Jones v. Singing River Health Services Foundation

Case: 16-60550 Document: 00514090716 Page: 1 Date Filed: 07/27/2017

IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT United States Court of Appeals

Fifth Circuit

FILED

July 27, 2017

No. 16-60550

Lyle W. Cayce

Clerk

THOMAS JONES, on behalf of themselves and others similarly situated;

JOSEPH CHARLES LOHFINK, on behalf of themselves and others similarly

situated; SUE BEAVERS, on behalf of themselves and others similarly

situated; RODOLFOA REL, on behalf of themselves and others similarly

situated; HAZEL REED THOMAS, on behalf of themselves and others

similarly situated,

Plaintiffs - Appellees

v.

SINGING RIVER HEALTH SERVICES FOUNDATION; SINGING RIVER

HEALTH SYSTEM FOUNDATION; SINGING RIVER HOSPITAL SYSTEM

FOUNDATION, INCORPORATED; SINGING RIVER HOSPITAL SYSTEM

EMPLOYEE BENEFIT FUND, INCORPORATED; SINGING RIVER

HOSPITAL SYSTEM; MICHAEL J. HEIDELBERG; MICHAEL D.

TOLLESON; TOMMY LEONARD; LAWRENCE H. COSPER; MORRIS G.

STRICKLAND; IRA POLK; STEPHEN NUNENMACHER; HUGO

QUINTANA; GARY C. ANDERSON; STEPHANIE BARNES TAYLOR;

MICHAEL CREWS; SINGING RIVER HEALTH SYSTEM; ALLEN

CRONIER; MARTIN BYDALEK; WILLIAM DESCHER; JOSEPH VICE;

ERIC WASHINGTON; MARVA FAIRLEY-TANNER; GRAYSON CARTER,

JR,

Defendants - Appellees

v.

CYNTHIA N. ALMOND; FRANCISCO C. AGUILAR; KITTY PATRICIA

AGUILAR; TANYA R. ARDOIN; RAY J. BARBOUR, ET AL

Appellant

******************************************************************

REGINA COBB, on behalf of themselves and others similarly situated, ET AL

Plaintiffs

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v.

SINGING RIVER HEALTH SYSTEM; BOARD OF TRUSTEES FOR THE

SINGING RIVER HEALTH SYSTEM; MICHAEL J. HEIDELBERG, in their

individual and official capacities; MICHAEL D. TOLLESON, in their

individual and official capacities; ALLEN L. CRONIER, in their individual and

official capacities; TOMMY L. LEONARD, in their individual and official

capacities; LAWRENCE H. COSPER, in their individual and official

capacities; MORRIS G. STRICKLAND, in their individual and official

capacities; IRA S. POLK, in their individual and official capacities; STEPHEN

NUNENMACHER, in their individual and official capacities; HUGO

QUINTANA, in their individual and official capacities; MARVA FAIRLEY-

TANNER, in their individual and official capacities; WILLIAM C. DESCHER,

in their individual and official capacities; JOSEPH P. VICE, in their individual

and official capacities; MARTIN D. BYDALEK, in their individual and official

capacities; ERIC D. WASHINGTON, in their individual and official capacities;

G. CHRIS ANDERSON, in their individual and official capacities; KEVIN

HOLLAND, in their individual and official capacities,

Defendants - Appellees

v.

CYNTHIA N. ALMOND; FRANCISCO C. AGUILAR; KITTY PATRICIA

AGUILAR; TANYA R. ARDOIN; RAY J. BARBOUR, ET AL

Appellants

Appeal from the United States District Court

for the Southern District of Mississippi

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Before HIGGINBOTHAM, JONES, and HAYNES, Circuit Judges.

EDITH H. JONES, Circuit Judge:

The Singing River Health System (SRHS), a community hospital owned

by Jackson County, Mississippi, created a defined benefits pension fund into

which employees have recently been paying three percent of their paychecks

and to which SRHS was obliged to contribute whatever additional amounts

were actuarially required to fund the Plan’s promised benefits. From 2009-14,

however, the hospital fell into serious financial difficulties and made only one

plan contribution. The Plan was “frozen” in late November 2014. This appeal

considers objections to the settlement of class actions that arose in the wake of

the financial crisis. The most troubling issues center on the extraordinarily

long-term, unsecured, and unpredictable proposed payout of the settlement

amount and the release of the County, a non-party, from liability. We vacate

and remand for further consideration of issues concerning the settlement’s

consequences for Plan beneficiaries.

BACKGROUND

As described by its CEO, SRHS “is a community-owned not-for-profit

health system owned by Jackson County. [Miss. Code Ann. § 41-13-10(c).] It

consists of two hospitals . . . [and] five primary care clinics . . . , [and] [i]t

employs about 2,400 people.” SRHS is the largest employer in Jackson

County. County Supervisors appoint seven of the nine members of the SRHS

Board; the Chief of Staff and Chief-elect of SRHS occupy the other two seats.

See Miss. Code. Ann. § 41-13-29. SRHS created the Employees’ Retirement

Plan and Trust (the “Plan”) in 1983 as a successor to the Public Employees’

Retirement System of Mississippi.

Since 2008, the most recent version of the Plan has required employees

to contribute three percent of their salaries to the Plan. Further, SRHS “shall

have the sole responsibility for making the [actuarially determined]

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contributions necessary to provide benefits under the Plan, as administered by

the Board of Trustees of [SRHS].” Finally, although the Plan states that it was

established in confidence that it would continue indefinitely, SRHS “reserve[s]

the right to terminate the Plan . . . , in whole or in part, at any time.”

SRHS’s finances became increasingly imperiled during the 2008

recession and with the reduction of federal assistance. Consequently, and

without informing the employees, SRHS failed to make all but one of its

contributions needed to maintain the Plan’s fiscal integrity from 2009 to 2014.

In late November 2014, the hospital Board, together with executives and

counsel, decided to liquidate the Plan. On December 1, 2014, SRHS announced

it was freezing the Plan and, “[i]n the coming months, the Plan will be officially

liquidated.” At that point, there were over three thousand Plan participants,

both current and past employees, of whom approximately 600 were retirees

receiving monthly payments.

