USCA1 Opinion
D e c e m b e r 2 4 , 1 9 9 6
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 96-1357
CITY PARTNERSHIP COMPANY, A NEW YORK GENERAL PARTNERSHIP,
ON BEHALF OF ITSELF AND ALL OTHERS
SIMILARLY SITUATED, ETC., ET AL.,
Plaintiffs, Appellees,
v.
ATLANTIC ACQUISITION LIMITED PARTNERSHIP,
A MASSACHUSETTS LIMITED PARTNERSHIP, ETC., ET AL.,
Defendants, Appellees,
____________________
THOMAS P. GORMAN, JOHN CARLSON, ANDREW N. BECKER,
BARRONIAN-IRA ROLLOVER, RICHARD AND EMILY BARRONIAN,
HAROLD E. AND WANJA M. BIRKEY, MARVIN W. AND CHARLOTTE L.
GREENUP, ESTATE OF ROBERT AND DOLORAS HANSON, JOHNNY'S SEAFOOD
COMPANY, PROFIT SHARING TRUST, GRAY LUMBER COMPANY PROFIT SHARING
TRUST, BARBARA ENGLE, JAMES P. DUFFY, H.C. HARNED, RICHARD HODSON
AND MARCELLA LEVY.
Intervenors, Appellants.
____________________
The published opinion of this Court issued on November 26,
1996, is amended as follows:
Page 3, last line: delete the underscore at "inter alia."
Page 7, second full paragraph, line 1: Delete "Atlantic's"
and insert "Intervenors'" in its place.
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
____________________
No. 96-1357
CITY PARTNERSHIP COMPANY, A NEW YORK GENERAL PARTNERSHIP,
ON BEHALF OF ITSELF AND ALL OTHERS
SIMILARLY SITUATED, ETC., ET AL.,
Plaintiffs, Appellees,
v.
ATLANTIC ACQUISITION LIMITED PARTNERSHIP,
A MASSACHUSETTS LIMITED PARTNERSHIP, ETC., ET AL.,
Defendants, Appellees,
____________________
THOMAS P. GORMAN, JOHN CARLSON, ANDREW N. BECKER,
BARRONIAN-IRA ROLLOVER, RICHARD AND EMILY BARRONIAN,
HAROLD E. AND WANJA M. BIRKEY, MARVIN W. AND CHARLOTTE L. GREENUP,
ESTATE OF ROBERT AND DOLORAS HANSON, JOHNNY'S SEAFOOD COMPANY
PROFIT SHARING TRUST, GRAY LUMBER COMPANY PROFIT SHARING TRUST,
BARBARA ENGLE, JAMES P. DUFFY, H.C. HARNED, RICHARD HODSON,
AND MARCELLA LEVY.
Intervenors, Appellants.
____________________
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Patti B. Saris, U.S. District Judge] ___________________
____________________
Before
Torruella, Chief Judge, ___________
Coffin and Campbell, Senior Circuit Judges. _____________________
____________________
Glen DeValerio, with whom Harry A. Garfield, II, Kimberly Masters ______________ _____________________ ________________
Gaines, Berman, DeValerio & Pease and Harold B. Obstfeld were on brief ______ _________________________ __________________
for plaintiff, appellees.
Deborah L. Thaxter, P.C., with whom Gregory P. Deschenes, ___________________________ _______________________
Christopher R. Goddu and Peabody & Brown were on brief for defendants, ____________________ _______________
appellees.
Robert W. Powell, with whom Carl D. Liggio, Michael S. Poulos, _________________ _______________ _________________
Robert W. Powell, Dickinson, Wright, Moon, VanDusen & Freeman, Thomas ________________ ____________________________________________ ______
G. Shapiro, Edward F. Haber, Shapiro, Grace, Haber & Urmy, Edward ___________ ________________ ______________________________ ______
Heboton, Lynda J. Grant and Goodkind, Labaton, Rudsoff & Suckarow LLP, _______ ______________ _________________________________________
were on brief for intervenors, appellants.
____________________
November 26, 1996
____________________
CAMPBELL, Senior Circuit Judge. Plaintiffs, _______________________
Intervenors Thomas Gorman, et al., ("Intervenors") appeal
from the district court's approval of a settlement of a class
action against Atlantic Acquisition Limited Partnership
("Atlantic"), the general partner in a series of limited
partnerships. The Intervenors allege that the settlement is
not fair, reasonable or adequate.
