author: SETH, Circuit Judge.

text:
    Ronald F. WEISZMANN and Deborah C. Weiszmann, Appellants, v. COMMISSIONER OF INTERNAL REVENUE, Appellee.
    No. 73-1162.
    United States Court of Appeals, Tenth Circuit.
    Argued and Submitted Aug. 15, 1973.
    Decided Sept. 4, 1973.

      Ronald F. Weiszmann, pro se.
    William A. Whitledge, Atty., Tax Div., Dept, of Justice (Scott P. Crampton, Asst. Atty. Gen., Meyer Rothwacks and Paul M. Ginsburg, Attys., Tax Div., Dept, of Justice, with him on the brief), for appellee.
    Before HILL, BARNES , and SETH, Circuit Judges.

       Senior Circuit Judge, of the Ninth Circuit, sitting by designation.

   SETH, Circuit Judge.

Ronald F. and Deborah C. Weiszmann seek review of a decision of the United States Tax Court, 31 T.C.M. 1201 (1972), holding that Ronald F. Weisz-mann’s expenses in obtaining a law degree could not be deducted as an ordinary and necessary business expense under section 162(a) of the Internal Revenue Code, 1954, and affirming the Commissioner’s disallowance of the deduction and determination of a deficiency. Deborah C. Weiszmann is a party in this action solely by virtue of the fact that she filed a joint return with her husband, Ronald F. Weiszmann.

This is the Weiszmann’s second journey to the Tax Court and their second appearance before a United States Court of Appeals following adverse decisions by the Tax Court relating to the deduct-ibility, under section 162(a) of the Internal Revenue Code, 1954, and the pertinent regulations thereunder, of Weisz-mann’s legal education expenses.

Ronald F. Weiszmann graduated from the Colorado School of Mines with an engineering degree in 1964. Following his graduation, he began working for Marathon Oil Company as a “patent trainee.” As a condition of this employment he was required to attend law school on a full-time basis. While working for Marathon, he was under the close supervision of patent attorneys and was engaged in various aspects of patent applications. It was understood that upon his graduation from law school, he would terminate his employment as a patent trainee and would either seek employment elsewhere or would accept a position with Marathon as a patent attorney.

Weiszmann was enrolled as a patent agent before the United States Patent Office on May 9, 1966, after successfully taking the requisite examination, and thereafter worked for Marathon’s patent department as a patent agent until March 1967. He received his law degree sometime in the spring of 1967 and subsequently was admitted to the Colorado and California Bars. As a result he was able to qualify as a patent attorney before the United States Patent Office.

The distinction between a patent agent and a patent attorney is that a patent agent can represent clients in all matters before the Patent Office while a patent attorney, by reason of his or her admission to the Bar, in addition to matters before the Patent Office, may also represent clients in matters outside the patent field in the general practice of law.

Mr. Weiszmann deducted the cost of his legal education as an ordinary and necessary business expense from his income for the year 1965. Upon a determination of a deficiency based on the denial of this deduction for 1965, he petitioned the United States Tax Court for a redetermination. The Tax Court held that his legal'education was not an ordinary and necessary business expense under section 162(a), Internal Revenue Code, 1954, and denied the deduction. 52 T.C. 1106 (1969). The United States Court of Appeals for the Ninth Circuit affirmed the Tax Court’s decision. Weiszmann v. Comm’r, 443 F.2d 29 (9th Cir.). Undeterred, Weiszmann again, for the tax year 1966, deducted the cost of his legal education under section 162(a) from his income. Following a denial of this deduction by the Internal Revenue Service he again petitioned the Tax Court for a redetermination. It is of another adverse decision by the Tax Court that Weiszmann now seeks review.

The Tax Court found that Weiszmann’s status as a taxpayer changed in May 1966 when he became a registered patent agent before the United States Patent Office and therefore divided the tax year into two segments —that prior to the time he became a patent agent and that thereafter. This categorization is not challenged. We agree with the Tax Court that as to the first segment, that prior to May 1966, Weiszmann is precluded from relitigating the question of the deductibility of his law school expenses by virtue of the collateral estoppel effect of the Ninth Circuit’s decision in Weiszmann v. Comm’r, 443 F.2d 29 (9th Cir.). Comm’r v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948); Jones v. United States, 466 F.2d 131 (10th Cir.). The same issue was presented to the Tax Court and the Ninth Circuit as to the deduction for 1965 as that presented to the Tax Court and this Court for the year 1966. It was “. . . raised and fully adjudicated under identical and inseparable relevant facts in a prior action between the same parties involving a different tax year.” Jones v. United States, 466 F.2d at 133.

We also agree with the Tax Court that as to that portion of the tax year 1966 after which Weiszmann became a patent agent rather than merely a patent trainee with Marathon Oil Company, Weiszmann could not deduct the cost of his legal education as an ordinary and necessary business expense under section 162(a), Internal Revenue Code, 1954. We further find that the fact that Weiszmann’s status changed from patent trainee to patent agent was not a change which materially altered his status as a taxpayer insofar as relates to the deductibility of his legal education expenses. Whether or not he was a patent trainee or a patent agent, he nevertheless had as his primary purpose in attending law school the object of becoming a patent attorney, Treas. Reg. 1.162-5 (1958); 52 T.C. 1106 (1969), and his obtaining of a law degree clearly qualified him for a new trade or business, Treas. Reg. 1.162-5 (1967); 52 T.C. 1106 (1969). Therefore, the relevant facts in the two eases, pertaining to the two tax years, 1965 and 1966, essential to judgment were “actually litigated and determined in the first tax proceeding,” and “the parties are bound by that determination in a subsequent proceeding . . . ” Comm’r v. Sunnen, 333 U.S. 591, 68 S.Ct. 715 (1948). In sum, the relevant facts in the two proceedings are indistinguishable, the legal issues therein were identical, and the situation was not altered between the time of the first judgment and the second. Mr. Weiszmann is therefore collaterally estopped from re-litigating this issue. Comm’r v. Sunnen, 333 U.S. 591, 600-601, 68 S.Ct. 715, 721 (1948).

The judgment of the Tax Court is affirmed.


source: Caselaw Access Project

license: Public Domain

text:
    John David YENCH, Appellant, v. Ted P. STOCKMAR et al., Appellees.
    No. 72-1692.
    United States Court of Appeals, Tenth Circuit.
    Argued and Submitted March 29, 1973.
    Decided Aug. 23, 1973.

      Hubert M. Safran, Denver, Colo., for appellant.
    Arthur P. Roy, Asst. Atty. Gen. (John P. Moore, Atty. Gen., and John E. Bush, Deputy Atty. Gen., with him on the brief), for appellees.
    Before PHILLIPS, SETH and HOLLOWAY, Circuit Judges.
   SETH, Circuit Judge (By reassignment from HOLLOWAY, Circuit Judge).

Appellant appeals from a judgment dismissing his action against the Board of Trustees of the Colorado School of Mines, Golden, Colorado, the School itself, its President, its Dean of Students, and student and faculty members of its “ad hoc Student Conduct Committee.” Mr. Yench sought a declaratory judgment to determine whether his dismissal from the School violated the provisions of 28 U.S.C. §§ 1343(3) and (4), 2201 and 2202, 42 U.S.C. §§ 1981, 1983 and 1985, and the First, Fifth and Fourteenth Amendments to the Constitution. He also sought to enjoin the defendants from refusing to admit him to classes at the School.

Mr. Yench began his classes at the School in the fall of 1965. During the 1969-70 academic year he was the editor of a student newspaper. On September 23, 1969, there appeared in the paper language which certain members of the School’s administration found objectionable. The School’s President, and the Dean of Students received complaints concerning the language in the paper from faculty, alumni, trustees, and townspeople. The Dean had a discussion with Mr. Yench concerning the language. On November 14, 1969, President Childs called a meeting at which Dean Smiley, Mr. Yench, and other students on the paper were present to discuss the use of “objectionable” language in the paper. At the close of this meeting, President Childs advised Mr. Yench that he was on “probation as editor.”

On February 2, 1970, the paper published another story containing language which the School’s administration also considered objectionable. President Childs called another meeting on February 12, 1970, which was attended by Dr. Childs, Dean Smiley, Mr. Yench, and others from the paper. There is some dispute in the testimony, but the District Court found that, at this meeting, Mr. Yench was notified that he was on “disciplinary probation as a student.”

About a week later, President Childs had another meeting with Mr. Yench, attended also by Dean Smiley, at which Mr. Yench was advised that his disciplinary probation as a student would continue until his graduation' and that should he violate the School’s regulations he would be dismissed. Mr. Yench testified that he could not recall that his probation had been expanded at the February 12, 1970, meeting, and that he did not recall the meeting of February 19, 1970. Relations between Mr. Yench and the School’s - administration appear to have been tranquil from February 19, 1970, until May 28,1971.

The School permits students who will complete their degree requirements in the next succeeding summer to participate in the spring commencement as no summer commencement is held. Mr. Yench, who was to have completed his degree requirements in the succeeding summer, sought to participate in the May 28, 1971, degree ceremonies. He appeared in the area where the students were assembling, wearing a “Mickey Mouse” hat instead of the standard mortarboard. Prior to the cememony, and while he was still in the dressing area, a representative of the Dean of Students office asked him to remove the hat. He declined to do so. While seated in the auditorium, Mr. Yench was sent a note by the Dean of Students advising him to remove the hat or discontinue his participation in the ceremonies. He further declined to do so. When he approached the platform, still wearing the hat, his name was not called, and the next student’s name was called. Mr. Yench, following the last student, mounted the platform, shook the President’s hand as did the other preceding students in the ceremonies, announced his name into the public address system, and returned to his seat. One other student from India who had received prior approval participated in the ceremonies wearing a turban.

