Korn v. Franchard Corporation, 78

Citation456 F.2d 1206
Decision Date06 March 1972
Docket NumberNo. 78,Docket 35578.,78
PartiesRuth KORN, individually and as executrix of the Estate of Ben Korn, Deceased, on behalf of herself and all other Purchasers and Holders of Limited Partnership Interests in 63 Wall Associates similarly situated, Plaintiff-Appellant, and Murray Wechsler et al., Intervening Plaintiffs, v. FRANCHARD CORPORATION et al., Defendants-Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Herbert Brownell, New York City (Wendell Davis, Jr., and Lord, Day & Lord, New York City, on the brief), for plaintiff-appellant.

Peter J. Schlesinger, New York City (Simpson, Thacher & Bartlett, New York City, on the brief), for defendants-appellees Franchard Corp. and Glickman Servicing Corp.

George A. Spiegelberg, New York City (Fried, Frank, Harris, Shriver & Jacobson, and Richard M. Michaelson, New York City, on the brief), for defendants-appellees Louis A. Siegel and Seymour Young.

Before FRIENDLY, Chief Judge, FEINBERG, Circuit Judge, and DAVIS, Judge.*

DAVIS, Judge:

In 1961 plaintiff-appellant Ruth Korn and her late husband purchased two units of limited partnership (which have been retained) in a real estate syndication, known as 63 Wall Associates, for $10,000 (the total issue amounted to $5,200,000). In this action in the Southern District of New York, Mrs. Korn1 seeks to recover damages and additional relief from the general partners (and others) for an allegedly misleading prospectus which is said to have been tainted by more than a hundred omissions and several misstatements, in violation of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), S.E.C. Rule 10b-5, and §§ 352-c and 352-e of the New York General Business Law, McKinney's Consol. Laws, c. 23-A.2 In March 1970, Judge Mansfield conditionally granted the plaintiff's unopposed request for class suit designation under Rule 23, Fed.R.Civ.P. (50 F.R.D. 57), ordering that forms for an optional "proof of claim", in addition to the regular notice under Rule 23, be sent to the more than 1,000 other purchasers of units in the limited partnership. Later, on the basis of the returns, the plaintiff moved that these proofs of claim be declared of no effect, and the defendants cross-moved to strip the suit of its class suit status. In the fall of 1970, the District Court revoked the designation. CCH Fed.Sec.L.Rep. ¶ 92,845. This appeal followed, and the court, denying a motion to dismiss, ruled that the order cutting off class suit status was appealable because "we are convinced that at this stage Mrs. Korn's action will go no further without class suit designation." 443 F.2d 1301, 1306 (1971). The case is now before us on the merits of the appeal.

The District Court grounded its withdrawal of class suit status on two separate factors. The first, stemming from an evaluation of the returned claim-proofs, was the judge's determination that the class was too small, that in any event plaintiff's interests were not typical of the proposed class, and that a class action was neither a necessary nor a superior mode of adjudication for this claim. Due to address changes over a ten-year period, about one-third of the proofs of claim were returned undelivered, but some 233 responses were received. Some 77 responses, representing 111 persons out of a potential class of over 1,000, requested exclusion. Of those who did not, 80 to 90% did not, in the lower court's view, state the approximate amount received upon sale of their units, or the particular representations on which they relied, although the great majority professed reliance in general terms. Moreover, while this suit was pending, all but seventy of the investors had accepted a check returning $4,570 for each $5,000 invested, and in doing so had signed a statement releasing appellee Franchard Corporation from any claims. Resting on its appraisal of the returned claim forms and the effect of the releases, the court found that there was no common core of reliance on any alleged misrepresentation, that the answers to the questions on the form "showed a definite apathy toward the class suit", and that the interested class was not large enough for class designation.

The second, and "equally important", component in deciding to end Rule 23 status was the conduct of the plaintiff's attorney who the court thought had acted improperly in connection with the suit and would therefore not fairly and adequately protect the class interest.

