Hughes Tool Co. v. Trans World Airlines, Inc.

PETITIONER:Hughes Tool Co.
RESPONDENT:Trans World Airlines, Inc.
LOCATION:Planned Parenthood Birth Control Clinic

DOCKET NO.: 501
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 380 US 249 (1965)
ARGUED: Mar 04, 1965
DECIDED: Mar 08, 1965

Facts of the case

Question

Audio Transcription for Oral Argument – March 04, 1965 in Hughes Tool Co. v. Trans World Airlines, Inc.

Earl Warren:

— Company, Petitioner, versus Trans World Airlines Incorporated.

Mr. Davis.

Chester C. Davis:

Mr. Chief Justice, may it please the Court.

Number 501 involves the basic controversy between the use — two company and the additional defendants.

And that is whether TWA should be controlled by stockholders or by the lending institutions we claim have monopolized the supplying of senior financing to the major airlines of the United States.

In order to address myself, or for the Court to address itself to the issues which are involved in connection with the dismissal of those counterclaims with prejudice, I think it is important that I’d spend sometime to explain the nature of those counterclaims and the facts which I’ve described at those counterclaims in which underlie the legal theories under which they have been brought.

The counterclaims alleged that the Equitable and the Metropolitan together with another insurance company have in fact a monopoly on the supplying of senior long-term financing to major airlines.

And that they abused their dominant position in that field, if not a monopolistic position in that field, to interfere with and acquire control over the management of various airlines.

And this has been accomplished by a variety of means.

Now counterclaims described in some detail the conduct which we claimed these additional defendants have engaged in.

It involves the use of the traditional lender concept.

It involves of the use of interlocking relationships.

It involves the use of terms and conditions in connection with the financing they supply unrelated to — in a reasonable needs of a lender and the use of negative covenants in connection of those terms and conditions so as to achieve their objectives.

We also claim in these counterclaims that these additional defendants entered into a conspiracy among themselves as to the terms and conditions of the basis upon which they would make their financing available.

More particularly insofar as TWA was concerned, one of the principle means were used was this insistence upon management clauses and voting trusts, not as means of remedies in the events of default, that we would not object to, but as conditions preceding to making any senior financing available.

Now — well, Your Honor there’s a difference between a lender who said, “If you don’t pay your interest on time, if you don’t pay the installments on time, I’m going to take over control of the business”.

And it’s another thing for lenders to get together and say, “I’m going to take control of your business before I lend you any money”.

Hugo L. Black:

Well, let me just —

William J. Brennan, Jr.:

Are you telling us that the (Inaudible) counterclaim or are you telling us that this is part of your motion to dismiss the (Inaudible)

Chester C. Davis:

The point the — Your Honor is that my counterclaim do allege violations of the antitrust laws and violations of the Federal Aviation Act from one single course of conduct.

William J. Brennan, Jr.:

I know, but you made a motion to dismiss without prejudice.

Chester C. Davis:

I made a motion for a stay actually Your Honor which was denied.

William J. Brennan, Jr.:

You made a motion which says (Inaudible)

Chester C. Davis:

The actual motion that I made below was a motion for a stay.

I attempted to suspend litigation when it became apparent that I was not going to be able to get complete and adequate relief.

William J. Brennan, Jr.:

But this is filing a motion to dismiss the (Inaudible)

Chester C. Davis:

That’s the effect of what I’ve done Your Honor.

The — my — the additional defendants claim that I should’ve used those words.

The words — what actually happened was that after they filed their reply asserting as a defense CAB approval.

I decided to suspend litigation.

Chester C. Davis:

I made — I filed a complaint with the CAB.

I made a motion for a stay of all further proceeding in the counterclaims until the CAB acted.

This was denied from the bench, and I was told that in my — the imposition of the dismissal with prejudice, I did not inform in those words make a motion for a voluntary nonsuit.

Those are the facts of the record.

William J. Brennan, Jr.:

Well, what we have before us, in this case I gather is the judgment dismissing with prejudice, accepted to that one count of — the Court of Appeals said, it was superseded by —

Chester C. Davis:

That is correct Your Honor.

William J. Brennan, Jr.:

(Voice Overlap) — is that right?

Chester C. Davis:

That is correct Your Honor.

And my position on that is as the Second Circuit did recognized that additional defendants don’t dispute the CAB has exclusive jurisdiction over the violation of the Federal Aviation Act and certainly over the (Voice Overlap) —

William J. Brennan, Jr.:

Well, what did they find — what I — that (Inaudible) all gotten so confused yesterday.

I don’t know that I’m going straighten that out today but — what do you want us to do with dismissal with prejudice.

Chester C. Davis:

Well, reverse it Your Honor.

William J. Brennan, Jr.:

Reverse it and say what?

Chester C. Davis:

Well, I think a reversal would be enough so far as I’m concerned because I have a complaint before the CAB, I am not asking to stay in the court below until after the CAB has acted.

I believe that my statute of limitations will not run until after the CAB has acted, at least I’ve got the confidence of the Ninth Circuit decision in that regard, petition for cert has been granted and to some extent, I’m dependent upon what this Court will say on that question.

William J. Brennan, Jr.:

Well, what you want then — do I understand you is that a reversal which will permit you to stay this —

Chester C. Davis:

Which will permit the —

William J. Brennan, Jr.:

— counterclaims?

