In Re: Cendant Corp

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit

8-28-2001

In Re: Cendant Corp
Precedential or Non-Precedential:

Docket 00-2684

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Filed August 28, 2001

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 00-2684

IN RE: CENDANT CORPORATION LITIGATION

MARTIN DEUTCH,
Derivatively on Behalf of Cendant Corp.,
Appellant

On Appeal from the United States District Court
for the District of New Jersey
(D.C. No. 98-cv-01664)
District Judge: Hon. William H. Walls

Argued May 22, 2001

Before: BECKER, Chief Judge, SLOVITER and AMBRO,
Circuit Judges

(Filed: August 28, 2001)
Bruce E. Gerstein (Argued)
Brett Cebulash
Garwin, Bronzaft, Gerstein &
Fisher LLP
New York, NY 10036

Elwood S. Simon
Elwood S. Simon & Associates
Birmingham, MI 48009

David M. Taus
Francis J. Devito
Hackensack, NJ 10166-0153

Richard Brualdi
Law Offices of Richard B. Brualdi
New York, NY 10006

Thomas G. Shapiro
Shapiro, Haber & Urmy
Boston, MA 02109

Attorneys for Appellant
Martin Deutch

Daniel L. Berger (Argued)
Max W. Berger
Jeffrey N. Leibell
Bernstein, Litowitz, Berger &
Grossmann
New York, NY 10019

Jeffrey W. Golan
Leonard Barrack
Gerald J. Rodos
Barrack, Rodos & Bacine
Philadelphia, PA l9l03

Attorneys for Appellee
California Public Employees'
Retirement System, et al.

Samuel Kadet (Argued)
Jonathan J. Lerner
Joseph N. Sacca
Skadden, Arps, Slate, Meagher &

2
 Flom LLP
New York, NY 10036

Carl Greenberg
Michael M. Rosenbaum
Budd, Larner, Gross, Rosenbaum,
Greenberg & Sade, P.C.
Short Hills, NJ 07078-0999

Attorneys for Appellee Cendant
Corporation

James G. Kreissman (Argued)
Jacob S. Pultman
Simona G. Strauss
Simpson, Thacher & Bartlett
New York, NY 10017

Herbert J. Stern
Joel M. Silverstein
Stern & Greenberg
Roseland, NJ 07068

Attorneys for Appellees HFS Inc.
Directors

Greg A. Danilow (Argued)
Weil, Gotshal & Manges LLP
New York, NY 10153

Alan N. Salpeter
Mayer, Brown & Platt
Chicago, IL 60603

Douglas S. Eakeley
Lowenstein Sandler
Roseland, NJ 07068

Cadwalader, Wickersham & Taft
New York, NY 10038

Sills Cummis Radin Tischman
Epstein & Gross, P.A.
Newark, NJ 07102-5400

Attorneys for Appellees CUC
Directors

3
OPINION OF THE COURT

SLOVITER, Circuit Judge.

Martin Deutch appeals from the District Court's
judgment and orders approving the settlement of a
securities fraud class action brought against Cendant
Corporation, 28 individual defendants, and Ernst & Young,
an accounting firm. Under the settlement, Cendant agreed
to pay $2.85 billion in cash to the class and Ernst & Young

agreed to pay $335 million to the class. In addition,
Cendant and certain of the individual defendants promised
to pay the class 50% of any recovery obtained in their
cross-claims against Ernst & Young. In exchange, the class
agreed to release any and all claims that could have been
brought against the defendants in the class action.

A number of class members objected to the settlement.
Deutch, who was not a member of the class but rather a
current shareholder of Cendant, also objected and moved to
intervene as both a current shareholder and as a derivative
action plaintiff. In two separate opinions filed on August 15,
2000, the District Court rejected the objections of the class
members and Deutch respectively and approved the
settlement.

The approvals generated a flurry of appeals. The appeals
of the class members are being disposed of in a separate
opinion, holding, inter alia, that the District Court did not
abuse its discretion in rejecting the class members'
objections to the settlement and plan of allocation. See In
re Cendant Corp. Sec. Litig., Nos. 00-2520, 00-2683, 00-

2708, 00-2709, 00-2733, 00-2734, 00-2769 and 00-3653
(3d Cir. Aug. 28, 2001). In this opinion, we turn to Deutch's
appeal, which presents distinct issues of law relating to a
current shareholder seeking to present claims on behalf of
the settling corporation.

4
I.

FACTS AND PROCEDURAL POSTURE

Many of the facts set forth in the following section of this
opinion will also be set forth and discussed in greater
length in the principal opinion dealing with the appeals of
the objecting class members. The abbreviated facts
included here are those necessary to put Deutch's
contentions in context.

A. Discovery of the Misconduct

On December 17, 1997, CUC International, Inc. ("CUC")
merged with HFS Inc. ("HFS"). As part of the merger,
shareholders of HFS stock were issued shares of CUC
common stock pursuant to a Registration Statement dated
August 28, 1997 and a Joint Proxy Statement/Prospectus.
The surviving corporation was renamed Cendant Corp.
("Cendant"). Cendant is now one of the world's foremost
consumer and business service companies, providing
shopping, dining, travel, mortgage, and real estate
brokerage services. It owns, among other things, Century
21, Avis, and the Ramada and Howard Johnson hotel
franchises.

