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Schlick v. Penn-Dixie Cement Corp.

decided: March 17, 1977.

JOHN SCHLICK, INDIVIDUALLY AND ON BEHALF OF ALL PURCHASERS OF THE COMMON STOCK OF CONTINENTAL STEEL CORPORATION SIMILARLY SITUATED, PLAINTIFF-APPELLEE,
v.
PENN-DIXIE CEMENT CORPORATION, JEROME CASTLE, DANIEL H. ESCHEN, OMAR J. GLANTZ, JAMES C. JACOBSEN, HARVEY KUSHNER, ALFONSO J. MARCELLE, OLIVER K. PARRY, PAUL WINDELS, JR., GEORGE C. GREEN, ERIC M. JAVITS, JAMES F. MORRILL, DEFENDANTS, PENN-DIXIE INDUSTRIES, INC. (FORMERLY PENN-DIXIE CEMENT CORPORATION), JEROME CASTLE, OMAR J. GLANTZ, JAMES C. JACOBSEN, HARVEY KUSHNER, ALFONSO J. MARCELLE, JAMES F. MORRILL, DEFENDANTS-APPELLANTS



Appeal from an order of the United States District Court for the Southern District of New York (Metzner, J.), granting plaintiff's application for class action designation, and designating plaintiff Schlick as the class representative. Appeal dismissed.

Mansfield, Gurfein and Meskill, Circuit Judges.

Author: Gurfein

GURFEIN, Circuit Judge:

This is an appeal from an order of the United States District Court for the Southern District of New York (Judge Charles Metzner), based on the recommendation in a written opinion by Magistrate Schreiber, certifying a class action under Fed. R. Civ. P. 23(c)(1) and designating plaintiff John Schlick as the class representative. We have previously sustained the original complaint which charged, inter alia, violations of the Securities Exchange Act of 1934 by the defendants in connection with a merger of Continental Steel Corporation ("Continental") into a wholly-owned subsidiary of Penn-Dixie Cement Corporation ("Penn-Dixie"). Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374 (2d Cir. 1974), cert. denied, 421 U.S. 976, 44 L. Ed. 2d 467, 95 S. Ct. 1976 (1975). The specific violations charged are of Section 10(b), 15 U.S.C. § 78j(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1974), as well as the proxy solicitation provision of Section 14(a), 15 U.S.C. § 78n(a), and Rule 14a-9, 17 C.F.R. § 240.14a-9 (1974).

The defendants-appellants are the directors of Penn-Dixie and of Continental. The appellants do not attack the class certification as failing to meet the requirements of Rule 23(b)(3). They do seek reversal of the designation of Schlick as a proper class representative on the ground that the District Court abused its discretion in determining that Schlick "will fairly and adequately protect the interests of the class." Rule 23(a)(4). The preliminary issue raised is whether the order is appealable. We hold that, in the circumstances present here, the order is not appealable, and accordingly, the appeal must be dismissed.

It is necessary to state certain salient facts briefly. Schlick became Executive Vice-President for finances and administration at Penn-Dixie in September 1968. During his tenure Penn-Dixie increased its control over Continental by acquiring in excess of 50% of its outstanding shares by June 1969. On April 15, 1969, Schlick became a director of Continental, as one of six Penn-Dixie directors to be named to the Continental Board. Schlick resigned from both the Penn-Dixie and Continental boards in August 1969. At the April 15, 1969 Board meeting of Continental, Schlick himself joined in a unanimous vote to continue in effect the 25 cents per share dividend which Continental had first declared in January 1969. The 25 cent dividend was a significant departure from the 80 cent dividend Continental had declared through 1968.

