Earl Warren: Number 13, William H. Black and Ruth H. Black, Petitioner, versus A. M. Amen et al. Mr. Acheson, you may proceed.
Dean G. Acheson: May it please the Court. This case comes before the Court on a limited writ of certiorari to the Court of Appeals for the Tenth Circuit. That Court reversed on a divided vote. A judgment of the District Court for the District of Kansas, which after trial, dismissed three suits which have been heard together. The principal suit was brought by a stockholder, a single stockholder in a corporation of Illinois known as the Black-Marshall Oil Company. It was brought against the petitioner here who was the President of that corporation and the manager of it. The jurisdiction was alleged to be based on diversity of citizenship. The complaint resounded in fraud. It alleged that the plaintiff in that case had been induced to sell stock which the plaintiff owned in the Black-Marshall Oil Company as have many other stockholders, it was alleged, by reason of fraudulent representations for which the defendant was said to be responsible. It went on to allege that less was paid for the stock than its value at the time of the sale that the stock was held until four or five years later when there was a sale of the corporation and a winding up of its affairs at which time the stock was worth more than it had been at the time of the sale and that the defendant was a constructive trustee. It alleged further that the defendant had acquired stock from the corporation without paying adequate consideration so that his share in the division of the assets of the corporation was fraudulently increased by that amount also. There was a second suit, which was brought by receivers which the plaintiff in the first suit had had appointed, which made the same allegations that I've just recited and asked for a recovery on behalf of the corporation for the amount of the stock, the value of the stock in liquidation which was said to have been issued without consideration. There was a third case brought by other stockholders in the state court in Kansas making the same allegations. Now, these cases were brought together. All the parties intervened in the first case and the cases were tried together before Judge Hill of the United States District Court.
William O. Douglas: Was any relief marked from these on behalf of the corporation?
Dean G. Acheson: Yes, Your Honor. The individual stockholders who brought suit asked that they be considered setting the trust of the defendant and that he should pay them the value of their stock.
William O. Douglas: Personally?
Dean G. Acheson: Personally, yes sir, each one. And the corporation wanted to recover from the defendant the value of the stocks supposed to have been issued without adequate compensation. Judge Hill had a long file and found on the merits against the plaintiffs. He found that the defendant was not guilty of any misrepresentation, that he was not responsible for the man who didn't make misrepresentations, that he was not his agent, that he did not know about it, that he'd pay full value for the stock and the -- both from the plaintiffs and also from the corporation, and the judge dismissed all the cases. There was then an appeal taken to the Court of Appeals. The Court of Appeals, over the dissent of one of the judges, reversed the District Court on the facts. It found the defendant, the petitioner in that Court of -- of the respondent in that Court guilty of fraud and allowed the individuals to recover on the shares which they had sold under these representations, either to the defendant below or to the corporation. The Court then went on and allowed the receivers to recover the value of the stock which this Court of Appeals said had been issued without consideration. So there were two recoveries, the individual plaintiffs on the shares which they had sold and the receivers on account of the stock issued without consideration. As the federal jurisdiction, the Court of Appeals said that the question was whether the claims of the stockholders who did not have diversity of citizenship in the state court and those who intervened in the federal court could be heard because there were common questions of law and fact, and common reliefs sought under Federal Rule 23 (a) (3). In other words, was it what is commonly known as the spurious class action, an action which has in common questions of law and fact, but no jural connection between the parties. And the Court held that it was such a case and that in the -- that such cases, only the original plaintiff needed to establish diversity of citizenship and that then, others could come in regardless of their own citizenship.
Speaker: Are there any suggestion that the jurisdiction might be predicated on the other sections to rules, subsection of the rule?
Dean G. Acheson: This comes in later, Your Honor, if I may --
Charles E. Whittaker: May I ask?
Dean G. Acheson: -- bring that in.
Charles E. Whittaker: May I ask in this connection, sir?
Dean G. Acheson: Yes, sir.
Charles E. Whittaker: Is there any claim that there must be also the requisite jurisdictional amount?
Dean G. Acheson: That is not involved. There was the jurisdictional amount. That -- that is not an --
Charles E. Whittaker: That is not involved.
Dean G. Acheson: That is not an issue.
Charles E. Whittaker: The -- only diversities?
Dean G. Acheson: Only diversity, yes, Your Honor.
Charles E. Whittaker: Thank you.
Dean G. Acheson: Only diversity.
Felix Frankfurter: The party being asked -- may I ask where in the record if you can turn to quickly, the explicit, specific relief asked by the non-diversity interveners, appears?
Dean G. Acheson: The -- they are in the petitions for intervention. Which -- which --
Felix Frankfurter: Which was the specific relief and that's still Justice Douglas' question. You said they -- their relief was directed to a personal claim for themselves, is that right?
Dean G. Acheson: That is correct. Yes, Your Honor.
Felix Frankfurter: Now where -- may I -- is it in the -- is it in the record that I had?
Dean G. Acheson: Yes, it is, Your Honor.
Felix Frankfurter: Sometimes doing a falsity.
Dean G. Acheson: I beg your pardon?
Felix Frankfurter: I'd like to see exactly what it is the interveners asked for. Did they all ask for the same kind of thing in the statutes?
Dean G. Acheson: Yes.
Felix Frankfurter: Because that is relevant to the question put to you by Justice Harlan to which will come in later to your arguments
Dean G. Acheson: The relief asked for by the plaintiff is on page 8 of the record, follows in -- I guess 17, 18.
Felix Frankfurter: That's the plaintiff who has standing without question.
Dean G. Acheson: I beg your pardon, Your Honor?
Felix Frankfurter: That is the plaintiff who has standing.
Dean G. Acheson: That -- that is correct.
Felix Frankfurter: Now, what I want to know --
Dean G. Acheson: Now, the interveners come along --
Felix Frankfurter: Who have no standing according to your view.
Dean G. Acheson: They -- we have interveners' complaint of an H. C. Wadleigh on page 21.
Felix Frankfurter: 21.
Speaker: (Inaudible)
Felix Frankfurter: They sort of incorporate by reference.
Dean G. Acheson: Yes. They -- they're all the same.
Felix Frankfurter: They're all the same.
Dean G. Acheson: Yes, sir. They -- they asked for the same (Voice Overlap).
Felix Frankfurter: When you come to answer Justice Harlan's question, you will deal with the extent to which they joined in asking for corporate relief rather than an individual's relief?
Dean G. Acheson: They -- yes sir, they do.
Felix Frankfurter: Well, all right.
