matters had been argued. See, In Re: Japanese Electronic Products Antitrust Litigation, M.D.L. No. 189 (E.D. Pa., filed November 29, 1974); In Re: Air Crash Disaster Near Pellston, Michigan on May 9, 1970, 357 F. Supp. 1286 (E.D. Pa., filed April 23, 1973); In Re: Professional Hockey Antitrust Litigation, 352 F. Supp. 1405 (E.D. Pa., filed January 18, 1973).
The various defendants advance four basic arguments in opposition to plaintiffs' class determination motion. Defendants ASI and Scherck contend that I should deny plaintiffs' motion as untimely filed in violation of Local Rule 45(c).
I recognize there is broad discretion vested in the district courts to enforce compliance with local rules of court promulgated under Fed. R. Civ. P. 83 and that in the exercise of that discretion Judge MacMahon in Walker v. Columbia University, 62 F.R.D. 63 (S.D. N.Y. 1973), denied plaintiffs' class determination motion for failure to timely file in compliance with the local rules of the United States District Court for the Southern District of New York. In this instance, however, I adopt the view of Judge Lasker in Gilinsky v. Columbia University, 62 F.R.D. 178, 180 (S.D. N.Y. 1974), that plaintiffs' failure here is a " de minimis lapse" and that denial of their motion is unwarranted under the circumstances.
ASI argues that the complexity of applying statutes of limitation, which may differ as to individual class members, demonstrates that in this instance a class action is not superior to other available methods as required by Fed. R. Civ. P. 23(b)(3).
A similar argument is made by Scherck and Touche Ross as to the substantive issue of whether the representative parties relied upon the alleged misrepresentations contained in the offering prospectus in purchasing the ASI debentures. Defendants have submitted evidence which they imply conclusively proves that plaintiffs did not rely upon the alleged misrepresentation and therefore they contend the claims of the representative parties are not typical of those of the class they propose to represent.
Defendants have not cited in their briefs any case which even suggests that the existence of these individual statute of limitations and reliance issues precludes maintenance of a class action, but to the contrary, the weight of authority is clearly against defendants' position. Lamb v. United Security Life Co., 59 F.R.D. 25, 34-37 (S.D. Iowa, 1972); Cohen v. District of Columbia National Bank, 59 F.R.D. 84, 90 (D. D.C. 1972); Dolgow v. Anderson, 43 F.R.D. 472 (E.D. N.Y. 1968).
The arguments which defendants advance in this securities case in opposition to plaintiffs' class determination motion do not raise novel issues, for these same arguments against the maintenance of securities fraud class actions due to individual issues of statute of limitations defenses and of reliance upon alleged misrepresentations have been made since the promulgation of the new Rule 23 in 1966. In Dolgow v. Anderson, supra, 43 F.R.D. at 490, the exhaustive landmark decision on class action determination issues decided soon after the 1966 amendments to Rule 23 had become effective, Judge Weinstein said:
"In spite of this abundance of common questions, defendants argue that each member of the class would have to prove reliance, compliance with the statute of limitations, and damages, and thus the common questions cannot be said to predominate over those affecting individual members. To 'acknowledge defendants' position at this point would be, in effect, an emasculation of the vitality and pliability of the amended rule.' Siegel v. Chicken Delight, Inc., 271 F. Supp. 722, 727 (N.D. Cal. 1967). The common issues need not be dispositive of the entire litigation. The fact that questions peculiar to each individual member of the class may remain after the common questions have been resolved does not dictate the conclusion that a class action is not permissible."
Lamb v. United Security Life Co., supra, 59 F.R.D. at 34, echoes this principle that ". . . such individual issues, unless they predominate . . . do not and must not preclude class actions, given the exceptional importance, superiority and desirability of the private 10b-5 action."
Defendants have made no showing that the statute of limitations issues or the reliance issues predominate to such an extent as to require denial of plaintiffs' class determination motion. To the contrary, defendants ASI and Touche Ross have argued on their motions to transfer that it is the very predominance of issues common to the entire class which necessitates my transferral of this action from this District to Massachusetts. I am not persuaded to take the opposite view on the class determination motion.
