Nelson v. Bennett

• Decision Date: 19 June 1987
• Docket Number: CIV. S-84-0858 RAR.,No. CIV. S-83-820 RAR,CIV. S-83-820 RAR
• Citation: 662 F. Supp. 1324
• Court: U.S. District Court — Eastern District of California
• Parties: Loyal E. NELSON, William G. Stash, and John Hartell, individually, and on behalf of all others similarly situated, Plaintiffs, v. Vern BENNETT; Bennett Farms, Inc.; Deloitte Haskins & Sells; Gerald Niesar; Niesar, Moody, Hill, Massey & Kregstein; Laventhol & Horwath; Thomas Nevis, Nevis Industries, Inc.; R. Grant Cline; and R & M Investment Marketing, Defendants. Robert I. ELLSWORTH and Patricia J. Ellsworth, David W. Forsgett and Roselene J. Fosgett, individually and on behalf of all others similarly situated, Plaintiffs, v. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, Michael Dobbs, Niesar Moody Hill Massey & Kregstein, Gerald Niesar, Mary Ann Feist, Kenneth B. Flating, Vern Bennett, R & M Investment Marketing and Deloitte, Haskins & Sells, Defendants.

662 F. Supp. 1324

Loyal E. NELSON, William G. Stash, and John Hartell, individually, and on behalf of all others similarly situated, Plaintiffs, v. Vern BENNETT; Bennett Farms, Inc.; Deloitte Haskins & Sells; Gerald Niesar; Niesar, Moody, Hill, Massey & Kregstein; Laventhol & Horwath; Thomas Nevis, Nevis Industries, Inc.; R. Grant Cline; and R & M Investment Marketing, Defendants.

Robert I. ELLSWORTH and Patricia J. Ellsworth, David W. Forsgett and Roselene J. Fosgett, individually and on behalf of all others similarly situated, Plaintiffs, v. BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, Michael Dobbs, Niesar Moody Hill Massey & Kregstein, Gerald Niesar, Mary Ann Feist, Kenneth B. Flating, Vern Bennett, R & M Investment Marketing and Deloitte, Haskins & Sells, Defendants.

Nos. CIV. S-83-820 RAR, CIV. S-84-0858 RAR.

United States District Court, E.D. California.

June 10, 1987.

As Modified June 19, 1987.

David L. Sanborg, Keith R. Weed, Stephen D. Coldwell, Bronson, Bronson & McKinnon, San Francisco, Cal., for Laventhol & Horwath.

J. Thomas Hannan, Ronald Lovitt, Lovitt & Hannan, San Francisco, Cal., for Nelson.

Donald H. Dye, Dye, Thomas, Luebs & Mort, Riverside, Cal., for the Ellsworths.

Michael E. Zacharia, Robert L. Shipley, James M. Meier, Weintraub, Genshlea, Hardy, Erich & Brown, Sacramento, Cal., for Niesar.

Philip B. Price, Price, Price, Brown & Halsey, Chico, Cal., for Thomas Nevis and Nevis Industries, Inc.

Philip R. Rotner, Charlene S. Shimade, Rebecca A. Lenaburg, McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., John V. Diepenbrock, David A. Riegels, Diepenbrock, Wulff, Plant & Hannegan, Sacramento, Cal., for Deliotte Haskins & Sells.

Frank R. Ubhaus, Pitto, Ubhaus & Waite, San Jose, Cal. for R & M Investment Marketing.

Robert Padway, San Francisco, Cal., for Bank of America.

Claire Greve, Sacramento, Cal., for Michael Dobbs.

ORDER

RAMIREZ, District Judge.

On January 14, 1987, the above-entitled matters came on specially for hearing before the undersigned on a motion to effectuate settlement brought by defendants GERALD V. NIESAR, MARY ANN (FEIST) McCAMANT, and the law firm of NIESAR, MOODY, HILL, MASSEY & KREGSTEIN (the Niesar defendants). Thomas Hannan, Esq. and Ronald Lovitt, Esq., appeared for the plaintiff class in Nelson v. Bennett (Nelson plaintiffs); Donald H. Dye, Esq., appeared for the plaintiff class in Ellsworth v. Bank of America (Ellsworth plaintiffs); Michael E. Zacharia, Esq. and James M. Meier, Esq., appeared for the Niesar defendants; Robert Padway, Esq., appeared for defendant BANK OF AMERICA; Claire Greve, Esq., appeared for defendant MICHAEL DOBBS; Stephen Coldwell, Esq., appeared for defendant LAVENTHOL & HORWATH; Philip Rotner, Esq. and David Riegels, Esq., appeared for defendant DELIOTTE HASKINS & SELLS; and Philip Price, Esq., appeared for defendants THOMAS NEVIS and NEVIS INDUSTRIES, INC.¹

After years of protracted litigation, the plaintiff classes entered into a settlement agreement with one group of defendants only. The present motion to effectuate said settlement agreement presents a single yet crucial issue: whether and under what circumstances a partial settlement² may operate to bar the non-settling defendants' implied rights of contribution under the federal securities laws. Since the issue presented is one of first-impression, the court opted to take the matter under submission so as to issue a published opinion on the merits.

