HARLINGTON WOOD, Jr., Circuit Judge.
In the two cases consolidated for our consideration, appellants contest the validity of the district court's judgment denying certification of their class action.
The facts in these cases are as follows:
1. The Microdot case.
Plaintiffs-Appellants Ann Flamm and Arnold Flamm (hereinafter referred to as plaintiffs) are co-trustees of a trust which purchased and sold shares of defendant Microdot, Inc.'s stock. Plaintiffs' complaint generally alleges that defendants made false and material misstatements or omissions in connection with the sale of Microdot common stock during the pendency of a tender offer by General Cable Corporation in violation of the Securities Exchange Act of 1934, §§ 10(b), 14(e), 15 U.S.C. §§ 78j(b), 78n(e). Plaintiffs sought to represent a class composed of:
Defendants opposed certification of the class on the grounds that plaintiffs would not fairly and adequately protect the interests of the class. The district court summarized the following undisputed facts as forming a basis for defendants' objection: 1) plaintiff Arnold M. Flamm is an attorney practicing with Arthur T. Susman, one of the two attorneys of record for plaintiffs, in a law firm named Prins, Flamm, and Susman, Ltd.; 2) plaintiff Ann Flamm is the mother of Arnold M. Flamm; (3) Thomas R. Meites, the second attorney of record of plaintiffs, rents and shares office space in the same suite of offices as is occupied by Prins, Flamm, and Susman, Ltd.; and 4) the potential recovery for individual plaintiffs of $800.00 is much less than attorney's fees which could be generated by this lawsuit. The district judge also noted that since plaintiffs are suing in their capacity as trustees of an inter-vivos trust, they would not receive any form of recovery at the termination of this case.
The district court ruled "that when the class representative is a close professional associate with the attorney of record in the cause, the class representative cannot adequately and fairly represent the class and certification should be denied." The district judge based this ruling on several policy considerations. First, the district court ruled that since potential recovery from attorney's fees greatly exceeds possible individual recovery, plaintiffs' role as class representative and interest in the law firm which would represent the class gives rise to a possible conflict of interest. The district court also pointed to an ethical question which would arise if plaintiff Arnold M. Flamm were to be called as a witness while his firm is employed as class attorney. Similarly, citing ethical questions concerning the solicitation of lawsuits by attorneys, the lower court noted that arrangements such as exist in the present case can only add support for the critics who wish to see class actions limited. Finally, the district judge rejected the argument that since the court could protect the class from any abuse which might occur by reason of the relationship between plaintiff and counsel, the requirements of Rule 23(a)(4) should not be strictly applied. Instead, the court ruled that an aggressive and interested class representative is required under Rule 23(a)(4).
The district judge also rejected defendants' argument that these policy considerations do not apply to Ann Flamm. First, the court pointed out that since Ann Flamm is the mother of Arnold M. Flamm, she cannot be characterized as totally independent. In addition, because the suit was filed by plaintiffs as co-trustees of an intervivos trust, the district judge stated that Ms. Flamm could not have filed suit without joining Arnold M. Flamm. Similarly, although there is no "legal" relationship between Mr. Meites and Mr. Flamm, the lower court stated that Mr. Meites is not independent of Mr. Flamm inasmuch as legal work is done in which Mr. Meites collaborates with the firm of Prins, Flamm, and Susman, Ltd. Finally, the lower court ruled that Arnold M. Flamm's waiver of interest in fees potentially generated by this case does not eliminate the potential for a conflict of interest. The district judge found that a conflict of interest might still exist since, as defendants pointed out, a waiver of an interest in fees may not be possible in a professional service corporation organized under the laws of the state of Illinois. The court stated:
2. The Lincoln American case.
Plaintiff-Appellant Michael Susman (hereinafter referred to as plaintiff) alleged in his complaint that defendants had acted deceptively and made misstatements and
Defendants opposed plaintiff's motion for certification of the class on the grounds that plaintiff did not satisfy the requirements of Fed.R.Civ.P. 23(a)(4). The basis for defendants' motion was that plaintiff is the brother of Arthur Susman, one of two attorneys representing plaintiff. The other attorney representing plaintiff is Thomas R. Meites. As was the case in Microdot, Mr. Meites rents and shares office space in the same suite of offices occupied by Arthur Susman's law firm. The potential recovery for plaintiff is $500.
