UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT
July 25, 1975
MEYERS L. GIRSH, HERMAN AND DOROTHY GREENFIELD, GEORGE H. ENTIN, AND DAVID AND DOROTHY STEINBERG, DERIVATIVELY AND ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, PLAINTIFFS-APPELLEES,
ROBERT S. JEPSON, JR., MAXWELL H. GLUCK, DONALD I. REIFLER, MERRILL BOTHAMLEY, RICHARD LEAVITT, DANIEL W. BURNS, ROBERT J. BRADLEY, WILLIAM K. GUMPERT, HUBERT I. ROSENBLUM, ROBERT J. MCGUINNESS, MELVIN L. DUCHIN, RICHARD B. LENG, GERALD L. SALZMAN, JOSEPH D. CARRABINO, NEW AMERICA FUND, INC., FUND MANAGEMENT CORPORATION, PORTFOLIO MANAGEMENT CORPORATION, PRICE WATERHOUSE AND COMPANY, DEFENDANTS-APPELLEES, LYNN SARA FRACKMAN, OBJECTOR-APPELLANT. ROBERT HELFAND, SUING DERIVATIVELY IN THE RIGHT AND ON BEHALF AND FOR THE BENEFIT OF NEW AMERICA FUND, INC., PLAINTIFF-APPELLEE, V. NEW AMERICA FUND, INC., FUND MANAGEMENT CORPORATION, PORTFOLIO MANAGEMENT CORPORATION, DONALD I. REIFLER, MERRILL BOTHAMLEY, RICHARD B. LEAVITT, DANIEL W. BURNS, ROBERT J. BRADLEY, WILLIAM K. GUMPERT, HUBERT I. ROSENBLUM, ROBERT J. MCGUINNESS, ROBERT S. JEPSON, JR., MAXWELL H. GLUCK, MELVIN L. DUCHIN, RICHARD B. LENG, GERALD L. SALZMAN, JOSEPH D. CARRABINO, PRICE WATERHOUSE AND COMPANY, DEFENDANTS-APPELLEES, LYNN SARA FRACKMAN, OBJECTOR-APPELLANT
ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA (D.C. Civil No. 72-2035) (D.C. Civil No. 73-652).
Van Dusen, Adams and Garth, Circuit Judges.
Opinion OF THE COURT
GARTH, Circuit Judge
On this appeal, Petitioner Frackman challenges the district court's order dismissing her objections and approving a settlement agreement. The district court, in its order of June 25, 1974, approved the settlement of a class and derivative action alleging violations of the Securities Exchange Act of 1934, 15 U.S.C. §§ 78j(b), the Investment Companies Act of 1940, 15 U.S.C. § 80a-33b and 35, the Investment Advisors Act, 15 U.S.C. § 80b-6, and Rule 10b-5 of the Securities and Exchange Commission. Because we believe that the record before the district court was not sufficiently developed and cannot, therefore, support the district court's approval of the settlement agreement we remand to the district court for further proceedings as indicated in this opinion.
The present appeal involves two cases which were consolidated by the district court for purposes of discovery and settlement.*fn1 Girsh v. Jepson was commenced as a class action on October 18, 1972, on behalf of all persons who purchased shares of the New America Fund between September 20, 1968, the date of the public offering, and December 31, 1790. Named as defendants in the Girsh action were: (1) the New America Fund, Inc. (hereinafter, "Fund"), a Delaware corporation, whose common stock is registered with the Securities and Exchange Commission and traded on the over-the-counter market;*fn2 (2) Fund Management Corporation, an investment advisor; (3) Portfolio Management Corporation, the parent corporation of Fund Management Corporation; (4) various individual defendants who were officers, directors and shareholders in the above named corporate defendants; and, (5) Price Waterhouse and Company, the Fund's auditor. The complaint alleged in Count 1 violations of Section 10(b) of the Exchange Act and Rule 10b-5 in that defendants filed a "false and misleading prospectus with the Securities and Exchange Commission." In Count 2, plaintiffs alleged violations of the Investment Company Act of 1940, Sections 34(b) and 36, in that among other things, ". . . Defendants violated their fiduciary duty with respect to compensation for services. . . ." In Counts 3 and 4, certain plaintiffs sought derivative recovery on behalf of the Fund based upon "Defendants' usurpation of [a] valuable business opportunity. . . ."
The complaint in Helfand v. New America Fund, Inc., the case consolidated with Girsh v. Jepson, was filed on March 23, 1973. The defendants were identical to those named in the Girsh complaint. The Helfand case was brought as a derivative action alleging violations of the Investment Company Act of 1940, Sections 34(b), 36(a) and (b); the Investment Advisers Act, Section 206; and, the Exchange Act, Section 10(b) and Rule 10b-5. Specifically, the complaint alleged, among other things, that the defendants had charged the Fund excessive advisory fees, over-valued the Fund's assets, invested in highly speculative securities without adequately disclosing the risk involved, and usurped valuable business opportunities.
