Eichenholtz v. Brennan

Opinions of the United
1995 Decisions States Court of Appeals
for the Third Circuit

3-27-1995

Eichenholtz v Brennan
Precedential or Non-Precedential:

Docket 94-5253

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 94-5253

PAULETTE EICHENHOLTZ, Individually and on behalf of all others
similarly situated and Derivatively on behalf of INTERNATIONAL
BREEDERS, INC., and DAVID W. CRAIG, (Intervenor in D.C.)

v.

ROBERT E. BRENNAN; FIRST JERSEY SECURITIES, INC.; INTERNATIONAL
THOROUGHBRED BREEDERS, INC.; GARDEN STATE RACETRACK, INC.; ROONEY
PACE, INC.; FIRST PHILADELPHIA CORPORATION; KERRY B. FITZPATRICK;
JOHN W. ALLEN; JOSEPH C. DANIEL, JR.; JACK PRICE; ROBERT J.
QUIGLEY; NORMAN ROTHSTEIN; JOHN J. DEGNAN; RICHARD J. HUGHES;
RONALD J. RICCIO; JOSEPH K. FISHER; and HERBERT BARNESS

(Newark New Jersey District Court Docket No. 88-cv-00515)

LARRY SALBERG, Individually and on behalf of all others similarly
situated and DAVID W. CRAIG, (Intervenor in D.C.)

v.

ROBERT E. BRENNAN; FIRST JERSEY SECURITIES, INC.; INTERNATIONAL
THOROUGHBRED BREEDERS, INC.; ROONEY PACE, INC.; KERRY B.
FITZPATRICK; ROBERT J. QUIGLEY; JOHN J. DEGNAN; RICHARD J.
HUGHES; RONALD J. RICCIO; and JOSEPH K. FISHER

(Newark New Jersey District Court Docket No. 88-cv-00773)

FIRST JERSEY SECURITIES, INC.;
ROONEY PACE, INC.; and FIRST
PHILADELPHIA CORPORATION,
Appellants.

Appeal from the United States District Court
for the District of New Jersey
 D.C. Civil Action Nos. 88-cv-00515 & 88-cv-00773

Argued December 1, 1994

Before: HUTCHINSON, NYGAARD and SEITZ, Circuit Judges.

Filed: March 27, 1995

Paul J. Linker, Esquire (Argued)
Donna M. Hughes, Esquire
Robinson, St. John & Wayne
Two Penn Plaza East
Newark, New Jersey 07104

Attorneys for Appellants

Paul D. Wexler, Esquire (Argued)
Raymond A. Bragar, Esquire
Bragar & Wexler, P.C.
900 Third Avenue
New York, New York 10022

Glenn F. Ostrager, Esquire
Ostrager, Chong & Flaherty, P.C.
300 Park Avenue
New York, New York 10022
(Attorneys for Plaintiffs)

Frederick B. Lacey, Esquire (Argued)
Jay G. Safer, Esquire
LeBoeuf, Lamb, Greene & MacRae
One Riverfront Plaza
Newark, New Jersey 07102
(Attorneys for Individual Settling Defendants)

Leonard Barrack, Esquire
Sheldon L. Albert, Esquire
Jeffrey W. Golan, Esquire (Argued)
Barrack, Rodos & Bacine
3300 Two Commerce Square
2001 Market Street
Philadelphia, Pennsylvania 19103
(Attorneys for International Thoroughbred Breeders, Inc.)

Attorneys for Appellees

OPINION OF THE COURT
SEITZ, Circuit Judge.

This is an appeal from an order of the district court

made final pursuant to Rule 54(b) of the Federal Rules of Civil

Procedure. In its order, the court approved a settlement with

some but not all defendants in a securities action. The non-

settling defendants appeal, arguing that the partial settlement

was unfair and prejudicial to them. The district court had

jurisdiction pursuant to 28 U.S.C. § 1331, and we have

jurisdiction under 28 U.S.C. § 1291. We review the district

court's order for an abuse of discretion. Walsh v. Great Atl. &

Pac. Tea Co., Inc., 726 F.2d 956, 965 (3d Cir. 1983).
I. FACTS

International Thoroughbred Breeders ("ITB") is a Delaware

corporation in the business of buying, selling, and leasing

interests in thoroughbred horses for breeding. In 1977, Garden

State Racetrack ("Garden State") burned down. In 1983, ITB

proposed a plan to purchase the Garden State grounds, construct a

new facility, and operate a thoroughbred and harness racing

facility. ITB raised money for this undertaking through the sale

of securities. At issue here are four public offerings of

securities by ITB.

Plaintiffs Paulette Eichenholtz ("Eichenholtz") and Larry

Salberg ("Salberg") sued on behalf of the class of purchasers of

ITB securities who were allegedly without knowledge of non-public

omissions and material misstatements in ITB's offerings of July
26, 1983; April 16, 1984; July 25, 1985; and May 14, 1986.1 See
generally JA at 485-520 (Plaintiffs' and Intervenor Plaintiffs'

Responses to Defendants' First Set of Contention

Interrogatories). In addition, plaintiffs sued derivatively on

behalf of ITB.

Named as defendants were First Jersey Securities, Inc.

