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FLICKINGER v. C.I. PLANNING CORP.

UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA


June 4, 1986

CHARLES FICKINGER on behalf of himself and all others similarly situated
v.
C.I. PLANNING CORPORATION and CITY INVESTING COMPANY

The opinion of the court was delivered by: SHAPIRO

NORMA L. SHAPIRO, J.

 MEMORANDUM and ORDER

 I. Facts and Procedural History

 Plaintiff, on behalf of a class of selling shareholders, brought this action alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. ยงยง 78j(b) and 78t(a) (the "Act"), and Pennsylvania common law, to recover damages for misrepresentations depreciating the financial condition of C.I. Realty Investors, a real estate investment trust (the "Trust"), and keeping the market price of its shares artificially low. On May 19, 1986, a hearing in accordance with Fed.R.Civ.P. 23(e) was held on plaintiff's motion to approve the settlement and for attorneys' fees and expenses. Upon full consideration of the written submissions and oral argument in support of the settlement, the court approves the settlement as fair, reasonable and adequate to the class and grants counsel for the class' petition for fees and costs in part.

 On March 11, 1981, plaintiff filed a complaint on behalf of himself and other shareholders of the Trust (other than the defendants and their affiliates), who acquired shares of the Trust prior to November 29, 1977 and sold those shares during the period from November 29, 1977 through August 30, 1979.

 Plaintiff had purchased shares in April, 1972, and sold them in April, 1978. Defendant, C.I. Planning Corp., a subsidiary of defendant City Investing Company, was the advisor to the Trust during that time and until August 30, 1979. Plaintiff alleged that between November 29, 1977 and August 30, 1979, defendants, insiders and controlling persons with respect to the Trust, failed to reveal certain favorable real estate appraisals and estimates of increased rental income from prospective lease renewals to depress the market price of its shares and profit from the purchase of Trust shares.

 Defendants moved for summary judgment on two grounds: (1) that the action was time-barred, and (2) that plaintiff failed to state a cause of action because disclosure of the appraisals and the estimates was adequate. In denying without prejudice defendants' claim that the action was time-barred, the court held that a two-year limitations period applied and that there was a factual issue as to whether plaintiff knew or should have known the allegedly actionable facts on or before March 11, 1979 (two years prior to suit). The court also denied defendants' claim that plaintiff failed to state a cause of action because of factual issues as to the adequacy of disclosure.

 After discovery with regard to plaintiff's motion for class certification, briefing and argument, plaintiff's motion that the action be maintained as a class action, with Charles Fickinger as class representative, was granted on July 3, 1984; the court certified a class of "all C.I. Realty Investors (Trust) shareholders, other than defendants and their affiliates, who acquired Trust shares prior to November 29, 1977 and sold their shares during the period November 29, 1977 through April 4, 1978" (the "Class"). The court certified the class conditionally in order to determine the following four issues:

 

1) whether defendants failed to disclose adequately with regard to the Trust office buildings' negotiated increases in rentals and consequent appreciation in value in the November, 1977 Fiscal 1978 Second Quarter Report and/or the January 31, 1978 Fiscal 1978 Third Quarter Report;

 

2) whether defendants failed to disclose a real estate appraisal prepared March 15, 1978 and a rental projection prepared on or after March 31, 1978.

 

3) whether said failures to disclose caused the value of the shares to be depressed to the benefit of the defendants and the detriment of the plaintiff class; and

 

4) whether defendants' failure to disclose was fraudulently concealed until on or after March 11, 1979.