PROCEDURAL AND FACTUAL BACKGROUND

The two related actions presently before the court arise from a common, and failed, investment scheme to breed a form of "supercows." As alleged in the various pleadings, investors in the scheme were led to believe that the promoters would purchase numerous "genetically superior cows." These prime dairy cows were to be injected with hormones so as to induce multiple ovulation. Thereafter, the harvested eggs would be fertilized with semen from "proven bulls", and the resulting product would then be implanted into the wombs of "ordinary cows." With such superior progenitors, the resulting calves were expected to be valuable, purebred "supercows."

Over a three year period, millions of dollars were collected from investors interested in the projected tax benefits and/or the prospect of future profits from the investment scheme. Eventually, however, the scheme collapsed and the invested funds were dissipated.

Not long thereafter, the present lawsuits were filed against the alleged perpetrators of the "supercow" scheme by two separate classes of hapless investors. Plaintiffs in both actions alleged that the prospectuses issued in connection with the investment scheme were misleading and failed to disclose various material facts. Most importantly, plaintiffs alleged that the prospectuses failed to disclose that the primary purpose of the scheme was to facilitate self-dealing by the defendants. Based on these allegations, both actions predicated subject matter jurisdiction on the federal securities laws (§ 10(b) of the Securities Act of 1934, 15 U.S.C. § 78j(b), and § 17(a) of the Exchange Act of 1933, 15 U.S.C. § 77q), the Racketeer Influenced and Corrupt Organizations Act (RICO) (18 U.S.C. § 1961, et seq.), and sundry state corporations and securities laws. Approximately twenty-two million dollars in actual damages was sought between the two actions, as well as treble damages under RICO and attorney's fees.

Although multiple defendants are named in each action, the major defendants fall into the following three categories: (1) the actual promoters of the scheme (Vern Bennett and Bennett Farms, Inc.); (2) the accounting firms (Laventhol & Horwath and Deloitte, Haskins & Sells); and, most importantly for the present motion, (3) the legal counsel (the Niesar defendants). Other minor defendants include: (1) the underwriter and broker (R & M Investment Marketing); (2) the alleged beneficiaries of related party transactions (Thomas Nevis, Nevis Industries, Inc., and R. Grant Cline); and (3) the bankers (Bank of America and Michael Dobbs). In due course, most of these defendants asserted cross-claims for contribution and/or indemnity against all other defendants.

Beginning in June of 1986, this court initiated a settlement process for the underlying actions. The settlement process consisted of a series of mandatory court-facilitated conferences, some with all parties present, some with just plaintiffs and each separate defendant or group of defendants. Included in this process, of course, were the Niesar defendants.

It soon became apparent that settlement might be a viable option with regard to the claims asserted against the Niesar defendants. Therefore, at the request of counsel, the court conducted additional settlement conferences with these respective parties. Such conferences spanned the course of several months and totalled dozens of hours. In addition, the Niesar defendants and plaintiffs engaged in extensive independent settlement negotiations.

The settlement efforts finally bore fruit in October of 1986, when a proposed settlement agreement was entered into by the Niesar defendants and both plaintiff classes. The essential terms of the settlement agreement are straightforward. In exchange for dismissals and releases from the plaintiffs, the Niesar defendants will pay plaintiffs a total sum of three million dollars. From that total sum, a $300,000 cost fund, or "war chest", will be established for plaintiffs' counsel. While the ultimate distribution of the remaining settlement funds is left for this court's determination, the settling parties contemplate that the plaintiff classes will make a pro rata division, such that each class member will receive a sum proportionate to his or her share of the total investment made.

The settlement agreement is subject to one critical condition: the entry, by this court, of an order dismissing all cross-claims for contribution or indemnity asserted against the Niesar defendants. Absent such an order, the agreement, by its own terms, is rendered null and void.

On January 14, 1987, this court heard oral argument on the plaintiffs' motion for approval of the settlement on behalf of the class and the Niesar defendants' motion to effectuate settlement. By virtue of previously-issued orders, several matters pertaining to the Niesar settlement had already been adjudicated.³ In ruling on the motions, the court first determined that the settlement was fair, adequate, and in the best interests of the plaintiff classes, and therefore granted court approval of the class-action settlement pursuant to F.R. Civ.P. 23(e). Second, the court determined that the settlement was a "good faith settlement" within the meaning of Cal.Civ. Proc. Code § 877.6.⁴ Third, in light of this good faith determination, the court ordered that the cross-claims for contribution and/or indemnity with respect to the state law causes of action be barred as against the Niesar defendants. Fourth, and finally, the court found that there are implied rights of contribution under § 10(b) of the Securities Exchange Act of 1934 and § 17(a) of the Exchange Act of 1933, but no such implied rights of contribution under RICO.

The Niesar defendants now contend that the judicial determination of good faith settlement also operates to bar the non-settling defendants' implied rights of contribution under the federal securities claims. This result may be reached, so the Niesar defendants argue, either by the adoption of the state settlement bar statute or, alternatively, by the recognition of a similar settlement bar rule as a matter of federal common law. The non-settling defendants, on the other hand, contend that the policies underlying implied rights of contribution and settlement bar rules are fundamentally in conflict. Therefore, the non-settling defendants conclude, implied rights of contribution for federal securities claims may never be barred prior to judgment by virtue of a...