Chester C. Davis:

That’s right, I want a reversal of this dismissal with prejudice which they are using to interfere with my action before the CAB claiming that the CAB should not consider the complaint I have before them, until the CAB has acted on the violations of Federal Aviation Act and then permit me to go after them to waive — I should be able to — but I need some help to do it.

Arthur J. Goldberg:

But Mr. Davis —

Byron R. White:

What if —

Arthur J. Goldberg:

Excuse me —

Byron R. White:

Go ahead.

Arthur J. Goldberg:

The dismissal with prejudice as I read the Court of Appeals’ decision is a dismissal of prejudice of a lawsuit because Hughes was not — Mr. Hughes was not available to discover, that’s clear, is it not?

Chester C. Davis:

That’s the basis they put it on, Your Honor.

Arthur J. Goldberg:

Yes.

There is no adjudication although it’s a dismissal with prejudice of a lawsuit.

There is no adjudication of the merits of the conduct.

Chester C. Davis:

None, Your Honor.

Arthur J. Goldberg:

Now, why does that inhibit you before the CAB?

Arthur J. Goldberg:

Why would the CAB feel inhibited in any way in exercising its own jurisdiction because a court dismissed a claim, because a person would not permit himself to discover?

Chester C. Davis:

That’s an argument that the Irving Trust has presented the CAB Your Honor.

And all I know, the CAB has not taken any action on my complaint.

What is inhibiting them, I don’t know.

I’m suggesting to you the fact is they have made the argument that after all these counterclaims involved with some — private controversy had been dismissed with prejudice and therefore the CAB ought to stay out of it.

That’s the argument they presented, that’s all I can say Your Honor.

I also want —

Arthur J. Goldberg:

They are not —

Chester C. Davis:

— to point out —

Arthur J. Goldberg:

They have not, Mr. Davis, passed upon that argument as I understand (Voice Overlap) —

Chester C. Davis:

No.

The Bureau of Enforcement found that there was a probable violation of Federal Aviation Act, they took an appeal to the Board itself and the Board has just been sitting there.

Arthur J. Goldberg:

Perhaps the Board has been waiting an adjudication here?

Chester C. Davis:

They could be.

It could very well be, Your Honor and I would like to point that — I recognize the ground on which the Court of Appeals below made its decision.

I submit that it was error because the question was not whether or not I was complying with discovery.

The question was whether or not based upon the circumstance I was confronted with as a claim and against these people.

I had a right to suspend my litigation of the counterclaims without any legal prejudice to these additional defendants.

And if I have the right to do that, then of course there’s no discovery question at all.

And that is the basic problem here.

And the reason for my going into the nature — scope of these counterclaims is to point out the problem that here exist is that this course of conduct of describing my counterclaim, described the violation of the antitrust laws as well as the violation of Federal Aviation Act.

Admittedly, if it’s a violation of the Federal Aviation Act, the CAB has to act first.

If they are engaged in the phase of aeronautics that they claimed they are, not because they are lenders but because of the way they abuse their power as lenders and have meshed themselves with the management of other airlines, they have unquestionably engaged with the phase of aeronautics now by the reason of the voting trust.

My problem there is not because I claimed there wasn’t any approval.

I claimed the CAB never approved this conduct.

But they filed replies 11 days after the — this Court’s decision in Panagra asserting as a defense that the CAB had approved their conduct.

I have no alternative about that point and I suspend that litigation on the counterclaims before there was any decision by Judge Metzner on my complaint.

And it is not a fact that I made my motion to suspend litigation because of discovery orders or because of what happened to me on the complaint, that is simply not the fact.

Byron R. White:

But Mr. Davis, whether or not the CAB holds the — that these people have violated the Civil Aeronautics Act, and whether or not we think here that there’s any supersession at all, you were still interested in maintaining your counterclaim in the District Court?

Chester C. Davis:

Unquestionably.

Byron R. White:

Because even if the CAB was to act first, you nevertheless have the claim for damages to be adjudicated to some —

Chester C. Davis:

I have claims for damages.

I have claimed the violation of the antitrust laws other than through the Federal Aviation Act.

Byron R. White:

Yes.

Chester C. Davis:

But I cannot get complete relief for the action now in the District Court until after the CAB has acted.

And I don’t want to try the same thing twice, number one and number two, if the CAB were to accept their contention that the — they had approved this voting trust, which the CAB claimed they have not and I’m sure they have not.

But nevertheless they claimed it.

Then, they would have the defense of it to that aspect to the violation of the antitrust laws by treating 414 of the Act.

So I claim that a right as a claimant so long as it did not cause them any legal prejudice, that I had a right to suspend my prosecution of the counterclaims at the time that I did but when conferred with as a dismissal of prejudice because I found myself with a position where I could not get complete and adequate relief admittedly so because admittedly I cannot get relief by reason of my alleged violation of Federal Aviation Act.

If I state below, I could not have gotten complete and adequate relief.

And therefore I decided to suspend — the only risk I was taking was on the statute of limitations, as for a state to avoid that problem.

And that’s the only reason why I asked for a stay rather than for a voluntary nonsuit.

I have an absolute right to withdraw seven days before they filed their reply under the rule.

But of course, while TWA was making a motion to dismiss these counterclaims on various grounds and implying approval by the CAB, it was not until they filed a replies on January 23rd 1963 that they asserted as an affirmative defense an alleged approval by CAB of this voting trust.

It is not true to state but I’m not before the CAB for the purpose of establishing a defense by them.

