Amicus Curiae Brief — Franklin v. Main

ay No. 90-98

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1990

GEORGE FRANKLIN, et al.,

Petitioners,

Vi

PEAT MARWICK MAIN & Co., et al.,

Respondents.

On Petition for Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

MOTION FOR LEAVE TO FILE BRIEF

AS AMICUS CURIAE

Davip B. GOLD JONATHAN W. CUNEO

(Counsel of Record) (NASCAT General Counsel)

PAUL F. BENNETT Law Offices of

STEVEN O. SIDENER JONATHAN W. CUNEO

DaviD B. GOLD, 1300 Eye Street, N.W.

A Professional Law East Tower, Suite 480

Corporation Washington, DC 20005

595 Market Street, Suite 2300 (202) 962-3860

San Francisco, CA 94105 Counsel for Amicus Curiae

(415) 777-2230

BOWNE OF SAN FRANCISCO. INC. + 190 NINTH ST. «+ S.F., CA 94103 + (415) 8664-2300

BEST AVAILABLE COPY

]

Pursuant to Rule 37.2 of the Rules of this Court, the National

Association of Securities and Commercial Law Attorneys

(“NASCAT”) respectfully moves for leave to file the enclosed

brief as amicus curiae in support of Petitioners. Counsel for the

Petitioners has granted consent to file this brief. Counsel for the

Respondents have refused to consent to the filing of this brief.

NASCAT is an association of law firms consisting of approxi-

mately 500 attorneys located throughout the United States whose

purpose is to promote the enactment and enforcement of legisla-

tion which protects investors from deceptive and manipulative

practices and to ensure that the securities markets operate in a

fair and free manner. NASCAT members have represented

plaintiffs in a variety of individual and class action contexts under

the federal securities laws. NASCAT members have also repre-

sented defendants in securities and other complex cases.

NASCAT and its members have a strong interest in the

effective private enforcement of the federal securities laws and in

the development of case law that effectively deters wrongdoers

from perpetrating securities violations upon public investors. The

issues raised by the Petition are extremely important to the

investment community and the capital markets generally. The

Ninth Circuit’s decision in Franklin v. Kaypro Corp., 884 F.2d

1222 (9th Cir. 1989) (the “Opinion”), as it relates to the

availability of contribution and the impact of partial settlements

on contribution rights, unduly restricts the effectiveness of the

federal securities law and contravenes Congress’ intent in passing

those laws. The Opinion ensures that the trial courts of the United

States will be clogged with unnecessary litigation with no in-

creased benefit to litigants or the judiciary. It erects unwarranted

impediments to legitimate and good faith settlements—all for the

stated purpose of doing “equity” to persons who have been found,

after trial and appeal, to be wrongdoers. Franklin v. Kaypro Corp.,

supra, 884 F.2d at 1231.

The enclosed amicus curiae brief addressses the two specific

legal issues raised by the Petition: (1) the appropriate settlement

bar rule to be applied in those circumstances where Congress, by

statute, has created a right of contribution; and (2) whether,

under Section 10(b) of the Securities Exchange Act of 1934, and

2

Rule 10b-5 promulgated thereunder, or under Section 12(2) of

the Securities Act of 1933, there exists an implied right of

contribution.

Respectfully submitted,

Davip B. GOLD

(Counsel of Record)

PAUL F. BENNETT

STEVEN O. SIDENER

DavipD B. GOLD,

A Professional Law Corporation

595 Market Street, Suite 2300

San Francisco, CA 94105

(415) 777-2230

JONATHAN W. CUNEO

(NASCAT General Counsel)

Law Offices of

JONATHAN W. CUNEO

1300 Eye Street, N.W.

East Tower, Suite 480

Washington, DC 20005

(202) 962-3860

Counsel for Amicus Curiae

TABLE OF CONTENTS

pro ye 8) | en

INTEREST OF THE AMICUS CURIAE.............

AMEE GEE PUIRAPUMDREEENE 005s c ccc cscs scecens

THE SETTLEMENT BAR RULE ANNOUNCED BY

THE NINTH CIRCUIT IS IN CONFLICT WITH

DECISIONS OF OTHER CIRCUITS AND IS CON-

TRARY TO CONGRESS’ INTENT IN ENACTING

THE FEDERAL SECURITIES LAWS .............

Il

NO RIGHT OF CONTRIBUTION EXISTS UNDER

SECTION 10(b) OF THE 1934 SECURITIES EX-

CHANGE ACT OR SECTION 12(2) OF THE 1933

EE ica s gdh ecn eek ch bes eenneenans

IIT

THE OPINION DISREGARDS CONGRESS’ IMPOSI-

TION OF JOINT AND SEVERAL LIABILITY

UIE OB cece bass enscccenversesecsess

I ee ee

12

rH

TABLE OF AUTHORITIES

Cases

Page

Baker, Watts & Company v. Miles & Stockbridge, 876 F.2d

ook se § rn oa 13, 14

Basic, Inc. v. Levinson, ___. U.S. ___, 108 S.Ct. 978

ree eer ree ee Pee are eee 12

Dalton v. Alston & Bird, [Current Binder], Fed.Sec.L.Rep.

CORED Fe CEI OOD oc ccciacensnncnccacis 3, 10

Financial Savings Bank, Inc. v. American Bankers Insurance

Co., [1989-90 Transfer Binder], Fed.Sec.L.Rep. (CCH)

Se CIEE CE oA NR Sie nee rate awae ties sens 15

Franklin v. Kaypro Corp., 884 F.2d 1222 (9th Cir.

SO a Ware ac kcccne cutie base eer eecebasenk nes passim

FSLIC v. Butler, 904 F.2d 506 (9th Cir. 1990).......... 5,7

Gill v. United States, 429 F.2d 1072 (Sth Cir. 1970) ..... 3

Gould v. American-Hawaiian Steamship Co., 535 F.2d 761

bf BR Peereeerret: eres tree eee Te Weswes 3

Heizer Corp. v. Ross, 601 F.2d 330 (7th Cir. 1979) ...... 14

In re American Continental Corporation/Lincoln Savings

and Loan Securities Litigation, 130 F.R.D. 475 (J.P.M.L.

SE ca Rabu bie ad be eee a RA aan orbs een k van 4

In re Atlantic Financial Management, Inc. Securities

Litigation, 718 F.Supp. 1012 (D.Mass. 1989) ......... 3, 11

In re Professional Financial Management, Ltd., 683 F.Supp.

Se I, SIR ao 5 cick auc ueekecdsback bacwees 13

King v. Gibbs, 876 F.2d 1275 (7th Cir. 1989) ........... 14

Makethan v. Burrus Cootes & Burrus, 545 F.2d 1388 (4th

Cir. 1976), cert. denied, 434 U.S. 826 (1977) ......... 3

Miller v. Apartments and Homes Of New Jersey, Inc., 646

Pee. SD i ee bs eeue eee d hientensicas passim

Miller v. Christopher, 887 F.2d (9th Cir. 1989) ........ 3, 5,9

TABLE OF AUTHORITIES

Cases

Page

Nelson v. Craig-Hallum, Inc., [1989 Transfer Binder],

Fed.Sec.L.Rep. (CCH) 994,500 (D.Minn. June 25,

NANG a co kh eenks Re Cke SLT eR ONUe eek Kd 13

Northwest Airlines, Inc. v. Transport Workers Union of

America AFC-CIO,451 U.S. 77 (1981) ............ passim

Robin v. Doctors Office Centers Corp., 730 F.Supp. 122

PE oc. Gp oeness sab suekaeealeakeeen’ 14, 15

Screen Gems—Columbia Music, Inc. v. Mettis & Lebow

Ce, SBS Fie See Ce Ge FITS onc cvcsncsnnecsss 3

Seymour v. Summa Vista Cinema, Inc., 809 F.2d 1385

Sn ML 0a Levee ce veluandeces as kawae stk 4,9

Singer v. Olympia Brewing Co. 878 F.2d 596

SE SET ich oiGca coche cine onee nace cen passim

Texas Industries, Inc. v. Radcliffe Materials, Inc., 451 U.S.

SE Wi bo4 wacko bee keen eee can eLaaeeeas 2, 13, 15

Van Bronkhorst v. Safeco Corp., 529 F.2d 943 (9th Cir.

SPE £05k 0 4k0a RK KESES Nee ees cae 7

Rules, Statutes and Regulations

Securities Exchange Act of 1934

EE oes i a ene daenan eee Maene 13,14

Securities Act of 1933

NE ai sa oa x6 4A AKA KK REAR RE 15

I, cn sic eeuk canbe thea eakeeeekeone 15

SE goa vas these ce komen eOaeaeae eee 15, 16

TE -o< ss'g debe 6 dad MeN eee eee 13, 14

Handbook of the National Conference of Commissioners

on Uniform State Laws and Proceedings of the Annual

Conference Meeting in Its Sixty-Fourth Year, 223-24

LEPOEE bondi pontine caccccuandbewben eee eee mnnees 5

iv

TABLE OF AUTHORITIES

Rules, Statutes and Regulations

United States Code

AEE oe rN ee eee eee

Other Authorities

Legislative History

H.R.Rep. No. 85, 73 Cong. Ist Sess. 8 (1933)

S.Rep. No. 47, 73 Cong. Ist Sess. 1 (1933)

“see eeee

eeeereeeveeve

No. 90-98

In the Supreme Court

OF THE

United States

OCTOBER TERM, 1990

GEORGE FRANKLIN, et al.,

Petitioners,

Vv

PEAT MARWICK MAIN & Co., et al.,

Respondents.

On Petition for Writ of Certiorari to the United States

Court of Appeals for the Ninth Circuit

BRIEF OF THE NATIONAL ASSOCIATION OF

SECURITIES AND COMMERCIAL LAW ATTORNEYS

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

l

INTEREST OF THE AMICUS CURIAE

As explained in the foregoing motion for leave to participate as

amicus curiae, NASCAT is a national association of law firms

consisting of approximately 500 attorneys located throughout the

United States. NASCAT’s primary purpose is to facilitate the

protection of investors and other consumers through appropriate

legislative and judicial activity.

The issues raised by the Petition are extremely important to the

management of complex, multi-party litigation in the federal

courts. The Ninth Circuit’s decision in Franklin v. Kaypro Corp.,

884 F.2d 1222 (9th Cir. 1989) (the “Opinion”), as it relates to

the availability of contribution under the federal securities laws,

and the impact of partial settlements on contribution rights,

unduly restricts the effectiveness of the federal securities laws and

contravenes Congress’ intent in enacting those laws. In essence,

the Opinion ensures that the trial courts of the United States will

be clogged with unnecessary litigation with n> additional benefit

to litigants or the judiciary. It erects unwarranted impediments to

legitimate and good faith settlkements—all for the stated purpose

of doing “equity” to persons who have been found, after trial and

appeal, to be wrongdoers. In addition, the Opinion overlooks or

rejects contrary decisions from other Circuit Courts and fails to

correctly analyze the desirability and wisdom of allowing parties

and trial courts to effectuate partial settlements in complex,

multi-party actions. Specifically, the Second and Third Circuits

have reached results contrary to the Opinion. As such, there exists

a serious conflict among the Circuits on important legal issues

which affect the administration of justice and the interpretation of

the federal securities laws. Based on the discussion presented here

and in the Petition, we believe that the Petition should be granted

so that this Court can resolve these important and controverted

legal issues.