 Plaintiff engaged in discovery and settlement negotiations with defendants throughout 1985 and early 1986. The court assisted at the request of the parties on some occasions. The parties reached an original settlement agreement on July 3, 1985. Under the settlement agreement originally proposed, defendants were to deposit $ 600,000 in cash in escrow with Provident National Bank within ten days of entry of approval of the settlement. This amount, and the interest thereon, would comprise the Settlement Fund. Plaintiff and the members of the class agreed to look solely to the Settlement Fund for satisfaction of all their claims against defendants, including but not limited to, claims for damages, interest and attorneys' fees. Class members filing Valid Proofs of Claim were entitled to receive from the Settlement Fund their provable loss (their actual out-of-pocket loss, i.e., the difference between the price at which they purchased Trust shares held as of November 29, 1977 and the price at which they sold such shares during the class period) or $ .50 per share, whichever was less. In the event the maximum allowable recovery of all qualified claimants exceeded the net Settlement Fund, qualified applicants were to receive a pro rata share. The settlement agreement also provided that before distribution of the Settlement Fund to qualified claimants, plaintiff's counsel were to receive from the Settlement Fund their costs and expenses incurred (not in excess of $ 50,000) and such attorneys' fees as the court would allow (not in excess of $ 200,000). In the event the maximum allowable recovery was less than the Settlement Fund, the balance was to be returned to defendants.

 On July 3, 1985, the court directed that notice of the proposed settlement be sent to the class and published twice, in two successive weeks, in The Wall Street Journal. The court also ordered that all brokers or nominees holding shares of C.I. Realty Investors of record for members of the class who had not previously supplied counsel for the class with the names and addresses of such class members forward the notice to the beneficial owners of those shares or supply counsel for the class with a list of the names and addresses of such beneficial holders.

 In accordance with the court's Order, counsel for the class sent notice to all class members that a hearing to determine whether the proposed settlement was fair, reasonable and adequate would be held on September 20, 1985. The notice stated that any member of the class could appear and be heard at the hearing to object to the settlement. The notice was also published in The Wall Street Journal. Proof of mailing and publication of the notice was filed with this court on August 9, 1985 and supplemented by a status report filed with the court on November 8, 1985.

 The scheduled hearing was held before The Honorable Thomas N. O'Neill, Jr. on September 20, 1985. No objections were filed; no one appeared to testify. On November 8, 1985, counsel for the class filed a supplemental affidavit concerning class administration: were the court to approve the settlement agreement, the funds distributed to the class would have been no more than $ 10,192.50; claims representing in excess of 250,000 shares would have been rejected because they were not sold at an actual loss.

 On December 4, 1984, upon review of the supplemental affidavit concerning claims' administration, the court ordered counsel for the class to submit to the court representative market prices of the shares of stock from April, 1972 through April, 1978. Upon examination of the fluctuation of the stock, the court ascertained that the reason for the nominal recovery of the class was that virtually no shares purchased between May, 1974 and November, 1977 were sold at a loss during the class period so that the actual loss requirement precluded a significant portion of the class from participating in the settlement fund. Consequently, the court concluded that it would not approve the settlement agreement and so informed the parties on January 29, 1986.

 On April 4, 1986, the parties entered into a revised settlement agreement. Under the revised settlement agreement, defendants agreed to pay all shareholders who sold their shares during the class period in an amount equal to $ .50 per share, regardless of whether the sale price was above or below the purchase price. In addition, counsel for the class agreed to reduce their requested attorneys' fees from $ 200,000 to $ 135,000. In all other respects, the settlement agreement remained the same.

 On April 8, 1986, a hearing was held on the revised proposed settlement agreement. Because the revised agreement removed the actual loss limitation on recovery and enabled all members of the class to participate in the settlement fund, the court gave its preliminary approval to the revised settlement agreement (the "Settlement Agreement").

 On April 10, 1986, the court directed that notice of the proposed settlement be sent to the class and published in the national edition of The Wall Street Journal. Accordingly, on April 16, 1986, all class members were mailed notice of a hearing on May 19, 1986 to determine whether the proposed settlement was fair, reasonable and adequate. The notice stated that any member of the class could appear then and be heard to object to the settlement. Notice was published in The Wall Street Journal on April 23, 1986.

