Petition for a Writ of Certiorari — Ohio v. Arthur Andersen & Co.

Opinions Below

Jurisdiction _.

Questions Presented

TABLE OF CONTENTS

Constitutional Provision and Federal Rules of Civil

Procedure Involved

Statement of the Case

-Reasons for Granting Writ

1.

Conclusion

The Tenth Circuit Refused to Follow the Rule of

Hansberry v. Lee, 311 U.S. 32 (1940), That Due

Process of Law in Class Actions Requires Ade-

quate Representation of Absent Class Members.

The Decision Below Conflicts in Principle With

a 1973 Decision of the Fifth Circuit. -...................

The Number and Size of Rule 23 (b) (3) Class

Actions Require a Definitive Determination of

the Interrelationship Between the Fair and Ade-

quate Representation Necessary Under Rule

23 (a) (4) and Notice Under Rule 23(c) (2)

This Court Should Halt the Practice in Rule

23 (b) (3) Class Actions of Postponing the Class

Determination Under Rule 23(c)(1) Until a

Settlement Is Proposed and Then Giving a Singie

Combined Notice Under Rules 23(c)(2) and

23 (e).

The Tenth Circuit Exceeded the Proper Scope

of Appellate Review and Undercut the Trial

Court's Discretion to Grant Relief Under Rule

60 (b) from a Judgment in a Class Action

11

14

15

3

Appendix (Separately printed):

Opinion of the Tenth Cireuit Court of Appeals,

August 13, 1974 | Al

Judgment of the Tenth Circuit Court of Appeals,

August 13, 1974 A21

Opinion of the District Court for the Western Dis-

trict of Oklahoma Designated “Opinion No. 4”,

June 7, 1973 . A22

Supplementing Opinion of the District Court Desig-

nated “Opinion No. 4A”, July 25, 1973 A52

Judgment of the District Court, August 17, 1973 .. A53

Opinion of the District Court Designated “Opinion

No. 2”, December 18, 1972 A56

Amendment V to the Constitution of the United

States A99

Rule 23 of the Federal Rules of Civil Procedure ..... A99

Rule 60 of the Federal Rules of Civil Procedure A103

TABLE OF AUTHORITIES

Cases

Bibeau v. Northeast Airlines, Inc., 429 F.2d 212 (D.C.

Cir. 1970) 19

Eisen v. Carlisle & Jacquelin, 391 F.2d 555 (2d Cir.

1968), rev’d on other grounds, 479 F.2d 1005 (2d

Cir. 1973), vacated and remanded, 94 S.Ct. 2140

(1974) 2, 9, 13, 14, 15

Fischer v. Kletz, 41 F.R.D. 377 (S.D.N.Y. 1966) ............ 13

Gonzales v. Cassidy, 474 F.2d 67 (5th Cir. 1973) ............

11, 12, 13, 14

Hansberry v. Lee, 311 U.S. 32 (1940) 2, 8, 9, 10, 11, 12

Hohmann v. Packard Inst., 43 F. R. D. 192 (N. D. III.

1967), rev’d on other grounds, 399 F.2d 711 (7th Cir.

1968) 13

Hutton v. Fisher, 359 F.2d 913 (3d Cir. 1966) ................ 19

Klapprott v. United States, 335 U.S. 601 (1949) 3, 19

Laguna Royalty Co. v. Marsh, 350 F.2d 817 (5th Cir.

1965) 19

Nichols v. United States, 460 F.2d 671 (10th Cir. 1972),

cert. denied, 409 U.S. 966 (1972) 21

Radack v. Norwegian America Line Agency, Inc., 318

F.2d 538 (2d Cir. 1963) 19

Rooks v. American Brass Co., 263 F.2d 166 (6th Cir.

1959) 19

Smith v. Jackson Tool & Die, Inc., 426 F.2d 5 (5th Cir.

