Case Name: WEBSTER EISENLOHR, Inc., v. KALODNER, Judge, et al.
Court: United States Court of Appeals for the Third Circuit
Jurisdiction: United States
Decision Date: 1944-09-27
Citations: 145 F.2d 316
Docket Number: No. 8412
Parties: WEBSTER EISENLOHR, Inc., v. KALODNER, Judge, et al.
Judges: Before BIGGS, MARIS, JONES, GOODRICH, and McLAUGHLIN, Circuit Judges.
Reporter: Federal Reporter 2d Series
Volume: 145
Pages: 316–326

Head Matter:
WEBSTER EISENLOHR, Inc., v. KALODNER, Judge, et al.
No. 8412.
Circuit Court of Appeals, Third Circuit.
Argued Feb. 8, 1944.
Reargued Aug. 7, 1944.
Decided Sept. 27, 1944.
John Wallis, of New York City, (Drinker, Biddle & Reath, of Philadelphia, Pa., Mudge, Stern, Williams & Tucker, of New York City, Andrew M. Williams, of New York City, Philip Wallis and Hayward H. Coburn, both of Philadelphia, Pa., and Herbert PI. Faber, of New York City, on the brief), for petitioner.
Judge Kalodner submits on brief.
Before BIGGS, MARIS, JONES, GOODRICH, and McLAUGHLIN, Circuit Judges.

Opinion:
GOODRICH, Circuit Judge.
The proceedings at bar are upon a petition to this court for writs of mandamus and prohibition to be directed to the Honorable Harry E. Kalodner, one of the Judges of the District Court of the United States for the Eastern District of Pennsylvania, and David Bortin, Esq., a Special Master appointed pursuant to his order.
Judge Kalodner has filed an answer to the petition. Mr. Bortin has filed none.
The essential facts are not in dispute. Andrew J. Speese, 3rd, alleging himself to be a citizen and resident of Texas and the owner of 10 shares of the preferred stock of the petitioner, Webster Eisenlohr, Inc., a Pennsylvania corporation, filed a suit against that company on February 1, 1943, in the District Court of the United States for the Eastern District of Pennsylvania. The action was brought by Speese "for and on behalf of all the preferred stockholders" of Webster Eisenlohr, Inc. The complaint, inter alia, described the division of the stock of the company into common and preferred shares and alleged that dividends on the preferred shares had remained unpaid since April 1, 1931, and, as of December 31, 1941, amounted to $73.25 per share; that the certificate of incorporation of Webster Eisenlohr, Inc., provides that the preferred stock shall not be entitled to vote at any meeting of stockholders, and shall not be entitled to participate in the management of the corporation " unless and only in the event [that] (1) two quarterly dividends payable thereon shall be and remain unpaid and in arrears, whereupon full voting power shall be vested in the preferred stock, until the arrearages of accumulated dividends upon [the] preferred stock shall have been paid ." It was further alleged that at the annual meeting of stockholders of the corporation on March 10, 1942, Speese, acting for himself and as proxy for 815 shares of preferred stock, demanded that the voting power be vested exclusively in the preferred stock and that the corporation, acting through its president, refused the demand and ruled that the preferred stock and common stock together had the voting power to elect directors; that the company persisted in this attitude despite frequent demands of Speese and other preferred stockholders; that the corporation is dominated and controlled by the Chase National Bank of the City of New York by reason of its ownership of a large block of the common stock of the company and that the control of Webster Eisenlohr, Inc., had been "usurped" by reason of the action of the company in refusing to recognize the officers elected by the preferred stock; that the alleged usurpation "is in fraud of the rights and privileges of the preferred stockholders and has had the effect of illegally depriving [them] of their right to name directors"; and that the assets and property of Webster Eisenlohr, Inc., are being managed, controlled, financed and otherwise disposed of for the sole benefit of the holders of the common stock to the "irreparable injury and prejudice of the preferred stockholders, notwithstanding the financial ability of the defendant company to pay or secure the rights and privileges " of the preferred stockholders.
Speese prayed that the court adjudge that the preferred stockholders possess presently the exclusive voting power in the company, that a receiver pendente lite be appointed, and that general relief be granted.
Webster Eisenlohr, Inc., filed an answer denying the substance of the allegations of the complaint and set out two affirmative defenses which need not be stated here.
