Petition for Writ of Certiorari — Hoffman v. Sylva
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Supreme Court, U.S.
——} +17. 1 D
8 o “2 3 J AUG 10 1985
NO . JOSEPH F. SPANIOL, JR.
_ CLERK
Supreme Court
of the
United States
October Term, 1985
CARL H. HOFFMAN and
CARL H. HOFFMAN, P.A.,
Petitioners,
VS.
DAVID SYLVA,
Respondent.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE ELEVENTH CIRCUIT
BRUCE S. ROGOW
3100 S.W. 9th Avenue
Fort Lauderdale, Florida 33315
(305) 522-2300
Counsel for Petitioner
QUESTIONS PRESENTED
I
MAY A COURT OF APPEALS, INVOKING
ITS “SUPERVISORY POWERS” MAKE
DETERMINATIONS OF FACTS NOT TRIED
IN THE DISTRICT COURT AND THEN
DEPRIVE COUNSEL AND HIS CLASS
ACTION CLIENTS OF TERE PROPERTY
DISTRIBUTED TO THEM BY ORDERS OF
THE DISTRICT COURT? DOES SUCH
ACTICN RESULT IN A DEPRIVATION OF
PROPERTY WITHOUT DUE PROCESS OF
LAW AND A USURPATION OF THE
DISTRICT COURT’S FACT FINDING
FUNCTION?
II
MAY A COURT OF APPEALS, INVOKING
ITS “SUPERVISORY POWERS” MAKE
DETERMINATIONS OF FACTS NOT TRIED
IN THE DISTRICT COURT AND THEN
SUMMARILY TERMINATE INSTANTER A
LONG STANDING LAWYER CLIENT
RELATIONSHIP, THUS PRECLUDING
COUNSEL FROM ANY FURTHER
REPRESENTAT'VE ROLE IN THE CASE,
AND PRECLUD.1NG HIS CLIENTS FROM
EXERCISING THEIR RIGHTS TO PETITION
FOR REHEARING OR CERTIORARI? DOES
SUCH ACTION RESULT IN A DEPRIVATION
OF PROPERTY OR LIBERTY WITHOUT DUE
PROCESS OF LAW AND A USURPATION
OF THE DISTRICT COURT'S FACT FINDING
FUNCTION?
iil
MAY THE EXTRAORDINARY REMEDY OF
MANDAMUS BE USED BY A COURT OF
APPEALS TO REVIEW A DISTRICT
COURT’S ALLEGED ABUSE OF DISCRE-
TION IN INTERPRETING ITS DUTIES WITH
REGARD TO SPECIFIC ISSUES PREVIOUS.
LY REMANDED TO IT BY THE COURT OF
APPEALS?
il
THE PARTIES TO THE PROCEEDING
IN THE COURT BELOW
The parties to the proceedings in the Court of
Appeals were Peter Piambino and Joseph F. Kucklick,
class representatives of all persons who purchased or
invested in direct distributorships of Bestline Corporation
during the period of March 7, 1970 through August 10,
1973.
The defendants below were Bestline Corporation,
a California corporation, which is the parent corporation
of a wholly owned subsidiary, Bestline Products, Inc.,
and William E. Bailey and David L. Eastis.
Another party below was David R. Sylva, the trustee
of a California Restitutionary Fund.
Carl H. Hoffman and Carl H. Hoffman P.A. were
not parties below. Carl Hoffman was one of the two
Lead Counsel for plaintiffs. The decision below removed
him and co-lead counse! irom that role, immediately
terminated Hoffman's lawyer-client relationship with
the plaintiff class, and required that he immediately
repay the fees and costs he had been awarded seven
years earlier. Thus he, and his professional association
which received those monies have now become parties
to this litigation.
ill
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED................... i, ii
THE PARTIES TO THE PROCEEDINGS IN
THE COURT BELOW ........................ iii
TABLE OF AUTHORITIES ................ vi, vii,
Lae 5 |
OPINION BELOW ........................... 1
PE ho 5k ech ce) eae st ae
CONSTITUTIONAL PROVISION INVOLVED... 2
STATEMENT OF THECASE................. 2
i ee a ee ee eee 4
SC nto snr a ee a vat ee nig Le 7
REASONS FORGRANTING CERTIORARI ..... 13
I
THE DECISION BELOW PRESENTS
IMPORTANT BUT UNANSWERED
QUESTIONS OF AN APPELLATE COURT'S
AUTHORITY TO MAKE DE NOVO FACTUAL
FINDINGS, AND CONFLICTS WITH THE
DECISIONS OF THIS COURT WHICH MAKE
FACTUAL DETERMINATIONS THE
PROVINCE OF THE UNITED STATES
fgg te les yy Se an er oe 13
A.
B.
‘
TABLE OF CONTENTS (Continued)
Page
II
THE DECISION BELOW, BY ENGAGING
IN APPELLATE FACT FINDING WHICH
PRETERMITTED THE OPPORTUNITY FOR
AN EVIDENTIARY INQUIRY CONFLICTS
WITH THE DUE PROCESS DECISIONS OF
THIS COURT REQUIRING A MEANINGFUL
OPPORTUNITY TO BE HEARD PRIOR TO
THE TAKING OF PROTECTED PROPERTY
AND LIBERTY INTERESTS..............
lil
THE DECISION BELOW PRESENTS
IMPORTANT BUT UNANSWERED
QUESTIONS REGARDING THE USE OF
MANDAMUS AND THE SUPERVISORY
POWERS DOCTRINE AND CONFLICTS
WITH THE DECISIONS OF THIS COURT
AUTHORIZING THE USE OF THOSE
EXTRAORDINARY REMEDIES AND
of ; Ra ett ren rar as
ae ee
Superviaary Pawers .. «5 vee ee
COINAGE se ov ns ke
15
TABLE OF AUTHORITIES
Page
Anderson v. Bessemer,
taal, SE , 105 S.Ct. 1504 (1985) ......... 13
Bell v. Burson,
Gan Ui. See ee oe ee el 16
Board of Regents v. Roth,
Ge Ui Ee. SRO tees oe ee es eee eee ee 16
Cossette v. Country Style Donuts, Inc.,
647 F.2d 526 (Sth Cir. 1981) ................. 13
Craig v. Boren,
Se | re ee 3
Fuentes v. Shevin,
Ge Wdes GE GROTEE s sv sacha veeee ea ee
Goldberg v. Kelly,
teh Nach’ ip ELEERSEE CU Te 16
Goland v. Central Intelligence Agency,
607 F.2d 339 (D.C. Cir. 1979) .............. —
Klapprott v. United States,
See es GOL IED oc ik oc cs ca cseeaaneees 19
Lassiter u Departmeni of Social Services of Durham
County,
GOR U.S. IS RGSS oi. oi Sins kn tee 20
McNabb v. United States,
an6 U.S. SUR tIOGR oo sk kcal ee 19
vi
TABLE OF AUTHORITIES (Continued)
Page
Oregon v. Kennedy,
Se Ce TI ok 5s od ee cd eae Weekes 14
Photovest Corp. v. Fotomat Corp.,
606 F.2e¢ 704 (7th Cir. 1978)... .............. 19
Piambino v. Baile y,
610 F.2d 1306, (Sth Cir. 1980)... ..... -.. passim
Piambino v. Bailey,
757 F.2d 1112, (11th Cir. 1985) ........... passim
Sniadach v. Family Finance Corporation,
te en eee 16
United States v. Dante,
739 F.2d 547 (11th Cir. 1984) ................ 14
'nited States v. Wodtke,
711 F.2d 86 (8th Cir. 1983) ............. one
Vendo Company v. Lektro-Vend Corporation,
oe eer . 19
Weisberg v. Department of Justice,
705 F.2d 1344 (D.C. Cir. 1983) ............... 13
Will v. United States,
Oe Ws GP CNUED os vc heck cnceseaseneecs 18
Wisconsin v. Constantineau,
Ee Et | rarer 16
Zenith Radio Corp. v. Hazeltine Research, Inc.,
See ar PEE hc a even ee ne ae 13
OTHER AUTHORITIES
Page
26 U.S.C. 12642) ......... rr 3 | 2
28 U.S.C. 1291 (1982) .... 7 | rt
28 U.S.C. 1651 (1982)... 7
28 U.S.C. 2101{e) 2
The Supervisory Power of the Federal Courts,
'6 Harv.L.Rev. 16. «°{1963) | 20
vill
NO.
in the
Supreme Court
of the
United States
October Term, 1985
CARL H. HOFFMAN and
CARL H. HOFFMAN, P.A.,
Petitioners,
vs.
DAVID SYLVA,
Respondent.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE ELEVENTH CIRCUIT
OPINION BELOW
The opinion of the United States Court of Appeals
fur the Eleventh Circuit is reported at 757 F.2d 1112
(llth Cir. 1985). A copy of the opinion and the Order
Denying Rehearing and Rehearing en banc appear in
the Appendix to this Petition. A copy of a former
opinion of the Eleventh Circuit in this case which was
reported at 610 F.2d 1306 (5th Cir.), cert. denied, 449
U.S. 1011 (1980), is also reproduced in the Appendix.
JURISDICTION
The decision of the Court of Appeals was rendered
on March 18, 1985. A timely Petition for Rehearing and
Suggestion for Rehearing En Banc was denied on May
15, 1985. This Petition has been filed within 90 days of
that date pursuant to 28 U.S.C. §2101(c). The jurisdiction
of this Court is invoked under 28 U.S.C. §1254(1).
CONSTITUTIONAL PROVISION INVOLVED
AMENDMENT V
No person shall. . . be deprived of life, liberty, or
property, without due process of law.
STATEMENT OF THE CASE
Carl H. Hoffman and Car! H. Hoffman, P.A. seek
certiorari to review a decision of the United States
Court of Appeals for the Eleventh Circuit which sua
sponte and summarily stripped Carl H. Hoffman of his
class action clients, denied those three thousand clients a
right to be heard on rehearing or certiorari, and ordered
that those clients, and Hoffman, repay instanter, with
accrued interest, the monies which had been disbursed
to them in 1977 pursuant to a United States District
Court order approving a several million dollar class
action settlement against various perpetrators of an
alleged securities fraud.’
That extraordinary decision, Piambino v. Bailey,
757 F.2d 1112 (11th Cir.1985) (A 65-142), (Piambino ID,
cast in the form of mandamus, found, as a matter of
fact, that
. . . the lawyers who have been representing
the plaintiff class have a conflict of interest
with the minority segment of the class. They
have used this conflict of interest to benefit
themselves and the majority of the class
members since the case began.
757 F.2d at 1115; A 65.
In arriving at its finding of conflict and decision to
“terminate” the existing lawyer client relationship, and
compel the return of approved fees and settlement
‘“'The te. mination of the lawyer-client relationship became
effective as of the date this opinion is published.” 757 F.2d 1147;
A 141. Thus the plaintiff class was denied any opportunity to
petition the court of appeals for rehearing. A motion to extend the
time for rehearing until 30 days after new counsel was appointed
for the class was denied (A 143). The harshness of that ruling is
underscored by the fact that the Court of Appeals, convinced of a
conflict, allowed Lead Counsel to argue plaintiffs’ case, and then
denied their losing clients any right to post-decision review.
As of the date of the filing of this Petition, no new counsel has
been appointed to represent the affected class plaintiffs. Petitioners
cannot represent them as a result of the decision below. However,
we believe that the doctrine of jus tertii standing permits this
Court to consider the class plaintiffs’ injuries. The petitioners
have plainly suffered an “injury in fact”, and are entitled to assert
“those concomitant rights of third parties that would be ‘diluted
or udversely affected’ =hould [their] constitutional challenge fail
and the [decision belowj remain in force.” Craig v. Boren, 429 U.S.
190,194-95 (1976).
proceeds, the Court below engaged in fact finding without
the benefit of a district court trial on the issue.
This Petition focuses upon the important questions
presented by the appell-te court usurpation of a power
traditionally left to the trial courts.
The long history of this case is not wholiy pertinent
to the specific questions presented here, but it must be
told. Therefore we begin with Piambino I, Piambino v.
Bailey, 610 F.2d 1306 (5th Cir.1980).
A. Piambino 1
In Piambino v. Bailey, 610 F.2d 1306 (5th Cir. 1980),
the Fifth Circuit reversed a District Court decision
granting summary judgment and other relief in favor
of a class of plaintiffs who had been the victim of a
nationwide pyramid scheme bilking them out of millions
of dollars.
Bestline Products, Inc., a Califcrnia corporation,
was the culprit, along with its principals, William E.
Bailey and Jerry G. Brassfield. The California Attorney
General successfully pursued state law remedies and
ultimately created a restitutionary trust fund ‘the
California fund) for the benefit of certain categories of
persons harmed by the Bestline scheme Piambino I,
610 F.2d at 1313; A 13, 14.
Shortly thereafter a federal class action alleging,
inter alia, violations of the Securities Exchange Acts of
1933 and 1934, was filed in the United States District
Court for the Southern District of Florida. That Court
issued an injunction enjoining Bestline from complying
with the California judgment. In addition, a $1,036,000
sum which had been deposited into the registry of a
federai court in California as a result of Bailey’s payment
of a judgment secured by the Federal Trade Commission
was transferred to the United States District Court for
the Southern District of Florida for distribution there
to the plaintiff class. 610 F.2d at 1315; A 17.
By enjoining Bestline from complying with the
California judgment, the beneficiaries of the California
fund were denied Bestline’s continuing contributions
to the California fund. David Sy!va, Compliance Officer
of the California restitutionary fund souzht to intervene
in the Florida case to protect the California fund. The
District Court denied his motion. 610 F.2d at 1320;
A 30.
Subsequently, with the District Court’s approval,
two separate setilements occurred: first, Bailey settled
and then Bestline and 27 individual defendants agreed
to pay, in various forms, approximately $2,300,000. 610
F.2d at 1327; A 46. The District Court aiso approved an
attorneys’ fee of $750,000, and expenses of $50,000.
Sylva’s appeal challenged all of the District Court’s
rulings and its approval of the Bestline settlement.
However, Sylva did not seek an appellate stay of the
District Court’s order permitting disbursement of the
Bestline funds. Sylva ultimately prevailed, and the Fifth
Circuit concluded its lengthy discussion this way:
We summarize our holdings in this case as
follows:
1. Summary judgment should not have been
entered.
2. Sylva was entitled to intervention as a
matter of right.
ul
3. The attorneys’ fees as proposed in the
Bestline settlement should not have been
approved as presented.
4. The entry of an injunction against
enforcement of the judgment of the
California Superior Court is reversed.
5. The order entering final judgment as to
Bestline and 27 individual defendants is
vacated.
610 F.2d at 1334; A 61, 62.
The Court was “convinced that the District Court
fell into serious error when it approved the attorneys’
fees proposed in the Bestline settlement”, 610 F.2d at
1328; A 49, and refused the request of the settling
parties to “independently evaluate the reasonableness
of those fees”, saying:
This is not our normal practice; however, since
the District Court is infinitely better situated
to conduct the factual inquiry necessary under
Johnson [v. Georgia Highway Express, 488
F.2d 715 (5th Cir.1974). . .
Id., 610 F.2d at 1329; A 49, 50.
Thus, Pzambino I did not compel the District Court
to secure return of the already paid fees and expenses.
Nor did Piambino I, by setting aside the Bestline
settlement, compel the injured plaintiffs to return the
monies they had received to the Court. Finally, Piambino
I did not compel the District Court to remove Lead
Counsel from the case.
Piambino II did compel the return of the attorneys’
fees; did compel the injured plaintiffs to return the
monies disbursed to them; and did compel the removal
of Lead Counsel from the case. It did so by utilizing
mandamus, claiming that the failure of the District
Court to order those results violated the “implicit”
holdings of Piambino J: “{Ift [the District Court] is bound
to follow the appellate court’s holdings, both express
and implied.” Pzambino II, 757 F.2d at 1119; A 77.
B. Piambino II
On remand from Piambino I the District Court
. . acting sua sponte, issued an order on our
mandate. The order followed the letter of the
mandate with one exception: it refused to grant
Sylva intervention as a party plaintiff.
757 F.2d 1118; A 74 (emphasis supplied)
Sylva also asked the District Court to “order plaintiffs
and Lead Counsel to transfer to the California Fund
the monies they had received as a result of the settlement,
contending that such action was mandated.” 757 F.2d
at 1118; A 74. Upon the District Court’s denial of Sylva’s
intervention and transfer motion, Sylva appealed.
The Eleventh Circuit “treat(ed) Sylva’s appeal as
a petition for writ of mandamus pursuant to 28 U.S.C
§1651 (1982) because there is some question whether
the District Court’s action in failing to follow our mandate
constitutes a final judgment reviewable under 28 U.S.C.
§1291 (1982).” 757 F.2d at 1115 n.2; A 66. Sylva did not
see mandamus as the proper remedy, characterizing
the case as an appeal “to review the District Court's
abuse of discretion in refusing to grant restitution of
funds seized pursuant to a subsequently reversed order.”
Brief of Appellant Intervenor David R. Sylva, Compliance
Officer of the California Restitutionary Fund, at 2
(emphasis supplied).
The Court below traced the history of the litigation
and then concluded “that the Piambino J panel properly
intended that the monies disbursed in connection with
the Bestline settlement be restored to the registry of
the district court”, 757 F.2d at 1137; A 119.
The panel no doubt would have expressed this
view had Lead Counsel informed it in oral
argument, or later in their petition for rehearing
that they intended to preserve their settlement
and notwithstanding the panel’s decision, would
resist any effort to make them, or their clients,
return the proceeds thereof to the district
court’s registry. Moreover, the panel would
have included among its explicit holdings the
instruction that the district court forthwith
order Lead Counsel and the plaintiffs who had
participated in the settlement to deposit the
funds they had received, with interest, in the
court’s registry. Finally, the panel would have
instructed the district court to determine
whether Lead Counsel's financial stake in the
case was such that Lead Counsel could no
longer represent the interests of the Majority
Group.
