Greenspun v. Bogan

• Decision Date: 22 February 1974
• Docket Number: 73-1304.,No. 73-1303,73-1303
• Parties: Noah GREENSPUN, Plaintiff-Appellee, v. Eugene F. BOGAN et al., Defendants-Appellees (two cases). Appeal of Joseph STEIR. Appeal of MORGAN GUARANTY TRUST COMPANY OF NEW YORK.
• Court: U.S. Court of Appeals — First Circuit

492 F.2d 375 (1974)

Noah GREENSPUN, Plaintiff-Appellee, v. Eugene F. BOGAN et al., Defendants-Appellees (two cases).

Appeal of Joseph STEIR.

Appeal of MORGAN GUARANTY TRUST COMPANY OF NEW YORK.

Nos. 73-1303, 73-1304.

United States Court of Appeals, First Circuit.

Argued January 8, 1974.

Decided February 22, 1974.

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Christopher Crowley, New York City, with whom John R. Hally, Daniel C. Sacco, Nutter, McClennen & Fish, Boston, Mass., Davis Polk & Wardwell, New York City, and Hannoch, Weisman, Stern & Besser, Newark, N. J., were on brief, for appellants.

George C. Caner, Jr., Boston, Mass., with whom John Silas Hopkins, III, Robert Charles Clark, Elizabeth Paine and Ropes & Gray, Boston, Mass., were on brief, for Durand A. Holladay and others, appellees.

Gordon T. Walker, Boston, Mass., with whom James D. St. Clair and Hale & Dorr, Boston, Mass., were on brief for Eugene F. Bogan and others, appellees.

Irving Bizar, New York City, with whom Demov, Morris, Levin & Shein, New York City, Harvey A. Silverglate, and Silverglate, Shapiro & Gertner, Boston Mass., were on brief, for Noah Greenspun, appellee.

Before COFFIN, Chief Judge, McENTEE and CAMPBELL, Circuit Judges.

COFFIN, Chief Judge.

This consolidated appeal arises from a judgment of August 3, 1973, approving the settlement of a shareholder's derivative suit, commenced April 5, 1972 on behalf of Continental Mortgage Investors (CMI), a real estate investment trust, against its management advisor, Continental Advisors (CA), and against its trustees, some of whom were affiliated with CA. The suit alleged that a corporate opportunity had been diverted from CMI, and also that fees paid to CA by CMI, under its advisory contract, were excessive and unwarranted by the services rendered. Appellant Morgan Guaranty Trust Company (Morgan), holding CMI stock as trustee in various trusts, and appellant Joseph Steir (Steir), a stockholder, neither a party to the original suit, contend that the district court abused its discretion in approving the settlement and in denying Morgan's Rule 60(b) motion to reopen the settlement judgment. They seek to have the entire issue remanded to the district court for the issuance of a new notice of settlement and a new hearing on the fairness of the proposed settlement. We conclude that a remand is unnecessary and improper under the circumstances of this case, and affirm the district court.

Appellants claim that the district court abused its discretion principally because (1) it failed to conduct the independent evaluation of the settlement required under Rule 23.1, F.R.Civ.P.; (2) the settlement itself is grossly unfair; (3) notice to CMI shareholders was inadequate because it failed to disclose material facts relating to the settlement; and (4) since appellant Morgan mislaid notices of settlement through clerical error, the court abused its discretion in refusing to reopen the proceedings.

I

Negotiations concerning a possible settlement spanned several months before it was finally announced that settlement had been reached. On March 19, 1973, the plaintiff in the derivative action filed an amended complaint, expanding its allegations concerning the excessiveness of the advisory fee schedule. On that same day it was announced that a settlement had been reached "in principle". Thereafter, depositions were taken of certain trustees, and documents collected, concerning the alleged excessiveness of the fee schedule. Details of the settlement were finally resolved by June 22, 1973, on which date a stipulation, setting out the terms of the proposed settlement, was executed and filed in court, along with a motion for an order providing CMI shareholders with notice of the proposed settlement and a hearing on the proposal. The notice was approved and mailed to shareholders on July 2, 1973. In it the settlement terms were set forth, a hearing date of August 2 was established, and objectors to the settlement proposal were put on notice that they must file and serve written objections on or before July 26.