I’m before the CAB because of what is a clear violation, in my judgment of the Federal Aviation Act.

It was also something I filed before the CAB, Your Honor, because of the most shocking thing which took place in December of 1962 and that is when after they took control of this airline in December of 1960.

After six months thereafter, they filed a complaint seeking divestiture of our stock which we’d acquire pursuant to the CAB approval.

After they had imposed upon TWA an additional loan of $147 million on terms and conditions that the entire amount would mature all at once if the voting trust ever terminated, what did they do?

Without right to vote 78% of the stock, but developed a plan to merge TWA with Pan Am.

When the chief executive of Pan Am and two other directors were also directors of the Metropolitan and when the chief executive of Pan Am is a chairman of the finance committee of the Metropolitan.

Notwithstanding the fact that both President Truman and President Eisenhower have not accepted this doctrine of the chosen instrument concept that Pan Am has been advocating, what Pan Am has done was first to acquire American Overseas Airline and now, through the Metropolitan tried to completely take over TWA.

Now that’s what happened.

That’s what triggered — and why is that merger that — which they filed with the CAB stock because of the complaint which we filed before CAB.

Now, the latest efforts of the — these additional defendants in this lender control management are engaged in to prevent us and prevent the stockholders from controlling this airline occurred very recently.

Two — the two company had a contractual right to be sure with the 22% penalty if you please, to pay back these insurance companies and thereby terminate the voting trust.

Well last year, last summer, we went to the CAB for permission to do just that.

By that time, the 22% premium reduces and were down to about 16.5%.

But that way, we’d also be reacquiring 6.5% and those were presumably the premiums of the economic impact on us with substantial but something that — it was important, it is important to us to regain control of this airline.

Well, TWA opposed that before the CAB.

Chester C. Davis:

TWA — the management of TWA opposed before the CAB the right of the two company, its 78% stockholder to take steps to pay back these insurance companies and terminate the voting trust.

The CAB held that if we dispose of our interest or control of Northeast Airlines in 1962, they permit us to acquire control of another sick airline, Northeast Airline.

They said, if we got rid of Northeast Airlines, then we could go ahead and exercise our contractual rights to payoff these insurance companies and terminate the voting trust without being involved a new concept, a new acquisition of control.

What does TWA do?

They appeal for the Second Circuit and I’m sorry to say Your Honor, the Second Circuit upheld TWA and set aside the order of the CAB.

That is a matter which I know the CAB is planning to file a petition for a review, I know I do.

But that is the last thing which has occurred in this struggle between the owners of this airline and these lending institutions to have acquired control of TWA, to have kept it as a captive market for their financing plans and other plans.

And that is basically clear Your Honor the problem — the basic problem which is involved in 501.

Our position —

Arthur J. Goldberg:

Mr. Davis (Inaudible) they’re doing?

If your business position that you say is (Inaudible)

Do you say they have the right —

Chester C. Davis:

Yes.

Arthur J. Goldberg:

(Inaudible)

Chester C. Davis:

No.

Arthur J. Goldberg:

(Inaudible)

Chester C. Davis:

I understand your question Mr. Justice Goldberg and I tell you the answer to it is, the decision to suspend the litigation of the counterclaims did not take place after this business decision or with it.

It took place before.

The motion to dismiss the complaint was heard and decided at the afternoon of February the 6th.On February 1, I wrote a letter to the Court with copies to the additional defendant telling them that I was filing this complaint with the CAB and the problem I had in prosecuting these counterclaims.

I filed my motion for a stay of the counterclaim on the morning of February 6th before I knew what the decision of the District Court was going to be on the motion to dismiss the complaint.

It is not true as a fact that the decision to suspend the counterclaims came after this business decision had referred to namely this — the state — the statement of position which I took on the complaint.

The course of conduct that followed in this counterclaim is entirely independent to that.

That was the result of things which occurred — I was — there were two of us working that — well, we’re more than two at that point there but we worked it pretty fast — pretty fast clearly.

The sequence of events is their replies asserting this defense was filed on January 23, 11 days following the handing down of the decision for (Inaudible) as I recall came down January 14th.

By February 1, I decided to make the move before the CAB.

I prepared the papers, I got them filed.

I notified everybody on February 1 in my intention to suspend the litigation to counterclaims.

Now, on the afternoon of February 6th, the court denied my motion to dismiss the complaint, and on February 8th, this is when I found my statement of position and suspend it.

So far as the discovery on the counterclaims was concerned, I stopped the lit — I stopped litigating the counterclaims and announced my intention to do so on February 1.

Arthur J. Goldberg:

Is that what the (Inaudible) had said?

Chester C. Davis:

I announced on February 1 by a letter to the Court and to all party, but by my papers, actually it was not filed until February 6th; I see, I believe on February 5th, but anyway, on the morning of February 6th, is when I made my motion for a stay.

That afternoon, at five o’clock I believe it was when the Court called us in, announced its decision from the bench on the motion to dismiss, the questions there were, “What about the stay on the counterclaims?”

Which had been scheduled to be heard I think on February 18th — been set out on February 18th.

And then it’s when they — on the 6th or the 8th, I forget which date it was when the District Court said, “Well, we might as well consider that now too”, and denied my motion.

Arthur J. Goldberg:

(Inaudible) to deny your motion to stay was in — on February (Inaudible)

And was the (Inaudible)

Chester C. Davis:

That is correct Your Honor.

