Jorstad v. IDS Realty Trust
| Decision Date | 10 March 1981 |
| Docket Number | 80-1290,Nos. 80-1289,s. 80-1289 |
| Citation | 643 F.2d 1305 |
| Parties | Fed. Sec. L. Rep. P 97,902 Otis M. JORSTAD and Ethel M. Jorstad, Appellees, v. IDS REALTY TRUST, a real estate investment trust; Appellant. IDS Mortgage Corporation, a corporation; IDS Financial Corporation, acorporation; Investors Diversified Services, Inc., a corporation; AlleghanyCorporation, a corporation; Charles R. Orem; H. Clifton Whiteman; William L.Mullins; EugeneGelphman; Robert W. Taylor; John M. Cassidy; John A. Rieder; Donald H. Bruer;J. William Buckley; Ernest U. Buckman; Robert T. Cross; Eugene B. Hanson;Victor A. Lalli; John M. LaVold; John W. Cochran; Bernie O. Snoddy; Howard L.Imme; Walter M.Mischer; Robert R. Patterson, Jr. and Peat, Marwick, Mitchell & Co., apartnership. Otis M. JORSTAD and Ethel M. Jorstad, Appellees, v. IDS REALTY TRUST, a real estate investment trust; IDS Mortgage Corporation, acorporation; IDS Financial Corporation, a corporation; Investors DiversifiedServices, Inc., a corporation; Appellant. Alleghany Corporation, a corporation; Charles R. Orem; H. Clifton Whiteman; William L. Mullins; Eugene Gelphman; Robert W. Taylor; John M. Cassidy; John A.Rieder; Donald H. Bruer; J. William Buckley; Ernest U. Buckman; Robert T.Cross; Eugene B.Hanson; Victor A. Lalli; John M. LaVold; John W. Cochran; Bernie O. Snoddy;Howard L. Imme; Walter M. Mischer; Robert R. Patterson, Jr. and Peat, Marwick,Mitchell & Co., a partnership. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Joe A. Walters, O'Connor & Hannan, and Peter Dorsey, Dorsey, Windhorst, Hannaford, Whitney & Halladay, Minneapolis, Minn., for appellant.
Charles T. Hvass, Hvass, Weisman & King, Minneapolis, Minn., for appellees.
Before ROSS, STEPHENSON and McMILLIAN, Circuit Judges.
This is an appeal from a final judgment of the United States District Court, 489 F.Supp. 1180, for the District of Minnesota 1 awarding $2,721,650.40 in attorneys' fees and expenses in a securities fraud class action. The parties signed a Stipulation of Settlement on the merits of the lawsuit which provided that class counsel were entitled to "some reasonable amount for attorneys' fees and expenses." The agreement was approved by order of the district court dated June 26, 1978. No appeal was taken from that order. This appeal challenges only the district court's March 13, 1980 order awarding fees and expenses pursuant to the Stipulation of Settlement.
The original complaint in this action was filed on August 10, 1976, by Otis and Ethel Jorstad, the purchasers of a $5,000 series E subordinated debenture from IDS Realty Trust (Trust). Between 1972 and 1974, the Trust and its underwriter, Investors Diversified Services, Inc. (IDS), sold five separate series of the subordinated debentures (series A-E). 2 A registration statement and prospectus was filed with the Securities and Exchange Commission in connection with the public offering of each series of the debentures, pursuant to the requirements of the Securities Act of 1933. The Jorstads' complaint asserted that these statements and prospectuses contained misrepresentations or omissions of material facts:
The Registration Statement and each of the prospectuses used by defendants Trust and IDS as part of the solicitation, offer and sale of said debentures contained misrepresentations and untrue statements of material fact or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.
The Jorstads sought class certification to assert the claims of the more than 25,000 persons holding interests in Trust's debentures against defendants Trust, IDS, IDS Mortgage Corporation, IDS Financial Corporation, Alleghany Corporation, the officers and trustees of Trust, the officers and directors of IDS, and Peat, Marwick, Mitchell & Co., Trust's certified public accountants. The complaint requested rescission of the sale of the debentures and a refund of the purchase price, or recovery of the damages resulting from the alleged violations of the securities laws.
