United States District Court, Northern District of Illinois, E.D
July 27, 1984
IN RE FINANCIAL PARTNERS CLASS ACTION LITIGATION.
The opinion of the court was delivered by: Leighton, District Judge.
Defendants K & S Commodities, Inc. (K & S), and the Chicago
Mercantile Exchange (CME) have filed counterclaims against
plaintiffs Elizabeth Vaccariello, Richard Winer, and certain
unnamed class members. The cause is before the court on
plaintiffs' motion to dismiss those counterclaims. For the
following reasons, the motion is denied.
The gravamen of the counterclaims is that these plaintiffs
aided and abetted defendant Robert Serhant in violating the
antifraud provisions of the Commodity Exchange Act by
knowingly accepting funds stolen from other investors and
allocated to their accounts as inducement to refrain from
exposing Serhant's allegedly fraudulent activities. In
considering the motion to dismiss the counterclaims, the
court, of course, is guided by the standard that they should
be dismissed for failure to state a claim only if it appears
beyond doubt that no set of facts can proved in their support
giving rise to an entitlement to relief. See, e.g., Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80
(1957). The first argument raised by plaintiffs is that the
counterclaims must be dismissed because plaintiffs' status as
"victims" insulates them, as a matter of law, from charges that
they aided and abetted Mr. Serhant. This naive characterization
misses the point, however; it is obvious that to the extent the
allegations in the counterclaims are true these plaintiffs
ceased being victims and became victimizers. Cf. Gerbardi v.
United States, 287 U.S. 112, 119, 53 S.Ct. 35, 36, 77 L.Ed. 206
Relying on Hochfelder v. Midwest Stock Exchange,
503 F.2d 364, 374 (7th Cir. 1974), cert. denied, 419 U.S. 875, 85 S.Ct.
137, 42 L.Ed.2d 114 (1974), plaintiffs also move for dismissal
of the counterclaims on the ground that it is not alleged that
they owed the CME and K & S a duty to investigate or disclose.
However, a close reading of the standard announced by the Court
of Appeals for the Seventh Circuit in Hochfelder shows that
allegations of the breach of duties to investigate or disclose
are not the only averments that will support a claim of aiding
and abetting; such a claim also may be premised on allegations
that parties, having knowledge of fraud, failed to act due to
an improper motive. 503 F.2d at 374. The counterclaims of K & S
and the CME easily satisfy this standard, and the court cannot
say beyond doubt that they can prove no set of facts in support
of their pleadings which will entitle them to relief.
Plaintiffs further argue that the counterclaims should be
stricken because defendants' allegations fail to satisfy the
standard of particularity required by Rule 9(b), Fed.R.Civ.P.
The court, however, finds the opposite; the counterclaims
comply with Rule 9(b) by providing plaintiffs with fair notice
of the allegations against them in a manner that evidences a
reasonable belief on the part of defendants that there may be
merit to their counterclaims.
See Baselski, Paine, Webber, Etc., 514 F. Supp. 535, 540
At the very least, plaintiffs next contend, the court should
strike one of the components of defendants' prayers for relief
— the request in which K & S and the CME seek indemnification
from plaintiffs adjudged to have aided and abetted Mr. Serhant.
In support of their position, they refer the court to the
pronouncement of the Court of Appeals for the Seventh Circuit
in Heizer Corporation v. Ross, 601 F.2d 330, 334 (1979), that a
"wrongdoer should not be permitted to escape loss by shifting
his entire responsibility to another party."
This isolated statement, however, cannot be unshackled from
the entire body of existing case law and accepted as a blanket
declaration that a culpable party can never be entitled to
indemnification from another wrongdoer. See, e.g., Maryville
Academy v. Loeb Rhoades & Co., Inc., 530 F. Supp. 1061, 1070
(N.D.Ill. 1981). A party adjudged liable may nevertheless be
entitled to indemnification when there is a gross disparity in
the quality of its misconduct and that of other parties. See
Parr v. Great Lakes Express Co., 484 F.2d 767, 770 (7th Cir.
1973); Madigan Inc. v. Goodman, 498 F.2d 233, 237-238 (7th Cir.
