Pearson v. Ecological Science Corp.

Decision Date31 October 1975
Docket NumberNo. 74-2175,74-2175
PartiesCarl M. PEARSON et al., Plaintiffs, v. Harry A. Skydell and Arnold Dutchen, Plaintiffs-Appellants, v. ECOLOGICAL SCIENCE CORP. et al., Defendants-Appellees.
CourtU.S. Court of Appeals — Fifth Circuit

Michael P. Fuchs, Stuart D. Wechsler, New York City, for Skydell.

Dermot G. Foley, New York City, for Dutchen.

James H. Schropp, David Ferber, Richard E. Nathan, Securities and Exchange Commission, Washington, D. C., for amicus curiae.

Stuart A. Summit, Gerard A. Dupuis, New York City, Miller Walton, Roy B. Gonas, Gaston, Snow, Motley & Holt, Boston, Mass., Metzenbaum, Gaines, Finley & Stern, Cleveland, Ohio, Koeppel, Stark, Marks & Newmark, Miami, Fla., for Ecological.

Sidney M. Aronovitz, Paige & Catlin, H. James Catlin, Jr., Miami, Fla., for Auerbach and others.

Thomas H. Seymour, Miami, Fla., for Co-Lead Counsel.

James W. Beasley, Jr., Miami, Fla., for Fabian, Grosh & Vollbrecht.

Reginald L. Williams, Miami, Fla., Michael A. Cooper, Richard G. Lyon, New York City, for Haskins & Sells.

Aubrey V. Kendall, Miami, Fla., for Essex Fund, Inc. & Salem Fund Inc.

Russo, Dubin & Goldberg, Michael H. Goldberg, New York City, for Cantor & Carter.

Appeals from the United States District Court for the Southern District of Florida.

Before BELL, DYER and SIMPSON, Circuit Judges.

SIMPSON, Circuit Judge:

Appellants Harry Skydell and Arnold Dutchen, two of ninety-nine original and intervening plaintiffs in sixteen consolidated actions, seek to overturn two orders enforcing a stipulation of settlement entered by the district court, and to have the settlement declared void. We affirm, finding no error in the actions or orders of the district court.

The basis of this litigation consists of sixteen actions commenced in 1971 and 1972, against Ecological Science Corporation (Ecological), and certain of its officers, directors, subsidiaries, and its accountants Haskins & Sells. Five of these actions were commenced in the Southern District of Florida, and eleven were transferred to that district pursuant to Title 28, U.S.C., Sec. 1404(a). Fifteen of the actions alleged individual and class action claims against some or all of the defendants. On March 20, 1972, the district court consolidated the sixteen actions, appointed the firms of Kelly, Black, Black & Kenny and Koeppel, Stark, Marks & Newmark as co-lead counsel (hereinafter co-lead counsel), 1 and directed that a consolidated amended complaint be filed by co-lead counsel setting forth all claims possessed by all plaintiffs in "whatever capacity". In delineating the authority of co-lead counsel to act on behalf of all plaintiffs the March 20, 1972, order provided:

"All other pleadings, including but not limited to stipulations and the making of all opposition to any motion, shall likewise be initiated and conducted by co-lead counsel on behalf of all plaintiffs subject to consultation by them with additional counsel representing specific plaintiffs."

The March 20 consolidation order also enjoined all present and former stockholders of Ecological from instituting or prosecuting any action based on any claims alleged in the consolidated complaint except through intervention in the consolidated case.

The consolidated complaint pleaded eight separate claims on behalf of thirty-two named plaintiffs. Five of the eight claims were also asserted on behalf of the class of individuals who "purchased said (Ecological) stock during the period of November 27, 1967, to approximately May 26, 1971"; two of the other counts were asserted on behalf of differently described classes of Ecological stockholders. 2

The district court on March 13, 1973, after oral argument and the filing of briefs by the parties, entered an order denying the plaintiffs' motion that their cause be certified as a class action. The plaintiffs appealed that order to this court, and on May 29, 1973, we granted the defendants' motion to dismiss the appeal for lack of jurisdiction. Plaintiffs then filed a petition for a writ of certiorari in the Supreme Court requesting that Court to review the jurisdiction of an appellate court to review an interlocutory denial of class action certification. The petition for certiorari did not and could not raise the merits of the district court's order denying class action status.

