Petition — Coopers & Lybrand v. Livesay

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1976

” -%6*1836

COOPERS & LYBRAND,

Petitioner,

Vv.

CECIL LIVESAY and DOROTHY LIVESAY, for Themselves and on Behalf

of All Others Similarly Situated,

Respondents.

PETITION FOR WRIT OF CERTIORARI

To the United States Court of Appeals

for the Eighth Circuit

VERYL L. RIDDLE

THOMAS C. WALSH

JOHN J. HENNELLY, JR.

500 North Broadway

St. Louis, Missouri 63102

Attorneys for Petitioner

BRYAN, CAVE, McPHEETERS & McROBERTS

Of Counsel

St. Louls Law Printing Co.. Inc., 812 Olive Street 63101 314-231-4477

aa

TABLE OF CONTENTS

Page

Pr cincLGere ot ads «ena sk neneue aaa re l

SE <hcn tanec ew heeee CR ede hee Kk Was eee 2

ns. cco bee ee be ks eee eed boa eae 2

ie Doe cs ena ee ccc ehk ses SORE OR MEENA 2

IOI, oc choses cae eaneaee vanes 2

Reasons Why the Writ Should Be Granted ............ 4

I. The Eighth Circuit Has Adopted the “Death-Knell”

Doctrine That Has Been Rejected by the Third and

Seventh Circuits, and Has Applied That Doctrine in

a Way That Is Inconsistent With Decisions of the

o ff fhe PT Te TT Tere 4

Il. The Court of Appeals Has Unjustifiably Interfered

With the District Court's Class Action Determination 8

SE Si55 sees ee cenceeedee hares ahead eRnstns 11

EE fo ntckacees ENOGUSEANEE SBR OSes eee keen A-l

PEE ED 6.0 68. 006060000escseeeseneeeenceseuses A-4

PS oi sen Ke AED MSM AA NEES RNA REE SON OES A-19

Cases Cited:

Abney v. United States, 45 U.S.L.W. 4954, 4955 (June 9,

re eee Tr ef eee ee 6

Anschul v. Sitmar Cruises, Inc., 544 F.2d 1364 (7th Cir.),

cert. denied, — U.S. — (1976) ........... cece eee 4

**

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723,

740 (1975) as quoted in Santa Fe Industries, Inc. v.

Green, — U.S. —, 45 U.S.L.W. 4317, 4322 (1977) .7-8, 10

East Texas Motor Freight System, Inc. v. Rodriquez, 45

UBL... GSO Gale Fb, TST ccc ccccccccsscoees 8, 10

Eisen v. Carlisle & Jacquelin, 370 F.2d 119 (2d Cir. 1966),

cert, denied, 386 U.S. 1035 (1967) ...........5.. 5

Gosa v. Securities Investment Co., 449 F.2d 1330 (Sth

Se. SE eH Saw Geet Oas ede aGe ee ekedsaeessees 5

Hackett v. General Host Corp., 455 F.2d 618 (3d Cir.),

cert. denied, 407 U.S. 925 (1972) 2.0... ..ccccveoes 4

Hooley v. Red Carpet Corp. of America, 549 F.2d 643

ee Se SE koh whe ta eed saenkeEe eee Neeues 5

Katz v. Carte Blanche Corp., 496 F.2d 747 (3d Cir.),

cert. denied, 419 U.S. 88S (1974) .........cceeees 4

King v. Kansas City Southern Industries, Inc., 479 F.2d

ee A EE bo ces) 60K os canbe cabin sees s 4

Parkinson v. April Industries, Inc., 520 F.2d 650, 660 (2d

SE Nv-Gd ack ReeneReeeN Ss erkadinseeenes 5, 6

Share v. Air Properties G, Inc., 538 F.2d 279 (9th Cir.),

cert. denied sub nom. Woodruff v. Air Properties G,

hy Se Gs ED bbc avin c0Varcedacvescees 5

Statutes Cited:

i ee eg a ee eedeseseunens 3

ee ee uae en sone anaes eee 2

'

I Ue a dal 2, 3, 4,6, 7,8

a A RVC R TT Eee T Te Tee 3,6, 7,8

Miscellaneous Cited:

Rule 23(c), F.R.C.P. occ cece eee eee 1,3, 7,9, 10

Rule 10b-5 of the S.E.C. 0... cece eee eee eens 2

Securities Act of 1933 ....... 0c eee reece eee e renee 2

Securities Exchange Act of 1934... 6... seer rere 2

IN THE

SUPREME COURT OF THE UNITED STATES

OCTOBER TERM, 1976

COOPERS & LYBRAND,

Petitioner,

.

CECIL LIVESAY and DOROTHY LIVESAY, for Themselves and on Behalf

of All Others Similarly Situated,

Respondents.

PETITION FOR WRIT OF CERTIORARI

To the United States Court of Appeals

for the Eighth Circuit

Petitioner Coopers & Lybrand prays that a Writ of Certiorari

issue to review the judgment of the United States Court of

Appeals for the Eighth Circuit in this action, which reversed

an order of the district court and ruled that this action should

proceed as a class action pursuant to Rule 23 of the Federal

Rules of Civil Procedure.

OPINIONS BELOW

The opinion and order of the United States District Court

for the Eastern District of Missouri are not officially reported

but are reproduced as Appendix A hereto. The opinion and

' This is a companion case to the Petition filed on behalf of

Punta Gorda Isles, et al., against the same respondents.

-—2—

judgment of the United States Court of Appeals for the Eighth

Circuit, reported at 550 F.2d 1106, are set forth as Appendix

B. The order of the Court of Appeals denying rehearing and

rehearing en banc is annexed as Appendix C. |

JURISDICTION

The judgment of the Court of Appeals was entered on March

4, 1977. Petitioner's timely petition for rehearing was denied

on March 28, 1977. This petition is being filed within 90 days

of March 28, 1977.

The jurisdiction of this Court is founded on 28 US.C.

§ 1254(1).

