Smith v. Sperling – Oral Argument – March 27, 1957

Media for Smith v. Sperling

Audio Transcription for Oral Argument – March 28, 1957 in Smith v. Sperling

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Earl Warren:

Number 422, Office Employees International Union, Local Number 11, AFL-CIO, Petitioner, versus, National Labor Relations Board.

Oh, wait a minute, wait a minute, wait a minute.

Well, I beg your pardon.

I — I just skipped one case result.

Number 316, I’m sorry, Charles B. Smith, as a — as Special Administrator of the Estate of Edward S. Birn, Deceased, Petitioner, versus Milton Sperling.

Mr. Levy.

Herman H. Levy:

Your Honors, this case comes here on certiorari for the Ninth Circuit.

In a good many respects, this case is similar to the preceding case.

In the Swanson case or may I — at this point interrupt what I was going to say by answering Judge — Justice Brennan’s question directed to Mr. Doyle that in the event a — the directors of a corporation said to a suing stockholder, there’s no use of going on with this thing.

All we can do is try a lawsuit and if they were — if we get a judgment, it will never be collected whether under said circumstances, the stockholder would be stating the kind of a cause of action that a court of equity or rather would — would the situation be such as to warrant the alignment of the corporation as a defendant.

I must disagree with Mr. Doyle on that and answer no to that question.

However —

William J. Brennan, Jr.:

Otherwise, you would always have a realignment —

Herman H. Levy:

That is —

William J. Brennan, Jr.:

— of the corporation on the other side.

Herman H. Levy:

That is correct, sir.

However, if the issue between the stockholder in that given situation and the corporation with this, the stockholder says, “I don’t agree with you.

We will collect this judgment.

I know of assets that this man has.”

Under those circumstances, there was a real disagreement between the stockholder and this corporation.

The corporation being definitely against the stockholder, it assumes an attitude deliberately against him.

And whatever the motives may be of the individual directors will make up this directory.

They, nevertheless, are genuinely oppose to the basic underlying issues that the stockholder races in his charge of wrongdoing against these directors.

Charles E. Whittaker:

Mr. Levy.

Herman H. Levy:

Yes, Your Honor.

Charles E. Whittaker:

On Mr. Justice Brennan’s hypothesis, do you think there would be any equity sufficient to enable the plaintiff even to maintain the suit?

Herman H. Levy:

That depends on whether the plaintiff has alleged in his complaint —

Charles E. Whittaker:

Alleged the facts —

Herman H. Levy:

— wrong.

Charles E. Whittaker:

— alleged — suppose — assumed he alleges the facts that Mr. Justice Brennan assumed.

Herman H. Levy:

Well, I assumed that what Mr. Justice —

Charles E. Whittaker:

It’s just a matter of disagreement between the directors and the stockholder.

Is that enough to give the stockholder a right to supplant the directors in their judgment as to whether the suit should be brought?

Herman H. Levy:

No, Your Honor, but I assume that Mr. — Mr. Justice Brennan’s question assumed that the stockholder had alleged a series of facts which indicated wrongdoing upon the part of these individuals and the directors took this position and they said, “Yes, I guess you’re right.

These things are wrong but what’s the use of going ahead with this thing?

The corporation alone had spent a lot of money and on the line up, get a judgment against the man who has nothing and cannot collect.”

Now, if the stockholder says, “Well, the disagreement between you and me is this, I disagree on — on the basic premise that you have made.”

I say this man has a lot of money.

He’s got it hidden.

He’s got it concealed.

I’ll show you how to get it under.

And under those conditions, I say that the — that the — we contend that the corporation should be aligned as a defendant because there is an adversity of interest to align such a corporation, to align such directors on the side of the plaintiff to ally them with the plaintiff.

It would create an incongruity of the worst order because in the first place, bare in mind that the directors have no controversy admittedly with these alleged wrongdoers, they say, “We have no controversy with them.”

Taking Mr. Justice Frankfurter’s reasoning in the — in the Indianapolis case.

Why — how can you take a — a directorate of a corporation that says, in so many words concededly and admittedly, “We have no quarrel with these defendants.”

We say that what they did was not only proper.

It was not only right.

It was just and the plaintiff hasn’t got a case.

Furthermore, in this particular case, in the Warner matter, the defendant corporation joined in an answer with the alleged wrongdoers and it is conceded by counsel in that case that the directors believed that the conduct that the stockholder alleges was wrongful.

It was perfectly proper and just.

And they admit and the fact show that the corporation participated in this wrongful conduct because here, it was a contract made between a corporation, namely, Warner Brothers and Harry Warner’s son-in-law.

Now, the corporate — the stockholder comes along and says, “This was a — a device and a vehicle by which the money was to be siphoned out of the corporation into the hands of the president’s son-in-law.

Now, these things are not unusual.

As I pointed out in my petition for certiorari in this Court, the — the statistics on the — on — on the questions are really astounding.

Here is what the American Institute of Management says as late as May 14th, 1956, I’m quoting now from my petition for certiorari, Your Honors, on page 12.

They say, “Feather-betting occurs as top level management and extends down to the rank performance,” said AIM in the report to its 17,000 members.

And one of the biggest causes of feather-betting is nepotism.

Now, this is what this case is about.

Of course, nepotism, the — the real connotation probably applies to things governmental, but in its latest connotation, that word has become — has come to be applied to awkward situations.