Dean G. Acheson: They do. After the Court made the decision to which I referred, a petition for rehearing is filed and as result of that petition for rehearing, the Court of Appeals withdrew its judgment and its opinion. Because it appeared to the Court of Appeals that when it -- it ought -- have allowed the receivers to recover on behalf of the corporation, the result of their action there was that the purchaser of the corporation stopped. It was not involved in this suit at all. It was an outside corporation. And then on, all the stock of the corporation would as a result of the receiver's success merely recover a large part of his purchase price back again. And since that was not an equitable result, it withdrew the judgment and decision. And then it held that each plaintiff and each intervener who had established that he had fraudulent representations made to him, was permitted to recover both for the wrong against himself and for the wrong against the corporation, which the Court went on to say, was not really a wrong against the corporation but had now been transformed into a wrong against the interveners and the plaintiffs. So these were merged together and each plaintiff and intervener was allowed to recover on his own right. In regard to jurisdiction, the Court affirmed its earlier finding that the jurisdiction allay in Rule 23 (a) (3) that these suits were joined together by common questions of fact in law and common relief was asked. We asked the certiorari to this Court on both questions, both on the fact that the Court had been wrong in reversing the District Court on facts and also that the Court had been wrong. I'm saying that under Rule 23 (a) (3) where there were common questions only of law and fact that each intervener or plaintiff did not have to establish federal jurisdiction independently. This Court granted certiorari on the jurisdictional question only and our brief present as a -- presents it here as it was presented to Your Honors. The question presented is whether a number of persons asserting separate and distinct demands as -- as to which there were some common questions of law and fact may intervene in the proceeding in a federal court regardless of the citizenship of each intervener or of the jurisdictional requirements as the Court of Appeals held they might do, merely because the original plaintiff in this so-called spurious class action possessed the requisite jurisdictional requirements including diversity of citizenship. That was what we thought was the question presented and that was the question on which this Court allowed certiorari. But in his brief on the merits filed on the 11th of October before this Court, my learned and distinguished brother, counsel for the respondents says that that is not the question presented at all. It's quite a different question. And he says that the Court was led to believe that that was the question presented on account of representations by me. Now, of course nothing could show me with more regret than to have led this Court into error, which would be wasteful of its time. But I have a feeling that perhaps my responsibility is reduced here and the likelihood that error has occurred is practically minimized by the fact that my distinguished brother took exactly this attitude quite successfully in both the lower courts in this very case. It was he who argued that this case fell on this Rule 23 (a) (3), both in the District Court and in the Court of Appeals. It was he who argued that under Rule 23 (a) (3), it was necessary only to establish diversity of citizenship and the original plaintiff and that all others could come flooding in under that protection. We unfortunately, were quite unsuccessful in both the lower courts. First of all, it was argued that this wasn't a class suit of any sort, spurious or otherwise. But if we were wrong about that and if my brother was right, nevertheless, even under Section 23 (a) (3), each plaintiff or intervener must establish his own right to be in a federal court. However, we were swept away by the success of our opponent's advocacy and the Court held with him that this was an (a) -- 23 (a) (3) case, that it was bound, all these cases were bound together by common questions of law and fact and a common recovery and in such a case, it was not necessary to establish more than the original plaintiff's diversity of citizenship. Counsel who was self-triumphant in presenting that point of view to the court below now charge us with -- perhaps indicating something which was not altogether accurate in saying that that is the question involved in this case. And I think the Court will understand that perhaps we experience some of the emotions of the lamb in Aesop's fable which was abraded by the wolf for polluting the stream from which the wolf was drinking, although the unfortunate lamb was a long way downstream from the wolf. But however that may be. We have collected all the arguments of counsel for the respondents in our brief, ten pages of these arguments in the reply brief on pages 10 to 14 -- 4 to 14, to indicate that their view at that time was quite identical with the view which we hold now as to the question which is presented. We leave this phase of the argument without dwelling on -- on those formal expressions of our opponents with perhaps only two comments. One is to paraphrase a remark which I heard made from this bench a great many years ago by Mr. Justice Holmes, who -- who said that when counsel come to reconcile his present exegesis with his past position, he may count on my undivided attention. The other observation is that however unlikely it may be that counsel on both sides in this case and both lower courts have been wholly wrong about the basis of federal jurisdiction, it is still conceivable and it still falls within the power of the human mind to grasp that that might be so, and therefore, it's necessary to turn to a consideration of what our opponents believed as the question presented and that brings me to the question asked by Mr. Justice Harlan. Whereas they thought in the District Court and in the Court of Appeals that this was a common law and common fact question and fell under Rule 23 (a) (3), they have now discovered that it isn't that sort of a case at all. It's a case involving, they believe, interdependent claims to a common fund and therefore, falls not under 23 (a) (3) but under 23 (a) (2). But they believe it is a -- a case exactly like a creditor's bill case, you know, where there has been a fraudulent transaction, receivers are appointed upon this, brought into Court, all creditors come in and the fund is divided among those who -- who come into Court. And they are of course -- it is a long and well-established rule that if the plaintiff has diversity of citizenship, then the distribution of the fund to others who may have an interest in it, that is merely ancillary to the original proceeding, and therefore, they may come in, because clearly, if they did not come in, their rights would be cut off. The fund is going to be distributed and their rights would be -- would -- would be gone. But in the present case, there's no common fund at all. Instead, here are a group of separate plaintiffs and interveners. They're all plaintiffs who have claims based upon fraudulent representations alleged to have been made to each one of them. It is alleged that each one of them relied on his fraudulent reputation -- representations, that each one took action and each one suffered a loss. And as a result of all of that, it is said that the defendant became a constructive trustee and that he holds their stock and the proceeds of their stock for them. They're clearly -- there are separate recovery sought against a defendant. They have no jural connection whatever with one another and they are both together for trial merely because there are common questions of fact and common questions of law and common money judgments asked, not to have a participation in a fund, but have to -- to have individual judgments against the petitioner, Black. Now, there would be no argument about this at all if the facts were simply that the defendant acquired the stock from the individual plaintiffs, kept it until the dissolution of the company and then received so much for each purchase of stock. Clearly then, each purchaser will be seen to be coming to the defendant and asking for the value of his stock which had been purchased as a result of the fraudulent representations before. But here, there are two facts, which while they do not change the -- the conclusion that there is no common fund, whatever, do make the computation only a slightly bit -- slight bit more complicated. These facts are -- are the following. I mentioned a little while ago that a -- the defendant was accused of having taken stock for the corporation for which he paid no adequate consideration. The lower court held that he did pay adequate consideration but the Circuit Court of Appeal, the Court of Appeals said no. Now as to that stock, the Court of Appeals says, "Since no adequate consideration was paid for it, we regard it as cancelled, just strike it out. In determining what the value per share was on dissolution, pay no attention to that stuff. Furthermore, the Court of Appeals says that not all of the stock purchased from all the plaintiffs and intervene -- intervenors was held by the defendant. Some of it in his capacity as President of the company, he had retired. So the Court says, "Strike out the stock which he got without payment of adequate consideration and add on the shares which were retired." Now, that the biggest shares which he got allegedly without compensation numbered 32 odd thousand. The number of shares which were retired, numbered 31 odd thousand shares. So the simple result is that you detract from the stock about 1000 shares. You take away 32, you add 31, the difference is one and therefore, instead of having 86,000 shares outstanding, there were 85 something, and each stockholder's value of his stock is computed on -- on the basis of the smaller outstanding shares. It -- it makes no difference in -- in the -- in the ultimate value of the stock. On dissolution, the value per share was according to respondent's figures, $51.06. As a result of all these computation, it turns out to be $51.75, a trivial and unimportant modification of -- of that share value. Still, each claimant is claiming a money judgment against the defendant. Each claimant is claiming the value of his stock, the only thing that has changed is that the per share value instead of $51.06 is now $51.75. It still leaves it individual claims against an individual defendant. Now, our opponents have a difficult time in suggesting that this creates a common fund. So they're going to change the argument and say the claims are interdependent. Well now, why are they interdependent? What -- what is interdependent about? They say because each respondent who is -- each plaintiff who is victorious affects the case in two ways. One way in which he affects it is that he is entitled to recover. Another way in which he affects it is that his shares, if they have been retired, have to be added back in. Therefore, the more shares that are added back in, the greater the total outstanding shares and when you divide it, the -- the denominator of the fraction is reduced or changed. This is a pure calculation. It has nothing to do with a common fund and it -- it really isn't true even in fact that each -- that recovery of each claimant affects the result. Now, why is that so? Because as I've suggested a moment ago, some of the shares which were purchased were not retired. Therefore, to the extent of all those who are not retired, clearly, you don't add their shares to the outstanding stock because they were outstanding still. There is no -- that affects the computation in no way. The important thing is that all of these has to do with computing the value of some shares for which defendant as held by the Circuit Court, the Court of Appeals to be a constructive trustee, it has nothing to do with a common fund. There is no fund of money which is to be divided among all these people. Each one has a separate claim. Each one has to make out his own right to recover by showing that representations were made to it. Each one has to make out that he -- he relied upon these representations enacted to his objection. Now, if this is so, then clearly, this is a -- a case of common questions of law and fact, the questions -- a case under 23 (a) (3). If that is the case, then we assert that each claimant has to make out his own right to come into a federal court and that conclusion is hardly disputed in the brief on the merits by our opponents.