 The court also ordered that all brokers or nominees holding shares of C.I. Realty Investors of record for members of the class who had not previously supplied counsel for the class with the names and addresses of such class members forward the notice to the beneficial owners of those shares or supply counsel for the class with a list of names and addresses of such beneficial holders.

 Class members who previously filed proofs of claim and had their claims rejected on the basis that they had no provable losses were advised that they were eligible to participate in the settlement fund and that it was not necessary for them to refile proofs of claim. Proof of mailing and publication of the notice was submitted to the court on May 19, 1986 (filed of record on June 4, 1986) and supplemented by a status report filed with this court on June 2, 1986. Under the revised settlement agreement, claims approved for distribution to the class total $ 143,543.

 II. Approval of Settlement

 Rule 23(e) of the Federal Rules of Civil Procedure requires court approval of a class action settlement:

 

A class action shall not be dismissed or compromised without the approval of the Court, and notice of the proposed dismissal or compromise shall be given to all members of the class. . . .

 Approval of a proposed class action settlement is discretionary with the court. Girsh v. Jepson, 521 F.2d 153, 156 (3d Cir. 1975); Ace Heating & Plumbing Company v. Crane Company, 453 F.2d 30, 34 (3d Cir. 1971). Settlement is a course favored by law, Weight Watchers of Philadelphia, Inc. v. Weight Watchers International, Inc., 455 F.2d 770, 773 (2d Cir. 1972), but a settlement will be approved only if it is "fair, adequate, and reasonable" to the members of the class, Walsh v. Great Atlantic and Pacific Tea Company, Inc., 726 F.2d 956, 965 (3d Cir. 1983). The settlement must be both substantively reasonable compared to the likely rewards of litigation, Shlensky v. Dorsey, 574 F.2d 131, 147 (3d Cir. 1978), and the result of good faith, arms length negotiations, Weinberger v. Kendrick, 698 F.2d 61, 74 (2d Cir. 1982).

 The appellate courts have specified factors to be considered prior to decision upon the fair, reasonable, and adequate nature of a proposed class action settlement. See Malchman v. Davis, 706 F.2d 426, 433-34 (2d Cir. 1983) (nine factors); Reed v. General Motors Corp., 703 F.2d 170, 172 (5th Cir. 1983) (six factors); Officers for Justice v. Civil Service Commission, 688 F.2d 615, 625, cert. denied, 459 U.S. 1217, 103 S. Ct. 1219, 75 L. Ed. 2d 456 (1983) (eight factors). In Girsh v. Jepson, 521 F.2d 153 (3d Cir. 1975), the Court of Appeals for this Circuit noted the relevancy of the following nine factors in determining the fairness 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. . . .

 Girsh, 521 F.2d at 157 (quoting City of Detroit v. Grinnell Corp., 495 F.2d 448, 463 (2d Cir. 1974)).

 A. Uncertainties of Litigation

 Plaintiff alleged that defendants failed adequately to disclose in either the Fiscal 1978 Second Quarter Report dated November 29, 1977, and/or the Fiscal 1978 Third Quarter Report dated January 31, 1978, certain improvements in the Trust's prospects because of higher rents to be received from new leases in two of its New York City office buildings. Plaintiff alleged that defendants understated the increase in rentals on the new leases in order to purchase Trust shares for their own accounts at depressed per share prices. Defendants contended that the disclosures regarding the prospective increases in rent and the office buildings' consequent appreciation in value were adequate.

  Plaintiff also alleged that defendants failed to disclose real estate and rental projections that the two office buildings were worth more than reflected on the corporate books. Defendants argued that the real estate appraisals and rental projections need not have been disclosed because they were speculative estimates not material facts.

 Subsequent to the institution of this action, the Court of Appeals in Flynn v. Bass Brothers Enterprises, Inc., 744 F.2d 978 (3d Cir. 1984), clarified the balancing test to determine if there is a duty to disclose soft information:

 

Courts should ascertain the duty to disclose asset valuations and other soft information on a case by case basis, by weighing the potential aid such information will give a shareholder against the potential harm, such as undue reliance, if the information is released with a proper cautionary note.