SUMMARY OF ARGUMENT

Where express rights of contribution exist under the federal

securities laws, this Court should recognize that the appropriate

settlement bar rule is based on the pro tanto rule. This ruie should

2

have the following components: (i) it should be applicable only to

partial settlements entered into in “good faith;” (ii) plaintiffs’

claims against non-settling tortfeasors should be reduced by the

settlement payment made by the settling tortfeasors; and

(iii) tortfeasors who settle with plaintiffs should be protected

from all claims for contribution and indemnity by nonsettling

tortfeasors arising out of the alleged wrongful conduct. The

adoption of such a rule would foster important public policy goals

of encouraging settlements, protecting investors and carrying out

Congress’ objectives in enacting the federal securities laws while

at the same time protecting the legitimate interests of non-settling

defendants.

Further, this Court should review whether an implied right of

contribution exists under Section 10(b) of the Securities Ex-

change Act of 1934 or Section 12(2) of the 1933 Securities Act

in light of the Court’s holding in Texas Industries, Inc. v.

Radcliffe Materials, Inc., 451 U.S. 630 (1981) and Northwest

Airlines, Inc. v. Transport Workers Union of America AFC-CIO,

451 U.S. 77 (1981).

ARGUMENT

I

THE SETTLEMENT BAR RULE ANNOUNCED BY THE

NINTH CIRCUIT IN KAYPRO IS IN CONFLICT WITH

DECISIONS OF OTHER CIRCUITS AND IS CONTRARY

TO CONGRESS’ INTENT IN ENACTING THE FED-

ERAL SECURITIES LAWS

The settlement bar rule announced by the Ninth Circuit in

Kaypro admittedly will discourage the prompt resolution of multi-

party litigation through good faith settlements. It does so by

completely ignoring the Third Circuit’s decision in Miller v.

Apartments and Homes of New Jersey, Inc., 646 F.2d 101, 109

(3d Cir. 1981). The Opinion even admits that it is at odds with,

and therefore rejects, the recent Second Circuit decision in Singer

3

v. Olympia Brewing Co., 878 F.2d 596 (2d Cir. 1989).' Moreover,

the Opinion ignores the historical evolution of good faith settle-

ments and bar orders as promulgated by the American Law

Institute. In so doing, the Opinion creates conflicts among the

Circuit Courts. Indeed, since its promulgation, district courts in

the First and Seventh Circuits have rejected, as unsound, the

settlement bar rule promulgated by the Ninth Circuit in Kaypro.

See Dalton v. Alston & Bird, [Current Binder], Fed.Sec.L.Rep.

(CCH) 4 95,348 (S.D.IL.1990); In re Atlantic Financial Man-

agement, Inc. Securities Litigation, 718 F.Supp. 1012

(D.Mass.1989).”

Settlement bar rules implemented under state statutes or by

judicial decisions can be classified broadly into two categories: pro

tanto and pro rata (or proportional). Under the pro tanto rule, a

plaintiff's claims against non-settlors are reduced by the amount

of the payment received from a settling defendant; the settling

defendant is protected from claims for contribution and indemnity

that might be asserted by non-settlors. The rule protects the

settling defendants from further exposure in connection with the

action and assures the plaintiff that his claims against the non-

settlors will be reduced only by the amount of the settlement. The

pro tanto ruie also protects non-settlors in that any partial

settlement which purports to bar claims for indemnity and contri-

bution must be made in “good faith.” The pro tanto rule is

generally recognized as a rule that promotes settlement. It assures

plaintiffs that they will be made whole if they prevail against any

'The ruling of the Second Circuit in Singer is in line with the

holdings in numerous other circuits. See, e.g., Gould v. American-

Hawaiian Steamship Co., 535 F.2d 761, 784 (3d Cir. 1976); Screen

Gems—Columbia Music, Inc. v. Mettis & Lebow Corp., 453 F.2d 552,

554 (2d Cir. 1972); Makethan v. Burrus Cootes & Burrus, 545 F.2d

1388, 1390 (4th Cir. 1976), cert. denied, 434 U.S. 826 (1977); Gill v.

United States, 429 F.2d 1072, 1079 (Sth Cir. 1970).

? Since the Kaypro Opinion was rendered, the Ninth Circuit in Miller

v. Christopher, 887 F.2d 902 (9th Cir. 1989) refused to adopt the

Kaypro settlement bar rule in an admiralty case and instead approved

the use of a pro tanto settlement bar rule to extinguish claims for

contribution. Jd. at 907-908.

4

one of the joint tortfeasors. Miller v. Apartments and Homes of

N.J., Inc., supra, 646 F.2d at 109; Seymour v. Summa Vista

Cinema, Inc., 809 F.2d 1385, 1389-90 (9th Cir. 1987), as

amended, 817 F.2d 609 (9th Cir. 1987).

Under a pro rata (or proportional) settlement bar rule, which

the Opinion erroneously adopts, the settling defendants are also

protected from claims which might be asserted by the non-

settlors. The plaintiff's claims against the non-settlors, however,

are reduced—not by the amount of the partial settlement—but by

the settlors’ proportionate share of liability as determined at trial

where they are not present as parties and after consummation of

the partial settlement. This approach limits the risk of trial to the

non-settling defendants, encourages the non-settling defendants

to refuse to settle on a fair basis, discourages settlements and

increases the likelihood of unnecessary trials. For example, non-

settlors do not run the risk that the settling parties paid too little.

The risk of “underpayment” instead is borne solely by the

plaintiff. As such, a plaintiff is very reluctant to settle with less

than all defendants unless there is a substantial premium built

into the partial settlement to “pay” for the unknown risk which

plaintiff would be assuming. This result will necessarily prolong

litigation without any real or significant benefit to the parties but

with a very real detriment to the judicial system.’

The settlement inhibiting effects of the pro rata (or pro-

portional) rule were recognized by the National Conference of

Commissioners on Uniform State Laws (“NCCUSL”), which

amended the Uniform Contribution Among Tortfeasors Act

(“Uniform Act”) in 1955 to move from ihe pro rata rule to the

pro tanto rule precisely because the pro rata rule discouraged

settlements. Miller v. Christopher, supra, 887 F.2d at 906-907.

The NCCUSL’s comment, based on real world experience, on

this change demonstrates the serious flaws in the Opinion:

* This issue is especially important in light of the burgeoning savings

and joan crisis, which is now engulfing the federal courts with complex,

multi-party litigation. See, e.g., In re American Continental Corpora-

tion/Lincoln Savings and Loan Securities Litigation, 130 F.R.D. 475

(J.P.M.L.1990).

5

The 1939 Act provided, in Section 5, that a release of any

tortfeasor should not release him from liability for contribu-

tion unless it expressly provided for a reduction “to the

extent of the pro rata share of the released tortfeasor” of the

injured person’s recoverable damages. This provision has

been one of the chief causes for complaint where the Act has

been adopted, and one of the main objections to adoption.

*- * *#

The effect of Section 5 of the Act has been to discourage

settlements in joint tort cases, by making it impossible for

one joint tortfeasor alone to take a release and close the file.

Plaintiff's attorneys are said to refuse to accept any release

which contains the provision reducing damages “‘to the extent

of the pro rata share of the released tortfeasor,” because they

have no way of knowing what they are giving up. The “pro

rata share” cannot be determined in advance of judgment

against the other tortfeasors....

No defendant wants to settle when he remains open to

contribution in an uncertain amount, to be determined on the

basis of a judgment against another in a suit to which he will

not be a party. Some reports go so far as to say that the 1939

Act has made independent settlement impossible.

Handbook of the National Conference of Commissioners on

Uniform State Laws and Proceedings of the Annual Conference

Meeting in Its Sixty-Fourth Year, 223-24 (1955) [Emphasis

added.] Miller v. Christopher, supra, 887 F.2d at 907. In an effort

to encourage non-collusive settlements, the NCCUSL amended

the Uniform Act to provide for a pro tanto, rather than a pro rata,

settlement bar rule provided settlements were entered into in

“good faith.” Id. at 906-907; FSLIC v. Butler, 904 F.2d 505, 511

(9th Cir. 1990).

The Third Circuit considered these same competing policies in

Miller v. Apartment and Hortes of New Jersey, Inc., 646 F.2d i01

(3d Cir. 1981). In Miller, the Third Circuit found that a right to

contribution existed in an action brought under 42 U.S.C. § 1982

aia aaa neil

6

and the Fair Housing Act. Jd. at 108. In so doing, the Court noted

that:

Contribution rules are of high importance in the process of

settling claims before trial. Consequently, the selection of a

contribution rule bears on the work of the federal courts as

well as on the substantive rights and liabilities of the parties.

Id.

In developing the appropriate “contribution” rule, the Third

Circuit in Miller identified three specific policy considerations.

First, the court in Miller recognized that:

[The] law generally seeks to assure the tort victim neither

more nor less than one complete satisfaction of his claim. A

tule of pro tanto reduction accomplishes this goal. A rule of

pro rata reduction frustrates it to the extent that the plaintiff

makes a good or a bad settlement.

Id. at 109. Contrary to the foregoing, the Opinion suggests that a

plaintiff should be willing to forego a complete satisfaction of his

claim even if the claim is fully and successfully litigated. The

Opinion further suggests that a partial settlement means that a

plaintiff has somehow voluntarily agreed to something less than a

— full satisfaction of his claim. This is wrong. Moreover, it is con-

trary to the settled law of, at least, the Second and Third Circuits.

See, e.g., Singer v. Olympia Brewing Co., supra, 878 F.2d at 660.

The Miller court also identified other appropriate policy factors:

Second, the law seeks to encourage settlements. A rule that

the settling defendant will remain liable to contribute after

an award against a non-settling defendant would impede

settlements. So would a rule that the plaintiff must give non-

settling defendants the benefit of a pro rata reduction in their

liability. The 1939 Uniform Contribution Among Tort-

feasors Act emphasized competing policies rather than the

policv of promoting settlements. Section 4 of the 1939 Act

required a pro tanto credit for the amount of settlements the

plaintiff received. However, Section 5 declared that settling

defendants remained liable to contribute to non-settling

defendants unless the release provided for a pro rata reduc-

7

tion of the plaintiff's damages recoverable against all the

other tort-feasors. The 1955 Uniform Contribution Among

Tort-feasors Act abandoned that policy choice. The 1955 Act

retains the direct pro tanto credit rule. But section 4(b) now

provides:

When a release or a covenant not to sue or not to

enforce judgment is given in good faith to one of the two

or more persons liable in tort for the same injury or the

same wrongful death;...(b) It discharges the tort-

feasor to whom it is given from all liability for contribu-

tion to any other tort-feasor.

