Farber v. Crestwood Midstream Partners L.P.

Case: 16-20742 Document: 00514075120 Page: 1 Date Filed: 07/17/2017

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

United States Court of Appeals

Fifth Circuit

No. 16-20742 FILED

July 17, 2017

LAWRENCE G. FARBER Lyle W. Cayce

Clerk

Plaintiff

v.

CRESTWOOD MIDSTREAM PARTNERS L.P.; CRESTWOOD MIDSTREAM

GP, L.L.C.; ROBERT G. PHILLIPS; ALVIN BLEDSOE; MICHAEL G.

FRANCE; PHILIP D. GETTIG; WARREN H. GFELLER; DAVID

LUMPKINS; JOHN J. SHERMAN; DAVID WOOD; CRESTWOOD EQUITY

PARTNERS L.P.; CRESTWOOD EQUITY GP L.L.C.; CEQP ST SUB L.L.C.;

MGP GP, L.L.C.; CRESTWOOD MIDSTREAM HOLDINGS L.P.;

CRESTWOOD GAS SERVICES GP, L.L.C.,

Defendants - Appellees

v.

DAVID G. DUGGAN,

Appellant

----------------------------------------------------

ISAAC ARON, Individually and on Behalf of All Others Similarly Situated,

Plaintiff - Appellee

v.

CRESTWOOD MIDSTREAM PARTNERS L.P.; CRESTWOOD MIDSTREAM

GP, L.L.C.; ROBERT G. PHILLIPS; ALVIN BLEDSOE; MICHAEL G.

FRANCE; PHILIP D. GETTIG; WARREN H. GFELLER; DAVID

LUMPKINS; JOHN J. SHERMAN; DAVID WOOD; CRESTWOOD EQUITY

PARTNERS L.P.; CRESTWOOD EQUITY GP L.L.C.; CEQP ST SUB L.L.C.;

Case: 16-20742 Document: 00514075120 Page: 2 Date Filed: 07/17/2017

No. 16-20742

MGP GP, L.L.C.; CRESTWOOD MIDSTREAM HOLDINGS L.P.;

CRESTWOOD GAS SERVICES GP, L.L.C.,

Defendants - Appellees

v.

DAVID G. DUGGAN,

Appellant

Appeal from the United States District Court

for the Southern District of Texas

Before STEWART, Chief Judge, and JOLLY and WIENER, Circuit Judges.

E. GRADY JOLLY, Circuit Judge.

The class members get nothing. The attorneys get their fees. A class

member objects, but untimely. Consequently, we lack appellate jurisdiction.

More specifically, this appeal arises from the district court’s approval of

a zero-dollar class action settlement and award of attorneys’ fees in a

consolidated lawsuit stemming from a merger between two Delaware entities:

Crestwood Midstream Partners LP (“Midstream”) and Crestwood Equity

Partners LP (“Equity”). In the class action lawsuit, Isaac Aron, a Midstream

unitholder and the class representative, alleged that Midstream’s directors

breached their fiduciary duty in approving the merger and that Equity’s

preliminary proxy statement omitted material information in violation of

federal securities laws and Securities and Exchange Commission (“SEC”)

rules. The parties settled for additional disclosures, confirmatory discovery,

and attorneys’ fees. David Duggan, a class member, objected to the settlement.

The district court approved the parties’ settlement and awarded Aron

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attorneys’ fees over Duggan’s objection. Duggan appeals. We DISMISS for

lack of appellate jurisdiction.

I.

On May 5, 2015, Midstream and Equity entered into a merger agreement

in which Midstream would become a wholly-owned subsidiary of Equity and

Midstream’s unitholders would receive 2.75 common units of Equity for each

unit of Midstream that they owned. The agreement was, however, subject to

a vote by Midstream’s unitholders.

Fifteen days later, Lawrence Farber, a Midstream unitholder, filed a

putative class action against sixteen named defendants, most notably

Midstream and Equity, asserting that: (1) Midstream’s directors breached

their fiduciary duty by attempting to sell Midstream by means of an unfair

process and for an unfair price; and (2) Equity aided and abetted such

breaches.

