Share v. Air Properties G. Inc.

• Decision Date: 06 July 1976
• Docket Number: No. 74-3282,74-3282
• Citation: 538 F.2d 279
• Parties: Fed. Sec. L. Rep. P 95,657 Richard Hudson SHARE et al., Plaintiffs-Appellants, v. AIR PROPERTIES G. INC. et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 279

538 F.2d 279

Fed. Sec. L. Rep. P 95,657

Richard Hudson SHARE et al., Plaintiffs-Appellants, v. AIR PROPERTIES G. INC. et al., Defendants-Appellees.

No. 74-3282.

United States Court of Appeals Ninth Circuit.

July 6, 1976.

Richard A. DeSantis (argued), Los Angeles, Cal., for plaintiffs-appellants.

Sandra J. Shapiro (argued), of Bancroft, Avery & McAlister, San Francisco, Cal., and Burton S. Levinson (argued), of Levinson, Rove & Lieberman, Beverly Hills, Cal. and Richard A. Fink (argued), of O'Melveny & Meyers, Los Angeles, Cal., for defendants-appellees.

OPINION

Before GOODWIN and SNEED, Circuit Judges, and EAST, ^* District Judge.

SNEED, Circuit Judge:

This case comes before us as an appeal from an order of the district court revoking its tentative class certification. The underlying action is brought by investors in a land development project for violations of various securities and related statutes. Appellants claim jurisdiction for this review under 28 U.S.C. § 1291. There is no jurisdiction to review and therefore we dismiss the appeal.

I. The Facts.

Plaintiffs-appellants are investors who acquired undivided interests in parcels of real property which were to be developed into an "Airpark" in the vicinity of Paso Robles Airport. The defendants are the individuals and corporations promoting or otherwise involved with the "Airpark" project. Investors paid 40% of the purchase price of their undivided shares as a cash down payment. A promissory note and deed of trust were executed for the balance. The notes were at the rate of 8% per annum. For the first five years repayment was to be monthly and was to include only interest. For the next ten years monthly payments were to include both principal and interest. The total purchase price paid was about $3,406,000. The deeds of trust securing the balance owed by the investors were subordinate to the deeds of trust executed between the promoters and the original holders of the real estate.

In order to market the undivided interests the promoters made representations in a number of publications concerning the project. In September, 1971, defendant Curran, who was apparently the chief promoter of the project, admitted his insolvency. The project appears to have collapsed at that point. On September 30, 1971, plaintiffs commenced this action based upon alleged violations of section 5 of the Securities Act of 1933, 15 U.S.C. § 77e (failure to comply with registration and prospectus requirement), section 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5, thereunder. In addition, plaintiffs allege counts under the Interstate Land Sales Full Disclosure Act, 15 U.S.C. §§ 1703, 1705, 1707, the California Corporate Securities Act, Cal. Corp. C. § 25,500 et seq., the California Real Estate Act, Cal. Bus. & Prof. C. § 11,000 et seq., the California Subdivision Map Act, Cal. Bus. & Prof. C. § 11,535 et seq., and counts of common law fraud and conspiracy to defraud.

On May 17, 1972, the district court conditionally granted plaintiffs' motion to maintain the action as a class action. There were some 300 investors who were potential class members. The district court issued an order denying class action status on August 20, 1974. It is this order which is on appeal here.

II. The Issue.

The question we face is whether the denial of class status in the circumstances of this case may be the basis of an immediate appeal as of right. The parties, following the recent case law, have centered their argument around the so-called "death knell" doctrine of the Second Circuit and, in particular, around the notion of the viability of the named plaintiffs' individual causes of action. See, e. g., Korn v. Franchard Corp., 443 F.2d 1301 (2d Cir. 1971). We believe that this focus is too narrow. Both the "death knell" doctrine and its ancestor, the collateral order doctrine, are applicable to a denial of class status. Moreover, it is our view that the theoretical bases for collateral order and "death knell" appeals have not been properly articulated and are often confused. Hence, we first will set forth our understanding of the "death knell" and "collateral order" doctrines before applying them to the facts of this case.