In more than — I — I quote again in more than half of the 23,000 U.S. companies, AIM studied and executive and put his sons, cousins and brothers even an assortment of relatives on the payroll.

Herman H. Levy:

Now, this comes out of Time Magazine dated May 14th, 1956.

I have no reason to question the authority of the authoritativeness of this statement as a statistic.

Now, in listening to the arguments that have gone long in this — in — in the Swanson case, I — I observed, if I may say so state, a — a confusion.

The question in my humble judgment as to whether diversity exists or does not exist in any case, it has been clearly stated by Mr. Justice Frankfurter in the Indianapolis case.

And we have gone — we have actually, in our brief applied the reasoning of Mr. Justice Frankfurter in the Indianapolis case to the present case and we have said in point two, I quote from page 22 of my brief, The Warner directorate is a validly on the defendant side of the matter in controversy.

It was error to realign the corporation as a — as a complainant.

And using Mr. Justice Frankfurter’s words in the Indianapolis case, I said that only if the expensive judicial integrity, judicial integrity, in quotes, may Warner be alive with the complainant in this case in face of directors’ admissions which I test to say the least that they are not on the complainant side of the dispute.

In face of Warner counsels, that is the corporation counsels admission, that they are not antagonistic to the step.

They are antagonistic to the suit but the corporation is at one with the defendants in a common contention, namely, the challenge dealings in which if the corporation and these directors against whom we allege this wrongdoing, again, in a common contention, namely, to challenge dealings which — in which it and they participate are unlawful.

Felix Frankfurter:

Mr. Levy, may I interrupt you to just summarize the material on the basis of which the criteria in which you have invoked is to be determined.

What are facts in short —

Herman H. Levy:

In this case?

Charles E. Whittaker:

In the three months — yes, in this case, at least the generalities that one can agree with —

Herman H. Levy:

Very well.

Felix Frankfurter:

— interpolate in the bite of it.

Herman H. Levy:

Very well.

I have —

Felix Frankfurter:

What are the facts in this case which are before us?

I assume there’s no such controversy in this case as in the prior one as to what facts are really before us so —

Herman H. Levy:

I don’t think so.

Felix Frankfurter:

You don’t think so.

Herman H. Levy:

No.

Felix Frankfurter:

Now, then what are the facts —

Herman H. Levy:

Very well.

Felix Frankfurter:

— which I take it your Brother will agree with or with the usual differences of counsel in stating the facts.

Herman H. Levy:

I have stated these facts, Your Honor, in my statement of the case beginning at page 4 and continuing on until page 12.

Briefly —

Felix Frankfurter:

What are the sources?

Its complaint is just state —

Herman H. Levy:

Yes.

Felix Frankfurter:

— all the sources on which you — from which the facts arrived on which we must act on this case.

Herman H. Levy:

In this case, we have both alleged and, of course, there was testimony in this case as Your Honors.

I — I don’t think I have made that thing clear and if Your Honors haven’t read my brief, maybe I should say this.

Felix Frankfurter:

Well, I’m one of these judges who doesn’t read the briefs as it does.

Herman H. Levy:

Well, then maybe — maybe I should — maybe I should —

Felix Frankfurter:

Who deal any such compulsion and I have good reason for not doing it myself whatever or anybody else’s reason for himself.

Herman H. Levy:

Well, then may I — may I state the facts briefly.

Our client is a New York citizen and a stockholder of Warner Brothers Pictures.

He commenced this action in the District Court in California back in 1948.

He commenced it against his corporation, the Warner Corporation, Harry and Jack Warner, the president and vice-president of the company, Harry Warner’s son-in-law, Milton Sperling, and another corporation, namely, United, which was owned by the son-in-law.

Now, there would have been no question of diversity in this case who had it not been for the fact that Warner corporation, the stockholders company, is a Delaware corporation and the son-in-law’s company happens to be a Delaware corporation.

Now, having joined as defendants, the stockholders corporation, namely, Warner for short, and United, the son-in-law’s corporation, if there — if the corporation is realigned, that is the stockholders corporation is realigned on the side of the plaintiff, obviously, diversity is lost.

Having done so, the defendants put in an answer.

Now, the — by the defendants, I mean the corporation, Warner, Harry and Jack Warner, they all appeared by the same attorneys and joined in a common answer in which they denied, (1), that the plaintiff was a citizen of New York, (2), they denied all of the allegations of alleged wrongdoing and breach of trust that the complainant had alleged in this complaint, namely, the making of a series of contracts and the dealings between the Warner corporation and the son-in-law’s corporation which the gist of which was that there was over reaching and self-dealing, bringing about an unwarranted and unjust enrichment in favor of the son-in-law and to the detriment of the corporation.

Now, of course, this unjust enrichment didn’t stop merely with the making of a contract or with the signing of a contract or with the dealings of the parties over a number of years.

And incidentally, while this action was pending, amendments were made to this — this contract and this joint venture between the Warner corporation and the son-in-law’s corporation was not only continued but was increased in scope from time to time, more and more pictures were added which the son-in-law’s corporation was to produce and on which he was to get 50% of the profits.

Now, the — the basic claim of the stockholder here is that something was given away to the son-in-law by a doting father-in-law.

Now, that’s the summon substance of that.