In June 2015, Equity filed a preliminary proxy statement with the SEC

related to the merger. The preliminary proxy, among other things,

summarized the merger agreement, explained the events leading up to the

agreement, and summarized the financial analyses of Tudor, Pickering, Holt

& Co. Advisors, LLC (“Tudor”), one of the financial advisors to the Midstream

Conflicts Committee. Two parts of the proxy addressing Tudor’s financial

analyses are particularly relevant. First, in the Contribution Analysis section,

the proxy stated that the contribution analysis indicated a range of implied

exchange ratios in the merger of 1.432x to 4.179x, as compared to the exchange

ratio of 2.750x. Second, in the Unaudited Financial Projections section, the

proxy included a table showing unaudited financial projections 1 from 2015 to

1 The financial projections were for: (1) earnings before interest, tax, depreciation, and

amortization (“EBITDA”); (2) distributable cash flow; (3) distributable cash flow per LP unit;

(4) distributions per LP unit; and (5) growth capital expenditures.

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2019 for Equity, Midstream, and the pro forma combined entity that would

result from the merger. Importantly, the proxy stated that each financial

forecast “included a base case 2 . . . , as well as an upside case[ 3] and a downside

case,[ 4] resulting from adjustments by . . . management to the applicable base

case.” But the relevant table included only one case and never identified

whether it reflected the base, upside, or downside case.

On July 6, 2015, Farber amended his complaint to add the claim that the

preliminary proxy violated SEC Rule 14a-9 5 and Section 14(a) of the Securities

Exchange Act of 1934 6 because it was materially misleading and omitted

material facts unitholders needed to properly evaluate the proposed merger.

Fifteen days later, Aron filed his own putative class action against the

Farber suit defendants, alleging that Midstream and Equity violated

Securities Exchange Act §§ 14(a) and 20(a) 7 and Rule 14a-9. Pertinently, Aron

contended that the preliminary proxy violated Section 14(a) and Rule 14a-9

because it omitted material facts regarding, among other things, key inputs

and assumptions of the financial analyses performed by Tudor.

2 The expected financial scenario.

3 The most optimistic financial scenario.

4 The most pessimistic financial scenario.

5 This Rule prohibits false or misleading statements with respect to any material fact

or the omission of any material fact in proxy statements. 17 C.F.R. § 240.14a-9(a) (stating

that a proxy statement shall not “contain[] any statement which, at the time and in the light

of the circumstances under which it is made, is false or misleading with respect to any

material fact, or which omits to state any material fact necessary in order to make the

statements therein not false or misleading”).

6 Section 14(a) provides that “[i]t shall be unlawful for any person . . . in contravention

of such rules and regulations as the Commission may prescribe . . . to solicit . . . any proxy . .

. in respect of any [registered, non-exempt] security . . . .” 15 U.S.C. § 78n(a)(1).

7 Section 20(a) provides for joint and several liability. 15 U.S.C. § 78t(a).

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Equity filed two amendments to the preliminary proxy in July and

August 2015. While they provided some of the information Farber and Aron

sought, these amendments did not provide the requested data underpinning

Tudor’s financial analyses.

On August 28, 2015, Equity filed its final proxy with the SEC. Notably,

Equity did not change the Contribution Analysis and Unaudited Financial

Projections sections.

Three days later, Midstream announced that it would hold a special

meeting for unitholders to vote on the proposed merger on September 30, 2015.

Shortly thereafter, Farber and Aron jointly moved for a preliminary injunction,

seeking to enjoin the unitholder vote until Midstream and Equity disclosed the

“material” information they had allegedly omitted from the final proxy in

violation of federal securities laws and regulations.

The district court consolidated Aron and Farber’s cases. Farber then

filed a voluntary notice of dismissal. But Aron moved for a temporary

restraining order, expedited preliminary injunction hearing, and preliminary

injunction.