See, 73 A.L.R.2d 403 (1960).

Miller vy. Apartment and Homes of New Jersey, Inc., supra, 646

F.2d at 109.

By 1955, leading experts in the field recognized that such an

approach made multi-party settlements on a partial basis virtually

impossible. Miller v. Apartment and Homes of New Jersey, Inc.,

supra, 646 F.2d at 109. As a direct result, the 1955 version of the

Act adopted the pro tanto rule of contribution. FSLIC v. Butler,

supra, 904 F.2d at 511. Unless the Petition is granted and the

Opinion reversed, virtually no partial settlements of complex

multi-party litigation will be entered into in the Ninth Circuit,

thus needlessly causing an increase in complex litigation. Such a

result is contrary to the public policy of encouraging the settle-

ment of litigation, especially complex litigation. Van Bronkhorst

v. Safeco Corp., 529 F.2d 943, 950 (9th Cir. 1976).

The third policy factor identified by the Third Circuit in Miller

consisted of the relative equities among wrongdoers. In this

regard, the Third Circuit in Miller stated:

A rule of pro rata reduction achieves the goal of equality

albeit at the expense of other values. The same could be said

of the rule of the 1939 Act which held a settling defendant

liable to contribute.

Miller v. Apartments and Homes of New Jersey, Inc., supra, 646

F.2d at 109.

8

The Opinion places primary, if not sole, weight on this factor.

Such reliance, however, is totally misguided. As the Opinion

candidly admits, “we are speaking of equities between wrongdo-

ers.” Kaypro, supra, 884 F.2d at 1231. Nevertheless, the Opinion

concludes that it is equitable to protect proven wrongdoers from

those it has victimized. This is not equity. Indeed, it makes a

mockery of the very essence of equity. A non-settling defendant

(or their insurers) should not receive an economic windfall solely

because certain co-defendants (or their insurers) have chosen to

act responsibly and to settle a lawsuit in good faith.

The Third Circuit in Miller recognized as much when it

established the controlling settlement bar rule. As the Third

Circuit held:

In making our choice, we accord the least weight to the third

principle [i.e., equities among joint tortfeasors]. We believe

that parties generally will have sufficient incentive to negoti-

ate settlements as vigorously as they can, and that in most

cases the settlements achieved will not deviate unacceptably

from the aimed for proportionality of payment. We further

believe that in most cases favoritism will present no problem,

and that skilled attorneys will be able to discover collusive

settlements and avoid the feared harmful éffects of the

collusion.* We see no necessary conflict between the first two

policies. The policy of allowing complete satisfaction is

furthered by a rule of pro tanto credit. And the rule of pro

tanto credit is plainly preferable to a rule of pro rata credit in

civil rights cases, where one or more defendants have settled

“The Opinion contends that trial courts are incapable, in a good faith

hearing, of determining whether a proposed settlement is fraudulent or

collusive. This is incozrect. Trial courts, on a daily basis, make serious

decisions affecting the lives and property of persons which decisions are

subject to review. Furthermore, the suggestion that a good faith hearing

requires “a full evidentiary hearing on all of the parties’ relative

culpabilities” is simply wrong. See Miller v. Christopher, supra, 887 F.2d

at 907-908.

9

with a plaintiff, the damages recoverable by that plaintiff

shall be reduced by the amount of the settlement received.

Id. at 109-110.°

The Ninth Circuit recently cited the Miller case with approval

in a securities case. Seymour v. Summa Vista Cinema, Inc.,

supra, 809 F.2d at 1389. In Seymour, the Ninth Circuit approved

the use of the pro tanto rule by stating that:

We start with the fundamental principle that a payment

made by a joint tortfeasor diminishes the claim against the

remaining tortfeasors....

*- s&s #8

White the district court’s approach is without precise prece-

dent, it comports with the policies of the law in this area. The

foremost of these is assuring the tort victim one complete

satisfaction of his claim, neither more nor less. Miller v.

Apartments and Homes of New Jersey, Inc., 646 F.2d 101,

109 (3d Cir. 1981). By deducting the fair market value of

the settlement agreement, the district court provided plain-

tiffs one satisfaction of their claim. Although future events

may diverge from the district court’s prediction, the determi-

nation must be made as of the time of the judgment. Our

system of justice cannot provide certainty; a fair and reason-

able approximation in light of the facts available when the

court makes its decision suffices. The district court’s ap-

proach also serves another policy, that of encouraging settle-

ment even with those whose present financial condition may

be less than optimal. Adopting Alexander's proposed ap-

*This Court modified the scope of Miller when it held that where

there is a comprehensive Congressional statutory scheme, such as Title

VII or the Equal Pay Act, no rights of contribution will be judicially

implied. Northwest Airlines, Inc. v. Transport Workers Union, 451 U.S.

77 (1981). Where a right to contribution does exist, however, the Miller

analysis is very relevant because it considers each of the policy issues

and weighs each appropriately. As such, Miller is directly on point. The

Opinion, however, fails to mention Miller or weigh the important policy

factors identified by the Third Circuit in that case.

a

10

proach might well deter plaintiffs from settling with impecu-

nious defendants for fear that a paper judgment will bar

recovery against solvent defendants.

Id. at 1389-90. [Emphasis added.] The holding by the Ninth

Circuit in Seymour is inconsistent with the Opinion since Kaypro

expressly envisions situations where a tort victim will not receive

complete satisfaction even if victorious.

The Ninth Circuit specifically recognized that its Opinion was

contrary to the holding of the Second Circuit in Singer v. Olympia

Brewing Co., 878 F.2d 596, 599-600 (2d Cir. 1989). Kaypro,

supra, 884 F.2d at 1230. Not surprisingly, since the Opinion was

rendered, district courts in—at least—the First and Seventh

Circuits have also rejected the Kaypro Opinion. For example, in

Dalton v. Alston & Bird, {Current Binder], Fed.Sec.L.Rep.

(CCH) 7 95,348 (S.D.IL.1990), an Illinois district court care-

fully weighed the public policy considerations raised in Kaypro

and Singer and chose the Singer rule. In so doing, the Dalton

court held:

The Court believes that the Singer approach is the better

approach to this problem. First, the Singer approach is much

easier in application. The jury need not determine the rela-

tive fault of all defendants, including those defendants who

are no longer participating in the trial. Under the Franklin

approach an exact apportionment of liability needs to occur

at some point, i.e., at the trial. Second, the Singer approach

is equitable. The fairness hearing ascertains whether the

settlement is fair in light of the potential liability «=f the

defendant and in light of the chance of recovery. Thus, the

fairness hearing prevents other defendants from paying far in

excess of their share of liability. Even under the one-satisfac-

tion rule, fairness hearings need not become more compli-

cated than they already are. Under the one-satisfaction

[rule], no such apportionment ever needs to be made. Third,

the Singer approach provides finality to the settlement.

Under the Singer approach, the settling defendants are no

longer a part of the litigation, and thus large portions of the

trial may be omitted. Under the Franklin approach, the

settling defendants’ liability needs to be determined, and thus

< sah

ll

their activities remain part of the trial. Fourth, the Singer

approach encourages settlements, while the Franklin ap-

proach discourages settlements. Under Singer, the uncertain-

ties of trial are increased, and thus parties are more likely to

settle. Under Franklin, a party is guaranteed that it will

never pay more than its share of the damages, thus decreas-

ing the risks of trial.

Dalton, supra, J 95,348 at 96,684.

Similarly, in Jn re Atlantic Financial Management, Inc. Securi-

ties Litigation, 718 F.Supp. 1012, 1018 (D.Mass. 1989), the

district court followed Singer and explained the drawbacks of the

Ninth Circuit’s Kaypro approach:

Delaying final determination of the amount of the set-off

deprives the plaintiff class of one of the chief inducements to

settle: certainty .... Furthermore, in complex securities liti-

gation, the burden on the jury’s time and perception is

already considerable. To add to this burden the task of

apportioning fault between absent and present defendants

would obviate much of the advantage of partial settlement to

the judicial system itself.

Where contribution claims do exist, this Court should reject

the pro rata (or proportional) concept embraced in the Opinion.

Such a settlement bar rule is inconsistent with Congressional

purpose of the federal securities laws. Public policy and Congres-

sional intent behind the federal securities laws is so strong that

investor protection cannot and should not be subordinated to the

relative “equities among wrongdoers.” As this Court recently

stated with respect to the 1934 Securities Exchange Act:

The 1934 Act was designed to protect investors against

manipulation of stock prices. Underlying the adoption of

extensive disclosure requirements was a legislative philoso-

phy: “There cannot be honest markets without honest pub-

licity”....This Court “repeatedly has described the

‘fundamental purpose’ of the Act as implementing a ‘philoso-

phy of full disclosure.’ ”

Basic, Inc. v. Levinson, ___ U.S. ——_, 108 S.Ct. 978, 982

(1988) (citations omitted). See also H.R.Rep. No. 85, 73 Cong.

tienen

12

Ist Sess. 8 (1933); S.Rep. No. 47, 73 Cong. Ist Sess. 1 (1933)

(setting forth similar purposes for the 1933 Securities Act).

Instead, this Court should recognize a pro tanto settlement bar

rule for use in actions brought by investors under the federal

securities laws where there are express rights of contribution. The

rule should have the following components: (i) it should be

applicable only to partial settlements determined to have been

entered into in “good faith” after notice to all parties and a “good

faith” hearing is held; (ii) plaintiffs’ claims against non-settling

tortfeasors should be reduced by the settlement payment made by

the settling tortfeasors; and (iii) tortfeasors who settle with

plaintiffs should be protected from all claims for contribution and

indemnity by non-settling tortfeasors arising out of the alleged

wrongful conduct. The adoption of such a rule would foster

important public policy goals of encouraging settlements, protect-

ing investors, and carrying out Congress’ intent in enacting the

federal securities laws while at the same time protecting the

legitimate interests of non-settlors.

UI

NO RIGHT OF CONTRIBUTION EXISTS UNDER SEC-

TION 10(b) OF THE 1934 SECURITIES EXCHANGE

ACT OR SECTION 12(2) OF THE 1933 SECURITIES

ACT

The Opinion assumes that a right to contribution is generally

available under the federal securities laws. This is incorrect.

While certain sections of the Securities Act of 1933 (the “1933

Act”) and the Securities Exchange Act of 1934 (the “1934

Act’) do provide for a right to contribution, the circuit courts and

district courts which have considered the issue, in light of this

Court’s teachings in Texas Industries, Inc. v. Radcliffe Materials,

Inc., 451 U.S. 630 (1981) and in Northwest Airlines, Inc.. v.