About two weeks after the graduation ceremony, the Dean of Students notified Mr. Yench by letter that he was on temporary disciplinary suspension and that a hearing would be held the following day to inquire whether or not he had violated a previously imposed disciplinary probation. Mr. Yench was charged with violating the “Standards and Codes of Conduct” of the Colorado School of Mines as stated in the Student Handbook 1970-71 (page 28), specifically:

(1) Failure to comply with the directions of authorized officials acting in the performance of their duties.

(2) Intentional obstruction and disruption of a university activity.

(3) Disorderly conduct on university-owned property at a university-sponsored function.

(4) Violation of published Colorado School of Mines policy.

(5) Conduct which adversely affected functions of the Colorado School of Mines being conducted in pursuit of its educational purposes and objectives.

The letter also described the time, place, and conduct which allegedly violated the “Standards and Codes of Conduct.”

A hearing was held on June 15, 1971, beforé the ad hoc Committee on Student Conduct after Mr. Yench’s request for a continuance was denied. The committee was composed of faculty members and students. Mr. Yench appeared at the hearing with counsel who was not permitted to speak, but was allowed to advise Mr. Yench. The Dean of Students read a statement to the committee listing the charges and briefly describing Mr. Yench’s conduct with reference to each charge. This was the only evidence introduced at the hearing against Mr. Yench. Mr. Yench was then permitted to make a statement on his own behalf and to call witnesses; however, he was not permitted to cross-examine the Dean of Students.

On June 21, 1971, the committee issued its conclusions in a memorandum to the Vice President for Academic Affairs in which it found Mr. Yench guilty of charges (1), (3), (4), and (5), and not guilty of charge (2). The committee’s findings were sent to Mr. Yench by the Dean of Students, and he was notified, by letter about three weeks later that the School’s President, Dr. Childs, had reviewed the committee’s findings and determined that Mr. Yench should be dismissed from the School. Accordingly he was dismissed.

The principal argument advanced on this appeal is directed to the procedure, or lack of procedure, followed when Mr. Yench was put on probation, and to the reason why such action was taken. The School had adopted and published in a Student Handbook the procedure for disciplinary proceedings of this nature. It is apparent that the parties did not follow it. We are thus concerned not with the relationship of the rules to due process standards as in Dixon v. Alabama State Board of Education, 294 F.2d 150 (5th Cir.), but instead with the conséquences of a failure to follow the published rules.

The initial disciplinary action was directed to probation of Mr. Yench as editor and subsequently as a student. This action resulted from a series of meetings or discussions directed to disciplinary action at which the Dean of Students, Mr. Yench, and other students on the paper were present. There is no contention that these sessions were not instituted with some disciplinary action in view. In such a situation the student and the faculty were both responsible for conformance to published procedure. However, if neither the student nor the faculty wished to follow the procedure, there was nothing which required that it be done. The machinery was made available by the published rules, but if neither party wanted to avail itself of it, and made no move to do so, there is no one to object. Mr. Yench had just as much right or duty to use or request the published procedure as did the School authorities. He made no attempt to do so, and he cannot now object to the choice he made. Student disciplinary proceedings are not comparable to criminal proceedings. See Norton v. Discipline Committee of East Tennessee State University, 419 F.2d 195 (6th Cir.), and Esteban v. Central Missouri State College, 415 F.2d 1077 (8th Cir.). It appears that the disciplinary meetings, and in fact the formal procedure prescribed by the rules, were part of the educational process conducted by both faculty and students.

Mr. Yench has acquiesced as a matter of law in the probationary status which resulted from the incidents relating to the paper. The record shows that he was placed on probation as a student on February 12, 1970. There was no objection made by him to this status and he made no attempt to seek any change through any school authorities or the Student Conduct Committee. This silence and inaction continued until at least the formal hearing of June 15, 1971, leading to expulsion for the graduation ceremonies incident. This constitutes an acquiescence in the initial procedure and in the probationary status which had continued for this period of about a year and four months.

As to the nature of acquiescence, the Colorado Supreme Court in McMullin v. Magnuson, 102 Colo. 230, 78 P.2d 964, considered litigation over a mining claim which had been tried to the court, but the federal statute provided that there be a jury. The complaining party had proceeded with the trial, and the court on appeal in part said: “. . . their silence must be deemed to have been an acquiescence in the procedure

■ followed of which they cannot now complain.” The term has been defined in Humboldt Livestock Auction, Inc. v. B & H Cattle Co., 261 Iowa 419, 155 N.W.2d 478:

“ ‘Acquiescence’ is where a person knows or ought to know that he is entitled to enforce his right or to impeach a transaction, and neglects to do so for such a length of time as would imply that he intended to waive or abandon his right.”

It has also been defined as consent to the conditions, United States v. Wilcox, 258 F.Supp. 944 (N.D.Iowa), and is familiar in situations where a party has acquiesced in the terms of a judgment and thereby loses a right to appeal. Roussel v. Marshall, 86 So.2d 758 (La. App.). See also Galion Iron Works & Mfg. Co. v. J. D. Adams Mfg. Co., 128 F.2d 411 (7th Cir.). This court considered acquiescence in the handling of certain shares of stock as barring a claim to ownership in Alexander v. Phillips Petroleum Co., 130 F.2d 593 (10th Cir.). Under the record before us, as we have above held, Mr. Yench acquiesced in both the disciplinary proceedings and the resulting status in which he was thereby placed. He cannot now complain of them.

The rights of students are well described in Healy v. James, 408 U.S. 169, 92 S.Ct. 2338, 33 L.Ed.2d 266; Tinker v. Des Moines Independent Community School District, 393 U.S. 503, 89 S.Ct. 733, 21 L.Ed.2d 731; Papish v. Board of Curators of the University of Missouri, 410 U.S. 667, 93 S.Ct. 1197, 35 L.Ed.2d 618, and Trujillo v. Love, 322 F.Supp. 1266 (D.Colo.), and need not be repeated here. However, every disciplinary event cannot give rise to a constitutional question and a right to have the federal courts intervene. See Freeman v. Flake, 448 F.2d 258 (10th Cir.); Smith v. Kansas, 356 F.2d 654 (10th Cir.).

On a somewhat different approach, the trial court followed the rationale of Sill v. Pennsylvania State University, 462 F.2d 463 (3d Cir.), that there was nothing in the initial disciplinary proceeding to constitute an aggrievement in the constitutional sense. We agree. The initial disciplinary action here taken was part of the educational process as we have said. Such action leading to sanctions of severity less than expulsion do not constitute aggrievements under the Constitution, nor do they invoke the jurisdiction of the federal court regardless of the nature of the incident or the reasons for the disciplinary action. It was not a deprivation of a right requiring judicial relief, as the court held in Sill. The Sill court further said:

“. . . We cannot agree that the possibility that a future sanction will be made more severe because of these infractions of discipline creates in the students on probation an ag-grievement analogous to that suffered by those students who were deprived of continued attendance at the University.”

We are now at this more severe sanction considered in the Sill case. This rule obviously involves a measure of the consequences, or the severity of the sanction, together with a consideration of the involvement in the educational process. See also Esteban v. Central Missouri State College, 415 F.2d 1077 (8th Cir.); Dixon v. Alabama State Board of Education, 294 F.2d 150 (5th Cir.); Duke v. North Texas State University, 469 F.2d 829 (5th Cir.).

Mr. Yench was expelled for a violation of his probation. This was the basis for the final disciplinary proceedings. He was found to have violated- the rules of conduct in a manner totally unrelated to the reason for his probation. There was no defect in these proceedings, but there is no proof that the graduation incident itself concerned constitutional rights. The ultimate sanction of dismissal thus was built upon the previously imposed probation which arose from incidents and proceedings not of constitutional dimensions. This is a consequence of any series of disciplinary actions — the punishment becomes more severe as the infractions accumulate. The fact that the total of all infractions may aggravate the ultimate penalty does not require the courts to go back into the prior events and proceedings which, when they took place, were not such as to constitute an aggrievement in the constitutional sense. These are not criminal proceedings as has frequently been held.

There was no procedural defect in the final disciplinary proceedings, as we have indicated. There was, however, no proof at trial on the issue of whether or not the wearing of the Mickey Mouse hat at graduation was the exercise of a right of constitutional dimensions. An answer cannot be assumed when the record is silent. Thus the case must be remanded for a determination of this issue, but is otherwise affirmed.

Affirmed in part, and remanded.


author: ALDISERT, Circuit Judge. BY THE COURT. ADAMS, Circuit Judge

text:
    Richard D. GREENFIELD and Samuel Moshinsky, on behalf of themselves and all others similarly situated v. VILLAGER INDUSTRIES, INC., et al., Appeal of duPONT GLORE FORGAN INCORPORATED, one of the class of plaintiffs above-named, in No. 72-1998. Appeal of BURNHAM & COMPANY, Inc., an interested party and applicant in its own behalf and in behalf of its customers and accounts, in No. 72-1999.
    Nos. 72-1998, 72-1999.
    United States Court of Appeals, Third Circuit.
    Argued April 23, 1973.
    Decided June 21, 1973.
    Rehearing Denied July 27, 1973.