On March 31, 1998, Cendant filed a Form 10-K Annual
Report with the Securities Exchange Commission ("SEC"),
which included its 1997 financial statements. On April 15,
1998, Cendant announced that it had discovered
accounting irregularities in certain former CUC business
units and that the annual and quarterly financial
statements for 1997 would be restated. Cendant also
suggested that financial statements from earlier periods
might need to be corrected as well. The next day, Cendant's
stock fell from $35 5/8 a share to $19 1/16 a share - a
47% drop. The Audit Committee of Cendant's Board of
Directors hired the law firm of Willkie Farr & Gallagher to
conduct an independent investigation into the irregularities,
and the law firm in turn hired the accounting firm of
Arthur Andersen LLP to assist in the investigation. On July
14, 1998, Cendant announced that CUC's financial
statements for 1995 and 1996 would also be restated.
Following this announcement, Cendant's stock dropped to

5
$15 11/16. On August 28, 1998, Cendant filed with the
SEC a report prepared by Willkie Farr which disclosed,
among other things, that the 1995, 1996, and 1997
financial statements materially misstated revenue and
income. Cendant's stock further dropped to $11 5/8 on the
next trading day.

B. The Securities Fraud Class Action

Numerous plaintiffs claiming to have acquired CUC or
Cendant securities filed lawsuits against Cendant and
others alleging, inter alia, federal securities law violations.
By an order of the Judicial Panel on Multidistrict Litigation
the suits were transferred to the United States District
Court for the District of New Jersey and then consolidated.
The District Court appointed the California Public
Employees' Retirement System, the New York State
Common Retirement Fund, and the New York City Pension
Funds as Lead Plaintiff.1 See In re Cendant Corp. Litig., 182
F.R.D. 144 (D.N.J. 1998). The District Court later approved
the law firms of Barrack, Rodos & Bacine and Bernstein
Litowitz Berger & Grossman LLP to be Lead Counsel for the
class. See In re Cendant Corp. Litig., 191 F.R.D. 387 (D.N.J.
1998).

C. The Amended and Consolidated Class Action
Complaint

On December 14, 1998, the Lead Plaintiff filed an
amended and consolidated class action complaint
("Amended Complaint") on behalf of all persons and entities
who purchased or acquired Cendant or CUC publicly-
traded securities, excluding the PRIDES securities, 2 during
the period of May 31, 1995 through August 28, 1998
_________________________________________________________________

1. We refer to Lead Plaintiff in the singular for the reasons explained at
In re Cendant Corp. Sec. Litig., Nos. 00-2520 et al., Opinion at 19 n.3.

2. The term "PRIDES securities" refers to a derivative security based on
Cendant common stock. The District Court separated all claims brought
by holders and former holders of the PRIDES securities and appointed a
different lead plaintiff and counsel. The PRIDES claims were settled on
March 17, 1999 for $341.5 million in Cendant securities and the District
Court approved the PRIDES settlement. See In re Cendant Corp. PRIDES
Litig., 51 F. Supp. 2d 537 (D.N.J. 1999), vacated in part by 243 F.3d 722
(3d Cir. 2001) (vacating attorneys' fees award).

6
("Class Period"). The Amended Complaint named as
defendants Cendant, 12 individuals who were former
officers and/or directors of CUC (the "CUC Individual
Defendants"),3 16 individuals who were former officers
and/or directors of HFS (the "HFS Individual Defendants"),4
and Ernst & Young ("E&Y"), which had been CUC's
independent public accountant before the merger.

The Amended Complaint alleged that Cendant (as
successor to CUC), E&Y, and certain of the CUC and HFS
Individual Defendants made numerous false and misleading
statements during the Class Period, in violation of Section
10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
S 78j(b), and Rule 10b-5, 17 C.F.R. S 240.10b-5.
Specifically, a number of SEC filings and press releases
issued by CUC allegedly overstated its revenues and
operating income for 1995, 1996, and 1997 through
improper accounting practices, which allegedly violated
Generally Accepted Accounting Principles and were
concealed by the defendants.

The Amended Complaint alleged that all of the
defendants except Anne Pember and Scott Forbes caused
the August 28, 1997 Registration Statement issued in
conjunction with the CUC/HFS merger to contain false and
misleading statements, in violation of Section 11 of the
Securities Act of 1933, 15 U.S.C. S 77k. The Amended
Complaint next alleged that Cendant violated Section
12(a)(2) of the Securities Act, 15 U.S.C. S 77l(a)(2), by
selling securities through a false and misleading
prospectus. The Amended Complaint further alleged
violations by certain of the individual defendants of Section
15 of the Securities Act, 15 U.S.C. S77o, Section 20(a) of
_________________________________________________________________

3. The CUC Individual Defendants are Walter A. Forbes, E. Kirk Shelton,
Christopher K. McLeod, Cosmo Corigliano, Anne M. Pember, Burton C.
Perfit, T. Barnes Donnelley, Stephen A. Greyser, Kenneth A. Williams,
Barlett Burnap, Robert P. Rittereiser, and Stanley M. Rumbough, Jr.

4. The HFS Individual Defendants are Henry R. Silverman, John D.
Snodgrass, Michael P. Monaco, James E. Buckman, Scott E. Forbes,
Steven P. Holmes, Robert D. Kunisch, Leonard S. Coleman, Christel
DeHaan, Martin L. Edelman, Brian Mulroney, Robert E. Nederlander,
Robert W. Pittman, E. John Rosenwald, Jr., Leonard Schutzman, and
Robert F. Smith.

7
the Securities Exchange Act, 15 U.S.C. S 78t(a), Section 20A
of the Securities Exchange Act, 15 U.S.C. S 78t-1, and
Section 14(a) of the Securities Exchange Act, 15 U.S.C.
S 78n(a), and Rule 14a-9, 17 C.F.R. S 240.14a-9.

D. Class Certification, Notice, and Settlement
Negotiations

Concurrent with the filing of the Amended Complaint,
Lead Plaintiff filed a motion to certify the class pursuant to
Fed. R. Civ. P. 23(a) and (b)(3), which the District Court
granted on January 27, 1999. Lead Counsel began
settlement discussions with Cendant and the HFS
Individual Defendants in June 1999, and Lead Counsel
began settlement discussions with E&Y in the subsequent
months.