I. Procedural and Factual History I. Procedural and Factual History
Atlantic is the general partner in twenty-one
limited partnerships, each of which was established to
purchase and lease capital equipment such as aircraft, ships
and construction machinery. On August 18, 1995, Atlantic
made essentially identical tender offers ("the tender offer")
to the limited partners in each of the partnerships, offering
to purchase up to 45% of the outstanding units of limited
partnership interest for a total price of approximately $22
million. The tender offer was to be financed by an outside
lender with a loan secured in part by Atlantic's general
partners' personal guarantees and in part by a security
interest in all the units tendered.
On September 6, 1995, City Partnership Co.
("City"), a limited partner in three of the partnerships,
filed the class action suit below on behalf of all the
limited partners of the twenty-one partnerships against
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Atlantic alleging, inter alia, that Atlantic had made
material misrepresentations in the disclosure statement
accompanying the tender offer, and that it had breached its
fiduciary duty to the limited partners by not arranging for
the loan to be made to the partnerships and limited partners
directly.
Because of the limited duration of the tender offer
and the possibility that the financing would expire, the
plaintiffs obtained expedited discovery and began negotiating
with Atlantic. The Intervenors participated in the
settlement negotiations and had access to all the discovery.
Within a few weeks, the plaintiffs and Atlantic reached an
agreement and filed a Stipulation of Settlement on September
27, 1995.
The settlement agreement provided that Atlantic
would limit its tender offer to 35% of the outstanding
units,1 would furnish significant additional disclosures and
would increase the tender offer price by almost 7%, a maximum
premium over the initial offer of $1.5 million. In return,
City granted Atlantic a broad release of all claims
pertaining to the tender offer, actual and potential, direct
and derivative.
____________________
1. No more than 15% of the units of any one partnership were
actually tendered. City did not tender its units.
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On October 3, 1995, notice of the settlement was
sent out to all the class members, a group of over 31,000.
The Intervenors moved to intervene for the sole purpose of
objecting to the settlement on the ground that it contained a
release of the partnerships' claims against Atlantic for
appropriating a partnership opportunity for itself (the
"derivative claims").2 The Intervenors argue that the
release of the derivative claims was obtained in exchange for
little or no consideration.
Despite the Intervenors' objections, the district
court approved the settlement, and the Intervenors brought
this appeal, arguing that the settlement was not fair,
adequate or reasonable insofar as it approved the release of
the derivative claims.
II. Discussion II. Discussion
A district court can approve a class action
settlement only if it is fair, adequate and reasonable.
Durrett v. Housing Authority of the City of Providence, 896 _______ _____________________________________________
F.2d 600, 604 (1st Cir. 1990). When sufficient discovery has
____________________
2. According to both City and the Intervenors, the
partnership units were worth far more than the tender offer
price. Atlantic thus had the potential to profit greatly
from its offer to buy the limited partners' units, depending
on the number of units actually tendered. The Intervenors
claim that any such profit really belongs to the limited
partnerships themselves and wish to pursue the partnerships'
claims against Atlantic in a derivative suit, suing on the
partnerships' behalf.
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been provided and the parties have bargained at arms-length,
there is a presumption in favor of the settlement. See ___
United States v. Cannons Engineering Corp., 720 F. Supp. ______________ __________________________
1027, 1036 (D. Mass. 1989) (quoting City of New York v. __________________
Exxon, 697 F. Supp. 677, 692 (S.D.N.Y. 1988)), aff'd, 899 _____ _____
F.2d 79 (1st Cir. 1990).
Upon review, our role, "is not to decide whose
assertions are correct, but merely to ascertain whether the
district court clearly abused its discretion in approving the
settlement." Greenspun v. Bogan, 492 F.2d 375, 381 (1st Cir. _________ _____
1974). Great deference is given to the trial court. "It is
only when one side is so obviously correct in its assertions
of law and fact that it would be clearly unreasonable to
require it to compromise to the extent of the settlement,
that to approve the settlement would be an abuse of
discretion." Id. Despite the deferential standard of ___
review, the Intervenors argue that we should overturn the
district court's approval of the settlement because City
released claims which it did not raise in its complaint and
because City was faced with a conflict of interest.
