LOCATION: New York Times Office
DOCKET NO.: 402
DECIDED BY: Warren Court (1962-1965)
LOWER COURT: United States Court of Appeals for the Seventh Circuit
CITATION: 377 US 426 (1964)
ARGUED: Apr 22, 1964 / Apr 23, 1964
DECIDED: Jun 08, 1964
Facts of the case
Media for J. I Case Company v. BorakAudio Transcription for Oral Argument - April 22, 1964 in J. I Case Company v. Borak
Audio Transcription for Oral Argument - April 23, 1964 in J. I Case Company v. Borak
J. I. Case Company et al., versus Carl H. Borak, et cetera.
Mr. Davis, you may continue with your argument.
Walter S. Davis:
May it please the Court.
As we closed yesterday afternoon, the question had arisen as to whether we've -- had attempted as our opposing counsel has suggested to sneak a question in on this petition for the writ.
I would refer to the -- the Corporate -- petitioner's reply brief, pages 10 through 15 which I reread last night.
I think it is a complete answer to the assertion and I -- I subscribed to it.
As I proceed with my argument and get to the statement of the question presented here, I think it will become obvious why the applicability of the state statute pertaining to security for expenses is inextricably entwined in the question that is before the Court on this grant of the petition.
Now, as I had said yesterday, Count 1 of the complaint is not before the Court.
Count 2, which our trial court, the District Court for the Eastern District of Wisconsin is before the Court.
Count 2 was held by the trial court to sufficiently state a federal question for the purpose of obtaining a declaratory judgment as to the validity of proxies.
Our trial court held that the reference to Section 14 (a) of the Securities Exchange Act was sufficient to give it jurisdiction to give if requested a declaratory relief pertaining to the proxies that were solicited for the stockholders' meeting authorizing the merger.
With respect to the balance of the claim of Count 2 and -- and here is the important distinction with respect to the claim for rescission and damages, our trial court said that that did not lie within federal law, that that claim was essentially a state claim, a claim for a common law, de -- derivative type relief.
And accordingly, since it was a state case of the state security for expense statute applied.
Upon the respondent's appeal to the Seventh Circuit, as I mentioned yesterday, they reversed the holding of Count 1 and that is not before the Court.
But as to Count 2, the Circuit Court for the Seventh Circuit held that the claimed violation of Section 14 (a) of the Securities Exchange Act was sufficient to make the cause of action uniquely grounded in the federal law.
The Court further held that Howard versus First, a decision in the Second Circuit was wrong.The opinion cites Howard versus First, as being contrary to its own.
The Seventh Circuit also held that Dann versus Studebaker Corporation in the Sixth Circuit was unnecessarily limited and would not be the rule in the Seventh Circuit.
And accordingly, upon our petition, the -- this Court granted the writ for certiorari to review the question as stated in the petition whether Section 27 of the Act grants a federal cause of action for rescission or damages to a corporate stockholder in respect of a consummated merger which was authorized pursuant to the use of a proxy statement, alleged to have contained misleading statements violative of Section 14 (a) of the Act.
I would like to make about three points to the Court if I may before I turn this (Inaudible) over to Mr. Whyte who is representing the corporate petitioner.
First of all, we would start with what we believe is a general agreement among all party here -- all parties here.
The petitioners, corporate and individual, are of the view that Count 2 of this complaint states a derivative cause of action.
That is an action that is brought in the right of the corporation, that it's really the corporation's cause of action that the corporation is not enforcing, so a stockholder has appointed himself as champion of the stockholders and is bringing it for the corporation.
The Securities Exchange Commission, amicus before this Court at pages 16 and 17 of their brief, I believe agree with us.
Where at the top of page 17 of their brief, they state, "We do not dispute the characterization of the action as derivative at least insofar as it seeks damages and rescission."
And that certainly is in accord with our view of the case.
The respondent, Carl Borak, the stockholder, has not conceived that it is derivative except for the purposes of extended argument.
I certainly not going to accuse counsel of having a -- reached an agreement with us but I think it is significant that counsel recognizes that this is an important point and an important feature of the entire case because they very readily assumed and admit that Count 2 maybe derivative for the purposes of extended argument.
Now, our position is this, that if Count 2 is derivative then under the rule of Howard versus First, we must look to the statutory history of the Securities Exchange Act and determine whether the Securities Exchange Act is intended to create any substantive rights in a corporate issuer.
The Second Circuit in going through this, processed -- found there was no such legislative history.
In fact, the legislative history was to the contrary.