757 F.2d 1139 ; A 123 (emphasis supplied.)
The Piambino IJ panel, having opined the “intent”
of the Piambino I panel, exercised its “power to supervise
the district courts” and “terminated” Lead Counsel's
representation of the plaintiff class.* 757 F.2d 1146;
A 140. Thus, despite its view that the Piambino J,
panel “would have instructed the district court to
determine [if there was a conflict]”, the Piambino IJ
panel, without providing notice and an opportunity to
be heard, made that determination itself. As a result,
thousands of beneficiaries of Lead Counsels’ settlement
were stripped of their right to counsel, and they, and
Lead Counsel, were ordered to immediately repay the
monies disbursed to them years before by court order.
The Piambino IJ Court summarized the pertinent part
of its holding this way:
Firsi, David R. Syiva, as an intervenor in
behalf of the Minority Group, is a party plaintiff
in this ease. The district court shall recognize
him as such and shall certify the Minority
Group as a plaintiff-subclass upon receipt of
our mandate.
Second, Lead Counsel shall pay into the
registry of the district court the attorney's
fee and reimbursed litigation expenses they
received in connection with the Bestline
settlement, with interest at the legal rate from
the date of this court’s issuance of the mandate
in Piambino I. Immediately upon its receipt of
our mandate, the district court shall instanter,
"Lead Counsel had, in response to Piambino J, limited their
represent.tion to the majority group—the non beneficiaries of
the California Fund.
without a hearing, issue an order directing
Lead Counsel to deposit such amount in the
court’s registry within thirty days of the date
of its order. The order shall recite that Lead
Counsel's failure to comply therewith shall
subject them to the district court’s contempt
power.
Third, each of the class plaintiffs who
received any of the proceeds of the Bestline
settiement shall pay the total amount of such
proceeds into the registry of the district court,
with interest from the date the clerk of the
court disbursed such proceeds to them.
Immediately upon its receipt of our mandate,
the district court shall imstanter, without a
hearing, issue an order directing that each
such plaintiff deposit the amount of the proceeds
he received in the court’s registry within thirty
days of the date of its order. The order shall
recite that failure of such plainiff to comply
therewith shall subject him to the district court's
contempt power.
* * *
Seventh, Lead Counsei are barred from
appearing as counsel for any party in this
case, save themselves, effective as of the date
this opinion is published.
Eighth, on receipt of our mandate, the
district court shall appoint counsel to represent
the members of the plaintiff-class comprising
the Majority Group, in the event such class
members are unable to employ counsel.
10
These holdings with regard to Lead Counsel and
their conflict were made without distinguishing between
the petitioner and James H. Joseph, a Pittsburgh attorney
who handled the California litigation and who was
co-counsel in the Florida proceedings.
The underlying factual bases for these hoidings
were the Court of Appeals findings that:
‘a) The Bestline settlement was accormplished
at the expense of the California class primarily
to provide Lead Counsel an attorneys’ fee;
(b) Lead Counsel knew that Sylva’s appeal
was meritorious;
(c)} Lead Counsel crew that the June 30.
1976 injunction . . . was entirely baseless;
(d) Lead Counsel could not have been
surprised when the Piambino I panel rejected
[the injunctive relief];
(3) Lead Counsel knew that if the panel
concluded that Sylva had a right to intervene.
their settlement would fall.
Piambino IT, 757 F.2d 1140, 1141; A 127, 128.
‘emphasis supplied)
Those findings form the foundation of the conflict
and the punitive sanctions imposed upon the petitioners
and the class members who are now without counsel in
this court, and who must return funds paid to them via
a valid order of the United States District Court for
the Southern District of Florida.
Those appeliate court findings of fact also form
the foundation of this Petition for Writ of Certiorari
11
which raises questions regarding the power and authority
of an appellate court to dispense with the opportunity
to present testimony on issues of knowlec ze intent and
conflict of interest, and instead usurp the fact finding
function historically assigned to the United States District
Courts.
REASONS FOR GRANTING CERTIORARI
I
THE DECISION BELOW PRESENTS
IMPORTANT BUT UNANSWERED
QUESTIONS OF AN APPELLATE COURT'S
AUTHORITY TO MAKE DE NOVO FACTUAL
FINDINGS, AND CONFLICTS WITH THE
DECISIONS OF THIS COURT WHICH MAKE
FACTUAL DETERMINATIONS THE
PROVINCE OF THE UNITED STATES
DISTRICT COURTS.
The opinion below, insofar as it found a conflict of
interest and terminated the lawyer client relationship
between Carl H. Hoffman and his class clients, is premised
upon the court’s belief that Lead Counsel knowingly
and intentionally manipulated this case “to benefit
themselves and the majority of the class members
since the case began.” 757 F.2d at 1115; A 65.
Whether or not a conflict exists is a question of
fact. Cossette v. Country Style Donuts, Inc., 647 F.2d
526, 530 (5th Cir. 1981). Questions of fact are for trial
courts, not appellate courts.
In Anderson v. Bessemer, ____ U.S. ___, 105 S.Ct.
1504, 1512 (1985), this Court, quoting Zenith Radio Corp.
v. Hazeltine Research, Inc., 395 U.S. 100, 123 (1969)
cautioned: “[A]ppellate courts must constantly have in
mind that their function is not to decide factual issues
de novo.” The Courts of Appeals have recognized that
“An appellate court has no fact finding function.” Goland
v. Central Intelligence Agency, 607 F.2d 338,371 (D.C.
Cir.1979); Weisberg vu. Department of Justice, 705 F.2d
1344 (D.C. Cir.1983).
13
Where, as here, the alleged intent of the lawyer
was the critical factor prompting the panel to find
conflict, a trial court was the proper forum for making
that determination.
This Court, addressing intent in the context of a
prosecutor's desire to cause a mistrial, has unequivocally
described the inquiry as a factual one.
[A] standard that examines the intent of the
prosecutor, though certainly not free from
practical difficulties, is a manageable standard
to apply. It merely calls for the court to make
a finding of fact. Inferring the existence or
non-existence of intent from objective facts
and circumstances is a familiar process in our
criminal justice system.
Oregon v. Kennedy., 456 U.S. 667,675 (1982).
The Courts of Appeals have recognized that the
trial courts, not the appellate courts. are the proper
forum for determining that intent. United States v.
Dante, 739 F.2d 547 (11th Cir.1984); United States v.
Wodtke, 711 F.2d 86 (8th Cir.1983).
Had the Piambino I] panel followed what it believed
the Prambino J panel intended to do— instruct the district
court to determine the intent of counsel and whether a
conflict existed —its decision would have been consistent
with tke decisions of this Court which leave fact finding
to the district Courts.
Instead, the panel usurped the district court's role
and in so doing, posed conflict with the dwe process
clause.
14
Il
THE DECISION BELOW, BY ENGAGING IN
APPELLATE FACT FINDING WHICH
PRETERMITTED THE OPPORTUNITY FOR
AN cVIDENTIARY INQUIRY CONFLICTS
WITH THE DUE PROCESS DECISIONS OF
THIS COURT REQUIRING A MEANINGFUL
OPPORTUNITY TO BE HEARD PRIOR TO
THE TAKING OF PROTECTED PROPERTY
AND LIBERTY INTERESTS.
The Petitioners, and the three thousand clients
Carl H. Hoffman represented, had received funds pursuant
to presumptively valid orders of the district court.
Based upon Piambino II's appellate de novo finding
that there was a conflict of interest “since the case
began” (the Florida case began in 1973), those property
rights have been destroyed. Moreover, they were
destroyed by a decision which, by terminating the lawyer-
client relationship, precluded the class action plaintiffs
from seeking rehearing in the Court of Appeals, or
certiorari review here.
The district court never tried the issue of whether
Lead Counsel achieved a settlement “primarily to provide
. au attorneys’ fee”; or whether Lead Counsel “knew
. . . Sylva’s appeal was meritorious”; or “knew that
the . . . injunction was baseless”; or “could not have
been surprised” with the Piambino J decision; or “knew
that . . . their settlement would fall.” 757 F.2d 1140,
1141; A 126-128.
Thus, without any opportunity for the kind of
process which always precedes findings of fact, the
Court of Appeals terminated constitutionally protected
property and liberty interests.
Several protected interests are implicated here.
First, the money. Second, the interest in utilizing the
appellate remedies of rehearing and <orticcari guaranteed
by the Federal Rules of Appellate Procedure and United
States Statutes. Third, the petitioners’ name, integrity
and reputation.
Board of Reyents v. Roth, 408 U.S. 564 (1972),
leaves no doubt that property interests “extend well
bevond . . . money”, and liberty interests include “good
name, reputation, honor or integrity.” /d., at 572,573.
Additionally, property interests are also “defined by
existing rules... .” /d., at 577.
Roth, and the body of due process law including
Fuentes v. Shevin, 407 U.S. 67 (1972); Bell v. Burson,
402 U.S. 535 (1971); Wisconsin v. Constantineau, 400
U.S. 433 (1971); Goldberg v. Kelly, 397 U.S. 254 (1970);
Sniadach v. Family Finance Corporation, 395 U.S. 337
(1969) guarantee “ne right to be aeard prior to the
taking of one’s property. The right +) presentation of
evidence is a critical component of due process. Goldberg
v. Kelly, 397 U.S. at 268.
The decision below, by usurping the traditional
role of a trial court to provide those guarantees before
affecting property interests, conflicts with established
due process principles.
It is one thing, after an issue has been tried, to
terminate a lawyer-client relationship and find seifish
motive and conflict. But it is quite another thing to
reach that result sans an evidentiary hearing, and, in
the process, deprive the lawyers’ clients of their otherwise
guaranteed rights to subsequent judicial review.
2
16
If an appellate court may, consistent with due
process of law, dispense with the usual evidentiary fact
finding procedure in determining conflict between counsel
and class action clients with the resultant effect of
depriving counsel and clients of protected property
and liberty interests, then that important question should
be answered by this Court.
iit
THE DECISION BELOW PRESENTS
IMPORTANT BUT UNANSWERED
QUESTIONS REGARDING THE USE OF
MANDAMUS AND THE SUPERVISORY
POWERS DOCTRINE AND CONFLICTS
WITH THE DECISIONS OF THIS COURT
AUTHORIZING THE USE OF THOSE
EXTRAORDINARY REMEDIES AND
POWERS.
A. Mandamus
Sylva did not seek mandamus relief. The Piambino
IT panel sua sponte turned the appeal into a 28 U.S.C.
§1651 mandamus. 757 F.2d 1115; A66. Sylva viewed the
case as one involving an “abuse of discretion”, Sylva
Brief at 2. Indeed sixteen months passed between issuance
of the mandate in Piambino I and Sylva’s attempt to
enforce that mandate in the district court. See, Docket
Entries, Nos. 1468 and 1506.
Throughout ?iambino IJ the panel referred to its
“implicit” holdings in Piambino I. 757 F.2d at 1120,1122;
A 79-83. Piambino IT was explicit in its acknowledgment
that Piambino I did not instruct the district court to
determine whether there was a conflict between Lead
Counsel and clients. 757 F.2d 1139; A 123. In fact, the
Piambino I panel sent a different message to the district
court by rejecting an invitation to independently evaluate
the fees:
This is not our normal practice; however, since
the District Court is infinitely better situated
to conduct the factual inquiry necessary under
Johnson [v. Georgia Highway Express, 488 F.2d
714 (5th Cir. 1974).
Mandamus is an extraordinary remedy.
(I}t is clear that only exceptional circumstances
amounting to a judicial “usurpation of power”
will justify the invocation of this extraordinary
remedy ... Thus the writ has been invoked
where unwarranted judicial action threatened
to embarrass the executive arm of the
government in conducting foreign
relations’, . . . where it was the only means
of forestalling intrusion by the federal judiciary
on a delicate area of federal-state
relations . . . where it was necessary to confine
a lower court to the terms of an appellate
tribunal's mandate. .. .
Will v. United States 389 U.S. 90,95 (1967)
(emphasis supplied) (citations omitted).
Piambino I contained no terms which warranted
the subsequent use of mandamus in Piambino II. Sylva’s
characterization of the appeal as one involving an “abuse
of discretion” belies «he propriety of mandamus. Sylva’s
sixteen month wait between issuance of the Piambino I
mandate and his motion to enforce it (Docket Entries
1468 and 1506) underscores the impropriety of mandamus.
The Piambino IT panel’s acknowledgment that had the
18
Piambino I panel known the resistance to be mounted
to returning the distributed funds it “would have
instructed the district court to determine [if there was
a conflict’ undermines the Piambino IT use of mandamus.
Thus there was either conflict with this Court’s
restrictive view of mandamus, or, if its use was proper,
the Court should answer that important question.°
B. Supervisory Powers
The court below invoked its “supervisory power”
to “bring an end to Lead Counsel's role as class attorneys
in this case.” 757 F.2d 1145; A 139. It sought to justify
its use with references to McNabb v. United States,
318 U.S. 332,340-41 (1943), Klapprott v. United States,
335 U.S. 601 (1949) and Photovest Corp. v. Fotomat
Corp., 606 F.2d 704,710-11 (7th Cir.1979).
Neither McNabb, Klapprott, Photovest nor the
numerous other appellate cases which have called upon
the supervisory power doctrine used it to summarily
terminate a lawyer-client relationship. Indeed, the panel's
citations implicitly acknowledge the dearth of specific
authority for its rationale, focusing instead on its objective
of “fashioning procedures and remedies that ensure
that the judicial process remains a fair one.” 757 F.2d
1146; A 139.
‘In Vendo Company v. Lektro-Vend Corporation, 434 U.S. 424
(1978) the Court said that mandamus was available if a lower court
“disobeys and mistakes” the meaning of an appeliate mandate.
But to mistake the meaning of a mandate means the manac-te
conveyed an unambiguous meaning. One cannoi disobey an unclear
instruction, or an instruction which is subsequently determined to
be what the mandate would have been had the appellate court
been apprised of facts it did no know when it ruled.
19
That goal is the touchstone of the supervisory
powers doctrine, see Note, The Supervisory Power of
the Federal Courts, 76 Harv.L.Rev. 1656,1659 (1963).
But laudable goals may oniy be reached wa constitutional
means.
[Due process] expresses the requirement of
“fundamental fairness,” a requirement whose
meaning can be as opaque as its importance is
lofty. Applying the Due Process clause is
therefore an uncertain enterprise which must
discover what “fundamental fairness” consists
of in a particular situation by first considering
any relevant precedents and then by assessing
the several interests that are at stake.
Lassiter v. Department of Social Services of
Durham County, 452 U.S. 18,24 (1981).
Here no precedents justified the use of the
supervisory powers doctrine to summarily terminate a
longstanding lawyer-client relationship and deprive the
lawyer and clients of property and liberty interests.
If such supervisory power action is to be tolerated,
then this Court should address its fairness.
same wham
20
CONCLUSION
For the foregoing reasons, the Petition for Writ of
Certiorari should be granted.
Respectfully submitted,
BRUCE 8S. ROGOW
3100 S.W. 9th Avenue
Fort Lauderdale, Florida 33315
(305) 522-2300
Counsel for Petitioner
21
Appendix
Peter PIAMBINO et al.,
Plaintiffs-Appellees,
v.
William E. BAILEY et al., Defendants,
Bestline Products, Inc., a California
Corporation et al.,
Defendants-Appellants.
In re BESTLINE PRODUCTS SECURITIES
AND ANTITRUST LITIGATION.
Peter PIAMBINO et al.,
Plaintiffs-Appellees,
v.
William E. BAILEY et al., Defendants,
David SYLVA, Compliance Officer of the
California Restitutionary Fund,
Int’ rvenor-Appellant.
Nos. 76-3495, 77-2045.
United States Court of Appeals,
Fifth Circuit.
Feb. 6, 1980.
x * *
Before COLEMAN, Chief Judge, GOLDBERG, and
RUBIN, Circuit Judges.
COLEMAN, Chief Judge.
This litigation arose from the sale by Bestline
Products, Inc.,' a California corporation, of direct
‘Bestline Products, Inc., is a “California corporation wholly
owned by Bestline Corporation, another California corporation. In
this opinion these corporations will be collectively referred to as
“Bestline”’.
App. 1
distributorship contracts (or agreements) for the sale
and distribution to the consuming public of its line of
personal and home care products. Bestline’s direct
distributorships were an integral part of its multi-level
distributorship system, a species of pyramid sales
schemes.*
The complexities of this case remind us of the
ancient Gordian Knot. Involved here are eleven lawsuits
transferred to the Southern District of Florida for
coordinated or consolidated pretrial proceedings with
a suit previously filed in that district.’ The two appeals
taken to this Court from those proceedings, and now
before us, have also been consolidated.'
For a detailed analysis of such schemes, see Note, Pyramid
Schemes: Dare to be Regulated, 61 Geo.L.J. 1257 (1973).
‘In 1974 the Judicial Panel on Multidistrict Litigation transferred
six cases to the Southern District of Florida for consolidation with
the case of Piambino v. Bailey, No. 73-1230—Civ. Jn re Bestline
Products Securities and Antitrust Litigation, 375 F.Supp. 926
(Jud.Pan.Mult.Lit. 1974). Later, it transferred four Texas cases to
the Florida court, 405 F.Supp. 313 (Jud.Pan.Mult.Lit. 1975), as well
as one North Carolina case. Most cf these cases were class actions
and alleged violations of the federal securities laws and various
state laws.
