Bruce W. Highley, D.D.S., M.S., P.A. Defined Ben. Annuity Plan v. Kidder, Peabody & Co., Inc.

• Decision Date: 22 February 1996
• Docket Number: No. 95CA1004,95CA1004
• Citation: 920 P.2d 884
• Parties: BRUCE W. HIGLEY, D.D.S., M.S., P.A. DEFINED BENEFIT ANNUITY PLAN; E.D. Warde & Sons, on behalf of themselves & others similarly situated; and Bronze Group, Ltd., Plaintiffs-Appellees, v. KIDDER, PEABODY & CO., INC., David C. Pulzone, Morgan Stanley & Co., Inc., and Barry M. Davis, Defendants-Appellees, and Concerning Stephen B. Hard, Intervenor-Appellant. . V
• Court: Colorado Court of Appeals

Page 884

920 P.2d 884

BRUCE W. HIGLEY, D.D.S., M.S., P.A. DEFINED BENEFIT ANNUITY PLAN; E.D. Warde & Sons, on behalf of themselves & others similarly situated; and Bronze Group, Ltd., Plaintiffs-Appellees, v. KIDDER, PEABODY & CO., INC., David C. Pulzone, Morgan Stanley & Co., Inc., and Barry M. Davis Defendants-Appellees and Concerning Stephen B. Hard, Intervenor-Appellant.

No. 95CA1004.

Colorado Court of Appeals Div. V.

Feb. 22, 1996.

Rehearing Denied March 28, 1996.

Certiorari Denied Aug. 19, 1996.

John F. Head, P.C., John F. Head, Denver; Hill & Robbins, P.C., Robert F. Hill, John H. Evans, Denver; Gold Bennett & Cera, Solomon B. Cera, San Francisco, California; Koncilja & Associates, P.C., Frances A. Koncilja, Denver; Dufford & Brown, P.C., S. Kirk Ingebretsen, Phillip D. Barber, Denver; and Pendleton, Friedberg, Wilson, Hennessey & Meyer, P.C., Alan C. Friedberg, Susan M. Hargleroad, Denver, for Plaintiffs-Appellees.

No Appearance for Defendants-Appellees.

Vaughan, Reeves & DeMuro, David R. DeMuro, Denver, J.C. Tim Scates, Denver, for Intervenor-Appellant.

Opinion by Judge CASEBOLT.

In this securities fraud class action, Stephen B. Hard, an unnamed class member, appeals the trial court's C.R.C.P. 23(e) approval of the settlement and the plan for the allocation of settlement proceeds. We affirm in part and reverse in part.

This class action was commenced by the named plaintiffs on behalf of themselves and a class composed of more than 900 individuals, pension plans, and other entities, against James D. Donahue; Kidder, Peabody & Co., Inc.; Morgan, Stanley & Co.; and others. The plaintiff class suffered a principal cash loss of more than $135 million invested in the Hedged Fund (Fund), a purported stock option trading program run by Donahue that, in reality, was a Ponzi scheme.

During the ten years Donahue operated the Fund, he regularly reported substantial earnings to investors, despite the fact that his trading activity actually consistently lost money. Donahue used money invested by later investors to pay out the fictitious earnings to the few investors who requested withdrawals. As a result, some of the investors in the Fund were able to withdraw more than they invested, while hundreds of others lost all or most of their investment.

Hard was one of the early investors in the scheme. He invested a total of $1,405,000 in the Fund in 1984 and 1985, and withdrew, at various times, a net cash total of $1,440,000. According to the fictitious reported earnings of the Fund, however, Hard's account showed a balance of $1,300,000 at the time the Fund collapsed.

A class action complaint was filed against Donahue, the broker-dealers, and a number of other entities and individuals. The complaint alleged losses by the class members consisting of the gross amounts invested less any distributions received, plus moratory interest of 20 per cent per annum on the net investment, as well as interest at the statutory rate. The trial court certified the class to include all those who had purchased or acquired an interest in the Fund and had "suffered a loss thereby."

The notice of class certification sent to Hard indicated that any individual or entity who had "suffered a loss on the investment" in the Fund was a member of the plaintiff class unless exclusion was requested. No definition of the term "loss" was provided with the notice; however, Hard did not inquire concerning its meaning, nor did he seek exclusion from the class.

A recovery in excess of $49 million was obtained through several settlements with various defendants, the largest of which was reached immediately before trial. The class plaintiffs filed a motion with the trial court to approve the proposed settlement, together with a plan proposing allocation of the proceeds to members of the class who had suffered a "net principal loss."

Essentially, this plan proposed payment to defrauded investors on a "cash-in cash-out" basis. Under this proposal, each member of the class could make a claim based on a formula that considered the amount of the cash invested minus any cash distribution received. In essence, the proposal recommended that no recognition be given to the fictitious earnings reported by Donahue on various accounts.

