Sved v. Chadwick

• Decision Date: 26 March 2010
• Docket Number: Civil Action No. 3:06–CV–1135–N.
• Citation: 783 F.Supp.2d 851
• Parties: Stanley SVED, Plaintiff,v.Michael S. CHADWICK, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

783 F.Supp.2d 851

Stanley SVED, Plaintiff,

v.Michael S. CHADWICK, et al., Defendants.

Civil Action No. 3:06–CV–1135–N.

United States District Court,N.D. Texas,Dallas Division.

Oct. 23, 2009.Order Denying Reconsideration March 26, 2010.

Michael S. Chadwick, Houston, TX, pro se.Frank J. Fradella, New Orleans, LA, pro se.Willard W. Kimbrell, New Orleans, LA, pro se.Charles P. McCusker, Jr., New Orleans, LA, pro se.Patrick A. McGeeney, Dallas, TX, pro se.Brian Marshall, Tampa Bay, FL, pro se.Michael J. McGrath, Roseland, NJ, pro se.Edward P. Perrin, Jr., James N. Henry, Jr., Hallett & Perrin, Bruce W. Collins, Emily Coleman McCall, Carrington Coleman Sloman & Blumenthal, Dallas, TX, for Defendants.

ORDER

DAVID C. GODBEY, District Judge.

This Order addresses final approval of the parties' proposed derivative settlement. The Court faces two issues: (1) whether it may grant final approval to the settlement agreement despite Derivative Plaintiff Stanley Sved (“Sved”)'s withdrawal of consent; and, if so, (2) whether final approval is appropriate. Because the Court finds that it may grant final approval over Sved's objection and that the settlement agreement at issue is fair, reasonable, and adequate, it grants final approval and incorporates the terms of the settlement agreement into this Order.

I. The Origins of the Parties' Dispute

This derivative shareholder action arises out of alleged false and misleading statements and omissions by members of the Home Solutions board of directors (collectively, the “Individual Defendants”) regarding the company's business practices, internal controls and financial results. Sved asserted six causes of action against the Individual Defendants: (1) breach of fiduciary duty; (2) abuse of control; (3) gross mismanagement; (4) waste of corporate assets; (5) unjust enrichment; and (6) insider selling.

A. The Settlement Agreement

The factual allegations in the complaint are substantially similar to the allegations in related securities class actions before this Court, consolidated under the caption Hansen v. Fradella et al., Civil Action No. 3:06–cv–1096. ¹ After filing numerous motions with this Court, the parties settled this case alongside Hansen in a hard-fought and extensive mediation. The two settlement agreements provide shareholders with different forms of relief. The Hansen settlement offers class members $3.5 million, less taxes, fees, and expenses. The derivative settlement agreement at issue in this case (the “derivative settlement”), which has the full support of the Home Solutions board of directors, requires the company to adopt a number of corporate governance measures. They are:

1. Home Solutions will separate the positions of Chairman of the Board and Chief Executive Officer, which shall remain separated for a period of at least four years following the date of the stipulation;

2. The appointment by Home Solutions of an independent and disinterested Chairman of the Board, Michael McGrath, whom Plaintiff acknowledges is independent and disinterested;

3. The appointment by Home Solutions of a new interim Chief Financial Officer;

4. The resignation of Defendant Brian Marshall as an officer and director of Home Solutions;

5. The retention of an outside law firm, Haynes & Boone, to conduct an investigation and report their findings to Homes Solutions' Board of Directors;

6. The adoption by Home Solutions of enhanced procedures to ensure the accuracy of its press releases and public announcements;

7. Home Solutions shall not make strategic equity investments in any company in which a Director or Executive Director has direct ownership of more than 5 percent subject to Home Solutions' ability, through reasonable efforts, to determine ownership interests in any such company.

Stipulation of Settlement [54–1] at 3–4. The derivative settlement also allows for $250,000 in attorneys' fees and a $2,000 incentive payment to Sved.²Id. at 7–8. It provides that the “finality of the Settlement shall not be affected by the Court's determination regarding the approval of fees and expenses for Plaintiff's Counsel.” Id. at 8.

The parties sought and received this Court's preliminary approval of both settlement agreements contemporaneously. As required by the preliminary approval order, the parties sent written notice to all affected Home Solutions shareholders informing them of both agreements. The detailed notice explained the terms of the derivative settlement, the date and time of the fairness hearing, and the shareholders' right to appear. See Stipulation of Settlement [54–4]. The parties also maintained a web site and toll free “helpline” to further provide information and answer questions about the settlement. Id. The Court received no shareholder objections to the derivative settlement, either in writing or in person at the fairness hearing.