("First Jersey"), Rooney Pace, Inc., and First Philadelphia

Corporation ("First Philadelphia"), all registered broker-

dealers; ITB, the company that issued the allegedly objectionable

securities; Kerry B. Fitzpatrick, Robert J. Quigley, John J.

Degnan, Richard J. Hughes, Ronald J. Riccio, Joseph K. Fisher,

Herbert Barness, John W. Allen, Joseph C. Daniel, Jack Price, and

Norman Rothstein, all past or present members of ITB's Board of

Directors; and Robert J. Brennan (collectively, "the individual

settling defendants"), the controlling shareholder of both First

Jersey and ITB and Chairman of the ITB Board of Directors.2

1 The Eichenholtz suit was initially filed in August 1986
in the United States District Court for the Southern District of
New York. The Salberg complaint was filed in the District of New
Jersey in July 1987. In February 1988, the Eichenholtz complaint
was transferred to the District of New Jersey, and it was
consolidated with the Salberg complaint. Thereafter, the parties
filed an amended complaint. See Joint Appendix at 106-63 ("JA").
Eichenholtz claims to represent the subclass of those who
purchased ITB securities in the 1983, 1984, and 1985 offerings,
and Salberg claims to represent those who purchased ITB
securities in the 1986 offerings.
2
Garden State Racetrack ("Garden State"), an ITB
subsidiary, was named as a defendant in the Eichenholtz
Complaint, but not in the consolidated and amended complaint.
Garden State remains in the caption in the current appeal, but is
not a party.
 The essence of the complaint is that the four public

offerings were elaborate schemes to generate underwriting fees

and to sell ITB securities at an inflated value. Plaintiffs

alleged violations of section 10(b) of the Securities and

Exchange Act of 1934, 15 U.S.C. § 78j(b); Rule 10b-5, 17 C.F.R.

§ 240.10b-5; sections 11, 12(2), and 17(a) of the Securities Act

of 1933, 15 U.S.C. §§ 77k,77l(2), 77q(a); and of the Racketeer
Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C.

§§ 1961-1968.

In September 1988, the defendants moved to dismiss the

complaint. The district court dismissed part of the complaint,

and it left the rest of the complaint substantially intact. See

JA at 164.3 Thereafter, the district court certified the

plaintiffs' proposed class pursuant to Federal Rule of Civil

Procedure 23, and the class was divided into four subdivisions.

See id. at 208-21. Following the court's ruling, the parties

began conducting discovery.

Prior to the conclusion of discovery, the parties began

discussions at the suggestion of the district court in an effort

to facilitate settlement. Settlement conferences were held

before a magistrate judge. Following the conferences, the judge

ordered the plaintiffs to submit any motions for voluntary

3
The court dismissed all federal securities claims arising
out of the 1983 offering, the section 10(b) claim arising from
the 1986 offering, the RICO claim arising from the 1986 offering,
the factual allegations that the 1984 and 1985 prospectuses
failed to disclose that there was no reasonable basis to conclude
that Garden State could be operated profitably, and all claims
arising under section 17(a) of the 1933 Act. See JA at 164.
dismissal, pursuant to Federal Rule of Civil Procedure 41(a),

which were to be accompanied by any purported settlement with or

affecting the individual settling defendants. Further, he

ordered that, within fourteen days of any determination on the

Rule 41(a) motions, the defendants were to file any cross-claims

for contribution and indemnification. In turn, ITB, First

Jersey, First Philadelphia, and Rooney Pace all filed cross-

claims for contribution under the federal securities laws and for

common law contribution and indemnification. See id. at 340, 943,
962, and 978. Additionally, First Jersey filed a cross-claim for

contractual indemnity, pursuant to a series of private indemnity

contracts between it and ITB. Id. at 946-49.

As a result, the plaintiff class submitted a motion for

voluntary discontinuance of the derivative claims against the

individual settling defendants and a proposed partial settlement

agreement ("the first agreement") between the plaintiff class,

the individual settling defendants,4 and National Union Fire

Insurance Company ("National Union").5 National Union is the

insurer of the individual settling defendants, but does not

insure ITB. See id. at 227.
A. The First Settlement Agreement

The first agreement, see JA at 235-58, provided for the

release of all claims against the individual settling defendants

to the extent of their insured interest and the discontinuance of

4
The first agreement indicates that Brennan was included
only in his capacity as a director and officer of ITB. See JA at
235.
5
National Union was not a defendant in this action.
the derivative claims. In return, National Union would

immediately pay the class $3.125 million. The class would pursue

its claims against First Jersey, Brennan (in his uninsured

capacity), First Philadelphia, and ITB. (the "non-settling

defendants").6 Moreover, the first agreement provided that,

"[t]o the extent that the class does not recover all or part of

an additional $4.375 million from the non-settling defendants,

National Union would pay all or part of this sum to the class

with a cap of $7.5 million." See id. at 228 (Wexler Affidavit at
¶ 7). If the class later settled with the non-settling

defendants and the amount of that settlement fell below $4.125

million, National Union's consent to the settlement would be

required. National Union agreed not to unreasonably withhold

that consent. See id. at 243.