Transport Workers Union of America AFL-CIO, 451 U.S. 77

(1981), have determined that no right of contribution exists

under Section 12(2) of the 1933 Act or Section 10(b) of the

1934 Act and Rule 10b-5 promulgated thereunder. See, e.g.,

Baker, Watts & Company v. Miles & Stockbridge, 876 F.2d 1101,

1104-1106 (4th Cir. 1989); In re Professional Financial Manage-

13

ment, Ltd., 683 F.Supp. 1283 (D.Minn. 1988); Nelson v. Craig-

Hallum, Inc., [1989 Transfer Binder], Fed.Sec.L.Rep. (CCH)

4 94,500 (D.Minn. June 25, 1989).

For example, the court in Nelson addressed the specific issue of

whether a right to contribution existed in actions under Rule 10b-

5. Nelson, supra, at 93,192. In deciding this issue, the Ne/son

court relied on the analysis in Jn re Professional Financial

Management, Litd., 683 F.Supp. 1283 (D.Minn. 1988), wherein

the court held that there was no right of contribution. In this

regard, the court in Nelson stated:

In Professional Financial Management, Judge Diana Mur-

phy followed the suggested analytical framework in address-

ing the precise issue presented by Terrano’s contention and

held that no right to contribution existed. Jn re Professional

Management, 683 F.Supp. at 1285-87.

In opposition to Terrano’s motion, Craig Hallum cites nu-

merous cases form other circuits which take a contrary

position to Judge Murphy. The Court has examined these

cases, along with Texas Industries, Northwest Airlines and

Professional Financial Management and finds itself per-

suaded by Judge Murphy’s reasoning and conclusion. Con-

gress did not expressly provide defendant a right to

contribution in enacting Section 10b of the Securities Ex-

change Act. The policy reasons for providing such a right

which Craig Hallum urges this Court to consider, and which

have been considered as a basis for providing such a night in

_other cases,... were the same policy reasons which the

Supreme Court resisted considering in Texas Industries on

the grounds that Congress is the more appropriate and better

equipped decision making body to pierce their complexity.

Texas Industries, 451 U.S. at 646-47. Accordingly, Terrano’s

motion for summary judgment is granted.

Id. at 93,192-93.

In Baker, Watts, supra, the Fourth Circuit reached the same

conclusion with respect to Section 12(2) claims under the 1933

Act when it held:

14

It is unclear whether a federal nght of action for contribution

would promote the general purposes of the federal securities

laws. Although some courts have stated that such a remedy

may further the deterrent purposes of the 1933 and 1934

Acts, [citation omitted}, much the same regulatory purpose

can be ascribed to the anti-trust laws under which no implied

right of action for contribution is recognized. See Texas

Industries, 451 U.S. at 630, 101 S.ct. at 2062. An even

greater deterrent effect may exist if a single securities wrong-

doer such as Baker, Watts, is held liable for the total adverse

judgment. ...

Baker, Watts, supra, at 876 F.2d at 1105-1106. [Emphasis

added.}] The above cases and the cases on which they rely,

including this Court’s own recent precedents, establish conclu-

sively that no implied right of contribution exists under either

Section 10(b) of the 1934 Act or Section 12(2) of the 1933 Act.

In these circumstances, this Court should review the Opinion’s

apparent holding that a right to contribution generally exists

under the federal securities laws. The sole case cited in the

Opinion for that proposition is Heizer Corp. v. Ross, 601 F.2d 330,

334 (7th Cir. 1979). The Heizer case predates and is inconsistent

with the Supreme Court decisions upon which the above cases

rely in rejecting the contention that rights of contribution exist

under Rule 10b-5 or Section 12(2).° Indeed, Heizer is no longer

good law in the circuit in which it was rendered. King v. Gibbs,

876 F. 2d 1275, 1280 (7th Cir. 1989). See also Robin v. Doctors

Office Centers Corp., 730 F.Supp. 122, 124 (N.D.II1.1989) (hold-

ing that the ruling in Heizer that contribution is implied under

Section 10(b) is no longer controlling). Applying the analysis

mandated by the Supreme Court in Texas Industries and North-

west Airlines, courts in the Seventh Circuit now hold that “[nJo

private cause of action for contribution may be implied under

Rule 10b-5. Robin, supra, 730 F.Supp. at 125. See also Financial

Savings Bank, Inc. v. American Bankers Insurance Co., [1989-90

® Unless there is a right to contribution under Rule 10b-5 or Section

12(2), the Opinion’s discussion of settlement bar rules would not be

applicable to those claims.

15

Transfer Binder], Fed.Sec.L.Rep. (CCH) {94,827 (E.D.N.C.

November 1, 1989).

Til

THE OPINION DISREGARDS CONGRESS’ IMPOSITION

OF JOINT AND SEVERAL LIABILITY UNDER

SECTION 11

Section 11(a) of the 1933 Act identifies, by category, those

groups of persons who are liable for a materially misleading

registration statement. Among others, Section 11(a) provides

liability for every person who signs the registration statement,

every person who is a director of the issuer, the issuer, an accoun-

tant or other expert who has with his consent been named as

having prepared or certified any part of the registration statement

and every underwniter. With respect to each of the persons liable

under Section 11(a), Section 11(f) provides that “all or any one

or more of the persons specified in subsection (a) shall be jointly

and severally liable”... . [Emphasis added. ]’ As a result of Con-

gress’ expressed intent, any one of these persons may be liable to

plaintiffs for the entire amount of the damages sustained

thereunder.

The Opinion completely disregards this carefully crafted statu-

tory scheme. For example, the Opinion states that “the [pro

tanto] offset scheme forces non-settling defendants to pay more

than the amount for which they are culpable.” Kaypro, supra, 884

F.2d at 1230. This assertion is unfounded (and, if true, would be

legally irrelevant). Under Section 11, each culpabie party is liable

to plaintiffs for the entire amount of the damages irrespective of

their proportionate fault. Section 11(f). The Opinion also inaccu-

‘rately contends that, under its settlement bar rule, non-settling

defendants will never pay more than they would if all parties had

gone to trial. Kaypro, supra, 884 F.2d at 1231. This contention is

wrong. It ignores both the very wording of Section 1] and

economic reality. If all defendants go to trial arid lose, they are all

’ Section 11(e) contains special treatment for underwriters which is

not relevant to the discussion here.

16

jointly and severally responsible to the prevailing plaintiff for the

entire damages. To the extent that any responsible party is

insolvent, close to insolvency or more difficylt to execute on,

plaintiff will collect on his judgment from the more wealthy

defendants irrespective of their culpability. These defendants will

then be left with their theoretical contribution claim against

insolvent or nearly insolvent defendants which they, in all likeli-

hood, will not pursue because the costs of doing so make no

economic or business sense. These are the same costs which the

Opinion unfairly states that plaintiffs should incur if they choose

to partially settle.

The policy adopted by the Opinion is unwise for a host of

reasons. There are legitimate incentives on the part of both

plaintiffs and defendants to settle (as there should be) only if the

hidden and unknown costs associated with the risks incurred

under the Opinion do not exist. As such, the Opinion is contrary

to public policy because it deters settlements. No plaintiff will

consider a partial settlement unless it is demonstrably above the

proportionate share of that person’s potential responsibility. In

that situation, however, a defendant is unlikely to agree to settle.

In fact, experience with the 1939 version of the Uniform Contri-

bution Among Tortfeasers Act tell us that the adoption of the

Opinion will make partial settlements a rarity, if not an impossi-

bility. In such circumstances, plaintiffs will simply not settle

except on a global basis. As a result, defendants who are wealthier

will be forced to pay more irrespective of their culpability. This is

because the amounts to be recovered in potential partial settle-

ments will decrease dramatically and therefore will reduce the

amount of any offset. Thus, contrary to the stated purpose of the

Opinion, the Opinion will actually force wealthier defendants to

pay more than if the pro tanto rule were adopted.’ More impor-

* Today, most acts of wrongdoing under the federal securities laws are

covered by insurance. Therefore, the economic risk of an adverse

judgment will not deter prospective wrongdoers—the insurance com-

pany and not the wrongdoers usually pay. Rather than maximizing

deterrence among wrongdoers, the practical effect of the Opinion is to

shift the source of payment from one group of insurance carriers to

another group of insurance carriers. In this environment, the Court’s

17

tantly, the entire judicial process, including both the parties and

the court system, would be benefitted by the adoption of the pro

tanto rule because that rule encourages the parties to negotiate

reasonable settlements based upon all of the facts and circum-

stances (including the financial resources and exposure of defend-

ants) of each particular case.

entire discussion of deterrence among wrongdoers is legally and factually

irrelevant. As the Third Circuit in Miller recognized, the deterrence

factor should be given little, if any, weight in fashioning modern day

contribution rules.

18

CONCLUSION

For the foregoing reasons, NASCAT requests the Court to

grant the Petition so that these serious legal issues will be

considered on their merits. This is especially important because

the Opinion creates conflicts among the various Circuits and

because the issues raised by the Opinion have national ramifica-

tions which will dramatically affect the effective private enforce-

ment of the federal securities laws.

Dated: August 30, 1990

Respectfully submitted,

DavipD B. GOLD

(Counsel of Record)

PAUL F. BENNETT

STEVEN O. SIDENER

DavipD B. GOLD,

A Professional Law Corporation

595 Market Street, Suite 2300

San Francisco, CA 94105

(415) 777-2230

JONATHAN W. CUNEO

(NASCAT General Counsel)

Law Offices of

JONATHAN W. CUNEO

1300 Eye Street, N.W.

East Tower, Suite 480

Washington, DC 20005

(202) 962-3860

Counsel for Amicus Curiae

:

|

IX.

THE TERMS OF THE SETTLEMENT

NOW, THEREFORE, IT IS HEREBY STIPULATED

AND AGREED by and among the Settling Plaintiffs, the

Settling Defendants, and the Insurers, by and through

their respective attorneys or counsel of record, as follows:

A. Definitions

As used in this Stipulation, the following terms have

the meanings specified below:

(1) “Person” means an individual, corporation, part-

nership, limited partnership, association, joint stock com-

pany, estate, legal representative, trust, unincorporated

organization, and any other type of legal entity and their

heirs, successors, or assignees.

(2) “Settlement Class” means all persons, except any

defendant (including members of the immediate family of

each of the individual defendants, any entity in which any

defendant has a controlling interest and the legal repre-

sentatives, heirs, successors or assigns of any excluded

party) named in the Class Action, who purchased or

otherwise acquired the stock of Kaypro between Au-

gust 25, 1983, and December 13, 1984, inclusive.

(3) “Settlement Class members” means all members

of the Settlement Class except those persons who file

valid and timely requests for exclusion pursuant to the

notice of class action determination and partial settle-

ment described in Paragraph [X.F.(1) below.

(4) “Settlement Class Period” means the period Au-

gust 25, 1983, through December 13, 1984, inclusive.

43a

(5) “Settling Plaintiffs” means each and all of the

Class Representatives and the Settlement Class

Members.