 Id. at 988 (footnote omitted). Flynn standards are not applied retroactively; pre-Flynn law governs this action. See Flynn, 744 F.2d at 988.

 Pre-Flynn, the presentation of future earnings, appraisal asset valuations and other hypothetical data was discouraged. Disclosure of soft information was not prohibited but the SEC presumption against disclosure was followed in this Circuit. See Kohn v. American Metal Climax, Inc., 458 F.2d 255 (3d Cir. 1972). Plaintiff argued that there was a duty to disclose even before Flynn so that Flynn did not expand the duty to disclose. But even if the Flynn balancing test were to govern this action, settlement avoids the risk that the court would weigh heavier the factors favoring non-disclosure.

 Plaintiff alleged that defendants' disclosures regarding negotiated increases in rentals and consequent appreciation in building values were inadequate in the November 29, 1977 Fiscal 1978 Second Quarter Report and/or the January 31, 1978 Fiscal 1978 Third Quarter Report. However, the quarterly reports at issue did contain statements regarding new leases in the Trust's New York City office buildings and the overall prospects of the Trust. See, for example, the Fiscal 1978 Second Quarter Report:

 

During the past several months, the general real estate market has experienced substantial improvement. Demand for office space in mid-Manhattan, in particular has been very good with the result that much of the office space that was available earlier in the fiscal year at the Trust's two major office buildings has been leased on favorable terms. As discussed below, income from these new leases will commence in the period between September 1, 1977 and January, 1978. Consequently, we anticipate a significant improvement in the Trust's operating results in the next fiscal year beginning March 1, 1978. . . .

 

At August 31, 1977, the aggregate amount of space on which rent was not being collected at 485 Lexington Avenue and 750 Third Avenue approximated 25 percent of the buildings' rentable space compared to almost 100 percent occupancy at the same date last year. The new office leases that take effect between September 1, 1977 and January 1, 1978, however, have reduced the buildings' unleased space to approximately eight percent. The estimated aggregate annual base rent (excluding electric and potential escalations) represented by the new leases approximates $2.0 million. In addition, two leases are pending which, if signed, would generate aggregate annual base rent (excluding electric and potential escalations) of another $ 350,000 after January 1, 1978.

 Settlement avoided the risk that the court would have found the disclosures adequate.

 But even if plaintiff had convinced the court that defendants had a legal duty to disclose and failed to do so adequately, plaintiff would have had to convince a jury of the materiality of the undisclosed facts.

 

An omitted fact is material if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote. . . . Put another way, there must be a substantial likelihood that the disclosure of an omitted fact would have been viewed by the reasonable investor as having significantly altered the "total mix" of information made available.

 TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449, 48 L. Ed. 2d 757, 96 S. Ct. 2126 (1976); Healey v. Catalyst Recovery of Pennsylvania, Inc., 616 F.2d 641, 647 (3d Cir. 1980).

 Plaintiff would have had to prove that a reasonable investor would have been interested in appraisals, the amounts stated in those appraisals and/or the rental income projected for the major properties controlled by the Trust. Defendants maintained that the information was not material because a reasonable investor would not have cared about it. Defendants also argued that even if the information were material, it was in fact made public on February 9, 1978 when the chairman of the Trust and President of City Investing, Peter Huang, was interviewed by Dow Jones, a major Wall Street publisher, and discussed improvement in the Trust's prospects in relation to new leases:

 

The Trust has signed new leases on its two major office building whose occupancy rate in fiscal 1979 will increase to 95% or better from 75% in the second quarter in fiscal year 1978. Rental rates on new leases having increased to about $11.00 per square foot from $8.00 per square foot a year ago.

 Settlement avoided the risk that the jury would have agreed with the defendants that making this information public in this way precluded liability in any event.