Between hearings upon the matter before the District Court the company sent to its stockholders copies of its annual report for the year 1942. Following the sending of the report the company also wrote its preferred stockholders, offering to purchase their interests. Copies of these documents were supplied to the District Judge upon his request although not introduced in evidence in the litigation. At one of the hearings Judge Kalodner indicated his belief that the financial statement sent by the corporation to stockholders was misleading and he criticized the letter sent to preferred stockholders for failure to state facts which he deemed material. Then, at a hearing on April 24, 1943, counsel for Speese stated to the court that he had no client since the shares of Speese and other stockholders which he had represented had been purchased. Judge Kalodner again expressed his dissatisfaction with the actions of the company and stated: "I will advise you gentlemen that I am going to appoint an examiner to look into this matter." Subsequently the court did appoint Mr. Bortin as Special Master under Rule S3 of the Rules of Civil Procedure, 28 U.S.C.A. following section 723c. The Special Master was directed "to investigate: the acts, conduct, property, liabilities, financial condition, books, records and assets [of Webster Eisenlohr, Inc.]; all the circumstances relating to an Offer made March 26, 1943 to the Holders of 7% Cumulative Preferred Stock ; the arrangement made by and between * . [Webster Eisenlohr, Inc.] with White, Weld & Co. of New York and Bertram K. Wolfe, Esq. with reference to the Offer made to the Preferred Stockholders; the conduct of the Board of Directors with reference to the making of said Offer to the Preferred Stockholders; the propriety, reasonableness and adequacy of the said offer to the Preferred Stockholders; the question as to whether or not there was any violation of Rule X-10B-S 'Employment of Manipulative and Deceptive Devices' of the Securities and Exchange Commission, and any other matters which may be referred to the Special Master by the Court as relevant to these proceedings."
Counsel for Webster Eisenlohr, Inc., sought vacation of the order in the District Court and, failing that, asks a writ of mandamus directing the District Court to vacate this appointment and a writ of prohibition directed to the Special Master to prevent him from carrying out his commission. A majority of the court believe the company's position to be well taken.
The fundamental proposition which probably no one would dispute is that a court's power is judicial only, not administrative nor investigative. A judgment may only be properly given for something raised in the course of a litigation between the parties. Now, what was the litigation in this case? The complaint presents the question of the legal effect of the provision that preferred stockholders, under given circumstances, shall have full voting power. Whether full voting power means that they may vote along with holders of shares of the common stock or whether "full" as used in the certificate of incorporation means "exclusive" is a question of interpretation of language to be made with such help as the Pennsylvania decisions give, since the corporate litigant is a Pennsylvania corporation. The allegations of fraud made in the complaint are conclusions from, the plaintiff's claim that he and other preferred stockholders were entitled to exclusive voting rights and did not get them. This interpretation is corroborated by a letter sent by counsel for Speese "To the Remaining Preferred Stockholders " of the company giving information concerning the institution of the Speese suit. The letter said "The gist of the suit was to settle, if possible, the long standing controversy between the preferred stockholders and the company as to whether or not the preferred stockholders should have the exclusive voting power in the company in view of the default in the payment of dividends, as distinguished from the right to vote together with the common stockholders."
If the plaintiff's contentions on voting rights are upheld as a matter of law, the preferred stockholders are entitled to determine who shall manage the corporation, and other questions which may be determined by stockholders. They are entitled to court help to get those rights if they need it. On the other hand, if the plaintiff's contentions as to the meaning of the phrase are incorrect, they have alleged no legal grounds for complaint. While a receiver was asked for, it was simply in connection with the relief to he given the plaintiff, based on the correctness of this theory of his voting rights. No one disputed the solvency of the corporation.
The directions given the Master went far beyond anything involved in the issues presented in the litigation, as will be seen from the reading of the order appointing him.
Masters are provided for in the Rules of Civil Procedure, Rule 53. This rule does not, in so many words, place any limitation on the scope of a master's commission. Nor has that question, apparently, been the subject of a great deal of litigation. There are general statements supporting the view that an order of reference cannot be more extensive than the allegations and proofs of the parties and there is some judicial authority to this effect. No authority has been found the other way.
On principle, however, the matter seems clear. Rule 53 is explicit in its statement that "A reference to a master shall be the exception and not the rule" and that in actions to be tried without a jury "a reference shall be made only upon a showing that some exceptional condition requires it." It is clear, we think, that a master is appointed only to help the court in a case where the help is needed. His appointment and activities are only for the purpose of assisting the court to get at the facts and arrive at a correct result in a complicated piece of litigation pending before the court. The master operates as an arm of the court. Surely he has no wider scope of activity than the court itself. If the court is limited in its judicial duties, to deciding the issues presented in the litigation before it, the master's function can go no further than to aid in the court's discharge of its duties.
In this case the report made by the company to its stockholders and the circumstances under which some of the preferred stockholders disposed of their interests were not before the court in the then pending law suit. The District Judge felt that there were indications that the company had not been entirely aboveboard in the matter. The company, through its counsel, earnestly contended that it had been entirely fair. This court refused to hear counsel on that point, for we thought the matter not relevant. None of these stockholders was under guardianship; all had the full legal power to sell their shares under such circumstances as it pleased them to sell. If any one felt that he had been deceived, he could take the steps necessary to protect his rights. There was no indication that any party to the transaction was complaining. We think that neither the report to the stockholders nor the sale of their stock was involved in the litigation. It was therefore outside the scope of investigation both by the Special Master and the court itself.
