Jorstad v. IDS Realty Trust

• Decision Date: 12 March 1980
• Docket Number: Civ. No. 4-76-358.
• Citation: 489 F. Supp. 1180
• Parties: Otis M. JORSTAD and Ethel M. Jorstad, Plaintiffs, v. IDS REALTY TRUST, a real estate investment trust, et al., Defendants.
• Court: U.S. District Court — District of Minnesota

489 F. Supp. 1180

Otis M. JORSTAD and Ethel M. Jorstad, Plaintiffs, v. IDS REALTY TRUST, a real estate investment trust, et al., Defendants.

Civ. No. 4-76-358.

United States District Court, D. Minnesota, Fourth Division.

March 12, 1980.

COPYRIGHT MATERIAL OMITTED

Plunkett, Schmitt & Plunkett, Austin, Minn., Popham, Haik, Schnobrich, Kaufman & Doty, Minneapolis, Minn., for plaintiffs.

Dorsey, Windhorst, Hannaford, Whitney & Halladay; O'Connor & Hannan, Minneapolis, Minn., for defendants.

MEMORANDUM AWARDING ATTORNEYS' FEES AND EXPENSES

MILES W. LORD, District Judge.

Before the Court in this securities class action is a joint application for attorneys' fees and expenses following approval of a settlement in behalf of debentureholders of IDS Realty Trust ("Trust"). Due to the nature of the settlement, which will be discussed later, the Court has had the benefit of a full adversary hearing on this fee application. The parties to this fee application have provided the Court with exhaustive legal memoranda. The Court conducted an evidentiary hearing over three days in which it received hundreds of pages of documentary evidence and took testimony by way of deposition, affidavits, and direct examination of expert witnesses and three of the attorneys representing the two law firms that have joined in this fee application. Each of the witnesses was rigorously cross-examined. In addition, the Court has had the opportunity to observe, first hand, the many facets of this litigation over the past three years and is in a unique position to evaluate this fee application.

BACKGROUND

This litigation was commenced on August 10, 1976. The plaintiffs alleged that registration statements and prospectuses filed with the Securities and Exchange Commission, and used in connection with the public offering of Trust's five series of debentures, contained material misrepresentations and omissions of fact and sought rescission of the sale of the debentures or damages. The complaint specified sixteen areas of misrepresentations or omissions related to the adequacy of Trust's loss reserves and policy for establishing loss reserves, Trust's delinquent loan experience, the value of Trust's assets, the losses sustained by Trust's Adviser, the adverse conditions in the real estate industry, and the suitability of the investment. The plaintiffs asserted liability based on sections 11, 12 and 17(a) of the Securities Act of 1933, section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5, and the common law.

The defendants included Trust; IDS Mortgage Corporation ("IDSMC"), which was the adviser to the Trust; Investors Diversified Services, Inc. ("IDS"), which controlled the Adviser; Alleghany Corporation, principal shareholder of IDS; officers, directors and trustees of IDS and Trust; and Peat, Marwick, Mitchell & Co., Trust's certified public accountants.

On August 19, 1977, this Court certified the lawsuit as a class action on behalf of all persons who held subordinated debentures of Trust acquired through IDS as agent and underwriter for Trust, during the period from October 20, 1972, through and including October 2, 1974, ("class"). The firms of Plunkett, Schmitt & Plunkett and Popham, Haik, Schnobrich, Kaufman & Doty, were designated as co-counsel for the class. These two law firms are the applicants in this fee application.

Following extensive discovery, numerous hearings, an expedited appeal and intense settlement negotiations, on May 11, 1978, the parties to this class action presented the Court with a stipulation of settlement. Pursuant to the Court's Order of May 16, 1978, notice was sent to all of Trust's debentureholders summarizing the terms of the settlement and advising them that they could appear and express their opinion concerning the settlement at a hearing on June 23, 1978. Following that hearing, the Court entered an Order on June 26, 1978, approving the settlement as fair, reasonable and adequate. The Court's Order approving the settlement reserved jurisdiction over the awarding of attorneys' fees and expenses to counsel for the class and also provided that a hearing regarding such fees and expenses would be held following an opportunity for full and free discovery by all parties.

THE SETTLEMENT

At the time this lawsuit was commenced, Trust had approximately $170 million in subordinated debentures outstanding; it had suspended payments to a presentment fund, which had been established for the early retirement of debentures. It was contemplating bankruptcy proceedings, and the debentures were selling between 20% and 30% of principal in a thin market.

