Koenig v. Benson

117 F.R.D. 330, 1987 U.S. Dist. LEXIS 9865
CourtDistrict Court, E.D. New York
DecidedAugust 14, 1987
DocketNos. 86-CV-1391, 86-CV-4290
StatusPublished
Cited by21 cases

This text of 117 F.R.D. 330 (Koenig v. Benson) is published on Counsel Stack Legal Research, covering District Court, E.D. New York primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Koenig v. Benson, 117 F.R.D. 330, 1987 U.S. Dist. LEXIS 9865 (E.D.N.Y. 1987).

Opinion

BARTELS, District Judge.

Plaintiffs Benzion Koenig, William Steiner, and Stuart G. Solomon move this Court pursuant to F.R.Civ.P. 23 for certification of their respective actions as class actions.1 All three plaintiffs allege violations of Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-5, based on omissions and misrepresentations of the financial condition of Mission Insurance Group (“Mission”) allegedly contained in Mission’s 1983 Annual Report and 1984 quarterly statements. Solomon also alleges three other claims arising out of the same facts, including a claim under § 20 of the 1934 Act, § 17(a)(2) and (3) of the Securities Act of 1933, 15 U.S.C. § 77q, and common law fraud. The proposed class in each plaintiff’s complaint includes all purchasers of Mission common stock, excluding shares held by the defendants and their affiliates, from March 29, 1984, when the 1983 Annual Report (Form 10K) was filed with the SEC, through February 15, 1985, the date on which Mission reported a loss of approximately $198 Million in 1984.2 [333]*333The defendants in this case are directors of Mission, one of its subsidiaries, and its largest stockholder.3

Mission is an insurance holding company organized under the laws of California. Several of Mission’s insurance subsidiaries were engaging in commercial, property, and casualty insurance, as well as underwriting, brokerage, and reinsurance. Since mid-1983, when Mission common stock was trading at $36 per share, Mission’s financial results have steadily deteriorated, culminating in state conservatorship proceedings against its major insurance subsidiary in late 1985 and the filing of a bankruptcy petition against Mission in early 1986. The defendants assert that Mission’s deteriorating condition was fully disclosed in its public filings and statements. Plaintiffs, conversely, allege a fraud, commencing with the 1983 Annual Report, because Mission concealed massive reinsurance obligations and failed to disclose that its loss reserves were inadequate to cover these bad debts in order to hide the company’s precarious financial condition. The plaintiffs allege that these omissions inflated the value of Mission stock during the class period and caused them to purchase grossly overpriced stock. They claim to have relied on the “integrity of the market” when making their purchases, i.e., the stock price was based on the market’s impersonal assessment of Mission’s financial health as publicly reported in its SEC filings.

The defendants have conducted extensive discovery for each plaintiff in order to ascertain their qualifications as class representatives in this action. They have challenged each plaintiff for various reasons, particularly the typicality and adequacy of their representation of the proposed class.

CLASS CERTIFICATION

This motion is brought under Rule 23 of the Federal Rules of Civil Procedure, the pertinent portions of which provide that one or more members of a class may sue or be sued as representative parties only if:

1. the class is so numerous that joinder of all members is impracticable,
2. there are questions of law or fact common to the class,
3. the claims or defenses of the representative parties are typical of the claims and defenses of the class, and
4. the representative parties will fairly and adequately protect the interests of the class.

See Rule 23(a). The Court notes that the rule is satisfied in this case as to numerosity and common questions of fact and law, and further, that the class action is superior to any other method of adjudication.

Here the defendants’ objections to the proposed class certification is based upon the alleged atypicality and inadequacy of the representatives. In resolving these questions the Court is aware of the many varied and, to some extent, conflicting decisions on these issues. Analysis of the caselaw indicates that each case turns upon its particular facts and circumstances. Although class certification is generally favored, e.g., Green v. Wolf Corporation, 406 F.2d 291 (2d Cir.1968), the Court must feel certain that the class representative [334]*334will discharge his fiduciary obligations by fairly and adequately protecting the interests of the class. In examining the qualifications of the representative his credibility, reliance, and potential conflicts of interest must be considered as the basis of possible unique defenses against him at trial which might affect the outcome of the class suit. With this in mind, the Court examines the qualifications of the named plaintiffs seriatim.

WILLIAM STEINER

William Steiner is challenged for three principal reasons. First, both Steiner and his counsel are presently bringing a derivative suit against Mission, and this commitment creates a conflict of interest in representing a class in this litigation. Secondly, Steiner purchased his Mission shares for a speculative purpose, which renders him atypical compared to the rest of the class. Finally, Steiner is termed a “professional plaintiff” because he has filed 39 securities actions in the last three years and his caseload is so heavy that he can’t even remember whether his cases are still active or have been settled.

Concerning the first objection, William Steiner and the law firm representing him, Abbey and Ellis, are both involved as plaintiffs in a derivative suit brought in California state court on behalf of Mission. Lewis v. Benson, No. C549832 (Super.Ct., L.A. Cty.; March 7, 1985). Defendants contend that this disqualifies Steiner as an adequate class representative under Rule 23(a)(4), because his commitments to the derivative suit shows an interest contradictory to that of the class he seeks to represent. Steiner argues that this conflict is more theoretical than real, and it should not affect class certification at this time, because the class representatives can always be decertified later if a true conflict prejudices the class members.

When a plaintiff brings a derivative suit seeking recovery for the corporation and simultaneously files a class suit for damages against that same corporation, there is an inherent conflict. One court has written, “it is difficult to understand how an attorney can properly represent the interests of a corporation and its present shareholders in a derivative action brought on their behalf, and, at one and the same time, properly represent its present and/or former shareholders in a class action against the corporation without compromising the independence of professional judgment and loyalty to these two groups of clients with potentially conflicting interests.” Stull v. Baker, 410 F.Supp. 1326, 1336-37 (S.D.N.Y.1976); see also Ruggiero v. American Bioculture, Inc., 56 F.R.D. 93, 95 (S.D.N.Y.1972); Hawk Industries, Inc. v. Bausch & Lomb, Inc., 59 F.R.D. 619, 624 (S.D.N.Y.1973); Kamerman v. Steinberg, 113 F.R.D.

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117 F.R.D. 330, 1987 U.S. Dist. LEXIS 9865, Counsel Stack Legal Research, https://law.counselstack.com/opinion/koenig-v-benson-nyed-1987.