In June 1973, a merger was completed. Schlick, who had purchased 2,000 shares of Continental stock and 1,000 shares of Penn-Dixie stock in 1969, was among the Continental shareholders to accept the exchange offer.*fn1

Schlick sues as a Continental shareholder on his own behalf and on behalf of his fellow shareholders. He complains that Penn-Dixie acquired control of Continental by the purchase of its stock from October 1967 to October 1969; that, having gained control, it placed its nominees on the Continental Board, caused Continental to engage in various activities detrimental to its interests, caused adjustments on the balance sheet of Continental, and caused the Continental dividend to be decreased, thus reducing the price of its shares in preparation for an unfair ratio of exchange in a forthcoming merger. Specific proxy violations are alleged in connection with the solicitation for approval of the merger in 1973.

The gravamen of the claim that Schlick is an inadequate representative of the class is that he was active in the purchase of Continental shares by Penn-Dixie which gave Penn-Dixie its 50% control, and that he voted to continue the decreased dividend which he now alleges was a part of the scheme to depress the price of Continental stock.

We have previously dealt with several aspects of appealability in respect of class actions. These appeals have dealt principally with certifications of a class.

Class action certification is not a final order, and hence, is not appealable, 28 U.S.C. § 1291, unless it comes within the "collateral order" doctrine of Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 93 L. Ed. 1528, 69 S. Ct. 1221 (1949). In Parkinson v. April Industries, Inc., 520 F.2d 650 (2d Cir. 1975), we repeated the tripartite test of the appealability of class actions which was stated in a number of our earlier opinions. See, e.g., Herbst v. International Tel. & Tel. Corp., 495 F.2d 1308 (2d Cir. 1974); Eisen v. Carlisle & Jacquelin, 479 F.2d 1005 (2d Cir. 1973) (Eisen III), vacated and remanded, 417 U.S. 156, 94 S. Ct. 2140, 40 L. Ed. 2d 732 (1974); Kohn v. Royall, Koegel & Wells, 496 F.2d 1094 (2d Cir. 1974); General Motors Corp. v. City of New York, 501 F.2d 639, 644 (2d Cir. 1974). Our now familiar test is: (1) whether the class action determination is "fundamental to the further conduct of the case"; (2) whether review of that order is "separable from the merits"; and (3) whether the order will cause "irreparable harm to the defendant in terms of time and money spent in defending a huge class action." 520 F.2d at 656. The appellants contend that all three criteria are met.

The appellants urge us, in effect, to treat the issue of adequacy of representation as something different from the ordinary run of appeals from the grant or denial of class action designation. It is suggested that this order can cause them "irreparable harm * * * in terms of time and money" because they will not be protected by a judgment in a class action if the representation of the class turns out to have been inadequate. Hansberry v. Lee, 311 U.S. 32, 85 L. Ed. 22, 61 S. Ct. 115 (1940). We have, indeed, held orders denying disqualification of counsel for the plaintiff class to be appealable. General Motors Corp. v. City of New York, supra, 501 F.2d at 644; Silver Chrysler Plymouth, Inc. v. Chrysler Motors Corp., 496 F.2d 800 (2d Cir. 1974) (en banc). The ratio decidendi was the conviction "that review of the final judgment will [not] provide adequate relief" 496 F.2d at 805. But cf. Community Broadcasting of Boston, Inc. v. FCC, 546 F.2d 1022, 45 U.S.L.W. 2271, 2272 (D.C. Cir. 1976).

We think, however, that an order refusing to disqualify a lawyer for alleged conflict of interest is not the same as an order refusing to disqualify a party plaintiff as an inadequate representative of a class. The former generally turns on past relationships which are truly collateral to the lawsuit. In the case of a claimed inadequacy of representation of the class by a plaintiff, by contrast, the issue of conflict often turns on appraisal of the complaint and the activities of the plaintiff himself in matters that are the essence of the litigation and go directly to the merits.

Prudence dictates that, in general, an appellate court should not become involved in assessing inferences from facts yet unknown or sparsely developed at the early stage of the litigation when Rule 23 requires the prompt determination of class action status. That is particularly true when the order is one that could, in any event, only be reversed for abuse of discretion, and when the District Judge controlling the litigation will still have sufficient time to declare an inadequacy of representation as the picture becomes clearer. By then, notice having been given, there may be a readily available substitute ...


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