Opinion
Master File No. 02 Civ. 3288 (DLC).
March 14, 2005
Max W. Berger, John P. Coffey, Bernstein Litowitz Berger Grossman LLP, New York, New York, Leonard Barrack, Jeffrey W. Golan, Barrack, Rodos Bacine, Philadelphia, Pennsylvania, for Lead Plaintiff.
Gregory A. Markel, Gregory G. Ballard, Stacey A. Lara, Cadwalader, Wickersham Taft LLP, New York, NY, for Defendants ABN AMRO, Inc.; Banc of America Securities LLC; Deutsche Bank Alex. Brown, Inc.; and Fleet Securities, Inc.
Richard L. Posen, Antonio Yanez, Jr., Lisa C. Solbakken, Anna Aguilar, Willkie Farr Gallagher LLP, New York, New York, for Defendants. Lehman Brothers Inc.; Credit Suisse First Boston LLC; Goldman, Sachs Co.; and UBS Warburg LLC.
John M. Callaghy, William C. Heck, Robert I. Steiner, Christine L. Schessler, Kelley Drye Warren LLP, New York, New York, for Defendants J.P. Morgan Securities, Inc.; J.P. Morgan, Securities Ltd.; and Chase Securities, Inc.
Jay B. Kasner, Jay S. Berke, Susan L. Saltzstein, Cyrus Amir-Mokri, Scott D. Musoff, Steven J. Kolleeny, Skadden, Arps, Slate, Meagher Flom LLP, New York, New York, Thomas J. Nolan, Jason D. Russell, Los Angeles, California, Liaison counsel for Underwriter Defendants.
OPINION AND ORDER
In the two weeks before the class action trial in this securities litigation is scheduled to commence, all but four of the remaining seventeen Underwriter Defendants have settled with the Lead Plaintiff. Seeking to block those settlements, to force the settling defendants to remain with them at trial, or at least to reduce the burden on them of any judgment imposed at trial, Underwriter Defendants J.P. Morgan Securities Inc. (including Chase Securities, Inc.) and J.P. Morgan Securities Ltd. (collectively, "J.P. Morgan") have objected to the terms of the proposed settlements.
The seventeen Underwriter Defendants consist of J.P. Morgan Securities, Ltd. and J.P. Morgan Securities, Inc. (now including Chase Securities Inc.); Banc of America Securities LLC ("BOA"); Lehman Brothers Inc. ("Lehman Brothers"); Blaylock Partners, L.P.; Credit Suisse First Boston Corp. ("CSFB"); Deutsche Bank Securities, Inc. ("Deutsche Bank"), f/k/a Deutsche Bank Alex. Brown, Inc.; Goldman, Sachs Co. ("Goldman Sachs"); UBS Warburg LLC ("UBS"); ABN/AMNRO Inc. ("ABN Amro"); Utendahl Capital; Mitsubishi Securities International plc ("Mitsubishi"), f/k/a Tokyo-Mitsubishi International plc; Westdeutsche Landesbank Girozentrale ("West LB"); BNP Paribas Securities Corp. ("BNP"); Caboto Holding SIM S.p.A. ("Caboto"); Fleet Securities Inc. ("Fleet"); and Mizuho International plc ("Mizuho"). Some of the Underwriter Defendants participated in only one of the two bond offerings in question.
This Opinion considers the bar order ("Bar Order") and judgment reduction formula ("Judgment Reduction Formula") to be entered upon approval of the settlement between the Lead Plaintiff and BOA and Fleet (now a BOA affiliate), the first of the remaining seventeen Underwriter Defendants to settle with the Lead Plaintiff in the consolidated class action arising from the financial collapse of WorldCom, Inc. ("WorldCom"). Familiarity with prior Opinions in the WorldCom Securities Litigation is assumed. Background
See, e.g., In re WorldCom, Inc. Sec. Litig., 352 F. Supp. 2d 472 (S.D.N.Y. 2005) (Arthur Andersen LLP's motion for summary judgment); In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628 (S.D.N.Y. 2004) (Underwriter Defendants' motion for summary judgment); In re WorldCom, Inc. Sec. Litig., 294 F. Supp. 2d 392 (S.D.N.Y. 2003) (deciding a number of defendants' motions to dismiss); In re WorldCom, Inc. Sec. Litig., 219 F.R.D. 267 (2003) (class certification).
The Underwriter Defendants in the WorldCom consolidated class action face claims under Sections 11 and 12(a)(2) of the Securities Act of 1933 ("Securities Act") stemming from their participation in WorldCom bond offerings in May 2000 and May 2001 (the "Offerings"). Several defendants affiliated with Citigroup, Inc. settled the claims against them with the Lead Plaintiff in May 2004 for $2.575 billion (the "Citigroup Settlement"). See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288 (DLC), 2004 WL 2591402 (S.D.N.Y. Nov. 12, 2004). The Citigroup Settlement included a payment of $1.45 billion to settle the Securities Act claims; the remainder of the payment settled claims brought under the Securities Exchange Act of 1934 ("Exchange Act"). One of the Citigroup affiliates, Salomon Smith Barney, Inc. ("SSB") had been a co-lead underwriter on the 2000 and 2001 Offerings. After the Citigroup Settlement, the Lead Plaintiff offered all remaining Underwriter Defendants the opportunity to settle at the same formula used to arrive at the amount of the Citigroup Settlement (the "Citigroup Formula") for forty-five days. No other Underwriter Defendant chose to settle during this period.
