WILL v. CALVERT FIRE INS. CO.
Argument of Milton V. Freeman
Chief Justice Warren E. Burger: At 1 o' clock, counsel, we will hear the case of Will against the Insurance Company.
I would to ask you to cut your arguments.
Mr. Freeman, you may proceed whenever you are ready.
Mr. Milton V. Freeman: Mr. Chief Justice and May it please the Court.
The petitioner in this case, the Hon.Hubert L.Will is the United States District Judge for the Northern District of Illinois.
As this Court knows, he is one of our most distinguished trial judges.
He has been asked on a number of occasions to address the seminars conducted by the Judicial Center for newly appointed United States district judges to instruct them.
In the 1971-1971 volume, he summarized the basic assumptions upon which Trial Courts work as follows.
The objective and responsibility of our legal system is to produce the highest quality of justice in the shortest time and at the lowest cost consistent therewith.
Justice, particularly the highest quality is unique in each case must be handcrafted by the most skilled artisans available, each case tailored to its own characteristics.
The production of justice is essentially a job shop as distinguished from a mass production operation.
This case is a case which tests whether that standard will continue to be applied to the work of United States District Judges.
The petition granted by this court was to review a mandamus of a panel of the Seventh Circuit requiring Judge Will to proceed to try a case immediately despite the fact that in his judgment, the particular case should not be tried but should be stayed because the same parties had the same issues pending before a State Court in a prior pending proceeding.
Every issue was identical.
It was clear to him that it would be the most wasteful and duplicate of exercise for him to proceed to act.
Unknown Speaker: Was the securities law issue pending in the State Court?
Mr. Milton V. Freeman: It was indeed Your Honor.
It was a defense.
It was the Department of Defense to the complaint in the State Court and it was the second count in the complaint in the Federal Court.
Unknown Speaker: Could it have been disposed off in the State Court?
Mr. Milton V. Freeman: It could have been.
It is conceded by the respondent here that --
Unknown Speaker: It could not have been re-litigated, if it had been decided a certain way in the State Court?
Mr. Milton V. Freeman: Well, I am not sure what the other parties would say about it.
I would think it could not be re-litigated but it was pending before that Court.
It could be deiced by the State Court and it was in fact, Judge Will?s thought that the issues being identical and between the same parties that the litigation of the State Court would dispose off the matter finally, and he would never have to do anything further with it unless something unforeseen came up.
Chief Justice Warren E. Burger: What other alternatives were available to him other than deferring to the State Court
Was there any other alternative?
Mr. Milton V. Freeman: Well, he could have proceeded to try the case in a race with the State Court to decide --
who would decide which issue first.
Chief Justice Warren E. Burger: Any other alternatives?
Mr. Milton V. Freeman: I think there were none Your Honor, and the issue that was presented to him was, should he stay in the interest of avoiding duplicate and wasteful litigation.
He had not hesitation about that.
If I may, I would like to present to the Court the facts in the case.
The Calvert Insurance Company is a Baltimore, Maryland Insurance company that engaged in conversations with the American Reinsurance Corporation which ran a reinsurance pool for casualty insurance.
As of January 1st , 1974, the Calvert Company joined the pool which consisted of 99 other insurance companies to reinsure casualty risks.
That took place in January of 1974.
In early April, two events took place which the parties are contesting before Judge Will.
One is that a series of tornadoes occurred in the Middle West and that the insurance publication said that re-insurers would be called ?murdered?.
Also in early April 1973, the financial statements of the reinsurance pool for the year 1973 became available.
Late April, the Calvert Company said we have been misled by the information we have been given as to the previous years functioning of this pool.
It is regarded by us as material and we believe we are entitled to cancel this agreement as of the day we entered into January 1st, 1974 and avoid liability.
After some discussion, the parties agreed that Calvert would be excused after the year 1974 but the pool insisted that it was liable for the year 1974 and brought suit in a State Court, the 99 insurance companies members to the pool, sued the Calvert Company and said we want a declaratory judgment that Calvert is responsible for the losses which appeared to be likely the result in the pool.
Justice William H. Rehnquist: Responsible in the sense of being obligated to defendant?
Mr. Milton V. Freeman: No, being obligated to respond to the losses.
In other words, there were losses that were going to be in the reinsurance.
Justice William H. Rehnquist: I thought you said lawsuits.
You said losses.
Mr. Milton V. Freeman: Responsible for the losses which appeared to be likely to result.
The State's suit was brought as I say July 3rd, 1974, for a declaratory judgment.
Calvert by reason of diversity said, it could have removed the case to the Federal Court.
It did not do so.
It filed various motions in the State Court and then on January 10th, 1975, six months later, it filed denials, answers and counterclaims in the State Court and denials, answers and counterclaims were that membership in this pool was a security.
That the security had been sold to them one, in violation of the 1933 Securities Act, in violation of Rule 10b-5 of the 34A.
This was by way of an affirmative defense that had been sold in violation of the Illinois Securities law that had been sold in violation of the Maryland Securities Law and also there are certain additional defenses that the American people did not have the right to sue and that there was a violation of the Illinois insurance statute.
On the very same day, a complaint was filed in the Federal Court and the complaint in the Federal Court tracked exactly what the affirmative defenses were in the State Court.
In other words count one, in the Federal Court was Securities Act of 1933 as the first affirmative defense was.
Count two was violation of 10b-5 of 34 A, that was affirmative defense two.