William O. Douglas: They only case against you, the Shipman case?
Dean G. Acheson: The only -- yes, Your Honor. This branch of the case, the only one that I know -- well, I -- I -- there may be some others, I don't wish to say that, Mr. Justice Douglas. There -- there may be some others but if they are, they're District Court cases. The -- let me examine for a moment the -- this matter that I've just been stating, perhaps somewhat dogmatically, that this is a case of separate actions, and not a case of a common fund. Now, it so happens that in the Second Circuit, in a group of five cases or more, I've only picked out five here, all this I did by an overlapping group of the most distinguished judges in the Second Circuit. The two hands, Judges Swan, Chase, Frank, Clark, and a visitor from the Third Circuit in one of them, Judge Maris. In all -- these cases, they point out a line between what is a common fund case and the reasons why they're -- only the jurisdiction needs to be acquired over by the original plaintiff and these separate cases by only a question of common law and fact is involved. In the first one, it is -- it is the case -- excellance of -- of a fund case. This is very much relied on by respondents in this case. It's the Dickinson case and if ever there was a case of a common fund, this is it. In that case, a group of people subscribed $600,000 for a common financial purpose. This fund was embezzled. People ran off for the whole effect. Now, $176,000 was traced to two men. The -- they had -- they were found in possession of that much of the -- of the swag. Two of the subscribers who had diversity of citizenship as against A and B who went off with the money, brought them into the federal court and there, it was proved and judgment was given that they had improperly taken these funds. At this point, by service by publication, by registered mail, all possible ways, all the available living reachable, original subscribers were brought into Court and there, they were given their proportionate share of the $176,000. Of course they weren't quite all. Of the people, some had died or moved away, but vastly more than -- than $176,000. So their proportion was whatever they subscribed, the fraction over $600,000 divided into the 176. Now the Court says, "The presence of all these other people is ancillary to our distribution of this fund of $176,000. We have it properly before us. We have to distribute it, and therefore, we must have, regardless of -- of citizenship of the people who claim an interest in that fund." This is exactly the kind of a case that the one before this Court is not. And it's pointed out in the very next case. It's -- the one I have just mentioned is a case exactly like Stewart versus Dunham which Your Honors decided, and is a case of a creditor's bill, but you said the same thing. Now, in the next case, this shows where the line is drawn. It's a case of Ayer versus Kemper in the 48 F.2d. Here we had Judges Learned Hand, Swan and Chase. Judge Chase holds over from the earlier case. Here, Kemper was the receiver of a railway and a fiduciary for Ayer and the other note holders who -- whose security he held. By fraudulent representations, the trustee purchased from the note holders their notes, both by positive representations and by the suppression of information, which it's -- was his duty to disclose. Question then arose whether persons not before the Court were bound by the judgment of the Court in that case, and Judges Hand, Swan and Chase said, "Most certainly not." Each one of these men has a separate -- totally a separate action against Kemper. He -- he misled each one separately. Each one relied separately on the misrepresentation and each one is bound. Those who are not before the Court are not bound and each one must establish his own federal right to come into a federal court. There was no common fund. They were separate suits. Then come in to one other case in this in the Second Circuit, 164 Federal, Steele versus the Guaranty Trust Company. There, the judges were Learned Hand, Augustus Hand and Jerome Frank. In that case, the Guaranty Trust Company was a trustee of note issue. By breach of its fiduciary duties, it failed to take action against the debtor until so much of his assets were dissipated that only 49% on -- on each note's value could be recovered. He didn't even act then. So each one of these note holders joined in together in a suit, brings action against the Guaranty Trust Company saying, "Your breach of duty lost me at least 49% of my investment." And the Court said, "These are separate suits." Judge Frank's language, "Is a 'conjuries' of separate suits under Rule 23 (a) (3) where each claimant must prove federal jurisdiction." Then I had another case very much like it, Miller versus the National City Bank. In that case, we have Judge Learned Hand, Judge Swan and Judge Frank. This was a case in which the National City Bank was alleged to have entered into a conspiracy with the Guaranty to induce note holders under towards -- where that Guaranty was a trustee of security for the notes, not to take action against the Guaranty until the fund had been used by the Guaranty for purposes of its own. In this case, these judges again said, "These are separate claims. What you say in effect is that the National City Bank deceived each one of you. Each one of you was induced not to proceed against the Guaranty until the funds were gone. There is no jural connection between you, there is no fund in the hands of the National City. You are suing it for breach of trust and -- and tort claim." Another case of the same court is (Inaudible) Company. Here we had Judge Learned Hand and Judge Chase and Judge Frank. That case was held that stockholders who bring a suit for injunction against the corporation to prevent the sale of stock and alleged violation of their preemptive rights have separate suits against the corporation. The suits are -- are brought together by reason of common questions of law and fact under Rule 23 (a) (3) and each must prove his own right to come into the federal court. Now, Your Honors, this has been a long excursion in pursuit of -- of respondent's statement as what is the question presented to you? But I think it has not been wholly wasted because I think it does show us that the present case is truly a case of separate claim. There is no common fund. There's no jural connection between these people. Each one says he was deceived or she was deceived. Each one says he or she relied on these representations and indeed in the court below, it was found that some did and some didn't. And therefore, those who did not rely or were not deceived were not allowed to recover and those who were in the opinion of the Court were allowed to recover. And I think it shows also to us the reason. This is not merely an arbitrary -- arbitrary matter of saying, "Well, if you're under Section 23 (a) (2), you don't have to show federal jurisdiction, but if you put -- make the number 3 than you do, that isn't the point." The point is that where there are separate suits, those who are not before the Court are not bound by the result, whereas, if there are separate suits, where -- where there are separate suits, they are not bound by the result and therefore, they must prove their right to come in. Each one has his own lawsuit and he must prove his right to come in to a federal court. Whereas, if there is a fund and the Court has jurisdiction over the fund, because the original plaintiff had diversity, then the claims of these intervenors in such a case are purely ancillary. The Court is going to dispose of the fund. The fund is there in Court to be divided and everyone claiming an interest must in right be able to come in. The first case, I've mentioned a moment ago that Judge Frank said, "These are merely a 'conjuries' of -- of separate cases. Judge Prettyman in the Court of Appeals here in the district says that the joinder of cases such as the one involved here is a matter of economy and efficiency on the part of courts and parties, an avoidance of multiplicity of suits." And he goes on to point out that each claimant or intervenor must prove his own right to be in a federal court. Even Professor Moore upon whose writings the court below relied and they were recited -- cited by the respondents, the court below followed them. Even Professor Moore who -- whose reasons I will come to in a moment says --
William O. Douglas: Why do you use the word "even"?
Dean G. Acheson: I beg your pardon?
William O. Douglas: Why do you use the word "even"?