The Opinion addressing the Underwriter Defendants' summary judgment motions outlines the claims against the Underwriter Defendants in great detail. See WorldCom, 346 F. Supp. 2d 628.
The Opinion considering the judgment reduction formula of an aborted directors' settlement contains a brief account of the claims that remain against most of the other defendants in the class action. See In re WorldCom, Inc. Sec. Litig., No. 02 Civ. 3288, 2005 WL 335201, at *4-*5 (S.D.N.Y. Feb. 14, 2005).
The Citigroup Defendants included Citigroup, Inc., Salomon Smith Barney, Inc., now d/b/a/ Citigroup Global Markets Inc., Salomon Brothers International Limited, now d/b/a Citigroup Global Markets Limited, and Jack B. Grubman.
J.P. Morgan Securities, Inc. was co-lead underwriter for the May 2000 Offering; it was also the joint book runner and co-lead underwriter for the May 2001 Offering. Prior to preliminary approval of the Citigroup Settlement, J.P. Morgan requested in a July 12, 2004 letter to counsel for the Citigroup Defendants that the proposed judgment be amended to reflect a judgment credit "in an amount equal to the greater of the Settlement Amount for common damages or the proportionate share of the Citigroup Releasees' fault as proven at trial." The request was adapted by the Lead Plaintiff and the Citigroup Defendants.
J.P. Morgan was responsible for issuing 37.5% of the May 2000 Offering and 32.11% of the May 2001 Offering.
J.P. Morgan made limited objections to the proposed judgment in the Citigroup Settlement. In making those objections it observed that the bar order in the proposed judgment "properly bars only claims by the non-settling underwriters where the damages are measured by the liability of the non-settling underwriters to Plaintiffs." It argued that the Master Agreement Among Underwriters ("MAAU") for each of the Offerings created a claim for "independent damages" for legal and other expenses which the underwriters had agreed to pay according to their underwriting percentage. See WorldCom, 2004 WL 2591402, at *14. Because J.P. Morgan had not provided any of the MAAUs at that time, its objection was rejected. See id. The Opinion noted, however, that the Citigroup bar order was consistent with that approved by the Second Circuit in Gerber v. MTC Electronic Technologies Co., 329 F.3d 297 (2d Cir. 2003), and that the issue could be litigated at some point in the future if necessary.
On March 3, 2005, a $460.5 million settlement was reached between the Lead Plaintiff and BOA and Fleet (the "BOA Settlement"). The BOA Settlement amount was calculated with the Citigroup Formula. The following day, the Lead Plaintiff reached settlement agreements totaling $100.3 million with terms identical or substantially similar to those of the BOA Settlement with Underwriter Defendants CSFB, Goldman Sachs, Lehman Brothers, and UBS (together, the "March 4 Settlements"), all non-lead syndicate members for the 2000 Offering. The March 4 Settlement dollar amounts were also calculated using the Citigroup Formula.
BOA was a non-lead syndicate member for both the 2000 and 2001 Offerings; Fleet was a non-lead syndicate member for the 2001 Offering only.
The week of March 7, the Lead Plaintiff announced settlements with seven more Underwriter Defendants: ABN Amro, BNP, Caboto, Deutsche Bank, Mitsubishi, Mizuho, and WestLB. Collectively, these defendants, all non-lead syndicate members, paid nearly $866 million. Each of these payments was at a premium over the Citigroup Formula, including a premium of 17 percent paid by Deutsche Bank.
The Court received the signed stipulation ("Stipulation") for the BOA Settlement on March 9 and a signed stipulation covering the March 4 Settlements on March 10. Later on March 10, a conference was held to address preliminary approval of the BOA Settlement and the March 4 Settlements. The Court delayed preliminary approval until it could consider objections raised by J.P. Morgan to the Judgment Reduction Formula and Bar Order in the BOA Settlement.
Because J.P. Morgan has centered the discussion in its Memorandum of Law around the terms of the BOA Settlement, and because the disputed terms of the BOA Settlement are essentially identical to those of the other pending settlements, the discussion in this Opinion is confined to the terms of the Bar Order and Judgment Reduction Formula accompanying the BOA Settlement.
J.P. Morgan has raised two objections to the BOA Settlement. The first regards the Judgment Reduction Formula, which reads as follows:
In addition, Arthur Andersen LLP ("Andersen") contributed a letter of March 8, 2005, requesting that all non-settling defendants be granted the protection of the judgment reduction credit regardless of whether the pending settlements are granted final approval. Andersen also requests that the class plaintiffs be bound by the proportionate fault determinations made by the jury at the class action trial even if the pending settlements fail. In the absence of such protections, Andersen argues that the Court should not sever the claims against the various settling defendants.
