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October 28, 1988


The opinion of the court was delivered by: O'NEILL, JR.



 Plaintiffs Federal Savings and Loan Insurance Corporation ("FSLIC") and class shareholders have reached a proposed agreement settling their claims against defendants Blank, Rome, Comisky & McCauley ("Blank Rome"), Michael D. Foxman, M. Kalman Gitomer, Kenneth A. Treadwell and Edward G. Fitzgerald. The agreement encompasses a number of claims: state common law and Securities Exchange Act of 1934 claims alleged in In re Sunrise Securities Litigation (MDL No. 655) (the "Securities case"); fiduciary duty claims alleged in FSLIC v. Jacoby, et al. (C.A. No. 86-7567) (the "Fiduciary Duty case"); and any other possible claims between the settling parties related to Sunrise Savings and Loan Association. In accordance with F.R.C.P. Rule 23(e), the settling parties have filed a motion requesting preliminary approval of the proposed settlement and certification of a settlement class.

 Section 4.4 of the settlement agreement requires that "FSLIC, the Class and Blank, Rome shall jointly move the Court and, as a condition of this Settlement, obtain a final Order dismissing and equitably barring any claims for indemnity and contribution that are or could be asserted, now or in the future, against the Firm and any Individual Settling Defendant by any person arising out of the Fiduciary Duty and Securities Cases." Although no motion has yet been filed requesting entry of a bar order, after conferring with counsel for both settling and non-settling parties I decided that consideration of the bar order should precede the Rule 23(e) hearing. In my view, any fairness hearing or class notification concerning the proposed settlement would be premature prior to evaluation of the bar order upon which the settlement is conditioned. Given this decision, counsel agreed that I should first determine whether the proposed bar order is legally permissible on its face, and then proceed, if necessary, to analysis of the fairness of the bar order under the facts of this case.

 Because the proposed settlement bars contribution *fn1" under a variety of claims rooted in both federal and state law, separate choice of law analysis is required for each type of claim. For the Securities case, any claims for "contribution under the federal securities laws and the effect of a release of a federal securities law cause of action are . . . governed by federal law." First Federal Savings & Loan v. Oppenheim, Appel, Dixon, 631 F. Supp. 1029, 1034 (S.D.N.Y. 1986); see also Nelson v. Bennett, 662 F. Supp. 1324, 1335 (E.D.Cal. 1987). Similarly, federal law applies to rights of contribution in the Fiduciary Duty case brought by the FSLIC, since under 12 U.S.C. § 1730(k)(1)(B) "any civil action, suit, or proceeding to which the [FSLIC] shall be a party shall be deemed to arise under the laws of the United States." *fn2" State law governs issues of contribution pertaining to the pendent state law breach of duty claims in the Securities case. First Federal, 631 F. Supp. at 1032; see also Rohm & Haas Co. v. Adco Chemical Co., 689 F.2d 424, 428-429 (3rd Cir. 1982). I first will discuss the content of the federal law regarding bar orders, and then turn to the choice of state law.

 I. Federal Law

 Since no federal statute provides a settlement bar rule, I must look to federal common law for the rule of decision. To give content to this law, I can adopt state law or "fashion a nationwide federal rule." U.S. v. Kimbell Foods, Inc., 440 U.S. 715, 728, 99 S. Ct. 1448, 59 L. Ed. 2d 711 (1979). This decision is "a matter of judicial policy dependent upon a variety of considerations always relevant to the nature of the specific governmental interests and to the effects upon them of applying state law." Kimbell Foods, 440 U.S. at 728, citing U.S. v. Standard Oil Co., 332 U.S. 301, 310, 91 L. Ed. 2067, 67 S. Ct. 1604 (1947) (quotations omitted). The federal courts which have faced this choice in the context of a bar order in a federal securities case have come to opposite conclusions. Compare Nelson, 662 F. Supp. at 1336 (finding that a uniform federal rule is necessary) with First Federal, 631 F. Supp. at 1036 (adopting N.Y. state law).

