John Daniels, Manuel Sanchez, Timothy Hoffman v. Wayne Bursey, Mellon Trust of New York, Prudential Insurance Company of America, Appeal Of: John J. Koresko, V

Citations: 430 F.3d 424; 63 Fed. R. Serv. 3d 647; 36 Employee Benefits Cas. (BNA) 1473; 2005 U.S. App. LEXIS 25676; 2005 WL 3159562Docket: 04-4316

Court: Court of Appeals for the Seventh Circuit; November 28, 2005; Federal Appellate Court

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Sanchez Daniels, a Chicago law firm, along with its partners and employees, initiated a putative class action against multiple defendants involved in the marketing and administration of a severance trust executive program (STEP), alleging fraudulent practices. Prior to class certification, the parties reached a settlement, but attorney John J. Koresko appealed the settlement and contested certain district court rulings, representing himself and the putative class members. The appeal was dismissed as Koresko and the class members were determined not to be parties to the litigation, lacking the capacity to appeal.

Sanchez Daniels enrolled in the STEP program in 1995, which was marketed as a tax-deductible scheme offering various benefits while protecting funds from creditors, appealing primarily to high-income owner-employees. However, a 1997 IRS audit of another participant revealed that the plan was not tax-deductible, leading to a Tax Court stipulation that disallowed about 75% of the deductions claimed.

Following this ruling, Sanchez Daniels sought to withdraw from the plan in March 2001. The plan administrator provided two withdrawal options, both involving a forfeiture of plan assets; Sanchez Daniels rejected these and demanded a transfer of their assets to a new independent plan. This dispute led to litigation in the Northern District of Illinois, where Sanchez Daniels alleged violations of the Employee Retirement Income Security Act, the Racketeer Influenced and Corrupt Organizations Act, and various state laws and common law through the defendants' actions in relation to the STEP plan.

Koresko filed a motion to appear pro hac vice in the Northern District of Illinois on behalf of the plaintiffs, which was opposed by the defendants, who argued that Koresko, as CEO of Penn-Mont Benefit Services, was a competitor of the plans and should not access litigation records that could provide a competitive advantage. The court allowed Koresko's appearance but indicated that his status as a competitor might limit his access to discovery materials. As the case progressed, settlement discussions occurred with a magistrate judge's assistance, but Koresko filed a motion to withdraw due to a conflict of interest, which the plaintiffs opposed. Koresko abstained from settlement discussions, seeking to delay negotiations until his withdrawal motion was resolved.

On September 8, 2004, a settlement was reached, leading to a motion by the plaintiffs to amend their complaint to remove all class claims. Koresko objected to the withdrawal of class claims and filed motions for a preliminary injunction, appointment of a receiver, and expedited discovery on behalf of potential class members, which the plaintiffs rejected. Following a hearing, the district court permitted the amendment and denied class certification as moot, determining that the settlement did not require court approval since it excluded class claims. The court subsequently granted both parties' motions to voluntarily dismiss their claims, entering judgment on October 26, 2004. 

Koresko appealed on his own behalf and for the putative class, including Schmier. A preliminary issue arose regarding whether Koresko and Schmier had the capacity to appeal, shifting the focus from standing to whether they qualified as "parties" in the litigation. It was established that only parties could appeal adverse judgments, as defined by federal rules, and since neither Koresko nor Schmier was named as parties nor moved to intervene, and the district court had not certified a class, they were not considered parties in the traditional sense.

Koresko and Schmier may be considered 'parties' with the capacity to appeal in specific situations, despite not being formally recognized as such. The Supreme Court has stated that the determination of 'parties' hinges on whether individuals feel bound by a settlement. However, Koresko and Schmier lack the capacity to appeal simply due to their membership in an unapproved class since the class was never certified and no settlement agreement binds them. The settlement agreement only involves named plaintiffs and defendants, leaving Koresko free to pursue his own claims, including a current fee dispute in a separate case.

Since there is no binding settlement agreement for Koresko or the putative class, they do not share the same status as unnamed certified class members allowed to appeal in a related case (Devlin). Non-class members cannot be bound by class actions, and even dissent in Devlin acknowledged that nonnamed class members are not parties until class certification occurs. Koresko's argument that an attorney for a putative class has a fiduciary duty elevating their status to that of a party is rejected. The referenced case (Culver) emphasizes the potential conflict of interest for class attorneys rather than confirming their party status. Consequently, Koresko and Schmier are not bound by the settlement agreement and lack the capacity to appeal, leading to the dismissal of their appeal.