During the course of this interlocutory appeal extensive discovery was conducted in the district court, and that court granted motions to intervene in the consolidated action filed on behalf of sixty-seven individuals. The district court on November 16, 1973, set March 18, 1974 as the date for trial of the consolidated action. In setting the trial date the district court made it clear to all parties that it intended to proceed with the trial on the scheduled trial date despite the pending petition for a writ of certiorari. At that point, and continuing for two months afterwards, co-lead counsel on behalf of the named plaintiffs and intervenors entered negotiations with defense counsel with the purpose of settling the litigation without the necessity of trial. These negotiations bore fruit on January 31, 1974, in the form of a stipulation of settlement which encompassed the claims of and was subject to ratification by the ninety-nine original and intervening plaintiffs. The stipulation of settlement dealt only with the claims of the ninety-nine named plaintiffs and did not purport to affect in any way the claims of other Ecological stockholders not involved in the litigation. Co-lead counsel wrote to each named plaintiff on February 9, 1974, setting out what in their opinion were the essential terms of the settlement, recommending approval of the settlement, and requesting that approval of the settlement be signified by each named plaintiff by signing and returning to co-lead counsel a copy of the letter. 3 On February 11, 1974, appellants, Skydell and Dutchen, both signified their ratification of the stipulation of settlement by signing and returning to co-lead counsel the copies of the letter sent to them. On February 22, 1974, co-lead counsel advised defense counsel in writing that they had been unable to contact three plaintiffs, whom they had represented both individually and as co-lead counsel throughout the litigation, and therefore had not obtained their consents. However, co-lead counsel suggested that they be permitted to accept the stipulation of settlement on behalf of these three individuals, since they knew of no reason why the three plaintiffs would deny them the authority to execute a definitive settlement agreement on their behalf. 4 Defense counsel agreed to this procedure with the result that on February 22, 1974, the approval of the stipulation of settlement had been obtained from all the original plaintiffs and intervenors.

However, two attempts were made to prevent the consummation of the settlement and the dismissal of the litigation. First, on February 22, 1974, Thomas G. Jenny, a member of the alleged class of purchasers of Ecological stock, filed a motion to intervene in the litigation with the district court, for the stated purpose of preventing the consummation of the stipulation of settlement. Simultaneous with the filing of the intervention motion with the district court, Jenny petitioned the Supreme Court for permission to intervene in the pending petition for a writ of certiorari, which was stipulated to be voluntarily dismissed by the named plaintiffs pursuant to the terms of the settlement. In support of allowing his intervention in both actions Jenny argued that the consummation of the proposed settlement, with the resultant dismissal of both the action in the district court and the petition for certiorari in the Supreme Court, would breach fiduciary duties owed by the named plaintiffs to other class members and, in addition, would constitute a sale of the appeal rights of class members under Young v. Higbee, 1945, 324 U.S. 204, 65 S.Ct. 594, 89 L.Ed. 890. On March 1, 1974, the district court denied Jenny's motion to intervene on the grounds that it was not timely made and that "the stipulation of settlement in no way affects his rights". This court subsequently denied Jenny's request for an interlocutory injunction to stay the consummation of the settlement below. On April 10, 1974, Jenny filed with the Supreme Court a petition seeking an injunction to stay the proceedings in the district court and to prevent the parties from consummating the settlement. The Supreme Court, on April 15, 1974, denied both Jenny's application for an injunction and his motion to intervene in the petition for a writ of certiorari.

The second attempt to prevent the consummation of the settlement, and the basis of this appeal, relates to the attempted revocation by Skydell and Dutchen of their ratification of the stipulation of settlement. On February 26, 1974, and February 28, 1974, Skydell and Dutchen, respectively, sent telegrams to co-lead counsel and to Chief Judge Fulton of the Southern District of Florida, in the absence of Judge Fay who handled the case below throughout, which purported to revoke their acceptances of the settlement proposal "(i)n light of advice from my attorney . . . regarding abandonment of class and my possible duties as class representative . . . " Because of these telegrams Judge Fay held a hearing on March 14, 1974, to "clarify the status of the case", and to determine the objections of Skydell and Dutchen to the settlement agreement. At that hearing it was agreed that an enforcement hearing should be held to determine whether the stipulation of settlement was enforceable. The enforcement hearing was held on March 27, 1974. At that time Skydell and Dutchen, through counsel, argued that their ratification of the stipulation of settlement was void or voidable due to the following actions and omissions on the part of co-lead counsel: (i) that the letter from co-lead counsel purporting to state...

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