Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-3_00-md-01300/USCOURTS-cand-3_00-md-01300-0/pdf.json

Nature of Suit Code: 850
Nature of Suit: Securities, Commodities, Exchange
Cause of Action: 15:78m(a) Securities Exchange Act

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United States District Court

For the Northern District of California

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IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

In re PATRIOT AMERICAN

HOSPITALITY INC SECURITIES

LITIGATION

This Document Relates To:

THE MERGER ACTION

99-2153 VRW 99-2239 VRW

99-3040 VRW 99-3966 VRW

00-0947 VRW

 /

MDL No C-00-1300 VRW

ORDER

As described in this court’s preliminary approval order

of July 14, 2005, Doc #206 (the “7/14/05 order”), the lead

plaintiff in this securities class action, Doris Johnson, has

reached a settlement with the defendants. In that order, the court

preliminarily approved the proposed settlement, certified a

settlement class pursuant to FRCP 23, preliminarily approved the

proposed plan of allocation, approved (subject to certain

modifications) a form of notice to be sent to class members and

preliminarily approved the lead plaintiff’s application for an
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For the Northern District of California

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award of attorneys’ fees and expenses. Notice having been

disseminated to the class under the terms of the court’s order, see

Doc #214 (Hansman Decl), plaintiff now moves for final approval of

the proposed settlement, final approval of the plan of allocation,

an award of attorneys’ fees and expenses and authorization to make

future payments to the claims administrator from the settlement

fund. Doc #212.

The court held a final settlement approval hearing (the

“hearing”) on October 18, 2005. For the reasons that follow, the

court GRANTS final approval of the proposed settlement, GRANTS

final approval of the plan of allocation and GRANTS an award of

attorneys’ fees and expenses to lead counsel. Because the 7/14/05

order addressed many of the issues presented here for final

approval, the court assumes familiarity with the 7/14/05 order; the

court will confine its discussion in this order to recent

developments and further analysis.

I

The court first takes up the issue of the fairness of the

settlement, which, in the aggregate, consists of $12,650,000 in

cash. In assessing whether a settlement is “fair, reasonable and

adequate” under FRCP 23(e)(1)(C), this court is to consider several

factors:

(1) the strength of the plaintiffs’ case; (2) the

risk, expense, complexity, and likely duration of

further litigation; (3) the risk of maintaining

class action status throughout the trial; (4) the

amount offered in settlement [presumably in relation

to maximum potential recovery or in comparison to

comparable cases]; (5) the extent of discovery
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For the Northern District of California

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completed and the stage of the proceedings; (6) the

experience and views of counsel; (7) the presence of

a governmental participant; and (8) the reaction of

class members to the proposed settlement.

Churchill Village v General Electric, 361 F3d 566, 575 (9th Cir

2004) (citing Hanlon v Chrysler Corp, 150 F3d 1011, 1026 (9th Cir

1998)). To these factors, the court adds (9) the procedure by

which the settlements were arrived at, see Manual for Complex

Litigation (Second) § 30.44 (1985), and (10) the role taken by the

lead plaintiff in that process, a factor somewhat unique to the

PSLRA.

Factor (1) favors the settlement. The sole remaining

claims arise under sections 11 and 12(a)(2) of the Securities Act

of 1933, and are premised upon two theories: (1) defendant Patriot

American Hospitality, Inc’s (“PAH”) failure to disclose in the

merger proxy statement that PAH intended to take on substantial

debt and (2) PAH’s failure to disclose its intent to rely upon

high-risk forward equity contracts to fund aggressive expansion

plans. In order to recover on either theory, the finder of fact

would need to find that PAH specifically intended either to take on

substantial debt or to rely upon forward equity contracts. And

even if the finder of fact were to find liability, loss causation

and damages have been continuously and vigorously disputed by

defendants. 

Factor (2) also militates in favor of the settlement. 

Class counsel in the “open market action” (a parallel class action)

highlight a risk of non-recovery or diminished recovery if the

litigation were to continue due to the precarious financial

position of both PAH and its primary directors and officers
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For the Northern District of California

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insurance carrier. Doc #216 at 13-14; see also Torrisi v Tucson

Elec Power Co, 8 F3d 1370, 1376 (9th Cir 1993) (characterizing

defendant’s financial position as a “predomina[nt]” factor favoring

settlement approval). The court is reluctant to accord too much

weight to these unsubstantiated statements. Still, the court finds

that the expense and uncertainty of litigating issues related to

intent, causation and damages support a settlement that would

confer an immediate, certain and, as discussed below, relatively

substantial recovery upon the class.

Factor (3) generally does not weigh heavily in favor of

settlement in securities fraud class actions, because class

treatment is generally appropriate in such litigation.

