United States District Court, S.D. New York
December 12, 2005.
JOSEPH ACHTMAN, SHIRLEY ACHTMAN, BLAIR AMBACH, THEODORE ANDREOZZI, SONDRA BAER-MILLER FOR THE ESTATE OF JENNY BAER, SANDY BERKOWITZ, JOSEPH BERLINGER, ELISSA BERLINGER, GUSTAVE BIRNBERG, FAITH BIRNBERG, GEORGE CAGEN, YVETTE COHEN, SELMA DAUBER, MARTIN DAUBER, ISABEL EZERSKY, PAUL EZERSKY, DOROTHY FEIGENBAUM, RICHARD FLYNN, INDIVIDUALLY, AND RICHARD FLYNN FOR THE ESTATE OF HERBERT FLYNN, DOROTHY GASTON, ERWIN GASTON, GUNTHER GLASER, GRACE GLUCK, SAUL GLUCK, RONA GREENBERG, BERNARD GREENBERG, BRIAN HENRY, ALBERT HODES, ARNOLD JACOBS, HAGOP JAMGOCHIAN, SHAMIRAM JAMGOCHIAN, HARRY KAISERMAN, LAWRENCE KESSLER, CARL KEVORKIAN, LINDA TABRIS FOR THE ESTATE OF BERNICE KRAMER, FREDERICK KROLL, WILLIAM LENNEY, SYLVIA LEVINE, SIDNEY LEVINE, DORIS LEVY, LAWRENCE LINDY, ANTHONY LONGO, JOSEPH LONGO, HARRY MANDELBAUM, BLANCHE MANDELBAUM, HENRY MEDVIN, SELMA MEDVIN, CAROL PEYSER, HARVEY PFAU, RENEE PFAU, HYMAN ROCK, PHILLIP ROSS, BARBARA SCHILDCROUT, LLOYD SCHILDCROUT, ALBERT SHERIDAN, ELEANOR SILVERSTEIN, STANLEY SINGER, JOE SINGER, KENNETH SMITH, HAROLD SOMMERS, MELVIN SPENCER, BEN SPENCER, RUSSELL STOTT, ANNE STOTT, PAUL TRUSIK, HARRIET WALLSHEIN, S. JOSEPH WALLSHEIN, JOHN WEIDEMEYER, ELEANOR WEIDEMEYER, HARRY WEINSTEIN, EDITH WEINSTEIN, ELAINE ZINBERG, GENIA ZWIRN, DAVID ZWIRN, AND OTHER JOHN DOES, Plaintiffs,
KIRBY, McINERNEY & SQUIRE, LLP and BERNSTEIN, LITOWITZ, BERGER & GROSSMANN, LLP, Defendants.
The opinion of the court was delivered by: JOHN SPRIZZO, District Judge
MEMORANDUM OPINION AND ORDER
The issues before the Court, as raised by a panel of the Second
Circuit in a Summary Order dated September 19, 2005 ("Remand
Order"), are the applicability to this action of an Order for
Preliminary Injunction dated July 30, 2002 and entered in the action
captioned In re Bennett Funding Group, Inc. Securities
Litigation, 96 Civ. 2583 ("Injunction Order"), the propriety of
entering the Injunction Order, and the bases for subject matter
jurisdiction over the present action. This Court finds that the
Injunction Order is clearly applicable to the present action,
that the Injunction Order was properly entered pursuant to this
Court's authority under the All Writs Act, 28 U.S.C. § 1651, and
that there are several bases for subject matter jurisdiction in
The present action stems from a federal securities class action
arising from an alleged Ponzi scheme perpetrated by the Bennett
Funding Group. See Achtman v. Kirby, McInerney & Squire, LLP,
336 F. Supp. 2d 336, 338 (S.D.N.Y. 2004). By Order dated August
1, 1996 a series of putative class actions were consolidated as
In re Bennett Funding Group, Inc. Securities Litigation, 96
Civ. 2583 ("underlying action"), see Aff. of Bertrand C.