‘In No. 76-3495, on August 6, 1976, the defendants filed notice
of appeal from three different orders of the District Court: (1) the
Order Determining Motions for Summary Judgment, dated March
19, 1976; (2) the Preliminary Injunction, dated July 7, 1976; and (3)
the Order Allowing Reimbursement of Costs and Disbursements
of James H. Joseph, dated July 15, 1976. The appellants filed their
opening brief in December 1976, and the State of California filed
an amicus brief in January 1977. The parties then began settlement
negotiations and moved this Court for a stay of the appeal proceedings,
which motion was granted.
App. 2
Included is a class of nearly 40,000 plaintiffs. There
are several corporate defendants, a law firm defendant,
and over 60 individual defendants. Swept up in the
proceedings are scores of lawyers, the attorneys general
of seven states, the Federal Trade Commission, and
the Department of Justice. Various state and federal
courts have decided related cases.
In this appeal, the parties have raised many issues,
including: (1) the management of class actions and complex
litigation; (2) the interpretation of 28 U.S.C. § 2283 (the
“Anti-Injunction Act”); and (3) the definition of a “security”
for purnoses of the federal securities laws.
We hold that summary judgment declaring the
distributorships to be securities was improvidently
entered. After a consideration of all issues we reverse
and remand for further proceedings not inconsistent
herewith.
(Footnote 4 Continued)
Although the settlement which was finally approved by the
District Court included a requirement that the defendants dismiss
their appeal in No. 76-3495, they refused to do so when David
Sylva appealed from the denial of his motion to intervene and
from the order approving the settlement. The latter appeal was
docketed as No. 77-2045, and the two appeals were consolidated
for oral argument. In January 1979 the plaintiffs filed their opening
brief in No. 76-3495.
App. 3
1.
BESTLINE’S ORGANIZATION
AND HISTORY*®
Bestline Products, Inc. began its aciivities in August,
1966, when defendants William E. Bailey and Jerry G.
Brassfield organized a multilevel direct sales organization
to sell and distribute a line of biodegradable soap products.
Bailey and Brassfield had previously been associated
as distributors for Holiday Magic, Inc., a multilevel
direct sales company which sold cosmetic products.
Those men had additional experience with pyramid
sales schemes resulting from their work with several
other (ultimately unsuccessful) companies.
From its inception, Bestline was a successful venture,
at least until the rising flood of lawsuits and regulatory
actions began to overwhelm it. Bestline recruited other
individuals with experience in multi-level direct sales
and grew until it became an operation in all fifty states
and several foreign countries. By March, 1972, its initial
meager line of cleaning agents and home care products
had expanded to sixteen in number. Six of the products
were manufactured by Bestline in its own facilities in
San Jose, California and Elk Grove Village, Illinois;
various other companies manufactured the remaining
items.
In order to share the ownership of the company
with other loyal and devoted participants in its direct
sales program, in 1968 Bai:ey and Brassfield organized
the Bestline Corporation and sold their interest in Bestline
‘Most of the discussion under this heading is taken from the
District Court’s Opinion and Order Determining Motions from
Summary Judgment. See Jn re Bestline Products Securities, 412
F.Supp. 732 (S.D. Fla. 1976).
App. 4
Products, Inc. to the new corporation for $10 million.
They sold some stock in the new corporation to others,
but they retained the majority ownership for themselves.
Bailey was the chief executive officer and chairman of
the board until August 1973, when Brassfield returned
to the organization he had left in 1970. As the business
expanded, the officers and top executives of Bestline
received ever-expanding compensation packages, including
six-figure salaries and such perquisites as use of the
corporate aircraft and yacht.
The most important factor in Bestline’s success,
and an equally important factor in its legal problems,
was its “National Marketing Plan’, a plan that was
implemented through three levels of independent
distributors. At the lowest level were the “Local
Distributors”,® who paid $5 annual dues and sold Bestline’s
products directly to the consuming public. At the second,
or middle, level were the “Direct Distributors”. The
status of “Direct Distributor” could be achieved by a
Local Distributor who sold approximately $5,000 worth
of products in a month. The status could also be obtained
by a prepurchase plan. A person could become a Direct
Distributor by paying $3,400 in cash; for this sum, the
purchaser received classification as a Direct Distributor
and soap products having a retail price of $5,000 together
with sales aids. Such a purchaser was required to serve
as a Local Distributor for seven days and, while a Local
*Although Local Distributors could recruit other Local
Distributors to sell for them, the profits achieved by a Local
Distributor turned solely upon sales to the consuming public.
Bestline paid no commissions or bonuses to persons at the lowest
level. Consequently, no party to these suits has alleged that this
aspect of the scheme violated the federal securities laws. As
certified by the District Court, the class did not include any Local
Distributors.
Distributor, to buy $100 (later $500) worth of Bestline
products. Unlike Local Distributors, Direct Distributors
were not required to sell products to the consuming
public or even to Local Distributors whom they sponsored.
They could engage in recruiting Local Distributors to
sell the products, but they could also recruit other
persons to become prepurchase Direct Distributors. If
a Direct Distributor successfully recruited two new
Direct Distriputors, he became qualified to move up to
the third, and highest, level, that of “General Distributor”.
This level in the Bestiine hierarchy could be attained
only by persons who first qualified as Direct Distributors
and then satisfied certain other requirements.
The district court certified as the class plaintiffs
only repurchase Direct Distributors. Thus, the action
does not involve Local Distributors, Local Distributors
who earned the status of Direct Distributor by selling
soap products or General Distributors.
Profits at the various levels were ‘1 part dependent
on the volume of sales to lower levels and to the consuming
public. A Local Distributor purchased the products
from his sponsoring Direct Distributor at a discount
that varied from 30% to 52% off of the retail price,
depending upon his monthly sales. A Direct Distributor
purchased the products for resale to his Local Distributors
and to the public at a 52% discount. At the top of the
pyrainid, a General Distributor purchased the products
for resale to his Director Distributors, his Local
Distributors, and the public at a 60% discount.
A person at any of the three levels could profit by
selling Bestline’s products to the public (which all levels
were authorized to do) or by recruiting other distributors
(which all levels were also authorized to do). In fact
App. 6
substantial sales of Bestline products were made, about
$1,000,000 per month at one point. (The record is not
clear, however, what part of these sales were made to
consumers and what part remained in the hands of
various classes of distributors.)
As is the case with most such pyramid sales schemes,
however, the lure of big profits came not from the
opportunity to sell Bestline’s products to the consuming
public but from the opportunity to recruit others who
would in turn recruit or sell. The district court discussed
four different methods by which Bestline Direct and
Ceneral Distributors could profit from the recruitment
of new distributors: (1) the release fee; (2) the standard
commission; (3) the override commission; and (4) the
special incentive bonus (SIB).
The release fee practice, which Bestline abandoned
in 1970, was the simplest method by which a person in
the top level profited from the recruitment aspect of
the National Marketing Plan. Under this program, a
Direct Distributor who wished to move up was required
to pay Bestline a $2750 fee, of which Bestline paid
$2250 to the Direct Distributor’s sponsoring Generai
Distributor (generally, the one who had initially recruited
the Direct Distributor). Ostensibly, this fee was paid to
release oneself from his General! Distributor’s organization
and compensate the latter for the loss of commission
which would be experienced when the Direct Distributor
left that organization. This fee therefore provided General
Distributors with an incentive to encourage their Direct
Distributors to move up the pyramid. Equally as obvious,
however, is the fact that the release fee provided no
incentive for Direct Distributors.’
The second method by which individuals profited
from the recruitment of others was the standard
commission. This resulted from the 8% differential in
discounts between General and Direct Distributors,
and it was applied to all “product movement” between
those two levels. This standard commission therefore
provided an incentive for General Distributors to recruit
more Direct Distributors, to whom they could sell Bestline
products at 48% of retail after having purchased such
products from the company at 40% of retail. The General
Distributors could therefore achieve a rapid 20% return
on their outlays.
The override commission was a 3% commission
paid to the sponsor of a sponsoring distributor. The
sponsor of a sponsoring distributor was entitled to this
commission solely because he had initially recruited
the initial distributor, even though he may have played
no part in the subsequent recruitment. This commission
therefore provided an incentive for distributors to recruit
people who in turn would be good recruiters and not
merely good retailers of Bestline’s products.
The fourth method, the special incentive bonus,
was introduced by Bestline shortly after it eliminated
the release fee practice. SIB’s were paid on an annual
basis to qualifying General, but not Direct, Distributors
and were a progressive percentage of product movement.
"Unless, of course, it was the expectation that one would
eventually move up to the position of General Distributor and
then be in a position to recruit other Direct Distributors, who
might eventually pay the release fee in order to move themselves
up in the hierarchy.
App. 8
Product movement consisted not only of products that
were sold to ultimate consumers, but also of products
that remained in the hands of a distributor who either
was unable to unload them on another distributor or
was unwilling or unable to sell them to the public. A
General Distributor had to account for at least $36,000
in product movement to be eligible for any SIB. His
commission would be 3.3% at that level, but if he could
push $200,000 in products, his commission rate jumped
to 15%, or earnings of $30,000.
One device utilized by Bestline to advance and
implement corporate policy was the monthly meeting
of its “Corporate Team”, which included key home
office officials, assistant vice-presidents, and Regional
Directors. These meetings were used to announce changes
in policy and to motivate Bestline’s personnel. A key
feature of these meetings was the constant exhortation
to hold “Opportunity Meetings” and to adhere closely
to the script provided by the company for use at these
meetings.
The district court found that dozens, if not hundreds
of opportunity meetings were conducted almost daily
throughout the United States.* These meetings involved
the gathering of a group of Bestline distributors and
prospective recruits in a hotel or motel meeting room,
or any other suitable place. The prospects were
*‘Bestline’s Opportunity Meetings differed little from the meetings
which have been integral parts of other pyramid sales schemes.
Compare SEC v. Koscot Interplanetary, Inc., 497 F.2d 473, 476
(5th Cir. 1974); SEC uv. Glenn W. Turner Enterprises, Inc., 348
F.Supp. 766, 770-71 (D.Gre. 1972), aff'd, 474 F.2d 476 (9th Cir. 1973),
cert. denied, 414 U.S. 821, 94 S.Ct. 117, 38 L.Ed.2d 53 (1973); see
generally Note, Pryamid Schemes: Dare to be Regulated, 61 Geo.L.J.
1257, 1259 (1973).
App. 9
systematically exhorte4 to take advantage of the Bestline
“opportunity”. To insure uniformity at each of the
thousands of Opportunity Meetings, Bestline distributed
scripts for speakers to use at such meetings, as well as
records, film strips, and copies of the “Bestline Business
Opportunity Booklet.” Bestline corporate officials
frequently conducted the meetings at least to insure
adherence to company policy.
The Opportunity Meetings were the means by
which Bestline distributors were urged to build an
“organization” of distributors whom they sponsored.
The time and place of each Opportunity Meeting was
reported to the Bestline home office and assembled
into a regularly published “Corporate Calendar” which
listed all the meetings currently planned across the
country. By means of this calendar, Bestline distributors
could, as they were urged to do by Bestline, refer
friends or acquaintances in distant locations to a
convenience Opportunity Meeting in their city or locale.
If the distant prospect signed up for a distributorship,
the referring friend became his sponsor and therefore
received a share of the commis;ions paid on the products
purchased from Bestline by the distant prospect, even
if the referring friend took no part in the actua!
recruitment of the distant prospect other than inviting
him to the Opportunity Meeting.
The Bestline system for computing the amount of
regular commissions, override commissions and SIB
bonuses which it paid to its distributors was based on
Bestline’s concept of “product movement,” which gave
credit for both retail and “wholesale” sales. Because of
the Credit for wholesale business, one effect of the
“product movement” was to reward distributors for
the recruitment of new prepurchase Direct Distributors.
App. 10
And since prepurchase Direct Distributors were required
to make large initial purchases to qualify for their
position, a General Distributor who sponsored a
prepurchase Direct Distributor would receive a substantial
commission, and possibly an SIB bonus, on the new
distributor’s initial purchase, even if the new distributor
made no attempt to sell the products which he had
purchased to the consuming public. Nor did the new
prepurchase Direct Distributor need to sell any of his
inventory in order to make a profit. He could instead
concentrate his efforts on the “wholesale” part of the
business, and try to recruit new prepurchase Direct
Distributors whose initial purchases could be applied
tow.rd fulfilling his own requirements for becoming a
General Distributor. The incentive for becoming a General
Distributor is revealed by the fact that, while a General
Distributor generally earned a lesser net discount on
product sales (as little as 8%) than did a Direct Distributor
(as high as 20%), only a General Distributor was entitled
to receive commissions and credit toward his SIB bonus
for the initial purchases made by newly recruited
prepurchase Direct Distributors whom he sponsored.
Thus, although the class certified as plaintiffs includes
only prepurchase Direct Dist~‘hutors, the route to highest
profits was by becoming a General Distributor. Becoming a
Direct Distributor and then recruiting another Direct
Distributor was the only way to achieve the top of the
pyramid, General Distributor status.°
*According to the district court’s opinion, prior to 1970 a
Direct Distributor could qualify as a General Distributor by (1)
recruiting a new prepurchase Direct Distributor to replace him in
his sponsoring General Distributor’s organization; and (2) paying
a $2;750 release fee to Bestline, $2,250 of wkich was then paid by
Bestline to the ascending distributor's former sponsoring General
Distributor, and $500 of which was retained by Bestline. Beginning
App. 11
il.
BESTLINE’S LEGAL BATTLES
Prosperity to the contrary notwithstanding, Bestline
soon found itself defending lawsuits brought by the
federal government, by the attorneys general of seven
states, and by numerous private plaintiffs.
In 1971 Bestline entered into a consent decree
with the Federal Trade Commission wherein it agreed
to cease and desist from al]'vged unfair trade practices
in connection with the recruitment of new distributors.”
On May 21, 1971, the State of California filed a
civil suit against Bestline and certain of its officials
alleging violations of state law."' On July 25, 1973, after
a lengthy trial, the Los Angeles County Superior Court
(Footnote 9 Continued)
in 1970, however, a Direct Distributor could become a General
Distributor only by (1) recruiting a Direct Distributor to replace
himself in his sponsoring General Distributor’s organization; (2)
paying a $600 (later $700) fee to Bestline for attendance at “General
Distributor’s School”; and (3) generating, either through retail or
“wholesale” sales volume (the latter category including the initial
“pre-purchase” sales to newly recruited pre-purchase Direct
Distributors), $5000 of “product movement” in a single month.
The pertinent provisions of that consent decree can be
found in United States v. Bestline Products Corp., 412 F.Supp.
754, 760-61 n. 2 (N.D.Cal. 1976).
"Specifically, California alleged violations of California Business
and Professions Code §17500 (deceptive advertising) and Civil
Code §3369 (unfair competition). Earlier, on January 14, 1971,
Bestline had signed a consent decree with the State and had
agreed to cease and desist from employing certain marketing and
advertising practices.
App. 12
entered a written judgment in the case, ordering
injunctive relief, restitution to certain California Bestline
distributors, and a total of $1,902,500 ($1,000,000 against
Bestline) in civil penalties. In addition, the order provided
for the appointment of a receiver to effectuate the
restitutionary provisions. After the state court judge
had announced his decision from the bench, but two
days before the written opinion issued, Bestline filed a
Chapter XI bankruptcy petition in the Northern District
of California. That court issued a stay order which
prevented the California Attorney General from enforcing
the state court judgment.
While the Chapter XI proceedings inched forward,
extensive negotiations took place. New management
took over control of Bestline and the California Attorney
General’s office negotiated with the new m*uagement.
These discussions bore fruit on December 21, 1973,
when the parties and the Superior Court signea a
modified judgment that expanded the restitution program
so that certain non-California Bestline distributors could
participate in it. Pursuant to this modified judgment,
Bestline transferred $4,085,936.61 into an irrevocable
restitutionary trust to be administered by the Bank of
America. Bestline agreed to make periodic payments,
beginning January 1, 1976, to the fund until full restitution
had been achieved, and it withdrew its bankruptcy
petition. The modified judgment also empowered the
Attorney General to seek termination of the trust
agreement if Bestline failed to make regular payments.
In addition, the court postponed Bestline’s payment of
$1,000,000 in civil penalties uztil full restitution had
been achieved.
Three categories of distributors were eligible to
participate in the California restitution program. These
were:
App. 13
(1) Each individual who became a Direct Distributor
or a Candidate Direct Distributor in California
after January 14, 1971, to and including July 25,
1973, and who requests a refund;
(2) Any individual who is entitled to restitution
pursuant to agreement reached between any other
state or political subdivision thereof or any federal
department or agency and Bestline Products, Inc.,
and/or Bestline Corporation..
(3) Any other individual who became a Candidate
Direct Distributor or Direct Distributor in Bestline
in any state other than those specified [above] who
has satisfied any of the following conditions: (1) the
company approves the claim; (2) the distributor
has received an arbitration award pursuant to a
national plan of arbitration, or (5) pursuant to
judgment.
The avowed purpose of this program as modified
was to keep the company afloat so that restitution
could be maximized. If large judgments were obtained
against Bestline, and if subsequent plaintiffs sought to
enforce those judgments, the company would become
bankrupt. Therefore, any plaintiff obtaining a judgment
could elect to join the California restitution program,
or he could attempt to enforce his judgment, depending
upon his own perception of which course of action he
thought would enhance his recovery.
Bestline appealed the Superior Court judgment
but did not challenge its restitutionary features. The
lower court was affirmed on all issues appealed, People
u Bestline Products, Inc., 61 Cal.App.3d 879, 132 Cal.Rptr.
767 (1976).