1970) 19

State of Ohio v. Crofters, Inc., et al., No. 72-81 4, 7

United States v. National Ass’n of Real Estate Boards,

339 U.S. 485 (1950) 20

Zenith Radio Corp. v. Hazeltine Research, Inc., 395

U.S. 100 (1969) 20

IV

Constitution, Statutes and Rules

Constitution of the United States, Fifth Amendment. 2,3

Federal Rules of Civil Procedure: |

Rule 23 3, 14, 15, 16, 22

Rule 23 (a) 16

Rule 23(a) (4) ? 2, 12, 14, 15

Rule 23 (b) 16

Rule 23 (b) (1) 13

Rule 23 (b) (2) 11, 12, 13

Rule 23 (b) (3) 2, 4, 11, 12, 13, 14, 15

Rule 23 (c) (1) 2, 15, 16, 18

Rule 23 (e) (2) 2, 6, 10, 12, 14, 15, 18

Rule 23 (c) (4) 16

Rule 23 (e) ~~ 2, 15, 18

Rule 60. 3

Rule 60(b) 7, 10, 13, 18, 20, 21, 22

Rule 60(b) (1) ; 7

Rule 60(b) (4) 7, 9, 10

Rule 60 (b) (6) } 3, 7, 10, 19, 20

Securities Act of 1933, Sec. 22(a) 4

Securities Exchange Act of 1934, Sec. 27 4

28 U.S.C. Section 1254(1) 2

28 U.S.C. Section 1407 21, 22

Texts

Manual for Complex Litigation (1973) 16, 18

7 C. Wricur & A. Mn, FepErRAL PRACTICE AND PRo-

CEDURE, Sec. 1765, p. 618 (1972) 8

11 C. Wricut & A. MILLER, FEDERAL PRACTICE AND Pro-

cepurE, Sec. 2857, pp. 157-158 (1973) .................. 18-19, 20

Sec. 2872, pp. 261-262, n.6, Supp. p. 83

Supreme Court of the United States

October Term, 1974

No.

STATE OF OHIO,

Petitioner,

vs.

ARTHUR ANDERSEN & CO., JACK L. CLARK, GORDON

H. McCOLLUM, GLENN R. MILLER, ‘MONTGOMERY

CO., and WALSTON & CO., INC.,

Respondents.

PETITION FOR A WRIT OF CERTIORARI

To the United States Court of Appeals

For the Tenth Circuit

Petitioner the State of Ohio respectfully prays that

a writ of certiorari issue to review the judgment of the

United States Court of Appeals for the Tenth Circuit en-

tered in this proceeding on August 13, 1974.

OPINIONS BELOW

The opinion of the Court of Appeals, not yet reported,

appears in the Appendix at p. Al. The opinion of the

District Court for the Western District of Oklahoma, re-

ported at 59 F.R.D. 667 (1973), appears in the Appendix

at p. A22. The supplementing opinion of the District

Court, not reported, appears in the Appendix at p. A52.

1. This case is part of a complex, multidistrict action known

as “Four Seasons Securities Laws Litigation, M.D.L. 55”. The

District Court opinion epproving the settlement which Ohio has

88 is reported at 58 F. R.D. 19 and appears in the Appendix

at p. . f

JURISDICTION

The judgment of the Court of Appeals was entered

on August 13, 1974. This Court’s jurisdiction is invoked

under 28 U.S.C. §1254(1).

QUESTIONS PRESENTED

1. Does not due process under the Fifth Amendment

and this Court’s decision in Hansberry v. Lee, 311 USS.

32 (1940), require adequate representation of the absent

members of a plaintiff class throughout g action under

Rule 23 (b) (3) even though notice may have been given?

2. Can the express requirement of Rule 23 (a) (4) that

there be ſair and adequate representation of absent class

members in all class actions be ignored in Rule 23 (b) (3)

class actions merely because of the notice and opt-out

provisions in Rule 23 (c) (2) in view of this Court’s state-

ment in Eisen v. Carlisle & Jacquelin, 94 S.Ct. 2140, 2152,

(1974) that “Rule 23 speaks to notice as well as to adequacy

of representation and requires that both be provided”?

3. Is amalgamating the class action determination un-

der Rule 23(c)(1) with the procedure for judicially ap-

proving a compromise under Rule 23(e) and issuing only a

single combined notice under Rules 23(c)(2) and 23(e)

permissible in a Rule 23(b) (3) case in view of the poten-

tially damaging effect such telescoping has on the rights

of absent class members?

4. Should not the scope of appellate review over the

District Court’s discretion “to vacate judgments whenever

such action is appropriate to accomplish justice” under the

3

“‘other reason’ clause” of Rule 60(b)(6), Klapprott v.

United States, 335 U.S. 601, 614-615 (1949), be limited to

correcting abuse of discretion in complicated, multidistrict,

class action litigation?

CONSTITUTIONAL PROVISION AND FEDERAL

RULES OF CIVIL PROCEDURE INVOLVED

This petition for certiorari involves the due process

clause of the Fifth Amendment to the United States Con-

stitution and Rules 23 and 60 of the Federal Rules of

Civil Procedure. These are set out in the Appendix at

p. A99, p. A99, and p. A103 respectively.

STATEMENT OF THE CASE

In March, 1970 the State of Ohio (Ohio) lent $4,000,000

to Four Seasons Nursing Centers of America, Inc. (Four

Seasons), a Delaware Corporation with its principal place

of business in Oklahoma City. The loans were evidenced

by three promissory notes with interest. Three months

later, on June 26, 1970, Four Seasons filed a petition for

reorganization under Chapter X of the Bankruptcy Act.

Ohio has persistently pursued every avenue by which

it might recover its loans. It filed a claim for $4,111,000

in the reorganization. It sought reclamation of the proceeds

of its loans in the reorganization court and appealed the

denial of its reclamation petition. App. pp. A25-A26;

59 F.R.D. at 670-671. As an ordinary creditor (Class

C), Ohio consistently objected to the inclusion of creditor-

stockholders (Class G) in the plan of reorganization and

2. The Tenth Circuit’s opinion the denial of the

affirming

reclamation petition is reported at 465 F.2d 25 (1972).

