Petition — Lewy v. Weinberger, 104 S. Ct. 77 (1983) (No. 82-1869)
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82 we 1 86 9 ( Office-Supreme Court, U.S.
4 FEL EOD
MAY 17 1983
ALEXANDER L. STEVAS,
No. CLERK
IN THE
Supreme Court of the United States
October Term, 1982
MORRIS L. LEWY, et al.,
Petitioners,
VS.
WILLIAM B. WEINBERGER, et al.,
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF
APPEALS FOR THE SECOND CIRCUIT
I. WALTON BADER
BADER AND BADER
Attorneys for Petitioners
65 Court Street
White Plains, N.Y. 10601
(914) 682-0072
0 7
Ged Bailey Fe. 203 Richmond Avenue @ Staten Island, New York 10302
Tel.: (212) 447-5358 — (516) 222-2470 — (914) 682-0848
QUESTIONS PRESENTED FOR REVIEW
1. May parties to a purported Class Action, which
has not been certified by the Court as such, collusively
agree to establish a ‘‘settlement class”’ for the purpose
of settlement.
2. May parties to a purported Class Action, prior
to any certification being made by the Court, agree to
establish a settlement class and amend their com-
plaint years after the filing thereof so as to destroy
State Court Class Litigation which has been diligently
prosecuted to arrive at a settlement in the Federal Ac-
tion of about five-hundreths of a cent on the dollar of
claims.
3. May a Federal Court grant pendent jurisdiction
over purely state claims when the settlement class in-
cludes members who have no Federal Claims and
whose claims are pending in State Court.
4. May a District Judge, in approving a settle
ment, avoid the requirements for a hearing, proper ex-
amination of the parties, and the normal requirements
for approval upon the ground that a Bankruptcy
Judge, in approving a settlement of $.21 on the dollar
of bondholder claims, 400 times greater than the set-
tlement arrived at in this case, has passed upon the
issues involved making further consideration by the
District Court unnecessary.
5. Where a District Court approves a Class Action
settlement which destroys pending State Court Class
Litigation is such action on the part of said Court in
violation of the ‘“‘Anti-Injunction Act.”
il
6. 1s there a conflict between the determination of
the United States Court of Appeals for the Seventh
Circuit in In Re General Motors and the determina-
tion of the United States Court of Appeals for the Se-
cond Circuit in this case.
7. In view of the fact that this Court has not yet
passed on the validity of ‘‘opt out’’ requests or at-
torneys’ fees to be awarded in this case is this action
now “‘final’’ for the purpose of Supreme Court Review.
ill
TABLE OF CONTENTS
Page
Questions Presented for eee en he i
List of All Parties to This Proceeding........ 2
Decisions of the Courts Below.......----->: 2
Time Periods Involved........--+::sss00: 3
Jurisdiction of the Court to Hear This Petition. 3
Statutes, Rules and Other Matters Involved
Oe i ee eee ess 3
Table of Contents and Table of Other
EEE 3
Statement of the Case........-..-:ssseeee: rl
Reasons Why This Petition Should be Granted 7
POINT ONE—
May Parties to a Purported Class Action
Which has not Been Certified by the Court
as such, Collusively Agree to Establish
a “Settlement Class’ for the Purpose
of Settlement Only.........-- esse eecee: 9
POINT TWO—
May Parties to a Purported Class Action,
Years After Filing, Amend Their Complaint
to Encompass State Claims Which Have
Been Heretofore Prosecuted in State Court
iV
and Then Enter Into a Collusive Settlement
to Destroy the State Claims..............
POINT THREE—
May a Federal Court Grant Pendent Juris-
diction Over Purely State Claims When the
Settlement Class Includes Members Who
Have no Federal Claims and Whose State
Claims Are Pending in State Court.........
POINT FOUR—
The Settlement Involved Herein is Clearly
RE a
POINT FIVE—
The Bankruptcy Determination of Judge
Galgay Relied Upon by the Court of
Appels to Sustain the Present Settlement
a ee
POINT SIX—
The Approval of the Settlement Herein,
Coupled with the Prohibition of the Conduct
of Related Proceedings is a Violation of
Ce Americus Act.................
POINT SEVEN—
The Case is Believed to be Final for Supreme
Court Review Even Though the Attorneys’
Fees in this Case Have Not yet Been Fixed
or the Validity of Certain Parties Who Have
“Opted Out” of the Present Settlement, of
Their Requests for Exclusion Have not Yet
Been Passed on by the Court..............
CONCLUSION—
The Petition for a Writ of Certiorari to
the United States Court of Appeals for
the Second Circuit Should be Granted
i}
13
17
19
21
22
23
Vv
TABLE OF CASES
Page
Blue Chip Stamp Co. vs. Manor Drug Stores,
re Pe i ak a ee ee ce ks i 7,8,14
City of New Orleans vs. Dukes, 427 US 297.... 23
Clarkson Co. vs. Shaheen, 660 F2nd 506...... 18
Pat oe AO OEE Ue Oe. . 2 8. ee ee 16
Geddes vs. Anaconda Mining Co., 254 US 590. 20
In Re American Lumber Co., 5 BR 470....... 19
In Re General Motors Engine Interchange
Litigation 594 F.2nd 1106................ 4,8
Matter of Multiponics, Inc., 622 F. 2nd 709. ... 19
Meyerhofer vs. Empire Fire & Marine In-
wees Ce. TA Ps LOE... 6 oo se ee we: 16
National Super Spuds vs. New York Mercan-
tile Bxchange, G60 F.2nd9............... 8,15
New York Credit Men’s Adjustment Bureau
ee I 8 oa ee ae ee 18
Pepper us. Litton, 308 US 295.............. 19
Perdondani vs. Riker-Maxon Corporation, 50
eee cs. oe 17
vi
Piper us. Christ-Craft Industries, 430 US1.... 8,16
tective Committee vs. Anderson, 390US414 8
Santa Fe Industries vs. Green, 430 US 462.... 8,16
United Mine Workers vs. Gibbs, 383 US715... 14
Ward us. City Trust Co. of New York, 192
lb I a 18
Weiss us. Chalker, 55FRD168.............. 18
TABLE OF OTHER AUTHORITIES
ee ee 9
colegio 21
INDEX TO APPENDICES
Appendix A—Opinions of the United States
Court of Appeals for the Second Circuit Affirm-
ing the Determination of the District Court ............. la
Appendix B—Rule 23 FRCP. ................0.<ccccsceccoscosses. 48a
Appendix C—Docket Entries In U.S. Court Of
Appeals for the Second Circuit ........0...ccccccecceccccceee 52a
Appendix D—Opinion of the United States
District Court For The Southern District of New
York Approving The Proposed Settlement Ob-
FE ey FI ong conc cccscncvciececceesecccescooss. 62a
1
IN THE SUPREME COURT
OF THE UNITED STATES
MORRIS L. LEWY, MELVIN KIMMEL, HELEN
SISK, MILDRED B. ANDERSON, GERALD J.
ANDERSON, WALTER E. BARRIE, ANNE
CRAWFORD, MALCOLM PINE, HERBERT
LAPHAM, ARTHUR GARSON, and ANDRE R.
JURKIEWICZ, and ARCHIE & ANNE PLESCIA
individually and as representatives of Classes con-
sisting of stockholders and bondholders of W.T.
GRANT COMPANY,
Petitioners,
-against-
WILLIAM B. WEINBERGER, ROBERT SMITH,
STEIN FAMILY FOUNDATION, INC., EDITH
CITRON, LEO E. PANZIRER, and EMANUEL G.
ROSENBLATT, JAMES C. KENDRICK, HARRY
E. PIERSON, A. RICHARD BUTLER, ROBERT H.
ANDERSON, JOHN E. SUNDMAN, ROBERT M.
SCARLATA, JOSEPH W. CHINN, JR., RAYMOND
H. FOGLER, JOSEPH HINSEY, JOHN G. GRAY,
DEWITT PETERKIN, J E., LOUIS
LUSTENBERGER, CHARLES PHILLIPS, ASA T.
SPAULDING, C.W. SPANGLE, E. ROBERT
KINSEY, RICHARD W. MAYER, MORGAN
GUARANTY TRUST COMPANY OF NEW YORK,
individually and as Agent for a Group of Twenty-
Seven Lending Banks described herein, CHASE
MANHATTAN BANK, N.A., CITIBANK, N.A.,
THE BANK OF NEW YORK, BANKERS TRUST
COMPANY, CHEMICAL BANK, IRVING TRUST
2
COMPANY, MARINE MIDLAND BANK, SANWA
BANK LTD., MANUFACTURERS HANOVER
TRUST COMPANY, ERNST & ERNST, W.T.
GRANT CO. and J.P. MORGAN & CO., INC..
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
The petitioners herein pray that this Court grant
a Petition for a Writ of Certiorari to the United States
Court of Appeals for the Second Circuit. The grounds
supporting this petition are set forth in full in the
body thereof.
LIST OF ALL PARTIES TO THIS PROCEEDING
In addition to the parties listed in the caption of
this petition this appeal is being brought in behalf of a
putative class of stockholders and debenture holders
of WT GRANT COMPANY who have State Claims
which are being prosecuted in pending State Litiga-
tion in the Courts of the State of New York. In addi-
tion, in the proceedings before the United States
Court of Appeals for the Second Circuit, there were
approximately four hundred fifty (450) individual par-
ties who were objecting to the proposed settlement ar-
rived at in the District Court.
DECISIONS OF THE COURTS BELOW
See appendix. The District Court opinion was not
officially reported. The opinion of the Court of Ap-
3
peals for the Second Circuit was reported at 698 F.
2nd 61.
TIME PERIODS INVOLVED
As indicated in the Docket sheets submitted in
the appendix to this Petition the original Order of the
Court of Appeals for the Second Circuit was filed on
July 4th, 1982 approving the proposed settlement.
Petitions for Rehearing were thereafter filed by Ap-
pellants and others which were eventually granted by
this Court. On January 26th, 1983 the Court essential-
ly denied the Petition for Rehearing filed by certain
appellants and on February 22nd, 1983 denied the
Petition for Rehearing and Suggestion for Rehearing
en banc filed by the Petitioners herein. This Petition
for Certiorari is filed within 90 days from the date of
such denial.
JURISDICTION OF THIS COURT
TO HEAR THIS PETITION
This Court acquires jurisdiction pursuant to 28
USC 1254(1).
STATUTES, RULES AND OTHER MATTERS
INVOLVED IN THIS PETITION
See appendix.
TABLE OF CONTENTS AND TABLE
OF OTHER AUTHORITIES
See the documents set forth supra in this petition.
4
STATEMENT OF THE CASE
This is the first time that the approval by a Court
of a settlement class (approved by the Court by agree-
ment of the parties and not by adversary proceedings)
has reached this Court for review. The practice was
disapproved by the United States Court of Appeals
for the Seventh Circuit in In Re General Motors
Engine Interchange Litigation, 594 F.2nd 1106 (1979).
It has been approved by various other Courts in-
cluding, in this case, the United States Court of Ap-
peals for the Second Circuit.
This is also the first time that a settlement has
been approved, over objection by a_ substantial
number of putative Class Members, without any ef-
forts by the District Court or the Court of Appeals to
determine the fairness and adequacy of the settle-
ment. The District Court and the Court of Appeals
merely adopted a determination made by a Barkrupt-
cy Judge in another proceeding relating to the fairness
and adequacy of a settlement of bondholder claims on
equitable subordination grounds. Interestingly
enough this settlement, which was obtained by
counsel bringing on this petition, resulted not in a set-
tlement of five-hundreths of a cent on the dollar of
claims (as was involved in this case) but a settlement
about 400 times greater (i.e. $.21 on the dollar of
claims). The prior determination of the Bankruptcy
Judge, of course, did not consider stockholder claims
at all.
The parties have conceded, before both the
District Court and the Court of Appeals, that the
basis of the claims originally brought by the plaintiffs
in this case was extremely weak and therefore the
+)
miniscule settlement arrived at was justified. On the
other hand the attorneys bringing on this matter,
despite its conceded weaknesses, are seeking a hand-
some fee reward.
In fact, of course, as the fragmentary record in
this case amply demonstrates, the State breach of
fiduciary duty, conspiracy, and breach of trust claims
were extremely strong. These claims were never inter-
posed into this action until the State Court litigation
was moving forward to trial and, at that time, were
merely interposed into the case to destroy these
claims for the benefit of the defendants and the plain-
tiffs’ counsel.
This case amply demonstrates all of the criticisms
that have been levelled at Class Actions by many par-
ties. This Court should review the matter and set
things right.
In 1975, by reason of the collapse of the WT
GRANT COMPANY, there were two major Class Ac-
tions brought against the ‘‘creditor banks” who,
through a high official of Morgan Guaranty Bank, one
PETERKIN, were effectively in control of WT
GRANT COMPANY. PETERKIN was also a director
of WT GRANT COMPANY and in practical control of
its policy making machinery.
The Weinberger action (brought by a “‘profes-
sional plaintiff'’ who has been involved in a myriad of
Class Actions and probably has a close relationship
with the plaintiffs’ attorneys) was a Section 10(b)
Securities Fraud Action. The State Litigation (the
Lewy action) involved State Claims only and was
primarily based on the fiduciary duties owned by a
corporate management to creditors and stockholders
€
the ‘‘trust fund theory”’ relating to the assets of a cor-
poration when the corporation is insolvent, conspiracy
and fraud.
The defendants moved to dismiss the Weinberger
complaint and, in January 1977 District J udge Duffy
dismissed the complaint since it did not set forth
viable claims. Leave to file an amended complaint was
thereafter granted and an amended Complaint was fil-
ed on March 25th, 1977.
Thereafter, on April 4th, 1977 the Weinberger
plaintiffs filed a motion for permission to file a Second
Amended Complaint. This motion was made by
reason of the fact the Weinberger plaintiffs became
aware of the Lewy action and wished to “ride piggy
back”’ on the Lewy allegations which constituted the
heart of the claims against the creditor banks. The
evidence clearly indicated that the Section 10-b
securities claims were so weak as to be practically
non-existent.
While the Second Amended complaint attempted
to plead common law fraud under State Law the
claims were not spelled out in detail and constituted a
‘‘broad brush” attempt to pre-empt the strong claims
pending in Lewy. There were, in fact, no allegations in
the said Weinberger second amended complaint which
would be sufficient, either under federal or state law,
to allege fraud.
Defendants thereafter moved to dismiss the Se-
cond Amended Cemplaint and, with respect to the
defendant ERNST & ERNST, the complaint was, in
fact, dismissed. The motion to dismiss by *he creditor
banks was held in abeyance by agreement of the par-
ties.
7
In the meantime the Lewy action was proceeding
apace. Therefore the defendant banks moved to stay
this action on the ground that the Federal Action was
all inclusive on the issues involved. The motion for a
stay was denied on January 23rd, 1980 and was
thereafter affirmed by the New York State Appellate
Division of the Supreme Court.
Thereafter the plaintiffs in Weinberger and the
defendant banks collusively decided to destroy the
viability of the Lewy action by, in effect, ‘“‘copying”’
the Lewy State Claims in a “Third Amended Com-
plaint”’ in Weinberger, filing a Stipulation of Settle-
ment and providing for a ‘‘settlement class’ covering
not only those plaintiffs who purchased Grant stock
during the “Class Period’’ but also those plaintiffs
who held such stock during the period even if they
purchased earlier. This, of course, was completely at
variance with the prior decisions of this Court and, in
particular, Blue Chip Stamps v. Manor Drugs Stores,
421 US 723.
The District Court, without an evidentiary hear-
ing, and over objections by parties adversely affected,
approved the settlement involved. The determination
was sustained by the Court of Appeals for the Second
Circuit and the opinions of the Court involved are set
forth in the appendix to this petition.
REASONS WHY THIS PETITION
SHOULD BE GRANTED
1. The Court of Appeals for the Second Circuit, in
rendering the determination sought to be reviewed,
has rendered a decision in conflict with a decision of
the United States Court of Appeals for the Seventh
8
Circuit (In Re General Motors Corp. Engine Inter
change Litigation, 594 F. 2nd 1106 (1979) and in con-
flict with another decision in the United States Court
of Appeals for the Second Circuit (National Super
Spuds vs. New York Mercantile Exchange, 660 F. 2nd
17 (1981). In General Motors the Court condemned
settlement negotiations undertaken by a putative
class representative who had not yet been certified as
such. In National Super Spuds, the Court of Appeals
for the Second Circuit refused to approve a settlement
where a part of the certified class received nothing.