Dean G. Acheson: Because he is -- I'll tell you why, Your Honor. Professor Moore is -- is the author of the view that in this 23 (a) (3) cases, it is not necessary to prove a jurisdiction if the original plaintiff has jurisdiction. Originally, in support of that view, we gave Your Honor's decision in the Stewart case. The Stewart case however was patently a case of a common fund. So in the second edition of his works, he dropped the Stewart case and he put in Shipley case from the Western District of Pennsylvania. Now, it did not escape the attention of writers on this subject that the only authority cited in the Shipley case is Professor Moore. And now, the only authority cited by Professor Moore is the Shipley case.
William O. Douglas: One way of getting to those.
Dean G. Acheson: I beg your pardon.[Laughter] This is a good way to work.[Laughter] You can really build up a reputation and that sort of thing. But even Professor Moore, if you would find me for another reputation of the word "even," Your Honor. Professor Moore, although he says there is no jural connection between the claimants, plaintiffs and interveners in the -- in the suit bound together with common questions of law and fact, he draws an odd conclusion from that. He says that if there are only a few such plaintiffs or interveners, then they must act under Rule 24 (b). They must ask to intervene. And when they ask to intervene, they must show federal jurisdiction. But if there are a whole lot of then, then they join together under Rule 23 (a) (3) and come in as a spurious class and then they don't have to show it at all. And he says the reason for this is procedural convenience. In other words, there are only two or three, you have to show -- each one shows his federal jurisdiction. But if they're more than that, you don't. And this -- in writing about it, -- Professor Hart at Harvard and Professor Wechsler of Columbia asked whether it's -- they say, "Is the Supreme Court likely to uphold this use of Rule 23 (a) (3) to accomplish so bold an enlargement of federal jurisdiction. We think that in large measure, this Court has indicated the correct principles here in Clark versus Paul Gray, Incorporated in 306 United States.
Speaker: Does your argument rest to the diversity in all these cases that Justice Whittaker referred to?
Dean G. Acheson: Well, Your Honor, our argument leads to this. We say that only in those cases where there was diversity did the Court have jurisdiction to any -- under any kind of a decree. Now, we will come -- I'll come right to it now. Our opponents say to us, -- well, this is just a dry legal question because they only admit that there are two people who -- who are citizens of California, which is the State of which the defendant is a citizen. I say it's clear about these two. Well, the fact of the matter is that it's very unclear about the rest of them because there are no allegations as to their citizenship except the original plaintiff. There is very sketchy proof, no request for findings of fact and no findings of (Inaudible). Some of them may not have diversity, some may, but that is unimportant. So far as these two are concerned, their phrase is, "We would have won a skirmish, but lost the war," if Your Honors decide as we urge you to decide. We think we can worry about what we have won or lost. In fact, these two people have claims which on one basis, the respondent's calculation are said to be $100,000, on another basis, $200,000. So it's an -- substantial in and of itself. But the -- the thing that is really important here is if this jurisdictional question is straightened out, and the cases go back to the -- reconsidered on the basis of proper jurisdiction, then there arises a question which really may go to the very heart of this recovery and that is whether the Black-Marshall Oil Company is a necessary party defendant. If it is, it is a citizen of Illinois and certainly a large number of these plaintiffs who claim to have lived in Illinois at the time these actions took place are citizens of the same State as a necessary defendant. Now, whether it's a necessary defendant or not, we are not asking this Court to decide, although we are scolded by our opponents for discussing some matters beyond the strict jurisdictional question. We discuss them to show that this is not a dry legal question but a very important one.
Hugo L. Black: May I ask you a question --
Dean G. Acheson: Yes sir.
Hugo L. Black: -- because I don't quite understand your answer to Justice Douglas. Suppose there are 25 people who filed a suit, separate (Inaudible) suit like this. Submitted, they all trying to get to the federal court by reason of diversity. One other person comes in and he is not entitled to get in by diversity, he gets in as an intervener. Are you claiming that in the circumstances, the 25 would lose their judgment over to one person who intervened?
Dean G. Acheson: No, no, no, Mr. Justice Black. We are not claiming that at all, sir. All we are claiming is that the one person cannot come in.
Hugo L. Black: Well, suppose he does come in, I have in the (Voice Overlap) --
Dean G. Acheson: Then it gets dismissed out.
Hugo L. Black: He's dismissed out?
Dean G. Acheson: Yes.
Hugo L. Black: He alone?
Dean G. Acheson: Yes, sir. But what I'm now saying is that when you straighten out this jurisdictional tangle, it goes back to the lower court. There, we can say to the lower court, "Now, you are paying no attention to the citizenship of these people because you believed it was unimportant." It is very important that the Black-Marshall Oil Company be -- come back into this case as a necessary party defendant. And if it does, then a very large number of people have to be dismissed out. They will have to go back to the state court and in the state court, many grave errors of state law will be corrected. Errors pointed out by Judge Phillips in the Court of Appeals.
Hugo L. Black: Well, why is -- we don't --
Earl Warren: Mr. Acheson, below, did you insist that the oil company be a party defendant?
Dean G. Acheson: It was a party defendant, Your Honor. It wasn't -- wasn't brought in by us. It was the first party defendant named in the long, long list in the suits brought by my opponents. Now, how did it disappear out of this case?
Earl Warren: Well, I don't know.
Dean G. Acheson: Well, it disappeared in a very interesting way. Amen, the plaintiff in the original proceeding, this corporation had -- had been dissolved under -- it was -- under the law of Illinois, it had two years when it should be resurrected. And before the two years were out, Amen asked for receivers to be appointed. The receivers were appointed by the District Court in Illinois, and one of the receivers is an Illinois citizen, the other is a Kansas citizen. So the two receivers appear in the District Court in Kansas. They filed a suit against Black. They intervened in the other person's suit as plaintiffs. They then asked for the corporation to be dismissed so that an Illinois defendant is whisked out of the case before you could hardly notice it and in comes the receivers as plaintiffs. So, diversity has -- has that -- has gotten rid of this very difficult and tricky problem of diversity. The Illinois defendant is out. In its place, there is an Illinois plaintiff. So we say this is one of the vitally important question --
Speaker: Could I ask you a question at this point? Under your view of it, that this case went back, goes as to whom there was no jurisdiction were weeded out, would there then be a retrial --
Dean G. Acheson: No.
Speaker: -- in the District Court of the merits as to those over whom there would be jurisdiction?
Dean G. Acheson: Your Honor, if -- if this case went back with the instructions which we hope you would give then we believe that in the District Court, Circuit Court of Appeals would of course correct its error and send the case on down to the District Court. And in the District Court, we believe that there, we would say, "Now, the Supreme Court has told you that you are proceeding quite wrongly." The Circuit Court of Appeals has thrown these receivers out of the case. They're no longer in the case at all. The Court of Appeals says, "They have no right to recover. They're out." Very well, then we go back to where we were before. We have the corporation as a defendant. We have the corporation out, we have the receivers in, the receivers are now out, let's have the corporation back." And if the corporation is back then those citizens who turn out to be citizens of Illinois will have to go to the state court. Now, whether in the state court the same record would be used is a matter of the counsel at the trial. Now, those people who -- who had survived this correct diversity test would of course remain and then whatever judgments they are entitled to would not be effective. But people who never had a right to be in court will have to go to a court where they have a right to be.
Felix Frankfurter: Mr. Acheson, may I ask you a question which I also addressed to Mr. Smith, let me see if -- answering, come to his term. There were some 25 individual -- how many, something like 25 individual plaintiff, something, whatever they were. Of these, how many were unquestionably set -- how many satisfied diversity? Two? Three?
Dean G. Acheson: We -- we don't -- we don't know.
Felix Frankfurter: Well, I mean, unquestionably on the record.
Dean G. Acheson: Well, there are -- there are two who clearly do not.
Felix Frankfurter: Clear -- clearly two do not?