Arthur J. Goldberg:

Is that correct?

Chester C. Davis:

That is correct, but that took place after you see — the action I took on the complaint.

I’m not pacing myself very well on this either.

I’ve got very little time left, and I’d like to reserve in rebuttal, but let me say in connection with something that was mentioned yesterday, this — the main relief I’m seeking on the counterclaim is to terminate this voting trust.

I’m also claiming damages, the figure of $45 million referred yesterday is that we claim as damages against these additional defendants is primarily for their conduct, particularly their conduct after December 1960 and has nothing to do whatever with respect to the claim that TWA is claiming that its suffering by reason of — a violation of the antitrust law.

Mr. Chief Justice, may I reserve the balance of my time for rebuttal?

Earl Warren:

You may.

Chester C. Davis:

Thank you.

Earl Warren:

Attorney Bromley.

Bruce Bromley:

Mr. Chief Justice, may it please the Court.

Two principal questions are presented for review.

First, is it a violation of due process or an abuse of discretion for a District Court to dismiss a party’s counterclaims with prejudice for repeated and deliberate refusals to obey court crucial discovery orders and the final refusal to prosecute when the refusal decision was the client’s decision with full awareness of the consequences including a dismissal of all of its claim with prejudice.

And the second question I apprehend is this, “Is the CAB jurisdiction so broad that the District Court has no jurisdiction over claims alleging conspiracy to violate the antitrust laws, prima-facie torts, and breaches of contract”.

I hope I can show that the answer to each question is no.

In 1960, Howard Hughes and his wholly owned company Toolco (Inaudible) — induced the insurance companies and the group of banks led by Irving to lend TWA a $165 million to buy a jet aircraft.

Because of the incredible mismanagement which Hughes had inflicted upon TWA, the loan was ultimately conditioned upon Toolco’s placing it 78% of stock of TWA in a voting trust.

The purpose of the voting trust obviously was to make sure that TWA’s management was independent of Hughes until our loans were repaid.

Now whatever degree of control the voting trust represents, it was established and limited by contract.

It was and is temporary and can be terminated at any time by TWA without any penalty and by Toolco with only the normal provision to make sure that if a third party buys out our loan, our rate of return on our money will be secured.

Toolco’s repeated assertions that TWA’s management that is lender-control is hardly accurate.

The lenders have never exercised any control over TWA’s management including its decision to bring and prosecute the lawsuit in 443.

The actions of the lenders have been confined.

They were pointing two entirely independent trustees, Mr. Hughes appointing a third which independent trustees promptly proceeded to elect an independent and outstanding board of directors and that’s all we’ve ever done.

Bruce Bromley:

Now, on February 1962, the counterclaims were filed against TWA and under Rule 13-H, we eight were joined as additional defendants.

An understanding of the counterclaims, I’m sure is vital to show how important discovery was to us and also to show that Toolco’s jurisdictional argument is frivolous.

Mr. Davis has saved me the trouble of summarizing the counterclaims except that he hasn’t made it quite accurate.

The first, third, fourth and fifth counterclaims and there are five of them altogether, as the sixth, we’re not concerned with, alleged numerous violations of the antitrust laws, the gist of those charges is that the additional defendants have conspired since prior to 1956 if you please, to monopolize the trade of lending money to air carriers have conspired to fix high interest rates and have conspired to monopolize the TW market for finance — TWA market for financing.

And as an important part of those charges, it is alleged that we, the additional defendants, rather than Hughes and Toolco caused delay in the TWA jet program, and forced Hughes to put Toolco’s stock in the voting trust.

Now those underlying facts are charged as a prima facie tort.

They are charged as a violation of Delaware state law, they are charged as breaching a — breaches of contract.

The counterclaims seek equitable relief and accounting $45 million for TWA derivatively and $308 million for Toolco as damages to it.

Now the second counterclaim which so far I have not mentioned seeks equitable relief only.

It alleges a violation of Section 408 of the Aviation Act, by three only of the eight additional defendants, Metropolitan, Equitable and Irving.

It charges that Metropolitan and Equitable are engaged in the face of aeronautics within the meaning of Section 08 — 408 and have unlawfully obtained control of TWA.

Now that counterclaim is the only counterclaim that has anything at all to do with the Federal Aviation Act or the CAB jurisdiction.

It was dismissed by the Court of Appeals for that jurisdictional reason as the three named additional defendants had pleaded it should be.

Now, I submit to the Court that these voluminous counterclaims were obviously brought to bring pressure upon TWA’s financing institutions to induce or compel TWA to drop its suit against Toolco.

But that step was a management decision with which we lenders should not, would not, and did not concern ourselves.

From the very beginning of the filing of these counterclaims in 1962, not more than three years ago, we additional defendants believe that the allegations of the counterclaims were false in all material respects.

We believe if — that we could show if given the opportunity that Hughes was personally responsible for many of the acts alleged in the counterclaims.

We were confident that we could show that Hughes himself had deliberately pushed TWA to the verge of bankruptcy in 1960 in order to reach personal — to reap personal tax benefits for himself and his company.

And we immediately on the very day the counterclaims were filed, served a notice to examine Hughes.

We immediately started to seek the kind of discovery that a defendant is entitled to.

However, it took us over a year really to accomplish anything and then we were met by a blank wall and a refusal to give us what we clearly were entitled to.

Now, this obstruction was directed by the client.

It’s not a case sir of an unwise lawyer, a careless lawyer, a mistaken lawyer, not at all.

