Denney v. Deutsche Bank Ag
| Decision Date | 31 March 2006 |
| Docket Number | Docket No. 05-1275CVL.,Docket No. 05-1279CV.,Docket No. 05-1287CV. |
| Citation | 443 F.3d 253 |
| Parties | Thomas DENNEY, on his own behalf and on behalf of all others similarly situated, R. Thomas Weeks, on his own behalf and on behalf of all others similarly situated, Norman R. Kirisits, on his own behalf and on behalf of all others similarly situated, TD Cody Investments, L.L.C., on their own behalf and on behalf of all others similarly situated, RTW High Investments, L.L.C., on their own behalf and on behalf of all others similarly situated, NRK Syracuse Investments, L.L.C., on their own behalf and on behalf of all others similarly situated, DKW Partners, on their own behalf and on behalf of all others similarly situated, DKW Lockport Investors, Inc., on their own behalf and on behalf of all others similarly situated, Donald A. Destefano, on his behalf and on behalf of all others similarly situated, Patricia J. Destefano, on her own behalf and on behalf of all others similarly situated, DD Tiffany Circle Investments, L.L.C., on their own behalf and on behalf of all others similarly situated, Tiffany Circle Partners, on their own behalf and on behalf of all others similarly situated, Diamond Roofing Company, Inc., on their own behalf and on behalf of all others similarly situated, Kathryn M. Kiiristis, on her own behalf and on behalf of all others similarly situated, Jeff Blumin, JB Hilltop Investments LLC, Kyle Blumin, KB Hoag Lane Investments LLC, Michael Blumin, MB St. Andrews Investments LLC, Fayetteville Partner, Laurel Hollow Investors, Inc., on their own behalf and on behalf of all others similarly situated, OAK Tree Investments, LLC, JM Walnut Investments, LLC, JMA Sedgemoor Investments LLC, HNC Ditch Investments LLC, Carmel Partners L.P., BAMC Inc., Carol Trigilio, Jay Michener, Jeffrey M. Adams, Henry N. Camferdam Jr., Plaintiffs-Appellees, v. DEUTSCHE BANK AG, Deutsche Bank Securities, Inc., doing business as Deutsche Bank Alex Brown, a division of Deutsche Bank Securities, Inc., Defendants-Appellants, Jenkens & Gilchrist, P.C., a Texas Professional Corporation, Defendant-Appellee, BDO Seidman, L.L.P., Pasquale & Bowers, L.L.P., Cantley & Sedacca, L.L.P., Dermody, Burke and Brown, Certified Public Accountant, Paul M. Daugerdas, Paul Shanbrom, Edward Sedacca, Erwin Mayer, Donna Guerrin, Defendants, v. J. Scott Mattei, James E. Mattei, Movants-Appellants, Loretta Clarke, Jeffrey Clarke, Douglas MacGregor, Lorraine Clasquin, Eric Harslem, Movants, Dot Com Investment, L.L.C., Jack Riggs, Sixth Street Partners, Technology Capital Corporation, Intervenors-Appellees. |
| Court | U.S. Court of Appeals — Second Circuit |
Robert J. Clary, Owens, Clary & Aiken, L.L.P., Dallas, Texas, for Movants-Appellants J. Scott Mattei and James E. Mattei.
Michael R. Young, Willkie Farr & Gallagher LLP, New York, New York, for Defendants-Appellants BDO Seidman LLP and Paul Shanbrom.
Lawrence M. Hill and Seth C. Farber (on the brief), Dewey Ballantine LLP, New York, New York, for Defendants-Appellants Deutsche Bank AG and Deutsche Bank Securities, Inc.
Samara L. Kline, Rod Phelan (on the brief), Baker Botts, L.L.P., Dallas, Texas, for Defendant-Appellee Jenkens & Gilchrist.
W. Ralph Canada, Jr. and David R. Deary, Deary Montgomery DeFeo & Canada, L.L.P., Dallas, Texas (on the brief); Joe R. Whatley, Jr. and Othni Lathram, Whatley Drake LLC, Birmingham, Alabama (on the brief); Jeffrey H. Daichman, Kane Kessler, P.C., New York, New York (on the brief); and Ernest Cory, Cory Watson Crowder & DeGaris, Birmingham, Alabama (on the brief), for Plaintiffs-Appellees.
Before: JACOBS, KATZMANN, HALL, Circuit Judges.