The first argument is easily dispensed with. It is
well-settled that "in order to achieve a comprehensive
settlement that would prevent relitigation of settled
questions at the core of a class action, a court may permit
the release of a claim based on the identical factual
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predicate as that underlying the claims in the settled class
action even though the claim was not presented and might not
have been presentable in the class action." TBK Partners, _____________
Ltd. v. Western Union Corp., 675 F.2d 456, 460 (2d Cir. ____ ____________________
1982). See also Matsushita Electric Industrial Co. v. _________ ____________________________________
Epstein, __ U.S. __, 116 S. Ct. 873, 879 (1996) (discussing _______
Delaware law); Nottingham Partners v. Trans-Lux Corp., 925 ___________________ ________________
F.2d 29, 33-34 (1st Cir. 1991); Class Plaintiffs v. City of ________________ _______
Seattle, 955 F.2d 1268, 1287-88 (9th Cir. 1992), cert. _______ _____
denied, 506 U.S. 953 (1992). ______
There is some dispute as to whether or not City did
in fact bring the derivative claims in its class action suit.
But regardless of whether it did or not, the derivative
claims clearly arose from the same factual predicate as
City's claims alleging misrepresentations and omissions in
Atlantic's disclosure statements and breaches of Atlantic's
fiduciary duties to the limited partners. All of these
claims stemmed from problems with the tender offers and were
releasable by the class action settlement.
Intervenor's second argument, alleging a conflict
of interest, is potentially more troublesome. The presence
of a conflict of interest would render the settlement
suspect. As the Ninth Circuit has written, "If, however, the
settlement negotiations are biased, or skewed by a conflict
of interest, we cannot presume that the attorneys have
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reached a fair settlement." In re Pacific Enterprises ____________________________
Securities Litigation, 47 F.3d 373, 378 (9th Cir. 1995). _____________________
Other courts have recognized a potential for a
conflict of interest in situations somewhat analogous to
this. In Pacific Enterprises, for example, the Ninth Circuit ___________________
reviewed a district court's approval of a simultaneous
settlement of both a derivative class action lawsuit and a
securities class action lawsuit. The court questioned the
wisdom of allowing one party to represent both derivative and
securities class action plaintiffs. It pointed to the
corporate officer defendants' incentive in such situations to
trade a larger securities settlement for lower derivative
liability, thereby sparing themselves at the corporation's
expense.
The potential conflict problem here is not the same
as that in Pacific Enterprises. If there was a conflict, it ___________________
arose from a difference in interest between those unitholders
who would accept Atlantic's newly-sweetened offer and those
who would choose to stay on as limited partners. The purpose
of the class action was to force Atlantic to improve its
tender offer by, inter alia, raising its price. Those who
accepted the offer by selling their units benefited from the
enhanced price. Those who remained limited partners--the
tender offer being limited to 35% of all units--did not so
benefit and lost out on whatever rewards a successful
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derivative suit might have conferred upon all unitholders,
the possibility of a derivative suit having been surrendered
in the settlement.
It follows that there may be although we do not
decide, infra a conflict of interest should one party _____
like City represent both tender offer and derivative claims.3
If such a party wished to tender its partnership units, it
might have an incentive to offer to trade a lower derivative
recovery for a higher offer price because once it sold its
units it would no longer benefit from the derivative
recovery. Similarly, if such a party did not wish to tender,
it would have an incentive to trade a lower offer price for a
higher derivative recovery. However, in order for there to
be a meaningful conflict of interest in the representation of
derivative and tender offer claims, there would first have to
be derivative claims of substance. In this case, the
district court approved the settlement only after considering
arguments over whether or not the derivative claims had any
____________________
3. The question of whether this situation would present a
conflict of interest is not an easy one. If, for example,
the limited partners had tendered more than the 35% of the
units that Atlantic had agreed to buy, the owners' shares
would have been purchased on a pro rata basis. Since no
partner would then be able to sell all her shares, some
incentive to preserve the retained shares' value by pursuing
the derivative claims might well remain. Because of the
potentially ad hoc nature of the conflict determination, we
prefer not to attempt to formulate at this time hard and fast
rules requiring separate representation of tender offer and
derivative claims in a class action.
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value, and did so in circumstances where the derivative
claims were championed by an independent party, the
Intervenors.