App. 14
The record does not indicate how many individual
cases, if any, proceeded to judgment, but public bodies
brought a number of suits which either proceeded to
judgment or were settled. The New York City Bureau
of Consumer Protection and the Attorneys General of
Missouri, Ohio, Pennsylvania, New Jersey, Texas, and
Wisconsin successfully brought suits against Bestline
on behalf of former Bestline distributors in their respective
jurisdictions. All of these seven classes elected to join
the California restitution program rather than execute
their judgments.
In the meantime, private lawsuits against Bestline
and various officers of the company were filed in several
federal courts across the country, and the scramble for
the assets of Bestline began in earnest. For example,
on July 20, 1973, counsel for the Piambino plaintiffs
filed their class action lawsuit in the Southern District
of Florida.
Lead counsel” for the consolidated actions made
several attempts in California courts to disrupt the
California restitution payments. The initial effort began
on September 20, 1974, when one of the two lead counsel
sent a letter to the Bank of America, the fund trustee,
claiming that the class had a prior equity in the trust
and warning the bank that it “will be held liable to
them [the class] for their proportional interest in any
funds disbursed after your receipt of this letter.” Another
letter, dated October 8, 1974, threatened “to commence
“The District Judge appointed as lead counsel! for the
consolidated proceedings the two attorneys, Carl H. Hoffman and
James H. Joseph, who had filed the class action lawsuit on behalf
of the Piambino plaintiffs in the Southern District of Florida.
These two attorneys have acted as lead counsel throughout the
litigation.
App. 15
legal proceedings against the Bank of America to enjoin
any distribution of funds from the Bestline trust...
[and which would seek] recovery of the proportional
interest in any funds disbursed by the Bank to which
the putative class is entitled.” Since the Bank was
scheduled to disburse payments to the participants in
the restitution program in the near future, it was
concerned about these threats and petitioned the
California Superior Court for instructions. After a hearing
attended by all interested parties, including lead counsel
for the Florida class, the state court ordered the bank
to make the disbursements. Bestline did not appeal
that decision, even though it may have been entitled to
do so under state law. See County of Alameda u Carleson,
5 Cal.3d 730, 97 Cal.Rptr. 385, 488 P.2d 953 (1971).
The very next day, lead counsel filed a class action
suit in the Northern District of California alleging that
the distribution of money through the restitution fund
constituted “common law fraud and deceit” and deprived
their clients of due process and equal protection. Plaintiffs
sought an injunction “restraining Bank of America,
(the compliance officer], Bestline, Bestline Corporation,
[the California Attorney General] and the Superior
Court from issuing any further instructions to [the
compliance officer] and/or Bank of America inconsistent
with the claims of [the plaintiff class), and restraining
Bank of America from any distribution of said funds
inconsistent with the rights of [the plaintiff class] to
share ratably therein.” Counsel then petitioned the
Judicia! Panel on Multi-district Litigation to treat the
action as a tag-along case with the Florida cases. A
conditional transfer order was summarily issued, but
the defendants promptly moved to vacate that order.
After a hearing, the defendants’ motion was granted
App. 16
on February 14, 1975, whereupon the parties returned
to the Northern District of California, where the court
notified all the parties that a hearing would be held on
March 28, 1975. Plaintiffs’ counsel iailed to appear at
that hearing, and the court granted the defendants’
motivn to dismiss under Rule 12(b) with prejudice.
Judgment was entered, the plaintiffs appealed, and the
Ninth Circuit dismissed the appeal without opinion.
At this point, if not before, the California state
court judgments became absolutely final and entitled
to full faith and credit.
On April 2, 1976, pursuant to a complaint filed by
the Federal Trade Commission, the United States District
Court for the Northern District of California found
that Bestline had violated the injunction issued as a
part of the 1971 consent decree. Among other things,
the Federal Trade Commission obtained a judgment of
$1,036,000 against the defendant, William Bailey, dated
July 19, 1976, United States v. Bestline Products
Corporation, 412 F.Supp. 754 (N.D.Cal. 1976). This money
was paid into the registry of that Court.
In the meantime, as will hereinafter be related,
the District Court in Florida had brought the enforcement
of the California state court judgment to a halt by
enjoining Bestline from complying with the California
state court judgment. The District Court in California
transferreu the $1,036,000 from its registry to that of
the Southern District of Florida for distribution to
members of the plaintiff class in that Court.
After the total lack of success in both the State
and Federal Courts in California, ending with the dismissal
of the appeal in the Ninth Circuit, plaintiffs’ counsel
resorted again to the Southern District of Florida,
where discovery proceeded apace.
App. 17
On March 19, 1976, the District Judge rendered an
opinion and order granting the plaintiffs’ motion for
summary judgment on the limited issue of whether the
prepurchase Direct Distributorship agreements were
“securities” for purposes of the Securities Act of 1933
and the Securities Exchange Act of 1934. Meanwhile,
on January 1, 1976, Bestline had made its first scheduled
payment of $250,000 to the restitution fund, and it had
notified the compliance officer that it would be able to
make its second periodic payment, in the arnount of
$500,000, as scheduled on June 30, 1976. This apparently
alarmed lead counsel and on June 18, 1976 less than
two weeks prior to the scheduled date of payment,
they moved the Florida District Court for a temporary
restraining order to prohibit Bestline from transferring
the money to the Bank of America. Lead counsel
recognized the problem presented by 28 U.S.C. §2283,
the Anti-Injunction Act, and submitted a brief to the
District Court arguing that the court could issue the
injunction on the ground that the plaintiff class had
been deprived of some right secured to it by the 1871
Civil Rights Act, 42 U.S.C. §1981 et seq., and on the
ground that such an injunction was permitted under
the “where necessary in aid of its jurisdiction” exception
contained in the statute. The court held a hearing on
June 30, 1976, the very day that Bestline was scheduled
to make the payment, and after the Bank of America
had gone to considerable expense in preparing checks
and envelopes for the mailing of individual checks to
the appreximately 7,043 persons then participating in
the restitution program.’ A representative of the
SOf this total, approximately 2300 resided at one time or
another in California. Except for four people whom Bestline had
authorized to participate in the fund, all of the other participating
members joined the fund pursuant to judgments or settlements
App. 18
California Attorney Geaeral appeared at the hearing
and argued, as did the defendants, that 28 U.S.C. §2283
barred the injunction. From the bench, the District
Judge enjoined Bestline from making the payment,
and, when the defendants demanded that the plaintiffs
post a security deposit for damages in accordance with
the requirements of Rule 65(c) of the Federal Rules of
Civil Procedure, the Judge decided that the $500,000
would be deposited into the registry of the court an”
would serve as the security deposit. Unfortunately, we
think, the written order completely avoided the question
of whether the Anti-Injunction Act barred the injunction.
The District Court simply opined that “it would be
inequitable to allow the California Plan participants to
continue to receive payments from Bestline where the
other members of the Plaintiff class were effectively
precluded from participating in the California Plan
because of matters outside of their control.” Thus, after
being clearly apprised of the barrier posed by the
Anti-Injunction Act, both in written briefs and in ora!
argument at the June 30 hearing, the District Judge
failed to address the problem and issued the injunction.
The defendants filed a timely notice of appeal.
(Footnote 13 Continued)
secured by six different state attorneys general or, in the case of
New York City, by a Consumer Protection Bureau.
“After the District Court enjoined Bestline, it missed six
payments to the restitution fund:
Date Amount
June 30.1976 the greater of $500,000 or 50% of pre-tax profits
Jan. 1, 1977 $500,000
June 30,1977 the greater of $750,000 or 50% of pre-tax profits
Jan. 1, 1978 $750,000
June 30,1978 the greater of $1,000,000 or 50% of pre-tax profits
Jan. 1, 1979 $1,000,000
App. 19
Bestline’s new Chief Executive, Bailey, then began
serious settlement negotiations with lead counsel. On
October 20, 1976, the District Court entered an order
preliminarily approving a settlement between Bailey
and the class. The settlement provided that the funds
obtained by the FTC and then on deposit in the registry
of the court in the Northern District of California would
be paid into the registry of the Southern District of
Florida in return for a complete release of all claims
against Bailey. It further provided that Bailey would
not have to pay any money above what he had already
paid in the FTC case, aad that the funds could be used
for the payment of attorneys’ fees to Lead Counsel.
The District Court, at Bestline’s expense, sent notice
to all members of the class concerning the proposed
settlement and then held hearings, at which the
Department of Justice appeared to protest the award
of $250,000 in attorneys’ fees tu Lead Counsel out of
funds generated by a successiul FTC prosecution. Despite
these objections, the Florida District Court concluded
that Lead Counsel had made a substantial contribution
to making those funds available for the plaintiff class,”
and awarded the attorneys’ fees in an order dated
February 25, 1977.
‘In the Northern District of California, Judge Renfrew’'s
extensive opinion does not mention any contribution by Lead
Counsel to the FTC case. See United States v. Bestline Products
Corp., 412 F.Supp. 754. In the Southern District of Florida no
written findings of fact were issued in support of the conclusion
that lead counsel had made a substantial contribution in the FTC
case.
If.
THE ALLEGED SECURITY
In the appeals now before us, the district court
held (1) that there was no genuine issue as to any
material fact bearing on the question of whether the
prepurchase Direct Distributorships sold to the plaintiffs
by Bestline were investment contracts within the meaning
of federal securities laws and (2) that those distributorships
were securities.
In SEC v. Koscot Interplanetary, Inc., 497 F.2d 473
(5 Cir., 1974), this Court held that for purposes of the
Securities Act of 1983'° and the Securities Exchange
Act of 1934" a pyramid distribution system is a security.
‘Section 2(1) of the Securities Act of 1933, 15 U.S.C. §77b(1),
provides as follows:
(1) The term “security” means any note, stock, treasury
stock, bond, debenture, evidence of indebtedness, certificate
of interest or participation in any profit-sharing agreement,
collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-
trust certificate, certificate of deposit for a security, fractional
undivided interest in oil, gas, or other mineral rights, or, in
general, any interest or instrument commonly known as a
“security”, or any certificate of interest or participation in,
temporary or interim certificate for, receipt for, guarantee of,
er warrant or right to subscribe to or purchase, any of the
foregoing.
"The definition of a “security” in §3(a\(10) of the Securities
Exchange Act of 1934, 15 U.S.C. §78c(aX10), is substantially identical
to that contained in the Securities Act, and the coverage of the
Acts may be regarded as the same. /nternational Brotherhood of
Teamsters v. Daniel, 439 U.S. 551, 99 S.Ct. 790, 795 n. 7, 58 L.Ed.2d
808.
The question of whether the direct distributorships were
“investment contracts” concerned the District Court. See In re
Bestline Products Securities, 412 F.Supp. 732 (S.D.Fla. 1976). In
PIAMBINO v. BAILEY Cite as 610 F.2d 1306 (1980) It
was recognized that the test for an “investment contract”
had been spelled out by the Supreme Court in SEC wv.
W. J. Howey Company, 328 U.S. 293, 298-299, 66 S.Ct.
1100, 1103, 90 L.Ed. 1244, (1946):
‘“{[A]n investment contract for purposes of the
Securities Act, means a contract, transaction or
scheme whereby a person invests his money in a
common enterprise and is led to expect profits
solely from the efforts of the promoter ora third
party. (Emphasis supplied).
After analyzing subsequent Supreme Court cases
involving the investment contract issue along with lower
court interpretations of Howey, and scholarly commentary,
the Koscot Court concluded that a literal application of
the Howey test, “solely from the efforts of the promoter
or a third party”, would frustrate the remedial purposes
of the Acts. Therefore, the Ninth Circuit standard was
adopted: “{[W]hether the efforts made by those other
than the investor are the undeniably significant ones,
those essential managerial efforts which affect the failure
or success of the enterprise”, 497 F.2d at 483 [quoting
SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d
476, 482 (9 Cir., 1973), cert. denied, 414 U.S. 821, 94
S.Ct. 117, 38 L.Ed. 53 (1937)]. As applied to the facts in
Koscot, it was held that efforts of the promoters in
setting up and conducting the Adventure Meetings,
which were designed to entice people to join the scheme,
(Footnote 17 Continued)
this Court, there is no contention that the phrases “certificate of
interest or participation in any profit-sharing agreement” or “any
interest or insty ument commonly known as a ‘security’ ” are broader
in scope, for purposes of this case, than the term “investment
contract”.
App. 22
were the “essential managerial efforts” without which
the enterprise would fail.
Since the Koscot decision the Supreme Court has
decided two cases involving the definition of investment
contracts, International Brotherhood of Teamsters v.
Daniel, 439 U.S. 551, 99 S.Ct. 790, 58 L.Ed.2d 808 (1979),
and United Housing Foundation, Inc. v. Forman, 421
U.S. 837, 95 S.Ct. 2051, 44 L.Ed.2d 621 (1975).
In both decisions, rejecting the arguments of the
Securities and Exchange Commission, the Supreme
"See, also SEC v. Sloan, 436 U.S. 103, 98 S.Ct. 1702, 56
L.Ed.2d 148 (1978); Santa Fe Industries, Inc. v. Green, 430 U.S.
462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977); Piper v. Chris-Craft
Industries, Inc., 430 U.S. 1, 97 S.Ct. 926, 51 L.Ed.2d 124 (1977);
TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 96 S.Ct. 2126,
48 L.Ed.2d 757 (1976); Ernst and Ernst v. Hochfelder, 425 U.S. 185,
96 S.Ct. 1375, 47 L.Ed.2d 668 (1976); Foremost-McKesson, Inc. v.
Provident Securities Co., 423 U.S. 232, 96 S.Ct. 508, 46 L.Ed.2d
464 (1976); Hondeau v. Mosinee Paper Corp., 422 U.S. 49, 95 S.Ct.
2069, 45 L.Ed.2d 12 (1975); Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975); Securities
Investor Protection Corp. v. Barbour, 421 U.S. 412, 95 S.Ct. 1733,
44 L.Ed.2d 263 (1975); see generally Lowenfels, Recent Supreme
Court Decisions Under the Federal Securities Laws: The Pendulum
Swings, 65 Geo.L.J. 991 (1977).
The District Court in this case had the benefit of the Forman
decision before granting summary judgment on the security issue,
but it seems not to have grasped the significance of that case.
According to the District Court, the ianguage quoted in the text
meant that the Supreme Court had restated the Howey test. “By
focusing on the quality of the efforts of others, the Supreme Court
read the word ‘solely’ out of the Howey test, it having become so
much surplusage, thereby according to its prior Howey decision
the flexibility originally. intended.” 412 F.Supp. at 737-38. The
District Court failed to deal with the remainder of the Forman
decision, however.
App. 23
Court reversed lower court holdings that the transactions
at issue were investment contracts, and hence securities.
The significant thing is that the Court expressly
reaffirmed the test first enunciated in Howey, which
had been on the books for thirty years.
In Forman the Court stated, “[t]he touchstone is
the presence of an investment in a common venture
premised on a reasonable expectation of profits to be
derived from the entrepreneurial or managerial efforts
of others”** (emphasis added), 421 U.S. at 852, 95 S.Ct.
at 2060.
It should be noted that the test is to be applied in
light of the “substance—the economic realities of the
transaction—rather than the names that may have
been employed by the parties”, Daniel, supra, 439 U.S.
at 558, 99 S.Ct. at 796.
In Forman, the Court emphasized, that, “in searching
for the meaning and scope of the word ‘security’ in the
'*The essential vice of chain or pyramid distribution schemes
has been well documented. For example, if the founder recruited
five distributors in the first month and if those five each recruited
five more distributors in month two, and if each of these subsequent
recruits enticed five people to join in the month following his own
recruitment, over 244 million new distributors would be recruited
in the twelfth month. Obviously, this would be impossible in a
nation of only 220 million people. Equally as obvious is the fact
that those who have the greatest risk of loss are those who enter
the pyramid when the market is closest to saturation. This seems
largely an element of chance, and it is just such a realization that
has prompted courts all over the country to declare such schemes
to be prohibited lotteries. See generally Annot., 54 A.L.R.3d 217,
227-31. The disclosure which would be necessary to inform a new
investor of his prospects for success or failure would have to
change almost daily in order to reflect the acquisition of new
distributors. Needless to say, there would be substantial
administrative obstacles connected with any such regime of disclosure.
App. 24
Act[s], form should be disregarded for substance and
the emphasis should be on economic reality”, 421 U.S.
at 848, 95 S.Ct. at 2058.
As in Koscot and Turner, as well as in SEC vw.
Galaxy Foods, Inc., 556 F.2d 559 (2 Cir., 1977), and Bell
v. Health-Mor, 549 F.2d 342 (5 Cir., 1977), there were
two distinct aspects to the distribution system set up
by Bestline. These were the retail sales portion of the
business on one hand and the recruiting portion on the
other, but it would appear, without our so deciding,
that these aspects were both integral parts of one
common scneme. The degree of investor participation
and control differed significantly with respect to each
of these aspects.
Following the approach applied in Securities and
Exchange Commission v. United Benefit Life Insurance
Company, 387 U.S. 202, 207, 87 S.Ct. 1557, 18 L.Ed.2d
673 (1967), the district court here, like the courts in
Turner, Koscot, Galaxy, and Health-Mor, separated these
distinct aspects of the Bestline operation for purposes
of its analysis. It also discussed the Howey formation
of “profits” as meaning either “capital appreciation
resulting from the development of the initial investment”
or “a participation in earnings resulting from the use
of investors’ funds”, 421 U.S. at 852, 95 S.Ct. at 2060.”
It is apparent that the purchasers of Bestline Direct
Distributorships would not profit by “capital appreciation
resulting from the development of the initial investment”.
