Phillips v. Tobin

• Citation: 548 F.2d 408
• Decision Date: 16 December 1976
• Docket Number: 889,D,891,890,Nos. 888,s. 888
• Parties: Fed. Sec. L. Rep. P 96,038 Randolph PHILLIPS, Plaintiff-Appellee, v. John E. TOBIN et al., Defendants-Appellants, Ralph K. Gottshall et al., Defendants, and Alleghany Corporation, Defendant-Appellant. ockets 75-7677, 75-7681, 76-7044, 76-7045.
• Court: United States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Page 408

548 F.2d 408

Fed. Sec. L. Rep. P 96,038

Randolph PHILLIPS, Plaintiff-Appellee, v. John E. TOBIN et al., Defendants-Appellants Ralph K. Gottshall et al., Defendants and Alleghany Corporation, Defendant-Appellant.

Nos. 888, 889, 890, 891, Dockets 75-7677, 75-7681, 76-7044, 76-7045.

United States Court of Appeals Second Circuit.

Argued July 22, 1976.

Decided Dec. 16, 1976.

William E. Hegarty, New York City (Cahill Gordon & Reindel, Richard Schumacher and John A. Shutkin, New York City, of counsel), for defendant-appellant Alleghany Corp.

Robert J. Geniesse, New York City (Debevoise, Plimpton, Lyons & Gates, Samuel E. Gates, New York City, of counsel), for defendants-appellants John E. Tobin, Fred M. Kirby, Allan P. Kirby, Jr. and John J. Burns, Jr.

Randolph Phillips, pro se.

Before WATERMAN and MESKILL, Circuit Judges, and BARTELS, District judge. ^*

BARTELS, District Judge:

This is an appeal by the defendants Alleghany Corporation ("Alleghany") and individual directors thereof pursuant to 28 U.S.C. § 1291 from an order of the United States District Court for the Southern District of New York (Ward, J.) denying defendants' motion to dismiss the plaintiff's pro se complaint upon the ground of plaintiff's disqualification. The complaint alleges a derivative action on behalf of defendant Alleghany and a representative action on behalf of plaintiff and others similarly situated, and after dismissal by the lower court of counts 2, 4, 5 and 6 and portions of counts 1 and 7, the remaining counts alleged violations by the directors of Alleghany of the Securities Exchange Act of 1934 (15 U.S.C. §§ 78a et seq.) (proxy and fraud claim, S.E.C. Rules 10b-5 (17 C.F.R. § 240.10b-5) and 14a-9 (17 C.F.R. § 240.14a-9)), and the state claim arising from the Jones Motor Company transaction. The complaint seeks various forms of injunctive relief against Alleghany, the divestiture by Alleghany of the Jones Motor Company acquisition, registration under the Investment Company Act of 1940, and declaration and distribution of dividends not heretofore paid out, in excess of $80 million, ¹ as well as payment by the directors of Alleghany of damages estimated at $18 million.

Both Alleghany and the individual defendants predicate their appeal upon the disqualification of plaintiff to bring this suit on two grounds: (1) plaintiff, not being an attorney, has no right to prosecute a derivative action on behalf of Alleghany pro se, and (2) plaintiff is not an adequate representative plaintiff under the requirements of Federal Rule of Civil Procedure 23.1. The former relates to who may serve as counsel and the latter relates to who may serve as a derivative stockholder representative. Phillips has moved to dismiss the appeal on various grounds, among them that the order appealed from is not final.

Appealability

While an order granting or denying disqualification of an attorney to appear in an action has not always been appealable, we have since 1974 held under 28 U.S.C. § 1291 such an order appealable. Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 496 F.2d 800 (2d Cir. 1974) (en banc ). See also J. P. Foley & Co., Inc. v. Vanderbilt, 523 F.2d 1357, 1359 (2d Cir. 1975); Hull v. Celanese Corp., 513 F.2d 568, 570-71 (2d Cir. 1975); Ceramco, Inc. v. Lee Pharmaceuticals, 510 F.2d 268, 271 (2d Cir. 1975); General Motors Corp. v. City of New York, 501 F.2d 639, 644 (2d Cir. 1974). Nevertheless, appellee denies that this Court has appellate jurisdiction relying on Willheim v. Murchison, 312 F.2d 399 (2d Cir. 1963), holding non-appealable a district court's order denying disqualification of this very plaintiff who brought a stockholder's derivative action pro se. But Willheim as well as the predecessor authorities upon which it relied were expressly overruled in Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., supra. There the court accepted an appeal from an order of the district court denying disqualification of the plaintiff's attorney formerly associated with the defendant's law firm. In upholding the appealability of the order the en banc court relied upon the doctrine of Cohen v. Beneficial Industrial Loan Corp.,337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949), noting that if the final disposition of a collateral right not an ingredient of the cause of action remained unresolved before trial, judicial and attorney time might be needlessly expended. Accordingly, the order denying disqualification on the first ground is appealable, and thus we deny the motion to dismiss the appeal.