QUESTIONS PRESENTED

1. Is an order of a district court determining that an action

cannot be maintained as a class action appealable pursuant to

28 U.S.C. § 1291 under the “death-knell” doctrine?

2. Did the Court of Appeals exceed the proper scope of its

authority in ordering the district court to re-certify this case as

a class action?

STATUTE INVOLVED

This case involves 28 U.S.C. § 1291, which provides in perti-

nent part: “The Courts of Appeals shall have jurisdiction of ap-

peals from all final decisions of the district courts of the United

States...”

STATEMENT OF THE CASE

The complaint in this action charged petitioner and others

with various violations of the Securities Act of 1933, the Se-

curities Exchange Act of 1934 and Rule 10b-5 of the S.E.C.

-

—

The claim asserted on behalf of the two named respondents

amounted to approximately $2,650 plus interest. The com-

plaint also purported to state claims on behalf of a class amount-

ing to several million dollars. The jurisdiction of the district

court was predicated upon 15 U.S.C. §§ 77v and 78aa.

At the original hearing om respondents’ motion for class-

action certification, the evidence showed that the class included,

inter alia, one member with a claim of approximately $500,000

and another one who had supposedly been damaged to the ex-

tent of $140,000. On June 9, 1975, the district court entered

an order certifying the case as a class action under Rule 23(c).

However, on September 1, 1976, in response to a motion filed

by petitioner and in accordance with Rule 23(c)(1), the district

court, having questioned respondents’ adequacy to represent the

class on several other occasions, ruled that the action could no

longer be maintained as a class action. Respondents, disdain-

ing the interlocutory appeal procedure of 28 U.S.C. § 1292(b).

appealed to the Eighth Circuit under 28 U.S.C. § 1291, which

applies only to “final orders.” In response to petitioner's motion

to dismiss the appeal, the Court of Appeals found as a matter

of fact that respondents’ individual claim was so miniscule that

they would not continue to prosecute the case unless the dis-

trict court's order was reversed. On the basis of that finding.

the Court of Appeals concluded that the order was a “final or-

der” under the “death-knell” theory and therefore appealable.

Despite the fact that Rule 23(c)(1) provides that any class ac-

tion determination “may be conditional and may be altered or

amended before the decision on the merits,” the Court of Ap-

peals then proceeded to hold that the district court had abused

its discretion in de-certifying the class action. It reversed the

district court's ruling and held, in effect, that the class should

be re-certified.-

2 Respondents’ alternative Petition for a Writ of Mandamus (8th

Cir. No. 76-1906) was dismissed, and respondents have not pursued

that matter in this Court.

REASONS WHY THE WRIT SHOULD BE GRANTED -

I. The Eighth Circuit Has Adopted the “Death-Knell”

Doctrine That Has Been Rejected by the Third and Seventh

Circuits, and Has Applied That Doctrine in a Way That Is

Inconsistent With Decisions of the Fifth and Ninth Circuits.

In deciding that it had jurisdiction to hear the appeal in this

case, the Eighth Circuit adopted and applied the so-called

“death-knell” theory. This doctrine, as applied here, permits

an appeal under § 1291 from a district court’s order denying

class-action status if the Court of Appeals finds that the named

plaintiffs will not continue the litigation on an individual basis.

The death-knell exception to the finality requirement of § 1291

has been a source of controversy and has produced a divergence

of judicial opinion. It has been unqualifiedly rejected by the

Third and Seventh Circuits, while being accepted in one form

or another by the Second, Fifth, Sixth and Ninth Circuits.

| The death-knell doctrine was rejected by the Seventh Circuit

in King v. Kansas City Southern Industries, Inc., 479 F.2d 1259

(7th Cir. 1973) where it was held that an order determining that

an action could not proceed as a class action was not a final order

and could not be appealed under § 1291. In its subsequent

en banc decision in Anschul v. Sitmar Cruises, Inc., 544 F.2d

1364 (7th Cir.), cert. denied, — U.S. — (1976), the Court ad-

hered to its rejection of the death-knell doctrine.

The Third Circuit took the same view in Hackett v. General

Host Corp., 455 F.2d 618 (3d Cir.). cert. denied, 407 U.S. 925

(1972) even though the value of the individual plaintiff's claim

was only $9.00. The court thereafter also reaffirmed its posi-

tion en banc in Katz v. Carte Blanche Corp., 496 F.2d 747 (3d

Cir.), cert. denied, 419 U.S. 885 (1974).

el

=

The death-knell theory had its origins in Eisen v. Carlisle &

Jacquelin, 370 F.2d 119 (2d Cir. 1966), cert. denied, 386 U.S.

1035 (1967). But even the Second Circuit has harbored

subsequent misgivings about the wisdom and propriety of the

doctrine. In fact, in Parkinson v. April Industries, Inc., 520 F.2d

650, 660 (2d Cir. 1975), Judge Friendly concluded that the

doctrine was ill-conceived and called for its abolition.

Further confusion is engendered by the fact that the doctrine

is not uniformly applied by those Circuits that have adopted it.

For example, the Ninth Circuit does not permit an appeal under

§ 1291 from an order denying class-action status if any mem-

ber of the class has an individually viable claim. Hooley v. Red

Carpet Corp. of America, 549 F.2d 643 (9th Cir. 1977);

Share v. Air Properties G, Inc., 538 F.2d 279 (9th Cir.), cert.

denied sub nom. Woodruff v. Air Properties G, Inc., — U.S. —

(1976). The court in Hooley, |.c. 645, analyzed the rationale

of the death-knell doctrine and refused to employ the simplistic

approach adopted by the Eighth Circuit here:

“The death knell doctrine is not designed to facilitate im-

mediate review of refusals to certify an action as a class

action. It is to make certain that the refusal to certify does

not deprive the members of the purported class of an op-

portunity for review in due course of the refusal on appeal.

All opportunity for such review is destroyed if the refusal

will have the practical effect of terminating all effort by

anyone to assert the particular cause of action involved and

to preserve for review on appeal the allegedly erroneous

refusal to certify. To determine whether such destruction

has occurred requires an examination not limited to named

plaintiffs.” (Emphasis added. )*

% The Fifth Circuit’s version of the doctrine was announced in

Gosa v. Securities Investment Co., 449 F.2d 1330 (Sth Cir. 1971).