The findings set forth in Judge Lord's March 13, 1980 order provide the background By 1975, as Judge Lord pointed out, "the Trust was in serious financial difficulties." One expert testified at the hearing on the fee application that Trust was hopelessly headed for bankruptcy at the time the Jorstads' lawsuit was filed. In July of 1976, as a result of the economic distress, IDS' sales force obtained the consent of the debentureholders to suspend payments to the Limited Reserve Fund until 1983. The investors were also informed that Trust was unlikely to remain a viable business entity without a significant improvement in the real estate industry or without further concessions from its creditors. As a result of these actions, the Jorstads sought the counsel of Mr. Hugh V. Plunkett of the lawfirm of Plunkett, Schmitt & Plunkett. This lawsuit was filed one month later.
for our inquiry. IDS Realty Trust was organized in 1971 as a Real Estate Investment Trust (REIT), pursuant to the Internal Revenue Code, for the purpose of accumulating capital and loaning it to builders and developers. Almost $200 million was accumulated through the sale of the five series of debentures. The debentures were sold by IDS' sales force and were purchased with the understanding that a Limited Reserve Fund would be established and maintained so that the debentureholders could liquidate their investment prior to maturity.
Seventeen pretrial hearings or court appearances took place between the filing of the complaint and the hearing on the Stipulation of Settlement on June 26, 1978. A hearing on the motion for class certification was scheduled for February 3, 1977, but was postponed until April 4, 1977. The hearing was further delayed when the defendants initiated settlement negotiations.
Class counsel responded to the defendants' overtures by indicating their willingness to consider the same cash discount (80% of the principal amount) that Trust's bank creditors had previously accepted if an immediate cash payment for the debentures would be made. A formal demand was submitted by class counsel on July 18, 1977, which would have required the Limited Reserve Fund payments to have been reinstated retroactively and would have guaranteed 80% of the outstanding debentures. Judge Lord found that the guarantee would have required a commitment by IDS of $122 million. The defendants then called off the negotiations.
On August 16, 1977, hearings on the class certification motion commenced. IDS then proposed a plan of financial assistance to Trust which would have required a release of all claims of the debentureholders in exchange for a tender offer of $34 million for the purchase of $42.5 million of debentures at 80% of the principal amount. The plan was ultimately rejected.
On August 19, 1977, Judge Lord certified the lawsuit as a class action on behalf of the holders of all of the five series of debentures. The Austin, Minnesota lawfirm of Plunkett, Schmitt & Plunkett and Popham, Haik, Schnobrich, Kaufman & Doty, a Minneapolis lawfirm, were designated as cocounsel for the class. Class counsel had previously moved for an order limiting direct communications between the defendants and the debentureholders. Because Judge Lord "viewed the adversary posture of the defendants versus the debentureholders to be the best guarantee of fair dealing between them as to the tender offer," the limiting order was also entered on August 19.
Shortly after the certification of the class, IDS' formal offer of the $34 million financial assistance plan was rejected by class counsel as inadequate. IDS and Trust then let it be known that they intended to proceed with the plan regardless of whether or not a settlement could be reached. IDS and Trust argued that they had a right to communicate with their customers without going through the counsel for the class, and a proxy statement describing the terms of the $34 million financial assistance plan was mailed to Trust's shareholders on November 29, 1977.
Class counsel responded to this communication with the shareholders by seeking the district court's approval of the plan as only a partial settlement. Before the court ruled on the motion, however, the settlement negotiations were reopened and the Stipulation of Settlement was signed.
The major feature of the settlement was the Trust's tender offer of $52 million for the purchase of up to $65 million of debentures at 80% of the principal amount of purchase. Trust was also obligated to purchase as many of the debentures which exceeded the $52 million fund as possible. IDS funded the bulk of the tender offer with a cash payment of $34 million and an agreement to loan and to guarantee loans for the remainder of the amount. A $6 million revolving loan commitment from IDS to the Trust was also established so that IDS would be at risk to the extent of the loan commitment if the Trust should default on the outstanding debentures and the debentureholders received less than 100% of the principal of their investment. Finally, the settlement provided that no attorneys' fees would be deducted from the $52 million tender offer. 3
The Stipulation of Settlement was approved by order of the district court on June 26, 1978. The fee application was submitted by class counsel on July 28, 1978, requesting $3,161,132 in fees and $56,342.71 for expenses. On February 8, 1979, after months of discovery, an amended complaint was filed. Affidavits which were submitted subsequent to that date revised the final request to $4,161,132 in fees on the settlement and $722,900 for prosecuting the fee application (bonuses for risk and quality were included in these figures). Expenses of $56,342.71 and $63,798.69 were requested for work on the settlement and the fee application, respectively. The total request was for...
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