___________

No. 95-2560

___________

Thomas E. Robertson, Jr., As *

Trustee of the Farmer's Co-op *

of Arkansas and Oklahoma, Inc., *

& as Rep. of a class of members *

depositors, and equity security *

holders, who are similarly *

situated to him trust Farmer's *

Co-op of Arkansas and Oklahoma, *

Inc., *

*

Plaintiff, *

* Appeal from the United States

Bob Reves, * District Court for the 

* Western District of Arkansas.

Appellee, * 

*

Elwood B. Courtney, Sr.; Carl *

Greuel; Jack Shackleford, *

*

Plaintiffs, *

*

Robert H. Gibbs, in his own *

right & as the natural guardian *

of two minor children, Robert H.*

Gibbs, Jr., Thomas A. Gibbs, *

*

Appellee, *

*

Thomas H. Hester; Susanne A. *

Hester, in her own right; Joe S.*

Hester, Executor of the Estate *

of J.G. Hester; Lee P. Bennett; *

Viola A. Bennett, in her own *

right; Merle Walker; Adalene *

Walker, in her own right; *

Rosetta Dickinson, in her own *

right; Herbert Chisum, *

*

Plaintiffs, *

*

Frances Graham, in her own *

right, *

*

Appellee, *

*
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George Wasson; Paula Jarrett, *

*

Plaintiffs, * 

*

v. *

*

Jack E. White; J.E.W., Inc.; *

Valley Feeds, Inc.; Citizens *

Bank & Trust, Company of Van *

Buren, Arkansas; Gene *

Kuykendall, doing business as *

Kuykendall & Kuykendall; Fred *

Kuykendall, doing business as *

Kuykendall & Kuykendall; Oran *

Moody, Jr., doing business as *

Moody & Moody, Individually; *

Michael O. Moody, doing business*

as Moody & Moody, individually, *

*

Defendants, *

*

Arthur Young & Co., now Ernst & *

Young LLP, *

*

Appellant, *

*

Hal Brewer; Waldo Price; Truman *

O. Boatright; J.O. McClure; *

Hugh Winfrey, Jr.; L.M. Creech; *

Charles Bane; E.H. Pritchett; *

Robert Plunkett; Ralph McClure; *

Jimmy Don Gooch; Jerry Metzger; *

W.J. Rimmer; Ball, Mourton & *

Adams; E.J. Ball; Kenneth R. *

Mourton; Stephen E. Adams, *

*

Defendants. *

__________

 Submitted: December 13, 1995

 Filed: April 12, 1996

__________

Before MAGILL, BRIGHT, and MURPHY, Circuit Judges.

___________

MAGILL, Circuit Judge.
 Mary Carter agreements are settlement agreements where the 1

exact amount of the settlement is not fixed. Rather, the

ultimate value of the settlement depends on the amount plaintiff

recovers from other defendants, either through settlement or

court-awarded damages. See generally Lisa Bernstein and Daniel

Klerman, An Economic Analysis of Mary Carter Settlement

Agreements, 83 Geo. L.J. 2215 (1995). Some definitions of Mary

Carter agreements further require that the settling defendant

remain a party to the suit. See, e.g., Hoops v. Watermelon City

Trucking, Inc., 846 F.2d 637, 639-40 & n. 2-3 (10th Cir. 1988);

In re Mosher, 25 F.3d 397, 402 (6th Cir. 1994).

-3-

This appeal concerns the degree to which a defendant is entitled to

damages offsets in the calculation of rescissory damages offsets.

In 1986, following a trial in federal district court, a jury found

that the accounting firm of Arthur Young had committed securities fraud in

connection with the sale of notes issued by Farmer's Co-operative of

Arkansas and Oklahoma, Inc. (Co-op). After appeals stretching over several

years, the district court awarded the plaintiff class of Co-op noteholders

(Class) $5.4 million in rescissory damages. 

Arthur Young appeals the award of damages, arguing that the district

court overstated the damages because of two erroneous legal conclusions.

First, the court increased the damages by the amount that the Class would

refund to several settling defendants pursuant to a Mary Carter agreement.1

Second, the court failed to reduce the class damages by the amount of

interim bankruptcy distributions. Based on the principles of rescissory

damages, we affirm in part and reverse in part, and remand to the district

court with instructions. 

I.

Organized in 1946, the Farmer's Co-operative of Arkansas and

Oklahoma, Inc., for most of its existence, operated as a
 Gasohol is a fuel consisting of 90% gasoline and 10% ethyl 2

alcohol.

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traditional farmers' cooperative. For a nominal fee, any farmer in the

area could become a member, entitled to one share and one vote. To raise

money to finance its operating expenses, the Co-op issued uncollateralized

and uninsured promissory notes that offered payment upon demand and a

higher interest rate than other local investment institutions.

On February 23, 1984, the Co-op filed for bankruptcy to protect

itself from a run on demand notes triggered by its inability to pay on

those obligations. The Co-op asserted that three factors caused the

bankruptcy: (1) ineffective management, (2) demand notes used as the

primary source of financing, and (3) financial problems of a gasohol plant 2

it owned. As a consequence of the bankruptcy filing, the demand notes were

frozen in the bankruptcy estate and were no longer redeemable at will.