Count three was the Illinois Securities Law affirmative defense three.
Count four was the Maryland Securities Law, affirmative defense four.
Count five Common Law being misled that was affirmative defense five.
There were two additional affirmative defenses which were not reflected in the federal complaint.
It was an absolute mirror image.
The federal suit asked with respect to 10b-5 which is the essential thing that in the state court suit, the relief requested on the 10b-5 count was that there should be rescission of the pool's contract.
In the Federal Court, the claim was there should be rescission identical or in the alternative for $2 million damages and that is the difference between the federal complaint and the state complaint.
The proceedings were brought before Judge Will and a motion to stay was made.
Judge Will said, this is a perfect case for a stay.
The parties have a course of action pending before the State Court, it had been filed six months before.
This is reactive litigation.
It is duplicative.
It is wasteful.
I will have no part of it.
I will stay my action.
Chief Justice Warren E. Burger: I suppose It goes to trial in the State Court and then goes to judgment, what is the status of the matter then with respect to federal jurisdiction?
Mr. Milton V. Freeman: I would think the federal jurisdiction still persists because he has not dismissed it.
The case is still pending but it might well be that a res judicata defense would be adequate to dispose off the motion.
Chief Justice Warren E. Burger: There is always a reasonable likelihood that one of the parties would not like the result in the State Court.
Then you re-litigate in the Federal Court?
You are suggesting that a res judicata might prevent litigating then.
Mr. Milton V. Freeman: That is right and that was indeed Judge Will?s hope that there might be no necessity for using any federal judicial power if the issues were fully litigated and decided in the State Court.
Chief Justice Warren E. Burger: What about the right to have the federal question litigated in the State Court?
Mr. Milton V. Freeman: There is no question that it is conceded that the federal question so called is a question which the State Court not only has a right to decide but must under the Supremacy Clause decide.
In other words, if there is a violation of Federal Law, that is a defense to a State Court action.
Chief Justice Warren E. Burger: Is the exclusion of the Federal Court's right to try the case?
Mr. Milton V. Freeman: No, it is not to the exclusion.
There is no question that the ?
Chief Justice Warren E. Burger: I am not sure, I track what you mean about res judicata of the State Court holding.
Mr. Milton V. Freeman: If there is a State Court holding, res judicata applies between a State Court and a Federal Court.
The Federal Court does not have an exclusive right to try the case unless it wants to.
The Federal Court has jurisdiction.
It does not have to exercise that jurisdiction, if the parties have another form, state or federal in which they can litigate it.
If that decision, if the issue is litigated in another forum and decided in another forum then it is clear, for example, if the forum decides that Calvert was in fact misled and is not bound then that judgment should be presented to Judge Will and Judge Will will decide whether that is res judicata.
Presumably, as I understand res judicata, it would be res judicata.
Justice William H. Rehnquist: The same would be true of any diversity case, would it not?
You have an action in the State Court and there is diversity of citizenship here but action on the same claims in the Federal Court and whichever one you prosecute, the judgment will probably be res judicata in the other.
Mr. Milton V. Freeman: That is right and that was Judge Will?s hope here that the matter would be disposed off where it had first been placed in the State Court and that there would be no necessity to exercise federal jurisdiction but if there were for some reason, the activities in the State Court had not disposed off the matter then he reserved the jurisdiction for a time when he could know how much federal judicial time and energy would necessarily be applied to that.
Chief Justice Warren E. Burger: Would the hypothetical suggested by Mr. Justice Rehnquist prevail if one of the parties having the diversity and the right to try it in Federal Court objected to the proceedings in the State Court and asked for removal?
This is not a matter of volition in this case, is it?
Mr. Milton V. Freeman: Yes, you have a right?
Chief Justice Warren E. Burger: One of the parties?
Mr. Milton V. Freeman: I am sorry Your Honor.
I am saying that the right to remove which existed in this case was granted by Congress for a period of 30 days.
During that 30 days, that right not having been exercised it was gone forever.
In other words, if somebody is going to say, I do not want litigation in the State Court, he has to notify them promptly.
That is what Congress said.
They did not do that.
They had a right to come into Federal Court yet they did not exercise that right.
They let the time pass.
Six months later, they have started an independent lawsuit raising the same issues.
A reactive duplicate of lawsuit.
Justice John Paul Stevens: Mr. Freeman, I am just rusty in one part of this case, what was the source of the right to remove?
Mr. Milton V. Freeman: Diversity of citizenship.
Justice John Paul Stevens: On diversity grounds.
Mr. Milton V. Freeman: The Maryland Corporation.
Justice John Paul Stevens: Because the federal question was not introduced by the plaintiff in the State Court case.
Mr. Milton V. Freeman: That is right.
There was no federal question.
It was a simple declaratory judgment action under state law filed in the Circuit Court of Cook County Law Department.
Justice Byron R. White: I see and they could remove it because of diversity.
Mr. Milton V. Freeman: That is right.
Justice John Paul Stevens: Was there complete diversity with all of the defendants on the state side?
Mr. Milton V. Freeman: Yes.
I have not counted all the 99 but I am so advised.
Justice John Paul Stevens: It surprises me a little bit being in the Northern District of Illinois.
Mr. Milton V. Freeman: But this was a Maryland corporation that was being sued and they had a right to remove it.
The Seventh Circuit granted a writ of mandamus.
