Katz v. Realty Equities Corp. of New York

• Citation: 521 F.2d 1354
• Decision Date: 30 June 1975
• Docket Number: Nos. 583,D,719,s. 583
• Parties: George KATZ, Plaintiff-Appellee, v. REALTY EQUITIES CORPORATION OF NEW YORK et al., Defendants-Appellees, and Klein, Hinds & Finke and Alexander Grant & Company, Defendants-Appellants. Kenneth I. HERMAN, Trustee F/B/O Sheril Esta Kupfer, Plaintiff-Appellee, v. REPUBLIC NATIONAL LIFE INSURANCE COMPANY et al., Defendants-Appellees, and Klein, Hinds & Finke and Alexander Grant & Company, Defendants-Appellants. ockets 74-2053, 74-2054.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 1354

521 F.2d 1354

30 A.L.R.Fed. 378

George KATZ, Plaintiff-Appellee, v. REALTY EQUITIES CORPORATION OF NEW YORK et al., Defendants-Appellees, and Klein, Hinds & Finke

and

Alexander Grant & Company, Defendants-Appellants.

Kenneth I. HERMAN, Trustee F/B/O Sheril Esta Kupfer, Plaintiff-Appellee, v. REPUBLIC NATIONAL LIFE INSURANCE COMPANY et al., Defendants-Appellees, and Klein, Hinds & Finke

and

Alexander Grant & Company, Defendants-Appellants.

Nos. 583, 719, Dockets 74-2053, 74-2054.

United States Court of Appeals, Second Circuit.

Argued Jan. 15, 1975.

Decided June 30, 1975.

Joseph P. Napoli, Harry H. Lipsig, New York City, Stuart D. Wechsler, Robert S. Schachter, Samuel K. Rosen, Kass, Goodkind, Wechsler & Gerstein, New York City, for plaintiffs-appellees.

James R. Hawkins, II, Richard P. Lasko, Andrew S. O'Connor, Shearman & Sterling, New York City, for Klein, Hinds & Finke and Alexander Grant & Co.

Sheldon Oliensis, Kaye, Scholer, Fierman, Hays & Handler, New York City, for Realty Equities and Republic National and certain other defendants-appellees.

Before WATERMAN, FRIENDLY and GURFEIN, Circuit Judges.

WATERMAN, Circuit Judge:

This appeal concerns an order of a district judge requiring the filing and service of a single consolidated complaint for pretrial purposes upon defendants in a number of related securities cases. We affirm the order which, under the circumstances present, was a proper exercise of the trial judge's authority in the management of the preliminary stages of complex multiparty litigation.

On March 8, 1974 the Securities and Exchange Commission commenced an enforcement action in the United States District Court for the Southern District of New York against Republic National Life Insurance Company ("Republic"), seven of its officers and directors, its auditor Peat Marwick Mitchell & Co., Realty Equities Corporation of New York ("Realty"), two of its officials, its auditor Westheimer, Fine, Berger & Co., and two other individuals. The SEC complaint alleges that the defendants participated in a scheme to defraud the investing public by concealing the actual facts of Realty's financial condition. Republic, which had large investments in Realty, advanced large sums of money, the SEC complaint alleges, through a series of intricate transactions, to Realty or related companies, so that Realty could repay existing indebtedness to Republic.

Patterned on the SEC complaint, twelve private actions were filed in the Southern District of New York ¹ based on the Realty-Republic transactions. In addition, four actions were filed in the Northern District of Texas and one action in the Middle District of Tennessee; ² these five actions were transferred to the Southern District of New York for pretrial purposes by the Judicial Panel on Multidistrict Litigation by order of August 22, 1974, and on August 26, 1974 the district court ordered them consolidated with the pending actions in the Southern District of New York which had been ordered consolidated two months previously.

On June 12, 1974 the district court sua sponte held a hearing to determine whether the actions then pending before it should be consolidated. On June 24, 1974 the district court filed an order of consolidation which provided in part:

Ordered:

(1) The above designated actions (sometimes herein "constituent actions") are hereby consolidated for all pretrial purposes to be had during the pendency of these actions in this District in accordance with the following terms which the Court in the exercise of discretion makes applicable to foster the efficient and proper conduct of the claims asserted in the individual complaints in the said actions.

(2) A single consolidated complaint, supplemented and amended, shall be prepared and served herein by liaison counsel which shall set forth the claims for relief asserted in the constituent actions, collated into separately stated counts by class and derivative categories as to each kind of securities holders and at the head of each count shall specifically designate by name or other convenient reference the defendants against whom such count is asserted.

