William Thomas Watts v. State

TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN

NO. 03-08-00373-CV

David Allen Hall, Appellant

v.

Pedernales Electric Cooperative, Inc.; John Worrall, individually and as representative of
others similarly situated; Glenn Van Shellenbeck, individually and as representative of
others similarly situated; Linda Evans, individually and as representative of others
similarly situated; Bennie R. Fuelberg; Will Dahmann; W.W. “Bud” Burnett; E.B. Price;
O.C. Harmon; R.B. Felps; Val Smith; and Vi Cloud, Appellees

FROM THE DISTRICT COURT OF TRAVIS COUNTY, 353RD JUDICIAL DISTRICT
NO. D-1-GN-07-002234, HONORABLE JOHN K. DIETZ, JUDGE PRESIDING

OPINION

Appellant David Allen Hall appeals from a final judgment approving the settlement

agreement in a class action lawsuit filed by appellees John Worrall, Glenn Van Shellenbeck, and

Linda Evans (collectively, the “Class Representatives”), against Pedernales Electric Cooperative, Inc.

(“PEC”) and a group of current and former PEC officers and directors (the “Individual Defendants”).

Hall, a member of the class who objected to the terms of the settlement, argues on appeal that the

trial court erred in certifying the class, appointing the class counsel and class representatives, and

approving the settlement. We affirm the trial court’s judgment.
 STANDARD OF REVIEW

The Texas Supreme Court has held that “[a]pproval of a class action settlement is

within the sound discretion of the trial court and should not be reversed absent an abuse of that

discretion.” General Motors Corp. v. Bloyed, 916 S.W.2d 949, 955 (Tex. 1996). A trial court

abuses its discretion when it acts in an arbitrary or unreasonable manner, or without reference to any

guiding rules and principles. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241-42

(Tex. 1985). In reviewing a trial court’s judgment approving a class-action settlement agreement,

“the appellate court must not merely substitute its judgment for that of the trial court.” Bloyed,

916 S.W.2d at 955.

BACKGROUND

PEC is a non-profit entity, organized as a Texas electric cooperative corporation

owned by its members and subject to the Texas Electric Cooperative Corporation Act. See Tex. Util.

Code Ann. §§ 161.001-.254 (West 2007). PEC is the largest electric cooperative in the United

States, serving 24 Texas counties. Any individual who purchases electricity through metered service

with PEC is a member and owner of the cooperative.

In July 2007, the Class Representatives filed suit for declaratory and injunctive relief

against PEC and its individual officers and directors, bringing claims of negligence, gross

negligence, breach of contract, and breach of fiduciary duty. These claims were based on various

allegations of mismanagement, self-dealing, and excessive compensation. The Class Representatives

sought class certification, disgorgement of misappropriated funds, removal of PEC’s officers and

directors, damages for excessive compensation and improper expenditures, as well as multiple

2
declarations regarding alleged wrongdoing by PEC. The Class Representatives later amended their

petition to add causes of action for constructive fraud, aiding and abetting breach of fiduciary duty,

civil conspiracy, tortious interference with contract, and, in the alternative, a derivative proceeding

on behalf of PEC. See Tex. Bus. Corp. Act art. 5.14 (West 2003).

The Class Representatives asserted in their pleadings that PEC and the Individual

Defendants concealed excessive officer and director compensation and benefits by omitting this

information from federal income tax forms and posted misleading information on the PEC website.

The pleadings further alleged that the Individual Defendants breached their fiduciary duties by

purchasing Envision, a wholly owned subsidiary, without proper due diligence, failing to require

competitive bidding for software billing services provided by Envision, and funneling millions of

dollars of PEC capital to Envision without proper due diligence or justification. The Class

Representatives also accused PEC general manager Bennie R. Fuelberg of “failing to provide notice

of Board meetings, calling Board meetings at the last minute, having telephonic Board meetings (and

not disclosing the call-in number), prohibiting member-owner attendance at workshops, claiming

to have no email accounts, and having no direct PEC telephone numbers” in an attempt to conceal

material information regarding the use of PEC funds.

Finally, the Class Representatives took issue with PEC’s handling of surplus funds

representing its accumulated retained excess of revenues over expenses. These funds, which are

allocated annually to PEC members in proportion to the amount of electricity purchased by each

member, are referred to as “patronage capital” and are held in trust by PEC for the benefit of the

members. Under the Electric Cooperative Corporation Act, an electric cooperative such as PEC

3
is required to periodically return patronage capital to its members. See Tex. Util. Code

Ann. § 161.059(d). The Class Representatives alleged that at the time suit was filed, PEC had never

returned patronage capital to its members, reported how patronage capital was being used, or notified

the members of their individual patronage capital account balance, despite the fact that PEC had

reported patronage capital in amounts ranging from $1.2 million to $2.2 million between 2002 and

2006. PEC justified this decision by citing a resolution passed at a 1987 board meeting, in which

the directors resolved to refrain from returning patronage capital to the members until PEC achieved

at least a 40% asset to equity ratio. The Class Representatives urged that this 40% threshold “was

arbitrarily selected by the Individual Defendants, is virtually impossible to meet, and was never

disclosed by them to the Plaintiff Class prior to the filing of this litigation.”