Soon after discovery commenced, the parties entered into settlement negotiations. These negotiations resulted in a "Stipulation of Settlement" which was filed in the district court on November 9, 1973. On November 21, 1973, the district court entered an order constituting ". . . a class action . . . for the purpose of effectuating the settlement of the cases pursuant to the Stipulation of Settlement. . . ."*fn3 The order set March 20, 1974, as the date for a hearing on the fairness and adequacy of the proposed settlement. The order directed that individual notice of the settlement hearing be sent by mail to all record holders of Fund shares as of the close of business on October 12, 1973. Concluding that the identity of class members who had ceased to be shareholders prior to October 15, 1973, ". . . cannot be determined without unreasonable expense and delay . . .," the district court directed notice to these individuals as follows: individual notice by mail to ". . . persons who were shareholders of record of the Fund and entitled to vote at the annual meetings of shareholders of the Fund held during the calendar years 1969 and 1970 . . .;" to those whose names did not appear on the annual meeting list, the court directed ". . . notice by publication . . . in the Eastern, Middle Western and Pacific Coast editions of The Wall Street Journal on two business days per week in each of two consecutive calendar weeks. . . ."
The Stipulation of Settlement provides for the payment of the following amounts by the following defendants: (1) Fund Management Corporation and its parent corporation agreed to pay $55,000 to the Fund and to reduce from its investment advisor's fee $12,500 quarterly, ". . . for as long as FMC remains the investment advisor to the Fund but in no event longer than 46 consecutive quarterly periods;" (2) Maxwell Gluck, a major shareholder, agreed to pay $10,000 to the Fund ". . . in settlement of all claims made against him in the Complaints or which might have been made by the plaintiffs or the Fund under any applicable law including particularly the provisions of Section 16(b) of the Securities Exchange Act of 1934;" (3) the Fund agreed to pay $400,000, less counsel fees and costs, to Fund Claimants (purchasers of Fund stock during the period covered by the settlement agreement).
On March 1, 1974, objector/appellant Frackman indicated her intention to object and moved in the district court to extend the time to file papers in support of her objections to the proposed settlement. By order of March 4, 1974, the district court permitted an extension until March 11, 1974. Thereafter, on March 11th, Frackman filed her objections to the proposed settlement specifying, among other grounds, the inadequacy of the settlement fund, the sparseness of the record, and the failure of certain defendants to contribute toward the settlement.*fn4
On the same date, March 11, 1974, Frackman moved to continue the date fixed for the settlement hearing ". . . to enable proper preparation for that hearing. . . ."*fn5 This motion was denied by the district court on March 20, 1974, at which time the settlement hearing was held.*fn6 On June 25, 1974, the district court entered a Memorandum and Order approving the settlement agreement and dismissing Frackman's objections. As previously indicated, we believe that a remand is required and we so order.
The decision of whether to approve a proposed settlement of a class action is left to the sound discretion of the district court.*fn7 Some of the factors which are relevant to a determination of the fairness of a settlement were listed by the Second Circuit in City of Detroit v. Grinnell Corp., 495 F.2d 448 (2d Cir. 1974) as follows:
". . . (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. . . ."
495 F.2d at 463. See Bryan v. Pittsburgh Plate Glass Co., supra.
We note that the district court referred to the nine factors listed in Grinnell, among others, in reaching its conclusion that the proposed settlement was fair, adequate and reasonable. Nevertheless, we believe that the district court did not live up to its fiduciary responsibility, as the guardian of the rights of the absentee class members in approving the settlement based upon the inadequate record before it. See Greenfield v. Villager Industries, Inc., 483 F.2d 824, 832 (3d Cir. 1973).
We believe that objector Frackman was not afforded an adequate opportunity to test by discovery the strengths and weaknesses of the proposed settlement. Soon after her notice of intention to object was filed, Frackman submitted four sets of interrogatories to the Fund, to plaintiffs' counsel in Girsh, to Price Waterhouse & Co., and to plaintiff's counsel in Helfand. None of these interrogatories were ever answered.*fn8 It is little comfort to objector Frackman that plaintiffs' counsel may have examined the documents sought by objector during the course of its discovery. As an objector, Frackman was in an adversary relationship with both plaintiffs and defendants and was entitled to at least a reasonable opportunity to discovery against both.
In Greenfield v. Villager Industries, Inc., supra at 833, we wrote:
"It is not unusual for objections to be presented at a hearing on a proposed settlement of a class action, [footnote omitted] and it is elemental that an objector at such a hearing is entitled to an opportunity to develop a record in support of his contentions by means of cross examination and argument to the court. . . ."