I recognize that identification of the legal issues raised by the complaint is necessary to apply the criteria of Rule 23, but plaintiffs filing of a class determination motion is not an invitation to engage in a plenary inquiry into the substantive issues raised by the complaint. In deciding whether a class action may be maintained under Rule 23 the district court need not explore the merits of plaintiffs' claims or the merits of defendants' defenses. B & B Investment Club v. Kleinert's, Inc., 62 F.R.D. 140, 144 (E.D. Pa. 1974) (See cases cited therein). Indeed, a class action may be proper under Rule 23 even though it may still be dismissed for failure to state a cause of action. Kahan v. Rosenstiel, 424 F.2d 161, 169 (3d Cir. 1970) cert. den. sub. nom. Glen Alden Corp. v. Kahan, 398 U.S. 950, 90 S. Ct. 1870, 26 L. Ed. 2d 290 (1970). Defendants' arguments as to the reliance and statute of limitations issues are clearly inappropriate on this class determination motion. They go to the merits of plaintiffs' claims and of defendants' defenses and they invite premature determinations on issues that are appropriate to motions to dismiss, motions for summary judgment, or which must be resolved at trial. Also a finding that the mere presence of these individual issues precludes a class determination in the present case would be tantamount to a holding that securities fraud cases cannot be maintained as class actions, since the existence of these individual issues is characteristic of most class actions for securities fraud under the Securities Exchange Act. Green v. Wolf Corp., 406 F.2d 291, 361 (2d Cir. 1968).
ASI and Scherck contend a conflict of interests exists between two subclasses of debenture holders which plaintiffs propose to represent, consisting of those debenture holders within plaintiffs' class who have sold their ASI debentures and those who still retain their interest in ASI. Relying upon Wood v. Rex-Noreco, Inc., 61 F.R.D. 669 (S.D. N.Y. 1963), these two defendants argue that the potential recovery of the class would have a major impact on the financial position of ASI and that although this would not affect the interests of those who have no interest in ASI, the interest of present debenture holders of ASI might be adversely affected by a substantial money judgment in this action. In Wood v. Rex-Noreco, Inc., supra, the representative parties were common shareholders who retained their securities in the defendant corporation, but who sought to represent a class of shareholders who had realized losses on the sale of their stock. The representative parties there had not realized any monetary loss at the time the motion was decided and Judge Bonsal denied the plaintiffs' class determination motion because of a potential conflict of interest between the former shareholders who had realized a loss and the representative parties who at that time retained their common stock. Although Judge Bonsal did not discuss in detail the nature of the conflict, his citation to the cases of Puharich v. Borders Electronics Co., Inc., 11 F.R. Serv. 2d 23a.52, case 5 (S.D. N.Y. 1968) and Mutual Shares Corp. v. Genesco, 384 F.2d 540, 546 (2d Cir. 1967) indicates a legal rationale different from that upon which defendants here rely. Mutual Shares Corp. v. Genesco, Inc., supra, held that non-selling shareholders may not recover damages in a Rule 10b-5 action; Puharich v. Borders Electronics Co., Inc., supra, held that since the representative parties there were limited to injunctive relief under the Genesco doctrine, they were not entitled to represent selling shareholders who might be entitled to damages if liability were proven. In both Wood and Puharich the representative parties did not have a financial interest in pursuing the potential damage claims of the class they sought to represent, and therefore they were not sufficiently representative of members of the class to insure an adequate protection of class interests. Fed. R. Civ. P. 23(a). Here, the named plaintiffs are representative of both subclasses having allegedly suffered a loss on their debentures by sale and by the depreciation of those debentures they still own, and there is no basis for me to assume that they will not fairly and adequately protect the interest of both the selling and the non-selling debenture holders.
Also, the substance of defendants' argument is that some of the debenture holders may prefer not to be parties to a suit which might impair their present investment in ASI. The "conflict of interests" between the two subclasses which defendant announces is grounded upon speculative assumption that ASI debenture holders will choose to forego their legal interest in possible damages for securities fraud against ASI in favor of protecting their present financial interest with ASI. Individual class members may ultimately arrive at the decision that defendant predicts, but I cannot make any assumptions as to whether all, most, or only a few of these debenture holders would prefer to throw their lot with ASI rather than with the named plaintiffs. In any case, each will have an opportunity to opt-out of the class under Fed. R. Civ. P. 23(c)(2) if a class determination is made.
I find that plaintiffs' inclusion of non-selling debenture holders within the proposed class does not preclude the maintenance of this suit as a class action and does not create such a conflict of interest within the class to require class subdivision at this point in the litigation.9(a) Cf. Kahan v. Rosenstiel, supra, 424 F.2d at 169; Entin v. Barg, 60 F.R.D. 108, 115 (E.D. Pa. 1973).