 I agree with all counsel who have addressed the Court on this issue that a uniform federal rule is desirable here. As the Nelson court points out, there are at least three compelling reasons why there should be a uniform national settlement bar rule: the rule adopted will affect "key substantive rights of the defendants under the federal securities laws;" adoption of existing state statutes would produce disparate results and could "thwart the overall federal regulatory scheme;" and adoption of state law would encourage forum shopping and spawn wasteful litigation over the applicable state law. Nelson, 662 F. Supp. at 1336-1337. These considerations outweigh any interest in preserving a uniform rule of contribution for both federal and state claims in the same case. *fn3" First Federal, 631 F. Supp. at 1036.

 The settling and non-settling parties present two different views as to the form the uniform federal settlement bar rule should take. Sections 4.2 and 4.3 of the settlement agreement provide that if either of the settling plaintiffs succeeds in a claim against a non-settling defendant, "the damages recoverable from such person(s) shall be reduced by the total amount received by" the plaintiffs in the settlement. In other words, the settling parties seek to limit the damages which the non-settling defendants can avoid through claims of contribution against the settling defendants to the amount of the settlement, regardless of liability findings at trial. Therefore, the settling parties contend that the federal settlement bar rule should allow only the " pro tanto " deduction of the amount of settlement from the liability of non-settling defendants. In contrast, the non-settling parties argue that the federal settlement bar rule should be "proportional", allowing non-settling defendants to set off against damages the share of liability attributed at trial to the settling defendants.

 Different policy considerations support each of the rules. The pro tanto rule promotes settlement by assuring plaintiffs that they will not be penalized if the settling defendants' liability for damages determined at trial exceeds the amount of settlement. At the same time, it prevents "double recovery by a plaintiff" if the settling defendants are assessed no share of liability at trial, because the non-settling defendants still are credited with the amount of settlement. In re Nucorp Energy Securities Litigation, 661 F. Supp. 1403, 1408 (S.D.Cal. 1987). To ensure that a settlement under the pro tanto rule approximates likely results at trial, a fairness hearing is held before the court approves the settlement. See Nelson, 662 F. Supp. at 1335 (stating that to prevent "unfair or sham settlements . . . judicial approval of the adequacy of a settlement is necessitated prior to the imposition of a settlement bar"); Nucorp, 661 F. Supp. at 1408-1409 (discussing factors to be evaluated in determining if the settlement represents the settling defendant's "fair" or "proper" share of damages sought).

 A proportional rule, on the other hand, places the risk of a bad settlement directly on the plaintiff, who thus has financial incentive to make sure that each defendant pays his respective share of damages. Moreover, because application of this rule limits the liability of non-settling defendants to the share attributed to them at trial, it "immuniz[es] the settling defendant from liability for contribution but does not require a hearing on the fairness of the settlement to other tortfeasors." Donovan v. Robbins, 752 F.2d 1170, 1181 (7th Cir. 1985). Thus, the advantage of the proportional rule is that it eliminates the fairness hearing and promotes fairer results.

 Although courts in this Circuit previously have faced a choice between settlement bar rules, no uniform federal rule applicable in the circumstances of this case has been formulated. *fn4" Therefore, the policy considerations and interests supporting each rule must be weighed to determine which rule should be adopted. Upon consideration of the arguments advanced by both settling and non-settling parties, I have concluded that the proportional rule is the preferable one.