On December 7, 1999, several months after notice to the
class of the pendency of the class action, Cendant, the HFS
Individual Defendants, and the Lead Plaintiff advised the
District Court that they had agreed to a settlement. Shortly
thereafter, E&Y and the Lead Plaintiff informed the court
that they too had settled. On March 17, 2000, the settling
parties executed a Stipulation of the Settlement.

E. Terms of the Settlement and Plan of Allocation

The settlement with Cendant and the HFS Individual
Defendants provides for a payment by Cendant to the class
of $2,851,500,000 in cash, provides for an additional
payment of 50% of any recovery by Cendant and the HFS
Individual Defendants in their cross-claims against E&Y,
and imposes certain corporate governance changes on
Cendant. These changes include constituting Cendant's
Board of Directors with a majority of independent directors,
constituting the Audit, Nominating, and Compensation
Committees of the Board entirely with independent
directors, and providing for the annual election of all
directors. In exchange, the class members would release all
claims that were filed or could have been filed in the action
against Cendant, the HFS Individual Defendants, and the
CUC Individual Defendants.

As part of the Stipulation of Settlement, Cendant, the
HFS Individual Defendants, and the Lead Plaintiff agreed to

8
request the District Court to approve the settlement as fair,
reasonable, and adequate. In addition, these parties asked
the court to permanently bar all claims for contribution
pursuant to the Private Securities Litigation Reform Act
(hereafter "Reform Act"), specifically the provision codified
at 15 U.S.C. S 78u-4(f)(7)(A), and as may be provided by
applicable federal and state statutes or common law.
However, the parties also asked the court to declare that
the settlement was not a waiver or release of any claims
that could be brought by Cendant against E&Y or any
current or former officer or director of CUC, HFS, or
Cendant.

The E&Y settlement provides for a cash payment of
$335,000,000 to the class. In conjunction with the Cendant
and E&Y settlement, the Lead Plaintiff proposed a Plan of
Allocation covering what each class member would receive
from the settlement. Neither the E&Y settlement nor the
Plan of Allocation is at issue in Deutch's appeal.

F. Settlement Notice, Objections, and Approval

The District Court granted preliminary approval of both
settlements on March 29, 2000, and Lead Plaintiff
proceeded with the required notices of settlement of class
actions, mailing over 478,000 to class members and
publishing notices in national newspapers and media. Only
four class members objected to the settlements and/or the
Plan of Allocation.

Martin Deutch, who was not a member of the class but
rather a current shareholder of Cendant, also objected and
moved to intervene as a current shareholder and
a derivative action plaintiff.5 Deutch objected on the
following grounds:
_________________________________________________________________

5. Deutch had earlier commenced a derivative action in the District
Court on behalf of Cendant against several of the CUC and HFS
Individual Defendants who were officers and/or directors of Cendant.
Deutch alleged that the individual defendants breached their fiduciary
duty of loyalty because, acting on insider information, they sold over
four
million shares of Cendant stock at artificially inflated prices in order
to
realize over $180 million for their personal gain, and that they breached
their fiduciary duties of loyalty, good faith, and due care in mismanaging

9
 (1) Cendant was not adequately represented in the
class action because 13 of the 14 members of
Cendant's board of directors that negotiated and
approved the settlement were also defendants in the
class action and therefore operated under a conflict of
interest;

(2) The settlement was grossly unfair to Cendant and
its current shareholders because it eliminated valuable
contribution claims against the individual defendants
without any meaningful payment into the settlement by
these defendants;

(3) The settlement failed to allocate the portion of
Cendant's $2.85 billion settlement that was
_________________________________________________________________

and wasting corporate assets. Deutch also alleged that Bear Stearns
Companies, Inc. and its subsidiary, Bear Stearns and Co., Inc., were
grossly negligent in advising HFS on the Cendant merger.

Several defendants moved to dismiss the complaint. On August 9,
1999, the District Court held that Deutch need not have made a demand
to Cendant's board of directors to bring that action because any such
demand would have been futile. However, the court dismissed the claims
against the Bear Stearns defendants on the basis that Deutch lacked
standing to sue on behalf of HFS. See In re Cendant Corp. Derivative
Action Litig., 189 F.R.D. 117 (D.N.J. 1999).

After the Cendant settlement was announced, Deutch moved for
partial summary judgment against the individual defendants, arguing
that these defendants violated Section 11 of the 1933 Securities Act, 15
U.S.C. S 77k(f), and were liable to Cendant for contribution under
Section 11(f) for monies to be paid out in the settlement. On April 14,
2000, the District Court denied summary judgment, holding that
Deutch's motion for summary judgment was not ripe for consideration
because any right to contribution is inchoate until after settlement has
been approved and Cendant has paid more than its fair share of the
settlement. See In re Cendant Corp. Derivative Action Litig., 96 F. Supp.
2d 394, 397 (D.N.J. 2000). The court also noted that Deutch's derivative
action complaint did not include any allegations pertaining to Cendant's
decision to settle or the structure of the settlement. See id. at 399. The
court later imposed Rule 11 sanctions on Deutch's attorney for
improperly moving for summary judgment. See In re Cendant Corp.
Derivative Action Litig., 96 F. Supp. 2d 403 (D.N.J. 2000). That action
remains pending.

10
 attributable to Section 11 claims, which was critical for
determining the value of the contribution claims that
will remain if the settlement is approved;

(4) The settlement constituted an illegal indemnification
of individual officers and directors of Cendant, CUC,
and HFS;

(5) The Notice of Settlement was defective because it
did not inform current Cendant shareholders that
certain derivative claims would be compromised and
that contribution claims by Cendant against the HFS
defendants would be barred.