The district court granted Farber’s motion to dismiss all of his claims

against Midstream and Equity and set a hearing on Aron’s motion.

The day before the scheduled hearing and after arm’s-length

negotiations, Aron, Midstream, and Equity reached a proposed settlement.

Midstream and Equity agreed to: (1) disclose financial projections that they

omitted from the proxy statement; (2) allow Aron to conduct discovery to

confirm that the proposed settlement was fair, adequate, and reasonable and

to terminate the settlement if he determined that it was not fair; and (3) not

oppose Aron’s application for an award of attorneys’ fees and expenses not to

exceed $575,000, which Midstream or its successor(s)-in-interest or their

respective insurer(s) would pay. Aron, in turn, agreed to a general release of

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the known and unknown claims that class members possessed in their capacity

as Midstream unitholders.

A week before the merger vote, Midstream supplemented the final proxy

statement with an addendum to the Unaudited Financial Projections section

that: (1) explained that the relevant table contained base case projections; and

(2) provided additional tables showing the upside and downside case

projections (together, the “supplemental disclosures”). The supplemental

disclosures showed that Midstream’s financial growth projections for EBITDA

and distributable cash flow increased at a significantly greater pace than

Equity’s under the upside case compared to the base case—facts relevant to

the fairness of the 2.75 exchange ratio.

Midstream’s unitholders voted to approve the merger on September 30,

2015.

Meanwhile, Aron reviewed both public and confidential documents

related to the merger and consulted with a financial expert to evaluate the

claims in his lawsuit. Then, in February and May 2016, Aron deposed a

member of Midstream’s Conflicts Committee, a managing director at Tudor,

and Equity’s senior vice president and chief financial officer.

After completing discovery and reviewing and analyzing his claims with

an expert, Aron concluded that his claims were not viable and that the

proposed settlement terms were fair, reasonable, and adequate. He therefore

entered into a stipulation of settlement and release.

In an order signed June 21, 2016, the district court preliminarily

approved the stipulation and certified the settlement class. The court found

that the settlement warranted notice to the class and scheduled a fairness

hearing for October 7, 2016, at which time it would hear any objections and

consider whether to give final approval to the settlement. The court then

formally approved the form and content of the proposed notice, ordering

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Midstream to mail a copy of the notice “[w]ithin fourteen (14) business days

following entry of [the] Order” to all members of the class who could “be

identified with reasonable effort.” Further, the court ordered that all record

holders who were not also beneficial owners of Midstream units must forward

notice to the beneficial owners or provide the notice administrator with a list

of the names and address of the owners. The notice administrator was then

required to use reasonable efforts to give notice to beneficial owners. The order

also specifically stated that the court would consider only objections submitted

in accordance with the procedure that it detailed in the order. 8 The order also

clearly stated that non-compliant objectors would “be deemed to have waived

[their] objection(s) (including any right of appeal) and [would] be forever barred

from making any such objection(s) . . . unless otherwise ordered by the Court.”

On June 22, 2016, the clerk entered the order, and the district court reset

the fairness hearing for October 14, 2016.

Midstream’s notice administrator, A.B. Data, Ltd., was responsible for

mailing notice. A.B. Data mailed 50,145 notices to unitholders, starting with

its initial mailing on July 13, 2016 9—the fourteenth business day after the

clerk entered the order. The notice explained how to object and that, if

objectors did not object in the prescribed manner, they would “be deemed to

have waived such objection and [would] forever be barred from raising such

objection in the Action or any other action or proceeding.” However, the notice,

8 The court required objectors to file with the court and serve upon specified counsel

no later than twenty-one calendar days prior to the hearing: (1) written notice of the intention

to appear; (2) proof of membership in the class by way of brokerage statement, account

statement, or other document evidencing ownership of Midstream units; (3) a detailed

summary of any objection(s); (4) the grounds for or reasons why they desired to appear and

be heard; and (5) all documents or writings they wanted the court to consider.

