WISDOM, Circuit Judge:
This appeal turns on the propriety of the district court's evaluating the substantive merits of a plaintiff's claims when passing on a motion for a class action and the validity of the grounds assigned in this case for the denial of a class action motion.
This case was originally filed as a class action by Martin Miller, Appellant in this Court, on behalf of himself and all others similarly situated, alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934. Miller sued Mackey International, Inc., the issuer of 400,000 shares of common stock covered by a registration statement made effective by the Securities and Exchange Commission on April 21, 1969; Consolidated Securities Corp., the underwriter of the issue; Joseph C. Mackey, the principal stockholder and chief executive of Mackey International; and other defendants who were never served. Mackey International (Mackey) operates an air taxi service between points in Florida and points in the Bahama Islands, engages in land development in Bimini, and operates a real estate brokerage business in Florida. Miller, the purchaser of 100 shares of the public offering, alleges material omissions and false statements in the prospectus issued by Mackey. He predicates his cause of action on §§ 11, 12(2), and 17 of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77l, and 77g, and § 10b of the Exchange Act of 1934, 15 U.S.C. § 78j (b).
Air service between Florida and the Bahamas is governed by Route 9 of the Bermuda Agreements, a bilateral treaty between the United States and the United Kingdom. In order for an American carrier to receive authorization to fly between Florida and the Bahamas, the carrier must be designated by the United States Government and receive a permit from the British Board of Trade.
Miller argues that the prospectus was deficient in three respects. First, according to Miller, the prospectus said that only Mackey International and Eastern Airlines held Route 9 operating permits. In fact, however, Chalk's Flying Service actually held a Route 9 permit
Second, Miller contends that the prospectus said that Mackey was subject to competition from only two airlines, Eastern Airlines and Bahamas Airways, while, in actuality, Chalk's was also a competitor holding a Route 9 permit. Finally, Miller argues that the prospectus failed to state that Mackey would be effectively excluded from revenues derived from air service to Bimini, where Mackey was engaged in real estate development, because of competition from Chalk's.
The answer of the defendants below and their brief in this Court deny the validity of Miller's claims on the merits. Besides arguing generally that the alleged omissions and false statements do not meet the test of Regulation C, Rule 405 of the Securities and Exchange Commission—facts about which "an average prudent investor ought reasonably to be informed before purchasing the security registered"—the defendants argue that each of the specific charges have no merit. First, they contend, based on inquiries by Chalk's to the Civil Aeronautics Board, that even Chalk's did not know it had a Route 9 permit and that the Mackey prospectus surely need not be clairvoyant. Second, they contend that an agreement, disclosed in the prospectus, between Mackey and Eastern Airlines precludes Mackey from operating between Florida and Bimini, Chalk's principal route, thus eliminating Chalk's as a competitor. Finally, they rely on the disclosure in the prospectus of this same agreement as sufficient to indicate Mackey's exclusion from the Bimini revenue.
Mackey's motion to dismiss for failure to state a claim upon which relief can be granted, F.R.Civ.P. 12(b), was denied by the district judge on September 23, 1970. Miller then filed a motion to determine the cause to be a class action, F.R.Civ.P. 23, which was
Miller contends, first, that the denial of his motion to determine the cause to be a class action should be reversed because the district judge improperly considered the merits of Miller's claim when passing on the propriety of a class action, basically a procedural question. We agree.
The district court's order (see footnote 2) in part stated:
This portion of the order indicates to us that in passing on the propriety of the class action the district judge may have considered whether the petition stated a cause of action or whether Miller would succeed on the merits. This was improper. In determining the propriety of a class action, the question is not whether the plaintiff or plaintiffs have stated a cause of action or will prevail on the merits, but rather whether the requirements of Rule 23 are met.