Having taken the position, when — when I say having taken the position, I mean by the corporation that this was perfectly good and advantageous to the company, they were going to make a lot of money and this was — this was good business to do it.

The plaintiff went on to discovery and for a long period of time, there were — there was a lot of discovery, admissions, request for admissions and depositions and interrogatories to this effect.

Finally, we came down to pretrial.

There was no suggestion in the answer or there was no suggestion up to this time.

Now, this pretrial happens some two or three years after the action have been commenced or maybe four.

There was no suggestion up to that time that there was a lack of diversity here.

Judge Mathes at pretrial questioned counsel with respect to that and sua sponte raised the question which he was entitled to do and as the — this Court has held that this Court can do it all when — when it gets here.

In other words, if there was no jurisdiction, there was no jurisdiction no matter how long the case had gone on and no matter when it was raised or no matter how somnolent and sleepy everybody was on the question up to that.

Having raised that question as the findings show in this case, the judge made an order practically as follows and I — I stated in my brief this way, the merits of the controversy, namely, whether the Warner-United dealings are in fact unlawful and should be terminated and whether United — Warner-United contract should be ordered canceled to the extent that they remain unexecuted or not reach.

The Court ordered two issues to be tried, namely, one, jurisdiction, and two, the statute of limitations.

He said, he should be inquired into preliminarily before we go ahead.

Let’s see whether this Court has jurisdiction before we go on and rightfully so.

Herman H. Levy:

The parties were directed to present evidence and I have this in quotes and emphasize only as to those issues and the findings go on to say, “Thereupon, evidence on behalf of plaintiff and defendants, it was offered and received and the cause argued and submitted on the two above stated issues only.”

So then, it is clear from this finding that Judge Mathes was concerned primarily and only as it turned out to be with the question of diversity jurisdiction and even the question of the statute of limitations although considerable evidence was introduced on it.

It was not reached.

Judge Mathes held as follows and this is in concurred distinction to the holding in the Swanson case.

And may I briefly summarize what I believe the holding in the Swanson case is before ours.

The holding in the Swanson case is that in the absence of a showing, that the law — that the directorate was hostile to the prosecution of the suit, the corporation should not be aligned as a defendant.

Now, that’s the summon substance of the holding in the Swanson case.

The holding in our case, however, in the — in the Sperling case, it goes beyond that.

The Court says, “That isn’t enough.”

The holding here is that neither a showing that the directorate is hostile to the prosecution of the suit nor a showing that the directorate is antagonistic to the objects of the suit is sufficient to warrant the corporation’s alignment as a defendant.

Nothing short of preponderating proof that the corporation was actually dominated and controlled by the co-defendants can save the corporation from being realigned as a plaintiff.

Now, we say that that is not the law and has never been the law.

Neither Doctor against Harrington has held that, nor has Venner against the Great Northern held that.

And while I’m on that subject, may I — may I say what —

William J. Brennan, Jr.:

Let’s see.

Does that mean, do you read that as saying that it’s not enough to show that however corrupt maybe the board of directors and however corrupt their motivation not to bring the action, the stockholder has actually to show that the corporation itself is a captive of the defendants not connected with the corporation?

Do you go that far?

Herman H. Levy:

No, Your Honor, I — I — no, I — I think what Judge Mathes said virtually was this.

He says, the stockholder is incumbent upon the stockholder and it’s a prerequisite to — as right to be heard in the federal court.

It is incumbent upon a stockholder to show that the directorate that each and every member of that board of directors was actually dominated and controlled in this case by the president and vice-president that he controlled them.

And that they were simply, as Mr. Justice Douglas in his article in the directors who do not direct practically, I think called them directorial gigolos or something to that effect.

That’s about the size of it.

That is the holding of Judge Mathes.

You have to go that far.

And in my petition for certiorari, Your Honor, I have — and I refer to page 13, I have made this remark with respect to that.

Admissions like the foregoing and I — in a moment state what these admissions were, admissions like the foregoing will fall short of proof by preponderance of the evidence that the directory was dominated and controlled by the alleged wrongdoers because as appellees successfully contended in the court below, men who posses personal strength and integrity cannot be controlled by such venal considerations or substantial annual salaries from the corporation.

In short, the decision of the courts below in essence is — or in essence required the stockholder to demonstrate to an almost mathematical certainty that the ethical current in each of his company’s directors is not adequate to overcome, prompt this himself.

And I went on to say a virtually impossible task and a task which with deference to the courts below seems decidedly out of harmony with this Court’s recent observations, and I refer to Mr. Justice Reeds’ observation in Koster against Lumbermens in which he said it has been the whole course of our law to break down the barriers against calling corporations to account in all States where they’re maybe doing business and Mr. Justice Black’s observation in that same case as follows, namely, the whole trend of recent congressional legislation has been to protect corporate stock and security holders.

See for example, Securities Act of 1933.

But this legislation was not intended as a complete substitute for the antidote by stockholder suits for the dangers inherent in the modern development of frequent conflicts between corporate owners and corporate managers.

Herman H. Levy:

Now, the factual background upon which we make all of these statements, Your Honors, is briefly stated in our statement beginning on page 6 and going on for three or four pages.

The inquiry that the Court had ordered into jurisdiction in this case unfolded, as we say the following realities, that one of us owned by the public.

Its stock was distributed among some 30,000 stockholders.