4

filed three separate appeals challenging the plan so

drafted. App. p. A28; 59 F.R.D. at 671-672.

Thus, a conflict of position between Ohio and the

ereditor-stockholders was early manifest. Certain of these

creditorstockholders amd other security holders fled sev-

eral lawsuits as class actions under Rule 23 (b) (3) of the

Federal Rules of Civil Procedure against the former of-

ficers, directors, accountants, and investment bankers of

Four Seasons. App. p. A57; 58 F.R.D. at 21. These cases,

which were later designated as class actions (App. p. A80;

58 F.R.D. at 32), are the subject of this petition.

Jurisdiction was based on the Securities Act of 1933,

822 (a), the Securities Exchange Act of 1934, §27, and pen-

dent jurisdiction. In May, 1971 ten actions were con-

solidated for pretrial proceedings in the Western District

of Oklahoma and assigned to Senior District Judge Roszel

C. Thomsen of Baltimore hy order of the Judicial Panel

on MRR Dkigetion. S23 F Sapp. 221. This corm

glomerate Decamre “MODE. SS. Meany additional canes

were later tranakered & A.

N Marek, 19% Ole Med Uree cares ef BS Cu

arising Gat ef Rs leans te Pour Seasens. One was State

of Chie wv Crofters, Inc. et ab, No. 7231, im the United

States District Court fer the Southern District of Ohio.

The other two cases were im the state court. lu Crofters

Ohio alleged that its loans to Four Seasons were procured

in violation of federal and state securities laws and by

common law fraud. Jurisdiction was also based on the

Securities Act of 1933, §22(a), the Securities Exchange

Act of 1934, §27, and pendent jurisdiction. The defen-

dants in Ohio’s action included several former officers and

directors of Four Seasons who were also defendants in

M.D.L. 55, as well as agents and others associated in the

procurement of the Ohio loans. App. p. A29; 59 F.R.D. at

672-673. Ohio's action was tremsierred t ML. 55 but mat

until July 17, 1973 (361 F. Supp. 636), approximately 2 year

after the events described below.

On July 20, 1972, after extensive hearings, Judge

Thomsen announced that he was ready to designate five

actions as class actions and define tentatively two plain-

tiff classes. App. pp. A31, A76-A77; 59 F. R. D. at 673; 58

F.R.D. at 30. Ohio, which had not participated in any

M.D.L. 55 proceedings, was not present at the July, 1972

hearings. App. p. A7. No notice had been sent to any ab-

sent member of the purported classes wp to that time, and

none Was sent until after September 21, 1972. App. pp.

Ae SS ERD. at . Upon Judge Thomeen’s am

eee, all COVAwel Prewant avked Phe coert to @aier

BAY GaarwMahing af The claweas sa Uhat The parties cad

Bw AM; B BRD at SH.

The peried fem aly 20 te September 21, 1972 proved

erttical to Oe Daterests. At that time, the selfappointed

representatives, who were all beneficiaries of the reor

ganization plan which Ohio was challenging in its ap-

peals, were negotiating a settlement which had serious side

effects for Ohio, such as: (1) discounting Ohio’s federal

and state securities claims by 90% while valuing their own

claims at 100%; (2) ignoring Ohio's special claim for inter-

est; (3) rejecting Ohio's claim for punitive damages; and

(4) expressly reserving all rights, claims, and causes of

action of the M.D.L. 55 defendants against Ohio. App. pp.

A79-A85, A48-A51; 58 FR D. at 32-35; 59 F_R.D. at 682-683.

On September 21, 1972 the proposed settlement was

presented to Judge Thomsen by counsel in M.D.L. 55. The

order entered that day preliminarily approved the proposed

settlement and directed that notice be sent to members of

‘the ‘two pluitiff classes described. The definition of one

class encompassed Ohio. App. p. AS’. The order, with

many exhibits, included the form of notice contemplated

by Rule 23(c)(2). App. p. A4, n.15; 59 FRD. at 679,

n. 15. Ohio received two copies of the order by registered

mail at the Office of the Attorney General, one on October

6, 1972 and the other on October 10, 1972. Notice of the

proposed settlement was also published in The Wall Street

Journal. App. p. A35; 59 F. RD. at 675. No one for Ohio

read either the copies of the notice received by the At-

torney General’s Office or the published notice at that

time. App. pp. A35, Ad-ASS; 59 FLR.D. at 675, 679.

From July 20 to September 22, 1972, Ohio was sepa-

Tately HegVodiating WA the Trustee and bis come! to sed-

DE Gen he Plan af Ne and

ahecatien of Shaves Da Ue reargepieed compa &

ereditersteckhelters, App pm AMMAR 32 PRD at FD

N Threnghent ts negotiations Qefore and after Sep.

tember 22, 1972 with the Trustee and bis counsel, as well

as im the discussions which Ohio's assistant attorneys gen-

eval had with counsel for some of the MDL. 35 defen-

dants, Ohie acted “im the belief that Ohio would not

be included in the MDL. 55 classes.” The District

Court so found. App. p. A42; 59 F.R.D. at 678-679.

