expend the class of cases in which aggregation is permissible,
would be an unwarranted extension of the limits of federal
We believe, as did Judge Lewis in Coburn, that Alvarez and
Snyder misconstrue the effect of new Rule 23. First of all,
to require determinations based upon the plaintiffs' legal
relationships to one another is to resurrect the confusing
distinctions which prompted the replacement of the old rule.
There no longer remains any justification for distinguishing
between types of class actions on any basis other than the
pragmatic tests established by the new rule. We do not believe
deviation is permitted for aggregation purposes. Certainly the
Alvarez and Snyder decisions frustrate the desire of the
Advisory Committee to achieve efficiency of judicial
administration by reducing necessary time and expense and
promoting uniformity of decision, without at the same time
sacrificing procedural safeguards. See 39 F.R.D. at 102;
Coburn, supra, 389 F.2d 831; Note 52 Minn.L.Rev. 509, 515
The lesson of those cases is that plaintiffs will have to first
determine whether their claims are joint or several, and will
be able to utilize the class action procedure only in the
former type of case, unless, of course, the claim of each is
for more than $10,000. But it seems that a purpose of Rule 23
"is to provide a means of vindicating small claims," Dolgow v.
Anderson, 43 F.R.D. 472 (S.D.N.Y. Jan. 3, 1968); Eisen v.
Carlisle and Jacquelin, 391 F.2d 555 (2d Cir. March 8, 1968).
Adoption of the Alvarez and Snyder rationale would
frustrate that purpose as well.
Secondly, the expansion of jurisdiction arguments relied upon
by Alvarez and Snyder seem to be unwarranted, although
admittedly the grant of rule-making power does not permit the
expansion or contraction of substantive statutory law. But a
construction of § 1331 which permits aggregation of claims in
all properly maintained class actions does not expand the
jurisdictional scope established by Congress.
As quoted in Coburn, Gibbs v. Buck, 307 U.S. 66, 72, 59 S.Ct.
725, 83 L.Ed. 1111 (1939), long ago established that
aggregation is proper when the "matter in controversy"
satisfies the jurisdictional amount. The function of Rule 23 in
no way deviates from that principle. What it does is redefine
the "matter in controversy." Under new Rule 23(b)(3), unlike
the old Rule 23(a)(3), all parties which do not explicitly
request exclusion from the class, are bound by the judgment.
Van Gemert v. Boeing Company, 259 F. Supp. 125 (S.D.N.Y. 1966).
Thus in fact, under the new rule the matter in controversy is
the aggregate of the claims of the entire class. The amount of
those claims may be aggregated under the rationale of Gibbs v.
Buck. See Barron and Holtzoff, Federal Practice and Procedure,
§ 569 (1967 Supp. at 106). But the effect of Rule 23 is only to
change the interpretation which must be given in the class
action context, to the jurisdictional law expressed by Gibbs.
This is not expanding the court's jurisdiction by rule.
Defendant's view of Rule 82 would have the effect of stifling
the growth and improvement of procedural rules. Indeed, its
position might have the effect of invalidating Rule 23(b)(3)
as an illegal expansion over former Rule 23(a)(3). Since
potential class members under the old rule were made parties
for judgment purposes only at their request, the current
provision has the effect of expanding the class of persons
subject to the court's jurisdiction by making all potential
class members parties, unless. they "opt-out."
Likewise, the class action rule necessarily affects certain
other jurisdictional questions, though it does not mean it
expands or limits the court's jurisdiction. For instance, it
provides a device for achieving diversity of citizenship.
Diversity in class actions is judged only by the representative
parties in the class. Stewart v. Dunham, 115 U.S. 61, 5 S.Ct.
1163, 29 L.Ed. 329 (1885); Irwin
v. Missouri Valley Bridge and Iron Company, 19 F.2d 300 (7th
Cir. 1927). It follows that the class action gives the court
jurisdiction over disputes involving non-diverse members of the
class which it would not otherwise have.