In a footnote, the Court also noted the Ninth Circuit decision
in SEC v. Glenn W. Turner Enterprises, Inc, supra. The Court
stated that the “solely from the efforts of others” part of the
Howey test was not presented in Forman and that it expressed no
opinion on the Ninth Circuit’s holding. 421 U.S. at 852 n. 16, 95
S.Ct. at 2060 n. 16.
App. 25
Neither is there any indication that prepurchasers oi
Direct Distributors expected a “participation in earnings
resulting from the use of investors’ funds”.
This relegates us to the standards long ago
articulated, and more recently reaffirmed, by the Supreme
Court.
An examination of the Bestline Business Opportunity
Booklet, coupled with the Applications, Qualification
Forms, and Agreements required to be executed by
Direct Distributors, clearly established that the efforts
of Bestline and its “Corporate Team” certainly constituted
the “common thread” on which all of the distributor's
“beads” were strung, see Securities and Exchange
Commission v. C. M. Joiner Leasing Corp., 320 US.
344, 348, 64 S.Ct. 120, 88 L.Ed. 88 (1943).
The person directing the Opportunity Meeting asks
his audience of prospective joiners, “How do you do it?
You get plenty of help. * * * We all work together on
this” (App. 32a-33a, emphasis supplied).
Actually, it was not the Direct Distributorship, as
such, but the General Distributorship that purportedly
would yield the anticipated great returns. It was at the
latter level that Bestline emphasized the building and
supervisory aspects of the business, with which Bestline
promised “plenty of help”. The assurances of “plenty
of help” infers that the person receiving that help
would also have to be exerting efforts of his own, else
there would be no need for help. “We ail work together
on this” could be construed as notice that it would be
necessary for the “investors” to “work”.
Becoming first a Direct Distributor was prerequisite
to becoming a General Distributor but the “over-ail
App. 26
facts” and Bestline’s presentation might be construed
as holding out a promise that a prepurchase Direct
Distributor would never have to retail the product at
all; he would simply have to locate other prospects and
bring them to the meetings, thus jumping immediately
to General Distributorship level without exerting
substantial effort.
There were parts of the Bestline presentation which
would support a finding by a judge or a jury that no
reasonable “investor” could have believed that he was
relying solely on Bestline. At the General Distributors
meetings the presentation constantly emphasized the
retail aspects of the business. “The retail part may
seem very elementary to you but I want you to understand
how important it is, particularly to a General
Distributor. . . . Although you're at 60%, 60% of nothing
is nothing, so it’s vitally important that sales occur,
and of course, it is your job to assure that they do”.
The presentation then discussed the non-retail aspects
of the business — building an organization and supervising
it. The General Distributor’s responsibility was to “train
and motivate these people to do a good job”. How?
Plenty of help. It is implicit in this reference that retail
sales will take place. The night meeting emphasized
. retail sales and the saleability of the product.
The meeting leader then discussed the prepurchase
plan. This discussion focused on recruitment since that
was integral to advancing from Direct Distributor to
General Distributor. Moreover, the promise of greatest
profits was linked to becoming a General Distributor.
The meeting also discussed the risk involved and there
was evidence that might lead the trier of fact to conclude
that Bestline intended to dispel (and dispelled) the
belief that it was promising profits with no expenditure
App. 27
eo
of effort. The presentation listed three ways to generate
product movement volume: (1) retail sales through one’s
own accounts. “It generally takes experience in commercial
selling to be successful in that area. But if you have
that experience or acquire it, thet can be one way... .” |
(2) Simpler for those without sales experience is to sell
that amount through local distributors. (3) “Strictly a
hypothetical illustration”, would be by recruiting people
as Direct Distributors and training them as General
Distributors. “You must train your people and continue
to work closely with them”. Finally, the printed material
accompanying the Bestline presentation did not mention
personal efforts by the Direct Distributor.
In a summary judgment context what it all comes
down to is:
1. Different inferences could be drawn from the
facts in the record as to whether the Bestline Direct
Distributorship Plan could be separated into two parts;
2. If the fact finder (judge or jury) were to hold
that the Direct Distributorship Plan could be separated
into two parts, one of which would be the recruitment
of Direct Distributors, different inferences could be
drawn from the facts in the record as to whether
anticipated profits were to come solely by Bestline’s
efforts, with no substantial personal effort on the part
of the “investor”.
This, of course, would be determined on the
expectations of a “reasonable investor” as prompted
by Bestline’s standardized presentation, rather than
the subjective beliefs of any particular individw .is, see
Internal Brotherhood of Teamster, supra, 99 «.Ct. at
797; United States Housing Foundation, Inc. v. Forman,
421 US. at 852, 95 S.Ct. 2051. The motivation of particular
~ App. 28
individuals might vary; the application of the statute
must be objectively based.
What a “reasonable investor” would under all the
circumstances expect is for determination by the trier
of fact in much the same manner as the determination
of what a reasonable person would or would not have
done concerning acts claimed to have been negligent.
Such issues can properly be resolved by summary
judgment only if (1) there is no genuine dispute concerning
any material fact and (2) no conflicting inferences could
be drawn from those established facts.
{1] After considering all the facts most favorably
to the party against whom summary judgment is sought
summary judgment may be entered, of course, if no
jury could reasonably reach any conclusion except that
reasonable investors did (or did not) believe they were
buying into an enterprise whose profits would be
determined by Bestline managerial and entrepreneurial
methods with no substantial effort by the investor. Up
to now, however, this is not such a case.
On what we have before us, the entry of summary
judgment must be reversed and the case remanded for
further proceedings conducted consistently with the
applicable jurisprudence.
It should not be necessary for us to say that we
intimate no opinion whatever as to how this case should
be resolved on remand.
IV.
SYLVA’S APPLICATION TO
INTERVENE
[2] It is well settled that one who has sought
intervention of right may appeal from an order denying
App. 29
a
his application and that an appellate court will reverse
if it concludes that he was entitled to intervene of
right. Cascade Natural Gas Corp. v. El Paso Natural
Gas Co., 386 U.S. 129, 87 S.Ct. 932, 17 L.Ed.2d 814
(1967); Stallworth v. Monsanto Co., 558 F.2d 257, 263
(5th Cir. 1977). In its order entering final judgment as
to certain of the defendants, dated March 22, 1977, the
District Court denied Sylva’s petition to intervene as
“both untimely and without merit”. Thus, the Court
concluded that Sylva did not satisfy Rule 24(a)’s
requirements that an application for intervention of
right be timely and that, on the merits, “{1] the applicant
claims an interest relating to the property or transaction
which is the subject of the action and [2] he is so
situated that the disposition of the action may as a
practical matter impair or impede his ability to protect
that interest, unless [3] the applicant’s interest is
adequately represented by exis..ng parties.” Fed.R.Civ.P.
24(a).
[3] In the recent case of Stallworth v. Monsanto
Co., supra, we exhaustively surveyed the jurisprudence
on Rule 24's “timeliness” requirement and recognized
that this question is largely committed to the diserstion
of the district court. Consequently, its determination
will not be overturned on appeal unless an abuse of
discretion is shown. /d. at 263. Although such discretionary
determiiiations must necessarily consider all the facts
and circumstances of the particular case, NAACP ».
New York, 413 U.S. 345, 366, 93 S.Ct. 2591, 2603, 37
L.Ed.2d 648 (i973), the Stallworth panel identified four
factors which must, as a minimum, be considered in
passing upon the timeliness of a petition to intervene.
These factors were listed as: (1) the length of time
during which the would-be intervenor actually knew or
reasonably should have known of his interest in the
App. 30
case before he petitioned for leave to intervene; (2) the
extent of the ,sej,udice that the existing parties to the
litigation may suffer as a result of the would-be
intervenor’s failure to apply for intervention as soon as
he actually knew or reasonably should have known of
his interest in the case; (3) the extent of the prejudice
that the would-be intervenor may suffer if his petition
for leave to intervene is denied; and (4) the existence of
unusual circumstances militating either for or against
a determination that the application is timely. Jd. at
264-66.
Proper consideration of these factors generally
cannot be divorced from a consideration of the merits
of a prospective intervenor's application, however. For
instance, factor 1 clearly requires an initial identification
of the prospective intervenor’s interest in the case,
and factor 3 requires a similar identification of that
interest in order to assess the potential of prejudice to
him. Furthermore, the question of timeliness is at least
partially linked to the question of adequate representative.
See United Airlines, Inc. v. McDonald, 432 U.S. 386,
394, 97 S.Ct. 2464, 2470, 53 L.Ed.2d 423 (1977) (“as soon
as it became clear to the [intervenor] that the interests
of the unnamed class members would no longer be
protected by the named class representatives, she
promptly moved to intervene to protect those interests.”);
Allegheny Corp. v. Kirby, 344 F.2d 571, 574 (2d Cir.
1965) (timeliness also turns on “when the interests of
the proposed intervenors were no longer properly
represented”) (construing pre-1966 rule). Due to these
problems, we should analyze the merits of Sylva’s
application to intervene before considering whether it
was timely.
App. 31
First, what interest does Sylva have “relating to
the property or transaction which is the subject of the
action”? Our cases have required that intervention of
right be supported by a “direct, substantial, legally
protectable interest in the proceedings.’ See United
States v. Perry County Bd. of Education, 567 F.2d 277,
279 (5th Cir. 1978); Diaz v. Southern Drilling Corp., 427
F.2d 1118, 1124 (5th Cir. 1970), cert. denied sub nom.
Trefina A. G. v. United States, 400 U.S. 878, 91 S.Ct.
118, 27 L.Ed. 115 (1970). Furthermore, Syiva “has standing
to prosecute a suit in the federal! courts only if he is the
‘real party in interest’ as that term is defined under
Fed.R.Civ.P. 17(a). The stricture applies to intervenors
as well as plaintiffs.” United States v. 936.71 Acres of
Land, More or Less, in Brevard County, State of Florida,
418 F.2d 551, 556 (5th Cir. 1969).
Sylva admits that he has never been a Bestline
distributor at any level, nor has he ever been an employee
or stockholder of the corporation. Although he sought
to intervene on behalf of the 7,043 parvicipants in the
California restitution fund and to be appointed as a
representative of a subclass consisting of those persons,
we need not consider whether such an interest would
satisfy Rule 24(a) because Sylva clearly has another
interest in this litigation which he may assert, namely,
his own duties as Compliance Officer in administering
the restitution fund and as receiver of the Bestline
properties in California.
[4] It is the general rule that courts musi look to
the substantive law creating the right being sued upon
to determine compliance with the real party in interest
requirement, anc for at least two reasons we look to
California law in order to measure Sylva’'s claims. First,
Sylva seeks to intervene in his capacity as the Compliance
App. 32
Officer of a restitution fund which was set up by a state
court judgment to remedy violations of state law. In
order to participate in that fund, every direct distributor
with a judgment was required to waive “any and all
rights and remedies available to him against corporate
defendants with the exception of those rights and
remedies available under the plan of restitution”. This
is obviously an interest created by the substantive law
of California. Second, although this case involves primarily
claims assertedly arising under federal law, it also
involves pendent state law claims which the settlement
purports to extinguish. At least to protect the interests
of the California fund participants in those claims, we
should look to California law.
[5, 6] We are satisfied that, as Compliance Officer,
Sylva is the trustee of an express trust who may sue in
the California state courts under Cal.Civ.Proc. Code
Section 369 ‘West 1973), and in the federal courts under
Fed.R.Civ.P. 17(a). Under California law, “[t]he nature,
extent, and object of a trust are expressed in the
declaration of trust”, Cal.Civ.Code Section 2253 (West
1973), and the primary rule in the censtruction of trusts
is that the court must, if possible, ascertain and effectuate
the intention of the trustor. Ephraim v. Metropolitan
Trust Company of California, 28 Cal.2d 824, 834, 172
P.2d 501 (1946). In this case, the Superior Court is the
trustor, see Cal.Civ.Code Section 2252 (West 1973), and
we must therefore discern the intention of that court
in creating the trust. “{[WJhen a declaration of trust is
made in writing, all previous declarations by the same
trustor are merged therein,” id. at §2254, but when
documents are executed contemporaneously with the
trust agreement and are cross-referenced to each other,
as were the Modified Judgment, Instructions to
App. 33
eae
Compliance Officer, and Trust Agreement in this case,
they must be regarded as one instrument. See Security-
First Nat. Bank of Los Angeles v. Ogilvie, 47 Cal.App.2d
787, 792, 119 P.2d 25 (1941). Finally, the terms of a trust
agreement may empower someone other than the named
trustee to sue and be sued on behalf of the beneficiaries
of the trust. Cf, Powers v. Ashton, 45 Cal.App.3d 783,
119 Cal.Rptr. 729 (1975).
The California restitution fund was formally
established by three separate documents—the Modified
Judgment, the Instructions to Compliance Officer, and
the Trust Agreement, all of which were signed in
December 1973. The Trust Agreement is somewhat
brief and contains only 12 short paragraphs. It named
the Bank of America as trustee of the “irrevocable,
express trust”, and spelled out the trustee’s duties.
These were: (1) to maximize the interest earned by the
corpus of the trust; (2) to distribute payments to the
participants in the fund as directed by the Compliance
Officer; (3) to account to Bestline, the California Attorney
General and the Compliance Officer for all payments
made from the fund; and (4) to pay the fees and expenses
of the Compliance Officer after Bestline and the California
Attorney General had approved them. The agreement
also expressly mentioned the Instructions to Compliance
Officer (a copy of which was attached to the Trust
Agreement) and stated that the Bank of America “shall
have no discretion or authority or responsibility under
the provisions of [the Instructions].” Finally, the agreement
stated thai it was to be governed by the laws of California,
and it did not affirmatively state that the Bank of
America was to have the duty to enforce the rights of
the beneficiaries whom it represented.
App. 34
In contrast to the Trust Agreement, the Instructions
to Compliance Officer is a detailed document and defines
the Compliance Officer’s duties quite explicitly and
definitively. He was to send proof of claim forms to
each former distributor who became eligible to participate
in the fund and to calculate the amount of refund due
each person returning such form. He was to make the
restitutionary payments on a pro rata basis according
to a schedule established in the Instructions. Most
importantly, the Instructions provided that ‘Said
Compliance Officer shall have full and complete authority
and power to supervise, control, carry out, oversee and
enforce the restitutionary provisions set forth herein.
Said Compliance Officer shall perform all necessary
and proper acts to effectuate said purpose.” To insure
his ability to carry out these responsibilities, the
Instructions granted him “all necessary power and
authority to employ persons and legal counsel to assist
him” and provided for the payment of his reasonable
fees and expenses from the trust fund.
[7] Thus, it seems apparent that the express trust
created by the California Superior Court contemplated
a division of authority and responsibility. The Bank of
America was to control and invest the funds and to
make the payments as directed by the Compliance
Officer. These duties are among those normally assumed
by a trustee and are mainly ministerial. The Compliance
Officer, although not formally designated as the “trustee”
assumed significantly more important responsibilities
and was, in fact, the real fiduciary in the arrangement.
The Court gave him broad oversight responsibilities,
charged him with enforcing the restitutionary provisions,
and gave him the means (financial resources and
manpower) to carry out his responsibilities. We have
not the faintest doubt that the California Superior
App. 35
Court contemplated that the Compliance Officer, and
not the Bank of America, would assume thai vital and
essential duty—the enforcement of the terms of the
express trust on behalf of the beneficiaries of the trust —
through legal action if necessary. We therefore conclude
that the Compliance Officer is a “trustee of an express
trust” within the meaning of that term in Rule 17(a),
and is a real party in interest for purposes of this
litigation.
Any doubts which might have been entertained
about the correctness of that conclusion have surely
been dispelled by subsequent events. The Compliance
officer has kept himself abreast of the litigation in
Florida from its inception and has been involved in
several proceedings in the California Superior Court.
In fact, Lead Counsel for the plaintiffs in this case even
though that the Compliance Officer was such a critical
actor that they named him as a defendant in their class
action suit filed in the Northern District of California
and sought to have him enjoined from issuing any
further instructions to the Bank of America inconsistent
with the claims of the plaintiff class. See p. 1314, supra.
When that fact is considered, it is, to say the least,
disingenuous for the plaintiffs now to deny that Sylva
has any interest in th instant proceedings and to
claim that the District Court properly denied his
intervention.
The preceding discussion leads inexorably to the
conclusion that Sylva, in his position of Compliance
Officer. was in fact a trustee and, as such, had a “direct,
substantial, legally protectable interest” in these
App. 36
proceedings.” He has at all times acted in the best
interests of the beneficiaries of the restitution fund,
and the Florida litigation directly affected his ability to
fulfill those responsibilities. Indeed, as will be
demonstrated shortly, the Florida litigation threatened
to snuff out his ability to comply with the directives of
the California Superior Court.
We also think it quite clear that Sylva, as Compliance
Officer, was so situated that the disposition of the
action would as a practical matter impair or impede his
ability to protect his interest as the representative of
the restitution fund. Not only did the District Court
intend to liquidate Bestline’s assets, but he intended to
distribute the proceeds only to class members “who
have not previously been admitted to participation in
the California restitutionary fund.” Furthermore, all
members of the California fund would be bound by the
Florida judgment, except for those who had opted out
early in the proceedings.
The manner in which the California fuad members
were treated in this litigation is illustrated well by the
series of notices which they received. On November 22,
“Because we have concluded that Sylva’s position as Compliance
Officer was an interest sufficient to warrant intervention of right,
we have no occasion to address the separate question of whether
his appointment as receiver of Bestline’s California properties by
the Superior Court en February 14, 1977, was sufficient to warrant
intervention of right. The record on appeal is insufficiently developed
on this point and reveals only that the California Court had
appointed him and issued instructions to take possession of the
assets, liquidate them, and transfer the proceeds to the restitution
fund for ultimate distribution to its participants. The briefs of the
parties have informed us that Sylva has carried out those duties,
and, if that is indeed tie case, his interest in these proceedings by
virtue of his appointment as receiver might well be moot. We, of
course, express no opinion on any of these points.