Counsel for retirees, many of whom have become Objectors to the

proposed settlement, immediately sought injunctive relief in the Jackson

County Chancery Court, which ordered SRHS not to terminate the Plan. Since

that date, however, the Plan has remained “frozen” in that no contributions

have been made by employees or SRHS. Plan assets are being steadily

depleted, however, because benefit payments to retirees have continued

without interruption. In August 2015, the Chancery court held SRHS indebted

as a matter of law to the Plan for the missed contributions plus lost earnings,

a sum exceeding $55 million.

Numerous lawsuits were soon filed in state and federal court after the

announced termination of the Plan. Pertinent here are three Rule 23 class

actions commenced and later consolidated in the federal district court, styled

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as the Jones, Cobb, and Lowe cases. 1 The operative complaint in the lead case,

Jones, names as defendants the Singing River Health Services Foundation,

Singing River Health System Foundation, Singing River Hospital System

Foundation, Inc., Singing River Hospital System Employee Benefit Fund, Inc.,

and Singing River Hospital System (collectively, “SRHS Defendants”), along

with various individual SRHS executives and members of SRHS’s Board of

Trustees. KPMG, LLP, and Transamerica Retirement Solutions Corporation,

advisers and administrators of the Plan, also were joined as defendants. See

Jones v. Singing River Health Sys., No. 1:14-CV-447, 2016 WL 6106521 (S.D.

Miss. June 2, 2016). 2 The Jones complaint alleged multiple causes of action

for, inter alia, state and federal constitutional violations, federal law breaches

of ERISA, and state law claims for breach of contract, fraud, and breach of

fiduciary duty. See id.

Expedited discovery led to the production of “thousands of pages of SRHS

financial documents” that enabled the plaintiffs’ retained CPA expert to

calculate the missed contributions and associated lost Plan earnings. The

district court appointed former Chief United States Bankruptcy Judge for the

Northern District of Mississippi, David M. Houston, as a mediator, and several

mediation sessions, open to various counsel including those of the Objectors,

occurred over the next several months.

When the Jones Plaintiffs moved for preliminary approval of a

settlement, the court granted the motion, conditionally certified the class, and

approved procedures for notifying class members, who include all current and

1 A fourth class putative action was stayed pending resolution of this settlement.

2Claims against KPMG, LLP and Transamerica Retirement Solutions Corporations

remain pending in the district court. The district court did not err in denying KPMG’s motion

to compel arbitration as to the Lowe plaintiffs. See Jones v. Singing River Health Servs.

Found., 674 F. App’x 382 (5th Cir. 2017) (affirming the district court judgment).

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former employee Plan participants, their spouses, alternate payees, death

beneficiaries, or “any other person to whom a plan benefit may be owed.”

On April 1, 2016, the Plaintiffs moved for approval of the final settlement

(the “Settlement Agreement”). The Settlement Agreement contains the

following terms specifically touted in the district court opinion:

• SRHS must deposit a total of $149,950,000 into the retirement

trust under a thirty-five year schedule. According to the testimony

of the Plaintiff’s accountant, the present value of this sum equals

the $55 million sum owed by SRHS to the Plan for missed

contributions and lost earnings from 2009-14, calculated with a six

percent discount rate.

• Jackson County, Mississippi, will pay SRHS $13,600,000 over

eight years “[t]o support the indigent care and principally to

prevent default on a bond issue by supporting the operations of

SRHS.” Jackson County earlier guaranteed the bond issue;

• SRHS will pay attorneys’ fees of $6.45 million and expenses up to

$125,000 of all Plaintiffs’ counsel;

• SRHS will pay incentive awards to the individual class

representatives in an amount totaling $12,500;

• The parties will jointly petition the Chancery Court of Jackson

County for an order that requires the Plan to be monitored by that

court for the duration of the payment schedule;

• SRHS’s CFO will give quarterly reports to Stephen Simpson, the

Special Fiduciary appointed by the Chancery Court to oversee the

Plan;

• Any adjustment to the Plan can only be made with the

recommendation of the Special Fiduciary and approval of the

Chancery Court after 60 days’ notice to Class Members and an

opportunity for hearing;

• Plan distributions can only be changed or terminated with the

approval of Simpson and the Chancery Court;

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• If SRHS recovers money from other entities or individuals, e.g.,

KPMG or Transamerica, Simpson can petition the Chancery Court

to accelerate SRHS’s payments;

• In the event of SRHS’s default on its payment obligations, there

will be a proceeding in the Chancery Court, and that court can

enter judgment on ten days’ notice for the unpaid balance.

See Jones, 2016 WL 6106521, at *3–5 (district court opinion summarizing the

Settlement Agreement). The Settlement Agreement preserves the rights of

“all parties,” the plaintiffs and SRHS, to pursue claims against corporate

entities like KPMG and Transamerica. However, the SRHS entities, all

individual defendants associated with those entities, and Jackson County

(although not a party to the lawsuits) are released broadly from any possible

claims. Jones, 2016 WL 6106521, at *5. Further, as a result of the settlement

negotiations, a majority of the SRHS Board resigned, and Jackson County

retained a turnaround firm to improve SRHS operations and long term

financial stability.

Additional important features of the Settlement Agreement not

mentioned in the court’s opinion are the following:

• There is no collateral or security for the payments owed the Plan by

either SRHS or Jackson County; these are wholly unsecured

promises to pay.

• The schedule of payments, Ex. A to the settlement agreement, calls

for SRHS to make full payout of the Plaintiffs’ attorney fees and

expenses (over $6.5 million) by the end of September 2018.

• According to the Ex. A payment schedule, SRHS must pay the Plan

$6.4 million by September 2017. Then SRHS commits to pay annual

amounts totaling $2.4 million for the next two years (through 2019),

escalating to $4.2 million from 2020 to 2023. Payments totaling $5.7

million are due in 2024, and annual payments of $4.5 million follow

until completion of the payout in 2051. Id.

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• Jackson County owes, under Ex. A, $5.2 million through September

2017, followed by annual payments of $1.2 million through 2024.

• If SRHS obtains payments in litigation against KPMG,

Transamerica, or insurers in connection with these matters, Simpson

“may petition the Chancery Court to accelerate the payment

schedule,” and SRHS may oppose that request. Any such recoveries,

in other words, do not automatically accrue to the benefit of the Plan,

nor will they benefit the Plan in addition to the amounts SRHS must

pay.

