Susman v. Lincoln American Corp.

• Decision Date: 31 August 1977
• Docket Number: Nos. 77-1145,77-1146,s. 77-1145
• Citation: 561 F.2d 86
• Parties: Fed. Sec. L. Rep. P 96,173 Michael SUSMAN, Plaintiff-Appellant, v. LINCOLN AMERICAN CORP. et al., Defendants-Appellees. Ann FLAMM and Arnold Flamm, Plaintiffs-Appellants, v. Rudolph EBERSTADT, Jr. and Microdot, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 86

561 F.2d 86

Fed. Sec. L. Rep. P 96,173

Michael SUSMAN, Plaintiff-Appellant, v. LINCOLN AMERICAN CORP. et al., Defendants-Appellees.

Ann FLAMM and Arnold Flamm, Plaintiffs-Appellants, v. Rudolph EBERSTADT, Jr. and Microdot, Inc., Defendants-Appellees.

Nos. 77-1145, 77-1146.

United States Court of Appeals Seventh Circuit.

Argued April 27, 1977.

Decided Aug. 31, 1977.

Arthur T. Susman, Thomas R. Meites, Chicago, Ill., for plaintiffs-appellants.

Randall L. Mitchell, Andrew R. Laidlaw, Chicago, Ill., for defendants-appellees.

Before PELL, BAUER and WOOD, Circuit Judges.

HARLINGTON WOOD, Jr., Circuit Judge.

In the two cases consolidated for our consideration, appellants contest the validity of the district court's judgment denying certification of their class action. ¹ In each case the district judge ruled pursuant to Fed.R.Civ.P. 23(a)(4) ² that the class representative would not fairly and adequately protect the interests of the class. For the following reasons, the judgment of the district judge is affirmed.

The facts in these cases are as follows:

1. The Microdot case.

Plaintiffs-Appellants Ann Flamm and Arnold Flamm (hereinafter referred to as plaintiffs) are co-trustees of a trust which purchased and sold shares of defendant Microdot, Inc.'s stock. Plaintiffs' complaint generally alleges that defendants made false and material misstatements or omissions in connection with the sale of Microdot common stock during the pendency of a tender offer by General Cable Corporation in violation of the Securities Exchange Act of 1934, §§ 10(b), 14(e), 15 U.S.C. §§ 78j(b), 78n(e). Plaintiffs sought to represent a class composed of All sellers of the common stock of Microdot, Inc. during the period beginning on December 5, 1975 and ending at the close of business on January 23, 1976, excluding the defendants and those in concert with them.

Defendants opposed certification of the class on the grounds that plaintiffs would not fairly and adequately protect the interests of the class. The district court summarized the following undisputed facts as forming a basis for defendants' objection: 1) plaintiff Arnold M. Flamm is an attorney practicing with Arthur T. Susman, one of the two attorneys of record for plaintiffs, in a law firm named Prins, Flamm, and Susman, Ltd.; 2) plaintiff Ann Flamm is the mother of Arnold M. Flamm; (3) Thomas R. Meites, the second attorney of record of plaintiffs, rents and shares office space in the same suite of offices as is occupied by Prins, Flamm, and Susman, Ltd.; and 4) the potential recovery for individual plaintiffs of $800.00 is much less than attorney's fees which could be generated by this lawsuit. The district judge also noted that since plaintiffs are suing in their capacity as trustees of an inter-vivos trust, they would not receive any form of recovery at the termination of this case.

The district court ruled "that when the class representative is a close professional associate with the attorney of record in the cause, the class representative cannot adequately and fairly represent the class and certification should be denied." The district judge based this ruling on several policy considerations. First, the district court ruled that since potential recovery from attorney's fees greatly exceeds possible individual recovery, plaintiffs' role as class representative and interest in the law firm which would represent the class gives rise to a possible conflict of interest. The district court also pointed to an ethical question which would arise if plaintiff Arnold M. Flamm were to be called as a witness while his firm is employed as class attorney. Similarly, citing ethical questions concerning the solicitation of lawsuits by attorneys, the lower court noted that arrangements such as exist in the present case can only add support for the critics who wish to see class actions limited. Finally, the district judge rejected the argument that since the court could protect the class from any abuse which might occur by reason of the relationship between plaintiff and counsel, the requirements of Rule 23(a)(4) should not be strictly applied. Instead, the court ruled that an aggressive and interested class representative is required under Rule 23(a)(4).