III. The "Death Knell."

The confusion began, albeit unrecognized, when the "death knell" doctrine was first enunciated. See Eisen v. Carlisle & Jacquelin, 370 F.2d 119 (2d Cir. 1966), cert. denied, 386 U.S. 1035, 87 S.Ct. 1487, 18 L.Ed.2d 598 (1967) (Eisen I ). The Second Circuit framed the issue in Eisen I as the question of whether the facts there fell within the collateral order doctrine. Id. at 120. Next the court invoked Gillespie v. United States, 379 U.S. 148, 85 S.Ct. 308, 13 L.Ed.2d 199 (1964), for the proposition that finality is to be given a "practical rather than a technical construction." That court concluded that an appeal would lie in a case where denying an appeal would mean the end of the lawsuit "for all practical purposes." Eisen I, at 120. The structure of the argument in Eisen I made the "death knell" rule appear to be merely a special case of the collateral order doctrine. Some courts continue to discuss the two as if they were interchangeable. See, e. g., City of New York v. International Pipe & Ceramics Corp., 410 F.2d 295 (2nd Cir. 1969). Other courts have rejected the "death knell" approach without articulating a distinction between the two rules. ¹ It is our view that the collateral order doctrine and the death knell rule represent two distinct but compatible tests for appealability. ²

The collateral order doctrine provides appellate jurisdiction with respect to asserted rights which do not constitute an ingredient of the basic cause of action and which will be lost forever if the disposition of the trial court is not reviewed on appeal prior to the adjudication of the basic cause. The death knell doctrine, on the other hand, is concerned with survival of the basic cause of action, not merely a right collateral thereto, and is grounded on the notion that a sentence of death should not be passed on a cause of action by only one judge. Its foundation is that each litigant deserves not only his day in district court but also his day on appeal. Congress set up the federal judiciary so that litigants are allowed at least "two bites at the apple" before they are foreclosed on the merits one before a trial court and another before a court of appeals. Presumably this was felt to be the proper balance between achieving finality on the one hand and reducing the probability of error in the individual case on the other. We see no reason why the balance should be differently drawn in the case of a class certification where the individual claims are not viable. This is so even though by the usual criteria the order may be otherwise inappropriate for review. Nonetheless, it is our view that justice demands that we compromise our usual notions of appropriateness for review to avoid the execution of a cause of action on the basis of a decision of a single district judge. ³

Our compromise should be no broader than necessary to serve its purpose. Thus, we believe that courts must be strict in making the plaintiff demonstrate that the order complained of truly means the death of his action. We agree with the Fifth Circuit that the size of the individual claims, the extent of plaintiffs' resources, and the probable expense of prosecuting the lawsuit are all factors relevant to the issue of viability. Graci v. United States, 472 F.2d 124 (5th Cir.), cert. denied, 412 U.S. 928, 93 S.Ct. 2752, 37 L.Ed.2d 155 (1973). We also agree that in those cases where the amount in controversy leaves the question of viability in doubt, the plaintiff bears the burden of showing that death to the action would result from the failure to certify the class. Gosa v. Securities Investment Co., 449 F.2d 1330 (5th Cir. 1971).

There has been confusion over the proper measure of the amount in controversy for the purpose of determining the viability of the action. Plaintiffs here have argued that the proper measure is the "average" claim, the "typical" claim, ⁴ or the claims of the representative plaintiffs. This is incorrect. If any member ⁵ of the purported class proceeds in an individual action, the class certification can be challenged on appeal by other members of the class, named or unnamed. See Monarch Asphalt Sales Co. v. Wilshire Oil Co., 511 F.2d 1073 (10th Cir. 1975).

Therefore, we hold that, if after appropriate proceedings and findings with respect to whether any member of the purported class possesses a cause of action which is viable if brought individually, it appears such a member exists, an order of the trial court denying class certification does not constitute an appealable order. ⁶ It is simply not true, as plaintiffs here claim, that the successful plaintiff in an individual action would have no incentive to challenge a denial of class status. Presumably, a reversal of the denial would lead to a greater recovery and hence lower the proportion of plaintiff's individual recovery going to his attorney. Such a challenge has in fact been mounted. See Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968), cert. denied, 394 U.S. 928, 89 S.Ct. 1194, 22 L.Ed.2d 459 (1969).

We believe the "death knell" has not rung in this action. The record reveals that among the class members actively engaged in this litigation there is one individual who purchased his undivided share for $44,752.50. Even if we accept the contention that the amount in controversy is only 40% of this ⁷ the cash down payment the claim is still for $17,901. This falls in the clearly viable range. See Gosa v. Securities Investment Co., supra. ⁸ These figures ignore, in addition to the amount of the note, any claim for interest paid on the notes or for punitive damages. Hence, even when an extremely conservative measure is used, this action is viable. ⁹ In...