Lehman Brothers v. Schein Simon v. Schein Investors Diversified Services, Inc v. Schein 8212 439, 73 8212 440, 43 8212 495

• Decision Date: 29 April 1974
• Docket Number: Nos. 73,s. 73
• Parties: LEHMAN BROTHERS, Petitioners, v. Jacob SCHEIN et al. Benjamin SIMON, Petitioner, v. Jacob SCHEIN and Marvin H. Schein. INVESTORS DIVERSIFIED SERVICES, INC., et al., Petitioners, v. Jacob SCHEIN et al. —439, 73—440, 43—495
• Court: U.S. Supreme Court

416 U.S. 386

94 S.Ct. 1741

40 L.Ed.2d 215

LEHMAN BROTHERS, Petitioners,

v Jacob SCHEIN et al.

Benjamin SIMON, Petitioner,

v. Jacob SCHEIN and Marvin H. Schein.

INVESTORS DIVERSIFIED SERVICES, INC., et al.,

Petitioners,

v. Jacob SCHEIN et al.

Nos. 73—439, 73—440, 43—495.

Argued March 19, 1974.

Decided April 29, 1974.

Syllabus

Shareholders' derivative diversity suits were brought in federal court in New York, alleging that the president of a Florida corporation as a fiduciary, with others, used inside information about projected corporate earnings for profit and hence wsa liable to the corporation for the unlawful profits. The District Court, looking to New York's choice-of-law rules, held that under Florida law, which it held governed, the defendants were not liable, and dismissed the complaints. The Court of Appeals reversed, finding that Florida law, though controlling, was not decisive, and that in this situation, Florida 'would probably' apply a certain New York decision to impose liability. Held: While resort to an available certification procedure, such as is available in Florida, is not obligatory where there is doubt as to local law, and its use in a given case is discretionary, resort to such procedure seems particularly appropriate here in view of the novelty of the question, the unsettled state of Florida law, and the fact that when federal judges in New York attempt to predict uncertain Florida law, they act as 'outsiders' not exposed to local law. Hence, the case is remanded to the Court of Appeals to reconsider whether the controlling issue of state law should be certified to the Florida Supreme Court. Pp. 389—392.

2 Cir., 478 F.2d 817, vacated and remanded.

James J. Hagan, New York City, for petitioners.

Donald N. Ruby, New York City, for respondents.

Mr. Justice DOUGLAS delivered the opinion of the Court.

These cases are here on petitions for certiorari and raise one identical question.

These are suits brought in the District Court for the Southern District of New York. Lum's, one of the respondents in the Lehman Bros. petition, is a Florida corporation with headquarters in Miami. Each of the three petitions, which we consolidated for oral argument, involves shareholders' derivative suits naming Lum's and others as defendants; and the basis of federal jurisdiction is diversity of citizenship, 28 U.S.C. § 1332(a)(1), about which there is no dispute.

The complaints allege that Chasen, president of Lum's, called Simon, a representative of Lehman Bros., and told him about disappointing projections of Lum's earnings, estimates that were confidential, not public. Simon is said to have told an employee of IDS¹ about them. On the next day, it is alleged that the IDS defendants sold 83,000 shares of Lum's on the New York Stock Exchange for about $17.50 per share. Later that day the exchanges halted trading in Lum's stock and on the next trading day it opened at $14 per share, the public being told that the projected earnings would be 'substantially lower' than anticipated. The theory of the complaints was that Chasen was a fiduciary but used the inside information along with others for profit and that Chasen and his group are liable to Lum's for their unlawful profits.

Lehman and Simon defended on the ground that the IDS sale was not made through them and that neither one benefited from the sales. Nonetheless plaintiffs claimed that Chasen and the other defendants were liable under Diamond v. Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248 N.E.2d 910 (1969). Diamond proceeds on the theory that 'inside' information of an officer or director of a corporation is an asset of the corporation which had been acquired by the insiders as fiduciaries of the company and misappropriated in violation of trust.

The District Court looked to the choice-of-law rules of the State of New York, Klaxon Co. v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941), and held that the law of the State of incorporation governs the existence and extent of corporate fiduciary obligations, as well as the liability for violation of them. Diamond did, indeed, so indicate. 24 N.Y.2d at 503—504, 301 N.Y.S.2d, at 85—86, 248 N.E.2d, at 915.

The District Court in examining Florida law concluded that, although the highest court in Florida has not considered the question, several district courts of appeal indicate that a complaint which fails to allege both wrongful acts and damage to the corporation must be dismissed.² The District Court went on the consider whether if Florida followed the Diamond rationale, defendants would be liable. It concluded that the present complaints to beyond Diamond, as Chasen, the only fiduciary of Lum's involved in the suits, never sold any of his holdings on the basis of inside information. The other defendants were not fiduciaries of Lum's.³ The District Court accordingly dismissed the complaints, Gildenhorn v. Lum's Inc., 335 F.Supp. 329 (1971).