Should any or all of the pending settlements between the Lead Plaintiff and various Underwriter Defendants ultimately fall through or fail to receive final approval, a contingency that is made much more unlikely by the determinations in this Opinion, Andersen may submit a request for relief. Its objection and request are otherwise denied.
The Non-Settling Entities/Individuals shall be entitled to judgment credit in an amount that is the greater of the amount allocated in the Settlement to claims for which a Non-Settling Entity/Individual may be found liable for common damages or, for each such claim, the proportionate share of the BOA Defendants' fault as proven at trial.
This Judgment Reduction Formula is a condition of the BOA Settlement, as the Stipulation specifies that the entry of a judgment "substantially in the form attached hereto" is a "condition of this Stipulation," and the proposed judgment contains the same language.
J.P. Morgan notes that relatively judgment-proof defendants such as WorldCom, its officers and directors, and possibly Andersen ("Insolvent Defendants"), could be assigned a significant percentage of responsibility for the Securities Act claims faced by the Underwriter Defendants, and that because J.P. Morgan faces joint and several liability under Section 11 if it remains in the action, it could end up paying much of the judgment for which such Insolvent Defendants are deemed responsible in addition to its own share. J.P. Morgan argues that fairness therefore dictates that the Judgment Reduction Formula be calculated as "the proportionate share of liability assigned to the Settling Underwriters stated as a percent of the liability assigned to all underwriters as a group." In other words, "in addition to the proportionate liability assigned to J.P. Morgan directly, J.P. Morgan could only be called upon to pay the liability allocated to other jointly and severally liable defendants based on its proportionate share of liability in comparison to the proportionate share assigned to all underwriters." The Lead Plaintiff, BOA, and the March 4 Settlement defendants counter that the Judgment Reduction Formula is identical to the formula approved in Gerber, 329 F.3d 297.
Any discussion of an underwriter's joint and several liability under Section 11 must include a caveat based on Section 11(e), which specifies:
In no event shall any underwriter (unless such underwriter shall have knowingly received from the issuer for acting as an underwriter some benefit, directly or indirectly, in which all other underwriters similarly situated did not share in proportion to their respective interests in the underwriting) be liable in any suit or as a consequence of suits authorized under subsection (a) of this section for damages in excess of the total price at which the securities underwritten by him and distributed to the public were offered to the public.15 U.S.C. § 77k(e). J.P. Morgan cites to this provision in a footnote in its Memorandum of Law but does not use it as a basis for any of its arguments. It is therefore unnecessary to explore the precise meaning of the provision in this Opinion. Given the broad definition of what constitutes an "Underwriter" in the Securities Act, however, see 15 U.S.C. § 77b(a)(11), the amount of securities "underwritten" by a lead underwriter in an offering may be greater than the amount formally allocated to that underwriter.
Another ambiguity in the law arises in regard to the allocation of liability should more than one defendant be found liable for the same set of transactions under Securities Act Section 12(a)(2), which creates liability for those who offer or sell securities by means of a prospectus or oral communication, or, under cases such as Wilson v. Saintine Exploration Drilling Corp., 872 F.2d 1124, 1126 (2d Cir. 1989), extending to Section 12(a)(2) the holding of Pinter v. Dahl, 486 U.S. 622, 642 (1988), for those who "solicit" such sales. But, again, because J.P. Morgan does not comment on this provision in its Memorandum, it is unnecessary to explore the issue here.
Not only did J.P. Morgan fail to make this objection to the Citigroup Settlement, for which the judgment reduction formula approved is virtually identical to that specified in the BOA Settlement, but as noted above, J.P. Morgan itself requested the judgment reduction formula of the Citigroup Settlement.
J.P. Morgan's second objection is to the proposed Bar Order, the approval of which is similarly a condition of the settlement. The Bar Order would
permanently BAR, ENJOIN, and RESTRAIN the other defendants in the Litigation . . . and any other person or entity later named as a defendant in the Litigation, from commencing, prosecuting, or asserting any claim for contractual or other indemnity or contribution against the BOA Releasees (or any other claim against the BOA Releasees where the injury to the Non-Settling Entity/Individual is the Non-Settling Entity's/Individual's actual or threatened liability to the Lead Plaintiffs, Named Plaintiffs and other Class Members), arising out of or related to the claims or allegations asserted by Plaintiffs in the Litigation, whether arising under state, federal or foreign law as claims, cross-claims, counterclaims, or third-party claims, whether asserted in the Litigation, in this Court, in any federal or state court, or in any other court, arbitration proceeding, administrative agency, or other forum in the United States or elsewhere. Provided, however, that the Bar Order stated in this paragraph shall not apply to claims that may be asserted by Non-Settling or Prior Settling Entities/Individuals in cases of persons who timely opted out of the Class and did not revoke their request for exclusion by September 1, 2004.
(Emphasis supplied.)
J.P. Morgan contends that the MAAU for each of the Offerings provides for contractual rights of contribution among participating underwriters. Under both the 2000 and the 2001 MAAUs, each underwriter is responsible for any judgment in an amount equal to that underwriter's share of the underwriting.
