advised Dickinson of

his proposed bid, whereby ‘‘ * * * we will get the title prop-

erly cleared and there can be no possible chance of anyone

antagonistic to our efforts being able to show collusion”’

(337-39). By Dickinson’s authorization dated December

8, 1925 (2780-83) Lloyd on behalf of Dickinson submitted

a bid of $87,310.28 cash plus 18,000 shares of Dickinson’s

‘‘bonus’’ of 20,600 shares Knox stock allegedly trusteed

to Lloyd and tendered a check of $5,000 ‘‘advanced’’ by

Dickinson (2563-64), as down payment and a ‘‘ Declaration

of Trust’’ reciting, inter alia, that he had received from

Dickinson and held in trust for the lien-holders said 18,000

shares of Knox stock represented by certificates numbered

10 to 33 inclusive (2291-94; 2298-99). The Knox stock

certificate book discloses that no such certificates were ever

issued (2836-38). Lloyd’s bid, the only one made for the

Knox plant, was accepted December 21, 1925.

The balance of $82,310.28 of the cash bid price was paid

by Dickinson to the Special Commissioner on January 21,

1926 and Dickinson received a deed dated January 2, 1926.

This deed, fully setting forth the consideration, was not

recorded until a year later, on January 7, 1927 (658) fol-

lowing the organization meetings of Petroleum.

20

At least as early as October 4, 1926 and prior to Lloyd’s

bid ‘*the general scheme’’ of reorganization was presented

to Dickinson in writing (370-76), including the Petroleum

set-up (372).

Between January 25, 1926 and September 7, 1926 Rinke

paid Dickinson from the Agency funds the sum of $87,310.28

in installments on various dates (659) plus interest of

$1,624.28 thereon. Dickinson continued to hold title to the

Knox plant until the organization of Petroleum on De-

cember 14-15, 1926 (660). In addition, Rinke paid Dickin-

son and Lloyd from Agency funds an additional $87,310.28

cash **profit’’ herein discussed at p. 16. For that money

neither Dickinson nor Lloyd transferred or assigned any-

thing of value to the Subscribers, or to Rinke as their

trustee (602-03, 492). It was a fraudulent scheme by which

Dickinson obtained $87,310.28 plus interest, and Dickinson

and Lloyd divided between them an additional $87,310.28

of the funds of the Subscribers for whom Rinke was a

trustee.

On February 13, 1926 Rinke, as Agent for the Bond-

holders’ Committee, at foreclosure sales, bought the Knox

patents for $25,000 and on August 5, 1926 bought the re-

maining 91 acres of Knox land at Texas City for $10,000

(664-65), with funds subseribed to the Rinke Ageney (678).

Of this sale Dickinson ‘‘had a notice from Loeffler * * *

the Commissioner"? (2136).

Assertions by petitioner that his bid was made on the

assumption that Knox was to continue are wholly without

support. The record is to the contrary (3117-25; 337-39).

Surely there is no indication of dissatisfaction in Diekin-

son’s letter to Lloyd on January 30, 1926 (3127-29). Diek-

inson testified that he had a conference at Attorney Gif-

ford’s office in New York between Jannary 7 and 21, 1926

‘‘with Mr. Lloyd, Mr. Gifford, and Mr. Rinke’’ but that

there was no discussion at that conference with reference

a i lediny 0 WO tein

21

to a new corporation to take over the property formerly

of Knox (2135) (emphasis supplied). Yet attorney Gif-

ford’s diary discloses that on January 12, 1926 he ‘‘had

conference with Mr. Lloyd, Mr. Dickinson and Mr. Sander-

son (Dickinson’s son-in-law) with reference to steps to be

taken in reorganization of company’’ (2215-16) (emphasis

supplied). Dickinson also testified that he thought he was

buying the liens and not the property (336). Yet he was

fully advised by Lloyd on December 5, 1925 of the terms

of the proposed bid for the Knox plant upon foreclosure

of liens stating, infer alia, ‘‘In this manner, of course, we

will get the title properly cleared * * * "’ (337-39) (em-

phasis supplied). And on December 4, 1926 Lloyd re-

minded Dickinson that ‘‘you and I are in line to make con-

siderable value out of a stock which we are about to es-

tablish a value for. We have been doing this for over two

years’’ (387).