Sellier, dated Apr. 14, 2003, Ex. B ("Consolidation Order"), and
defendants in the present action, Kirby, McInerney & Squire, LLP
and Bernstein, Litowitz, Berger & Grossmann, LLP ("defendants" or
"law firms"), were named lead counsel, Consolidation Order at
In April 1997 the Court certified the class in the underlying
action, Achtman, 336 F. Supp. 2d at 338, and on behalf of the
class the law firms secured a series of settlements totaling more
than $166.5 million, see Order, dated June 5, 2003; Order,
dated Oct. 19, 2000; Order, dated July 25, 2000 (collectively
"Fee Orders"). As to each settlement, pursuant to Federal Rule of
Civil Procedure 23, this Court approved the notices provided to
class members, held settlement hearings, heard any objections as
to attorneys' fees, found the settlements to be fair, reasonable,
and adequate, and approved the law firms' applications for
attorneys' fees and expenses. See Fee Orders.
In April 2002, upset over the law firms' failure to name Arthur
Andersen & Co. ("Andersen") as a defendant in the underlying
action, the firm of Shapiro & Shapiro began soliciting class
members to file malpractice actions against the law firms. See
Mem. of Law in Supp. of Mot. for Prelim. or Permanent Inj., dated
June 5, 2002 ("Injunction Mem."), at 1-2. In response, the law firms filed a motion seeking
to enjoin Shapiro & Shapiro from communicating with class members
without Court approval and from bringing its proposed malpractice
action in another forum. Following briefing and oral argument,
this Court determined that "[t]he legal malpractice litigation . . .
against Class counsel for failure to join Anders[e]n as a
defendant will seek to recover Bennett related losses from class
counsel," Injunction Order at 1, and therefore the Court ordered
Shapiro & Shapiro [defined as "Chikovsky and Shapiro,
P.A., Shapiro & Shapiro, and other firms acting in
concert with them"], their principals, shareholders,
officers, directors, employees, successors, assigns,
suppliers, agents, servants, attorneys and customers,
all members of the Class certified herein, as well as
those persons in active concert, participation, or
privity with them, or any of them who receive notice
of this order by personal service or otherwise, are
PRELIMINARILY RESTRAINED AND ENJOINED FROM:
A. Sending further notices to Class members without
prior Court approval:
B. Filing and/or proceeding with any legal
malpractice claim against Class counsel relating to
losses incurred in Bennett Funding securities in
courts other than in this Court.
Id. at 2.
The present action, a putative class action brought on behalf
of the class members in the underlying action "by their
attorneys, CHIKOVSKY & SHAPIRO, P.A.," Compl. at 1, ¶ 2, was
commenced by Complaint dated December 3, 2002 and seeks relief
from the law firms for their alleged malpractice in failing to
name Andersen as a defendant in the underlying action, id. ¶¶
177-78. Finding that the Complaint failed to state a cause of
action under New York law, this Court, in a Memorandum Opinion
and Order dated September 17, 2004, dismissed the Complaint
pursuant to Rule 12(b) (6) of the Federal Rules of Civil
Procedure. Achtman, 336 F. Supp. 2d at 339-42.
As stated above, the Second Circuit remanded the action and
raised the jurisdictional issues posed at the outset of this
Opinion. This Court held a Pre-Trial Conference on September 29,
2005 and ordered the parties to submit simultaneous briefs on the
issue of jurisdiction by November 7, 2005. See Order, dated
Sept. 30, 2005. Plaintiffs' local counsel, Arnold E. DiJoseph,
III, refused to appear at this Conference, opting instead to send
a wholly unprofessional and wildly accusatory letter directly to the Court of Appeals. See
Letter of Arnold E. DiJoseph, III, dated Sept. 22, 2005.
Defendants submitted their brief on the issue of jurisdiction on
October 28, 2005. Plaintiffs failed to offer a submission.
The first issue raised by the Remand Order is the applicability
of the Injunction Order to the present action. According to the
Second Circuit, "[i]t is unclear . . . how [the Injunction Order]
applies to the plaintiffs in the current action" since they "are
not represented by the law firms named therein." See Remand
Order at 2.
As stated above, the Injunction Order applied to Chikovsky and
Shapiro, P.A., Shapiro & Shapiro, other firms acting in concert
with these two firms, and a host of others. The Complaint in the
present action indicates that the action was brought by
"CHIKOVSKY & SHAPIRO, P.A.," Compl. at 1, and Arnold E. DiJoseph,
III represented himself as "Trial/Local Counsel," id. at 41. It
seems clear, therefore, that plaintiffs are represented by a firm
specifically named in the Injunction Order and that their
Complaint was signed by local counsel who is acting in concert
with that firm. As such, the Injunction Order is patently
applicable to the present action.