It said we recognize in this Circuit, in exactly identical circumstances Aetna State Bank against Altheimer is a case of a 10b-5 claim in Federal Court, parallel with the state claim of the same effect.
We recognize that the Federal District Courts have discretion and that is the rule that we apply and what Judge Will did in this case was perfectly correct in accordance with our rule and we follow Landis against North American opinion by Mr. Justice Cardozo and that is the rule in this Court.
However, since Judge Will ruled, the Supreme Court of the United States has decided the Colorado River case and Indian Water Rights case and we believe that we are obliged by the rulings of the Supreme Court to reverse our findings in Altheimer, to reverse our adherence to Judge Cardozo's opinion in Landis against North American and to say that the District Courts have no discretion whatsoever that whenever a case raising a federal claim is presented to them, they must try the case and that we direct Judge Will immediately to try the case, we say our own Altheimer case based on the Landis case is overruled and reversed as no longer the law.
Four of the active judges thought that was such a remarkable ruling and such a misconstruction.
They wanted en banc consideration but four of eight is not a majority and so we are here.
We say that plainly the Seventh Circuit panel misconstrued the Colorado River case.
It was a case in which this Court was motivated by the same considerations of judicial economy by which Judge Will is motivated, that is was a specific case as to the construction of the McCarran Amendment and both majority and dissenting judges in that case proceeded from different views as to what was judicial economy but in both cases, the Supreme Court said we are concerned with conservation of judicial resources and in fact, on two occasions, the Colorado River Case cited Landis against North American which the Seventh Circuit panel felt had been overruled by Colorado River.
We say that if the decision below is not vigorously rejected by this Court, it will encourage wasteful and duplicate of litigation.
It will make much more difficult efficient, low cost, high quality justice and that is why Judge Will insisted on taking this case up.
The parties would not take it up.
The Department of Justice has a rule that they will not represent judges when private lawsuits are involved in mandamus cases and they suggested that he retain private counsel and he has done so.
It is because of his devotion to the swift and economical administration of justice and its feeling that the necessity of having a ruling from this Court that applies not only to him and not only to this case but to all other cases to show that this Court did not mean in the Colorado River case what the Seventh Circuit panel felt it meant.
This case is consequently not the most important aspect of the matter but I would like to examine it to show what can happen if this kind of thing is allowed to go forward.
Here is a very simple case presented to the State Court.Calvert people said, we were misled.
The pool people said you were not misled.
That was a fair deal and it is perfectly clear Calvert was misled, they could be excused from performance.
If they were not misled, they would not be excused from performance.
What is the result of the federal action?
All kinds of irrelevant questions are raised.
Is there a security?
Is there a violation of 10b-5?
Is there a violation of Maryland Law or of Illinois law?
They do not see any difference.
Justice John Paul Stevens: Are you assuming that the test of being misled is the same in the state proceedings, it would be under the Securities Act?
Mr. Milton V. Freeman: I would think that the test in the state proceedings would be less than it would be under the Securities Act.
In other words, if there were a false statement or a misleading statement that was material, it would be a defense in the state proceedings as a matter of Common Law even without the requirements of intent to deceive, scienter required by Ernest case.
So that they had a perfect defense if they were in fact misled, even innocently by the pool people.
In other words, if the earnings of the pool were material and they had been misstated and they were misled by that and till joining the pool, they were home free. On the other hand, no matter how many times the Court decides that a security is at involved, that does not help them because they have to prove that a false statement was made, that it was material, that they are relying upon it.
So the question which has been presented by this reactive federal lawsuit has nothing to do with the merits of the case, it will not dispose off it for or against Calvert.
The sole issue which is involved is were they misled or were they not misled?
But because of this running back and forth between the Federal and the State Courts, we stand now at a situation in terms of swift and efficient justice where four years almost after the lawsuit was filed in the State Court, nothing has happened.
The first deposition has not been taken.
The first item of discovery has not been taken while it is decided what should be done.
Judge Will saw that.
He said I will not have any part to that.
I will stand aside and I will let the State Courts decide that.
But because the Court of Appeals panel in this case, saw it differently and they felt that this Court had obliged them to overrule what they regarded as a correct exercise of discretion and they have said that this Court had compelled them to deprive District Courts of the jurisdictions that they had previously been thought to have under Justice Cardoza?s opinion in the North American case.
It is most important that this Court correct those deficiencies, announce that it does recognize the necessity of District Courts shaping remedies on a handcrafted basis as Judge Will said, for the purpose of seeing to it that justice is provided economically and without unnecessary delay and it is for that reason that we are here and that Judge Will desires a ruling from this Court that his Colorado River decision has been misconstrued, that the rule of Landis against North American remains the law and that he and his fellow district judges throughout the country have the kind of discretion that is necessary to see that efficient judicial process occurs and that justice is not unduly delayed by complicating and duplicated ways.
Justice John Paul Stevens: Mr. Freeman, Before you sit down, I have two questions.
Did I correctly understand, you said that there has been no progress in the State Court proceeding?
I understood from Judge Will?s opinion there had been discovery in the State Court action that was going forward?
Mr. Milton V. Freeman: That was his understanding at that time, Mr. Justice Stevens but I called Mr. Weather?s counsel for the American Reinsurance Company yesterday morning and he told me that he had filed a request for depositions and had filed notices to admit or whatever and nothing has been done.
Justice John Paul Stevens: I do not understand why the delay and the dependency of the federal case should have slowed down the state case?