While suit was pending, PEC began taking steps to remedy issues raised by the Class

Representatives. These measures included amending its bylaws to make the director-election process

more open and democratic, posting federal income tax forms on its website, and creating a

mechanism to begin returning patronage capital to the members. Fuelberg resigned as general

manager, forfeiting $600,000 in deferred compensation, and his replacement, Juan Garza, publicly

voiced his commitment to bringing transparency and open governance to PEC. Board President

W.W. “Bud” Burnett also resigned, and the “coordinator” position he had held at PEC—a position

that had been criticized by the Class Representatives for its lack of value to the cooperative and that

involved a compensation package of approximately $200,000 per year—was eliminated.

In January 2008, the trial court suspended discovery and hearings in order to facilitate

settlement negotiations. On February 8, 2008, the parties filed a Rule 11 agreement, dismissing the

4
non-voting advisory directors of PEC as defendants, as well as Barry Adair, a voting director who

was not yet on the board at the time of the alleged wrongdoing. PEC’s board of directors then voted

to delegate authority to the dismissed directors to consider and approve settlement on PEC’s behalf.

The parties ultimately reached a settlement agreement, and on April 9, 2008, written notice of the

settlement agreement was mailed to each of the approximately 220,000 PEC members, notifying

them that they were members of the settlement class, that they had a right to object to the settlement,

and that a fairness hearing would be held on April 30, 2008. Notice was also published in every

newspaper within PEC’s service area and posted on the PEC website, along with a copy of the full

settlement agreement and the Class Representatives’ live petition.

Under the terms of the settlement agreement, the settlement class released all related

claims against PEC, its past and present officers, directors and employees, and its attorneys, insurers,

and agents. PEC and the Individual Defendants also released any claims related to the suit against

any other party, including the settlement class. In exchange for this release, PEC agreed to retire

$23 million in patronage capital by bill credits to members over a period of five years, undergo and

pay for a “comprehensive and independent review of the financial and management operations of

the PEC” by Navigant Consulting, an independent consulting firm, and pay the Class

Representatives’ attorneys’ fees and other court costs, up to an amount of $4 million. The

settlement agreement also stated that the suit would proceed as a non-opt-out class action. See Tex.

R. Civ. P. 42(b)(2).

On April 30, 2008, the trial court held an evidentiary hearing on the fairness of the

settlement and certification of the settlement class. At the hearing, which was continued on May 5,

5
the trial court allowed members of the settlement class to voice their objections. The trial court also

reviewed and considered over 200 written objections that were filed by class members.1

Following the fairness hearing, the trial court signed a final judgment approving the

settlement, certifying the class, appointing class counsel and representatives, and awarding attorneys’

fees and costs to the Class Representatives in the amount of $4 million. Hall, a class member who

objected to the settlement, filed this appeal.2

DISCUSSION

Hall raises the following arguments on appeal: (1) that the settlement agreement was

not properly approved by the parties and that the approval was based on improper motivations,

(2) that notice to the settlement class was inadequate, (3) that the trial court erred in appointing class

representatives and class counsel, (4) that the trial court erred in failing to appoint interim class

counsel, (5) that the settlement agreement presented a conflict of interest between PEC and its

attorneys, (6) that the settlement agreement is unconscionable, (7) that the trial court improperly

“procrastinated” in certifying the settlement class, (8) that the trial court erred by facilitating

settlement negotiations between the parties, (9) that the trial court’s approval of the settlement was

based on a “faulty prediction of the complexity, expense, and likely duration of continued litigation,”

1
The trial court’s docket sheet reflects that 268 objections were filed by the May 2, 2008
filing deadline.
2
Two other class members also filed notices of appeal, but this Court, by order dated
November 21, 2008, dismissed one of those appellants on his own motion and the other for want of
prosecution.

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and (10) that the trial court erred in certifying the class. Because Hall failed to preserve error

regarding a number of these arguments, we must first address the issue of waiver.

Waiver of Error

An unnamed class member who objects to a settlement at a fairness hearing has

standing to appeal the trial court’s decision to disregard his objections. Devlin v. Scardelletti,

536 U.S. 1, 9 (2002); City of San Benito v. Rio Grande Valley Gas Co., 109 S.W.3d 750, 752

(Tex. 2003). However, the fact that unnamed, objecting class members may appeal their objections

to a class settlement does not suggest that such class members are exempt from the requirement that

complaints must be properly raised in the trial court in order to be preserved for appellate review.

See Tex. R. App. P. 33.1(a); see also Northrup v. Southwestern Bell Tel. Co., 72 S.W.3d 1, 13 n.20

(Tex. App.—Corpus Christi 2001, no pet.) (“It is quite possible that while an unnamed class member

may have standing to bring an appeal, he may have waived certain issues by failing to adequately

present them to the trial court.”). Furthermore, an appellant may not rely on the objections of other

class members to preserve issues not raised in his own objections, as the Supreme Court held in

Devlin that an unnamed class member “will only be allowed to appeal that aspect of the District

Court’s order that affects him—the District Court’s decision to disregard his objections.” 536 U.S.

at 9 (emphasis added); see also Citizens Ins. Co. v. Daccach, 217 S.W.3d 430, 449 (Tex. 2007)

(observing that in class action context, Texas courts may rely on “persuasive federal decisions and

authorities interpreting current federal class action requirements”). As a result, Hall’s issues on

appeal are limited to those matters raised in his written objections to the settlement agreement.

