Greenfield v. Villager Industries, Inc.

• Decision Date: 21 June 1973
• Docket Number: No. 72-1998,72-1999.,72-1998
• Court: U.S. Court of Appeals — Third Circuit
• Parties: Richard D. GREENFIELD and Samuel Moshinsky, on behalf of themselves and all others similarly situated v. VILLAGER INDUSTRIES, INC., et al., Appeal of duPONT GLORE FORGAN INCORPORATED, one of the class of plaintiffs above-named, in No. 72-1998. Appeal of BURNHAM & COMPANY, Inc., an interested party and applicant in its own behalf and in behalf of its customers and accounts, in No. 72-1999.

483 F.2d 824 (1973)

Richard D. GREENFIELD and Samuel Moshinsky, on behalf of themselves and all others similarly situated v. VILLAGER INDUSTRIES, INC., et al., Appeal of duPONT GLORE FORGAN INCORPORATED, one of the class of plaintiffs above-named, in No. 72-1998.

Appeal of BURNHAM & COMPANY, Inc., an interested party and applicant in its own behalf and in behalf of its customers and accounts, in No. 72-1999.

Nos. 72-1998, 72-1999.

United States Court of Appeals, Third Circuit.

Argued April 23, 1973.

Decided June 21, 1973.

Rehearing Denied July 27, 1973.

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Charles M. Solomon, Fox, Rothschild, O'Brien & Frankel, Philadelphia, Pa., and Charles H. Miller, New York City, for appellants.

Aaron M. Fine, Philadelphia, Pa., for appellees.

Charles H. Miller, Michael H. Graham, Marshall, Bratter, Greene, Allison & Tucker, New York City, for Burnham & Co., Inc.

Before VAN DUSEN, ALDISERT and ROSENN, Circuit Judges.

OPINION OF THE COURT

ALDISERT, Circuit Judge.

This appeal presents the question whether the notice to prospective class members ordered by the district court was "the best notice practicable" under the class action rule 23(c)(2), F.R.Civ.P.

Appellants are registered owners of stock of Villager Industries, Inc., acquired during the years 1968 and 1969. Appellant Burnham is a New York investment banking and brokerage firm holding 22,972 shares of Villager common stock in street name for some 111 customers. Appellant du Pont is a brokerage corporation which, as a result of a recent merger with three other stock brokerage firms, holds 52,670 shares of Villager common stock in street names for 334 customers. Appellants were not formal parties to litigation brought by plaintiff-appellees, shareholders of Villager, against the defendant-appellees, Villager corporation and certain of its officers, directors and other shareholders. Burnham and du Pont present this appeal, contending that the district court failed to provide them with adequate notice of the hearing held on August 31, 1972, at which approval of a proposed settlement of the class action was obtained.

Plaintiffs instituted this action in federal district court, alleging that during the period January 1, 1968, to December 31, 1969, defendants violated the federal securities laws in that they failed to disclose or misrepresented facts in prospectuses, registration statements, proxy materials, periodic reports, and releases filed with the Securities and Exchange Commission. Plaintiffs moved for a determination that the suit be maintained as a class action. However, not until nineteen months later, following settlement negotiations, did the district court order the suit to "proceed and be maintained as a class action" for settlement purposes only. The participating litigants also presented the district court with a proposed "notice to class members," the purpose of which was to inform absentee class members of the existence of the class action and the proposed settlement.¹

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Under the terms of the notice, "all persons who purchased shares of Villager during the period January 1, 1968, to December 31, 1969," would be deemed members of plaintiffs' class of stockholders. Membership in the class did not of itself guarantee participation in the settlement, however. In order to participate in the settlement fund, class members were required to file "a verified proof of claim with supporting documents." If such proof were not filed, or if shareholders did not exclude themselves, they were to be "barred from any future recovery on any claim." The district court ordered that notice of the hearing and proposed settlement be made "by publication . . . once a week during the weeks of June 19 and 26, 1972, in the national edition of the Wall Street Journal and in The Philadelphia Evening Bulletin in 1/8 of a page columns." Under the settlement plan, verified proofs or requests for exclusion were required to be filed by August 1, 1972.