The district judge also rejected defendants' argument that these policy considerations do not apply to Ann Flamm. First, the court pointed out that since Ann Flamm is the mother of Arnold M. Flamm, she cannot be characterized as totally independent. In addition, because the suit was filed by plaintiffs as co-trustees of an inter-vivos trust, the district judge stated that Ms. Flamm could not have filed suit without joining Arnold M. Flamm. Similarly, although there is no "legal" relationship between Mr. Meites and Mr. Flamm, the lower court stated that Mr. Meites is not independent of Mr. Flamm inasmuch as legal work is done in which Mr. Meites collaborates with the firm of Prins, Flamm, and Susman, Ltd. Finally, the lower court ruled that Arnold M. Flamm's waiver of interest in fees potentially generated by this case does not eliminate the potential for a conflict of interest. The district judge found that a conflict of interest might still exist since, as defendants pointed out, a waiver of an interest in fees may not be possible in a professional service corporation organized under the laws of the state of Illinois. The court stated:

While plaintiffs have not responded to this point, all the court need state is that it is the spectre of conflict of interest which moves the court to deny class certification here and not the actuality of such a conflict.

2. The Lincoln American case.

Plaintiff-Appellant Michael Susman (hereinafter referred to as plaintiff) alleged in his complaint that defendants had acted deceptively and made misstatements and omissions of material facts in connection with the purchase and sale of securities and the solicitation of proxies in violation of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) and Rule 10b-5. Plaintiff filed suit both derivatively on behalf of Consumers National Corporation and also sought to act as representative of a class of Consumers National Corporation common stock shareholders.

Defendants opposed plaintiff's motion for certification of the class on the grounds that plaintiff did not satisfy the requirements of Fed.R.Civ.P. 23(a) (4). The basis for defendants' motion was that plaintiff is the brother of Arthur Susman, one of two attorneys representing plaintiff. The other attorney representing plaintiff is Thomas R. Meites. As was the case in Microdot, Mr. Meites rents and shares office space in the same suite of offices occupied by Arthur Susman's law firm. The potential recovery for plaintiff is $500.

Relying on the same analysis as was applied in his prior decision in Microdot, ³ the district judge ruled that:

where an individual plaintiff is represented by a member of his immediate family and/or one of his relatives' close associates, class certification is inappropriate since the plaintiff fails to satisfy the requirements of Fed.R.Civ.P. 23(a)(4).

Plaintiffs in both of the cases now before this court jointly argue on appeal that the district court decision, which they characterize as a per se approach, is improper. Plaintiffs assert that the adequacy of class representatives should be determined under the same rules as apply to fiduciaries acting on behalf of others in a non-class action context. Plaintiffs contend that in non-class action settings, a showing of actual danger of conflict of interest rather than the mere possibility of a conflict of interest is required to support a finding that a fiduciary will not adequately represent the interest of others. Plaintiffs argue that no actual danger of a conflict of interest exists in the present case since plaintiffs will not share in any attorney's fees which might be awarded to class counsel. Plaintiffs also contend that neither ABA Canons of Professional Ethics No. 9, nor Kramer v. Scientific Control Corp., 534 F.2d 1085 (3rd Cir. 1976), cert. denied, 429 U.S. 830, 97 S.Ct. 90, 50 L.Ed.2d 94, a case relied upon by defendants, supports the "spectre of conflict" approach utilized by the district judge. Plaintiffs next assert that the district judge's reliance on the class representative to protect the interests of absent class members is unrealistic. According to plaintiffs, the class representative who has little knowledge of the facts of the case and relatively little at stake in the outcome of the suit inevitably relies on the class attorney. Plaintiffs assert that in reality the class attorney rather than the class representative protects the interests of the absent class members. Finally, plaintiffs point to alternative methods of protecting absent class member interests which could avoid disqualification of plaintiffs as class representatives under Rule 23(a)(4).

Prior to certification of a class, a court must find that the named representatives of the class will fairly and adequately protect the interests of the class. "Basic consideration of fairness require that a court undertake a stringent and continuing examination of the adequacy of representation by the named class representatives at all stages of the litigation where absent members will be bound by the court's judgment." National Association of Regional Medical Programs v. Mathews,551 F.2d 340 (D.C.Cir.1976). Strict oversight is necessitated since due process requires that absent class members be adequately represented in order to be bound by a court's judgment. ⁴ National Association of Regional Medical Programs, 551 F.2d at 344-5; Hansberry v. Lee, 311 U.S. 32, 42-43, 61 S.Ct. 115, 85 L.Ed. 22 (1940); Gonzales v. Cassidy, 474 F.2d 67 (5th Cir. 1973); Wright & Miller, Federal Practice and Procedure, § 1765, p. 617. "Adequate representation depends on two factors: (a) the plaintiff's attorney must be qualified,...