On June 28, 2000, the District Court conducted a
fairness hearing at which the objectors were given an
opportunity to be heard. On August 15, 2000, the District
Court issued two opinions rejecting the objections and
approving the Cendant and E&Y settlements and the Plan
of Allocation. See In re Cendant Corp. Sec. Litig., 109 F.
Supp. 2d 235 (D.N.J. 2000) (rejecting the class members'
objections); In re Cendant Corp. Sec. Litig., 109 F. Supp. 2d
273 (D.N.J. 2000) (rejecting Deutch's objections).

In the corresponding judgment approving the Cendant
settlement, the court ordered that "[a]ll actions and claims
for contribution are permanently barred, enjoined and
finally discharged (i) as provided by 15 U.S.C.S 78u-
4(f)(7)(A), and (ii) as may be provided by applicable federal
or state statutes or common law." App. at 16. Moreover, the
court noted that "this Judgment shall not be deemed a
waiver or release of and shall not preclude Cendant . . .
from asserting any claims . . . against E&Y, its present or
former officers, directors, partners and employees, or
against any current or former officers or directors of CUC,
HFS or Cendant, either in the form of a cross-claim,
counterclaim, third-party complaint, or other form." App. at
16.

Deutch filed a timely appeal. On appeal, he makes the
following arguments:

(1) The District Court erred by refusing to consider
whether the settlement was fair to Cendant, where the
corporation was effectively unrepresented in connection

11
 with the settlement because its board of directors faced
personal liability in the class action and therefore
operated under a conflict of interest;

(2) The District Court erred by entering a contribution
bar order in favor of the HFS Individual Defendants
without first determining whether their payment into
the settlement was sufficient to extinguish their
liability;

(3) The District Court failed to analyze the fairness or
adequacy of the HFS Defendants' settlement separately
in order to ensure that the settlement did not impair
the rights of Cendant, which will lose valuable
contribution rights;

(4) The District Court erred by denying Deutch's
motion to intervene as of right under Fed. R. Civ. P.
24(a) in order to protect Cendant's and its current
shareholders' rights to contribution;

(5) The District Court erred by approving the Notice of
Settlement which failed to notify current Cendant
shareholders that Cendant's contribution claims were
being abrogated under the settlement;

(6) The District Court allowed Cendant to assume the
bulk of the settlement payment, thereby permitting an
illegal indemnification of individual defendants for the
substantial federal securities law claims pending
against them;

(7) The District Court failed to determine what portion
of the settlement was attributable to Section 11 of the
1933 Securities Act, 15 U.S.C. S 77k.

II.

DISCUSSION

A. Jurisdiction and Standard of Review

We have jurisdiction under 28 U.S.C. S 1291. We will
uphold a district court's approval of a class action
settlement unless there has been an abuse of discretion.

12
See In re General Motors Corp. Pick-Up Truck Fuel Tank
Prod. Liability Litig., 55 F.3d 768, 782-83 (3d Cir. 1995)
(hereafter In re GM Trucks).

B. Relevance of Settlement's Fairness, Reasonableness,
and Adequacy to Cendant

Deutch's principal objection to the settlement is that the
District Court evaluated it without considering Cendant's
interests. Deutch contends that the District Court was
required by Fed. R. Civ. P. 23(e) to consider the settlement's
fairness, reasonableness, and adequacy with regard to
Cendant because the majority of its board of directors
suffered a serious conflict of interest at the time the board
agreed to settle. He alleges that 13 of Cendant's 14 board
members at that time faced personal liability in the class
action, effectively making Cendant an unrepresented party
in the settlement.6

The District Court rejected Deutch's view of its
responsibility. It stated that Rule 23 "requires court
scrutiny of settlements to protect absent class member,"
and that "[t]he standard is whether the settlement is fair,
reasonable and adequate to the class." In re Cendant Corp.
Sec. Litig., 109 F. Supp. 2d at 280. The court noted that in
In re Prudential Ins. Co. of Am. Sales Practices Litig., 148
F.3d 283 (3d Cir. 1998), we stated that "Rule 23(e) imposes
on the trial judge the duty of protecting absentees, which is
executed by the court's assuring the settlement represents
adequate compensation for the release of the class claims."
Id. at 316 (quotation omitted). It cited other courts of
appeals' decisions that had taken a similar view. See, e.g.,
In re Jiffy Lube Sec. Litig., 927 F.2d 155, 159 (4th Cir.
1991) ("[F]or Rule 23(e) to be satisfied, the court must
determine only that sufficient compensation is being paid to
the class, without necessarily speculating as to the
_________________________________________________________________

6. Deutch has not specified the individual defendants to whom he
referred but it appears, from the subsequent derivative action filed in
Delaware by his counsel on behalf of a different plaintiff, that they are
Henry Silverman, Martin Edelman, John Snodgrass, James Buckman,
Michael Monaco, Stephen Holmes, Brian Mulroney, Robert Nederlander,
Robert Pittman, Robert Smith, Leonard Coleman, Leonard Schutzman,
and Robert Schutzman.

13
appropriateness of the contributions of the various settling
defendants."); In re Warner Comm. Sec. Litig. , 798 F.2d 35,
37 (2d Cir. 1986) ("If the total compensation to class
members is fair, reasonable, and adequate, the court is not
required to supervise how the defendants apportion liability
for that compensation among themselves.").

The District Court declined to apply the "entire fairness"
standard advocated by Deutch, which the court believed
would require it to "substitute its judgment for the
judgment of Cendant's board to determine whether the
settlement is in the company's best interest." In re Cendant
Corp. Sec. Litig., 109 F. Supp. 2d at 280. Instead, it held
that any claim that the Cendant settlement is unfair to
Cendant and its current shareholders should be brought as
a derivative action under Delaware corporate law. See id.