1974); Maryville Academy, supra. After reviewing the
pleadings, the court cannot say beyond doubt that K & S and the
CME, in the event they and counterdefendants are subsequently
found liable to certain class members, can prove no set of
facts establishing that the differential in the misconduct of
the parties is so gross that counterdefendants should be
required to indemnify them. Accordingly, the motion to strike
the demand for indemnification from the counterclaims' prayers
for relief is denied.
Plaintiff's final argument is that, in any event, the
counterclaims against Richard Winer and the unnamed class
members have to be dismissed because they, unlike Elizabeth
Vaccariello, are absent class members and, therefore, should
not be considered parties for purposes of Rule 13,
Fed.R.Civ.P. The Court of Appeals for the Seventh Circuit has
yet to rule on the status of absent class members. See Brennan
v. Midwestern United Life Ins. Co., 450 F.2d 999, 1004 (7th
Cir. 1971), cert. denied, 405 U.S. 921, 92 S.Ct. 957, 30
L.Ed.2d 792 (1972). Indeed, there are a number of cases,
including one decided by Judge McMillen of this district,
holding that absent class members should not be accorded party
status for purposes of counterclaims. See, e.g., Weit v.
Continental Illinois Nat. Bank & T. Co. of Chicago, 60 F.R.D.
5, 8 (N.D.Ill. 1973) (McMillen, J.); In re Sugar Industry
Antitrust Litigation, 73 F.R.D. 322, 323, 349 (D.C.Pa. 1976);
Donson Stores Inc. v. American Bakeries Company, 58 F.R.D. 485,
488 (S.D.N.Y. 1973). But there is another substantial line of
cases holding that absent class members can be considered
parties, at least in some circumstances. See, e.g., National
Super Spuds, Inc. v. New York Mercantile Exchange, 75 F.R.D. 40
(S.D.N.Y. 1977); Rodriguez v. Family Publications Service,
Inc., 57 F.R.D. 189, 193 (C.C.Cal. 1972).; Cotchett v. Avis
Rent A Car System, Inc., 56 F.R.D. 549, 552 (S.D.N.Y. 1972).
After reviewing the relevant case law, the court concludes
that in the present situation a formulaic recital of a rigid
rule that absent class members can never be considered parties
is to be eschewed. See National Super Spuds, Inc. v. New York
Mercantile Exchange, supra. Rule 13, Fed.R.Civ.P., should not
be applied in a restrictive, mechanistic manner that frustrates
the overriding goal of the Federal Rules of Civil Procedure to
promote the efficacious litigation of all the claims and issues
in a case before a federal court. Cf Maryville Academy v. Loeb
Rhoades & Co., Inc., 530 F. Supp. 1061, 1070 n. 14 (N.D.Ill.
Even if the court were to apply the rule argued for by
plaintiffs in this case, the counterclaims would not disappear
forever; defendants would simply be allowed to raise the
counterclaims against absent class members at a subsequent
point in the litigation. See Weit v. Continental, 60 F.R.D. at
8; National Super Spuds, 75 F.R.D. at 43.
The court observes, moreover, that, as a practical matter, the
issues associated with these counterclaims would never
disappear from the case at all; they share a common core of
allegations with affirmative defenses raised in defendants'
answers to the complaint. In essence, plaintiffs are asking
the court to employ Rule 13 as an artifice for postponing the
trial of the counterclaims, while blinding itself to the
irrefragable argument that the progress of this and related
litigation would best be served if discovery with respect to
the counterclaims is allowed to proceed.
Resort to this clumsy application of Rule 13 is not
warranted. Rules 16, 23, and 42, Fed.R.Civ.P., provide a
practical, straight-forward, and comprehensive system whereby
in complex class action litigation a court, in the interest of
expedition and economy, can order separate trials with respect
to various claims while, at the same time, allowing for common
discovery. See National Super Spuds, 75 F.R.D. at 43-44.
Accordingly, the parties are directed to proceed with discovery
on the counterclaims; and the court, as contemplated by Rule
42, Fed.R.Civ.P., reserves unto itself the right to make a
subsequent determination as to when and in what manner the
counterclaims are to be tried. With this understanding,
plaintiffs' motion to dismiss the counterclaims is also denied
insofar as it seeks their dismissal on Rule 13 grounds;
therefore, the motion is denied in its entirety.
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