In addition, the proposed settlement included a provision

whereby the district court, in giving its approval, would order

"that all claims for contribution or indemnification however

denominated, against the settling defendants, based upon

liability on any of the settled claims, in favor of persons,

including [the] non-settling defendants are extinguished,

discharged, satisfied and/or otherwise barred and unenforceable."

Id. at 249 (the "bar order").
ITB strongly objected to the first settlement agreement.

First, ITB argued that any settlement by its fiduciaries, the

individual settling defendants, that did not include ITB but did

6
At that time, Rooney Pace, which is now a non-settling
defendant, was in bankruptcy.
include a bar order necessarily required its fiduciaries to

breach their obligations to ITB. Second, ITB claimed that the

plaintiff class lacked standing to voluntarily withdraw the

derivative action without providing any consideration to ITB.

ITB reasoned that, as the derivative action belonged to the

corporation and not the shareholders, the shareholders were in no

position to withdraw the claim. Accordingly, with the assistance

of the district court, the first agreement was revised by the

parties. ("proposed final agreement").
B. Proposed Final Agreement

The proposed final agreement included the addition of ITB

as a settling defendant and a statement that ITB consented to the

withdrawal of the derivative claim. In addition, ITB paid the

sum of $250,000 to the plaintiff class, and it has agreed to pay

an additional $150,000, if, and when, that amount is received by

ITB pursuant to a contract ITB entered into for the sale of a

mortgage note on Philadelphia Park, its former subsidiary.

The proposed final agreement also expressly barred the

plaintiffs "from seeking from the non-settling defendants any

amounts greater than the proportionate liability, if any, of the

non-settling defendants for any damages, if any, determined at

trial . . . ." JA at 1308 ("proportionate fault judgment

reduction provision"). The bar order and the provision requiring

National Union's consent to a settlement below $4.375 million, as

they had been presented in the first agreement, remained intact.
C. The District Court Proceedings
 The district court granted the plaintiffs' Rule 41(a)

motion and preliminarily approved the proposed final agreement.

Notice was then given to the class in compliance with Federal

Rule of Civil Procedure 23, and the court held a hearing on the

proposed final agreement. The non-settling defendants were the

only parties who opposed the partial settlement. On April 11,

1994, the court entered judgment made final pursuant to Rule

54(b) of the Federal Rules of Civil Procedure and formally

approved the proposed final agreement ("partial settlement").7

The court concluded that the partial settlement is "fair,

reasonable and adequate, is in the best interests of the Class

and ITB and should be and is hereby approved . . . ." JA at 1540.

The non-settling defendants Rooney Pace, First Jersey,

and First Philadelphia ("non-settling defendants") filed a timely

notice of appeal. Non-settling defendant Brennan is not a party

to this appeal. The non-settling defendants contend that the

district court abused its discretion in approving the partial

settlement.

II. DISCUSSION

7
On August 31, 1994, the district court filed an
additional memorandum in support of its earlier decision
approving the partial settlement. Appellees made a motion to
expand the appellate record pursuant to Federal Rule of Appellate
Procedure 10(e) to include the August 31, 1994 memorandum. The
non-settling defendants opposed; however, on November 8, 1994, we
granted appellees motion to expand the record. In its
memorandum, the court explains the appropriateness and fairness
of the bar order and the proportionate judgment reduction
provision.
 Generally, the approval of a class action settlement is

committed to the sound discretion of the district court. It can

endorse a settlement only if the compromise is "fair, adequate,

and reasonable." Walsh v. Great Atl. & Pac. Tea Co., Inc., 726
F.2d 956, 965 (3d Cir. 1983); see In re Masters Mates & Pilots

Pension Plan, 957 F.2d 1020, 1026 (2d Cir. 1992). Where the

rights of third parties are affected, it is not enough to

evaluate the fairness of the settlement to the settling parties;

the interests of such third parties must be considered. See id.

In the present case, the plaintiffs, ITB, and the

individual settling defendants (collectively "appellees") argue

that the non-settling defendants, as non-parties to the

agreement, lack standing to object to the partial settlement. We

turn to that issue.
A. Standing

Non-settling defendants, in general, lack standing to

object to a partial settlement, because they are ordinarily not

affected by such a settlement. See In re School Asbestos Litig.,

921 F.2d 1330, 1332 (3d Cir. 1990), cert. denied, 499 U.S. 976

(1991); see also Zupnick v. Fogel, 989 F.2d 93, 98 (2d Cir.),
cert. denied, 114 S. Ct. 384 (1993); Waller v. Financial Corp. of

America, 828 F.2d 579, 582-83 (9th Cir. 1987). There is,

however, a recognized exception to this general rule, which

permits non-settling defendants to object to a partial settlement

where they can demonstrate that they will suffer some formal

legal prejudice as a result of the partial settlement. Zupnick,
989 F.2d at 98; In re School Asbestos Litig., 921 F.2d at 1332.
"There is consensus that a non-settling defendant has standing to

object to a partial settlement which purports to strip it of a

legal claim or cause of action, an action for indemnity or

contribution for example," or to invalidate its contract rights.

Waller, 828 F.2d at 583 (citations omitted); see In re School
Asbestos Litig., 921 F.2d at 1332.

