Masters Mates & Pilots Pension Plan and IRAP Litigation, In re
| Decision Date | 18 March 1992 |
| Docket Number | Nos. 947,948,D,s. 947 |
| Citation | 957 F.2d 1020 |
| Parties | 14 Employee Benefits Cas. 2569 In re MASTERS MATES & PILOTS PENSION PLAN AND IRAP LITIGATION. Andrew CULLEN; George Bomareto; Paul McGuire; Harold Beck; A.J. Morales; Guy Chadbourne; Francis E. Kyser; MM & P Pension Plan; MM & P Individual Retirement Account Plan; Pete Prevas; Paul H. Nielsen; Florin Dente; James N. Haverfield; John M. Hayes; Lynn Martin, Secretary of the United States Department of Labor; Arthur Holdeman, Plaintiffs-Appellees, v. Franklin K. RILEY, Defendant-Appellant, Robert J. Lowen; Lloyd M. Martin; Paul Bardyn; Michael DiPrisco; Richard Evans; James R. Hammer; Martin F. Hickey; Edward Morgan; Robert Murphy; Anthony Naccarato; Robert W. Parker; Michael Swayne; Allen Taylor; William I. Ristine; Edmund Davis; James Hayes; Allen C. Scott; Francis E. Keyser; Henri L. Nereaux; David York; John Sokolowski; David A. Boyle; David C. Haa; Charles Landry; Ernest Swanson; Marine Midland Bank, N.A.; Robert Parker; Allen C. Taylor; Proskauer, Rose, Goetz & Mendelsohn; Carmina J. Bracco, Defendants-Appellees, Tower Asset Management Inc., Tower Capital Corporation; Tower Securities, Inc.; Andrew A. Levy; W. Randolph Wheeler; Walter Levering, Defendants, Bert Epstein, Seham, Klein & Zelman, Esqs.; Martin Seham; IOMM & P, Appellees, Federal Insurance Company, Appellant. ockets 91-6276, 91-6288. |
| Court | U.S. Court of Appeals — Second Circuit |
Kirke M. Hasson, San Francisco, Cal. (C. Douglas Floyd, Pillsbury, Madison & Sutro, of counsel), for appellant Franklin K. Riley, Jr.
Barry R. Ostrager, New York City (Kevin P. Mulry, Judah A. Shechter, Meridith Randall, Simpson Thacher & Bartlett, of counsel), for appellant Federal Ins. Co.
David S. Preminger, Rosen, Szegda, Preminger & Bloom, New York City (Jeffrey Lewis, Sigman & Lewis, Oakland, Cal., Alan M. Sandals, Berger & Montague, Philadelphia, Pa., of counsel), for appellees Andrew Cullen, et al.
Nathaniel I. Spiller, Sr. Appellate Atty., U.S. Dept. of Labor, Washington, D.C. (Marshall J. Breger, Sol. of Labor, Allen H. Feldman, Associate Solicitor for Special Appellate and Supreme Court Litigation, Marc I. Machiz, Associate Sol. for Plan Benefits Sec., Karen Handorf, Counsel for Decentralized and Special Litigation, Jeff Sacher, Counsel for General Litigation, U.S. Dept. of Labor, Washington, D.C., of counsel), for appellee Secretary of Labor.
Before TIMBERS, MESKILL and KEARSE, Circuit Judges.
This appeal follows an approval of a class action settlement in the United States District Court for the Southern District of New York, Broderick, J. The settlement, which came after years of complex and protracted litigation, provides over $20 million to injured plaintiffs but bars third parties from asserting against the settling defendants any claims that arise out of the subject matter of this litigation.
Appellants Franklin K. Riley, Jr. and Federal Insurance Company (Federal), Riley's excess liability insurer, object to the settlement on the grounds that it unfairly cuts off Riley's rights and potentially subjects him to a disproportionate share of liability for the injuries caused the plaintiffs. Federal further asserts that the settlement unfairly will make it immediately liable for a judgment against Riley and the sole insurer responsible for defending Riley.
The settlement we review requires us to weigh the policy favoring settlement of claims by injured plaintiffs against the need to protect the rights of nonsettling defendants. We conclude that this settlement is unbalanced, in part because it reflects a misunderstanding of recent case law and in part because the district court gave inadequate consideration to relative culpability before approving the settlement bar. Accordingly, we reverse.
The backdrop to this litigation previously has been set forth fully. See Lowen v. Tower Asset Management, 829 F.2d 1209 (2d Cir.1987). We will describe only those facts necessary to provide an understanding of the issues before us.
