Court Opinion

ID: 2996439
Source: CourtListenerOpinion
Date Created: 2015-09-24 19:28:43.217204+00
Date Added: 2024-06-11T18:01:28.454282
License: Public Domain

In the
 United States Court of Appeals
                For the Seventh Circuit
                           ____________

No. 03–2217
EDWARD P. DECHERT, individually
 as trustee of the estate in bankruptcy
 of Judy A. Oyler, and on behalf of
 all others similarly situated to her,
                                                    Plaintiff-Appellee,
                                  v.

THE CADLE COMPANY,
                                               Defendant-Appellant.
                           ____________
             Appeal from the United States District Court
      for the Southern District of Indiana, Indianapolis Division.
          No. IP01–0880–C–B/G—Sarah Evans Barker, Judge.
                           ____________
       SUBMITTED MAY 27, 2003—DECIDED JUNE 24, 2003
                           ____________

  Before BAUER, POSNER, and COFFEY, Circuit Judges.
  POSNER, Circuit Judge. We accepted the defendant’s ap-
peal under Fed. R. Civ. P. 23(f) from the certification of
this suit as a class action in order to determine whether,
as the district judge held, a trustee in bankruptcy is, in
general and in this case, a proper class representative—
whether, that is, he is a member of the class who, as named
plaintiff, “will fairly and adequately protect the interests
of the class.” Fed. R. Civ. P. 23(a)(4). There are no appel-
2                                                  No. 03-2217

late cases on the question, although our decision in Morlan,
quoted below, bears on it; a district court has held that
a trustee in bankruptcy cannot be a proper class represen-
tative, King v. Sharp, 63 F.R.D. 60, 64–65 (N.D. Tex. 1974);
and several other cases remark the danger of a conflict of
interest if a bankruptcy trustee is allowed to be class
representative. Ernst & Ernst v. U.S. District Court, 457
F.2d 1399 (5th Cir. 1972) (per curiam); Maddox & Starbuck,
Ltd. v. British Airways, 97 F.R.D. 395, 397 n. 2 (S.D.N.Y. 1983);
In re Plywood Anti-Trust Litigation, 76 F.R.D. 570, 579
(E.D. La. 1976); In re Ball, 201 B.R. 204, 208–09 (Bankr. N.D.
Ill. 1996).
  The suit at hand was filed by Judy Oyler under the Fair
Debt Collection Practices Act, 15 U.S.C. § 1692, and al-
leges that she had received a dunning letter from Cadle
Company (the defendant), a collection agency, that vio-
lated the Act because it failed to state the amount that
Cadle was seeking to collect from her and had other defi-
ciencies as well. She sued on behalf not only of herself
but also of all other persons—at least 30 in number, and
possibly 68—who had received the identical form letter
from Cadle. She sought for herself statutory damages
(a maximum of $1,000), costs, and attorneys’ fees. 15 U.S.C.
§ 1692k. If the case is certified as a class action, the other
members of the class will be entitled to total damages of
either $500,000, or 1 percent of the defendant’s net worth—
whichever is less. 15 U.S.C. § 1692k(2)(B). Cadle’s net
worth is somewhere between $350,000 and $800,000, so
that the additional damages to which the class would be
entitled if the suit were successful would be between $3,500
and $8,000.
  Shortly before filing the suit, however, Oyler had de-
clared bankruptcy under Chapter 7 of the Bankruptcy
Code, and when the trustee discovered this he had himself
No. 03-2217                                                  3

substituted for her as the plaintiff in her suit. He then
asked the district court to certify the suit as a class action,
with him as the only named plaintiff and therefore as
the only class representative. The district court did so,
precipitating this appeal.
   In Morlan v. Universal Guaranty Life Ins. Co., 298 F.3d
609, 619 (7th Cir. 2002), we noted the infrequency of class
actions in which a trustee in bankruptcy is the named
plaintiff: “What trustee in bankruptcy would think it
worthwhile to insert himself in the place of the named
plaintiff? We are not surprised to find very few cases in
which trustees in bankruptcy have done so. The named
plaintiff in a class action usually has only a small stake in
the action, and while the stakes for the class as a whole
may be large, very few of the benefits of settling the
class action or prosecuting it to judgment would be re-
ceived by the trustee (which is to say the creditors), since
he would just be the named plaintiff’s surrogate. Most of
the benefits would go to the other members of the class
and to the lawyers for the class, so that the trustee, as
class representative yet having fiduciary obligations ex-
clusively to the estate in bankruptcy, would have a poten-
tial conflict of interest” (citations omitted). The problems
we noted in Morlan are present in this case. Oyler’s trustee
has a fiduciary obligation to Oyler’s unsecured creditors,
and they will derive no benefit from so much of any judg-
ment or settlement in the class action as enures to the bene-
fit of the other members of the class.
  Granted, a class representative always has a conflict of
interest of sorts, because he has an individual as well as a
representative interest in the outcome of the case. In the
usual class-action case, in which the class representa-
tive’s stake is so small that as a practical matter the lawyer
for the class completely controls the litigation, there is
4                                                  No. 03-2217