(6) “Settling Defendants” means each and all of the

following persons: (a) Andrew F. Kay; (b) David A. Kay;

(c) Allan M. Kay; (d) Mary M. Kay; (e) Arthur B.

Laffer; (f) W. Bradford Ryiznd; (g) Ludwig Weindling;

(h) Roger S. Wooley; (i) Roger S. Wooley as Executor of

the Estate of Ludwig Weindling; and (j}) Kaypro Corpo-

ration and each and all of its present and former officers

and directors.

(7) “Insurers” means each and all of those persons

identified on Exhibit “A” hereto, which shall be filed with

the Court under seal.

(8) “Settled Claims” means any and all claims, actions

or causes of action, rights or liabilities, including Un-

known Claims, which exist or may in the future exist by

reason of (i) any matter, cause or thing whatsoever,

arising out of, relating to, or in any way connected with

the purchase or sale or other disposition of acquisition

during the Settlement Class period of any Kaypro com-

mon stock by a Sett!ement Class Member; (ii) any and all

claims, actions, causes of action, rights or liabilities,

including Unknown Claims, which a Settlement Class

Member has_or may in the future have by reason of any

acts, omissions, or failures to act of any of the Defendants

during the Settlement Class Period in (but only in) their

capacities as officers, directors, employees, agents,

and/or advisors of Kaypro; and (iii) any and all claims,

actions, causes of action, rights or liabilities, including

Unknown Claims, which a Settlement Class Member has

or may in the future have arising out of or in any way

connected with or related to any of the facts, circum-

stanees, transactions, events, occurrences, acts or omis-

44a

sions or failures to act, of whatever kind—or character

whatsoever, irrespective of the state of mind of the actor

performing, or omitting to perform the same, that are or

could have been alleged, referred to, alluded to, or re-

flected in the Class Action.

(9) “Unknown Claims” as used in the definition of

Settled Claims in Paragraph IX.A.(8) hereof, means

claims which the Settlement Class Members do not know

or suspect to exist in their favor at the time of the release

of the Settling Defendants which if known by them might

have affected their settlement with Settling Defendants.

Solely with respect to any and all Settled Claims asserted

against the Settling Defendants, it is the intention of the

parties hereto that, upon the Effective Date, as defined

below, each of the Settlement Class Members does hereby

expressly waive and relinquish, to the fullest extent per-

mitted by law, the provisions, rights, and benefits of

section 1542 of the California Civil Code, which provides:

A general release does not extend to claims which the

creditor does not know or suspect to exist in his favor

at the time of executing the release, which if known

by him must have materially affected his settlement

with the debtor.

1.é€., any and all provisions, rights and benefits of any

similar statute or law of California or of any other

jurisdiction. Each of the Settlement Class Members fur-

ther acknowledges hereby that said Settlement Class

Member is aware that said Settlement Class Member may

hereafter discover facts in addition to or different from

those which said Settlement Class Member now knows or

believes to be true with respect to the subject matter of

the release, but that it is the Settlement Class Member’s

intention to, and each Settlement Class Member does

hereby, upon the Effective Date, fully, finally and forever

45a

settle and release any and all Settled Claims asserted

against the Settling Defendants only, known or unknown,

suspected or unsuspected, contingent or non-contingent,

whether or not concealed or hidden which now exist, may

hereafter exist, or heretofore have existed, and without

regard to the subsequent discovery or existence of such

different or additional facts. All of the foregoing is the

definition of “Unknown Claims.”

(10) “Settlement Fund” means Nine Million Two

Hundred Fifty Thousand Dollars ($9,250,000) in eash or

cash equivalents, plus such interest earned on or imputed

to said sum after transfer to the Escrow Agent.

(11) “Effective Date,” or the date on which the settle-

ment embodied in this stipulation becomes “effective,”

means the date on which the Court’s judgment (the

Judgment”), substantially in the form of Exhibit D

hereto, becomes final, 1.e., 35 days after the entry of the

Judgment if no appeal by a Settlement Class Member is

filed. If an appeal by a Settlement Class Member is filed,

the Effective Date shall be the date of the final affirmance

on appeal, the expiration of the time for petitions for

writs of certiorari to the U.S. Supreme Court and, if

certiorari be granted, the date of final affirmance follow-

ing review pursuant to that grant; or the final dismissal of

any appeal or proceedings on certiorari to the U.S. Su-

preme Court. No appeal or attempted appeal or any other

attempt to secure other appellate review of the Judgment

by any Non-Settling Defendant shall affect the finality or

the Effective Date of the Settlement in any way.

(12) “Non-Settling Defendant” means (a) Peat,

Marwick Mitchell & Co. (‘Peat’); (b) Prudential-Bache

Securities, Inc., individually, and as the representative of

all underwriters who, pursuant to an Underwriting Agree-

ment, participated in the registered public offering and

46a

sale of Kaypro common stock on or about August 25, 1983

(“Underwriters Group’); and (¢c) the Underwriters

(and/or their sueccessors-in-interest) listed on Exhibit C

hereto. Settlement Counsel represent and warrant that

they will not hereafter assert the Settled Claims against

any Person other than the Non-Settling Defendants.

(13) “Eserow Agent’? means Milberg Weiss Bershad

Specthrie & Lerach and Wolf Popper Ross Wolf & Jones

or their successors, as the parties may agree upon, which

Escrow Agent shali perform its duties as set forth in this

Stipulation.

(14) “Settlement Counsel” means the law firms of

Milberg Weiss Bershad Speethrie & Lerach and Wolf

Popper Ross Wolf & Jones.

B. Transfer of Funds

(1) Within ten (10) business days of the execution of

this Stipulation, the payments comprising the Settlement

Fund shall be delivered to the Escrow Agent pursuant to

the terms of this Stipulation. Such payments may not be

disbursed by the Escrow Agent, except as provided in this

Stipulation, an Order of the Court or the agreement of the

parties.

(2) The Escrow Agent shall invest the Settlement

Fund deposited pursuant to Paragraph [X.B.(1) above,

at current market rates in certificates of deposit, money

market funds or U.S. T-Bills (the “Escrow Securities”’)

and shall reinvest the proceeds of the Escrow Securities

as they mature in similar Escrow Securities at the current

market rates.

47a

C. Notice, Administration, Claims Solicitation and As-

sistance Fund

(1) As soon as practicable after the payments required

by paragraph [X.B.(1) are deposited in escrow, the Es-

crow Agent shall establish a fund separate from the

Settlement Fund (the “Notice and Administration

Fund”) and shall pay $100,000 into the Notice and

Administration Fund. The Notice and Administration

Fund may be used by Settlement Counsel, witheut re-

course, to pay the costs of indentifying and notifying

members of the Settlement Class, soliciting the filing of

claims by them, assisting them in making their claims and

otherwise administering, on behalf of the Settlement

Class, the settlement embodied in this Stipulation.

(2) On the Effective Date, any balance then remaining

in the Notice and Administration Fund, less expenses

incurred but not yet paid, shall be made a part of the

Settlement Fund. Thereafter, Settlement Counsel shall

have the right to use such portions of the Settlement

Fund as are, in the exercise of their reasonable judgment,

necessary to carry out the purposes set forth in paragraph

IX.C.(1).

D. Deposit and Exchange of Releases

(1) As soon as practicable after the execution of the

Stipulation, each Settling Defendant shall deliver to their

respective counsel, in the form of Exhibit E hereto,

mutual releases of all claims, if any, that the Settling

Defendants may have against each other based on the

Settled Claims. On the Effective Date, their respective

counsel shall deliver forthwith these releases to the re-

spective counsel for the other Settling Defendants as

their interests may then appear.

48a

Said releases shall contain language which renders the

releases null and void until the occurrence of the Effec-

tive Date.

(2) As soon as practicable after the execution of the

Stipulation, each Settling Defendant shall deliver to the

Escrow Agent separate executed releases of each Non-

Settling Defendant for the claims that such Settling

Defendant may have against such Non-Settling Defen-

dant that are based on or arise from the Settled Claims of

each Settling Plaintiff. Such releases shall be substan-

tially in the form of Exhibit F hereto and shall be

delivered to the Escrow Agent with appropriate written

irrevocable instructions providing that the Escrow Agent

shall deliver those releases to a Non-Settling Defendant

only when (a) all of the events set forth in Paragraph

IX.H. below shall have occurred; (b) the Settling Plain-

tiffs shall have settled the Settled Claims with a Non-

Settling Defendant, which settiement is embodied in a

final judgment within the meaning of Paragraph [X.G.

below; and (¢c) a Non-Settling Defendant shall have

deposited with the Escrow Agent the executed releases

described in Paragraph [X.D.(3) below with appropriate

written instructions to deliver such releases to the Set-

tling Defendants.

(3) Each of the Settling Plaintiffs agrees that he or

she shall not hereafter release, dismiss or settle any

claims asserted in the Class Action against a Non-Set-

tling Defendant without the execution by such Non-

Settling Defendant of a release of all claims which such

Non-Settling Defendant may have against the Settling

Defendants that are based on or arise from the Settled

Claims of said Settling Plaintiff, which releases shall be

substantially in the form of Exhibit G hereto.

49a

E. The Good Faith Hearing

(1) Promptly after execution of this Stipulation, the

parties hereto shall jointly move the Court for an order

and Judgment (the “Good Faith Order’), substantially

in the form of Exhibit H hereto, providing, inter alia,

(a) that the settlement embodied in this Stipulation is

entered into and made in good faith, within the meaning

of Sections 877 and 877.6 of the California Code of Civil

Procedure, and (b) that all claims for contribution, in-

demnification, or reimbursement, however denominated,

against the Settling Defendants arising under the federal

securities laws or state law, including those based in tort,

contract or statute, or any other body of law, in favor of

persons, including the Non-Settling Defendants, who are

asserted to be or who may be joint tortfeasors or wrong-

doers, however denominated, with the Settling Defend-

ants in the Settled Claims and based upon or arising from

the Settled Claims are extinguished, discharged, satisfied

and/or otherwise unenforceable. At the Good Faith Hear-

ing, the Court, or, upon reference, to which reference the

parties hereby stipulate, the Honorable Harry R. McCue,

United States Magistrate, or his successor, shall be re-

quested by the parties hereto to consider evidence and

make findings (or, in the ease of Magistrate McCue or his

suecessor, make recommendations to the Court) on those

issues which are deemed relevant to the entry of the Good

Faith Order.