 In essence, the choice between pro tanto and proportional rules is a choice as to which party should bear the risk of a bad settlement, settling plaintiff or non-settling defendant. Nelson, 662 F. Supp. at 1339, n.24. The pro tanto rule promotes settlement by placing this risk on the non-settling defendant. But it also provides incentive for attempts by "guiltier defendants to get off cheaply by settling first." Donovan, 752 F.2d at 1181; see also Gomes, 394 F.2d at 468 (noting the possibility of a "collusive arrangement between a plaintiff and a favored joint tortfeasor.") Because their ultimate monetary recovery would be unaffected, plaintiffs have no incentive to ensure that a settlement approximates the defendant's share of liability. Indeed, it is arguable that the only settlements the pro tanto rule would promote would be bad settlements, i.e. those in which settling defendants pay less than their share of liability. *fn5"

 To remedy this problem, courts employing the pro tanto method hold fairness hearings before approving settlements. But as Judge Posner has pointed out, the fairness hearing requirement:


means bogging down the settlement process in a miniature trial before trial, for in determining good faith the court could consider the risk of victory or defeat, the risk of a high or low verdict, the unknown strengths or weaknesses of the opponent's case, the inexact appraisal as to the elements of danger, the defendant's solvency and the amount of insurance coverage. 752 F.2d at 1181 (quotations omitted)

 In addition to the loss of efficiency inherent in such a system, the circumstances of this case suggest that a fairness hearing may be inadequate to assure that the settlement figure was a fair approximation of fault. *fn6" The parties have conducted only limited discovery thus far. *fn7" Moreover, due to the pending criminal action in the Southern District of Florida (United States v. Robert C. Jacoby, et al., No. 87-6034 CR-HOEVELER), the prospects of completing a significant portion of discovery in the near future are slim. *fn8"

 Adoption of a proportional rule provides a "neat solution" to these problems because it eliminates the need for a fairness hearing. Donovan, 752 F.2d at 1181. Plaintiffs, who in this case are in a better position than the non-settling defendants to judge the fairness of the settlement, *fn9" are placed in a position where their financial interests demand that they settle for an amount approximating share of liability. If plaintiffs want to fund the litigation through settlement with some of the defendants, they should bear the risk of any inadequacy in the settlement.

 The settling parties argue that the proportional rule should be rejected because it invites the non-settling defendants to try to shift blame at trial to the "empty chair" left by the settling defendants. Settling Parties' Memorandum at 12. As a result, they contend, the settling defendants will have to appear at trial to prevent shifting of liability to them. But under either rule, the non-settling defendants have every incentive to minimize their liability by arguing at trial that the settling defendants were at fault. Application of a proportional rule has no effect on the settling defendants, because the settlement bar order will still operate to prevent contribution for any additional share of liability attributed at trial. The only parties who will be penalized by the proportional rule are the settling plaintiffs FSLIC and class shareholders, who will lose money damages to the extent that their settlement was inadequate.

 Settling parties also argue that the Third Circuit's reasoning in Miller should apply here, even though adoption of the pro tanto rule in that case was specifically limited to federal civil rights cases. 646 F.2d at 110. They claim that because FSLIC is a public entity, there is reason to believe that the settlement it has reached is in the public interest, and therefore even more reason than there was in Miller for believing that the settlement "will not deviate unacceptably from the aimed for proportionality of payment." 646 F.2d at 109. But the Miller court faced the settlement bar rule question after a trial which assessed liability against the non-settling defendants and exonerated the settling defendants from any liability. 646 F.2d at 110. In the present case, settling defendants' ultimate liability is uncertain, because the parties are far from being prepared for trial. Under these circumstances there is little to support the Miller court's assumptions that "parties generally will have sufficient incentive to negotiate settlements as vigorously as they can," and that "in most cases . . . attorneys will be able to discover collusive settlements." 646 F.2d at 109-110. Moreover, FSLIC's status as a public entity does not entitle it to a presumption of fairness. Indeed, because it is a public entity, FSLIC is better suited than the private party plaintiffs in Miller to bear the risk of a bad settlement.