Deutch argues that our decision in Eichenholtz v.
Brennan, 52 F.3d 478 (3d Cir. 1995), requires consideration
of the interests of persons other than class members.
Eichenholtz involved a securities fraud class action brought
against International Thoroughbred Breeders ("ITB"),
individual members of ITB's Board of Directors, and three
registered brokers. ITB and the individual board members
negotiated a settlement with the class, which contained a
provision that would prevent the non-settling defendants
from commencing any claim for contribution or indemnity
against the settling defendants. The non-settling defendants
appealed from the district court's approval of the settlement
as being fair, reasonable, and adequate to the class and
ITB.

In our opinion on appeal, we stated that "[w]here 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." Id. at 482. That is the language on which
Deutch relies, but he takes it out of context. In response to
the argument by the settling parties that the non-settling
defendants had no standing, we held that the non-settling
defendants did have standing to object because they
claimed to have "suffered a cognizable prejudice by the
approval of the partial settlement." Id. at 483. We ultimately
held that the non-settling defendants would not be

14
prejudiced because they would be responsible only for their
portion of the liability. See id. at 487. Therefore we affirmed
the district court's approval of the partial settlement.

Cendant does not stand in the position of a non-settling
defendant or an unrepresented third party whose rights are
affected by the settlement. Quite the contrary. Cendant is
a settling defendant. Therefore, Eichenholtz does not control
our disposition of this case.

Deutch also cites to Judge Newman's concurrence in In
re Warner Comm. Sec. Litig., 798 F.2d 35, 37 (2d Cir. 1986).
In that case, a class member who still owned stock in
Warner Communications, Inc. sought to overturn the
district court's approval of a securities fraud class action
settlement against Warner, one of its subsidiaries, and
certain of their officers and directors. The class member
argued, much like Deutch argues now, that the district
court should have compelled a greater contribution from
the individual defendants. The Court of Appeals for the
Second Circuit affirmed the district court's approval of the
settlement after noting that the district court's fiduciary
duties covered the class members and not the defendants.
See id. at 37.

In a separate concurring opinion, Judge Newman agreed
with the majority that "normally, once a district court is
satisfied that the total compensation paid to class members
in settlement of a class action is fair and reasonable, the
court need not be concerned as to how the defendants
apportion liability for the settlement among themselves." Id.
at 38 (Newman, J., concurring). He then noted:

[I]n a case such as this, where the apportionment
between corporate and individual defendants can have
economic significance for a shareholder-claimant, some
scrutiny of the portion contributed by a corporate
defendant normally would be appropriate. In such
circumstances, a settlement might well be shown to be
unreasonable to a shareholder if the corporate
defendant contributed so much more than a fair share
as to cause a discernable incremental pro rata decline
in the value of the shareholder's stock below the
reduction attributable to a fair contribution.

15
Id. Judge Newman's view apparently did not convince his
colleagues but he ultimately concurred with the judgment
of the majority because the Delaware Court of Chancery
had already determined in a derivative action that the
allocation of the settlement's burdens between the
corporation and the individual defendants was fair. See id.

To the extent that Judge Newman's view was that the
fairness of the allocation between the corporation and other
defendants is an issue to be considered in a derivative
action, we agree. Deutch's allegations that Cendant was
unrepresented in the settlement negotiations because a
majority of its board of directors operated under a conflict
of interest and that Cendant's board members breached
their duty of loyalty are best made in a shareholder
derivative action. See, e.g., Wolf v. Barkes, 348 F.2d 994,
996 (2d Cir. 1965) ("A new derivative suit against
management for fraud or waste in releasing corporate
claims for inadequate payment can redress improper
settlements even without setting them aside."); In re Warner
Comm. Sec. Litig., 618 F. Supp. 735, 753 (S.D.N.Y. 1985)
("If [the objector] believes that the settlement is unfair to
Warner he should pursue his objection in the Delaware
Chancery Court . . . . This Court is concerned solely with
the fairness of the settlement to the class."), aff'd, 798 F.2d
35 (2d Cir. 1986) (noting that the Delaware Chancery Court
had already resolved the issue of apportionment of the
burdens of the settlement between the corporations and
their officers).

Significantly, counsel for Cendant informed us at oral
argument that the same counsel for Deutch in this appeal
has commenced a derivative action in Delaware Chancery
Court on behalf of a different Cendant shareholder. That
action, entitled Resnik v. Silverman et al., Civ. A. No. 18329
(Del. Ch. filed Sept. 19, 2000), includes the allegation that
13 of the HFS Individual Defendants breached their duties
of loyalty and good faith by causing Cendant to obtain
releases of their personal liability when settling the class
action. Thus, the derivative action plaintiff will have an
opportunity to make the same argument that Deutch is
trying to make here.

16
In so holding, we are not convinced by Deutch's
contentions that the state law derivative action will be
inadequate to protect Cendant's rights. Deutch asserts that
a derivative action is not the functional equivalent of a
contribution claim, but, as his counsel conceded at oral
argument, the alleged damages in the derivative action are
similar to those in a contribution claim.

Deutch also argues that a state law derivative action
plaintiff will face significant roadblocks to Cendant's
recovery from the directors for their fair share of liability.
He first notes that a derivative action plaintiff will have to
satisfy the demand requirement. See Aronson v. Lewis, 473
A.2d 805, 811-12 (Del. 1984) (recognizing that the demand
requirement "exists at the threshold, first to insure that a
stockholder exhaust his intracorporate remedies, and then
to provide a safeguard against strike suits"). This is a
generally applicable requirement for any derivative action
and does not make the derivative action inadequate. Next,
Deutch complains that Delaware law allows Cendant's
officers and directors to seek indemnification. If so, that
reflects the policy of the state corporation law but does not
provide a basis for objection by current shareholders to a
class action settlement.