F. The Notice Order

Promptly after execution of this Stipulation, the Class

Representatives shall move the Court for an order (the

“Notice Order”), substantially in the form of Exhibit B

hereto, providing for notice to the Settlement Class of

and hearing on the proposed settlement (the “Settlement

50a

Hearing’). Unless otherwise ordered by the Court, the

Settlement Hearing shall occur contemporaneously with

the hearing on the Good Faith Order. The Notice Order

shall specifically include provisions which, among other

things:

(1) Approve forms of notice for mailing to members of

the Settlement Class that shall notify Settlement Class

Members of the hearing (i) in connection with the Good

Faith Order, (ii) on approval of the settlement, and

(iii) plaintiffs’ counsel’s application for attorneys’ fees

and reimbursement of expenses (the “Settlement

Notice’’);

(2) Approve a summary notice of the hearing on pro-

posed settlement for publication to members of the Settle-

ment Class (the “Summary Notice’’);

(3) Direct Settlement Counsel to mail or cause to be

mailed the Settlement Notice to those members of the

Settlement Class who can be identified through reasona-

ble effort. Nominees who purchased Kaypro common

stock during the Settlement Class Period will also be

requested to send the Settlement Notice to all beneficial

owners within ten (10) days after receipt of the Settle-

ment Notice or to send a list of said names and their

addresses to Settlement Counsel within ten (10) days of

receipt of the Notice;

(4) Direct Settlement Counsel to cause the Summary

Notice to be published in the national edition of The Wall

Street Journal;

(5) Find that the mailing and publication pursuant to

Paragraphs 3 and 4 constitute the best notice practicable

under the circumstances, including individual notice of

all such members of the Settlement Class who can be

identified through reasonable effort, and is due and suffi-

lll

5la

cient notice of the matters set forth in the Settlement

Notice to all such members of the Settlement Class, and

that the Settlement Notice and Summary Notice fully

satisfy the requirements of due process and of Rule 23 of

the Federal Rules of Civil Procedure;

(6) Provide that any members of the Settlement Class

who so desire may exercise the right to exclude them-

selves from the Certified Class but only if they comply

with the requirements for so doing as set forth in the

Settlement Notice;

(7) Schedule the Settlement Hearing to be held by the

Honorable Harry R. McCue, United States Magistrate or

his successor, contemporaneously with the hearing on the

Good Faith Order to determine whether the proposed

settlement should be approved as fair, reasonable and

adequate and whether an order approving the settlement

should be entered thereon, and to award counsel fees and

expenses to plaintiffs’ counsel;

(8) Provide that any objections to the proposed settle-

ment shall be heard and any papers submitted in support

of said objections shall be received and considered by the

Honorable Harry R. MeCue, United States Magistrate, or

his successor, at the Settlement Hearing (unless, in its

diseretion, the Court shall direct otherwise) only if, on or

before a date to be specified in the Notice Order, persons

making objections shall file notice of their intention to

appear and copies of any papers in support of their

position with the clerk of the Court and serve such notice

and papers on counsel to the parties to this stipulation;

and

(9) Provide that all Srttlement Class Members,

whether or not they file a proof of claim within the time

provided for, shall be barred from asserting any Settled

52a

Claims against any of the Settling Defendants, and any

such Settlement Class Members shall be conclusively

deemed to have released any and all such Settled Claims;

(10) Provide that, unless otherwise ordered by the

Court, any person that is not a Settlement Class Member

shall have no right to any portion or in the distribution of

the Settlement Fund; and

(11) Provide that the Settlement hearing may, from

time to time, and without further notice to the Settlement

Class, be continued or adjourned by Order of the Court.

G. Judgment Te Be Entered By The Court Approving

The Settlement

Upon approval by the Honorable Harry R. McCue,

United States Magistrate, or his successor, of the settle-

ment of the Class Action contemplated by this Stipula-

tion, a judgment shall be entered by the Court,

substantially in the form of Exhibit D attached hereto,

which shall:

(1) Approve the settlement embodied in this Stipula-

tion as fair, reasonable and adequate to the Settlement

Class;

(2) Dismiss the Class Action as against the Settling

Defendants, with prejudice and without costs to any party

as against any other;

(3) Adjudge, subject to Paragraph [X.I below, that the

Settling Plaintiffs shall be deemed conclusively to have

released any rights, claims or causes of action against the

Settling Defendants and the Insurers only, including.

without limitation (but excluding the Non-Settling De-

fendants), their respective predecessors and successors,

parents, subsidiaries and affiliates, and all their present

and former partners, principals, officers, directors, rein-

53a

surers, employees, agents, attorneys, assigns, representa-

tives, heirs, executors and administrators arising out of

or based upon the Settled Claims and any and all claims

against the Insurers under California Insurance Code,

Section 790.03 (h);

(4) Bar and permanently enjoin all Settling Plaintiffs

from prosecuting the Settled Claims against the Settling

Defendants and the Insurers, including, without limita-

tion (but excluding the Non-Settling Defendants), their

respective predecessors and successors, parents, subsidi-

aries and affiliates, and all of their present and former

partners, principals, officers, directors, reinsurers, em-

ployees, agents, attorneys, assigns, representatives, heirs,

executors and administrators; and

(5) Reserve jurisdiction, without affecting the finality

of the judgment entered, over: (a) implementation of this

settlement and any award or distribution of the Settle-

ment Fund, including interest earned thereon; (b) dispo-

sition of the Settlement Fund; (c) hearing and

determining applications for attorney’s fees, costs, inter-

est, expenses (including fees and costs of experts and/or

consultants) in the Class Action; and (d) enforcing and

administering this Stipulation.

H. Conditions of Settlement

(1) This Stipulation shall be effective only on the

condition that all of the following events occur:

(a) The Settling Defendants timely deliver the Settle-

ment Fund, as required by Paragraphs [X.B., and the

releases, as required by Paragraph [X.D. above;

(b) The Court enters the Good Faith Order, as re-

quired by Paragraph [X.E. above;

54a

(ec) The court enters the Notice Order, as required by

Paragraph LX.F. above;

(d) The Court enters the judgment, as required by

Paragraph LX.G. above; and

(e) The Representative Plaintiffs obtain an Order of

the Court which redefines the scope of the class as

provided in Paragraph III.B. above;

(f) The number of shares of Kaypro stock purchased

by members of the class who seek, and obtain exclusion

therefrom is below certain limits as set forth in Exhibit I

hereto, and/or the Settling Defendants decline to exer-

cise their option to withdraw from the Settlement under

such circumstances, as set forth in Exhibit J hereto; and

(g) There is an Effective Date.

(2) Upon the occurrence of all of the events referenced

in Paragraph LX.H.(1) above, each of the Settling Plain-

tiffs, subject to the provisions of Paragraph [X.I. below,

(a) agrees to dismiss the Ciass Action against the Set-

tling Defendants, (b) acknowledges full and complete

satisfaction of, and does hereby fully, finally and forever

settle, release and discharge each and all of the Settling

Defendants and Insurers (but excluding the Non-Settling

Defendants) and all of their past and present agents,

employees, officers, directors, partners, members, share-

holders, and their estates, the personal representatives of

their estates, executors, heirs, successors, and assigns,

who are or ever may become liable with respect to the

Settled Claims.

(4) Upon the occurrence of all of the events referenced

in Paragraph [X.H.(2) above, any and all interest or

rights of the Settling Defendants or the Insurers in or to

the Settlement Fund shall be absolutely and forever

extinguished.

55a

I. Effect of Disapproval, Cancellation Or Termination

(1) If the Court does not enter the judgment provided

for in Paragraph [X.G., or if the Court enters the judg-

ment and appellate review is sought and on such review

such judgment is materially modified or reversed, then

this Stipulation shal! not be cancelled and terminated if

all parties to this Stipulation who are adversely affected

thereby, within thirty (30) days from the date of the

mailing of such ruling to such parties, provide written

notice to all other parties hereto of their intent to proceed

with this Stipulation. Such notice may be provided on

behalf of each party to this Stipulation by their counsel

and, on behalf of the Settlement Class, by Settlement

Counsel. Neither a modification nor reversal on appeal of

any amount of fees, costs, expenses and interest awarded

by the Court to any of the Class Representatives, the

named plaintiffs or their counsel in the Class Action shall

be deemed a material modification of or a part of the

material terms of the judgment or this Stipulation.

(2) Excepting only an appeal filed by a Settlement

Class Member, the partial settlement shall become final

after the Judgment is entered by the District Court

approving the Settlement and the Good Faith Order is

entered extinguishing the claims of the Non-Settling

Defendants. Any appeal by the Non-Settling Defendants

from either the Good Faith Order approving the partial

settlement or the Judgment extinguishing claims of the

Non-Settling Defendants shall not affect the finality of

the Settlement between the settling parties or the pay-

ment of the fees awarded to plaintiffs’ counsel. Upon a

successful appeal by the Non-Settling Defendants, how-

ever, the Settlement as to the Plaintiff Class shall remain

binding and shall convert to a reduction in judgment

settlement. The purpose and effect of such a judgment

56a

reduction settlement is to protect the Settling Defend-

ants individually and collectively against any liability for

any amount in excess of the Settlement Amount with

respect to the Settled Claims or claims for contribution,

indemnification, or reimbursement, however denominated,

against the Settling Defendants arising under the federal

securities laws or state law, including those based in tort,

contract or statute, or any other body of law, in favor of

persons, including the Non-Settling Defendants who are

asserted to be or who may be joint tortfeasors or wrong-

doers, however denominated, with the Settling Defend-

ants in the Settled Claims and based upon or arising from

the Settled Claims, 1.e., any judgment entered against any

Non-Settling Defendant would be reduced by the amount

of the Settlement between Settling Plaintiffs and Settling

Defendants or by the amount of the Settling Defendants’

share of the damages, whichever is greater.

(3) If the Effective Date does not oceur, or if this

Stipulation is terminated or cancelled pursuant to its

terms, then, within ten (10) business days after written

notification of such event is mailed by Settlement Counsel

to the Settling Defendants, the Settlement Fund, plus

any amount then remaining in the Notice and Administra-

tion Fund, less reasonable Escrow Agent fees and ex-

penses, and any costs disbursed or chargeable to the

Notice and Administration Fund, shall be refunded to the

agent designated by the Settling Defendants.

(4) If the Effective Date does not occur, or if this

Stipulation is terminated pursuant to its terms, neither

the Settling Plaintiffs nor any of their counsel shall have

any obligation to repay any amounts disbursed from the

Notice and Administration Fund. In addition, any ex-

penses already incurred and properly chargeable to the

Notice and Administration Fund at the time of such

57a

termination or cancellation but which have not been paid

shall be paid by the Escrow Agent is accordance with the

terms of this Stipulation prior to said funds being re-

funded to the agent designated by the Settling

Defendants.

(5) If the Effective Date does not occur, or if this

Stipulation is terminated or cancelled pursuant to its

terms, the parties to this Stipulation shall be deemed to

have reverted to their respective status as of the date and

time immediately prior to the execution of this Stipula-

tion, and they shall proceed in all respects as if this

Stipulation and related orders had not been executed.

J. Escrow Agent

(1) Settlement Counsel are authorized to execute such

transactions on behalf of the Settlement Class as are

consistent with the terms of this Stipulation.

(2) All funds held by the Escrow Agent shall be

deemed and considered to be in custodia legis of the Court

until such time as such funds shall be distributed pursu-

ant to further order of the Court.