The amount of the settlement is substantial in comparison

to various measures of the maximum potential recovery, thereby

aligning factor (4) in favor of settlement. According to

plaintiff’s expert Dr Marc Vellrath, the maximum damages available

to the class in the merger action is $28.7 million. The settlement

of $12.65 million represents 44% of Dr Vellrath’s estimated total

damages. This percentage is well above the mean and median

observed in the Bajaj Report relied upon by this court in In re

Cylink Securities Litigation, 274 F Supp 2d 1109, 1114 (ND Cal

2003) (Walker, J). 

The settlement can also be evaluated against the total

“market drop.” Id at 1113. The value of PAH shares never exceeded

$44/share during the class period, and sold for approximately

$10/share at the end of the class period, with a difference of

$34/share. Multiplying this figure by 5.75 million (the

approximate number of shares held by class members during the class
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For the Northern District of California

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period) yields a total market drop of $195.5 million. The proposed

settlement represents 6.47% of the total market drop, which is

significantly higher than the mean and median identified in the

Bajaj Report relied upon by the court in Cylink. See id at 1114

(identifying a market drop recovery mean of 2.95% and a median of

2.02%).

Factor (5) strongly favors settlement. This litigation

is now in its sixth year and had proceeded for four years before

settlement negotiations commenced. Class counsel has reviewed over

200,000 documents produced in the course of discovery. Moreover,

this discovery was conducted before, and therefore presumably

informed, the settlement negotiations.

The views of counsel, factor (6), support settlement. 

While some courts have indicated that such views are entitled to

deference, see, e g, Williams v Vukovich, 720 F2d 909, 922-23 (6th

Cir 1983), the court is reluctant to put much stock in lead

counsel’s pronouncements, given their obvious pecuniary interest in

seeing the settlement approved.

Factor (7) does not support the settlement, inasmuch as

there is no government participant present.

Factor (8) strongly supports the settlement. The

response to the notice mailed to individual class members and

published in The San Francisco Chronicle and Investor’s Business

Daily has been positive. The claims administrator has received

hundreds of proof of claim forms. More importantly, no objector

has come forward. And although two class members have requested

exclusion from the settlement (i e, opted out), see Doc #219

(Marotto Decl), Ex A, in the main class members have elected to
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For the Northern District of California

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remain in the class.

As discussed in the 7/14/05 order, the settlement was

reached after protracted arm’s-length negotiations by experienced

counsel. 7/14/05 order at 5. Factor (9) therefore supports the

settlement. 

Finally, factor (10) supports the settlement because lead

plaintiff participated in the settlement negotiations, see Doc #185

(Molumphy Decl) at 4, ¶11, something Congress sought to foster by

the PSLRA’s lead plaintiff provisions.

For the reasons discussed above and in its 7/14/05 order,

the court finds that, on balance, the settlement is fair,

reasonable and adequate to the class within the meaning of FRCP

23(e)(1)(C). Accordingly, the court GRANTS plaintiff’s motion for

final settlement approval.

II

As suggested by the court’s extended discussion of the

plan of allocation in its 7/14/05 order, the court has harbored

doubts about the plan of allocation inasmuch as it extinguishes the

claims of a large number of class members in exchange for zero

recovery. Specifically, class members who sold their PAH shares on

or before November 8, 1998, (the “in-and-out” class members) will

recover nothing under the proposed plan of allocation. 

Recognizing that the best course was to allow in-and-out

class members to decide for themselves, the court preliminarily

approved the plan of allocation, subject to modifications in the

form of notice that would explicitly and with emphasis warn in-andout class members that they were giving up their right to recover
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For the Northern District of California

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in exchange for no consideration. Specifically, the court ordered:

The following language shall be inserted before the

last paragraph of part VII: “The exact recovery

received by each Settlement Class Member is

determined by the Plan of Allocation, which is

described in Part IX. Under the Plan of Allocation,

some Settlement Class Members will receive nothing,

but will nonetheless give up their right to pursue

the Released Claims against the Released Persons. 

In particular, Settlement Class Members who

exchanged their shares on a one-for-one basis for

shares in Patriot but sold the Patriot shares on or

before November 9, 1998, will receive nothing under

the plan of allocation. If you are a Settlement

Class Member who falls within the group described

above, you may wish to exercise your rights

described in part VIII of this notice, or to use the

procedures described in part IX of this notice.”

7/14/05 order at 10:13-11:3. The court concludes that, with the

inclusion of this language, the notice directed to class members

adequately advised them of the proposed plan of allocation and

their rights with respect thereto.

No class member came forward to object to this plan of

allocation. It does not appear that either of the two class

members who elected to opt out were in-and-out class members. See

Marotto Decl, Ex A. The court is therefore constrained to find

that the class does not object to the proposed plan of allocation.