—

The Eighth Circuit in the instant case focused solely, and

myopically, on the claims of the named representatives of the

proposed class and ignored the existence of several other size-

able claims. The anomalous effect of the Eighth Circuit's rule,

of course, is to encourage litigation by those who have the least

at stake.

This Court has recently reiterated the well established prin-

ciple that “. . . there has been a firm congressional policy against

interlocutory or ‘piecemeal’ appeals and courts have consistently

given effect to that policy. Finality of judgment has been re-

quired as a predicate for federal appellate jurisdiction.” Abney

v. United States, 45 U.S.L.W. 4954, 4955 (June 9, 1977).

Obviously the decision by the district judge in this case to de-

certify the class action was not a “final” judgment in the tra-

ditional sense of that term. The respondents still have their

individual claim, which was clearly not de minimis and which

was certainly viable if respondents desired to pursue it. The

Court of Appeals, however, surmised that in all likelihood the

respondents (or more probably their lawyer) would choose to

abandon the case if the “in terrorem” prospects of a class action

recovery or settlement were removed. Therefore, although the

respondents had purposefully eschewed the Congressionally-

created path to the Court of Appeals created by § 1292(b), the

Eighth Circuit nonetheless entertained their appeal by branding

the district court’s order as “final” under § 1291. It is a source

of mystery how an economic decision by litigants or their coun-

sel can confer finality on an order that is patently interlocutory.

It is precisely that kind of logic which has caused several Circuits

to reject the death-knell theory and has recently prompted Judge

Friendly to conclude in his concurring opinion in Parkinson v.

April Industries, Inc., supra at 660 (2d Cir. 1975) that:

“

. . the best solution is to hold that appeals from the

grant or denial of class-action designation can be taken

=

.

only under the procedure for interlocutory appeals pro-

vided by 28 U.S.C. § 1292(b).”

Although it can be seriously questioned whether the death-

knell doctrine is even a legitimate interpretation of § 1291, it is

also of equal concern whether that doctrine, assuming its validity,

represents the optimal—or even an acceptable—solution to the

problem created by denial of class-action status under Rule 23.

Because there are almost as many views of these problems as

there are Circuits, and in light of the burgeoning caseloads al-

ready borne by our over-burdened federal courts, a rule which

significantly expands the jurisdiction and the workloads of the

Courts of Appeals should not be adopted without the im-

primatur of this Court.

Even if we assume that the death-knell theory is an appropri-

ate response to the situation presented by the instant case, its

very application has implications which militate against its en-

dorsement by this Court. One of the obvious problems, of

course, is that the death-knell doctrine requires the appellate

courts to make findings of fact on the issue of finality on a rec-

ord which simply does not address that issue. Among the other

shortcomings of the death-knell rule is the fact that it is not

even-handed in its application because it is available to plain-

tiffs but never to defendants. Moreover, since a ruling adverse

to a class-action plaintiff is immediately appealable, whereas an

order granting a class-action status is not, it is not unreasonable

to anticipate that these considerations may very well create a .

. stemic bias in favor of plaintiffs in class-action determinations.

ay factors which would tend to increase the number of class

uctions }> *e federal system, particularly for reasons extraneous

to the purposes of Rule 23, would only serve to heighten “the

concern expressed for the danger of vexatious litigation which

could result from a widely expanded class of plaintiffs under

Rule 10b-5.” Blue Chip Stamps v. Manor Drug Stores, 421

U.S. 723, 740 (1975) as quoted in Santa Fe Industries, Inc.

v. Green, — U.S. —, 45 U.S.L.W. 4317, 4322 (1977). x.

The death-knell theory is an unwarranted and inept vehicle

for circumventing the machinery provided by Congress in §§

1291 and 1292(b). The sharp conflict among the Circuits is

ripe for review, and the problems created by the death-knell

doctrine call for resolution by this Court.

II. The Court of Appeals Has Unjustifiably Interfered With

the District Court’s Class Action Determination.

In addition to the important jurisdictional question presented

by the Eighth Circuit's adoption of the death-knell theory, this

case also poses the issue explicitly left unresolved in this Court's

recent opinion in East Texas Motor Freight System, Inc. v.

Rodriquez, 45 U.S.L.W. 4524 (May 31, 1977), where the

Court said:

“. . . we do not reach the question whether a Court of Ap-

peals should ever certify a class in the first instance.”

In the case at bar, the district court originally certified the

case for class-action treatment in June of 1975. At the same

time, however, the district court, puzzled by the respondents’ fail-

ure to join the underwriters as defendants and apprised of the

fact that respondents’ then-counsel regularly represented one of

the underwriters, directed counsel to show cause why he should

not be enjoined from representing the class. Counsel chose not

to contest the matter and promptly withdrew from the action.

When respondents’ new counsel appeared, the district court

asked them to make a determination as to the advisability of

naming the underwriters as defendants in the lawsuit. Respond-

ents apparently reached the conclusion, however, that the statute

of limitations had expired on all claims against the underwriters

anim

during the period in which they had suppressed the conflict-of-

interests problems of their first attorney. When the court real-

ized that respondents’ conduct may have seriously impaired the

rights of their fellow class members, it expressed serious reser-

vations about respondents’ ability to fairly protect the interests of

the class and ordered the parties to notify class members that,

if they felt it necessary to protect their interest, they could either

petition for an appointment of a new class representative or

intervene in the action. While pressing for discovery on the

merits, respondents delayed for many months in commencing dis-

covery of the names and addresses of the class members and

engaged in a procedural squabble about the form of notice to

be given to the class. This resulted in considerable delay in

sending the notice to the class members. Finally, exasperated

by respondents’ behavior and convinced of their inability to lead

the class, the district court de-certified the class on September

1, 1976.

The Court of Appeals, after first announcing its new juris-

dictional rule, summarily swept aside the district court's de-

certification order and, in effect, re-certified the class. The

advisability of that ruling, made on the basis of a cold record,

as distinguished from the district court’s years of living with

this case, is avestionable at best and evinces a growing disre-

gard for the adjudicatory scheme embodied in Rule 23.