K. Administration and Caleulation of Claims, Finai

Awards and Distributions of Settlement Fund

(1) Settlement Counsel, or their authorized agents,

acting on behalf of the Settlement Class, and subject to

the supervision, direction and approval of the Court, shall

administer and caleulate the claims submitted by Settle-

ment Class Members and shall oversee distribution of

that portion of the Settlement Fund that is finally

awarded by the Court to the Settlement Class.

58a

(2) On and after the Effective Date, the Settlement

Fund shall be applied, subject to the approval and further

order(s) of the Court, as follows:

(a) To pay counsel to the named plaintiffs in the Class

Action attorneys’ fees and costs, interest and expenses,

including the fees of experts and consultants, if and to

the extent allowed by the Court. It is agreed that the

procedure for and the allowance or disallowance by the

Court of any applications by any of the counsel to the

named plaintiffs in the Class Action for attorneys’ fees,

costs, expenses and interest, including the fees of experts

and consultants, to be paid out of the Settlement Fund,

are not part of this Stipulation, and any order or proceed-

ing relating thereto shall not operate to terminate or

eancel this Stipulation or affect its finality; and

(b) To pay all unpaid costs and expenses incurred in

connection with providing notice to members of the Set-

tlement Class, locating Settlement Class Members, solic-

iting Class claims, assisting with the filing of claims, and

in administering and distributing the Settlement Fund to

the Settlement Class, and processing proofs of claim,

escrow fees and costs and the costs of processing requests

for exclusion.

(3) The balance of the Settlement Fund (the ‘“Claim-

ants’ Fund’’) shall be allocated among Settlement Class

Members who submit valid, timely proofs of claim (‘‘Au-

thorized Claimants’), in the following manner (the

amount so allocated to each Authorized Claimant consti-

tuting his or her Payable Claim):

(a) Each such Authorized Claimant will receive an

amount which bears the same ratio to the Claimants’

Fund as his or her recognized loss bears to the total of all

such Authorized Claimants’ recognized losses. Recog-

59a

nized loss for purchasers of Kaypro common stock is

defined as an amount equal to the amount paid (inclusive

of commissions) for all Kaypro stock purchased during

the Class Period less the sum of (i) the amount realized

(after commissions) from the sale of any such shares sold

on or before December 13, 1984, and (ii) the number of

any such shares held at the close of business on Decem-

ber 13, 1984, multiplied by $2.88, the closing bid price of

Kaypro common stock on December 14, 1984.

(b) Payment in the manner set forth above shall be

deemed conclusive against all Authorized Claimants. All

Authorized Claimants who fail to file valid and timely

proofs of claim shall be barred from participating in

distributions from the Claimants’ Fund (unless otherwise

ordered by the Court), but otherwise shall be bound by all

of the terms of this Stipulation, including the terms of

any judgment entered and the releases given.

(4) The Settling Defendants shall have no obligations

or liabilities or any kind whatsoever in connection with

the determination, administration, calculation or payment

of claims.

L. Miscellaneous Provision

(1) The parties hereto consent, pursuant to 28 U.S.C.

§ 636 and Rule 73 of the Federal Rules of Civil Proce-

dure, to United States Magistrate Harry R. McCue con-

ducting all proceedings and entering such orders and

judgments as are necessary or required to approve and

implement the Settlement, to consider and enter orders

concerning plaintiffs’ counsels’ application for award of

attorneys’ fees and reimbursement of expenses and to

make recommendations to the District Court regarding

the Good Faith Order.

60a

(2) At the request of Settlement Counsel, the Settling

Defendants agree to be available for interview. At the

request of Settlement Counsel, the Settling Defendants

agree to attend and testify at the trial of the Class Action

or any other actions initiated by the Settling Plaintiffs

arising out of the Settled Claims. The requesting counsel

agree to give reasonable notice of the scheduled date for

any such interview or testimony; to reimburse each such

Settling Defendant for his round-trip travel expenses

from his then location to the place of trial or interview

and his expenses of lodging, meals and local ground

travel while making such trip, awaiting such testimony or

interview and testifying; and to make such reimbursement

no later than ten (10) days after the witness has submit-

ted a statement to Settlement Counsel! for the expenses

incurred.

(3) Representative Plaintiffs, and each of them, and on

behalf cf all persons engaged by them to assist them in

the prosecution of the Class Action, including, but not

limited to, their counsel, attorneys, experts, accountants

and agents, agree, to the extent permitted by law, that

they shall not provide nor advise, counsel, assistance,

documentation, analyses or work product to any person

who requests exclusion from the Settlement Class in the

prosecution of any claims arising out of, based upon, or

otherwise related to the factual allegations or pleadings

in the Class Actions.

(4) Nothing in this Stipulation shall be construed to,

or contended to, waive or otherwise affect the right of the

Settling Plaintiffs to proceed and/or recover against the

Non-Settling Defendants in the Class Action.

(5) The parties hereto agree to cooperate to the extent

necessary to effectuate all terms and conditions of this

Stipulation.

6la

(6) All of the exhibits attached hereto are hereby

incorporated by this reference as though fully set forth

herein.

(7) This Stipulation may be amended or modified only

by a written instrument signed by all parties or their

successors-in-interest.

(8) With the exception of any agreements or under-

standings between and among the Insurers and the Set-

tling Defendants, this Stipulation and the exhibits

attached hereto constitute the entire agreement among

the parties hereto and no representations, warranties or

inducements have been made to any party concerning this

Stipulation or its exhibits other than the representations,

warranties and covenants contained and memorialized in

such documents.

(9) Settlement Counsel, on behalf of the Settlement

Class, are expressly authorized by the Class Representa-

tives to take all appropriate action required or permitted

to be taken by the Settlement Class pursuant to this

Stipulation to effectuate its terms and are also expressly

authorized to enter into any modifications or amendments

to this Stipulation on behalf of the Settlement Class

which they deem appropriate.

(10) Counsel for each Settling Defendant and counsel

for the Insurers are authorized to sign this Stipulation on

behalf of their respective clients.

(11) This Stipulation may be executed in one or more

counterparts. All executed counterparts and each of them

shall be deemed to be one and the same instrument.

Counsel for the parties to this Stipulation shall exchange

among themselves original signed counterparts and a

eomplete set of original executed counterparts shall be

filed with the Court.

62a

(12) This Stipulation shall be binding upon, and inure

to the benefit of, the successors and assigns of the parties

hereto.

(13) All terms of this Stipulation and the exhibits

hereto shall be governed by and interpreted according to

the laws of the State of California.

(14) All parties shall use best efforts to perform all

terms of this Stipulation.

(15) All parties hereto submit to the jurisdiction of the

Court for purposes of implementing the settlement em-

bodied in this Stipulation.

IN WITNESS WHEREOF, the parties hereto have

eaused this Stipulation to be executed, by their duly

authorized attorneys, as of the day and year first above

written.

MILBERG WEISS BERSHAD

SPECTHRIE & LERACH

WILLIAM 8S. LERACH

KEITH F. PARK

BLAKE M. HARPER

Dated: August 10,1987 By: /s/

KEITH F. PARK

2000 Central Savings Tower

225 Broadway

San Diego, CA 92101

Telephone: (619) 231-1058

Dated: August 10, 1987

63a

WOLF PopPPER Ross WOLF &

JONES

ROBERT A. SKIRNICK

MICHAEL P. FUCHS

PATRICIA I. AVERY

By: /s/

ROBERT SKIRNICK

845 Third Avenue

New York, New York 10022

Telephone: (212) 759-4600

Co-Lead Counsel for

Plaintiffs

ABBEY & ELLIS

ARTHUR N. ABBEY

212 East 39th Street

New York, New York 10016

SCHOENGOLD & Sporn, P.C.

SAMUEL P. SPORN

217 Broadway

New York, New York 10007

Attorneys for Plaintiff

Stefan Reznic

WoLF, HALDENSTEIN, ADLER

FREEMAN & HERZ

DANIEL W. KRASNER

FRED TAYLOR ISQUITH

270 Madison Avenue

New York, New York 10016

Attorneys for Plaintiffs

Jon and Ellen Quint

64a

LAW OFFICES OF

JOSEPH H. WEISS

JOSEPH H. WEISS

319 Fifth Avenue

New York, New York 10016

Attorneys for Plaintiffs

Paul L. and Evelyn 8.

Holmes

SACCOMANNO, CLEGG, MARTIN

& KIPPLE

ROBERT D. DANIEL

800 Allied Bank Plaza

Houston, Texas 77002

Attorneys for Plaintiff

Richard Love

IRELL & MANELLA

KENNETH R. HEITz

Dated: July 13, 1987 By: /s/

KENNETH R. HEITZ

1800 Avenue of the Stars

Los Angeles, CA 90067

Attorneys for Defendants

Kaypro Corporation,

Andrew F. Kay, David

A. Kay,

Allan M. Kay, and Mary

M. Kay

65a

LATHAM & WATKINS

PETER H. BENZIAN

Dated: July 6, 1987 By: /s/

PETER H. BENZIAN

701 B Street, Suite 2100

San Diego, CA 92101-8197

Attorneys for Defendants

Laffer, Weindling, Woolley

and Ryland

66a

APPROVED AS TO FORM:

Dated: July 6, 1987 MUSICK, PEELER & GARRETT

ROBERT J. FELDHAKE

By: /s/

ROBERT J. FELDHAKE

One Wilshire Building

Suite 2100

Los Angeles, CA 90017

O’MELVENY & MYERS

JOHN W. STAMPER

By: /s/

JOHN W. STAMPER

400 South Hope Street,

Suite 1050

Los Angeles, CA 90071

Attorneys for the Insurance

Carriers listed on Exhibit A

[Exhibits Omitted]

67a

APPENDIX E

[Not For Publication]

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT -

GEORGE FRANKLIN, On Behalf of Himself and All

Others Similarly Situated,

Plaintiffs,

Vv.

KAYPRO CORPORATION; ANDREW F. Kay; Davip Kay;

ALLAN M. Kay; Mary M. Kay; PRUDENTIAL-BACHE

SECURITIES, INC.

Defendants.

In Re: KAYPRO CORPORATION, Shareholder Litigation,

PRUDENTIAL-BACHE SECURITIES, INC.,

Defendant-Cross-claimant-A ppellant,

Vv.

KAYPRO CORPORATION; ANDREW F. Kay;

Davip A. Kay; ALLAN M. Kay,

Plaintiffs-Cross-claimants-A ppellees.

In Re: KAYPRO CORPORATION SECURITIES LITIGATION

GEORGE FRANKLIN, On Behalf of Himself and All

Others Similarly Situtated, JON QUINT; ELLEN QUINT;

STEFAN REZNIK; WILLIAM B. WEINBERGER; RICHARD

LOWE; PAUL L. HOLMES; EVELYN S. HOLMEs,

Plaintiffs-Appellees,

Vv.