On August 31, 1972, the day appointed for the hearing, Burnham appeared in court, presenting a rule to show cause why the hearing should not be adjourned until September 29, 1972, to allow Burnham "to solicit its customers and accounts . . . in order to determine whether such customers and accounts desire to be included in the class" or "have any objections to the proposed settlement," and to permit Burnham "for itself and the various customers and accounts on whose behalf it holds or held shares . . . to file verified proofs of claim and/or requests for exclusion from the class." du Pont also appeared and moved that the "period for filing verified proofs of claim be extended to September 30, 1972." The district court denied both requests and entered an order on August 31, 1972, approving the settlement.²

Both appellants filed timely notices of appeal. Additionally within the appeal period, du Pont unsuccessfully moved before the district court for a stay of the August 31, 1972, order pending appeal to this court. The settlement agreement as approved by the district court provided, in part:

11. Settlement shall not become effective, nor be consummated, until a final order has been entered pursuant to paragraph 9 hereof and until the time to appeal from such order has expired and no appeal has been taken therefrom, or if an appeal is taken until such order is finally affirmed on appeal, or the appeal is finally dismissed.

Subsequent to the filing of these appeals, and notwithstanding the above provision, on October 4, 1972, the district court ordered distribution.

I.

We swiftly dispose of appellees' contention that appellants lack standing. Appellants are record holders of the stock. They are at least nominally the legal, if not the equitable, owners of the shares. They were properly the objects of the public notice because they are "persons who purchased shares of Villager during the period January 1, 1968, to December 1, 1969." They appeared at the hearing and presented motions which were denied. They are complaining about exclusion from a class because of improper notice. They are not attempting on this appeal to object to the settlement. As record or legal shareholders they have standing on behalf of the equitable owners of the shares, asserting a wrongful denial of the opportunity to participate in the class action. See Zients v. LaMorte, 459 F.2d 628 (2d Cir. 1972); Sertic v. Carpenters District Council of the United Brotherhood of Carpenters and Joiners of America, 459 F.2d 579 (6th Cir. 1972); Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30 (3d Cir. 1971); Cohen v. Young, 127 F.2d 721 (6th Cir. 1942).

II.

It was plaintiff-appellees who sought a determination that this litigation be maintained as a class action, pursuant to F.R.Civ.P. 23(c)(1),³ and Rules 23(a) and 23(b)(3).⁴ "Plaintiffs' Memorandum in Support of Application for Class Action Determination . . ." outlined a procedure for notification of class members ostensibly in compliance with Rule 23(c)(2). Rule 23(c)(2) provides that:

In any class action maintained under subdivision (b)(3), the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. The notice shall advise each member that (A) the court will exclude him from the class if he so requests by a specified date; (B) the judgment, whether favorable or not, will include all members who do not request exclusion; and (C) any member who does not request exclusion may, if he desires, enter an appearance through his counsel.

Following recitation of the notice rule, Plaintiffs' Memorandum set forth what must be considered their interpretation of the "best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." Plaintiffs' Memorandum asserted, "Defendant, Villager should be required to furnish whatever information it has from its stock transfer records or stockholder lists which would serve to identify class members. See Herbst v. Able, 47 F.R.D. 11 (S.D.N.Y.1969). Cf., Contract Buyers League v. F & F Investment, 48 F. R.D. 7 (N.D.Ill.1969). Those who cannot readily be identified for the purpose of receiving individual notice, can be notified by publication. Herbst v. Able, supra, as modified in 49 F.R.D. 286 (S.D.N.Y.1970)."

But the deed did not match the promise. Notwithstanding plaintiffs' expressed intention to send individual notices to those who could be "readily identified" from Villager's "stock transfer records or stockholder lists," this was not done. There was but one type of notice: publication in one-eighth page columns in the Wall Street Journal and The Philadelphia Evening Bulletin on two days, June 23 and 30, 1972. This was insufficient notice under any standard of fairness, justice, or due process; it flew in the face of the specific terms of "the best notice practicable" rule; it contravened plaintiffs' stated representation to use individual notice insofar as possible; and it constituted such a defect to the proceedings in the district court that we will not only reverse the district court's orders relating to appellants' requests for extension of time, but we will also vacate the order approving the class action settlement and all orders implementing the settlement.

A.

Because a class action, "so instinct with benefits, is also wrought with mischievous effects,"⁵ it is imperative that participating litigants and the court never lose sight of the laudatory fundamental purposes of this procedural device. Its historical purpose was to alleviate the burden on the court and its facilities in cases where a claim was common to a large number of persons. The practice originated in the English Court of Chancery and was assimilated into our judicial system at an early date, largely, it is said, because of the endorsement...