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SILBERMAN v. BOGLE

February 6, 1980

JOSEPH SILBERMAN
v.
JOHN C. BOGLE, et al.



The opinion of the court was delivered by: MCGLYNN

MEMORANDUM OF DECISION

The issues presented by defendants' Motions to Vacate Orders, for Reargument, and for Security for Costs and a Stay of Proceedings involve questions concerning the proper relationship between proceedings in this court and those before the Securities and Exchange Commission (SEC). As noted in our September 28, 1979 Memorandum of Decision, in the present action a shareholder of Wellington Fund asserts that in the course of the Fund's participation in a joint distribution arrangement with other mutual funds, the directors breached their fiduciary duty and issued misleading proxy statements. In addition to initiating this action, plaintiff intervened in an application submitted to the SEC by the Funds to secure approvals and exemptions pursuant to sections 17(d), 6(c) and 17(b) of the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. The SEC gave temporary approval to the proposed arrangement and also ordered a full hearing. The administrative law judge found the formula for allocating costs among the funds unfair to Wellington Fund, but later approved a revised formula. This approval is currently under review by the full Commission.

 Jurisdiction

 Before considering defendants' motions, we must first decide whether an appeal of part of our order of September 28, 1979 divests us of jurisdiction. On October 30, 1979 plaintiffs filed a notice of appeal seeking review of our decision not to disqualify the law firm of Stradley, Ronon, Stevens and Young or to permit joinder of that firm as a defendant. Ordinarily, the filing of a notice of appeal immediately transfers jurisdiction of a case to the Court of Appeals. SEC v. Investors Security Corp., 560 F.2d 561, 568 (3d Cir. 1977); Plant Economy, Inc. v. Mirror Insulation Co., 308 F.2d 275 (3d Cir. 1962). But in various circumstances where the judgment appealed does not finally determine the entire action, the district court may proceed with matters not involved in the appeal. 9 Moore's Federal Practice P 203.11 at 739. See, e.g., Gaudiosi v. Mellon, 269 F.2d 873 (3rd Cir. 1959), cert. denied, 361 U.S. 902, 80 S. Ct. 211, 4 L. Ed. 2d 157 (1959) (where district court expressly reserved class action claim, that claim being outside the scope of the appeal). The novel question presented here is whether the appeal falls under the general rule divesting our jurisdiction or within the exceptions to that rule.

 An appeal from our refusal to disqualify the law firm is currently cognizable by the Court of Appeals, if at all, as a collateral order under the doctrine of Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 546-47, 69 S. Ct. 1221, 1225-26, 93 L. Ed. 1528 (1949). The Court of Appeals for the Third Circuit recently expanded upon that doctrine:

 
The disqualification order is a "collateral order" which, although it does not terminate the claims in litigation, does finally dispose of an issue entirely separable from and independent of those claims which involves the risk of irreparable injury and the loss of an important right if immediate review is denied. International Business Machines Corp. v. Levin, 579 F.2d 271, 278 (3d Cir. 1978).

 The varying reasons for granting review have conflicting implications for an attempt to define the limits of our jurisdiction. The "separable" nature of the disqualification order weighs in favor of proceeding with the rest of the case. Yet the purpose of immediate review, to prevent irreparable injury, might be undermined if we conducted the trial with Stradley as counsel before the Court of Appeals considered the appeal.

  The carefully circumscribed nature of the jurisdiction of the Court of Appeals under the collateral order doctrine signifies that we are not divested of jurisdiction over the remaining issues. In Akerly v. Red Barn System, Inc., 551 F.2d 539 (3d Cir. 1977), the Court of Appeals carefully noted that it did not obtain jurisdiction over all issues in a case when it granted review of an order refusing to disqualify an attorney. Because the order was separable, the court could consider it apart from other matters before the district court. If the Court of Appeals is not asserting jurisdiction over any issue not directly appealed, the district court retains jurisdiction.

 Despite our power to proceed, the particular nature of the order under appeal and the possible harm or prejudice created weigh heavily in deciding whether to stay the action pending the outcome of the appeal. See generally, 15 Wright and Miller, Federal Practice and Procedure, § 3911 at 497. The harm to any party in conducting discovery appears minimal. Defendants have voluntarily selected Stradley as counsel and plaintiff does not contend he is being harmed by Stradley's representation at the pretrial stage. Indeed, only the independent directors have questioned on jurisdictional grounds whether discovery should commence, and they have not asserted any prejudice. Conducting the trial, however, may create different problems. The Court of Appeals may ultimately rule that Stradley should not have represented defendants and require a new trial. Accordingly, we shall proceed at present, reserving decision on whether to await the ruling of the Court of Appeals once discovery is complete.

 The Motions

 To bring the current pretrial controversy into focus, a brief examination of jurisdiction under the Investment Company Act is helpful. Section 6(c) of the Act gives the Commission power to exempt persons, securities or transactions from any provision of the Act. *fn1" Section 17(b) grants power to exempt a transaction from restrictions imposed by § 17(a) concerning sales between affiliated persons and companies. *fn2" Section 17(d) and Rule 17d-1 require an investment company wishing to conduct transactions involving joint participation with affiliated persons to first convince the SEC that the transactions are not less advantageous to the corporation than to any other participant.

 In light of these provisions and the general expertise of the SEC in interpreting and enforcing the Act, the SEC appears to be the exclusive decision maker with regard to § 17(d) and the exemptions. See generally, E. I. du Pont de Nemours and Co. v. Collins, 432 U.S. 46, 97 S. Ct. 2229, 53 L. Ed. 2d 100 (1977). Various other provisions, however, give the district court power to hear cases arising under the act. See, e.g., § 44, 15 U.S.C. § 80a-43; § 36(b)(5), 15 U.S.C. § 80a-35(b)(5). To ensure that the courts and the agency do not work at cross purposes, § 38(c) of the Act provides that no liability may be imposed for any act done "in good faith in conformity with any . . . order of the commission." The district court may neither review the decision of the SEC nor make its own independent assessment of the fairness of the activity. On the other hand, when acts are not performed in good faith in conformity with the SEC's order, the district court has the duty to determine whether the Act has been violated and if so to order the appropriate remedy.

 First, we disagree that the administrative law judge determined whether defendants made their initial presentation to the SEC in good faith. The judge was chiefly concerned with the fairness of the modified formula, and made no express findings of good faith in the initial application. *fn3" Basically, defendants' argument is founded on the refusal of the administrative law judge to apply the modified formula retroactively in light of the temporary exemption given by the Commission. While we agree that good faith may be relevant to this decision, the judge may not have investigated that issue regarding the Commission's order ...


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