The next two issues raised by the Remand Order are the
propriety of entering the Injunction Order and the bases for
subject matter jurisdiction over the present action.
The All Writs Act empowers federal courts to "issue all writs
necessary or appropriate in aid of their respective jurisdictions
and agreeable to the usages and principles of law."
28 U.S.C. § 1651.*fn2 The Supreme Court has indicated that "federal
injunctive relief may be necessary to prevent a state court from
so interfering with a federal court's consideration or
disposition of a case as to seriously impair the federal court's
flexibility and authority to decide that case," Atl. Coast Line
R.R. v. Bhd. of Locomotive Eng'rs, 398 U.S. 281, 295 (1970), and
courts have used this power to prevent state court litigation of
claims that were being settled in a federal class action, In re
Baldwin-United Corp., 770 F.2d 328, 336-38 (2d Cir. 1985); In re Corrugated Container Antitrust Litig.,
659 F.2d 1332, 1334 (5th Cir. 1981), and to prevent the relitigation in
state court of issues that were determined in federal court,
Hutton Constr. Co. v. County of Rockland, Nos. 87-4027,
93-2465, 1997 WL 291954, 1997 U.S. Dist. LEXIS 7666, at *10-13 &
n. 2 (S.D.N.Y. June 2, 1997), aff'd, 1998 U.S. App. LEXIS 14968
(2d Cir. 1998); Thomas v. Albright, 77 F. Supp. 2d 114, 118-23
(D.D.C. 1999). Because the court's power under the All Writs Act
is limited to that necessary "in aid" of its jurisdiction, it is
a prerequisite to the power's use that the court first have
original jurisdiction over an underlying case or controversy.
See Syngenta Corp Prot., Inc. v. Henson, 537 U.S. 28, 33
This Court finds that the Injunction Order was properly entered
pursuant to the All Writs Act, and therefore, under the terms of
the Injunction Order, this Court has subject matter jurisdiction
over the present action.
First, there is no dispute that this Court has jurisdiction
over the underlying action a federal class action seeking
recovery for a violation of the federal securities laws. See
Consol. Class Action Compl., dated Sept. 16, 1996, ¶¶ 11-12.
Second, it is clear that the Injunction Order was issued to
curb interference with the Court's continuing jurisdiction over
the underlying action as well as to stop the threatened
relitigation in other fora of issues already fully and finally
determined by this Court. See, e.g., Schiavo v. Schiavo,
403 F.3d 1223, 1238 (11th Cir. 2005) (Wilson, J., dissenting);
In re Application of United States, 538 F.2d 956, 963 (2d Cir.
1976) (Mansfield, J., dissenting).
The Consolidation Order, signed by this Court on August 1,
1996, explained the responsibilities of the law firms in the
underlying action. Consolidation Order at 6-7. Pursuant to the
requirements of Rule 23(h) of the Federal Rules of Civil
Procedure and mindful of the responsibilities decreed in the
Consolidation Order, this Court, by the time the Injunction Order
was entered, had presided over two hearings to determine the
attorneys' fees owed to the law firms and had each time ruled
that the law firms' "efforts in the litigation were novel and
creative" and awarded substantial fee awards as "fair and
reasonable in light of the record and all arguments raised before
and during" the hearings. See Order, dated Oct. 19, 2000, at 4;
Order, dated July 25, 2000, at 5-6. If the threatened malpractice
litigation against the law firms based on the representation they
provided in the underlying action was brought before another
court, this Court's interpretation of the Consolidation Order
would be undermined, and its two orders granting fees based on
the quality of the representation before this Court would be
relitigated and essentially undone by another court. See
Hutton Constr. Co., 1997 U.S. Dist. LEXIS 7666, at *12-13 & n.
2; Thomas, 77 F. Supp. 2d at 121-23.*fn3
Similarly, in order to adjudicate plaintiffs' claim that the
law firms sent out a deficient notice to the class, see Pls.'
