Appeal by an objector from an order of the District Court for the Southern District of New York, Lloyd F. MacMahon, Chief Judge, approving the settlement of a class action. Reversed and remanded.
Before Friendly, Mansfield and Kearse, Circuit Judges.
This appeal from an order of Chief Judge MacMahon of the District Court for the Southern District of New York concerns one of the three actions in that district relating to the May 1976 default of Maine potato futures contracts with which we dealt in Leist v. Simplot, 638 F.2d 283 (2d Cir. 1980), cert. granted, -- - U.S. -- , 101 S. Ct. 1346, 67 L. Ed. 2d 332 (1981). Familiarity with the opinions in that case is assumed. The order was made in the third of the actions there described, a consolidated class action (hereafter "the NSS class action") in which National Super Spuds, Inc. and nine others were plaintiffs and New York Mercantile Exchange (NYME), Clayton Brokerage Co. of St. Louis, Inc. (Clayton), Pressner Trading Corp. (Pressner), Jack Richard Simplot, and thirteen others were defendants. The first amended complaint alleged that "(e)ach of the named plaintiffs purchased May 1976 Maine Potato Future Contracts ("Contract or Contracts') on the Exchange and was damaged in liquidating said Contracts between April 13, 1976 and the close of trading on the Exchange on May 7, 1976." The action was brought on behalf of the named plaintiffs and "all other persons who held a net long position in Contracts and who liquidated their long position in said Contract between April 13, 1976 and the close of trading on the Exchange on May 7, 1976." (Emphasis in original.) By order dated August 15, 1977, National Super Spuds, Inc. v. New York Mercantile Exchange, 77 F.R.D. 361, 375, Judge MacMahon allowed certification of the class described in the complaint, and on December 15, 1978, the Clerk sent a notice of such certification addressed to class members similarly defined. The notice advised that:
A final judgment entered in this case, whether favorable or unfavorable to plaintiffs, will include, and will be binding upon, all persons whom the court ultimately finds to be members of the class and who do not request exclusion.
Any member of the class desiring exclusion was instructed to send a request to the Clerk which had to be postmarked by January 29, 1979, 45 days following the date of the notice. Objector-appellant Dexter Richards filed such a request on January 17, 1979.
Before the class certification Richards had brought an action in his own behalf in the District Court for the District of New Hampshire against many of the defendants in the class action. The complaint generally alleged the same types of wrongful action that the NSS complaint alleged. However, it sought damages not only with respect to 60 May 1976 long contracts which Richards apparently liquidated at a loss before May 7, 1976, but also, as against NYME and its president, with respect to 12 long contracts on which sellers defaulted after that date. This action was transferred to the Southern District of New York and coordinated for discovery purposes with the NSS class action and the other actions but was never consolidated with the NSS class action.
By letter dated February 14, 1979, counsel for Richards advised the court that Richards had decided to repudiate his opt-out decision and to rejoin the NSS class action. On April 27, 1979 his counsel, Jay W. Kaufmann, now deceased, entered into a stipulation with counsel for the defendants in the New Hampshire action discontinuing the latter, which on May 9, 1979 was incorporated in an order entered by Judge MacMahon discontinuing Richards' action. The stipulation (except for the signatures) is set forth in the margin.*fn1
Prior to the discontinuance of Richards' individual action and even prior to the sending of the notice of class certification, some of the defendants, essentially Simplot and his associates, submitted to counsel for the class plaintiffs, on September 21, 1978, a proposal to settle the class action against them for $575,000. This sum, after deduction of administrative costs and the fees and expenses of plaintiffs and their counsel, was to be applied
to the payment of all persons who held a net long position in May 1976 Maine Potato Future Contracts ("May contracts") and who liquidated such long position between April 13, 1976, and the close of trading on the New York Mercantile Exchange on May 7, 1976.
Various members of the class, including the plaintiffs in the two other actions dealt with in our Leist opinion, supra, 638 F.2d 283, and Richards, were expressly excluded from the provisions in the proposed settlement in which the plaintiffs and the settling defendants were to release each other from any claims which were asserted or which might have been asserted with respect to any of the matters alleged in the complaint. The proposal was accepted by counsel for the class plaintiffs, subject to embodiment in a formal stipulation and court approval. Early in March 1979 NYME and Clayton entered into a letter agreement with lead counsel for the plaintiffs in the NSS class action wherein each defendant would pay $65,000 in settlement of the plaintiffs' claims. This letter agreement stated that the formal settlement "will include appropriate details such as set forth in the September 21, 1978, letter agreement" between counsel for the class plaintiffs and the Simplot defendants. There is nothing that demonstrates that Richards had any knowledge of these agreements or of negotiations concerning them when he rejoined the class.
On May 29, 1979, Judge MacMahon entered an order, 470 F. Supp. 1256, granting motions to dismiss the complaint in the NSS class action, as well as two independent actions, to the extent that these relied upon violations of the Commodities Exchange Act.*fn2 Despite this the Simplot defendants (who had not joined in the motion to dismiss), NYME and Clayton, and the NSS plaintiffs agreed to proceed with the settlement, and the NSS class action plaintiffs, in contrast to the plaintiffs in the two other consolidated actions, appealed to this court only as against movants who had not agreed to settle, to wit, Heinold Commodities, Inc. (Heinold) and Thomson & McKinnon, Auchincloss, Kohlmeyer, Inc. (Thomson).
Later in 1979 Richards, now represented by a new attorney, A. Arnold Gershon, Esq., brought a class action against NYME, Clayton, Heinold and Thomson in the Supreme Court of the State of New York for New York County. Richards brought this action "on his own behalf and as the representative of a class consisting of all persons who had held open long contracts (i. e. executory contracts to purchase) of May 1976 Maine potato futures traded at the Exchange after the close of trading on May 7, 1976." The class was claimed to comprise some 200 persons. The complaint alleged that at the conclusion of trading on May 7, 1976, there were 1911 open unliquidated contracts wherein plaintiff and the class were buyers and the Exchange was the seller;*fn3 that, as to 911 of these contracts, delivery of less than the 500 cwt. required was made; and that no deliveries were made on the remaining 1000. Plaintiff sought to recover damages for the incomplete deliveries and the failure to deliver.*fn4
On December 14, 1979, lead counsel for the NSS class plaintiffs and counsel for the Simplot defendants, NYME and Clayton entered into a formal stipulation of settlement. This included a paragraph, which had been included in substance in the previous letter agreement between the class plaintiffs and the Simplot defendants, reading as follows:
7. For purposes of clarity, it is intended that the effect of the final judgment should be as follows:
The settling defendants, their affiliates, and each of them shall be released from any and all claims of every nature and description asserted, or which might have been asserted by plaintiffs and the class members or any of them against the settling defendants, their affiliates, or any of them based upon, arising out of, or in any way respecting any act or omission relating to any of the matters or transactions set forth in the Complaint. (Proof of claim forms shall contain a release in conformity with the provisions of this paragraph.)
Paragraph 18 of the settlement stated:
18. Upon final judgment approving this settlement the plaintiffs and the settling defendants and the settling defendants among themselves shall be deemed to have released each other completely from any and all claims, demands, or choses in action relating to the May Contract, except it is understood that the following members of the plaintiff class shall not be included in this release made by or in favor of the settling defendants: