VMS Ltd. Partnership Securities Litigation, Matter of, 91-3449
| Decision Date | 01 October 1992 |
| Docket Number | No. 91-3449,91-3449 |
| Parties | Fed. Sec. L. Rep. P 97,031, 23 Fed.R.Serv.3d 752 In the Matter of VMS LIMITED PARTNERSHIP SECURITIES LITIGATION. Appeal of EQUITY RESOURCES GROUP, INCORPORATED. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Jeffrey P. Lennard, Margo Weinstein, Sonnenschein, Nath & Rosenthal, Ronald A. Schy (argued), Beigel & Sandler, Chicago, Ill., for plaintiffs-appellees.
Robert E. Shapiro, Barack, Ferrazzano, Kirschbaum & Perlman, Chicago, Ill., for appellant.
Before MANION, Circuit Judge, and FAIRCHILD and WOOD, Jr., Senior Circuit Judges.
Equity Resources Group, Inc. ("ERG") appeals the district court's order approving a sale of property pursuant to a settlement agreement in a class action. Because we conclude that ERG has no right to appeal, we dismiss the appeal.
ERG challenges the district court's administration of a class action settlement that partially settled 40 cases. The cases were consolidated for discovery and pretrial matters in the District Court for the Northern District of Illinois before Judge Zagel as In re VMS Limited Partnership Securities Litigation, 90 C 2412 ("Consolidated Actions"). 1 The Consolidated Actions were brought in the early or mid-1980's by or on behalf of limited partners in approximately 100 syndicated limited (real estate) partnerships sponsored by VMS Realty Partners or its affiliates. The plaintiffs in the Consolidated Actions asserted claims for violations of federal securities laws, federal anti-racketeering laws, and common law fraud and breach of fiduciary duty. The plaintiffs sought compensatory damages, treble damages under the anti-racketeering laws, and punitive damages. They also sought injunctive relief to prevent sales or other dispositions of the real estate owned by the limited partnerships and to prevent further payments on mortgage loans made by certain defendants. Some plaintiffs sought rescission of their obligation to reimburse a surety or a limited partnership in the event of a default under the promissory notes executed at the time the plaintiffs purchased their limited partnership interests.
On April 3, 1991, Spitz v. VMS Realty Partners, No. 90 C 2412 ("Class Action"), was filed as a class action on behalf of limited partners in 95 VMS-sponsored syndicated limited partnerships ("Settling Limited Partnerships") against all of the defendants who had reached a tentative settlement with the Class. The Class was defined as all persons who purchased an interest in one or more of the Settling Limited Partnerships on or before December 31, 1989, regardless of whether those persons still owned the interest. ERG is the general partner for five funds which are Class members because they hold limited partnership interests in 23 Settling Limited Partnerships. Although ERG was a named plaintiff in one of the suits included in the Consolidated Actions (Moore v. Bateman Eichler, 90 C 7115 (N.D.Ill.)), it was not a named plaintiff in the Class Action.
After extensive negotiation, VMS and other settling defendants executed an agreement to settle the Class Action and partially settle the Consolidated Actions ("Settlement Agreement"). The Settlement Agreement promised settling class members specified cash payments, certain liens, and the opportunity to refinance promissory notes that some class members had used to finance investments in the Settling Limited Partnerships. It also provided for the creation of an Oversight Committee that would have the right to challenge before the district court sales of partnership properties proposed by the managing general partners. In exchange, the Class members who did not opt out would give a release of the Settling Defendants and an irrevocable proxy granting the managing partners of the Settling Limited Partnerships the power to vote in favor of a proposed disposition of the property owned by the Settling Limited Partnerships and an amendment to the partnership agreement that permitted the withdrawal and substitution of the general partners.