Dean G. Acheson: Now, we know that one does.
Felix Frankfurter: One does.(Voice Overlap) --
Dean G. Acheson: Now, what happens to the rest, I don't know.
Felix Frankfurter: Well, that's what I'm --
Dean G. Acheson: Mr. Smith believes that they all satisfied.
Felix Frankfurter: That's the question I'm putting to you.
Dean G. Acheson: And cannot tell from this record.
Felix Frankfurter: Well, that's the question I want to put to you. If they come in -- if they come in on the assumption that an allegation of diversity was unnecessary because of the view of the Court assuming your position is the one the court took below. In view of the Court that this is 23 (3) etcetera, did they come in on that basis and therefore, their counsel being elegant pleaders didn't have to set forth diversity of jurisdiction? If they did that, then we can't assume, assuming you raised the point below, that diversity jurisdiction does exist unless it's affirmatively asserted.
Dean G. Acheson: Well -- that's -- that's quite correct, Your Honor. That --
Felix Frankfurter: Therefore, as to each one of them, there has to be an examination on the assumption of your argument that -- that if it's diversity, if you are right about this particular class -- spurious class and each one would have affirmatively to maintain this jurisdiction. And on the record, you say, since the contrary theory was the basis of this litigation, that would have to be considered de novo down below, is that right?
Dean G. Acheson: I should think so. There is no question about the fact that Amen, the original plaintiff in the original suit, he was the sole plaintiff, nobody else, that he is a citizen of North -- South Dakota, I forgot which one it is.
Felix Frankfurter: And there are two --
Dean G. Acheson: But as to him, there is diversity, there's no question about that.
Felix Frankfurter: And there are two who are plainly not and it's (Voice Overlap) --
Dean G. Acheson: Two are plainly not. There are great many about whom there is such evidence as, “Well, I live in this place” or “I'm the wife of someone who lives in some place.” But there are no allegations, no findings of fact and it's only fugitive testimony.
Felix Frankfurter: Well, if Mr. Smith's theory is right then there was no need of alleging.
Dean G. Acheson: That is correct, Your Honor. That is quite correct.
Felix Frankfurter: And therefore, if he's not right, there must be an affirmative reconsideration of this property.
Dean G. Acheson: Yes, Your Honor. That -- that's (Inaudible). Now, may I just take one further moment and save the rest of my time because our opponents have introduced into their brief filed in October what seems to me to be a new thought. And that is that there on pages 48 and 51 of their brief, they say that -- there's a federal question here, this is -- case really don't have to rest on diversity at all, that their cause of action was stated and proved under a rule of the Securities and Exchange Commission which was authorized by the Securities and Exchange Act of 1934. Now, although this case was filed, these petitions were filed at 1949, no evidence, no argument, oral or written, has ever been based on this claim. It is not imperative before until this time. In the District Court, no findings of fact or conclusions of law were asked for on the basis of any federal question being involved here. In the Court of Appeals, there was no argument. In the brief and opposition in this Court, it was not mentioned. Even in the brief on the merits, the respondents do not suggest that this claim which they now advance for the first time is one of the questions presented in this case. There has been no mention of this so-called rule, which is a rule indeed of the SEC until this brief. There was not even a mention of the Act of 1934 in any pleading which is shown in the record as certified by the District Court to the Court of Appeals or by the Court of Appeals to this Court. So tenuous is this claim that counsel for the respondents did not even notice until October 1957 that an amendment to a pleading which they have made earlier had been left out of the record ever since 1954. They amended the pleadings by striking out a reference to one federal statute and putting in a reference to another. That was in 1949. In printing the record from the District Court to the Court of Appeals, this reference was left out, they didn't even notice it, the three and a half years, so little attention that they pay to it. What actually happened is -- on paragraph 19 on page 8 of the record. In their original complaint, they have an information, believe the conspirators -- conspiracies, joint ventures and unlawful acts violated the Federal Securities Act of 1933, the Farm Credit Act and various other acts. And an -- an amendment, they struck out the Farm Credit Act and put in the Securities and Exchange Act of 1932, 1934. This was left out in printing the record, they didn't even notice it for three and a half years. And in regard to such an argument, I suggest only what this Court has said in the Niles- Bement Farm Company case that it was an afterthought. Much too casual in media to give serious color to the claim now made, but the cause of action asserted is one arising under the laws of the United States.
Earl Warren: Mr. Smith.
Douglas F. Smith: May it please the Court. My distinguished brother has made some reference to an earlier participation of mine in this case. I think he somewhat overemphasizes the significance of -- add harmony on -- in that respect. He does it very pleasantly but I think it reflects somewhat of an overappraisal of the importance of that matter. We -- we'll refer to that a little later on if our time permits, and I think it will. I want to digress from the ordered plan of my argument to say this at the very outset. If my distinguished opponent has said once, he said 20 times that here, you have no fund. I don't want to catapult myself into a discussion of this case on the merits before I've led up to it. But I just want to say this about that contention that here there's no fund, which is the critical thing apparently in petitioner's mind. In every single case in which this Court has exercised ancillary jurisdiction over non-diverse interveners in order to finally permit a court to dispose a property or money or a fund of which it's taken control. There isn't a single one of those cases in which there's any money locked up in the clerk's drawer or in the registry of the Court. Every single case is a case in which a court has taken jurisdiction of some fund by virtue of having service upon the defendant and has impressed an equitable trust upon that money and that's precisely what the Court did here with reference to Black's unjust enrichment. I -- I want to go on and develop this case if I may in an orderly way. The Court was persuaded to grant certiorari here. We say it with great deference and humility to decide a question which is not presented by the facts of this case. Certiorari was granted upon the representation of the petitioners here that respondent's claims are related solely in the sense that they involve some common questions of law and fact. The question stated by you for decision simply assumed the correctness of that assumption, copied it out of their petition and set that down as the question. That question is not here before this Court on the facts of the case. The claims of the numerous parties here are not separate and distinct, they're interdependent claims to property upon which the Court of Appeals impressed a constructive trust. The claim of each party here is for a proportionate share of the distribution of the 1947 sale which came into Black's hands as unjust enrichment and upon which the Court impressed a constructive trust. The claims are interdependent by their very nature inherently and my friend on the other side is compelled in light of the decisions of this Court to conceive that if they are interdependent, then the Court has ancillary jurisdiction to deal with non-diverse interveners. Now, I'm going to show in the reply brief when they finally face the facts that they have admitted the interdependence of these claims. Now, a second question before the Court and I shall undertake later to show that this is a substantial question, is whether or not quite apart from the diversity of citizenship or any question about that, this Court has jurisdiction because of the existence here of a federal question. The complaint alleged, they say it -- it's an afterthought. The complaint alleged that Black's fraud here constituted not only a violation of the common law but that it constituted a violation of the Securities and Exchange Act of 1934 and thus, made unlawful and forbad the gross fraud committed by William Black in this case. Now, if you please, to know whether these claims are related solely in the sense that they involve some common questions or whether their interdependent claims and to know whether this federal cause of action is a substantial cause of action. It's necessary to look at the facts, look at the facts as to how the case arose, how Black treated these shares, what relief is sought and the formula of the Court of Appeals for determining how much everybody is entitled to it.
Felix Frankfurter: Mr. Smith, may I ask you whether you accept as conveying the idea of interdependence that you can't decide A's lawsuit without -- if the federal is thereby deciding B, is that what you mean by interdependence?
Douglas F. Smith: Yes, sir. That's substantially it, that if you need B in there to determine what his share is in this common unjust enrichment, then they're interdependent.
Felix Frankfurter: I'm at the beginning of the suit that you can't say, "Jones defrauded A without necessarily determining that he did or didn't before B."