Felix Frankfurter:

We’re turning on giving us all — it came out on evidence after Judge Mathes put this question — these issues, is that right?

Herman H. Levy:

That’s right, Your Honor.

These are the matters that came up in evidence before Judge Mathes and the reason why we stated or brought these things out in evidence because we were under this impression and I believe that we were right.

We took, as our text say, this Court’s decision in Pacific Railroad against Ketchum and in the removal cases in which Chief Justice Waite laid down the following as the rule to be observed.

He said, namely, that the District Court will “ascertain the real matter in dispute and arrange the parties on one side or the other of that dispute.”

Now, so that the District Court will know what the real matter in dispute is, we, the complainant, offered the following evidence.

We — we showed that the Warner was owned by the public that 30,000 people owned this stock and they’re located all over the world.

That three of the stockholders, namely, Harry and Jack Warner and his brother Albert, between them have a working control of the company.

They owned between 15% and 20% of the stock.

We showed by — and these are statements out of the mouths of the directors and they are stated on page 6 and 7 of our brief and we showed that the — that Harry and Jack and Albert Warner run the company, run in quotations.

They —

Charles E. Whittaker:

Mr. Levy, may I ask, is the object of this argument to show that the findings made by Judge Mathes to the — are not supported by evidence?

Herman H. Levy:

No, Your Honor, no.

Only incidentally am I — am I relating these things in answer to Mr. Justice Frankfurter as to what the factual background is that came out before of Mr. Justice Mathes.

Charles E. Whittaker:

You did have an 18-day trial up before Judge Mathes.

Herman H. Levy:

There was a lot — when we say — we didn’t have an 18-day trial in the first place, Your Honor.

I don’t think it went on that long and on the second place —

Charles E. Whittaker:

If he —

Herman H. Levy:

Oh, some 15 days but we had short sessions as well as long sessions and — and in during that time, what we have was this, Your Honor, we could have all — practically all of what, let’s say most of what went into evidence in this record, could have been just — I could have just said I — I offer an evidence of these interrogatories or I offer an evidence of these requests for admissions.

Now, they were this thick instead of that, we read them.

Charles E. Whittaker:

Well, isn’t the trouble —

Herman H. Levy:

So that —

Charles E. Whittaker:

Mr. Levy, however, if Judge Mathes’ findings made it to conclusion of the trial are supported by — by evidence, then we’re now down to questions of law, aren’t we?

Herman H. Levy:

That’s right.

In other words, I am assuming for the sake of the argument and is my question — as my question was paused in this case.

I am assuming for the sake of this argument that these directors were not controlled.

Felix Frankfurter:

Well, we’re not?

Herman H. Levy:

We’re not controlled, yes, Your Honor.

Felix Frankfurter:

Which directors?

Herman H. Levy:

The Warner directors —

Felix Frankfurter:

As I —

Herman H. Levy:

— all of them.

Felix Frankfurter:

— as I understood your argument, I may have hoped they must concede it, you persuaded me if what you said was so that the Warner Brothers with a 15% to 20% working interest controlled in the sense determined what that corporation would or wouldn’t do.

Herman H. Levy:

That’s right.

Felix Frankfurter:

(Voice Overlap) —

Herman H. Levy:

That’s what the record shows.

Felix Frankfurter:

You said that’s what the record shows that having that control determining what the corporation which they control can — would or would not do by their ipse dixit that in fact these stockholders said, “You are milking the corporation in what I have a monetary interest by giving favors by trigging the outside and the way in which you shouldn’t be treated if you merely regard the corporate interest.

Herman H. Levy:

Yes, Your Honor.

Felix Frankfurter:

Isn’t that what you said?

Herman H. Levy:

Yes, Your Honor.

Felix Frankfurter:

Now, that being so, your argument I think it is that Judge Mathes applied the wrong legal doctrine as Justice Whittaker suggests, applied the wrong legal standard for determining when you transfer a nominal plaintiff over to the defendant’s side.

Isn’t that your position?

Herman H. Levy:

He applied the wrong legal standards.

Now, I’m going beyond that, Your Honor.

I say that assuming for the sake of the argument, he was — that his findings were correct.

Felix Frankfurter:

Yes.

Herman H. Levy:

Namely, he found that these were — this in — that Warner — that Harry and Jack Warner despite the fact that the directors had testified that if they became persona non grata to Harry and Jack Warner, they’d be through and so they did and that — those are admissions in the record.

Felix Frankfurter:

Well, does that mean that — that what you said that this 15%-20% Warners did not have control?

Herman H. Levy:

No, it means they — they had control.

But I’m assuming —

Felix Frankfurter:

Well, if they had control, then judge — then — then, how can the fellows saying that the fellow has control hasn’t got control?

I don’t understand that.

Herman H. Levy:

Well, that’s what Judge Mathes said.

He said he had — they said that these men did — these men were disinterested men.

Charles E. Whittaker:

You said they acted in good faith and this was a matter of judgment.

Felix Frankfurter:

Well, then he must have —

Herman H. Levy:

He said — he said that —

Felix Frankfurter:

Then he must have rejected the conclusion which you and I under your inference have drawn from this testimony and hear the witnesses, then you’re up against —

Herman H. Levy:

He didn’t —

Felix Frankfurter:

— Justice Whittaker’s question.

Herman H. Levy:

May I — may I point this out, Your Honor.