Rule 23 itself recognizes the existence of substantial discre-

tion in the trial court with regard to class action matters and

provides that class action determinations may be conditional.

Unfortunately, however, steadily increasing encroachment by

appellate courts threatens to subvert the purpose of the Rule.

This is particularly disturbing in Securities Act cases such as

this, for the Court of Appeals, without even considering whether

the original certification of the class was appropriate or whether,

for example, the class action would be “manageable,” has simply

substituted its view for that of the district court and has re-cer-

—

tified the class. Hence, petitioner has summarily been subjected,

inter alia, to extensive and wide-ranging discovery on the merits

in a class-action context, thus creating the problems about

which this Court voiced apprehension in Blue Chip Stamps v.

Manor Drug Stores, 421 U.S. 723, 740-41 (1975)

“. .. [To the extent that [the discovery process] permits a

plaintiff with a largely groundless claim to simply take up

the time of a number of other people with the right to do

sO representing an in terrorem increment of the settlement

value, rather than a reasonably founded hope that the

process will reveal relevant evidence, it is a social cost

rather than a benefit. Yet to broadly expand the class of

plaintiffs who may sue under Rule 10b-5 would appear to

encourage the least appealing aspect of the use of the dis-

covery rules.”

In the East Texas Motor Freight case, the Court restored

some of the equilibrium provided by Rule 23. But the action

of the Court of Appeals in the instant case constitutes an un-

warranted interference with the district court's functions under

Rule 23. Accordingly, this Court should grant review to fur-

ther reinforce the discretion vested in the district courts in class

action matters.

=

CONCLUSION

For the foregoing reasons, a Writ of Certiorari should issue to

review the opinion and judgment of the Court of Appeals.

Respectfully submitted,

VERYL L. RIDDLE

THOMAS C. WALSH

JOHN J. HENNELLY, JR.

500 North Broadway

St. Louis, Missouri 63102

Attorneys for Petitioner

BRYAN, CAVE, McPHEETERS & McROBERTS

Of Counsel

APPENDIX

—_ =

APPENDIX A

In the United States District Court for the

Eastern District of Missouri

Eastern Division

Cecil and Dorothy Livesay, 7

Plaintiffs,

m | No. 73 C 517 (3)

Punta Gorda Isles, Inc., et al.,

Defendants.

Order

(Filed September 1, 1976)

In accordance with the Memorandum of this Court filed this

date and incorporated herein,

IT IS HEREBY ORDERED that the motion of the various

defendants to decertify this case as a class action be and is

GRANTED; and

IT IS FURTHER ORDERED that this action be and is de-

certified as a class action; and

IT IS FURTHER ORDERED that this matter shall proceed

to trial only upon the individual claims of Cecil and Dorothy

Livesay; and

IT IS FURTHER ORDERED that this action shall be set

for trial at a later date; and

—_.

IT IS FURTHER ORDERED that all restrictions on dis-

covery shall be lifted, and that discovery with regards to the

individual claims of Cecil and Dorothy Livesay shall proceed

in a normal fashion.

Dated this Ist day of September, 1976.

s H. KENNETH WANGELIN

United States District Judge

Memorandum

(Filed September 1, 1976)

This matter is before the Court upon the motion of the vari-

ous defendants to decertify this lawsuit as a class action.

The basis of the various defendants’ motion is that the plain-

tiffs, as class representatives, are failing to prosecute this action,

and are therefore denying the defendants a right to a speedy

adjudication of the claims against them.

In order to deal with the defendants’ motion, a brief chro-

nology of events is required. This lawsuit was originally filed on

July 27, 1973. Plaintiffs’ original counsel did not seek a class

action hearing until April 9, 1974. On June 19, 1975, this

Court, in a Memorandum and Order, declared that the action

should proceed as a class action pursuant to Rule 23(b)(3) of ©

Federal Rules of Civil Procedure. The delay between the ciass

action hearing, and this Court's certification was due to the

substitution of new counsel for plaintiffs. On October 23, 1975,

this Court partially dissolved its stay order regarding discovery,

and allowed discovery to proceed as to the names and addresses

of the members of the class so that the appropriate class action

notice could be sent. The plaintiffs did not institute discovery

— <

to determine the names and addresses of the absent class mem-

bers until July 20, 1976.

It is the opinion of the Court that the plaintiffs have failed

to offer adequate excuses for their delay in prosecuting this ac-

tion as a class action. In response to the motion of the defend-

ants, the plaintiffs have alleged that it is anomalous for the de-

fendants to attempt to protect the interests of the members of

the class. The Court agrees that such concern on the part of

the defendants involves tears of the crocodilian variety, however,

the plaintiffs misjudged the true thrust of the defendants’ motion.

The defendants are merely seeking, as is their right, to have a

speedy adjudication of the claims against them. Since this law-

suit has been pending for approximately three years, and

class action notices have not gone out more than a year after

the action was certified as a class action, the Court is forced to

the conclusion that there has been a lack of prosecution on the

part of the plaintiffs as class representatives.

Since the plaintiffs seem to have no desire to prosecute this

matter as a class action, the Court will decertify this matter as

a class action, and the lawsuit shall proceed on the individual

claims of Cecil and Dorothy Livesay as stated in the accompany-

ing Order.

Dated this Ist day of September, 1976.

/s/ H. KENNETH WANGELIN

United States District Judge

ay!

APPENDIX B

United States Court of Appeals

For the Eighth Circuit

No. 76-1881

Cecil Livesay and Dorothy Livesay, for Themselves and on

Behalf of All Others Similarly Situated,

Plaintiffs-Appellants,

Vv.

Punta Gorda Isles, Inc., Wilber H. Cole, Alfred M. Johns,

Robert J. Barbee, Samuel A. Burchers, Jr., Russell C. Faber,

John Matarese, Robert C. Wade, Earl Drayton Farr, Jr., John

W. Douglas, D.D.S., Coopers & Lybrand (Formerly Ly-

brand, Ross Bros. & Montgomery),

Defendants-Appellees.

