PENNSYLVANIA CO. FOR INSURANCES, ETC. v. Deckert, 7768

• Decision Date: 19 November 1941
• Docket Number: 7769,No. 7768,No. 7773.,7768,7773.
• Citation: PENNSYLVANIA CO. FOR INSURANCES, ETC. v. Deckert, 123 F.2d 979 (3rd Cir. 1941)
• Parties: PENNSYLVANIA CO. FOR INSURANCES ON LIVES AND GRANTING ANNUITIES v. DECKERT et al. INDEPENDENCE SHARES CORPORATION v. SAME. MILLER et al. v. SAME.
• Court: U.S. Court of Appeals — Third Circuit

123 F.2d 979 (1941)

PENNSYLVANIA CO. FOR INSURANCES ON LIVES AND GRANTING ANNUITIES v. DECKERT et al. INDEPENDENCE SHARES CORPORATION v. SAME. MILLER et al. v. SAME.

Nos. 7768, 7769, No. 7773.

Circuit Court of Appeals, Third Circuit.

November 19, 1941.

COPYRIGHT MATERIAL OMITTED

Walter Biddle Saul, of Philadelphia, Pa., (Francis H. Bohlen, Jr., and Saul, Ewing, Remick & Saul, all of Philadelphia, Pa., on the brief), for appellant, Pennsylvania Co.

George Maxman, of Philadelphia, Pa., (Charles L. Miller, of Lancaster, Pa., on the brief), for intervenors-appellants, Miller et al.

Richardson Dilworth, of Philadelphia, Pa. (Harry A. Kalish, Thomas P. Glassmoyer, and Murdoch, Paxson, Kalish & Green, all of Philadelphia, Pa., on the brief), for Independence Shares Corporation, Alfred H. Geary, Frank McCown, Robert E. Bonner, Horace M. Barba, and Eckley B. Coxe, 3d.

Harry Shapiro, of Philadelphia, Pa. (Wm. B. Rudenko, of Philadelphia, Pa., on the brief), for appellees.

Before BIGGS, JONES, and GOODRICH, Circuit Judges.

BIGGS, Circuit Judge.

This is the second time that this case has been before this court upon appeal. 108 F.2d 51. We shall restate briefly what we consider the essential facts.

The Capital Savings Plan Contract Certificates purchased by the plaintiffs call for installment payments to be made by the subscribers. These payments are made by the subscribers to The Pennsylvania Company for Insurances on Lives and Granting Annuities as trustee. Pennsylvania deducts certain fixed charges and uses the balance of these installment payments, as directed by Independence Shares Corporation, to purchase Independence Trust Shares for the benefit and accounts of certificate holders. Independence Trust Shares represent aliquot interests in a trust of common stocks of American corporations deposited by Independence with Pennsylvania. Pursuant to agreements between Pennsylvania and Independence, Pennsylvania collects dividends and profits from the stocks and administers the trust. The underlying stocks comprising the trust portfolio under the terms of the agreement are selected by Independence. Independence exercises the power of selling underlying stocks out of the portfolio and of purchasing other stocks in lieu thereof. While we have referred to Pennsylvania as a trustee, the function of making investments ordinarily accomplished by a trustee is performed by Independence. In several particulars Pennsylvania is little more than a custodian performing its most important functions as trustee under the direction of Independence, as the agreements between it and Independence require.

The injunction issued by the court below Deckert v. Independence Shares Corp., D. C., 39 F.Supp. 592, has the effect of suspending the operation of the trusts and the functions of Pennsylvania. We have set it out in the note below.¹ The defendants have appealed from it.

Jurisdiction of the action lies in the court below by virtue of Section 12(2) of the Securities Act of 1933, 48 Stat. 84, 15 U.S.C.A. § 77l, Deckert v. Independence Shares Corp., 311 U.S. 282, 61 S.Ct. 229, 85 L.Ed. 189.

There were originally nine plaintiffs, all of whom except one were residents of Pennsylvania. Other owners and holders of certificates have been allowed to intervene as parties plaintiff until now the parties plaintiff number forty-nine persons. These plaintiffs allege that their plans were sold to them by Independence or by its predecessors, Capital Savings Plan, Inc. (the liabilities of which have been assumed by Independence), by misrepresentation or by the omission of material facts. The main objects of the bill are the rescission of the contracts of sale and the recovery back of the considerations severally paid. The complaint also alleges that Independence is insolvent, that its business is at a standstill and that it is threatened with many suits which may result in preferences to creditors. The bill seeks the appointment of a receiver, the liquidation of the corporation and the return of the plaintiffs' payments. It is cast in the form of a class bill, the plaintiffs suing not only on behalf of themselves, but also all other certificate holders and planholders who may, with the plaintiffs' consent, join therein. A motion was made to amend the complaint and charge Pennsylvania and Independence with conspiring to sell and selling to the public by fraudulent means plans of investment which are also inherently fraudulent. A motion in opposition to the motion to amend the complaint was filed by the Pennsylvania Company. These motions are undetermined.