• Although approval of any changes in distribution, Plan restructuring

and/or Plan termination require approval of Simpson and the

Chancery Court, that paragraph of the settlement agreement begins

by stating: “The payment of the SRHS Consideration may require

modification of the Plan to equitably distribute the benefits paid.”

Attorneys Earl L. Denham and W. Harvey Barton represent 245

Objectors to the settlement agreement, about 200 of whom are retirees

currently receiving benefits under the Plan and, in many cases, substantially

depending on those benefits. Their clients comprise about one-third of the

Plan’s current beneficiaries. The Objectors argued the “settlement is illusory,

provides no real protection for class members, and lacks any specificity as to

how different class members will be treated should the class be certified and

the settlement approved.” They also maintained the class did not meet the

requirements for certification, and a release of Jackson County was improper.

The SRHS Defendants and Plaintiffs supported the Settlement Agreement as

the only alternative to lengthy, costly litigation; the only vehicle for obtaining

a contribution from Jackson County; and the only feasible way to obtain some

reimbursement from the still-financially precarious SRHS.

The district court held a fairness hearing on the Settlement Agreement

on May 16–17, 2016 (“Fairness Hearing”), at which thirteen live witnesses

testified. Lee Bond, CFO of SRHS, testified about the financial stability of

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SRHS, the Settlement Agreement, and how the settlement will affect the

Singing River hospital system. Wayne Allen Carroll, Jr., an accountant with

experience auditing employee benefit plans, testified about how he calculated

the value of the missed annual required contributions between 2009 and 2014.

Carroll valued the missed contributions at $55,714,784. Because the hospital

did not have the present ability to make that payment, the settlement sets

forth a payment schedule over a thirty-five year period. Accordingly, the total

amount to be paid was adjusted to $149,950,000 to account for the present

value of the missed contributions.

Three of the five class representatives, Joseph Lohfink, Hazel Thomas,

and Sue Beavers, also testified in support of the settlement at the Fairness

Hearing. The Objectors offered testimony of members of their group in

opposition. Attorney Stephen Simpson, the Special Fiduciary in the Chancery

Court proceeding, was permitted to make a brief statement supporting the

Settlement Agreement. In so doing, he noted that he had “requested and

reviewed preliminary benefit payout models, based upon certain assumptions,

including the consideration proposed in the settlement.” The court denied

Objectors’ request to cross-examine Simpson, and it rejected the request to

recall Bond as an adverse witness and to call SRHS Comptroller Craig

Summerlin.

On June 2, 2016, the district court entered a memorandum opinion and

order granting the motion for final approval of the class action settlement. See

Jones, 2016 WL 6106521. After carefully considering the issues, the court

determined that the settlement “is fair, reasonable and adequate, is ordered

finally approved, and shall be consummated in accordance with its terms and

provisions.” The class was certified pursuant to Fed. Rule Civ. Pro. 23(b)(1)(A),

which authorizes non-opt-out class actions where “prosecuting separate

actions by or against individual class members would create a risk of . . .

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inconsistent or varying adjudications . . . that would establish incompatible

standards of conduct for the party opposing the class . . . .” Determining that

there was no just reason for delay, the district court entered partial final

judgment under Rule 54(b) as to the claims against the settling defendants.

The Objectors timely appealed. 3

STANDARD OF REVIEW

“The abuse-of-discretion standard governs this court’s review of both the

district court’s certification of the class and its approval of the settlement under

Rule 23.” In re Deepwater Horizon, 739 F.3d 790, 798 (5th Cir. 2014). See also

Newby v. Enron Corp., 394 F.3d 296, 300 (5th Cir. 2004) (“A district court’s

approval of a class action settlement may be set aside only for abuse of

discretion.”). “Implicit in this deferential standard is a recognition of the

essentially factual basis of the certification inquiry and of the district court’s

inherent power to manage and control pending litigation.” Allison v. Citgo

Petrol. Corp., 151 F.3d 402, 408 (5th Cir. 1998). Whether the district court

3 This court has appellate jurisdiction under 28 U.S.C. § 1291. The district court

properly exercised subject matter jurisdiction over this dispute. See 28 U.S.C. §§ 1331,

1332(d)(2), 1367(a). The Jones complaint alleged federal claims under the United States

Constitution, 42 U.S.C. § 1983, and ERISA. The Cobb complaint alleged federal claims under

42 U.S.C. § 1983 and ERISA. Despite allegations under ERISA, the plan is a governmental

plan, and thus is exempt from ERISA. 29 U.S.C. § 1003(b)(1); The Lowe complaint, however,

alleged jurisdiction under the Class Action Fairness Act (CAFA), 28 U.S.C. § 1332(d). The

amount in controversy exceeds $5 million, one or more of the Defendants are non-residents

of the State of Mississippi, and members of the class are also non-residents of the State or

Mississippi. 28 U.S.C. § 1332 (Diversity-CAFA). See Frazier v. Pioneer Americas LLC,

455 F.3d 542, 546–47 (5th Cir. 2006) (holding the state action bar to CAFA jurisdiction

applies only where all primary defendants are states, state officials, or other governmental

entities against whom the district court may be foreclosed from ordering relief).

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applied the correct legal standard in its consideration of the settlement is

reviewed de novo. Deepwater Horizon, 739 F.3d at 798.

DISCUSSION

Under Rule 23, a court must hold a hearing to consider whether a

proposed class action settlement is “fair, reasonable, and adequate.” Fed. R.

Civ. P. 23(e)(2). At the fairness hearing, “[o]bjectors have a right to be heard,

but a fairness hearing is not a full trial proceeding.” Union Asset Mgmt.

Holding A.G. v. Dell, Inc., 669 F.3d 632, 641 (5th Cir. 2012). Nevertheless,

“district judges must . . . exercise the highest degree of vigilance in scrutinizing

proposed settlements of class actions to consider whether the settlement is fair,

adequate, and reasonable, and not a product of collusion.” Mirfasihi v. Fleet

Mortg. Corp., 450 F.3d 745, 748 (7th Cir. 2006) (internal quotation marks

omitted). This court has set forth a six-factor test (the “Reed Test”), to

determine the appropriateness of a proposed settlement:

(1) the existence of fraud or collusion behind the settlement; (2) the

complexity, expense, and likely duration of the litigation; (3) the stage

of the proceedings and the amount of discovery completed; (4) the

probability of plaintiffs’ success on the merits; (5) the range of possible

recovery; and (6) the opinions of the class counsel, class

representatives, and absent class members.