 At oral argument, the settling parties also contended that a pro tanto rule should be adopted here because FSLIC will not settle otherwise. It remains to be seen, however, whether FSLIC will refuse to settle with the knowledge that a proportional settlement bar rule would apply. In addition, the mere fact that FSLIC wants a pro tanto rule does not require its adoption; while the federal policy of encouraging settlement is important, it does not completely overwhelm the considerations of fairness and deterrence which support a proportional rule. See Gomes, 394 F.2d at 468-469 (in formulating Virgin Islands settlement bar rule, ruling that although pro tanto rule might be more conducive to settlement, "on balance the equities inherent in a [proportional] system convince us of its ultimate merit.")

 In short, I adopt a proportional rule as the uniform federal settlement bar rule to be applied to the federal claims in this case. Because the agreement proposed by the settling parties is premised on application of a pro tanto rule, I cannot approve the agreement unless amended to reflect the application of a proportional rule to the federal claims. Although the settling parties' current motion must be denied, in order to give the settling parties guidance in reforming their agreement (should they choose to do so), I will now discuss the choice of a settlement bar rule applicable to the pendent state law claims.

 II. State Law

 Two groups of state claims have been consolidated for joint pretrial proceedings in the present action: one group consists of suits originally filed in the Eastern District of Pennsylvania; *fn10" the other group is composed of the suits filed in the Southern District of Florida and transferred to this Court under 28 U.S.C. § 1407. *fn11" For state claims in those suits originally filed in this Court, the conflicts of laws rules of Pennsylvania must be applied. Klaxon Co. v. Stentor Electric Manufacturing Co., 313 U.S. 487, 85 L. Ed. 1477, 61 S. Ct. 1020 (1941). In the Florida suits transferred here under § 1407, Florida's conflicts of laws rules govern. In re "Agent Orange" Product Liability Litigation, 580 F. Supp. 690, 695 (E.D.N.Y. 1984); Philadelphia Housing Authority v. American Radiator & Standard Sanitary Corp., 309 F. Supp. 1053, 1055 (E.D.Pa. 1969).

 For tort claims, both Pennsylvania and Florida have abandoned the traditional lex loci delicti conflicts rule in favor of the interest analysis approach of Restatement (Second) of Conflicts of Laws § 145. *fn12" Griffith v. United Air Lines, Inc., 416 Pa. 1, 203 A.2d 796 (1964); Bishop v. Florida Specialty Paint Co., 389 So. 2d 999 (Fla. 1980). Under this approach, "the court must weigh the relative interests of each concerned state in the outcome of the particular issue to be decided." Shenandoah v. City of Philadelphia, 438 F. Supp. 981, 988 (E.D.Pa. 1976); see Stallworth v. Hospitality Rentals, Inc., 515 So. 2d 413, 415 (Fla.App. 1 Dist. 1987) ("contacts must be evaluated with respect to the particular issue under consideration") (emphasis in original).

 The issue under consideration here is the effect of the settlement agreement on the non-settling defendants' rights to reduce their liability under state law by claims for contribution. *fn13" As all counsel agree, a genuine conflict of laws exists: Pennsylvania law permits proportional reduction of the non-settling defendants' liability; *fn14" while Florida law allows pro tanto reduction if the settlement is in "good faith." *fn15"

 Analysis of the states' respective contacts under § 145(2) shows that Florida's interest in resolution of the settlement bar issue is paramount. The conduct that allegedly caused the injury that is the subject of the settlement agreement occurred in Florida. This conduct includes: issuance of fraudulent statements which influenced the market price of Sunrise stock; approval of unsound loans; disbursement of funds for these unsound loans; meetings of the Sunrise Board of Directors at which loans were approved; and performance of legal work and issuance of legal opinions by Blank Rome from its Florida office. Although most of the class plaintiffs and some defendants are Pennsylvania residents, several class plaintiffs and most of the defendants are residents of Florida. *fn16" Finally, there can be no doubt that the relationship between the parties to this lawsuit centers on Sunrise Savings and Loan, which was chartered and incorporated in Florida, and conducted its business there.