The witnesses that Your Honor speaks of were several directors, only one of which who appeared before Judge Mathes, the others, Judge Mathes never had the benefit of seeing these people anymore than Your Honors have (Voice Overlap) —

Felix Frankfurter:

Well, then what’s challenging as Justice Whittaker suggested to you a minute ago, you say that the conclusion which he arrived at is unfounded in law because it’s unfounded in fact.

Herman H. Levy:

I say it’s unfounded in law because it’s unfounded in fact but I go on to say further that assuming that it is unfounded in law as well as unfounded in fact and assuming, however, that he have the right to make such findings.

I say, nevertheless, I come to this point assuming in other words that these directors were all honest men.

Felix Frankfurter:

And capable of exercising —

Herman H. Levy:

Capable —

Felix Frankfurter:

— their honesty.

Herman H. Levy:

— capable of exercising their — their good business judgment.

William J. Brennan, Jr.:

And in fact exercising (Voice Overlap) —

Herman H. Levy:

And in fact exercise and I will go that far and say in fact exercise.

I say this that where a stockholder comes in and says, “You milked this corporation for the benefit of this boy.”

The fact that every one of these men is honest and has exercised to the best of his ability, this interested of an independent judgment, nevertheless, does not argue for the fact that these men cannot be wrong.

I say that the road to a fraud maybe bottomed down the best of intentions.

Felix Frankfurter:

But they (Voice Overlap) —

Herman H. Levy:

Now, let us assume —

Felix Frankfurter:

But you — you just negative our right to conclude that Judge Mathes was wrong or unjustified on the record in finding there was no fraud.

If there was fraud, then we got no problem.

Herman H. Levy:

May it please, Your Honor, Mr. Judge Mathes did not find that there was no fraud.

What he found was this.

He found that these men, when they approve this arrangement, were not acting in bad faith.

They intended this to be good.

They considered this to be good.

The proposed findings and I call Your Honors attention to the record on this point, the proposed findings on page 74 of the record, Your Honors will notice — Your Honors will notice (Voice Overlap).

Felix Frankfurter:

What do you mean by proposed findings?

Herman H. Levy:

These are the findings that the successful party proposed to Judge Mathes.

Felix Frankfurter:

And he made them as amended?

Herman H. Levy:

And he deleted certain — he deleted certain portions of the record and —

Felix Frankfurter:

But this isn’t what he actually found.

Herman H. Levy:

That’s right.

Felix Frankfurter:

All right.

Herman H. Levy:

Now, these deletions of the things that I particularly call Your Honors attention to, Your Honor said something a moment ago create — made — made a premise, namely, that Judge Mathes had found that no fraud had been committed here.

I say that is not the fact and Judge Mathes did not find it to be the fact.

Here is what he said, let us take first what the proposal is that Judge Mathes find.

Our opponents asked the Court to find that the board of directors of Warner Brothers is composed of 11 men of whom the defendants Harry —

Earl Warren:

Where is that, Mr. —

Herman H. Levy:

On page 74, Your Honor, of Volume 1.

Felix Frankfurter:

Bottom of the page — bottom words.

Herman H. Levy:

But three, that the contract in controversy was and all amendments and supplements thereto were and are sound business arrangements made and entered in good faith and without fraud.

Now, what Judge Mathes did was struck out, the ultimate fact.

He did not find that these contracts were honest and without fraud.

He said they were intended to be.

They were intended by the directors to be a — a benefit to the company and the directors considered them.

Felix Frankfurter:

Well, he — he’s very categorical in saying — in signing his name to a finding that the contract in question, in controversy was made and entered into in good faith and without fraud.

Herman H. Levy:

That’s right.

He says under the — under the record (Voice Overlap) —

Felix Frankfurter:

There weren’t — on the finding, there was no fraud.

Herman H. Levy:

Well, because he — what he says there, Your Honor, he didn’t say, “I examined this whole situation and I find that this son-in-law wasn’t — wasn’t treated — wasn’t treated with — with favor.”

He says this, “The directors examined this thing and they came to the conclusion in their opinion that this was all right.”

But I don’t say it’s all right.

Felix Frankfurter:

Because — between what says.

Herman H. Levy:

He could be —

Felix Frankfurter:

But why do you paraphrase?

He says, the contract in controversy was made and entered into in good faith and without fraud.

Herman H. Levy:

That’s right.

That isn’t the finding in my humble judgment that that contract is not fraudulent.

Charles E. Whittaker:

What does it mean then?

Herman H. Levy:

Well, it means this, Your Honor.

It means that these directors when this contract was placed before them and they said, “Very well, we’ll pass on this.”

And at the time they did, they didn’t intend to hurt the company.

They weren’t out to hurt the company.

That’s all but it is a far cry from the director saying — from saying that the directors were honest men and they didn’t intend to hurt the company to saying that what actually was contained in that contract and the dealings under that contract between these two corporations were not, as a matter of fact, unwarrantedly favorable to a son-in-law and did not, in fact, militate in the direction of siphoning a — a part of Warner’s capital into the coffers of a — of a favorite boy.

It’s quite a different thing and the fact that Judge Mathes was careful enough to X this out is another indication of the fact.

And furthermore may I say this, Your Honor, another evidence of the fact that Judge Mathes didn’t find that there was actual fraud here in the sense these — whether these dealings were actually closure or not, let me put it that way, is this.

