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Law School Case Brief

Lehman Bros. v. Schein - 416 U.S. 386, 94 S. Ct. 1741 (1974)


When state law does not make the certification procedure available, 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.


Shareholders' derivative actions, based on diversity of citizenship, were instituted, and consolidated for trial, in the United States District Court for the Southern District of New York, by certain stockholders of a Florida corporation against the corporation, its president, and outsiders to recover allegedly unlawful profits realized by certain of the outsiders by use of inside information which had been furnished by the corporation's president. The plaintiffs contended that the corporation's president and certain of the outsiders, none of whom had personally benefitted from the use of the inside information, should be held liable on a theory of breach of fiduciary duty. The District Court held that under New York's choice of law rules, the law of Florida, as the state of incorporation, governed the issue, and that although the Florida Supreme Court had not considered the question, liability on the theory of breach of fiduciary duty could not be imposed under Florida law. On appeal, the United States Court of Appeals for the Second Circuit reversed, holding that the Florida courts "would probably" allow recovery. On rehearing, the Court of Appeals denied the defendants' request that the court utilize certification procedure under Florida law, authorizing certification of state law questions to the Florida Supreme Court from a federal court.


Was it proper for the court to deny the request for certification?




The United States Supreme Court vacated the Court of Appeals' judgment and remanded the cases. The United States Supreme Court held that, in view of the novelty of the legal questions and the great unsettlement of Florida law, the proper procedure for the New York Court of Appeals was to certify the state law question to the Florida Supreme Court. It held that resort by a federal court to certification procedure available under state law was not obligatory, even when there was a doubt as to local law, but instead rested in the federal court's sound discretion, and that the instant proceeding would be remanded so that the Court of Appeals could reconsider whether the controlling issue of Florida law should be certified to the Florida Supreme Court, resort to such procedures seeming particularly appropriate in view of the novelty of the question, the uncertainty of Florida law, and the lack of exposure to Florida law by the federal judges sitting in New York.

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