Herbst v. International Telephone and Telegraph Corp.

• Decision Date: 03 April 1974
• Docket Number: Docket 73-2062.,No. 314,314
• Citation: 495 F.2d 1308
• Parties: Hilda HERBST, Plaintiff-Appellee, v. INTERNATIONAL TELEPHONE AND TELEGRAPH CORPORATION et al., Defendants-Appellants.
• Court: U.S. Court of Appeals — Second Circuit

495 F.2d 1308 (1974)

Hilda HERBST, Plaintiff-Appellee, v. INTERNATIONAL TELEPHONE AND TELEGRAPH CORPORATION et al., Defendants-Appellants.

No. 314, Docket 73-2062.

United States Court of Appeals, Second Circuit.

Argued January 9, 1974.

Decided April 3, 1974.

John H. Schafer, III, Washington, D. C. (Charles E. Lister, Covington & Burling, Washington, D. C., Joseph P. Cooney, Cooney, Scully & Dowling, Hartford, Conn., on the brief), for defendants-appellants International Telephone and Telegraph Corp., Raymond L. Brittenham, Francis J. Dunleavy, Russell F. Erickson, Harold S. Geneen, R. Newton Laughlin, Hart Perry and Ted B. Westfall.

Samuel E. Gates, Robert L. King, Debevoise, Plimpton, Lyons & Gates, New York City, John Q. Tilson, Wiggin & Dana, New Haven, Conn., on the brief, for defendants-appellants Eugene R. Black, George R. Brown, Alvin E. Friedman, J. Patrick Lannan, John A. McCone and Warren Lee Pierson.

James A. Wade, Robinson, Robinson & Cole, Hartford, Conn., Paul, Weiss, Rifkind, Wharton & Garrison, New York City, on the brief, for defendant-appellant Felix G. Rohatyn.

Sidney B. Silverman, New York City, (Silverman & Harnes, New York City, James O'Connor Shea, New Haven, Conn., on the brief), for plaintiff-appellee.

Before DANAHER,^* LUMBARD and MULLIGAN, Circuit Judges.

LUMBARD, Circuit Judge:

This appeal from the District of Connecticut by the International Telephone and Telegraph Corporation (ITT) and its directors in May 1970¹ brings before us once again important questions concerning the administration of class actions. The first and more difficult issue is whether Chief Judge Blumenfeld's order of May 11, 1973, which held that this case may be maintained as a class action is appealable at this time. The second issue is whether the judge was correct in so holding. We hold that the order is appealable and that the district court correctly decided that a class action is proper.

I.

Alleging that ITT in its controversial² acquisition of the Hartford Fire Insurance Company (Hartford) violated several provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934 as well as Rules 10b-5 and 15c-2 of the Securities and Exchange Commission, Hilda Herbst initiated this action in September 1972. The complaint, which sought damages or rescission, alleged that Herbst had owned 100 shares³ of Hartford common stock which she exchanged for 100 shares of ITT cumulative preferred stock, $2.25 convertible series N (with voting rights). In connection with this exchange, Herbst was given a prospectus dated May 26, 1970. Herbst admitted in a subsequent affidavit that on August 4, 1970, she sold the ITT preferred stock which she received in the exchange.

The prospectus stated that it was the opinion of counsel for ITT and Hartford that if ITT in its exchange offer acquired at least 80% of the outstanding Hartford common stock and if ITT acquired no Hartford common stock except in exchange for ITT voting stock, then no gain or loss to the Hartford shareholders would be recognized on their exchange for ITT preferred stock and their basis in the ITT stock would be their previous basis in the Hartford stock. ITT represented that it did not hold any Hartford common stock and that it would not acquire any Hartford common stock for cash or property other than ITT voting stock if that would affect the tax-free nature of the exchange. Herbst claims that these representations concerning the tax status of the exchange were false and misleading and that in fact ITT did own Hartford common stock which it had acquired by cash or property other than by its voting stock.

In April 1969 ITT entered into a merger agreement with Hartford. Several months prior to this agreement, ITT had purchased approximately 1.7 million shares or about 8% of the Hartford common stock. In connection with the proposed merger ITT sought from the Internal Revenue Service (IRS) a ruling that the merger would be a tax-free reorganization. The IRS held that the merger would be a valid reorganization, if prior to the merger's consummation, ITT unconditionally disposed of the shares of Hartford common stock it had acquired.⁴ On October 21, 1969, ITT received a supplemental IRS ruling, which stated that a proposed contract of sale between ITT and an Italian bank, Mediobanca BancadiCredito Finanziaro-S. p.A. (Mediobanca), would result in ITT's unconditional disposition of its Hartford shares.