Mem., dated May 13, 2003, at 8, the court presiding over the
malpractice litigation would be required to rule upon the
sufficiency of the Notice of Pendency. This Court, by Order dated
August 25, 1997, "approve[d] the form, substance and
requirements" of that Notice. See Order, dated Aug. 25, 1997.
In addition, the threatened malpractice litigation in another
forum posed a threat to this Court's continuing jurisdiction over
the underlying action. At the time of the Injunction Order two
settlements in the underlying action had been finalized and
another was expected shortly. See Injunction Mem. at 2. That
settlement was reached several months later, and the Court,
finding that the law firms had "produced an exceptional result
for the Settlement Class," again approved substantial fee awards.
Order, dated June 5, 2003, at 5. If the malpractice litigation
had continued in another forum, it would have severely hampered
settlement efforts in this Court, see, e.g., In re
Baldwin-United Corp., 770 F.2d at 335-37, and it would have
undermined this Court's authority over a matter uniquely before
it the quality of representation by the law firms in this
federal class action, see Fed.R.Civ.P. 23(h).
Finally, there are important policy considerations that counsel
in favor of enjoining malpractice litigation that arises from a
federal class action from being brought in alternative fora.
Having declined to opt out of the class action, plaintiffs have
reaped the benefits of the work done by the law firms and have either failed
to object to the fees requested by the law firms or have failed
to convince this Court that the fees were not warranted. Despite
this, plaintiffs now seek to drag the law firms into court
essentially to recover from the law firms for losses incurred in
the Ponzi scheme that formed the basis for the underlying action.
As Judge Sporkin so cogently noted in Thomas v. Albright, to
unleash such suits upon class counsel in fora far and wide would
severely undermine the class action system and would discourage
able counsel from taking such cases to the detriment of those for
whom a class action suit may be the only vehicle for achieving
justice. Thomas, 77 F. Supp. 2d at 122-23; see also In re
Baldwin-United Corp., 770 F.2d at 337.
In sum, this Court finds that the subject matter jurisdiction
for the Injunction Order was properly based upon the All Writs
Act as a means of preserving this Court's jurisdiction over the
underlying action and as a means of protecting the judgments it
had already entered.
In addition, this Court has supplemental jurisdiction over the
present action. The supplemental jurisdiction statute,
28 U.S.C. § 1367, vests in the district court "supplemental jurisdiction
over all other claims that are so related to claims in the action
within such original jurisdiction that they form part of the same
case or controversy under Article III of the United States
Constitution." 28 U.S.C. § 1367(a). As the Second Circuit noted
in the Remand Order, courts have found that supplemental
jurisdiction empowers, and sometimes compels, courts to hear
attorney fee disputes that arise from actions that were properly
before the court. See Alderman v. Pan Am World Airways,
169 F.3d 99, 102-03 (2d Cir. 1999); Itar-Tass Russian News Agency v.
Russian Kurier, Inc., 140 F.3d 442, 445-48 (2d Cir. 1998);
Cluett, Peabody & Co. v. CPC Acquisition Co., 863 F.2d 251, 256
(2d Cir. 1988). Of course, the exercise of supplemental
jurisdiction requires that the district court have original
jurisdiction over an underlying case or controversy. See,
e.g., Exxon Mobil Corp. v. Allapattah Servs., Inc.,
125 S. Ct. 2611, 2617 (2005).
Here, this Court has supplemental jurisdiction over the present
action since it is beyond dispute that this Court has original
jurisdiction over the underlying action. See Consol. Class
Action Compl., dated Sept. 16, 1996, ¶¶ 11-12. This Court finds
that malpractice litigation brought by class members against class
counsel arising from counsel's representation in a federal
securities class action is part of the same case or controversy
as the underlying federal securities class action for several
First, the Court notes that the rationale offered in support of
supplemental jurisdiction in the fee dispute cases the Court's
familiarity with the "relevant facts and legal issues,"
Alderman, 169 F.3d at 102, and the related desire to avoid
having to relitigate and reconsider those issues in a forum
unfamiliar with them, Itar-Tass Russian News Agency,
140 F.3d at 445 is equally applicable to the present situation. In this
case, this Court has presided over this federal securities class
action since 1996, and has similarly handled a slew of other
cases seeking recoveries for Bennett-Funding-related losses in
this multi-district litigation.
