Felzen v. Andreas

• Decision Date: 21 January 1998
• Docket Number: No. 97-2829,97-2829
• Citation: 134 F.3d 873
• Parties: , Pens. Plan Guide (CCH) P 23947U Paul FELZEN, Trustee of Louise Laskin Trust--1991, and Sandra Esner, Plaintiffs-Appellees, v. Dwayne O. ANDREAS, et al., Defendants, California Public Employees' Retirement System and Florida State Board of Administration, Objectors-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 873

134 F.3d 873

39 Fed.R.Serv.3d 852, Pens. Plan Guide (CCH) P 23947U

Paul FELZEN, Trustee of Louise Laskin Trust--1991, and Sandra Esner, Plaintiffs-Appellees, v. Dwayne O. ANDREAS, et al., Defendants,

California Public Employees' Retirement System and Florida

State Board of Administration, Objectors-Appellants.

No. 97-2829.

United States Court of Appeals, Seventh Circuit.

Submitted Sept. 19, 1997.

Decided Jan. 21, 1998.

Terry Rose Saunders (submitted), Chicago, IL, Robert M. Roseman, Spector & Roseman, Philadelphia, PA, for Plaintiff-Appellee Felzen.

Terry Rose Saunders (submitted), Chicago, IL, Fred Isquith, Wolf, Haldenstein, Adler, Freeman & Herz, New York City, for Plaintiff-Appellee Esner.

James E. Peckert, A. James Shafter, Kehart, Shafter, Hughes & Webber, Decatur, IL, for Defendant Archer-Daniels-Midland Co. Mark C. Hansen, Kellogg, Huber, Hansen & Todd, Washington, DC, for Appellants California Public Employees Retirement Systems, Florida State Board of Administration.

Before POSNER, Chief Judge, and FLAUM and EASTERBROOK, Circuit Judges.

EASTERBROOK, Circuit Judge.

"The rule that only parties to a lawsuit, or those that properly become parties, may appeal an adverse judgment, is well settled. The Court of Appeals suggested that there may be exceptions to this general rule, primarily 'when the nonparty has an interest that is affected by the trial court's judgment.' We think the better practice is for such a nonparty to seek intervention for purposes of appeal; denials of such motions are, of course, appealable." Marino v. Ortiz, 484 U.S. 301, 304, 108 S.Ct. 586, 587-88, 98 L.Ed.2d 629 (1988) (citations omitted). With these words the Supreme Court held that a person adversely affected by the settlement of a class action may appeal from the consent decree based on that settlement only if he has intervened as a party. See also Fed. R.App. P. 3(c): "A notice of appeal must specify the party or parties taking the appeal by naming each appellant in either the caption or the body of the notice of appeal." (Emphasis added.) Following Marino we held that a class member in an action under Fed. R. Civ. P. 23 who has not become a party may not appeal from an order granting summary judgment to the defendant. In re Brand Name Prescription Drugs Antitrust Litigation, 115 F.3d 456 (7th Cir.1997). Today we consider another proposed exception to the rule stated in Marino.

Courts have disagreed for several decades about whether class members (and shareholders, their counterparts in derivative actions under Rule 23.1) must intervene as parties in order to appeal from adverse decisions. See Comment, The Appealability of Class Action Settlements by Unnamed Parties, 60 U.Chi.L.Rev. 933 (1993). Until Marino this circuit permitted class members and stockholders to appeal, whether or not they had intervened, provided they had informed the district court of their objections to the decision that disadvantaged them. See Research Corp. v. Asgrow Seed Co., 425 F.2d 1059 (7th Cir.1970) (class action); Tryforos v. Icarian Development Co., 518 F.2d 1258, 1263 n. 22 (7th Cir.1975) (shareholders' derivative suit). We held in Brand Name Prescription Drugs that in light of Marino and In re VMS Limited Partnership Securities Litigation, 976 F.2d 362 (7th Cir.1992), Asgrow Seed is no longer authoritative. 115 F.3d at 458. But two shareholders who have appealed from the district court's approval of a settlement in this derivative action ask us to apply Tryforos notwithstanding intervening precedent and the language of Rule 3(c).