Relying on Arkansas and federal law, the purchasers of Co-op demand notes

brought a class action securities fraud suit in the United States District

Court for the Western District of Arkansas against the Co-op's directors

and officers, Arthur Young, and several others. 

Prior to trial, the Class arrived at a settlement with the Co-op's

directors and officers. According to the settlement terms, International

Insurance Company (International), on behalf of the directors and officers,

agreed to make an initial payment of $5.6 million to the Class. The

agreement also contained a "sliding scale" provision, requiring the Class

to repay International an amount equal to one-half of the Class's

recoveries from nonsettling defendants. Ultimately, the Class settled with

every defendant but Arthur Young.

Following a trial in late 1986, a jury found that Arthur Young had

committed fraud against purchasers of notes between
 In 1981, the Co-op hired Russell Brown and Company, at that 3

time the largest accounting firm in Arkansas, to perform a

company audit. However, on January 2, 1982, Russell Brown merged

with Arthur Young and Company. Therefore, the 1981 audit was

performed under the Russell Brown name while the 1982 audit was

performed under the Arthur Young name. Later, in 1989, Arthur

Young merged with Ernst & Whinney to form Ernst & Young.

 Arthur Young appealed the district court's denial of its 4

motion for judgment n.o.v. We reversed the district court

decision, believing that the demand notes did not constitute a

security for purposes of either the federal or Arkansas security

acts. Arthur Young & Co. v. Reves, 856 F.2d 52 (8th Cir. 1988). 

The Supreme Court granted certiorari, vacated our decision,

and remanded. It held that the demand notes constituted

securities within the meaning of §3(a)(10) of the Securities

Exchange Act of 1934. Reves v. Ernst & Young, 494 U.S. 56

(1990).

On remand from the Supreme Court, we affirmed the judgment

of the district court in all respects except the damage award,

which we reversed and remanded for a new trial to determine

damages. Arthur Young & Co. v. Reves, 937 F.2d 1310 (8th Cir.

1991). 

Prior to the new trial, the Class sought Supreme Court

review on the question of whether summary judgment in favor of

Arthur Young on the claim that it had acted in violation of RICO

was proper. The Supreme Court granted certiorari and affirmed

our holding that Arthur Young did not contravene RICO under the

theory propounded by the Class. Reves v. Ernst & Young, 507 U.S.

170 (1993). 

-5-

February 15, 1980, and the bankruptcy date by issuing misleading audit

reports in violation of § 10(b) of the Securities and Exchange Act of 1934,

15 U.S.C. § 78j(b), and § 67-1256 of the Arkansas Securities Act, Ark.

Stat. Ann. § 67-1256 (recodified at Ark. Code Ann. § 23-42-106 (1987)).

In audits performed for fiscal years 1981 and 1982, Arthur Young3

misrepresented the value of a gasohol plant owned by the Co-op, creating

the impression that the Co-op had a positive net worth when, in fact, the

net worth was negative.

A lengthy series of appeals followed. During the course of these

4
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appeals, the bankruptcy trustee made five distributions to the noteholders.

In September 1987, the trustee paid noteholders
 A full description of the background to this litigation is 5

set forth in Arthur Young & Co. v. Reves, 937 F.2d 1310 (8th Cir.

1991).

-7-

the proceeds of the Co-op's settlement with its directors and officers.

The trustee made an additional four distributions to Co-op noteholders as

well as other creditors between December 1988 and January 1990 with the

proceeds from the periodic sales of Co-op's assets. The trustee made the

later payments on an interim basis, subject to adjustments in the future

to ensure that the final distribution is fair to all the creditors. 

5

On November 14, 1994, the case returned to the district court to

retry the issue of damages. Before the court were questions about the

specific mechanics for calculating damages. The court found Arthur Young

liable for $5,446,073.38 to the Class. Crucial to reaching this figure was

the court's conclusion that the damage figure should be adjusted upward to

account for the rebate provision in the settlement agreement and that the

interim bankruptcy distributions to shareholders did not entitle Arthur

Young to a damages offset.

At the damages trial, it was undisputed that Arthur Young is entitled

to a damages offset for the settlement proceeds. The amount of that

offset, however, was contested. Because of the settlement agreement's

sliding scale rebate provision, the value of the settlement varies

depending on whether it is measured before or after the rebate to

International. The court held that the value of the settlement must be

measured after the rebate and, therefore, the amount of damages to be paid

by Arthur Young must be adjusted upward to account for the effect of the

sliding scale reimbursement clause. Following traditional notions of

rescissory damages and the fact that "the Eighth Circuit emphasized that

defendant is to receive an offset for settlement proceeds and settlements

received," Mem. Op. at 12, the court stated that the settlement
-8-

offset must be measured after the operation of the sliding scale provision.

The upward adjustment should be in an amount such that the Class will be

made whole after paying fifty percent of their recovery to International.

The parties also contested whether Arthur Young should receive a

damages offset for the bankruptcy distributions. The district court held

that an offset would contravene the Eighth Circuit's directions on damages.