While rejecting any criticism of counsel for the M.D.L.

55 defendants or the Trustee, the District Court also

found that the course of dealings from July 20 through

September 22, 1972 “lulled Ohio’s attorneys into the

belief that the statement made to them [on Septem-

ber 22 by counsel for the Trustee] ‘that the case had been

7

settled around Ohio’ meant that Ohio was not involved in

the M.D.L. 55 settlement.” App. p. A42; 59 F.R.D. at 679.

Ohio first read the whole order of Sentember21, 1972

gbout December Sth after being Slertet by siztmlents of

counsel for one of the MDL. 55 defendants at 2 Pretrial

hearing in the Crofters case. Ohio's motion fr relief

from judgment under subdivisions (1), (4), and (6) of

Rule 60(b) was promptly filed with Judge Thonsen in

Baltimore on December 21, 1972. App. p. A38; 5¢ F. R..

at 677.

After depositions by both sides, two oral arguments,

and extensive briefs, the District Court granted Oho's mo-

tion on the “other reason” ground of Rule 60(5) (6).

App. pp. AS3-A54. Having stated that “Ohio has made a

strong case that the judgment should be held void ss to all

the claims of Ohio,” Judge Thorasen continued:

To The considerations referred % Je the est pre-

ceding Paragraph west de added Yhe Wg effect of

the deadhgs eh Ve atterseys fr Ode ded with the

athersey fee the Chapter X Treatee and the astorneys

fer some ef the MDL, 5S defeedants, discussed under

the heading “G0()) (1)—Excusable Neglect”, above.

4 wk

The court concludes that the totality of the evi-

dence requires that Ohio be relieved from the opera-

tion of the judgment. App. p. A51; 59 F.R.D. at 683.

The Tenth Circuit reversed Judge Thomsen’s grant of

relief to Ohio and ordered the judgment reinstated.

REASONS FOR GRANTING WRIT

1. The Tenth Circuit Refused to Follow the Rule of

Hansberry v. Lee, 311 U.S. 32 (1940), That Due

Process of Law in Class Actions Requires Ade-

quate Representation of Absent Class Members.

The Tenth Circuit specifically rejected Hansberry

as either governing or guiding authority. After acknowl-

edging Hansberry as “the landmark due process decision

in class action law,” the appellate court departed from the

existing authorities, which interpret the decision “to estab-

lish adequate representation as a prerequisite for due

process in class actions.” App. p. A17,n.8. Ultimately the

Tenth Circuit cut itself completely free from Hansberry

and stated that:

While adequacy of representation has been up-

held as an extremely important factor in due process

considerations in class actions and has, in fact, been

deemed a prerequisite thereto under most circum-

stances, we do not feel bound in the instant proceed-

ing by Hansberry and its progeny. ... App. p. Als

(emphasis added).

From there it was an easy step to the conclusion “that due

process may be satisfied by notice alone and that, where

5. See 7 C. WricoTt & A. MILLER, FEDERAL PRACTICE AND

PROCEDURE, §1765, p. 618 (1972) and cases cited therein.

due process is thus satisfied, adequacy of representation

need not be shown as a matter of constitutional neces-

sity.” App. p. A19.

In Hansberry, this Court determined that persons seek-

ing to enforce a restrictive covenant could not and did not

adequately represent those opposed to its enforcement and

that there could be no proper class consisting of both.

Id. at 44. The Ccurt then concluded (1) that a prior judg-

ment could not be res judicata as to the petitioners in

Hansberry because they had not been adequately repre-

sented in the original action, and (2) that the petitioners

had been denied due process in the court below. Id. at

44-46. The Court recognized that absent class mem-

bers . . may be bound by the judgment where they

are in fact adequately represented by parties who are

present. Id. at 42-43. But the Court then held

that . . . a selection of representatives for purposes of

litigation, whose substantial interests are not necessarily

or even probably the same as those whom they are deemed

to represent, does not afford that protection to absent

parties which due process requires.” Id. at 45.

In discussing Ohio’s motion under Rule 60(b) (4), the

District Court properly applied and followed the rule that

due process in class actions requires adequate representa-

tion of absent class members:

But where a party has not appeared, although

he has received due notice, the judgment will not

be binding upon him unless he has had representation

which meets the tests of Rule 23(a) (3) and (4), quoted

above. Adequacy of representation cannot take the

place of notice;* nor can notice take the place of

6. As this Court recently held in Eisen v. Carlisle & Jacque-

lin, 94 S.Ct. 2140, 2152 (1974).

10

adequacy of representation. App. p. A44; 59 F.R.D.

at 680.