Reed v. Gen. Motors Corp., 703 F.2d 170, 172 (5th Cir. 1983) (citation omitted).

The district court considered each of the elements of class certification

as well as the Reed factors, all of which, it found, weigh in favor of approving

the proposed settlement. The court’s treatment of the individual Reed factors

will be discussed infra as pertinent to the issues on appeal.

On appeal, the Objectors challenge the class certification and the court’s

approval of the settlement. Specifically, they assert that the district court

abused its discretion by (1) ignoring evidence of collusion and by failing to order

further discovery; (2) finding the Settlement Agreement was fair, reasonable,

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and adequate although its future payments to Plan participants are uncertain,

SRHS was not required to reimburse contributions owed to the Plan through

2016, and a large number of class members object; (3) overlooking perjury and

the alleged destruction of documents; (4) approving the release of Jackson

County; (5) approving the settlement where “there is known pending

litigation” against Jackson County; and (6) admitting “testimony” of Simpson

at the fairness hearing without cross-examination. Each issue will be

discussed in turn.

I.

The Objectors maintain that the district court improperly certified the

class under Rule 23. Class certification under Rule 23 has four requirements:

(1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of

representation. Fed. R. Civ. P. 23(a); see also Ibe v. Jones, 836 F.3d 516, 528

(5th Cir. 2016). The burden is on the party seeking certification to satisfy these

requirements. See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 345, 131 S. Ct.

2548 (2011).

The Objectors challenge only the fourth requirement: the adequacy of

both class counsel and class representatives. The Objectors challenge the zeal

and competence of class counsel by questioning many of the decisions made by

class counsel, including the fact that counsel did not pursue damages beyond

2014. 4 The Objectors also argue there was no evidence that class counsel met

with class representatives to explain the settlement, no evidence that counsel

produced any detailed documentation that would allow class members to

4 Objectors also argue the fact that one of the class representative’s names (Rodolfo A.

Rel) was misspelled in some of the pleadings shows counsel’s inadequacy, but as the district

held, “a typographical error is insufficient evidence that the attorney-class representative

relationship was lacking.”

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understand the settlement, and no evidence provided to the district court on

how or how much the settlement will pay out to each class member.

The district court explained that the class counsel were experienced in

complex litigation and qualified to represent the interests of the proposed class.

In regard to the representatives themselves, the district court found that the

class representatives have the same interest and desire as the rest of the

proposed class to receive retirement benefits as promised by the Plan, and

there was no evidence that the class representatives suffer from a conflict of

interest. The court concluded the representatives would adequately represent

the interests of the class.

Under Rule 23(a)(4), “the representative parties [must] fairly and

adequately protect the interest of the class.” Fed. R. Civ. P. 23(a)(4).

Rule 23(a)(4) involves examination of both the representatives’ counsel and the

representatives themselves. See Horton v. Goose Creek Indep. Sch. Dist.,

690 F.2d 470, 484 (5th Cir. 1982). More specifically, “[t]he adequacy

requirement mandates an inquiry into the zeal and competence of the

representative’s counsel and into the willingness and ability of the

representative to take an active role in and control the litigation and to protect

the interests of absentees.” Id. “The adequacy inquiry also ‘serves to uncover

conflicts of interest between the named plaintiffs and the class they seek to

represent.’” Berger v. Compaq Comput. Corp., 257 F.3d 475, 479–80 (5th Cir.

2001) (quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625, 117 S. Ct.

2231, 2251 (1997)).

Class counsels’ decision not to pursue damages after 2014 was based on

the legal uncertainty whether the class could prevail on claims for additional

amounts unpaid by SRHS into the Plan, and the greater practical concern

whether SRHS could financially make any additional commitment (discussed

infra) beyond restoring the missed payments from 2009 to 2014. In the face of

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this rational calculation, the Objectors are incorrect that limiting the litigation

in this way demonstrates class counsel’s inadequacy.

The Objectors’ contention that there was no evidence that class counsel

met with class representatives is refuted by their testimony at the fairness

hearing, as is the contention that the representatives did not understand the

Settlement Agreement. Objectors’ third contention, which concerns the

production of documents to the district court, is not relevant to the issue of

adequacy of representation. Accordingly, this case is distinguishable from

those in which class representatives were inadequate. See Amchem, 521 U.S.

at 626–28, 117 S. Ct. at 2251 (class members were inadequate where they had

diverse, conflicting interests in receiving medical payments). The district court

did not abuse its discretion in determining that class representation was

adequate for certification.

II.

Pertinent to the first Reed factor concerning the settlement, the

Objectors argue that there was evidence of collusion between class counsel and

the defendants sufficient to warrant disapproving the Settlement Agreement.

Without citing the state court record, the Objectors emphasize numerous

curious events in the state court proceedings—ex parte meetings, one judge’s

refusal to recuse, denied discovery requests, alleged improper handling of

signed orders, and alleged conflicts. Positing a quid pro quo for counsels’ less

than zealous negotiations, they also question the circumstances that led to a

stipulation of class counsel fees within the Settlement Agreement.

The district court found no evidence of collusion or fraud under Reed.

The time to present evidence regarding collusion would have been at the

fairness hearing. See Reed, 703 F.2d at 172. Despite the court’s admonishing

Objectors’ counsel to substantiate their allegations with competent evidence at

least four times during the fairness hearing, the Objectors presented none.

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Their request for additional discovery was thus a fishing expedition that the

court justifiably preempted.

Moreover, the district court, rightly concerned about the implications of

the “clear sailing” fee agreement 5 between class counsel and the SRHS

defendants, applied a heightened standard of care in examining the allegations

of collusion. In re Bluetooth Headset Litig., 654 F.3d 935, 946 (9th Cir. 2011).

After careful review of these contentions, the court found that none of the

allegations presented proved collusion. State court discovery decisions, and an

allegedly ex parte meeting among SRHS counsel, class counsel and the state

court that postdated the Settlement Agreement do not raise a fact issue

regarding collusion. The court also rejected Objectors’ contention that the

settlement was collusively produced because an attorney for SRHS

represented a former member of the SRHS Board of Trustees during a state

court deposition; Objectors failed to show that, even if a conflict of interest

existed, the settlement negotiations themselves were unfair or collusive.