a danger remarked in numerous cases that the lawyer
will negotiate a settlement with the defendant that gives
the lawyer a large fee but the class a meager recovery. See,
e.g., Reynolds v. Beneficial National Bank, 288 F.3d 277
(7th Cir. 2002). But that is just to say that agents, being self-
interested, cannot be trusted always to be faithful to
their principals. This problem, which economists dis-
cuss under the rubric of “agency costs,” lies behind the
law’s imposing on agents strict, enforceable duties of care
and loyalty toward their principals, and behind such
specific rules as the requirement that the court approve
a class-action settlement because of the “sell out” danger
noted above. But from the ubiquity of potential conflicts
of interest in the class-action setting and other principal-
agent settings it does not follow that a person can properly
be an agent of two principals having conflicting interests
(unless both principals consent). For then the conflict
of interest is not potential but actual. The fact that some
lawyers may be imperfect agents because of their self-
interest does not permit a lawyer to represent two clients
in the same case who have inconsistent defenses, with-
out both clients’ consent.
  It might seem that the conflict of interest in this case
between the trustee in bankruptcy and the members of
the class (other than the estate in bankruptcy) is inherent
in class actions because a named plaintiff cannot be as-
sumed to have the same interest in the litigation as the
unnamed class members. So what difference does it
make whether the named plaintiff is a trustee in bank-
ruptcy? The difference is that in the usual class action the
named plaintiff is a nominal party and the real party is
the lawyer for the class. The lawyer has no reason to fa-
vor the named plaintiff over the rest of the class mem-
bers. When the named plaintiff is a fiduciary, however,
he cannot just “go along” with the class lawyer. He has
No. 03-2217                                                 5

a duty to seek to maximize the value of his claim, and
this duty may collide with his fiduciary duty as class
representative (if he is permitted to be the class represen-
tative) to represent all members of the class equally. Such
a collision is especially likely in a case in which the fidu-
ciary is a trustee in bankruptcy, because class-action liti-
gation tends to be protracted yet the Bankruptcy Code
requires the trustee to complete his work expeditiously.
11 U.S.C. § 704(1).
  We do not want to lay down a flat rule that a trustee
in bankruptcy (or, what is the equivalent, a debtor in
possession) can never be a class representative. And we
do not want to question the appropriateness of other fidu-
ciaries, such as pension funds, guardians, and admin-
istrators of decedents’ estates, serving as class representa-
tives, see Woodard v. Online Information Services, 191 F.R.D.
502, 506 (E.D.N.C. 2000); In re Pizza Time Theatre Securities
Litigation, 112 F.R.D. 15, 22 (N.D. Cal. 1986); Landy v.
Amsterdam, 96 F.R.D. 19, 21 (E.D. Pa. 1982); Kane Associates
v. Clifford, 80 F.R.D. 402, 409–10 (E.D.N.Y. 1978), especially
when there is consent by the beneficiaries, as in In re
Independent Gasoline Antitrust Litigation, 79 F.R.D. 552, 557
(D. Md. 1978). There may be cases in which the expected
recovery of individual class members is substantial and
only a fiduciary is available to be the class representative.
There has been no showing of either circumstance in
this case.
  The case features another conflict of interest besides
that inherent in the trustee’s dual role as class representa-
tive and creditors’ representative: The defendant, Cadle,
the collection agency that sent the dunning letter to Oyler,
is affiliated with the firm that bought Oyler’s delinquent
loan that Cadle dunned her to repay. That firm is thus
one of Oyler’s creditors, and by virtue of the affiliation
6                                                   No. 03-2217

with it Cadle is an indirect creditor of Oyler. She responded
to the dunning letter by suing the sender rather than by
paying what she owed her creditor. Because the trustee
in bankruptcy is the representative of all Oyler’s unse-
cured creditors, he is (via the affiliation) Cadle’s repre-
sentative, putting him on both sides of the controversy
between the creditors and Oyler. There would be no
actual conflict if one of the other class members were
the named plaintiff, for the trustee would then have no
control over the litigation.
    For the reasons stated, the class certification is vacated.

A true Copy:
          Teste:

                             _____________________________
                             Clerk of the United States Court of
                               Appeals for the Seventh Circuit

                      USCA-02-C-0072—6-24-03