Opinion
Civil Action No. 99- 4908
July 12, 2002
ORDER
The motion for class certification, Fed.R.Civ.P. 23, by Martin Schnall, having been referred to the Honorable Ronald J. Hedges, United States Magistrate Judge, pursuant to 28 U.S.C. § 636(b)(1)(B); and the Court having reviewed de novo the May 14, 2002 Report and Recommendation of Magistrate Judge Hedges and objections filed by plaintiff; and for the reasons set forth in the accompanying Opinion; and good cause appearing,
It is on this 12th day of July 2002 hereby
ORDERED that the Report and Recommendation of Magistrate Judge Hedges is adopted as the Opinion of this Court.
OPINION
Martin Schnall filed this action on October 18, 1999, alleging that Amboy National Bank's (Amboy's) newspaper advertisements and account disclosures for its money market accounts violated the Truth in Savings Act, 12 U.s.c. § 4301 et seq (TISA). Amboy had placed ads promoting its money market accounts in the Star-Ledger from October 18, 1998 through October 10. 1999. Schnall invested $20,000. The Third Circuit held that Amboy was liable under TISA, remanding for a determination of liability. See Schnall v. Amboy National Bank, 279 F.3d 205, 207 (3d Cir. 2002). Schnall filed a motion for class certification, Fed.R.Civ.P. 23, which this Court referred to Magistrate Judge Ronald J. Hedges. On May 14, 2002, Judge Hedges recommended that Schnall's motion for class certification be denied. Schnall filed objections.
This Court's review of the magistrate judge's Report and Recommendation (RR) and the related objections to the RR is governed by Local Civil Rule 72.1(a)(2) and 72.1(c)(2). In accordance with the Rules, the Court "shall make a de novo determination of those portions [of the RR] to which objection is made and may accept, reject or modify, in whole or in part, the findings or recommendations made by the Magistrate Judge. The judge . . . may consider the record developed before the magistrate judge, making his or her own determination on the basis of that record." L.Civ.R. 72.1(c)(2); Zinberg v. Washington Bancorp., Inc., 138 F.R.D. 397, 401 (D.N.J. 1990) (holding that the court makes a de novo review of the parts of the report to which the parties object); see also Magicorp. v. Kinetic Presentations, Inc., 718 F. Supp. 334, 335 (D.N.J. 1989).
Judge Hedges recommended that class certification be denied because Schnall has failed to show that he could adequately represent the putative class. Fed.R.Civ.P. 23(a)(4). One of the four general principles for class certification under Rule 23 is that "the representative parties will fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a)(4). The adequacy of representation prong involves a two-step inquiry: (1) whether the legal counsel is qualified, and (2) whether the named plaintiffs interests are antagonistic to the class. See Weiss v. York Hosp., 745 F.2d 786, 811 (3d Cir. 1984). The Third Circuit in Kramer v. Scientific Control Corp., 534 F.2d 1085, 1093 (3d Cir. 1976), vindicating the rules of professional conduct and the "appearance of impropriety," held that
no member of the bar either maintaining an employment relationship, including a partnership or professional corporation, or sharing office or suite space with an attorney class representative during the preparation or pendency of a Rule 23(b)(3) class action may serve as counsel to the class if the action might result in the creation of a fund from which an attorneys' fee award would be appropriate.
Applying Kramer, courts have employed its reasoning to other situations where there is an appearance of impropriety. See Susman v. Lincoln Am. Corp., 561 F.2d 86, 95 (7th Cir. 1977) (class could not be adequately represented by the brother of the class action attorney because of the "natural assumption that brothers enjoy a close personal and family relationship and, consequently, would be inclined to support each other's interests."); Fechter v. HMW Indus., 117 F.R.D. 362, 365 (E.D.Pa. 1987) (refused to certify class where a partner in the firm, although not a representative plaintiff, had a demonstrated interest in the outcome of the litigation); Hedges Enter., Inc. v. Continental Group. Inc., 81 F.R.D. 461, 471 (E.D.Pa. 1979) (where attorney had a one eight interest in the corporation that served as a class representative and was of-counsel in the firm, the firm had to be disqualified because of the appearance of impropriety). Where there was no appearance of impropriety, courts have allowed certification despite some factual connection. See Stephenson v. Bell Atlantic Corp., 177 F.R.D. 279, 286 (D.N.J. 1997) (certified class where one named class representative worked as a paralegal at the class firm, noting that she was only one of the class representatives and did not have to meet the Rule 23(a)(4) standard); Lewis v. Goldsmith, 95 F.R.D. 15, 20 (D.N.J. 1982) (where uncle attorney was representing his nephew's class the court found no appearance of impropriety, noting that the nephew was financially independent and could support the litigation costs without his uncle's financial help).