Thus with the cash ‘‘profit’’ in sight they were ready

to and did proceed with the next step in their fraudulent

schemes (668), viz., the organization of Petroleum.

Petroleum, ‘‘a replica of Knox in financial structure’’

(270), was incorporated under the laws of Delaware on

March 25, 1926 with an authorized capital stock of 1,200,000

shares, par value of $5.00 each (668). The first meeting

of the Board of Directors was held on December 14, 1926

and an adjourned meeting on December 15, 1926, by three

dummy directors (682; 2218).

The organization of Petroleum conformed to the scheme

outlined by Lloyd to Dickinson on October 4, 1926 (370-76).

Lloyd was sure the scheme would satisfy Dickinson (375).

It did (376-77). Prior to December 4, 1926 Dickinson read

the organization documents before they were presented

to the Bondholders’ Committee and the directors of Knox

(2700).

On December 7, 1926, by an exchange of letters, Lloyd

on behalf of Petroleum agreed to the sale by Rinke to

Petroleum of 91 acres at Texas City and certain patents,

formeriy of Knox, in exchange for 590,400 shares of Petro-

leum stock—240,000 shares to be issued to Rinke as Agent

for the Subscribers and 350,400 shares to be issued as Agent

for Knox Bondholders’ Protective Committee. With re-

spect to these shares Lloyd imposed, and Rinke without

authorization accepted, ‘‘restrictions’’ against sale (2241-

42). Rinke accepted the offer by letter dated December

7, 1926 (668-69; 2246-51) and assigned, transferred and

conveyed such property to Petroleum.

Similarly on December 7, 1926 Lloyd on behalf of Petro-

leum offered to purchase the Knox plant from Dickinson

in consideration of 609,600 shares of Petroleum stock,

469,600 of which he agreed to have issued in Dickinson’s

name or his designee (they were actually issued in Lloyd’s

name and without ‘‘restrictions’’ against sale), 140,000

of which were issued in Lloyd’s name and by him trans-

ferred and delivered to Petroleum as treasury stock (669-

71; 2252-56).

The offers and acceptances submitted by Lloyd to the

Petroleum dummy Board of Directors on December 14,

1926 were part of the fraudulent scheme to obtain for

Dickinson from Petroleum an amount of stock in excess

of that provided under the resolution of Knox directors

on February 26, 1925 (674), which was 79,928 shares (or

twice 34,964 at 2 for 1) (489-90).

Shares so issued to Rinke were computed on the basis

of 400 shares for each $1,000 par value of Knox bonds

deposited with the Committee and of 400 shares for each

$1,000 subseribed and paid in, respectively (681). The

stock provided to be issued to Dickinson, a bondholder

und nonpaying publie subscriber to the Rinke Agency, was

computed on the same basis (2148).

—

Prior to the organization of Petroleum and on October

4, 1926, Lloyd had advised Dickinson that he would hold

the stock issued to Rinke, Agent, after its issuance (372).

And he did! This stock was delivered ten years later in

1937 by direction of Petroleum’s Board after the disap-

pearance of Lloyd in October, 1936 while under investiga-

tion (732-34).