Here, the non-settling defendants argue that their rights

to indemnification and contribution, and First Jersey's

contractual right to indemnification from ITB, have been

extinguished by the bar order imposed by the district court

pursuant to the partial settlement. See JA at 1302 (partial

settlement at ¶ 2(a)), 1307 (partial settlement at ¶ 3(b)), 1543

(district court's order approving the partial settlement).8 As a

result, the non-settling defendants claim that they have suffered

a cognizable prejudice by the approval of the partial settlement.

8
In approving the partial settlement, the district court
imposed the following bar order:
4 (a) Each of the Non-Settling Defendants,
each of the Settling Defendants, and any other
Person who may assert a claim against the Settling
Defendants based upon, relating to, or arising out
of the Settled Claims, the Action or the
settlement of this Action, are permanently barred,
enjoined and restrained permanently from
commencing, prosecuting, or asserting any such
claim or claims for contribution or indemnity or
otherwise denominated, against the Settling
Defendants, as claims, cross-claims,
counterclaims, or third-party claims in the Action
or in any other court, arbitration, administrative
agency or forum, or in any other manner, including
but not limited to offset. All such claims are
hereby extinguished, discharged, satisfied and
unenforceable.
JA at 1543.
 We conclude that the non-settling defendants fall within

the recognized exception and have standing to object to the

partial settlement. We now address the merits of the objections

made by the non-settling defendants.
B. The Fairness of the Partial Settlement
to the Non-settling Defendants

The non-settling defendants first argue that the

inclusion of the bar order renders the partial settlement unfair

and prejudicial to them.

1. The Bar Order
The non-settling defendants claim that the bar order

extinguishes their right to seek contribution and indemnification

from the settling defendants. They argue that their right to

contribution lies in the federal securities laws and in the

common law, and their right to indemnification lies in the

federal securities laws, the common law, and, as to First Jersey,

in its underwriting agreements with ITB.
i. The Right to Contribution and Indemnification

a) Federal Securities Laws

The court agrees with the non-settling defendants that

under section 11 of the Securities Act of 1933 (the "1933 Act"),

they have an express right to seek contribution for liability

under that section. See 15 U.S.C. § 77(f); see also In re Jiffy

Lube Sec. Litig., 927 F.2d 155, 160 (4th Cir. 1991). Although

there is no express right to seek contribution under section

10(b) of the Securities Exchange Act of 1934 (the "1934 Act"),
see 15 U.S.C. § 78(b), and Securities Exchange Act Rule 10b-5,
see 17 C.F.R. § 240.10b-5, the Supreme Court has implied a right

to seek contribution under both provisions. See Central Bank,

N.A. v. First Interstate Bank, N.A., 114 S. Ct. 1439, 1448-49

(1994); Musick, Peeler & Garrett v. Employers Ins., 113 S. Ct.

2085, 2091 (1993); see also TBG, Inc. v. Bendis, 36 F.3d 916, 923

(10th Cir. 1994) (contribution under Rule 10b-5); Alvarado

Partners, L.P. v. Mehta, 723 F. Supp. 540, 549 (D. Colo. 1989)

(contribution under section 10(b)); Seiler v. E.F. Hutton & Co.,

102 F.R.D. 880, 885-86 (D.N.J. 1984) (contribution under section

10(b) and rule 10b-5).

However, there is no express right to indemnification

under the 1933 or 1934 Acts. Further, those courts that have

addressed the issue have concluded that there is no implied right

to indemnification under the federal securities laws. See First

Golden Bancorporation v. Weiszmann, 942 F.2d 726, 728 (10th Cir.

1991); Riverhead Sav. Bank v. National Mortgage Equity Corp., 893

F.2d 1109, 1116 (9th Cir. 1990); Baker, Watts & Co. v. Miles &

Stockbridge, 876 F.2d 1101, 1104-05 (4th Cir. 1989) (holding that

there is no right to indemnification under section 12(2)); King
v. Gibbs, 876 F.2d 1275, 1281 (7th Cir. 1989); Alvarado Partners,

L.P., 723 F. Supp. at 549 (stating that there is no right to

indemnification under sections 11 or 10(b)); Seiler, 102 F.R.D.

at 885. This circuit has not yet addressed this issue.

As will be explained below, indemnification runs counter

to the policies underlying the 1933 and 1934 Acts. In addition,

there is no indication that Congress intended that
indemnification be available under the Acts. See Baker, Watts &
Co., 876 F.2d at 1105; King, 876 F.2d at 1281. In drafting the

Acts, Congress was not concerned with protecting the

underwriters, but rather it sought to protect investors. Here,

it is the underwriters, not the victims, who seek

indemnification. We agree with those courts that have held that

there is no implied right to seek indemnification under the

federal securities laws.