The relevant provision of the 2000 MAAU is as follows:
Contribution. Notwithstanding any settlement on the termination of the applicable [Agreement Among Underwriters], you agree to pay upon request of the Manager, as contribution, your Underwriting Percentage of any losses, claims, damages or liabilities, joint or several, paid or incurred by any Underwriter, to any person other than an Underwriter, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, any Preliminary Prospectus or Prospectus . . . or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading (other than an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information furnished to the Company in writing by the Underwriter on whose behalf the request for contribution is being made expressly for use therein) and your Underwriting Percentage or any legal or other expenses reasonably incurred by the Underwriter (with the approval of the Manager) on whose behalf the request for contribution is being made in connection with investigating or or defending any such loss, claim, damage or liability of any action in respect thereof; provided that no request shall be made on behalf of any Underwriter guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the [Securities Act]) from any Underwriter who was not guilty of such fraudulent misrepresentation. None of the foregoing provisions of this Section . . . shall relieve any defaulting or breaching Underwriter from liability for its defaults or breach.
(Emphasis supplied.)
The 2001 MAAU contains the following language:
If any claim or claims shall be asserted against [Chase Securities International], as Representative, or otherwise involving the Underwriters generally, relating to the registration statement or any preliminary prospectus . . . or the final prospectus . . ., including in each case any document incorporated by reference, you authorize CSI to make such investigation, to retain such counsel, including separate counsel for any particular Underwriter or group of Underwriters, and to take such other action as CSI shall deem necessary or desirable under the circumstances, including settlement of any claim or claims if such course of action shall be recommended by counsel whom CSI retains. You agree to pay, on request, as contribution, your underwriting proportion of any losses, damages or liabilities, joint or several, paid or incurred by any Underwriter (including CSI) to any person other than an Underwriter arising out of or based upon such claim or claims, whether such losses, damages or liabilities shall be the result of a judgment or settlement, and you agree to pay your underwriting proportion of any legal or other expenses incurred by CSI or with its consent in investigating or defending any such claim or claims.
(Emphasis supplied.)
J.P. Morgan argues that, because the Bar Order would forbid it from pursuing contractual contribution claims against the settling BOA Defendants under the MAAUs, it violatesGerber's mandate that bar orders must be fair to non-settling defendants. See Gerber, 329 F.3d at 302. The Lead Plaintiff, BOA, and the March 4 Settlement defendants argue that the Bar Order is permissible pursuant to Gerber's holding that a bar order may extinguish claims "where the injury is the non-settling defendants' liability to the plaintiffs." Id. at 307.
That claims for contractual contribution would be enjoined under the Bar Order is undisputed by the parties to the BOA Settlement.
At the March 10 conference, counsel for J.P. Morgan argued unpersuasively that it did not make the same objection to the Citigroup Settlement bar order because the Bar Order in the BOA Settlement contains specific language barring contractual contribution, while the Citigroup Settlement bar order did not. The Citigroup Settlement bar order enjoins all contribution claims arising under any law. It forbids non-settling defendants from asserting
any claim for indemnity or contribution against the Citigroup Releasees (or any other claim against the Citigroup Releasees where the injury to the [non-settling defendant] is the [non-settling defendant's] liability to the Lead Plaintiff, Named Plaintiffs and other Class Members), arising out of or related to the claims or allegations asserted . . . in the Complaint, whether arising under state, federal or foreign law as claims, cross-claims, counterclaims, or third-party claims.
(Emphasis supplied.)
In addition, the Lead Plaintiff and the Citigroup Defendants note that J.P. Morgan never claimed that its contractual contribution claims would survive the bar order imposed in the Citigroup Settlement, and that in its October 8, 2004 Memorandum of Law describing its objections to the Citigroup Settlement, J.P. Morgan stated that "consistent with the holding of theGerber court, the [Citigroup] Bar Order on its face properly bars only claims by the non-settling underwriters where the damages are measured by the liability of the non-settling underwriters to Plaintiffs." Discussion
The Court's October 13, 2004 Opinion concerning the bar order and judgment credit provisions of the partial settlement in In re WorldCom ERISA Litigation, 339 F. Supp. 2d 561 (S.D.N.Y. 2004), contains a detailed discussion of the standards for approval of a class action settlement. This Opinion draws significantly from that ERISA settlement Opinion.
In complex litigation, the importance of settlement to both the public interest and to the parties is indisputable:
Where a case is complex and expensive, and resolution of the case will benefit the public, the public has a strong interest in settlement. The trial court must protect the public interest, as well as the interests of the parties, by encouraging the most fair and efficient resolution. This includes giving the parties ample opportunity to settle the case.United States v. Glens Falls Newspapers, Inc., 160 F.3d 853, 856-57 (2d Cir. 1998); see also Gambale v. Deutsche Bank AG, 377 F.3d 133, 143 (2d Cir. 2004).
"A court can endorse a settlement only if the compromise is fair, reasonable and adequate." Gerber, 329 F.3d at 302 (quoting In re Masters Mates Pilots Pension Plain and IRAP Litig., 957 F.2d 1020, 1026 (2d Cir. 1992)). But "where the rights of one who is not a party to a settlement are at stake, the fairness of the settlement to the settling parties is not enough to earn the judicial stamp of approval." Id. (citation omitted). It is therefore necessary to determine that the terms of the settlement do not unfairly prejudice the rights of J.P. Morgan and other non-settling defendants in the action.