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 A generous reading of Hall’s written objections reveals that he has properly preserved

his appellate complaints that the notice to the settlement class was insufficient and that the settlement

agreement is unconscionable.3 Hall also appeared at the fairness hearing and made an oral request

for interim class counsel. While this request was made after the deadline for filing objections, we

will consider the issue to be preserved for appellate review. In addition, while Hall does not raise

a specific point of error on appeal regarding the fairness, adequacy, and reasonableness of the

settlement agreement, his brief includes an extensive discussion of this issue. Because the question

of whether the trial court erred in approving the settlement agreement turns on the fair-adequate-and-

reasonable inquiry and because PEC concedes on appeal that Hall’s objection sufficiently preserved

this matter for appellate review, we will address it as well. The remainder of Hall’s complaints on

appeal were not addressed in his objections to the trial court and are therefore waived.4 We will now

address those issues for which error was preserved.

3
Hall’s written objections, filed April 14, 2008, do not appear in the record on appeal. Upon
review of the trial court’s docket sheet, it appears that the written objections of Martin Reeves, which
were filed April 23, 2008, and bear the notation, “Prepared by: David Allen Hall,” were mistakenly
recorded on the docket as Hall’s objections, and were subsequently designated for inclusion in the
appellate record as such. PEC has included Hall’s actual objections as an appendix to its brief.
While this document does not appear in the record, we note that it is essentially identical to the
objections of Martin Reeves, which were prepared by Hall and identified as Hall’s objections on the
docket. We will therefore rely on the Reeves objections to represent the substance of Hall’s
objections.
4
While Hall makes an equitable argument that certain problems with the settlement were
not fully revealed until the fairness hearing, we note that the hearing, which began on April 30, 2008,
was continued to a second day on May 5, 2008, in order to accommodate additional objections filed
prior to the May 2 filing deadline. The issues Hall complains of on appeal—all of which were at
least preliminarily addressed during the first day of the fairness hearing—could have been raised by
written objection prior to the deadline.

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Notice to the Settlement Class

Hall raises a number of arguments regarding the notice to the settlement class,

claiming that it failed to sufficiently explain the underlying controversy or settlement terms, that it

did not afford ample time for members to file objections, that newspaper publication of the notice

was inadequate to reach all class members, and that additional discovery should have been conducted

and made available to class members prior to dissemination of the notice.

The present suit was certified as a class action under rule 42(b)(2), which applies to

class actions involving injunctive and declaratory relief. See Tex. R. Civ. P. 42(b)(2). When a

42(b)(2) action is certified, personal notice to the members is permitted but not required. Tex. R.

Civ. P. 42(c)(A) (“For any class certified under Rule 42(b)(1) or (2), the court may direct appropriate

notice to the class.”). If a settlement agreement is reached, however, “[n]otice of the material terms

of the proposed settlement . . . shall be given to all members in such manner as the court directs.”

Tex. R. Civ. P. 42(e)(1)(B). “The mechanics of the process of giving notice of a proposed settlement

are left to the discretion of the court subject to the reasonableness standards imposed by due

process.” Ball v. Farm & Home Sav. Ass’n, 747 S.W.2d 420, 424 (Tex. App.—Fort Worth 1988,

writ denied). To satisfy due process, notice should be “reasonably calculated, under all the

circumstances, to apprise interested parties of the pendency of the action and afford them an

opportunity to present their objections.” Mullane v. Central Hanover Bank & Trust Co., 339 U.S.

306, 314 (1950). “[T]here are no rigid standards governing the contents of notice, and numerous

decisions have approved very general descriptions of the proposed settlement.” Ball, 747 S.W.2d

at 425.

9
 Prior to dissemination, the notice in the present case was reviewed and approved by

both the trial court and Charles Silver, a professor who testified at the fairness hearing as an expert

in class-action litigation. The notice, which was mailed directly to all PEC members and published

in 33 local and regional newspapers, informed the members that a class action settlement had been

reached in a lawsuit involving “allegations of wrongdoing by the PEC, its directors and

management.” The notice further provided a brief summary of the material terms of the settlement,

including the plan to retire $23 million in patronage capital, an award of attorneys’ fees, expenses,

and bonuses to the class representatives not to exceed $4 million, the Navigant review, and the

release of related class action and derivative claims. The notice directed members to the PEC

website to view copies of the settlement agreement and the Class Representatives’ live petition,

provided a telephone number where members could obtain additional information, provided details

regarding the upcoming fairness hearing, and explained the procedure for filing written objections

to the settlement. Finally, the settlement contained the following notice:

YOUR RIGHTS WILL BE AFFECTED BY THESE LEGAL PROCEEDINGS. IF
THE COURT APPROVES THE PROPOSED SETTLEMENT, YOU WILL HAVE
NO FUTURE RIGHT TO CONTEST THE FAIRNESS, REASONABLENESS OR
ADEQUACY OF THE PROPOSED SETTLEMENT, OR TO PURSUE THE
RELEASED CLAIMS.

