Juris v. Inamed Corp.

• Decision Date: 06 July 2012
• Docket Number: No. 10–12665.,10–12665.
• Citation: 23 Fla. L. Weekly Fed. C 1251,685 F.3d 1294
• Parties: Zuzanna JURIS, Plaintiff–Appellant, v. INAMED CORPORATION, McGhan Medical Corp., et al., Defendants–Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

685 F.3d 1294

23 Fla. L. Weekly Fed. C 1251

Zuzanna JURIS, Plaintiff–Appellant,

v.INAMED CORPORATION, McGhan Medical Corp., et al., Defendants–Appellees.

No. 10–12665.

United States Court of Appeals, Eleventh Circuit.

July 6, 2012.

Joe R. Whatley, Jr., William Tucker Brown, Whatley, Drake & Kallas, LLC, Birmingham, AL, Cynthia C. Lebow, Lebow Law Offices, for Plaintiff–Appellant.

Augusta S. Dowd, J. Mark White, Katherine R. Brown, White, Arnold & Dowd, PC, Birmingham, AL, Ellen L. Darling, Richard A. Derevan, Brendan Mathieu Ford, Todd E. Lundell, Snell & Wilmer, LLP, Costa Mesa, CA, Defendant's Liaison Counsel, Dinsmore & Shohl, LLP, Cincinnati, OH, Charles C. Lifland, O'Melveny & Myers, LLP, Los Angeles, CA, for Defendants–Appellees.

Leslie Joan Bryan, Ralph I. Knowles, Jr., Doffermyre, Shields, Canfield & Knowles, LLC, Atlanta, GA, Elizabeth Joan Cabraser, Lieff, Cabraser, Heimann & Bernstein, LLP, San Francisco, CA, Fredric L. Ellis, Ellis & Rapacki, LLP, Boston, MA, Edgar C. Gentle, III, Gentle, Turner & Sexton, Hoover, AL, Ernest H. Hornsby, Farmer, Price, Hornsby & Weatherford, LLP, Dothan, AL, Dianna Pendleton–Dominguez, Saint Mary's, OH, for Sandy Altrichter, Janell Crumley Black, Darlene Davis, Lois Hazmilton, Rose Marie Hodges, Gloria Jones, Amici Curiae.

Appeal from the United States District Court for the Northern District of Alabama.

Before TJOFLAT, CARNES and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge:

In 1999, the United States District Court for the Northern District of Alabama approved a mandatory, limited fund class settlement, which resolved tens of thousands of claims arising out of injuries allegedly caused by defective silicone breast implants manufactured by Inamed Corporation (“Inamed”). Several years later, in 2006, Zuzanna Juris filed an individual action in California state court against Inamed and Allergan, Inc. (“Allergan”), Inamed's successor, alleging injuries caused by her Inamed implants. The defendants contended that Juris's lawsuit was barred because the 1999 class settlement resolved her claims; Juris posited that she could avoid the settlement's res judicata effect on due process grounds. The district court held that the class settlement precluded Juris from prosecuting the California case. This is Juris's appeal.

For the reasons explained below, we affirm.

I. BACKGROUND¹

Well after the creation of silicone breast implants, women implanted with them began claiming that leaking gel was causing them various diseases. In 1992, the Food and Drug Administration (“FDA”) first banned the use of silicone gel implants, and a flood of litigation followed. The FDA relaxed the ban later that year to permit the use of such implants for specified medical procedures. The number of lawsuits only increased further. As a result, the Judicial Panel on Multidistrict Litigation consolidated more than 21,000 cases against various breast implant manufacturers for pretrial proceedings and transferred them to District Judge Sam Pointer in the Northern District of Alabama.²See In re Silicone Gel Breast Implants Prods. Liab. Litig., 793 F.Supp. 1098 (J.P.M.L.1992); In re Silicone Breast Implants Prods. Liab. Litig., MDL 926, 2:92–cv–10000 (N.D.Ala.). The transfer included all pending federal lawsuits against Inamed regarding allegedly defective implants.

A. Inamed's Pre–Settlement Financial Condition

In 1991, women with Inamed breast implants began filing individual suits against Inamed and its subsidiaries. The litigation ballooned. At one point, more than 15,000 lawsuits were pending against Inamed across the country. Breast implant litigation forced the company to divert substantial capital to funding defense efforts. In 1994, in an attempt to stem the tide, Inamed and the plaintiffs' settlement committee negotiated a global settlement agreement, which would have required Inamed to pay $1 million per year for twenty-five years. Anticipating approval of that proposal, Inamed booked the $25 million annuity as a contingent liability in the amount of $9.2 million (the present value of twenty-five annual payments of $1 million). Inamed sought to certify a limited fund settlement class pursuant to Federal Rule of Civil Procedure 23(b)(1)(B) in an effort to secure a mandatory, global resolution of all present and future claims. The plaintiffs' settlement committee retained Ernst & Young to review Inamed's finances and determine whether limited fund treatment was appropriate. Ernst & Young issued a report confirming Inamed's claims that its liabilities, both operational and litigation-related, dwarfed its assets. Counsel for the plaintiffs did not dispute this. However, they questioned whether the $9.2 million present value contribution was prudent considering Inamed's potential future earnings. Disagreement yielded further negotiations, and the possibility of a global settlement languished.