Relying on the same analysis as was applied in his prior decision in Microdot,
Plaintiffs in both of the cases now before this court jointly argue on appeal that the district court decision, which they characterize as a per se approach, is improper. Plaintiffs assert that the adequacy of class representatives should be determined under the same rules as apply to fiduciaries acting on behalf of others in a non-class action context. Plaintiffs contend that in non-class action settings, a showing of actual danger of conflict of interest rather than the mere possibility of a conflict of interest is required to support a finding that a fiduciary will not adequately represent the interest of others. Plaintiffs argue that no actual danger of a conflict of interest exists in the present case since plaintiffs will not share in any attorney's fees which might be awarded to class counsel. Plaintiffs also contend that neither ABA Canons of Professional Ethics No. 9, nor Kramer v. Scientific Control Corp., 534 F.2d 1085 (3rd Cir. 1976), cert. denied, 429 U.S. 830, 97 S.Ct. 90, 50 L.Ed.2d 94, a case relied upon by defendants, supports the "spectre of conflict" approach utilized by the district judge. Plaintiffs next assert that the district judge's reliance on the class representative to protect the interests of absent class members is unrealistic. According to plaintiffs, the class representative who has little knowledge of the facts of the case and relatively little at stake in the outcome of the suit inevitably relies on the class attorney. Plaintiffs assert that in reality the class attorney rather than the class representative protects the interests of the absent class members. Finally, plaintiffs point to alternative methods of protecting absent class member interests which could avoid disqualification of plaintiffs as class representatives under Rule 23(a)(4).
Prior to certification of a class, a court must find that the named representatives of the class will fairly and adequately protect the interests of the class. "Basic consideration of fairness require that a court undertake a stringent and continuing examination of the adequacy of representation by the named class representatives at all stages of the litigation where absent
The district judge found in both of the cases now before this court that plaintiffs would not adequately protect the interests of the class because of the relationship of plaintiffs to plaintiffs' counsel. The lower court's decision is supported by a majority of courts which have refused to permit class attorneys,
Finally, in a different but related context, the court in Kramer v. Scientific Control Corp., 534 F.2d 1085 (3rd Cir. 1976), held that a motion for disqualification of an attorney acting as class counsel should be granted pursuant to ABA Canons of Professional Ethics No. 9 where even an appearance of an improper conflict of interest exists because of the close relationship of the putative class representative and putative class attorney.
Our circuit has not yet considered the question of adequacy of representation when a close relationship exists between plaintiff and his attorney.
In Brick v. CPC Intern. Inc., 547 F.2d 185 (2d Cir. 1976), the attorney of record for the plaintiff was plaintiff's sole law partner. The district judge denied plaintiff's motion for class certification "because of concern over the ethical problems posed by the attorney-plaintiff relationship in this case and plaintiff's `ability and diligence to prosecute the suit as a class action.'" 547 F.2d at 186. Although declining to adopt a per se rule prohibiting class representation under the circumstances of the case, the court on appeal found that the district judge had not abused his discretion in denying class certification:
Of the four named plaintiffs in Turoff v. May Co., 531 F.2d 1357 (6th Cir. 1976), "three are attorneys with the law firm of counsel and the fourth is the wife of one of them." 531 F.2d at 1360. The court ruled that the relationship between plaintiff and counsel created an inherent conflict which prohibited plaintiffs from adequately protecting the interests of the class. For purposes of determining the adequacy of representation, the court treated plaintiffs who were members of the law firm of counsel or a spouse of a member of the law firm as being the same "person" as counsel:
The court in Kramer v. Scientific Control Corp., 534 F.2d 1085 (3rd Cir. 1976), ruled that the Code of Professional Responsibility requires that:
According to the court, the notion that the appearance of conduct is as important as the conduct itself is a predicate for the Code of Professional Responsibility. Thus, ABA Canons of Professional Ethics No. 9 provides: "A lawyer should avoid even the appearance of professional impropriety." Under this standard, the court ruled that it is immaterial whether plaintiff has taken precautions to ensure that he will not benefit from attorney's fees or act as an attorney in the case. Similarly, neither plaintiff's motivation in bringing the suit nor the quality of legal representation afforded by counsel are relevant. On the contrary, the factor mandating judicial inquiry is the appearance of impropriety inherent in plaintiff's role as representative of class members interests vis-a-vis plaintiff's business associate's desire to maximize recovery of attorney's fees from an equitable fund created by the court for the benefit of the class. Since the public understands a partnership to provide for sharing profits and losses, the court concluded that "[e]soteric internal protections in writing or under oath, insulating the plaintiff-attorney partner from participating in a fee, can hardly dissipate the lay notion that action by one partner is action for the partnership." 534 F.2d at 1092.