Yet, in the present case, the United States Court of
Appeals for the Second Circuit did precisely what was
condemned in the prior opinions.
2. The Court of Appeals for the Second Circuit has
decided this case in contravention of other decisions of
this Court, in particular, Blue Chip Stamps vs. Manor
Drug Stores, supra, Protective Committee vs. Ander-
son 390 US 414, Santa Fe Industries vs. Green, 430
US 462, Cort vs. Ash, 422 US 66, and Piper vs. Chris-
Craft Industries, Inc., 430 US 1 and taken jurisdiction
of claims under State Law where no jurisdiction ex-
isted.
3. The Court of Appeals, in approving the settle-
ment involved, has so far departed from proper prac-
tice as to require the exercise of this Court’s supervi-
sion.
9
POINT ONE
MAY PARTIES TO A PURPORTED CLASS
ACTION, WHICH HAS NOT BEEN CER-
TIFIED BY THE COURT AS SUCH, COL-
LUSIVELY AGREE TO ESTABLISH A “SET-
TLEMENT CLASS” FOR THE PURPOSE OF
SETTLEMENT.
Rule 23, FRCP, requires that a Class be certified
in a case ‘‘as soon as practicable after the commence-
ment of an action brought as a class action.’’ The
Local Rules of many Courts, including the United
States District Court for the Southern District of New
York, require that a Class be certified within 60 days
after the commencement of the action. These salutory
rules are consistently flouted by collusive parties by
entering into stipulations indefinitely extending the
time for moving for Class Certification, then agreeing
to a settlement, and certifying a Class, on consent,
‘for the purpose of settlement only.”’
This Court has not passed on this practice. It has
been approved by many lower courts and specifically
disapproved by the United States Court of Appeals
for the Seventh Circuit. In so disapproving, in General
Motors, supra, the Court, on page 1125 of the opinion,
held as follows:
‘‘* * A person who unofficially represents the class
during settlement negotiations must be under strong
pressure to conform to the defendants’ wishes...
KK’
* * *
‘“* * Finally, unauthorized settlement negotiations
deny other class counsel access to information about
the negotiations which is helpful in evaluating the
fairness of the settlement. * * *”
10
In the present case, while the Weinberger action
was commenced in 1975, a Class was not certified un-
til 1981, a period of six years.
Even after this long period of time, the Class was
certified for the purposes of settlement only.
Therefore, if the settlement were not had, or if the
plaintiffs’ counsel did not conform to the defendants’
wishes, there would be no Class Certification.
In addition, in this case the defendants knew that
there was another Class Action pending in State
Court. In that action the State Claims were previously
set forth. Contrary to the position of the plaintiffs in
the Federal Class Action the Complaint, in the State
Action, was sustained against attack. Thus conduc-
ting settlement negotiations with one set of attorneys
to exclusion of the others is conduct to be condemned.
(See General Motors, supra.)
Where Federal and State Class Actions are both
pending, and particularly where the State Court has
refused to stay the State Action, and where State
Claims have not been involved in the Federal Action
any settlement which excludes the State action is not
proper under General Motors. Had the defendants
been required to negotiate a settlement of both the
Federal and State actions simultaneously the results
would have been very different to the Class Members.
The action of the District Court, in approving a
settlement arrived at between the Federal Class
Counsel having a weak case without the simultaneous
settlement of the State Action, is a violation of Rule
23(b)(3)(b) and Rule 23(b)(3)(C) which requires that, in
determining the propriety of a Class Action, the Court
must consider:
11
‘“* * the extent and nature of any litigation concern-
ing the controversy already commenced by or against
members of the Class. * * *”’
and
‘““* * the desirability or undesirability of concentrating
the litigation of the claims in the particular forum.
* * &’’
The exclusion of the State Court action from the
proposed settlement and the Court’s allowance of a
“Third Amended Complaint’’ by agreement of the
parties including the State Allegations when they had
not been placed in the Federal Complaint heretofore
and the Federal Action had been pending for years
should simply not be permitted. The supervision of
this Court so as to definitely forbid such practices is
mandatory.
POINT TWO
MAY PARTIES TO A PURPORTED CLASS
ACTION, YEARS AFTER FILING, AMEND
THEIR COMPLAINT TO ENCOMPASS
STATE CLAIMS WHICH HAVE BEEN
HERETOFORE PROSECUTED IN STATE
COURT AND THEN ENTER INTO A COL-
LUSIVE SETTLEMENT TO DESTROY THE
STATE CLAIMS.
The parties in Weinberger are required to concede
that the purported attempi to “copy” the State
Claims set forth in Lewy without conducting any pro-
ceedings with respect to such claims, would normally
be improper.
The sole justification for this practice, as set forth
in the opinion of the Court of Appeals, is that the
12
State Claims were also weak and that, for this reason,
the actions of the parties were not sufficiently gross to
void the settlement arrived at.
The Court of Appeals relied, for this conclusion,
on a decision of Bankruptcy Judge Galgay who, in the
Bankruptcy Proceedings involving W T GRANT
COMPANY, approved a settlement with subor-
dinated debenture holders of $.21 on the dollar of
claims.
This settlement, in the Bankruptcy Court, was
negotiated principally by the attorneys filing this
Petition and indicates to the Court what would have
occurred had the settlement involved in this case been
negotiated with State Court Counsel.
The Bankruptcy Settlement, of course, was
negotiated purely for debenture holders and
amounted to approximately 400 times the settlement
arrived at in this case. It is also noteworthy that the
settlement in this case, in effect, gives the debenture
holders nothing because the settlement received in the
Bankruptcy Proceeding is deducted from the settle-
ment received in this case. Since the Bankruptcy Set-
tlement amounted to $.21 on the dollar of claims the
debenture holders are, in connection with this case,
receiving nothing.
Quite obviously, a Court cannot deprive parties of
their rights in another suit by taking over claims
presented in that suit and then dismissing them.
Assuming, arguendo, that the Court had jurisdic-
tion over the State Claims, (which is doubtful as will
be set forth infra in this Petition), the general practice
13
is, of course, that a Court that first has jurisdiction of
a controversy is entitled to proceed to a conclusion
with respect to such controversy. Thus, for example, if
a plaintiff brings an action in a State Court, and the
defendant thereafter commences a similar action in
Federal Court, the Federal Court will refuse to take
jurisdiction of the second suit on the ground that
another action is pending.
What the Court has done in this case is to stand
the salutory doctrine preventing duplication of litiga-
tion and prevention of ‘forum shopping”’ on its head.
If this settlement is permitted to stand the Court will
have set forth a Rule to the effect that, once a federal
suit is commenced, regardless of the weakness of the
claims presented, the parties, by collusion, can
destroy related State Litigation by simply copying
the State Claims in the Federal Proceeding.
POINT THREE
MAY A FEDERAL COURT GRANT PEN-
DENT JURISDICTION OVER PURELY
STATE CLAIMS WHEN THE SETTLEMENT
CLASS INCLUDES MEMBERS WHO HAVE
NO FEDERAL CLAIMS AND WHOSE STATE
CLAIMS ARE PENDING IN STATE COURT
Federal Courts are, by definition, Courts of
limited jurisdiction. In order to prevent duplication of
litigation a judge-made doctrine has developed known
as pendent jurisdiction. Thus, if a Federal Claim is
presented in a Federal Court, and a State Claim arises
out of the same factual pattern, the Federal Court, as
a matter of discretion only, may take pendent jurisdic-
tion of the non-federal claims. However, if there js no
14
federal claim presented by a party, pendent jurisdic-
tion is not available. (United Mine Workers v. Gibbs,
383 US 715 (1966).
In the present case since the Court certified a
class of parties who purchased or held securities of
WT GRANT COMPANY during the ‘‘Class Period,’’
those security holders of W T GRANT COMPANY,
who did not purchase their securities during the
‘Class Period’”’ had no Federal Claims. Thus, in Blue
Chip Stamps vs. Manor Drug Stores, 421 US 723, this
Court, on pages 737 and 738 of the opinion, pointed
out that the Birnbaum Rule, requiring a party to have
purchased or sold a security during the appropriate
period, was viable and affirmed. In its opinion this
Court specifically held that holders of securities dur-
ing the Class Period did not qualify as plaintiffs under
Section 10(b) of the Securities Exchange Act, the
Court stating as follows:
‘‘* * * Three principal classes of plaintiffs are present-
ly barred by the Birnbaum Rule.
* * x
Second are actual shareholders of the issuer who
allege that they decided not to sell their shares
because of an unduly rosy repres.atation or a failure
to disclose unfavorable material. Third are
shareholders, creditors, and perhaps others related to
an issuer who suffered loss in the value of their invest-
ment due to corporate or insider activities. * *”’
The Court, in Blue Chip, further points out that
State remedies may be available for such parties but a
federal remedy is not.
The Court of Appeals, in supporting the utiliza-
tion of ‘‘pendent jurisdiction” to cover the claims of
15
the mere holders of said securities pointed out that the
State and Federal claims had a common factual pat-
tern. Even assuming that this was correct (which it is
not) pendent jurisdiction is simply not available with
respect to parties who have no federal claims. Thus, at
least with respect to the putative class members who
did not purchase their Grant securities during the
“Class Period” the Court had no jurisdiction over
them.
The grant of pendent jurisdiction over the deben-
ture holders of Grant who are present holders thereof
is likewise improper since these parties are receiving
nothing in connection with the present settlement.
Since the Bankruptcy Settlement of $.21 on the dollar
of claims is about FOUR HUNDRED times more
than the settlement in this case and the settlement
provides that any amount awarded to the putative
class members in the Bankruptcy Proceeding must be
deducted from the amount to be awarded in this pro-
ceeding, these parties are receiving nothing. Thus the
approval of the grant of pendent jurisdiction over
these parties is in violation of a determination of the
United States Court of Appeals for the Second Circuit
in National Super Spuds vs. New York Mercantile Ex-
change, 660 F. 2nd 9 where the Court disapproved a
settlement which had the effect of destroying State
Claims of certain Class Members end awarded them
nothing.
While the grant of pendent jurisdiction with
respect to (1) those putative class members who mere-
ly held Grant securities during the ‘‘Class Period”’ and
(2) the present holders of Grant debentures, was clear-
ly improper the grant of pendent jurisdiction with
respect to the remaining putative Class Members with
16
respect to State Claims was an abuse of discretion
under the specific facts involved.
Since the State Claims were being dilligently pro-
secuted in State Court and an application to the State
Court for a stay was denied and affirmed on appeal,
the District Court, as a matter of discretion, abused
such discretion by permitting pendent jurisdiction to
be applied.
The petitioners submit that, where State Claims
are first presented in State Court, a federal court has
no power to grant pendent jurisdiction over these
claims. While, this Court has not heretofore taken
such a position it may very well desire to do so.
However, it is submitted that under the specific facts
of this case the Federal Court abused its discretion in
granting pendent jurisdiction in this case.
In the first place this Court has held that claims
for breach of fiduciary duties, breach of trust, and con-
spiracy are traditionally state remedies. Thus, where
these claims are presented to a federal court, federal
jurisdiction over them is uniformly denied. See, for ex-
ample, Santa Fe Industries vs. Green, 430 US 462;
Cort vs. Ash, 422 US 66 and Piper us. Chris-Craft In-
dustries, Inc., 430 US 1.
There have been, of course, a number of cases
where a Court has refused to grant pendent jurisdic-
tion over State Claims where the ‘‘center of gravity’’
of the claims resides in State Court. See, for example,
Meyerhofer vs. Empire Fire & Marine Insurance Com-
pany, 74 FRD 151 (Federal pendent jurisdiction
denied over State Claims related to Federal Securities
Claims).
sf
In the present case, particularly because of the
weakness of the Federal Claims presented, the
District Court abused its discretion in granting pen-
dent jurisdiction in this case.
POINT FOUR
THE SETTLEMENT INVOLVED HEREIN 1S
CLEARLY INADEQUATE
It has been conceded by all parties, in the prior
proceedings in this case, that the amount of the pre-
sent settlement is about $.05 on the dollar of claims.
The settlement in the related Bankruptcy Proceeding
(which is relied upon to sustain this settlement) is
about four hundred times higher at $.21 on the dollar
with this amount deducted from any amount to be
received by the Class Members in connection with the
present settlement.
The inadequacy of this settlement cries out for
review. Why would present counsel bringing on this
petition have received forty times more than the
counsel supporting the present settlement. If, indeed,
the Bankruptcy Proceedings and this proceeding are
related, then is not the fact that the Bankruptcy pro-
ceedings resulted in a 400 times increase in settlement
amount compared to the amount obtained in this pro-
ceeding, absolute proof of the inadequacy of the pre-
sent settlement.
Courts have rejected settlements for inadequacy
which have permitted a far greater recovery than the
settlement in the present case. Thus in Percondani vs.
Riker-Maxon Corporation, 50 FRD 473 the Court
refused to permit a settlement to proceed which
18
granted the Class Members only 15% of the possible
recovery. (Not one-half of one percent which the pre-
sent settlement grants to the Class Members).
In Weiss us. Chalker, 44 FRD 168 the Court re-
quired that further discovery be conducted before a
settlement that could be inadequate was approved.
The State Law theory of the case (which was not
considered by either the Bankruptcy Court or by the
Courts below) involves the fiduciary duties that of-
ficers and directors of an insolvent corporation owe to
stockholders and creditors thereof.
W T GRANT COMPANY was headquartered in
New York and New York Law applies to this Com-
pany. In Clarkson Co. vs. Shaheen, 660 F. 2nd 506
(1981) the Court of Appeals for the Second Circuit set
forth the New York Rule as follows:
‘“* * If the corporation was insolvent at that time it is
clear that defendants, as officers and directors
thereof, were to be considered as though trustees of
the property for the corporate beneficiaries * *’’
See also Ward us. City Trust Co. of New York, 192
NY 61 and New York Credit Men’s Adjustment
Bureau, Inc. vs. Weiss, 305 NY 1.
In the present case PETERKIN was the controll-
ing director of W TGRANT COMPANY and also was
an officer and director of the principal bank lender of
W T GRANT COMPANY. While this company was
insolvent he so manipulated the corporation so as to
protect the position of the creditor banks and destroy
the position of the stockholders and debenture holders
of that corporation.
19
The ‘‘trust fund doctrine” set forth herein as ap-
plied under State Law is not the same as “equitable
subordination’’ applied in a Bankruptcy Context.
However the facts involved are of some import on the
question of equitable subordination. This explains
why the creditor banks were willing to pay about forty
times more than in the present lawsuit to settle the
Bankruptcy Proceedings. It also explains the despera-
tion of the defendants to conclude a ‘‘sweetheart set-
tlement”’ with the weak plaintiffs in Weinberger so as
to destroy the strong viable claims pending in State
Court in Lewy.
POINT FIVE
THE BANKRUPTCY DETERMINATION OF
JUDGE GALGAY RELIED UPON BY THE
COURT OF APPEALS TO SUSTAIN THE
PRESENT SETTLEMENT IS NOT IN POINT
The Court of Appeals, in its opinion, admits that
the District Judge did not conduct the required
evidentiary proceedings necessary to approve a Class
Settlement. However it relies on an opinion of
Bankruptcy Judge Galgay which was rendered in the
W T GRANT BANKRUPTCY PROCEEDINGS
which approved a settlement of $.21 on the dollar of
claims (not five-hundreths of a cent on the dollar of
claims as involved in this case) for subordinated
debenture holders based on theories of ‘‘equitable
subordination.”
That “equitable subordination” is a viable theory
in Bankruptcy Proceedings is, of course, correct. See,
for example, Matter of Multiponics, Inc. 622 F.2nd
709: In Re American Lumber Co., 5 BR 470; Pepper vs.
20
Litton, 308 US 295 and Geddes vs. Anaconda Mining
Co., 254 US 590. Based on the factual pattern involv-
ed, and considering that a settlement of about 25% of
the total claims was being presented, Bankruptcy
Judge Galgay correctly held that the proposed settle-
ment was approvable. Petitioners do not question
Judge Galgay’s approval of that settlement.
The rules, however, with respect to ‘‘equitable
subordination” involve discretionary powers on the
part of the Bankruptcy Judge. These rules, of course,
do not apply to the violation of the fiduciary duties
that officers and directors of a corporation owe to the
stockholders thereof. Thus Judge Galgay did not con-
sider the effect of stockholder claims.