In addition, in support of its right to seek

indemnification from ITB, First Jersey relies on its underwriting

agreements with ITB.9
b) First Jersey's Contractual Right to Indemnification

Each of four separate underwriting agreements between ITB

and First Jersey contains provisions for indemnification. In

these provisions, ITB agreed to indemnify First Jersey from any

and all loss, liability, claims, damage, and expense arising from

9
The non-settling defendants also argue that they have
common law rights to contribution and indemnification. They
claim that the two common law theories of liability asserted
against them preserve their rights to indemnification and
contribution. The claims are: 1)respondeat superior, seeking to
hold First Jersey liable for the actions of individual non-
settling defendant Brennan (the majority shareholder of First
Jersey); and 2) the commission of waste and breach of fiduciary
duty alleged in the Ninth Claim of the Consolidated Amended
Complaint asserting a derivative claim for ITB.
These arguments are without merit. First, Brennan, in his
uninsured capacity, is a non-settling defendant. Therefore,
First Jersey's indemnification and contribution claims against
Brennan would not be barred by the partial settlement. Second,
the Ninth Claim has been dismissed as part of the partial
settlement.
any material misstatement, untrue statement, or omission in the

public offering. See JA at 1133, 1154, 1174, 1195.
Generally, federal courts disallow claims for

indemnification because such claims run counter to the policies

underlying the federal securities acts. See, e.g., In re U.S. Oil

and Gas Litig., 967 F.2d 489, 495 (11th Cir. 1992); Baker, Watts

& Co., 876 F.2d at 1104-05; Globus v. Law Research Service, Inc.,

418 F.2d 1276, 1288-89 (2d Cir. 1969), cert. denied, 397 U.S. 913

(1970). The underlying goal of securities legislation is

encouraging diligence and discouraging negligence in securities

transactions. See Baker, Watts & Co., 876 F.2d at 1105 (citing

Laventhol, Krekstein, Horwath & Horwath v. Horwitch, 637 F.2d

672, 676 (9th Cir. 1980), cert. denied, 452 U.S. 963 (1981));

Franklin v. Kaypro Corp., 884 F.2d 1222, 1227 (9th Cir. 1989),

cert. denied, 498 U.S. 890 (1990); Globus, 418 F.2d at 1288-89.

These goals are accomplished "by exposing issuers and

underwriters to the substantial hazard of liability for

compensatory damages." Id. at 1289.

The non-settling defendants argue that the policy of not

enforcing indemnification provisions should not apply in cases,

as here, where an underwriter was merely negligent, played a "de
minimis" role in the public offering at issue, or was being held

derivatively or vicariously liable. Non-settling Defendants' Br.

at 28 (quoting Globus, 418 F.2d at 1288).10 We disagree.

10
The non-settling defendants' argument would obviously
not apply to the section 10(b) and Rule 10b-5 allegations,
because those provisions require more than "ordinary negligence"
 A number of federal courts have held that this policy

against allowing indemnification extends to violations of

sections 11 and 12(2), where the underwriter is merely negligent

in the performance of its duties. See LOUIS LOSS & JOEL SELIGMAN,
SECURITIES REGULATION 4632 & n.428 (3d ed. 1988) (citing negligence

cases where indemnification was not permitted); see also Baker,

Watts & Co., 876 F.2d at 1105, 1108; Franklin, 884 F.2d at 1227;

Globus, 418 F.2d at 1288;11 Odette v. Sherson, Hammill & Co.,

Inc., 394 F. Supp. 946, 956-57 (S.D.N.Y. 1975) (disallowing

indemnification in a section 12(2) case). We agree. The

policies underlying the 1933 and 1934 Acts demand that all

underwriters be encouraged to fulfill their duties in a public

offering, regardless of their role.

for liability either as a primary defendant or as an aider and
abetter.
11
Contrary to the non-settling defendants' assertion, it
appears that the Globus rationale extends to section 11
violations. The Second Circuit stated:
Civil liability under section 11 and similar
provisions was designed not so much to compensate
the defrauded purchaser as to promote enforcement
of the Act and to deter negligence by providing a
penalty for those who fail in their duties. And
Congress intended to impose a "high degree of
trusteeship" on underwriters. Thus, what
Professor Loss terms the "in terrorem effect" of
civil liability might well be thwarted if
underwriters were free to pass their liability on
to the issuer. Underwriters who knew they could
be indemnified simply by showing that the issuer
was "more liable" than they (a process not too
difficult when the issuer is inevitably closer to
the facts) would have a tendency to be lax in
their independent investigation.
Globus, 418 F.2d at 1288 (citations omitted) (footnote omitted);
see Helen L. Scott, Resurrecting Indemnification: Contribution
Clauses in Underwriting Agreements, 61 N.Y.U. L. REV. 223, 245
(1986).
 As stated, the federal securities laws seek, inter alia,
to encourage underwriters to conduct thorough independent

investigations. Unlike contribution, contractual indemnification

allows an underwriter to shift its entire liability to the issuer

before any allegation of wrongdoing or a determination of fault.

As such, indemnification, it is argued, undermines the role of

the underwriter as "investigator and public advocate." Scott,

supra n.11, at 225.12 If the court enforced an underwriter

indemnification provision, it would effectively eliminate the

underwriter's incentive to fulfill its investigative obligation.

"The statute would fail to serve the prophylactic purpose that

. . . underwriters make some reasonable attempt to verify the

data submitted to them." Id. at 245.

In addition, if the court were to allow the non-settling

defendants to avoid secondary or derivative liability "merely by

showing ignorance[, it] would contravene the congressional intent

to protect the public, particularly unsophisticated investors,

from fraudulent practices." In re Olympia Brewing Co. Sec.