Despite Dickinson's testimony to the contrary (2138-

39), prior to the organization of Petroleum on December

14-15, 1926, plans in ‘‘the general seheme’’ were actively

under consideration by Dickinson and Lloyd. On Decem-

ber 22, 1925, the day on which Lloyd was notified of ac-

ceptance of his bid on behalf of Dickinson to purchase the

Knox plant, Lloyd advised Dickinson in writing of the

‘general plan’’ (341, 343-47); according to his diary At-

torney Gifford, on January 12, 1926, ‘*had conference with

Mr. Lloyd, Mr. Dickinson and Mr. Sanderson with reference

to steps to be taken in reorganization of (Knox)*’ (2215-

16); on January 20, 1926, Dickinson requested Lloyd ‘‘in

the next ‘conference’ * * * to go into the reorganization

plans and plans for control’ (3127-29); on February 10,

1926 Lloyd felt that Dickinson had ‘‘the organization plans

** * very clearly in mind”’ and proposed ‘‘the organization

of Perrotervm Conversion Corp’x’’ (3130-33), and by

October 4, 1926, when the ‘*second $87,000’? was in sight

and ‘‘the general scheme’’ became definite, Lloyd wrote

Dickinson in detail as to the reorganization procedure,

adding assurance that he would ‘‘see to it*’ that their Petro-

leum stock would be sold to the public ‘twhen it is quoted

on the curb’ (370-76). Immediately expressing his ap-

proval, Dickinson on October 7, 1926, wrote Lloyd: ‘‘I take

my hat off to you for the manner in which you are framing

this to our advantage * * * ** (376-77).

The Dickirsor* block of 469,600 shares, being without

sale restrictions, was so-called ‘‘free stoek"’ or ‘loose

stoek’’ (390-91). Three months prior to the organization

“ADA Sie ON Alita a PET AOL TD NPE LO AINE SEL AO SEL BC EIETE ETN:

Dp be ph ale a RR har q

24

of Petroleum Dickinson and Lloyd planned to use their

share of this block and part of the cash from the ‘‘second

$87,000.00’’ Rinke agency payment in Petroleum stock

market operations (3137-38). From ‘‘the very first day’’

it was sold simultaneously with the 140,000 shares of Petro-

leum so-called treasury stock (3070-72). Lloyd figured

that ‘‘this will leave for you (Dickinson) and for me on

the deal alone anywhere from $600,000 to $700,000 par’’

(374) and Dickinson’s hat was off to him (377).

On December 8, 1926 Lloyd received from Rinke the

balance of the ‘‘second $87,000,’’ of $27,310.28, ‘‘in lieu

of subscription of $25,000 which we made at the dinner’’

(389). On the same day Rinke advised Dickinson that he

was sending to Lloyd $27,310.28 in connection with ‘‘the

release of liens’’ (390). Dickinson agreed to its use in

market operations in Petroleum stock (662; 377; 386-87).

Out of the ‘‘free stock’’ Lloyd set aside 244,041 shares

for the stockholders of U. S. Gasoline Manufacturing Cor-

poration (the predecessor of Knox) which he confided to

Dickinson on January 21, 1928, enabled him to retain con-

trol of Petroleum (391). For the same reason Dickinson

sought possession and control of this same block of stock

after Lloyd’s disappearance on October 26, 1936 (692-93;

217-19) by demand of Dickinson, Sanderson and Rinke as

‘*Trustees’? under a purported Declaration of Trust by

Lloyd (692 ; 723-26 ; 215-16; 218-19), for the delivery thereof.

Inquiry ordered by the Petroleum Board as to the merits

of such demand led to the disclosure of the Dickinson-

Lloyd frauds, part of the subject matter of this litigation

(723-26; 219).

During the years 1927 to 1929 Lloyd was engaged in

extensive market operations in Petroleum stock, with Dick-

inson, his son-in-law Sanderson, and Rinke actively par-

ticipating (695; 3139-41; 3142-44; 3145-47; 3148-50; 309:

411-12).

ail A RA RS IE REN EIT Tag TEE

The stock market having collapsed meantime, Dickinson

made demand upon Lloyd on May 5, 1931 for one-half of

$27,310.28 or $13,655.14, with interest (415-16), although

Dickinson had authorized Lloyd to use same for their joint

account in stock market operations in Petroleum stock (696;

385-86).