      Charles M. Solomon, Fox, Rothschild, O’Brien & Frankel, Philadelphia, Pa., and Charles H. Miller, New York City, for appellants.
    Aaron M. Fine, Philadelphia, Pa., for appellees.
    Charles H. Miller, Michael H. Graham, Marshall, Bratter, Greene, Allison & Tucker, New York City, for Burnham & Co., Inc.
    Before VAN DUSEN, ALDISERT and ROSENN, Circuit Judges.
   OPINION OF THE COURT

ALDISERT, Circuit Judge.

This appeal presents the question whether the notice to prospective class members ordered by the district court was “the best notice practicable” under the class action rule 23(c) (2), F.R.Civ.P.

Appellants are registered owners of stock of Villager Industries, Inc., acquired during the years 1968 and 1969. Appellant Burnham is a New York investment banking and brokerage firm holding 22,972 shares of Villager common stock in street name for some 111 customers. Appellant du Pont is a brokerage corporation which, as a result of a recent merger with three other stock brokerage firms, holds 52,670 shares of Villager common stock in street names for 334 customers. Appellants were not formal parties to litigation brought by plaintiff-appellees, shareholders of Villager, against the defendant-appellees, Villager corporation and certain of its officers, directors and other shareholders. Burnham and du Pont present this appeal, contending that the district court failed to provide them with adequate notice of the hearing held on August 31, 1972, at which approval of a proposed settlement of the class action was obtained.

Plaintiffs instituted this action in federal district court, alleging that during the period January 1, 1968, to December 31, 1969, defendants violated the federal securities laws in that they failed to disclose or misrepresented facts in prospectuses, registration statements, proxy materials, periodic reports, and releases filed with the Securities and Exchange Commission. Plaintiffs moved for a determination that the suit be maintained as a class action. However, not until nineteen months later, following settlement negotiations, did the district court order the suit to “proceed and be maintained as a class action” for settlement purposes only. The participating litigants also presented the district court with a proposed “notice to class members,” the purpose of which was to inform absentee class members of the existence of the class action and the proposed settlement.

Under the terms of the notice, “all persons who purchased shares of Villager during the period January 1, 1968, to December 31, 1969,” would be deemed members of plaintiffs’ class of stockholders. Membership in the class did not of itself guarantee participation in the settlement, however. In order to participate in the settlement fund, class members were required to file “a verified proof of claim with supporting documents.” If such proof were not filed, or if shareholders did not exclude themselves, they were to be “barred from any future recovery on any claim.” The district court ordered that notice of the hearing and proposed settlement be made “by publication . . . once a week during the weeks of June 19 and 26, 1972, in the national edition of the Wall Street Journal and in The Philadelphia Evening Bulletin in % of a page columns.” Under the settlement plan, verified proofs or requests for exclusion were required to be filed by August 1, 1972.

On August 31, 1972, the day appointed for the hearing, Burnham appeared in court, presenting a rule to show cause why the hearing should not be adjourned until September 29, 1972, to allow Burn-ham “to solicit its customers and accounts ... in order to determine whether such customers and accounts desire to be included in the class” or “have any objections to the proposed settlement,” and to permit Burnham “for itself and the various customers and accounts on whose behalf it holds or held shares ... to file verified proofs of claim and/or requests for exclusion from the class.” du Pont also appeared and moved that the “period for filing verified proofs of claim be extended to September 30, 1972.” The district court denied both requests and entered an order on August 31, 1972, approving the settlement. 3

Both appellants filed timely notices of appeal. Additionally within the appeal period, du Pont unsuccessfully moved before the district court for a stay of the August 31, 1972, order pending appeal to this court. The settlement agreement as approved by the district court provided, in part:

11. Settlement shall not become effective, nor be consummated, until a final order has been entered pursuant to paragraph 9 hereof and until the time to appeal from such order has expired and no appeal has been taken therefrom, or if an appeal is taken until such order is finally affirmed on appeal, or the appeal is finally dismissed.

Subsequent to the filing of these appeals, and notwithstanding the above provision, on October 4, 1972, the district court ordered distribution.

I.

We swiftly dispose of appellees’ contention that appellant's lack standing. Appellants are record holders of the stock. They are at least nominally the legal, if not the equitable, owners of the shares. They were properly the objects of the public notice because they are “persons who purchased shares of Villager during the period January 1, 1968, to December 1, 1969.” They appeared at the hearing and presented motions which were denied. They are complaining about exclusion from a class because of improper notice. They are not attempting on this appeal to object to the settlement. As record or legal shareholders they have standing on behalf of the equitable owners of the shares, asserting a wrongful denial of the opportunity to participate in the class action. See Zients v. LaMorte, 459 F.2d 628 (2d Cir. 1972); Sertic v. Carpenters District Council of the United Brotherhood of Carpenters and Joiners of America, 459 F.2d 579 (6th Cir. 1972); Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30 (3d Cir. 1971); Cohen v. Young, 127 F.2d 721 (6th Cir. 1942).

II.

It was plaintiff-appellees who sought a determination that this litigation be maintained as a class action, pursuant to F.R.Civ.P. 23(c)(1), and Rules 23(a) and 23(b)(3). “Plaintiffs’ Memorandum in Support of Application for Class Action Determination . . .” outlined a procedure for notification of class members ostensibly in compliance with Rule 23(c)(2). Rule 23(c)(2) provides that:

In any class action maintained under subdivision (b)(3), the court shall direct to the members of the class the best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort. The notice shall advise each member that (A) the court will exclude him from the class if he so requests by a specified date; (B) the judgment, whether favorable or not, will include all members who do not request exclusion; and (C) any member who does not request exclusion may, if he desires, enter an appearance through his counsel.

Following recitation of the notice rule, Plaintiffs’ Memorandum set forth what must be considered their interpretation of the “best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort.” Plaintiffs’ Memorandum asserted, “Defendant, Villager should be required to furnish whatever information it has from its stock transfer records or stockholder lists which would serve to identify class members. See Herbst v. Able, 47 F.R.D. 11 (S.D.N.Y.1969). Cf., Contract Buyers League v. F & F Investment, 48 F.R.D. 7 (N.D.Ill.1969). Those who cannot readily be identified for the purpose of receiving individual notice, can be notified by publication. Herbst v. Able, supra, as modified in 49 F.R.D. 286 (S. D.N.Y.1970).”

But the deed did not match the promise. Notwithstanding plaintiffs’ expressed intention to send individual notices to those who could be “readily identified” from Villager’s “stock transfer records or stockholder lists,” this was not done. There was but one type of notice: publication in one-eighth page columns in the Wall Street Journal and The Philadelphia Evening Bulletin on two days, June 23 and 30, 1972. This was insufficient notice under any standard of fairness, justice, or due process; it flew in the face of the specific terms of “the best notice practicable” rule; it contravened plaintiffs’ stated representation to use individual notice insofar as possible; and it constituted such a defect to the proceedings in the district court that we will not only reverse the district court’s orders relating to appellants’ requests for extension of time, but we will also vacate the order approving the class action settlement and all orders implementing the settlement.

A.

Because a class action, “so instinct with benefits, is also wrought with mischievous effects,” it is imperative that participating litigants and the court never lose sight of the laudatory fundamental purposes of this procedural device. Its historical purpose was to alleviate the burden on the court, and its facilities in cases where a claim was common to a large number of persons. The practice originated in the English Court of Chancery and was. assimilated into our judicial system at an early date, largely, it is said, because of the endorsement given it by Justice Storey in his Commentaries. From the equity side of the court, where the doctrines of res judicata are less than clearly defined, class actions gradually found recognition on the law side. Its use in claims for damages is justified where the public policy considerations of efficient court administration outweigh the potential prejudice to persons in interest who are not parties to the proceedings, but who may nevertheless become legally bound by an adjudication as if they were in fact parties litigant.

Also influencing the general acceptance of class actions has been recognition of the fact that the collective or accumulative technique of this device makes possible an effective assertion of many claims which otherwise would not be enforced, for economic or practical reasons, were it not for the joinder procedure. The 1966 amendments to Rule 23 are a restatement and reinforcement of public policy, mutually expressed by the Judicial Conference of the United States, its advisory committee on Rules of Civil Procedure, the Supreme Court, and the Congress, which candidly facilitate and encourage the use of class actions. For example, except as otherwise ordered by the court, every potential member of a class is considered to be a member unless he affirmatively seeks exclusion. Rule 23(c)(3).

A procedure such as the class action, which has a formidable, if not irretrievable, effect on substantive rights, can comport with constitutional standards of due process only if there is a maximum opportunity for notice to the absentee class member, i. e., “[T]he best notice practicable under the circumstances including individual notice.

Given that class action procedures are conceptualized as an exception to the general rule that only parties to a lawsuit are legally bound by a final judgment, and that interested parties normally have a real voice in the strategy and management of the litigation, the procedure can be tolerated, if not completely justified, only if there is fealty to both the spirit and the letter of the procedural rules, especially those relating to notice. Responsibility for compliance is placed primarily upon the active participants in the lawsuit, especially upon counsel for the class, for, in addition to the normal obligations of an officer of the court, and as counsel to parties to the litigation, class action counsel possess, in a very real sense, fiduciary obligations to those not before the court. The ultimate responsibility of course is committed to the district court in whom, as the guardian of the rights of the absentees, is vested broad administrative, as well as adjudicative, power.