The expansion of jurisdiction arguments used in Alvarez and
Snyder fail to understand, we believe the proper meaning of
Rule 82. They both rely upon the alleged lack of specific
authority for allowing aggregation of all class actions under
Rule 23. But Professor Benjamin Kaplan of the Harvard Law
School, the Reporter to the Advisory Committee at the time new
Rule 23 was adopted, has implicitly put the quietus to the
arguments relied upon in Alvarez and Snyder, in a recent
article. Kaplan, Continuing Work of the Civil Committee; 1966
Amendments of the Federal Rules of Civil Procedure (I), 81
Harv.L.Rev. 356 (1967). Although writing in his personal
capacity, the following comments indicate what may have been
the Committee's understanding of the jurisdictional issue: (at
"We need not be long delayed by the suggestion that the
provisions for the (b)(3) action, especially those which state
that the judgment shall cover in terms all members of the class
as defined (apart from opters-out), have the effect of
extending jurisdiction despite the declaration of rule 82 that
the rules `shall not be construed to extend * * * the
jurisdiction of the United States district courts * *.'
`Jurisdiction' `here means subject matter jurisdiction, and in
this respect rule 82 may describe an inherent limitation on the
rulemaking power. The argument seems to be that only in the
more `standard' situations for class actions may the
citizenship of members other than the actual parties be
disregarded for diversity of citizenship purposes; that is, it
is only in those situations that an ancillary principle
operates to permit the judgment to cover the class
notwithstanding absence of diversity as to some of the class
members; and this principle cannot be modified by rule. Thus it
would be argued that in actions under the new rule which would
formerly have been spurious, the judgments cannot be given full
reach to a class with nondiverse elements. But even if one
should accept dubious doctrine about the outworn spurious
category as immovable law, it would not be decisive of problems
under the new rule. New rule 23 alters the pattern of class
actions; subdivision (b)(3), in particular, is a new category
deliberately created. Like other innovations from time to time
introduced into the Civil Rules, those as to class actions
change the total situation on which the statutes and theories
regarding subject matter jurisdiction are brought to bear. From
the start the Civil Rules elaborating and complicating actions
through joinder of claims and parties, have profoundly
influenced jurisdictional result. Similarly, the introduction
of the ramified action meant that the statutes on appellate
review had to be freshly interpreted. This is far from saying
that the Civil Rules in the former case extended subject matter
jurisdiction contrary to rule 82, or in the latter case
subverted the received system of appellate review. Not only
must new rule 23 be considered a fresh datum for deciding
whether diversity of citizenship requirements are satisfied by
the original parties or intervenors; it also presents a new
complex in deciding questions of permissible `aggregation' of
amounts in controversy. And these can hardly be a complete list
of the matters that will be collaterally affected by the new
Rule 82 cannot obviate the necessity of interpreting the amount
in controversy requirement in a sensible way. To ignore changes
in class action rules in the process of interpretation, would
undermine the purpose of the class action rule and derogate
from the effective utilization of the jurisdictional
requirement as well.
For all of the above reasons, we decline to follow Alvarez
and Snyder, but join Coburn and Booth in permitting
claims to be aggregated in actions properly brought under Rule
23. The amount in controversy herein is well above the minimum
requirement. Should we find that we possess subject matter
jurisdiction herein, § 1331 would be a proper statutory basis
Jurisdiction Under the Civil Rights Statutes
Since we have upheld jurisdiction under § 1331, it is
unnecessary to decide whether the action is properly brought
under § 1983, of Title 42.
However, it is true that many cases in this Circuit have held
that § 1983 does not confer jurisdiction where the complaint
seeks only to protect a monetary or property right. Ream v.
Handley, 359 F.2d 728, 731 (7th Cir. 1966); Gray v. Morgan,
371 F.2d 172, 175 (7th Cir. 1966); McManigal v. Simon,
382 F.2d 408, 410 (7th Cir. 1967); Booth v. General Dynamics
Corporation, 264 F. Supp. 465, 470 (N.D.Ill. 1967); Robinette v.