C. The Decisions Below

“The acts through which the fraud was perpetrated

on the Subscribers were not discovered until the early part

of 1939. The intervenors, Vaughan and Burnham, served

their answer and counterclaim in (the District) Court in

January, 1944" (597-98), well within Section 48(5) of the

New York Civil Practice Act.

In affirming the judgment below on the merits, the Court

of Appeals, referring to the merits of the intervenors’

counterclaim, said in part:

**(Dickinson) has taken issue with a series of the

findings by the district court and proffers, instead,

an exculpatorily innocent interpretation of the

events, skillfully woven from the documentary and

uncontroverted evidence, on which he bases a claim

of error in the findings. We are unable, however,

to find grounds for holding these findings ‘clearly

erroneous’ under F.R. 52(a)’’ (R. 1071; see also

R. 1074).

Wi BEAN IN LIED ELITE LB I EL ELLIE LOLA LION LE LEAL OLEAN ETO neon TRY.

26

SUMMARY OF ARGUMENT

POINT I

If important or novel questions actually exist in

Petitioner's Class Action Argument their determina-

tion is not required in solving any controversy between

the petitioners and respondents.

POINT II

Questions now presented—as to (1) applicability

of Section 48(5) of the New York Civil Practice Act,

(2) petitioner’s demand for trial by jury of the issues

raised by his answer to the claims of the subsequently

intervening members of the class, (3) knowledge by

Subscribers of fraudulent payments out of the Rinke

Agency funds to petitioner (and Lloyd), (4) the Rinke

“release”, and (5) Petroleum, not the Subscribers, had

the claim for the misappropriated Rinke Agency

funds—were raised at the trial, considered and deter-

mined by the trial court, on all the facts and the law,

in his exhaustive opinions which were unanimously

affirmed by the Court of Appeals. Selected facts and

construction thereof most favorable to petitioner should

not serve as a basis for re-litigation.

es AA eR AOA LIER ALIN 2 AG RE AGE IESE cps ORAS ALOE AE ALES FEM Ret SAILS YEE ILE SAIS

27

ARGUMENT

POINT I

If important or novel questions actually exist in

Petitioner’s Class Action Argument their determina-

tion is not required in solving any controversy between

the petitioners and respondents.

A.

The principal points relied on by petitioner (pp. 2-3; 17-

23, pars. 1-4)' in the so-called ‘‘Class Action Argument’’

may be summarized as follows:

The decision below raises ‘‘important’’ and ‘‘novel’’

questions of federal law in that:

(a) the Court below said so.

(b) Difficulty was (and is) experienced in correctly

classifying the type of these suits (i. e—true; hybrid or

spurious).

(c) The holding of the Court of Appeals that there was

a fund (i. e. a constructive trust) is contrary to other deci-

sions ; and

(d) The holding violates due process requirements.

We shall demonstrate that if important or novel ques-

tions actually exist—their determination is not required in

solving any controversy between the petitioner and respond-

ents.

Petitioner was the plaintiff in an action begun in 1938

to impress a lien on stock of defendant Petroleum. Cer-

tain defrauded investors intervened. Their claims, based

upon common questions of law and fact and seeking a com-

mon relief, were presented by two representatives of the

' Page references to petition are indicated ‘*P”’.

Be

el oranda chi eee ae Bite §

mem pot MA: Je es NE Re wee : cea hr Kf

28

class. This intervention was permitted by the District

Court and consented to by plaintiff-petitioner.

The claim pressed by the class through their representa-

tives was identical in scope to the counterclaim asserted

by the intervenor, Petroleum, against plaintiff-petitioner.

As petitioner points out (Bw. BR. 8), the claim of Petro-

leum was dismissed by the District Court, in a decree labeled

by this Court as ‘‘final’’, Dickinson v. P. C. C., 338 U.S.

507, 94 L. ed. 299. So, too, were plaintiff-petitioner’s claims.