Had he done so, he would have assumed jurisdiction.

He says, he never assumed jurisdiction in this case.

He says he never tried the merits in this case.

He ordered the parties not to present evidence on the merits in this case.

He confined and limited the issue, the hearing to questions involving whether — involving what whether or not there was diversity in this case.

Charles E. Whittaker:

It’s —

Herman H. Levy:

What — pardon me?

Charles E. Whittaker:

It’s just a fact raised for the pleading preliminary to the determination of the question of whether he had time to try the case.

Herman H. Levy:

That’s right.

The question before Judge Mathes was simply this, Have I or have I not the power to examine into the merits of this thing and determine whether this was an honest deal or was not an honest deal.

First of all, I’m going to determine whether I have the power as the federal court does.

Now, what he meant, he makes these findings and he says this, before I can have the power to decide this case, the stockholder must show me not only that the directors are hostile to him, not only that they are antagonistic to him in anyway, unless he shows and by preponderating evidence that each and everyone of these men were — was dominated and controlled by the three Warner Brothers so that they were not free agents.

I cannot decide this case because then the corporation must be aligned on the other side of the fence and notwithstanding the fact — notwithstanding the fact that the corporation has taken the position and concedes it contrary to the stockholders notwithstanding any of such things all together.

Now, we say that that is not the law in this case, neither Doctor against Harrington has held that, neither Venner against the Great Northern hasn’t held that.

William J. Brennan, Jr.:

Now, in the light of these findings which you said you’re willing to accept for the purposes of your argument, as I understand it you believe it.

Herman H. Levy:

Yes, Your Honor.

William J. Brennan, Jr.:

Will you phrase what you think the rule is in the light of these findings?

Herman H. Levy:

The rule of alignment?

William J. Brennan, Jr.:

Yes, in light of these findings?

Herman H. Levy:

That where a stockholder can show or show us whether it is pleadings or by affidavit or by evidence taken orally that the corporation, his corporation, the stockholder’s corporation is hostile, is inimical to the objects of the suit under those conditions, the corporation has to be aligned as a defendant where he cannot show that the corporation is hostile, not —

William J. Brennan, Jr.:

(Voice Overlap) —

Herman H. Levy:

— to the best interest of the corporation as — as Judge Mathes held.

What Judge Mathes held here is this, it isn’t enough for the stockholder to show that the corporation was hostile to him or that the directors were hostile.

Herman H. Levy:

He must show that they were hostile not to him or to the commencement of the action or to its object.

He must show that they are hostile to the best interest of the corporation.

Now —

Charles E. Whittaker:

Isn’t that the law?

Herman H. Levy:

— I contend this, Your Honor

If that’s the situation, how can he do that unless he tries the merits as the Chief Justice suggested to one of the gentlemen who argued the case before this?

How can he do this unless he tries all the merits?

Now, if that were the rule, what will happen?

Judge Mathes would have gone along and tried the merits of the controversy.

(Voice Overlap) —

William J. Brennan, Jr.:

Well, Mr. Levy, you — you said at the very outset of your argument that you did not agree with Mr. Doyle’s answer to me in the previous case.

Herman H. Levy:

That’s right.

William J. Brennan, Jr.:

And it seems to me that the findings of the fact made here by Judge Mathes are the very findings which I hypothesized from Mr. Doyle when I put in the question to him, namely, when acting in good faith and in the exercise of an independent business judgment, they resolve not to bring the suit.

Mr. Doyle’s proposition was that never let — in that circumstance, the corporation was to be aligned on the side of the defendant as I understood it.

Herman H. Levy:

Yes, except —

William O. Douglas:

And you said you disagreed with that.

Herman H. Levy:

I — I disagreed with it for this reason.

I didn’t — it – it struck me that a mere disagreement between a stockholder and the directors of a corporation that has no real basis are just — a disagreement with stockholders as I think you ought to bring this thing and the — and the directors say, “We don’t think you all agreed.

You haven’t showed us why.”

There’s no reason for it at all and the stockholders simply remained quiet about it and it’s just — just arbitrary and capricious about it.

That’s no reason.

I mean I don’t think that that would establish diversity because he hasn’t shown that the corporation is antagonistic, is hostile to what he claim is right, unless the — when the stockholder comes into Court and he says, “Look, here is a series of acts that were done.

These things I say are wrong.

They are evil.”

The corporate director say, “Oh, no, we regard these things as good and rightful.”

You have what Mr. Justice Frankfurter pointed out to be inevitable.

You have a situation where one side says, “Yes” and the other side says, “No.”

In this case, we have this situation.

Here is the Warner outfit, the corporation, being aligned with the complainant against the directors of the company, the — the president and vice-president when the corporation has no dispute at all with them.

Now, as a matter if we go one step further and as I say in my second point adopting to Mr. Justice Frankfurter’s language to this situation, we point out that only at the expense we say of judicial integrity can this be done in this case for these reasons.

Herman H. Levy:

I put it this way.

The error of both courts in realigning Warner Corporation as a complainant, thus destroying diversity becomes clear.

When this Court’s language in Indianapolis has adopted to the realities and that’s the thing that we talked about in — that Mr. Justice Frankfurter talked about in Indianapolis, the realities of the present case and it is seemed that the question which permeates this litigation is, “Should the Court terminate and cancel the Warner-United arrangement as unlawful and unfair to Warner and compel the defendants — the co-defendants to account for the injuries they — they were alleged to?”