App. 37
1974, the District Court certified a class of plaintiffs
consisting of
all persons who purchased or invested in Direct
Distributorship contracts or agreements, or their
equivalents, offered by Bestline Products, Inc., who
never qualified as General Distributors of Bestline
Products, Inc., or their equivalents, and who have
not re-ordered products from Bestline Products,
Ine., within the six (6) months next preceding the
date of this order. . . .”
On January 15, 1975, the court notified potential
class members, including participants in the California
fund, that a class had been designated and that unless
they requested exclusion, their interests would be
represented by lead counsel. At that time, the California
fund had just made its second payment, and many of
the participants undoubtedly were confused by this
notice of yet another lawsuit. A substantial percentage
took no action and thereby became members of the
class. When the District Court’s injunction prevented
the mailing of the mid-1976 payments, many of the
California fund participants became anxious about the
delay and contacted the Compliance Officer, who informed
them that an appeal had been taken and that there was
no cause for alarm. In December 1976, the District
Court preliminarily approved the settlement with William
Bailey and sent notice to all members of the class,
As finally modified on October 21, 1976, the class included
all persons who purchased or invested in Direct Distributorship
contracts or agreements, or their equivalents, offered by
Bestline Products, Inc., who never qualified as General
Distributors of Bestline Products, Inc., or their equivalents,
and who are not active distributors as evidenced by current
renewal of their mailing list privileges.
App. 38
along with a proof of claim form. This notice, however,
clearly stated that no payments would be distributed
to persons who had previously participated in the
California fund. It also stated that the Court expected
to take no further action with respect to the money
obtained from Bestline until its appeal had been decided;
as events later unfolded, this promise proved to be an
empty one. Understandably, many of the California
group did not return proof of claim forms to the court.
In December 1977 the court preliminarily approved
the Bestline settlement and then sent notice of the
proposed settlement only to those persons who had
returned the proof of claim forms. Thus, it appears
that the California fund participants were lulled into
mistakenly thinking that their rights were being protected
and that they were members of the plaintiff class.
Suddenly, the court informed them that they would not
participate in the funds distributed pursuant to the
settlement. When they did not return proof of claim
forms because they knew that they would get no money,
the court declined to send them notice of the final,
more important settlement (to be discussed, post).
Thus, the members of the California group were
not given the treatment contemplated by the law, and
they would be bound by a final judgment which completely
shut them off from any hope of monetary recovery. It
necessarily follows that Sylva’s ability to protect his
interest as a trustee would not only be impeded or
impaired, but it would be utterly destroyed.
Much of the foregoing discussion makes it clear
that Sylva was not represented at all in this litigation
when the parties agreed to a settlement, one provision
of which was that Bestline would abandon its appeal to
App. 39
this Court. Sylva was then, and only then, left “without
a friend in this litigation.” See Atlantis Development
Corp. v. United States, 379 F.2d 818, 825 (5th Cir. 1967).
[8] To sum up, we conclude that, on the merits,
Sylva was entitled of right to intervene.
The only remaining inquiry is whether his application
was timely.
Each of the Stallworth factors on timeliness points
toward the conclusion that the application was timely.
First, although the Compliance Officer knew as early
as June 30, 1976, when the injunction issued, that he
had an interest in the litigation that might be impaired,
there was absolutely no reason for him to intervene at
that time. Bestline immediately appealed and filed a
sterling brief with this Court. In addition, Bestline’s
attorneys met on several occasions with the Compliance
Officer, the California Attorney General, and the Superior
Court Judge and assured these people that they were
prosecuting the appeal diligently and in good faith.” In
**Sylva outlined the position of the Superior Court as follows
in his deposition:
Q. Concerning your discussions with Bestline about the
appeal, you indicated that you had monthly hearings
before Judge Hupp and there was discussions at that
time. Can you give me a little bit more detail about the
discussions, what was indicated about Bestline pursuing
the appeal?
A. [Compliance Officer] Only that —okay, to give you some
background, upon the five thousand [sic] being paid over
te ‘he Florida Court, California Attorney General's Office
toes that as being a breach of the agreement between
Bestline and the Attorney General's Office, and immediately
sought to enforce its judgment, have a receiver appointed.
At the same time, as we understand it, there were motions
in Florida for the appointment of receivers. Judge Hupp did
Aop. 40
reliance upon those representations, and upon the
obviously adequate representation of Bestline’s attorneys,
the Superior Court Judge refused the Attorney General’s
request for a receivership and Sylva did not attempt to
intervene. On January 28, 1977, when the settlement
agreement was filed, Sylva then knew that his interests
(Footnote 23 Continued)
not want this thing to deteriorate into a race to the courthouse
to determine which group of people obtained the judgment,
and got the most money. He rather would have liked to have
seen some sort of a cooperative effort in resolving the whole
matter, making sure all of the people, including the Florida
people, received at least partial restitution of the funds that
they had been bilked out of.
In light of this appeal [of] Judge Hupp, he was advised
that the court ordered—the judgment of the Florida Court
was being appealed, and that the appeal was progressing
nicely and that the briefs were being filed or had been filed,
you know, each month and there would be a progress report
by Mr. Pitto and Mr. Humphreys [attorneys for Bestline].
Those were thoughts in mind— but in the meantime the
California Attorney General’s Office is champing at the bit to
close down Bestline. They are taking a very aggressive posture
on behalf of, I guess, the cuizens of Californja and all the
other attorney generals who agreed with their posture.
It was in light of these discussions that the trial court,
the California Superior Court, would not rule on the motions
of the Attorney General to shut everything down. It just —
preservation of the status quo, let’s not get excited here,
things are going to work out, was in light of these remarks of
the judge and reports by Bestline’s attorneys that the thing
continued to rock along from July up until February.
* ca * * * oa
Q. Sothat the Attorney General put off the proceeding on
his receivership motion, and the court put off ruling on
those motions, and you put off taking any action in
Florida on the basis that Bestline was appealing this
specific seizure of the half a miilion doliars?
A. Yes. that’s correct. . .(A. 758-760).
App. 41
were no longer adequately represented by Bestline,
and his motion to intervene was filed on February 14.
This delay of a mere seventeen days cannot rationally
be denominated as unreasonable.
Furthermore, the existing parties have suffered
no prejudice from the delay. This is not a case where
intervention was attempted after the entry of a final
judgment, see United Airlines, Inc. v. McDonald, 432
U.S. 385, 97 S.Ct. 2464, 53 L.Ed.2d 423 (1977); McDonald
v. E. J. Lavino Co., 430 F.2d 1065, 1072 (5th Cir. 1970);
nor is it a case where more hearings must be held in
the lower court. In this case, Sylva presented three
witnesses at the hearing on the settlement and fully
developed his position. The parties are in exactly the
same position they would be if some members of the
class had objected to the settlement and then taken an
appeal to this Court. As has already been demonstrated,
there was a distinct probability that the confusing, if
not deceptive, series of notices guaranteed that no
members of the California group would appear at the
hearing to protest the settlement.” In short, the parties
have not been prejudiced legally by the brief delay in
filing the application to intervene.
**Sylva’s three witnesses testified that they had difficulty
understanding the notice and that they did not need to file the
proof of claim form since they had previously filed in California.
“Q. (Ms. Greer) Did you take any steps to file a Proof of
Claim Form?
A. (Norman Feinberg) No.
Q. Why didn’t you file a Proof of Claim form after trying to
read that, the Notice?
A. Well, I thought I didn’t have to.
Why did you think you didn’t have to?
A. Because I already had. There was a contract entered
between New York City and Bestline. And then I
subsequently asked three lawyers, which [sic] said ‘I
App. 42
©
It is unnecessary for us to recount the substantial
prejudice which will be visited upon Sylva and the
members of the California group if his motion to intervene
(Footnote 24 Continued)
don’t know how an agreement entered by a court could
be nullified, so that agreement would have to stand’
Now, I thought I would suffer if I would subscribe to
this.” (A. 808).
* * * * * *
(Ms. Greer) So the fact that you had already filed a claim
in California, you had been notified you didn’t have to
participate, that convinced you not to file in Miami?
(Valentin Dominguez) I thought I didn’t have to.
Did you speak to any other Bestline distributors concerning
the Notice?
Yes, I did; a couple distributors. And in fact one of them
was from California, and he was in the same—I don’t
even know the name of the fellow. He happened to ask
me that I was a distributor because he saw some of the
products that I was using; and he was from California.
And as I understand it, he didn't participate in the Class
neither.
Do you have any personal knowledge of why he didn't
participate?
We discussed the situation. And he says, ‘Well, we don’t
have to. We covered from California.” (A. 816-817).
* * * x * *
(By Ms. Greer) Mr. Dominguez, is it correct that the
reason you did not file here in Florida is because you had
already filed a claim in California?
Right. And they have all the records that I have, plus
the fact that the form that I got from Florida requires
me to file an inventory and an amount of money that I
invested in Bestline. I didn’t have anything like that
because it was sent to California.
Then you sent all of your documents and supporting
information to California when you filed your claim there?
App. 43
is denied. In addition to the facts already recounted, it
should be noted that the District Court also intended
to appoint a receiver with instructions to liquidate all
(Footnote 24 Continued)
A.
“Q.
©
O>Oo>peop
To California, right.” (A. 818).
(By Ms. Greer) Please tell the Court what you did when
you received the Notice.
(By Susie Rosenrot) When I received the letter, you
know, I answer saying I don't see any I have to make
another claim because I already did it.” (A. 822).
* + * * ” .
(By Ms. Greer) Mrs. Rosenrot, what steps did you take
to try to get information about the Notice? What did you
do to try to get information?
I wrote the letter to Mr. Dan Sylva saying that I did not
see why I have to do it all over again because I already
filed it so I could not understand it.
Did you read the Notice?
I read it but I could not understand too much, you know.
I don’t know why I had to do that.” (A. 823).
~ +. * * * *
(By Ms. Greer) Did you file a Proof of Claim form here in
Florida?
No.
Other than writing that letter?
That’s right.
You wrote that letter for more information?
That's all.
Do you have the documents for your claim or did you
send them to California?
I sent everything to California when I made the claim.
So tha’ the California Fund has ail of your documents
and the claim form?
That's right.” (A. 825-826).
App. 44
of Bestline’s assets. Such an action might have affected
Sylva's ability to carry out the Superior Court's
instructions to him to liquidate Bestline’s California
assets. We also think that the manner in which this
group was treated in the Florida litigation. including
the fact that the District Court failed to employ the
subclassing power spelled out in Rule 23(c(4\(B) and to
designate a representative for the California group, is
an “unusual cireumstance” militating for a determination
that the application is timely. See Stallworth, supra at
266,
Therefore, we hold that it was error as a matter of
law to deny Sylva’s application to intervene and we
reverse on this point.
V.
THE BAILEY AND BESTLINE
SETTLEMENTS
By separate orders, the District Court approved
two settlements. In the first order, dated February 15,
1977 (the Bailey Settlement), the Court entered fina!
judgment as to defendant William Bailey and dismissed
all claims against Bailey with prejudice. Bailey gave no
consideration whatsoever for the release of these claims;
the Court’s order merely directs him to apply to the
Northern District of California pursuant to the final
judgment in the FTC case for an order directing the
clerk of that court to transfer the amount of $1,036,000
to the Southern District of Florida. No notice of appeal
was filed from the February 15 order, nor could there
have been due to the lack of a Rule 54(b) certificate. On
February 25 the District Court directed the payment
of $250,000 in attorneys’ fees to lead counsel from the
Bailey settlement funds.
App. 4°
In the second order, dated March 22, 1977 (the
Bestline Settlement), the District Court approved a
settlement to which Bestline and 27 individual defendants
had subscribed. Jn return for the dismissal of all claims
against them with prejudice, the defendants agreed: (1)
_ to pay $900,000 (collectively); (2) to tender a note for
$300,000 (executed by Bestline Products. Inc. and
guaranteed by Brassfield); (3) to pay whatever sums
might be realized by liquidating Bestline’s assets
(approximately $600,000); and (4) to waive any claim to
the $491,636.59 deposited with the court pursuant to
the preliminary injunction, plus interest. This settlement
also provided that attorneys’ fees of $750.00 21d expenses
of up to $50,000 would be paid out »/ *»« fund. The
March 22 order both denied interven: oi and entered
final judgment as to the settling defendants.
Our jurisdiction to review the merits of the
settlement can be supported on three grounds. First,
this may be a case for invoking the “hardship finality”
doctrine of Forgay v. Conrad, 47 U.S. ‘6 How.) 201, 12
L.Ed. 404 (1848), since the District Court immediately
ordered the payment of attorneys’ fees out of the
settlement proceeds. This was surely an execution on
the judgment. See generally 15 C. Wright, A. Miller &
E. Cooper, Federal Practice & Procedure §3910 (1976).
In the circumstances of this case, there seems to be no
reason not to review the merits of the settlement since
the intervenor has already presented his evidence and
arguments to the lower court. Second, the order entered
final judgment as to Bestline, which had been enjoined
by the court since June 30, 1976. The order was therefore
appealable under 28 U.S.C. §1292(a\(1) as an interlocutory
order dissolving an injunction. Finally, the order appointed
lead counsel as “trustees” of the real and personal
App. 46
property of Bestline with instructions to liquidate the
property within six months in a commercially reasonable
manner. We have no doubt that this was in effect an
appointment of a receiver and was an order appealable
under 28 U.S.C. §1292(a\2). “A receiver by any other
name, or by no name, is still a receiver.’ United States
v. Sylacauga Properties, Inc., 323 F.2d 487, 490 (5th Cir.
1963).
We shall examine only Sylva’s objections to the
Bestline settlement.
[9] Rule 23(2) requires the trial judge to review
any proposed settlement of a class action. The purpose
of this salutary requirement is to protect the nonparty
members of the class from unjust or unfair settlements
affecting their rights. 7A C. Wright & A. Miller, Federal
Practice & Procedure §1797, at 226 (1972). Conflicts
may arise between the attorney and the class, between
the named plaintiffs and the absentees, and between
various subclasses.
ji0, Li) To minimize tie first conflict —ihat between
the attorney and the class— district courts must address
the issue of attorneys’ fees under the standards of
Johnson v. Georgia Highway Express, 488 F.2d 714
(5th Cir., 1974). If the agreement leaves attorneys’ fees
to be fixed by the Court then, as stated in Jn re Air
Crash Disaster at Florida Everglades, 549 F.2d 1006,
1021 (5th Cir. 1971):
The district court must set and conduct a hearing
in the full sense of the word and must address the
fee issue under the Johnson standards. [C]lounsel
must offer relevant evidence and must be available
for cross-examination. The court should enter findings
of fact and conclusions of law setting eut the basis
App. 47
for the fee award and adequately presenting the
issue for further appellate review should this be
necessary.
[12, 13] See also Norwood v. Harrison, 581 F.2d
518 (5th. Cir., 1978); Premier Corp. v. Serrano, 578 F.2d
566 (5th Cir.), cert. denied sub nom. Premier Corp. v.
Shevin, Shapo & Shevin, P.A., 439 U.S. 1003, 99 S.Ct.
613, 58 L.Ed.2d 678 (1978). If he has not done so, then
he must require that notice be given to the class of the
proposed attorneys’ fees as well as the rest of the
settlement agreement and afford anyone who objects
an opportunity to be heard. Finally, he must himself
determine whether the attorneys’ fees proposed are
reasonable. A district court is not bound by the agreement
of the parties as to the amount of attorneys’ fees.
Foster v. Boise-Cascade, Inc., 577 F.2d 335 (5th Cir.
1978), affirming 420 F.Supp. 674 (S.D., Tex., 1976). In
fixing the amount of attorneys’ fees the court must, of
course, take all of the Johnson criteria into account,
including the difficulty of the case and the uncertainty
of recovery. He is not, however, merely to ratify a
pre-arranged compact.
The second and third conflicts are much more
difficult to prevent and police. Generally, courts depend
upon structuring the settlement process to promote
adequate representation and, hopefully, fair settlements.
As a backstop, the law requires that the trial court
eva!uate whether the settlement is fair, adequate and
reasonable and is not the product of fraud or collusion.
Pettway v. American Cast Iron Pipe Company, 576
P.2d 1157, 1169 (5th Cir. 1978); Cotton v. Hinton, 559
F.2d 1326, 1330 (5th Cir. 1977); Miller v. Republic National
Life Insurance Company, 559 F.2d 426, 428, 429 (5th
Cir. 1977); Young v. Katz, 447 F.2d 431, 433 (5th Cir.
App. 48
__) i
1971). Against these concerns must be weighed the
general policy of the law to favor settlements and to
uphold them whenever possible because they produce
an amicable resolution of disputes and minimize demands
on judicial time and resources. Pettway, supra, at 1214;
Miller, supra, at 428.
We are convinced that the District Court fell into
serious error when it approved the attorneys’ fees
proposed in the Bestline settlement. The order entering
final judgment states:
This court is not being asked to set reasonable
attorney's fees in conjunction with the instant
settlement; rather the court is being presented
with a proposed settlement, agreed to by all parties
and unopposed by the class, which incorporates an
award of attorney’s fees in the amount of $750,000
as a vital part of the settlement. Certainly, different
procedures and considerations might obtain were
the court being requested to initially fix an attorney's
fee. Since the award and amount of attorney’s fees
comes before the court in the posture of an unopposed
settlement, the court finds that the amount is
reasonable under the circumstances of this protracted
and complicated case. (Emphasis in original.)