Not the least important of the fiduciary duties shared by counsel and the court is their duty to ensure that absentee class members have knowledge of proceedings in which a final judgment may directly affect their interests. “An elementary and fundamental requirement of due process in any proceeding which is to be accorded finality is notice reasonably calculated, under all the circumstances, to apprise interested parties of the pendency of the action and afford them an opportunity to present their objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct. 652, 657, 94 L.Ed. 865 (1950). In Mullane the Court held that notice by publication failed to satisfy due process l’equirements since “. . . it is not reasonably calculated to reach those who could be informed by other means at hand.” 339 U.S. at 319, 70 S.Ct. at 660. “ [W]hen notice is a person’s due, process which is a mere gesture is not due process. The means employed must be such as one desirous of actually informing the absentee might reasonably adopt to accomplish it.” 339 U.S. at 315, 70 S.Ct. at 657. . Where names and addresses of members of the class are easily ascertainable, requirements of due process would dictate that the “best notice practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort,” Rule 23(e)(2), would be individual notice. See, e.g., Armstrong v. Man-zo, 380 U.S. 545, 85 S.Ct. 1187, 14 L.Ed. 2d 62 (1965); Schroeder v. City of New York, 371 U.S. 208, 83 S.Ct. 279, 9 L. Ed.2d 255 (1962); New York v. New York N. H. & H. R. Co., 344 U.S. 293, 73 S.Ct. 299, 97 L.Ed. 333 (1953). In a recent episode of the Second Circuit’s continuing saga of Eisen v. Carlisle & Jac-quelin, 370 F.2d 119 (2d Cir. 1966); 391 F.2d 555 (2d Cir. 1968); and 479 F.2d 1005 (2d Cir. 1973), it appeared that 2,250,000 members of a 6,000,000 member class could be identified easily. The court stated, “[Ajetual notice must be given to those whose identity could be ascertained with reasonable effort and that ‘in this type of case’ plaintiff must pay the expense of giving notice to these members of the class.” Eisen v. Carlisle & Jacquelin, supra, 479 F.2d at 1009.

B.

Although the foregoing are principles of general application to class actions, other considerations prompt our strong disaffection for the extremely superficial compliance with these principles which characterizes this case. Although the rules call for the determination of the class action issue “[a]s soon as practicable after the commencement of an action brought as a class action,” Rule 23(c), in this case some nineteen months intervened between the filing of the request for designation as a class action and its determination. While there is no impediment to determining class actions for the purpose of settlement only, Ace Heating & Plumbing Co., Inc. v. Crane Co., 453 F.2d 30 (3d Cir. 1971), here the delay-accentuated the necessity for adequate notice.

Moreover, the purpose of this notice was to afford a threefold opportunity to absentee class members: (1) to file a claim; (2) to state a desire for exclusion or (3) to object to the settlement. Each of these alternatives is important. Here the claimants were to share in a distribution of stock; the fewer the claimants, the more each would receive. Unlike many class actions, and, indeed, unlike the general inclusion provisions of Rule 23(c)(3), here the individual participants were required to perform the affirmative act of filing a verified proof of claim by August 1, 1970. This date was within a month of the last publication date. Thus, an uninformed claimant paid a price for non-action.

It is not unusual for objections to be presented at a hearing on a proposed settlement of a class action, and it is elemental that an objector at such a hearing is entitled to an opportunity to develop a record in support of his contentions by means of cross examination and argument to the court. Cohen v. Young, supra, 127 F.2d at 724. See also Schwartzman v. Tenneco Manufacturing Co., 375 F.2d 123 (3d Cir. 1967). Whether the proposed compromise is submitted to the court before or after class action status has been obtained, the court is obliged to determine whether the settlement has been influenced by fraud or collusion and whether, it is fair, adequate and reasonable

Furthermore, we are not unaware that at best the publication procedure utilized was scanty: publication in two newspapers on two occasions seven days apart during the East Coast summer vacation period. Thus, assuming that all possible claimants normally read the Wall Street Journal and The Philadelphia Evening Bulletin — and this is a generous assumption — an absence from home or work during this period, or any departure from normal habits during this critical seven-day period, would have lessened the probability of the claimant’s receiving notice. Appellees contend that since appellants are stockbrokers they should be held to know the contents of the Wall Street Journal. Although we can agree that there is a reasonable probability that appellants’ personnel read this publication regularly, this argument misses the point. The issue raised by appellants affects the notice to all potential members of the class, not only the appellants. In our view, the vice of inadequate notice makes it impossible for any court to determine whether an interested and uninformed absentee would have raised an objection to the settlement, elected to file a verified proof of claim, or opted for exclusion

This, too, must be said. We have a serious problem with the limited period of time in which the shareholders .were permitted to file proofs of claim of ¡requests for exclusion. As the Supreme Court has recognized, the opportunity to be heard, a fundamental requisite of due process, is of “little reality or worth unless one is informed that the matter is pending and can choose for himself whether to appear or default, acquiesce or contest.” Mullane v. Central Hanover Bank & Trust Co., supra, 339 U.S. at 314, 70 S.Ct. at 657. It is clear therefore that the notice procedures utilized in class actions are of constitutional significance and must themselves be viewed in due process terms. As a consequence, just as a hearing which does not afford a meaningful opportunity to be heard may be as fatal to due process as a denial of any hearing at all, so too constitutionally mandated notice which is inadequate under the circumstances may be as fatal to due process as no notice at all. Moreover, pro forma gestures will not suffice. The notice must not only convey the required information, but, synthesizing from the Supreme Court’s own language, it must also “afford a reasonable time for those interested to choose whether to appear or default, acquiesce or contest.” Mullane v. Central Hanover Bank & Trust Co., supra, 339 U.S. at 314, 70 S.Ct. at 657. Appellants present a reasonable argument that the thirty-day period was insufficient for those members of the class who had left their stock in street names with their stockbrokers. A one-month period hardly seems sufficient time for brokerage firms to search their records, notify customers, probably by mail, for whom they held shares in street name, received instructions from these customers, again probably by mail, and file the proofs of claim or requests for exclusion.

III.

Finally, appellees contend that the issue is moot because the settlement has been approved and the stock distributed. Additionally, they contend appellants are foreclosed from prosecuting this appeal because they failed to obtain a stay of the district court’s order by this court. This contention borders on the frivolous. We were told at oral argument by appellants that had their motion for a stay been granted by this court, appellees had indicated to them that they would have asked this court to set a bond of eleven million dollars.

That the stock has been distributed in accordance with the district court’s order is immaterial. The distribution of that stock, pursuant to the settlement agreement, made at a time when these appeals were underway, was in direct contravention of paragraph 11 of the settlement agreement which states that the settlement would not “become effective, nor be consummated . if an appeal is taken until such [settlement] order is finally affirmed on appeal, or the appeal is finally dismissed.” With full knowledge of the pendency of these appeals, and presumptively with knowledge of the affect of the appeals as a bar to consummation of the settlement agreement which appel-lees participated in negotiating, appel-lees, jointly or severally, persuaded the district court to order distribution. Both appellees took this step with full cognizance of the risk involved.

The matter is not moot. We hold that because the notice was fatally defective, all subsequent proceedings pertaining to the settlement are devoid of validity and all settlement orders issued pursuant to those proceedings will therefore be vacated.

The judgment of the district court will be reversed and the proceedings remanded for further proceedings not inconsistent with this opinion.

SUR PETITION FOR REHEARING

Present SEITZ, Chief Judge, and VAN DUSEN, ALDISERT, ADAMS, GIBBONS, ROSENN, JAMES HUNTER, III and WEIS, Circuit Judges.

BY THE COURT.

The petition for rehearing filed by Plaintiffs-Appellees in the above entitled case having been submitted to the judges who participated in the decision of this court and to all the other available circuit judges of the circuit in regular active service, and no judge who concurred in the decision having asked for rehearing, and a majority of the circuit judges of the circuit in regular active service not having voted for rehearing by the court in banc, the petition for rehearing is denied.

ADAMS, Circuit Judge, dissents.

ADAMS, Circuit Judge

(dissenting Sur Denial of Petition for Rehearing).

I respectfully dissent from the order denying rehearing in this case, because I believe that the petition presents a serious question regarding “notice” in connection with proposed settlements of class actions. Also, it addresses important problems relating to standing and the nature of relief when notice is deemed by an appellate court to be inadequate.

The settlement here was reached by the named plaintiffs and Villager. It provided that 660,000 shares of Villager stock was to be made available for distribution to those who had purchased Villager stock in 1968 and 1969, the period during which fraudulent statements regarding the company were allegedly made.

Plaintiffs had sought to have the matter declared a class action under Rule 23(c) on November 13, 1970, an early stage of the litigation, but the district court deferred making the necessary determination. When the proposed settlement developed, the plaintiffs again requested the district court to declare the matter a class action. Although in their petition for class determination plaintiffs had offered to send individual notices, predicated on an appropriate list being prepared and submitted by Villager, the district court entered an order on June 7, 1972, providing that notice by publication would be sufficient under Rule 23(c)(2). Also, the class was to consist of “purchasers” during 1968 and 1969. Publication appeared on June 23 and June 30, 1972, in both the Philadelphia Evening Bulletin and Wall Street Journal. It provided for a cut-off date of August 1st for the filing of all claims or the filing of an election to be excluded from the class, or for filing objection to the settlement; and for a hearing on August 31, 1972, to determine whether the settlement was fair and reasonable and should be approved. The August 1st deadline was later extended to August 23, 1972.

