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Rosen v. Dick

decided: December 30, 1980.

IRVING M. ROSEN, TRUSTEE IN REORGANIZATION OF BERMEC CORPORATION, PLAINTIFF-APPELLEE,
v.
LYNDA DICK, EXECUTRIX OF THE ESTATE OF JACK R. DICK, DECEASED, HERMAN L. MECKLER, HERBERT R. DEGNAN, JOHN DOE I AND JOHN DOE II AS EXECUTORS OR ADMINISTRATORS OF THE ESTATE OF BERNARD KAYE AND AUDREY KAYE, DECEASED, ROBERT D. BYRNES, JEROME S. KATZIN, HAL A. KROEGER, THIBAUT DESAINT PHALLE, CHARLES H. HARFF, CHADBOURNE, PARKE, WHITESIDE & WOLFF, JOSEPH BONURA, PEAT MARWICK MITCHELL & CO., ARTHUR ANDERSEN & CO. AND EMPIRE NATIONAL BANK, DEFENDANTS ; ARTHUR ANDERSEN & CO., DEFENDANT AND THIRD-PARTY PLAINTIFF-APPELLANT, V. ARISTOCRAT ANGUS RANCH, BEN R. HOUSTON, AND CHARLES D. ALEXANDER, THIRD-PARTY DEFENDANTS .



Interlocutory appeal from an order of the United States District Court for the Southern District of New York, entered by Judge Charles M. Metzner, denying plaintiff's motion to strike one defendant's jury trial demand, but ruling that another defendant was not entitled to a jury trial in reliance on the existing demand and that the second defendant must proceed with a court trial before the defendant who made the demand proceeds to its jury trial. Modified and remanded.

Before Moore, Kearse, Circuit Judges, and Tenney, District Judge.*fn*

Author: Tenney

This interlocutory appeal under 28 U.S.C. ยง 1292(b) represents one small part of the complex bankruptcy reorganization of Bermec Corporation ("Bermec"). In May 1973, Bermec's Trustee in Reorganization ("Trustee") brought this plenary action centering on Bermec's acquisition of Black Watch Farms ("Black Watch"), a cattle tax shelter.*fn1 The principal problem raised here, as the case heads for trial, is the extent to which one defendant, who has not demanded a jury trial, may rely on another's jury demand. We modify the district court's order and remand for trial in accordance with this opinion.

BACKGROUND

Factual History. In the spring of 1968, Bermec began negotiations to buy Black Watch. Trustee's Second Amended Complaint ("Complaint") P 22, Joint Appendix ("Appendix") at 62; Answer of Defendants Meckler and Degnan to the Complaint ("Meckler's Answer")*fn2 P 17, Appendix at 168; Answer of Arthur Andersen & Co. to the Complaint ("Andersen's Answer") P 22, Appendix at 112. Pursuant to a letter dated May 27, 1968, Arthur Andersen & Co. ("Andersen"), a public accounting firm, conducted a limited investigation of certain balance sheet accounts of Black Watch as of March 31, 1968. On June 14, Andersen delivered to Bermec a letter and report on its findings. On June 21, Bermec entered into a purchase agreement for a large portion of the ownership interests in Black Watch. On July 11, the agreement was executed by exchanging the farm's assets for a substantial amount of Bermec stock. Complaint PP 22-23, 163, Appendix at 62, 94-95; Meckler's Answer PP 17-18, Appendix at 168; Andersen's Answer PP 22-23, 162-63, Appendix at 112, 119-20.

In the fall of 1968, Andersen examined the consolidated financial statements of Bermec for the twelve-month period ending June 30, 1968. The records examined included the financial statements of the Black Watch partnership before Bermec's purchase. In a certification dated September 11, 1968, Andersen stated:

In our opinion, the financial statements (of Black Watch Farms) present fairly the financial position of (the farms) as of June 30, 1968, and the results of its operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the year ended December 31, 1967.