Even though the District Court granted Ohio’s motion on

the “other reason” ground set out in Rule 60(b) (6), rather

than the voidness ground in (b) (4), it repeatedly stated

that Ohio had “made a strong case that the judgment

should be held void as to all the claims of Ohio.“ App.

pp. A51, A53, A54; 59 F. R. D. at 683.

In addition to not feeling bound by Hansberry, the

Tenth Circuit justified its rejection of adequate representa-

tion as a constitutional requirement for due process in this

case in order “to prevent one-way intervention”. App.

p. Al9. Yet, the court failed to explain how the circum-

spect exercise of judicial discretion under Rule 60(b) (6)

to relieve one party Ohio from one class action judg-

ment could constitute “‘a return to one-way intervention

under a new guise.’” Id. This prediction is baffling since

the District Court found that the attorneys for the Trustee

and the M.D.L. 55 parties “assumed that Ohio would opt

out when it received the notice” (App. p. A34; 59 F. R. D.

at 675) and Ohio had had the right under Rule 23(c) (2)

unilaterally to opt out at an earlier point.

In other words, the granting of Ohio’s motion under

Rule 60(b) put the parties exactly where they thought

they would be when they negotiated the settlement. Ohio

was merely permitted to exercise its right to opt out after

the date fixed by the September 21st order.

7. The Tenth Circuit assumed “the conclusion of the court

below on the adequacy question to be correct. App. p. Al6.

8. Motions also under Rule 60 (b) a ode oe

Thomsen to movants Kleinman and Phillips. 60 F. 598

(1973); M.D.L. 55, Opinion No. 8 (July 10, 1974).

— —

11

The District Court correctly recognized the consti-

tutional due process requirement of both notice and ade-

quate representation to bind absent class members and

properly applied the Hansberry principle in a Rule 23 (b) (3)

class action. On the other hand, the Tenth Circuit was

wrong not only in concluding that adequate representation

could be dispensed with if there was notice but also in ig-

noring the mandate of Hansberry in so doing. In light

of the damage this precedent could cause absent class

members in Rule 23(b)(3) actions, a writ of certiorari

should issue to correct the appellate court’s error.

2. The Decision Below Conflicts in Principle With

a 1973 Decision of the Fifth Circuit.

The Fifth Circuit, in a class action under Rule 23(b)

(2), recently applied the Hansberry rule that due process

requires adequate representation of absent class members

throughout all stages of the case. Gonzales v. Cassidy,

474 F.2d 67 (5th Cir. 1973). In that case, the named

plaintiff sought to enjoin enforcement of a Texas statute

providing for automatic suspension of the driver’s license

and motor vehicle registration receipt of any uninsured

motorist involved in an accident who did not post security.

The District Court held that res judicata barred the named

plaintiff and the class in their claim for retroactive appli-

cation of the declaration of the statute’s unconstitutionality

because they had been members of an identical class in

a prior action. Only prospective relief had been granted

to the class in the earlier case although the named plain-

tiff had obtained retroactive relief for himselZ but did

not appeal to secure the same relief for the class.

The Fifth Circuit reversed because inadequate repre-

sentation of absent class members in the earlier case had

«* } 12

denied them due process, citing Hansberry and other cases.

Id. at 74-75. In refusing to apply res judicata, the court of

appeals held that [due process of law would be violated

. . . unless the court . . can conclude that the class was

adequately represented in the first suit.” Id. at 74. The

court made it clear that Gonzales was not precluded from

raising the adequate representation issue because his at-

torney “was aware” of the proceedings and judgment in

the earlier class action. Id. at 76. In noting that Rule 23

(a) (4) must be “stringently applied”, the court observed

that

The purpose of Rule 23 would be subverted by requir-

ing a class member who learns of a pending suit involv-

ing a class of which he is a part to monitor that litiga-

tion to make certain that his interests are being pro-

tected; this is not his responsibility—it is the responsi-

bility of the class representative to protect the interests

of all class members. Id. at 76.

In this case, the Tenth Circuit attempted to distinguish

Gonzales on the ground that Gonzales was not under Rule

23(b):(3) but Rule 23(b)(2) which is not subject to an

express notice or opt-out provision. It stressed that Ohio

had been given the benefit of these provisions but com-

pletely failed to address the point that Ohio was represented

in the settlement by persons with adverse interests. App.

p. Al7, n.9.

