The opinion of the court was delivered by: O'NEILL, JR.
THOMAS N. O'NEILL, JR., UNITED STATES DISTRICT JUDGE
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
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."
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.
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).
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.
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.
To remedy this problem, courts employing the pro tanto method hold fairness hearings before approving settlements. But as Judge Posner has pointed ...