Although an order denying a plaintiff-stockholder the right to proceed with a derivative suit on the ground of inadequacy of representation would probably be a final order and appealable, see Nolen v. Shaw-Walker Co., 449 F.2d 506 (6th Cir. 1971); Quirke v. St. Louis-San Francisco Ry., 277 F.2d 705, 706 (8th Cir.), cert. denied, 363 U.S. 845, 80 S.Ct. 1615, 4 L.Ed.2d 1728 (1960), we can find no precedent for the appealability of the converse order which permits such a plaintiff to proceed with the action by denying disqualification upon the same ground. Such an order not being a final judgment under 28 U.S.C. § 1291, we do not believe it falls within the narrow bounds of the collateral right doctrine of Cohen, supra, entitling this order to the extraordinary treatment of appealability there authorized, nor do we find that the order comes within the doctrine of equality of treatment between plaintiffs and defendants as postulated in Korn v. Franchard Corp., 443 F.2d 1301, 1307 (2d Cir. 1971) (Friendly, J., concurring); Parkinson v. April Industries, Inc., 520 F.2d 650, 656 n. 6 (2d Cir. 1975); Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1007 n. 1 (2d Cir. 1973), vacated and remanded, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974), nor that the lower court's determination will cause " 'irreparable harm to a defendant in terms of time and money spent in defending' " this action. Kohn v. Royall, Koegel & Wells, 496 F.2d 1094, 1098 (2d Cir. 1974). See also General Motors Corp. v. City of New York, supra, 501 F.2d at 644. Due to the factual variations present in the determination of adequacy of representation, there is no reason to believe that this decision would establish a legal principle once and for all as is true of Cohen, supra. See Donlon Industries, Inc. v. Forte, 402 F.2d 935, 937 (2d Cir. 1968). In fact, such an adjudication would, as stated by Judge Friendly in Weight Watchers of Philadelphia, Inc. v. Weight Watchers Int'l, Inc., 455 F.2d 770, 773 (2d Cir. 1972), "open the way for a flood of appeals concerning the propriety of a district court's ruling on the facts of a particular suit." We conclude that this order is not significant enough to warrant a finding that it is final, nor to permit an immediate review even though it may not be effectively reviewable on appeal from the final judgment. ² Id. at 774; West v. Zurhorst, 425 F.2d 919 (2d Cir. 1970); Donlon Industries, Inc. v. Forte, supra; Flegenheimer v. General Mills, Inc., 191 F.2d 237 (2d Cir. 1951). Thus, Judge Ward's refusal to disqualify Phillips as a proper class representative is not appealable, and hence we do not reach the merits.

This does not mean that the appellants are wholly without a remedy. The district court has determined that plaintiff at present is an adequate representative to institute the action and to set in motion the machinery of equity. If during the trial the district court finds this is no longer true it is within the court's power to take such action as it may deem necessary to permit other shareholders who satisfy the adequacy requirements to continue the suit. The option may be exercised by authorizing such notice to other shareholders as may be advisable and prudent under the circumstances. See Advisory Committee's Note to Rule 23.1, 39 F.R.D. 108 (1966); Note, Res Judicata in the Derivative Action: Adequacy of Representation and the Inadequate Plaintiff, 71 Mich.L.Rev. 1042, 1051 (1973). Cf. Papilsky v. Berndt, 466 F.2d 251, 256-60 (2d Cir.), cert. denied, 409 U.S. 1077, 93 S.Ct. 689, 34 L.Ed.2d 665 (1972); Beaver Associates v. Cannon, 59 F.R.D. 508 (S.D.N.Y.1973).

Merits

Having established appellate jurisdiction to review the denial of the motion to dismiss upon the first ground, we turn to the merits of the question as to whether the plaintiff should be disqualified to bring this suit in his pro se capacity. At the threshold, we recognize the long established principle that in the federal courts the parties have the right to plead and conduct their own cases, Faretta v. California, 422 U.S. 806, 830 n. 39, 95 S.Ct. 2525, 45 L.Ed.2d 562 (1975), and in the criminal context a defendant has a constitutional right to represent himself under the Sixth and Fourteenth Amendments. ³ Id. Section 1654 of Title 28 of the United States Code expressly provides:

"In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein." (Emphasis added). ⁴

The basic question raised by the above statute is whether this stockholder's derivative suit is the plaintiff's "own case" or is a suit belonging to the corporation. Courts have repeatedly held that the substantive right in a stockholder's derivative suit is that of the corporation, Ross v. Bernhard, 396 U.S. 531, 538-39, 90 S.Ct. 733, 24 L.Ed.2d 729 (1970); Koster v. Lumbermens Mut. Cas. Co., 330 U.S. 518, 522-23, 67 S.Ct. 828, 91 L.Ed. 1067 (1947); Vincel v. White Motor Corp., 521 F.2d 1113, 1118 (2d Cir. 1975); Papilsky v. Berndt, supra, 466 F.2d at 255-56, and not that of the stockholders. In fact, it has long been settled that the derivative suit was an invention of the courts of equity which "came to the relief of the stockholder, who had no standing to bring civil action at law against faithless directors and managers. Equity, however,...