12
As the Ninth Circuit stated:
The overarching purpose of the Securities Act of
1933, and of the subsequent Exchange Act of 1934,
was to restore confidence in the market.
Confidence was to be restored by forcing the
public disclosure of facts sufficient to permit
prudent investors to understand the risks assumed
when purchasing a security offered for sale to the
public. One of the most important changes brought
about by the legislation was that it made
accountable all parties responsible for public
reports.
Franklin, 884 F.2d at 1227 (citing H.R. REP. NO. 85, 73d Cong.,
1st Sess. 9 (1933)).
Litig., 674 F. Supp 597, 613 (N.D.Ill. 1987). As for vicarious

liability, "[c]ertain employers . . . assume a higher public duty

under the securities laws than do other persons, a duty that

requires the affirmative exercise of a high standard of

supervision." Id. at 613-14 (citing Sharp v. Coppers & Lybrand,

649 F.2d 175, 181-82 (3d Cir. 1981), cert. denied, 455 U.S. 938

(1982)) (other citations omitted).13 The public depends upon an

underwriter's investigation and opinion, and it relies on such

opinions when investing. Denying claims for indemnification

would encourage underwriters to exhibit the degree of reasonable

care required by the 1933 and 1934 Acts. See Baker, Watts & Co.,

876 F.2d at 1108.

The non-settling defendants also argue that it makes no

sense to preserve their sections 11 and 12(2) statutory defenses,

of due diligence and due care respectively, while they are

deprived of the right to seek indemnification. This argument

lacks merit.

In order to successfully assert a due care or a due

diligence defense, an underwriter must prove that it conducted a

reasonable investigation and had a reasonable belief that the

information relating to an offering was accurate and complete.

See LOUIS LOSS, FUNDAMENTALS OF SECURITIES REGULATIONS 894-95, 898-900

13
First Jersey is being held liable for the conduct of its
agent, Brennan. As such, it argues, that its right to seek
indemnification from Brennan should not be barred. In this case,
because Brennan is a non-settling defendant, First Jersey is not
barred from seeking indemnification from him. Therefore, it will
be able to recover if it is held vicariously liable for Brennan's
conduct.
(1988). These defenses encourage an underwriter to act

reasonably; they are not available to a negligent underwriter.

Unlike indemnification, the statutory defenses support the

policies of the act. Underwriters will be more likely to act

diligently in an effort to assert the defenses.

We conclude that the underwriter indemnification

agreements between First Jersey and ITB run counter to the

policies underlying the securities acts. Although the non-

settling defendants had a right to contribution, they did not

have a right to indemnification. Therefore, the district court

did not abuse its discretion in barring and extinguishing any

causes of action for indemnification. We turn now to whether the

bar order impermissibly impinges on the non-settling defendants'

right to contribution.
ii. Settlement Contribution Bar

In general, the settlement of complex litigation before

trial is favored by the federal courts. However, in multi-party

litigation, settlement may be difficult. Defendants, who are

willing to settle, "buy little peace through settlement unless

they are assured that they will be protected against co-

defendants' efforts to shift their losses through cross-claims

for indemnity, contribution, and other causes related to the

underlying litigation." In re U.S. Oil and Gas Litig., 967 F.2d
at 494; see In re Jiffy Lube Sec. Litig., 927 F.2d at 160. In

cases involving multiple defendants, a right to contribution

inhibits partial settlement.
 Therefore, in order to encourage settlement in these

cases, modern settlements increasingly incorporate settlement bar

orders into partial settlements. "In essence, a bar order

constitutes a final discharge of all obligations of the settling

defendants and bars any further litigation of claims made by non-

settling defendants." Franklin, 884 F.2d at 1225.
Many states have enacted settlement bar statutes, which

allow a bar to the right of contribution if the settlement is

made in good faith and the non-settling defendants are entitled

to a setoff against any judgment ultimately entered against them.

By contrast, however, the federal securities statutes do not

expressly provide a settlement contribution bar. See In re

Sunrise Sec. Litig., 698 F. Supp. 1256, 1257 (E.D. Pa. 1988).

A settlement contribution bar is designed to encourage

settlements. On the other hand, the right to contribution under

the federal securities laws seeks to promote fairness to

defendants and to deter wrongdoing. "The purpose of a settlement

contribution bar rule is to `harmonize the equitable objectives

of contribution with the encouragement of settlement.'" Alvarado
Partners, L.P., 723 F.Supp at 550-51 (quoting First Fed. Sav. &

Loan Ass'n v. Oppenheim, Appel, Dixon & Co., 631 F. Supp. 1029

(S.D.N.Y. 1986)). Therefore, we agree with the federal courts

that "have imposed the bar as a matter of federal common law,

finding that a fair and equitable settlement bars implied rights

of contribution for federal securities claims." In re Jiffy Lube
Sec. Litig., 927 F.2d at 160 n.2; see In re Sunrise Sec. Litig.,

698 F. Supp. at 1257.
 Because the federal securities statutes do not expressly

prescribe a settlement contribution bar rule, in structuring the

federal common law rule federal courts may either adopt the forum

state's statute or fashion a uniform federal rule. See United
States v. Kimbell Foods, Inc., 440 U.S. 715, 728 (1979); see also

Franklin, 884 F.2d at 1228; In re Sunrise Sec. Litig., 698 F.