The Court of Appeals by a divided vote reversed the District Court. Schein v. Chasen, 478 F.2d 817 (CA2 1973). While the Court of Appeals held that Florida law was controlling, it found none that was decisive. So it then turned to the law of other jurisdictions, particularly that of New York, to see if Florida 'would probably' interpret Diamond to make it applicable here. The Court of Appeals concluded that the defendants had engaged with Chasen 'to misuse corporate property.' id., at 822, and that the theory of Diamond reaches that situation, 'viewing the case as the Florida court would probably view it.' Ibid. There were emanations from other Florida decisions⁴ that made the majority on the Court of Appeals feel that Florida would follow that reading of Diamond. Such a construction of Diamond, the Court of Appeals said, would have 'the prophylactic effect of providing a disincentive to insider trading.' Id., at 823. And so it would. Yet under the regime of Erie R. Co. v. Tompkins, 304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938), a State can make just the opposite her law, providing there is no overriding federal rule which pre-empts state law by reason of federal curbs on trading in the stream of commerce.

The dissenter on the Court of Appeals urged that that court certify the state-law question to the Florida Supreme Court as is provided in Fla.Stat.Ann. § 25.031 and its Appellate Rule 4.61, 32 F.S.A. 478 F.2d, at 828. That path is open to this Court and to any court of appeals of the United States. We have, indeed, used it before⁵ has have courts of appeals.⁶

Moreover when state law does not make the certification procedure available, ⁷ a federal court not infrequently will stay its hand, remitting the parties to the state court to resolve the controlling state law on which the federal rule may turn. Kaiser Steel Corp. v. W. S. Ranch Co., 391 U.S. 593, 88 S.Ct. 1753, 20 L.Ed.2d 835 (1968). Numerous applications of that practice are reviewed in Meredith v. Winter Haven, 320 U.S. 228, 64 S.Ct. 7, 88 L.Ed. 9 (1943), which teaches that the mere difficulty in ascertaining local law is no excuse for remitting the parties to a state tribunal for the start of another lawsuit. We do not suggest that where there is doubt as to local law and where the certification procedure is available resort to it is obligatory. It does, of course, in the long run save time, energy, and resources and helps build a cooperative judicial federalism.⁸ Its use in a given case rests in the sound discretion of the federal court.

Here resort to it would seem particularly appropriate in view of the novelty of the question and the great unsettlement of Florida law, Florida being a distant State. When federal judges in New York attempt to predict uncertain Florida law, they act, as we have referred to ourselves on this Court in matters of state law, as 'outsiders' lacking the common exposure to local law which comes from sitting in the jurisdiction.

'Reading the Texas statutes and the Texas decisions as outsiders without special competence in Texas law, we would have little confidence in our independent judgment regarding the application of that law to the present situation. The lower court did deny that the Texas statutes sustained the Commission's assertion of power. And this represents the view of an able and experienced circuit judge of the circuit which includes Texas and of two capable district judges trained in Texas law.' Railroad Comm'n v. Pullman Co., 312 U.S. 496, 499, 61 S.Ct. 643, 644, 85 L.Ed. 971 (1941).

See also MacGregor v. State Mutual Life Assur. Co., 315 U.S. 280, 281, 62 S.Ct. 607, 86 L.Ed. 846 (1942); Reitz v. Mealey, 314 U.S. 33, 39, 62 S.Ct. 24, 28, 86 L.Ed. 21 (1941).

The judgment of the Court of Appeals is vacated and the cases are remanded so that that court may reconsider whether the controlling issue of Florida law should be certified to the Florida Supreme Court pursuant to Rule 4.61 of the Florida Appellate Rules.

So ordered.

Judgments vacated and cases remanded.

Mr. Justice REHNQUIST, concurring.

The Court says that use of state court certification procedures by federal courts 'does, of course, in the long run save time, energy, and resources and helps build a cooperative judicial federalism.' Ante, at 391. It also observes that '(w)e do not suggest that where there is doubt as to local law and where the certification procedure is available, resort to it is obligatory,' and further states that '(i)ts use in a given case rests in the sound discretion of the federal court.' Ante, at 391. I agree with each of these propositions, but think it appropriate to emphasize the scope of the discretion of federal judges in deciding whether to use such certification procedures.

Petitioners here were defendants in the District Court. That court, applying applicable New York choice-of-law rules, decided that Florida law governs the case and, finding that the respondents' complaint requested relief which would extend the...