On August 31, 1972, Burnham & Co. and duPont Glore Forgan, two large and widely-known brokerage firms, presented a rule to adjourn the hearing in order to permit additional time to solicit and file claims on behalf of individual customers of these firms who may have purchased Villager stock during 1968 and 1969, but kept such stock in street name. Specifically, Burnham and duPont sought extensions of time until the end of September, 1972, to file claims on behalf of their customers. At the hearing it was made clear that duPont and Burn-ham had learned of the proposed class settlement by the latter part of July. No explanation was given by them as to why they did not request an extension, at that time, before the deadline fixed by the court. They did explain that it would take a number of weeks to ascertain the names of their customers who may have bought Villager stock in 1968 and 1969. An affidavit filed by Burn-ham on August 31, 1972, stated that “because of an error in a computer run and because of the number of customers and transactions involved” it had taken several weeks to obtain the information. duPont did not file an affidavit, but at the hearing on August 31, 1972, its counsel stated that there had been a delay caused because of recent mergers and the fact the material was in a warehouse.

Claims representing 11,000,000 shares of Villager stock had apparently been filed by the deadline. Also, customers of Burnham had sent in a substantial number of verified claims within the time designated by the district judge.

There was no suggestion at the hearing before the district court that the settlement had been influenced by fraud or collusion, that it was not fair, or that it was unreasonable. Indeed, on August 31, 1972, the day the district judge approved the settlement in open court, counsel for duPont and Burnham were present in the courtroom and did not object to the settlement.

The notices of appeal filed by Burn-ham and duPont indicate that these companies were appealing primarily from the failure of the district court to extend the period of time for filing claims for their customers, or opting out of the settlement.

After the appeals were filed, Burnham and duPont sought a stay of the distribution of. the Villager stock. This was denied by the district court on October 4, 1972. Burnham and duPont did not apply to this Court for a stay of the distribution.

Under the circumstances, there would seem to be considerable question whether Burnham and duPont have standing to assert claims regarding the nature of the notice of the class action settlement or regarding the order of the trial judge in refusing to grant additional time for filing notice of claims or for opting out. The real injury caused by the nature of the notice or the failure to extend the time, is suffered by their customers. And in any event, Burnham and duPont would not appear to have standing to complain on this appeal about the nature of the notice since the specific complaint pressed by them before the district court was not addressed to the nature of the notice (publication rather than individual notification) but to the district court’s refusal to extend the time.

More important though, at least for me, is the implication of the panel decision regarding notices in the future insofar as cases arising from stock transactions are concerned. There is some danger that the opinion may be interpreted to mean that individual notice must always be required in such situations. Yet, whether there should be individual notices or whether notice by publication may be satisfactory should, in the absence of an abuse of discretion, be a matter for the district court. Notice to members of a class can involve many considerations, and the district court has the advantage of being on the scene and aware of all of the countervailing factors. Although a district judge might well have provided for wider publication, or a greater time period for filing claims or for opting out of the class, or even insisted on individual notices, the critical question is whether it is an abuse of discretion when the district judge does not do so. The record would not appear to support a conclusion that the district court here did, in fact, abuse his discretion.

Finally, I am troubled by the sweep of this Court’s judgment, which vacates the entire settlement, even though no party has requested such drastic action, or even objected to the settlement as such. Restructuring a settlement involving a volatile stock, such as Villager, may be most difficult and even inequitable at this late date. Would it not be more appropriate, assuming it is determined that there are some purchasers of the stock within the two-year period who have not yet asserted claims, to remand this particular problem to the district court who, after hearing from counsel, might well permit such purchasers to recover on a pro rata or some other equitable basis if they now come forward and establish their claims ? It is conceivable, I suppose, that there might be very few such stockholders. To strike down the entire settlement because of the possibility of a few such stockholders may be punitive for individual members of the class who in no way actively participated in formulating the notice or in deciding to proceed with the distribution. The matter might be more susceptible to a solution aimed at the specific problem, whether that problem is considered in terms of an additional 30 days to file claims or the lack of individual notice to purchasers of Villager stock during 1968 and 1969.

The ordering of distribution by the district court before the appeal is somewhat troublesome. However, it may be that such step was taken by the district court on the premise that if there were a reversal on his ruling not to extend the period for filing by Burnham and du-Pont stockholders for approximately a month, the harm caused by the early distribution could be rectified by specific awards, such as suggested above, or by permitting such purchasers to assert their claims by separate suit. Admittedly, the record is not clear on the distribution point, but a hearing on remand would undoubtedly clarify it.

For the foregoing reasons I believe the rehearing should be granted to permit a full exploration of the problems posed by the petition.

      . The notice as published in the Wall Street Journal and The Philadelphia Evening Bulletin provided:
      Pursuant to Rule 23 of the Federal Rules of Civil Procedure You Are Hereby Notified :
      There is pending in this court an action on behalf of purchasers during the period January 1, 1968, to December 1, 1969, of the common stock of Villager Industries, Inc., formerly known as The Villager, Inc. (hereinafter referred to as

        ‘‘Villager”), for damages to such purchasers for alleged violations by defendants of the federal securities laws. It is alleged in the complaint that defendants concealed or misrepresented facts relating to Villager’s business in prospectuses, registration statements, proxy materials, periodic reports and releases filed with the Securities and Exchange Commission or the New York Stock Exchange, or distributed to the public, or otherwise, upon which such purchasers relied to their detriment. Defendants deny any of the alleged violations and also deny any liability whatsoever on account thereof, but are agreeable to a settlement of the action upon the terms and conditions described herein in order to avoid further litigation. For the purpose only of effectuating such settlement defendants have agreed to the establishment of a temporary class of claimants as defined herein (hereinafter referred to as the “class”).
      1. You may be a member of the class, and if so, your rights may be affected by this action and the settlement thereof. This notice, however, is not to be understood as an expression of any opinion by the Court as to the merits of any of the claims, defenses, counterclaims or cross-claims, which have been asserted by any party in this action, or as to any participation in the settlement to which any claimant may be entitled, but is given for the sole and exclusive purpose of informing you of the pendency of this action and of the proposed settlement described herein so that you may decide what steps, if any, you wish to take in relation thereto. * * * * *
      5. Glass Defined. The class of persons to whom the settlement is being-offered includes all persons who purchased shares of Villager during the period January 1, 1968, to December 31, 1969, and suffered a loss. Excepted from the class are the named defendants. If you purchased shares during the period you will be deemed to be a member of the class unless you take steps provided for herein to exclude yourself.
      6. The Settlement. Defendants Norman Raab and Max L. Raab (the “Raabs”) have agreed, subject to the approval of the Court, and for a full and final settlement of all claims of members of the class as to all defendants, to make available for distribution to those members who file verified proofs of claim with supporting documents, 660,000 shares of unregistered Villager common stock (hereinafter referred to as the “settlement fund”). The Raabs shall have the option to make 60,000 of said shares available on or before February 28, 1973, or in lieu thereof the sum of $240,000. In addition defendant Norman Raab has agreed to pay counsel fees to plaintiffs’ attorneys as counsel for the class in the sum of $300,000 and to pay their out-of-pocket expenses not to exceed $7,500, and to pay the expenses of the settlement.
      It is intended that the settlement fund be distributed as follows :
      (a) Each claimant who desires to participate in the distribution of the settlement fund shall file a verified proof of claim in the form appended hereto on or before June 30, 1972.
      (b) Each claimant whose claim is accepted shall, depending upon the size and number of the claims made and the further orders of the Court, be entitled to share in the settlement fund in accordance with the following formula: (1) each claimant shall be entitled to receive such share of the settlement fund as equals a fraction, the numerator of which is the recognized loss sustained by claimant, and the denominator of which is the aggregate recognized loss sustained by all claimants whose claims have been accepted, multiplied by the settlement fund; (2) recognized loss shall mean the excess of (a) the total cost of purchase of shares by claimant over (b) the amount realized upon any sales of shares during the period January 1, 1968, to December 31, 1989, and in the case of claimants who held shares on December 31, 1969, the recognized loss shall consist of the excess of (a) the cost of purchase of shares over (b) closing market price of the shares on the date, namely, 7%.
      (c) No fractional shares shall be distributed to any claimant. None of the named defendants shall be entitled to participate in the distribution of the settlement fund.
      The foregoing formula may be modified by the Court in the interests of fairness to all claimants and no claimant shall be entitled to participate in the settlement fund to any greater extent than his actual recognized loss entitles him.
      If you are a member of the class, and neither exclude yourself nor file a verified proof of claim with supporting documents, you will be barred from any future recovery on any claims, and shall not receive notice of any further proceedings, hearing, or any other matter in connection with such claims, including the entry of a final order dismissing with prejudice any claims you may have as a member of the class.
      Under the settlement agreement no distribution will be made until (a) all of the conditions set forth in the settlement agreement have been satisfied, and (b) the Court has approved the settlement and the distribution to the claimants thereunder, and entered a final order of dismissal with prejudice against the plaintiffs and all other members of the defined class who have not timely excluded themselves, and such order shall have become final either by affirmance or expiration of the time for appeal.
      NOW THEREFORE, TAKE NOTICE:
      1. The Court will exclude you from the class if you request exclusion in writing, on or before August 1, 1972. If you are a member of the class, and do not request to be excluded therefrom, you will be bound to look to the settlement fund only for relief as to any claims which you as a member of the class have against defendants, and will be deemed a party to this action to be included in and bound by any order rendered in connection with this settlement.
      2. If you are a member of the class who does not request to be excluded and you wish to participate in the distribution of the settlement fund, you must file, no later than August 1, 1972, a verified proof of claim in the form appended hereto together with your brokers’ confirmations of purchase and sale or copies thereof supporting your claim, or you will be forever barred from recovery for any claim you may have against the defendants as a member of the class. Additional forms of proof of claim will be supplied upon written request to the undersigned.
      3. If you do not request exclusion, you may, if you so desire, enter an appearance through counsel of your own choosing. If you do not request exclusion, and you do not enter such an appearance your interests in this litigation will be represented by counsel for plaintiffs and the class.
      4. If you are a member of the class who does not request exclusion and who does not file a verified proof of claim, you shall not receive notice of any further proceedings, hearings, orders, or any other matters in connection with your claims, including the entry of final order dismissing with prejudice any claim you may have against the defendants, and you shall be bound by all said proceedings, hearing, orders or other matters.
      5. A hearing will be held on August 31, 1972, at 10:00 A.M. (D.S.T.) before the United States District Court for the Eastern District, in Court Room , United States Courthouse, 9th and Market Streets, Philadelphia, Pennsylvania, on approval of the settlement described herein, at which you may appear and be heard with respect to any of the matters set forth herein.
      O. At such hearing no member of the class who desires to object to the settlement will be heard and no papers submitted by or on behalf of any such member will be received or considered by the Court at or in connection with the hearing, except as the Court may in its discretion otherwise direct, unless such member desiring to be heard or to submit papers files with the Clerk on or before August 1, 1972, his objections in writing, together with all his papers to be submitted to the Court at the hearing.