Douglas F. Smith: Where you got a fund as we have here of the only type this Court has ever dealt with, a fund that consists of unjust enrichment upon which the Court has impressed constructive trust and as a matter of fact, as I'm going to undertake to demonstrate to Your Honor, you do have that interdependence. Then to finally adjudicate the question and dispose of the fund of which the Court has taken jurisdiction, you need to know what these interest is. That's my point.
Felix Frankfurter: I heard it said that, the court below, that some were defrauded and some were not.
Douglas F. Smith: Some -- what, please?
Felix Frankfurter: That some of the claimants weren't -- that some of the plaintiffs were defrauded, the court below found, and some were not.
Douglas F. Smith: That's exactly right.
Felix Frankfurter: Is that true?
Douglas F. Smith: That's exactly right.
Felix Frankfurter: Is that true?
Douglas F. Smith: That's true. The Court of Appeals took the position that you had to have everybody in court to see who was defrauded and for how much in order to -- to distribute and allocate this fund of which the Court had taken jurisdiction. That's my principle factual argument that I'm going to get to a little later.
Felix Frankfurter: But the fellow who was -- suppose some of the people in this who were plaintiffs, you haven't come in, couldn't they brought separate suits?
Douglas F. Smith: No, sir.
Felix Frankfurter: They couldn't?
Douglas F. Smith: They couldn't have brought separate suits to participate in this unjust enrichment on which the Court impressed a constructive trust because that was a fund of which the Court took jurisdiction.
Speaker: They could sue Black, couldn't they?
Douglas F. Smith: They could sue Black on some theory, possibly, but not -- not -- they could not sue Black on our theory to participate in this unjust enrichment of which this Court had first taken jurisdiction. Most of these cases on competition between courts, Your Honor, depend on who first gets jurisdiction of the plaintiff that has the money and not this Court.
Felix Frankfurter: What you mean by the fund is that property of money, if he was judgment -- if he was judgment proof of Black, isn't that all you mean?
Douglas F. Smith: Yes. I mean the fund exactly in the sense that existed in Stewart versus Dunham where the fund, as Mr. Acheson would call it, was the property in the hands of the fraudulent transferee. It wasn't in the registry of the Court, the Court took -- took jurisdiction of the -- of the fraudulent transferee and that was the fund, and that's the fund that my friends have got --
Felix Frankfurter: Well, of course, the Court always has to get hold of a read, whatever it is, whether it's money or a share.
Douglas F. Smith: You Honor, let me say this to the justice. There isn't a case in the books that I have been able to find in which this Court or if you please, any court to my knowledge, has distinguished between these two things. One, money locked up in the registry of the Court or in the clerk's desk and two, money in possession of the defendant on which the Court has impressed a constructive trust. I can't find any difference between those two things. This is the latter situation and that's the situation that existed in substantially every case in which this Court has exercised ancillary jurisdiction. Now, I want to give you the facts of this case because after all, I take it, this turns on the facts. Many of the parties here live in and around the Aledo, a farming community in Illinois. William Black in 1938 came into this community. He was an oil explorer, driller, he wanted to get money to finance some drilling in Illinois. He establish connections in Aledo, Illinois with a lawyer there of wide acquaintance. And working together, they induced a large number of the people in that little farming area to put up money for his oil explorations. He immediately won their trust and confidence. He is that kind of an operator. The first agreement that they made between them to show that fiduciary relationship is that in this agreement, Black was authorized to transact all business of every kind and nature under and in connection with said agreement without interference from any parties of the second part. Well, he didn't find oil in Illinois and so he moved to Kansas. And again, this group of Aledo people advanced in excess of all he used in the purchase and leasing and development of our properties in the state of Kansas. A corporation was formed and they were allotted shares in proportion to their advances. That was a corporation just informed. The Circuit Court of Appeals states for all practical purposes. Now, I'm quoting, “Black was the corporation. He did with it as he saw fit and the stockholders followed him with almost blind loyalty. In Kansas, Black struck oil fairly prolifically. In 1944 when the properties began to increase in value, he formulated what the Court of Appeals called a -- and I'm quoting. "A definite plan to eliminate the large family of stockholders including the Aledo group and to acquire the stock or a majority of it in the effectuation of that plan.” Our respondent's faith and confidence in Black was such that he didn't need to indulge in any particular subtleties in order to get this stock away from them. He just told them or had them told that the company had been sold, if you please, and that their share amounted to about $11 per share.H He told them they must just turn in their stock a half of it in 1944 and the other half in 1945 and they did so. Now, the shares that were thus personally acquired were paid for by Back out of company funds that he just made in advance to himself for that purpose. He took a block of it in his own name, just put in his own name. At the bulk of it, he just simply retired. Well, since at the time of liquidation he owned practically all the stock, put in it -- retire and it had just the same effects substantially as that that he took in his own name as if he'd taken it all in his own name. Now, Black's second major fraud was the secret issuance to himself. He was the corporation as the Court of Appeal said. He just issued to himself 32,000 shares as a secret property. The Court of Appeals says about that, “It's clear beyond doubt that it was issued surreptitiously, covertly, and we say fraudulently to Black." I -- actually, the company hadn't been sold at all in 1944 but in 1947 when he had succeeded in his plan of eliminating what was pleasantly called the family of stockholders, where then he sold to NCRA for a price of $4.5 million. Now we've designated for printing Black's entire record or testimony on cross-examination. I committed to your attention because it shows the particular way in which it -- he handled these shares that make these claims interdependent, claims to this fund upon which the Court impressed a constructive trust. It also shows that we've got a violation of the federal statute here. Incidentally, it shows through Black's own list, a fraud as callous and cruel as was ever committed by a fiduciary against people who trusted him. Now, at the time of the sale of this stock, this company, Black owned the predominant majority of the stock. His stock consisted of three increments, the 32,000 shares that he stole. It consisted of the shares that he got from these respondents that he just put in his own name. It consisted of a block of shares that he legally owned. Now, all of those shares are the participation of all of those shares was of course very greatly increased in the participation of the -- in the sale. Their share was very greatly increased by the fraudulent acquisition and the arbiter retirement of these thousands of shares of the respondents nationally. The result was that Black took about $3.5 million out of the $4.5 million purchase price. Now, on those facts, I want to deal first with the federal question because it isn't necessary to say much about it and I can get that out of the way. We say, if you please, that without regard whatsoever to the existence of diversity jurisdiction, there's a federal question here that gives the federal court jurisdiction. In that, the complaint alleged a federal statutory cause of action. Section 10 (b) of the Securities and Exchange Act of 1934 in conjunction with Rule X-10B-5 of the Securities and Exchange Commission, which that Act requires to be made, make unlawful acts which constitute fraud or deceit in the purchase of securities and thus, make unlawful, the gross fraud committed by Black in this case. Specifically, it's made unlawful by the Act and the rule by means of the instrumentalities of interstate commerce which were used here. I quote, “to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security.” Now, I say to you that within the rule cited or quoted or laid down, I should say by this Court in Hurn versus Oursler. What we have here is a single cause of action for fraud supported on two grounds, a common law ground and a federal ground. We charge fraud and we prove fraud. Here, far from this question, they -- they attempt to -- I think if they say it's a happenstance or an afterthought, it'll go away. But here, far from the federal question being insubstantial, the Court of Appeals decision may fairly be read to sustain the cause of action on the federal ground as well as on the state ground. It's a determination of fraud committed by Black and that satisfies both the state and the federal. Of course such a construction of the opinion isn't at all necessary under the rule of this Court to sustain the existence of a federal question and to sustain the existence of the federal court's jurisdiction for that reason. The rule of the Court stated in the Syler case is that if the federal question is substantial, the federal court has jurisdiction even if the Court omits to pass upon the federal question or even if it rules adversely upon it. And I suggest to the Court that while the merits of this federal claim are of course not before this Court, we think that if -- far from being insubstantial, whether that question were here, this Court would certainly hold that Black's gross fraud is not beyond the reach of the Securities and Exchange Act and Rule X-10B-5. And so, we respectfully submit that the position that the federal court had jurisdiction here because of the existence of a federal cause of action is invulnerable and we think it's more invulnerable or we think that there's great evidence of its invulnerability from the manner in which they attempt to deal with it. They say in their brief, and my distinguished friend has said here, citing Niles versus Beeman (ph), the contention is an afterthought. That's a fragment of this sentence in which that language appears. The sentence is this; “The contention is an afterthought and plainly was not in the mind of the writer of the bill of complaint. That's what this Court hold. Here in paragraphs 8F, and I want to be explicit. In paragraphs 8F and 19 of the complaint, we explicitly alleged a violation of the statute and quoted almost the entire text of Rule X-10B-5. The evidence, if you please, proved equally. We weren't talking -- of course neither side was talking about what kind of fraud this is, we were talking about whether we're -- whether there was fraud. But the decision of the Court of Appeals establishes equally a violation of the federal claim and a violation of the state claim and it would require --
Speaker: Excuse me, you said 8F, I don't find 8F.