 Plaintiff would have to prove some sort of reliance to establish this Rule 10b-5 claim. Sharp v. Coopers and Lybrand, 649 F.2d 175, 186-7 (1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982). Plaintiff contended that reliance is presumed in a "fraud on the market" case. But defendants contended that a fraud on the market presumption was inapplicable here and that plaintiff had to prove actual reliance. Plaintiff also would have had to establish the scienter required to sustain a cause of action under Rule 10b-5. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 47 L. Ed. 2d 668, 96 S. Ct. 1375 (1976). Settlement avoided the risk that plaintiff would not have been able to meet these burdens of proof.

 Plaintiff also would have to establish that defendants continued fraudulently to conceal material information until March 11, 1979 (two years prior to filing their complaint) to toll the statute of limitations. Van Buskirk v. Carey Canadian Mines Ltd, 760 F.2d 481, 487 (3d Cir. 1985). Plaintiff had to demonstrate that he and the members of the class with the exercise of reasonable diligence could not have known of defendants' actionable conduct until March 11, 1979.

 Settlement also relieved plaintiff of difficult problems of proof as to damages. Plaintiff would have to establish that defendants' alleged omissions and misstatements depressed the share price and to what extent. This would require expert evidence perhaps hard for a jury to comprehend. Plaintiff contended that the measure of damages for each class member who sold shares of the Trust was the fair value of those shares during the class period minus the price at which the shares were actually sold during the class period. Based on this theory of damages, plaintiff originally asserted that the amount of damages suffered by the class was in excess of $ 4.5 million plus interest.

 Defendants contested plaintiff's damage theory and argued that the proper measure of damages was only the amount of artificial depression, if any, in the market price of the Trust shares caused by whatever fraudulent misrepresentations or omissions there were at any given date during the class period. The measure of damages would then have been no more than the difference between the price at which the stock was actually trading on any given date during the class period and the price at which it would have been sold at the time had this unrevealed information been available. Whether damages were sustained by the class, and if so, their precise amount, would have been difficult to prove so that settlement for damages certain in amount was beneficial to the class.

 To summarize, if this case had gone to trial, it is far from certain that plaintiff the class would have been the prevailing party. In the present state of the law regarding the duty to disclose soft information, there is a possibility that plaintiffs would not have been able to establish a failure to disclose. Even if the class established liability, there still would have been difficult problems of proof on damages. Settlement allowed plaintiffs to avoid the risk involved in continuing to litigate against defendants.

 B. Negotiation Process

 Although the court must independently evaluate the proposed settlement, the professional judgment of counsel involved in the litigation is entitled to significant weight. This agreement was negotiated by experienced counsel. Bernard Gross, Esquire, Eugene Spector, Esquire, and associates have successfully litigated class actions. They were personally involved in extended negotiations and the decision to accept the settlement agreement on behalf of the class was made after evaluation of all relevant factors, including the competence, experience and tenacity of opposing counsel.

 C. Amount of the Settlement

 The court must review a settlement to determine whether it falls within a "range of reasonableness," not whether it is the most favorable possible result of litigation. See Newman v. Stein, 464 F.2d 689, 693 (2d Cir.), cert. denied sub nom., Benson v. Newman, 409 U.S. 1039, 34 L. Ed. 2d 488, 93 S. Ct. 521 (1972) ("in any case there is a range of reasonableness with regard to a settlement - a range which recognizes the uncertainties of law and fact in any particular case and the concomitant risks and costs necessarily inherent in taking any litigation to completion"). The court in holding a hearing on the proposed settlement need not make a final determination on the merits. "It is not part of [the court's] duty in approving a settlement to establish that 'as a matter of legal certainty . . . the subject claim or counterclaim is or is not worthless or valuable.'" Flinn v. FMC, 528 F.2d 1169, 1172 (4th Cir.), cert. denied, 424 U.S. 967, 47 L. Ed. 2d 734, 96 S. Ct. 1462 (1976), quoting from City of Detroit v. Grinnell Corp., 495 F.2d 448, 455 (2d Cir. 1974). To do so would defeat the purpose of concluding a case by settlement rather than trial.