Mr. Milton V. Freeman: Well, I do not know what happened in the state case but may I suggest from my own point of view that the State Courts have great respect for the federal judiciary and if something is pending before the Federal Courts that it may induce them to --
Justice John Paul Stevens: They wait for each other forever.
Mr. Milton V. Freeman: Precisely your Honor.
Chief Justice Warren E. Burger: That hardly produces the expeditious results that Judge Will is hopeful about, does it?
Mr. Milton V. Freeman: No but if his stay order had been allowed to stand, then the rule would have been clear that the State Courts did not have to wait on him, that they could have proceeded and they would have felt free.
It is only because Judge Will?s sensible and reasonable decision was overruled in a mandamus issue against him by the Appellate Court that that State Courts properly regard the matter as of some consequence as to whether the State and Federals Courts are or should be actively involved and they think that they are in a position where they may have to wait for each other for the Federal Courts and the Federal Courts have not said that they do not have jurisdiction.
Justice John Paul Stevens: My second question, Mr. Freeman, is it perfectly clear that if, I forgot which companies prevails in the State Court, proving there was deception, therefore they did not have to participate in the pool, would it necessarily follow that they would not also be entitled to recover some damages, I don't know and you can defy?
Mr. Milton V. Freeman: The fact of the matter, as I understand from the briefs is that no money has been paid by them.
They had just assumed the responsibility for the certain amount of losses and they have gotten the right to get a certain amount of premiums.
They have not paid any money as I understand.
Justice John Paul Stevens: Because there could be cases in which the state case would not necessarily end everything and then you have to try the federal case sooner or later anyway.
But you say, this is not such a case?
Mr. Milton V. Freeman: This is not such a case and such a case would be a question of which a remedy as to stay would be shaped by the judge in his discretion.
Justice John Paul Stevens: That he considered, I see.
Chief Justice Warren E. Burger: Mr. Loss.
Argument of Louis Loss
Mr. Louis Loss: Mr. Chief Justice and May it please the Court.
If I may, I should like to begin by agreeing most decidedly with my brother Freeman, that Judge Will is an admirable judge.
It just happens that Judge Will and Mr. Freeman and I have been very good friends for 40 years, all three of us.
Now, I would like to get to the question.
Justice Byron R. White: We noticed who introduced Mr. Freeman here in Court so?
Chief Justice Warren E. Burger: He could not be here without that.
Mr. Louis Loss: I had little difficulty getting that motion granted.
Let me start, if I may with a brief description of the statutory provisions on jurisdiction.
I do not want to go through the facts again.
I would like to do this.
Under all of the SEC statutes, except the Securities Exchange Act of 1934, the Federal and State Courts are given concurrent jurisdiction.
For some reason, Congress in the 34 Act said the Federal Courts shall have exclusive jurisdiction over all violations of this act at all suits in equity or actions at law brought to enforce any liability or duty created by this Act.
So that it is impossible to bring a 10b-5 action as the famous fraud rule under the Exchange Act which had been taking over the universe.
It is impossible to bring such an action in the State Court.
Now then, if 'x' sues 'y' for breech of contract or for declaratory judgment in the State Court and 'y' has the defense based on rule 10b-5, obviously the State Court must entertain and decide the defense under the Supremacy Clause.Otherwise it might be giving a judgment under state law when there is a perfectly good federal defense.
However, that in a sense as I suggest in our brief is an imperfection in our federal system.
It is a necessary imperfection in our federal system to work.
It does not follow that when 'x' sues 'y' in the State Court for let us say breech of contract or in this case since the alleged brief was anticipatory over the declaratory judgment action, it does not follow that when 'x' sues 'y' in the State Court under state law and 'y' has a 10b-5 defense and a 10b-5 counterclaim because when Section 27 of the Exchange Act says exclusive jurisdiction of the Federal Court, it says over all actions.
Not just actions for damages, actions for rescission as well.
So it does not follow that when the State Court defendant moves into the Federal Court expeditiously as a Federal plaintiff for rescission, forget the damages for the moment.
Let us assume there are not any, for rescission in the Federal Court, it does not follow, but in that case, the Federal Court should go out of its way and ignore the exclusive jurisdiction that Congress mandated and stay its hands indefinitely while the State Court tries the whole case so that when it gets back to the Federal Court, unless of course we went on the fraud charge as a Common Law but why should we be put to all of that litigation when we have federal claims and defenses.
It does not follow that in that case, the Federal Courts would sit on its hands indefinitely until all the State Courts finish and the case gets back to the Federal Court at which time, the only decision left is res judicata or collateral estoppel.
That is a rather strange way to exercise the exclusive jurisdiction that Congress gave to the Federal Court.
Justice William H. Rehnquist: There are going to be some cases though Mr. Loss are there not where the Federal Court for one reason or another is going to say there are related proceedings pending in another Court and we are just not going to set a trial later, we are not going to have discovery for the next six months there?
Mr. Louis Loss: Of course, Your Honor, we do not suggest for a moment that the Federal Court is completely without power to control its docket all of brother my associate justices.
There are stays instead.
Justice William H. Rehnquist: The Seventh Circuit really an issue in writ of mandamus, which I understood to entertain the idea that it was not a discretionary obligation of the judge at all but a mandatory duty under which could he labored, which could be enforced, by mandamus seems to me to have said that Judge Will you simply do not have that kind of part that you and I just said the Court does?