Because an unlimited right to seek contribution would "surely diminish the incentive to settle," Masters Mates, 957 F.2d at 1028, courts may approve provisions in settlement agreements that bar contribution and indemnification claims between the settling defendants and non-settling defendants so long as there is a judgment reduction provision that gives the non-settling defendants an appropriate right of set-off from any judgment imposed against them. In re Ivan F. Boesky Sec. Litig., 948 F.2d 1358, 1368-69 (2d Cir. 1991). Without the ability to limit the liability of settling defendants through bar orders, "it is likely that no settlements" could be reached. Id. at 1369. Nonetheless, "[a] settlement bar should not be approved unless it is narrowly tailored and preceded by a judicial determination that the settlement has been entered into in good faith and that no one has been set apart for unfair treatment." Masters Mates, 957 F.2d at 1031. A settlement bar may not be approved if it grants a non-settling defendant "a judgment reduction less than the amount paid by settling defendants toward damages for which the non-settling defendant would be jointly and severally liable." Id. Where a judgment credit is given to a non-settling defendant in an amount equal to its proporitonate share of liability, its rights "are protected even without a determination of the fairness of the settlement." Gerber, 329 F.3d at 303. In assessing the fairness of a bar order, a court may weigh relative fault, the likelihood of a plaintiff's success at trial, and the adequacy of the resources of the most culpable party to ensure that "a settling defendant escapes neither the responsibility for his wrongdoing nor, therefore, the deterrent effect which underlies the right to contribution." Masters Mates, 957 F.2d at 1032 (citation omitted).
There may be instances in which a settlement may be approved without the identification of a specific judgment reduction provision. Where the settling defendants wish or require approval of a formula for judgment reduction, where there are only a few non-settling defendants, or where there is "a single set of facts," it may be practical and desirable to designate a formula at the time the settlement is reviewed for fairness. Boesky, 948 F.2d at 1369. Because the Judgment Reduction Formula has been deemed a condition of the BOA Settlement, it is appropriate to consider its fairness at this time.
A. Standing
A non-settling defendant usually lacks standing to object to a partial settlement, because such a defendant is ordinarily unaffected by the settlement's terms. Zupnick v. Fogel, 989 F.2d 93, 98 (2d Cir. 1993). There is, however, a "recognized exception to this general rule which permits a non-settling defendant to object where it can demonstrate that it will sustain some formal legal prejudice as a result of the settlement." Id. (citation omitted).
The contractual contribution provision of the 2000 MAAU specifies that the contractual contribution is to be paid "upon request of the Manager," which is clearly defined elsewhere in the agreement as SSB, the lead underwriter of the 2000 Offering that settled out of the action in 2004. Because the legal right to demand contractual contribution apparently does not belong to J.P. Morgan, it is doubtful that J.P. Morgan has standing to raise the contractual contribution provision of the 2000 MAAU as an objection to the BOA Settlement. Because an order barring state law contract claims in which liability is measured by the amount of the judgment in the securities action is appropriate, however, it is unnecessary to rule on the import of the contractual language expressly stating that the contribution is to be paid upon request of SSB.
The Citigroup Defendants also reserve the right to challenge whether J.P. Morgan has produced the MAAU that actually governed the 2001 Offering. Additionally, at least one of the non-lead underwriters disputes that it was a party to the MAAU in the Offering in which it participated.
B. The Judgment Reduction Formula
Under joint and several liability, "when two or more persons' torts together cause an injury, each tortfeasor is liable to the victim for the total damages." Masters Mates, 957 F.2d at 1027. Under this doctrine, a "tortfeasor is not relieved of liability for the entire harm he caused just because another's negligence was also a factor in effecting the injury." Edmonds v. Compagnie Generale Transatlantique, 443 U.S. 256, 259 n. 8 (1979). For this reason, a plaintiff may satisfy an entire judgment against one of several tortfeasors. Id. The Supreme Court has recognized that joint and several liability might "result in one defendant's paying more than its apportioned share of liability when the plaintiff's recovery from other defendants is limited by factors beyond the plaintiff's control, such as a defendant's insolvency." McDermott, Inc. v. AmClyde and River Don Castings, Ltd., 511 U.S. 202, 220 (1994). The policy behind this allocation of liability is clear: "When the limitations on the plaintiff's recovery arise from outside forces, joint and several liability makes the other defendants, rather than an innocent plaintiff, responsible for the shortfall." Id.
J.P. Morgan is correct about the implications of the joint and several liability it faces under Section 11. The Lead Plaintiff seeks damages of $13 billion in its Securities Act claims stemming from the Offerings. As a hypothetical involving no settlements, a jury might return Section 11 damages of $10 billion. If the jury determined that Insolvent Defendants bore responsibility for 90% of damages, and that the Underwriter Defendants were collectively responsible for 10% of damages, and if the Insolvent Defendants could only pay $1 billion, the Underwriter Defendants would be required to pay 90% of the judgment, or $9 billion, even after exercising their rights to recover contribution from the Insolvent Defendants.
