103 F.3d 1317 (7th Cir. 1996), 95-2526, Matter of VMS Securities Litigation

Docket Nº:95-2526, 95-2635, and 95-2619.
Citation:103 F.3d 1317
Party Name:In the Matter of: VMS SECURITIES LITIGATION. In the Matter of: VMS LIMITED PARTNERSHIP SECURITIES LITIGATION Robert Taylor, Roberta Taylor, Foster Fluetsch, Lorna Crooks, Jack Shoemaker, Marie Shoemaker, and David Sells, Plaintiffs-Appellants-Cross-Appellees, v. PRUDENTIAL SECURITIES INCORPORATED, Defendant-Appellee-Cross-Appellant.
Case Date:December 31, 1996
Court:United States Courts of Appeals, Court of Appeals for the Seventh Circuit
 
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103 F.3d 1317 (7th Cir. 1996)

In the Matter of: VMS SECURITIES LITIGATION.

In the Matter of: VMS LIMITED PARTNERSHIP SECURITIES

LITIGATION Robert Taylor, Roberta Taylor, Foster Fluetsch,

Lorna Crooks, Jack Shoemaker, Marie Shoemaker, and David

Sells, Plaintiffs-Appellants-Cross-Appellees,

v.

PRUDENTIAL SECURITIES INCORPORATED,

Defendant-Appellee-Cross-Appellant.

Nos. 95-2526, 95-2635, and 95-2619.

United States Court of Appeals, Seventh Circuit.

December 31, 1996

Argued Dec. 6, 1995.

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Joseph A. Grear, Rolf O. Stadheim, Stadheim & Grear, Chicago, IL, Allan S. Haley (argued), Archibald M. Mull, III, Old Sacramento, CA, William J. Barcellona, Irving H. Perluss, Edward T. Clifford, Greve, Clifford, Wengel & Paras, Sacramento, CA, for Plaintiffs-Appellants-Cross-Appellees.

Miriam Goldman Bahcall (argued), Rawn H. Reinhard, Coffield, Ungaretti & Harris, Donna L. McDevitt, Timothy A. Nelsen, Skadden, Arps, Slate, Meagher & Flom (Illinois), Chicago, IL, for Defendant-Appellee-Cross-Appellant.

Before LAY, [*] CUDAHY, and KANNE, Circuit Judges.

KANNE, Circuit Judge.

This case involves a group of investors who attempted to bring a state class action lawsuit in California alleging that Prudential Securities, Inc. ("Prudential") fraudulently induced them to participate in two class action settlements in the United States District Court for the Northern District of Illinois. The federal district court approved the two settlements and entered final judgments thereon.

Subsequently, Robert Taylor, Roberta Taylor, Foster Fluetsch, Lorna Crooks, Jack Shoemaker, Marie Shoemaker, and David Sells (the "California Investors") filed a state court complaint in California asserting claims for fraud, breach of fiduciary duty, and negligent misrepresentation. The Investors claimed that Prudential provided them with fraudulent and misleading information in an attempt to prevent them from "opting out" of the two federal class action settlements.

Prudential asked the two federal district court judges-Judge Conlon and Judge Zagel--to enforce their final judgment orders against the California Investors; both judges granted Prudential's motions, thereby enjoining the California class action lawsuit. The California Investors appeal these decisions, as well as the decision by Judge Zagel to declare the California claims legally insufficient. Prudential filed a cross-appeal from Judge Conlon's final judgment order--which refused to discuss the merits of the California claims--seeking a declaration that those claims were legally insufficient.

We affirm the decisions enjoining the California class action suit and find it unnecessary to address the legal merits of the California claims.

I. HISTORY

This consolidated appeal arises from the approved settlements and final judgment orders from two class actions in the federal district court in Chicago. The California Investors were plaintiffs in the two class actions--In re VMS Securities Litigation, No. 89 C 9448 and In re VMS Limited Partnership Securities Litigation, No. 90 C 2412-before District Judges Suzanne B. Conlon and James B. Zagel respectively. Prudential was one of the named defendants in both class actions. Both lawsuits arose out of the offer and sale of various securities sponsored by VMS Reality Partners and its affiliates.

In the class action before Judge Conlon (the "VMS Funds" action), plaintiffs represented all persons, except for defendants, who had purchased an interest in any VMS fund before August 21, 1990. On September 24, 1991, the parties reached a settlement in which all defendants agreed to pay the class approximately $59 million in exchange for the plaintiffs' release of their VMS Funds claims.