The District Court however, entered a money judgment in

favor of the class and against petitioner and Lloyd's

Estate. An examination of that decree, October 17, 1946

(R. 203-51) and order, April 9, 1947 (R. 252-4) will show

that the trial court rendered a final determination of all

issues between plaintiff and the class, and set the amount

at $176,245.24 with interest, as in the decree set forth. At

that point, had the Court (as it could have) directed the

issuance of execution, that would have been an end to this

case—except for the appeal on the merits, just decided ad-

versely to plaintiff (197 F. (2) 973)—because the trial

court’s findings were not, as the Appellate Court pointed

out, ‘‘clearly erroneous’’. Indeed, on any examination of

the record, it would be impossible to reach any other con-

clusion.

If the Court had issued an execution against the plain-

tiff on the judgment in favor of the class, it could have pro-

vided for a retention of juridiction (the case was in equity)

to determine any questions that might thereafter arise with

respect to a division of any recovery on the judgment. That

the Court retained jurisdiction to determine those ques-

tions prior to issue of execution, does not change the prin-

ciple involved, namely that it was the final determination

of the trial court that members of the class were entitled

to recover a fixed and determined sum of money from plain-

tif. At that point, all matters respecting the facts forming

a Ee et teen oe as vt A

29

the basis of that determination between all the parties

(including the class), the amount of recovery and every

other element necessary to support a final judgment had

been resolved. Principles of res adjudicata applied.

‘‘A, What the court reserved was essentially

supervisory jurisdiction over the distribution among

the class of the recovery awarded the intervenors as

the class’ representatives. The only questions were,

so to speak, internal to the intervening interest.’’

Dickinson v. Petroleum Conversion Corporation, 338

U. S. 507, 514, 94 L. ed. 299, 304.

What followed was a determination as between members

of the class, as to whom should share in the recovery already

granted, and in what proportions, ete.

Such a proceeding, while grafted on to the main suit,

was in every respect ancillary to it. It was similar to any

situation where having determined in a litigation that de-

fendant may recover against plaintiff the Court goes on to

adjudicate between defendant and others (his assignee or

some other undisclosed party in interest identified with de-

fendant) who shall share in the recovery. Plaintiff has

no need—nor propriety in controverting who ultimately

may share in the recovery against him. His obligation to

pay a sum of money to a person (collectively or individu-

ally) has been fixed. It would seem, therefore, that on such

questions (i. e., the division of the sum awarded) plaintiff is

not entitled to be heard.

So in the case at bar, Dickinson was required to pay to

the representatives of the intervenors (Burnham and

Vaughan) the sum of $176,245.24 and interest. If he paid

that, he was forever protected by the judgment and pay-

ment thereunder.

beads WAITER, aa

we A eh io EES ALOE ME Inn |

30

Accordingly, examined in this light, we have this situa-

tion:

1. Representatives of a class of defrauded investors

asserted a claim in a pending action and were awarded a

judgment for money on the collective claim of all investors

similarly situated (ordinary class action where one of a

class asserts a right on his behalf and behalf of all simi-

larly situated). There is nothing novel about that situa-

tion.

2. Having finally determined the right of the entire

class against plaintiff—and all issues between the plaintiff

and all members of the class (whoever and how many they

may be)—the Court retained jurisdiction over the class

representatives to determine as between them and mem-

bers of the class, how the recovery (or judgment or ‘‘claim "

should ultimately be determined. If that created a ‘‘novel”’

situation, it was a ‘‘novel’’ situation in which a determina-

tion was sought and accomplished, and such determination

could have no bearing upon or relation to plaintiff.

Therefore, plaintiff-petitioner is in no position today

to urge that decisions or determinations reached in that

proceeding (or in that phase of the main litigation) in-

volved any rights of plaintiff. If by the determinations

below, error has been committed in apportioning the re-

covery, as between members of the class, that error can-

not help or hurt plaintiff and, accordingly, the ‘‘novelty”’,

if any exists in any question so determined, involved a pro-

ceeding (or phase of a proceeding) to which plaintiff was

neither a necessary or proper party. Plaintiff cannot attack

that proceeding but is limited in any attack to the ques-

tions: Did the trial court have jurisdiction to determine

between plaintiff and the intervening class the issues it

adjudicated? Are the findings in the judgment (or decree)

entered on those issues, ‘‘clearly erroneous’? under Federal

Rule 52(a)?