Here Schnall is the named class representative in a case where his attorney-son, Harley Schnall, has been heavily involved. Although Harley Schnall is not the counsel of record, he has actively participated in this litigation with the expectation that he will be compensated, within legally permissible limits, if the class action is successful.
Harley Schnall has directed this case, and seven cases like this to Heller, Horowitz Feit, P.C. (the Heller firm).
As Judge Hedges noted,
[t]here are circumstances involved here that will inevitably cause Martin Schnall to confuse his fiduciary duty to the prospective class with his interest in protecting and advancing his son's contingent financial relationship with the Heller firm. Here the statutory damages are de minimis and, therefore, Martin Schnall's possible recovery is far exceeded by potential attorney's fees. In addition, Harley Schnall has assisted the Heller firm with the litigation and is expecting a portion of the attorney's fees. These circumstances may allow settlement on terms less favorable to the interests of absent class members. Martin Schnall cannot be relied on to fairly and adequately represent the interests of the proposed class, as is required by Rule 23(a)(4).
(RR, at p. 6.)
Judge Hedges also relied on Hale v. Citibank, 198 F.R.D. 606, 607 (S.D.N.Y. 2001), where the court refused to certify a class represented by Andrea Hale, Harley Schnall's wife. As in this case, Harley Schnall had referred his wife to the Heller firm for representation. The Hale court reasoned that Andrea Hale could not fairly represent the interests of the putative class given the
potential conflict of interest between her duties to the prospective class and her husband's contingent financial interest in the fees, if any, obtained by the law firm proposed to represent the class, Heller, Horowitz Feit, P.C. ('the Heller firm'), not just in this suit but in [seven] other actions . . . Schnall and the Heller firm have an "expectation' that "when the cases are resolved and if they're settled substantially in favor of the plaintiff[s], that within the bounds of what's legally and ethically acceptable [Schnall] might be recognized for [his] contribution to the cases.' Schnall's 'contribution' to these cases allegedly consists of directing the attorneys at the Heller firm to the relevant statute and regulations and reviewing pleadings and briefs prepared by the Heller firm.
Whether these problematic arrangements violate New York State law or ethics is not before this Court. Whether lawful or not, however, they will inevitably cause Hale to confuse her fiduciary duty to the prospective class with her interest in protecting and advancing her husband's contingent financial relationship with the Heller firm, which in turn is related to a host of extraneous considerations, including the conduct of other cases.198 F.R.D. at 607 (internal citations omitted).
Schnall opposes the recommendation to deny class certification on essentially the same grounds he raised with Judge Hedges. He asserts that the relationship between Harley Schnall and the Heller firm does not create a conflict of interest because (1) the fee award under TISA is paid directly by the defendant and not out of an equitable fund; (2) the Court has to oversee and approve any award of attorney fees; and (3) "there is no evidence (or even suggestion) that Harley Schnall and Martin Schnall 'pool' their resources or otherwise have a common economic interest." (Objections, at pp. 9 — 11.)
Schnall also points to a post-Hale, Southern District of New York decision, Green v. Am. Express Co., 200 F.R.D. 211 (S.D.N.Y. 2001), where the court certified the class in spite of the Hale outcome. But Green, which involved class certification for injunctive relief only, and a plaintiff who did not appear to be related to Schnall, is not instructive. In fact, one justification given by the Green court for certifying the class is that "there is no possibility for the named plaintiff to benefit from this settlement at the expense of other class members." 200 F.R.D. at 213. As Judge Hedges noted, the situation here is quite different.
This Court agrees with Judge Hedges' recommendation to deny the class certification. When viewed within Kramer's "appearance of impropriety" context and the nearly identical facts in Hale, denial of class certification is proper. Schnall argues that this case differs from Hale because Schnall is Harvey Schnall's father and is not part of an "economic unit" like his wife. But Schnall misses the issue. Harvey Schnall's heavy involvement in this case, and seven other cases like this, his desire to be compensated for his efforts, and his family ties with the sole class representative, combine to create an "appearance of impropriety," that requires the denial of class certification. Accordingly, this Court adopts Judge Hedges' recommendation to deny class certification.