Miller v. Mackey International, Inc.

• Decision Date: 23 November 1971
• Docket Number: No. 71-1276 Summary Calendar.,71-1276 Summary Calendar.
• Citation: Miller v. Mackey International, Inc., 452 F.2d 424 (5th Cir. 1971)
• Parties: Martin MILLER, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v. MACKEY INTERNATIONAL, INC., Consolidated Securities Corp., Joseph C. Mackey, et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Fifth Circuit

452 F.2d 424 (1971)

Martin MILLER, on behalf of himself and all others similarly situated, Plaintiff-Appellant, v.MACKEY INTERNATIONAL, INC., Consolidated Securities Corp., Joseph C. Mackey, et al., Defendants-Appellees.

No. 71-1276 Summary Calendar.^*

United States Court of Appeals, Fifth Circuit.

November 23, 1971.

Bruce E. Lazar, Palmer & Lazar, Miami, Fla., for plaintiff-appellant.

Robert E. Venney, Miami, Fla., for defendants-appellees.

Before WISDOM, COLEMAN and SIMPSON, Circuit Judges.

WISDOM, Circuit Judge:

This appeal turns on the propriety of the district court's evaluating the substantive merits of a plaintiff's claims when passing on a motion for a class action and the validity of the grounds assigned in this case for the denial of a class action motion.

This case was originally filed as a class action by Martin Miller, Appellant in this Court, on behalf of himself and all others similarly situated, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934.Miller sued Mackey International, Inc., the issuer of 400,000 shares of common stock covered by a registration statement made effective by the Securities and Exchange Commission on April 21, 1969; Consolidated Securities Corp., the underwriter of the issue; Joseph C. Mackey, the principal stockholder and chief executive of Mackey International; and other defendants who were never served.Mackey International (Mackey) operates an air taxi service between points in Florida and points in the Bahama Islands, engages in land development in Bimini, and operates a real estate brokerage business in Florida.Miller, the purchaser of 100 shares of the public offering, alleges material omissions and false statements in the prospectus issued by Mackey.He predicates his cause of action on §§ 11,12(2), and17 of the Securities Act of 1933,15 U.S.C. §§ 77k,77l, and77g, and§ 10b of the Exchange Act of 1934,15 U.S.C. § 78j (b).

Air service between Florida and the Bahamas is governed by Route 9 of the Bermuda Agreements, a bilateral treaty between the United States and the United Kingdom.In order for an American carrier to receive authorization to fly between Florida and the Bahamas, the carrier must be designated by the United States Government and receive a permit from the British Board of Trade.

Miller argues that the prospectus was deficient in three respects.First, according to Miller, the prospectus said that only Mackey International and Eastern Airlines held Route 9 operating permits.In fact, however, Chalk's Flying Service actually held a Route 9 permit also,¹ and Chalk's is the principal air carrier between Florida and Bimini.

Second, Miller contends that the prospectus said that Mackey was subject to competition from only two airlines, Eastern Airlines and Bahamas Airways, while, in actuality, Chalk's was also a competitor holding a Route 9 permit.Finally, Miller argues that the prospectus failed to state that Mackey would be effectively excluded from revenues derived from air service to Bimini, where Mackey was engaged in real estate development, because of competition from Chalk's.

The answer of the defendants below and their brief in this Court deny the validity of Miller's claims on the merits.Besides arguing generally that the alleged omissions and false statements do not meet the test of Regulation C, Rule 405 of the Securities and Exchange Commission—facts about which "an average prudent investor ought reasonably to be informed before purchasing the security registered"—the defendants argue that each of the specific charges have no merit.First, they contend, based on inquiries by Chalk's to the Civil Aeronautics Board, that even Chalk's did not know it had a Route 9 permit and that the Mackey prospectus surely need not be clairvoyant.Second, they contend that an agreement, disclosed in the prospectus, between Mackey and Eastern Airlines precludes Mackey from operating between Florida and Bimini, Chalk's principal route, thus eliminating Chalk's as a competitor.Finally, they rely on the disclosure in the prospectus of this same agreement as sufficient to indicate Mackey's exclusion from the Bimini revenue.

Mackey's motion to dismiss for failure to state a claim upon which relief can be granted, F.R.Civ.P. 12(b), was denied by the district judge on September 23, 1970.Miller then filed a motion to determine the cause to be a class action, F.R.Civ.P. 23, which was denied on December 22, 1970.²This appeal from that order followed.This Court has denied Mackey's motion to dismiss the appeal on jurisdictional grounds.³

Miller contends, first, that the denial of his motion to determine the cause to be a class action should be reversed because the district judge improperly considered the merits of Miller's claim when passing on the propriety of a class action, basically a procedural question.We agree.