Chicago Land Clearance Commission, 115 F. Supp. 669, 674
Plaintiffs seek to escape that rule on the ground that they
assert not a deprivation of a property right, but a deprivation
of procedural due process. Many courts have accepted such
arguments and assumed jurisdiction even where property rights
were the gist of plaintiff's aggrievement. E. g. Hornsby v.
Allen, 326 F.2d 605 (5th Cir. 1964); Dixon v. Alabama State
Board of Education, 186 F. Supp. 945 (M.D.Ala. 1960); reversed
on other grounds, thereby upholding jurisdiction, 294 F.2d 150
(5th Cir. 1961); Cobb v. City of Malden, 202 F.2d 701, 705 (1st
Cir. 1953); McGuire v. Sadler, 337 F.2d 902 (5th Cir. 1964).
However, virtually every time a person is deprived of a
property right without due process, he is denied procedural
fairness, simultaneously, so the argument as it stands is not
Indeed, it appears merely a convenient manner for avoiding the
jurisdictional bar to cases involving property rights, which
was first expressed in Holt v. Indiana Manufacturing Company,
176 U.S. 68, 20 S.Ct. 272, 44 L.Ed. 374 (1900), and later in
Hague v. C. I. 0., 307 U.S. 496, 531, 59 S.Ct. 954, 83 L.Ed.
1423 (1939). The rule has been criticized, as well as avoided.
Note, 66 Harv.L.Rev. 1285, 1288 (1953).
In a case on virtually all fours factually with this one, Judge
Parsons held that property rights are and should be protected
by § 1983. Joe Louis Milk Company v. Hershey, 243 F. Supp. 351
(N.D.Ill. 1965). And were we pressed to decide the issue, we
would tend to agree with the analysis which he adopts, and
which is expressed in the Harvard Law Review, Note, cited
above. Nevertheless, we are not compelled to make a decision,
and should observe that despite Joe Louis Milk Company, the
Seventh Circuit continues to hold that § 1983 has no
application where property rights capable of approximate
valuation are involved. It expressly rejected the holding of
Joe Louis Milk Company in Ream v. Handley, 359 F.2d 728, 731
(7th Cir. 1966).
Is a Substantial Federal Question Presented?
Finally, we must decide whether or not a "substantial" federal
question is presented in order to determine whether to dismiss
the complaint or to convene a three-judge panel. Idlewild Bon
Voyage Liquor Corporation v. Epstein, 370 U.S. 713, 715, 82
S.Ct. 1294, 8 L.Ed.2d 794 (1962); Swift and Company v. Wickham,
382 U.S. 111, 114-115, 86 S.Ct. 258, 15 L.Ed.2d 194 (1965); Ex
parte Poresky, 290 U.S. 30, 54 S.Ct. 3, 78 L.Ed. 152 (1933);
California Water Service Company v. City of Redding,
304 U.S. 252, 58 S.Ct. 865, 82 L.Ed. 1323 (1938). As was stated in Ex
parte Poresky, 290 U.S. 30, 32, 54 S.Ct. 3, 4, 78 L.Ed. 152
"The question may be plainly unsubstantial, either because it
is `obviously without merit' or because `its unsoundness so
clearly results from the previous decisions of this court as to
foreclose the subject and leave no room for the inference that
the question sought
to be raised can be the subject of controversy'. * * *"
Defendant's motion to dismiss asserts that the issue raised in
the complaint has already been decided adversely to plaintiffs,
and additionally that it is clearly without merit.
But it does not appear that the precise question raised here
has previously been decided.