After further review of the report of plaintiff’s expert,

Dr Vellrath, the court is satisfied that the plan of allocation

distributes funds consistent with the various levels of price

inflation that existed during the class period. Dr Vellrath based

the plan of allocation on an event study prepared by Dr Scott

Hakala. See Doc #178 (Hakala Decl). Based on Dr Hakala’s

findings, Dr Vellrath concluded that PAH shares were inflated by

11.1% at the time of the merger, which, after accounting for stock
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For the Northern District of California

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splits, equals approximately $2.477 per share (rounded up to $2.48

per share). Doc #205 (Vellrath Decl) at 4 n2. On November 9,

1998, PAH disclosed proceeds from the sale of PAH properties in an

amount insufficient to fund PAH’s forward equity contract

obligations. Hakala Decl at 11. In Dr Vellrath’s estimation, this

disclosure reduced the amount of price inflation attributable to

defendants’ alleged misrepresentations to 4.7%. Vellrath Decl at

7. On December 16, 1998, PAH announced a recapitalization plan to

settle PAH’s forward equity contract obligations. This disclosure

produced an initial upturn in the price of PAH stock, followed by a

downturn on December 17, 1998. Dr Vellrath agreed with Dr Hakala’s

assumption that all fraud-induced inflation was eliminated from the

price of PAH shares as of December 17, 1998 (the end of the class

period). Id. 

The court is satisfied that the event study prepared by

Dr Hakala is sufficiently sound for purposes of supporting Dr

Vellrath’s plan of allocation. Viewing these findings against a

backdrop devoid of objections and opt-outs by in-and-out class

members, the court finds it appropriate to GRANT plaintiff’s motion

for final approval of the plan of allocation. Settlement proceeds

shall be distributed among class members as follows:

(1) For shares sold on or after December 17, 1998, and for

“retention” shares held on May 7, 1999: $2.48 per share;

(2) For shares sold on or before November 9, 1998: No

damages;

(3) For shares sold on or after November 9, 1998, and on or

before December 15, 1998: $2.48 per share less 4.7% of

the selling price; and
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For the Northern District of California

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(4) For shares sold on December 16, 1998: $2.48 per share

less 10.9% of the selling price.

III

Plaintiff seeks an award of attorneys’ fees in the amount

of $2,500,000 to be paid from the settlement fund. Plaintiff also

seeks reimbursement in the amount of $81,805.58 for expenses

incurred to date. Plaintiff further requests authorization to make

future payments from the settlement fund to the claims

administrator for additional expenses not yet incurred. At the

hearing, plaintiff’s counsel suggested that these future costs

should not exceed $45,000. Adding these figures to the requested

fee award produces a sum total award of $2,626,805.58, which

represents 20.6% of the common fund. A percentage of 20.6% is at

the low end of the range and below the mean for the percentage of

common funds devoted to attorneys’ fees and costs. See 7/14/05

order at 11 (reciting data from Stuart J Loan, Jack Moshman &

Beverly C Moore, Attorney Fee Awards in Common Fund Class Actions,

24 Class Action Rep 167 (2003)). As noted elsewhere, the court has

serious reservations about the adequacy of such a comparison to

test the reasonableness of a fee award. See generally Vaughn R

Walker & Ben Horwich, The Ethical Imperative of a Lodestar CrossCheck: Judicial Misgivings About “Reasonable Percentage” Fees in

Common Fund Class Actions, 18 Georgetown J Legal Ethics 1453

(2005). 

Yet, and as discussed in the 7/15/04 order, plaintiff’s

counsel performed a lodestar cross-check consistent with the

analysis set forth in In re HPL Technologies, Inc Securities Litig,
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For the Northern District of California

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366 F Supp 2d 912 (ND Cal 2005) (Walker, J). The lodestar crosscheck produced a lodestar amount of $951,523,75, resulting in an

implied multiplier of approximately 2.63. 7/14/05 order at 12

(citing Doc #196 at 10). While an implied multiplier of this

magnitude appears to be on the high side of reasonableness, class

members’ apparent satisfaction with the terms of the settlement and

the plan of allocation, as well as counsel’s performance, militates

in favor of the award. This is sufficient to satisfy the court in

this case that there is no great public disservice in making an

award of this scale relative to the amount of attorney effort.

Accordingly, the court GRANTS plaintiff’s motion for

attorneys’ fees and expenses in the amount of $2,626,805.58. 

IV

In sum, plaintiff’s motion for final settlement approval,

final approval of the plan of allocation and an award of attorneys’

fees and expenses is GRANTED.

IT IS SO ORDERED.

 

VAUGHN R WALKER

United States District Chief Judge