 In light of the difficulties in establishing defendants' liability, it could be argued that any recovery by the class is in its best interest. But even if the court presumes liability, recovery is adequate in light of the difficulty of proving damages.

 The recovery of $ .50 per share is the same regardless of when the shares were sold. Although defendants deny liability, their expert witnesses agreed with plaintiffs that the damages sustained by the class, if any, were uniform. But had the case gone to trial, the court would have considered creating subclasses to ensure that the recovery of selling class members was commensurate with their losses; that is, to ensure that class members would recover the difference between the price at which the shares were sold and the price at which they would have been sold but for the concealment. Some members of the class might not have been able to prove any loss at all so that settlement for damages certain in amount is beneficial to them. Defendants have stated they would not have settled this case for more than $ .50 per share so that creation of settlement subclasses would not increase the recovery of any class members. The claims filed do not exceed the amount of the settlement fund, so there is no need for a pro rata distribution and no conflict within the class; each class member will receive the maximum amount per share that the defendants are willing to pay. The uniformity of the recovery provided for in the settlement agreement is fair, reasonable and adequate.

  The number of shares sold during the class period is not a matter of record. However, the parties agree that the maximum number is approximately 700,000. The $ 143,543 which will be distributed to the class represents 287,086 shares, approximately 41% of the shares sold during the class period. The number of shares participating in the distribution of the Settlement Fund is satisfactory.

 D. Reaction of the Class

 Notice of the proposed settlement was mailed to class and published in The Wall Street Journal ; brokers or nominees holding shares of the Trust for members of the class were ordered to forward notices to beneficial owners or supply counsel for the class with a list of the names and addresses of beneficial owners so that counsel could forward notices to them.

 No member of the class has raised any objection to this proposed settlement. "This unanimous approval of the proposed settlement by the class members is entitled to nearly dispositive weight in this court's evaluation of the proposed settlements." In re Art Materials Antitrust Litigation, 100 F.R.D. 367, 382 (N.D. Ohio 1983). Approximately 173 class members representing 301,651 shares filed claim forms. This demonstrates sufficient satisfaction with the results of the litigation. See discussion of percentage of claims filed in Zimmer Paper Products, Inc. v. Berger & Montague, P.C., 758 F.2d 86, 92-93 (3d Cir. 1985).

 E. State of Proceeding

 This case has been pending for some time. The trial would be complex, expensive and might result in extended appeals because it presents novel issues regarding the duty to disclose soft information. It has settled at a stage of the proceedings that permits the parties and the court to evaluate realistically the risks of establishing liability and the extent of the relief that might be awarded after a trial. It is clear to the court that: 1) defendants will not agree to more favorable terms; and 2) the settlement is clearly within the range of reasonableness for plaintiffs when the likelihood of being the prevailing party and the recovery if the class prevails are considered. Therefore, after full consideration of all relevant factors, the court approves this settlement as fair, reasonable and adequate.

 III. Attorneys' Fees and Costs

 A. Costs

 Petitioners are entitled under the settlement agreement to reimbursement of no more than $ 50,000 for such costs and expenses incurred in connection with the litigation as the court may allow. Petitioners jointly request costs to date in the amount of $ 44,852. Petitioners claim the following expenses and costs: 1. Court costs (filing fees, sheriff and marshal service, opinions or order, docket entries) $ 600.00 2. Transcript 1,763.87 3. Witness fees 25.00 4. Travel, Food and Lodging 1,586.38 5. Long distance telephone, telecopier 239.92 6. Duplicating 3,590.41 7. Special Postage (special delivery air couriers, messenger service, etc.) 851.84 8. Professional Services (Experts) 12,922.40 9. Wall Street Journal (Publication of Notice of Proposed Settlement) 11,648.73 10. Printing Notices 6,601.68 11. Provocor/PNC Information Systems 4,335.27 12. Nominee reimbursement 667.60

19860604

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