The general rule cited by defendant that policyholders and
stockholders are not necessary parties to an assessment
proceeding is not challenged here. E. g. Hawkins v. Glenn,
131 U.S. 319, 9 S.Ct. 739, 33 L.Ed. 184 (1889); Pink v. A.A.A.
Highway Express, Inc., 314 U.S. 201, 62 S.Ct. 241, 86 L.Ed. 152
(1941); Supreme Council of the Royal Arcanum v. Green,
237 U.S. 531, 35 S.Ct. 724, 59 L.Ed. 1089 (1915). Plaintiffs do not
claim that they must actually receive notice, or must be made
parties to the Liquidation Proceedings. They only claim the
right to receive notice of the Petition for Authority to Levy
an assessment, and the further Liquidation Proceedings
resulting in the assessment, so as to decide for themselves
whether to attempt to intervene.
In several of the cases cited by defendants, the Court
explicitly noted that under the relevant Minnesota statute,
(involved in all the cases), shareholders were sent notice
prior to the levy of the assessment and given an opportunity to
appear at a hearing on the question of the necessity and amount
of the assessment. Bernheimer v. Converse, 206 U.S. 516, 519,
27 S.Ct. 755, 51 L.Ed. 1163 (1907); Converse v. Hamilton,
224 U.S. 243, 252, 32 S.Ct. 415, 56 L.Ed. 749 (1912); Marin v.
Augedahl, 247 U.S. 142, 145, 147, 38 S.Ct. 452, 62 L.Ed. 1038
(1918); Chandler v. Peketz, 297 U.S. 609, 611, 56 S.Ct. 602, 80
L.Ed. 881 (1936). The statutes examined in those cases afforded
shareholders exactly the kind of notice, to which the instant
plaintiffs claim entitlement.
Finally, another series of cases cited by defendant, involved
legislation empowering the Comptroller of the Currency to
declare the insolvency of national banks, and make assessments
upon stockholders statutorily liable therefor. Kennedy v.
Gibson, 8 Wall. 498, 75 U.S. 498, 19 L.Ed. 476 (1869); Forrest
v. Jack, 294 U.S. 158, 55 S.Ct. 370, 79 L.Ed. 829 (1934);
Crescent City National Bank v. Case, 99 U.S. 628, 629, 25 L.Ed.
448 (1879); Christopher v. Norvell, 201 U.S. 216, 26 S.Ct. 502,
50 L.Ed. 732 (1906); Casey v. Galli, 94 U.S. 673, 24 L.Ed. 168,
Hence, none of the cases cited by defendant foreclose the issue
raised today by plaintiff.
There may well be valid reasons why notice is not required
prior to the authorization for levy of assessments. In the
normal liquidation, either in insolvency or bankruptcy
proceedings, the corporation, through its officers, defends the
actions, and courts have held that shareholder interests are
properly represented by the corporation.*fn4 The need for
prompt action is greatest when it is determined that an
insurance company is in financial difficulty. It may be
unfeasible because of delay, or because of the expense of a
large mailing, to send notice of the
liquidation proceedings to every policyholder. Such delay and
expense would, in some cases, dissipate assets, further the
company's decline, and be to the detriment of the estate, its
creditors, and the general public.
In addition, the statute provides for notification to each
shareholder of the actual assessment. At that point he may
object to the necessity of the assessment or its amount and may
intervene in the liquidation proceeding to question the
propriety of the assessment and seek reconsideration. Such
notification was afforded in this case. Furthermore, even if
the issue of the propriety of the assessment order is not
raised by an intervening policyholder, each individual
shareholder may raise defenses peculiar to himself in the
course of the collection proceeding.
We are not certain Mullane v. Central Hanover Bank & Trust Co.,
339 U.S. 306, 70 S.Ct. 652, 94 L.Ed. 865 (1950), relied upon so
heavily by plaintiffs, requires more than this.
Mullane was concerned with the sufficiency of notice sent to
beneficiaries of a common trust fund administered by the
defendant. The Court held that statutory notice by publication
was insufficient as a basis for adjudication involving
substantial property rights, since it is not impractical to
mail personal notice to beneficiaries whose addresses are
known. Mullane did not hold, however, that such notice must
The statutory notice in Mullane related to court proceedings
which made a judicial settlement of account "binding and
conclusive as to any matter set forth in the account upon
everyone having any interest" (339 U.S. at 309, 70 S.Ct. at
655) therein, and to finally settle all "questions respecting
the management of the common fund." (at 311, 70 S.Ct. at 655).
