Appeal by plaintiffs Fay Kline and Paul Block from an order of the Southern District of New York, Edward Weinfeld, Judge, granting final judgment of their claim of securities law violations by Price Waterhouse & Co. and several individual defendants. Affirmed in part; judgment vacated and case remanded.
LUMBARD, MANSFIELD and MESKILL, Circuit Judges.
MANSFIELD, Circuit Judge:
Fay Kline and Paul Block appeal from an order of the Southern District of New York, Edward Weinfeld, Judge, entered over their protests, granting final judgment in their favor on their claim of securities violations by Price Waterhouse & Co. ("Price Waterhouse") and several individual defendants but conditioning the judgment's effectiveness. The plaintiffs also appeal from the district court's denial of their two motions for class certification. We affirm the denial of those motions. Because the district court was without power to enter a judgment based upon a "settlement" to which the plaintiffs had not consented, however, we vacate the judgment and remand for further proceedings.
In September 1978, Allied Artists Industries, Inc. ("Allied") issued an annual report for the year ending March 31, 1978, certified by defendant Price Waterhouse, which allegedly contained materially false overoptimistic statements about Allied's prospects for future success. In April 1979 Allied filed a petition under Chapter 11 of the Bankruptcy Act. Plaintiffs Block and Kline purchased Allied stock in the summer and fall of 1978. In 1980 each filed suit under the Securities Exchange Act, 15 U.S.C. §§ 78a, et seq., charging Price Waterhouse and several individual defendants with having issued false and misleading statements about Allied's financial condition to the investing public. The two suits were consolidated by the court.
Plaintiffs sought certification under F.R.Civ.P. 23 as representatives of a class of all purchasers of Allied stock from August 18, 1978, when the annual report was printed, until April 4, 1979, when Allied filed its petition in bankruptcy. The complaints rested on two alternative theories: first, that plaintiffs and the rest of the class had relied directly upon the allegedly misleading statements in the annual report, and second, that they had relied on "the integrity of the market price of Allied's stock," and that the defendants had compromised the integrity of the market by introducing materially false or misleading information about Allied to the public.
After defendants conducted considerable discovery of plaintiffs' case, Judge Weinfeld denied plaintiffs' motion for class certification. See 88 F.R.D. 696 (S.D.N.Y. 1981). Plaintiff Block had testified with certainty at his deposition that he had purchased Allied stock in July 1978 on the basis of his reading of the fiscal 1978 annual report, when in fact the annual report was not printed until August 18, 1978, and was not mailed to stockholders until September 8 and 11, 1978. Plaintiff Kline had not purchased Allied stock as a result of her own investigation, but on the advice of her husband, William Kline. Mr. Kline in turn testified in a deposition that he had recommended Allied to his wife on the advice of his brokeer. The broker, however, denied ever making any statement to Mr. Kline about Allied's performance. In addition, Judge Weinfeld found that Mrs. Kline had refused to answer "critical and relevant questions" posed to her at her deposition.
On the basis of this and other testimony developed in discovery, Judge Weinfeld found that both plaintiffs were vulnerable to serious attacks upon their credibility, and were thus subject to unique defenses atypical of the class of purchasers of Allied stock during the relevant period, which dould "divert attention from the substance of the basic claim" with the result that the "remaining members of the class could be severely damaged by plaintiffs' representation of them."
Defendants later tendered to each plaintiff the full amount of damages that each could individually recover after a trial, including interest to date and court costs. This settlement offer was conditioned, however, on the understanding that it was "without waiver of any defenses or making any admissions in respect of any matters alleged in the complaints." The district court found that the defendants made this offer to avoid the heavy litigation costs they would incur in continuing the present litigation. The plaintiffs rejected this offer, noting that were the case to proceed to trial and were they to prevail, their recovery would be on the merits and they would not be forced to accept the conditions imposed by defendants' settlement offer.
The district court then informed the parties that if the defendants deposited the tendered amount into court, the plaintiffs could collect their individual damages and the court would stay all proceedings in the case pending resolution of class certification motions in two similar actions in the Eastern District of Pennsylvania. The court adopted a proviso, similar to that proposed by the defendants, that this disposition of the case "in no respect shall constitute a waiver of any right or any defense which the defendants may have with respect to any other action instituted upon the same claim. . . ." See 93 F.R.D. 128, 1131 (S.D.N.Y.1982). The plaintiffs objected to this procedure, arguing that when a defendant porposes a settlement, the most he can do is "to put the plaintiff on the spot in either accepting or rejecting" the offer. The plaintiffs argued that if they were permitted to proceed with a trial on the merits of their individual claims they could erase any doubts about their credibility and establish their adequacy as representatives by winning a victory at trial. The district court disagreed, stating that it would proceed with the announced plan. The plaintiffs then orally renewed their motion for class certification, which the district court denied, finding that nothing had occurred to persuade it to alter its view that the plaintiffs were inadequate as class representatives. It then stayed all proceedings in the action pending disposition of the class certification motions in the similar cases in the Eastern District of Pennsylvania.
On June 2, 1982, class certification was denied in the two Pennsylvania cases. Both parties to the present action then submitted proposed forms of judgment. The plaintiffs' version stated that the judgment was "on the merits . . . against all defendants." The defendants' version followed the form prescribed by the district court at the previous hearing. The court entered a judgment adopting the language proposed by defendants. The judgment provided that the plaintiffs could collect the full amount of money damages claimed, $7,357.16 plus accumulated interest for plaintiff Kline, and $15,134.19 plus accumulated interest for Block. However, it also provided that it did not "constitute a waiver of any rights or defenses defendants may assert in any pending or future action other than the individual claims of plaintiffs Fay M. Kline and Paul Block."