By concluding that mandatory notice to class members

under Rule 23(c)i(2) in a (b) (3) class action is sufficient—

by itself—to satisfy the requirements of due process, the

Tenth Circuit overlooked the substantial authority that

adequate representation is equally, if not more, important

in Rule 23(b) (3) actions than in other class actions. This

stems from the lack of any ongoing relationship or true

13

identity of interest among members of a (b) (3) class,

which tends to assure adequacy of representation in (b) (1)

and (b) (2) cases. Indeed, the Fifth Circuit had recognized

this by citing (b)(3) cases in support of its conclusion

on the importance of adequate representation. Gonzales

v. Cassidy, supra, text at 75, n.15.°

Ohio’s case is a fortiori to Gonzales which involved a

collateral attack based on inadequacy of representation

whereas Ohio was granted relief on a direct attack under

Rule 60(b). When Ohio’s Rule 60(b) motion was filed,

Judge Thomsen had already lived with M.D.L. 55 for 19

months. In referring to the “strong case” Ohio had made

for voidness of the judgment as to it, Judge Thomsen

implicitly recognized that continuing adequate representa-

tion, in addition to notice, is necessary throughout a Rule

23(b)(3) class action and that the Gonzales insistence on

such representation is not to be confined narrowly to Rule

23(b).(2) cases.

The Tenth Circuit expressed concern for the stabil-

ity of judgments in class actions in reversing the District

Court. In contrast, the Fifth Circuit, in Gonzales, imposed a

continuing duty on the district judge to make certain that

absent class members are adequately represented through-

out the action. The approach of the Fifth Circuit is a fairer

and more positive way of achieving binding judgments.

Only this Court can resolve the conflict in principle between

these circuits.

9. The Fifth Circuit cited Eisen v. Carlisle & Jacquelin, 391

F.2d 555, 562 (2d Cir. 1968), rev’d on other grounds, 479 F.2d

1005 (2d Cir. 1973), vacated and remanded, 94 S.Ct. 2140 (1974);

Hohmann v. Packard Inst., 43 F.R.D. 192, 196 (N.D. Ill. 1967),

rev d on other grounds, 399 F.2d 711 (7th Cir. 1968), and Fischer

v. Kletz, 41 F.R.D. 377, 382 (S.D.N.Y. 1966).

14

3. The Number and Size of Rule 23(b)(3) Class Ac-

tions Require a Definitive Determination of the

Interrelationship Between the Fair and Adequate

Representation Necessary Under Rule 23(a)(4)

and Notice Under Rule 23(c)(2).

In view of the complexity and popularity of Rule 23

(b) (3) class actions since the 1966 amendment of the rule,

numerous questions concerning the definition and applica-

tion of the various provisions of Rule 23 have inevitably

confronted the lower federal courts. Tnis Court provided

considerable guidance in Eisen v. Carlisle & Jacquelin,

94 S.Ct. 2140 (1974). This case offers an excellent op-

portunity for the Court to shed light on another im-

portant aspect of the operation of Rule 23—the relation-

ship between the requirement of fair and adequate repre-

sentation of Rule 23 (a) (4) and the notice requirement

of Rule 23 (e) (2). |

In Eisen, also a Rule 23 (b) (3) case, the Court held

that adequate representation was not a substitute for no-

tice. Supra at 2152. In this case, the Court has before it

the converse question of whether notice is a substitute for

adequate representation.

Pre-Eisen, Judge Thomsen held that “notice [cannot]

take the place of adequacy of representation.” App: p. A44;

59 FR. D. at 680. Post-Eisen, the Tenth Circuit asserted

that the interrelationship of notice and adequate repre-

sentation “has never been completely and clearly articu-

lated.” App. p. Al6. This is a curious assertion to be made

after this Court’s flat statement that “Rule 23 speaks to

notice as well as to adequacy of representation and requires

that both be provided.” Eisen v. Carlisle & Jacquelin, supra

at 2152. In light of this language in Eisen and the explicit

15

language of Rule 23(a) (4), it is even more perplexing

that the court below concluded that only notice was re-

quired in this case. App. p. A19.

Moreover, the plain language of Rule 23 (a) (4) requires

fair and adequate representation in every class action and

the Advisory Committee’s note describes this as a “neces-

sary” condition for “any class action.” 39 F.R.D. at 100.

In Eisen, this Court made it clear that class action pre-

requisites cannot be ignored on a random basis: “[I]ndi-

vidual notice to identifiable class members is not a dis-

eretionary consideration to be waived in a particular case.

It is, rather, an unambiguous requirement of Rule 23.”

Supra at 2152. Contrary to the clear import of this

passage on construing Rule 23, the Tenth Circuit has ef-

fectively read (a) (4) out of Rule 23 and established a

precedent which will surely undermine the adequacy re-

quirement unless this Court takes corrective action.

4. This Court Should Halt the Practice in Rule

23(b)(3) Class Actions of Postponing the Class De-

termination Under Rule 23(c)(1) Until a Settle-

ment Is Proposed and Then Giving a Single Com-

bined Notice Under Rules 23(c)(2) and 23(e).

M.D.L. 55 was pending for 14 months before the Dis-

trict Court indicated its readiness to determine whether

the actions could be maintained as class actions. Even then,

the trial court permitied unsupervised settlement negotia-

tions to continue for 2 more months among the parties to

M.D.L. 55, all of whose interests were antagonistic to Ohio.

Only after a proposed settlement was reached by them were

the class action determinations under Rule 23(c) (1) made

and the classes defined. As a result only a single combined

notice was sent out despite the discrete requirements of

Rules 23(c) (2) and 23(e).