Supp. at 1257.

The Supreme Court has stated, "Whether to adopt state law

or to fashion a nationwide federal rule is a matter of judicial

policy `dependant on a variety of considerations always relevant

to the nature of the specific governmental interests and to the

effects upon them of applying state law.'" Kimbell Foods, Inc.,

440 U.S. at 728 (quoting United States v. Standard Oil Co., 332

U.S. 301, 310 (1947)). In cases involving the federal securities

laws, we believe that a nationwide federal rule is preferable.14

Given our determination favoring uniformity, we next

evaluate the particular settlement contribution bar adopted by

the district court.

14
There are sound reasons to adopt a uniform federal rule.
First, contribution under the federal securities laws affects
substantive federal rights. Second, the issue is central to a
federal regulatory scheme, and, therefore, national uniformity is
desirable. Kimbell Foods, 440 U.S. at 728. Third, adopting a
state's rule would lead to disparate results, because some state
do not have a settlement bar rule, and other states have
different types of bar rules. Finally, if we adopt state law, we
would encourage forum shopping and spawn wasteful litigation over
the applicable state law. We agree with those federal courts
that have opted for a nationwide federal settlement bar rule.
See, e.g., Franklin, 884 F.2d at 1228-29; Alvarado Partners,
L.P., 723 F. Supp. at 551-52; In re Sunrise Sec. Litig., 698 F.
Supp. at 1257-58.
 In the present case, the district court adopted the

proportionate judgment reduction rule. See JA at 1544-45. It

concluded that the proportionate judgment reduction is the

fairest method, and the non-settling defendants will not be

prejudiced by a proportionate fault reduction. See Non-settling

Defendants' Supplemental Reply Brief, Addendum, at 16-17. We

agree with the determination of the district court.

Under the proportionate judgment reduction method, the

jury, in the non-settling defendants' trial, will assess the

relative culpability of both settling and non-settling

defendants, and the non-settling defendants will pay a

commensurate percentage of the judgment.15 The risk of a "bad"

settlement falls on the plaintiffs, who have a financial

incentive to make certain that each defendant bears its share of

the damages. See In re Jiffy Lube Sec. Litig., 927 F.2d at 160

n.3; In re Sunrise Sec. Litig., 698 F. Supp. at 1258-59. As

pointed out by the Ninth Circuit, the proportionate fault rule

satisfies the statutory contribution goals of equity, deterrence,

and the policy goal of encouraging settlement. See Franklin, 884

F.2d at 1231. The proportionate fault rule is the equivalent of

a contribution claim; the non-settling defendants are only

responsible for their portion of the liability.16

15
The other commonly used setoff methods are the pro tanto
method and the pro rata method. See In re Jiffy Lube Sec. Litig.,
927 F.2d at 161-62 n.3. Neither method is at issue in the
present case.
16
Recently, in discussing a partial settlement, the United
States Supreme Court stated that a proportionate share approach,
the proportionate judgment reduction method, adequately protects
non-settling defendants' contribution rights. See McDermott, Inc.
 We conclude that the district court did not abuse its

discretion in imposing the bar order with the proportionate

judgment reduction provision.17

2. Additional Objections
In addition, the non-settling defendants argue that

Article IV of the partial settlement is prejudicial. Article IV,

paragraph 2(b) provides that National Union, the insurer for the

individual settling defendants, will have to consent to any

future settlement between the plaintiff class and the non-

settling defendants for an amount less than $4.125 million. See

JA at 1298. The provision further provides that such consent

shall not be unreasonably withheld. See id. The non-settling

defendants argue that the district court abused its discretion in

approving a partial settlement that gives National Union the

power to be final arbiter of any future settlement.

v. AmClyde, 114 S. Ct. 1461, 1466 (1994). The Court stated,
"Under [the proportionate share] approach, no suits for
contribution are permitted, nor are they necessary, because the
non-settling defendants pay no more than their share of the
judgment." Id. Although McDermott arose in the admiralty
context, its rationale is applicable to the present case.
17
In TBG, Inc. v. Bendis, 36 F.3d 916 (10th Cir. 1994),
the Tenth Circuit addressed the issue of settlement bar orders:
We conclude that orders barring contribution claims
are permissible only because a court or jury has
or will have properly determined proportionate
fault and awarded the equivalent of a contribution
claim, not because of the compensatory award
alone. Since the court did not decide the
settling defendants' proportional fault and order
a credit in that amount, the court had no power to
bar the non-settling defendants' contribution
claim.
Id. at 923.
 As stated, the approval of a class action settlement is

committed to the sound discretion of the district court. The

court will approve the compromise only if it is fair, adequate,

and reasonable. See Walsh v. Great Atl. & Pac. Tea Co., Inc., 726
F.2d 956, 965 (3d Cir. 1983). The partial settlement at issue

does not affect the court's power to approve or disapprove any

future settlement between the plaintiff class and the non-

settling defendants. Essentially, the class plaintiffs have

agreed not to present a settlement to the district court without

National Union's consent. In essence, this is no different from

the plaintiff class rejecting a settlement proposal from the non-

settling defendants. In addition, under the settlement, National

Union retains an interest in any future settlement, because they

may be called upon to pay additional amounts. See JA at 228.18

We conclude that the district court did not abuse its

discretion in approving a partial settlement that contained the

clause in question. National Union is not the final arbiter; it

is the district court that will ultimately approve or disapprove

any settlement. In addition, National Union is under an

obligation not to act unreasonably.