[14] On this reasoning, the District Court abdicated
its responsibility to assess the reasonableness of attorneys’
fees proposed under a settlement of a class action, and
its approval of the settlement must be reversed on this
ground alone.
On this appeal, the parties to the settlement urge
that the record is adequately developed to enable this
Court to independently evaluate the reasonableness of
those fees. This is not our normal practice, however,
App. 49
since the District Court is infinitely better situated to
conduct the factual inquiry necessary under Johnson,
and since we are not asked to determine reasonable
attorneys’ fees incident to an appeal to this Court. See
Davis v. Roadway Express, Inc., 590 F.2d 140 (5th Cir.
1979).
[15] Regrettably, this does not end the matter.
For reasons about to be stated, we must vacate in its
entirety the order entering final judgment as to Bestline
and 27 individual defendants.
This is demanded by the failure to assess the
interests of the two categories of plaintiffs and whether
the settlement was fair, adequate and reasonable as to
each.” One group of plaintiffs was comprised of the
7,043 participants in the California restitution fund, all
of whom had either reduced their claims against the
defendants to a judgment or had settled. Approximately
$4.5 million had been distributed to these persons before
the District Judge issued his preliminary injunction
halting further payments from Bestline to the Bank of
America. Although that recovery may seem large when
compared to the proposed settlement in this case, it
must be remembered that those 7,043 people had an
average claim against Bestline of $3000 each, for a
“If this were simply a case of defining the zone of acceptable
settlements, we would look to the standards set forth by the
Supreme Court in a bankruptcy approval case, Protective Committee
v. Anderson, 390 U.S. 414, 424-25, 88 S.Ct. 1157, 20 L.Ed.2d 1
(1968). Those criteria wou!d be especially applicable in this case
because the assets of the corporation were so likely to be liquidated.
See also Cotton v. Hinton, 5 Cir. 1977, 559 F.2d 1326; Miller v.
Republic National Life Ins. Co., 5 Cir. 1977, 559 F.2d 426, 429;
Developments in the Law—Class Actions, 89 Harv.L.Rev. i318,
1573-75 (1976).
App. 50
total claim of perhaps $21 million. Rather than execute
their judgments and force Bestline into bankruptcy,
those 7,043 people chose to accept smaller installment
payments and to keep Bestline afloat for the greater
good of all concerned. Cf. Marshall v. Holiday Magic,
Inc., 550 F.2d 1173, 1178 (9th Cir. 1977) (approving a
similar settlement in a pyramid scheme nearly identical
to that involved in this case). Since the issuance of the
preliminary injunction, Bestline has failed to make at
least $4,500,000 in payments to the California restitution
fund. See note 14, supra. Therefore the members of the
fund have been deprived of over $600, on the average,
to which they were entitled as a result of their judgments
against Bestline. The interest of these 7.043 people in
protecting their judgments has not been adequately
recognized or protected. This is not a bankruptcy
proceeding in which the debtor's assets are being parcelled
out to creditors on an equitable basis.” The participants
in the California fund all had judgments that were
entitled to full faith and credit under Article IV of the
Constitution and 28 U.S.C. §1738. As the amicus brief
filed by the State of Wisconsin indicates, those 7,04°
people waived their rights to pursue any claims against
Bestline, either as part of their judgments or upon
*The February 10, 1977, Notice of Proposed Partial Settlement
of Litigation contains some interesting statistics concerning the
composition of the class which was certified. Notice was originally
mailed to approximately 34,000 potentiai plaintiffs. 3,744 of these
elected to exclude themselves from the litigation, and 8,779 of the
notices were returned as undeliverable. Of the remaining ciass
members, 4,332 completed and returned a proof of claim form.
Apparently, the District Judge intended to distribute the settlement
proceeds only to those 4,332 people. The record on appeal does not
indicate how many of the California group excluded themselves
from the litigation or how many filed proof of claim forms in
Florida.
App. 51
joining the California fund. Unless those waivers were
somehow not entitled to full faith and credit, it would
seem that those 7,043 people never should have been
included in the class. The record on appeal does not
permit us to rule definitively on this point, however,
and we shall assume that the California fund participants
constituted a subclass in this litigation. Unitess it was
proper for the District Judge to enjoin Bestline from
complying with those judgments, a question which is
answered in the negative in part VI of this opinion, the
District Court erred by not making the California group
whole out of the settlement proceeds, or at least according
them an absolute priority to all such funds. Furthermore,
since those 7,043 people were already entitled to such
funds (up to $4,500,000 plus interest), this litigation has
generated no common fund from which to pay attorneys’
fees and expenses.
Thus, the result which we reach, by assuming that
the 7,043 California fund participants were properly
included in the class as defined by the District Court, is
the same as that which would have been reached if
those persons had not been included in the class and if
the preliminary injunction had not issued. By concluding
that those persons are entitled to settlement proceeds
up to $4,500,000 plus interest, they are placed in the
same position they would have been in if Bestline had
made all the scheduled payments to the trustee. If,
however, Bestline would have defaulted on those
payments before now, the California class would still
have obtained Bestline’s assets through liquidation long
before this settlement.
Therefore, the order approving the Bestline
settlement and entering final judgment as to the
subscribing defendants is vacated in its entirety.
App. 52
i
THE PRELIMINARY INJUNCTION
[16] In the face of Rule 52(a)’s requirement that
courts set forth findings of fact and conclusions of law
which form the grounds for granting interiocutory
injunctions, and after having been clearly apprised of
the barrier presented by 28 U.S.C. §2283 (the “Anti-
Injunction Act’), both by briefs and oral argument, the
District Judge brushed past the statute in the belief
that it would be “inequitable” not to issue the injunction.
Since the appeal in No. 76-3495 has not been dismissed,
and since Bestline has represented to this Court that it
would not move to dismiss if Sylva were allowed to
intervene in No. 77-2045, we clearly have jurisdiction
under 28 U.S.C. §1292(a)(1) to review the issuance of
that injunction. We reverse.
The Anti-Injunction Act, the predecessor of which
was enacted in 1793, has long been an important and
integral part of our federal system. As amended in
1948, it now provides:
A court of the United States may not grant an
injunction to stay proceedings in a State court
except as expressly authorized by Act of Congress,
or where necessary in aid of its jurisdiction, or to
protect or effectuate its judgments.
28 U.S.C. §2283. The Supreme Court has on many
occasions explicitly declared that this statute must be
given a strict construction due to the sensitive nature
of federal interference with state court proceedings.
On its face the present Act is an absolute
prohibition against enjoining state court proceedings,
unless the injunction falls within one of three
App. 53
specifically defined exceptions. The respondents
here have intimated that the Act only establishes
a “principle of comity,” not a binding rule on the
power of the federal courts. The argument implies
that in certain circumstances a federal court may
enjoin state court proceedings even if that action
cannot be justified by any of the three exceptions.
We cannot accept any such contention. . . . [We]
hold that any injunction against state court
proceedings otherwise proper under general
equitable principles must be based on one of the
specific statutory exceptions to §2283 if it is to be
upheld... .
Mitchum v. Foster, 407 U.S. 225, 229, 92 S.Ct. 2151,
2155, 32 L.Ed.2d 705 (1972), quoting Atlantic Coast
Line R. Co. v. Brotherhood of Locomotive Engineers,
398 U.S. 281, 286-87, 90 S.Ct. 1739, 26 L.Ed.2d 234
(1970). See also Amalgamated Clothing Workers v.
Richman Bros., 348 U.S. 511, 75 S.Ct. 452, 99 L.Ed. 600
(1955); Carter v. Ogden Corp., 524 F.?d 74, 76 (5th Cir.
1975); International Ass'n of Machmists & Aerospace
Workers v. Nix, 512 F.2d 125, 129 (5th Cir. 1975).
Furthermore, it has long been “settled that the
prohibition of §2283 cannot be evaded by addressing
the order to the parties or prohibiting utilization of the
results of a completed state proceeding.” Atlantic Coast
Line R. Co., supra, 398 U.S. at 287, 90 S.Ct. at 1743,
citing Oklahoma Packing Co. v. Gas Co., 309 US. 4, 9,
60 S.Ct. 215, 84 L.Ed. 537 (1940), and Hill v. Martin, 296
U.S. 393, 403, 56 S.Ct. 278, 80 L.Ed. 293 (1935). In Mill,
Justice Brandeis wrote as follows for a unanimous court:
The prohibition of [§2283] is against a stay of
“proceedings in any court of a State.” That term is
comprehensive. It includes all steps taken or which
App. 54
may be taken in the state court or by its officers
from the institution to the close of the final process.
It applies to appellate as well as to original
proceedings; and is independent of the doctrine of
res judicata. It applies alike to action by the court
and by its ministerial officers; applies not only to
an execution issued on a judgment, but to any
proceeding supplemental or ancillary taken with a
view to making the suit or judgment effective. The
prohibition is applicable whether such supplementary
or ancillary proceeding is taken in the court which
rendered the judgment or in some other. And it
governs a privy to the state court proceeding. . .
as well as the parties of record. Thus, the prohibition
applies whatever the nature of the proceedings
296 U.S. at 403, 56 S.Ct. at 282-283 (footnotes omitted).
Alt' ough the plaintiffs make a feeble attempt to argue
that che injunction did not stay “proceedings in a State
court”, Hill leaves absolutely no doubt that the scheduled
._ payment of $500,000 to the trustee of an express trust
set up by a judgment of the California Superior Court
was, at the least, a “proceeding supplemental or ancillary
taken with a view to making the suit or judgment
effective.” Therefore, we cannot accept this argument
and proceed to determine whether the injunction can
be justified by any of the three express exceptions.”
"We do not consider the “protect or effectuate its judgments”
exception for the simple reason that there was no judgment to
protect when the injunction issued. See Mitchum v. Foster, 407
U.S. 225, 236 & n. 21, 92 S.Ct. 2151, 32 L.Ed.2d 705 (1972); International
Ass'n of Machinists & Aerospace Workers v. Nix, 5 Cir. 1975, 512
F.2d 125, 129-33 (recognizing the federal court under this exception
may enjoin “the relitigation in state court of issues that federal
courts have fully and finally adjudicated’).
App. 55
A. The “expressly authorized” exception
{17, 18] The plaintiffs first argue that the injunction
was “expressly authorized” by Fed.R.Civ.P. 23(d), and
claim that the rule cannot insure the fair and efficient
conduct of class actions unless injunctions are permitted
against state court proceedings by absent class members.
The trouble is that this argument was never presented
to the District Ceurt and there is no rea! reason to
suppose that it formed the unexpressed rationale for
its decision. Moreover, this Court has never held that
Rule 23(d) is an express exception to 28 U.S.C. §2283,
and we cannot accept that theory today. As stated in
Mitchum v. Foster, 407 U.S. 225, 238, 92 S.Ct. 2151,
2160, 32 L.Ed.2d 705 (1972), “The test. . . is whether
an act of Congress, clearly creating a federal right or
remedy enforceable in a federal court of equity, could
be given its intended scope only by the stay of a state
court proceeding.” Rule 23(d) is a rule of procedure and
it creates neither a right nor a remedy enforceable in a
federal court of equity. Thus, even under the expansive
Mitchum test, which may not be quite as expansive as
it seems,” this argument must fail.
Next, the plaintiffs claim that the injunction was
authorized by 42 U.S.C. §1983, which the Supreme
Court held in Mitchum to be one of the “expressly
authorized” exceptions to §2283. Section 1983 speaks
in terms of the “the deprivation of any rights, privileges,
or immunities secured by the Constitution and laws,”
and if it were construed to mean all federal laws, then
the exception would quickly swallow the rule set forth
in §2283. Cf. Chapman v. Houston Welfare Rights
*See, e.g., Juidice v. Vail, 430 U.S. 327, 341-47, 97 S.Ct. 1211,
51 L.Ed.2d 376 (1977) (Brennan, J., dissenting); Huffman v. Pursue,
Ltd., 420 U.S. 592, 613-18, 95 S.Ct. 1200, 43 L.Ed.2d 482 (1975).
App. 56
Organization, 441 U.S. 600, 99 S.Ct. 1905, 60 L.Ed.2d
508 (1979) (Powell, J., concurring, asserting that the
word “laws” in §1983 should be interpreted to mean
laws providing for equal rights). This was not the result
intended by the Supreme Court in Mitchum, as is
evidenced by its direct progeny, e.g., Juidice v. Vail,
430 U.S. 327, 97 S.Ct. 1211, 51 L.Ed.2d 376 (1977);
Huffman v. Pursue, Ltd., 420 U.S. 592, 95 S.Ct. 1200, 43
L.Ed.2d 482 (1975); as well as the case of Vendo Co. v.
Lektro-Vend Corp., 433 U.S. 623, 97 S.Ct. 2881, 53 L.Ed.2d
1009 (1977).
[19] In this case the plaintiffs allege that they
have been deprived of two separate constitutional rights.
First, they argue that they were somehow deprived of
property without due process of law because they never
received notice of the California proceedings. Those
proceedings were instituted by the California attorney
general on behalf of California residents against a
California corporation alleging violations of California
law. As to themselves, non-Californians were not bound
by that judgment, and it cannot be thought that the
Constitution required t..e attorney general to notify
residents of other states of the institution of his lawsuit.
The fact that Californians ultimately won a judgment
against Bestline and began to recover has not deprived
the plaintiff class of property without notice.
Second, the plaintiffs argue that they have been
denied the equal protection of the laws because the
California restitution fund denied participation solely
on the basis of residence. This arguement is meritless,
if not frivolous. In the first place, the Modified Judgment
allows anyone with a judgment to participate in the
restitution fund, and it does not differentiate on the
basis of residence. Next, even if the judgment allowed
App. 57
no persons outside California to participate, which it
does not, there is no showing that this involved suspect
classes, or fundamental interests or that it would be an
arbitrary or irrational distinction; hence there could be
no equal protection violation.
Although the plaintiffs have not articulated their
arguments well, they could be advancing an assertion
that Section 27 of the Securities Exchange Act, 15
U.S.C., Section 78aa, when coupled with the authority
to issue injunctions and writs of mandamus contained
in Section 21 of the Act, 15 U.S.C., Section 78u, constitutes
an “expressly authorized” exception to Section 2283.
The Second Circuit rejected a similar contention in
International Controls Corporation v. Vesco, 490 F.2d
1334, 1349 (2d Cir., 1974); and we think that decision, at
least insofar as it affects private lawsuits, compare
SEC vu Wencke, 577 F.2d 619 (9th Cir., 1978), is eminently
correct.
[20] There can be no doubt of this conclusion
after the decision of the Supreme Court in Vendo Co. »v.
Lektro-Vend Corp., 433 U.S. 623, 97 S.Ct. 2881, 53 L.Ed.2d
1009 (1977). In that case, three Justices concluded that
§16 of the Clayton Act, 15 U.S.C. §26, did not constitute
an express exception to the Anti-Injunction Act. Those
three Justices concluded that the Mitchum decision,
which held that 42 U.S.C. §1983 was an express exception
to the Anti-Injunction Act, was based upon a “recognition
that one of the clear congressional concerns underlying
the enactment of §1983 was the possiblity that state
courts, as well as other branches of state government,
might be used as instruments to deny citizens their
rights under the Federal Constitution.” 433 U.S. at 633,
97 S.Ct. at 2888. They were unable to find such concerns
in either the clear language or the legislative history of
App. 58
=e
the antitrust laws and therefore concluded that §16 of
the Clayton Act was not such an exception. Two
concurring Justices would have held “that no injunction
may issue against currently pending state-court
proceedings unless those proceedings are themselves
part of a ‘pattern of baseless, repetitive claims’ that
are being used as an anticompetitive device, all the
traditional prerequisites for equitable relief are satisfied,
and the only way to give the antitrust laws their intended
scope is by staying the state proceedings.” 433 U.S. at
644, 97 S.Ct. at 2894 (Blackmun, J., concurring). We
are unable to find any Congressional concern in the
language of the Securities Exchange Act that state
courts might be used to deny individuals their rights
under the Act, nor have we been pointed to any convincing
legislative history to that effect. Nor can we ascertain
any manner in which state court proceedings could be
used to defeat the goals of the Securities Exchange
Act. The California litigation was based upon violations
of the state’s deceptive advertising and unfair competition
laws, which arguably are congruent in purpose with
the Exchange Act and most assuredly do not defeat
the purposes of that Act. Finally, the fact that 15
U.S.C. §78u is concerned entirely with the authority of
the SEC to seek injunctions or other equitable reliei
strongly militates against any contention that it expressly
authorizes a federal court to enjoin state court proceedings
at the behest of private parties. Therefore, we conclude
that for private lawsuits the Securities Exchange Act
does not constitute an “expressly authorized” exception
to 28 U.S.C. §2283. See Vendo Co., supra, 433 U.S. at
635-39 & n. 7, 97 S.Ct. 2881.
App. 59
B. The “in aid of its jurisdiction” exception
The last argument advanced by the plaintiffs is
that the District Court acted to protect its exclusive
jurisdiction to adjudicate controversies arising under
the Securities Exchange Act of 1934. See 15 U.S.C.
§78aa. In Carter v. Ogden Corp., 524 F.2d 74 (5th Cir.
1975), we consia2red and rejected a similar claim. In
that case, Carte: filed a suit in a Louisiana federal
court alleging antitrust violations and a state law breach
of contract claim. Ogden then filed suit in Delaware
state court, and the Louisiana federal court enjoined
Ogden from prosecuting any other suit. We reversed,
noting that “[t]he phrase ‘where necessary in aid of its
jurisdiction, . . . should be interpreted narrowly, in
the direction of federal non-interference with orderly
state proceedings.” 524 F.2d at 76, quoting T. Smith &
Sons, Inc. v. Williams, 275 F.2d 397, 407 (5th Cir. 1960).