We believe that the District Court correctly identified the
applicable law - under Fed. R. Civ. P. 23(e), courts must
determine whether the settlement is fair, reasonable, and
adequate to the class. The fiduciary duty to the class exists
because the very nature of the class action device prevents
many who have claims from directly participating in the
litigation process. See In re GM Trucks, 55 F.3d at 805
("Rule 23(e) imposes on the trial judge the duty of
protecting absentees."); see also 2 Herbert Newberg & Alba
Conte, Newberg on Class Actions S 11.46, at 11-105 to 11-
106 (3d ed. 1992) ("The court must be assured that the
settlement secures an adequate advantage for the class in
return for the surrender of litigation rights against the
defendants."). Deutch has not persuaded us that the
court's fiduciary duty under Rule 23(e) should be extended
to include defendant corporations even if they may be
controlled by individuals who have conflicts of interest.

17
Deutch has made several other arguments that require
little discussion. He argues that the Notice of Settlement
was deficient because it failed to inform current Cendant
shareholders that the settlement would eliminate Cendant's
rights to contribution. However, Deutch fails to show that
current Cendant shareholders who were not part of the
class should have been notified of the settlement. Rule 23(e)
requires only that "notice of the proposed dismissal or
compromise [of the class action] shall be given to all
members of the class." Because there is no requirement
imposed by Rule 23(e) or our case law to inform current
shareholders of corporate defendants of the settlement or
the allocation, we reject Deutch's objection to the Notice of
Settlement.

Deutch also argues that the District Court erred by
denying his motion to intervene as of right, because he had
a right to intervene as a derivative action plaintiff to protect
Cendant's rights to contribution.7 Under Fed. R. Civ. P.
24(a), an applicant can intervene as of right "when the
applicant claims an interest relating to the property or
transaction which is the subject of the action and the
applicant is so situated that the disposition of the action
may as a practical matter impair or impede the applicant's
ability to protect that interest, unless the applicant's
interest is adequately represented by existing parties."
Inasmuch as we have declined to hold that Cendant was
unrepresented in the settlement negotiations, we see no
reason why Deutch is entitled to intervene in order to object
to the settlement on behalf of Cendant. As we noted above,
the proper forum for Deutch's allegations is a derivative
_________________________________________________________________

7. In addition, Deutch argued before the District Court that he could
intervene as of right in order to protect his interest as a current
Cendant
shareholder. The District Court rejected this argument, stating that the
logical result would be that a corporation could not settle any lawsuit
against it without first obtaining the approval of every shareholder. See
In re Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 277. Although Deutch
listed this issue in his statement of issues on appeal, he did not argue
the point in his brief and therefore we will not consider it. See Travitz
v.
Northeast Dep't ILGWU Health & Welfare Fund, 13 F.3d 704, 711 (3d Cir.
1994) ("When an issue is not pursued in the argument section of the
brief, the appellant has abandoned and waived that issue on appeal.").

18
action against Cendant's board members for breach of
fiduciary duties. Therefore, the District Court did not err in
denying Deutch's motion to intervene as of right in the
class action and granting him only permissive intervention
under Rule 24(b).

C. Allocation of the Burdens of Settlement

Deutch's remaining contentions stem primarily from his
belief that Cendant may have paid more than its fair share
of the settlement to the benefit of the HFS Individual
Defendants. He argues first that the District Court should
not have released the HFS Individual Defendants from
certain contribution claims that could have been brought
by Cendant without first determining whether the HFS
Individual Defendants paid their fair share into the
settlement.

The District Court's order approving the settlement
provides that "[a]ll actions and claims for contribution are
permanently barred, enjoined and finally discharged (i) as
provided by 15 U.S.C. S 78u-4(f)(7)(A), and (ii) as may be
provided by applicable federal or state statutes or common
law." App. at 16. The court added that "this Judgment shall
not be deemed a waiver or release of and shall not preclude
Cendant . . . from asserting any claims . . . against E&Y, its
present or former officers, directors, partners and
employees, or against any current or former officers or
directors of CUC, HFS or Cendant, either in the form of a
cross-claim, counterclaim, third-party complaint, or other
form." App. at 16.

In entering the contribution bar, the District Court
believed itself bound by the settlement discharge provision
of the Reform Act which provides:

A covered person who settles any private action at any
time before final verdict or judgment shall be
discharged from all claims for contribution brought by
other persons. Upon entry of the settlement by the
court, the court shall enter a bar order constituting the
final discharge of all obligations to the plaintiff of the
settling covered person arising out of the action. The
order shall bar all future claims for contribution arising
out of the action -

19
 (i) by any person against the settling covered person;
and

(ii) by the settling covered person against any person,
other than a person whose liability has been
extinguished by the settlement of the settling covered
person.

15 U.S.C. S 78u-4(f)(7)(A).

Deutch reads the language of subsection (ii) to mean that
"only a person who has paid to extinguish his own liability
- i.e., one whose liability is not extinguished by the
payment of another - is entitled to a contribution bar." Br.
of Appellant at 32. In his view, because the HFS Individual
Defendants have not paid their fair share into the
settlement, they are not entitled to a contribution bar but
rather are liable for contribution claims from Cendant.

We acknowledge at the outset that there is some question
as to the scope of the contribution bar imposed by the
District Court. The District Court's order does not identify
by name those parties who are covered by the contribution
bar. However, in its opinion denying Deutch's motion to
intervene as of right the court stated, "[a]ll parties concede
that the HFS Individual Defendants are covered by the
contribution bar for Section 10(b) claims and outside HFS
defendant-directors for Section 11 claims as well. Disputed
is the impact of the bar on the CUC Individual Defendants
who arguably are not parties to settlement but whose
liability to the plaintiff class is extinguished by the
settlement as structured." In re Cendant Corp. Sec. Litig.,
109 F. Supp. 2d at 277 n.4.

