Franklin v. Kaypro Corp.
| Decision Date | 06 September 1989 |
| Docket Number | PRUDENTIAL-BACHE,88-5934,Nos. 88-5931,s. 88-5931 |
| Parties | , Fed. Sec. L. Rep. P 94,567 George FRANKLIN, On Behalf of Himself and All Others Similarly Situated, Plaintiffs, v. KAYPRO CORPORATION; Andrew F. Kay; David Kay; Allan M. Kay; Mary M. Kay; Prudential-Bache Securities, Inc., Defendants. In re KAYPRO CORPORATION, SHAREHOLDER LITIGATION.SECURITIES, INC., Defendant-Cross-claimant-Appellant, v. KAYPRO CORPORATION; Andrew F. Kay; David A. Kay; Allan M. Kay, Plaintiffs-Cross-claimants-Appellees. In re KAYPRO CORPORATION SECURITIES LITIGATION. George FRANKLIN, On Behalf of Himself and All Others Similarly Situated, Jon Quint; Ellen Quint; Stefan Reznik; William B. Weinberger; Richard Lowe; Paul L. Holmes; Evelyn S. Holmes, Plaintiffs-Appellees, v. KAYPRO CORPORATION; Andrew F. Kay; David A. Kay; Allan M. Kay; Mary M. Kay; Arthur B. Laffer; Bradford W. Ryland; Ludwig Weindling; Roger S. Wooley, Defendants-Appellants, v. PEAT MARWICK MAIN & COMPANY, Defendant-Appellant. |
| Court | U.S. Court of Appeals — Ninth Circuit |
J. Anthony Sinclitico, III, Gibson, Dunn & Crutcher, San Diego, Cal., and John A. Shutkin, New York City, for defendants-appellants.
Stephen Young, Robert D. Feighner, and Ben Suter, Keesal, Young & Logan, San Francisco, Cal., for defendant-cross-claimant-appellant.
William S. Lerach, Milbert, Weiss, Bershad, Specthrie & Lerach, San Diego, Cal. and Michael P. Fuchs, Wolf Popper Ross Wolf & Jones, New York City, for plaintiffs-defendants-cross-claimants-appellees.
Appeal from the United States District Court for the Southern District of California.
Before FARRIS, FERGUSON and BEEZER, Circuit Judges.
This is an appeal from a pretrial order by the district court approving settlement with some but not all defendants in a securities action. The class action consists of cases consolidated as In re Kaypro Shareholders Securities Litigation, No. 84-2091-N(I). The plaintiff class includes all persons, except defendants, who acquired common stock of Kaypro Corporation between August 25, 1983 and July 17, 1984. The defendants are Kaypro Corporation, eight of its officers and directors, Peat Marwick Main & Company, and Prudential-Bache Securities, Inc., named in its corporate capacity and as the representative of a class of underwriters. Because substantial legal rights of Prudential-Bache and Peat Marwick are affected by the district court's order, they have standing to appeal. Waller v. Financial Corp. of America, 828 F.2d 579, 583 (9th Cir.1987). We have jurisdiction pursuant to rule 54(b) of the Federal Rules of Civil Procedure, and we affirm in part and remand in part.
The plaintiffs' complaint alleges that on August 25, 1983, Kaypro commenced an initial public offering of four million shares of Kaypro common stock at the price of ten dollars per share. The complaint further alleges that between August 25, 1983 and July 17, 1984 the defendants distributed false and misleading statements and reports concerning Kaypro.
On July 17, 1984 Kaypro released its third quarter earnings report showing essentially flat earnings. In September 1984 Kaypro reported that it was unable to locate or account for inventory valued at several million dollars. Kaypro's 1984 Annual Report indicated that a twenty million dollar operating profit reported for the first nine months of the year was completely eliminated by accounting adjustments. As these and other adverse facts became known, the market price of Kaypro's common stock fell to between two and three dollars per share.
After the initial complaints were filed, the district court considered the sufficiency of the complaints, and certification of the plaintiff stock purchaser and defendant underwriter classes. The parties also undertook document and interrogatory discovery. After certifying the classes and consolidating the complaints, the district court ordered status and settlement hearings before a magistrate. After extended hearings and negotiations, the plaintiff class signed a stipulation of settlement with Kaypro and its officers and directors ("settling defendants"). Prudential-Bache and Peat Marwick ("nonsettling defendants") participated in settlement hearings but declined to join the settlement.