Such an "opportunity to develop a record" was denied to Frackman by the totality of the circumstances surrounding the settlement hearing. Not only was Frackman's attempt to compel answers to her interrogatories thwarted by the order of the district court, but her opportunity to participate effectively in the settlement hearing, through cross examination and argument, was also frustrated by the late filing of the affidavits upon which plaintiffs and defendants relied to demonstrate the fairness of the settlement. Objector asserts, and neither plaintiffs nor defendants dispute, that her attorneys did not receive the affidavits submitted in support of the settlement until the day before the settlement hearing was held. Since the date of the settlement hearing had been known by the parties for more than four months, we cannot understand, and the record reveals no explanation, why there was such a long delay in the submission of these affidavits. On her part, Frackman made repeated efforts, through timely filed motions, to obtain answers to her interrogatories and to continue the date of the settlement hearing. In our view, from the time objector Frackman became actively involved in this case, she did everything within her power to prepare for the settlement hearing.*fn9 Nevertheless, the actions of the district court and her adversaries combined to deny her meaningful participation in that hearing.
We are not satisfied that the best notice practicable under all the circumstances was provided to class members. It is now well established that, ". . . Individual notice must be sent to all class members whose names and addresses may be ascertained through reasonable effort." Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 173, 40 L. Ed. 2d 732, 94 S. Ct. 2140 (1974). As indicated supra pp. 155-56, the district court directed individual mail notice to shareholders who were of record on three separate days. As to all other class members, publication notice was required. The only evidence indicating that this combination of notice by mail and publication was the best notice that could be provided "through reasonable effort" appears in the affidavit of Gerald L. Salzman, which was one of the affidavits made available to Frackman's counsel the day before the settlement hearing.*fn10 We believe that the late date at which Frackman's counsel received this affidavit prevented effective cross-examination of Salzman as to the adequacy of the notice and foreclosed effective attempts to produce evidence in rebuttal of Salzman's conclusions.*fn11 Salzman was not cross-examined at the settlement hearing in regard to the "adequacy of notice" issue. Nor was opposing testimony, in the form of affidavits or otherwise, submitted to dispute Salzman's conclusion. See note 11 supra. We cannot say that the district court would have reached the same conclusion as to the adequacy of notice, had Frackman been afforded a fair opportunity to meet the assertions made in the Salzman affidavit. This is especially so in light of this Circuit's strong policy in favor of "maximum notice."*fn12
We are satisfied that the fairness and adequacy of the settlement agreement, insofar as the claims against Maxwell Gluck and Price Waterhouse & Co. are concerned, cannot be determined from the record in its present form.
As indicated supra, p. 156, the settlement agreement provides for the compromise of all claims against defendant Gluck for $10,000.00, including claims based upon Section 16(b) of the Exchange Act of 1934. Frackman asserts that the § 16(b) claim ". . . did not appear in the Helfand or Girsh complaints or in any subsequent pleadings. . . ." She further argues that:
". . . Not one fact is in the record . . . as to the nature of this claim or its potential recovery value . . . . The objector and the Court had absolutely no idea whatsoever of the amount of short-swing profits that Gluck realized . . . ."
Objector's Brief at 43-44.
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. On this state of the record, we have no other recourse but to require such a factual development on remand.
Similarly, we are not satisfied that the opinion explains why Price Waterhouse & Co. is contributing nothing toward the proposed settlement. The district court's only separate consideration of the claim against Price Waterhouse appears not in the section of its opinion discussing liability but rather in that portion of its opinion analyzing the ability of the defendants to withstand a greater judgment. There, the district court comments that Price Waterhouse's ". . . possible liability is questionable . . . ." This conclusion is devoid of factual support in the record, and, as such, we cannot properly perform our function of evaluating the district court's exercise of discretion in concluding that the settlement was fair and adequate. ". . . It is essential . . . that a reviewing court have some basis for distinguishing between well-reasoned conclusions arrived at after a comprehensive consideration of all relevant factors, and mere boiler plate approval phrased in appropriate language but unsupported by evaluation of the facts or analysis of the law. . . ." Protective Committee v. Anderson, 390 U.S. 414, 434, 20 L. Ed. 2d 1, 88 S. Ct. 1157 (1968) (dealing with the compromise of claims in bankruptcy); Allis-Chalmers Corp. v. Philadelphia Electric Co., 521 F.2d 360 (3d Cir. 1975); Bryan v. Pittsburgh Plate Glass Co., supra.
In remanding for a more complete development of the record and for an articulation by the district court of the relevant factors on which it relied in approving the settlement, we express no opinion on the merits of the proposed settlement agreement. That decision, in the first instance, is to be made by the district court in light of the record to be developed by the parties.
Nor by our remand do we suggest that a record appropriate to a trial on the merits is required. We recognize that the task of the district court is to determine whether the proposed settlement should be accepted and approved -- a determination substantially different than a decision on the merits. Bryan v. Pittsburgh Plate Glass Co., supra at 804. However, in order to satisfy even the less rigorous evidential requirements for settlement approval, the district court must at least evaluate all the contentions of the parties and provide any objectors with an opportunity for meaningful exposition of their positions. Since that was not done here, we will vacate the order of the district court approving the settlement and dismissing Frackman's objections and will remand for further proceedings consistent with this opinion.*fn13 Each party will bear its own costs.