Appeal from the United States District Court for the

Eastern District of Missouri

No. 76-1906

Cecil Livesay and Dorothy Livesay, for Themselves and on

Behalf of All Others Similarly Situated,

Petitioners,

Vv.

Punta Gorda Isles, Inc., Wilber H. Cole, Alfred M. Johns,

Robert J. Barbee, Samuel A. Burchers, Jr., Russell C. Faber,

John Matarese, Robert C. Wade, Earl Drayton Farr, Jr., John

—~ vn

W. Douglas, D.D.S., Coopers & Lybrand (Formerly Lybrand.

Ross Bros. & Montgomery),

and

Honorable H. Kenneth Wangelin, United States District Judge,

Respondents.

Petition for Writ of Mandamus

Submitted: January 13, 1977

Filed: March 4, 1977

Before HEANEY and STEPHENSON, Circuit Judges, and

STUART, * District Judge.

STEPHENSON, Circuit Judge.

In these consolidated cases, Cecil and Dorothy Livesay

(plaintiffs) seek review of the district court's order decertifying

their action as a class action. In No. 76-1881, plaintiffs appeal

from that order. In No. 76-1906, plaintiffs seek a writ of

mandamus compelling the district court to vacate its decertifica-

tion order.

On July 27, 1973, plaintiffs filed a complaint seeking approxi-

mately $2650 in individual damages resulting from their pur-

chase cf $5000 worth of debentures and 100 shares of common

stock issued by Punta Gorda Isles, Inc. (Punta Gorda), a Florida

land development corporation, pursuant to a registration state-

ment and prospectus dated May 2, 1972. The essence of plain-

tiffs’ claim was that the prospectus and registration statement

contained materially misleading statements and omissions.' The

* The Honorable William C. Stuart, United States District Judge

for the Southern District of lowa, sitting by designation.

! Essentially, the complaint alleges: (1) a failure to disclose that

new accounting rules of the American Institute of Certified Public

—

named defendants were Punta Gorda, certain individuals who

were Officers and directors of Punta Gorda, and the accounting

firm of Coopers & Lybrand (Coopers), which had certified the

financial statements in the registration statement and prospectus.

Plaintiffs sought to represent a class of approximately 1,800 per-

sons who had purchased securities at the May 2, 1972, public

offering.

On April 9, 1974, plaintiffs moved pursuant to Fed. R. Civ.

P. 23 to have the action certified as a class action. On May 13,

1974, the district court granted Coopers’ motion for a stay of all

discovery except discovery relating to the class action determina-

tion. On June 24, 1974, oral argument on the class action

certification motion was held. On July 16, 1974, the district

court denied Coopers’ motion to strike the class action allega-

tions in the complaint, but did not at that time certify the class.

On September 23, 1974, the district court denied plaintiffs’

motion to lift the stay on substantive discovery.

On November 1, 1974, plaintiffs filed a petition for a writ

of mandamus in this court, requesting that the district court

be ordered to lift the stay on substantive discovery. This court

denied the petition by order dated November 15, 1974, but

expressed the view that plaintiffs should request a prompt

ruling on their motion for class action certification and that

the district court should promptly rule on the motion and

thereafter permit discovery on the merits. Livesay v. Punta

Gorda Isles, Inc., No. 74-1827 (8th Cir., November 15, 1974).

Accountants would require an adverse restatement of earnings for

1967-1972; (2) a failure to disclose that the earnings consisted of

installment sale contracts where cash would not be received until

future dates; (3) a misleading statement of the ratio of earnings to

fixed charges because not based on actual cash flow; and (4) a

failure to disclose that certain Florida ecological regulations would

seriously impede Punta Gorda from developing artificial waterfront

property.

—

On December 30, 1974, an evidentiary hearing on the class

action certification motion was held in the district court. On

June 19, 1975, the district court entered an order certifying the

action as a Rule 23(b)(3) class action, which order expressly

found plaintiffs to be adequate class representatives. The order

also held that plaintiffs’ counsel had a conflict of interest be-

cause he had represented one of the underwriters of the Punta

Gorda offering on unrelated matters. The order deemed this

conflict serious because none of the underwriters had been

joined as defendants in the plaintiffs’ suit. Plaintiffs’ counsel

withdrew, and on June 30, 1975, plaintiffs’ current counsel

entered its appearance.

On July 25, 1975, plaintiffs moved to dissolve the stay on

substantive discovery. Coopers opposed the motion and sought

a reconsideration of the order certifying the action as a class

action. On October 23, 1975, the district court denied plain-

tiffs’ motion to dissolve the stay. In its order, the district court

expressed concern about the adequacy of plaintiffs as class rep-

resentatives, based largely on plaintiffs’ failure to join any under-

writers as defendants. The court did not, however, decertify

the class action at that time, because it believed that such de-

certification might jeopardize the claims of absent class mem-

bers. The court directed the parties to prepare forms of notice

of the pendency of the class action to be mailed to the class

members and also lifted the stay on discovery to the extent that

plaintiffs could seek the names and addresses of the class mem-

bers. The parties submitted proposed forms of notice in Novem-

ber 1975.

On March 1, 1976, the district court mailed to the parties

its proposed form of notice. Both parties submitted suggested

changes, and on April 9, 1976, the district court mailed to the

parties the final form of notice.

On April 20, 1976, plaintiffs’ counsel telephoned counsel for

Punta Gorda and requested the names and addresses of the

_—*

initial registered owners (after the underwriters) of the deben-

tures and common stock sold pursuant to the May 2, 1972,

registration statement. By letter dated April 21, 1976, Punta

Gorda’s counsel declined to furnish that information.

On July 9, 1976, plaintiffs requested the district court to

conduct a conference for the purpose of discussing the issues

involved in discovery of the names of class members. On July

20, 1976, plaintiffs served defendants with a motion to produce

the names and addresses of the initial registered owners of the

stock and debentures. On July 23, 1976, Coopers filed a mo-

tion to decertify the action as a class action. On July 26, 1976,

the conference requested by plaintiffs was held at which the

district court ordered the parties to submit briefs, etc. in support

of the various pending motions.