While Hall contends that the notice is inadequate because it fails to fully describe the

details of the underlying controversy or the settlement agreement, “class members need not ‘be made

cognizant of every material fact that has taken place prior to the mailing of their individual notice.’”

Peters v. Blockbuster, Inc., 65 S.W.3d 295, 308 (Tex. App.—Beaumont 2001, no pet.) (quoting

10
In re Nissan Motor Corp. Antitrust Litig., 552 F.2d 1088, 1104 (5th Cir. 1977)). Significantly, the

notice in this case provided members with a telephone number to obtain additional information, as

well as the website where both the settlement agreement and the plaintiffs’ live petition was

available. “Generally, a notice which prompts class members to investigate and which gives the

class members the information they need to obtain complete information about the settlement is

adequate.” Peters, 65 S.W.3d at 308. While Hall speculates that PEC members in rural areas may

not have adequate Internet access to review materials on the PEC website, the provision of a

telephone number to obtain additional information sufficiently resolves this concern. In light of the

notice’s summary of the settlement terms, as well as the guidance provided for those seeking

additional information, we hold that the notice in this case was adequate to inform the members of

the material provisions of the settlement agreement. See id. (finding notice adequate where class

members were informed “that they may obtain a copy of the agreement by contacting class counsel

or by visiting [the defendant’s] web-site.”).

Hall also argues that newspaper publication of the settlement was inadequate because

“in some publications” the text was “too small for many people to decipher,” and because “[a]ll but

a handful of counties within the PEC service area rely on weekly newspapers,” rather than daily

newspapers. Hall does not contend that the weekly newspapers failed to print the notice, but that

members relying on weekly newspapers had less time to file written objections before the fairness

hearing. However, the notice was not only published in 33 local and regional newspapers but also

directly mailed to each PEC member and published on the PEC website. As a result, any

inadequacies in the newspaper publication were sufficiently cured by more direct forms of notice.

11
See Mullane, 339 U.S. at 318 (“Where the names and post-office addresses of those affected by a

proceeding are at hand, the reasons disappear for resort to means less likely than the mails to apprise

them of its pendency.”).

Hall also argues that the notice, which was mailed to members on April 8, 2008, did

not allow for sufficient time to file objections before the April 28, 2008 deadline. The April 28

deadline was actually extended to May 2, 2008, when the trial court continued the hearing to a

second day in order to accommodate additional objections.5 There is no minimum time frame that

must be allowed for the filing of objections, but the notice must “afford a reasonable time for those

interested to make their appearance.” Ball, 747 S.W.2d at 424. We conclude that the trial court was

not unreasonable in allowing a total of 24 days between issuance of the notice and the deadline for

filing objections. See U.S. v. Alabama, 271 Fed. Appx. 896, 901 (11th Cir. 2008) (not designated

for publication) (holding that “the district court did not abuse its discretion in providing for two

weeks’ notice before objections were due”); see also Marshall v. Holiday Magic, Inc., 550 F.2d

1173, 1178 (9th Cir. 1977) (holding that 26 days between mailing of notice and deadline for opting

out of class was “more than adequate”).

Finally, Hall argues that additional discovery should have been conducted prior to the

mailing of the notice and that sealed discovery should have been made available to the class

members. This argument, though couched among Hall’s complaints regarding the form and

5
The notice actually stated that objections filed by April 28 would be considered at the
April 30 fairness hearing, and that objections filed between April 28 and May 2 would be considered
and ruled on by the trial court after the hearing. Because the hearing was completed on May 5, all
objections filed by May 2 had been reviewed and considered by the court at that time.

12
substance of the notice, appears to be an attack on the trial court’s decision to approve the settlement,

rather than on a perceived deficiency in the notice. In light of our determination that the trial court

did not abuse its discretion in approving the settlement, see discussion infra, we overrule this issue

as well.

Interim Class Counsel

Hall argues that the trial court erred by not appointing interim class counsel as

authorized by Texas Rule of Civil Procedure 42(g)(2)(A), which provides that a trial court “may

designate interim counsel to act on behalf of the putative class before determining whether to certify

the action as a class action.” Tex. R. Civ. P. 42(g)(2)(A). By the plain language of the rule, the

appointment of interim counsel is discretionary, rather than mandatory. Furthermore, the trial court

did appoint interim counsel in this case, in an April 2, 2008 order provisionally approving the

settlement and provisionally appointing as class counsel and class representatives those individuals

who were later confirmed in the final order. Hall argues that the trial court should have appointed

additional interim counsel, other than the attorneys representing the Class Representatives, to review

the settlement agreement. Hall provides no authority to support this argument, but contends that

the class members were entitled to “objective legal interpretation” of the complex issues involved

in the litigation.