Although City submitted an expert's affidavit
stating that the derivative claims were worthless, the
district court did not rely on City's advocacy alone in
making its decision. The Intervenors, who represented only
the derivative claims, vigorously argued that the derivative
claims had value and submitted their own expert's affidavit
as support. The court examined both affidavits before
ruling. Thus for the purposes of making this threshold
decision, the two sets of claims were each represented by a
different party. The Intervenors' participation eliminated
the risk that a conflict problem would skew the presentation
of the valuation issues and the court's holding is therefore
subject to the usual abuse of discretion standard of review
for approval of class action settlements. See Greenspun, 492 ___ _________
F.2d at 381.
We do not believe the district court abused its
discretion in approving the settlement and, by implication,
determining that the derivative claims were of little, if
any, value.4 The essence of the derivative claims was that
____________________
4. At oral argument, counsel for the Intervenors pointed out
that the district court did not explicitly find that the
derivative claims were worthless. However, the court's
approval of a settlement which, the Intervenors agree,
provided for a release of the derivative claims in exchange
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Atlantic had coopted a partnership opportunity by making the
tender offer on its own behalf instead of the partnerships'.
The value of this claim is entirely dependent on the
partnerships' ability to make the tender offer themselves,
and City's expert's affidavit explained that the partnerships
were unable to do so.
First, the partnership agreements prohibited the
partnerships from buying partnership units. Removing this
restriction would have required the approval of the owners of
a majority of the units. Such approval might not have been
forthcoming and would at least have been difficult and
expensive to obtain. Also, even if the majority ownership of
each partnership agreed, the result would have been to coerce
the dissenting minority to participate in the making of the
tender offer. By making the tender offer itself, Atlantic
avoided this possibility; only those unitholders who desired
to tender their shares participated in the tender offer in
any way.
City's expert also stated in his affidavit that the
partnerships could not have obtained the necessary outside
loans to finance the tender offer. The loan desired by each
individual partnership would be too small to attract the
____________________
for no consideration after the court's examination of
affidavits exclusively devoted to debating the derivative
claims' worth indicates that the court resolved the issue of
the claims' value against the Intervenors.
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interest of the sort of financial institution typically
involved in this type of transaction. In addition, potential
lenders would have been much less willing to participate in a
loan to the partnerships without a cross-collateralization
agreement, something prohibited by the partnership agreements
without the approval of the owners of a majority of the
units.5 Moreover, the partnerships lacked the sort of
developed credit history which Atlantic had, making the
securing of a loan more difficult, and could not have
supplied the personal guarantees made by the general
partners.
The Intervenors' expert believed the partnerships
could have obtained financing for the tender offer by forming
a joint venture or by creating a new limited partnership.
The purpose of establishing either would be to overcome the
problems of small loan size and inability to form a cross-
collateralization agreement. The expert also thought it
____________________
5. Atlantic was able to provide a security interest in the
tendered units from all of the partnerships as collateral for
the loan. If a partnership's tendered units failed to
generate sufficient income to pay off that partnership's
proportionate share of the loan, the lender could use excess
income from the other partnerships' tendered units to cover
the shortfall. However, if each partnership obtained its own
loan to make a tender offer for its own units, the lender
would be unable to seek such coverage payments from the units
of other partnerships and would thus bear a greater risk of
loss. The lender could eliminate this risk only by
persuading the partnerships to enter into a cross-
collateralization agreement specifically authorizing such
coverage payments.
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would be possible for the partnerships to interest a lender
in financing the tender offers individually, despite the
small loan size, if all the loans were arranged at once.
City's expert submitted a rebuttal affidavit in
which he explained why these schemes were not feasible. He
wrote that the administrative expenses involved in creating
a joint venture of the twenty-one limited partnerships would
be prohibitive and that creating a new limited partnership to
make the tender offers would be "completely unworkable and
uneconomical." He also reiterated that no lender would be
interested in making loans of the size required for each
partnership individually, even if all the loan requests were
processed at once.
Considering the evidence, we think the district
court was justified in holding that the partnerships could
not have made the tender offers and that the derivative
claims therefore had no value. Once this determination had
been made City's potential conflict of interest dissipated,
and its ability to represent the interests of the entire
class of limited partners ceased to be impaired in any way.
Affirmed. _________
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