As noted above, the amount would be capped under Section 11 as to each Underwriter Defendant by the amount underwritten by that defendant, and Section 12(a)(2) may yield a different result.
Section 11 explicitly provides for contribution rights.See 15 U.S.C. § 77k(f)(1). There appears to be no dispute that a Bar Order can extinguish a defendant's statutory and common-law rights to recover contribution.
Assume, however, that all Underwriter Defendants but one settled prior to the judgment, and that the jury determined that the single non-settling Underwriter Defendant's own proportion of liability for the Section 11 claims was half of the Underwriter Defendants' collective proportion, or 5%. If the Judgment Reduction Formula of the BOA Settlement were applied, the overall judgment would be reduced by either 5% (the proportion of the judgment for which the settling Underwriter Defendants were ultimately deemed responsible) or the dollar amount the Lead Plaintiff actually received in the settlements of the Securities Act claim ($3 billion, for example), whichever is greater. Since in this scenario, the $3 billion actually paid out by the settling Underwriter Defendants is greater than the $500 million that constitutes their proportionate share, the judgment would be reduced by $3 billion. The Lead Plaintiff could then reach the nonsettling Underwriter Defendant for the sum of $7 billion. The nonsettling Underwriter Defendant could in turn seek contribution from the Insolvent Defendants and under this hypothetical obtain $1 billion — the amount those defendants are actually able to pay — but would foot the bill for the remaining $6 billion (assuming at least that amount had been "underwritten" by the nonsettling Underwriter Defendant or was recoverable under Section 12(a)(2)).
J.P. Morgan urges the Court to adopt a judgment reduction formula that would "amount to the proportionate share of liability assigned to the [settling Underwriter Defendants] stated as a percent of the liability assigned to all [Underwriter Defendants] as a group," although it concedes that "courts have yet to reach the precise issue" of whether such a formula is required. It cites the Uniform Comparative Fault Act § 6, illus. 12, and the Restatement (Third) of Torts: Apportionment of Liability § C21 cmt. 1 illus. 8 ("Restatement"), in support of its proposed formula. As these two sources advocate a similar approach, the Restatement formula is considered here.
Applying the formula laid out in the provision of the Restatement cited by J.P. Morgan to the scenario described above, in which Insolvent Defendants can collectively only pay $1 billion of the $9 billion of damages for which they are deemed responsible, and all but one of the Underwriter Defendants have settled out of the action for a total of $3 billion, the nonsettling Underwriter Defendant would ultimately only be responsible for $4.5 billion in damages rather than the $6 billion yielded by the current Judgment Reduction Formula. This is because the uncollectible $8 billion of the Insolvent Defendants' portion of the judgment would be split evenly (since the settling Underwriter Defendants and the non-settling Underwriter Defendant are each responsible for an equal amount — 5% — of the judgment) between the judgment reduction credit and the non-settling Underwriter Defendant's share of the judgment. The respective shares of the judgment incorporating the uncollectible share would be $4.5 billion each — $500 million of liability as assessed by the factfinder, plus half of the $8 billion uncollectible share. Since the $4.5 billion arrived at by combining the settling Underwriter Defendants' proportionate share of the judgment and their proportionate share of the uncollectible share is greater than the settlement amount of $3 billion, the judgment credit would be $4.5 billion. The Lead Plaintiff could collect the full remaining (non-credited) judgment of $5.5 from the non-settling Underwriter Defendant, who could in turn recover $1 billion in contribution from the Insolvent Defendants, resulting in $4.5 billion of eventual liability for the non-settling Underwriter Defendant. The Lead Plaintiff would have forfeited the right to collect $1.5 billion on its judgment by its decision to accept only $3 billion from the settling Underwriter Defendants.
Before addressing the legality of applying the Restatement formula here, there is one other significant impediment that must be recognized. The Restatement formula depends on a jury's allocation of proportionate fault, not on any rights established through a MAAU. Since J.P. Morgan did not raise this objection in connection with the Citigroup Settlement, it has waived its right to augment the judgment reduction formula in the event of a co-defendant's insolvency by a credit that reflects the proportionate liability of SSB beyond that already encompassed in the judgment reduction formula approved in the Citigroup Settlement. Indeed, as noted above, it was J.P. Morgan's formulation that was adopted. Since SSB and J.P. Morgan were the co-lead underwriters, and all other Underwriter Defendants acted as junior underwriters and relied on the due diligence performed by SSB and J.P. Morgan, it is likely that only SSB and J.P. Morgan will be allocated, in comparison to junior underwriters, any significant responsibility for the losses suffered by the class. If SSB's proportionate liability can only be taken into account to reduce the judgment as described in this Opinion's first settlement hypothetical, then as a practical matter, J.P. Morgan will gain little if anything from an application of the Restatement formula. But, for entirely separate reasons, J.P. Morgan cannot in any event reduce the effect of any judgment by resort to the Restatement.