Before the case was initiated, plan administrators filed a lawsuit against Sanchez Daniels and Koresko in the District of Connecticut, alleging forfeiture of plan assets and defamation. Sanchez Daniels, representing similarly situated participants, subsequently filed complaints against plan administrators and insurers in Pennsylvania state court, which were removed to the Eastern District of Pennsylvania and then voluntarily dismissed to allow proceedings in Chicago. The case was filed in the Circuit Court of Cook County and later removed to the Northern District of Illinois.

Sanchez Daniels accused the defendants of violating the Employee Retirement Income Security Act, the Racketeer Influenced and Corrupt Organizations Act, and various state laws related to the financial structuring, marketing, and administration of the STEP plan. Koresko sought to appear pro hac vice on behalf of the plaintiffs, but the plan administrative defendants opposed this, asserting that Koresko, being the CEO of a competing firm, could misuse litigation access for competitive advantage. The court allowed Koresko's appearance with a note that his competitive status might limit his access to discovery materials. Koresko was not the sole representative for the plaintiffs.

As settlement discussions progressed with a magistrate judge's assistance, Koresko moved to withdraw due to a conflict of interest, which the plaintiffs opposed. He refrained from participating in settlement discussions while trying to delay them until his motion was resolved. On September 8, 2004, a settlement was reached, leading plaintiffs to amend their complaint to remove class claims. Koresko objected to this amendment and the settlement, while also seeking a preliminary injunction, receiver appointment, and expedited discovery, claiming representation of putative class members. The plaintiffs rejected Koresko's motions.

Following a hearing, the district court allowed the amendment to eliminate class claims and denied the class certification motion as moot. The settlement not covering any class claims meant court approval was unnecessary. The district court granted both parties' motions for voluntary dismissal, entering judgment on October 26, 2004. Koresko appealed on his behalf and for the putative class, raising the issue of whether he and the putative class had the capacity to appeal, framed as a standing issue, but fundamentally questioning whether they were parties to the litigation.

The key issue is whether the petitioner qualifies as a "party" eligible to appeal the settlement approval. This determination involves defining "party" in the context of appeal rather than standing. A "party" can appeal, while a nonparty cannot. The established rule is that only parties to a lawsuit or those who properly become parties can appeal adverse judgments. In this case, neither Koresko nor Schmier were named parties in the litigation or moved to intervene, and the district court did not certify a class, indicating they are not traditional parties.

However, in specific circumstances, individuals may still be regarded as "parties" with the capacity to appeal, particularly if bound by the settlement agreement. The Supreme Court has emphasized that the essence of being a "party" relates to being bound by the settlement terms. Here, since the settlement agreement is between named plaintiffs and defendants and does not resolve class claims, Koresko is not bound by the agreement, allowing him to pursue his own claims independently.

Since there was no class certification and the settlement does not bind Koresko or the putative class members, they cannot appeal as unnamed members of a class. The situation is distinct from the precedent set in Devlin, which allowed an appeal for unnamed certified class members. Therefore, the appellants in this case do not have the rights to appeal due to the absence of binding settlement terms or class certification.

Koresko argues that an attorney representing a putative class should be recognized as having a fiduciary duty akin to a party in a case under ERISA. He references the case of Culver v. City of Milwaukee, where it was suggested that a class action lawyer acts as the "real plaintiff in interest." However, the context of this assertion highlights concerns about potential conflicts of interest, indicating that courts and Congress have resisted classifying attorneys as the true plaintiffs. The court ultimately rejects Koresko's position, stating that an attorney's fiduciary role does not equate to that of a party. Consequently, since Koresko and Schmier are not bound by the settlement agreement, they lack the capacity to appeal, leading to the dismissal of their appeal. Additionally, prior to this litigation, the plan administrators had sued Sanchez and Koresko individually in Connecticut, while Sanchez and Daniels filed related complaints in Pennsylvania state court, which were subsequently moved to Illinois.