Of course, we asked and our answer that the Court halt this —

Felix Frankfurter:

Mr. Levy —

Herman H. Levy:

Yes, sir.

Felix Frankfurter:

— do you conceived of a corporation as having an external existence apart from those who control its fate?

Herman H. Levy:

That’s what the Court in Doctor against Harrington said.

Felix Frankfurter:

That’s because — that’s — Doctor and Harrington was the case where the Harrington has a corporation by the throat.

They were the corporation for purpose of that transaction.

William O. Douglas:

That’s what you say has happened here?

Herman H. Levy:

Yes, Your Honor.

I say that it happened here even though Mr. — even though Judge Mathes found that in his opinion.

Felix Frankfurter:

That — that may have happened here, but then you have to say that the findings of Judge Mathes to the contrary or to the outset, although he found that as a fact, he drew the wrong inference from it.

Herman H. Levy:

That’s right.

Felix Frankfurter:

Which is it?

Herman H. Levy:

Both I think, Your Honor.

And in the next place, I go one step further and I say, he assumed (Voice Overlap) —

Felix Frankfurter:

When you go that part to that point, you don’t have to go any further.

Herman H. Levy:

Well, then maybe I misunderstood Your Honor’s question.

Felix Frankfurter:

I want to know this.

Herman H. Levy:

Yes.

Felix Frankfurter:

Do you say that Judge Mathes — does it appear from the finding, the first one, does it appear from the finding that the people who control the fate of Warner Brothers as a corporation exercise an honest, non-fraudulent judgment?

Is that a finding of it?

If you challenge that as a finding, then — then my next question isn’t going to be what it is.

But if you say that’s what he found and that’s as I read it, then the next question is, is that a baseless finding?

Is there no evidence in this record which justify it?

Herman H. Levy:

There is not.

Felix Frankfurter:

Very well, I can understand that and — or you can say, “Yes, he found that but he applied the wrong rule of law.

Herman H. Levy:

He found that when he applied the wrong rule of law.

William O. Douglas:

Because I thought your point was that the 20% interest that the Warner — Warners had in the company is sufficient to make all the directors their nominees and pay.

Herman H. Levy:

Yes, Your Honor.

William O. Douglas:

Is that your point?

Herman H. Levy:

Yes, Your Honor.

He says —

Felix Frankfurter:

And did he find that?

William O. Douglas:

He didn’t find it.

Herman H. Levy:

He — he excluded it from his findings.

Felix Frankfurter:

What do you mean he excluded it?

Did you mean he found the opposite?

Herman H. Levy:

No, he didn’t find one or another, Your Honor.

Felix Frankfurter:

(Voice Overlap) irrelevant?

Did he say it was irrelevant?

Herman H. Levy:

No, he said nothing of the kind.

He simply confined these findings to one thing.

It was because he was under this impression that before a corporation can be realigned as a complainant in a stockholder suit, the stockholder must show that the — the directors were dominated in control and —

William J. Brennan, Jr.:

But, Mr. Levy, what do you mean he didn’t find out?

What — what am I reading at 75?

And that even the corporation nor the directors or officers were shown that they at that time or at anytime under the domination or control of the three brothers, Warner above name, what do you mean he didn’t find it?

Herman H. Levy:

He found that they were not under the domination and control of the three brothers.

Oh, yes, he found that.

Felix Frankfurter:

Well, then —

William J. Brennan, Jr.:

(Voice Overlap) —

Felix Frankfurter:

— we can’t find unless we find that that finding is based that they were under control and that’s Doctor and Harrington.

Herman H. Levy:

No, Your Honor.

Doctor and Harrington — may I say this, Doctor and Harrington was not decided on that issue at all.

Felix Frankfurter:

Doctor and Harrington were decided on a simple plain stock issue that the dominant control of that corporation did something in their self-interest and thereby deprived the Doctors of their right —

Herman H. Levy:

May I —

Felix Frankfurter:

— Doctor and Harrington case.

Herman H. Levy:

May I — may I respectfully call Your Honors attention to —

Felix Frankfurter:

One of the charge of Doctor and Harrington among others is the — the brief opinion, so we can read it very quickly.

Herman H. Levy:

Yes, Your Honor.

And may I point out that if Doctor, and — and I say this advice, that after reading a lot of law on this thing, Your Honor, I believe that in the Doctor and Harrington case, I’ll go so far as to say this, if there had been no allegation in the complaint in the Doctor and Harrington case of domination and control by the defendants, by the co-defendants of — of the corporation under the stockholder, that complaint would — the diversity would still be present in Doctor —

Felix Frankfurter:

Maybe it would —

Herman H. Levy:

— against Harrington.

Felix Frankfurter:

— but the whole point of Doctor and Harrington was that a certificate came up here from Judge Lacombe of the Circuit Court in the Southern District asking this specific question and not aligning it and this Court said that — and aligning it with the plaintiff, this Court said, “No”, because the people who actually has the corporation there by the throat were the fellows against whom you complained.

Herman H. Levy:

May I call Your Honors attention to this though.

Here is what — here is — here’s the language of the Court on this thing, it says the 94th rule in equity contemplates that there may be and provides for a suit by a stockholder in a corporation founded on rights which maybe properly asserted by the corporation.

