Cherner v. Transitron Electronic Corporation

• Decision Date: 05 February 1962
• Docket Number: Civ. A. No. 61-857.
• Citation: 201 F. Supp. 934
• Parties: Marvin CHERNER and Cherner Clothing Co., a Partnership, by K. Cherner, Rachael Cherner, and Marvin Cherner, Partners, on behalf of themselves and as respresentatives of all other persons similarly situated, v. TRANSITRON ELECTRONIC CORPORATION, David Bakalar, Leo Bakalar, Hylan Freed, Wilbar Whittemore, Paul H. Messer, Russell Baker, and Merrill Lynch, Pierce, Fenner and Smith, Incorporated.
• Court: U.S. District Court — District of Massachusetts

201 F. Supp. 934

Marvin CHERNER and Cherner Clothing Co., a Partnership, by K. Cherner, Rachael Cherner, and Marvin Cherner, Partners, on behalf of themselves and as respresentatives of all other persons similarly situated, v. TRANSITRON ELECTRONIC CORPORATION, David Bakalar, Leo Bakalar, Hylan Freed, Wilbar Whittemore, Paul H. Messer, Russell Baker, and Merrill Lynch, Pierce, Fenner and Smith, Incorporated.

Civ. A. No. 61-857.

United States District Court D. Massachusetts.

February 5, 1962.

Louis Loss, Cambridge, Mass., James D. St. Clair, Boston, Mass., Jacob Green, Boston, Mass., Marvin Cherner, Birmingham, Ala., for plaintiffs.

Harold M. Willcox, Herrick, Smith, Donald Farley & Ketchum, Brooks Potter, James C. Heigham, Choate, Hall & Stewart, Boston, Mass., for defendants.

WYZANSKI, District Judge.

Purchasers of 200 shares of the stock of the defendant Transitron bring this action under the Securities Act of 1933. The first two counts of the amended complaint rest on § 11 of the Act (15 U.S. C.A. § 77k) and on a statement in each of the two registration statements filed with the Securities and Exchange Commission that Transitron "holds no patent licenses from others requiring the payment of royalties and knows of no patent rights of others which might interfere with the conduct of its business." The other two counts rest on § 12(2) of the Act (15 U.S.C.A. § 77l(2)) and a like statement in the prospectus. Counts 1 and 3 are brought on behalf of the plaintiffs, Counts 2 and 4 purport to be what are sometimes called spurious class actions under F.R.Civ.P. Rule 23(a) (3), 28 U.S.C.A. The particular classes the plaintiffs claim to represent are described as follows:

"All persons who have bought any shares of common stock of Transitron since December 8, 1959, either from any of the underwriters or dealers who participated in either of the distributions covered by the two registration statements herein referred to or in the open market, * * *." (Count 2)

and

"* * * all persons to whom defendant Merrill Lynch has sold any shares of Transitron since December 8, 1959, by the use of any means or instruments of transportation or communication in interstate commerce or of the mails, by means of either of the prospectuses herein referred to (the said persons not knowing of the alleged untruths or omissions) * * *" (Count 4)

The action is presently before this Court on Merrill Lynch's motion for early assignment for trial, Transitron's motion for an order establishing an expedited schedule for further proceedings including trial and plaintiffs' motion "for production of documents under F.R.C.P. Rule 34 and for order directing or authorizing notice to members of class under F.R.C.P. Rule 23." The specific relief sought in this last motion is an order (1) requiring Transitron to produce and to permit plaintiffs to inspect or copy "a list of all persons who now hold of record, or who have held of record at any time since December 9, 1959, any of the shares of the common stock of Transitron"; (2) requiring Merrill Lynch to produce and to permit plaintiffs "to inspect and copy, a list of all persons to whom the said defendant has sold any shares of common stock of Transitron as principal since December 9, 1959"; and (3) "directing or in the alternative authorizing plaintiffs to give notice" of this action to the classes they claim to represent.

For present purposes, this Court assumes that the spurious class actions alleged in Counts 2 and 4 are properly pleaded under Rule 23(a) (3). See Independence Shares Corp. v. Deckert, 3rd Cir., 108 F.2d 51, 55, rev'd on other grounds, 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189; Oppenheimer v. F. J. Young & Co., Inc., 2nd Cir., 144 F.2d 387. Cf. York v. Guaranty Trust Company, 2nd Cir., 143 F.2d 503, 528-529, rev'd on other grounds, 326 U.S. 99, 65 S.Ct. 1464, 89 L.Ed. 2079; Zahn v. Transamerica Corp., 3rd Cir., 162 F.2d 36, 49. If Gilbert v. Clark, D.Mass., 13 F.R.D. 498, 499, be construed as reaching a different conclusion, it is contrary to the weight of authority and may no longer be regarded as binding, even in this District. Of course, nothing said in this paragraph conflicts with the opinion of Judge A.N. Hand in Oppenheimer that "If it shall later appear that the plaintiffs are not able within a reasonable time to obtain others to intervene in the class action it the count setting forth the spurious class action may properly be dismissed as a class action because of lack of adequate representation of members of the class." (144 F.2d page 390). For present purposes, this Court also assumes that under the present version of the Federal Rules of Civil Procedure a court in which a spurious class action has been pleaded has the power to order at any stage of the case that notice of the pendency of the action be given to "absent persons that they may come in and present claims and defenses if they so desire." Moore, Federal Practice Rules and Official Forms (1961) 562-564.

But even on these assumptions, this Court, as a matter of discretion, denies plaintiffs' motion "for production of documents under Rule 34 and for order directing or authorizing notice to members of class under Rule 23." The reasons for the Court's exercise of its discretion follow.

1. Despite plaintiffs' contentions to the contrary, this Court does not regard them or their counsel as having any fiduciary duty to notify potential members of the spurious class of this litigation and of their opportunity here to intervene. "These plaintiffs are not their brothers' keepers." Hormel v. United States, So.D.N.Y., 17 F.R.D. 303, 305. Ordinarily the primary duty of counsel is to his own client. His obligation, like that of his client, may in some situations require him to give notice to other interests which may be adversely affected by his prosecution of his own client's cause of action. But the bringing of the present suit, and any preliminary proceedings in connection with the taking of evidence prior to judgment, cannot legally prejudice other shareholders who might be in like case with his own client. No precedent supports the suggestion that the plaintiffs or their counsel have a moral duty to act as unsolicited champions of others. Without going so far as to agree with defendants' arguments that the proposed conduct of the plaintiffs or their counsel would be champertous, or would violate either Canon 27 or Canon 28 of the American Bar Association Canons of Professional Ethics, this Court concludes that at the present stage of the controversy (when there is no more reason to accept as true plaintiffs' declaration than defendants' answers,) Rule 23 should not be used "as a device to enable client solicitation." Bain and Blank, Inc. v. Warren Connelly Company, So.D. N.Y., 19 F.R.D. 108, 111.

2. If this Court were to grant plaintiffs' motion, the normal consequence would be that many persons would incorrectly infer that this Court regarded the plaintiffs' complaint as prima facie well-founded and had required a...