Petition for Writ of Certiorari — Toland v. Prudential Securities Inc.

Supreme Court, U.S.

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961731 APR 28 1997

No OFFICE OF THE CLERK

In The

Supreme Court of the United States

October Term, 1996

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LESLIE AND DOROTHY BISHOFBERGER,

Petitioners,

VS.

PRUDENTIAL SECURITIES INCORPORATED,

Respondent.

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Petition For Writ Of Certiorari

To The United States Court Of Appeals

For The Second Circuit

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PETITION FOR WRIT OF CERTIORARI

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ALLAN S. HALey

Counsel of Record

Hacey & BILHEIMER

505 Coyote Street, Suite A

Nevada City, California 95959

Telephone: (916) 265-5831

Facsimile: (916) 265-5836

Attorneys for Petitioners

COCKLE LAW BRIEF PRINTING CO., (800) 225-6964

OR CALL COLLECT (402) 342-2831

QUESTION PRESENTED

Whether a court who certifies an expansive class

definition that aids the defendant in circumventing its

contractual and regulatory obligations to arbitrate should

relax its standard in allowing persons who had already

elected to arbitrate, who were engaged in arbitration, and

who were not represented at the certification hearing, to

opt out from the class after the deadline has passed?

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LIST OF PARTIES BELOW

Appellants in the Second Circuit:

John D. Toland, Christal Toland (deceased),

MacDaniel Jackson, Miriam Jackson, Matt

Nilson, David Matus, Melinda Matus, Carl

Roba, Vincent Lazara, Jay Jablonski, James

Barrett, Jeffrey Schiller, Leslie Bishofberger, and

Dorothy Bishofberger.

Appellee in the Second Circuit:

Prudential Securities Incorporated.

LIST OF AFFILIATED ENTITIES

The Prudential Insurance Company of America

(parent corporation)

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TABLE OF CONTENTS

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This Court Should Act to Limit Abuses of the Class

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TABLE OF AUTHORITIES

CASES

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) ..

Mullane v. Central Hanover Bank & Trust Co., 339

Sh Ne Oe cE eet en

Shearson/American Express, Inc. v. McMahon, 482

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STATUTES

Racketeering Influenced and Corrupt Organiza-

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Federal Rules of Civil Procedure

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Supreme Court Rules

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OPINIONS BELOW

The opinion below of the Second Circuit Court of

Appeals and of the United States District Court for the

Southern District of New York are unreported. The opin-

ion of the Court of Appeals is reprinted in the Appendix

to the related Petition for Certiorari in No. 96-1538 filed

by John D. and Christal Toland (“Toland Petition”),

beginning at Toland App. 1. The District Court’s order as

to these Petitioners is reproduced infra, at App. 1.

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JURISDICTION

The summary order of the Second Circuit affirming

the district court was entered on December 27, 1996

(Toland App. 1). Following a timely petition, the Second

Circuit entered an order denying rehearing on January

27, 1997 (Toland App. 58). This petition, as well as the

Toland Petition, have been filed within ninety days fol-

lowing the entry of the order denying rehearing, as per-

mitted by Rule 13.3 of the Rules of this Court. This Court

has jurisdiction pursuant to 28 U.S.C. § 1254(1).

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STATUTES AND RULES INVOLVED

This case involves the interpretation and application

of the following rule:

Rule 60. Relief from Judgment or Order

(b) On motion and upon such terms as are just, the

court may relieve a party or a party’s legal representative

from a final judgment, order, or proceeding for the fol-

lowing reasons: (1) mistake, inadvertence, surprise, or

excusable neglect; .. . or (6) any other reason justifying

relief from the operation of the judgment... .

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STATEMENT OF THE CASE

This petition seeks review of a summary order of the

Second Circuit Court of Appeals affirming the denial, by

the United States District Court for the Southern District

of New York, of petitioners’ motion under Rule 60 (b),

Fed.R.Civ.P., to be excluded from a previously certified

class. Jurisdiction in the district court was based on the

Racketeering Influenced and Corrupt Organizations Act,

18 U.S.C. § 1961 et seq.

In the early 1980’s petitioners, Leslie and Dorothy

Bishofberger, were sold $266,000 worth of interests in

private limited partnerships sponsored by the respondent

Prudential Securities Incorporated (PSI). In October 1993,

the Securities Exchange Commission and PSI entered into

a consent decree that established a special claims pro-

cedure to make restitution to those customers who could

show, without taking into account any statute of limita-

tions defense, that they had been sold unsuitable partner-

ship investments. Acting through their stockbroker, the

Bishofbergers submitted a claim in the SEC proceedings.

PSI rejected their claim. In June 1995 the Bishofbergers

signed forms to elect expedited arbitration of their claim

in accordance with the SEC’s procedures. As before, they

sent their forms to their broker, who was no longer with

PSI, to fill in the details of their investments and to

submit the forms to the claims administrator. The next

day, however, their broker was hospitalized with a heart

attack. Their papers apparently never reached the claims

administrator.