By objecting to the first settlement scenario described above, in which the non-settling Underwriter Defendant is saddled with $6 billion of the judgment, as unfair, J.P. Morgan is effectively arguing that traditional principles of joint and several liability are unfair. It is indisputable, however, that joint and several liability is prescribed by Section 11 for all defendants except outside directors. See 15 U.S.C. § 77k(f). When Congress passed the Private Securities Litigation Reform Act of 1995 ("PSLRA"), replacing the former scheme of joint and several liability for Exchange Act violators and outside directors facing Section 11 claims with proportionate liability in most circumstances, it could easily have done the same with respect to all Section 11 defendants. Congress chose not to do so.
For a detailed discussion of the PSLRA's innovations in the apportionment of liability, see generally WorldCom, 2005 WL 335201.
Nor have the majority of states replaced the traditional joint and several liability system with the reallocative approach urged by J.P. Morgan; as of 2000, only seven jurisdictions had adopted some form of reallocative joint and several liability, 2 David G. Owen et al., Madden Owen on Products Liability § 24:2 (3d ed. 2000), and even in those jurisdictions, reallocation is not available among defendants who acted "in concert," see Restatement § C21, which may be the case here.
Under the hypotheticals, the principal impact of J.P. Morgan's view of the Restatement formula is the Lead Plaintiff's loss of $1.5 billion of judgment it wins at trial. That is not a result intended by the Restatement. The Restatement explicitly intends that "the full risk of insolvency" be placed on defendants when a plaintiff is free of any comparative responsibility. Restatement § C21 cmt. a. "Thus, this Section continues the common-law principle that an innocent plaintiff may recover all damages from any solvent defendant." Id. The Restatement provision on which J.P. Morgan relies addresses post-judgment rights of contribution under comparative liability regimes in which a plaintiff may be assigned a percentage or responsibility. It does not address judgment reduction formulae or judgments entered against defendants bearing joint and several liability.
In Gerber, the Second Circuit approved a judgment reduction formula that is substantially the same as the Judgment Reduction Formula of the BOA Settlement. See 329 F.3d at 302-05. Gerber dealt with securities fraud claims under the Exchange Act, which at the time that lawsuit was filed subjected all defendants to joint and several liability. The Gerber court stated unequivocally that "[b]y awarding a credit that is at least the settling defendants' proven share of liability, the non-settling defendants' rights are protected even without a determination of the fairness of the settlement." Id. at 303. It did not indicate that the possibility that a non-settling defendant would be unable to pay its proportionate share should be factored into the judgment credit. Since it is unclear whether the court had occasion to contemplate the insolvency issue in the Gerber opinion, however, the analysis will not stop here.
One of the holdings of Gerber was that the lawsuit was not governed by the PSLRA. See Gerber, 329 F.3d at 309-310.
Although the Underwriter Defendants are not "covered persons" under Section 21D(f) of the Exchange Act, which was added by the PSLRA, the Section provides guidance as to whether judgment reduction provisions that might require non-settling jointly and severally liable defendants to pay more than a reduced share of an insolvent defendant's uncollectible share should be considered unfair in the context of the securities acts. Congress codified a judgment reduction formula in the PSLRA (the "PSLRA Formula") applicable to "covered persons" — Exchange Act defendants and outside-director Section 11 defendants, 15 U.S.C. § 78u-4(f)(10)(C) — that is virtually the same as the Judgment Reduction Formula of the BOA Settlement. See id. § 78u-4(f)(7)(B). When the PSLRA Formula was created, the drafters certainly had insolvent defendants in mind; another provision of Section 21D(f) sets forth a detailed scheme for collection of uncollectible shares from covered persons after a judgment.See id. § 78u-4(f)(4). Nevertheless, the PSLRA Formula does not provide for an uncollectible share of a judgment to be factored into the judgment credit. Nor does it have a special scheme for collection from defendants bearing on joint and several liability. Some courts have noted that the PSLRA may be instructive even in regard to securities cases that it does not govern. See, e.g., Gerber, 329 F.3d at 309. Because the determination to be made here is ultimately an equitable one, the PSLRA may be accorded persuasive weight. In light of the judgment reduction formulas approved in Gerber and the PSLRA, the Judgment Reduction Formula of the BOA Settlement is permissible.
The analysis might be different if J.P. Morgan had made a showing of procedural unfairness, as the Court explicitly invited it to do at the March 10 hearing. If a non-settling defendant could show it had been in some respect singled out during settlement negotiations — for example, that the Lead Plaintiff had never been willing to let J.P. Morgan settle on the same terms as the other co-lead underwriter — it might be necessary to give the BOA Settlement a higher degree of scrutiny to assure that there was no collusion involved between the Lead Plaintiff and BOA or other settling Underwriter Defendants. See Masters Mates, 957 F.2d at 1031 (listing whether a party "has been set apart for unfair treatment" as a consideration in the approval of a settlement bar). As noted above, all Underwriter Defendants had the opportunity to settle at the same rate as the Citigroup Defendants for forty-five days after the Citigroup Settlement was announced. Moreover, J.P. Morgan has presented no argument that the Lead Plaintiff has conducted its settlement negotiations with it or any Underwriter Defendant in a way that is unfair to J.P. Morgan.