Mr. Louis Loss: Not anymore, but I suspect that the reason the Seventh Circuit ordered Judge Will to proceed ?forthwith? is the amount of delay that had already occurred and Judge Will has already said, as far as I am concerned this decision by the State Judge that there is no security is res judicata so that the Seventh Circuit quite properly treated that as if it were a dismissal and my brother Freeman twice answered questions half hour ago by saying yes.
A decision by the State Court will be res judicata.
We do not conceive that except arguendo.
But there is at least a good --
I must conceive arguendo that there is a good argument that any decision by the State Court and the State of Appellate Court has already decided there is no security will be res judicata if the case ever gets back to the Federal Court.
That is what we are complaining about.
Justice William H. Rehnquist: It is not who is going back to the Federal Court.
Judge Will did not dismiss as in England sense or Pullman sense, he simply postponed prosecution of the case in the Federal Court, didn't he?
Mr. Louis Loss: But Your Honor he postponed it so indefinitely and so fully an so completely that the only question left for him if it ever gets back will be not was there a security which is the question that Congress intended him to decide, but is the State decision res judicata or a matter of collateral estoppel.
Justice William H. Rehnquist: But these are questions of shading and degree.
How long do you wait are those all enforceable by mandamus?
Mr. Louis Loss: No your Honor the only thing that is enforceable by mandamus as this Court very recently said in Thermtron Products, Inc.against Hermansdorfer, is this, the Court said a traditional use of the writ in aid of appellate jurisdiction both the common law and in the Federal Courts has been to confine an inferior Court to a lawful exercise of its prescribed jurisdiction or to compel it to exercise its authority when it is its duty to do so and I suggest it his duty.
Justice William H. Rehnquist: In Thermtron there was a dismissal.
Mr. Louis Loss: Informed there was a dismissal and informed here there was a mere stay, but as the Seventh Circuit correctly held, I submit, a stay that has all the effect of a dismissal as this one does must be treated like a dismissal mandamus purposes and I cannot see how my brother can have it both ways.
He argues it is mere stay but then he also says yes it would be res judicata and I think his second position undoes his first.
Justice Byron R. White: Suppose a Federal Suit had never been filed until after the State Suit had been completed?
Mr. Louis Loss: At some point, Your Honor.
Justice Byron R. White: You must agree you cannot re-litigate the matter in the Federal Court.
Mr. Louis Loss: Of course, indeed we worry about res judicata and collateral-estoppel although we do not admit it, we worry about it in a good deal and that is why we are here.
That is why we are making the argument.
Justice Byron R. White: If a fellow with a defense if he does not want to get it tried in a State Court and even present it, is it?
Mr. Louis Loss: Well, If I may say so we did everything we should have done.
We raised these questions defensively.
Justice Byron R. White: And you certainly tendered it to the State Court.
Mr. Louis Loss: We had to or we might have risk to default judgment.
Justice Byron R. White: Maybe, but you also asked for your federal claim to be adjudicated?
Mr. Louis Loss: We had to Your Honor or we might have suffered a default judgment but on the very same day --
Justice Byron R. White: That is the defect in our system.
Mr. Louis Loss: Rather than my answers to your question.
Justice John Paul Stevens: Mr. Loss how would you have suffered the default judgment.
I understand you had several defenses?
Mr. Louis Loss: Well, I suppose we could have answered solely on the ground that awe had been induced to enter the contract by fraud.
But res judicata was bar as to all arguably.
Justice John Paul Stevens: Not on the security issue.
How would it barge you on the security issue if you had not raised it.
Mr. Louis Loss: But res judicata as I understand it applies to all the issues that should have been raised if the course action.
Justice Potter Stewart: Could have been raised.
Mr. Louis Loss: We are talking res judicata.
Justice William H. Rehnquist: But that is the same case it is collateral-estoppel it applies in a different case.
Mr. Louis Loss: If it is basically the same case and this is all one case.
Justice William H. Rehnquist: But it is not.
I thought it was two different acts, one in the Federal Court and one in the State Court.
Unknown Speaker: Certainly, you could not present your counterclaim, you could not present the 10b-5 claim there at all.
Mr. Louis Loss: If we have to someday that is exactly what we are going to argue, but it is not clear Your Honors that we would say that a State Court decision without jurisdiction cannot be res judicata.
They will say they at least had jurisdiction defensively which we have to admit that is the imperfection I talked about.
In that state of affairs the only thing we could say certainly is that the questions of res judicata are terribly complex and this is perhaps one of the best reasons why Judge Will should have proceeded so as to avoid those questions.
Justice John Paul Stevens: What about the argument that you could have avoided all these complexities by removing.
Mr. Louis Loss: The short of it is Your Honor that counsel for Calvert, his researches did not reveal to his mind the possibility of a security question in the less than thirty days.
If that kills us we are killed, but I suggest Your Honors that it should not for a number of reasons.
One, our negligence if you like or our failure to recognize that point of 30 days does not override the exclusive jurisdiction of the Federal Court in so far as it deprives the State Courts.
Justice John Paul Stevens: Then on the other side of the balance I suppose you mentioned that 10b-5 is sort of taking over the universe.
It is awful lot of litigation that may end up in the Federal Court, if every 10b-5 and every antitrust defense is ever available requires that the case be tried in the first instance.
Mr. Louis Loss: It does not your Honor so require.
On the other hand --
Justice John Paul Stevens: I thought that the judge does not have power to deny that you have a right to go forward in the Federal --.