Douglas F. Smith: Well, the reason you don't find it, sir, is because the complaint was amended and there was a lot that was just shorthand in the report but I'll read -- that have to be appearing on page 15.
Speaker: I see.
Douglas F. Smith: To employ devices schemes and artifices to defraud and then follows the verbatim statement of Rule X-10B-5, another rule of the complaint if you please. 19 -- I mean, another paragraph of complaint. Having specifically alleged a violation of the Securities and Exchange Act of 1934 under which this rule is promulgated. I say if you please that if -- it would require a change in the subtle line of decisions on this -- this Court with reference to a federal question to say that this -- this did not present a substantial federal question. Now, I want to go on and discuss the other great point in this case whether these claims are interdependent claims to property in the control of the Court or whether they're related solely in the sense that they present some common questions of law and fact. Before doing that, I'd like to spend a moment on stating the class suits that were brought, the type of relief asked and the citizenship of the parties. Two identical class actions were brought in the State of Kansas, mark the fact please that one was brought in the state court and the other in the federal court. The petitioner here who is so concerned and so solicitous of the burden imposed upon federal courts by diversity jurisdiction in general. It was the petitioner who removed the state case to the Federal Court asserting federal jurisdiction. Although they presently have a great deal to say in favor of a state determination to this question naturally, they wanted a federal determination until they got it. And secondly, as to diversity, there's no genuine question here as to the diversity of citizenship with these parties. When a party testifies, I submit that he's been farming in the State of Illinois for 40 years or living in Aledo for 27 years and that was the type of testimony offered here. It approaches the frivolous to try to raise questions about citizenship but they were there, Mr. Justice Frankfurter, if they'd want an elucidation of whether residents in Illinois as a farmer for 40 years means that he's living there, they were there and had their full opportunity to inquire. But the fact is that the petitioners no to an absolute certainty that there are only two non-diverse people in this case and that's Mr. and Mrs. Constant.
Felix Frankfurter: They may know but that doesn't mean we know it.
Douglas F. Smith: The record shows the substantial fact --
Felix Frankfurter: Well, that's a different story --
Douglas F. Smith: Yes.
Felix Frankfurter: -- but --
Douglas F. Smith: And I -- I'm -- I'm addressing myself to the observation that the Court made that made me to ought to go back to the left, the Court really find out. I say that in view of this issue about citizenship, it was raised. When this man goes on and says, “Well, I live in Illinois. I've been farming there for 40 years.” If somebody thinks that means that he isn't a citizen, there's some nuance between citizenship and residence. There was the chance to find out about it.
Felix Frankfurter: I will respect diversity and citizenship as scrupulously as I have to but not beyond that (Inaudible). And you well pointed out --
Douglas F. Smith: I knew that, Your Honor. Now, when Black consummated his fraud, he moved to California. Two of his victims, Mr. and Mrs. Constant are also now residents of California. They lived in Aledo and have citizenship there, if you please, when this fraud was committed. Mrs. Constant was a doctor's assistant there. Her husband was in the Navy. When he got out of the Navy, they moved to California, which is Black's residence. They're the only two non-diverse individuals in this case.
Charles E. Whittaker: Mr. Smith, may I ask you, sir? Does the record show removal proceedings of one of the state case to the federal court?
Douglas F. Smith: Yes, sir, it does.
Charles E. Whittaker: Were there allegations in the removal petition as to the residence of the plaintiffs in that case? In other words --
Douglas F. Smith: No, they didn't. They didn't make any allegations as I recall it. Now, I'm a little bit hazy about that, I recall it --
Felix Frankfurter: (Inaudible) as it is.
Charles E. Whittaker: In order to --
Douglas F. Smith: Because they made Mr. Seder advise me, they did make some allegations on citizenship.
Charles E. Whittaker: Well, does that take care of a substantial number of persons in recovering this?
Douglas F. Smith: Oh, yes. Yes, it would. It would take care -- it's on page 39, if the Justice please. Now, I want to come to the merits with this statement. As I said very unconnectedly in the first instance, I think, the reason for the federal court's historic exercise of ancillary jurisdiction over non-diverse interveners. In certain types of cases is -- has been made very clear by this Court. When the Court has in its control for disposition, property or money as to which there are a number of plaintiffs, full equity and justice make it necessary to let those people come into Court to present their claims and to share in the participation of the property subject to the disposition of the Court.
Felix Frankfurter: Mr. Smith --
Douglas F. Smith: Now --
Felix Frankfurter: -- may I ask whether in this case, if some of the -- some of the plaintiff interveners had not come in, have stayed out, would they had been foreclosed by any adjudication?
Douglas F. Smith: Well, you're asking me about res judicata of course, and I think they'd be bound in this respect. I think they couldn't win to another Court and undertake to get paid out of the unjust enrichment upon which this Court impressed a constructive trust and I think what would happen in this case and should happen in this case is it goes back to the District Court with a mandate to serve notice and let anybody come in who hasn't come in and prove up and participate in the distribution of this fund of which the Court has taken control.
Felix Frankfurter: You mean to say, one of these non-intervening interveners that I hypothesized, if he stayed out, couldn't sue, even in the state court or assuming there is diversity in the federal court and get a judgment for fraud against Black?
Douglas F. Smith: Your Honor, I'm not saying he couldn't get a judgment for fraud. That -- that raises the question of due -- res judicata in the Dickinson case that I hope to have an opportunity to refer to. Judge Clark, former Dean Clark, said that he -- he wasn't going to anticipate res judicata questions. I think that if this case proceeds as I hope it will that finally, everybody will have to come in and be permitted to come in and certainly, it'll be res judicata as to the fellow that comes in.
Felix Frankfurter: Well, yes.