Because Hard had already withdrawn a cash amount greater than his initial investment, he was not entitled to any share of the settlement proceeds under the proposed plan of allocation. After receiving notice of the proposed settlement and plan of allocation, Hard filed a notice of objection to the proposed allocation. At the hearing, he asserted that the proposal was unfair because it did not take into account the "time value of money," which he defined under a formula that considered the fictitious earnings that had been reported to investors as part of the Ponzi scheme.

Under this formula, Hard argued that he had suffered a "loss" on his investment. In addition, he contended that he had a tax loss, i.e., the amount of taxes paid on the fictitious profits, which he argued should be considered in evaluating whether he was an individual sustaining a "loss." He waived his initial request, however, that the tax loss be directly compensated out of the settlement proceeds.

At the conclusion of the hearing, the trial court stated:

I recognize that there's more than one fair way to do this. The objectors want me to attribute interest rates or income to their investment when in fact there was none, and it seems to the Court that the method proposed by settlement counsel for deciding who had losses is more fair than doing it any other way. If settlement counsel had presented what the objectors propose to me and gave me a choice between the cash-in-and-cash-out method and the proposed method, why, I would choose the cash-in-and-cash-out method.

As a matter of fact, there were no earnings, and so these people who got more cash out than they [put] in got their own investment back and they got somebody else's capital account in addition.

So it seems to the Court that the proposed method is the most fair, and I approve it.

The orders concerning the settlement and plan of allocation required class members to submit proofs of claim, which also contained a release of liability in favor of the defendants, as a condition of a class member's right to obtain a distribution from the settlement fund. Hard declined to submit a claim.

Hard filed a motion to intervene to ensure his standing to maintain an appeal of the order approving the allocation plan. The motion was denied by the trial court. The court entered orders which provided that the settlement and plan of allocation were fair, reasonable, and adequate. From these orders, Hard appeals.

I.

After this appeal was commenced, plaintiffs filed a motion to dismiss the appeal, contending that Hard lacks standing because, by failing to file a proof of claim, he has rendered himself ineligible to participate in any distribution of the settlement fund. Therefore, plaintiffs reason, he has no interest in the subject matter of the orders he is appealing and thus, there is no actual controversy over which we may assert jurisdiction. Plaintiffs further assert that Hard is not an aggrieved party and that the trial court correctly denied his motion to intervene.

Hard argues that the trial court erred in denying his motion to intervene and asserts that, in any event, he has standing to appeal. Because we determine that Hard's motion to intervene should have been granted, we conclude that he has standing to appeal. Hence, we need not discuss Hard's alternative arguments concerning standing.

A.

No Colorado appellate court has addressed whether class members under C.R.C.P. 23 who are not named plaintiffs may appeal an order approving a settlement or plan of allocation. Because C.R.C.P. 23 is virtually identical to Fed.R.Civ.P. 23, cases applying the federal rule are instructive, see Rosenthal v. Dean Witter Reynolds, Inc., 883 P.2d 522 (Colo.App.1994), aff'd in part, rev'd in part, 908 P.2d 1095 (Colo.1995), even though concepts of standing in the federal courts are somewhat different from those applied in Colorado. See Wimberly v. Ettenberg, 194 Colo. 163, 570 P.2d 535 (1977) (state courts are not subject to "case or controversy" requirements of federal Constitution).

It is not clear in the federal courts whether class members who are unnamed plaintiffs have standing to appeal under these circumstances. One commentator has noted:

While absent class members need not formally intervene in a class action in order to raise objections concerning settlement, intervention may be permitted in order to allow class members to participate fully in settlement proceedings, to clarify the identity of parties bound by a consent decree, or to question implementation of the decree.

If objections to a proposed class settlement are overruled by the court, an absent class member may seek to intervene for the limited purpose of filing an appeal from that order, though it is not clear whether intervention is a prerequisite to the right of a class member to prosecute an appeal.

3 H. Newberg & A. Conte, Newberg on Class Actions § 16.10 (3d. ed. 1992).

Some federal appellate courts have adopted the rule that unnamed class members who have objected to a settlement have standing to appeal final orders in class actions without formal intervention. Bell Atlantic Corp. v. Bolger, 2 F.3d 1304 (3d Cir.1993); Marshall v. Holiday Magic, Inc., 550 F.2d 1173 (9th Cir.1977). Others have held that formal intervention is a prerequisite. Gottlieb v. Wiles, 11 F.3d 1004 (10th Cir.1993); Guthrie v. Evans, 815 F.2d 626 (11th Cir.1987); Walker v. City of Mesquite, 858 F.2d 1071 (5th Cir.1988).

In Gottlieb v. Wiles, supra, the court held that unnamed members of a class do not have standing to appeal the approval of a class action settlement unless the trial court has granted them intervenor status, at least in the absence of...