The levy of assessment, for which no notice is provided herein,
of course, is not finally binding upon policyholders, who
receive notice thereafter and are able to challenge the
necessity and amount of the assessment. This is quite different
from Mullane, where the insufficient notice pertained to
"binding and conclusive" judicial action.
However, the argument can be made, and, with some practical
force, that once the assessment is made, a heavy burden is
placed upon the policyholder to overturn it, and that he should
be notified prior to its issuance, when the burden to
forestall it might not be as difficult, and when he might
prevent the consequences of its issuance from occurring.
This argument is to be weighed against the alleged practical
convenience of commencing liquidation proceedings and allowing
assessment without notice to the policyholders. At this point,
it appears plaintiffs' argument is not terribly persuasive,
but, of course, no evidence has yet been received in support of
the parties' respective positions.
The substantiality of the question raised is to be determined,
in any event, from the allegations of the complaint. Mosher v.
City of Phoenix, 287 U.S. 29, 30, 53 S.Ct. 67, 77 L.Ed. 148
(1932); Levering and Garrigues Co. v. Morrin, 289 U.S. 103,
105, 53 S.Ct. 549, 77 L.Ed. 1062 (1933). Failure to give notice
when substantial rights are involved is a serious problem. In
considering a question factually indistinguishable from this
one and involving the application of the same statute, Judge
Parsons stated he would have invoked a three-judge court if the
issue of the statute's constitutionality had been presented.
Joe Louis Milk Company v. John Bolton, No. 64 C 1478
(unreported) (N.D.Ill., June 26, 1967).
Although the issues before Judge Parsons presumably were
different, and, he, therefore did not have the benefit of
briefs on the instant issues, we believe at least that his
instinct to convoke a three-judge court was correct.
Although there is some likelihood that the issues raised by
plaintiffs may be difficult to sustain, we believe at least
they should have the opportunity to present them before a
court. A claim that official action is unconstitutional should
not be dismissed for lack of jurisdiction unless it appears, to
a legal certainty, that the claim is insubstantial and
frivolous. Bell v. Hood, 327 U.S. 678, 66 S.Ct. 773, 90 L.Ed.
939 (1946); Wheeldin v. Wheeler, 373 U.S. 647, 83 S.Ct. 1441,
10 L.Ed.2d 605 (1963). We believe the same stringent
requirements should apply to a challenge to a state statute on
As Judge Parsons stated in Joe Louis Milk Company v. Hershey,
243 F. Supp. 351, 354-55 (N.D.Ill. 1965):*fn5
"Experience teaches that the wiser and better practice is for
the court to assume jurisdiction for the purpose of determining
whether the complaint states a claim upon which relief can be
granted. Rogers v. Provident Hospital, 241 F. Supp. 633
(N.D.Ill. 1965); Harrison v. Murphy, 205 F. Supp. 449 (D.Del.
1962); Byrd v. Sexton, 277 F.2d 418 (8th Cir. 1960)."*fn6
Accordingly, we find that the complaint states a "substantial"
constitutional question, and pursuant to 28 U.S.C. § 2284, will
immediately request Chief Judge Castle of the Seventh Circuit,
to convene a three-judge court. The motion to dismiss for lack
of subject matter jurisdiction is denied.
However, under Sections 2281 and 2282 of Title 28, we may not
issue either an interlocutory or permanent injunction as a
single-judge court. That function is reserved to the full three
man panel. Defendant has voluntarily refrained from taking
steps to collect the pending assessments while these motions
have been pending. We would hope that he would continue his
inaction until the three-judge court has an opportunity to act
upon the merits of this complaint. We, however, are without
power to order him to continue his course of action. But, if he
insists upon proceeding, the three-judge court would have power
to allow preliminary equitable relief, if appropriate. The
motion for a preliminary injunction, is therefore continued for
consideration by the full court.