Mr. Louis Loss: If we had been satisfied to stay in the State Court, the State Court could have and should have, would have had to decide the Federal defense, but we wanted our right and still do to have a Federal Court for various reasons decide this Federal question.
Justice William H. Rehnquist: But it has to only when the plaintiff wants it to.
Mr. Louis Loss: Exactly.
It is also truly fortuitous that there was diversity in this case.
If there have not been complete diversity we couldn't have moved anyway and I think that this Court would not want lay down the rule, it depends on that kind of fortuity.
So that I think that our failure to remove regrettable though at laws should not be a very significant consideration into the decision of the case.
I suggest if the Court please, that our case rests on three or four basic simple fundamental propositions that could be stated in as many minutes.
One, as this Court very recently and unanimously held in the Colorado River Case, I quote, it is the duty of a District Court to adjudicate a controversy properly before it and in that same case this Court called the duty a virtually unflagging obligation.
The Court recognized that and they took the opportunity to summarize in a very useful way if I may say so.
The various abstention doctrines and the like, but emphasize that all those are exceptions to this virtually unflagging obligation.
Justice John Paul Stevens: because, the Colorado Case itself was an exception too, wasn't it?
Mr. Louis Loss: In a sense yes.
Indeed our case applies a fortiori because in Colorado there was concurrent jurisdiction.
Here there was exclusive Federal jurisdiction.
Justice William H. Rehnquist: In Colorado there was dismissal not simply withholding.
Mr. Louis Loss: True, Your Honor except our answer to that must be that in substance there was a dismissal here.
This was not an ordinary stay.
Ordinary stay is fine and indeed if the case comes back to Judge Well, if this Court affirms subject to whatever the forthwith means we would not object to Judge Will's staying this case for a few months if he had other business that was more important.
We are not suggesting that the Federal Court has to drop everything and decide 10b-5 cases before other cases, but we are suggesting that when a Federal Court ?stays? as indefinitely and as completely as in this case, that is not consistent with virtual and flagging obligation that the Court spoke about in Colorado.
Justice Thurgood Marshall: It is not exactly indefinite.
If the State Court moves it would not be indefinite, would it?
If the State Court moves with all deliberate speed, they would be prudent to it.
Mr. Louis Loss: The State Court could do several things.
One, we would hope to win on the common law defense.
Justice Thurgood Marshall: If the State did nothing to stop the State Court from moving immediately and sent down the schedule for depositions and the schedule for hearing, and the schedule for the decision.
Mr. Louis Loss: True Mr. Justice Marshall when I said indefinitely, I did not mean an temporal sense.
I meant until however long it takes the State Court and the State Appellate Courts to decide the question completely afterwards there is nothing left for the Federal Court to decide except the res judicata or collateral-estoppel consequences and that is simply not doing what I think Congress wanted the Federal Courts to do.
The fact that we could get complete relief by successfully defending on one ground or another including the Federal ground in the State Court should not deprive us of our right to have a Federal Court determine our action, our action for rescission, 27 says, ?All actions?.
So the first proposition is that we start with the idea abstention and so on is an exception.
The second proposition is that if anything that applies a fortiori, when the Federal jurisdiction is exclusive rather concurrent although we think it applies in either of them.
Thirdly, subject to Mr. Rehnquist's point, which I hope I have answered, this left Judge Well with what this Court called a clear legal duty in Thermtron to decide the case enforcible by mandamus.
Forth there are stays and stays and we do not suggest that the Federal Court is completely without power to control its docket.
Everything that my brother has argued is an attempt somehow to get around if he must.
These one or another of these very simple propositions.
First he says, we can get complete relief by successfully defending in the State Court.
I have answered that one I think.
It is true, but we prefer to litigate the way Congress said we had the right to litigate by being an action for rescission in the Federal Court.
Mind you when we brought that nothing had happened on the State side except that we had filed a motion to the effect that, that state action should have been on the equity side because it reported to be a class action and that was overruled and there was an exchange of correspondence about discovery, but nothing else.
The same day, on which we filed an answer on the State side, we filed the action on the Federal side.
Then my brother Freeman says that Calvert does not need 10b-5 we have this State Law defense and everything else we did he says is a bunch of irrelevant questions, raises irrelevant questions.
Well, I suggest that with all respect these are not irrelevant questions.
We chose other defenses and other claims which Congress gave us.
For example, if we satisfy the Courts some day that there is security here there will be nothing left to litigate except the summary judgment motion because anybody who sells the security without registration is liable under the Securities Act, and nobody will enforce the contract that violates the registration provisions of the Securities Act.
So I do not think it is from my brother Freeman to say that we are trying to litigate irrelevant questions.
Then the argument is made it is a mere stay and I hope I have answered that.
Justice William H. Rehnquist: Mr. Loss it is not even a stay in the sense that Justice Cardozo referred to it in on the Landis Case where there one part was staying in action, in other words, this is simply Judge Will saying in the control of my own docket, I will not call this case for trial be here for six months.
So, it really does not even rise to level of a stay.
Mr. Louis Loss: Well, actually, the Seventh Circuit said in substance it is an abatement because whatever it is I do not think it is important to put labels on it Your Honor whatever it is.
The net effect I must say again, with all respect is to deprive us of our day in the Federal Court except ultimately on the question of res judicata and that simply is not exercised against exclusive jurisdiction to decide questions under the Exchange Act.