Because Texas Rule of Civil Procedure 42, governing class actions, was patterned

after the federal equivalent, Federal Rule of Civil Procedure 23, Texas courts “rely on our precedents

and persuasive federal decisions and authorities interpreting current federal class action

requirements.” Daccach, 217 S.W.3d at 449. The advisory committee note on federal rule 23

13
elaborates on the appointment of interim class counsel when necessary to conduct discovery or

otherwise prepare for certification, stating, “Ordinarily, such work is handled by the lawyer who filed

the action. In some cases, however, there may be rivalry or uncertainty that makes formal

designation of interim counsel appropriate.” Fed. R. Civ. P. 23 advisory committee’s note.6 This

language suggests that the purpose of the rule authorizing interim class counsel is to clarify which

of a group of competing attorneys may act on behalf of the putative class prior to certification. The

rule does not appear to contemplate, as Hall contends, that a trial court abuses its discretion in failing

to seek out and appoint additional interim counsel for the purpose of reviewing a settlement

agreement negotiated by the named plaintiffs’ counsel. As a result, we overrule this issue on appeal.

Unconscionability

Hall argues that the settlement agreement is void as an unconscionable contract.

Several of Hall’s points on this issue—that the unnamed class members did not assist in drafting the

agreement, that settlement negotiations took place in an “opaque atmosphere” because members

were not aware of its terms until they received notice of the upcoming fairness hearing, and that the

unnamed class members had no bargaining power with which to negotiate the settlement terms—can

be summarized as a general public policy argument against class action settlements.

6
“Although not binding, the interpretations in the Advisory Committee Notes ‘are nearly
universally accorded great weight in interpreting federal rules.’” Horenkamp v. Van Winkle & Co.,
402 F.3d 1129, 1132 (11th Cir. 2005) (quoting Vergis v. Grand Victoria Casino & Resort,
199 F.R.D. 216, 218 (S.D. Ohio 2000)).

14
 The procedural rules governing class actions include mechanisms for protecting

unnamed class members when a settlement is reached. See Bloyed, 916 S.W.2d at 953 (“One of the

foremost objectives of Rule 42 is to protect the interests of absent class members.”). Rule 42

provides every class member the right to object to a proposed settlement, Tex. R. Civ. P. 42(e)(4),

and requires the trial court to find that the agreement is fair, reasonable, and adequate before

approving it, Tex. R. Civ. P. 42(e)(C). In determining whether to approve a settlement agreement,

the trial court must consider, among other factors, “the respective opinions of the participants,

including . . . the absent class members.” Bloyed, 916 S.W.2d at 955. Furthermore, we are bound

to enforce rule 42, which authorizes the settlement of class action litigation by the class

representatives. See Tex. R. Civ. P. 42(e); Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620

(1997) (“[C]ourts must be mindful that the [class action] rule as now composed sets the requirements

they are bound to enforce.”). We further note the impracticality of allowing approximately 220,000

class members to participate in settlement negotiations and that one of the purposes of the class

action mechanism is to alleviate the logistical problems of having an unwieldy number of potential

plaintiffs. See Tex. R. Civ. P. 42(a) (providing that class action suit may not be filed unless “the

class is so numerous that joinder of all members is impracticable”); Jenkins v. Raymark Indus., Inc.,

782 F.2d 468, 471 (5th Cir. 1986) (“The purpose of class actions is to conserve ‘the resources of both

the courts and the parties by permitting an issue potentially affecting every [class member] to be

litigated in an economical fashion.’”) (quoting General Tel. Co. of Southwest v. Falcon, 457 U.S.

147, 155 (1982)). Therefore, in light of the rules authorizing class action settlements and the

15
procedural protections in place for unnamed class members, we overrule Hall’s policy arguments

regarding the settlement negotiations.

Hall further argues that the settlement agreement in this case is an unconscionable

contract because its terms are oppressive and unreasonable. Specifically, he contends that the

agreement’s release of liability constitutes a “windfall of immunities” for PEC and the Individual

Defendants, while the benefits to the class members in the form of patronage capital credits are

“illusory” because “the membership owns the credits.” The terms of the settlement agreement do

not, as Hall claims, provide “global releases for all claims, not just those related to the instant case.”

Rather, the agreement extends the release of liability to claims “based upon, relating to, arising out

of, connected to, or subsumed within allegations that have been asserted” in the underlying suit.

Such a release is hardly uncommon in the class action settlement context. See, e.g., Wal-Mart

Stores, Inc. v. Visa U.S.A. Inc., 396 F.3d 96, 106 (2d Cir. 2005) (observing that “[b]road class action

settlements are common, since defendants and their cohorts would otherwise face nearly limitless

liability from related lawsuits”); Berardinelli v. General Am. Life Ins. Co., 357 F.3d 800, 805 (8th

Cir. 2004) (“There is no impropriety in including in a settlement a description of claims that is

somewhat broader than those that have been specifically pleaded. In fact, most settling defendants

insist on this.”). Furthermore, while the patronage capital credits are in fact held by PEC in trust for

the individual members, the utilities code merely requires PEC to return patronage capital to its

members “periodically” and in a “manner determined by the board.” Tex. Util. Code Ann.

§ 161.059(d). Under the terms of the settlement agreement, the members benefit from a guaranteed

retirement of $23 million in patronage capital in the form of bill credits. While Hall points out that

16
the board of directors voted in November 2007 to begin disbursing bill credits, general manager Juan

Garza testified at the fairness hearing that the positive changes in PEC policies and procedures,

including the decision to retire patronage capital, were a direct result of the ongoing litigation. As

a result, we disagree with Hall’s characterization of the patronage capital bill credits as “illusory.”

