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DECKERT v. INDEPENDENCE SHARES CORP.

June 17, 1941

DECKERT et al.
v.
INDEPENDENCE SHARES CORPORATION et al.



The opinion of the court was delivered by: KALODNER

To preserve the estate pending final decree, plaintiffs *fn1" in this case have moved to enjoin the Pennsylvania Company for Insurances on Lives and Granting Annuities from making any deductions (other than deductions for insurance premiums and taxes) from payments received by it in its capacity as trustee under the trust agreement with Capital Savings Plan, Inc., and in its capacity as custodian for Independence Trust Shares Purchase Plans, from the holders of Capital Savings Plan Contract Certificates or the holders of Independence Trust Shares Purchase Plans, or from any distributions received upon Independence Trust Shares, and from applying said payments or distributions to the purchase of Independence Trust Shares from the Independence Shares Corporation.

The plaintiffs' motion for injunction further seeks to restrain the Pennsylvania Company for Insurances on Lives and Granting Annuities (hereinafter referred to as Pennsylvania) from dealing in Independence Trust Shares, or from paying over the proceeds of the sale, redemption or liquidation of any Independence Trust Shares to the holders thereof, leaving Pennsylvania free to sell, redeem or liquidate any Trust Shares at the direction of any holder thereof.

 Additionally, the injunction sought provides that Pennsylvania shall segregate and set aside in a special account until further order of this Court all payments by plan holders, distributions and proceeds of sale, liquidation or redemption, excepting only deductions for insurance premiums and taxes previously mentioned.

 Finally, the prayed for injunction specifically provides that it shall not affect any Independence Trust Shares other than those held by Pennsylvania as trustee under the trust agreement with Capital Savings Plan, Inc., and those held by Bean & Company, nominee of Pennsylvania as custodian for Independence Trust Shares Purchase Plans.

 It is agreed by the parties that the injunction asked for poses these important questions: (1) The nature of the action; (2) the extent of relief permissible under the action; (3) the nature or position of the assets held by Pennsylvania as trustee under the trust agreement with Capital Savings Plan, Inc., and in its capacity as custodian under Independence Trust Shares Purchase Plans.

 Disposition of these questions is essentially involved in the ultimate determination of the prayers in the complaint, to wit, appointment of a receiver for the defendant Independence Shares Corporation, with power to collect and take possession of the assets of Independence, and the trust assets held by Pennsylvania, to liquidate the assets, determine the claims of complainants and other certificate holders, and distribute the same among the persons entitled thereto.

 Earlier in this proceeding (27 F.Supp. 763) I referred to a special master the question of solvency of Independence, having in the meanwhile enjoined Pennsylvania from transferring or disposing of the sum of $38,258.85 representing certain charges, income and proceeds received by Pennsylvania.

 An appeal to the United States Circuit Court of Appeals for the Third Circuit interrupted the proceedings on the solvency question. That appeal was based on my denial of motions to dismiss on the ground that this Court lacked jurisdiction and the granting of the temporary injunction with respect to the $38,258.85 previously mentioned.

 The Circuit Court of Appeals (3 Cir., 108 F.2d 51) reversed all of the orders appealed from, and remanded the cause with directions to allow the complainants to amend their complaint and state a claim for a money judgment at law against Independence only.

 The Supreme Court of the United States (311 U.S. 282, 61 S. Ct. 229, 85 L. Ed. 189) reversed the decision of the Circuit Court of Appeals, ruling that the complaint stated a cause for equitable relief under Sections 12(2) and 22(a), 15 U.S.C.A. §§ 77 l (2) and 77v.(a) of the Securities Act of 1933 (48 Stat. 84 and 86) and remanded the cause for further proceedings.

 Subsequent to the Supreme Court's ruling (December 9, 1940) the special master resumed hearings on December 20, 1940 on the question of solvency of Independence. He filed his report on January 13, 1941, with the finding that Independence was insolvent at the time of institution of the instant action and is presently insolvent.