This case involves allegations against professional advisors for improper and fraudulent tax counseling. Scott and James E. Mattei, two of the class action plaintiffs, and Deutsche Bank AG and Deutsche Bank Securities, Inc. (collectively "Deutsche Bank"), a defendant, appeal from a judgment entered February 18, 2005 in the United States District Court for the Southern District of New York (Scheindlin, J.), and the accompanying Opinion and Order, entered February 22, 2005, certifying a class action pursuant to Fed.R.Civ.P. 23(b)(3) and approving a class-wide settlement with defendant law firm Jenkens & Gilchrist and three attorneys of the firm (Paul Daugerdas, Erwin Mayer, and Donna Guerin) (collectively the "Jenkens & Gilchrist Defendants"). See Denney v. Jenkens & Gilchrist, 230 F.R.D. 317 (2005). The settlement agreement resolves claims against the Jenkens & Gilchrist Defendants arising out of tax strategies allegedly devised by them and Deutsche Bank, and allegedly marketed by co-defendant BDO Seidman, L.L.P. ("BDO"). The Internal Revenue Service ("IRS") declared the strategies illegal, and has assessed penalties against some of the class members.
The Matteis challenge the class certification on the grounds that: [1] the class contains members who have not yet been assessed tax penalties and who (according to the Matteis) therefore lack Article III and/or statutory standing; [2] the named representatives—all of whom have been assessed tax penalties—do not adequately represent the interests of all class members, some of whom have not been penalized (at least as yet); and [3] the district court erroneously conditioned certification on the reaching of a settlement. The Matteis further contend that [4] the district court violated due process and Fed R.Civ.P. 23(e) in failing to provide a second opt-out period when the settlement terms were finalized.
Deutsche Bank challenges two provisions in the settlement agreement concerning the rights of nonsettling defendants and third parties to seek contribution and indemnity from the settling defendants.1 First, Deutsche Bank argues that the district court erred in approving a provision that extinguishes any claim of a nonsettling defendant or third party against a settling defendant that directly or indirectly arises out of the tax strategies and is for recovery of amounts the nonsettling defendant or third party paid or owes to the class. While bars on claims against settling defendants for contribution and indemnity are not uncommon, Deutsche Bank argues that any bar order provision must be expressly limited to claims for recovery of monies paid to the class or a class member based on the nonsettling defendants' liability. Second, Deutsche Bank argues that the district court erred in approving the "judgment credit" provision, which purports to compensate a non-settling defendant or third party for the loss of claims against the settling defendants but which fails to specify the method by which the judgment credit will be calculated.
We affirm in part and in part vacate and remand. The district court did not abuse its discretion in certifying the Denney class, but the contribution and indemnity provisions insufficiently protect the rights of nonsettling defendants and third parties.
The district court provided a detailed background of this action in its Opinion & Order. See Denney v. Jenkens & Gilchrist, 230 F.R.D. 317 (2005). We summarize the facts that bear on the issues presented.
The Jenkens & Gilchrist Defendants, Deutsche Bank, and others allegedly developed tax strategies based on the purchase of foreign currency options, and marketed them through accounting firms, including defendant BDO. The accounting firms (including BDO) allegedly represented that the tax strategies had been devised by them, not by Jenkens & Gilchrist, and told the plaintiffs that a law firm, Jenkens & Gilchrist, would provide an "independent" opinion letter confirming the legitimacy of the tax shelters. In return for their tax counseling services, the defendants charged a fee based on the amount of tax savings. The defendants allegedly knew that the tax strategies would be held invalid by the IRS, but they marketed them to plaintiffs nevertheless in order to collect "outrageous fees."
On July 23, 2003, the lead plaintiffs filed a class action against the law firm Jenkens & Gilchrist, the accounting firm BDO, the investment bank Deutsche Bank, and other professional advisors, alleging violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") and state law. Denney, 230 F.R.D. at 321.2
Shortly after the complaint was filed, defendants BDO and Deutsche Bank moved to compel arbitration on the basis of written arbitration agreements with the individual plaintiffs. The district court denied the motion, ruling that the arbitration provisions were void as a matter of public policy. BDO and Deutsche Bank appealed. On June 14, 2005, this Court vacated the order denying defendants' motion to compel, and remanded. Denney v. BDO Seidman, L.L.P., 412 F.3d 58 (2d Cir. 2005). The issues in that appeal do not bear on this one.
Class counsel opened settlement negotiations with the Jenkens & Gilchrist Defendants in November 2003, soon after the complaint was filed. Jenkens & Gilchrist claimed to be under severe financial pressure by reasons of the tax shelter litigation and its insurers' disclaimers of coverage. Denney, 230 F.R.D. at 323. Given the uncertainty of insurance and the precarious position of Jenkens & Gilchrist, lead counsel for the class "believed it was in the best interest of all Class Members to immediately attempt to negotiate a global settlement." Decl. of Lead Counsel ¶ 48.
Plaintiffs (including the Camferdam and Riggs plaintiffs) negotiated with the Jenkens & Gilchrist Defendants (and Jenkens & Gilchrist's insurers) in three mediation sessions before Retired Judge Robert Parker. The fruit of...
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