Hall cites several other settlement terms that he considers oppressive and

unreasonable, including the provision holding PEC, rather than the Individual Defendants, liable for

the $4 million attorneys’ fees and costs award, the lack of opt-out rights for class members, the

Navigant review of PEC operations, and the provisions preserving the benefits of unspecified oral

agreements between PEC and its individual officers and directors, oral trusts benefitting individual

employees, and future retirement benefits for Burnett, the former president of the board. Beyond

basic statements regarding contract unconscionability, Hall has not provided us with any authorities

supporting his arguments that these particular provisions are oppressive and unreasonable. Each of

these provisions was addressed at the fairness hearing, and we do not find them to be so oppressive

or unreasonable as to render the agreement unconscionable.

Hall’s argument regarding the payment of the attorneys’ fees and costs award is that

PEC’s insurer should shoulder “all defense and settlement costs, less a $125,000 deductible,” and

that the Individual Defendants should be held personally liable for some portion of the costs. At the

fairness hearing, evidence was presented that PEC’s insurer had agreed to cover $2.4 million of the

attorneys’ fees and costs award, and that the remaining $1.6 million would come solely from PEC

funds. Professor Silver, who testified as an expert in class actions and insurance law, stated, “I think

the class is lucky to be getting 2.4 million of [the attorneys’ fee and cost award] from the insurance

17
company. . . . I was looking through the complaint and the settlement and thinking about whether

the insurance companies were obligated to pay any part of these losses, and really, I’ve had trouble

finding anything that they would have to pay.” Further, PEC’s insurer issued a reservation of rights

to contest coverage for the claims raised in the Class Representatives’ petition, citing potentially

applicable exclusions in PEC’s insurance policy for, among other things, losses in connection with

claims arising from improper gain or profit, fraud, or breach of contract.

The possibility for recovery from the Individual Defendants was similarly

problematic. Garza testified at the fairness hearing that officers and directors of PEC are subject to

an indemnification resolution that was passed by the board in 1987. This resolution, which was

entered into evidence, states that PEC will “indemnify and hold harmless, individually, all officers

and directors of the Cooperative, General Manager Fuelberg and General Counsel Moursund against

any legal action that might be brought against any of them in relation to their services to” PEC. See

Tex. Util. Code Ann. § 161.078 (authorizing electric cooperatives to “indemnify and provide

indemnity insurance in the same manner and to the same extent as a nonprofit corporation”).

Professor Silver testified that “it is very uncommon to get contributions from individual officers and

directors of defendant corporations” in class action litigation, and that even if the Individual

Defendants were held personally liable in this case, PEC would likely be required to reimburse them

under the indemnification agreement. In light of this evidence, the payment provisions of the

settlement agreement do not appear to be so oppressive and unreasonable as to render the agreement

unconscionable.

Hall’s argument regarding opt-out rights, in its entirety, is that “PEC members lose

the right to pursue individual litigation. Paragraph 1.15 quashes all members’ rights to opt-out of

18
the settlement.” Rule 42(b)(2) specifically allows for a class action with no opt-out rights for class

members where, as here, the class seeks declaratory and injunctive relief. Hall has not demonstrated

that this provision renders the settlement agreement unconscionable.

Hall also voices concern that the Navigant review is not “labeled as an audit.” This

matter was addressed by Garza’s testimony at the fairness hearing, in which he stated, “[B]ecause

Navigant is not an auditing firm, we refer to it as an investigation, but essentially it is a very detailed

look at all the financial transactions that have occurred for the prior ten years, and then a look at our

management practices going forward.” The use of an “investigation” rather than an “audit” does not

appear to be an unreasonable and oppressive contract provision, and Hall has provided us with no

authority to the contrary.

Regarding Hall’s complaints of unspecified oral agreements or trusts, the agreement

merely states that it does not waive or release claims for rights or benefits to which PEC officers,

directors, or employees would otherwise be entitled under other agreements, including “any oral or

written agreement with PEC” and that any trusts set up by PEC employees are included in the group

of entities released from liability. The agreement goes on to state that the provision regarding oral

agreements “shall not create such rights or benefits, nor shall it revive rights or benefits that have

been waived or released separately and independently” of the settlement agreement. Garza testified

at the fairness hearing that he was not aware that any unspecified oral agreements or trusts existed,

and no evidence to the contrary appears in the record. As a result, these provisions do not serve to

render the settlement agreement unconscionable.7

7
The provision protecting separate agreements with employees is also the basis for Hall’s
complaint regarding Burnett’s retirement benefits. This complaint relies solely on facts outside the
record and cannot be considered.

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 Because Hall has not demonstrated that the settlement agreement is an

unconscionable contract, we overrule this issue on appeal.

Was the Settlement Agreement Fair, Adequate, and Reasonable?

The Texas Supreme Court has provided six factors that a trial court must take into

account when determining whether a proposed class settlement is fair, adequate, and reasonable.

Bloyed, 916 S.W.2d at 955. These factors are: (1) whether the settlement was a product of fraud or

collusion, (2) the complexity, expense, and likely duration of the litigation, (3) the stage of the

proceedings and amount of discovery completed, (4) the factual and legal obstacles to the plaintiffs’

success on the merits, (5) the possible range of recovery and certainty of damages, and (6) the

respective opinions of the participants, including class counsel, class representatives, and absent

class members. Id.; see also Parker v. Anderson, 667 F.2d 1204, 1209 (5th Cir. 1982).