During the 1980s, Tower 1 performed investment services for the Masters Mates and Pilots' Individual Retirement Income Plan (IRAP) and Pension Plan (collectively "plans"). Beginning in 1983, Tower violated the prohibited transaction provisions of the Employee Retirement Income Security Act of 1974, 29 U.S.C. §§ 1001-1461 (ERISA) by mismanaging ERISA protected investments. See Lowen, 829 F.2d at 1211-12. To be precise, Tower caused the investment of approximately $30 million of the plans' assets in risky ventures. Id. at 1212. Many of these investments were in companies having more debt than capital. Some of these companies are now defunct. Id. Moreover, Tower both (1) owned substantial equity interests in some of those companies, and (2) received commissions, fees and securities from many of those companies for its investment services. Id. Tower's actions were improper and caused extensive losses to the plans. Id. at 1212-13, 1221. Plaintiffs estimate that damages exceed $50 million.
The Secretary of Labor (Secretary) and the plan participants and beneficiaries (private plaintiffs) have engaged in extensive litigation under ERISA's civil enforcement provisions to recover losses from Tower, trustees, counsel and auditors of the plans. Under ERISA, breaching fiduciaries are jointly and severally liable. See 29 U.S.C. § 1105(a)(2) (). The settlement before us would affect a number of actions that are pending. 2
Riley is one of many defendants against whom the private plaintiffs and the Secretary have actions pending. Although Riley did not become a trustee until 1984, he did have other affiliations with the plans prior to that time. Riley has vigorously disputed his ERISA liability and has argued that, even if liable, his share of the blame pales in comparison to that of other defendants.
Many of the defendants in these actions have insurance coverage. For the purposes of this settlement agreement, three insurance companies' policies are significant.
Aetna Casualty and Surety Company (Aetna) insured the plans and their trustees for the period from 1981 through 1984, with an aggregate liability cap of $7 million. This policy requires Aetna to pay defense costs until such time as judgment or settlement exhausts the policy limits.
Republic Insurance Company (Republic) issued separate policies covering fiduciary liability for the plans, each policy having been effective for 1985. Republic's potential coverage totals $10 million. Like the Aetna policy, defense obligations are additional and cease only on exhaustion of the policy limits by judgment or settlement.
A third insurer, Federal, issued a fiduciary liability policy to Riley's employer, American President Companies, Ltd. which covers Riley's activities as a fiduciary in outside associations. The policy also provides, however, that "such coverage shall be specifically excess of any other indemnity or insurance available to such Insured Person by reason of serving on such plans."
After overseeing this litigation for the better part of a decade, the district court approved a settlement among the Secretary, the private plaintiffs and most of the defendants. Neither Riley nor Tower agreed to the settlement. In addition to the trustee defendants, the settling parties included the law firm defendants, the accounting firm defendants and the custodial trustee defendant. The agreed payments are as follows:
Aetna $7,500,000
Republic $5,250,000
Counsel $5,625,000
Custodial Trustee $1,950,000
Auditors $1,575,000
In return for these payments, which total $21.9 million, the settling defendants receive complete protection from further liability.
In addition to a general release, the settlement contains a bar order. This provision conditions the settlement on procurement of a final judicial order "dismissing with prejudice and equitably barring all claims that are or could be asserted, now or in the future, against any Settling Defendant by any nonsettling defendant ... arising out of" the subject matter of the Tower litigation. Thus, the settlement, if approved by us, would bar Riley from pursuing certain claims against the settling defendants.
The settlement purports to protect Riley, however. For fiduciary breaches committed by Riley in 1983 or 1984, the settlement provides for reduction of any judgment obtained against Riley "by an amount equal to the amount paid over by [Aetna] on behalf of the Trustee Defendants"--namely, $7.5 million.
The settlement potentially would also compensate Riley for the amount paid toward the settlement by Republic. To be exact, the settlement provides that the Secretary and private plaintiffs shall seek dismissal of "all claims brought by them against Riley for all damages uniquely attributable to breaches of fiduciary duty Moreover, the settlement contains a specific judgment reduction provision in order to credit Riley for amounts contributed to the settlement by counsel, auditors and the custodial trustee. This proviso stipulates that the plaintiffs will reduce any judgment obtained against a nonsettling defendant by the lesser of (1) "the amount (exclusive of interest) of the payments made by or on behalf of such Settling Defendant(s) pursuant to this Agreement," or (2) "the amount which is the proportional share of the damages attributable to such Settling Defendant(s), or any of them, as may be determined by the Court or trier of fact at trial."
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