Malchman v. Davis

• Decision Date: 08 June 1984
• Docket Number: No. 77 Civ. 5151.,77 Civ. 5151.
• Citation: 588 F. Supp. 1047
• Parties: MALCHMAN (Nathan), Frieda Lederer and Gerta C. Conway v. DAVIS (Leonard), Sophie Davis, Colonial Penn Group, Inc., Colonial Penn Franklin Insurance Company, Intramerica Life Insurance Company, National Association Plans, Inc., American Association of Retired Persons, Carrie B. Allen, Oranda Bangsberg, Bernard Berggren, June Biggar, Arthur Bouton, Mamie R. Capellen, Verna A. Carley, French E. Dennison, Fred Faassen, Jerry P. Johnson, Olaf Kaasa, Clara L. Kleweno, George W. Schluderberg, Floyd E. Tumbleson, Kenneth J. Waite, Alice Van Landingham, J. Leonard Johnson, Melvin Thompson, C.E. Carmichael, Francis C. Seely, Harriet Miller, American Association of Retired Persons Insurance Trust, Dorothy M. Crippen, Edward J. Wenig, James J. Browning, Arthur Schuettner, Lloyd I. Singer, Cyril F. Brickfield and John J. MacWilliams.
• Court: U.S. District Court — Southern District of New York

588 F. Supp. 1047

MALCHMAN (Nathan), Frieda Lederer and Gerta C. Conway v. DAVIS (Leonard), Sophie Davis, Colonial Penn Group, Inc., Colonial Penn Franklin Insurance Company, Intramerica Life Insurance Company, National Association Plans, Inc., American Association of Retired Persons, Carrie B. Allen, Oranda Bangsberg, Bernard Berggren, June Biggar, Arthur Bouton, Mamie R. Capellen, Verna A. Carley, French E. Dennison, Fred Faassen, Jerry P. Johnson, Olaf Kaasa, Clara L. Kleweno, George W. Schluderberg, Floyd E. Tumbleson, Kenneth J. Waite, Alice Van Landingham, J. Leonard Johnson, Melvin Thompson, C.E. Carmichael, Francis C. Seely, Harriet Miller, American Association of Retired Persons Insurance Trust, Dorothy M. Crippen, Edward J. Wenig, James J. Browning, Arthur Schuettner, Lloyd I. Singer, Cyril F. Brickfield and John J. MacWilliams.

No. 77 Civ. 5151.

United States District Court, S.D. New York.

June 8, 1984.

Shea & Gould by Michael Lesch, Fran M. Jacobs, Kaufman, Malchman & Kirby by Stanley L. Kaufman, Irving Malchman, New York City, for plaintiffs.

Paul, Weiss, Rifkind, Wharton & Garrison by Sidney S. Rosdeitcher, Jeffrey C. Slade, Washington, D.C., for Colonial Penn Group defendants.

Kramer, Levin, Nessen, Kamin & Frankel by Geoffrey M. Kalmus, Michael S. Oberman, New York City, for Ass'n defendants.

Yablonski, Both & Edelman by Joseph A. Yablonski, Daniel B. Edelman, Washington, D.C., Phillip Hirschkop, Alexandria, Va., Sugarman & Denworth by Robert J. Sugarman, Philadelphia, Pa., for objectors.

GRIESA, District Judge.

On May 2, 1983 the Second Circuit reversed and remanded this court's approval of the settlement in this action and approval of counsel fees. Malchman v. Davis, 706 F.2d 426 (2d Cir.1983).

Upon reconsideration in light of the remand, the court determines that the settlement is fair and reasonable and that plaintiffs' counsel are entitled to attorneys' fees and disbursements of $2.325 million.

FACTS

The background facts are well summarized in the Court of Appeals opinion as follows:

This litigation and the companion state court action, Conway v. Davis, No. 10535/76 (N.Y.Sup.Ct., N.Y.Cty.), principally arise from the relationship between Leonard Davis and various corporate entities owned or controlled by him and two nonprofit organizations of elderly persons, the National Retired Teachers Association (NRTA) and the American Association of Retired Persons (AARP).

Dr. Ethel Percy Andrus, a retired California high school principal, founded the NRTA in 1947 to promote the interests of retired teachers. In 1956, at Dr. Andrus's request, insurance broker Leonard Davis persuaded a national insurance company to underwrite a voluntary group health insurance program for the members of NRTA. In 1958, again with Davis's help, Dr. Andrus formed the AARP to serve the interests of Americans over 55 years old. AARP offered voluntary group health insurance to its members similar to NRTA's. Since their founding, the two associations have attracted millions of members and presently have, between them, over 13 million members throughout the United States. Meanwhile, Davis formed the companies that in time became Colonial Penn Group (CPG) to underwrite health insurance policies in group plans and to provide other services to the associations' members. From 1958 on Davis and his companies managed the AARP and NRTA insurance plans. The associations encouraged their members to purchase insurance, travel and other products and services exclusively through Davis-controlled entities, including insurance subsidiaries, group travel companies, and employment agencies. Davis's entities, moreover, had the exclusive right to advertise in the associations' publications and were permitted to do so at what appears to be substantially less than the fair market value of such advertising. CPG also maintained the membership lists of the associations in its computers.