 Independence and Pennsylvania thereupon filed exceptions to the special master's report. At the request of the parties the court held further hearings in January and February, 1941, and during the course of these further hearings the parties and additional plan holders laid down a barrage of motions to intervene, to amend, to strike, and to dismiss. All motions to intervene on the part of plan holders, other than those represented by counsel for the original complainants, were granted. A motion by counsel for the complainants to amend the original complaint by adding 38 additional complainants was also granted. Objection was made by both Independence and Pennsylvania to the amendment adding the additional complainants on the ground that they were barred by the statute of limitations, the objection involving question No. 1 -- the nature of the proceeding -- which will be discussed subsequently. At the conclusion of the taking of testimony the complainants made the motion for the injunction mentioned at the beginning of this opinion.

 In recognition of the fact that adjudication of the problems posed by the objections to the special Master's report finding insolvency and the motion to amend the complaint, as well as other pending motions to strike evidence and to dismiss the complaint, would consume considerable time, the complainants and the respondents have agreed upon the desirability of determination of the questions raised by the motion for the injunction.

 Now, as to the questions raised by the motion for the injunction:

 (1) The nature of the complainants' action

 Defendants Independence and Pennsylvania strenuously contend that this is a "spurious" class bill, while the complainants contend that it is what is generally called a "hybrid" class action. The question as to whether this is a "spurious" class bill or a "hybrid" class bill according to the contending parties involves (1) the extent of relief which may be granted, and (2) the joining of additional complainants. Respondents contend that this is a "spurious" class bill and that under the statute of limitations in Section 13 of the Securities Act of 1933 (48 Stat. 74, 84, 15 U.S.C.A. § 77m additional parties cannot now be joined as complainants; complainants contend that it is a "hybrid" class action and that the statute of limitations does not apply.

 The dispute between the parties as to the nature of the bill is predicated to some extent upon the course of this litigation. In my opinion (27 F.Supp. 763, 769) I specifically ruled that "this is a class bill". The Circuit Court of Appeals, on appeal (108 F.2d 51, 55), ruled "The suit at bar is of the type denominated a 'spurious' class suit * * *." The Supreme Court's opinion (311 U.S. 282, 61 S. Ct. 229, 85 L. Ed. 189) failed to append any descriptive label to the action.

 The Circuit Court of Appeals' denomination of the bill as a "spurious" class suit must be considered in connection with its ruling that the action was one at law and not in equity, and that the complainants were merely seeking individual redress although acting as a "group" under the permissive joinder facilities of Rule 23(a) (3) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c.

 In my judgment this is a "hybrid" class bill, maintainable under Rule 23(a) (2) of the Federal Rules of Civil Procedure, which reads as follows:

 "Rule 23. Class Actions

 "(a) Representation. If persons constituting a class are so numerous as to make it impracticable to bring them all before the court, such of them, one or more, as will fairly insure the adequate representation of all may, on behalf of all, sue or be sued, when the character of the right sought to be enforced for or against the class is

 * * *

 "(2) several, and the object of the action is the adjudication of claims which do or may affect specific property involved in the action."

 In the present action the claims of the various claimants are several in nature. The action can be viewed as akin to the ordinary creditor's bill for the appointment of a receiver, an accounting, and distribution of the assets of the insolvent debtor. Although there is a mutuality of interests in the questions involved, the rights of the claimants are several and not joint; in addition, there is present a fund to be managed and distributed.

 The ruling of the Supreme Court that the instant action may be maintained under the Securities Act of 1933 is of the utmost significance in this connection. The following quotation from the Supreme Court's opinion, 31 U.S. 282, at page 290, 61 S. Ct. 229, at page 234, 85 L. Ed. 189, is highly illuminating: "As already stated, there were allegations that Independence was insolvent and its assets in danger of dissipation or depletion. This being so, the ...


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