To the contrary, the district court relied heavily on the fact that a well-

recognized neutral mediator oversaw settlement negotiations of the federal

cases to ensure they were conducted at arms’ length. That mediator’s affidavit

affirmed that, “[a]t all times, the participating parties’ negotiations were civil,

professional, but hard fought. The negotiations were conducted at arm’s length

without collusion.” The involvement of “an experienced and well-known”

mediator “is also a strong indicator of procedural fairness.” Morris v. Affinity

5 The district court cited the following definition of a clear sailing clause: “A

compromise in which the defendant agrees not to contest the amount awarded by the court

presiding over the settlement as long as the award falls beneath a negotiated ceiling.”

William D. Henderson, Clear Sailing Agreements: A Special Form of Collusion in Class

Settlements, 77 Tul. L. Rev. 813, 813 (Mar. 2003). The use of a clear sailing provision is

recognized as a red flag regarding arms-length class action settlement negotiations, but it

does not automatically justify a finding of collusion. See, e.g., Gooch v. Life Ins. Co. of Am.,

672 F.3d 402, 426 (6th Cir. 2012).

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Health Plan, Inc., 859 F. Supp. 2d 611, 618 (S.D.N.Y. 2012). See also La Fleur

v. Med. Mgmt. Int’l, Inc., 2014 WL 2967475, at *4 (C.D. Cal. June 25, 2014)

(“Settlements reached with the help of a mediator are likely non-collusive”).

“Because Appellants have pointed to no record evidence that contradicts

this finding . . . [,] we reject their contention that collusion was present in the

settlement negotiations.” Ayers v. Thompson, 358 F.3d 356, 369 (5th Cir.

2004). The district court did not clearly err or abuse its discretion in holding

that the proposed settled was not the product of collusion or fraud. 6

III.

The Objectors next argue that the Settlement Agreement is not fair,

reasonable, or adequate. Their contentions embrace several of the Reed

factors, including the court’s estimate of the complexity and expense of ongoing

litigation (factor 2); the probability of plaintiffs’ success on the merits (factor

3); and the range of possible recovery (factor 5). Numerous individual points

are made, a number of which are articulated for the first time in this court.

One of their principal propositions is that the court evaluated only the terms

of SRHS’s reimbursing the Plan without considering how the settlement would

affect individual beneficiaries. A second proposition is that no evidence at the

fairness hearing demonstrated how SRHS will comply with its payment

obligations in the future or how the Plan’s inevitable termination will affect

the class members. 7 Objectors also claim that the Settlement Agreement lacks

6 In upholding the district court’s ruling on this point, we neither comment on nor

affirm the integrity of the state proceedings. Some of the Objectors’ allegations about those

proceedings are provocative, to be sure, and raise issues that may potentially bear on the

status of the Plan and SRHS payments in the future. But any possible state court

irregularities did not influence the class action settlement negotiations overseen by the

district court and its experienced mediator.

7The Objectors also claim that the district court’s preliminary certification of the class

action as a “limited fund” under Rule 23(b)(1) was in error. Similarly, Objectors argue

without citing any authority that the Settlement Agreement is not fair because it did not

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adequate safeguards for future declines in the financial health of SRHS. These

are serious arguments that go to the heart of the settlement’s consequences for

the plaintiffs and thus to its fairness and adequacy.

Because the district court’s discussion focused too narrowly on SRHS’s

proffered payments, we will vacate and remand for further elucidation of

points relevant to the hospital’s ability to sustain the promised settlement

payments, how the settlement affects the plaintiffs, and why class counsel

should receive their multimillion dollar fees up-front while significant

uncertainty surrounds SRHS’s future compliance. In this section, we also

reject other complaints objectors make against the settlement.

A.

“The court must be assured that the settlement secures an adequate

advantage for the class in return for the surrender of litigation rights against

the defendants.” In re Katrina Canal Breaches Litig., 628 F.3d 185, 195 (5th

Cir. 2010). “A district court faced with a proposed settlement must compare

its terms with the likely rewards the class would have received following a

successful trial of the case.” Reed, 703 F.2d at 172. This inquiry may also

involve whether or not the defendant had the financial means to pay a greater

judgment than the settlement agreement. Settlements have been considered

fair when “there would be almost insurmountable problems collecting any

judgment against the Settling Defendants” due to their “financial insolvency.”

Newby, 394 F.3d at 302. The Objectors take issue with the district court’s

contain an opt-out provision. However, the District Court ultimately certified this class

under, Rule 23(b)(1)(A), as “a mandatory settlement class,” Objectors have not briefed the

propriety of this legal determination, and it is waived.

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opening comment at the fairness hearing that, “even bad settlements are better

than protracted litigation.”

Objectors initially challenge the fairness and adequacy of the Settlement

Agreement because the settling parties concededly provided no information

regarding the actual payments retirees would receive in the future under the

agreement. Appealing on behalf of their clients, many of whom currently rely

on the Plan’s retirement payments, the Objectors urge that SRHS and the class

counsel had a duty to inform the class members transparently about how the

settlement would affect their individual financial positions in the future. How

much could they expect to receive compared with the implicit promise of

lifetime guaranteed payments embodied in the defined benefits Plan? This is

a legitimate question, albeit one that is fraught with contingencies and could

not readily have been answered for each of over three thousand Plan

participants. Instead, the settlement proponents’ testimony assured that

given SRHS’s desperate financial straits, whatever the hospital could promise

simply to make up its contribution shortfalls from 2009-14 was all that class

members, individually or collectively, could expect. The district court accepted

this bit-of-a-loaf-is-better-than-none approach and rejected Objectors’

contention that more disclosure was required concerning the Settlement’s

impact on Plan participants.

In addition, the testimony taken as a whole was remarkably vague about

SRHS’s future ability to fund its share of payments as well as the results to

retirees and other class members if it did not. The court’s very brief treatment

of these issues in its opinion chose to credit boilerplate summations by the

hospitals’ CFO Lee Bond that SRHS “should be able” to make its scheduled

settlement payments, and “[a]pproval of the settlement would result in an

immediate contribution to the Plan and subsequent scheduled contributions

that would have the potential to generate earnings for the Plan.” Jones,

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2016 WL 6106521 at *15. The court balanced this “potential” against the

ongoing litigation costs for “over 150 lawsuits,” the present inability of SRHS

to pay its judgment of over $55 million, and the resulting uncertainty of any

recovery absent a settlement. Id. The court concluded that the “proposed

settlement recovery . . . replaces one hundred percent of the missed 2009

through 2014 contributions.” Id. The court should have noted, and required

the

proponents to address, the significant qualifications to this “one hundred

percent” forecast.