The Bishofbergers were unaware of what had hap-

pened, and believed that they were in the SEC’s expe-

dited arbitration process. When they received a notice of

the pendency of a class action against PSI in the Southe

District of New York, they read in the notice that they

were automatically excluded if they had previously

elected to join the SEC proceedings. Because they had

done so, they took no action to opt out of the class.

Some weeks later, they spoke to their broker and

asked him about their expedited arbitration. He checked

with his office, but could not determine what had hap-

pened to their submission papers. He came to their home

and had them fill out a duplicate set. He told them what

to write in a letter to explain the reason for the late

submission, and they sent the package off to the claims

administrator. That official forwarded a copy of the

papers to PSI, who received them on October 16, 1995.

An in-house attorney for PSI contacted the Bish-

ofbergers two weeks later to obtain more details of their

excuse for late submittal. They told him about their

broker’s heart attack. He told them that they should do

nothing until they got a ruling on their late submission.

Instead of passing on the details about the heart attack to

the claims administrator, however, PSI’s attorney recom-

mended only that the Bishofbergers’ late submittal be

rejected because it had been “postmarked after the dead-

line.” The claims administrator did not contact the Bish-

ofbergers, but simply sent a notice of rejection based on

PSI’s recommendation. By the time the Bishofbergers

received the rejection, the deadline to opt out of the class

had passed. Their broker referred them to an attorney,

who filed a motion on their behalf under Rule 60(b),

Fed.R.Civ.P., to exclude them from the class so that they

could apply to the claims administrator for relief. (The

judgment in the class action barred them from pursuing

any remedy in any other forum [Toland App. 39, at { 6].)

The district court held that the Bishofbergers should have

taken the precaution of opting out of the class before the

October 30 deadline, and denied their motion. The court

of appeals, while noting that the Bishofbergers’ situation

was “unusual”, affirmed on the ground that the district

court had not abused its discretion in denying relief from

its judgment under Rule 60 (Toland App. 21-23).

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REASONS FOR GRANTING REVIEW

This Court Should Act to Limit Abuses of the Class

Action Notice Procedure

The narrow issue before this court is whether the

district court abused its discretion in denying the Bish-

ofbergers the right to opt out of the class after the initial

deadline had passed. PSI stressed that because of an

option to cancel out of its proposed settlement which it

had reserved in the event that too many individuals

opted out, it would be prejudiced by the late exclusion of

the Bishofbergers. Although the district court agreed with

PSI, its order did not take into account the fact that PSI

already had in its hands the Bishofbergers’ papers sub-

mitting their claim to the SEC when its counsel told them

to “do nothing” while waiting for the claims administra-

tor to act. PSI could not rationally claim that it would be

prejudiced by allowing the Bishofbergers to proceed in

the forum which it knew they had previously elected. The

same is true of the other appellants below, who were

already in private arbitrations with PSI when the opt-out

deadline passed.

This case is about more than the legal sufficiency of

excuses offered under Rule 60, however. It is impossible

to review the discretion exercised below without at the

same time reviewing what happened before the deadline

for opting out had passed. While the earlier orders certi-

fying the class and finding the proposed settlement fair

and reasonable are not at issue here, it is the district

court’s refusal to exclude petitioners from their operation

that requires them to be examined in the context of peti-

tioners’ individual situations. When that is done, the

abuse of discretion that occurred becomes manifest.

The record in this case demonstrates a gross abuse of

class action notice procedures under Fed. R. Civ. P. Rule

23. This Court should exercise its power of review in

order to rein in excesses of the type that occurred below,

which were given only cursory review by the Court of

Appeals in an unpublished summary order. See Rule 10(a)

of the Rules of this Court; Eisen v. Carlisle & Jacquelin, 417

U.S. 156, 174-76 (1974); Mullane v. Central Hanover Bank &

Trust Co., 339 U.S. 306, 314-18 (1950). Consider the roles

played by:

(a) Defendant Prudential Securities Incorporated

(“PSI”), which was accused by the Securities and

Exchange Commission (“SEC”) of bilking hundreds of

thousands of public customers in the sale of limited part-

nerships in the 1980’s. As a member of the securities

industry, it had supported the enforceability of standard

industry arbitration clauses in customer agreements,

which were upheld by this Court for the first time in

Shearson/American Express, Inc. v. McMahon, 482 U.S. 220

(1987). Notwithstanding those agreements to arbitrate,

PSI below used the power of the District Court under

Rule 23 to nullify arbitration proceedings against it that

had been ongoing for more than two years, and in which

claimants, the Tolands, had invested $100,000. In a

number of other cases consolidated for appeal below, PSI

used the broad class definition to sweep in a number of

its own former sales representatives who were in the

middle of arbitrating employment claims, not partnership

investment claims, with their employer PSI. Without

actual notice of the class proceedings in several instances,

all of the former PSI employees were determined to be

included in a class that (a) contained not one representa-

tive member who was a present or former PSI employee,

and (b) afforded no relief for the type of claims which

they were then arbitrating. The district court held, and

the Court of Appeals affirmed, that persons who had no

actual notice of the proceedings and who did not have

claims typical of the class nevertheless were bound, at

their peril, to show up at the fairness hearing and present

their objections to the scope of the class!