Second, pursuant to Rule 23 of the Federal Rules of Civil
Procedure and the Consolidation Order entered in this case, this
Court plays an active role in passing upon the quality of
representation provided by the law firms. See, e.g., Valerio
v. Boise Cascade Corp., 645 F.2d 699, 700 (9th Cir. 1981). In
fact, as already stated, this Court has approved attorneys' fees
applications three times, each time finding that the law firms
achieved exceptional results for the class. See Fee Orders. To
consider plaintiffs' arguments here, another court would not only
need to familiarize itself with the relevant facts and legal
issues but it would also need essentially to reconsider this
Court's findings that the law firms provided adequate
representation in the underlying action. See Thomas,
77 F. Supp. 2d at 123.
Third, in this case the theory of recovery against the law
firms is integrally related to the underlying litigation.
Plaintiffs claim that they had a meritorious cause of action
against Andersen which has been lost forever because the law
firms failed to name Andersen as a defendant in the underlying
action, see Compl. ¶¶ 177-182, and that the notice provided to
class members by the law firms was deficient because it failed to
notify the class that Andersen was not a defendant in the action,
see Pls.' Mem., dated May 13, 2003, at 8. In order for
plaintiffs to prevail on their malpractice action they would need
to show that they had a legitimate claim against Andersen that
was forfeited by the law firms' negligence. See Achtman,
336 F. Supp. 2d at 339. Given this Court's familiarity with the
underlying action, including its approval of the Notice of Pendency, see
Order, dated Aug. 25, 1997, it is uniquely qualified to determine
the merits of plaintiffs' assertion, which arises from the same
nucleus of facts as the underlying action, as well as to
determine the reasonableness of the law firms' decision not to
name Andersen as a defendant. This is especially true since
plaintiffs were free to opt out of the class action or simply to
pursue their own claims against Andersen, as others did. Having
chosen not to do so or even to object to the law firms' counsel
fees, they should not be permitted to attack the quality of the
law firms' representation on that ground in a separate
Alternatively, this Court has subject matter jurisdiction in
the form of diversity of citizenship jurisdiction over most of
the causes of action asserted in the present action. Under
28 U.S.C. § 1332 this Court has original jurisdiction over "civil
actions where the matter in controversy exceeds the sum or value
of $75,000" and is between citizens of different states. In
putative class actions only the citizenship of the named
plaintiffs is considered. See E.R. Squibb & Sons, Inc. v.
Accident & Cas. Ins. Co., 160 F.3d 925, 931 (2d Cir. 1998). The
citizenship of a partnership is determined by the citizenship of
each of its partners. See Herrick Co. v. SCS Commc'ns, Inc.,
251 F.3d 315, 322 (2d Cir. 2001). Only one diverse plaintiff need
meet the $75,000 amount-in-controversy requirement, as
28 U.S.C. § 1367 authorizes supplemental jurisdiction over the causes of
action of the remaining diverse plaintiffs. See Exxon Mobil
Corp., 125 S. Ct. at 2615.
Here, the parties have entered a Stipulation agreeing that
sixty of the named plaintiffs are diverse with defendants and
that at least one of these diverse plaintiffs "has asserted
claims in this action in excess of $75,000." See Class
Counsel's Mem. of Law Concerning Subject Matter Jurisdiction,
dated Oct. 28, 2005, Ex. B, Stipulation, dated Oct. 26, 2005.
Therefore, diversity jurisdiction has been established as to
these sixty plaintiffs.
As to the remaining thirteen named plaintiffs, this Court finds
that they may, if necessary, be dropped from this suit as
dispensable non-diverse parties in order to salvage this Court's
jurisdiction. See Fed.R.Civ.P. 21; see also
Newman-Green, Inc. v. Alfonzo-Larrain, 490 U.S. 826, 833-38
Based on the foregoing, this Court finds that the Injunction
Order is applicable to plaintiffs in the present action, that the
Injunction Order was properly entered pursuant to the All Writs
Act, and that this Court properly exercised subject matter
jurisdiction over the present action. As such, this Court had
jurisdiction to enter the Memorandum Opinion and Order dismissing
It is SO ORDERED.
© 1992-2006 VersusLaw Inc.