Douglas F. Smith: And that's as far as I -- now, I have attempted to state the rule that underlies the exercise of ancillary jurisdiction by this Court, where the courts got property in an order distributed and each to know whom it belongs to. Now, the petitioners concede this. On page 22 of the brief, I don't mean to herald that as a big concession, they're conceding the ancillary jurisdiction rule. But on page 22 of their brief referring to Stewart versus Dunham on which we strongly rely, and Your Honor, you won't find any difference between the so-called fund that existed there and the fund we've got here because the Court have jurisdiction to the defendant. Referring to the Dunham case, they say this on page 22. In this type of action as emphasized in Stewart versus Dunham, all members of the class having claims regardless of their citizenship are entitled to the benefit of the decree adjudicating rights in the fund or other property under the Court's control. Not in the registry of the Court, but under the Court's control. On the next page, however, it occur that the action here, and I'm quoting again, “presents only a series of separate and distinct claims.” Now, mark this, “related solely in the sense that there's a common question of law or fact involved in the common relief as sought.” I'm going to show that they've had to concede in the reply briefs that that just isn't so. That's the issue between us. Now, the theory of these class actions which the Court of Appeals sustained is this, that these people that were defrauded of their stock continued to be the equitable owners of that stock until the time of the sale. And that upon the sale, equity impressed a constructive trust upon that portion of the purchased price that came into Black's hands for the interest represented by those shares equitably held by these people. And he denominated Black a trustee ex maleficio to account for that unjust enrichment. The Court recognized first that the rights being vindicated was a common right to participate in that unjust enrichment. The Court said this, three -- two or three sentences. “In equity, the stockholders remain the owners of their shares with the right to participate in the proceeds of the sale in the proportion that their stock ownership there as to the total stock entitled to participate in the assets of the company at the time of sale.” I'm still quoting. “In these circumstances, equity will impress a trust upon the stock and constitute Black a trustee for the profits he reaped from the date he received it until he finally sold it or retired.” Now, here's the reason these claims are interdependent. The fact is that no one having a claim here that his shares were fraudulently acquired and arbitrarily retired. No such person has a claim for any fixed absolute or pre-determinable amount. All he has is a claim that he was deprived of a common right to participate in the proceeds of the 1947 sale. The claim and the recovery on each of these claims of the defrauded stockholders necessarily depended therefore on the total number of shares that were fraudulently acquired, and entitled to be equitably outstanding. And that obviously depended in turn upon the determination of the total number of shares that were entitled to participate on the ground that their -- of the owners that their shares were fraudulently acquired and arbitrarily retired. And so, the claims are inherently interdependent. Now, I want to sharply contrast the explicit representation -- I don't mean to use that in an unpleasant sense, the -- the assertion of my friend on the other side on which this Court granted certiorari, I want to contrast that with fact. Petitioner told this Court, “Your plaintiffs are to be paid in full. Your recovery is based on an ordinary tort liability for defrauding.” I want to contrast that with the court of -- what the Court of Appeals said. “Recovery is predicated upon the equitable principle of unjust enrichment, not the theory of provable damages.” Well then, Mr. Acheson goes on. “Your recovery is based on an ordinary tort liability for defrauding under” -- and I'm quoting, “a formula resulting in the same fixed, absolute amount of each claimant regardless of the number of claimants.” I'm going to show that he has admitted that that isn't true in his reply brief. Now, let's see whether the -- under this Court of Appeals formula, the setup for the District Court. The claims is represented by petitioners “are to be paid in full,” as counsel says. Under a formula which produces the same fixed absolute amount, each claimant regardless the number of claim. Or whether under the prescribed, formula they're actually practically, factually interdependent. This formula provides first that only validly issued shares may participate. What follows is the critical part of the formula that they just ignored in their petition for certiorari. The Court says, “Validly issued shares involved in the 1947 sale must include any arbitrarily retired” -- I underscore that language -- “arbitrarily retired by Black prior to set sale and of course must exclude the stock fictitiously issued.” “Arbitrarily retired,” they are the keywords in this formula. To determine which shares were arbitrarily retired and entitled to participate in the proceeds is necessary to determine on the evidence, if you please, what shares were fraudulently acquired, who was defrauded, and for how much. It's necessary to do that as they now concede in order to determine the recovery on every other claim against this property in the control of the Court. Our chart on page 27 of the brief shows the interdependence of these claims under the Court's formula. Due to the fact, if you please, that the number of shares outstanding, the number of validly issued shares which include only those who were fraudulently acquired, the number of shares outstanding is a variable depending upon the determination of the merits of every other claim to that fund of which the Court has taken control. As shown in column two, if Amen shares the loan, had established the basis for recovery, the outturn to him would have been $81 per share. Taking the -- another -- the other extreme shown in column two on that chart, “If everybody before the Distinct Court who made a claim had been shown to be entitled to recover, the amount would have been $48.66. They all weren't permitted to recover. As a matter of fact, a lot of them were not by the District Court or he didn't' make findings that they've been deprived of their shares to a fraud and they appealed. And as to some that appealed, the Court said there that -- as to those few that they were defrauded, they were entitled to participate and what practical effect did that had? That enlarged the divisor, it reduced the per share out turn for every individual in the case. Now, that's what I call here interdependence as a matter of fact, the type of case which requires a court to take ancillary jurisdiction if he's disposed of the whole fund. That wide variation shows the degree of interdependence. Now, I want to summarize by saying this. There isn't just one element of interdependence here. There are three factors that make these claims interdependent. The amount of recovery on each individual claim depends on a determination of the merits of every other claim. That's one. The second is that all illegally and equitably outstanding shares here have a common right to participate in the proceeds of the sale that went to that fictitious 32,000 shares that Black issued secretly and fraudulent to himself. Now, there's the third type of interdependency. Some of Black's business cronies were permitted to stay in this thing until the sale, and to participate in the proceeds of the sale. Their participation, of course like Black's, was very greatly increased by the arbitrary retirement of the shares of the Aledo group. That didn't go to swell Black's unjust enrichment, it went to those individuals. And the result of it is that Black's unjust enrichment which is the property, the fund, upon which this Court has issued levy to constructive trust. It's less than the total loss of the respondents. And the result is, because of that discrepancy that -- if every claim here must be pro rata adjusted because the unjust enrichment is less than the total loss, so to those three types of interdependency. Now, in his reply brief, for the first time, prior to that time, Mr. Acheson has relied upon what somebody said in the early stages this case below or on what the Circuit Court of Appeals -- he comes to grips for the first time in his reply brief with the facts that determined whether there is truly interdependence or where there's not. Now, we submit that on pages 17 to 21 of his reply brief -- I like to underscore that. 17 to 21 of his reply brief. He shows that he finds it impossible to turn to the facts and to discuss the facts without conceding that there is indeed interdependence as between these claims to the fund upon which the Court impressed a constructive trust. Petitioner there acknowledges, as I'm going to point out to you, as our chart demonstrates, that the recovery on every claim here depends in literal fact upon a determination of the merits of every other claim of every other person seeking a right to participate. Brought face-to-face for the first time with the Court of Appeals formula which they had ignored in the three brief previously filed. Brought face-to-face with it, the statement in the formula that only validly issued shares can participate and that it must be determined by the evidence as to each share whether it was fraudulently obtained and arbitrarily required in order to determine whether it was validly -- existed. Face-to-face with that, they're brought to this striking confession. I'm going to put together a few sentence to this, in that portion of their brief. The total number of validly issued shares at liquidation is a fact to be determined. In determining the fact from the proof, a court must decide the number of validly issued shares at the time of liquidation, facts that go beyond an individual plaintiff's interest must be considered in working of the amount of recovery. Here, the amount per share to which he's entitled. There's five-minute period or --
Felix Frankfurter: Mr. Smith, may I ask you tomorrow to state what follows if the Court of Appeals judgment is to stand, namely what the District Court would do. And assuming a judgment would be entered without any further proceeding, what kind of a judgment the District Court will enter on the basis of the Court of Appeals decision?
Douglas F. Smith: I'll note that to address my --
Felix Frankfurter: Do you think that you can do that?
Douglas F. Smith: I'll address myself to that.