 Non-settling defendants argue that I should adopt the reasoning of First Federal, in which the Eastern District of New York applied Restatement § 145 to the same issue under New York law. *fn17" The First Federal court stated that "the specific aspect of the litigation upon which the choice of law analysis must focus on this motion is not the underlying tortious conduct . . . but rather the actual trial and settlement of the . . . action." 631 F. Supp. at 1033. Accordingly, the Court ruled that the New York applied because: the original action "was tried and settled in New York;" "the settlement was negotiated between the parties and formalized on the record in New York;" and two defendants were citizens of New York. 631 F. Supp. at 1033. Although the plaintiffs were domiciled in other states and the alleged tortious acts were committed in California, the Court stated that plaintiffs could offer "no explanation of the interests their domiciles or California might have in encouraging settlement or equitably apportioning post-settlement liability." 631 F. Supp. at 1033.

 I agree with the First Federal Court that analysis under § 145 must focus on the states' respective interests in the cases' trial and settlement, not simply on the locus delicti. But unlike New York in First Federal, Pennsylvania is not the residence of most of the parties, nor was it the site for most of the settlement negotiations. *fn18" Under First Federal, Pennsylvania's only significant interest in the settlement bar issue is that this Court is the forum for the litigation.

 Moreover, Pennsylvania's interest as forum is less substantial than that of New York in First Federal. While the First Federal action was tried and settled in New York, the present action was consolidated in this District only for "centralized pretrial proceedings." *fn19" Docket No. 655 Transfer Order, Judicial Panel on Multidistrict Litigation, December 10, 1985. This Court will be the forum for all future pretrial proceedings and for trial of the actions filed in Pennsylvania, but the actions filed in Florida presumably will be tried there. Thus, Florida shares Pennsylvania's interest in the settlement bar issue as the eventual forum of litigation.

 During oral argument, the non-settling parties argued that Pennsylvania has a greater interest than Florida in settlement of these actions because pretrial proceedings will consume much more of the Court's time and energy than will the trial itself. But it is neither prudent nor necessary to estimate how much time pretrial proceedings and the trial will consume to determine which state will be more affected by the choice of bar rule here. Florida's interests as site of the injury and alleged conduct, residence of several parties, and locus of the parties' relationship, as well as its interest as forum for trial of the actions originally filed in Florida, clearly outweigh Pennsylvania's interests in those actions.

 For the actions originally filed in Pennsylvania, the difference is not so extreme, but Florida's interests are still more substantial. Pennsylvania's interest in this issue is solely procedural, while Florida's interests go to the heart of the controversy that the proposed agreement would settle. In addition, Restatement (Second) of Conflicts of Laws § 6(2), *fn20" lists general factors to be considered in conflicts of laws decisions, including promotion of "certainty, predictability and uniformity of result." See Stallworth, 515 So. 2d at 417-418, n.4. Adoption of the Florida rule in the actions filed in Pennsylvania would produce a uniform rule for all of the state claims, regardless of where they were filed. *fn21" Under these circumstances, Florida's pro tanto rule should govern settlement of the state law claims filed in Pennsylvania.

 In conclusion, federal law mandates proportional reduction of the non-settling defendants' liability under the federal claims, and Florida law requires a pro tanto rule for the state law claims. The proposed settlement agreement is conditioned upon pro tanto reduction of liability for all claims, and therefore cannot be approved. The settling parties' motion for preliminary approval of the proposed settlement and certification of a settlement class will be denied. *fn22"


 AND NOW, this 28th day of October, 1988, upon consideration of the joint motion of Federal Savings and Loan Insurance Corporation, class plaintiffs, and Blank, Rome, Comisky & McCauley for preliminary approval of a proposed partial settlement and certification of a settlement class, and of the parties' memoranda regarding the proposed bar order, it is hereby ORDERED that said motion is DENIED for the reasons stated in the accompanying memorandum.

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