On the latter point there has been a significant operative change since the ruling below. The former attorney, whose actions were severely criticized by the District Court, has withdrawn from all connection with or participation in the litigation. New counsel, of great experience as well as unimpeachable character and reputation, entered the case at the appeal stage and will represent plaintiff in the succeeeding phases. This substitution of attorneys drastically alters the nature of the case as it comes to us. Since our decision has to be forward-looking, determining the cast of the proceedings from now on, we must take account of this new situation, just as we would if we were considering an injunction for the future.3 By the same token, we can no longer look at the suit in the same way as Judge Mansfield. One of the double bases on which he acted — in his view, an "equally important" basis which, as we read his opinion, may well have been a necessary prerequisite to his ultimate conclusion — has now fallen entirely out of the case. Moreover, we think that the court's opinion should not have condemned the attorney's conduct without affording him a hearing on the propriety of his activities; there was, in fact, no more than some discussion at oral argument with no proper prior notice of the charges, and the court's severe strictures appeared for the first time in written form in the opinion, without the lawyer having had an adequate opportunity to meet them.4 We are therefore called upon to consider the order, under the criteria of Rule 23, solely on the first ground the court gave (which, as we have just indicated, may not, standing alone, have been enough in its eyes for withdrawal of class status).

In a situation such as this, where circumstances have changed between the ruling below and the decision on appeal, the preferred procedure is to remand to give the district court an opportunity to pass on the changed circumstances. We do not do that in this instance because the new situation demands one result only, and discretion could not be exercised either way. In the present circumstances, as we shall show, a district judge could not decide against allowing a class action without abusing his discretion; we would have had to reverse if the lower court, on remand, had adhered to its denial of class action status.

Under Rule 23, there are six standards bearing on the case, which we shall discuss seriatim though some of the relevant factors overlap and relate to more than one criterion. Our conclusion, mindful of the admonition of liberality toward demands for class suit status in securities litigation (particularly 10b-5 suits) (Green v. Wolf Corp., 406 F.2d 291, 298 (2d Cir. 1968) cert. denied, Troster, Singer & Co. v. Green, 395 U.S. 977, 89 S.Ct. 2131, 23 L.Ed.2d 766; Esplin v. Hirschi, 402 F.2d 94, 101 (10th Cir. 1968) cert. denied 394 U.S. 928, 89 S.Ct. 1194, 22 L.Ed.2d 459), will be that there is not now enough reason to deprive this action of such a designation or to handle it differently from the many other 10b-5 cases which have been accorded class treatment.5

Rule 23(a) (1) — number in class: However it be defined, the group here is sufficiently numerous that joinder of all members is impracticable. Out of some 1154 investors, almost all small holders and scattered throughout the country, only about 111 filed timely or untimely requests to be excluded; under Rule 23(c) (2) and (3), the rest are potential members. Even if it be assumed, arguendo, that the class should be limited to the 212 (or so) individuals who sent in the permissive proof of claim forms, that number would be enough.6 Forty investors have been said to represent a sufficiently large group "where the individual members of the class are widely scattered and their holdings are generally too small to warrant undertaking individual actions." Swanson v. American Consumer Industries, Inc., 415 F.2d 1326, 1333 n. 9 (7th Cir. 1969). That is surely the case here. See also Fidelis Corp. v. Litton Industries, Inc., 293 F.Supp. 164, 170 (S.D.N.Y.1968), Philadelphia Electric Co. v. Anaconda American Brass Co., 43 F.R.D. 452, 463 (E.D.Pa.1968). Similarly, should a subsequent disposition find the releases signed by the majority of investors to be valid (see the discussion, infra), the remaining group of at least seventy, who failed to sign, would suffice for a proper class.

The court below stressed the apparent unconcern of most of those who returned the optional claim forms. But even if we assume that apathy and lack of interest on the part of a great majority of the investors can be inferred from the paucity of intervenors (only 8 so far), together with the character of the responses on the optional claim-proofs,7 still the current Rule, unlike its predecessor, does not permit that subjective inference to be used as a disqualification or to narrow the potential class. See Mersay v. First Republic Corporation of America, 43 F.R.D. 465, 470-471 (S.D. N.Y.1968). The notice provisions of subdivision (c) (2) supply the objective mechanism for an apathetic or uninterested member to opt out; it would disrupt the working of that straight-forward device, as well as prolong and encumber the process of deciding whether to give a class suit designation, to superimpose a disputable judgment as to the degree of enthusiasm of those who do not choose to exclude themselves. The...

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