The establishment of the Oversight Committee proved critical to reaching settlement. Section 1.01G of the Settlement Agreement provides for the creation of the Oversight Committee and describes how it will review proposed sales. That section reads as follows:
As of the Effective Date, an Oversight Committee shall be established consisting of the members of the Plaintiffs' Counsel Executive Committee that was created pursuant to orders of the Court (the "Plaintiff's Counsel Executive Committee") and any other such persons or professionals as the Plaintiffs' Counsel Executive Committee shall designate. The managing general partner of any Settling Limited Partnership shall be required to submit information regarding proposed sales or other dispositions of real property and/or other assets owned by the Settling Limited Partnerships to the Oversight Committee for its review. During the period ending fifteen (15) days following receipt of such information concerning a proposed sale or other disposition, the Oversight Committee shall have the right, in a proceeding before the Court, to challenge the action based upon the inadequacy of the consideration being paid or other business considerations deemed appropriate by the Oversight Committee. In the event of such a challenge, the sale or disposition shall not be consummated until a ruling by the Court. All expenses, including counsel fees, regarding the operation of the Oversight Committee shall be paid from the Settlement Funds.
Section 8.13 of the Settlement Agreement defines "Court" as "the District Court for the Northern District of Illinois."
The Notice to the Class described the Oversight Committee process as follows:
All sales and other dispositions of the real estate or other assets owned by the Settling Limited Partnerships will be negotiated by and will be the responsibility of the respective managing general partners of the Settling Limited Partnerships which own the real estate or other assets, but all sales or dispositions will be subject to review by an Oversight Committee (whose members will be appointed by Class Counsel) representing the interests of the settling Class members. The Oversight Committee will have the right to petition the Court to challenge a proposed sale or disposition which in the Oversight Committee's opinion is not in the best interest of the Class members. In the event such a petition is filed, the proposed sale or disposition will not be consummated until the Court rules on the petition. 2
On June 10, 1991, ERG, as the General Partner for Fund IV, filed formal objections to the Settlement Agreement. As part of its objections, ERG challenged the Oversight Committee's composition and procedures. In an effort to persuade ERG to accept the Settlement Agreement, VMS and other Settling Defendants negotiated with ERG and signed and filed with the District Court a Memorandum of Understanding. Among other things, that Memorandum stated that the Plaintiffs' Counsel Executive Committee would "irrevocably appoint ERG as a member of the Oversight Committee for each of the twenty-three Settling Limited Partnerships in which ERG currently holds a limited partnership interest." It further provided that in its capacity as a member of the Oversight Committee, ERG would "have full access to all information to be made available to Class Counsel in its capacity as members [sic] of the Oversight Committee and all other rights as provided to the Oversight Committee, including those with respect to access to the Court." In exchange for this appointment to the Oversight Committee, ERG agreed to revoke all of its requests for exclusion and participate in and be bound by the terms of the Settlement Agreement for all of its interests. 3 ERG further agreed that although it would not withdraw the objections it had already filed, it would not appeal a final approval of the settlement.
On June 14, 1991, the district court considered the objections to settlement that had been raised. Class Counsel described the Oversight Committee at the hearing as permitting "VMS and its creditors to work together to maximize the value of the properties without being unnecessarily restricted." (Tr. Jun. 14, 1991 at 14.) In summing up the Oversight Committee process, Class Counsel explained that "the process can be there for the general partners at the appropriate time to secure the highest price for the properties without the limited partners losing their opportunity to ensure that the general partners are fulfilling their fiduciary obligations." (Tr. Jun. 14, 1991 at 14.) The district court found that the Oversight Committee was proper and the system of disposing of the properties was fair. 4
On September 19, 1991, VMS presented to the limited partners and the Oversight Committee a proposed transaction to sell the Lynnhaven Landing, an apartment complex in Virginia Beach, Virginia, owned by Lynnhaven Associates, a VMS limited partnership. VMS also sent the limited partners of Lynnhaven a notice describing the proposed sale and explaining that the sale was contingent upon review by the Oversight Committee. The notice further stated that if the limited partners had any comments or thoughts they would like the Oversight Committee to consider, they should contact Class Counsel or ERG. The Oversight Committee as a body did not submit any objection to the sale; however, ERG did. 5
After considering briefs and affidavits submitted by Class Counsel, ERG and counsel for VMS, the district court heard ERG's challenge on October 10, 1991. The district court concluded that the interests to be protected by the Oversight Committee were those of the limited partners as a class and that the Settlement Agreement contemplated only that "the degree to which individual limited partners were damaged by the course of conduct which extricated people from...
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