On September 1, 1976, the district court issued a memo-

randum and order decertifying the class action. The court found

that plaintiffs had inordinately delayed in prosecuting the case

and were thus not adequate class representatives. The order also

lifted the stay on substantive discovery. Subsequently, both

parties have engaged in some discovery on the merits. Plaintiffs

now seek review of the September 1 decertification order by

direct appeal (No. 76-1881) and by a petition for a writ of

mandamus (No. 76-1906).

We are confronted with the threshold issue of our jurisdic-

tion to hear an appeal from the district court's order decer-

tifying the lawsuit as a class action. Defendants allege that the

order is not a final order which is appealable under 28 U.S.C.

§$ 1291. We disagree.

Orders denying class action certification are reviewable under

28 U.S.C. § 1291 if they sound the “death knell” of the action.

See, e.g., Share v. Air Properties G. Inc., 538 F.2d 279, 282

(9th Cir.), cert. denied sub nom., Woodruff v. Air Properties

—_.

G. Inc., 97 S.Ct. 321 (1976); Ott v. Speedwriting Pub. Co.,

518 F.2d 1143, 1146-49 (6th Cir. 1975); Williams v. Mum-

ford, 511 F.2d 363, 366 (D.C. Cir.), cert. denied, 423 U.S.

828 (1975); Shayne v. Madison Square Garden Corp., 491

F.2d 397, 399-401 (2d Cir. 1974); Graci v. United States, 472

F.2d 124, 126 (Sth Cir.), cert. denied, 412 U.S. 928 (1973):

Eisen v. Carlisle & Jacquelin (Eisen 1), 370 F.2d 119, 120-21

(2d Cir. 1966), cert. denied, 386 U.S. 1035 (1967). See also

Hartmann v. Scott, 488 F.2d 1215, 1220 (8th Cir. 1973);

compare, In re Cessna Aircraft Distributorship Antitrust Litiga-

tion, 518 F.2d 213 (8th Cir.), cert. denied, 423 U.S. 947,

rehearing denied, 423 U.S. 1039 (1975). Contra, King v.

Kansas City Southern Industries, 479 F.2d 1259, 1260 (7th

Cir. 1973); Hackett v. General Host Co., 455 F.2d 618, 621-26

(3d Cir.), cert. denied, 407 U.S. 925 (1972).

To determine whether a decertification order sounds the

“death knell” of the action, we begin by examining the amount

of the class representatives’ individual claim.? Plaintiffs’ indi-

vidual claim for damages totals approximately $2,650. Because

this claim falls between those cases where the individual claim

is clearly not viable* and those cases where the individual claim

* Defendants allege that because the record reveals other members

of the p orted class who have substantial individual claims, the

“death knell” doctrine should not apply. That was the result reached

in Share ¥. Air Properties G. Inc., supra, 538 F.2d at 283. We do

not consider the soundness of that holding, however, because the

case is distinguishable on its facts. In Share the court refern »

class members who were “actively engaged” in the litigation. -

the record reveals only that certain class members had indicat:

willingness to pay part of the expenses of suit, and even that

gential involvement ceased after the appearance of plaintiffs’

counsel.

* See, e.g., Ott v. Speedwriting Pub. Co., supra ($30); Korn v.

Franchard Corp., 443 F.2d 1301 (2d Cir. 1971) ($386); Green v.

Wolf Corp., 406 F.2d 291 (2d Cir. 1968), cert. denied, 395 U.S. 977

Th (“less than $1000”); Eisen v. Carlisle & Jacquelin, supra

— A-10 —

is viable,* we must examine the amount of plaintiffs’ claim in

relation to their financial resources and the probable cost and

complexity of the lawsuit. See, e.g., Share v. Air Properties G.

Inc., supra, 538 F.2d at 282; Graci v. United States, supra, 472

F.2d at 126; Korn v. Franchard Corp., 443 F.2d 1301, 1307

(2d Cir. 1971).

Plaintiffs, both of whom are employed, have an aggregate

yearly gross income of $26,000. Their total net worth is ap-

proximately $75,000, but only $4,000 of this sum is in cash.

The remainder consists of equity in their home and investments.

As of December 1974 plaintiffs had already incurred ex-

penses in excess of $1,200 in connection with this lawsuit.

Plaintiffs’ new counsel has estimated expenses of this lawsuit

to be $15,000. The nature of this case will require extensive

discovery, much of which must take place in Florida, where

most defendants reside. Moreover, the allegations regarding the

prospectus and financial statements will likely require expert

testimony at trial.

After considering all the relevant information in the record,

we are convinced that plaintiffs have sustained their burden®

4 See, e.g., Shayne v. Madison Square Garden Corp., supra

($7,482); Falk v. Dempsey-Tegeler & Co., 472 F.2d 142 (9th Cir.

1972) ($14,125); Milberg v. Western Pac. R.R., 443 F.2d 1301

(2d Cir. 1971) ($8,500).

* Plaintiffs who seek to invoke the “death knell” doctrine have

the burden of developing, in the trial court, an adequate factual rec-

ord upon which an appellate court may determine whether the action

will proceed absent class certification. Share v. Air Properties G.

Inc., supra, 538 F.2d at 282; Gosa v. Securities Investment Co., 449

F.2d 1330 (Sth Cir. 1971). As the Gosa court indicated, the pre-

ferable way to do this is in a post-ruling hearing where the district

court has the opportunity to enter appropriate findings of fact. No

such hearing was held in the instant case. However, we do not read

Gosa as requiring such a hearing in all cases. In the instant case, the

record of the entire proceeding contains sufficient facts to allow us

to make an informed judgment on the matter.

— A-ll —

of showing that they will not pursue their individual claim if

the decertification order stands. Although plaintiffs’ total net

worth could absorb the cost of this litigation, “it [takes] no

great understanding of the mysteries of high finance to make

obvious the futility of spending a thousand dollars to get a

thousand dollars—or even less.” Douglas, Protective Com-

mittees in Railroad Reorganizations, 47 Harv. L. Rev. 565,

567 (1934). We conclude we have jurisdiction to hear the

appeal.

