Eichenholtz v. Brennan

• Decision Date: 27 March 1995
• Docket Number: No. 94-5253,D,Nos. 88-,94-5253,s. 88-
• Citation: 52 F.3d 478
• Parties: Fed. Sec. L. Rep. P 98,658 Paulette EICHENHOLTZ, Individually and on behalf of all others similarly situated and Derivatively on behalf of International Breeders, Inc., and David W. Craig, (Intervenor in D.C.) v. Robert E. BRENNAN; First Jersey Securities, Inc.; International Thoroughbred Breeders, Inc.; Garden State Racetrack, Inc.; Rooney Pace, Inc.; First Philadelphia Corporation; Kerry B. Fitzpatrick; John W. Allen; Joseph C. Daniel, Jr.; Jack Price; Robert J. Quigley; Norman Rothstein; John J. Degnan; Richard J. Hughes; Ronald J. Riccio; Joseph K. Fisher; and Herbert Barness. Larry SALBERG, Individually and on behalf of all others similarly situated and David W. Craig, (Intervenor in D.C.) v. Robert E. BRENNAN; First Jersey Securities, Inc.; International Thoroughbred Breeders, Inc.; Rooney Pace, Inc.; Kerry B. Fitzpatrick; Robert J. Quigley; John J. Degnan; Richard J. Hughes; Ronald J. Riccio; and Joseph K. Fisher First Jersey Securities, Inc.; Rooney Pace, Inc.; and First Philadelphia Corporation, Appellants. C. Civ. A.cv-00515, 88-cv-00773.
• Court: U.S. Court of Appeals — Third Circuit

Page 478

52 F.3d 478

Fed. Sec. L. Rep. P 98,658

Paulette EICHENHOLTZ, Individually and on behalf of all

others similarly situated and Derivatively on behalf of International Breeders, Inc., and David W. Craig, (Intervenor in D.C.) v. Robert E. BRENNAN; First Jersey Securities, Inc.;

International Thoroughbred Breeders, Inc.; Garden State

Racetrack, Inc.; Rooney Pace, Inc.; First Philadelphia

Corporation; Kerry B. Fitzpatrick; John W. Allen; Joseph

C. Daniel, Jr.; Jack Price; Robert J. Quigley; Norman

Rothstein; John J. Degnan; Richard J. Hughes; Ronald J.

Riccio; Joseph K. Fisher; and Herbert Barness.

Larry SALBERG, Individually and on behalf of all others

similarly situated and David W. Craig, (Intervenor in D.C.) v. Robert E. BRENNAN; First Jersey Securities, Inc.;

International Thoroughbred Breeders, Inc.; Rooney Pace,

Inc.; Kerry B. Fitzpatrick; Robert J. Quigley; John J.

Degnan; Richard J. Hughes; Ronald J. Riccio; and Joseph K. Fisher

First Jersey Securities, Inc.; Rooney Pace, Inc.; and

First Philadelphia Corporation, Appellants.

No. 94-5253, D.C. Civ. A. Nos. 88-cv-00515, 88-cv-00773.

United States Court of Appeals, Third Circuit.

Argued Dec. 1, 1994.

Decided March 27, 1995.

Paul J. Linker (argued), Donna M. Hughes, Robinson, St. John & Wayne, Newark, NJ, for appellants.

Paul D. Wexler (argued), Raymond A. Bragar, Bragar & Wexler, P.C., New York City, Glenn F. Ostrager, Ostrager, Chong & Flaherty, P.C., New York City, for plaintiffs.

Frederick B. Lacey (argued), Jay G. Safer, LeBoeuf, Lamb, Greene & MacRae, Newark, NJ, for Individual Settling defendants.

Leonard Barrack, Sheldon L. Albert, Jeffrey W. Golan (argued), Barrack, Rodos & Bacine, Philadelphia, PA, for Intern. Thoroughbred Breeders, Inc.

Before: HUTCHINSON, NYGAARD and SEITZ, Circuit Judges.

OPINION OF THE COURT

SEITZ, Circuit Judge.

This is an appeal from an order of the district court made final pursuant to Rule 54(b) of the Federal Rules of Civil Procedure. In its order, the court approved a settlement with some but not all defendants in a securities action. The non-settling defendants appeal, arguing that the partial settlement was unfair and prejudicial to them. The district court had jurisdiction pursuant to 28 U.S.C. Sec. 1331, and we have jurisdiction under 28 U.S.C. Sec. 1291. We review the district court's order for an abuse of discretion. Walsh v. Great Atl. & Pac. Tea Co., Inc., 726 F.2d 956, 965 (3d Cir.1983).

I. FACTS

International Thoroughbred Breeders ("ITB") is a Delaware corporation in the business of buying, selling, and leasing interests in thoroughbred horses for breeding. In 1977, Garden State Racetrack ("Garden State") burned down. In 1983, ITB proposed a plan to purchase the Garden State grounds, construct a new facility, and operate a thoroughbred and harness racing facility. ITB raised money for this undertaking through the sale of securities. At issue here are four public offerings of securities by ITB.

Plaintiffs Paulette Eichenholtz ("Eichenholtz") and Larry Salberg ("Salberg") sued on behalf of the class of purchasers of ITB securities who were allegedly without knowledge of non-public omissions and material misstatements in ITB's offerings of July 26, 1983; April 16, 1984; July 25, 1985; and May 14, 1986. ¹ See generally JA at 485-520 (Plaintiffs' and Intervenor Plaintiffs' Responses to Defendants' First Set of Contention Interrogatories). In addition, plaintiffs sued derivatively on behalf of ITB.