Appellate review of the trial court’s approval of a class settlement is limited, due to

“the strong judicial policy favoring the resolution of disputes through settlement.” Parker, 667 F.2d

at 1209; see also Piambino v. Bailey, 610 F.2d 1306, 1328 (5th Cir. 1980) (settlements favored

because “they produce an amicable resolution of disputes and minimize demands on judicial time

and resources”). On appeal, “an approved settlement will not be upset unless the court clearly

abused its discretion.” Id. In reviewing whether the trial court’s approval of the settlement

agreement was a clear abuse of discretion, we will address each of the six factors described in

Bloyed. 916 S.W.2d at 955.

1. Fraud or Collusion

In the final judgment approving the settlement, the trial court made the following

finding:

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 [T]he Court finds that there is no evidence of fraud, collusion, or willful misconduct
in respect to the determination to settle, rather, the Court finds that the Settlement
was the result of arm’s length negotiations, after extensive discovery and briefing on
the merits, and based on intelligent evaluation of the lawsuit by the parties and their
counsel.

Hall’s assertions that the agreement was the product of fraud or collusion are based primarily on his

dissatisfaction with the settlement terms and the fact that the absent class members were not

involved in the negotiation process. The mere fact that a proposed settlement agreement was reached

without the input of absent class members does not render the agreement the product of fraud or

collusion. As previously discussed, the trial court allowed absent class members to file objections,

and reviewed and considered all objections before approving the settlement agreement. See Tex. R.

Civ. P. 42(e)(4) (providing absent class members right to object to proposed settlement).

To the extent that Hall accuses the trial court itself of fraud or collusion with the

parties, there is no evidence to support these allegations. The trial court’s involvement in class

settlement negotiations was not improper because, “[w]hile the trial court generally plays a relatively

detached role in most civil proceedings, in a class action the court is the guardian of the class

interest.” Bloyed, 916 S.W.2d at 954. As the guardian of this interest, the court has an “inherent

power to manage the class action,” In re Corrugated Container Antitrust Litig., 643 F.2d 195, 225

(5th Cir. 1981), and is required “to police the proceeding to minimize conflicts of interest and,

primarily, to protect absent class members,” Bloyed, 916 S.W.2d at 954.

In light of the trial court’s express finding that the settlement agreement was not the

product of fraud or collusion and the lack of evidence to the contrary, we hold that this factor weighs

in favor of approval of the settlement agreement.

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 2. Complexity, Expense, and Likely Duration of the Litigation

In its order approving the settlement agreement, the trial court stated, “Had the case

not settled, it is likely that the litigation, and any certain appeal, would continue for years; the parties

would incur immense attorneys’ fees and cause continued disruption to all.” Hall, however, argues

that “little of the relief sought [by the class] remains unrealized,” and therefore the future complexity,

expense, and likely duration of the litigation is minimal.8 In describing the relief sought by the class,

Hall focuses solely on the positive governance changes made by PEC during the pendency of the

litigation and ignores the other benefits accruing to the class members as a result of the settlement

agreement, including the $23 million patronage capital retirement and submission to the Navigant

review of PEC’s business and financial records. The achievement of positive governance changes,

while a benefit to the class, does not reduce the complexity, expense, or likely duration of future

litigation related to the remaining forms of relief sought by the class.

Furthermore, the trial court emphasized at the fairness hearing that future litigation

would be particularly disruptive in this case, stating:

When people get up in the morning, they walk over to the wall, they flip their switch
and the lights come on, and that’s the way it should be. That’s the reason we call it
“a utility.” It is essential to the schools, to the businesses, to the people who live
within that service area, and we need not interfere with that in the least. And so one
of my goals in supervising this litigation was to try to minimize the disruption that
occurred to that essential primary business, which was the continuing providing of
power to that service area.

8
Hall also claims that PEC’s insurer, rather than PEC, will be responsible for the expenses
of continued litigation. This assertion is inaccurate. Having fully discussed the issue of PEC’s
insurance coverage, we need not address it further.

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 Under the circumstances, it was not unreasonable for the trial court to conclude that

the complexity, expense, and likely duration of continued litigation weighed in favor of approving

the settlement.

3. Stage of the Proceedings and Amount of Discovery Completed

“A trial court correctly analyzes this factor by determining whether sufficient

discovery has been conducted to allow the parties to make an informed decision about the

relative merits of the case and the settlement.” Johnson v. Scott, 113 S.W.3d 366, 372

(Tex. App.—Beaumont 2003, pet. dism’d). The trial court should also consider “whether counsel

had an adequate appreciation of the merits of the case before negotiating.” In re General Motors

Corp. Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 813 (3d Cir. 1995). In its order

approving the settlement, the trial court found that at the time settlement negotiations began,

“[t]hirteen depositions had been taken and almost 25,000 pages of documents had been exchanged.

Pending before the Court were six Motions for Summary Judgment and one Motion to Dismiss.”