C. Scope of the Bar Order
As noted above, if courts could not enter bar orders, partial settlements would be greatly inhibited. Settling defendants "buy little peace . . . unless they are assured that they will be protected against co-defendants' efforts to shift their losses through cross-claims for indemnity, contribution, and other causes related to the underlying litigation."Eichenholtz v. Brennan, 52 F.3d 478, 486 (3d Cir. 1995). More bluntly, "[a]nyone foolish enough to settle without barring contribution is courting disaster. They are allowing the total damages from which their ultimate share will be derived to be determined in a trial where they are not even represented."Franklin v. Kaypro Corp., 884 F.2d 1222, 1229 (9th Cir. 1989) (citation omitted). This observation applies with equal force to contractual contribution claims and statutory or common law contribution claims. If de facto contribution claims were allowed to survive in any form, settlement negotiations would become an all-or-nothing game that might effectively coerce some underwriters into proceeding to trial if one or more fellow underwriters refused to settle.
In addition to its fairness analysis of a judgment reduction formula, Gerber also considered the permissibility of a bar order provision. The Gerber court emphasized that the inquiry for deciding whether a claim could be barred was "less one of independent `claims' than independent `damages.'" Gerber, 329 F.3d at 307. It stated that a bar order is permissible provided that "the only claims that are extinguished are claims where the injury is the non-settling defendants' liability to the plaintiffs." Id. at 307 (emphasis added). At issue in Gerber was a bar order with language broad enough to cover fully independent contractual claims; the court modified the order to bar non-settling defendants from bringing "any claim for indemnity or contribution against [the settling defendant] (or any other claim against [the settling defendant] where the injury to the Non-Settling Defendant is the Non-Settling Defendant's liability to the plaintiffs), arising out of or reasonably flowing from the claims or allegations in the . . . [settled] action." Id. at 306 (emphasis in original).
The language of the Bar Order in the BOA Settlement parallels that of Gerber, although it adds an explicit bar of contractual contribution claims. The Bar Order forbids claims
for contractual or other indemnity or contribution . . . or any other claim against the BOA Releasees where the injury to the [non-settling defendant] is the [non-settling defendant's] actual or threatened liability to the Lead Plaintiffs . . ., arising out of or related to the claims or allegations asserted by Plaintiffs in the Litigation.
The contractual contribution rights asserted by J.P. Morgan would indisputably give rise to state-law claims where the injury for which a non-settling Underwriter Defendant would seek to recover would be its liability to the Lead Plaintiff; the contractual provision calls for redistribution of a judgment against a non-settling Underwriter Defendant among other underwriters in proportion to their participation in the offering. As such, a bar order enjoining such claims is appropriate under Gerber. Without such a bar, the settling Underwriter Defendants would effectively face continuing liability from the action, a scenario that would certainly significantly diminish their incentive to settle in the first place.
J.P. Morgan cites two cases in support of its contention that the scope of the Bar Order in the BOA Settlement is impermissible. One of these cases, United States v. Hardy, Civ. Nos. C90-0695, C90-0792, 1992 WL 439759 (W.D. Ky. Sept. 9, 1992), dealt with a consent decree in a CERCLA action. The Hardy court dismissed the non-settling defendants' objection to the bar order because those defendants did not possess the right under the statute to make the contribution claims that would be barred in the first instance. In a brief statement, Hardy distinguishes non-contractual contribution claims from contractual indemnification claims that the parties "bought and paid for,"id. at *2, but the statement is entirely dictum. The other case on which J.P. Morgan relies, In re Forty-Eight Insulations, Inc., 149 B.R. 860 (N.D. Ill. 1992), held that a bankruptcy settlement could not abrogate the contract rights of the bankrupt entity's parent corporation; the basis for the decision was that the insurance contracts at issue were not property interests of the bankruptcy estate. See id. at 864. The case is therefore inapposite.
It is understandable that underwriters, particularly lead underwriters, would try to contract out of the implications of joint and several liability that are discussed supra. This Opinion does not consider the enforceability of contractual contribution provisions generally, although though many courts have held that contractual indemnity provisions are unenforceable with respect to Securities Act claims. See, e.g., Eichenholtz, 52 F.3d at 484-86. They have relied upon the fact that the underlying goal of Section 11 "is encouraging diligence and discouraging negligence" by underwriters. Id. at 484. Nonetheless, because there is a strong federal policy favoring settlement, because Section 11 imposes joint and several liability on underwriters, and because the language of Gerber clearly covers bar orders like the one at issue here, the BOA Settlement Bar Order is appropriate. It is J.P. Morgan's right to defend itself at trial, but neither law nor equity dictate that it be further protected from the risks inherent in doing so.
As stated above in respect to the Judgment Reduction Formula, more scrutiny of the scope of the Bar Order would be warranted if J.P. Morgan could show that it had been singled out for unfair treatment. It has made no such contention.
Conclusion
J.P. Morgan's objections to the terms of the March 9, 2005 Stipulation governing the BOA Settlement are rejected.
SO ORDERED.