Similarly Judge Galgay did not consider the effect
of the questioned conduct under the New York “‘trust
fund’”’ rule. Thus, Judge Galgay did not consider
whether W T GRANT was insolvent prior to the filing
of the Petition in Bankruptcy nor a number of other
questions which are germane to the imposition of
liability upon the creditor banks under New York
State Law in a plenary suit as opposed to claim priori-
ty questions under Bankruptcy Law. The only matter
that Judge Galgay had before him was the relative
priority between the subordinated debenture holders
claims and the bank creditor claims. Breach of
Fiduciary Duty claims, conspiracy claims and other
State Claims were just not before him.
More importantly, of course, is the fact that
Judge Galgay did not have any merit determination of
the claims involved before him. In any event discre-
tionary and mandatory liability is quite different.
21
Thus the matters before Judge Galgay were not
material with respect to the approval or disapproval
of the proposed settlement of this litigation.
The District Judge, since the State claims involv-
ed different theories than the claims for equitable
subordination passed upon by Judge Galgay, could
not avoid the requirements relating to settlement of
class actions by merely relying on Judge Galgay’s opi-
nion.
Further confirmation of the above facts is found
in the determination of the State Court which, in de-
nying an application to stay the State Proceedings
because of the pendency of the Weinberger litigation
held that the Weinberger action and the Bankruptcy
Proceedings were:
‘“# * not so all-encompassing as to render certain that
a settlement therein will necessarily obviate the tort
claims before this Court * * *”’
POINT SIX
THE APPROVAL OF THE SETTLEMENT
HEREIN, COUPLED WITH THE PROHIBI-
TION OF THE CONDUCT OF RELATED PRO-
CEEDINGS IS A VIOLATION OF THE ANTI-
INJUNCTION ACT
Congress, in its wisdom, in order to avoid unseem-
ly conflicts between Federal and State Courts of coor-
dinate jurisdiction has passed the ‘‘Anti-Injunction
Act’’ 28 USC 2283 which provides, in pertinent part
that:
“* * A court of the United States may not grant an in-
22
junction to stay proceedings in a State Court except
as expressly authorized by Act of Congress, or where
necessary in aid of its jurisdiction, or to protect or ef-
fectuate its judgments. * * *”’
The Act was passed to prevent defendants, who
were subjected to proceedings in a forum not of their
liking, to bring on some type of proceeding in a federal
court and enjoin the State Proceedings.
In the case at Bar it is conceded that the State
Claims involved were presented, for the first time, in
the State Court and were only ‘“‘copied”’ by the parties
in Weinberger as part of the settlement objected to in
this proceeding. Thus, in effect, the federal court has,
as a practical matter, enjoined a State Proceeding and
prevented the prosecution of State Claims in the
forum where they were initially presented.
This is in clear violation of the Congressional in-
tent in passing the ‘‘Anti-Injunction Statute’ and
should be reviewed by this Court.
POINT SEVEN
THE CASE IS BELIEVED TO BE FINAL FOR
SUPREME COURT REVIEW EVEN THOUGH
THE ATTORNEYS’ FEES IN THIS CASE
HAVE NOT YET BEEN FIXED OR THE
VALIDITY OF CERTAIN PARTIES WHO
HAVE “OPTED OUT” OF THE PRESENT
SETTLEMENT, OF THEIR REQUESTS FOR
EXCLUSION HAVE NOT YET BEEN PASSED
ON BY THE COURT
In order to have this Court grant a Petition for a
Writ of Certiorari the determination complained of
23
must be ‘‘final’’ and not subject to further review. In
the present case, while the validity of the proposed
settlement has been finally determined by the District
Court and the Court of Appeals there are still other
matters to be considered by the District Court in this
matter.
There has been no determination as to the amount
of fees to be awarded to the plaintiffs’ attorneys if this
settlement is approved and there is another proposed
settlement to be considered by the District Court
relating to claims against officers and directors of
W T GRANT COMPANY.
Based on the decisional law (Cf. City of New
Orleans vs. Dukes, 427 US 297 it would appear to the
undersigned that this Petition is properly filed at this
time.
However, in fairness to the Court, the finality
question is being presented for the Court’s considera-
tion.
CONCLUSION
THE PETITION FOR A WRIT OF CER-
TIORARI TO THE UNITED STATES COURT
OF APPEALS FOR THE SECOND CIRCUIT
SHOULD BE GRANTED.
Respectfully submitted,
I. WALTON BADER
BADER AND BADER
Attorneys for Petitioners
65 Court Street
White Plains, NY 10601
914-682-0072
—————————— i“.
la
OPINIONS OF THE UNITED STATES COURT OF
APPEALS FOR THE SECOND CIRCUIT
AFFIRMING THE DETERMINATION OF THE
DISTRICT COURT
William B. WEINBERGER, et al.,
Plaintiffs-Appellees,
Vv.
James C. KENDRICK, et al.,
Defendants-Appellees,
Charles M. Coyne, et al., Appellants.
Nos. 956-959, Dockets 81-7317, 81-7629,
81-7827, 81-7829.
United States Court of Appeals,
Second Circuit.
Argued April 19, 1982.
Decided July 14, 1982.
Order on Petitions for Rehearing
Jan. 26, 1983.
* * *
20. Federal Civil Procedure 2737.5
In view of fact that district court offered little by
way of explanation for its attorneys’ fee award and
that scope of document was narrowed by telephone
conversation and trial judge erroneously relied upon
assumption that there were no objections to settle-
ment in determining that issuance of subpoenas was
improper, record failed to support finding that there
2a
was Clear evidence of bad faith or vexatiousness in is-
suing subpoenas which trial court described as ‘“‘on
their face, grossly overbroad,’”’ and sanction of fee
award was not shown to be justified.
SF A SS se
Benedict Wolf and Lester L. Levy, New York City
(Wolf, Popper, Ross, Wolf & Jones, and Wolf,
Haldenstein, Adler, Freeman & Herz, New York City),
for plaintiffs-appellees.
Philip C. Potter, Jr., Ogden N. Lewis and Denny
Chin, New York City (Davis, Polk & Wardwell, New
York City), for defendants-appellees.
Bradley R. Brewer, New York City (Brewer &
Soeiro, New York City), for appellants Coyne, Collins
and 580 other named appellants.
I.W. Bader, White Plains, N.Y. (Bader & Bader,
White Plains, N.Y.), for appellants Lewy, Anderson,
Barrie, Pine, Lapham, Garson, Howe, Barnes &
Johnson and Jurkiewicz.
Before WATERMAN, FRIENDLY and
MESKILL, Circuit Judges.
FRIENDLY, Circuit Judge:
These consolidated appeals are from a final judg-
ment of Judge Duffy of the District Court for the
Southern District of New York, entered on October
16, 1981, 91 F.R.D. 494, approving, pursuant to F.R.
Civ.P. 23, the settlement of two securities class ac-
tions consolidated below— Weinberger, et al. v. Ken-
drick, et al, and Panzirer v. Peterkin, et al. The com-
plaints in these actions, filed on October 3, 1975, and
3a
October 22, 1976, respectively, asserted claims on
behalf of classes consisting of persons who had pur-
chased securities of W.T. Grant Company (Grant) dur-
ing the 34 months prior to that company’s bankrupt-
cy on October 2, 1975 (sometimes referred to hereafter
as the class period). The defendants named in the ac-
tions were financial institutions (the banks) that loan-
ed Grant more than $600 million prior to its bankrupt-
cy,! and Dewitt Peterkin, Jr., a former vice-chairman
of Morgan Guaranty and a Grant director. The com-
plaints alleged that the defendants had dominated the
management of Grant in the years preceding its
bankruptcy and had concealed from the public both
the seriousness of Grant’s financial predicament and
the inflated value of Grant securities. The plaintiffs
asserted, among other things, claims against the
defendant-appellees based on §10(b) of the Securities
Exchange Act of 1934, 15 U.S.C. §78j(b), Rule 10b-5
promulgated thereunder, 17 C.F.R. §240.10b-5, and
common law fraud. The complaints in Weinberger and
Panzirer were superseded by a consolidated amended
complaint, filed July 25, 1980, along with the propos-
ed settlement. In addition to the claims previously
asserted, this advanced state law breach of fiduciary
duty claims; the new complaint also expanded the
plaintiff class to include persons who merely held
Grant securities during the class period. The settle-
ment approved by Judge Duffy would extinguish a
number of these claims? in return for some $2.84
million,? which, after allowance of attorneys’ fees,
would be distributed to the plaintiff class. While no
determination has been made how even the gross
amount of the settlement compares to the amounts
claimed, estimated by objectors’ counsel as between
$250 million and $1 billion, it is not disputed that the
recovery will be only a negligible percentage of the
4a
losses suffered by the class. Both the plaintiffs and
the defendants below are here as appellees defending
the settlement’s adequacy.
The appellants are a number of persons who pur-
chased or held Grant securities during the class
period. One group, the Coyne appellants, allegedly 583
in number, represented by Bradley R. Brewer, fit the
above description simpliciter. The other group, the
Lewy appellants, are the eight named plaintiffs in a
class action, Index No. 17857-75, filed in September
1975 in the Supreme Court of New York County which
is now against three of the lending banks, Morgan
Guaranty, Chase Manhattan and Citibank, asserting
some of the claims asserted in the Weinberger/Pan-
zirer actions but only under state law. Appellants
raise a number of procedural and substantive
challenges to the determination that the settlement is
fair, reasonable and adequate. We affirm.
I. Background
On October 2, 1975, Grant, with recorded
liabilities of well over a billion dollars, filed a petition
in bankruptcy court in the Southern District of New
York for an arrangement under Chapter XI of the
former Bankruptcy Act. Grant’s petition came after
two years of declining earnings and credit ratings.
When the company’s publicly reported earnings for
the year ending January 31, 1974, declined by some
$85,000,000, rating agencies downgraded Grant’s
commercial paper, thereby effectively denying the
company access to the commercial paper market. As a
result, in the spring of 1974, Grant began to obtain
financing from commercial banks, first on an ad hoc
basis with credit lines from numerous lenders
5a
throughout the country, and later, in the fall of 1974,
under a $600,000,000 committed revolving credit
agreement arranged by the company’s principal
banks. Morgan Guaranty was the lead lender and
acted as agent for the other banks, see note 1, supra.
The revolving credit was secured by Grant’s accounts
receivable and certain securities it held in a sub-
sidiary.
Despite the new credit, and various other steps
taken by its lenders to ameliorate Grant’s situation,*
and contrary to rosy predictions by Grant’s manage-
ment, the company’s financial position continued to
deteriorate. The seriousness of this became fully ap-
parent when an internal study ordered in the summer
of 1975 by a new Grant president, Robert Anderson,
was completed in late September: this revealed that
the company had a negative net worth. The evidence
indicates that the news came as a surprise to the
banks and Grant’s board. Grant’s Chapter XI petition
quickly followed.
Even more quickly came the first complaint in the
Weinberger action, filed October 3, 1975. The com-
plaint alleged that, as a result of their large loans,
Grant’s principal lenders had been in a position to,
and in fact did, exercise considerable control over the
management of the company in its final years. It fur-
ther charged that the defendant banks and Grant’s
management had cooperated in presenting a
misleadingly optimistic picture of the company’s
future to the public. The Panzirer complaint, filed on
October 22, 1976, elaborated on this theme. It alleged
that Peterkin became aware of Grant's true financial
predicament in March, 1973, and passed this informa-
tion to Morgan Guaranty, including the Trust and In-
vestment Division, which thereafter sold virtually its
64
entire holding of Grant securities on the open market.
Motions for class certification were filed in
Weinberger in June, 1977, and in Panzirer in August,
1977; the motions were later adjourned during settle-
ment discussions and were not renewed until agree-
ment had been reached.
The development and settlement of the
Weinberger/Panzirer action require an understanding
of Grant’s bankruptcy proceedings. Some six months
after the filing of Grant’s Chapter XI petition, the
Bankruptcy Court, on April 13, 1976, determined that
the company could not be reorganized and ordered its
liquidation. On July 2, 1976, the principal banks com-
menced an adversary proceeding seeking enforcement
of security interests they held in property of Grant’s
estate, see p. 64, supra. In his September 24, 1976,
answer, the trustee in bankruptcy challenged these
security interests on the grounds that they were
preferential transfers and fraudulent conveyances;
more important for our purposes, he also claimed that,
because of the control they allegedly exercised over
Grant’s affairs during the years 1973-75, the com-
pany’s principal lenders should be equitably subor-
dinated® to other claimants.
In an effort to substantiate his charges, par-
ticularly his claim to equitable subordination, the
trustee conducted investigations throughout the re-
mainder of 1976 and 1977 into the relationship bet-
ween Grant and its lenders during the class period. He
relied principally on testimony taken under Bankrupt-
cy Rule 205 and un documents subpoenaed from
various parties.* Rule 205 examinations were taken of
all the principal officers and directors of Grant, the
principal officers at Morgan Guaranty responsible for
dealings with Grant, and two officers of other major
ia
lending banks. The testimony ran to some 10,000
pages. The trustee also subpoenaed those files of
Grant’s principal lenders which related to the com-
pany—comprising hundreds of thousands of
documents.’ In short, the trustee conducted a far-
reaching and intensive probe of the banks’ involve-
ment in Grant’s affairs during the class period.
Despite his extensive investigations, Grant's
trustee concluded that his chances of proving any
fraud or other wrongdoing by the lending banks were
extremely slim, cf. 4 B.R. at 73-79 (Judge Galgay’s ap-
proval of similar determinations by the trustee). Ac-
cordingly, he attempted, ultimately successfully, to
settle the banks’ claims. On February 24, 1978, the
trustee and the banks entered into a settlement
whereby the banks released their security interests in
Grant’s property in return for allowance of principal
and interest on all prepetition loans which it was
estimated would result in their receiving distributions
of 55% or more of their claims, 4 B.R. at 59. The
Bankruptcy Court, in a careful decision, 4 B.C.D. 597,
issued on July 20, 1978, approved the settlement, and
shortly thereafter the banks began receiving distribu-
tions. The appellees have averred that, despite the set-
tlement, the banks will have lost more than
$250,000,000 on their loans to Grant by the time the
estate is fully liquidated.
Following approval of the settlement of the
banks’ claims, negotiations commenced regarding
claims of holders of Grant’s subordinated debt.* By
April, 1979, an agreeinent had been reached and the
trustee applied to the Bankruptcy Court for permis-
sion to offer the proposed settlement to holders of
Grant’s subordinated debt. On February 20, 1980,
after six days of hearings on the proposed settlement,
8a
including cross-examination of the trustee, his
counsel, and his chief staff assistant regarding the
fairness of the settlement, Judge Galgay, in a second
lengthy decision, 4 B.R. 53, approved the settlement.
He expressly found, among other things, that the
banks’ relationship with Grant during the class period
had been one of ‘‘arms-length negotiations’’ and that
Grant’s actions “‘reflected independent policy deci-
sions’, 4 B.R. at 76-77. Eleven bondholders appealed
this order to the District Court for the Southern
District of New York (Conner, J.), which stayed con-
sideration of the appeals so that Bankruptcy Judge
Galgay could supervise continuing negotiations
among the bankruptcy trustee, the indenture trustee,
the banks, and the debentureholders for an improved
offer to the latter. Counsel for the debentureholders
who had appealed from the order approving the earlier
offer stipulated that these appeals be withdrawn with
prejudice, and this was so ordered. On June 23, 1981,
an amended offer was approved by Judge Galgay.
Two groups of debentureholders appealed to the
District Court (Duffy, J.) from the order approving
the amended offer. In an opinion and order dated
March 15, 1982, Judge Duffy affirmed the order, 20
B.R. 186. He rested his decision primarily on the
ground of res judicata, although he also stated that
the appeals were without merit. Two groups of deben-
tureholders have appealed to this court.
After agreement in principle was reached regar-
ding the claims of Grant’s major creditors, efforts
focused, in the fall of 1979, on settling the Weinberger
and Panzirer actions. Plaintiffs’ counsel had engaged
in a wide range of discovery during the four years
prior to the commencement of settlement discussions.
They had access to, and reviewed, both the bank
documents subpoenaed by the trustee and the
9a
testimony from the Rule 205 examinations he con-
ducted. In addition, plaintiffs’ counsel deposed
several officers of Morgan Guaranty, paying par-
ticular attention to the relationship between that
bank and Grant during the class period. Like Grant's
trustee and Judge Galgay, however, plaintiffs’
counsel found virtually nothing to substantiate their
allegations against the banks: “‘[o]n the basis of all the
evidence we were ccmpelled to the conclusion that our
chance of prevailing against the banks, while not
nonexistent, was slim.’’ With this in mind, and after
rejecting as inadequate one settlement offer by the
banks, plaintiffs’ counsel agreed in late 1979 to the
settlement of a number of the class action claims
asserted in the Weinberger/Panzirer actions. An
original settlement fund of $2.6 million agreed upon in
May of 1980 was later increased to $2.84 million,
which, with interest, now exceeds $3.5 million.