As AARP and NRTA grew, so did Colonial Penn and its various subsidiaries, its total revenues being $171 million in 1972 and $445 million in 1976. The AARP/NRTA health insurance plans generated over $261 million in premiums in 1977. As of January 1, 1976, CPG led 929 major United States corporations in profitability with a five-year average annual return on capital of 33.5% a figure nearly double the profitability of either IBM or Xerox and three times greater than the median return of 11.3% for the entire insurance industry.

706 F.2d at 427-28.

This litigation was commenced initially in Supreme Court, New York County on May 4, 1976. The complaint was filed on behalf of Frieda Lederer as representative of the class of AARP members who had purchased group health insurance from CPG on AARP's recommendation. At a subsequent time, Frieda Lederer died and other named plaintiffs were added. The suit was against CPG, Davis and other defendants. The complaint sought injunctive relief only and no damages. The original counsel for plaintiffs was the law firm then known as Kaufman, Taylor, Kimmel & Miller (presently Kaufman Malchman & Kirby). Defendants promptly moved to dismiss the complaint. While the motion was pending, the firm then known as Shea, Gould, Clemenko & Casey (now Shea & Gould) appeared as co-counsel for plaintiff. The original complaint was dismissed upon consent with leave to replead. An amended complaint was filed in the state court action in July 1977. Gerta Conway was named as an additional plaintiff, and the state court action thereafter carried the name Conway v. Davis. The amended complaint alleged that defendants had committed fraud and breach of fiduciary duty in arranging with CPG for group health insurance and other services to be offered to AARP members. The amended complaint alleged that AARP had entered into improper arrangements with CPG, and had failed to select independently a group health insurance carrier and purveyors of other services which would be recommended by AARP.

In October 1977 Lederer and Conway, joined by Nathan Malchman, commenced the federal court action. It was brought as a class action under the federal antitrust laws. The class, as described in the complaint, consisted of the insurance-buying members of AARP. The federal action was basically the same as the state action, except that the federal action was based on the antitrust theory.

Between November 1977 and May 1978 there was motion practice in the state court action. Defendants' attempt to dismiss the action was unsuccessful, and defendants served their answers in the state court action in June 1978.

Discovery commenced in the state action on June 12, 1978 when defendants served interrogatories and document requests. In July 1978 plaintiffs served document requests. In response to the mutual document requests, plaintiffs produced over 4,000 pages of documents and defendants produced over 100,000 pages of documents, of which plaintiffs made copies of over 65,000 pages.¹ Plaintiffs also filed lengthy answers to interrogatories.

The parties chose, for good and sufficient reason, to conduct almost all their discovery in the state court action. It is easy to understand why this was so. The litigation originated in the state court. Moreover, motion practice directed to the sufficiency of the complaint was completed early in the proceedings. There was no question of the jurisdiction of the state court over the fraud and breach of fiduciary duty claims, as there was in the federal court action, where subject-matter jurisdiction was seriously challenged, as will be described later in this opinion. In any event, it was understood that the state court discovery would be used in the federal court action.²

Depositions in the state court action commenced in January 1979. Plaintiffs deposed fourteen persons. Defendants deposed four persons. These depositions were conducted through mid-May 1980. There were sixty-six days of testimony resulting in 11,850 pages of transcript. There were numerous disputes during the discovery resulting in applications to the state court.

Plaintiffs moved in the state court action on January 8, 1979 for an order certifying the class. Defendants objected on the ground that they had not completed discovery on the adequacy of the representatives. On February 15, 1979 it was stipulated in the state court action to withdraw the motion for class certification until further discovery had been completed.

To return to the federal action, on August 11, 1978 a motion was filed to dismiss the federal complaint on the grounds that the action was barred by § 2(b) of the McCarran-Ferguson Act, 15 U.S.C. § 1012(b), and that plaintiffs lacked standing to assert the antitrust claims. Extensive briefs were filed on this motion. The questions presented were of considerable difficulty. The court requested further submissions and stipulations of fact. This additional work was completed in April 1980.

By the spring of 1980 serious settlement negotiations were taking place. One immediate result of this was that on June 16, 1980 the parties requested the federal court to withhold decision of plaintiffs' motion to dismiss.

The following events relating to the ultimate settlement of the action occurred. In February 1979 AARP and NRTA both passed a series of resolutions which provided for the discontinuance of their endorsement of certain CPG products other than group health insurance, and authorized a study of health insurance programs to determine whether the Associations' arrangement for group health insurance with CPG should continue after the then current term expired in June 1981.

In January 1980 the Associations decided to initiate a competitive bidding process to determine who would underwrite the group health insurance programs after June 1981. On September 1, 1980 the Associations signed an agreement with CPG. At least one of the purposes of this agreement was to provide for the transition from CPG to another insurer in the event that CPG was not...