In summary, under the settlement, Trust made a tender offer to purchase up to $65 million in principal amount of the debentures at 80% of principal, plus accrued interest. Pursuant to the tender offer, the cash payment to the debentureholders was $52 million. In order to fund the tender offer, IDS made a cash payment of $34 million and agreed to loan and guarantee loans to the Trust for the balance.

Approximately $85 million principal amount of debentures were tendered, which represented half of the debentures outstanding. The settlement provided a method for prorating in the event that more than $65 million debentures were tendered and that those not purchased in the initial tender offer could continue to be offered for sale to the Trust until September 30, 1982, under the same terms as the tender offer. The Trust was obligated to use its best efforts to apply its excess resources to purchase those debentures at 80% plus accrued interest and to report to the debentureholders on the purchase of debentures and the source and use of its cash. At the time of the hearing on the joint fee application, Trust had purchased most of the tendered but unpurchased debentures pursuant to its continuing offer to purchase.

In addition, the settlement provided for a $6 million revolving loan commitment from IDS to the Trust by which IDS agreed that if the Trust should default on the outstanding debentures and the debentureholders received less than 100% of the principal, IDS would be at risk with them to the extent of the loan commitment. Finally, no attorneys' fees would be deducted from the $52 million available for the tender offer. Instead, the settlement provided that IDS and Trust would pay the fees and expenses awarded by a final judgment.

CAUSATION

IDS and Trust have stipulated that counsel for the class are entitled to reasonable attorneys' fees and expenses and that they have produced a benefit for the class. Nevertheless, Trust and IDS assert that the efforts of counsel for the class and desire to settle the litigation had little impact on the decision by IDS to provide financial support for the Trust or to make the tender offer to the debentureholders. IDS argues that it was motivated to provide financial assistance to Trust and arrange for the tender offer for business reasons because many of the debentureholders are good customers of IDS and, in order to protect their public image, they had to take steps to see that Trust met its obligations to the debentureholders.

The Court has reviewed hundreds of documents touching on the motives of IDS and Trust in resolving this litigation and the causal relationship between the efforts of counsel for the class and the settlement in behalf of Trust's debentureholders. The documents include correspondence and memoranda from outside and home counsel for Trust, IDS and Alleghany, minutes of meetings of the directors of Alleghany and IDS, the executive committee of IDS, the trustees, and confidential memorandums and communications among the officers and directors of those companies. Despite Trust's dire financial condition, the evidence shows that IDS recognized no obligation to protect the debentureholders prior to this litigation. IDS assistance to Trust was the minimum necessary in order to avoid bankruptcy. Even the bankruptcy of Trust was acceptable to IDS, despite the impact that would have on the debentureholders.

By 1975 Trust was in precarious financial circumstances. Trust preferred to raise more capital through the offering of another debenture series, but was forced to forego any new debenture offers and turned to its creditor banks. The banks insisted that IDS, Trust's sponsor, must make a commitment to the future of Trust before they would provide new financing. IDS minimized its financial commitment to Trust by agreeing to secure the consent of Trust's debentureholders to suspend payments by Trust to a presentment fund for the early retirement of debentures, a concession by the debentureholders that would generate approximately $13 million per year.

By July of 1976, IDS, through its sales force, had secured the necessary consent of the debentureholders to suspend presentment fund payments by Trust. In order to secure the debentureholders' consent to suspension of presentment fund payments, IDS had considered, but rejected, a guarantee of future interest payments or an extra interest payment of one-half of one percent for the debentureholders. Instead the prospect of bankruptcy of Trust was the only inducement used to secure the debentureholders' consent. The attitude of IDS toward the debentureholders is reflected in handwritten notes from a meeting on May 5, 1976, involving personnel responsible for overseeing the consent of the debentureholders to the suspension of the presentment fund payment. The notes contain the statement: "Bring people to the brink of disaster to get them to respond"; and "Reps. should not say or leave impression that IDS has guaranteed REIT obligations". In addition, IDS continued to maintain the position that Trust was a separate entity and that it had no responsibility to the debentureholders.

This litigation was commenced one month after the debentureholders had consented to the suspension of the presentment fund payments. A significant change in the attitude of IDS...