This proposed settlement was submitted to Judge
Duffy for approval on July 25, 1980. It was accom-
panied by a consolidated amended complaint. Count I
of the consolidated amended complaint, brought on
behalf of all purchasers of Grant securities during the
class period, alleged, as had the Weinberger com-
plaint, that the banks ‘‘were in a position to, and did,
control, influence and participate in Grant’s opera-
tions, including the disclosure and nondisclosure of in-
formation relating to Grant’s financial condition,’
428, and that, using this control the banks ‘‘engaged
in a scheme, plan and continuous course of conduct to
present a falsely inflated and optimistic picture of
Grant's... financial condition, and to conceal the true
nature of Grant’s operations and deteriorating finan-
cial condition from the investing public...” 430. It
also asserted that the purchasers of Grant securities
during the class period had relied in purchasing the
10a
allegedly overvalued Grant securities upon false or
misleading disclosures and nondisclosures resulting
from the defendants’ ‘‘course of conduct.’ Based on
these allegations Count I of the complaint claimed
violations of §10(b) of the Securities Exchange Act of
1934 and Rule 10b-5 promulgated thereunder, 942, as
well as of common law fraud principles, 9/44.
Count II of the consolidated amended complaint
asserted claims on behalf of a broader class of plain-
tiffs. In addition to purchasers of Grant securities, the
class included persons not previously included in
either the Panzirer or Weinberger classes—persons
who merely held, rather than purchased, Grant
securities during the class period 948(B). In addition
to alleging the claims described above under the
federal securities laws, 449, the complaint charged
that the defendants ‘‘have committed common law
fraud and have breached their fiduciary duties to
plaintiffs...’’, 958, the latter theory not having
previously been expressly advanced by plaintiffs. All
these claims were based upon factual allegations
almost identical to those underlying the federal
securities law claims. The banks were charged with
having ‘‘caused Grant to delay disclosing facts
relating to the financial condition of Grant” and hav-
ing caused Grant ‘‘to delay for their own benefit the
filing of a petition in bankruptcy by Grant,” 956.
Count III of the consolidated amended complaint,
asserted on behalf of a class limited to purchasers of
Grant common stock during the class period, alleged
that Morgan Guaranty and Peterkin had violated
Rule 10b-5 by engaging in insider trading during the
class period. It also alleged that, during the class
period, Morgan Guaranty was a controlling person of
Grant under §20(a) of the Securities Exchange Act of
1934.
lia
The proposed settlement agreement submitted to
the district court along with the consolidated amend-
ed complaint, was accompanied by the parties’ con-
sent to the filing of the new complaint. In addition,
the agreement requested the district court to enter an
order determining, ‘‘for the purpose of effectuating
the settlement”’ 8(a), that the action be maintained
as a Class action on behalf of the previously discussed
classes of purchasers and holders of Grant securities.
Substantively, the settlement agreement provided for
the release of the above-described class claims
asserted in the consolidated amended complaint, as
well as any related claims arising out of the same tran-
sactions which might have been asserted, cf. note 2,
supra, in return for the payment to the class of some
$2.84 million.
Submitted to Judge Duffy on July 25, 1980, along
with the consolidated amended complaint and the pro-
posed settlement agreement, were notices of the
pendency of class action, the class action determina-
tion, the proposed settlement and settlement hearing,
which were to be mailed to prospective class members.
These notices, among other things described the
Weinberger/Panzirer action, set out the terms of the
proposed settlement, defined the class that approval
of the settlement would bind, and informed class
members that they could opt out of the settlement, by
so requesting before January 24, 1981,° or enter an ap-
pearance through counsel. Objections to the proposed
settlement were required to be filed not later than two
weeks before the scheduled February 18, 1982,
fairness hearing; no deadline was set for submission of
affidavits supporting the proposed settlement. Pur-
suant to the July 28, 1980, order of Judge Duffy, these
notices were mailed to class members on December 9,
1980, and were published in the Wall Street Journal.
124
In a January 19, 1981, motion to vacate the July 25
order, counsel for appellants alleged that the settle-
ment was inadequate and that the class notification
procedure was defective in a number of respects.
Judge Duffy denied the motion on February 6, 1981.
On February 17, 1981, the appellees filed papers
supporting the settlereat, including lengthy af-
fidavits from counsel fer both plaintiffs and defen-
dants attesting to the fairness and adequacy of the
settlement. Judge Duffy conducted the fairness hear-
ing the next day; appellants tell us that this took no
more than 10 minutes. At this hearing counsel for ap-
pellants submitted a memorandum requesting that
the court treat their January 19 motion and certain
letters counsel had written to the court as timely ob-
jections to the settlement. Judge Duffy refused to do
so, although in his opinion approving the settlement,
91 F.R.D. at 495 n.3, he also rejected the objections as
without merit. By May 19, 1981‘the deadline for filing
proofs of claim—some 26,000 claims had been filed.
[1] On August 13, 1981, Judge Duffy issued an
opinion approving the proposed settlement as fair,
reasonable and adequate. He found that “‘able and ex-
perienced”’ counsel for the class had conducted pro-
tracted arms-length negotiations in good faith; that
‘‘extensive’’ pre-trial discovery had enabled the par-
ties to ‘“‘fully...evaluate the strengths and
weaknesses of the class claims’’; that both he and the
parties properly could rely on factual and legal find-
ings made by Bankruptcy Judge Galgay, In re W. T.
Grant Co., 4 B.R. 53 (Bkrtcy. S.D.N.Y. 1980), which
dealt with the circumstances underlying the settle-
ment and which indicated that the plaintiffs’ “chances
of prevailing were slim’; that the plaintiffs’ claims
were ‘‘complex”’ and “‘not easily proven,”’ particularly
13a
in view of the ‘‘heavy burdens of proof’’ faced by
plaintiffs and ‘‘vigorous defenses’’ asserted by defen-
dants; and that a trial would inevitably involve
“lengthy and costly litigation.’’ He concluded that,
‘‘[iJn view of the difficulties plaintiffs would confront
if this case went to trial, the recommendation of ex-
perienced counsel and the lack of individual objections
to the settlement, I find that the sum offered by the
defendants is acceptable.’’ The opinion did not discuss
most of the procedural objections considered in this
opinion, perhaps because of the judge’s findings that
no timely objections were filed.'°
II. DISCUSSION
A. The Class Notice
[2] We deal first with appellants’ numerous
challenges to the notice of class action and proposed
settlement mailed to prospective class members on
December 9, 1980. Appellants initially argue that the
notice failed adequately to describe the proposed set-
tlement. They also contend that it should have con-
tained a wide variety of additional information more
fully describing the terms of the proposed settlement
and the manner in which the negotiations leading to it
had been conducted. ''
Although no rigid standards govern the contents
of notice to class members, Mullane v. Central
Hanover Bank & Trust Co., 339 U.S. 306, 314, 70 S.Ct.
652, 657, 94 L.Ed. 865 (1950), the notice must ‘‘fairly
apprise the prospective members of the class of the
terms of the proposed settlement and of the options
that are open to them in connection with [the] pro-
ceedings,’’ Grunin v. International House of Pan-
cakes, 513 F.2d 114, 122 (8 Cir.), cert. denied, 423 U.S.
l4a
864, 96 S. Ct. 124, 46 L.Ed.2d 93 (1975), quoting
Philadelphia Housing Authority v. American
Radiator & Standard Sanitary Corp., 323 F. Supp.
364, 378 (E.D. Pa. 1970), aff'd sub nom., Ace Heating
& Plumbing Co. v. Crane Co., 453 F.2d 30 (3 Cir. 1971);
See Mullane v. Central Hanover Bank & Trust Co.,
supra, 339 U.S. at 314, 70 S. Ct. at 657, and it must be
neutral, see Grunin, supra, 513 F.2d at 122. Numerous
decisions, no doubt recognizing that notices to class
members can practicably contain only a limited
amount of information, have approved ‘‘very general
description[s] of the proposed settlement,’’ Grunin uv.
International House of Pancakes, supra, 513 F.2d at
122. See In re Equity Funding Corp. of America
Securities Litigation, 603 F.2d 1353, 1361-62 (9 Cir.
1979); Mendoza v. United States, 623 F.2d 1338,
1351-52 (9 Cir. 1980), cert. denied, 450 U.S. 912, 101 S.
Ct. 1351, 67 L.Ed. 2d 336 (1981), In re Corrugated
Container Antitrust Litigation, 643 F.2d 195, 223-24
(5 Cir. 1981).
[3] The December 9, 1980, class action notice, met
the foregoing requirements. It fairly, accurately and
neutrally described the claims and parties in the
Weinherger/Panzirer litigation, as well as the terms of
the proposed settlement and the identity of persons
entitled to participate in it. The notice described in
detail a related state court action—Lewy v. The Chase
Manhattan Bank, N.A., et al., App. Div. 437 N.Y.S.2d
263—brought by counsel for the appellants.'? It ex-
plicitly informed class members that “‘[p]articipation
in the present settlement would preclude any par-
ticipation in the Lewy case.” The notice also explained
that class members could exclude themselves from the
settlement by requesting this prior to January 24,
1981, or could enter an appearance at the fairness
hearing through counsel. Finally, it informed the class
15<
that the recovery would be subject to the district
court's allowance of attorney’s fees and expenses and
that counsel expected to apply for fees not exceeding
25% of the settlement fund. There is little question
that all this ‘‘fairly apprise[d]’’ prospective class
members of the class action’s pendency, the relevant
terms of the proposed settlement, and their options in
connection with that case. Those who wanted to probe
more deeply could, as the notice plainly told them, ex-
amine “‘[t]he settlement stipulation and the papers
and documents filed in this action... ’’"
[4] Appellants next contend that the mailing of in-
dividual notices to the last known addresses of all
class members, as determined from the records of
Grant and various brokerage houses and nominees,
was inadequate since the addresses of many security-
holders might have changed during the period since
Grant’s bankruptcy. Feeral Rule of Civil Procedure
23(c)(2)'* and Eisen v. Carlisle & Jacquelin, 417 U.S.
156, 176, 94 S Ct. 2140, 2151, 40 L.Ed.2d 732 (1974),
require only that ‘“‘each class member who can be iden-
tified through reasonable effort’’ (emphasis added), be
notified. In Jn re Franklin National Bank Securities
Litigation, 574 F.2d 662, modified, 599 F.2d 1109
(1978), we discussed the application of the Hisen re-
quirement to classes consisting of purchasers of
securities, noting the difficulty of ensuring that notice
is received by persons whose purchases are recorded
in ‘“‘street names’’—typically banks or brokerage
houses. We disapproved the practice of sending class
notices to street name addresses with a request that
the recipient forward the notice to the beneficial
holder of the securities but without an offer to defray
the resulting expenses, 574 F.2d at 669-70. We in-
dicated approval, however, of the use of bank and
brokerage house records to compile a list of actual
164
holders of securities to whom individual notices would
be mailed, 574 F.2d at 672. Here appellees compiled
such a list, mailed individual notices, and, in addition,
published notice of the class action and settlement in
the Wall Street Journal. Some 26,000 proofs of claim
have been filed as a result of these notice procedures.
The district court, in its July 28, 1980, order, express-
ly found this procedure adequate and we see no reason
to disturb its finding, particularly since no alternative
method of ascertaining class members’ identities has
been suggested to us, see Grunin v. International
House of Pancakes, supra, 513 F.2d at 121-22 (in-
dividual mailing to last known address, without sup-
plemental newspaper publication, approved, despite
evidence that one third of prospective class did not
receive notices).
(5, 6] Likewise, the timing of the notices, which
were mailed on December 9, 1980; the opt-out
deadline, January 24, 1981; the deadline for the filing
of objections, February 4; the date affidavits in sup-
port of the settlement were filed, February 17; and the
fairness hearing, February 18, were not beyond the
authority of the Court. According to the Professor
Moore, ‘‘[t]he manner of giving notice is committed to
the sound discretion of the court,’ 3B Moore's
Federal Practice 423.80[3], at 23-513 (1982). as is sug-
gested by Rule 23’s statement that notice of settle
ment shall be ‘“‘in such manner as the court directs."
The notice, however, must be ‘‘reasonably calculated,
under all the circumstances, to apprise interested par-
ties of the pendency of the action and afford them an
opportunity to present their objections,’’ Mullane v.
Central Hanover Bank & Trust Co., supra, 339 U.S. at
314, 70 S. Ct. at 657, and it must ‘‘afford a reasonable
time for those interested to make their appearance,’
17a
Id. Prospective class members had some six weeks in
which to decide whether or not to accept the settle-
ment. Although we think it would have been
preferable if appellees’ affidavits and other papers in
support of the settlement had been required to be
available at a date earlier than the eve of the hearing,
the failure of the district court to demand this does
not require reversal. Objectors were fully apprised of
the terms of the proposed settlement and, although
they did not avail themselves of the opportunity, had
complete access to materials discovered in the case;
this provided an adequate base from which objections
could be developed. See 3 Newberg, Class Actions
$5660d (1977). The requirement, challenged by ap-
pellants, that requests to opt-out be filed prior to the
fairness hearing placed prospective objectors in no
worse position than occurs when formal class cer-
tification precedes settlement; indeed, their position
was better in that they knew the terms of the propos-
ed settlement before having to decide whether to opt
out.
Appellant’s final procedural objections relate to
appellees’ having engaged in and concluded settle-
ment negotiations prior to class certification and
notice. Closely related to this, they challenge the
simultaneous notification of class members of the
class determination (for purposes of settlement) and
the proposed settlement. We shall discuss this initially
as if the class certification related solely to the class
named in the earlier Weinberger/Panzirer complaints,
i.e., Claims arising from the purchase of Grant
securities during the class period, and will deal later
with the added problems arising from the inclusion of
other claims.
18a
In In re Franklin National Bank Securities Litiga-
tion, supra, 574 F.2d at 671-72 n.6, we questioned in
dictum the practice of bypassing the formal class cer-
tification procedure and of sending simultaneous
notice of the pendency of a class action and of a pro-
posed settlement to prospective class members. We
voiced concern that the praactice might be ‘‘inconsis-
tent with the requirement [of Rule 23] that certifica-
tion as a class action be determined ‘as soon as prac-
ticable after the commencement of the action’ and the
implication that the initial class notice should follow
promptly after the certification,’ id. and said that
“(slo far as we are aware the only cases in which this
question has been specifically passed upon have held
that the sending of the initial class notice should not
be postponed,”’ id. Our hesitation to approve the prac-
tice echoed the concerns expressed in the Manual for
Complex Litigation §1.46, at 60-61 (1977) (Manual),
which argues that the practice may create the
possibility of collusion or improper pressure by defen-
dants on “unofficial’’ counsel for the class. The
Manual recommends a firm prophylactic rule pro-
hibiting the bypassing of an early formal class cer-
tification and the formation of temporary classes for
settlement purposes.
Despite the Manual’s concerns and the misgiv-
ings expressed in the Franklin National Bank foot-
note, we concluded in Plummer v. Chemical National
Bank, 668 F.2d 654, 656 (2 Cir. 1982), that ‘‘[a]lthough
negotiations in the instant case were conducted by
undesignated class representatives without pretrial
discovery, this, standing alone, did not preclude
judicial approval,’’ 668 F.2d at 658. See also City of
Detroit v. Grinnell Corp., 495 F.2d 448, 464-66 (2 Cir.
1974). A similar view is taken in Judge Wisdom's
19a
thorough opinion in Jn re Beef Industry Antitrust
Litigation, 607 F.2d 167, 173-78 (5 Cir. 1979), cert.
denied, 452 U.S. 905, 101 S. Ct. 3029, 69 L.Ed.2d 405
(1981), which carefully reviews the authorities and
commentary on the question. Much like our decision
in Plummer v. Chemical Bank, the Fifth Circuit con-
cluded that:
A blanket rule prohibiting the use of temporary settle-
ment classes may render it virtually impossible for the
parties to compromise class issues and reach a propos-
ed class settlement before a class certification. Such a
firm restriction does not appear necessary or
desirable. The hallmark of Rule 23 is the flexibility it
affords to the courts to utilize the class device in a par-
ticular case to best serve the ends of justice for the af-
fected parties and to promote judicial efficiencies.
* * *
Temporary settlement classes have proved to be quite
useful in resolving major class action disputes. While
their use may still be controversial, most courts have
recognized their utility and have authorized the par-
ties to seek to compromise their differences, including
class action issues, through this means.