9 This initial mailing was made to the 4,534 names and addresses on a mailing list

A.B. Data compiled from a record owner list and a database of domestic brokerage firms,

banks, financial institutions, and other nominee purchasers.

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which was undated, mistakenly stated that the fairness hearing would be held

on October 7, 2016, instead of the later amended date, October 14.

No objections were filed prior to September 23, 2016, the deadline to

object to the settlement. One objection—Duggan’s—was, however, filed about

two weeks past the deadline on October 3, 2016.

This objection first asserted “good cause” for its untimeliness. Duggan

stated that, although the notice was dated June 21, 2016, he did not receive it

until “sometime in August.” But he was not, he asserted, able to file his

objection before the submission deadline of September 16th 10 because he had

to go on “a long-planned European vacation” from September 7–21, 2016.

Turning to the merits of his objection, Duggan argued that, in the context of

mergers and securities class actions, disclosure-only settlements were often

strike suits that “sold out” the class and were designed to accrue attorneys’

fees. Thus, the district court should follow In re Walgreen Co. Stockholder

Litigation, 832 F.3d 718 (7th Cir. 2016), and In re Trulia, Inc. Stockholder

Litigation, 129 A.3d 884, 894 (Del. Ch. 2016), and not approve the settlement—

that is, unless the court found that “the supplemental disclosures address[ed]

a plainly material misrepresentation or omission.” And, he argued, neither the

notice nor the supplemental disclosures asserted a plainly material

misrepresentation or omission in the proxy statements.

On October 14, 2016, the district court conducted the fairness hearing.

The hearing focused on Duggan’s objection. The district court interrogated

counsel at length about her concern that this was “a scenario where every

single time there’s . . . a merger on the table, that somebody is going to say that

there hasn’t been enough disclosed, and that’s just sort of like the new game in

10If the court had not pushed the fairness hearing back a week in its subsequent order,

this date would have been the submission deadline instead of September 23rd.

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town, and . . . [whether there] should be attorneys’ fees for disclosure” if that

were the case. The court concluded, however, that “everybody believes that the

attorneys’ fees are fair and warranted in this particular case.” The court then:

approved the class action settlement, granted certification of the settlement

class, awarded attorneys’ fees and expenses of $575,000, and entered final

judgment.

Duggan has timely appealed. He contends that we have jurisdiction to

hear the merits of his appeal, arguing that he has Article III standing and that

the untimeliness of his objection to the settlement did not constitute a waiver

of his right to appeal. Turning to the merits of his objection, he argues that

the district court erred in approving the settlement because: (1) it applied an

incorrect legal standard; (2) it did not determine whether the supplemental

disclosures provided a material benefit to the class, much less a plainly

material benefit; (3) the supplemental disclosures were immaterial as a matter

of law; (4) the court’s finding that notice was constitutionally satisfactory was

clearly erroneous; and (5) the court abused its discretion in awarding attorneys’

fees because the settlement achieved no value for the class.

II.

A.

We begin by addressing the threshold issue of our appellate jurisdiction.

Where, as here, an appellant is a “nonnamed member of a class certified under

Federal Rule of Civil Procedure 23(b)(1)” who has not “intervene[d] in the

litigation,” the underlying question is “whether [the] appellant should be

treated as a party for purposes of appealing a judgment when it was not a party

in the proceedings below,” not whether the appellant has Article III standing

or prudential standing. E.g., Devlin v. Scardelletti, 536 U.S. 1, 3–4, 6–7 (2002);

Official Comm. of Unsecured Creditors of WorldCom, Inc. v. S.E.C., 467 F.3d

73, 77 (2d Cir. 2006) (citation omitted).