(11) At the conclusion of the pretrial proceedings, the Court will give consideration to a consolidated trial of the issues herein.

The order of the district court provided for the appointment of lead and liaison counsel for all plaintiffs. The order also stated that the answer of each defendant to the consolidated complaint "shall be deemed" to have asserted cross-claims in the nature of contribution and indemnification against all other defendants.

At the June 12 hearing, the appellants Klein, Hinds & Finke ("KHF") and Alexander Grant & Company ("Grant"), favored the use of consolidated discovery proceedings, but they objected to proceeding under a single consolidated complaint. After the consolidation order was entered the appellants filed a timely notice of appeal which was limited to the portion of the order providing for the consolidation for all pretrial purposes and for the filing of a single consolidated complaint. The sole objection pressed on appeal is to the use of a consolidated complaint.

KHF and Grant had been named as defendants in two of the private complaints, the Herman complaint, a class action brought on behalf of the holders of common stock of Republic, and the Katz complaint, a class action brought on behalf of the holders of common stock in Realty. ³ They had not been named as defendants in the SEC action. In nearly identical language the complaints allege that the appellants violated § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder:

Grant and KHF were the independent auditors for Realty during certain relevant portions of the periods above described. Each discovered and knew of certain and many ways of the material problems between Realty and Republic, all as hereinabove described. Grant and KHF informed Realty of the fact that the financial statements of Realty and of FNR (First National Realty & Construction Corp., a Realty affiliate) would not be unqualified and both firms were replaced as auditors for Realty. Yet both firms failed of their obligations to the public and to the SEC and Amex to fully disclose such facts and to alert the responsible authorities thereto. Instead each firm withheld the facts thereof in order to benefit themselves by not involving themselves therein, directly or indirectly, and to prevent damage to themselves and to other defendants, despite the further damage resulting to plaintiff and the class. (P 109 of the Katz complaint; P 111 of the Herman complaint. Caveat: The word "ways" in the second sentence above quoted is omitted in the Katz complaint).

Thus the claims against Grant and KHF are limited. There is no allegation that they participated in the complicated real estate and financial transactions between Republic and Realty which are at the core of the SEC complaint and the private complaints based upon the SEC allegations.

The amended consolidated complaint was served on all defendants including KHF and Grant on October 15, 1974. Under it twenty-one plaintiffs sue thirty-nine defendants. Five different classes of plaintiffs allege a total of thirty counts against defendants. The classes consist of: persons who purchased securities in Realty; persons who purchased securities in Republic; holders of shares of Pacific National Life Assurance Company; owners of certain debentures of Realty; and holders of common stock in Mercantile Security Life Insurance Company. Two counts involve derivative claims on behalf of Realty and Republic, and one count is brought individually. Grant and KHF are named in three counts of the consolidated complaint. Each of these counts contains the above-quoted § 10(b) and Rule 10b-5 allegations of the Katz and Herman complaints and the several plaintiffs are the purchasers of Realty securities, the purchasers of Republic securities, and stockholders of Realty suing derivatively. The remaining bulk of the consolidated complaint concerns the manipulative transactions between Realty and Republic, transactions which allegedly began in September 1970, after Grant and KHF were unable to present unqualified financial statements and after Grant and KHF had been replaced as auditors for Realty.

We are faced with deciding whether the order of consolidation sought to be appealed is an appealable order, and we find that this Circuit's decisions in MacAlister v. Guterma, 263 F.2d 65 (2 Cir. 1958), and Garber v. Randell, 477 F.2d 711 (2 Cir. 1973), compel us to hold that this obviously interlocutory order is appealable under the collateral order doctrine of Cohen v. Beneficial Industrial Loan Corporation, 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949). In Garber the Second Circuit dealt with an appeal from a motion for severance and also from an order consolidating class and derivative stockholder suits. There the Court read MacAlister as holding that the collateral order doctrine was applicable in cases in which an order of consolidation went beyond the permissible objective of judicial economy "to deny a party his due process right to prosecute his own separate and distinct claims or defenses without having them so merged into the claims or defenses of others that irreparable injury will result." Garber v. Randell, supra at 716. We note, however, that a significant factor in favor of finding the MacAlister order appealable is stated to be that "serious and unsettled questions (are) presented for review" and that until then there had been no previous appellate consideration of consolidation for pretrial purposes. MacAlister v. Guterma, supra at 67. See, also, Cohen v. Beneficial Industrial Loan Corp., supra at 547, 69 S.Ct. 1221. As experience with various economical devices for the judicial handling of complex and multifaceted actions accumulates it may well develop that the...