In re: Beef Industry Antitrust Litigation, supra, 607
F.2d at 177-78, quoting 3 Newberg, Class Actions
§5570c, at 479-80 (1977).
Other circuits have held that the absence of class
certification prior to the notice of the settlement is not
an absolute bar to approval. See Ace Heating & Plum-
bing Co. v. Crane Co., supra, 453 F.2d at 33; In re Cor
rugated Container Antiirust Litigation, supra, 643
F.2d at 228 (‘‘Rule 23 includes no language proscrib-
ing combined notice of a class action and a proposed
settlement.”’); Marshall v. Holiday Magic, Inc., 550
20a
F.2d 1173, 1176 (9 Cir. 1977); Valerio v. Boise Cascade
Corp., 80 F.R.D. 626, 639 (N.D.Cal.1978), aff'd, 645
F.2d 699 (9 Cir. 1981), cert. denied, 454 U.S. 1126, 102
S.Ct. 976, 71 L.Ed.2d 113 (1981).
[7] Although we thus refuse to adopt a per se rule
prohibiting approval when a class action settlement
has been reached by means of settlement classes cer-
tified after the settlement, with notice simultaneous
with that of the settlement, we emphasize that we are
permitting, not requiring, use of this procedure, and
also underscore that, as intimated by us in Plummer,
supra, 668 F.2d at 658, district judges who decide to
employ such a procedure are bound to scrutinize the
fairness of the settlement agreement with even more
than the usual care. This is necessary in order to meet
the concerns, noted in the Manual, regarding the
possibilities of collusion or of undue pressure by the
defendants on would-be class representatives. Accor-
dingly, we will demand a clearer showing of a settle-
ment’s fairness, reasonableness and adequacy and the
propriety of the negotiations leading to it in such
cases than where a class has been certified and class
representatives have been recognized at an earlier
date. As discussed below, we are satisfied that the set-
tlement in this case meets these requirements.
B. The Fairness, Reasonableness and Adequacy of the
Proposed Settlement
[8] The central question raised by the proposed
settlement of a class action is whether the com-
promise is fair, reasonable and adequate. There are
weighty justifications, such as the reduction of litiga-
tion and related expenses, for the general policy favor-
ing the settlement of litigation, 3 Newberg, Class Ac-
2la
tions §5570c, at 479-80 (1977); cf. Williams v. First
National Bank, 216 U.S. 582, 595, 30 S.Ct. 441, 445,
54 L.Ed. 625 (1910). In part to realize these advan-
tages of settlements negotiated by litigants, we have
long recognized that a district court’s disposition of a
proposed class action settlement should be accorded
considerable deference, West Virginia v. Chas. Pfizer
& Co., 440 F.2d 1079, 1085 (2 Cir.), cert. denied sub
nom. Cotler Drugs, Inc. v. Chas. Pfizer & Co., 404 U.S.
871, 92 S.Ct. 81, 30 L.Ed.2d 115 (1971); Newman v.
Stein, 464 F.2d 689, 692 (2 Cir.), cert. denied sub nom.,
Benson v. Newman, 409 U.S. 1039, 93 S.Ct. 521, 34
L.Ed.2d 488 (1972); City of Detroit v. Grinnell Corp.,
supra, 495 F.2d at 454-55 (2 Cir. 1974); Patterson v.
Newspaper & Mail Delivery Union, 514 F.2d 767, 771
(2 Cir. 1975). The trial judge ‘‘is exposed to the
litigants, and their strategies, positions and proof. He
is aware of the expense and possible legal bars to suc-
cess. Simply stated, he is on the firing line and can
evaluate the action accordingly.”’ Ace Heating &
Plumbing Co. v. Crane Co., supra, 453 F.2d at 34.
While this principle does not apply in full force when
settlement of a class action has been negotiated before
a class has been certified and a higher degree of
judicial scrutiny is required, particularly when, as
here, there is nothing to indicate that the district
judge felt compelled to do this, it is not wholly depriv-
ed of force.
[9] Determination whether a proposed class action
settlement is fair, reasonable and adequate involves
consideration of two types of evidence. The primary
concern is with the substantive terms of the settle-
ment: ‘‘Basic to this ... is the need to compare the
terms of the compromise with the likely rewards of
litigation.’ Protective Committee for Independent
224
Stockholders of TMT Trailer Ferry, Inc. v. Anderson,
390 U.S. 414, 424-25, 88 S.Ct. 1157, 1163, 20 L.Ed.2d
1 (1968). See also Newman v. Stein, supra, 464 F.2d
689; City of Detroit v. Grinnell Corp., supra, 495 F.2d
at 455. In order to make this comparison, the trial
judge must “‘apprise[ ] himself of all facts necessary
for an intelligent and objective opinion of the pre
babilities of ultimate success should the claim be
litigated.’’ Protective Committee for Independent
Stockholders of TMT Trailer Ferry, Inc. v. Anderson,
supra, 390 U.S. at 424, 88 S.Ct. at 1163. However,
“‘all’”’ cannot really mean “‘all’’. The Supreme Court
could not have intended that, in order to avoid a trial,
the judge must in effect conduct one. Saylor v. Lind-
sley, supra, 456 F.2d at 904; Newman v. Stein, supra,
464 F.2d at 691-92; City of Detroit v. Grinnell Corp.,
supra, 495 F.2d at 462. In order to supplement the
thus necessarily limited examination of the settle-
ment’s substantive terms, attention also has been
paid to the negotiating process by which the settle-
ment was reached, and courts have demanded that the
compromise be the result of arm’s-length negotiations
and that plaintiffs’ counsel have possessed the ex-
perience and ability, and have engaged in the
discovery, necessary to effective representation of the
class’s interests, City of Detroit v. Grinnell Corp.,
supra, 495 F.2d at 463-66.
[10] The appellants, citing Protective Committee
vu. Anderson, supra, argue at great length that the
lower court’s two page opinion demonstrates that it
did not adequately scrutinize either the substantive
terms of the proposed settlement or the propriety of
the process of neyotiations. We see nothing in the lat-
ter point. The district court noted the absence of any
indication of collusion, the protracted settlement
negotiations, the ability and experience of plaintiffs’
23a
counsel, the extensive discovery preceding settlement
and the fact that counsel for all parties—including the
objectors—had access to materials produced in
discovery, including the extensive and detailed
discovery of Grant’s trustee, who commanded finan-
cial resources and professional assistance, see note 6,
supra, not always available to plaintiffs’ counsel in
class actions. All these considerations, as previous
decisions have noted, City of Detroit v. Grinnell Corp.,
supra, 495 F.2d at 465; In re Beef Industry Antitrust
Litigation, supra, 607 F.2d at 176; Plummer v.
Chemical Bank, supra, 668 F.2d at 658, are important
indicia of the propriety of settlement negotiations. In-
deed, as discussed more fully below, plaintiffs’ preset-
tlement preparation and discovery efforts in this case
were substantially more thorough than those in many
other decisions where settlements have been approv-
ed.
We are almost equally confident as regards the
substantive terms of the proposed settlement.
Although the district court’s discussion of this was
rather cursory, our own examination of the record
leads us to conclude that the court had before it suffi-
cient materials to evaluate the settlement and came to
the correct conclusion.
Both the defendants and plaintiffs in
Weinberger/Panzirer submitted lengthy affidavits to
the district court. These carefully described the
history of the litigation and, more important,
thoroughly canvassed the evidence, both that suppor-
ting and that refuting plaintiffs’ claims. As noted
above, this evidence included the materials amassed
in the trustee’s investigation. Since his claim of
equitable subordination required a detailed inquiry in-
to the relationship between the banks and Grant,
24a
which is precisely the issue raised in the
Weinberger/Panzirer actions, his discovery efforts
were extremely relevant to the plaintiffs’ claims. The
lower court also had the unusual and important
benefit of several careful and well-reasoned opinions
by Bankruptcy Judge Galgay, see pp. 7-8, supra.
These opinions, particularly as they related to the
equitable subordination question, provided excellent
guidance from a disinterested source on questions cen-
tral to the fairness and adequacy of the proposed set-
tlement. Taken together, these materials provided a
satisfactory record on which the district court could
base its decision.
Moreover, from what we have distilled from the
record, we think the district court’s decision met the
higher standard of scrutiny we believe appropriate in
this case. As plaintiffs’ counsel observed, ‘‘[i]n
weighing the class’ chance of prevailing on the merits
in the case against the banks it was ... important to
differentiate between proving the liability of a
bankrupt Grant to the class and proving any liability
on the part of the defendant banks, who themselves
lost hundreds of millions of dollars by reason of their
transactions with Grant during the class period.”
Levy Affidavit §59. Central to plaintiffs’ claims
against the banks under both the federal securities
laws and the common law was the allegation that the
defendants ‘‘were in a position to, and did, control, in-
fluence and participate in Grant’s operations.’ Con-
solidated Amended Complaint 428. This precise point
had been considered by Judge Galgay in Grant’s
bankruptcy proceedings. He said:
I am satisfied that in the case of Grant the trans-
actions between the Bank Claimants and Grant are
the result of arms-length negotiations conducted in
25a
good faith and governed by the dictates of sound
business judgment. I have reviewed the evidence and,
in particular, the portions of testimony elicited in ex-
aminations pursuant to Bankruptcy Rule 205(a) which
the [objectants] claim establish control and domina-
tion on the part of the Bank Claimants. The excerpts
referred to by the [objectants] constitute but a small
portion of the vast amount of information, facts and
materials considered by the Trustee. To a considerable
extent, the ‘‘facts’’ presented by the [objectants] are
based upon hearsay testimony, distortions of
testimony, out-of-context statements or
misstatements.
The record establishes the converse. It appears
that the action taken by Grant reflected independent
policy decisions and not rigid submission to the dic-
tates of the Bank Claimants. Mr. Sundman, a chief
financial officer of Grant who had been appointed a
director in 1974, testified that he operated without in-
structions from the Bank Claimants and that the ad-
visory group organized by the Bank Claimants in 1974
offered neither suggestions nor opinions as to the
business operations of Grant. There has been no
evidence introduced by the [objectants] which would
tend to establish that the Bank Claimants prevented
Grant from initiating a proceeding under the
Bankruptcy Act in 1974 or 1975. The record
demonstrates that prior to the decision made by the
Grant Baord of Directors during the end of September
1975 to seek relief under the Bankruptcy Act, both the
Bank Claimants and Grant management viewed
Grant as a turnaround situation and not insolvent.
Accordingly, it must be concluded that the pro-
babilities of success as to the prosecution of claims of
equitable subordination are very remote. In that con-
text, the Trustee’s recommendation is well founded.
264
4 B.R. at 76-77 (footnote omitted).
Likewise the affidavit of plaintiffs’ counsel
described the uncontradicted deposition statements
of various officers of Morgan Guaranty to the effect
that the bank was “‘not capable or desirous of making
management decisions and did not attempt to tell
Grant how to run its business.”’
The evidence adduced in discovery had also failed
to support plaintiffs’ claims in other respects. Counsel
for the plaintiffs averred that the evidence indicated
that ‘“‘the banks themselves were misled by Grant’s
management’s statements and projections that the
fortunes of Grant would recover.’’ Levy Affidavit 56.
The allegation, advanced in the Panzirer action, and
Count III of the consolidated amended complaint,
that Morgan Guaranty’s Trust and Investment Divi-
sion had sold approximately one million shares of
Grant common stock in 1973 based on inside informa-
tion obtained from Peterkin regarding Grant’s finan-
cial condition, was also belied by the evidence.
Peterkin testified that in 1973 he had not foreseen
Grant’s later troubles. Harrison U. Smith, Vice-
Chairman of Morgan Guaranty’s Trust and Invest-
ment Committee, testified that the decision to sell
Grant securities had been reached in 1972 and that no
discussions with Peterkin had occurred. Plaintiffs’
counsel frankly conceded, ‘‘[w]e do not have any hard
evidence to contradict Smith” and admitted that the
fact that Morgan commenced selling Grant shares in
1972 severely cut against his case.
We should thus have no difficulty in affirming the
approval of the settlement were it not for appellants’
contentions based on the inclusion in the consolidated
2%a
amended complaint and thus in the settlement of
‘‘state law” claims arising from the purchase of Grant
securities prior to the ‘‘class period”’ but held into or
beyond the period—a subject to which we now turn.
C. The Inclusion of Claims Arising Out of the Mere
Holding of Grant Securities
[11,12] So far as concerns a class member who had
purchased Grant securities prior to and during the
class period, the court clearly had jurisdiction to
entertain the claims arising from mere holding as well
as those arising from purchase as a matter of pendent
jurisdiction. The requirement of United Mine Workers
v. Gibbs, 383 U.S 715, 725, 86 S.Ct. 1130, 1138, 16
L.Ed.2d 218 (1966), that federal and state claims
share a ‘‘common nucleus of operative fact’’ before the
doctrine may apply is satisfied, as our discussion of
the similarities between the rule 10b-5 and the state
common law claims, pp. 31-35, infra, demonstrates.
Likewise, there is no question that plaintiffs’ Rule
10b-5 claims are constitutionally ‘‘substantial’’. The
requirement of ‘‘an examination of the posture in
which the non-federal claim is asserted and of the
specific statute that confers jurisdiction over the
federal claim, in order to determine whether ‘Congress
... has ... expressly or by implication negated’ the
exercise of jurisdiction over the particular nonfederal
claim,’ Owen Equipment & Erection Co. v. Kroger,
437 U.S. 365, 373, 98 S.Ct. 2396, 2402, 57 L.Ed.2d 274
(1978), is readily met since the Securities Exchange
Act’s conferal of exclusive jurisdiction on federal
courts, §27, for violations of that act permits ad-
judication of all rclated claims only in those courts,
see International Controls Corp. v. Vesco, 593 F.2d
166, 175 n.5 (2 Cir.), cert. denied, 442 U.S. 941, 99
S.Ct. 2884, 61 L.Ed.2d 311 (1979).
28a
[13] A more difficult jurisdictional question would
be raised by the inclusion of persons having only
claims arising from purchases prior to the class
period, if such there be. Such a person would lack the
federal claim necessary as a predicate to pendent
jurisdiction; federal jurisdiction with respect to him
seemingly would have to rest on the notion that when
there is federal jurisdiction over the claims of many
parties having both federal and state claims with a
common nucleus of law and fact, a federal court, in the
exercise of sound discretion, may also join as
plaintiffs persons holding only state claims having
such a nexus.
The law on this subject, including the Supreme
Court’s decision in Aldinger v. Howard, 427 U.S. 1, 96
S.Ct. 2413, 49 L.Ed.2d 276 (1976), is fully discussed in
3A Moore, Federal Practice 420.07 [5.-1]-[5.-3] (1982).
Although the Aldinger Court disapproved of the
joinder of a pendent party defendant in the case before
it, the Court explicitly limited its conclusion to ‘‘the
issue of so-called ‘pendent party’ jurisdiction with
respect to a claim brought under [28 U.S.C.] §§1343(3)
and [42 U.S.C.] 1983”, id. at 18, 96 S.Ct. at 2422, and
noted that ‘“‘o]ther statutory grants and other
alignments of parties and claims might call for a dif-
ferent result,” id., and that “‘it would be as unwise as
it would be unnecessary to lay down any sweeping
pronouncement upon the existence or exercise of such
jurisdiction’, id.
The circumstances here are about as powerful for
the exercise of pendent party jurisdiction as can be
imagined. The exclusivity of federal jurisdiction over
claims for violation of the Securities Exchange Act
makes a federal court the only one where a complete
29a
disposition of federal and related state claims can be
rendered. Cf. the Court’s comment in Aldinger that
‘“{w]hen the grant of jurisdiction to a federal court is
exclusive, for example, as in the prosecution of tort
claims against the United States under 28 U.S.C.
§1346, the argument of judicial economy and conve-
nience can be coupled with the additional argument
that only in federal court may all of the claims be tried
together,’ 427 U.S. at 18, 96 S.Ct. at 2422. The con-
cern most frequently voiced with regard to the pen-
dent party doctrine is that it requires a party not
otherwise subject to suit in federal court to defend
himself in that forum, see Aldinger v. Howard, supra,
427 U.S. at 18, 96 S.Ct. at 2422. In this case pendent
party jurisdiction serves, see Almenares v. Wyman,
453 F.2d 1075, 1084-85 (2 Cir. 1971), cert. denied, 405
U.S. 944, 92 S.Ct. 962, 30 L.Ed.2d 815 (1972), to ex-
tend federal jurisdiction to a new group of plaintiffs.