Finding no evidence that the Delaware proceedings
would interfere with the jurisdiction of the Louisiana
court to hear the case, we held that the grant of exclusive
jurisdiction to federal courts to entertain antitrust actions
had no impact on state law breach of contract claims.
In this case the plaintiffs have alleged violations
of state law, the Securities Act of 1933, and the Securities
Exchange Act of 1934. The federal courts have jurisdiction
to entertain the state law claims only if diversity of
citizenship is present or under the doctrine of pendent
jurisdiction. The state and federal courts have concurrent
jurisdiction to decide cases arising under the Securities
Act of 1933, and no case originally brought in a state
court of competent jurisdiction under that Act may be
removed to a federal court. 15 U.S.C. §77v. Under the
Securities Exchange Act of 1934, the federal district
cou:ts have exclusive jurisdiction to decide cases arising
App. 60
—
under that act. 15 U.S.C. §7Saa. Thus, in this case, the
plaintiffs’ argument seems to include the proposition
that if they are correct in their assertion that the “in
aid of its jurisdiction” exception applies because of the
Exchange Act, then the District Court may enjoin state
court prosecutions of either state law claims or of
Securities Act claims, simply because such claims have
been attached to a complaint alleging violations of the
Exchange Act.
[21] The California litigation was based solely
upon violations of state law, and it never purported to
adjudicate a claim under the Exchange Act. Those
proceedings in no way affected the “flexibility and
authority” of the federal court to decide the Exchange
Act claims. See Atlantic Coast Line R. Co., supra, 39&
U.S. at 295, 90 S.Ct. 1739. The fact that Bestline might
hav- fewer assets available to satisfy any judgment
entered as a result of the Florida federal litigation in
no way affects the jurisdiction of the federal court.
Just as we rejected in Williams, supra, the claim that a
federal district court may enjoin state court proceedings
simply because it has before it a case arising under the
antitrust laws, we reject the argument that a federal
court may enjoin state court proceedings in order to
decide a private lawsuit brought under the Securities
Exchange Act of 1934.
SUMMARY
We summarize our holdings in this case, as follows:
1. Summary judgment should not have been
entered.
2. Sylva was entitled to intervention as a matter
of . cht.
App. 61
3. The attorneys’ fees as proposed in the Bestline
settlement should not have been approved as presented.
4. The entry of an injunction against enforcement
of the judgment of the California Superior Court is
reversed.
5. The order entering final judgment as to Bestline
and 27 individual defendants is vacated.
CONCLUSION
The Judgment of the District Court is reversed.
The case is remanded for further proceedings not
inconsistent herewith.
REVERSED and REMANDED.
App. 62
APPENDIX
Chronology of Events in Bestline Litigation
July 22, 1970
May 12, 1971
Nov. 3, 1971
Oct. 25, 1972
June 13, 1973
July 20, 1973
July 23, 1973
July 25, 1973
Dec. 2i, 1973
Jan. 31, 1974
May 3, 1974
June 30, 1974
Sept. 20, 1974
Oct. 8, 1974
Nov. 14, 1974
Nov. 15, 1974
Nov. 22, 1974
Dec. 20, 1974
Jan. 1, 1975
F7TC issues complaint against Bestline.
California files suit Bestline.
Consent order with FTC becomes final.
Trial begins in Cal. Superior Court.
Trial ends.
Piambino plaintiffs file class action in So. Dist.
Florida.
Bestline files bankruptcy petition in N.D. California.
Cal. Superior Court issues written judgment and
order, later stayed by N.D. California.
Modified Judgment entered and Bestline withdraws
bankruptcy petition.
First payment made from restitution fund
($1,000,000).
Multidistrict panel first transfers cases to S.D.
Florida.
Second payment made from restitution fund
($1,000,000).
Lead counsel threaten Bank of America.
Lead counsel threaten Bank of America.
Cal. Superior Court orders payments to be made.
Lead counsel file class action in N.D. California
to enjoin payments.
S.D. Florida certities class.
Multidistrict panel conditionally transfers N.D.
California suit te S.D. Florida.
Third payment made from restitution fund
($1,000,000).
App. 63
APPENDIX—Continued
Chronology of Events in Bestline Litigation
Feb. 14, 1975
March 28, 1975
April 4, 1975
June 30, 1975
Jan. 1, 1976
Feb. 23, 1976
March 19, 1976
April 2, 1976
june 30, 1976
July 19, 1976
Oct. 20, 1976
Feb. 25, 1977
Multidistrict panel vacates previous order. Case
returns to N.D. California.
Hearing held in N.D. California; plaintiffs fail to
appear.
N.D. California dismisses complaint with prejudice.
Fourth payment made irom restitution fund
($1,000,000).
Fifth payment made from restitution fund
($250,000).
Ninth Circuit dismisses appeal.
S.D. Florida grants motion for summary judgment.
N.D. California holds that Bestline has violated
consent order.
S.D. Florida enjoins Bestline from bench; written
order follows on July 7.
N.D. California enters judgment against Bailey.
S.D. Florida ayproves Bailey settlement; money
then transferred from N.D. California to S.D.
Florida.
S.D. Florida approves Bestline settlement and
denies intervention.
App. 64
Peter PIAMBINO and JOSEPH F.
KUCKLICK, Plaintitfs-A ppellees.
v.
William E. BAILEY and David L.
Eastis, Defendants,
and
Bestline Products, Inc., a Californi:
corporation, Defendant-Appellee,
David Sylva, Intervenor-Appellant.
No. 82-5844.
United States Court of Appeals,
Eleventh Circuit.
March 18, 1985.
* * *
Appeal from the United States District Court for
the Southern District of Florida.
Before TJOFLAT and CLARK, Circuit Judges.
and GOLDBERG”, Senior Circuit Judge.
TJOFLAT, Circuit Judge:
I.
This is a class action in which the plaintiffs seek
money damages under the federal! securities laws. The
lawyers who have been representing the plaintiff-class
have a conflict of interest with the minority segment of
the class. They have used this conflict of interest to
benefit themselves and the majority of the class members
since the case began. On March 11, 1977, they concluded
a settlement and obtained an attorney’s fee award,
beth of which were highly unfair to the minority members.
App. 65
We set aside the settlement and the fee award in
Piambino v. Bailey (Piambino I), 610 F.2d 1306 (5th
Cir.),' cert. denied, 449 U.S. 1011, 101 S.Ct. 568, 66
L.Ed.2d 469 (1980), and instructed the district court to
grant David R. Sylva the status of an intervening party
plaintiff to protect the interests of these minority members
of the plaintiff-class (the “Minority Group”).
When the district court received our mandate, the
plaintiff's lawyers resisted its enforcement because
the proceeds of the vacated settlement had been disbursed
. and they had spent the attorney's fee the court had
awarded them. Faced with this problem, the district
court refused to enforce our mandate. Sylva now turns
to us for relief.”
A brief synopsis of the events that led to our
decision in Piambino J and thereafter took place in the
‘Piambino I was decidec oy our predecessor circuit, the former
Fifth Circuit. On October 1, 1981, that circuit divided into the new
Fifth Circuit and our Eleventh Circuit. Throughout this opinion
we treat Piambino J, which is binding on chis court, as if the
Eleventh Circuit had decided it. In Bonner v. City of Prichard, 661
F.2d 1206, 1209 (iith Cir. 1981) (en banc), we adopted as binding
precedent all decisions of the former Fifth Circuit handed down
prior to October 1, 198i.
“We treat Sylva's appeal as a petition for a writ of mandamus
pursuant to 28 U.S.C. §1651 (1982) because there is some question
whether the district court's action in failing to follow our mandate
constitutes a final judgment reviewable under 28 U.S.C. §1291
(1982). See United States v. Haley, 371 U.S. 18, 83 S.Ct. 11, 9
L.Ed.2d 1 (1962); United States v. United Siates District Court,
334 U.S. 258, 263, 68 S.Ct. 1035, 1037, 92 L.Ed. 1351 (1948); United
States v. Ritter, 273 F.2d 30 (10th Cir. 1959), cert. denied, 362 U.S.
950, 80 S.Ct. 863, 4 L.E'd.2d 869 (1960); cf Baltuomore & O.R. Co. »v.
United States, 279 U.S. 781, 785, 49 S.Ct. 492, 493, 73 L.Ed. 954
(1929); In re Sanford Fork & Tool Co., 160 U.S. 247, 255-56, 16 S.Ct.
291, 293, 40 L.Ed. 414 (1895).
App. 66
—
district court is necessary to give context to the holdings
of that decision, the serious legal and ethical questions
this appeal presents, and our disposition of those questions.
A.
The plaintiffs in this case are purchasers of
distributorships in a nationwide pyramid marketing
scheme devised and operated by Bestline Corporation’
to sell soap products. The plaintiffs became Bestline
distributors, they allege, in reliance upon Bestline’s
represent: tion that its distributors were making
substantial profits and that they would also. This
representation was false, and the plaintiffs lost their
investments. They brought this class action, on July
20, 1973, against Bestline and its principals, contending
that their distributorships were “securities” and seeking
money damages under federal securities laws.
The plaintiffs comprising the Minority Group are
the beneficiaries of a multimillion dollar state court
judgment (the “California Judgment”) the attorney geieral
of Caifornia obtained against Bestline Corporation in
1973, about the time this litigation began, under
California's consumer fraud laws. That judgment required
Bestline to make periodic restitution payments into a
fund (the “California Fund”), established by the judgment,
for distribution Bestline’s California distributors. David
R. Sylva is the trustee of that fund; he is charged with
the responsibility of approving the distributors’ claims
and forwarding Bestline’s restit'*tion payments to them.
‘Bestline Corporation, a California corporation, is the parent
corporation of a wholly-owned subsidiary, Bestline Products, Inc.,
also a California corporation and also a defendant in many of the
lawsuits discussed infra. These two entities will be referred to,
collectively, as Bestline.
App. 67
Soon after they filed the present class-action suit,
if not before, it became evident to the plaintiffs’ lawyers
(“Lead Counsel”) that Bestline would lack sufficient
financial resources to make a significant settlement
offer, or to satisfy any judgment the plaintiff-class
might obtain after a trial on the merits, and to pay
them an attorney's fee, if Bestline continued making
restitution payments to their clients in the plaintiff-
class who were beneficiaries of the California Judgment,
i.e., the Minority Group. Lead Counsel therefore took
steps to stop the flow of money from Bestline to these
clients.
First, Lead Counsel appeared before the Superior
Court of Los Angeles County, whose ‘udgment was
providing the vehicle for Bestiine’s restitution payments,
and requested that court to impose a constructive trust
on the California Fund for the benefit of their clients in
the plaintiff-class who were not beneuciaries of the
California Judgment (the “Majority Group”). The Superior
Court rejected Lead Counsel’s request. Lead Ccunsel
then brought suit in the U.S. District Court for the
Northern District of California. They named as plaintiffs
the entire plaintiff-class now before us (the Majority
and the Minority Groups) and as defendants, among
others, Sylva,‘ the Superior Court of Los Angeles County,
and the California attorney general. Lead Counsel asked
the district court to enjoin Sylva from distributing to
the Minority Group the restitution funds Bestline was
paying into the California Fund on the grounds, inter
alia, that the California Judgment, by not providing for
‘H. Lee Holden, Sylva’s predecessor as trustee of the California
Fund, was actually named as defendant. When Sylva replaced
Holden as trustee he was substituted as the proper party defendant.
A pp. 68
A
restitution to the Majority Group, denied the members
of that Group rights secured by the ninth and fourteenth’
amendments to the U.S. Constitution. The district court
refused to grant the injunction and dismissed the case,
with prejudice, iur faiiure to state a claim for relief.’
See Fed.R.Civ.P. 12(b\(6).
Having failed in California, Lead Counsel turned
to the district court below for relief. The district court
had previously determined, on plaintiffs’ motion for
summary judgment, that the distributorships plaintiffs
had purchased from Restiine were securities within
the meaning of the federal securities laws, and the
parties were in the process of preparing for trial. On
June 18, 1976, Lead Counsel moved the court to enjoin
Bestline Corporation from making a $500,000 restitution
payment to the California Fund that was due on June
30. In urging the court to issue the injunction, they
pointed out that Bestline was rapidly disposing of its
‘The ninth amendment to the U.S. Constitution provides that
“[t]he enumeration in the Constitution, of certain rights, shall not
be construed to deny or disparage others retained by the people.
‘Section One of the fourteenth amendment to che U.S.
Constitution provides that:
All persons born or naturalized in the United States, and
subject to the jurisdiction thereof, are citizens of the United
States and of the State wherein they reside. No State shall
make or enforce any law which shall abridge the privileges or
immunities of citizens of the United States; nor shail any
State deprive any person of life, liberty, or property, without
due process of law; nor deny to any person within its jurisdiction
the equal protection of the laws.
‘The court made its ruling in an unpublished memoraudum
order.
App. 69 ©
assets and that, unless the court took action, Bestline
would soon have no assets to pay the plaintiffs’ claims.
On June 30, the district court preliminarily enjoined
Bestline from making the payment due that day and
ordered it to deposit the sum of $500,000 in the registry
of the court. The court further enjoined Bestline from
making any subsequent payment called for by the
Califernia Judgment.
Bestline objected to the issuance of this injunction
on the ground, inter alia, that the court had not required
the plaintiffs to post a bond as required by Fed.R.Civ.P.
65(c).* In response, the court said that Bestline’s $500,000
deposit would serve as the plaintiffs’ bond and would
remain in the court's registry as long as the injunction
remained in effect.
Bestline immediately appealed the district court's
injunctive order to this court. While Bestline’s appeal
was pending, Lead Counsel negotiated a settlement
with Bestline and twenty-seven of the individual
defendants. On January 28, 1.77, the distriet court
preliminarily approved the settlement. Two weeks later,
Sylva moved the court to intervene as a party plaintiff,
representing the Minority Group. He requested the
court to designate that Group a plaintiff-subelass, claiming
that Lead Counsel's representation of both the Majority
and the Minority Groups constituted a conflict of interest.
‘Fed.R.Civ.P. 65(c) provides:
(c) Security. No restraining order or preliminary injunction
shall issue except upon the giving of security by the applicant,
in such sum as the court deems proper, for the payment ol!
such costs and damages as may be incurred or suffered by
any party who is found to have been wrongfully enjoined or
restrained. No such security shall be required of the United
States or of an officer or agency thereof.
App. 70
————— LLL Ll ll
Sylva sought to intervene for two reasons: to seek
the vacation or modification of the injunction that was
preventing Bestline from fulfilling its obligations under
the California Judgment, and to contest the settlement
the court had preliminarily approved. Sylva objected
to the settlement because most of the members of the
Minority Group would not share in the proceeds thereof
and because, under its terms, Bestline would be precluded
from making further restitution to that Group under
the California Judgment.
The district court entertained Sylva’s motion to
intervene on March 11, 1977, at a hearing on Lead
Counsel's application for the final approval of the
iforementioned settlement and the award of an attorney's
fee and expenses. The court denied Sylva’s motion as
untimely and meritless, without further explication. It
then addressed the propriety of the settlement and the
issue of Lead Counsei's attorney's fee and litigation
expenses. The court approved the settlement as “fair,
reasonable and adequate’ and, stating that there were
no objections, approved Lead Counsel's request for a
$750,000 attorney's fee and $50,000 in expenses. Three
days later, the clerk of the court disbursed the fee to
Lead Counsel out of fuads on deposit in the court’s
registry.
On April 1, 1977, Sylva took an appeal from the
district court’s order denying his motion to intervene;
at the same time, he moved the district court te stay
the execution of the settlement and to set aside the
attorney's fee the clerk had disbursed to Lead Counsel.
The district court, on May 2, 1977, refused to set aside
the fee disbursement or to grant the stay, and, by the
time we heard Sylva’s appeal, the district court had
disbursed all of the settlement proceeds to the eligible
members of the plaintiff-class.
App. 71
crenata
B.
On December 5, 1980, we decided Piambino I. 610
F.2d 1306 (5th Cir.), cert. denied, 449 U.S. 1011, 101
S.Ct. 568, 66 L.Ed.2d 469 (1980), Svlva’s appeal and
Bestline’s earlier appeal from the district court's
preliminary injunction,’ which had been consolidated
for argument and decisional purposes.'® We reversed
the district court's order enjoining Bestline from making
the restitution payments called for by the California
Judgment, because that order had no basis in law. Jd.
at 1334. We also reversed the district court’s order
denying Sylva intervention, concluding that the court
should have allowed him to intervene in behalf of the
Minority Group because its interests were at odds
with those of the Majority Group and were not being
adequately represented by Lead Counsel. Accordingly,
we instructed the district court, on remand, to treat
Sylva as a party plaintiff.
Most of the factors that counseled our decision on
the intervention issue made clear the unfairness of the
settlement. We therefore vacated the settlement. Having
“Although the settlement between Besiline and the plaintiff-
class would have ordinarily mooted Best!ine’s appeal, see United
Airlines, Inc. v. McDonald, 432 U.S. 385, 400, 97 S.Ct. 2464, 2473,
93 L.Ed.2d 423 (1977), the possibility that Sylva might be permiited
to intervene, as the representative of the Minority Group, to
contest the validity of the injunction, the settlement, and Lead
Counsel's attorney's fee and expense award kept the controversy
alive and ripe for appellate review.
“In its notice of appeal, Bestline also sought review of the
district court's partial summary judgment which determined that
Bestline’s distributorships were securities. The partial summary
judgment was not appealabie. See infra note
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