B. Sved's Withdrawal of Consent to the Settlement

Five days before the final fairness hearing, Sved's counsel filed a notice to this Court purporting to unilaterally withdraw the derivative settlement because Home Solutions “may be unable to fulfill one or more of its obligations under the proposed derivative settlement.” Derivative Pl.'s Notice of Withdrawal [59] at 1. At the fairness hearing, the parties disputed the company's ability to comply with first two of the above-listed corporate governance measures due to the resignation of Home Solutions' chairman of the board, Michael McGrath. It was apparent at the time of the fairness hearing that Home Solutions faced serious financial problems; its ability to pay the attorneys' fees and incentive payment, if approved, was unclear. Because of these issues, the Court continued the fairness hearing on the derivative settlement for about ninety days.³

The parties stood in essentially the same positions at the time of the second fairness hearing. They continued to debate the company's ability to comply with the derivative settlement due to resignations by some Home Solutions directors and officers. The Individual Defendants maintained that the company had implemented all of the required corporate governance measures regardless of the resignations, stating “no company can promise that any individual employee or director can serve in perpetuity, and the company never agreed to any such thing.” Tr. of June 22, 2009 Fairness Hr'g at 5. Further, Home Solutions still faced financial difficulties. As a result, the Individual Defendants still could not guarantee on-time payment of the attorneys' fees or the incentive payment, if approved. Based on these issues, Sved requested that the Court deny final approval. The Individual Defendants, on the other hand, continued to support the agreement as fair, reasonable and adequate. The Court took the matter under advisement. Now the Court must evaluate the weight and impact of Sved's objection on the derivative settlement.

II. Sved's Withdrawn Consent Does Not Bar Final Approval

The Court limits its inquiry to the very narrow question presented: whether a federal court can grant final approval of a derivative settlement where the derivative plaintiff withdraws his consent to the settlement after the court grants preliminary approval and the parties issue notice to shareholders. This issue is governed by federal procedural law. According to the Fifth Circuit:

Whether a settlement agreement, thus tested under state law, has been accepted by a federal court and properly incorporated into a valid and enforceable judgment is purely a matter of federal procedure. Federal courts have the inherent power to enforce settlement agreements entered into by the parties litigant in a pending case, to determine compliance with procedural prerequisites, and to determine when, if ever, a party may repudiate a contractually binding settlement agreement.

White Farm Equip. Co. v. Kupcho, 792 F.2d 526, 529 (5th Cir.1986).

To be clear, this issue does not involve the contractual validity or post approval enforcement of the settlement, issues governed by substantive state law on contracts generally. “For example, challenges to a settlement agreement based on interpretation of an ambiguous term, capacity to contract, fraud, or indefiniteness of a term all turn on the applicable state law.” Id.; see also Khouw v. Methodist Hosp. of Dallas, 126 Fed.Appx. 657, 659 (5th Cir.2005) (analyzing the validity of a settlement agreement using the interpretive canons of traditional state contract law); Bamerilease Capital Corp. v. Nearburg, 958 F.2d 150, 152 (6th Cir.1992) (distinguishing the question of an agreement's validity from whether it can be incorporated into a final judgment). In the instant matter, the parties do not dispute the validity of the agreement and the plaintiffs do not seek its enforcement. Rather, Sved urges the Court not to grant final approval of the settlement. Thus, the Court must evaluate the federal procedural question of whether final approval of the settlement agreement is appropriate despite Sved's withdrawn consent.

Under federal procedural law in the Fifth Circuit, “[u]nless the [moving party] can demonstrate that the judgment differs materially from their agreement, or that their agreement was invalid under state law at the time it was made, a federal court may hold them to their word by incorporating the terms of their agreement into a final judgment.” Kupcho, 792 F.2d at 530. Thus, a federal court may incorporate a settlement agreement into a final judgment even if one party withdraws its consent before final approval. Id.; see also Ledet v. Northland Ins. Co., No 07–CV–0683, 2009 WL 2338044 (W.D.La. Jul. 29, 2009) (enforcing a settlement agreement where judgment was entered despite an alleged lack of consent by the plaintiff); Beckham v. Reed, Kapt. H. Krohn, G.M.B.H., 217 F.Supp. 749, 751 (S.D.Tex.1963) (“It seems clear that ... such agreements are binding at the time there is a meeting of the minds and subsequent repudiation is no bar to a...