In the case of these petitioners, the Bishofbergers, PSI

was able to get the district court to make a nullity of their

continuing attempts to participate in an expedited arbi-

tration procedure established by the SEC for the benefit

of defrauded PSI customers. The class notice sent to them

told them that they were excluded from the class if they

had previously elected the SEC claims administration

procedure. They had done everything humanly possible

to make that election by the class opt-out date. Neverthe-

less the district court held, and the Court of Appeals

affirmed, that despite the express language of the class

notice they were in retrospect required not only affirma-

tively to elect the SEC’s forum, but also to opt out of the

New York class before the deadline.

In this manner, PSI was able to escape from the terms

of its own arbitration agreements, and even from the

terms of a consent decree it had negotiated with the SEC.

It yanked the petitioners, both represented (the Tolands)

and unrepresented by counsel (the Bishofbergers), out of

their elected arbitrations by negotiating a dragnet class

definition that no one was present to oppose.

The second major role was played by:

(b) Class plaintiffs and their counsel, public customers

who had not chosen arbitration in front of any forum, but

who were financially interested in having as big a class as

possible, and who therefore cooperated with PSI in defin-

ing the class so broadly that it swept up people like the

Tolands who were in ongoing industry arbitration pro-

ceedings; people like the Bishofbergers who were doing

all they could to join the expedited proceedings set up by

the SEC; and people who were not even investors, but

present and former employees of PSI who happened to

have complaints against PSI based on their employment

contracts, which also contained mandatory arbitration

clauses.

Finally, there was:

(c) The District Court itself, which approved the class

definition proposed by PSI and the named plaintiffs with-

out the benefit of objections from any of the other classes

of persons included in its sweep. Having engaged in the

fiction that misdirected and undelivered notices were

legally adequate, it went on to chastise those who never

got the notices for not appearing and objecting to their

inclusion in the class. The result was a Kafkaesque pro-

ceeding in which those who did not represent the inter-

ests of the absent petitioners were allowed to act as if

they had done so, and those who did not object for the

very good reason that they either had no notice, or read

the notice to mean that they were excluded, were held

accountable for failing to appear and object.

These were all of the active participants in the pro-

ceedings below. Not one of them could be expected to

represent fairly or adequately the interests of these par-

ticular petitioners. What is equally not surprising is that

all of them have circled the wagons in defending the

procedural excesses for which they are jointly responsi-

ble.

It is unreasonable to expect that a plaintiff who

brings a class action will narrow or restrict the definition

of the class if the defendant also has an interest in sweep-

ing in as many potential adversaries as possible. In such a

circumstance, both sides have their own reasons for

wanting the class made as large as the court will allow.

Absent objective opposition, the court has no way of

perceiving the unjust consequences of its certifying the

proposed class. When it caps its arbitrary creation of a

class with a “tough . . . exercise of discretion” (Toland

App. at 16) in adjudicating Rule 60 motions for late

exclusion, the court gives the impression that it is collud-

ing with the named parties to achieve a one-sided result.

The result is a process that transforms the class action

from a vehicle to aid those who are too weak to obtain

individual relief into a sword to punish those who are

already obtaining their own individual relief. This was

not the intent of Rule 23. Only this Court is in a position,

by granting certiorari in this case and by reversing the

orders denying late opt-outs, to put reasonable limits on

the excesses of power asserted by the courts below.

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CONCLUSION

Having fashioned an extremely broad class via a

stipulation between PSI and the named class representa-

tives, the district court was obliged to see that the judg-

ment did not operate unfairly to prejudice parties who

had already affirmatively elected an alternative forum. It

failed to protect the interests of those who received inad-

equate notice, and by refusing late opt-outs to these and

other petitioners, transformed the class action into a tool

that PSI was able to use to evade its contractual and

regulatory obligations to arbitrate. For the reasons given

10

in the preceding section, the Court should grant this

petition for certiorari.

Respectfully submitted,

ALLAN S. HALEY

Counsel of Record

Hacey & BILHEIMER

505 Coyote Street, Suite A

Nevada City, California 95959

Telephone: (916) 265-5831

Attorneys for Petitioners

A-1

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

X MDL Docket

In re: PRUDENTIAL SECURITIES : No. 1005

INCORPORATED LIMITED

PARTNERSHIPS LITIGATION M-21-67 (MP)

ORDER NO. 57

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ORDER

(Filed Jan. 30, 1996)

Leslie and Dorothy Bishofberger (the “Bishof-

bergers”) having moved this Court for an order determin-

ing that they are excluded from the class certified therein;

or, alternatively, pursuant to Rule 60(b) of the Federal

Rules of Civil Procedure, for relief from this Court's

November 20, 1995 Order and Final Judgment; and for an

order excluding them from the class; it is hereby

ORDERED that the Bishofbergers are Class Members

in this action and accordingly are bound by this Court’s

November 20, 1995 Order and Final Judgment; and it is

further

ORDERED that the Bishofberger’s motion is denied

in its entirety.

Dated: New York, New York

January 30, 1996

/s/ Milton Pollack

MILTON POLLACK

SENIOR UNITED STATES

DISTRICT JUDGE