Piambino v. Bailey

Decision Date18 March 1985
Docket NumberNo. 82-5844,82-5844
Citation757 F.2d 1112
PartiesFed. Sec. L. Rep. P 92,034, 1 Fed.R.Serv.3d 1159 Peter PIAMBINO and Joseph F. Kucklick, Plaintiffs-Appellees, v. William E. BAILEY and David L. Eastis, Defendants, and Bestline Products, Inc., a California corporation, Defendant-Appellee, David Sylva, Intervenor-Appellant.
CourtU.S. Court of Appeals — Eleventh Circuit

Evelyn Langlieb Greer, P.A., Miami, Fla., for intervenor-appellant.

Frank R. Ubhaus, J. Russell Pitto, San Jose, Cal., for defendant-appellee Bestline Products Inc.

Carl H. Hoffman, Coral Gables, Fla., for plaintiff-appellee Peter Piambino.

Appeal from the United States District Court for the Southern District of Florida.

Before TJOFLAT and CLARK, Circuit Judges, and GOLDBERG *, Senior Circuit Judge.

TJOFLAT, Circuit Judge:


This is a class action in which the plaintiffs seek money damages under the federal securities laws. The lawyers who have been representing the plaintiff-class have a conflict of interest with the minority segment of the class. They have used this conflict of interest to benefit themselves and the majority of the class members since the case began. On March 11, 1977, they concluded a settlement and obtained an attorney's fee award, both of which were highly unfair to the minority members. We set aside the settlement and the fee award in Piambino v. Bailey (Piambino I), 610 F.2d 1306 (5th Cir.), 1 cert. denied, 449 U.S. 1011, 101 S.Ct. 568, 66 L.Ed.2d 469 (1980), and instructed the district court to grant David R. Sylva the status of an intervening party plaintiff to protect the interests of these minority members of the plaintiff-class (the "Minority Group").

When the district court received our mandate, the plaintiffs' lawyers resisted its enforcement because the proceeds of the vacated settlement had been disbursed and they had spent the attorney's fee the court had awarded them. Faced with this problem, the district court refused to enforce our mandate. Sylva now turns to us for relief. 2

A brief synopsis of the events that led to our decision in Piambino I and thereafter took place in the district court is necessary to give context to the holdings of that decision, the serious legal and ethical questions this appeal presents, and our disposition of those questions.


The plaintiffs in this case are purchasers of distributorships in a nationwide pyramid marketing scheme devised and operated by Bestline Corporation 3 to sell soap products. The plaintiffs became Bestline distributors, they allege, in reliance upon Bestline's representation that its distributors were making substantial profits and that they would also. This representation was false, and the plaintiffs lost their investments. They brought this class action, on July 20, 1973, against Bestline and its principals, contending that their distributorships were "securities" and seeking money damages under federal securities laws.

The plaintiffs comprising the Minority Group are the beneficiaries of a multimillion dollar state court judgment (the "California Judgment") the attorney general of California obtained against Bestline Corporation in 1973, about the time this litigation began, under California's consumer fraud laws. That judgment required Bestline to make periodic restitution payments into a fund (the "California Fund"), established by the judgment, for distribution to Bestline's California distributors. David R. Sylva is the trustee of that fund; he is charged with the responsibility of approving the distributors' claims and forwarding Bestline's restitution payments to them.

Soon after they filed the present class-action suit, if not before, it became evident to the plaintiffs' lawyers ("Lead Counsel") that Bestline would lack sufficient financial resources to make a significant settlement offer, or to satisfy any judgment the plaintiff-class might obtain after a trial on the merits, and to pay them an attorney's fee, if Bestline continued making restitution payments to their clients in the plaintiff-class who were beneficiaries of the California Judgment, i.e., the Minority Group. Lead Counsel therefore took steps to stop the flow of money from Bestline to these clients.