      . FINAL JUDGMENT
      AND NOW, this 31st clay of August, 1972, after a hearing held on August 31, 1972, pursuant to due notice at which time the parties were heard by their respective counsel, and no persons having appeared in opposition to the proposed settlement, and the Court being fully advised, and the Court having in Settlement Order No. 3 apiproved the settlement proposed in Settlement Order No. 1 as fair, reasonable and adequate, tlie Court now enters a Final Judgment in accordance with the Federal Rules of Civil Procedure, as follows :
      1. The complaint in this action be, and the same is hereby, dismissed with prejudice. This Final Judgment be, and the same hereby is, in full and final discharge of any and all claims and causes of action against any and all defendants, which have been or might have been asserted with respect to the matters alleged in the complaint.
      2. This Final Judgment includes and binds all the members of the class alleged in the complaint in this action, namely, all persons who purchased shares of Villager Industries, Inc., during the period January 1, 1968, to December 31, 1969, and who suffered a loss, except those persons who have requested exclusion.
      3. Any and all claims asserted by any parties in this action, whether as a counter-claim or cross-claim or otherwise be, and the same are hereby, also dismissed with prejudice.
      4. The settlement proposed in Settlement Order No. 1 shall be consummated in accordance with the Agreement of Settlement and Settlement Order No. 3, and this Court shall retain jurisdiction in this action for the purpose of supervising the consummation of the settlement.

      . As soon as practicable after the commencement of an action brought as a class action, the court shall determine by order whether it is to be so maintained. An order under this subdivision may be conditional, and may be altered or amended before the decision on the merits.

      . Rule 23(a) provides:
      One or more members of a class may sue ... as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims ... of the representative parties are typical of the claims ... of the class, and (4) the representative parties will fairly and adequately protect the interests of the class. Rule 23 (b) (3) provides :
      An action may be maintained as a class actioh if the prerequisites of subdivision (a) are satisfied, and in addition :
      (3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The matters pertinent to the findings include : (A) the interest of members of the class in individually controlling the prosecution or defense of separate actions ; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class-; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; (D) the difficulties likely to be encountered in the management of a class action.

      . Morris v. Burchard, 51 F.R.D. 530, 536 (S.D.N.Y.1971).

      . The original class action Rule 23, promulgated in 1937, was a restatement and clarification of Rule 38 of the Equity-Rules for Federal Courts (1912).
      Absent adequate notice, the rights of many could be at the mercy of a very few. Experience has shown that by comparison to the size of the class, relatively few class members actively participate in the management of the litigation.

      . In the case at bar, prospective class members were required to perform the affirmative of filing a verified daim.

      . We are not unmindful that after seven years’ experience with the 1966 amendments, thoughtful criticisms of the class action device under Rule 23(b), (c) are now emerging with increasing frequency from distinguished members of the federal judiciary who have had vast experience in this field. See Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1018-1020 (2d Cir. 1973), “Class actions have sprawled and multiplied like the leaves of the green bay tree.” Friendly, Federal Jurisdiction : A General View, Columbia University Press, at 120, “Something seems to have gone radically wrong with a well intentioned effort.”

      . Experience teaches that it is counsel for the class representative and not the named parties, who direct and manage these actions. Every experienced federal judge knows that any statements to the contrary is sheer sophistry.

      . For dangers associated with class action settlements, see, McGough and Lerach, Termination of Class Actions: The Judicial Role, 33 U.Pitt.L.Rev. 445 (1972).

      . See note 1, supra, ¶ 6(b), description of the settlement.

      . See cases, McGough and Lerach, Ibid., at 463, n. 74.

      . Zerkle v. Cleveland-Cliffs Iron Co., 52 F.R.D. 151 (S.D.N.Y.1971) ; Percodani v. Riker-Maxson Corp., 50 F.R.D. 473 (S.D.N.Y.1970) ; Norman v. McKee, 290 F.Supp. 29 (N.D.Cal.1968), aff’d, 431 F.2d 769 (9th Cir. 1970) ; Roman v. Master Industries, Inc., CCH Fed.Sec.L.Rep. [1966-67 Transfer Binder] ¶ 91,806 (S.D. N.Y.1966) ; Neuwirth v. Allen, CCH Fed. Sec.L.Rep. [1961-64 Transfer Binder] ¶ 91,324 (S.D.N.Y.), aff’d, 338 F.2d 2 (2d Cir. 1964).

      . For a complete exposition of the notice requirements of Rule 23 and related issues, see generally Symposium, Federal Rule 23 — The Class Action, 10 B.C.Ind. & Com.L.Rev. 497 (1969). See especially Ward & Elliott, The Contents and Mechanics of Rule 23 Notice, 10 B.C.Ind. & Com.L.Rev. 557 (1969).

      . See Eisen. v. Carlisle & Jacquelin, 1002 F.2d 479 (2d Cir. filed May 1, 1973), rehearing denied, May 24,1973.

      . Since, at the hearing on August 31, 1972, Burnham and duPont requested only an extension of time to file claims or elections, and did not at that time ask for a new notice procedure to include individual notices, the charge of abuse of discretion by the district court should be addressed to the district court’s order denying the extension of time.


author: LARAMORE, Senior Judge.

text:
    Paul DONALD, Plaintiff-Appellant, v. MADISON INDUSTRIES, INC., a corporation, et al., Defendants, and The United States of America, Defendant-Appellee.
    No. 72-1879.
    United States Court of Appeals, Tenth Circuit.
    Argued and Submitted May 21,1973.
    Decided Aug. 28, 1973.

      Russ B. Anderson, Emporia, Kan., for plaintiff-appellant.
    Roger K. Weatherby, Scott P. Cramp-ton, Robert J. Roth, Meyer Rothwacks, Crombie J. D. Garrett, and Wesley J. Filer, Washington, D. C., for defendant-appellee.
    Before LEWIS, Chief Judge, HOLLOWAY, Circuit Judge, and LARAMORE, Senior Judge.

       Senior Judge Don N. Laramore of the United States Court of Claims is sitting by designation.

   LARAMORE, Senior Judge.

The question presented by this appeal involves the relative priority of a Federal tax lien and a private security interest to the proceeds from the sale of certain property of a taxpayer-debtor, Madison Industries. Resolution of this question devolves to an interpretation and application of section 6323(c) of the Internal Revenue Code of 1954, as amended.

To the extent relevant herein, the facts disclose that in 1966, Madison Industries (taxpayer) borrowed $40,000 from First National Bank of Madison, Kansas (First National). As collateral for the loan, taxpayer executed a “security interest” in

all inventory, accounts, machinery, equipment, finished products and products being manufactured. Also everything connected with said business in any way.

In November 1968, the 1966 First National note was transferred to Alliance Capital Corporation of Fort Worth, Texas (Alliance Capital). Because Alliance Capital extended additional credit to the taxpayer, a replacement promissory note and security agreement were executed granting Alliance Capital a security interest in the following items:

All items of personal property, wherever situated, including, but pot limited to: cars, trucks, inventory, accounts receivable, equipment used in connection with manufacturing, tools, finished products, work in process, now owned or purchased as a replacement, or purchased as new equipment in the future. This is intended to cover everything owned by this business in any fashion.