According to Bond, SRHS’s financial condition, as of the date of the

fairness opinion, had moved from unsustainable (losing $39 million annually)

in 2014 to a very small positive margin (a few hundred thousand) in mid-2016.

Under Bond’s stewardship over two years, SRHS had built up a necessary 65-

day cash operating reserve of $51 million, whereas it had less than 30 days

cash on hand when he arrived. In favor of the settlement, SRHS was incurring

over a hundred thousand in attorneys’ fees every month, and the Plan, as

frozen, will run out of money to pay claims in 2024. Against this improving

picture, however, cross-examination elicited that without Jackson County’s

contribution SRHS “probably [can]not” pay even the $6.5 million class counsel

fees as scheduled and approved by the court. As to the settlement, he opined

that “those payments or some form of payments can be made” by SRHS to

reimburse the Plan. The hospital had negative equity exceeding $136 million

at that time. Further, the most recent auditor’s report for SRHS, covering

fiscal year 2015 and introduced for the hearing, showed that the Plan had

about $137 million in assets, but approximately $441 million in projected

liabilities, and had been paying out over $1 million each month in benefits.

These facts tend to support the necessity of some settlement, but they do

not address whether over the extraordinarily lengthy 35-year contemplated

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term, SRHS, still in precarious shape, will be able to handle the escalating

annual installment payments. 8 The Settlement Agreement’s payment

obligations are no more than unsecured contractual obligations of SRHS (and

Jackson County); there is no collateral to support them or incentivize payments

to the Plan over those to other unsecured creditors. Multimillion dollar

payments for attorneys’ fees (over $6.5 million) and installments to the Plan

($6.4 million) are due from SRHS by September 2018, but the system’s net

operating revenue was recently less than a million dollars. In 2024, SRHS

owes the Plan $5.7 million and thereafter until 2051 $4.5 million annually.

Jackson County’s initial contribution to the settlement and annual $1.2 million

payments raise additional doubts, as these were variously explained to support

either indigent care (running at $40 million annually according to Bond) or

municipal bond obligations that had been guaranteed by the County. Either

way, this is not much of a “contribution.”

Perhaps the most intriguing fact is that class counsel arranged for their

agreed, complete payout of fees from SRHS before the end of 2018, and thus

alleviated any significant future risk of nonpayment. Meanwhile, the Plan

participants bear considerable risk and, worse, uncertainty. As the record

stands, SRHS’s future ability to make escalating annual payments to the Plan

over thirty-five years is arguable, and that question compounds with

demographic reality as more plaintiffs approach eligibility for retirement

benefits. That counsel assured themselves a multimillion-dollar bird in hand,

while leaving the class members two in the bush, is disturbing. If they were

confident about SRHS’s ability to comply with the settlement, they could have

accepted payments over its prescribed duration. Doing so would also have

8 The court refused Objectors’ request to recall Bond for additional testimony about

the Settlement.

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freed up more cash for an up-front contribution by SRHS to the Plan and, thus,

the class members. This situation is reminiscent of justly derided class action

settlements where counsel take home substantial fees while the class members

receive worthless coupons. Without more information about the viability and

nature of payout prospects for class members under the settlement’s terms,

class counsel’s agreed payout is dubious.

Another factor bearing on the financial fairness of the settlement is that

SRHS’s recoveries, if any, from SRHS from KPMG and Transamerica are not

treated as sums owed directly to the Plan but may be petitioned to be used to

reduce SRHS’s Plan payments. Also, rather than enable class members to

share in any improvement in SRHS’s financial fortunes, the Settlement

Agreement allows SRHS to reduce its obligated payments ahead of schedule,

if it is able, with a very favorable discount rate. In essence, SRHS’s accelerated

payments would reduce its overall liability and thus the amounts payable to

class members as returns on the Plan’s assets would accrue at a lower rate.

Perhaps these provisions were regarded as safeguards with little potential

impact on the settlement, or perhaps they were intended as indirect means of

forestalling SRHS’s longer-term payment defaults, but they were not explored

at the hearing.

The fiscal doubts about payments even in the relatively near term

heightened the need for an inquiry into the sufficiency of Plan assets to make

promised payments to Plan beneficiaries because they come due over, say, the

coming ten to fifteen years. There is no assurance in the record that the Plan

will not run out of money to pay the class members’ claims well before 2051.

The class members, especially current retirees, were owed something more

than legal provisions enabling a speedy Chancery Court judgment for failed

SRHS Settlement payments and a vague statement that changes in Plan

distribution terms would be subject to notice and hearing. Money judgments

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are worthless if they cannot be enforced. Without foreknowledge of the possible

timing of payment crises, and the possible results in the event of payment

defaults, class members have no way to plan their futures. Finally, as

Objectors point out, the confirmed settlement dispenses with SRHS’s

significant ongoing litigation costs, but because of the clear possibility that

future litigation will occur in the Chancery Court over a missed payment, or

changes in distributions, or formal termination and liquidation of the Plan, the

class members will continue to need representation. Even though the

Settlement may have been justified as a matter of necessity, the class members

were entitled to greater transparency about its weaknesses.

For the foregoing reasons, we vacate and remand for the development of

further information in regard to the settlement.

B.

The Objectors also argue that the Settlement Agreement was unfair and

inadequate because it did not include the value of missed contributions in 2015,

2016, and at least to the conclusion of the fairness hearing. The district court

held that the tenuous possibilities that the class would receive, or SRHS would

be able to pay, a larger verdict were not sufficient grounds for rejecting the

proposed settlement. By its terms, the Plan could have been terminated in

2014 and might not have been liable at all for subsequent contributions. On

the other hand, a judgment required SRHS to reimburse the Plan for

contributions missed from 2009-14. Although the Plan is not formally

terminated, it is not “open” at this time as the Objectors assert; theirs is a

litigating position, and a weak one at that. The court’s legitimate doubts that

the class could prevail on any post-2014 claim, whether in contract or tort, for

missed Plan payments support its conclusion that the settlement was fair and

adequate. See Ayers, 358 F.3d at 370–73 (discussing the probability of success

on the merits); Parker v. Anderson, 667 F.2d 1204, 1209–10 (5th Cir. 1982).