Complaint PP 178-79, Appendix at 97-98; Andersen's Answer PP 178-79, Appendix at 121. (Meckler's Answer did not address these paragraphs on the grounds that they "contain no allegations to which a responsive pleading is required by Meckler or Degnan." Meckler's Answer P 77, Appendix at 178.)

In December 1968 and January 1969, Bermec acquired the outstanding Black Watch interests which were not covered by the first transaction. In addition, between July 1968 and September 1970, Bermec allegedly extended credit to Black Watch, performed some unspecified services for the farm, and made cash advances. Although the particulars of these transactions are in dispute, both Meckler and Andersen have admitted that Bermec's affairs with Black Watch extended beyond the two purchases. Complaint PP 26-27, Appendix at 63; Meckler's Answer PP 21-22, Appendix at 168-69, Andersen's Answer PP 26-27, Appendix at 112. In September 1970 Black Watch filed a petition under Chapter XI of the Bankruptcy Act and was adjudicated bankrupt on April 30, 1971, as a result of which Bermec suffered substantial injury.

At some point in the history of these business affairs a date which is crucial to the defendants' liabilities, if any the corporate directors, accountants, and commercial lenders of Bermec discovered that Black Watch was not worth what Bermec had paid, that money had been wrongfully withdrawn from the farm through a series of improper transactions (the "defalcations"), and that the owners of Black Watch had misrepresented its financial condition in selling their interests to Bermec (the "misrepresentations").*fn3 Complaint PP 31-40, Appendix at 63-67. The defendants have denied knowledge or information sufficient to judge the truth of the Trustee's allegations about Black Watch's financial background, but they admit on information and belief that the defalcations and misrepresentations did occur. Meckler's Answer PP 26-35, Appendix at 169-72; Andersen's Answer PP 31-40, Appendix at 113-15.

Procedural History. In his original complaint, the Trustee alleged several violations of the federal securities laws and breaches of common law duties owed to the corporation. The named defendants were officers and directors of Bermec, including Herman Meckler, the former chairman and chief executive officer; as well as Empire National Bank; Peat, Marwick, Mitchell & Co., a public accounting firm which acted as Black Watch's independent auditor prior to its acquisition by Bermec; and Jack Dick, described as the "moving force" behind Black Watch at the time of Bermec's purchase.*fn4 Appellant's Brief at 3; Complaint PP 3-12, Appendix at 3-4. The Trustee's claims against the corporate directors sounded in fraud and failure to exercise proper care in purchasing Black Watch. He alleged that prior to Bermec's second purchase from Black Watch, the corporate directors learned of Dick's defalcations, but they failed to investigate them properly or to reveal them to the corporation, as a result of which Bermec continued to sink more and more money into a losing venture. Original Complaint PP 48-58, Appendix at 12-14.

In September 1973, Meckler answered the complaint, asserted several cross-claims, and made a general jury demand. In November of that year, the Trustee served an amended complaint which particularized his allegations, but which is otherwise immaterial to this appeal. Then in March 1974, plaintiff Trustee was granted leave to file his second amended complaint, adding several defendants, including appellant Andersen, another public accounting firm. Andersen was charged with breaching its professional duties in connection with its investigation and financial reports on Black Watch, Complaint PP 160-70, Appendix at 94-96, and plaintiff further alleged that Andersen aided and abetted the corporate defendants' wrongdoing, Complaint PP 193-99, Appendix at 101-02. Andersen denied any grounds for liability; asserted various cross-claims, including claims against Meckler and the other corporate defendants; and filed a third-party complaint against several other persons and entities involved in the Black Watch transactions. Appendix at 110-54. After Andersen filed its answer and cross-claims, Meckler responded to the Complaint, answered Andersen's cross-claims, and asserted its own cross-claims against Andersen. Appendix at 164-84. The cross-claims between Andersen and Meckler seek contribution and indemnification for any liability suffered under the federal securities law or under the common law. Andersen's Answer PP 287-88, Appendix at 141; Meckler's Answer PP 89-91, Appendix at 180-81.