And the decisions of this Court established that such a suit when between citizens of different states involves a controversy cognizable in a — in a court of the United States.

The ultimate interest of a corporation maybe — may defendant maybe the same as that may plaintiff — plaintiff of the corporation maybe under a control antagonistic to him on how the — what is the semantic meaning of the word antagonistic doesn’t mean antagonistic of the corporation ultimate interest which require a trial of the merits in order to determine.

And after you get a trial of the merits, what happens?

The judge says, “I have found that the plaintiff hasn’t got a case but I cannot decide it because I have no jurisdiction.”

That’s what it will amount to.

Earl Warren:

Mr. Levy, you — you’ve been interrupted so much.

If you wish the rest of the time until adjournment, you may have it to —

Herman H. Levy:

May I say that —

Earl Warren:

— to sum up.

You may and counsel — counsel may have an additional amount of time in responding.

Herman H. Levy:

Thank you, Your Honor.

Earl Warren:

We’ll go right ahead.

Eugene D. Williams:

(Voice Overlap) —

Earl Warren:

I beg your pardon?

Eugene D. Williams:

Will I start now, Your Honor?

Earl Warren:

Yes, if you please.

Eugene D. Williams:

Mr. Chief Justice and Members of the Court.

It has been well pointed out by Judge — more and more of the justices that they should first find out what the facts are in determining that framework, what rule of law is after.

We suggest most definitely that the facts are those which are found by Judge Mathes after a full scale trial lasting 15 days, consuming 2000 pages of transcript and many hundreds of dozens of exhibits.

On the single question or the double question of the jurisdiction of the United States District Courts to entertain the action and the questions of whether the statute of limitations was a bar to the taking of the action and the fact that those two issues were coupled is logical because the issue of realignment and diversity jurisdictions depended on the question of whether the corporation was in hands hostile to its interest or whether it was dominated by the wrongdoers or otherwise unable to protect itself.

And also basically, the question of statute of limitations depended upon a finding of fact covering the same subject matter because if the corporation had been unable to protect its own interests, the statute of limitations would not have been running against the action, whereas if it were able to protect his own interest, it would have been.

However, in view of Judge Mathes’ decision with reference to the — to the basic question of diversity of jurisdiction, he never came to the point and obviously, he could not come to the point of deciding the — the second question of statute of limitations because he had no jurisdiction to decide anything except that he had no jurisdiction.

Eugene D. Williams:

I may say, if the Court please, that frankly we were a little disappointed at the judges decision realizing the sincerity of his approach and the meticulous regard which Judge Mathes had for the limits of federal jurisdiction, a — a regard which is probably unusual and probably accounts for the fact that there hasn’t been, so far as I know, another case just like this where so much evidence has been taken where the real issues have really been decided because I suspect in many cases where judges who had less regard for the limits of federal jurisdiction, they may have gone ahead and decided the cases on the merits in favor of the defendants, they never came up on this point.

But Judge Mathes did have that regard and as you’re — this Court will find when the examination of his very scholarly opinion, he — he had a great deal of thought and — and sincere work to the solution of the problem.

However, with all this background of evidence, he made findings of facts which appears to me it would be utterly decisive of this case in view of our understanding of the meaning and effect of Doctor against Harrington and Venner against Great Northern and — and Koster against Lumbermens Mutual and so forth.

He found this, and I think it’s worth reading these findings in full because they’re not too long and yet, they are the very crux of this case, that the Board of Directors of Warner Brothers Pictures, Inc. is composed of 11 men of whom the defendants, Harry M. Warner and Jack L.Warner and their brother Albert Warner, not a defendant, but three, that the contract in controversy was made and entered into in good faith and without fraud.

And said contract was intended by the directors to be of financial benefit to Warner Brothers Pictures, Inc. and its stockholders.

And said contract was considered by said 11 members of the Board of Directors of Warner Brothers Pictures, Inc. to be a sound business arrangement for the best interest and future interests of the — for the best present and future interests of the corporation.

That in approving and authorizing the contract, the officers and board of directors acted in good faith and exercised their independent business judgment that at time of the execution of the contract, Albert Warner, together with the defendants Harry M. Warner and Jack L. Warner, owned less than 20% of the outstanding shares of stock of Warner Brothers Pictures, Inc. and that neither the corporation nor the directors or officers were shown to be at that time or at any time under the domination or control of the three brothers Warner above name that neither the stockholders, its officers or directors were at any time involved in this action antagonistic to the financial interest of the corporation that it is not true either as alleged in the complaint or otherwise that all or a majority or any of the board of directors and officers of Warner Brothers Pictures, Inc. wrongfully participated in the acts in the complaint complained of, nor was said board of directors dominated or controlled by Harry M. Warner, Jack L. Warner and Albert l. Warner, Milton Sperling or anyone or more of them.

It is not true that if demand had been made upon Warner Brothers Pictures, Inc. that those to whom such application would be made to institute said act said suit would have been disqualified from faithfully doing their duty as directors and officers of said corporation because of any matters or facts set forth in said complaint or otherwise that no demand was made under directors of Warner Brothers Pictures Incorporated to institute this suit and such demand would have been futile, nor was any demand addressed to the stockholders of said corporation that the stockholders of said corporation —

Earl Warren:

We’ll recess now, Mr. Williams.

Eugene D. Williams:

All right.