The contract between ITT and Mediobanca was signed on November 3, 1969. At the same time Mediobanca and ITT's investment bankers, Lazard Freres & Co. (Lazard), signed an agreement, which Herbst alleges the IRS never saw before it made its ruling. Herbst claims that by reading the two contracts together it becomes apparent that ITT did not sell its Hartford stock to Mediobanca but that in fact Mediobanca was holding ITT's stock for a fee, and that, while Mediobanca held the stock, ITT retained the risks and benefits of ownership including the right to dividends and profits or losses upon sale.

The ITT-Hartford merger never became effective, for in December 1969, the Insurance Commissioner of Connecticut disapproved the plan. ITT then made arrangements to offer Hartford shareholders a voluntary exchange of their stock for ITT preferred stock. This exchange was conditional upon at least 95% of the Hartford shares being exchanged unless ITT chose to declare the exchange effective after 80% was exchanged. Apparently because the tax consequences of this plan were identical to those of the aborted merger, no effort was made to obtain a further IRS ruling. On May 23, 1970, following hearings, the Insurance Commissioner held that the proposed offer was fair to Hartford shareholders and on May 26 the offer became effective. Subsequently, more than 99% of Hartford common stock shares were exchanged for ITT preferred.

Soon after this case was started, Herbst moved for an order pursuant to Fed.R.Civ.P. 23(c)(1) holding that she could maintain her action as a representative of all Hartford shareholders who exchanged their stock for ITT preferred. Chief Judge Blumenfeld held that the suit could be maintained as a class action,⁵ and from this order ITT appeals.

II.

In the last few years, we have passed upon the appealability of district court orders which held that a class action could not be maintained but that the individual claim of the plaintiff could proceed to trial. We have developed the "death knell" doctrine, which makes such an order "final" for purposes of appeal under 28 U.S.C. § 1291 if the individual claim is so small that plaintiff will not proceed upon it alone. We first announced this doctrine in Eisen v. Carlisle & Jacquelin, 370 F.2d 119 (2d Cir. 1966), cert. denied, 386 U.S. 1035, 87 S.Ct. 1487, 18 L.Ed.2d 598 (1967) (Eisen I), where the district court dismissed the class action but allowed an individual claim of $70 to be continued. We said, "We can safely assume that no lawyer of competence is going to undertake this complex and costly case to recover $70 for Mr. Eisen.... If the appeal is dismissed, not only will Eisen's claims never be adjudicated, but no appellate court will be given the chance to decide if this class action was proper under the newly amended Rule 23." 370 F.2d at 120.

We followed this doctrine in Green v. Wolf Corp., 406 F.2d 291 (2d Cir. 1968), cert. denied, Troster, Singer & Co. v. Green, 395 U.S. 977, 89 S.Ct. 2131, 23 L.Ed.2d 766 (1969), where the individual claim was less than one thousand dollars. 406 F.2d at 295 n. 6. But in two cases where the individual claims were very substantial, we held that the dismissal of the class action was not appealable. City of New York v. International Pipe & Ceramics Corp., 410 F.2d 295 (2 Cir. 1969); Caceres v. International Air Transport Association, 422 F.2d 141 (2d Cir. 1970). In Korn v. Franchard Corp. (Korn I), and Milberg v. Western Pacific R. R., 443 F.2d 1301 (2d Cir. 1971), we clarified our holdings by ruling in Korn that the dismissal of the class action was appealable when the individual claim was for $386 and in Milberg that the dismissal was not appealable when the individual claim was for $8500. Although the death knell doctrine has been criticized by courts that feel that no order dismissing only the class action claim should be appealable⁶ and by commentators who feel all such orders should be appealable,⁷ we have reiterated our adherence to the doctrine. Consequently, we dismissed an appeal because the individual claim of $7,482 was so substantial that the plaintiff would sue on that claim alone. Shayne v. Madison Square Garden Corp., 491 F.2d 397 (2d Cir. 1974).

Here the defendant is appealing from an order holding that a class action can be maintained. Our most recent statement on whether such an order is appealable is found in Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir.), cert. granted, 414 U.S. 908, 94 S.Ct. 235, 38 L.Ed.2d 146 (1973) (Eisen III).

Building on Judge Friendly's concurring opinion in Korn I, supra, 443 F.2d at 1307, in which he suggested that the court might wish to consider a rule that would "afford equality of treatment as between plaintiffs and defendants," we said that the district court's order allowing a class action to be maintained is appealable. 479 F.2d at 1007 n. 1.

In so saying we relied on Supreme Court cases that have given 28 U.S.C. § 1291 a "practical rather than a technical construction." Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 546, 69 S.Ct. 1221, 1226, 93 L.Ed. 1528 (1949). See also Gillespie v. United States Steel Corp., 379 U.S. 148, 85 S.Ct. 308, 13 L.Ed.2d 199 (1964); Mercantile National Bank v. Langdeau, 371 U.S. 555, 83 S.Ct. 520, 9 L.Ed.2d 523 (1963). We stated that an order authorizing a class action is appealable under Cohen because

it clearly involves issues "fundamental to the further conduct of the case;" ...

and is also separable from the merits of the case; and the

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