In his answer to the original complaint, Meckler demanded a jury trial. In December 1978, the plaintiff Trustee moved to strike the jury demand in its entirety on the ground that the Seventh Amendment does not extend to the matters raised, and in the alternative, he moved for a separate trial of the Trustee's claim against Andersen on the ground that Meckler's jury demand did not cover the issues surrounding Andersen's liability.*fn5 Appendix at 185. In an opinion dated June 26, 1979, Judge Metzner refused to strike the jury demand in its entirety, but ordered that "(t)he issues between plaintiff (Trustee) and Andersen will be tried to the court without a jury, and that trial shall proceed before any other claims are tried." 83 F.R.D. 540, 544 (S.D.N.Y.1979). Judge Metzner's decision rested on alternative grounds. First, he found that Meckler's jury demand did not "embrace" the issues presented by the claims against Andersen. Second, he stated that he "would have stricken an otherwise proper jury demand covering all parties under the developing theory that such claims are not protected by the Seventh Amendment to the Constitution." Id. at 543. On a motion for reargument, Judge Metzner denied Andersen's request, but certified for interlocutory appeal the following questions which are now before this panel:

(1) Is defendant Arthur Andersen & Co. entitled to a trial by jury of the issues between plaintiff and itself based on the jury demand filed by defendant Meckler?

(2) If it is so entitled, is the opinion of this court correct that nevertheless a jury trial in this case is not protected by the Seventh Amendment to the Constitution?

(3) Should the court recuse itself under the circumstances of this case?

83 F.R.D. at 546-47.

Upon careful consideration of these questions, we have found that Andersen waived whatever jury trial rights it could have asserted in this case, except to the limited extent of the issues "embraced" by Meckler's jury demand. As to the issues embraced by Meckler's jury demand, we note that Judge Metzner refused to invoke the limits of the Seventh Amendment to strike the existing jury demand, thereby implicitly ruling that these issues are not too complex for a jury to decide. We therefore need not confront the divisive and perplexing problem of a district court's discretion to take complex cases away from the jurors who would otherwise hear them. Compare In re United States Financial Sec. Antitrust Litigation, 609 F.2d 411 (9th Cir. 1979), cert. denied sub nom. Gant v. Union Bank, 446 U.S. 929, 100 S. Ct. 1866, 64 L. Ed. 2d 281 (1980), with Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 631 F.2d 1069, 29 Fed.Rules Serv.2d 933, 49 U.S.L.W. 2051 (3d Cir. July 22, 1980). We would, however, question Judge Metzner's endorsement of what he calls the "developing theory" about the limits of the constitutional jury trial right. Without some direction from the Supreme Court and without fuller consideration of the problem by this court, it would be premature to suggest that one view of this matter has prevailed over the other in this Circuit.

MECKLER'S DEMAND UNDER RULE 38

The record in this case is peppered with equivocal statements made by the parties and the Judge about how the case would eventually be tried. These references have provided the parties with fertile ground for arguing over their understandings (and misunderstandings) about whether their factual disputes would be resolved by a court or a jury.*fn6 We decline, however, to launch immediately into a discussion of the nuances latent in the conferences and correspondence of this case. These gleanings are pertinent, but not central to our inquiries. Instead, we begin with the jury trial rule itself, Federal Rule of Civil Procedure ("Rule") 38, which provides in part:

(a) Right Preserved. The right of trial by jury as declared by the Seventh Amendment to the Constitution or as given by a statute of the United States shall be preserved to the parties inviolate.

(b) Demand. Any party may demand a trial by jury of any issue triable of right by a jury by serving upon the other parties a demand therefor in writing at any time after the commencement of the action and not later than 10 days after the service of the last pleading directed to such issue. Such demand may be indorsed upon a pleading of the party.

(c) Same: Specification of Issues. In his demand a party may specify the issues which he wishes so tried; otherwise he shall be deemed to have demanded trial by jury for all the issues so triable. If he has demanded trial by jury for only some of the issues, any other party within 10 days after service of the demand or such lesser time as the court may order, ...


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