TBG INC. v. Bendis

• Decision Date: 30 December 1992
• Docket Number: Civ. A. No. 89-2423-EEO.
• Parties: TBG INC., Plaintiff, v. Richard A. BENDIS, Terrance Schreier, John G. Pappajohn, Robert H. Mann, Jr., Ernst & Whinney, Shook, Hardy & Bacon, Defendants.
• Court: U.S. District Court — District of Kansas

811 F. Supp. 596

TBG INC., Plaintiff, v. Richard A. BENDIS, Terrance Schreier, John G. Pappajohn, Robert H. Mann, Jr., Ernst & Whinney, Shook, Hardy & Bacon, Defendants.

Civ. A. No. 89-2423-EEO.

United States District Court, D. Kansas.

December 30, 1992.

J.D. Lysaught, Mustain, Higgins, Kolich, Lysaught & Tomasic, Kansas City, KS, Herbert E. Milstein, Lisa M. Mezzetti, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, DC, for TBG Inc., TBG Information Systems, Inc., George A. Bridgmon.

Bruce Keplinger, John Benge, Michael G. Norris, Michael B. Lowe, Payne & Jones, Chtd., Overland Park, KS, for Richard A. Bendis.

Karen J. Halbrook, John R. Cleary, Husch & Eppenberger, Kansas City, MO, for W. Terrance Schreier.

William G. Howard, Lathrop & Norquist, Overland Park, KS, William Ray Price, Jr., John H. Calvert, Lathrop & Norquist, Kansas City, MO, for John G. Pappajohn, Robert H. Mann, Jr.

Anthony F. Rupp, Shughart, Thomson & Kilroy, Overland Park, KS, John M. Kilroy, R. Lawrence Ward, Shughart, Thomson & Kilroy, P.C., Kansas City, MO, Emmett E. Eagan, Jr., Ernst & Young, Cleveland, OH, for Ernst & Whinney.

John J. Jurcyk, Jr., McAnany, Van Cleave & Phillips, P.A., Kansas City, KS, Andrew C. Hartzell, Jr., John G. Koeltl, Lorna G. Schofield, Debevoise & Plimpton, New York City, for Shook, Hardy & Bacon.

J.D. Lysaught, Mustain, Higgins, Kolich, Lysaught & Tomasic, Kansas City, KS, Herbert E. Milstein, Lisa M. Mezzetti, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, DC, Martin E. Karlinsky, Scheffler, Karlinsky & Stein, New York City, for Richard S. Masinton, Continental Healthcare Systems, Inc.

Herbert E. Milstein, Lisa M. Mezzetti, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, DC, Martin E. Karlinsky, Scheffler, Karlinsky & Stein, New York City, for Continental Healthcare Systems, Inc.

Tim S. Haverty, M. Michael Gill, Tamara Wilson Setser, Julie A. Riggle, Hillix, Brewer, Hoffhaus, Whittaker & Wright, Kansas City, MO, Herbert E. Milstein, Lisa M. Mezzetti, Daniel S. Sommers, Cohen, Milstein, Hausfeld & Toll, Washington, DC, J.D. Lysaught, Mustain, Higgins, Kolich, Lysaught & Tomasic, Kansas City, KS, for Paul R. Billington.

MEMORANDUM AND ORDER

EARL E. O'CONNOR, District Judge.

This matter is before the court on the joint motion of plaintiff TBG and defendants and third-party plaintiffs John G. Pappajohn and Robert H. Mann, Jr. for an order approving and implementing their proposed settlement agreement (Doc. # 679); the joint motion of plaintiff TBG and defendant Shook, Hardy, and Bacon for an order approving and implementing their proposed revised settlement agreement (Doc. # 756); and defendant Schreier's motion to certify a controlling question of law for interlocutory appeal (Doc. # 789). Having reviewed the motions and after a November 23, 1992, hearing on the settlement agreements, the court is now prepared to rule.

The Settlement

I. Factual Background

This action arises out of the June 10, 1986, acquisition of Continental Healthcare Systems, Inc. ("CHSI") by plaintiff TBG, Inc. ("TBG"). CHSI was a computer software company specializing in developing and marketing computer-based information systems for hospitals and other health care providers. TBG's claims against all defendants stem from alleged material misrepresentations about the value of CHSI.¹ TBG claims that it reasonably relied on alleged misrepresentations and omissions about matters central to TBG's purchasing decision — the status of completion of CHSI's products, the terms of CHSI's existing sales contracts with customers, improper revenue recognition by CHSI, and the status of employment of certain CHSI officers (Richard Masinton, Chief Executive Officer, and Paul Billington, Controller) who had threatened to resign. TBG seeks $46,000,000 in actual and punitive damages.

Specifically, TBG claims that defendants Robert Mann and John Pappajohn, formerly outside directors of CHSI and members of CHSI's Audit Committee, are liable for federal securities laws violations, state common law fraud, and negligent misrepresentation. TBG alleges that Mann and Pappajohn, as Directors of CHSI and members of the Audit Committee, are liable because they made or aided others in making misrepresentations and omissions of material fact in connection with TBG's acquisition of CHSI.² Although Mann and Pappajohn deny liability, they have reached a settlement with TBG ("the Mann/Pappajohn settlement").