31

It is submitted, that there is no novelty presented by

such questions. On the contrary, the action and the issues

determined fall within an ordinary fraud action which moti-

vates a Court in holding in favor of those defrauded and

against the instigator and perpetrator of the fraud.

Wholly in accord with the above indicated procedure

of retaining jurisdiction after determination of all issues

on the merits as between petitioner and the Subscribers—

to supervise distribution of the recovery awarded among

the members of the class—the trial Court ruled that such

procedure would be limited to any question with respect to

the right of any member of the class (his representative or

transferee) to assert his claim as a holder of Rinke Agency

receipts, or as a subscriber under the Rinke Agency agree-

ments (1181-1184; 1203). The trial Court anticipated that

the proof would be documentary (1201). An ‘‘answer’’

was not at any time subsequent to the decision on the

merits ‘‘directed’’ by the trial Court, as stated by peti-

tioner (P. 24).

Further, the order of the trial Court (972) does not

‘*recognize’’ that petitioner could raise issue with respect

to individual claims beyond the Court’s said ruling. Never-

theless petitioner’s contentions based on his ‘‘answer’’

were considered by the trial Court in his opinion on the

individual claims of members of the class who intervened

and disposed of adversely to petitioner (R. 468-500).

Although the motion to vacate petitioner’s Interroga-

tories was granted by Judge Coxe nevertheless the trial

Court subsequently permitted Interrogatories to be served

on each subsequent intervener (2168). Significantly peti-

tioner elected not to make such Interrogatories a part of

his transeript of record on appeal. He therefore has no

ground for complaint as to the personal factors of decep-

tion, knowledge and discovery of the facts.

32

POINT II

Questions now presented—as to (1) applicability

of Section 48(5) of the New York Civil Practice Act,

(2) petitioner’s demand for trial by jury of the issues

raised by his answer to the claims of the subsequently

intervening members of the class, (3) knowledge by

Subscribers of fraudulent payments out of the Rinke

Agency funds to petitioner (and Lloyd), (4) the Rinke

“release”, and (5) Petroleum, not the Subscribers, had

the claim for the misappropriated Rinke Agency

funds—were raised at the trial, considered and deter-

mined by the trial court, on all the facts and the law,

in his exhaustive opinions which were unanimously

affirmed by the Court of Appeals. Selected facts and

construction thereof most favorable to petitioner should

not serve as a basis for re-litigation.

B.

The acts through which the fraud was perpetrated on

the Subscribers were discovered early in 1939 and reported

to Petroleum’s Board February 9, 1939 (725). Interveners

Burnham and Vaughan served their answer and counter-

claim in the District Court in January, 1944 (597-8), well

within six years of discovery under the New York Practice

Act, Section 48(5).

Between Dickinson and Lloyd there existed a common

plan or scheme to appropriate funds of the Rinks Sub-

seribers to their own use through the medium of deceit

(994). The claim which Burnham and Vaughan asserted

for the Subscribers against Dickinson and Lloyd is for the

payments made to Dickinson and Lloyd by Rinke as a

result of such scheme, which was fraudulent in its essence

(997). Their claim is not barred by the New York Statute

of Limitations (598, 750, 761).

33

C.

