Flight Transp. Corp. Securities Litigation, In re
| Citation | 730 F.2d 1128 |
| Decision Date | 26 March 1984 |
| Docket Number | Nos. 83-2021,83-2115 and 83-2121,83-2114,s. 83-2021 |
| Parties | , Bankr. L. Rep. P 69,796 In re FLIGHT TRANSPORTATION CORPORATION SECURITIES LITIGATION. Drexel Burnham LAMBERT Incorporated and Moseley, Hallgarten, Estabrook & Weeden, Inc., on behalf of themselves and all others similarly situated, Appellants, v. FLIGHT TRANSPORTATION CORPORATION, FTC Executive Air Charter, Inc., FTC Cayman, Ltd., and William Rubin, Appellees, Putnam High Yield Trust, United High Income Fund, Inc., Opperheimer High Yield Fund; Continental Illinois Nat'l Bank & Trust Co. of Chicago, Greyhound Leasing, & Norwest Bank Minneapolis, N.A., Norwest Bank Calhoun-Isles, N.A., and named plaintiffs in the action of Frank P. Antinore, et al., Intervenors. In re FLIGHT TRANSPORTATION CORPORATION SECURITIES LITIGATION. Appeal of FOX & COMPANY. In re FLIGHT TRANSPORTATION CORPORATION SECURITIES LITIGATION. Appeal of Jack ADAMS, Jr., Ezell Jones, Russell T. Lund, Jr., Wardwell M. Montgomery, Delbert Oldenburg, Marjorie Terhaar, Larry Walston, Walston Wings, Inc., Lunds, Inc., and Edward Brunner. In re FLIGHT TRANSPORTATION CORPORATION SECURITIES LITIGATION. Appeal of REAVIS & McGRATH. |
| Court | United States Courts of Appeals. United States Court of Appeals (8th Circuit) |
Dorsey & Whitney, James H. O'Hagan, Minneapolis, Minn., for appellants Drexel Burnham Lambert Incorporated and Moseley, Hallgarten, Estabrook & Weeden Inc.
Cahill, Gordon & Reindel, (a partnership including professional corporations) New York City, of counsel, for appellant Drexel Burnham Lambert Inc.
Shearman & Sterling, New York City, of counsel, for appellant Moseley, Hallgarten, Estabrook & Weeden Inc.
Gray, Plant, Mooty, Mooty & Bennett, Edward J. Callahan, Jr., Thomas Darling, Dylan J. McFarland, Minneapolis, Minn., for Greyhound Leasing & Financial Corp.
Robins, Zelle, Larson & Kaplan, Howard Patrick, James R. Safley, Minneapolis, Minn., for Continental Illinois Nat. Bank & Trust Co. of Chicago.
Faegre & Benson, Duane W. Krohnke, Thomas H. Bennin, Minneapolis, Minn., for Norwest Bank Minneapolis, N.A. and Norwest Bank Calhoun-Isles, N.A.
Resnick & Bartsh, P.A., Thomas C. Bartsh, Minneapolis, Minn., for Receiver of Flight Transp. Corp. and its subsidiaries.
Best & Flanagan, James C. Diracles, Frank Vogl, Minneapolis, Minn., for Putnam High Yield Trust, United High Income Fund, Inc. and Oppenheimer High Yield Fund, individually and as certified class representatives of Subclass IV (Unit Purchasers).
Before LAY, Chief Judge, HENLEY, Senior Circuit Judge, and ARNOLD, Circuit Judge.
This appeal presents the question whether the District Court abused its discretion in approving a "settlement" among claimants in a massive securities-fraud case that has been further complicated by a bankruptcy. We affirm in the main, vacate with respect to one aspect of the settlement, and remand for further proceedings.
Flight Transportation Corporation (FTC), a Minnesota corporation, and its subsidiary corporations provided air-charter and other general-aviation services. William Rubin was FTC's President, Chairman of the Board, and chief executive officer.
In June 1982 FTC made two public offerings of securities. On June 3, 1982, FTC sold 715,000 shares of common stock and, on June 4, 1982, 25,000 "units" of securities, each unit consisting of a debenture and a number of stock warrants. Drexel Burnham Lambert Incorporated and Moseley, Hallgarten, Estabrook & Weeden (Drexel-Moseley) were the lead underwriters, and, on June 10 and June 14, 1982, they delivered certified checks totalling over $24 million to FTC in full payment for the two offerings. 1 FTC deposited these checks in its account at a New Jersey bank.