TBG has also asserted claims against defendant Shook, Hardy and Bacon ("Shook"), CHSI's outside counsel for the sale. Shook issued an "Opinion Letter" and advised CHSI officers in conjunction with the sale. TBG alleges that Shook is liable for federal securities violations, negligence, common law fraud, and negligent misrepresentation because Shook learned of facts during the due diligence investigation of CHSI by TBG which made the following documents materially false and misleading: 1) CHSI's financial statements; 2) CHSI's financial projections; 3) the merger proxy; and 4) oral and written representations by other defendants. TBG alleges that Shook had a duty to disclose this information and to investigate these matters to ensure that they were brought to the attention of independent members of CHSI's board of directors. TBG contends that, knowing these facts, Shook should not have participated in the closing of the transaction without insuring disclosure of the information. Further, TBG alleges that Shook is liable because Shook's opinion letter was false and misleading in that it failed to disclose this material information. Although Shook denies liability, Shook and TBG have also reached a settlement ("the Shook settlement").

If both settlements are approved, the following nonsettling defendants will remain: Richard Bendis (former Chairman of the Board, President, and Chief Executive Officer of CHSI); W. Terrance Schreier (former Executive Vice President, Chief Operating Officer, and director of CHSI); and Ernest and Whinney ("E & W"), outside accounting firm for CHSI prior to and during the sale. TBG alleges that Bendis and Schreier are liable for federal securities violations and state law breach of contract and indemnity, fraud and negligent misrepresentation because they signed representations, warranties and covenants to TBG concerning the business, operations and status of CHSI and the truthfulness of the merger documents and other documents provided to TBG.

TBG alleges that E & W, as independent auditor of CHSI's financial statements, is liable for federal securities violations, negligence, common law fraud and negligent misrepresentation. TBG contends that E & W was aware of questionable transactions and the questionable status of products on which revenue was recognized and that despite this knowledge, E & W assisted CHSI in generating both the 1985 Form 10-K and the March 1986 Form 10-Q which were materially misleading. TBG also alleges that E & W is liable in connection with the Comfort Letter they issued as a part of the CHSI acquisition because the letter assured TBG that CHSI's financial statements accurately reflected CHSI's financial status.

Both settlement agreements, however, are subject to several contingencies. First, all the parties to the settlement agree to release each other from all claims, present and future, arising out of this transaction.³ All settling defendants also agree to dismiss with prejudice any and all claims against any other party in this action.⁴ Second, the court must enter an order barring all present and future claims against the settling defendants (whether for contribution, indemnity, or otherwise) by any party arising out of the CHSI sale (the "bar order"). Third, the bar order must implement the pro tanto method of judgment reduction consistent with the "one satisfaction of judgment" rule and limit any future setoff of damages by the non-settling defendants to the amount of the settlement.

II. Discussion

Ordinarily, settlement agreements need not be approved by the court. See In re Masters Mates & Pilots Pension Plan and IRAP Litigation, 957 F.2d 1020, 1025 (2d Cir.1992) ("Typically, settlement rests solely in the discretion of the parties, and the judicial system plays no role."). However, where a settlement agreement requires a bar order which affects the right of parties to the litigation who are not also parties to the settlement, the court must determine whether the settlement agreement is fair to those affected nonsettling parties. See id. at 1026; Williams v. Vukovich, 720 F.2d 909, 921 (6th Cir.1983); Donovan v. Robbins, 752 F.2d 1170, 1176 (7th Cir.1985). In considering the fairness of the proposed settlement agreements, the court may consider the following factors: 1) relative fault; 2) likelihood that plaintiff will prevail at trial; 3) the adequacy of resources of the most culpable party; and 4) the adequacy of resources of the settling parties. In re Masters Mates, 957 F.2d 1020, 1031 (2d Cir.1992).

A. The Bar Order

1. The Implied Right to Contribution

Before we can consider the propriety of the proposed bar order in this case, we must first consider whether the nonsettling defendants have claims for contribution, indemnity or otherwise that will be impeded by entry of such an order. Clearly, defendants have no implied right to indemnification under section 10(b) or rule 10b-5. See King v. Gibbs, 876 F.2d 1275, 1281 (7th Cir.1989); Globus v. Law Research Serv., Inc., 418 F.2d 1276, 1288 (2d Cir.1969), cert. denied, 397 U.S. 913, 90 S.Ct. 913, 25 L.Ed.2d 93 (1970).

Regarding contribution, the Tenth Circuit has indicated that an implied right to contribution exists under Section 10(b) of the 1934 Securities Act ("§ 10(b)") and Rule 10b-5 of the Securities Exchange Commission ("rule 10b-5").⁵ In addition, the majority of jurisdictions have recognized an implied right to contribution in 10(b) litigation. See, e.g., Employers...