Justice William H. Rehnquist: But then you must go further than at least the holdings of the Colorado Case and that how in the England case where you are talking about dismissals and you have got to say that you are talking about calendar control of individual Federal District.
Mr. Louis Loss: Whether there is a stay or a dismissal, I respectfully suggest is a matter of substance and not of terminology.
Justice Potter Stewart: In the Colorado case the District Court's dismissal was approved by this Court.
Mr. Louis Loss: If something has to be called a dismissal then obviously we are finished.
I suggest that cannot be at all.
Justice Byron R. White: We are not depriving ultimately in the Federal Court but once you prevail on the State Court on your Federal defense.
Mr. Louis Loss: Well if we prevail on any our defenses in the State Court, we have won and we do not need any further litigation.
Unknown Speaker: Well, I suppose if you have a 10b-5 claim, you might want to press it.
Mr. Louis Loss: Well, first of all, 10b-5 was pleaded as a defense on the State side.
Unknown Speaker: That means I suppose that there was a violation of 10b-5.
Mr. Louis Loss: We allege it in this sense --
Unknown Speaker: Assuming you prevailed on that in the State Court?
Mr. Louis Loss: Yes, your Honor but then.
Unknown Speaker: Well, if you were damaged by the 10b-5 violation, I suppose you could then press it in the only Court you could press it in.
Mr. Louis Loss: If we prevail on any of our defenses in the State Court.
Unknown Speaker: I am talking about Just about the 10b-5 claim here.
Mr. Louis Loss: Certainly if we prevail on that defense work.
Unknown Speaker: Then you could come right back to the Federal Court and move on.
Mr. Louis Loss: We would not even have to Your Honor because we would have got everything we wanted.
They are suing us for right damages, they are suing us for declaratory judgment of the contracts enforceable and if we have a 10b-5 defense, they will lose their case and we are finished.
Unknown Speaker: I know, but it did you some damages.
Mr. Louis Loss: Oh Well at the moment, I am exceeding arguendo but the --
Unknown Speaker: That is a kind a claim , but 10b-5 is --.
Mr. Louis Loss: A 10b-5 claim Your Honor can be also a basis for affirmative rescission.
Unknown Speaker: I understand that, but nevertheless you could come back to the Federal Court with your 10b-5 claim if you --
Mr. Louis Loss: If we had any damages.
Unknown Speaker: Yes.
Mr. Louis Loss: If we have any there, very minimal in terms of how much money we spent.
Unknown Speaker: So you are to be precluded from return to the Federal Court, if you prevail on your federal claims and if you do not, I am not sure you have much to complain about either.
Mr. Louis Loss: Well, I would respectfully suggest that we do if we lose in the State Court and that is considered res judicata we have lost our right to a Federal forum.
Justice Thurgood Marshall: Except you bring it in.
Mr. Louis Loss: That was going to be my clincher Your Honor.
If this Court leaves this case to the State Court, then this Court inevitably in cases like this is going to be the first Federal Court on the scene and this Court is going to be under considerable pressure to grant more writs for Certiorari that it is today.
Justice Thurgood Marshall: We are bound with all of the --
Mr. Louis Loss: Because that will be the only way --
Justice Thurgood Marshall: What we mean when we are talking about Federal Courts, we mean Federal Courts on the same level as the State Court.
Mr. Louis Loss: Yes so far as the state --
Justice Thurgood Marshall: That is all you need for your argument --
Mr. Louis Loss: Yes, but I do suggest that the net effect of leaving these cases to the State Courts and ignoring the exclusive jurisdiction of the Federal District Court this will be that this will be the only way to correct Federal error in this Court.
Chief Justice Warren E. Burger: Does it make any differences in your view that the Colorado case was decided under the McCarran Act and getting with the securities.
Mr. Louis Loss: Only this Your Honor that our case would be stronger because there was concurrent jurisdiction and here so far as 10b-5 is concerned the Federal jurisdiction is exclusive, so if anything this is a stronger thing.
Justice Thurgood Marshall: I have great trouble with the exclusive point.
If it is ?exclusive? how can you get it in the State Court?
Mr. Louis Loss: Only about way of defense, suppose for example, that I assume?
Justice Thurgood Marshall: That is a difference.
Mr. Louis Loss: Let us assume my brother Freeman for breach of contract involving a patent of his defenses that the patent is invalid.
Justice Thurgood Marshall: But that is the only difference.
Mr. Louis Loss: That's right.
Justice John Paul Stevens: But even on that point the issue is whether there is a security, where there is a problem.
You really do not have any damage claim if you win so that there is not anything that is exclusive.
Your exclusive right is to recover damages but this is a non damage case.
Mr. Louis Loss: I must repeat the Section 27 says a Federal Courts have exclusive jurisdiction over all actions.
Justice John Paul Stevens: I know but it is just the other side of the coin.
Mr. Louis Loss: That is why we have been asking for rescission, and I do not think with all respect that it is for this Court to say that we can exercise that rescission argument by way of defense in the State Court by which we can. Congress said we have a right to a Federal Court.
Justice John Paul Stevens: But the judgment that would be entered if you prevail on the rescission action, has precisely the same practical consequences as a judgment that would be entered in your favor in the State Court on the Securities issue.
Mr. Louis Loss: But that is only if we win Your Honor.
We have decided --
Justice John Paul Stevens: It would be the same if you lose in both Courts too the judgment will be precisely the same win or lose.
