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In re Penn Central Securities Litigation Shearson Hayden Stone

argued: April 1, 1977.

IN RE: PENN CENTRAL SECURITIES LITIGATION SHEARSON HAYDEN STONE INC., BACHE & CO., INC., DREXEL BURNHAM & CO., INC., LOEB, ROADES & CO., PAINE, WEBBER, JACKSON & CURTIS INC., WHEAT, FIRST SECURITIES INC., DEAN WITTER & CO., INC., E. F. HUTTON & CO., INC., HORNBLOWER & WEEKS-HEMPHILL, NOYES INCORPORATED, MERRILL LYNCH, PIERCE, FENNER & SMITH INC., REYNOLDS SECURITIES INC., L. F. ROTHSCHILD & CO., AND THOMPSON & MCKINNON, AUCHICLOSS KOHLMEYER INC., APPELLANTS (D.C. MDL NO. 56)


APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA.

Van Dusen, Gibbons and Garth, Circuit Judges.

Author: Gibbons

GIBBONS, Circuit Judge

I

This is an appeal by Shearson Hayden Inc., Bache & Co., Inc., Drexel Burnham & Co., Inc., Loeb, Roades & Co., Paine, Webber, Jackson & Curtis Inc., Wheat, First Securities Inc., Dean Witter & Co., Inc., E. F. Hutton & Co., Inc., Hornblower & Weeks-Hemphill, Noyes Incorporated, Merrill Lynch, Pierce, Fenner & Smith Inc., Reynolds Securities Inc., L. F. Rothschild & Co. and Thompson & McKinnon, Auchicloss Kohlmeyer Inc. (the Brokerage Houses), from a final order of the United States District Court for the Eastern District of Pennsylvania denying the motion of the Brokerage Houses for reimbursement of the costs they incurred in locating and sending class action settlement notices to the beneficial owners of stock held by the Brokerage Houses in street name*fn1 during a period relevant to the settlement. We reverse and remand for further proceedings.

The underlying class action grows out of the failure of the Penn Central Transportation Company. Following the filing of the Penn Central petition for reorganization in June of 1970 a number of suits were filed by stockholders of various companies affected by the reorganization, alleging various violations of federal securities laws and state common law fiduciary obligations. In June of 1971 the Judicial Panel on Multidistrict Litigation transferred all of these suits to the Eastern District of Pennsylvania. See In re Penn Central Securities Litigation, 322 F. Supp. 1021 (Jud. Pan. Mult. Lit. 1971); In re Penn Central Securities Litigation, 333 F. Supp. 382 (Jud. Pan. Mult. Lit. 1971). In 1973 the district court approved the stockholders' suits for class action treatment, defining five separate plaintiff class entities. The defendants thereafter negotiated a so-called "global settlement" with the class action representatives, calling for the payment of approximately $8.7 million to the five plaintiff classes, and the surrender by some defendants of shares of common and preferred stock in some of the affected corporations. The district court made an equitable division of the $8.7 million cash fund among the five classes. See In Re Penn Central Securities Litigation, 416 F. Supp. 907, 911, 912 (E.D. Pa. 1976).

On August 22, 1975, the district court, ex parte insofar as the Brokerage Houses are concerned, entered Post Settlement Order Numbers One and Two, which amended the definition of the plaintiff classes to include: (1) "all persons who between September 5, 1967, and June 21, 1970, bought, sold or held the common stock of the Penn Central Company, Pennsylvania Railroad Company or New York Central Company," and (2) "all persons who between January 1, 1965 and August 31, 1972, bought, sold or held the common stock of Great Southwest Corporation." The orders directed that, within ten days, the Brokerage Houses mail a "Notice and Proof of Claim Form" regarding the settlement to all persons in each defined class on whose behalf they had held stock in street name. The orders provided that the Brokerage Houses could reproduce copies of the Notice and Proof of Claim Form, or obtain copies of the Form from the district court, and that they would be reimbursed for "reasonable postage expenses incurred in connection with [the] mailing."

To comply with the district court's order, the Brokerage Houses individually performed research to identify and locate the stockholders whose shares they had held in street name during the relevant period, made sufficient copies of the Notice and Proof of Claim Form to send to those stockholders so located and identified, and mailed out the Forms to those stockholders. In so doing, the Brokerage Houses incurred aggregate costs for such research, copying and mailing totalling $24,106.03. Thereafter, each Brokerage House filed with the district court a Proof of Claim form seeking reimbursement out of the class settlement fund for their expenses. The Proof of Claim forms identify separately for each Brokerage House its copying costs, its mailing costs and its research costs. For each Brokerage House the largest expense item was its research costs, which involved a computerized search through old records for the names and addresses of stockholders included in the classes as defined in the district court's orders.

The notice form of the proposed settlements fixed November 3, 1975, for a hearing on the fairness and adequacy of the proposed settlements. At that hearing, attorney Philip M. Hammett entered an appearance on behalf of the Brokerage Houses and requested reimbursement on their behalf for their research, copying and mailing costs incurred in complying with the court's order of August 22, 1975. Though the district court heard argument on the Brokerage Houses' application for reimbursement, it did not rule on the application at that time. Instead, it suggested that the Brokerage Houses wait until the plaintiff classes filed a motion for distribution of the settlement proceeds and, at that time, the Brokerage Houses file a motion to share in the distribution of the proceeds, which would then be considered by the court. Apparently, the Brokerage Houses' Proofs of Claim, referred to above, which were on file with the court, were viewed as complying with the court's suggestion that the Brokerage Houses file a motion to share in the distribution of the settlement proceeds.

On June 21, 1976, the district court, in a lengthy opinion devoted primarily to the issue of attorney's fees, ruled on the application of the Brokerage Houses for reimbursement of their mailing, copying and research expenses:

Finally we come to the request of a number of brokerage houses for reimbursement of their costs in forwarding the class action notices to the beneficial owners of the stock involved. This is stock which the brokerage houses held in "street name."

Nothing the brokers have pointed to in their brief convinces us that the class fund should bear the costs of forwarding the documents involved. Neither trade custom nor the inapposite holding of the Supreme Court in Eisen IV, supra at 179 overcomes the very obvious and common sense logic that if the brokers are to be reimbursed, it should come - if at all*fn38 - from the individual beneficial owners involved - not the entire class. There is simply no reason to require the entire class to pay for the choice of a few to have their stock held in street name.

In Re Penn Central Securities Litigation, 416 F. Supp. 907, 921 (E.D. Pa. 1976) (footnote omitted). In a separate order ...


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