Responding to its growing financial troubles, in 1996, Inamed approached a high risk investment group and raised $35 million through the private placement of senior secured convertible notes. The notes were senior to all claims, including operational liabilities and tort claims, and were secured by interests in substantially all of Inamed's assets. Pursuant to the terms of the offering, Inamed deposited $15 million in escrow for the sole purpose of financing a non-opt-out class settlement if approved before January 23, 1997. That temporal condition was not met. Inamed returned the $15 million to the noteholders in exchange for warrants to purchase Inamed common stock in the event a mandatory class settlement was later approved. Inamed quickly exhausted the balance, $20 million, which provided necessary cash to stay in business and cover expenditures related to inventory, payments to vendors, and other operational items.

In January of 1997, Inamed secured an additional $6.2 million through another private debt placement. All proceeds were immediately applied towards day-to-day operational expenses and payments against past-due income tax liabilities. Around this time, Inamed defaulted on its repayment obligations under the senior secured notes and its stock price dropped. The company continued to explore options for raising working capital. However, between the senior secured noteholders exercising their veto authority over Inamed's ability to raise capital through equity offerings and, more generally, the unavailability of commercially reasonable lending opportunities given the company's dire financial predicament, Inamed's only option was to borrow approximately $10 million from an entity associated with its former chairman.

Throughout the 1990s, each audit letter prepared by Inamed's independent auditing firm, Coopers & Lybrand, included a qualified opinion expressing “substantial doubt about the Company's ability to continue as a going concern.” For fiscal years 1995, 1996, and 1997, Inamed reported pre-tax operating losses of $8.6 million, $6.0 million, and $6.6 million, respectively.By the end of 1997, the company's consolidated book value—subtracting liabilities from assets—was negative $10.9 million. Setting aside the $9.2 million contingent liability booked in 1994 in anticipation of the proposed global settlement, Inamed's book value was still negative $1.7 million. And, significantly, other than the $9.2 million contingent liability, Inamed's balance sheet did not account for any other litigation expenses, including possible settlements, attorneys' fees, and potential judgments. Those litigation expenses, however, were staggering. For example, it cost Inamed's attorneys approximately $150,000 to take a single case to the brink of trial, and an additional $150,000 to defend through trial. In 1997 alone, Inamed settled sixteen breast implant cases. The settlement values ranged from $2,500 to $50,000, averaging out to $18,500 per case.³ During this time, neither Inamed nor its subsidiaries had products liability insurance coverage.

In light of Inamed's rapidly deteriorating financial condition, in the latter part of 1997, the company and plaintiffs' counsel revisited settlement negotiations. By this time, investors were unwilling to finance any settlement that would not extinguish substantially all of the breast implant litigation. They considered elimination of the enormous costs and risks associated with the implant litigation an essential precondition to the economic turnaround that would be necessary to repay any investment. Coupling this pressure with the senior secured noteholders' authority over Inamed's financial decisions, Inamed's ability to afford any settlement was dependent on the senior creditors' willingness to finance it.

The parties considered the possibility of Inamed pursuing bankruptcy. Chapter 7 liquidation, as opposed to Chapter 11 reorganization, was the only viable solution to Inamed's financial stresses. If Inamed had elected to pursue Chapter 7 bankruptcy at the end of 1997, the company's saleable assets, discounted by the impairment likely to result from a forced liquidation, would have totaled between $11.4 million and $20.4 million. From this sum, the senior secured noteholders would have been entitled to $19 million, leaving unsecured creditors—trade creditors, subordinated noteholders and tort claimants—with somewhere between $0 and $1.4 million. At best, the tort claimants would have been left to compete for $1.4 million against trade creditors, with rights to payment valued at $12.5 million, and subordinated noteholders, with rights to payment valued at $10 million.

Plaintiffs' counsel, including Ernest Hornsby, an attorney designated to represent the interests of Inamed breast implant recipients with potential, future injury claims, negotiated with Inamed and its senior secured noteholders.⁴ The senior secured noteholders—the only lenders open to advancing Inamed funds for settlement—conditioned financing on the settlement being mandatory and not...