By July 30, when no objections to the settlement had been filed by any shareholder, the plaintiff filed a memorandum in support of the settlement, followed on July 31 by a similar memorandum from defendants. During the August 2 hearing, after presentations from counsel, the court asked if anyone else present wished to speak to the settlement. Appellant Steir then identified himself, and argued that the settlement should not be approved because some trustees of CMI were also trustees of CA — this creating an alleged conflict of interest — and because "35 per cent of the profits of CMI go to CA; 65 per cent go to the stockholders who have got $115 million invested in the company." Counsel responded to Steir's argument. At the close of the hearings, additional documents and exhibits were filed with the court. The following day, August 3, the court found the stipulation of settlement to be "fair, reasonable, and proper".

It is well established that a court should not merely rubber stamp whatever settlement is proposed by the parties to a shareholder derivative action. A court must, instead, exercise judgment sufficiently independent and objective to safeguard the interests of shareholders not directly involved in the action. See Newman v. Stein, 464 F.2d 689 (2d Cir. 1972), cert. denied, 409 U. S. 1039, 93 S.Ct. 521, 34 L.Ed.2d 488 (1972); cf. West Virginia v. Charles Pfizer Co., 440 F.2d 1079 (2d Cir. 1971), cert. denied, 404 U.S. 871, 92 S. Ct. 81, 30 L.Ed.2d 115 (1971); Protective Committee for Independent Stockholders of TMT Trailer Ferry v. Anderson, 390 U.S. 414, 424-425, 88 S.Ct. 1157, 20 L.Ed.2d 1 (1968). "It is essential . . . that a reviewing court have some basis for distinguishing between well-reasoned conclusions arrived at after a comprehensive consideration of all relevant factors, and mere boiler-plate approval phrased in appropriate language but unsupported by evaluation of the facts or analysis of the law." Protective Committee for Independent Stockholders of TMT Trailer Ferry v. Anderson, supra, 390 U.S. at 424, 88 S. Ct. at 1163. At the very least, the district court must possess sufficient evidentiary facts to show the fairness of the proposed settlement; the burden is placed squarely on the proponents of the settlement to show that it is in the best interests of all those who will be affected by it. Norman v. McKee, 431 F.2d 769 (9th Cir. 1970), cert. denied, 401 U. S. 912, 91 S.Ct. 879, 27 L.Ed.2d 811 (1970). F.R.Civ.P. 23.1.

Appellants contend that the district court could not have exercised independent judgment because it lacked sufficient evidence to show the fairness of the proposed settlement. They point to the fact that the court had access to only two depositions concerning the proposed fee schedule, both of which were conducted after the March 19 announcement that an agreement had been reached "in principle" between the parties of the derivative action. Moreover, two volumes of exhibits and documents were given to the court on the eve before it approved the settlement, giving rise to the speculation that the court did not have a full opportunity to review their contents. And appellants point, most particularly, to the fact that the court did not have any documents in its possession which could show that the proposed fee schedule was comparable to the fee schedules of other, similar real estate investment trusts and their advisors.

While the district court's evaluation of the proposed settlement may not have been as comprehensive or intensive as it could have been, appellants have failed to show that the district court clearly abused its discretion in approving the settlement because it lacked sufficient evidence on which an independent appraisal might be based. See West Virginia v. Charles Pfizer Co., supra, 440 F.2d at 1085. We think that the district court had ample opportunity to gain familiarity with the subtleties of the proposed settlement. By the time of the August 2 hearing, the court had read the memoranda from the parties to the action, and had had access to numerous documents and exhibits, which had been gathered in various discovery proceedings over the preceding months. The two additional volumes of exhibits given the court shortly before final approval of the settlement were indeed bulky, but the information that was both new and germane to the fairness of the settlement terms constituted a minor proportion. They were well within the digestive capacity of a judge familiar with the proceedings.

As to the comparability of the fee schedule with other fee schedules in the industry, the affiliated trustees alleged in their memorandum that the new fee schedule was indeed comparable, and referred the court to an exhibit listing fourteen other real estate investment trusts and their fee arrangements. Appellants now contend that the exhibit is grossly misleading in that it fails to show that the fee schedule is one of the highest in the industry since only two trusts on the list are similar to CMI in that they have no Blue Sky limitation on their fees and, as to these two trusts, unlike CMI, undisbursed commitments are not included in their fee base. Appellees argue, however, that several of the trusts on the list do have a fee schedule comparable with CMI's, in which the advisor is paid a fee of 1.2 per cent against the base and, while CMI does not have the Blue Sky limitation, it does not receive other kinds of compensation realized by many other advisors, such as incentive compensation or a portion of forfeited commitment fees or capital gains. Moreover, appellees contend that, for a highly leveraged real estate investment trust (i. e., a trust conducting its business with greater reliance on borrowed money than others, which utilize equity capital to a greater degree), a more meaningful measure would compare fees with gross revenues, instead of with net income, and on...