If you lose then you owe the money into the pool.
Mr. Louis Loss: Yes Your Honor, but we are entitled to our view as counsel that we have a better chance to win ultimately in the Federal Court system.
We think the Federal judges are more experienced in these matter, they feel more about what a security is and then the State Courts too there are a hundreds of Federal cases only a handful of State cases and we are entitled to the Federal jurisdiction, Congress gave to us.
Justice John Paul Stevens: Another Irony of this case as I begin to sink in on me that apparently delay in this case is entirely to the benefit of your client is it not because you do not have to pay the money while the case is still dragging along.
Mr. Louis Loss: In that sense it is true Your Honor, but I do not think we have been delaying in any sense we have nothing to gain except perhaps the use of the money.
Justice John Paul Stevens: Which is the Insurance Companies are --
Mr. Louis Loss: We are anxious to have this case determined and indeed we were surprised and I think Judge Will was, it never occurred to us when we filed this Federal lawsuit that it would end up this way with a deference to the State Courts.
I still think it is a remarkable thing that happened and Judge Will indicated his disappointment that the State Judge decided this question when he thought he was going to get to decide it, but once the State Court decided he said that res judicata as far as I am concerned the best evidence that his so called stay was a dismissal in substance.
Thank you very much.
Chief Justice Warren E. Burger: Mr. Freeman do you have anything further?
Rebuttal of Milton V. Freeman
Mr. Milton V. Freeman: First I think I should make it clear that the reason that the State Courts have not acted in this case and have waited is that every action as I understand has been on a motion for stay by Calvert so that they are in a hurry to get justice, they are not in a hurry to get justice in the State Court to which Judge Will remitted them.
Then Mr. Loss says if we get it decided that this is a security, then we have some rights because you cannot sell a security without registration.
But that is under the 33 Act where there is no exclusive jurisdiction as there is on 10b-5 where the Congress said suit may be brought in any Court of competent jurisdiction so as far as the 33 Act is concerned on which Mr. Loss is mentioning his reliance, that that is something that Congress said you can go into a State Court and you can bring affirmative actions in the State Court and so that there is no exclusive federal right.
That leaves them down to 10b-5 and he says I have got a 10b-5 claim which will let me off in the State Court but I would like to go into a Federal Court because I prefer that and he has got a right to do that under the First Amendment but it seems to me to be perfectly clear that that is what federal judges are for to see that rights which are provided by statute are not abused so that the Courts are made mere puppets to carry out the desires of litigants for one forum rather than the other when they are both able to give justice.
It seems to me that that is the essential element here as to whether you are going to give trial judges the right, the discretion free of the threat of mandamus when they exercise what the panel itself down below said was a correct decision on discretion that this will result in more efficient justice, more promptly.
Chief Justice Warren E. Burger: Do I understand Mr. Freeman that you agree that the federal jurisdiction was exclusive and that that exclusivity was lost by failure to move within 30 days to remove the case to Federal Court?
Mr. Milton V. Freeman: No, Your Honor, there's two separate entirely.
One is the right to come in the Federal Court by way of diversity.
That was lost because they waited beyond 30 days.
Congress gave them 30 days to decide where they wanted to litigate.
They had the choice and they gave it up.
The other point is that there is it is true a statement in the Exchange Act that when you have a securities case and a violation of the Securities Exchange Act and you want to sue for damages for that, then only the Federal Court may give you damages.
Justice Potter Stewart: Not only for damages.
Mr. Milton V. Freeman: Only for damages.
Justice Potter Stewart: You agree with your brother Loss?
Mr. Milton V. Freeman: Yes, we do.
Justice Potter Stewart: An action for rescission and --
Mr. Milton V. Freeman: That is the difference and as a matter of fact, his pleadings in the State Court are very clear on that point.
They raise 10b-5 as a defense, then they have a counterclaim and they leave 10b-5 out of the counterclaim.
Justice Byron R. White: What was there a prayer for damages in the Federal Court?
Mr. Milton V. Freeman: In the Federal Court, it was for rescission or in the alternative, for $2 million in damages.
Justice William H. Rehnquist: Mr. Freeman, a colloquy has developed up here between me and one of my colleague which may be wholly irrelevant but a case has come to me and cited in neither of your briefs and did not occur to me until now called Bruce?s Juices, decided maybe 20 years ago with the availability of a defense to enforceability of a contract made in violation of Federal Law, I take it that fact that cited in neither brief means that neither of you considered to be relevant here?
Mr. Milton V. Freeman: I think it is irrelevant Your Honor.
That was a question of whether and we were involved in that case.
That was a case of a suit on notes.
The defense was a violation of the Anti-Trust Laws.
What the Court said was that the amount of the notes were of such a nature that they had no relation to the issue of the defense so that it was not an appropriate defense to the claim on the notes and the Supreme Court decided five to four that we could not make an Anti-Trust defense and had to bring a separate Anti-Trust suit.
We could not even raise a defense in that case whereas
Justice Byron R. White: I see why you would not cite it.
Mr. Milton V. Freeman: In this case, it is conceded that the defense of 10b-5 can be raised, it has been raised.
It is before the State Court.
Neither party questions that the defense can be raised whereas in Bruce?s Juices, the point was that the defense of Anti-Trust violation could not be raised in a State Court on a suit.
Chief Justice Warren E. Burger: Thank you gentlemen.
The case is submitted.