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The court’s skepticism that these additional amounts could hardly be paid

anyway is borne out by the record and further justified approval of this aspect

of the settlement.

C.

The Objectors also contend that the number of Objectors to the

settlement warrants its disapproval. “[V]ast class dissatisfaction with the

settlement” can require a district court to withhold approval of the agreement.

Reed, 703 F.2d at 174 (citing Pettway v. Am. Cast Iron Pipe Co., 576 F.2d 1157,

1214–19 (5th Cir. 1978) (disapproving settlement agreement to which

70 percent of class members objected). However, “[a] settlement can be fair

notwithstanding a large number of class members who oppose it.” Cotton v.

Hinton, 559 F.2d 1326, 1331 (5th Cir. 1977). At the end of the day, it is not the

number of Objectors but the quality of their objections that should guide the

court’s review. “[A] settlement is not fair where all the cash goes to expenses

and lawyers, and the [class] members receive only discounts of dubious value.”

In re Katrina Canal Breaches Litig., 628 F.3d at 195 (citing In re Compact Disc

Minimum Advertised Price Antitrust Litig., 216 F.R.D. 197, 221 (D. Me. 2003))

(alterations in original).

According to the district court, roughly 205 individuals objected, from

among 3,076 class members. The Objectors comprise only 6.66% of the class

although they constitute about one-third of the retirees currently receiving

Plan payments. Regardless, courts have approved of settlements with much

higher percentages of Objectors. Salinas v. Roadway Express, Inc., 802 F.2d

787, 790 (5th Cir. 1986) (34% of known class members objected); Reed, 703 F.2d

at 174 (number of objections nearly 40%). Therefore, the number of Objectors

to the Settlement Agreement does not demonstrate unfairness.

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IV.

Contrary to their concerns about SRHS’s ability to make future

payments, the Objectors complain that the district court refused to invoke

stern sanctions, up to and including dismissal of the class actions, because of

alleged perjury by Bond about financial documents the Objectors claim were

shredded. Such documents, they claim, would have revealed that SRHS is now

returned to fiscal solvency and therefore able to bear a verdict for its missed

contributions. Yet the district court thwarted their attempt to thoroughly

cross-examine Bond about shredding documents, and they were not allowed to

offer witness Rachel Thompson, an SRHS employee, who claimed to have

witnessed a unique event in which locked boxes of SRHS financial documents

were delivered for shredding.

Extensive discovery assures the court the parties have a good

understanding of the likely outcomes and their expected value, while

reinforcing adversarial bona fides against collusion or conspiracy. This issue

pertains to Reed factors 1 and 3. Reed, 703 F.2d at 172. Thus, “if the record

points unmistakably toward the conclusion that the settlement was the

product of uneducated guesswork, a court may be acting within its discretion

in disapproving the agreement without ever considering whether the

agreement’s terms are adequate.” In re Corrugated Container Antitrust Litig.,

643 F.2d 195, 211 (5th Cir. 1981). But the lack of discovery is not necessarily

fatal to a settlement agreement, provided the parties demonstrate the case

“cannot be characterized as an instance of the unscrupulous leading the blind.”

Cotton, 559 F.2d at 1332. “[T]he trial court is entitled to rely upon the

judgment of experienced counsel for the parties.” Id. at 1330. The quality and

experience of the lawyering is thus “something of a proxy for both

‘trustworthiness’ and ‘reasonableness’—that is, if experienced counsel reached

this settlement, the court may trust that the terms are reasonable in ways that

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it might not had the settlement been reached by lawyers with less experience

in class action litigation.” Newberg on Class Actions, § 13:53 (5th ed., updated

Dec. 2016).

The Objectors have not made out a case for perjury or discovery

violations. The district court asked Bond directly whether he had shredded

financial documents, and Bond testified unequivocally that neither he nor

anyone under his direction shredded any documents. At the fairness hearing,

Carroll, the expert CPA, testified that he had reviewed the financial

information of SRHS when assessing the loss to the Plan, up to and including

SRHS audited financial statements for the years ending September 30, 2003-

2014. Objectors challenge the information he relied on as potentially

incomplete, but they do not have any supporting evidence for their suspicion.

“[T]he trial court may limit its proceeding to whatever is necessary to aid

it in reaching an informed, just and reasoned decision.” Cotton, 559 F.2d at

1331. As the settlement proponents note, nearly two hundred thousand pages

of financial information were produced during discovery. Without some

evidence of such alleged misconduct beyond Thompson’s speculation, and some

showing of how shredding affected the case, the district court did not abuse its

discretion by refusing Thompson’s testimony. 9

9The Objectors complain that their counsel were not permitted to cross-examine

Special Fiduciary Steve Simpson after he read his statement at the fairness hearing. “[N]o

court of appeals, to our knowledge, has demanded that district courts invariably conduct a

full evidentiary hearing with live testimony and cross-examination before approving a

settlement.” Union Asset Mgmt., 669 F.3d at 641–42 (5th Cir. 2012) (quoting Int’l Union v.

Gen. Motors Corp., 497 F.3d 615, 636 (6th Cir. 2007)). The court’s opinion approving the

settlement did not cite to or rely on Simpson’s statement, which was largely conclusional in

any event. Any error was harmless.

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V.

Throughout their appellate brief, the Objectors contend that the district

court erred in approving the settlement because it released Jackson County,

Mississippi, a non-party to the class actions, from liability. 10 They argue that

Jackson County has a continuing duty to cover any shortfall in the Plan and

guarantee payment of the pension to retirees under the Mississippi Code,

which states in pertinent part:

The board of supervisors acting for a county . . . are hereby

authorized and empowered to levy ad valorem taxes on all the

taxable property of such counties . . . for the purposes of raising

funds for the maintenance and operation of hospitals.

Miss. Code Ann. § 41-13-25. Further, one of the reasons for the Plan’s

exemption (as the retirement plan of a government entity) from ERISA is that

government entities can fulfill their obligations through their taxing power.

They also argue that public policy should abjure releasing Jackson County

because doing so blesses past official malfeasance and provides a “judicially

created blueprint” for other government entities to default on their retiree

obligations and escape liability. Objectors chide the mediator and the court for

not looking into Jackson County’s ability to pay for SRHS’s Plan obligation

and, in short, for not forcing the County to assume liability for its wholly-owned

10 Procedurally, they object that while the district court verbally expressed skepticism

that a non-party to the case could be released, the court reversed its position when approving

the settlement. A court, however, is entitled to change its mind after deliberating on a legal

point.