First, Lead Counsel appeared before the Superior Court of Los Angeles County, whose judgment was providing the vehicle for Bestline's restitution payments, and requested that court to impose a constructive trust on the California Fund for the benefit of their clients in the plaintiff-class who were not beneficiaries of the California Judgment (the "Majority Group"). The Superior Court rejected Lead Counsel's request. Lead Counsel then brought suit in the U.S. District Court for the Northern District of California. They named as plaintiffs the entire plaintiff-class now before us (the Majority and the Minority Groups) and as defendants, among others, Sylva, 4 the Superior Court of Los Angeles County, and the California attorney general. Lead Counsel asked the district court to enjoin Sylva from distributing to the Minority Group the restitution funds Bestline was paying into the California Fund on the grounds, inter alia, that the California Judgment, by not providing for restitution to the Majority Group, denied the members of that Group rights secured by the ninth 5 and fourteenth 6 amendments to the U.S. Constitution. The district court refused to grant the injunction and dismissed the case, with prejudice, for failure to state a claim for relief. 7 See Fed.R.Civ.P. 12(b)(6).

Having failed in California, Lead Counsel turned to the district court below for relief. The district court had previously determined, on plaintiffs' motion for summary judgment, that the distributorships plaintiffs had purchased from Bestline were securities within the meaning of the federal securities laws, and the parties were in the process of preparing for trial. On June 18, 1976, Lead Counsel moved the court to enjoin Bestline Corporation from making a $500,000 restitution payment to the California Fund that was due on June 30. In urging the court to issue the injunction, they pointed out that Bestline was rapidly disposing of its assets and that, unless the court took action, Bestline would soon have no assets to pay the plaintiffs' claims. On June 30, the district court preliminarily enjoined Bestline from making the payment due that day and ordered it to deposit the sum of $500,000 in the registry of the court. The court further enjoined Bestline from making any subsequent payment called for by the California Judgment.

Bestline objected to the issuance of this injunction on the ground, inter alia, that the court had not required the plaintiffs to post a bond as required by Fed.R.Civ.P. 65(c). 8 In response, the court said that Bestline's $500,000 deposit would serve as the plaintiffs' bond and would remain in the court's registry as long as the injunction remained in effect.

Bestline immediately appealed the district court's injunctive order to this court. While Bestline's appeal was pending, Lead Counsel negotiated a settlement with Bestline and twenty-seven of the individual defendants. On January 28, 1977, the district court preliminarily approved the settlement. Two weeks later, Sylva moved the court to intervene as a party plaintiff, representing the Minority Group. He requested the court to designate that Group a plaintiff-subclass, claiming that Lead Counsel's representation of both the Majority and the Minority Groups constituted a conflict of interest.

Sylva sought to intervene for two reasons: to seek the vacation or modification of the injunction that was preventing Bestline from fulfilling its obligations under the California Judgment, and to contest the settlement the court had preliminarily approved. Sylva objected to the settlement because most of the members of the Minority Group would not share in the proceeds thereof and because, under its terms, Bestline would be precluded from making further restitution to that Group under the California Judgment.

The district court entertained Sylva's motion to intervene on March 11, 1977, at a hearing on Lead Counsel's application for the final approval of the aforementioned settlement and the award of an attorney's fee and expenses. The court denied Sylva's motion as untimely and meritless, without further explication. It then addressed the propriety of the settlement and the issue of Lead Counsel's attorney's fee and litigation expenses. The court approved the settlement as "fair, reasonable and adequate" and, stating that there were no objections, approved Lead Counsel's request for a $750,000 attorney's fee and $50,000 in expenses. Three days later, the clerk of the court disbursed the fee to Lead Counsel out of funds on deposit in the court's registry.

On April 1, 1977, Sylva took an appeal from the district court's order denying his motion to intervene; at the same time, he moved the district court to stay the execution of the settlement and to set aside the attorney's fee the clerk had disbursed to Lead Counsel. The district court, on May 2, 1977, refused to set aside the fee disbursement or to grant the stay, and, by the time we heard Sylva's appeal, the district court had disbursed all of the settlement proceeds to the eligible members of the plaintiff-class.


On December 5, 1980, we decided Piambino I, 610 F.2d 1306 (5th Cir.), cert. denied, 449 U.S. 1011, 101 S.Ct. 568, 66 L.Ed.2d 469 (1980), Sylva's appeal and Bestline's earlier appeal from the district court's preliminary injunction, 9 which had been consolidated for argument and decisional purposes. 10 We reversed the district court's order enjoining Bestline from making the restitution payments called for by the California Judgment, because that order had no basis in law. Id. at 1334. We also reversed the district court's order denying Sylva intervention, concluding that the court should have allowed him to intervene in behalf of the Minority...

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