Kahan v. Rosenstiel, 3 Cir. 1970, 424 F.2d 161, 169. See Johnson v. Georgia Highway Express, 5 Cir. 1969, 417 F.2d 1122; Esplin v. Hirschi, 10 Cir. 1968, 402 F.2d 94; Eisen v. Carlisle & Jacquelin, 2 Cir. 1968, 391 F.2d 555; City of Philadelphia v. Emhart Corp., 50 F.R.D. 232 (E.D.Pa.1970); Berland v. Mack, 48 F.R.D. 121 (S.D.N.Y.1969); Fogel v. Wolfgang, 47 F.R.D. 213 (S.D.N.Y. 1969)
Mackey relies on sub-division (c) (1) of Rule 23 as allowing if not requiring an assessment of the substantive claims. That sub-division provides in pertinent part:
Mackey argues that the power to determine the propriety of use of the device envisions an evaluation of the merits. Although the language may appear to confer broad power, the Advisory Committee Notes make clear that a district judge is to consider only the specific requirements of sub-divisions (a) and (b) of Rule 23. The Committee stated with respect to sub-division (c) (1) of Rule 23:
Advisory Committee Notes, 39 F.R.D. 69, 104 (1966).
Mackey further contends that a district judge should assess the likelihood of success on the merits before approving a class action because of the grave consequences attendant upon the approval. Specifically, the defendants point out that approval of a class action will result in notice to shareholders of Mackey and that such notice will appear to laymen to be a tacit approval by a federal court of the claims presented in plaintiff's suit. Such notice, they argue, would seriously injure the financial position of Mackey and should not be allowed unless the claims presented in the suit have some merit. This Court cannot, however, rewrite the Federal Rules of Civil Procedure and seriously undermine the class action device in order to avoid dubious harm to these defendants. Purely vexatious litigation could be
Furthermore, Mackey has prepared and disseminated a Preliminary Prospectus dated January 27, 1971, for a proposed secondary public offering containing five paragraphs pertaining to the instant suit and describing the claims presented, explaining the company's position, and stating the company's opinion of ultimate success.
Finally, Mackey advances a strange basis for distinguishing those cases where courts have refused to consider the merits of plaintiffs' claims in determining the propriety of a class action. See Eisen v. Carlisle & Jacquelin, 2 Cir. 1968, 391 F.2d 555; Esplin v. Hirschi, 10 Cir. 1968, 402 F.2d 94; Kahan v. Rosenstiel, 3 Cir. 1970, 424 F.2d 161; Fogel v. Wolfgang, 47 F.R.D. 213 (S.D.N.Y.1969). Mackey contends that those cases involved "serious complaints," "serious allegations," and "serious charges." Even if we were to accept the "serious" standard and define that standard with such specificity so as to be possible of application, we surely would not hold that this case, alleging violations of the federal scheme for regulation of securities and involving thousands of dollars and many investors, is not "serious". Forbidding inquiry into the merits only when the charges are "serious" would require an examination of the merits to determine whether the charges are "serious" so that the standard applies and defeat the very purpose of the test. Such a test is unworkable if not completely improper. Mackey's parallel contention that class action treatment is not necessary here because this litigation is "simple" must similarly be rejected. Not only do we believe that this litigation does not fit defendant's own test, i. e. it is not simple, but also we find this test inappropriate, unworkable, and self-defeating.
In addition to considering the substance of Miller's claims, the district judge denied the class action motion for yet another reason. His order also stated:
This portion of the order indicates that the district judge felt that Miller, because of his alleged personal knowledge, failed to meet one or more of the requirements of Rule 23. Although the Order does not specify the particular sub-division of Rule 23 which Miller fails to satisfy, it seems logical to conclude that the personal knowledge disqualified Miller, in the judgment of the district judge, because of either sub-division (a) (3) or (a) (4).
Even assuming Miller's personal knowledge of air operations between Florida and the Bahamas would prevent his suit from being brought as a class action,
Because the district judge's order leaves this Court unclear as to his reasons, other than those discussed in this opinion, for denying class action status, we must remand for a hearing on the question of the propriety of this cause being brought as a class action and for findings on that issue. We have held that in passing on the class action motion inquiry into the substance of Miller's claims was improper and that denial of class action status apparently because Miller possessed personal knowledge
Vacated and remanded.
See also Gosa v. Securities Investment Co., 5 Cir., 1971, 449 F.2d 1330. We do not believe that our earlier order on appealability conflicts with the recent decision of another panel of this Court. Appealability may be based, in the instant case, either on the "death knell" exception to the rule enunciated in Gosa or on the collateral order exception to 28 U.S.C. § 1291. See Cohen v. Beneficial Industrial Loan Corp., 1949, 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528.
Fogel v. Wolfgang, 47 F.R.D. 213, 214 fn. 4 (S.D.N.Y.1969).