16

This notice advised those who received it of (1) their

option to be excluded from the class or classes upon timely

request, (2) their necessary inclusion in any judgment

rendered absent an opt-out request, and (3) their right

to appear by personal counsel. By combining what should

have been separate notices, the right to enter an appearance

was reduced to the right to be heard on the approval

of the proposed settlement, the distribution of the settle-

ment fund, the allowance of legal fees and similar matters.

Basic questions such as whether the requirements of Rules

23(a) and (b) had been met and the definition of the

classes under Rule 23(c) (1) were simply not on the agenda.

As a result of the pressure for settlement put on Judge

Thomsen at the July, 1972 hearings, there never was any

real inquiry into the coextensiveness of interests or hostil-

ity between the named plaintiffs and potential class mem-

bers, the capacity of the named plaintiffs to provide ade-

quate representation for Ohio’s interests, and the need

to create a subclass under Rule 23(c)(4). This surely

compromised the protective scheme built into the require-

ments of Rule 23.

In reversing the grant of relief, the Tenth Circuit

apparently endorsed the practice of postponing the class

action determination until a settlement has been reached

and then giving a single combined notice of both. App.

p. Al8. This practice is condemned by the 1973 edition

of the Manual for Complex Litigation.

The Manual warns against premature settlement nego-

tiations before the class action determination has been

made:

Before any settlement negotiations occur, there should

be a class action determination. Thereafter, all settle-

ment negotiations on behalf of the class should be

17

conducted by counsel representing the class in the

litigation. Id. at 24.

It lists nine reasons why “tentative classes for the purpose

of settlement . . should never be formed.” Six of them

are especially relevant to this case:

(1) Rule 23 does not authorize formation of

tentative classes for the purpose of settlement.

(2) There can be no assurance that the class

members will be adequately represented in the settle-

ment negotiations until the findings which are condi-

tion precedent to the formation of a class are made

by the court after an opportunity for an evidentiary

hearing. Formation of a tentative class for the pur-

pose of settlement with a requirement that the class

member accept the settlement or opt out and litigate

independently denies to the members of the class the

opportunity to show the inadequacy of the representa-

tion of the class by the representative party or parties

agreeing to the settlement and their counsel.

(3) The appropriate membership of the class and

the identity of the members cannot be determined

in the absence of an opportunity for hearing and judi-

cial findings of fact and conclusions of law. Nor can

there be any assurance that the tentative class will

be composed of interests which are not conflicting. . . .

(4) In the absence of the development of the

information relevant to liability, damages, and the ex-

pense of preparation for trial and of trial, there cannot

be a fair recognition in settlement negotiations of the

potential liability of the party or parties opposing the

class and the potential damages that might be re-

covered for the class.

(6) The formation of a tentative class for the

purpose of settlement denies to the class member the

choice contemplated by amended Rule 23 to become

a member of the proposed class for the purpose of

litigation with adequate representation as a member

of a litigating class.

(7) Formation of such a class denies to a mem-

ber of the class the right to appear in the action

as a party and to maintain the position of a litigating

party. Id. at 24-25.

Moreover, the Manual advocates that the two separate

notices be given as required by the Rule, one under 23(c)

(2) and one under 23(e). Id. at 22.

This Court should give the federal courts much needed

guidance in administering the Rule 23(c)(1) class action

determination, the timing of the Rule 23(c)}(2) notice, the

conduct of settlement negotiations, and the approval of

settlements under Rule 23(e). Otherwise, the under-

standable desire, sometimes dictated by expediency, to

bring class actions to an early termination by settlement

will continue to encourage federal judges to permit the

short-circuiting of fundamental rights seen here.

5. The Tenth Circuit Exceeded the Proper Scope of

Appellate Review and Undercut the Trial Court’s

Discretion to Grant Relief Under Rule 60(b) from

a Judgment in a Class Action.

Rule 60(b) gives a district court broad discretion to

“relieve a party or his legal representative from a final

judgment, order, or proceeding” See 11 C. War & A

Mun, Feoexat Practice amp Proc, $2257, pp. 157-

188 (1973). As this Court stated in Klepprott v United

States, 335 U.S. 601 (1949):

In simple English, the language of the “other reason”

clause [Rule 60 (b) (6) ], for all reasons except the five

particularly specified, vests power in courts adequate

to enable them to vacate judgments whenever such

action is appropriate to accomplish justice. Id. at 614

615.