Additionally, the non-settling defendants complain that

the partial settlement is unfair and prejudicial because ITB is

not provided with any benefit. We conclude that the non-settling

18
Paul Wexler, attorney for the plaintiffs explained, "To
the extent that the class does not recover all or part of an
additional $4.375 million from the non-settling defendants,
National Union would pay all or part of this sum to the class
with a cap of $7.5 million." See JA at 228 (Wexler Affidavit at
¶ 7).
defendants lack standing to make this objection. Assuming,

arguendo, that the non-settling defendants are correct in their

conclusion, they have nowhere argued that they are prejudiced by

the dismissal of the Ninth Claim. In fact, the non-settling

defendants have received a benefit because the Ninth Claim has

been dismissed, with prejudice, against all defendants. See JA at
1541-42.

We conclude that the district court did not abuse its

discretion in approving the partial settlement.
C. Adequacy of the Findings

As stated, the decision whether to approve a proposed

settlement of a class action is left to the sound discretion of

the district court. See Walsh v. Great Atl. & Pac. Tea Co., Inc.,

726 F.2d 956, 965 (3d Cir. 1983); Girsh v. Jepson, 521 F.2d 153,

156 (3d Cir. 1975). In Girsh, we set forth several factors a

district court must consider when evaluating the adequacy,

fairness, and reasonableness of a settlement:
(1) the complexity, expense and likely duration of
the litigation . . . ; (2) the reaction of the
class to the settlement . . . ; (3) the stage of
the proceedings and the amount of discovery
completed . . . ; (4) the risks of establishing
liability . . . ; (5) the risks of establishing
damages . . . ; (6) the risks of maintaining the
class action through the trial . . . ; (7) the
ability of the defendants to withstand a greater
judgment; (8) the range of reasonableness of the
settlement fund in light of the best possible
recovery . . . ; (9) the range of reasonableness
of the settlement fund to a possible recovery in
light of all the attendant risks of litigation . .
. .
Id. at 157 (quoting City of Detroit v. Grinnell Corp., 495 F.2d
448 (2d Cir. 1974)); see also Stoetzner v. U.S. Steel Corp., 897

F.2d 115, 118 (3d Cir. 1990). Here, the non-settling defendants

argue that the district court failed to provide adequate findings

to support its approval of the partial settlement.

In approving the partial settlement, the court stated:
2. The proposed settlement . . . is fair,
reasonable and adequate, is in the best interests
of the Class and ITB and should be and is hereby
approved, especially in light of the benefits to
the Plaintiff Class and to ITB because of the
complexity, expense and probable duration of
further litigation, the substantial discovery and
investigation conducted, the risks of establishing
liability, causation and damages and, with respect
to ITB, the complete and final settlement of all
claims asserted on behalf of the Plaintiff Class
against ITB and the judgment reduction provisions
of the Order with respect to all remaining claims
against the non-settling defendants.

JA at 1540-41. In addition, in its August 31, 1994 memorandum,

the court addressed the non-settling defendants' objections and

explained, in detail, the fairness and reasonableness of the bar

order and the proportionate judgment reduction rule.
We have held that in order to provide for meaningful

appellate review, a district court must explain its reason for

approving a class action settlement agreement. See Bryan v.

Pittsburgh Plate Glass Co. (PPG Indus., Inc.), 494 F.2d 799, 804

(3d Cir.), cert. denied, 419 U.S. 900 (1974) ("It is essential in

cases such as this that the district court set forth the

reasoning supporting its conclusion in sufficient detail to make

meaningful review possible . . . ."). The Bryan court noted that
the "use of `mere boilerplate' language will not suffice." Id.;
see also Malchman v. Davis, 706 F.2d 426 (2d Cir. 1983) (no
intelligent review on appeal where district court adopted state

court referee's report, making no independent findings of fact or

conclusions of law); Maher v. Zapata Corp., 714 F.2d 436, 455

(5th Cir. 1983); Gautreaux v. Pierce, 690 F.2d 616 (7th Cir.

1982) (district court must clearly set forth its reasons for

approving the settlement in order to make intelligent appellate

review possible); CHARLES ALAN WRIGHT, ET AL., FEDERAL PRACTICE AND

PROCEDURE § 1797, at 359 & n.39 (1986).

Here, the district court's explanation meets the

requirements set forth by this court in Bryan. The court made

findings of the type articulated in Girsh, and it concluded that

the partial settlement was fair, reasonable, and adequate.

Further, the district court's memorandum of August 31, 1994,

explained the appropriateness of the bar order and the

proportionate judgment reduction provision in great detail. As

we stated in Bryan, "To require a fuller statement of the court's

views would turn a decision on approval of a proposed settlement

into a determination on the merits in all but name." Bryan, 494

F.2d at 804. Contrary to the non-settling defendants'

contentions, the court's explanation allows for a meaningful

appellate review here.19

The judgment of the district court will be affirmed.

19
The court has considered the non-settling defendants'
additional contentions and found them to be meritless.