Pursuant to the opt-out procedures established by the
district court, plaintiffs who did not wish to have their
claim settled in a federal forum and in fact received
notice of the settlement needed only to request exclu-
sion. Finally, the state law claims asserted on behalf
of the pendent plaintiffs are already before the federal
courts, having been asserted on behalf of persons who
purchased Grant securities during the class period.'®
Appellants contend further that what was done
here with respect to claims arising out of purchases of
Grant securities before the class period was, for all
practical purposes, what we condemned in National
Super Spuds, Inc. v. New York Mercantile Exchange,
660 F.2d 9 (2 Cir. 1981). We disagree. in that case class
certification had been ordered fairly early in the game;
the class was limited to persons who had purchased
May 1976 Maine Potato Future Contracts and were
30a
damaged in liquidating such contracts between April
13, 1976, and the close of trading on May 7, 1976. The
settlement, executed a year after notice of the cer-
tification had been sent and long after the opting out
period had expired, purported to settle claims going
beyond those asserted on behalf of this class and in-
cluding the objector’s claims for losses on contracts
which were not liquidated on or before May 7, 1976,
but on which he claimed to have suffered a loss
thereafter. However, the proceeds of the settlement
were to go solely to persons who had suffered losses
on contracts which were liquidated on or before May
7, 1976.
The situation here is quite different. Before the
class was certified, it was expanded to include persons
holding state as well as federal claims. The notice sent
to security holders clearly stated this and afforded an
opportunity to opt out. Moreover, the settlement
made provision for payments to holders of state
claims although these were generally less than to
holders of federal claims. We have no intention to
depart in any way from National Super Spuds; we
simply find it inapplicable to the facts here and hold,
in agreement with other courts, that there is no rigid
rule against the addition of new claims shortly before
submission of a proposed settlement provided that
proper notice and opportunity for opting out are af-
forded, see Cherner v. Transitron Electronic Corp., 221
F.Supp. 48, 50 (D.Mass.1958); Heddendorf ov.
Goldfine, 167 F.Supp. 915, 921, 928 (D.Mass.1958);
Pergament v. Frazer, 93 F.Supp. 13, 20 (E.D.Mich.
1950), aff'd sub nom., Masterson v. Pergament, 203
F.2d 315 (6 Cir.), cert. denied, 346 U.S. 832, 74 S.Ct.
33, 98 L.Ed. 355 (1953), and that the settlement fairly
and adequately provides for the new claims. See also
National Super Spuds v. New York Mercantile Ex-
3ia
change, supra, 660 F.2d at 18 n.7; TBK Partners Ltd.
v. Western Union Corp., 675 F.2d 456 (2nd Cir. 1982).
[14,15] In considering whether the settlement
discriminated unfairly against the state versus the
federal claims, we confront the reiterated contention
by appellants that the state law fraud and breach of
fiduciary duty claims faced less worrisome legal
obstacles than did the federal securities law claims.
Such a position runs counter to generally received
learning. 5 Jacobs, Litigation and Practice under Rule
10b-5, §11.01, at 1-272 to 1-273 (1981) (footnotes omit-
ted) (‘‘it is now generally agreed that [rule] 10b-5 is
procedurally more advantageous and substantively
broader than the common law.’’) (citing cases);
Shapiro v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 495 F.2d 228, 239 (2 Cir. 1974) (citing cases). For
example, the plaintiff's burden of proof in a common
law fraud case—clear and convincing evidence—is
more demanding than in a Rule 10b-5 case. Rudman v.
Cowles Communications, Inc., 30 N.Y.2d 1, 330
N.Y.S.2d 33, 280 N.E.2d 867 (1972); Pierce v. Richard
Ellis & Co., 62 Misc.2d 771, 773, 310 N.Y.S.2d 266,
269 (Civ. Ct. 1970); Ajax Hardware Mfg. Corp. v. In-
dustrial Plants Corp., 569 F.2d 181, 186 (2 Cir. 1977); 5
Jacobs, supra, at 1-277. Similarly, Rule 10b-5 is
typically regarded as better suited than common law
fraud principles for application to novel theories of
securities frauds—which is admittedly the type of ac-
tion involved in Weinberger/Panzirer, see, e.g., Frohl-
ing, The Promoter and Rule 10b-5; Basis for Accoun-
tability, 48 Cornell L.Q. 274, 290 (1963). The one ele-
ment in which Rule 10b-5 is more rigorous against a
plaintiff than New York law, which appellants assume
would apply to the common law fraud claims, is its re-
quirement that the fraud be ‘‘in connection with”’ the
purchase or sale of a security, see Blue Chip Stamps v.
32a
Manor Drug Stores, 421 U.S. 723, 730, 95 S.Ct. 1917,
1922, 44 L.Ed.2d 539 (1976), in contrast to the rule of
New York law whereby persons who merely held
Grant securities would have been permitted to show
reliance by proving that defendants’ alleged
misrepresentations and nondisclosures caused them
to hold securities they would otherwise have sold.
Continental Insurance Co. v. Mercadanta, 222 A.D.
181, 225 N.Y.S. 488 (1927); 24 N.Y.Jur. Fraud and
Deceit §165, at 233-34 (1962 & 1982 Supp.). This,
however, simply shows which claims get into the
federal basket, not that those that don’t are more
valuable than those that do. In the light of all this, we
conclude that the common law fraud claims against
the defendants were generally less valuable than the
Rule 10b-5 claims of actual purchasers of Grant
securities, and that it was not unfair for the settle-
ment’s distribution formula to reflect this.
[16] We are similarly unimpressed by the ap-
pellants’ contentions as to the strength of their com-
mon law breach of fiduciary duty claims. Appellants
make much of the point that under New York law the
general rule that plaintiff has the burden of proving
fraud is ‘‘somewhat relaxed in cases where a fiduciary
relation exists between the parties to a transaction,
and where one has a dominant and controlling force
over the other’, 24 N.Y. Jur. §278, at 360 (1962 &
1982 Supp.). Application of this principle ordinarily
has been limited to relationships such as those bet-
ween ‘guardian and ward, trustee and cestui que
trust, attorney and client, and physician and patient”’,
id., with more recent extensions to relationships such
as those between social worker and client, Hector M.
v. Commissioner of Social Services, 102 Misc.2d 676,
425 N.Y.S.2d 199 (Family Ct. N.Y. City 1980) (ad hoc
33a
application only), and nursing home and patient, Gor-
don v. Bialystoker Center & Bikur Cholim, Inc., 45
N.Y.2d 692, 412 N.Y.S.2d 593, 385 N.E.2d 285 (1978).
In order for the principle to apply plaintiffs must affir-
matively show the existence of a fiduciary relation-
ship between defendants and themselves, which re-
quires judicial inquiry into the legitimate expecta-
tions of the parties and, more generally, the practical
implications of recognition of a fiduciary relationship,
24 N.Y.Jur. §278 (1962 & 1982 Supp.); see Diamond v.
Oreamuno, 24 N.Y.2d 494, 301 N.Y.S.2d 78, 248
N.E.2d 910 (1969); Frigitemp Corp. v. Financial
Dynamics Fund, 524 F.2d 275, 278-79 (2 Cir. 1975).
Plaintiffs would have faced serious difficulties in
establishing the existence of a fiduciary relationship
between a lending bank and the security holders of a
borrowing corporation. While such a development is
not beyond the realm of possibility, it would have re-
quired a significant extension of existing procedures.
The fiduciary relation recognized in Diamond uv.
Oreamuno, supra—between a manager of a corpora-
tion and its shareholders—has been accorded such
status for nearly a century. In contrast, appellants
have cited us to no decisions in which a fiduciary rela-
tionship was found to exist between a bank and its
borrower’s security holders. Moreover, the extension
of fiduciary principles to this relationship would face
serious obstacles, such as arguments that lending
relations between banks and large corporations are
the product of arm’s-length bargaining and that it
would be anomalous to require a lender to act as a
fiduciary for interests on the opposite side of the
negotiating table.'® Similarly, Bankruptcy Judge
Galgay’s findings that ‘‘the transaction between the
Bank Claimants and Grant are the result of arms-
length negotiations” and ‘‘the action taken by Grant
34a
reflected independent policy decisions’, 4 B.R. at
76-77, would cut strongly against the application of
fiduciary principles to the banks in this case.
[17] Even assuming that the banks could be
shown to stand in a fiduciary relation to Grant’s
security holders, the record indicates that neither
they nor Peterkin, who as a director concededly was in
such a relation, engaged in any wrong-doing. Indeed,
as the above-quoted findings of Judge Galgay on the
closely-related subject of equitable subordination
show, see pp. 24-26, supra, there is virtually no
evidence that the defendants engaged in any wrongdo-
ing in their dealings with Grant. In light of all this, we
agree with appellees that the state law claims were ex-
tremely weak and that the proposed settlement’s
treatment of such claims was fair and adequate, even
though the fairness of the treatment of claims added
on the eve of settlement is subject to especial
scrutiny. Finally, as to the settlement’s release of
unasserted class claims arising out of the facts
underlying the consolidated amended complaint, ap-
pellants have suggested no such claims, and we are
aware of none, which wouid have had even the slight
chance of success that the Rule 10b-5 and common law
claims possessed.
D. The Lack of an Evidentiary Hearing
[18] We next deal with appellants’ contention that
the district court erred in refusing to conduct an
evidentiary hearing preceded by additional discovery
on the adequacy of the settlement. As the court below
obseryed; counsel for appellants have had complete
access to the extensive materials compiled in this
litigation in the bankruptcy proceedings, and their
35a
state court claim provided them with yet another
route for discovery. Appellants appear to have done
little to explore any of these options. In addition, they
came forward with ne specific objections to the
substantive fairness of the settlement, and they have
provided no specific criticisms of Judge Galgay’s
careful examination of the relationship between the
banks and Grant. Moreover, aside from expressing a
desire to cross-examine plaintiffs’ counsel regarding
their efforts in the litigation, appellants did not sug-
gest what further efforts at discovery might be pur-
sued.
On these facts we see no reason to require an
evidentiary hearing preceded by discovery. The only
objections raised by appellants which have required
serious consideration deal with points of law. Given
the adequacy of the existing record and the absence of
cogent factual objections to the settlement, we do not
see what purpose an evidentiary hearing would have
served. As we said in City of Detroit v. Grinnell Corp.,
supra, 495 F.2d at 464:
Although the parties reaching the settlement have the
obligation to support their conclusion to the satisfac-
tion of the District Court, once they have done so,
they are not under any recurring obligation to take up
their burden again and again ad infinitum unless the
objectors have made a clear and specific showing that
vital material was ignored by the District Court.
III. Propriety of the Fee Award against Appellants
One other matter requires discussion. On
~ a
February 13, 1981, five days before the scheduled
February 18 fairness hearing, Mr. Brewer served sub-
poenas duces tecum on counsel for both plaintiffs and
364
defendants. The subpoena served on lead counsel for
the banks, Davis Polk & Wardwell, sought production
of ‘‘[aJll documents and records ... relating to the
commencement, prosecution and settlement’’ of the
Weinberger/Panzirer action, and listed ten categories
of documents. Mr. Brewer claims that in a subsequent
phone conversation with an attorney at Davis Polk he
limited the scope of the subpoena; the attorney aver-
red that even if Mr. Brewer’s recollection was correct,
he continued to seek production of an extremely wide
range of materials, many of which he must have
known to be privileged.
On February 17 Davis Polk applied for an order to
show cause why an order quashing the subpoena and
awarding Morgan Guaranty $1,800 in attorneys’ fees
and expenses should not be issued. Counsel for the
plaintiffs also moved to quash the subpoena, but did
not seek a fee award. Judge Duffy did not sign the
Davis Polk order, but, in an endorsement on the ap-
plication, stayed the subpoena. A copy of Judge Duf-
fy’s endorsement was delivered to Mr. Brewer on
February 17, although it appears he was not then in-
formed of Davis Polk’s request for fees. At the
February 18 fairness hearing, Judge Duffy briefly
questioned Mr. Brewer as to why he had served the
February 13 subpoenas. Not satisfied with Mr.
Brewer's responses, he imposed two $2,500 fee awards
against him, one to plaintiffs’ attorneys, and the other
to Davis Polk. These were later reduced to a single
$1,800 award to Davis Polk.
Appellees argue that the award against Mr.
Brewer was warranted because he acted “vexatiously
both in issuing subpoenas seeking obviously privileg-
ed materials ... and in doing so without having pro-
37a
perly identified any client or having properly filed any
objections.’’ Mr. Brewer vigorously denies these
charges, averring that ‘‘the subpoenas in question
were issued by my office in good faith on my part and
in the honest belief and expectation that the pro-
ceedings at the hearing on the fairness and adequacy
of the proposed settlement would be evidentiary and
adversary in nature.’’ Brewer Affidavit 94. He stated
that he intended to use the documents produced to at-
tack the adequacy of plaintiffs’ preparations for the
case.
[19] ‘The general American rule governing alloca-
tion of the costs of litigation places the burden of
counsel fees on each party ... .'’ Nemeroff v. Abelson,
620 F.2d 339, 348 (2 Cir. 1980), citing Alyeska
Pipeline Service Co. v. Wilderness Society, 421 U.S.
240, 247, 95 S.Ct. 1612, 1616, 44 L.Ed.2d 141 (1975).
There is, however, an ‘‘exceptional power to shift fees
where an action has been commenced or conducted ‘in
bad faith, vexatiously, wantonly or for oppressive
reasons.’ ’’ F.D. Rich Co. v. United States ex rel. In-
dustrial Lumber Co., 417 U.S. 116, 129, 94 S.Ct. 2157,
2165, 40 L.Ed.2d 703 (1974); Browning Debenture
Holders’ Committee v. DASA Corp., 560 F.2d 1078 (2
Cir. 1977). We have previously found that a pro-
cedural step such as the issuance of ‘‘dragnet sub-
poenas’’, id. at 1088-89, may constitute bad faith or
vexatiousness. We have required, however, a high
degree of specificity in the factual findings of lower
courts when attorneys’ fees are awarded on the basis
of bad faith, id. at 1089, and that there be ‘“‘clear
evidence” that the challenged actions “are entirely
without color and [are taken] for reasons of harass-
ment or delay or for other improper purposes’’,
Nemeroff v. Abelson, supra, 620 F.2d at 348, quoting
38a
Browning Debenture Holders’ Committee v. DASA
Corp., supra, 560 F.2d at 1088. These requirements
are a sound means of ensuring that persons with col-
orable claims will not be deterred from pursuing their
rights by the fear of an award of attorneys’ fees
against them, see id. at 1088.
[20] The district court offered little by way of ex-
planation for its fee award. At the February 18
fairness hearing, when the awards were initially im-
posed—even in favor of the plaintiffs who had not
sought one—no reasons were stated. In a brief order of
March 26, 1981, the court characterized the sub-
poenas as ‘‘on their face, grossly overbroad.’’ The
order also relied on the fact that ‘“‘there were no objec-
tions’’ to the settlement in determining that the is-
suance of the subpoenas was improper.
The record does not support a finding that there
was ‘‘clear evidence’ of bad faith or vexatiousness.
Mr. Brewer contends that he was expecting an eviden-
tiary hearing to be held on February 18 and that he
needed to have the documents in court, particularly
since the affidavits supporting the settlement were
not yet available. His phone conversation with Mr.
Lewis narroing the scope of the document request was
at least some evidence that he had not in fact been ac-
ting in bad faith in issuing the February 13 sub-
poenas. As noted previously, the judge erred with
respect to the absence of any objections to the propos-
ed settlement. Davis Polk contends that Mr. Brewer
had no standing t to be heard on February 18 since all
Nee ee RY ys 7) ee ees
his clients who had filed objections had withdrawn
them. The judge did not so find and this is not piain to
us. In short, while not applauding Mr. Brewer’s con-
duct, we do not think it reached the level at which the
sanction of a fee award would be justified.
39a
The judgment approving the settlement is affirm-
ed. The order imposing sanctions on Brewer is revers-
ed. No costs.
FURTHER ORDER ON PETITIONS
FOR REHEARING
On September 10, 1982, we entered an unpublish-
ed order on petitions for rehearing and suggestions for
rehearing in banc filed by both sets of appellants with
respect to our opinion of July 14, 1982, slip opinions at
61, in which we affirmed an order of Judge Duffy, in
the District Court for the Southern District of New
York, approving the settlement of class actions
brought by purchasers of W. T. Grant Co. securities
alleging violations of federal and state securities law.