Thereafter, these security agreements were assigned to Paul Donald, plaintiff-appellant. On December 12, 1969, the Internal Revenue Service filed its first notice of tax liens against the taxpayer in the appropriate state and local offices. In July, August and September of 1970, First National made additional loans to the taxpayer based on new security agreements, which were ultimately assigned to Donald in September, 1971. The government seized all of the taxpayer’s property on September 9, 1970, but three days later released all of it back to the taxpayer, except for six trailers (five manufactured by taxpayer and one trade-in) and one pick-up truck.

In November 1970, Donald initiated the present action in the District Court of Lyons County, Kansas, seeking'to enjoin the United States from disposing of the taxpayer’s assets then in possession of the Internal Revenue Service. The United States removed the action to the United States District Court and filed a cross-complaint asking for an adjudication of the relative priorities of the various liens on taxpayer’s property. By agreement between the parties, the assets in issue were sold at a private sale and the $11,000 proceeds deposited in the Court Registry. From a decision in favor of the United States, Donald has prosecuted the present appeal.

The lower court found the basic issue herein to be whether the appellant’s security interest was “choate” at the time the Federal tax liens were filed. Pursuant to a thesis tendered by the government, resolution of this “choateness” issue was seen as being dependent on whether the property subject to the security agreements was described with sufficient “specificity,” i. e., was it “identifiable.” Based in part on an interpretation of Illinois v. Campbell, 329 U.S. 362, 67 S.Ct. 340, 91 L.Ed. 348 (1946), the District Court concluded that the security agreement’s coverage of “finished goods” was not sufficiently specific, since that description encompassed a class of goods which was constantly changing and only identifiable at some particular point in time. As a result, the security interest was found to be “inchoate,” and thus inferior to the Federal tax lien in priority.

A review of the pertinent Federal law in this area convinces us that we must reject as inappropriate and out-of-date the legal criteria advanced by the government and adopted by the lower court for resolution of the lien priority issue presented herein. While we do not find the “choateness doctrine” totally obsolete, it appears that the government would have us revitalize the doctrine to its pristine form by completely ignoring the Federal Lien Act of 1966, and emasculating significant elements of section 6323 which were specifically designed to alter the effects of said doctrine. We cannot concur in such a scheme.

Moreover, even if this case had arisen prior to the Federal Lien Act, we would harbor grave doubts as to whether the choateness doctrine would have dictated the degree of specificity which the government would have us find. Our dubiousness stems from the government’s reliance on the “specificity” criteria in Illinois v. Campbell, supra, a case arising under the Federal insolvency priority statute, R.S. § 3466, which was later construed as giving virtually absolute priority to Federal liens in insolvency situations, unless the secured party had already gained either possession or title to the property. United States v. Gilbert Associates, 345 U.S. 361, 73 S.Ct. 701, 97 L.Ed. 1071 (1953). Appellee correctly points out that United States v. Security Trust and Savings Bank, 340 U.S. 47, 71 S.Ct. 111, 95 L.Ed. 53 (1950), also applied the general choateness doctrine to a case involving the predecessor tax lien priority statute, and in United States v. R. F. Ball Construction Co., 355 U.S. 587, 78 S.Ct. 442, 2 L.Ed.2d 510 (1958), it was established that the doctrine is also applicable to a consensual lien created by contract between the parties.

However, the government fails to note that in United States v. Vermont, 377 U.S. 351, 84 S.Ct. 1267, 12 L.Ed.2d 370 (1964), the Supreme Court explicitly held that the degree of “specificity” required under the Federal tax lien provisions is not as great as that which is necessary in cases involving insolvent debtors under R.S. § 3466 — such as Illinois v. Campbell, supra. In fact, it was held in Vermont that to be choate a state lien need not attach to specifically identified portions of a taxpayer’s property, as it must in the case of a lien on an insolvent debtor, but instead may cover “all property and rights to property, whether real or personal, belonging to such [taxpayer].” 377 U.S., at 352, 84 S.Ct., at 1267. Since this all-encompassing description was found sufficient to establish the identity of the property subject to the lien for purposes of the choateness doctrine in. Vermont, we fail to see how the descriptions herein, “finished goods” (among others), could be faulted as being too broad or unspecific.

In any event, we no longer need rely solely on Vermont and its predecessors to light the way, for Congress provided us with new guide posts in the Federal Lien Act of 1966. Section 6323 deals generally with the “validity and priority [of Federal tax liens] against certain persons,” while subsection (c) specifically addresses itself to “protection for certain commercial transactions financing agreements.” Section 6323(c)(1) provides, in pertinent part, that:

* * * even though notice of a lien imposed by section 6321 has been filed, such lien shall not be valid with respect to a security interest which came into existence after tax lien filing but which — (A) is in qualified property [defined in (c)(2)(B)] covered by the terms of a written agreement entered into before tax lien filing and constituting — (i) a commercial transactions financing agreement [defined in (c)(2)(A)] * * * and * * * (B) is protected under local law against a judgment lien arising, as of the time of tax lien filing, out of an unsecured obligation.

For purposes of sections 6323 and 6324, section 6323(h)(1) defines a “security interest” as meaning:

* * * any interest in property acquired by contract for the purpose of securing payment or performance of an obligation or indemnifying against loss or liability. A security interest exists at any time (A) if, at such time, the property is in existence and the interest has become protected under local law against a subsequent judgment lien arising out of an unsecured obligation, and (B) to the extent that, at such time, the holder has parted with money or money’s worth.

Subsection 6323(c)(2)(B) states, that the “term ‘qualified property,’ when used with respect to a commercial transactions financing agreement, includes only commercial financing security [collateral] acquired by the taxpayer before the k6th day after the date of tax lien filing,” (emphasis added). “Commercial financing security” (collateral) is defined by subsection 6323(c)(2)(C) as including “inventory,” which the committee reports state “include raw materials and goods in process as well as property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business.” H.R. Rep.No.1884, 89th Cong., 2d Sess. 41 (1966), reprinted at 1966-2 Cum.Bull. 844.

Subsection 6323(c)(2)(A) defines a “commercial transaction financing agreement,” as relevant herein, as “an agreement (entered into by a person in the course of his trade or business)- — (i) to make loans to the taxpayer to be secured by commercial financing security [here, inventory] acquired by the taxpayer in the ordinary course of his trade or business, * * * but such an agreement shall be treated as coming within the term only to the extent that such a loan or purchase [made pursuant to the agreement which was entered into before tax lien filing] is made before the 46th day after the date of tax lien filing or (if earlier) before the lender or purchaser had actual notice or knowledge of such tax lien filing.”

-In addition, subsection 6323(i) (2) provides, as interpreted by the committee reports, that “[i]f local law permits one person to acquire by substitution the rights of another with respect to any lien or interest dealt with here, then .the person substituted is to stand in the shoes of the person he replaces with regard to Federal tax liens.” H.R.Rep.No.1884, supra-, (1966-2 Cum. Bull. 823). Thus, the rules set out above are applicable to appellant even though the original security agreements were between the taxpayer and First National and Alliance Capital, as long as his substitution was valid under local law. The government has not suggested that it was not.

Summarizing the foregoing definitions and rules as applicable herein, it is apparent that the appellant’s security interest will take priority over the filed Federal tax lien if the following requisites are met:

1. The “security interest” stems from a written agreement which

(a) was entered into before the Federal tax lien was filed, and

(b) qualifies as a “commercial transactions financing agreement” under section 6323(c) (2) (A) (i);

2. The loans were made pursuant to the written agreement within 45 days of the tax lien filing or prior to receiving actual notice or knowledge that the tax lien had been filed, i. e., disbursements or loans after receipt of actual notice or 45 days, whichever is sooner, are unprotected;

3. The written agreement covered “qualified property” — here inventory- — which was “acquired” by the taxpayer within 45 days of the tax lien filing; and

4. State law gives the security interest holder priority over a judgment lien by an unsecured creditor, as of the time the Federal tax lien is filed.

Before measuring the facts of this case against these requisites, it appears appropriate at this juncture to further answer the government’s initial allegation of insufficient specificity in view of the above criteria, and make several other pertinent observations.

First, it should be noted that the definition of “qualified property” specifically includes “inventory,” and the committee reports indicate that said term encompasses everything from raw materials to finished products. Neither the Code nor the committee reports imply that these elements of inventory need to be specifically described or perpetually up-dated as to exact identity and amount of each, as the government suggests. In fact, exactly the opposite implication can be drawn from the face of the statute. Since subsection 6323(c) provides that collateral acquired by the taxpayer-debt- or within 45 days after the tax lien filing will be subject to the lienor’s priority if, among other conditions, the written agreement was entered into prior to the tax lien filing, it is evident that Congress envisioned the security agreements being allowed to describe collateral in broad enough terms that after-acquired property could automatically become subject to the creditor’s lien without a constant rewriting of the agreement as to exact quantities and specific identities of items currently covered by the agreement. In other words, if we required the government’s suggested degree of specificity, it would be impossible to ever have property acquired during the 45-day grace period become subject to the creditor’s prior lien since the security agreement is not allowed to be rewritten after the tax lien filing. Such a result is clearly not consistent with the intent of the statute, and this fact alone would contradict the government’s assertion.