Touche Ross contends that a conflict of interest exists between the representative parties and the class because the named plaintiffs, Cletus Lyman, Esquire, is an attorney and partner with counsel for plaintiffs, Richard A. Ash, Esquire, in the law firm of Lyman & Ash. The remaining named plaintiffs, defendants claim, are "siblings" of Cletus Lyman. It is in the nature of the motion practice on class determination issues that defendants, who naturally have no interest in the successful prosecution of the class suit against them, are called upon to interpose arguments in opposition to class determination motions verbally grounded upon a concern for the "best" representation for the class while the implicit, but nonetheless real, objective of their vigorous legal assaults is to insure "no" representation for the class. Of course I must assess defendants' argument upon its intrinsic merit, but on this issue it is my judgment that Lyman's status as an attorney, his business relationship with counsel for plaintiffs, and his family relationship with the other named plaintiffs do not create interests which are adverse to those of the class, and thus neither the named plaintiffs nor counsel for plaintiffs should be disqualified from class representation. Although Cletus Lyman may benefit through his partnership in the law firm of Lyman & Ash from an award of legal fees, if plaintiffs are successful in the present litigation, this interest does not in my opinion create substantially more of a risk that the suit would be compromised unfairly as respects class interests than would exist if there were no relationship between the representative parties and counsel for plaintiffs. The vision of substantial counsel fees might cloud the judgment of counsel for plaintiffs and the representative parties but the court does not in granting a motion for class determination entrust to the representative parties ultimate responsibility for determining the fairness to the class of settlement decisions which compromise class interests. Any compromise or dismissal of a class action must be approved by the court and notice of the proposed compromise or dismissal must be given to all class members; judicial approval should be granted only after the court determines that the compromise is in the interest of the entire class. Fed. R. Civ. P. 23(e).
Euresti v. Stenner, 458 F.2d 1115 (10th Cir. 1972). In my estimation the safeguard provided in Rule 23(e) against litigation compromises unfair to the class as a whole are adequate to insure protection of class interest under the representation of these named plaintiffs and counsel. Kramer v. Scientific Control Corp., 365 F. Supp. 780 (E.D. Pa. 1973) (See also Slip Opinion of October 1, 1974).
Finally, ASI and Scherck contend that due to plaintiffs' maintenance of an individual suit on the same cause of action, plaintiffs cannot fairly and adequately protect the interests of the class; defendants express concern that plaintiffs could prosecute or compromise their individual claims without the accountability mandated by Rule 23(e). I am concerned about the appropriateness of the representative parties maintaining a separate individual action on the identical claims made in the class suit. Since the class action is to be transferred to Massachusetts and the individual action is to remain in this district, the bifurcation of control of the two suits clearly presents practical obstacles to protection of the class from a compromise of representative party claims which could adversely affect the claims of the class. Specifically, a compromise of the claims of the representative parties in the individual suit could deprive the class of representation by removing the requisite standing of these parties to further prosecute class claims.
However, plaintiffs have moved to have the individual action consolidated with the class suit. A consolidation of the two cases would remove my concerns that a potential compromise of the representative party claims might be effected beyond the reach of Rule 23(e). The motion for consolidation was filed before my decision on defendants' transfer motion in the class suit and the granting of that motion at this juncture would mean that both the individual and the class actions would be subject to my transfer order. Plaintiffs have three basic options at this point: (1) they may continue to press their motion to consolidate the two actions and thus have the entire litigation transferred to Massachusetts; (2) they may withdraw their motion to consolidate and risk a determination by the transferee judge that the class determination motion must be denied because of the maintenance of the individual suit; or (3) they may prefer to voluntarily dismiss the class suit in favor of pursuing their individual claims in this forum. In order to give plaintiffs an opportunity to consider these options, I am delaying the entry of my transfer order. I am entering an order setting a pretrial conference at which time counsel for plaintiffs will advise the Court and the other parties of his intentions in this matter in light of my ruling on defendants' transfer motions and my advisory opinion upon plaintiffs' motion for class determination.
I conclude that considering the representative nature of plaintiffs' suit a transfer under 28 U.S.C. § 1404(a) of this case from the Eastern District of Pennsylvania to the District of Massachusetts will promote the convenient, efficient, and expeditious trial of the issues in this litigation and will be in the interest of justice.
A. LEON HIGGINBOTHAM JR.
AND NOW, this 27th day of January, 1975, it is hereby ORDERED that a pretrial conference is scheduled for Monday, February 10, 1975 at 9:45 A.M. Counsel for plaintiffs is to be prepared at that time to state whether in view of my opinion of January 27, 1975, he still intends to prosecute Umbriac v. American Snacks, Inc., C.A. 74-549 (E.D. Pa., filed March 8, 1974) and whether he intends to pursue Plaintiffs' Motion to Consolidate Two Actions for All Purposes. (Doc. #28 in C.A. 73-1928), with both being prosecuted in Massachusetts.
BY THE COURT:
A. Leon Higginbotham, Jr.