A few days later, on June 18, 1982, the SEC halted trading in FTC securities and commenced an action against FTC, its subsidiaries, and Rubin in the United States District Court for the District of Minnesota, alleging that the defendants had violated several provisions, especially the antifraud provisions, of the federal securities laws. 2 The SEC sought an injunction against further violations, appointment of a receiver, an accounting, and an order of disgorgement so that, apparently, restitution might be made to defrauded investors. See SEC v. Flight Transportation Corp., 699 F.2d 943, 945 & n. 2 (8th Cir.1983). The District Court entered a temporary restraining order and appointed a receiver, who caused some $22.7 million, the remaining proceeds of the June 3 and 4, 1982, offerings, to be transferred from FTC's account in the New Jersey bank to a segregated, interest-bearing account in a Minneapolis bank (the Escrow Fund). 3
Then, on June 23, 1982, Drexel-Moseley filed a class action in the same district court on behalf of themselves and all other persons who had purchased FTC securities pursuant to the June 3 and June 4 offerings. 4 In August 1982 Drexel-Moseley moved for a constructive trust on the Escrow Fund on behalf of members of the public to whom they had sold the June 1982 securities and sought a preliminary injunction against the distribution, commingling, withdrawal, or other disposition of the Escrow Fund. The District Court has never explicitly ruled on this motion.
During the following months, the litigation became increasingly complex. A number of separate individual and class actions were filed against FTC, its subsidiaries, its officers and directors, its accountants, and its underwriters. Certain defendants cross-claimed for indemnity, and some of FTC's directors brought suits for damages directly against FTC. On October 8, 1982, about 22 cases were consolidated when a class-action complaint was filed on behalf of all persons who purchased FTC securities between November 30, 1979, and June 18, 1982. Antinore v. Flight Transportation Corp., Master Docket No. 4-082-874 (D.Minn.1982), Jt. App. 693. Moreover, on June 29, 1982, several major creditors filed an involuntary Chapter 11 bankruptcy petition against FTC in the Bankruptcy Court for the District of Minnesota. When the District Court stayed the bankruptcy as well as all other proceedings against the defendants, several appeals to this Court ensued. We directed that the bankruptcy action be allowed to proceed, SEC v. Flight Transportation Corp., 693 F.2d 66 (8th Cir.1982) (per curiam); SEC v. Flight Transportation Corp., Nos. 82-1964, -1990 (8th Cir. Mar. 8, 1983) (order dismissing appeals), and that one of FTC's creditors and William Rubin's wife be allowed to intervene in the SEC action in the District Court, SEC v. Flight Transportation Corp., 699 F.2d 943 (8th Cir.1983). We left open the other major issue on appeal, that of whether the District Court or the Bankruptcy Court should decide the constructive-trust and disgorgement claims, noting that the issue could be addressed in the lower courts and thereafter reviewed on appeal if necessary. SEC v. Flight Transportation Corp., Nos. 82-1964, -1990 (8th Cir. Mar. 8, 1983) (order dismissing appeals).
Meanwhile, representatives of persons who had purchased FTC securities and certain business creditors of FTC began negotiating in order to resolve their competing claims to the Escrow Fund. On April 15, 1983, they entered into the "Sharing Agreement" which is the subject of this appeal.
On May 18, 1983, the Bankruptcy Court directed that FTC be declared a bankrupt. Subsequently, Judge Charles R. Weiner, 5 who had previously been designated by the Judicial Panel on Multidistrict Litigation to sit as the District Judge in this litigation, was also designated to sit as the Bankruptcy Judge. On May 27, 1983, Drexel-Moseley moved the District Court for summary judgment on its constructive-trust claim and for certification of a constructive-trust-beneficiary class.
On June 27, 1983, Judge Weiner held a hearing to consider the Sharing Agreement. Various parties argued the merits of the Sharing Agreement and the constructive-trust claim, among other matters. About three weeks later, Judge Weiner entered the three orders from which these appeals are taken. The first order, Pretrial Order No. 153, certifies as a class all persons who purchased FTC securities between 1979 and 1982, and suffered a loss from such purchase, with the exception of officers and directors of FTC and related companies, other defendants named in the FTC or related actions, and any other person found guilty of wrongdoing in the FTC action or related actions. The class is divided into five subclasses: (1) purchasers of FTC common stock pursuant to a registration statement dated November 30, 1979; (2) purchasers of units of securities of FTC including common stock and warrants, issued pursuant to a registration statement dated March 2, 1981; (3) purchasers of FTC common stock pursuant to a registration statement dated June 3 1982; (4) purchasers of FTC units consisting of debentures and stock warrants, pursuant to a registration statement dated June 4, 1982; and (5) all class members not included in any of the four preceding subclasses.
The second order entered by the District Court, Pretrial Order No. 154, approved the Sharing Agreement. The court found that the Sharing Agreement was fair, adequate, and reasonable, and directed the parties to place it into effect. The third order was entered by Judge Weiner in his capacity as bankruptcy judge, and it authorizes Thomas C. Bartsh, previously appointed as receiver of FTC by the District Court, and later also appointed by the Bankruptcy Court as debtor-in-possession of FTC's bankrupt estate, to become a party to the Sharing Agreement, to bind the estate to the Agreement, and to transfer or assign claims of the estate as necessary to comply with the Sharing Agreement.
Drexel-Moseley (the underwriters) appeal all three orders. The remaining appellants--Fox & Company (FTC's auditor), Reavis & McGrath (the underwriters' lawyers), and a group of "outside" directors of...
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