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Baffa v. Donaldson

United States Court of Appeals for the Second Circuit

January 31, 2000, Argued ; August 25, 2000, Decided

Docket No. 99-7607


 [*54]  POOLER, Circuit Judge:

Robert Baffa ("Baffa"), Brett Baffa ("Brett"), and Mary J. Dorflinger ("Dorflinger") appeal from orders of the United States District Court for the Southern District of New York (Constance Baker Motley, Judge) imposing sanctions on Baffa; denying Baffa's motion for class certification; and denying Brett's and Dorflinger's motion to intervene as class representatives. Appellants also appeal from the order of the district court dismissing the  [*55]  action for Brett's and Dorflinger's failure to comply with the sanctions order and failure to proceed with their individual claims. 2 We conclude that the imposition of sanctions was procedurally defective and that the district court erroneously denied Brett's motion to intervene as class representative. We vacate the order imposing sanctions and vacate the order denying Brett's motion for intervention as class representative; affirm the orders denying Baffa's motion for class certification; and affirm as well the denial of Dorflinger's motion to intervene as class representative. Finally, we vacate the judgment of dismissal and remand for further proceedings consistent with this opinion.


This securities fraud action stems from allegedly false and misleading information contained in a registration statement and prospectus of Rickel Home Centers ("Rickel"). The Securities and Exchange Commission declared the Rickel prospectus effective on October 28, 1994, for an initial public offering ("IPO") of shares of stock. On November 9, 1994, Baffa purchased shares of Rickel stock for his then minor son Brett and placed them in a Uniform Gifts to Minors Act ("UGMA") account designated Robert Baffa, C/F/A, Brett Baffa, UGMA/NY. Soon after, the price of Rickel stock declined drastically, and Baffa sold the shares at a loss.

On January 26, 1996 Robert Baffa commenced this action against Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), EOS Partners, L.P. ("EOS"), and General Electric Capital Corporation ("GE Capital"), as well as several officers and directors of Rickel (collectively "defendants"). At the time of the IPO, EOS and GE Capital each controlled 44.2% of Rickel common stock and DLJ controlled 7.3% of shares. The complaint alleged principally that defendants violated Sections 11 and 15 of the Securities Exchange Act of 1933, 15 U.S.C. §§ 77k, [**4]  77o, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), 78t, as well as Rule 10b-5, 17 C.F.R. § 240.10b-5, by providing false and misleading financial information in the Rickel prospectus and registration papers. Baffa claimed that defendants failed to disclose in the prospectus four financial indicators -- net sales, gross profit, EBIDTA (the sum of earnings before income tax [operating income] depreciation, and amortization), and operating income (loss) after debt expense -- which reflected a decline in Rickel's business during the third quarter of 1994 and that left it "in an extremely precarious financial condition at the time of the Offering." According to Baffa, Rickel's poor third quarter financial showing could be deduced by reference to Rickel's annual 10-K Report which had been filed with the SEC on April 29, 1995. Baffa claimed that he and other members of the class who acquired Rickel stock suffered financial loss as a result of the defendants' material untruths and omissions in the registration statement.

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222 F.3d 52 *; 2000 U.S. App. LEXIS 22162 **; Fed. Sec. L. Rep. (CCH) P91,056; 47 Fed. R. Serv. 3d (Callaghan) 760

ROBERT BAFFA, On Behalf of Himself and All Others Similarly Situated, Plaintiff-Appellant, MARY J. DORFLINGER, Individually and On Behalf of All Others Similarly Situated, and BRETT BAFFA, Individually and On Behalf of All Others Similarly Situated, Plaintiffs-Intervenors-Appellants, v. DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION, EOS PARTNERS, L.P., GENERAL ELECTRIC CAPITAL CORP., ANDREW A. LEVISON, STEVEN M. FRIEDMAN, DOUGLAS R. KORN, JULES A. BORSHADEL, and JOHN K. HENRY, Defendants-Appellees.

Prior History:  [**1]  Appeal from order of the United States District Court for the Southern District of New York (Motley, J.) dismissing plaintiffs' securities fraud claims arising out of allegedly false and misleading statements made in registration statement and prospectus. Appellants claim that the district court erroneously: 1) imposed sanctions under Rule 11 of the Federal Rules of Civil Procedure; 2) denied the motion of Robert Baffa for class certification and the motion of Mary Dorflinger and Brett Baffa to intervene as class representatives and for class certification; and 3) dismissed the action.

Disposition: Affirmed in part, reversed in part, vacated and remanded in part.


district court, class representative, sanctions, class certification, vacate, adequacy, motion to intervene, attorney's fees, figures, stock, sanction order, interrogatories, atypical, abuse of discretion, member of the class, quotation, shares, lack of knowledge, certification, defendants', discovery, defenses, Powers, notice

Civil Procedure, Sanctions, Baseless Filings, General Overview, Criminal Law & Procedure, Appeals, Standards of Review, Abuse of Discretion, Abuse of Discretion, Attorneys, Discovery & Disclosure, Discovery, Misconduct During Discovery, Standards of Review, Special Proceedings, Class Actions, Certification of Classes, Prerequisites for Class Action, Commonality, Judicial Discretion, Numerosity, Typicality, Estate, Gift & Trust Law, Personal Gifts, Gifts to Minors, Custodial Duties & Rights, Gifts, Personal Gifts, Uniform Acts, Parties, Intervention, Motions to Intervene, Class Members, Named Members, Adequacy of Representation, Class Attorneys, Dismissal, Involuntary Dismissals, Failure to Comply, Appellate Review, Failure to Prosecute, Dismissal of Appeals