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The Supreme Court has often underscored that “only parties to a lawsuit,

or those that properly become parties, may appeal an adverse judgment.” E.g.,

Devlin, 536 U.S. at 7 (citation omitted); Marino v. Ortiz, 484 U.S. 301, 304

(1988) (citing FED. R. APP. P. 3(c) (“The notice of appeal shall specify the party

or parties taking the appeal.”)). But then the Devlin Court came along and

concluded that it should carve out a limited exception to this well-established

rule: “[N]onnamed class members . . . who have objected in a timely manner to

approval of the settlement at the fairness hearing have the power to bring an

appeal without first intervening.” Devlin, 536 U.S. at 14. Central to this

appeal, however, the Court stated that its holding did not address a case in

which an objector made an “untimely objection[].” Id. at 13. That situation

“implicates basic concerns about waiver that should be easily addressable by

courts of appeals.” Id. We rise to the assigned task.

B.

Duggan provides three reasons why his failure to comply with the notice

does not constitute waiver of his appeal. First, even though he failed to file a

notice of appearance in the district court, Duggan contends that this failure is

not a waiver because the district court’s notice stated that objectors need not

appear at the fairness hearing and he did not appear. Second, Devlin did not

create a jurisdictional rule forbidding the district court from considering his

objection. And because the district court considered the merits of his objection,

we may infer that: (1) Duggan satisfied the court’s objection procedures; and

(2) the court implicitly allowed the filing deadline to be extended. Finally,

Duggan argues, Aron, the appellee, has waived his argument against Duggan’s

objection by failing to move to strike Duggan’s objection in the district court.

Notwithstanding Duggan’s arguments, we conclude that we lack

jurisdiction over this appeal because Duggan, a nonparty, non-intervenor,

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waived his right to appeal by filing an untimely, procedurally deficient 11

objection.

Turning to Duggan’s arguments, the fact that the district court

considered the merits of Duggan’s objection before dismissing it does not cure

the waiver problem for Duggan. The district court’s June order stated that

objectors who filed noncompliant objections would “be deemed to have waived

[their] objection(s) (including any right of appeal) . . . unless otherwise ordered

by the Court.” The court, in approving the settlement agreement, did indeed

interrogate the parties relating to the subject matter of Duggan’s objection, but

it neither indicated that it had accepted, approved, or waived the objection’s

procedural defects. It certainly did not hold that Duggan had good cause for

failing to timely submit his objection. Moreover, waiver of appellate rights

does not turn on how a district court chooses to address a late or deficient

objection. As Devlin recognized, “waiver of objections below” is “the type of

issue[] . . . typically addressed only by an appellate court.” Devlin, 536 U.S. at

14. And the issue of waiver essentially turns on whether waiver “was made

knowingly and voluntarily.” See United States v. Anglin, 215 F.3d 1064, 1068

(9th Cir. 2000), superseded on other grounds by United States v. Lo, 839 F.3d

777 (9th Cir. 2016); see also United States v. Walters, 732 F.3d 489, 491 (5th

Cir. 2013) (citation omitted). This test is easily applied here because Duggan

duly received specific notice of the objection requirements, yet knowingly failed

to comply with those requirements.

Furthermore, Duggan’s argument that Aron was required to move the

district court to strike Duggan’s objection as a predicate to raising Duggan’s

procedural failures is unpersuasive. Duggan bases his argument upon the

11Duggan’s objection was procedurally deficient because he did not file with the court,

or serve upon counsel, written notice of his intent to appear at the fairness hearing.

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unpublished case Younce v. Barnhart, 98 F. App’x 305 (5th Cir. 2004). In

Younce, the magistrate judge ruled in favor of a Social Security claimant,

Younce, reversing the Commissioner of Social Security’s denial of benefits. See

id. at 305–06. The district court rejected the magistrate judge’s report and

recommendation and, instead, affirmed the Commissioner’s denial of benefits.

Id. at 305. Younce appealed, arguing that the district court had “erred by

considering the Commissioner’s untimely objections to the magistrate’s”

report. Id. We held that Younce had “no basis to complain of the district court’s

[decision] . . . even though [the Commissioner’s] objections were untimely”

because the “court was free to reject the . . . report . . . in [the] absence of the

filing of objections.” Id. at 306. Duggan’s argument hinges on our additional

statement—made without any citation—that “if Younce felt aggrieved by the

district court’s acceptance of [late] objections . . . , his proper course was to file

a motion to strike, a motion for an extension of time to file a counter written

objection, or a motion for reconsideration.” Id.