The issue of the contribution bar is raised by Deutch
because he argues that the District Court erred in imposing
a contribution bar in favor of the HFS Individual
Defendants without first determining if they had paid their
fair share into the settlement. However, we believe this is
an inappropriate time to flesh out the various uncertainties
with respect to the scope of the contribution bar. Because
no party has yet filed a claim for contribution, the District
Court was not required to decide the issue raised here by
Deutch.

20
It is not necessary to determine who is covered by the
contribution bar in order to address Deutch's argument
that the District Court should have determined if the HFS
Individual Defendants paid their fair share into the
settlement before imposing a contribution bar in their favor.
Nothing in the text of 15 U.S.C. S 78u-4(f)(7)(A) or in the
legislative history of the Reform Act suggests that there is
such a requirement, see H.R. Conf. Rep. No. 104-369
(1995), reprinted in 1995 U.S.C.C.A.N. 730; S. Rep. No.
104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679, and we
decline to impose one in this case.

Deutch argues that such a requirement is supported by
the Reform Act's policy of favoring proportionate liability
among wrongdoers. The proportionate liability provisions of
the Reform Act do not support Deutch's argument, as they
merely state that "a covered person against whom a final
judgment is entered in a private action shall be liable solely
for the portion of the judgment that corresponds to the
percentage of responsibility of that covered person." 15
U.S.C. S 78u-4(f)(2)(B)(i).8 Thus, when there is a final
judgment in an action where other defendants have
previously settled, i.e., a partial settlement,"the verdict or
judgment shall be reduced by the greater of - (i) an amount
that corresponds to the percentage of responsibility of that
[settling] covered person; or (ii) the amount paid to the
_________________________________________________________________

8. The Act further provides:

In any private action, the court shall instruct the jury to answer
special interrogatories, or if there is no jury, shall make
findings,
with respect to each covered person and each of the other persons
claim by any of the parties to have caused or contributed to the
loss
incurred by the plaintiff, including persons who have entered into
settlements with the plaintiff or plaintiffs, concerning-

(i) whether such person violated the securities laws;

(ii) the percentage of responsibility of such person, measured as a
percentage of the total fault of all persons who caused or
contributed to the loss incurred by the plaintiff; and

(iii) whether such person knowingly committed a violation of the
securities laws.

15 U.S.C. S 78u-4(f)(3)(A).

21
plaintiff by that [settling] covered person." 15 U.S.C. S 78u-
4(f)(7)(B). Such a reduction is appropriate because non-
settling defendants would otherwise be prejudiced if they
were held fully liable for the entire amount of the verdict or
judgment. The situation before us is different because there
has been a full settlement of claims.

Two of the cases on which Deutch relies, Eichenholtz v.
Brennan, 52 F.3d 478 (3d Cir. 1995), and TBG, Inc. v.
Bendis, 36 F.3d 916 (10th Cir. 1994), both involved partial
settlements in which non-settling defendants would have
been prejudiced if proportionate fault had not been
determined. However, neither Eichenholtz nor TBG
discusses the situation where the parties have negotiated a
full settlement of claims, and where the rationale behind
proportionate fault reduction in partial settlements
(avoiding prejudice to non-settling defendants) is
inapplicable. Indeed, one of the benefits of a full settlement
is the avoidance of a determination of the merits. See, e.g.,
Young v. Katz, 447 F.2d 431 (5th Cir. 1971) ("In examining
a proposed compromise for approval or disapproval under
Fed. R. Civ. P. 23(c) the court does not try the case. The
very purpose of compromise is to avoid the delay and
expense of such a trial.") (quotation omitted). Moreover,
both Eichenholtz and TBG were decided before the
applicable date of the Reform Act.

Inapplicable here for the same reasons are United States
v. Alcan Aluminum, Inc., 25 F.3d 1174 (3d Cir. 1994), and
Herbst v. International Tel. & Tel. Corp., 72 F.R.D. 85 (D.
Conn. 1976), where releases of contribution claims were
negotiated by the parties. That the Reform Act significantly
changed the law of securities fraud since Herbst and the
other cases on which Deutch relies cannot be gainsaid. We
therefore find no support for Deutch's position in the cases
he cites.

The District Court's order approving the settlement takes
great care in preserving to Cendant any claims "against any
current or former officers or directors of CUC, HFS or
Cendant, either in the form of a cross-claim, counterclaim,
third party complaint, or other form." App. at 16. Thus, the
settlement itself should not prejudice a derivative action
plaintiff, and the District Court did not err in rejecting

22
Deutch's claim that the court should not impose a
contribution bar in favor of the HFS Individual Defendants
without first determining if they have paid their fair share
into the settlement.

Deutch relies on language in our decision in Girsh v.
Jepson, 521 F.2d 153 (3d Cir. 1975)9 to support his
contention that the District Court was required to analyze
the value of the contribution of the HFS Individual
Defendants. The language to which Deutch refers 10 was
directed to our concern that the district court had approved
a class action settlement without providing an adequate
record that would enable us to fulfill our review function.

Unlike the situation in Girsh, there was no deficiency in
the record in this case. The District Court considered the
nine Girsh factors before finding the Cendant settlement to
be fair, reasonable, and adequate. The court recognized
that questions had been raised about the value of the HFS
Individual Defendants' contribution and noted that"the
HFS Defendants have agreed to contribute to the class 50%
_________________________________________________________________

9. In Girsh, we set forth nine factors that should be considered in
connection with a class action settlement's fairness, reasonableness, and
adequacy. The nine Girsh factors are: (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; and (9) the range of reasonableness of the
settlement fund to a possible recovery in light of all the attendant risks
of litigation. See id. at 156-57.
10. We noted:

The district court did not specifically deal with the Gluck
settlement
and we are, therefore, at a loss and without the benefit of its
analysis as to why $10,000.00 was a fair and adequate settlement
of all claims against defendant Gluck. It may be that the
$10,000.00
contribution is overly generous. On the other hand, it may be
grossly inadequate. The determination as to the fairness of this
aspect of the settlement must depend upon facts still to be
developed.