Instead, it represents a determined effort by Hughes and his company in which this gentleman was merely an instrument to maintain the counterclaims as long as it could but to prevent discovery of the facts at any and all costs.

Now, there were three separate categories of information which Hughes refused to produce.

First, there were a group of documents which he refused to produce claiming they were covered by the attorney-client privilege.

Hughes had used his lawyers as we showed before the Special Masters, business agents to negotiate the very agreements involved in the counterclaims.

But these lawyers had made affidavits in this and other cases as had their clients which disclosed all of the confidential relationship between the lawyer and client.

And one of those affidavits as the Special Master said really constituted the first draft of the counterclaims.

Toolco had also pleaded as a defense to the charges of the complaint that everything it did, it did on the advice of counsel.

Bruce Bromley:

So do you wonder that the Special Master after looking at the papers and hearing extensive argument said the privileges waived — been waived, produced that arguments.

Mr. Davis went to the District Court.

We argued it all over again.

The District Court affirms and produced the documents.

Davis wanted reargument.

The Master gave it to him.

He looked at the documents himself.

He again ordered their production.

Again, the Court affirmed.

Mr. Davis went to the Court of Appeals then with the — an appeal and the petition for writ of mandamus both of which were denied by that Court.

And then, Toolco bluntly refused to produce the documents and Mr. Davis wrote a letter to the Court, the District Court below, on January 23, saying that Toolco would not obey the Court’s order and I want to read it to you.

It’s (b) — page 385 at a pretrial hearing, (b) is this —

At the pretrial hearing, January 28, 1963 the Court — you wrote me a letter, Mr. Davis on January 23rd, which has been made part of the record before the Special Master.

I will just refer to the last three lines of the second sentence of the letter, which read, “I must respectfully decline to comply with your said orders, at least prior to a determination of this motion to dismiss now pending before Your Honor”.

The judge continued, “The question I want to ask you about these three lines is, “Did you make this decision on your own or did you discuss this with your client?”

Mr. Davis, “I discussed it with my clients Your Honor”.

The record shows that those so-called privilege documents were conveniently assembled.

It could have been produced in an instant.

And yesterday, Mr. Davis told Your Honors that he gave those documents to the District Court to do whatever it wanted with them.

That is untrue.

He gave the documents to the District Court to review in connection with its ruling as any court should do.

The Court then returned the documents to Davis and ordered him to give them to us and we were met with a complete and blunt refusal.

Now the second deliberate default of Toolco is with respect to tax documents.

Toolco said in a footnote in its reply brief at page 12 and Mr. Davis told you yesterday that the tax documents after all were just Toolco’s 1961 and 1962 tax returns which could be handed over in a moment.

That is not true.

If you will look at B-237 to 240, you will see that the documents in question are listed in a long schedule of 23 separate groups of tax documents with all of which we sought and all of which Toolco refused to produce.

And only the last two of those 23 groups concern 1961 or 1962 returns.

All of the remainder relate to pre-1961 tax information.

And Mr. Davis knows very well that much more is involved than merely these two little tax returns for 1961 and 1962.

As page B235 of the record shows, Mr. Davis objected to the production at one time before the Court because as he said, “It would take weeks to try to gather all the material called for.”

Bruce Bromley:

Now this information I submit to the Court, we were confident, would have exposed Hughes’ motives for delaying the TWA financing.

From the document which he did produce for us, we believe that we could show a pattern of abuse of his control of — to TWA.

And we believe we could show that the delay of the 1960 financing was his fault in the early record of the company.

For example, we were confident that the withheld documents would show that Toolco bought numbers of these jets, in fact all of the jets instead of TWA and leased them to TWA on a day-to-day basis in order to make large profits for Toolco and for Hughes which profits increased with every days delay in working out a financial plan.

We hoped to show that Toolco charged off the jets which it bought and leased and accelerated depreciation against which it charged the daily rentals.

And when it finally sold the leased jets to TWA, it sold them at cost less straight line depreciation, thus realizing millions of profits for Toolco and to the great damage of TWA and also being able to charge all these gains as capital gains and not as income.

Thus, we submit the documents had we ever been able to get hands on them, would have tended to show that Hughes and not be additional defendants who caused the damage to TWA with which we were charged in the counterclaims.

Moreover, we expected the hold — that to show that the withheld documents would show that Hughes had used TWA as a device to avoid tax so far as Toolco was (Inaudible) — concerned, Hughes owned a 100% of Toolco.

Toolco made enormous profits, if it declared dividends, Hughes would have had to pay income tax on them.

If the profits however were unreasonably accumulated by Toolco, it would have to pay a substantial penalty tax under 531.

And to avoid both taxes, Hughes may well have kept TWA impoverished so that Toolco could justify its otherwise unreasonable accumulations by reference to TWA’s needs.

Further examples of what we — were sure — we could or hopefully could prove by these documents and by Hughes’ examination are 18 and 19 of our brief.

Now both the Special Master and the Court found good cause for and ordered production of these documents.

Hughes — Toolco refused to produce them although they were readily available.

And at a time of neither of these defaults, if you please, was there any assertion that they were justified by Panagra or by any lack of jurisdiction in the ordering court.

The third default was Hughes’ refusal to appear for examination by us.

He would have been I submit obviously the most important witness from our standpoint in the case.

And with the aid of the documents, we though we could have forced him to admit his tax manipulations and that he had deliberate caused to his lawyers many of expert with which we are charged.