The district court's order (see footnote 2) in part stated:

* * * considering the status of the alleged competitor and statements concerning other competition contained in the prospectus and that the alleged omitted competitor was not in direct scheduled competition with the Defendant, * * * The Court finds that the requirements of Rule 23 are not presently apparent and it is, therefore, ordered that the motion to determine this action to be a class action is denied.

This portion of the order indicates to us that in passing on the propriety of the class action the district judge may have considered whether the petition stated a cause of action or whether Miller would succeed on the merits.This was improper.In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.

The determination whether there is a proper class does not depend on the existence of a cause of action.A suit may be a proper class action, conforming to Rule 23, and still be dismissed for failure to state a cause of action.

Kahan v. Rosenstiel, 3 Cir.1970, 424 F. 2d 161, 169.SeeJohnson v. Georgia Highway Express, 5 Cir.1969, 417 F.2d 1122;Esplin v. Hirschi, 10 Cir.1968, 402 F.2d 94;Eisen v. Carlisle & Jacquelin, 2 Cir.1968, 391 F.2d 555;City of Philadelphia v. Emhart Corp., 50 F.R.D. 232(E.D.Pa.1970);Berland v. Mack, 48 F.R.D. 121(S.D.N.Y.1969);Fogel v. Wolfgang, 47 F.R.D. 213(S.D.N.Y.1969)⁴;Mersay v. First Republic Corp. of America, 43 F.R.D. 465(S.D.N.Y.1968);but seeEisen v. Carlisle & Jacquelin, 52 F.R.D. 253(S.D.N.Y.1971)(hearing before assessing cost of notice);Milberg v. Western Pacific R. R. Co., 51 F.R.D. 280(S.D.N.Y.1970);Cannon v. Texas Gulf Sulphur Co., 47 F.R.D. 60(S.D.N.Y.1969)(hearing before assessing cost of notice);Dolgow v. Anderson, 43 F.R.D. 472(E.D.N.Y.1968).Rule 23 delineates the scope of inquiry to be exercised by a district judge in passing on a class action motion.Nothing in that Rule indicates the necessity or the propriety of an inquiry into the merits.Indeed, there is absolutely no support in the history of Rule 23 or legal precedent for turning a motion under Rule 23 into a Rule 12motion to dismiss or a Rule 56motion for summary judgment by allowing the district judge to evaluate the possible merit of the plaintiff's claims at this stage of the proceedings.Failure to state a cause of action is entirely distinct from failure to state a class action.

Mackey relies on sub-division (c)(1) of Rule 23 as allowing if not requiring an assessment of the substantive claims.That sub-division provides in pertinent part:

As soon as practicable after the commencement of an action brought as a class action, the court shall determine by order whether it is to be so maintained.

Mackey argues that the power to determine the propriety of use of the device envisions an evaluation of the merits.Although the language may appear to confer broad power, the Advisory Committee Notes make clear that a district judge is to consider only the specific requirements of sub-divisions (a) and (b) of Rule 23.The Committee stated with respect to sub-division (c)(1) of Rule 23:

In order to give clear definition to the action, this provision requires the court to determine, as early in the proceedings as may be practicable, whether an action brought as a class action is to be so maintained.The determination depends in each case on satisfaction of the terms of subdivision (a) and the relevant provisions of subdivision (b).(emphasis added).

Advisory Committee Notes, 39 F.R.D. 69, 104(1966).

Mackey further contends that a district judge should assess the likelihood of success on the merits before approving a class action because of the grave consequences attendant upon the approval.Specifically, the defendants point out that approval of a class action will result in notice to shareholders of Mackey and that such notice will appear to laymen to be a tacit approval by a federal court of the claims presented in plaintiff's suit.Such notice, they argue, would seriously injure the financial position of Mackey and should not be allowed unless the claims presented in the suit have some merit.This Court cannot, however, rewrite the Federal Rules of Civil Procedure and seriously undermine the class action device in order to avoid dubious harm to these defendants.Purely vexatious litigation could be halted by a Rule 12motion to dismiss or a Rule 56motion for summary judgment.Nothing would appear to prevent the defendants in this or other cases from sending material to the recipients of Rule 23 notice explaining their position on the merits of the claims.The specific requirements enumerated in Rule 23 are difficult to meet and represent additional obstacles to frivolous suits.Even if we were to assume that grave consequences to a defendant might follow from Rule 23 notice, such is not the situation presented here.Mackey has...