The proposed Stipulation and Agreement of Settlement, later approved by the district court, provided that plaintiffs release "every asserted or potential" claim under "federal, state or common law" arising out of any acts, facts, representations, occurrences, transactions,

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or other business relating to the VMS entities or funds that occurred on or before August 21, 1990. In the settlement, plaintiffs further released

every asserted or potential claim that in any manner whatsoever relates to the purchase or sale of any securities of any of the Funds by any Class Member during the Class Period [November 14, 1984 through August 21, 1990] or to the decision to continue holding any such securities purchased during the Class Period to and including the date of signing of the Stipulation [September 24, 1991].

Following Judge Conlon's approval of the proposed settlement, class notices were sent to potential class members in early October 1991; class members had until November 9, 1991 to opt out of the proposed settlement. In the class notice, Prudential was identified as one of the defendants charged with "the making of false and misleading statements and/or omissions of material facts." The notice further provided class members with the name and address of lead class counsel, as well as a toll-free telephone number that they could call for information regarding the proposed settlement.

In the action before Judge Zagel (the "VMS Partnership" action), plaintiffs represented all persons, except for defendants, who purchased interests in the VMS Partnership before December 31, 1989. The VMS Partnership action settled in March of 1991, with the defendants agreeing to pay the class over $24 million in cash, future cash, and other non-cash consideration in exchange for plaintiffs releasing their claims. The settlement agreement provided that plaintiffs release defendants, including Prudential, from

any and all claims ... known and unknown ... arising out of or in any way relating to any acts, facts, transactions, occurrences, representations or omissions that have been or might have been asserted in the New Action ... or in any other court or forum whatsoever, which in any way arise from or relate to the Settling Limited Partnerships....

As in the VMS Funds action, the class notice in the VMS Partnership action summarized the details of the settlement, named Prudential as one of the defendants, and provided the names and addresses of the lawyers representing the class members' interests.

In 1991, the judges in both actions approved the settlements and entered final judgments against the defendants, including Prudential. See Final Judgment of Dismissal of Class and Derivative Actions, In re VMS Sec. Litig., No. 89 C 9448 (N.D.Ill. Nov. 19, 1991) (Conlon, J.); In re VMS Ltd. Partnership Sec. Litig., No. 90 C 2412, 1991 WL 134262 (N.D.Ill. July 16, 1991) (Zagel, J.).

In both final judgment orders, the district court explicitly retained jurisdiction over the implementation and enforcement of the settlements. The final judgment from the VMS Funds action furnished the district court with

continuing jurisdiction: (a) over implementation of this settlement; ... (e) over these actions until the Final Judgment contemplated hereby has become effective and each and every act agreed to be performed by the parties shall have been performed pursuant to the Stipulation of Settlement; and (f) over all parties to these actions for the purpose of taking such other actions as may be necessary to conclude and administer this settlement and to implement and enforce the Stipulation of Settlement.

Final Judgment of Dismissal of Class and Derivative Actions, In re VMS Sec. Litig., at 17-18. The VMS Partners final judgment similarly provided that the district court would "retain[ ] jurisdiction over the Actions for purposes of implementing and enforcing the Settlement Agreement and this Final Judgment and Order." In re VMS Ltd. Partnership Sec. Litig., 1991 WL 134262, at * 6.

In December 1994, the California Investors filed a class action lawsuit against Prudential in Sacramento County, California. The class members, by definition, were California residents who purchased certain "VMS Securities" from Prudential and elected not to opt out of the Northern District of Illinois class action settlements. The California Investors put forth three causes of action in

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their complaint: (1) fraud and conspiracy to defraud, (2) breach of fiduciary duty, and (3) negligent misrepresentation.

In essence, the California Investors alleged that shortly after the consolidation of the first federal class action in Illinois, Prudential developed a scheme to minimize their overall litigation liability; this scheme entailed Prudential fraudulently inducing investors to join in the class settlements. The California Investors sought compensatory damages--"based on the amount of their original investment less any amount recovered in the prior class actions"--as well as punitive damages and attorneys' fees.

Once served with the California Complaint, Prudential asked Judge Conlon and Judge Zagel to enforce their final judgment orders by enjoining the California class action and declaring the California Investors' claims to be without merit. In the VMS Funds action, Judge Conlon granted Prudential's motion in part and enjoined the California Investors from further prosecuting their claims in state court, thereby thwarting their attempted " 'end run' around the final judgment." In re VMS Sec. Litig., No. 89 C 9448, 1995 WL 317085, at * 4 (N.D.Ill. May 23, 1995) (Conlon, J.). Judge Conlon, however, denied Prudential's motion in part by declining to enter judgment on the legal merits of the California claims. Id. at * 4 n. 2. The California Investors appeal Judge Conlon's decision to enjoin the California class...

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