We corrected a factual statement, slip opinions at 67,
full paragraph, last sentence, in a manner stated
therein. Beyond that we noted the contention made on
behalf of the Coyne appellants that by affirming
Judge Duffy’s order approving the settlement despite
his failure to render more than a cursory opinion, we
had placed ourselves in conflict with Jn re General
Motors Corp. Engine Interchange Litigation, 594 F.2d
1106 (7 Cir.), cert. denied sub nom. Oswald v. General
Motors Corp., 444 U.S. 870 (1979), and Girsh v. Jep-
son, 521 F.2d 153 (3 Cir. 1975), and indeed had ignored
the command of Protective Committee for Indepen-
dent Stockholders of TMT Trailer Ferry, Inc., v.
Anderson, 390 U.S. 414 (1968). We stated that we had
no intention of doing anything of the sort but rather
had regarded this as a unique situation where, because
——— 7 we Oe eee
yy
of the careful and well-reasoned opinions of Bankrupt-
cy Judge Galgay on closely related issues arising in
the bankruptcy liquidation of Grant, the district
judge could properly have considered himself relieved
40a
of what would otherwise have been his obligation to
make a detailed assessment of the settlement. See slip
opinions at 74. However, because the point ha not
been adequately brought to our attention, we had not
sufficiently focused on the fact that Judge Galgay’s
findings and conclusions were being seriously attack-
ed in an appeal in the Grant bankruptcy proceedings
that would shortly reach this court. We therefore
directed that argument on the appeal from the order
of Judge Duffy affirming Bankruptcy Judge Galgay’s
order in the Grant bankruptcy proceedings
(hereinafter the Cosoff and Miller appeals) be heard
before this same panel and ordered that issuance of
the mandate in this case be stayed pending further
order of this court.
Because of the number of issues raised in the
Cosoff and Miller appeals, the need to supplement the
inadequate record that had been filed, and the fact
that Judge Duffy had rested his approval in that case
primarily on res judicata, disposition of those appeals
has taken longer than we had anticipated. However,
by decision filed today, In re W.T. Grant Co., we have
generally approved Judge Galgay’s findings of fact
and conclusions of law in his opinion of February 20,
1980, 4 B.R. 53, as supplemented by his order of June
23, 1981, approving the settlement with the subor-
dinated debentureholders there at issue. Specifically,
after examining the findings and conclusions submit-
ted by counsel for the trustee in bankruptcy in that
case, we have rejected the assertions made by at-
torney Brewer, both in that case and in this, that
Judge Galgay had simply rubber-stamped the submis-
sions of counsel for the trustee, a practice disapproved
by United States v. El Paso Natural Gas Co., 376 U.S.
651, 656-67 (1964). Taking note of that decision Judge
4li
Galgay said he had adopted the trustee’s proposed fin-
dings of fact where he had found no reason to do other-
wise; however, he formulated his own discussion of the
law of equitable subordination, the issue that is of par-
ticular moment here. In light of his opinion and our
own examination of much of the evidence, we find that
the chances of plaintiffs’ establishing that the banks
promoted a public belief in the viability of Grant
which the banks did not share are extremely pro-
blematic.
We thus adhere to our opinion of July 14, 1982. In
doing so we reaffirm the duty of district judges in this
circuit to make a considered and detailed assessment
of the reasonableness of proposed settlements of class
actions, as held by the Third Circuit in Girsh, supra,
521 F.2d 153, 157-58, 159-60, and by the Seventh Cir-
cuit in General Motors, supra, 594 F.2d 1106, 1132 n.
44,
The factual correction made by our order of
September 10, 1982, is further revised as follows:
Strike last sentence of the full paragraph on p. 67 and
substitute:
Eleven bondholders appealed this order to the District
Court for the Southern District of New York (Conner,
J.), which stayed consideration of the appeals so that
Bankruptcy Judge Galgay could supervise continuing
negotiations among the bankruptcy trustee, the in-
denture trustee, the banks, and the debentureholders
for an improved offer to the latter. Counsel for the
debentureholders who had appealed from the order ap-
proving the earlier offer stipulated that these appeals
be withdrawn with prejudice, and this was so ordered.
On June 23, 1981, an amended offer was approved by
Judge Galgay. Two groups of debentureholders ap-
424
pealed to the District Court (Duffy, J.) from the order
approving the amended offer. In an opinion and order
dated March 15, 1982, Judge Duffy affirmed the
order, 20 B.R. 186. He rested his decision primarily on
the ground of res judicata, although he also stated
that the appeals were without merit. Two groups of
debentureholders have appealed to this court.
The petitions for rehearing are thus granted in-
sofar as concerns the correction of the factual state-
ment but are otherwise denied. The clerk will ap-
propriate steps with respect to appellants’ suggestion
for rehearing in banc. The stay of the mandate will be
revoked if no judge in regular active service requests
rehearing in banc or, if this is done, such a request is
denied.
FOOTNOTES
1. The principal lender to Grant was Morgan Guaranty
Trust Company of New York (Morgan Guaranty), a wholly
owned subsidiary of J. P. Morgan & Co., Inc. The banks
named as defendants in the actions below, in addition to
Morgan Guaranty are Citibank, N.A., The Sanwa Bank,
Ltd., The Chase Manhattan Bank, N.A., Chemical Bank,
Irving Trust Company, Marine Midland Bank, Bankers
Trust Company, Manufacturers Hanover Trust Company
and The Bank of New York. The settlement also applies to
a number of other banks that had been major lenders to
Grant, because the suits below were brought against
Morgan Guaranty both individually and as agent for these
banks and also because the loan agreements among the
banks and Grant provide for the sharing of obligations and
recoveries on the loans to Grant.
2. Federal securities and state common law claims
asserted against a number of defendants, including certain
43a
officers and directors of Grant and Grant’s auditors, are
not involved in the settlement. In addition, claims against
Mr. Peterkin that do not relate to insider trading (Count
III of the consolidated amended complaint) are not includ-
ed in the settlement. Finally, the settlement does not affect
claims against Chase Manhattan as Indenture Trustee for
Grant’s 4%% Debentures, see note 8, infra, or claims
asserted in Grant’s bankruptcy proceedings on behalf of
present debenture holders.
3. This was deposited in an interest-bearing account
and by the date of oral argument had increased to approx-
imately $3.5 million.
4. For example, the banks agreed to the granting of a
senior security interest to Grant’s vendors in early 1975,
extended the maturity of the revolving credit agreement
from June 2, 1975, to March 31, 1976, permitted the early
repayment of loans due to a number of small banks, and
subordinated payments of $300,000,000 of the outstanding
bank loans to the payment of Grant’s vendors. The last ac-
tion was taken less than a month before Grant filed its
Chapter XI petition. Naturally the objectors place a quite
different interpretation upon those actions.
5. The Bankruptcy Court defined equitable subordina-
tion as requiring proof that ‘‘the claimant sought to be
subordinated (a) has acted in a fiduciary capacity; (b) has
breached a fiduciary duty; [and] (c) that breach resulted in
detriment to those claimants to whom a duty was owed,”’
In re W. T Grant Co., 4 B.R. 53, 74 (Bkrtcy. N.Y. 1980). See
Pepper v. Litton, 308 U.S. 295, 306-07, 60 S.Ct. 238, 245, 84
L.Ed. 281 (1939) (‘‘The essence of the [equitable subordina-
tion] test is whether or not under all the circumstances the
transaction carries the earmarks of an arm’s length
bargain.’’)
444
6. The trustee was assisted by the law firm of Weil,
Gotshal & Manges and the accounting firm of Price
Waterhouse & Co.
7. On March 20, 1976, Bankruptcy Judge Galgay
ordered that various of Grant’s business records be
preserved and made available to counsel for the plaintiffs
below; Grant’s employees also were enjoined from dispos-
ing of or destroying any of these documents.
8. These were holders of Grant’s 4%4% convertible
subordinated debentures due 1996 ($92,507,000 face
amount outstanding) and 4% convertible subordinated
debentures due 1990 ($834,000 face amount outstanding).
The settlement covered only claims of persons then
holding the debentures.
9. Judge Duffy later extended the deadline for opting
out as to states represented by Mr. Brewer whose pension
funds had invested in Grant securities, but not as to other
class members, until February 16, 1981.
10. In addition to the January 19 motion, a letter by
Mr. Brewer to Judge Duffy dated September 16, 1980,
with copies to counsel for the plaintiffs and for the defen-
dants in the Weinberger action, clearly raised the objec-
tions as to the inclusion of state law claims not previously
pleaded and as to the making of class determination only
as incident to a settlement considered below. Objections
which have been brought to the attention of the court and
of counsel for proponents of a settlement by counsel for ob-
jectors should not be disregarded simply because they do
not precisely comply with the procedures for the filing of
individual objections specified in the notice of settlement.
See 3 Newberg, Class Action §5660d (1977). In passing on
settlements of class actions under F.R.Civ.P. 23 the judge
should not regard himself as an umpire in typical adver-
sary litigation. He sits also as a guardian for class
members who have not received a notice or who lack the in-
45a
tellectual or financial resources to press objections, Na-
tional Super Spuds v. New York Mercantile Exchange, 660
F.2d 9, 20 (2nd Cir. 1981) (citing cases); Mandujano v. Basic
Vegetable Products, Inc., 541 F.2d 832, 834-36 (9 Cir.
1976). Here the judge evidently did consider all the objec-
tions, see 91 F.R.D. at 495 n.4 and the February 6 order,
although erroneously believing he was not required to do
so and accordingly not discussing many of them or doing
so only conclusorily.
11. Appellants also argue that the notice was defective
because it did not state what proportion of the class’s total
loss the settlement fund represented. Appellees meet this
by noting that any estimate as to class losses—much less
individual losses—would have been highly speculative and
more likely to hinder informed decision-making by class
members than advance it.
12. The Second Amended Complaint in Lewy served in
March, 1979, named only Chase Manhattan, Morgan
Guaranty and Citibank as defendants. The complaint,
which relies on factual allegations almost identical to those
in the consolidated amended complaint, asserts that the
defendants “‘exercised dominance and control over the
board of directors and management of Grant’”’ 99. In addi-
tion, the complaint alleges that the defendants
‘‘conceal[ed] negative facts concerning the financial condi-
tion and unlawful mismanagement of Grant’’ thus effec-
ting a manipulation of the securities market. 911. The com-
plaint goes on to describe numerous acts allegedly commit-
ted in furtherance of defendants’ conspiracy, dwelling prin-
cipally upon those set out in the Weinberger/Panzirer
papers. Like the consolidated amended complaint, the
Lewy complaint asserts causes of action based on common
law fraud, 91, and on breach of fiduciary duties, 791, 31. So
far as we can tell, the Lewy action would require proof of
fault identical to what would be demanded in the
Weinberger/Panzirer cases.
46u
13. Appellants also allege that the notice was
“substantially incorrect and seriously isleading’’ in a
number of respects, Appellants’ Br. in No. 81-7829, at
19-21. The defects cited by appellants either do not ex-
ist—owing to misreadings by appellants’ counsel of the
notice or other publicly filed documents—or are im-
material.
14. The subsection provides, in pertinent part, that
In any class action maintained under subdivision
(b)(3), the court shall direct to the members of the class
the best notice practicable under the circumstances,
including individual notice to all members who can be
identified through reasonable effort.
15. Our holding regarding pendent party
jurisdiction is also limited to the peculiar ‘alignment of
parties and claims” involved here, namely, the joinder of
plaintiffs in a settlement of an action involving Rule 10b-5
and state law claims. Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723, 95 S.Ct. 1917, 44 L.Ed. 2d 539 might
be read as discerning a congressional intent to preclude the
joinder of mere holders of securities in Rule 10b-5 cases in
federal court, because of a desire to prevent disruption of
the nation’s businesses and to reduce vexatious litigation,
421 U.S. at 739-49, 95 S.Ct. at 1927-31. Whatever the
strength of this argument as to claims that are proceeding
to litigation, it surely is inapplicable when, as here, exten-
sion of pendent party jurisdiction permits the comprehen-
sive settlement of plaintiffs’ claims, thus furthering the
policies underlying Blue Chip Stamps. We need not now
decide how Blue Chip Stamps would affect the assertion of
pendent plaintiff jurisdiction in a case not involving a set-
tlement.
47a
16. Cf, Rader v. Boyd, 252 F.2d 585, 587 (10 Cir. 1958)
(‘Parties may assuredly deal at arm’s length for their
mutual benefit without raising a confidential relationship
between them.’’) In passing on a settlement we are “not
to...resolve unsettled legal questions,’’ Carson uv.
American Brands Inc., 450 U.S. 79, 88 n.14, 101 S.Ct. 993,
998 n. 14, 67 L.Ed.2d 59 (1981), which a theory of recovery
based on breach of fiduciary duty by the lenders surely
would be.
48a
RULE 23 FRCP
Rule 23. Class Actions.
(a) Prerequisites to a Class Action. One or more
members of a class may sue or be sued as represen-
tative parties on behalf of all only if (1) the class is so
numerous that joinder of all members is imprac-
ticable, (2) there are questions of law or fact common
to the class, (3) the claims or defenses of the represen-
tative parties are typical of the claims or defenses of
the class, and (4) the representative parties will fairly
and adequately protect the interests of the class.
(b) Class Actions Maintainable. An action may be
maintained as a class action if the prerequisites of
subdivision (a) are satisfied, and in addition:
(1) the prosecution of separate actions by or
against individual members of the class would create
a risk of
(A) inconsistent or varying adjudications
with respect to individual members of the class
which would establish incompatible standards of
conduct for the party opposing the class, or
(B) adjudications with respect to individual
members of the class which would as a practical
matter be dispositive of the interests of the other
members not parties to the adjudications or
substantially impair or impede their ability to
protect their interests; or
(2) the party opposing the class has acted or refus-
ed to act on grounds generally applicable to the class,
49u
thereby making appropriate final injunctive relief or
corresponding declaratory relief with respect to the
class as a whole; or
(3) the court finds that the questions of law or fact
common to the members of the class predominate over
any questions affecting only individual members, and
that a class action is superior to other available
methods for the fair and efficient adjudication of the
controversy. The matters pertinent to the findings in-
clude: (A) the interest of members of the class in in-
dividually controlling the prosecution or defense of
separate actions; (B) the extent and nature of any
litigation concerning the controversy already com-
menced by or against members of the class; (C) the
desirability or undesirability of concentrating the
litigation of the claims in the particular forum; (D) the
difficulties likely to be encountered in the manage-
ment of a class action.
(c) Determination by Order Whether Class Action
to Be Maintained; Notice; Judgment; Actions Con-
ducted Partially as Class Actions.
(1) As soon as practicable after the commence-
ment of an action brought as a class action, the court
shall determine by order whether it is to be so main-
tained. An order under this subdivision may be condi-
tional, and may be altered or amended before the deci-
sion on the merits.
(2) In any class action maintained under subdivi-
sion (b)(3), the court shall direct to the members of the
class the best notice practicable under the cir-
cumstances, including individual notice to all
members who can be identified through reasonable ef-
50u
fort. The notice shall advise each member that (A) the
court will exclude him from the class if he so requests
by a specified date; (B) the judgment, whether
favorable or not, will include all members who do not
request exclusion; and (C) any member who does not
request exclusion may, if he desires, enter an ap-
pearance through his counsel.
(3) The judgment in an action maintained as a
class action under subdivision (b)(1) or (b)(2), whether
or not favorable to the class, shall include and describe
those whom the court finds to be members of the
class. The judgment in an action maintained as a class
action under subdivision (b)(3), whether or not
favorable to the class, shall include and specify or
describe those to whom the notice provided in subdivi-
sion (c)(2) was directed, and who have not requested
exclusion, and whom the court finds to be members of
the class.
(4) When appropriate (A) an action may be
brought or maintained as a class action with respect
to particular issues, or (B) a class may be divided into
subclasses and each subclass treated as a class, and
the provisions of this rule shall then be construed and
applied accordingly.
(d) Orders in Conduct of Actions. In the conduct
of actions to which this rule applies, the court may
make appropriate orders: (1) determining the course of
proceedings or prescribing measures to prevent undue
repetition or complication in the presentation of
evidence or argument; (2) requiring, for the protection
of the members of the class or otherwise for the fair
conduct of the action, that notice be given in such
manner as the court may direct to some or all of the
5la
members of any step in the action, or of the proposed
extent of the judgment, or of the opportunity of
members to signify whether they consider the
representation fair and adequate, to intervene and
present claims or defenses, or otherwise to come into
the action; (3) imposing conditions on the represen-
tative parties or on intervenors; (4) requiring that the
pleadings be amended to eliminate therefrom allega-
tions as to representation of absent persons, and that
the action proceed accordingly; (5) dealing with
similar procedural matters. The orders may be com-
bined with an order under Rule 16, and may be altered
or amended as may be desirable from time to time.