We need not rely solely on the logical inferences of the statutory structure, however, since both the definition of a security interest, § 6323(h)(1)(A), and § 6323(c)(1)(B) explicitly provide that the standard of security perfection is dependent on “local law,” i. e., if the security interest is sufficiently perfected under state law to be protected against an unsecured creditor’s judgment lien, then it shall also be considered “perfected” for Federal tax lien priority purposes. Thus being directed to “local law,” we find that the degree of specificity of description required by the Uniform Commercial Code (UCC) as adopted by Kansas, whose law is applicable herein, is set out in Kan.Stat.Ann. § 84-9-110 as follows:

Except in the case of a description of real estate concerned with goods which are or are to become fixtures, for purposes of this article any description of personal property or real estate is sufficient whether or not it is specific if it reasonably identifies what is described. [Emphasis added].

The official comment for this provision explains that “under this rule courts should refuse to follow the holdings, often found in the older chattel mortgage cases, that descriptions are insufficient unless they are of the most exact and detailed nature, the so-called ‘serial number’ test.” As a result, it is readily apparent that the UCC does not require, but instead rejects the degree of specificity which the government suggests is necessary. Based on this fact and the logical inferences of the statutory structure, we must conclude that the collateral herein was described with sufficient specificity to make it reasonably identifiable at the appropriate point in time — 45 days after the tax lien filing.

Secondly, it is apparently necessary to clarify the scope of subsection 6323(c) since both parties virtually ignored it and the lower court found it inapplicable because “it speaks of a ‘security interest which came into existence after tax lien filing,’ and the security interest of plaintiff here came into existence before tax lien filing.” While it is true that the plaintiff-appellant’s security interest was “in existence” prior to the tax lien filing with respect to that collateral which the taxpayer had acquired prior to said filing, it is also true that a portion of the security interest did not “come into existence” until after the filing with respect to any after-acquired property. This result stems from the fact that the security interest ordinarily attaches automatically to new collateral the moment it is acquired, and hence cannot be “perfected” with respect thereto, until “the debtor has rights in the collateral.” Uniform Commercial Code, Kan.Stat.Ann. §§ 84-9-204(1) and 84-9-303(1). This evolving security interest is, however, frozen after the 45th day with respect to loans already made and the value of property “acquired” by that time. Section 6323(c)(2)(A) and (B). Thus, we must also dismiss as wholly untenable appellant’s contention that when a security interest comes into existence is solely dependent on when the loans are made and not when the property to which it attaches is acquired, since both the UCC and section 6323 make it clear that the security interest is perfected only as it attaches to the after-acquired property. Moreover, it is apparent that subsection 6323(c) defines the outer-limits of a creditor’s protection, and it is obvious that a lien would not forfeit the benefits of its standards or avoid its requisites simply because there had been no changes in the status of the security interest during the 45-day grace period. As a result, section 6323(e) is determinative of the lien priorities herein.

Returning now to an application of the above conditions of priority to the facts of this case, it is apparent that the first and second requisites are met, i. e., the 1966 First National and 1968 Alliance Capital security agreements were entered into prior to the December 12, 1969 tax lien filing and qualify under section 6323(e) (2) (A) (i), and the relevant loans were made pursuant to these agreements within 45 days of the tax lien filing. Appellant also endeavors to base his priority on security agreements which First National entered into with the taxpayer in July, August and September of 1970 and were subsequently assigned to appellant in September 1971. Since these security agreements were entered into after the tax lien filing by some eight months or more (one day after would be just as fatal), appellant clearly can draw no support from these documents with respect to the December 1969 tax lien. Section 6323(c)(1). However, they would be relevant to any tax liens filed after their execution.

Similarly, there does not appear to be any problem with meeting the fourth requirement that the security interest have priority under local law over a judgment lien arising out of an unsecured obligation, as of the time of tax lien filing. The required steps for perfection under U.C.C., Kan.Stat.Ann. §§ 84-9-302 to 84-9-306 appear to have been met herein, and the government has not suggested otherwise. Although this “state priority” issue is measured as of the time of tax lien filing, it is pertinent to note that because a judgment lienor, like a secured creditor/ could not attach his lien to after-acquired property until said property is, in fact, “acquired,” the judgment lien could not possibly be perfected prior to the security holder’s interest being perfected. Thus, if a security holder has priority at the time of the tax lien filing, he will retain that priority during the 45-day grace period as to after-acquired property.

The third requisite, however, presents questions of less certainty’. Five of the trailers in issue were not completed until some eight months after the Federal tax lien was filed. The sixth was a trade-in. The government contends that the phrase “came into being or existence” should be used interchangeably with the word “acquired” in subsection 6323(c) (2) (B)’s limitation on “qualified property,” i. e., only collateral which “came into existence” before the 46th day after the tax lien filing would be subject to the security holder’s priority. As a result, the government maintains that the trailers in issue are not “qualified property” since they did not “come into existence” within 45 days of the tax lien filing.

The effect of the government’s construction, as we understand it, would be a finding that any items which constituted “goods-in-process” on the 45th day (subject to the security holder’s lien priority) would no longer be counted as “qualified property” (priority collateral) if on the 46th day the taxpayer added a coat of paint or some other finishing touches which would now place the items in the category of “finished products.” That is to say, since the items were not “in existence” as “finished products” on the 45th day after tax lien filing, none of their value would be subject to the lien holder’s priority when they are subsequently completed, although said finished products admittedly: (1) would have been subject to his priority if they had been “in existence” on the 45th day, rather than the 46th, and (2) contain substantial materials which were owned by the taxpayer on the 45th day. We cannot concur with such an interpretation of the statute.

While we find it evident from the face of the statute that property not yet owned or “acquired” by the debtor-taxpayer by the 45th day after the tax lien filing, such as purchases of new raw materials or new equipment, would not be subject to the creditor’s priority, we find it equally clear that where property owned by the debtor within the 45-day period subsequently undergoes transformations in character and form, such as the evolution of raw materials into final products and eventually cash proceeds, as occurred herein, the creditor does not lose his security interest in the value of that property which was owned on the 45th day. Implicit in this conclusion, however, is the fact that the creditor would have no rights to the “value-added” to the product after the 45th day by the addition of either labor or parts subsequently acquired.

It is with some surprise — although the inappropriateness and invalidity of the bulk of the government’s contentions should have put us on notice — that we find our foregoing conclusions strongly supported by the government’s own Proposed Treasury Regulation § 301.-6323(c)-1(d), which provides, in relevant part, that:

* * * qualified property consists solely of commercial financing security acquired by the taxpayer-debtor before the 46th day after the date of tax lien filing * * *. Inventory is acquired by the taxpayer when title passes to him. Identifiable proceeds, which arise from the collection or disposition of qualified property by the taxpayer, are considered to be acquired at the time such qualified property is acquired if the secured party has a continuously perfected security interest in the proceeds under local law. The term “proceeds” includes whatever is received when collateral is sold, exchanged, or collected. For purposes of this paragraph, the term “identifiable proceeds” does not include money, checks and the like which have been commingled with other cash proceeds.' Property acquired by the taxpayer after the 45th day following tax lien filing, by the expenditure of proceeds, is not qualified property, [emphasis added].

It is evident from the preceding proposed regulation that not only cash proceeds from the disposition of the pre-46th day collateral are qualified property, but also that which may be received in exchange for said property. Consequently, the trade-in trailer involved herein would constitute qualified property to the extent that its value reflects an exchange for property owned by the taxpayer before the 46th day after the tax lien filing. However, it should be noted that the proposed regulation suggests that once protected collateral is reduced to cash proceeds, it may not be reinvested in similar products and still be considered qualified property. We concur in this conclusion, for while we accept the commercial necessity of allowing continued production of that which is in process, we also recognize the necessity of ending the perpetuity of the taxpayer’s liens by payment of his debts and tax obligations with the consequent funds.

Thus, the crucial fact which should have been determined in this case was an analysis of what portion of the finished products’ value was attributable to the inclusion of property which was owned by the taxpayer before the 46th day after the tax lien filing. ’ The government maintains, in anticipation of this conclusion, that the judgment of the lower court must be affirmed since the appellant failed to allege or prove this value and thereby failed to sustain his burden of proof on one of the elements that is indispensable to showing the superiority of his claims under section 6323. We are forced to agree, and it is on this ground alone that we normally would affirm the decision of the lower court.

However, as pointed out, much of the briefing to us was inappropriate. Our record also shows that the critical issue which has been defined, was not properly presented to the trial court. Moreover, the stipulation of facts on which the case was submitted does not cover the issue as to what portion of the finished products’ (the trailers) value was attributable to inclusion of property owned by the taxpayer within 45 days after the tax lien was filed. And the recent proposed regulation, favoring the appellant which is discussed above, was not before the trial court.

Accordingly, in the interest of justice we remand this case with directions to the District Court for further proceedings in accordance with this opinion. Hormel v. Helvering, 312 U.S. 552, 558-559, 61 S.Ct. 719, 85 L.Ed. 1037; Youngstown Sheet and Tube Co. v. Lu-cey Products Co., 403 F.2d 135, 140 (5th Cir. 1968); Empire Life Insurance Co. of America v. Valdak Corp., 468 F.2d 330, 334 (5th Cir. 1972).

      . By stipulation between the parties, Donald has abandoned his claim to the proceeds from the truck.

      . All section references herein are to the Internal Revenue Code of 1954, as amended, unless otherwise stated.