Id. at 159 (emphasis in original).

23
of any recovery against E & Y." In re Cendant Corp. Sec.
Litig., 109 F. Supp. 2d at 284. In its opinion rejecting the
objections of the class members, the District Court stated:
"The Court recognizes that this recovery is inchoate but
once again affirms that it is not `illusory.' This does not
mean that valuation is impossible, but only difficult." In re
Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 256. As
Deutch notes, the court stated that it need not consider the
"added value from recovery against E & Y" before it held
that the Cendant settlement was fair, reasonable, and
adequate. Id. This did not amount to an abuse of the
court's discretion.

Deutch further argues that the HFS Individual
Defendants' promise to give 50% of their recovery against
E&Y to the class was illusory. He states that "the
settlement creates no obligation for the HFS Defendants to
prosecute the suit after the settlement is final or to
guarantee some minimum amount commensurate with
their liability - even though the other parties have fully
complied with their obligations." Br. of Appellant at 44.

However, implicit in the settlement is a promise to make
a good faith effort to seek recovery against E&Y. See Russell
v. Princeton Labs., Inc., 50 N.J. 30, 38, 231 A.2d 800, 805
(1967) ("A contract should not be read to vest a party . . .
with the power virtually to make his promise illusory.");
Nolan v. Control Data Corp., 243 N.J. Super. 420, 431, 579
A.2d 1252, 1258 App. Div. (1990) (implying a good faith
requirement because a "[l]iteral interpretation of these
clauses would go far towards making these contracts
illusory, a result which courts usually seek to avoid"); 2
Joseph M. Perillo & Helen Hadjiyannakis Bender, Corbin on
Contracts S 5.28, at 149-50 (rev. ed. 1995) ("An implied
obligation to use good faith is enough to avoid the finding
of an illusory promise.").11

Deutch also argues that the District Court was required,
but failed, to determine the amount paid into the
_________________________________________________________________

11. We note that Cendant and the HFS Individual Defendants
subsequently did file cross-claims against E&Y and were for the most
part successful in overcoming E&Y's motion to dismiss. See In re
Cendant Corp. Sec. Litig., 139 F. Supp. 2d 585 (D.N.J. 2001).

24
settlement to release the claims brought under Section 11
of the 1933 Securities Act, 15 U.S.C. S 77k(f). He contends
that this determination was necessary because the
contribution bar mandated by 15 U.S.C. S 78u-4(f) cannot
bar "contribution claims for S 11 violations against inside
directors . . . under any circumstance." Reply Br. of
Appellant at 16.12

Once again, we conclude that whether, and to what
extent, the HFS Individual Defendants are covered under
the contribution bar is better presented in a contribution
claim, if any, brought by Cendant, E&Y, or the CUC
Individual Defendants against those defendants. We need
only hold that the District Court was not required under
the Reform Act or Rule 23(e) to apportion the settlement
according to the plethora of claims raised in the class
action. See, e.g., Cotton v. Hinton, 559 F.2d 1326, 1330 (5th
Cir. 1977) ("It cannot be overemphasized that neither the
trial court in approving the settlement nor this Court in
reviewing that approval have the right or the duty to reach
any ultimate conclusions on the issues of the fact and law
which underlie the merits of the dispute.") (quotation
omitted).

Finally, Deutch argues that because Cendant is paying
the entire cash amount of the settlement, it constitutes an
impermissible indemnification of the HFS Individual
Defendants for securities law violations. Deutch again cites
to Eichenholtz, 52 F.3d at 483, where we held that there
was no express or implied right to indemnification under
the federal securities laws and recognized that"federal
courts disallow claims for indemnification because such
claims run counter to the policies underlying the federal
securities acts." Id. at 484.

Ordinarily, indemnification refers to the reimbursement
by a corporation to its directors and officers for liabilities
_________________________________________________________________

12. Deutch apparently refers to 15 U.S.C. S 78u-4(f)(10), which defines
"covered person" as "(i) a defendant in any private action arising under
this chapter [i.e., Section 10(b) claims]; or (ii) a defendant in any
private
action arising under section 77k of this title [i.e., Section 11 claims],
who
is an outside director of the issuer of the securities that are the
subject
of the action."

25
incurred in connection with actions brought against them
in their official capacities. See, e.g., Kirschbaum v. WRGSB
Associates, 243 F.3d 145, 156 (3d Cir. 2001). Cendant has
not reimbursed the HFS Individual Defendants, all of whom
were directors and/or officers of Cendant at some point
during the class period. Instead, the settlement provides for
Cendant to make a direct payment to the class of $2.85
billion. Deutch has not cited to any case in which a court
has determined that a full settlement of claims amounted to
an indemnification of certain defendants. Therefore, we
decline to hold that the settlement between Cendant, the
HFS Individual Defendants, and the Lead Plaintiff
amounted to an indemnification of the HFS Individual
Defendants.

III.

CONCLUSION

Deutch has not convinced us that his objections to the
settlement are supported by the applicable law, nor has he
persuaded us that new rules are required for a derivative
action plaintiff. Whether Cendant's board members
breached their fiduciary duties to the corporation is best
addressed in a derivative action, and not in connection with
approval of a class action settlement. The District Court
was not required by Rule 23 or the Reform Act to consider
the effect of the settlement on Cendant nor was it required
to determine the relative fault of the defendants before
approving the settlement. Therefore, we hold that the
District Court did not abuse its discretion in rejecting
Deutch's objections to the settlement.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

26