The district court has wide latitude in determining whether

an action may be maintained as a class action. If the court

applies the proper criteria in making this determination, its

decision is reviewable only for an abuse of discretion. Wright

v. Stone Container Corp., 524 F.2d 1058, 1061 (8th Cir.

1975); Shumate v. Nat'l Ass'n of Securities Dealers, 509 F.2d

147, 155 (Sth Cir.), cert. denied, 423 U.S. 868 (1975); Kamm

v. California City Development Co., 509 F.2d 205, 210 (9th

Cir. 1975); Wetzel v. Liberty Mutual Ins. Co., 508 F.2d 239,

245 (3d Cir.), cert. denied, 421 U.S. 1011 (1975); City of

New York v. Int'l Pipe & Ceramics Corp., 410 F.2d 295, 298

(2d Cir. 1969).

Because the decertification order in this case was predicated

solely on the finding that plaintiffs were not adequate class

representatives because they had inordinately delayed in prose-

cuting the litigation,® the sole issue’ on this appeal may be

* As plaintiffs correctly point out, the decertification order was

phrased in terms of a denial of defendants’ rights to a speedy ad-

judication of claims against them. This factor is not a proper cri-

terion to consider in determining whether plaintiffs will adequately

represent the members of the class. However, a review of the entire

record convinces us that the district court was concerned with plain-

tiffs’ failure to prosecute the case as it related to their adequacy as

class representatives.

* Plaintiffs also seek to raise the following issues: (1) that the

decertification order was erroneously predicated on plaintiffs’ failure

to join underwriters as defendants; (2) that the district court ex-

— A-12 —

simply stated: was the district court’s deceriification order find-

ing plaintiffs to be inadequate class representatives so erro-

neous as to constitute an abuse of discretion? We answer the

question in the affirmative, and we reverse.

The decertification order was apparently based upon three

distinct periods of delay. The first period of delay was approxi-

mately eight months from the date of filing the complaint until

the plaintiffs moved to have the action certified as a class action.

The record indicates that this period of time was largely de-

voted to preparing and amending pleadings and engaging in

discovery. We note that plaintiffs filed their motion to certify

shortly after defendants filed their last responses to plaintiffs’

interrogatories. In these circumstances, we find little to support

a finding that plaintiffs were dilatory in moving for class action

certification. Furthermore, the general rule is that a delay

prior to moving for class action certification is not a basis for

refusing certification absent some showing of prejudice. See,

e.g., Bernstein v. National Liberty Int'l Corp., 407 F. Supp.

709, 714 (E.D. Pa. 1976); Souza v. Scalone, 64 F.R.D. 654,

656 (N.D. Cal. 1974); Boring v. Medusa Portland Cement

Co., 63 F.R.D. 78, 80 (M.D. Pa.), appeal dismissed without

opinion, 505 F.2d 729 (3d Cir. 1974); Feder v. Harrington,

52 F.R.D. 178, 181-82 (S.D.N.Y. 1970); Epstein v. Weiss,

50 F.R.D. 387, 392 (E.D. La. 1970). No showing of preju-

dice was made here.

hibited a lack of fair and impartial judicial procedure, (3) that the

district court ordered plaintiffs to follow class action procedures

which violate the federal rules; and (4) that the district court vio-

lated this court’s mandate by not promptly lifting the stay on substan-

tive discovery after certifying the class. The first two claims are de-

void of factual support in the record. The third claim is relevant to

the decertification order only insofar as it alleges that the class action

procedures authorized by the district court impeded the progress of

the litigation. As such, it merely restates the allegation that the delay

was not caused by plaintiffs. The final claim is moot because the

decertification order lifted the stay on substantive discovery. More-

over, as with the third claim, its only relevance to the decertification

order is the allegation that the stay of discovery was a contributing

cause of the delay.

=~ £43 —

The second time period referred to in the decertification order

was the 14 month period between the motion for class action

certification and the order certifying the class. The district

court’s decertification order attributed this delay to the appoint-

ment of new counsel for plaintiffs. However, it should be noted

that new counsel for plaintiffs did not appear until after the

order certifying the class was entered.

The defendants’ only colorable allegation of delay during

this second period is that plaintiffs were dilatory in moving for

an evidentiary hearing on the class action motion. The record

discloses that the district court indicated during oral argument

that an evidentiary hearing should be held if the court decided

that the issue of individual reliance did not bar maintaining

the suit as a class action. This decision was reached on July

16, 1975, and plaintiffs did not seek an evidentiary hearing

until September 20, 1975, a period of nine weeks. During this

nine-week period plaintiffs were not inactive. They moved to

enjoin the destruction of documents and also moved to lift

the stay on substantive discovery. We cannot say, and the

district court did not find, that pursuing these avenues was a

sign of inaction, negligence, or a failure adequately to protect

the interests of other class members.

The third period of time mentioned in the decertification or-

der is the period from the district court order allowing discov-

ery of the names and addresses of class members until plaintiffs

first sought to discover that information.” This period runs

‘ A persuasive ary can be made that this is the only period

of delay upon which the decertification order could properly be

predicated. Because the first two periods of delay occurred prior to

the certification order, defendants could have raised the issue of

failure to prosecute at that time, but did not. They may now be

foreclosed from raising the issue based on these delays. Kramer vy.

Scientific Control Corp., 67 F.R.D. 98, 99 (E.D. Pa. 1975), rev'd

in part on other grounds, 534 F.2d 1085 (3d Cir.), cert. denied sub

nom., Arthur Andersen & Co. v. Kramer, 97 S.Ct. 90 (1976). Cf.

In re Cessna Aircraft Distributorship Antitrust Litigation, 518 F.2d

213, 215 (8th Cir.), cert. denied, 423 U.S. 947, rehearing denied,

423 U.S. 1039 (1975).

—_*’

from October 23, 1975, to April 20, 1976, when plaintiffs first

requested Punta Gorda’s counsel to furnish the names and ad-

dresses of the initial registered owners of the securities. Defend-

ants contend that because plaintiffs have offered no compelling

excuse for failing to request this information more promptly,

this delay ipso facto justified the district court's finding that

plaintiffs are inadequate representatives. We disagree.