(e) Dismissal or Compromise. A class action shall
not be dismissed or compromised without the ap-
proval of the court, and notice of the proposed
dismissal or compromise shall be given to all members
of the class in such manner as the court directs.
52a
DOCKET ENTRIES IN U.S. COURT OF APPEALS
FOR THE SECOND CIRCUIT
4/28/81—Copies of docket entries and notice of appeal
on behalf of Brewer & Soeiro filed.
5/8/81—Copy of receipt of payment of docketing fee on
behalf of Brewer & Soeiro filed.
5/8/81—Appellant Brewer & Soeiro Form C, pfs filed.
5/8/81—Appellant Brewer & Soeiro Form D, pfs filed.
5/12/81—Scheduling Order No. 1, PC filed.
6/1/81—Order withdrawing the appeal of Brewer &
Soeiro and such motions, if any now pending without
costs and without attorney’s fees and without pre-
judice to whatever rights appellant has under law to
appeal after entry of final judgment, filed. (JON). (on
consent).
6/1/82—Issued certified copy of order withdrawing the
appeal, etc.
6/9/81—Receipt of certified copy of order withdrawing
the appeal received.
1/15/82—Record on appeal filed [& in 81-7629,
81-7827, & 81-7829].
1/20/82—Appellants Brewer & Soeiro notice of
reinstatement of the appeal filed.
2/8/82—Scheduling Order No. 2 filed; further ordered
that Appeals Docket Nos. 81-7827, 81-7829, 81-7629 &
81-7317 be and are hereby consolidated filed [& in
81-7827, 81-7829, 81-7629]
53a
2/9/82—Supplemental record on appeal filed [copies of
original papers filed in district court]
2/9/82— Appellants Coyne, Collins & 580 other named
appellants brief filed [w/pfs] [& in 81-7827]
2/9/82—Appellants Lewy, Anderson, Barrie, Pine
Lapham, Garson, Howe, Barnes & Johnson and
Jurkiewicz brief filed [w/pfs]
2/9/82—Appellants Coyne, et al. joint appendix filed
[w/pfs] [Volume I]
2/9/82—Appellants Coyne, et al. joint appendix filed
[w/pfs] [Volume IT]
3/3/82—Order granted, Appellants Coyne, et al. mo-
tion for leave to supplement the record on appeal with
office copies of certain documents filed [LWP, CJ] [en-
dorsed on motion for 1-29-82 filed in 81-7827]
3/8/82—Appellees Kendrick, et al., brief filed [w/pfs]
3/8/82— Appellees Weinberger, et al. brief filed [w/pfs]
3/22/82—Appellants Coyne, et al., reply brief filed
[w/pfs] [& in 81-7827]
3/26/82—Appellants Coyne, Collins, et al., motion for
an order adjourning the argument of this appeal filed;
Appellants Coyne, Collins, et al., motion for an order
consolidating this appeal with an appeal being taken
from the S.D.N.Y. concerning the underlying
bankruptcy proceeding filed [w/pfs] [& in 81-7827]
54a
3/30/82—Appellees Weinberger, et al. affidavit in op-
position to motion to delay this appeal filed [w/pfs]
3/31/82— Appellees Kendrick, et al. affidavit in opposi-
tion to motion for modification of order entered by
staff counsel and for consolidation with proposed ap-
peal in Cosoff v. Rodman filed [w/pfs]
4/1/82—Order denied, Appellants Coyne, Collins, et
al., motion for an order adjourning the argument of
this appeal filed; Order denied, Appellants Coyne, Col-
lins, et al., motion for an order consolidating this ap-
peal with an appeal being taken from the S.D.N.Y.
concerning the underlying bankruptcy proceeding fil-
ed [TJM, CJ] [endorsed on motion of 3-26-82]
4/19/82—Case argued before: Waterman, Friendly &
Meskill, CJJ
4/19/82—Appellant Lewy reply brief filed [w/pfs]
[handed up in open court]
6/23/82—Second supplemental record on appeal filed
(original papers of district court) (pursuant to Court’s
Request)
7/14/82—Order approving settlement affirmed; order
awarding $1,800 in attorneys’ fees against one of ob-
jectors’ counsel reversed by published, signed opinion
filed [HJF, CJ] [& in 81-7629, 81-7827 & 81-7828.
7/14/82—Judgment filed [& in 81-7629, 81-7827 &
81-7829]
55a
7/27/82— Appellants Lewy, et al. petition for rehearing
with suggestion for rehearing in banc filed [w/pfs]
7/29/82— Appellants Coyne, Collins & 580 other nam-
ed appellants motion for leave to file a petition for
rehearing with suggestion for rehearing in banc one
day out of time filed [w/pfs] [& in 81-7827]
7/29/82— Appellants Coyne, Collins & 580 other nam-
ed appellants petition for rehearing with suggestion
for rehearing in banc received [& in 81-7827] (granted;
8/27/82; see motion, HJF)
8/27/82—Appellants Coyne, Collins & 580, etc. peti-
tion for rehearing with a suggestion for rehearing en
banc filed, pfs.
9/1/82—Appellants Lewy et al. motion to file sup-
plemental Petition for Reconsideration and sugges-
tion for rehearing en banc, pfs filed. (Granted)
9/1/8.1—Appellants Lewy, et al petition for rehearing
received.
9/10/82—Order on petitions for reconsideration; ap-
pellees are directed to file within 14 days a response to
both petitions for rehearing. This shall include all
issues raised in the petitions and should consider
whether we ought not at least to direct the mandate
be deferred until argument and decision of the appeal
in the bankruptcy case and that that appeal should be
heard before this panel.
9/10/82—Appellant Lewy supplemental petition for
rehearing with suggestion for rehearing in banc filed
(per 9/10/82 order)
564
9/10/82—Corrected order on petitions for reconsidera-
tion, etc., filed.
9/24/82—Appellant Weinberger response to petition
for rehearing filed, pfs
9/24/82—Appellees J.P. Morgan et ano ‘appendix to
response to petition for rehearing filed, pfs.
10/1/82—Order on petitions for reconsideration: Ap-
pellees in 81-7317, et al. having filed responses to the
petitions for reconsideration as directed by our order
of 9-10-82, it is order that: Oral arguement 8n docket
nos. 82-5019 and 82-5023 shall be heard on November
9, 1982 at 2:00 p.m. before Judges Watreman, Friend-
ly and Meskill. One half hour is allotted to each side,
to be divided as counsel may agree; Counsel in the
Weinberger appeals are directed to be present at the
time of the foregoing argument in order to be
available for any questions which the court may desire
to ask; The mandate in the Weinberger appeals shall
continue to be stayed pending the further order of this
court. (HJF, TJM)
10/14/82—Appellant Coyne motion for leave to file a
reply to reargument statements, pfs filed (order en-
dorsed: 10/14/82 granted; TJM)
10/14/82—Appellee Weinberger affidavit in opposition
to motion to appellant’s motion pfs filed.
10/14/82—Appellants Coyne, Collins, et al., reply
statement filed.
10/18/82—Appellant Lewy motion for leave to file rep-
ly statement to statements of appellees filed in con-
57a
nection with petitions for reargument and en banc
suggestion filed by appellants, pfs filed (order endors-
ed: 10/18/82 granted)
10/18/82—Appellant Lewy, et al., reply statement, pfs
filed
1/26/83—Petitions for rehearing are thus granted in-
sofar as concerns the correction of the factual state-
ment but are otherwise denied, Published Signed Opi-
non.
2/22/83—Order denying Appellant Lewy petition for
rehearing with suggestion for rehearing en banc, filed.
(clerk)
3/2/83—Mandate Issued (Opinion, Judgment)
58a
OPINION OF THE UNITED STATES DISTRICT
COURT FOR THE SOUTHERN DISTRICT OF
NEW YORK APPROVING THE PROPOSED SET-
TLEMENT OBJECTED TO BY PETITIONERS
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
WILLIAM B. WEINBERGER, et al.,
Plaintiffs,
-against-
JAMES C. KENDRICK, et al.,
Defendants.
APPEARANCES:
WOLF POPPER ROSS WOLF & JONES
Attorneys for Plaintiffs
845 Third Avenue
New York, New York 10022
Of Counsel: Lester L. Levy, Esq.
-and-
WOLF HALDENSTEIN ADLER
FREEMAN & HERZ
Attorneys for Plaintiffs
270 Madison Avenue
New York, New York 10016
Of Counsel: Daniel W. Krasner, Esq.
DAVIS POLK & WARDWELL
Attorneys for Defendant
Morgan Guaranty Trust Company
59a
of New York
1 Chase Manhattan Plaza
New York, New York 10005
Of Counsel: Philip C. Potter, Jr.
Ogden N. Lewis, Esq.
Laureen F. Bedell, Esq.
SHEARMAN & STERLING
Attorneys for Defendant
Citibank, N.A.
53 Wall Street
New York, New York 10005
MILBANK TWEED HADLEY & McCLOY
Attorneys for Defendant
The Chase Manhattan Bank, N.A.
1 Chase Manhattan Plaza
New York, New York 10005
HERTZOG CALAMARI & GLEASON,
Of Counsel to
Cravath Swaine & Moore
Attorneys for Defendants
Chemical Bank, Irving Trust Company,
Marine Midland Bank and Bankers Trust Company
100 Park Avenue
New York, New York 10017
SIMPSON THACHER & BARTLETT
Attorneys for Defendant
Manufacturers Hanover Trust Company
One Battery Park Plaza
New York, New York 10004
60a
EMMET MARVIN & MARTIN
Attorneys for Defendant
The Bank of New York
48 Wall Street
New York, New York 10005
KEVIN THOMAS, D.J.:
On October 2, 1975, the W.T. Grant Company
[(““Grant’’] filed a petition for bankruptcy under
Chapter XI of the Bankruptcy Act. The next day cer-
tain purchasers of Grant securities instituted this
class action claiming, inter alia, that defendant banks,
[the ‘‘Banks’’] and Morgan Guaranty, its corporate
parent, J.P. Morgan & Co., Inc., and its former Vice-
Chairman DeWitt Peterkin violated Section 10 of the
Securities and Exchange Act of 1934 and Rule 10b-5
thereunder.
In essence, plaintiffs claimed that the Banks par-
ticipated in a scheme to conceal from purchasers of
Grant securities the allegedly far worse financial con-
dition of Grant than was revealed to the investing
public. Plaintiffs also asserted that Morgan Guaran-
ty’s Trust and Investment Division sold substantial
holdings of Grant common stock on material inside in-
formation supplied by Mr. Peterkin.
The parties to this case have now reached a settle-
ment [the ‘‘Settlement’’] with respect to these claims
and hereby submit it to this court for approval in ac-
cordance with Fed. R. Civ. P. 23. The proposed Settle-
ment, in short, settles the fraud claims of purchasers
and holders’ of Grant securities against the Banks for
alleged violations of the Exchange Act and Rule 10b-5
thereunder, as well as alleged violations of state
6la
statutory law and common law fraud.” The Settlement
also settles class members’ insider trading claims
against Morgan Guaranty, its corporate parent, J.P.
Morgan & Co., Inc., and Mr. Peterkin.
The Settlement provides that the Banks pay
$2,840,000 in settlement of these claims. This sum has
been deposited by the Banks into an escrow account.
Notice of the class action determination, the pro-
posed Settlement and dismissal of certain claims
against the settling defendants was mailed in early
December, 1980 to all persons who purchased or held
Grant securities during the class period. Notice of the
Settlement also was published in The Wall Street
Journal.
Class members were also notifed about the hear-
ing on the fairness of the proposed Settlement
scheduled for February 18, 1981. Deadlines were set
for class members to object to the terms of the Settle-
ment or to exclude themselves from the Settlement.
Proof of claim forms were included with the notice.
No objections to the Settlement were timely
filed.* The fairness hearing was held on February 18,
1981. At the hearing, certain plaintiffs’ attorneys at-
tempted to file late objections and asked the court to
waive the deadline for filing such objections. This re-
quest was denied.
The rest of the parties present at the hearing sub-
mitted papers in support of the Settlement. I reserved
judgment.
62a
Discussion
Rule 23 of the Federal Rules of Civil Procedure
provides that a class action ‘‘shall not be dismissed or
compromised without approval of the court.”’ If fair,
reasonable and adequate, however, the settlement of a
class action should be approved. City of Detroit v.
Grinnell Corp., 356 F. Supp. 1380 (S.D.N.Y.), aff'd in
part, rev'd in part on other grounds, 405 F.2d 448 (2d
Cir. 1974).
In deciding whether a settlement is fair, the court
must determine (i) whether the settlement was
negotiated at arms length and in good faith; (ii) the
probabilities of plaintiff’s ultimate success or failure if
settlement is not achieved; and (iii) the reasonableness
of the amount offered in settlement.
The Settlement in this case satisfies each of these
criteria. There is no indication that the Settlement
was handled in a collusive manner. The settlement
negotiations took place over a period of many months
and were conducted by able and experienced counsel
who are respected members of the bar of this court. I
am confident that plaintiffs’ attorneys have
represented the class adequately and would not enter
into any settlement agreement which would jeopar-
dize the interests of the class.
Moreover, the decision to settle this case was bas-
ed on extensive discovery conducted in connection
with this case and in the related bankruptcy pro-
ceedings.’ Counsel for all parties had full access to the
record in this case and the bankruptcy record. I am
satisfied, therefore, that the parties were fully able to
evaluate the strengths and weaknesses of the class
63a
claims against the defendants. In view of the findings
of fact and conclusions of law entered by Bankruptcy
Judge Galgay and the difficulties of proof present in
this case, plaintiffs’ conclusion that their chances of
prevailing were slim was by no means an unreasonable
one.
I also find that the sum offered in settlement by
the defendants is fair considering the likelihood of
plaintiffs’ success on the merits. Plaintiffs’ position
with respect to each claim in this case is not so strong
that settlement should be lightly rejected. Plaintiffs’
claims against the defendants are complex and not
easily proven. Indeed, plaintiffs have heavy burdens
of proof with respect to each claim and the establish-
ment of damages. Furthermore, the defendants have
asserted vigorous defenses to each claim. Should the
case proceed to trial, lengthy and costly litigation can
be expected.
The reasonableness of the Settlement is further
supported by the fact that the majority of counsel for
the class members is recommending the acceptance of
this Settlement. See Philadelphia Housing Authority
vu. American Radiator & Standard Sanitary Corp., 322
F. supp. 834, 838 (E.D. Penn. 1971), aff'd in part and
modified in part, 435 F.2d 30 (3d Cir. 1971). Finally, no
objections to the Settlement have been filed by any
members of the class.
In view of the difficulties plaintiffs would con-
front if this case went to trial, the recommendation of
experienced counsei and the lack of individual objec-
tions to the Settlement, I find that the sum offered by
the defendants is acceptable.
64a
Accordingly, I hereby approve the Settlement as
fair and reasonable. The claims against the settling
defendants are dismissed with prejudice in accordance
with the terms of the Settlement.
SO ORDERED.
Dated: New York, New York
August 13, 1981
s/Kevin Thomas Duffy, U.S.D.J.
KEVIN THOMAS DUFFY, U.S.D.J.
FOOTNOTES
1. On July 29, 1980, I entered an order with respect to
the class action determination and the hearing on the pro-
posed settlement in this case. That order provided that the
class was amended to include not only those persons who
purchased but also those who held Grant securities during
the period March 1, 1973 to October 2, 1975 inclusive.
2. On July 28, 1980, I approved the consolidation of
Weinberger v. Kendrick, 75 Civ. 4870 (KTD) with Panzirer
v. Peterkin, 77 Civ. 3462 (KTD). I also approved the filing
of a consolidated amended complaint. That complaint in-
cluded, in addition to the original claims, pendent state
claims for breach of fiduciary duty.
3. The order filed on July 29, 1980, see note 1, supra, re-
quired class members who did not wish to be bound by the
Settlement to request exclusion in writing from the Settle-
ment not less than 25 days pricr to the fairness hearing on
February 18, 1981. Class members who did not wish to be
excluded from the Settlement but wanted to file objections
to it were required by the July 24, 1980 order to file them at
least 14 days prior to the fairness hearing.
65a
4. Certain plaintiffs’ attorneys have attempted to file
late objections. Not only were these objections late, they
were also without merit. I, therefore, reaffirm my denial of
the late filing of these objections.
5. In re W. T. Grant Company, Bankruptcy No. 75 B
1735.
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This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.