The plaintiffs' consolidated amended complaint seeks a damage judgment for $25 million. An analysis commissioned by the plaintiffs indicated theoretical damage of between $19 million and $22 million. Peat Marwick asserted in a settlement statement that the total damage figure did not exceed $5 million. The plaintiffs and the settling defendants agreed to settle for $9.25 million.
On October 19, 1987 the magistrate conducted a good faith hearing on the settlement. The nonsettling defendants filed briefs and participated in the hearing. After briefing and hearings extending over two months, the magistrate issued proposed findings of fact and a recommended final judgment and order of dismissal declaring that the settlement was made in good faith.
The nonsettling defendants moved for de novo review by the district court. After conducting its own hearing, the district court adopted the findings and conclusions of the magistrate. Both the magistrate and the district court conducted a good faith hearing in accordance with procedures specified in sections 877 and 877.6 of the California Code of Civil Procedure. 1 The nonsettling defendants now appeal and claim that the order approving settlement was impermissibly entered.
A proposed partial settlement of complex, class action litigation involving the potential for substantial damages raises a number of concerns. Trial courts in which litigation is pending have a natural desire to clear court dockets of complex litigation in as expeditious a manner as possible. This desire, however, is tempered by the need to assure factual fairness and the correct application of legal principles. See Menkel-Meadow, For and Against Settlement: Uses and Abuses of the Mandatory Settlement Conference, 33 UCLA L.Rev. 485, 486-90 (1985).
In general, the policy of federal courts is to promote settlement before trial. "Since it obviously eases crowded court dockets and results in savings to the litigants and the judicial system, settlement should be facilitated at as early a stage of the litigation as possible." Fed.R.Civ.P. 16(c) advisory committee note; see Fed.R.Evid. 408 advisory committee note ("public policy favor[s] the compromise and settlement of disputes"). Settlement conferences are incorporated by rule into pretrial conferences. Fed.R.Civ.P. 16(c). In class actions such as this, a settlement requires the approval of the court. Fed.R.Civ.P. 23(e); see Note, Abuse in Plaintiff Class Action Settlements: The Need for a Guardian During Pretrial Settlement Negotiations, 84 Mich.L.Rev. 308, 320-25 (1985) ().
An overwhelming majority of class action suits settle before reaching trial. One study indicated that seventy-one percent of such suits filed settled before trial. Jones, An Empirical Examination of the Resolution of Shareholder Derivative and Class Action Lawsuits, 60 B.U.L.Rev. 542, 544-47 (1980). The reasons for this are quite understandable. Litigation settlements offer parties and their counsel relief from the burdens and uncertainities inherent in trial. In class action litigation, plaintiffs' counsel may be encouraged to enter settlement with some defendants to obtain financial resources with which to assure payment of the costs of continuing litigation against the remaining defendants. The plaintiffs and the class they represent may view some recovery by way of settlement more favorably than the risk of recovering nothing. Even if liability is considered certain, the present value of money received in settlement may be greater than the value of a judgment entered at some future date. Some defendants may pay a negotiated settlement sum in order to avoid litigation costs or to hedge against the risk of an excessive adverse damage verdict. The economics of litigation are such that pretrial settlement may be more advantageous for both sides than expending the time and resources inevitably consumed in the trial process.
In spite of its attractiveness, obtaining a settlement in multi-party litigation may be quite complex. The facts specified in the pleadings may give rise to cross claims or counterclaims based on contribution or indemnity. In such cases, settling defendants cannot obtain finality unless a "bar order" is entered by the court. In essence, a bar order constitutes a final discharge of all obligations of the settling defendants and bars any further litigation of claims made by nonsettling defendants against settling defendants.
The settlement agreement at issue in this appeal is expressly conditioned on obtaining an order from the district court that the nonsettling defendants' rights to contribution are satisfied and that further contribution is barred. 2 The bar order was issued after hearings before a magistrate and the district court. The nonsettling defendants argue that the bar order impermissibly infringes their right to full contribution from the settling defendants. The appeal poses a question of first impression.
Subsection 11(f) of the Securities Act of 1933, now codified at section 77k(f) of Title 15 of the United States Code, provides for a right of contribution among those defendants who are found jointly and severally liable in certain securities actions.
(f) All or any one or more of the persons specified in subsection (a) of this section shall be jointly and severally liable, and every person who becomes liable to make any payment under this section may recover contribution as in cases of contract from any person who, if sued separately, would have been liable to make the same payment, unless the person who has become liable was, and the...
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