Hall argues that the class members cannot “assess their position in a settlement

negotiation” until the Navigant review is completed, or until any potential legislative or criminal

investigations are completed. However, the record reflects that a substantial amount of discovery

had been conducted at the time the settlement agreement was approved, including depositions of key

individuals and the production of almost 25,000 pages of documents. Under these circumstances,

we cannot conclude that the trial court erred in finding that sufficient discovery had been conducted

to allow the parties to make an informed decision about the relative merits of the case and the

settlement. See D’Amato v. Deutsche Bank, 236 F.3d 78, 87 (2d Cir. 2001) (holding that “stage of

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proceedings” factor weighed in favor of settlement approval where “the parties had engaged in an

extensive exchange of documents and other information”).

4. Factual and Legal Obstacles to the Plaintiffs Prevailing on the Merits

“In deciding whether a clear abuse of discretion has occurred, . . . absent fraud or

collusion, the most important factor is the probability of the plaintiffs’ success on the merits.”

Parker, 667 F.2d at 1209. A number of potential obstacles were discussed in the fairness hearing,

including the issue of whether a derivative claim could be brought against an entity governed by the

Electric Cooperative Corporations Act, the question of whether the PEC board of directors could be

removed under the Texas Nonprofit Corporations Act, and the issue of class action certification,

which the trial court stated was “problematic” because “there has not been a class action approved

by the Texas Supreme Court since 2000, that I know of.” The trial court also stated at the hearing

that the plaintiffs’ case relied heavily on “novel theories.”

In addition, several potentially dispositive motions were pending before the court at

the time of the fairness hearing, including the defendants’ motion for summary judgment based on

the statute of limitations, the Individual Defendants’ motion for summary judgment based on a lack

of duty to the plaintiffs, the defendants’ partial motion for summary judgment on standing, the

defendants’ motion for partial summary judgment based on a lack of contractual damages to

plaintiffs, the defendants’ motion for partial summary judgment on the breach of contract claim

relating to patronage capital, and the defendants’ motion to dismiss for failure to comply with the

trial court’s order on special exceptions. In its order approving the settlement, the trial court found

that its rulings on these motions could potentially change “the legal landscape of the case.”

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 In reference to this factor, Hall argues that the “[p]laintiffs have already realized

nearly every requested remedy.” Like many of Hall’s previous arguments, this statement ignores the

fact that a significant portion of the benefits to the class were realized only as a result of the

settlement agreement. In addition, the fact that the class has received numerous benefits as a result

of this litigation, derived either from the settlement agreement or from PEC’s positive internal

changes prior to settlement, does not necessarily have bearing on the probability of the plaintiffs’

success on the merits, as these changes may have been prompted, at least in part, by the extensive

media attention and attendant public outcry regarding this case. Given the factual and legal obstacles

to the plaintiffs’ success on the merits, the trial court did not abuse its discretion in finding that this

factor weighed in favor of approving the settlement.

5. Range of Recovery and Certainty of Damages

The trial court and the parties emphasized during the fairness hearing that any

recovery of monetary damages would likely be paid by PEC—and by extension, its members—rather

than the Individual Defendants or PEC’s insurer. Garza addressed this issue in his testimony, stating,

“There is no magical source of money here. The money comes from our members. . . . [T]hat’s been

my frustration with this lawsuit, that the only source of funds is our membership.”

Furthermore, the plaintiffs’ chances of obtaining relief at trial are uncertain in light

of the previously discussed obstacles to the plaintiffs’ success on the merits. Given this uncertainty

and the fact that most, if not all, monetary damages would come from the members themselves, we

hold that the trial court was not unreasonable in finding that this factor supported approval of the

25
settlement agreement. See Johnson, 113 S.W.3d at 374 (where certainty of damages is elusive, this

factor could reasonably support approval of settlement).

6. Opinions of the Participants

The class counsel, the class representatives, and the defendants each expressly stated

their approval of the settlement agreement in this case. Of approximately 220,000 absent class

members, 268 objections were filed. The trial court stated on the record that it reviewed and

considered each of these objections. Further, the trial court addressed the objections at the fairness

hearing, explaining to the class members in attendance why issues commonly raised by the

objections could not feasibly be incorporated into the final settlement agreement. While the trial

court was required to consider the opinions of absent class members, the mere existence of

objections is not sufficient to render the agreement unfair, inadequate, or unreasonable. “[I]nherent

in compromise is a yielding of absolutes and an abandoning of highest hopes.” Cotton v. Hinton,

559 F.2d 1326, 1330 (5th Cir. 1977) (quoting Milstein v. Werner, 57 F.R.D. 515, 524-25

(S.D.N.Y.1972)). Given the trial court’s careful consideration of the members’ objections, as

evidenced by the lengthy discussion of these concerns during the fairness hearing, we hold that the

trial court sufficiently considered the opinions of the participants, including class counsel, class

representatives, and absent class members, before approving the settlement agreement.

Based on our review of the six factors set forth in Bloyed, we hold that the trial court

did not commit a clear abuse of discretion in approving the settlement agreement as fair, adequate,

and reasonable.

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 CONCLUSION

Because we overrule each issue that was properly preserved on appeal, we affirm

the trial court’s judgment in its entirety.

__________________________________________

Diane M. Henson, Justice

Before Justices Patterson, Waldrop and Henson

Affirmed

Filed: March 5, 2009

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