KAYPRO CORPORATION; ANDREW F. Kay; Davip A.

Kay; ALLAN M. Kay; Mary M. Kay; ARTHUR B.

LAFFER; BRADFORD W. RYLAND; LUDWIG WEINDLING;

ROGER S. WOOLEY,

Defendanis-Appellants,

Vv.

PEAT MARWICK MAIN & COMPANY

Defendant-Appelilant.

68a

C.A. Nos. 88-5931, 88-5934

D.C. No. CV-84-2091-N

Order

Filed April 10, 1990

Before: FARRIS, FERGUSON and BEEZER,

Cireuit Judges

The panel has voted to deny the petitions for rehearing

and to reject the suggestion for rehearing en bance.

The full court has been advised of the suggestion for

rehearing en bane. A vote was taken of the active judges

and has failed to receive a majority of votes in favor of en

bane consideration. Fed. R. App. P. 35(b).

The petitions for rehearing are denied and the sugges-

tion for rehearing en banc is rejected.

69a

APPENDIX F

Civil No. 85-4302

IN THE UNITED STATES DISTRICT COURT

FOR THE SOUTHERN DISTRICT OF ILLINOIS

WILLIAM F. DALTON, individually and as a

representative of a bondholder class,

vs.

ALSTON & ByRD, et al.,

Defendants.

MEMORANDUM AND ORDER

Filed May 24, 1990

FOREMAN, Chief Judge:

The Court has carefully considered the motion for

approval of the settlements between the plaintiff class and

the settling defendants, namely the Gallop, Johnson de-

fendants, Hospital Management Associates, Ine. and

H.M.A., Ine. (collectively referred to as HMA), and Peter

Orr. By separate order, the Court has ruled on the

fairness of those settlements. This order addresses those

portions of the settlement agreements that seek to bar

cross-claims by the non-settling defendants and others

against the settling defendants. The Court, being fully

advised of the relevant facts and the law, finds that a

complete pretrial bar of any and all cross-claims would

further the policies of the federal courts of encouraging

settlements and avoiding a multiplicity of suits.

FINDINGS OF FACT

By separate orders, the Court has expressed its opinion

on the fairness and good faith of the settlements between

the plaintiff class and the settling defendants. The Court

finds that the discovery in this case has been completed

70a

and the time limit for all substantive motions has expired.

Having taken judicial notice of the entire record, in

particular the pleadings and affidavits filed regarding

plaintiffs’ motion for class certification and the numerous

motions for summary judgment filed by the defendants,

the Court finds that the settling defendants have paid an

amount reasonably proportionate to their liability in this

case.

CONCLUSIONS OF LAW

Assuming that a right of contribution exists for these

claims, an order barring any actions for indemnity or

contribution must also provide for the reduction of the

non-settling defendants’ liability. There are three meth-

ods of dealing with this problem: 1) not issue a bar order;

2) issue the order and deduct the entire amount of the

settlement from any jury verdict and apportion the re-

mainder among the non-settling defendants; or 3) issue

the order and declare that the amount paid by the settling

defendant represents that defendant’s proportionate

share of whatever judgment is ultimately entered in the

ease. Franklin v. Kaypro Corp., 884 F.2d 1222, 1229-1232

(9th Cir. 1989).

The first alternative should be rejected. This would

make settlements less likely and has been disapproved by

other courts. Franklin, 884 F.2d at 1229.

The second alternative, allowing the settlement amount

to operate as a set-off against the liability of the other

defendants, was adopted by the Second Circuit in Singer

v. Olympia Brewing Co., 878 F.2d 596 (2d Cir. 1989). The

court first stated that, in securities litigation based on

federal law, a uniform rule of settlement credit is appro-

priate. Jd. at 599. The rule adopted in that case is referred

to as the “one satisfaction rule” or a pro-tanto method.

Tla

“Under this rule, when a plaintiff receives a settlement

from one defendant, a nonsettling defendant is entitled to

a credit of the settlement amount against any judgment

obtained by the plaintiff against a nonsettling defendant

as long as both the settlement and the judgment re-

present commen damages.” Jd. at 600.

The third approach, adopted in Franklin, is the ap-

proach urged by the non-settling defendants. The Frank-

lin court rejected the Singer approach for two reasons.

First, the one satisfaction rule may result in additional

liability for the non-settling defendants. For example, two

defendants would each be liable for $100,000 to the

plaintiff, who has suffered $200,000 in common damages.

If one defendant settles for $80,000, the other defendant

would be liable for $120,000 to the plaintiff, or $20,000

more than if the settlement did not occur. See Franklin,

884 F.2d at 1230 n.15 (expressing this concept through

the formula (S — x) + (N +x) =T, where T equals total

liability, S equals the settling defendant’s share of the

liability, N equals the non-settling defendant’s share of

the liability, and x equals the excess). The Franklin court

rejected the idea that a hearing on the good faith of the

settlement would remove this problem, since, in order for

a court to accurately determine whether a settlement

would cause the non-settling defendant to pay more than

its fair share would involve a mini-trial on the parties’

relative culpability. Franklin, 884 F.2d at 1230.

The second reason that the Franklin court rejected the

one-satisfaction rule is that it would interfere with the

dynamics of settlement. Jd. Settlements are attractive

because they reduce the costs of litigation. This cost (i.e.

the cost of trial or completing discovery) must be dis-

counted from every settlement to determine its fairness.

Under the one-satisfaction rule, the non-settling defend-

72a

ants are required to pay the price of this discount. In the

above example, assume that the cost of trial is $10,000.

Thus, the plaintiffs, who expect to recover $200,000 after a

trial, would gladly settle for $190,000 (the amount of

recovery less cost of trial). If one defendant settles for

$80,000, and the jury returns a verdict for $200,000, the

plaintiff would receive $190,000 after the trial ($80,000

from the settlement, $120,000 from the non-settling de-

fendant, less $10,000 to go to trial). The non-settling

defendant, in effect, pays the entire cost of the trial rather

than the $5,000 it would pay if both defendants went to

trial.

The approach adopted by the Franklin court eliminates

the problem of overpayment by one of the defendants.

Under this approach (referred to as a pro-rata approach),

“Ta]t trial, the jury is asked not only to determine the

total dollar damage amount, but also the percentage of

cuipability of each of the nonsettling defendants as that

of the settling defendants. Nonsettling defendants as a

whole will then be required to pay the percentage of the

total amount for which they are responsible. The nonset-

tling defendants will be jointly and severally liable for

that percentage, and will continue to have rights of

confribution against one another.” Franklin, 884 F.2d at

1231. In the above example, the jury would be asked to

find total damages, and return a verdict for $200,000. The

jury will then be asked to apportion fault and, in this case,

will find each defendant liable for $100,000. The plaintiff

will then recover an additional $100,000, for a total of

$180,000.

The Court believes that the Singer approach is the

better approach to this problem. First, the Singer ap-

proach is much easier in application. The jury need not

determine the relative fault of all defendants, including

73a

those defendants who are no longer participating in the

trial. Under the Franklin approach an exact apportion-

ment of liability needs to occur at some point, i.e. at the

trial. Second, the Singer approach is equitable. The fair-

ness hearing ascertains whether the settlement is fair in

light of the potential liability of the defendant and in light

of the chances of recovery. Thus, the fairness hearing

prevents other defendants from paying far in excess of

their share of liability. Even under the one-satisfaction

rule, fairness hearings need not become more complicated

than they already are. Under the one-satisfaction, no such

apportionment ever needs to be made. Third, the Singer

approach provides finality to the settlement. The settling

defendants are no longer a part of the litigation, and thus

large portions of the trial may be omitted. Under the

Franklin approach, the settling defendants’ liability

needs to be determined, and thus their activities remain

part of the trial. Fourth, the Singer approach encourages

settlements, while the Franklin approach discourages

settlements. Under Singer, the uncertainties of trial are

increased, and thus parties are more likely to settle.

Under Franklin, a party is guaranteed that it will never

pay more than its share of the damages, thus decreasing

the risks of trial.

Most importantly, the entire focus of the Franklin court

is on fairness to the defendants. A court’s role in approv-

ing a class action settlement is to insure that the settle-

ment is fair to the absent class members. Grunin v.

International House of Pancakes, 513 F.2d 114, 123 (8th

Cir. 1975), cert. denied 423 U.S. 864; MCL 2d § 30.41 at

236. This does not give a court carte blanche to disregard

the rights of non-settling defenants. However, in deter-

mining the effect of a bar order, the court must weigh the

interests of both the non-settling defendants and the

plaintiffs. The defendants are not absent; they have a full

T4a

and fair opportunity to be represented by individual

counsel. The defendants have the opportunity to protect

themselves if it appears that the settlement will result in

higher liability (either by objecting to the settlement or

by entering into a settlement themselves). Furthermore,

plaintiffs are prejudiced under the Franklin approach.

This approach allows the non-settling defendants to adopt

a trial strategy of blaming the settling defendants for the

plaintiff's injury in the hope that their share of the total

liability will thus be smaller. The plaintiff would, of

course, be allowed to present evidence to refute this

strategy, but that evidence will probably not be as effec-

tive since a plaintiff will not be intimately familiar with

the settling defendant’s activities.

Another reason for adopting the Singer approach is

that it is in line with state law. See Ill. Rev. Stat. ch. 70

¢ 302; Restatement (Second) of Torts § 885(3) (1979).

Since most federal securities claims will also have pen-

dent state law claims, an approach which is compatible

with state law would be much easier to administer.

Therefore, the Court concludes that the pro-tanto or

“one satisfaction” method of reducing a non-settling de-

fendant’s liability is preferable to the pro-rata method

used in Franklin.

The Court also concludes that any bar order entered in

this case must also bar any claims for contribution or

indemnification by the settling defendants against the

non-settling defendants.

ORDER

Wherefore, it is ORDERED that:

1) All claims by the non-settling defendants against

H.M.A., Ine., Hospital Management Associates, Inc., Gal-

75a

lop, Johnson, and Peter Orr, for contribution and indem-

nification under the federal securities laws, the state

securities laws, RICO and any and all common law claims

and all other claims arising out of the offer, purchase, sale

or retention of the Jefferson County Health Facilities

Authority First Mortgage Bonds are hereby extinguished,

discharged and barred;

2) The non-settling defendants are entitled to a reduc-

tion in the amount of damages awarded against them in

an amount no more than the total of the partial settlement

amount paid by Gallop, Johnson, H.M.A., Ine., Hospital

Management Associates, Ine., and Peter Orr;

3) The settlement bar shall also bar cross-claims for

contribution and indemnification under the federal securi-

ties laws, state securities laws, RICO, and any and all

common law claims by Gallop, Johnson, H.M.A., Ince.,

Hospital Management Associates, Ine., and Peter Orr

against the non-settling defendants and all other persons,

corporations and entities; IT IS SO ORDERED.

DATED: May 24, 1990.

JAMES L. FOREMAN

Chief Judge