Named as defendants were First Jersey Securities, Inc. ("First Jersey"), Rooney Pace, Inc., and First Philadelphia Corporation ("First Philadelphia"), all registered broker-dealers; ITB, the company that issued the allegedly objectionable securities; Kerry B. Fitzpatrick, Robert J. Quigley, John J. Degnan, Richard J. Hughes, Ronald J. Riccio, Joseph K. Fisher, Herbert Barness, John W. Allen, Joseph C. Daniel, Jack Price, and Norman Rothstein, all past or present members of ITB's Board of Directors; and Robert J. Brennan (collectively, "the individual settling defendants"), the controlling shareholder of both First Jersey and ITB and Chairman of the ITB Board of Directors. ²

The essence of the complaint is that the four public offerings were elaborate schemes to generate underwriting fees and to sell ITB securities at an inflated value. Plaintiffs alleged violations of section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. Sec. 78j(b); Rule 10b-5, 17 C.F.R. Sec. 240.10b-5; sections 11, 12(2), and 17(a) of the Securities Act of 1933, 15 U.S.C. Secs. 77k, 77l (2), 77q(a); and of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. Secs. 1961-1968.

In September 1988, the defendants moved to dismiss the complaint. The district court dismissed part of the complaint, and it left the rest of the complaint substantially intact. See JA at 164. ³ Thereafter, the district court certified the plaintiffs' proposed class pursuant to Federal Rule of Civil Procedure 23, and the class was divided into four subdivisions. See id. at 208-21. Following the court's ruling, the parties began conducting discovery.

Prior to the conclusion of discovery, the parties began discussions at the suggestion of the district court in an effort to facilitate settlement. Settlement conferences were held before a magistrate judge. Following the conferences, the judge ordered the plaintiffs to submit any motions for voluntary dismissal, pursuant to Federal Rule of Civil Procedure 41(a), which were to be accompanied by any purported settlement with or affecting the individual settling defendants. Further, he ordered that, within fourteen days of any determination on the Rule 41(a) motions, the defendants were to file any cross-claims for contribution and indemnification. In turn, ITB, First Jersey, First Philadelphia, and Rooney Pace all filed cross-claims for contribution under the federal securities laws and for common law contribution and indemnification. See id. at 340, 943, 962, and 978. Additionally, First Jersey filed a cross-claim for contractual indemnity, pursuant to a series of private indemnity contracts between it and ITB. Id. at 946-49.

As a result, the plaintiff class submitted a motion for voluntary discontinuance of the derivative claims against the individual settling defendants and a proposed partial settlement agreement ("the first agreement") between the plaintiff class, the individual settling defendants, ⁴ and National Union Fire Insurance Company ("National Union"). ⁵ National Union is the insurer of the individual settling defendants, but does not insure ITB. See id. at 227.

A. The First Settlement Agreement

The first agreement, see JA at 235-58, provided for the release of all claims against the individual settling defendants to the extent of their insured interest and the discontinuance of the derivative claims. In return, National Union would immediately pay the class $3.125 million. The class would pursue its claims against First Jersey, Brennan (in his uninsured capacity), First Philadelphia, and ITB. (the "non-settling defendants"). ⁶ Moreover, the first agreement provided that, "[t]o the extent that the class does not recover all or part of an additional $4.375 million from the non-settling defendants, National Union would pay all or part of this sum to the class with a cap of $7.5 million." See id. at 228 (Wexler Affidavit at p 7). If the class later settled with the non-settling defendants and the amount of that settlement fell below $4.125 million, National Union's consent to the settlement would be required. National Union agreed not to unreasonably withhold that consent. See id. at 243.

In addition, the proposed settlement included a provision whereby the district court, in giving its approval, would order "that all claims for contribution or indemnification however denominated, against the settling defendants, based upon liability on any of the settled claims, in favor of persons, including [the] non-settling defendants are extinguished, discharged, satisfied and/or otherwise barred and unenforceable." Id. at 249 (the "bar order").

ITB strongly objected to the first settlement agreement. First, ITB argued that any settlement by its fiduciaries, the individual settling defendants, that did not include ITB but did include a bar order necessarily required its fiduciaries to breach their obligations to ITB. Second, ITB claimed that the plaintiff class lacked standing to voluntarily withdraw the derivative action without providing any consideration to ITB. ITB reasoned that, as the derivative action belonged to the corporation and not the shareholders, the shareholders were in no position to withdraw the claim. Accordingly, with the assistance of the district court, the first agreement was revised by the parties. ("proposed final agreement").

B. Proposed Final Agreement

The proposed final agreement included the addition of ITB as a settling defendant and a statement that ITB consented to the withdrawal of the derivative claim. In addition, ITB paid the sum of $250,000 to the plaintiff class, and it has agreed to pay an additional $150,000, if, and when, that amount is received by ITB pursuant to a contract ITB entered into for the sale of a mortgage note on Philadelphia Park, its former subsidiary.

The proposed final agreement also expressly barred the plaintiffs "from seeking from the non-settling defendants any amounts greater than the proportionate liability, if any, of the non-settling defendants for any damages, if any, determined at trial...." JA at 1308 ("proportionate fault judgment reduction provision"). The bar order and the provision requiring National Union's consent to a settlement below $4.375 million, as they had been presented in the first agreement, remained intact.

C. The District Court Proceedings

The district court granted the plaintiffs' Rule 41(a) motion and preliminarily approved the proposed final agreement. Notice was then given to the...