The District Court early referred the case to a special master to determine whether Independence Shares Corporation was solvent or insolvent. The master's report has been filed, finding Independence to be insolvent upon the theory that since the planholders are entitled to the return of the considerations paid by them, the claims of planholders against Independence far exceed its assets. Objections have been filed to the report but these have not yet been passed upon by the court below. By an earlier injunction of the court below, Deckert v. Independence Shares Corp., D.C., 27 F.Supp. 763, sustained by the Supreme Court in Deckert v. Independence Shares Corp., supra, reversing the decision of this court in Independence Shares Corp. v. Deckert, 108 F.2d 51, the court below granted an injunction restraining Pennsylvania from disposing of a fund of $38,250.85 belonging to Independence. This fund represents certain charges, income and proceeds received in the administration of the trust and represents compensation alleged to be due Independence for its services as the investing and managing agent.

The intervention of eleven other persons holding contracts, plans and certificates was allowed by the court below. These intervenors assert that there was no fraud or misrepresentation in the sale to them of their securities, and oppose the appointment of a receiver. At the time when suit was begun there were approximately 18,000 plans outstanding. In approximate numbers, one-third of the planholders have liquidated their plans; another third have ceased making payments; and the remaining third are continuing to make payments. Thus as of December 31, 1940 there were more than 13,000 persons holding plans entitling them to more than 1,655,000 trust shares which possessed a liquidation value as of January 1, 1941 in excess of $3,245,000. The trust assets back of the shares are worth in excess of $2,900,000. Approximately half of the plans sold had a life insurance feature whereby if a planholder dies an insurance company will pay to Pennsylvania a sum of insurance calculated to make up the balance remaining unpaid upon the plan at the time of his death. Approximately 3,650 of these latter planholders are continuing their payments to Pennsylvania as provided by their contracts. If the forty-nine plaintiffs were to recover in full the consideration paid by them with interest, the sum due from Independence would not exceed $10,000. It may be noted that the number and value of the trust shares held for the appellants-intervenors exceeds that held for the plaintiffs and that a major part of the securities owned by the forty-nine plaintiffs was sold by one selling agent.

The court below has described the action at bar as a "hybrid" class action maintainable under the provisions of Rule 23(a) (2) of the Rules of Federal Procedure, 28 U.S.C.A. following section 723c. We had previously denominated it a "spurious" class action under Rule 23(a) (3). Names are not important. If the rights of the individual plaintiffs are separate causes of action and they have no right to a common fund or to common property, the class action at bar is a "spurious" one. If, upon the other hand, the individual plaintiffs having individual causes of action have also a right to a common fund or in common property, the class action may be "hybrid." It should be borne in mind that the so-called spurious class cause may be turned by circumstances into the hybrid action. For example, if a corporation engaged in the sale of stock by fraudulent means to a number of individuals, under Rule 23(a) (2) they might join together as parties-plaintiff in one action to avoid multiplicity of suits though seeking separate judgments. This is the typical "spurious" class action. If, on the other hand, the corporation which they were suing had become insolvent in the meantime and the plaintiffs were compelled to look to a common fund in the hands of a receiver for the payment of their claims, they would then become claimants in a receivership, the common hybrid action referred to by the learned district judge. In this connection it should be borne in mind that the trial court found that the trust assets held by Pennsylvania for the planholders were not subject to the claims of individual planholders who might recover judgments against Independence, saying 39 F.Supp. 598: "It may be stated at this point that I am in agreement with the contention of Pennsylvania that the assets held by Pennsylvania for plan holders are `trust assets' and that no plan holders, by sustaining a claim against Independence or Pennsylvania, can in any way thereby obtain any interest in the trust assets held for other plan holders. This is so even though the particular trust assets are not `earmarked' for the benefit of any particular plan holders."

If the statement of the court below is correct, we must conclude at least insofar as trust assets are concerned, that the individual planholders possess no right to common property. Therefore they could not maintain a hybrid class action in respect to the trust funds. If the statement of the trial judge is correct, even if Independence is insolvent there will be applicable to the claims of the planholders only the general assets of Independence. Claims to such general assets might be maintained in a hybrid class action.

It will be...