We do not think this view imposes unduly restrictive limitations upon courts. The judicial power is limited to deciding controversies. That has been its 'function historically; that is its function under the Constitution of the 'United States. No doubt a great deal goes on in the world which ought not to go on. If courts had general investigatory powers, they might discover some of these things and possibly right them. Whether they would do as well in this respect as officers or bodies expressly set up for that purpose may be doubted, but until the concept of judicial power is widened to something quite different from what it now is courts will better serve their public function in limiting themselves to the controversies presented by parties in litigation.
The final point required for our attention is the application of Rule 23(c) of the Federal Rules of Civil Procedure. "A class action shall not be dismissed or compromised without the approval of the court. " The suit here in question was the type known as a "spurious" class suit. Speese, the original litigant, brought the action on behalf of himself and other persons similarly situated, that is other persons who were preferred shareholders in Webster Eisenlohr, Inc., and had the same interests as Speese had in determining the voting rights of the preferred shareholders. If, after the litigation started, Speese could dismiss the suit or compromise it by taking something less than he originally claimed, the rights of other people (that is other preferred shareholders) might be adversely affected. The statute of limitations might have run or subsequent suit might be met by a charge of laches and so on. So the rule in question was to provide against such adverse effect when a plaintiff who starts an action becomes faint-hearted .before its completion or gets what he wants by compromise.
But, in this case the original action is. still pending in the District Court for the Eastern District of Pennsylvania. Other preferred shareholders may intervene under Rule 24. The company stipulates that it will raise no obstacle against their intervention, a harmless stipulation since they are entitled to intervene as of right anyway. It also stipulates that it will not ask for dismissal of the suit. Without such stipulation, however, the suit is there in the District Court, notice of it was given to all preferred stockholders and any preferred stockholder who wishes to litigate the question presented by the complaint can do so. The suit cannot be dismissed without court approval. Rule 23(c) therefore is not applicable to the present case. Malcolm v. Cities Service Co., D.C.Del.1942, 2 F.R.D. 405. See also Heesch v. Pittsburgh Steel Co., D.C.W.D.Pa.1941, 40 F.Supp. 243.
In view of the above discussion we think it unlikely that the formal issuing of the writs prayed for will be necessary. The applicant may later apply to this court if the need presents itself. No order for costs will be made.
Reynolds v. Stockton, 1891, 140 U.S. 254, 266, 270-271, 11 S.Ct. 773, 35 L.Ed. 464; Osage Oil & Refining Co. v. Continental Oil Co., 10 Cir., 1929, 34 F.2d 585; Georgia S. & F. Ry. Co. v. Einstein, 5 Cir., 1914, 218 F. 55, certiorari denied 1915, 239 U.S. 643, 36 S.Ct. 164, 60 L.Ed. 483; J. P. Jorgenson Co. v. Rapp, 9 Cir., 1907, 157 F. 732; Bradley v. Converse, 1876, Fed.Cas.No.1,775, 4 Cliff. 366; Munday v. Vail, 1871, 34 N.J.L. 418.
"The order [of reference] cannot be more extensive than the allegations and proofs of the parties." 30 C.J.S., Equity, § 530, citing Consequa v. Fanning, N.Y. 1818, 3 Johns.Ch. 587, mod. on other grounds, N.Y.1820, 17 Johns.Ch. 511, 8 Am.Dec. 442. The "order and reference must be founded on the pleadings and proofs, and cannot be made more extensive than the allegations of the parlies; the court has no power to refer matters not thus put in issue." 1 Kocher and Trier, New Jersey Chancery Practice and Precedents (1924) § 520, citing Wycoff v. Combs, 1877, 28 N.J.Eq. 40. To the same effect is 1 Whitehouse, Equity Practice (1915), § 357, citing Levert v. Redwood, Ala. 1839, 9 Port. 79. See also Bland v. Stewart, 1891, 35 W.Va. 518, 14 S.E. 215.
In United States v. American Bell Tel. Co., C.C.D.Mass., 1889, 39 F. 230, the court refused to restrict the testimony to be taken before an examiner to the single issue of fraud plead by one of the defendants since the other defendant had answered generally and plaintiff had filed replications to both defendants' answers.
Counsel for Webster Eisenlohr, Inc., urges that there is no such showing of exceptional circumstances in this case. The point ,is a serious one, but we do not need to settle it, since onr decision is being placed upon a broader ground.
See Piccard v. Sperry Corporation, D.C.N.Y.1941, 36 F.Supp. 1006, affirmed, 2 Cir.,1941, 120 F.2d 328. "Generally speaking a stockholder-plaintiff can prejudice the cause of action in two ways: one by discontinuing the suit, and second by compromising the suit and obtaining the entry of a consent judgment. The discontinuance may result in the surrender of an advantage already gained in the litigation, or even if ostensibly effected,^ without prejudice may subject the cause of action to the statute of limitations. Compromising a suit and entering a consent judgment, in the absence of a showing of fraud or collusion, destroys a right of action." McLaughlin, Capacity of Plaintiff-Stockholder to Terminate a Stockholder's Suit (1937) 46 Yale L.J. 421.