We begin by noting that there has been no showing that

plaintiffs’ failure to request production of this information at

an earlier date has prejudiced the class members. The notices

to the class members could not have gone out until the final

form of notice was approved by the court, which did not oc-

cur until April 9, 1976. Eleven days later, plaintiffs’ attorney

telephoned counsel for Punta Gorda and requested that Punta

Gorda furnish the names and addresses of the initial registered

owners of the securities in question. In a letter dated August

4, 1975, counsel for Punta Gorda had agreed to furnish this

information. However, in response to the telephone call, coun-

sel for Punta Gorda wrote a letter to plaintiffs’ counsel refus-

ing to furnish this information.” In these circumstances we

cannot agree that plaintiffs were dilatory in seeking the names

and addresses of potential class members. They had every right

to expect that defendants would promptly furnish this infor-

mation. To hold that plaintiffs are inadequate class representa-

tives because they failed to anticipate defendants’ eventual ob-

jections to discovery would be tantamount to saying that class

representatives must be gifted with prescience. This we decline

to do.

That there has been undue delay in this lawsuit is beyond

question. From examination of the entire record of this pro-

” This refusal was later formalized in objections to plaintiffs’ mo-

tion to produce. One of the objections to this motion was that the

requested information was not in the possession of Punta Gorda, but

in the possession of Punta Gorda’s transfer agent. Because the trans-

fer agent could only release this information at the direction of

Punta Gorda, we find this objection little else than a delaying tactic.

as fiph§ an

tracted proceeding, however, it becomes quite clear that much

of the delay in this case is directly attributable to defendants.

For example, defendants have been granted 14 extensions of

time, totalling approximately 190 days, in which to file plead-

ings, motions and other papers. In addition, defendants have

filed motions to reconsider or modify earlier court orders,

which motions have consistently alleged grounds previously

ruled upon by the court. The clear import of this course of

conduct is to make this lawsuit as time-consuming and costly

as possible.

In addition, the district court has on some occasions taken

action which did not advance the progress of this litigation.

The court took approximately five months to decide the class

action certification motion after the evidentiary hearing was

held. The court took approximately four months to approve the

form of notice to the class members. These delays appear to

have been justifiable due to the complex nature of the ques-

tions presented. However, during this time there was a stay of

substantive discovery in effect. The practical effect of this stay

was to prevent the par .cs from concurrently proceeding to the

merits while the court considered the various procedural ques-

tions. In these circumstances, virtually all the plaintiffs could

do to advance the course of this litigation was to attempt to lift

the stay on discovery. Plaintiffs twice sought to lift this stay

and were twice unsuccessful.

We conclude that the district court order decertifying the

action as a class action because of plaintiffs’ failure to prosecute

is wholly unsupported by the record, and we accordingly re-

verse. We do not disturb that portion of the order which lifted

the stay on substantive discovery.

The record in this case compels us to make certain further

comments. We are dismayed at the utter lack of cooperation

between opposing counsel. The record is replete with instances

— igen

where relatively minor procedural matters have mushroomed

into full-scale confrontations, with the concomitant avalanche

of briefs, memoranda, etc. By and large, these matters could,

and should, have been settled informally by the parties or, if

necessary, in conference with the district court.

Even more disturbing is the tone with which these proceed-

ings have been conducted. All too often the parties have en-

gaged in personal attacks on opposing counsel and the district

court. These baseless allegations are not a substitute for advo-

cacy based on the facts and the law and they have no place in

our judicial system.

On remand, we anticipate that this conduct will not reoccur.

If it does, the district court will be forced to take a more active

role in managing this case to insure that it progresses as ex-

peditiously as possible consitent with fairness to the parties.

See Manual for Complex Litigation § 1.10 (1973).

In No. 76-1881, the order of the district court is reversed

and the cause remanded for further proceedings consistent here-

with. In No. 76-1906, the petition for writ of mandamus is

dismissed.

A true copy.

Attest:

Clerk, U. S. Court of Appeals, Eighth Circuit.

—*) ee

United States Court of Appeals

for the Eighth Circuit

No. 76-1881 September Term, 1976

Cecil Livesay and Dorothy Livesay, for themselves and on be-

half of all others similarly situated,

Appellants,

VS.

Punta Gorda Isles, Inc., Wilber H. Cole, Alfred M. Johns,

Robert J. Barbee, Samuel A. Burchers, Jr., Russell C. Faber,

John Matarese, Robert C. Wade, Earl Drayton Farr, Jr.,

John W. Douglas, D.D.S., Coopers & Lybrand (formerly

Lybrand, Ross Bros. & Montgomery),

Appel'ees.

JUDGMENT

(Filed March 4, 1977)

Appeal From the United States District Court for the Eastern

District of Missouri.

This Cause came on to be heard on the record from the

United States District Court for the Eastern District of Mis-

souri and was argued by counsel.

On Consideration Whereof, it is now here ordered and ad-

judged by this Court, that the judgment of the said District

Court, in this cause, be. and the same is hereby, reversed.

— A-18 —

And it is further ordered by this Court that this cause be and

is hereby remanded to the said District Court for proceedings

consistent with the opinion of this Court.

March 4, 1977

A true copy

Attest: /s/ Robert C. Tucker

Clerk, U. S. Court of Appeals, 8th Circuit

== Api? —

APPENDIX C

United States Court of Appeals

for the Eighth Circuit

76-1881 September Term, 1976

Cecil Livesay, et al., etc., Appeal from the

Agpetents, United States Dis-

. trict Court for the

Eastern District of

Missouri

vs.

Punta Gorda Isles, Inc., et al.,

Appellees. |

The Court having considered petitions for rehearing en banc

filed by counsel for appellees and, being fully advised in the

premises, it is ordered that the petitions for rehearing en banc

be, and they are hereby, denied.

Considering the petitions for rehearing en banc as petitions

for rehearing, it is ordered that the petitions for rehearing also

be, and they are hereby, denied.

March 28, 1977