From all the evidence the District Court found that

the Dickinson-Lloyd plan or scheme whereby they mis-

appropriated Rinke Agency funds was not disclosed to

any Knox bondholders or Rinke Agency Subscribers and

said bondholders and Subscribers had no knowledge with

respect thereto (651-3; 492-5). If by ‘*documentary evi-

dence’’ petitioner refers to Dickinson’s deed (which ex-

pressed the consideration) to the Texas City property, :

it is to be noted that Dickinson withheld recording of the

deed (402-3); if he refers to the Subscription Agreements, :

it is to be noted that none refers to the sale of said prop- ’

erty to Dickinson nor was there disclosure of payments

to Dickinson or to Lloyd of any of the Rinke Agency funds

subscribed (494-5). Petitioner does refer to a letter dated

July 1, 1926 to the Subscribers as informing them of the 4

balance due for the *‘liens’’ but that letter was unadulterated :

double talk, as the trial Court pointed out (478-88). 4

The fiction of the ‘‘liens’’ was used to screen the frauds 4

of the Dickinson-Lloyd scheme from the beginning, and 5

extended throughout the life of the Rinke Agency, and :

extended by Dickinson for purposes of deception until yi

1937 (434, 426-n, 423-n-426-n). i

If ‘‘uncontroverted evidence’’ refers to testimony of

Dickinson and Rinke (Lloyd had been declared dead at the “

time of trial (418) the Court said ,inter alia, ‘‘ Dickinson i

and Rinke testified at the trial before me. They are un- z

worthy of belief’ (417-18). :

From all the evidence the trial Court found that the 3

interveners, Burnham and Vaughan. did not release peti- 4s

tioner or Lloyd from any claims that they had against :

Dickinson and Lloyd (750). “

:

|

34

When Rinks distributed Petroleum stock to the Sub-

scribers in 1937, some ten years after the organization of

the company and after Rinke Agency was terminated, he

incorporated in his transmittal letter to the Rinke Agency

receipt holders a **release’’ clause (495-501). It was no

protection to Dickinson as a defense to the claim of Burnham

and Vaughan, as interveners. It was not only without

consideration to support it (502) but the Subseribers had

heen defrauded, and they did not know of the fraud when

they signed the letter of transmittal (502-3). Moreover

Rinke was performing a duty which he should have per-

formed many years prior to 1937 (502) but failed to do

so in deference to Dickinson and Lloyd who, like him-

self, were engaged in market operations in Petroleum stock

in 1927-1929 (694-5).

E.

Petitioner likewise renews his contention that the

Dickinson-Lloyd misappropriation, ‘if misappropriation

there was*’, damaged l’etroleam and not the Subscribers.

The Rinke Agency was not a capital-raising device for

Petroleum. It expired November 15, 1926 with the termina-

tion of the Fifth Ageney Agreement (632) and prior to

the organization of Petroleum on December 14-15, 1926.

Despite Rinke’s testimony as to transfer of the balance

of Rinke Agency funds to Petroleum, his Ageney Account

discloses that on December 13, 1926, the day before

Petroleum’s organization meeting, Rinke paid by check

from the Agency funds *tto Wm. A. Fine, Special’? the

sum of $26,845.79 (2398). Rinke identified Fine’s check,

used two days later on December 15, 1926, whereby Fine

paid Lloyd $25,000, the cheek being endorsed by Lloyd, ‘for

deposit’? (2907-9). Fine also was a tool of Lloyd's (458)

and Rinke could not reeall ever refusing to draw a check

for Lloyd (2858-9). There is no record that Petroleum

actually received any Rinke Agency funds.

_-_ oo

"ea —— ass on ateamnnare- tain,

35

Moreover, the Dickinson-Lloyd money frauds were con-

summated in 1926, during the life of Knox and prior to the

organization of Petroleum.

Conclusion

It is therefore respectfully submitted that this case is

not a proper one for review by certiorari in this Court, and

that the petition for a writ of certiorari be denied.

Respectfully submitted,

Dated: October 22, 1952.

EK. Lewis Burngam and

James A. Vaucnay, et al.,

Respondents,

By Myron Scort,

Room 1006,

44 Wall Street,

New York, N. Y.,

Counsel for Respondent.

James A. VAUGHAN,

of Counsel.