Now the date for Hughes’ examination was set many, many, many times and adjourned on Toolco’s motion.

Hugo L. Black:

All of that was relevant with reference to the antitrust proceeding, is that right?

What (Voice Overlap) —

Bruce Bromley:

All of this was relevant to the counterclaims, sir.

Hugo L. Black:

To the counterclaim only?

Bruce Bromley:

To the counterclaims.

Both?

Bruce Bromley:

Both.

Hugo L. Black:

For the claims only?

Bruce Bromley:

Yes — but no, there — I suppose there were reference — they were relevant to both because there is an overlap between the allegations of the complaint and the counterclaims.

The complaint says that Toolco damaged TWA.

TWA says we damaged — Toolco says that we damaged TWA as a part of this.

Bruce Bromley:

So there is that kind of an overlap, so these documents were relevant to both, Mr. Justice Black.

Arthur J. Goldberg:

(Inaudible) only the second counterclaim had reference to (Inaudible)

Bruce Bromley:

Yes sir.

Arthur J. Goldberg:

(Inaudible) the court properly exercised that discretion and (Inaudible) allegations of that kind.

Bruce Bromley:

That’s right.

Arthur J. Goldberg:

(Inaudible)

Bruce Bromley:

That’s right Your Honor.

And that’s the second question I said was here for review.

Now, may it please the Court, I was starting to say the third default was Hughes’ refusal to appear.

There’s no doubt that what he refused to appear and there’s no doubt that Toolco was told of what the sanctions were and what might happened and that it was Toolco’s decision to make the default in appearance.

Dismissal of the counterclaims and with prejudice was justified under Rule 37 and Rule 41.

Now in the Link case, I do not have to remind you, I’m sure that his Court sustained dismissal with prejudice for failure to prosecute where all that happened was the plaintiff’s counsel had been lax in prosecuting his client’s personal injury claim and had failed to appear at the pretrial conference.

Here I say again unlikely, this refusal with the clients and this case I submit is far more grievous than either the dismissal with prejudice in Hammond Packing or in Link so much so, that I say to Your Honors that I rely not only on the majority opinion which I think is clearly right, but I also place almost equal reliance on the dissent.

The dissent said that no client should be penalized for the conduct of his lawyer and I quote from page 648 of 370 U.S., unless notice is given to the client himself that such a threat hangs over his head, “Such a rule would do nothing more that incorporate basic constitutional requirements of fairness into the administration of justice of this country”.

I turn now to the argument that Toolco makes to excuse its conduct below.

(Inaudible)

Bruce Bromley:

We served a notice to examine Toolco through Hughes, its managing agent.

Nobody was ever able to catch him to serve him with the subpoena except that finally under the Courts prodding, Mr. Davis accepted a subpoena in — on the complaint on Hughes’ behalf.

But far as the counterclaim — I rely on my notice to examine Toolco through Hughes’ managing agent.

That was never challenged by the way that he was the manning agent — managing agent and the notice was proper.

So on the basis of this complaint it was —

Tom C. Clark:

I gather that Hughes is not accounted (Inaudible) the service by his attorney.

That’s the only ground he relied on in order to get (Inaudible)

Bruce Bromley:

No, I didn’t get service on him himself and I didn’t have to Mr. Justice Clark because under the rule, I was entitled to his appearance, as manning — managing agent of Toolco.

I didn’t try to serve him with the subpoena.

I didn’t have to.

Now on the basis of the complaint which Mr. Davis says he filed with the CAB, he asked the Court for a stay and three times he told the Court that he was not seeking a voluntary dismissal but only a stay.

He now concedes the stay would have been improper.

He contends now that the District Court didn’t have jurisdiction to entertain the counterclaims even for the purpose of conducting discovery.

I say that argument as applied to the counterclaims is frivolous.

Bruce Bromley:

The argument that he makes here is quite different from what he made to 443.

In 443, he said I have a lot of orders from the CAB going way back to 1944 in which all of Toolco’s conduct was approved.

Byron R. White:

Mr. Bromley, are there some specific provision of the rule that provides for dismissal of the claim where a corporation failed to produce his managing agent?

Bruce Bromley:

37 (d) — (a) (b) (c) (d).

Byron R. White:

I don’t know where the — what line does — where the (Inaudible)

Bruce Bromley:

If a party or an officer or a managing agent of a party willfully fails to appear before the officer and was to take his deposition after being served with a proper notice.

Byron R. White:

Now, who’s to be served, the managing agent or the party?

Bruce Bromley:

The party sir.

Byron R. White:

How does this — how does the managing agent go for the — refused — they must be served.

Bruce Bromley:

Of course, I submit this rule says clearly and has been so interpreted time and time again that it’s sufficient to serve the party.

That calls upon the party to produce the managing agent.

And since here, Toolco was Hughes and Hughes was Toolco, it was merely calling upon Hughes to produce himself.

I say in the complaint Mr. Davis says, “I have a lot orders from the CAB”.

In this case, he has no orders.

His claim is that we defendants may as a result of his complaint sometime in the future obtain a good defense to his counterclaims.

He urges this might be so because the CAB at some future time he says may issue an order retroactively approving our acquisition of control of TWA 1960.

And he says that might retroactively exempt all of our conduct.

Now, in fact nothing that the CAB might ever do, could in anyway exempt us from liability from any of the Acts alleged in the counterclaims.