We find Younce completely inapposite. The case does not touch upon the

rights of a nonparty to appeal the judgment of a district court. Nor does it in

any other way address appellate jurisdiction as such. Younce addressed the

plenary powers that district courts possess over their magistrate judges—i.e.,

whether a district court is constrained from exercising its power to reject a

magistrate’s report when the losing party before the magistrate fails to timely

object to the report. Id. at 306. And its statement with respect to motions to

strike seems gratuitous: the Commission likely did not have to file any

objections at all given the fact that the district court did not accept, but instead

rejected, the magistrate judge’s report. See id.; Douglass v. United Servs. Auto.

Ass’n, 79 F.3d 1415, 1430 (5th Cir. 1996) (en banc) (setting out the rule raised

in Younce: if parties do not object to a magistrate’s report in a timely manner,

this Court will apply plain error review to any of “the unobjected-to proposed

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factual findings and legal conclusions accepted by the district

court”), superseded by statute on other grounds, 28 U.S.C. § 636(b)(1). Duggan

attempts to bootstrap his jurisdictional untimeliness argument to a case based

on irrelevant facts, irrelevant procedure, and irrelevant law.

In sum, Duggan’s reasons for his several failures are lame. Duggan

opted to go on vacation, which may well have seemed like a good idea at the

time. He submitted his procedurally deficient objection, however, after he

returned from vacation and ten days after the actual deadline. Such choices

have consequences. Devlin’s specific exception for nonparty objectors is limited

to those who have “who have objected in a timely manner.” Devlin, 536 U.S.

at 14. In short, what we have decided today is consistent with the application

of Devlin to nonparty objectors. 12 Duggan fails to qualify for the Devlin

exception, and, because Duggan is also a nonparty to the judgment below, we

have no appellate jurisdiction over his claims.

12 E.g., Abeyta v. City of Albuquerque, 664 F.3d 792, 796 (10th Cir. 2011) (holding “that

the Devlin exception . . . will only apply where the nonparty has a unique interest in the

litigation and becomes involved in the resolution of that interest in a timely fashion both at

the district court level and on appeal”); In re UnitedHealth Grp. Inc. S’holder Derivative

Litig., 631 F.3d 913, 916–17 (8th Cir. 2011) (“A shareholder—or an unnamed class member

for that matter—must file a timely objection pursuant to district court procedure, or else he

loses any right he would have otherwise had to appeal a settlement agreement.”); In re

Plastics Additives Antitrust Litig., No. 08-3358, 2009 WL 405522, at *1 (3d Cir. Feb. 19, 2009)

(“For an unnamed class member to have standing to appeal a decision in a class action, he or

she must have properly raised objections to that decision during the pendency of the

litigation.”); In re Integra Realty Res., Inc., 354 F.3d 1246, 1251, 1257–58 (10th Cir. 2004)

(holding that a class member waived his right to appeal because he did not strictly comply

with the objection procedure laid out by the district court); Grinberg v. Maria’s Holding Corp.,

No. B244535, 2013 WL 6061764, at *6 & n.9 (Cal. Ct. App. Nov. 18, 2013) (looking to Integra

and UnitedHealth Grp. in holding that it had no appellate jurisdiction over an appeal to a

settlement brought by an unnamed class member who filed an untimely objection and was

not permitted to intervene); Velma-Alma Indep. Sch. Dist. No. 15 v. Texaco, Inc., 162 P.3d

238, 242 (Okla. Civ. App. 2007) (“Devlin and Integra make plain that to preserve an objection

to a class settlement agreement, and to be considered a party, for purposes of appeal, the

objecting party must present his objection at the settlement fairness hearing by following

whatever directions are given in the notice to secure the right to present those objections at

the hearing.”).

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III.

For the reasons we have set out above, this appeal, for lack of appellate

jurisdiction, is DISMISSED.

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