The Objectors also contend the district court erred in accepting an unsolicited, post-

hearing letter from class counsel regarding the release of Jackson County because they had

no opportunity to respond. This argument is without merit. The release of Jackson County

was discussed at length during the fairness hearing, and the very points made by Reeves’s

letter were addressed when the Objectors raised them. More importantly, the Objectors did

not object to the submission of the letter in the district court and did not seek the opportunity

to respond to it at that time. This argument is therefore waived on appeal. See F.D.I.C. v.

Mijalis, 15 F.3d 1314, 1327 (5th Cir. 1994) (arguments not preserved for appeal are waived

and cannot be addressed in the first instance by the court of appeals).

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community hospital system. See Miss. Code. Ann. § 41-13-10(c), (d) (definition

of community hospitals). See also § 41-13-15 (county authority to acquire

community hospital).

The district court rejected these arguments for good legal reasons. It

held that no statute cited by the Objectors requires the County to levy taxes to

fund hospital pensions; § 41-13-25 merely provides that the County is

authorized to use revenues for hospital funding, not that it is mandated to do

so. Neither Objectors nor this court has found definitive legal authority

holding a Mississippi county responsible for the debts of its “independent”

entities. 11 The district court held that the policy behind granting ERISA

exemptions for public entities’ plans is an insufficient basis for imposing a legal

duty on Jackson County. The district court noted that the Mississippi Tort

Claims Act, Miss. Code Ann. §§ 11-46-1–23, governs any lawsuit against

Jackson County, thus limiting any available recovery against the County even

if it were not released from liability. 12

11The FY 2015 audited financial report for SRHS states: “While the County may

appropriate money from its general fund and levy property taxes to support the operations

of the Health System, the Health System has been self-supporting and receives no County

appropriations for its operations, nor has it received any such financial support from the

County in over twenty-six years.” There is no suggestion from the auditors that the County

is a payor of last resort.

12The Mississippi Tort Claims Act limits recovery against a political subdivision for

tort law to $500,000, providing: “In any claim or suit for damages against a governmental

entity or its employee brought under the provisions of this chapter, the liability shall not

exceed the following for all claims arising out of a single occurrence for all damages permitted

under this chapter: . . . (c) For claims or causes of action arising from acts or omissions

occurring on or after July 1, 2001, the sum of Five Hundred Thousand Dollars ($500,000.00).”

Miss. Code. Ann. § 11-46-15. Similarly, political subdivisions are immune from claims arising

from breach of an implied contractual term. City of Jackson v. Estate of Stewart ex rel.

Womack, 908 So. 2d 703, 711 (Miss. 2005) (“Miss.Code Ann. § 11–46–3 grants immunity to

the state and its political subdivisions for breach of implied term or condition of any warranty

or contract.”) (internal quotation omitted).

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The district court did not abuse its discretion by approving the release of

Jackson County. Although it must carefully consider the consequences, a court

may approve a class action settlement that releases non-parties if “the claims

against the non-party being released were based on the same underlying

factual predicate as the claims asserted against the parties to the action being

settled.” Wal-Mart Stores, Inc. v. Visa U.S.A., Inc., 396 F.3d 96, 109 (2d Cir.

2005) (citing In re Lloyd’s Am. Trust Fund Litig., 2002 WL 31663577, at *11

(S.D.N.Y. Nov. 26, 2002)). 13

Here, Jackson County agreed to make a $13.6 million contribution to

SRHS for the stated purpose of assisting with indigent care and to prevent

bond default, in exchange for a release of liability for claims that the district

court found to have little support or be limited by statute. Whatever liability

Jackson County may have had, or however much more it could have

contributed to benefit the class than what amounts to approximately 22% of

the Plan’s liability for missed contributions from 2009-14, the Objectors have

not demonstrated that this release renders the Settlement Agreement

inadequate. 14

13 “[T]he rationale behind approving releases of non-parties turns on the courts’

interest in the settlement of disputes. A defendant may be unlikely to settle a class action if

class members can later pursue unasserted claims, or claims against non-parties, that may

have the effect of re-opening the litigation.” Newberg on Class Actions § 18:20.

Curiously, Objectors make no argument concerning the court’s simultaneous release

of individual SRHS defendants from whatever claims may have been asserted based on their

ineptitude or malfeasance, and which claims would not necessarily have been “based on the

same underlying factual predicate.” See Wal-Mart, 396 F.3d at 109.

14 The Objectors argue, in a single paragraph, that the district court erred by

approving a settlement when additional lawsuits are pending in state court. In specific, the

Objectors appealed the Jackson County Board of Supervisors’ decision to contribute to the

proposed settlement. The district court considered this argument but held that no authority

supports the Objectors’ position and that nothing requires the district court to delay approval

of the Settlement Agreement until the Objectors’ state court appeal has been concluded. The

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CONCLUSION

The terms of the Settlement Agreement as they affect Plan participants

should have been more thoroughly examined prior to the court’s approval. It

was improper for the court to limit its consideration to the hospital’s ability to

pay while ignoring a transparent explanation of the settlement’s consequences

for the class members. We do not hold that the settlement should not be

approved, or cannot be approved as modified, but we Vacate and Remand for

further consideration of the following illustrative issues:

1. How, and how much, the future stream of SRHS’s payments

into the Plan, together with existing Plan assets and

prospective earnings, will intersect with future claims of Plan

participants, including, but not limited to, what effect the

Settlement has on current retirees;

2. What are SRHS’s future revenue projections, showing dollar

amounts, assumptions and contingencies, from which a

reasonable conclusion is drawn that SRHS has the financial

ability to complete performance under the settlement;

3. Why any payments from litigation involving KPMG,

Transamerica or related entities are permitted to defray

SRHS’s payment obligation rather than supplement the

settlement for the benefit of class members;

4. Why class counsel’s fees should not be tailored to align with the

uncertainty and risk that class members will bear.

The judgment of the district court is VACATED and REMANDED with

Instructions

Objectors have not adequately briefed this argument to show the district court abused its

discretion in so holding. See Mijalis, 15 F.3d at 1327.

29