Section 414, the only exemptive section, provides that a person affected by an order under 408 shall be exempted from the operations of the antitrust laws and other restraints insofar as maybe necessary to enable such person to do anything authorized, required or proved by such order.

Clearly, as this Court pointed out in Panagra and the CAB confirms in its amicus brief here, this Section has only perspective application and thus relates only to acts taken by an affected person after the entry of an order, under Section 408, if such an order in the future could not possibly exempt, could not possibly be construed to reach backwards prior to 1956 and exempt us from all the asserted liabilities.

In making the argument for the CAB order might have this impossible retroactive effect of eliminating private lawsuits, Toolco also overlooks entirely Section 1106 of the Act which provides that nothing contained in this chapter shall in any way abridge or alter the remedies now existing at common law or by statute but the provisions of this chapter are in addition to such remedies.

Now, Toolco places so far up until today — maybe today a great reliance in Panagra.

But of course, as you all realized full well, Panagra involved only an agreement to allocate air rules.

Arthur J. Goldberg:

(Inaudible) correct me if I’m wrong, you made a statement that they never raised Panagra earlier in the litigation.

But Panagra was decided in January 1963 so they could not have raised it much earlier than they did.

Bruce Bromley:

No sir.

I said they’d — they didn’t —

Arthur J. Goldberg:

Did I misunderstand you that that’s what I —

Bruce Bromley:

To this extent sir, I said they did not raised Panagra or any lack of jurisdictional argument.

It didn’t need Panagra to have any lawyer realized that there was a question of jurisdiction.

Arthur J. Goldberg:

I understand that, but they could not have raised Panagra before Panagra obviously was decided?

Bruce Bromley:

No, and I didn’t mean to say so.

Well, Panagra dealt with air routes and air carriers and tariffs of the air carrier’s subsidiary.

And the only question presented is that Department of Justice under the antitrust laws are the CAB, the proper ones to act.

Now, Section 411 under which that proceeding was brought does — this is not included under Section 414, the exemptive section.

So, if there was any contention that our Act came under 11, we couldn’t possibly be exempted by it.

Now, I submit that the record supports the holding of the Court of Appeals that Hughes and Toolco in this matter looked upon discovery as some sort of a gain and that Toolco’s position regarding jurisdiction is and was nothing more than a part of that game, the purpose of which was to harass the additional defendants, try to get them to call off the suit against Toolco without giving the additional defendants an opportunity to establish that the counterclaims had no support in fact.

And I submission — I submit for these two reasons that judgment below should be affirmed in all respect.

Now finally, the client here Toolco, not only had notice and directed a default but that default continued in the Court of Appeals because after we got up there, Mr. Justice Kaufman repeatedly asked Davis whether if that Court reversed on — conditioned on Hughes’ appearance — Hughes would comply with the order to appear and Mr. Davis would not even then agree that Hughes would appear and I submit sirs that the time to negotiate with this gentleman has passed and the judgment should be affirmed.

Earl Warren:

Mr. Davis.

Chester C. Davis:

If Your Honor please, confusion which I think arise between the position I’m taking of that — of Mr. — Judge Bromley is that this is not a situation of a claimant who wants to continue to litigate and failed to comply with the Court order as was involved in the Link case, but this is a question of the right of the claimant who said, “I cannot get complete and adequate relief, now, I want to stop the litigation”.

In the minute he says that, then he has no longer any obligation as I see to produce anything.

Insofar as the counterclaims are concerned, the confusion appears to be that merely because in dividing the single course of conduct and why I claimed to be the various ways to violate the law.

In my second counterclaim repeating other allegations, I said and this furthermore violates the Federal Aviation Act of Section 408.

And everybody admits that I could not get relief and my central relief is to terminate this voting trust and I cannot get it from the District Court.

And Mr. Bromley would like us to overlook the fact that I made the decision to suspend litigation on the counterclaims before I was required to produce these documents he’s talking about.

Now let’s talk about the need of Mr. Hughes for the purpose of enabling themselves to defend themselves against the allegations of the counterclaims by reason of their conduct and the way they used their mono (Inaudible) — their monopolistic powers and conspired is beyond belief.

The truth of the matter is that these people anticipated my counterclaims.

In anticipation of my counterclaim, they filed this complaint.

And I would like to call the Court’s attention first the testimony of Mr. Tillinghast which appeared in the (Inaudible) — Appendix before the Court of Appeals, A399 when he said — and I was questioning about the circumstance under which he authorized the filing of this complaint.

I was trying to find what it was all about.

And he said, “I believe in a telephone call to counsel, say that I heard from Mr. Gilmore some rumor and I can’t remember just what it was at this point, indicative of the fact that the two companies might be preparing to institute an action out in Los Angeles.

And therefore I thought we ought to go right ahead with it and not run that risk”.

And that should be kept in line with the testimony of Mr. Kokey (ph) which I quoted in part in my brief in 501 at page 16.

Mr. Kokey (ph) is the Senior Vice-President of TWA.

Question: “Do you have any recollection of what — if anything was said about what interest would be made to obtain the deposition of Mr. Hughes?”

“There was a discussion that I recall”.

he was referring to this executive committee meeting when they decide to file this complaint.”

There was a discussion that I recall that one of the reason TWA was to file the suit first was to obtain the right of prior deposition.

I am not completely familiar with these legal terms but I can only state it was obvious that TWA had the right for prior deposition that the deposition of Mr. Hughes will be taken before the deposition of any of the TWA witnesses.”