Although the cases which have been referred to offer some support for a per se approach, this court declines to adopt a per
In Microdot, the joint membership of Arnold M. Flamm and Arthur T. Susman in the same law firm renders Arnold M. Flamm an inadequate class representative. First, the likelihood of a conflict of interest exists between Flamm's assertion of class interests and his interest in attorney's fees which might be awarded to his law firm. Although Flamm has filed an affidavit stating that he has waived his interest in fees which might be awarded to his law firm, defendants argued before the district court and contend on appeal that Flamm's waiver of interest in attorney's fees is not possible under the Professional Service Corporation Act, Ill.Rev.Stat. ch. 32, § 415-1, et seq. Plaintiffs failed to respond to this point either before the district judge or on appeal. Even if plaintiff's waiver is effective, plaintiff retains both pecuniary and non-pecuniary interests in an award of attorney's fees to his law firm which would support a finding of a likelihood of a conflict of interest.
We also find that this possible conflict of interest must be considered in conjunction with public perception that plaintiff shares in attorney's fees won by his law firm. As the court in Kramer, 534 F.2d at 1092, noted, "esoteric internal protections" preventing an attorney from sharing in fees awarded to his law firm do not dissipate the public's perception that plaintiff would in fact receive benefit from fees awarded to his law firm.
We find for similar reasons that the district court properly concluded in Lincoln American that Michael Susman is under the circumstances an inadequate class representative. Michael Susman's possible recovery as plaintiff is dwarfed by attorney's fees which could be awarded to his brother as class counsel. As the district judge stated:
In addition, the likelihood of a conflict of interest is also supported by "the natural assumption that brothers enjoy a close personal and family relationship and, consequently, would be inclined to support each other's interests." SCA Services, Inc., No. 77-1194, at 116.
Plaintiffs' relationship to Mr. Meites raises similar considerations. The fact that an individual rents office space from a law firm does not by itself render a member of that firm or a relative of a member of that firm an inadequate class representative. On the contrary, a court must examine the circumstances of each case. The district court's ruling which was based on the interdependence between Mr. Meites and the law firm of Prins, Flamm and Susman, Ltd., cannot be said to be an abuse of discretion.
We do not accept under the circumstances of this case plaintiffs' argument that reliance on the court's control of settlement and attorney's fees renders strict enforcement of the requirements of Rule 23(a)(4) unnecessary. Nor do we under the present circumstances agree with plaintiffs that a realistic approach to ensuring protection of absent class members' interests places principal reliance on class counsel and the court. Both Rule 23(a)(4) and the due process clause require that representative parties adequately protect the interests of absent
As the district judge noted, plaintiffs are free to seek different counsel and thereby dispel any possibility of a conflict of interest. In lieu of a change in counsel which might result in a certification of the class actions, plaintiffs are not barred from continuing the lawsuits on their own behalf.
By holding as we do in this case we intend no adverse reflection whatsoever, either professionally or personally, upon the individual counsel involved.
For the foregoing reasons, the rulings by the district judge in the two cases now before this court are hereby affirmed.
In Sommers v. Abraham Lincoln Federal Savings and L. Ass'n, 66 F.R.D. 581 (E.D.Pa.1975), one of each of the five plaintiff couples was employed by plaintiffs' counsel's law firm. The court concluded that inadequacies which may have existed had been cured by the intervention of numerous other named plaintiffs.
In reversing the lower court's opinion on other grounds, this court stated on appeal:
The court found that denial of the motion to disqualify plaintiffs' attorney was appealable under the collateral rule of Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949).
Although, as the court in Kramer pointed out, the disqualification motion does not raise an issue identical to a Rule 23(a)(4) question, the policy considerations expressed by the court in Kramer are equally applicable in the present case. Even though we find the policy considerations expressed in Kramer to be applicable to the present case, this court does not adopt the absolute approach utilized in that case.
In Kesselhaut, the trial judge disqualified the law firm of Krooth and Altman from representing plaintiffs because A. M. Prothro, an attorney working for the law firm who had recently retired as General Counsel of the FHA, had come into contact with plaintiffs' lawsuit before he left the FHA. Prothro was not a partner in Krooth and Altman. He initially received a straight salary and later was paid hourly compensation for part-time work. Prothro disqualified himself from all contacts with the lawsuit and expected to retire prior to the time when plaintiffs' case would come to trial. On the basis of these facts, the Court of Claims, sitting en banc, reversed the trial judge's decision. The court ruled that disqualification of an entire law firm because of the prior involvement of one of its members when serving as a government attorney was too inflexible a rule. The primary policy consideration relied upon by the court was that an inflexible disqualification of an entire law firm "would act as a strong deterrent to the acceptance of Government employment by the most promising class of young lawyers." At 793.
The policy consideration relied upon by the court in Kesselhaut is not applicable to the case now before this court. In addition, the decision in Kesselhaut was made in a nonclass action context free from the requirements imposed by Rule 23(a)(4) and the due process clause in a class action context. We therefore conclude that Kesselhaut does not control our decision in the present case.