The District Court granted Ohio relief on “the totality

of the evidence” under the “other reason” clause of Rule

60(b) (6). App. p. A51; 59 FR. D. at 683. That “the total-

ity of the evidence” iz: a given case may justify the grant

of relief under Rule 60(b) (6) is well established ”

totality of the evidence” were: (1) “nome of the class

representatives had been a Cs C Creditor in the Chapter

X proceedings”; (2) “the differences between the claims

of Ohio and other class members”; (3) “the provisions

of the order and judgment dealing specifically with the

Ohio and Ohio-related claims” and (4) “the lulling effect

of the dealings which the attorneys for Ohio had with

the attorney for the Chapter X Trustee and the attorneys

for some of the M.D.L. 55 defendants”. App. pp. A49-A50,

A51; 59 F.R.D. at 682, 683. Moreover, Judge Thomsen

found that “Ohio has made a strong case that the judgment

should be held void as to all the claims of Ohio” in his

initial opinion (App. P A5l; 59 FRD. at 683), restated

that view in his supplementing opinion (App. p. A53),

and adhered to that position in the judgment (App. p.

A54). But he ultimately concluded that his grant of re-

lief on “ground (6) of Rule 60 (b)“ made “it unnecessary

for the Court to decide whether relief should be granted

under ground (4) of Rule 60(b)”. Id.

Despite the District Court’s unambiguous statement

that relief was granted under Rule 60(b) (6), the Tenth

Circuit thought it desirable to recount “the lower court 's

decisional process . in order to demonstrate that the

court did not pigeonhole its basis for relief into any par-

ticular one of the Rule 60(b) categories.” App. p. Al4

It then rejected the District Courts own statement and

concluded, in an extreordimary excursion into extrasensory

low . . . was its belief that under all of the circumstances

presented Ohio was simply denied due process of law.”

App. p. A15.

The net effect of this tour de force was that the

Tenth Circuit substituted its judgment on the facts for

that of the District Court. The Tenth Circuit felt that

it could decide on appeal “whether, under all of the circum-

stances, the relief granted was justified.” App. p. Al4.

This clearly was improper. See Zenith Radio Corp. v.

Hazeltine Research, Inc., 395 US. 100, 123 (1969); United

States v. National Ass'n of Real Estate Boards, 229 US.

4, 4 AFH).

In reviewing à grant of relief under Rule @0(b), the

scope of proper ſalppellate review is limited to deter-

mining whether the district court abused its discretion.”

II C. Watcer & A. Mn, Peoenat Practice amp Proce-

pur, 2857, p. 158 (1973). An appellate court “will not set

21

aside the district court’s exercise of discretion unless it

is persuaded that under the circumstances of the particular

case the action of the district court is an abuse of discre-

tion.“ Id. at §2872, p. 261. This standard for appellate

review of decisions on Rule 60(b) motions has been recog-

nized by the courts in the nine circuits which have con-

sidered the matter, including the Tenth Circuit" (except

in this case). Here, the Tenth Circuit did not even men-

tion abuse of discretion, let alone apply the established

standard in measuring it. Instead it simply ignored any

element of discretion which the trial court properly had

in considering a motion under Rule 60(b).

The unique expertis- of the District Court in this

case graphically demonstrates the importance of adhering

to the proper scope of arpellate review. This was a consoli-

dated, multidistrict action over which Judge Thomsen had

presided for 19 months at the time Ohio filed its motion.

This experience gave him a familiarity with MDL. 55

which fully qualified him to decide Ohio's motion and

disqualified the Tenth Circuit from superimposing its own

views in areas of trial court discretion. The development

of competence in a transferee judge to insure the proper

management of complex litigation is the very genius of

proceedings under 28 U.S.C. 51407; similarly, the applica-

tion of a trial judge’s special expertise is the essence of

Rule 60 (b). Neither should be sacrificed to ad hoc in-

trusions by a court of appeals in the absence of an abuse

of discretion by a district court.

The Tenth Circuit so far departed from the accepted

and usual course of appellate review as to justify this

11. Nichols v. United States, 406 24 O71, 675 (16h Cir.

1972), cert. denied, 409 US. 966 (1972). See 11 C. waer & A.

Mx, Peorzat PRactice amp Proceourt, $2272, pp. 261-262, n.6,

Supp. p. 8 (1973) and cases cited therein.

22

Court in exercising its supervisory role over the lower fed-

eral courts, thereby insuring the effectiveness of 28 U.S.C.

§1407, Rule 23, and Rule 60 (b).

CONCLUSION

Any notion that the granting of Rule 60(b) relief

from judgment in a proper case undermines class actions

is specious. Rule 60(b) provides protection for, not erosion

of, class action judgments. The stability of such judgments

can best be achieved by this Court’s directing trial judges

to assure adequate representation of absent class members

throughout all stages of all class actions. This will preclude

later collateral attack. More fundamentally, it will assure

all absent class members due process of law whether the

case is fully litigated or terminated by settlement.

Respectfully submitted,

WILIA J. BRown j

Attorney General of Ohio

State Office Tower

Columbus, Ohio 43215

RICHARD F. STEVENS

Special Counsel to the Attorney General

1956 Union Commerce Building

Cleveland, Ohio 44115

Attorneys for Petitioner, The State of

j Ohio

Of Counsel:

RONALD B. Brown

Assistant Attorney General

Wayne C. Dass, JR.