Chester C. Davis:

And then — this answer, “There had been discussions that if it was necessary for Mr. Hughes to make a deposition, that there would be a probability that it would be easier to reach a settlement, yes.”

Earl Warren:

Mr. Davis —

Chester C. Davis:

Hughes —

Earl Warren:

I understood Judge Bromley to say that your counterclaim alleged certain conduct on the part of these added defendants and the effect of that conduct on their part so far as TWA was concerned and I understood him to say that they proposed to prove and could prove that this was actually the conduct of Mr. Hughes personally and that he was responsible for the effect of it on TWA.

Now, I may have been mistaken but that’s the way I understood it.

And if so, if that is true, what is your answer to the question as to whether Mr. Hughes is a proper witness?

Chester C. Davis:

Well, Your Honor, the fact is that that — the reason for my suspension of the counterclaim is wholly unrelated to the discovery of Mr. Hughes of any documents.

That was the problem of not being able to get adequate relief.

Insofar as Mr. Bromley, you’re quite correct Your Honor, Mr. Bromley does try to say that he needed Mr. Hughes very badly for the purpose of the defense.

The thing that Mr. Bromley did not explain to Your Honor however is how can Mr. Hughes’ conduct had anything to do with respect to what they did subsequent to 1960 after the voting trust was created and what did Mr. Hughes’ activities have to do with respect to what is alleged in the counterclaims which is their conspiracy to make senior financing available upon certain terms and conditions.

I don’t deny that it could — arriving point in the litigation when Mr. Hughes’ testimony might be important to them and presumably they will make a showing to that effect.

What is also ignored here Your Honor is that all the deposition that took place by order of Judge Metzner, we would not and I was not permitted to have any deposition, any discovery on the issue of the counterclaim.

In that connection, Mr. Justice Goldberg, the Court of Appeals is in error in referring to the record as indicating that there had been a lot of deposition taken on the issues of the counterclaims.

There was some deposition taken on the issues of the complaint.

No deposition was taken on the counterclaims.

They were furnished with a mass of documents because they were asking for the same thing TWA was asking for and so long as I was producing the TWA, I was also giving it to them.

It is true.

They did certainly with a notice for the production of documents and for the examination Mr. Hughes as an alleged managing agent of the Tool Company.

But the issue that is involved here Your Honor is not the question of discovery permitted or not permitted.

The issue is two-fold and that is primarily whether or not a claimant who reaches the point where he realizes he cannot get complete and adequate relief, may suspend litigation without legal prejudice to the additional defendants, or any defendant.

And the moment he decides to stop prosecuting, what duties and obligation does he then act?

The other question which is involved is the one which it — unquestionably is more complicated that is involved in 443 and that is by reason of the course of conduct which I am alleging in the counterclaim, which unquestionably involved the Federal Aviation Act and the CAB, they admit it.

There is where you have the question even though we claim that no orders of approval.

They claim even in their brief today, they claim they got approval from the CAB for this voting trust.

Under that state of affairs, I don’t see how any alternative but to say then, I’ve got to get relief from the CAB first before I can continue to litigate.

I cannot be on both places at once.

I don’t want to incur the expenses of litigation if I’m not going to be able to get the relief I’m seeking, if I have to get relief from the agency first.

That is the decision that was made on February 1.

That is all that occurred.

What they’re not trying to do however are trying to involve and make this things also complicated that this was a question of a deliberate refusal on my part to produce documents which I had available to produce to them.

Chester C. Davis:

I admit that with respect to the attorney-client privileges after I’ve exhausted all my legal remedies, I did make those available to the Court.

I did refuse to waive the attorney-client privilege.

Now, what is the confusion there is Your Honors and — that is a question which — did not plan to take the time to argue, it was recognized that all of these documents that were withheld where in fact communication between attorney and client.

The question was whether they had been waived.

We did not claim the attorney-client privilege with respect to negotiations or activities that the lawyers participated in.

They claim that it was waived primarily because of an affidavit filed before the CAB and because of some assertions made in my pleading.

I claimed that until such time as they were entitled to the documents where I could waive my defenses in any event, so far as I was concerned, I was in no position to waive the attorney client privilege and if the Court to whom I physically surrender the documents, furnished them through these additional defendants, then so far I was concerned, I was protecting my attorney-client privilege to the extent to which I could at least until after I had appellate review.

Because I did file for it, interlocutory appellate review of that question, it was denied to me, not on the merits, but they denied me of the interlocutory appeal and denied my writ to bring up that question for review.

Now, there’s a lot of talk about this leases and tax benefits since I’d like to straighten down half a second.

The lease that they referred to of course are leases which — submitted to the CAB and approved by the CAB and it is not true that we were realizing any particular tax benefit.

This argument that the Tool company — is my time, I have five —

Earl Warren:

You may take a minute or so to —

Chester C. Davis:

I realized any tax benefit under 531 is just simply does not make any sense.

From the tax point of view, it makes no different whether the parent as we were furnished additional capital funds to a subsidiary in form of cash or provided that a systems in the form of making down payments on orders for aircraft or for purchasing of aircraft to be made available to the subsidiary.

And the tax point of view, from the 531 point of view where it’s done this way or that way, it has exactly the same significance insofar as any unreasonable retention of income is concerned to 531.

Chief Justice, thank you very much for the extra time you’ve given me.