Tryforos did not analyze the question now before us--whether shareholders who are not parties to a Rule 23.1 action nonetheless may appeal--but stated that their right to so do is "clear". Footnote 22 in Tryforos cites one case from the 1940s that permits such appeals, but that opinion did not give reasons. (Tryforos also cites one district court opinion from the 1960s, an odd reference for a rule of appellate jurisdiction.) An unexplained practice does not offer shelter from a later opinion of the Supreme Court holding that only parties may appeal, and withdrawing from the appellate courts any exception-making power. The two shareholder-appellants offer a number of arguments in support of appeal without intervention that boil down to a claim that erroneous decisions should be reversed, but arguments of this stripe do not justify omitting the step of intervening as a party. A court of appeals is not an ombudsman. Suppose the settlement of a derivative action induces the corporation to fire its CEO, or to curtail its purchases of fax machines, or to choose a different law firm. The affected employees, vendors, and lawyers could not appeal just because they believed the settlement improvident or the judge's action in approving it legally erroneous. Only parties may appeal. So too with shareholders, who have no more right to speak for the firm or control its litigation decisions than bondholders or banks or landlords, all of whom have contractual interests that may be affected by litigation. It may be, as appellants stress, that some district judges would not be receptive to attempts to intervene for the purpose of appeal, but the Supreme Court spoke to this in Marino when observing that a denial of a motion to intervene is itself appealable.

According to appellants, Brand Name Prescription Drugs did not actually jettison the approach of Asgrow Seed even for class actions. The question at issue in Brand Name Prescription Drugs was whether class members (other than the named representatives) could appeal from an order granting summary judgment, while Asgrow Seed and today's case involve an appeal from an order approving a settlement. VMS Limited Partnership, while dismissing the appeal at hand, remarked in a footnote that the decision did not disturb Asgrow Seed. 976 F.2d at 368 n. 8. That is technically so; neither VMS Limited Partnership nor Brand Name Prescription Drugs involved an appeal from an order approving a settlement. But the distinction is inconsequential for purposes of Rule 3(c), the rationale of Marino, and the rationale of Brand Name Prescription Drugs: that the court should not "fragment the control of the class action" (115 F.3d at 457) by allowing class members to usurp the role of the class representative without persuading the district judge that the representative is unfit or unfaithful, or that subclasses should be created. See also Shults v. Champion International Corp., 35 F.3d 1056, 1060-61 (6th Cir.1994); Gottlieb v. Wiles, 11 F.3d 1004, 1010-12 (10th Cir.1993). Lest doubt linger, we now formally overrule Asgrow Seed and any other case in this circuit (including Armstrong v. Board of School Directors, 616 F.2d 305, 327-28 (7th Cir.1980), and Patterson v. Stovall, 528 F.2d 108, 109 n. 1 (7th Cir.1976)) that permits non-parties to appeal from a decision of any kind in a class action.

Well, then, is a shareholders' derivative action under Rule 23.1 different from a class action under Rule 23 in a way that permits appeal by non-parties? Not so far as Rule 3(c) or Marino is concerned. Although there are differences between class actions and derivative suits, these cut against the appellants' position. All class members are identical in entitlement to litigate; which injured persons become the representatives, and which the "mere" class members, is to a degree fortuitous and to a degree dependent on the entrepreneurial activity of the class counsel. It is the fact that each class member has a real grievance with the defendant that sets up at least an equitable argument for a class member who wants to appeal. But in a shareholders' derivative action, the individual investor is not an injured party and is not entitled to litigate. A derivative suit is brought by an investor in the corporation's (not the investor's) right to recover for injury to the corporation. Frank v. Hadesman & Frank, Inc., 83 F.3d 158 (7th Cir.1996); Kagan v. Edison Brothers Stores, Inc., 907 F.2d 690 (7th Cir.1990). The corporation obtains the damages; the investor-plaintiffs just get the ball rolling after the fashion of a qui tam action. Only when the corporation's board defaults in its duty to protect the interests of the investors is this step permitted, and even then many states permit the board to regain control of the litigation following a special investigation. See Kamen v. Kemper Financial Services, Inc., 500 U.S. 90, 111 S.Ct. 1711, 114 L.Ed.2d 152 (1991); American Law Institute, Principles of Corporate Governance: Analysis and Recommendations §§ 7.01, 7.03, 7.05 (1992). If in the course of managing or settling derivative litigation investors receive new injury, they do so only because the corporation becomes worse off--but loss to the corporation does not permit stockholders to sue directly. See Mid-State Fertilizer Co. v. Exchange National Bank, 877 F.2d 1333 (7th Cir.1989). Once again the corporation holds the legal claim, and it acts through the board of directors. Stockholders may replace the board if dissatisfied with its performance, but they may not displace the board in litigation. So it cannot be surprising that stockholders other than the named plaintiffs are not treated as parties in derivative litigation--their citizenship is ignored when determining diversity, see Smith v. Sperling, 354 U.S. 91, 77 S.Ct. 1112, 1 L.Ed.2d 1205 (1957), and they are not allowed to opt out. Corporate management may affect the interests of stockholders without notifying them or obtaining their consent; by investing in stock, they placed their funds at the management's disposal and obtained, in exchange, the right to choose future managers. Shareholders have no more the attributes of parties when managers settle derivative litigation than when managers settle antitrust litigation. (This particular derivative suit arose out of claims that managers of Archer Daniels Midland Co. conspired with rival...