According to the district court, the Eighth Circuit opinion, Arthur Young

v. Reves, 937 F.2d 1310 (8th Cir. 1991) (referred to as Reves II), "simply

does not expressly instruct this court to provide a bankruptcy distribution

offset." Mem. Op. at 13. In addition, the court noted that such an offset

might violate the collateral source rule.

Arthur Young challenges the district court's damage calculation,

arguing that the court erred (1) in basing the settlement offset on the

settlement's post-rebate value, and (2) in denying an offset for bankruptcy

distributions received by the Class.

II.

In an earlier appeal of this case, this Court held that rescissory

damages best suited the harm suffered by the Class. Reves, 937 F.2d at

1336. Rescissory damages serve to place the Class in the same position

they would have been in but for Arthur Young's fraud. Id. at 1337.

Recognizing that rescissory principles underlie the resolution of

questions concerning damage calculations, this opinion considers the two

arguments asserted by Arthur Young in turn. 
-9-

A.

Arthur Young and the Class agree that Arthur Young is entitled to an

offset for the amount received by the Class as settlement. The

disagreement between the parties lies in the calculation of the amount of

the offset. The district court, interpreting Reves II, held that Arthur

Young should be allowed an offset only for that part of the initial Mary

Carter agreement that the Class retains after rebating fifty percent to

International.

Arthur Young offers three grounds for reversing the district court's

decision. First, it argues that the district court deviated from the

mandate in Reves II. Second, it claims that the Class procedurally

defaulted on the claim by failing to raise it in earlier appeals. Third,

Arthur Young asserts that the district court cannot increase the judgment

against it based on the provisions of other settlement agreements. These

arguments are not compelling. 

We issued no mandate in our Reves II opinion regarding a specific

amount of offset for the directors and officers' settlement. We stated

that the district court should "credit Arthur Young with the settlement

proceeds allocated to the post-April 22, 1982, demand note purchasers."

Reves, 937 F.2d at 1338. Arthur Young assumes that the phrase "settlement

proceeds" necessarily refers to the entire amount of the settlement paid

to the Class, without deduction for the Class's obligation to refund fifty

percent of any award to International. Appellant's Br. at 26. Arthur

Young errs in this assumption. 

When referring to standard settlements, the phrase "settlement

proceeds" has a clear and unchanging meaning. With a Mary Carter

agreement, however, the amount of the proceeds could arguably be one of two

figures: it could be the final apportionment after judgment or it could be

the initial payment. In our Reves II
 In Primary Care Investors, we held that a "cursory and 6

summary statement" that failed to provide any "hint as to the

nature of the asserted error" could result in a waiver of a claim

on subsequent appeal. Primary Care Investors, 986 F.2d at 1212.

-10-

opinion, we did not reach the issue of how "settlement proceeds" should be

defined in this context.

Rather, we stated that the damage award must "place the Class in the

same position that it would have been in if not for Arthur Young's

fraudulent acts." Reves, 937 F.2d at 1338. The offset for the settlement

proceeds should result in no unjust enrichment for the Class and no

undeserved benefit for Arthur Young. In order to achieve these results,

the district court properly adjusted the damages upward to insure that the

damages awarded made the Class whole. To do otherwise would ensure that

the Class is undercompensated by the amount of the settlement rebate.

Arthur Young is also mistaken in claiming that the Class had

previously defaulted on this issue. The Class questioned the manner in

which the district court applied the sliding scale to the settlement

credits in its first appeal. Arthur Young acknowledges this, but, relying

on Primary Care Investors, Seven, Inc. v. PHP Healthcare Corp., 986 F.2d

1208 (8th Cir. 1993), believes that the single sentence argument on the

rebate issue is inadequate to maintain the claim. 

6

Arthur Young's argument misses the point: until this appeal, how the

settlement offset should be calculated remained an open issue. In earlier

appeals the Class never conceded that the offset for settlement proceeds

should be based on the initial settlement payment - in fact it argued

exactly the opposite, albeit in a single sentence. In Reves II we remanded

the case to the district court for a new trial on damages. Reves, 937 F.2d

at 1338. We therefore conclude that the question of how to calculate the

settlement offset was properly within the purview of the district
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court and is properly before us on appeal. 

Finally, Arthur Young argues that the court cannot make its liability

contingent on the Class's settlement with other defendants. According to

Arthur Young, the settlement operated like insurance for the Class,

offering the benefit of a guaranteed multi-million dollar recovery, but the

drawback that any future recovery would be shared with International.

Because it had no voice in defining the terms of the settlement, Arthur

Young feels that its liability should not be affected by it.

This argument misses the mark. Arthur Young is jointly and severally

liable, with the other defendants, for the injuries suffered by the Class.

See TBG, Inc. v. Bendis, 36 F.3d 916, 929-30 (10th Cir. 1994) (White, J.,

concurring). The Class cannot obtain double recovery from both Arthur

Young and the settling defendants, and therefore Arthur Young's liability

to the Class must be offset by the final amount received from the

settlement. The provisional Mary Carter agreement of $5.6 million,

however, is not final. It is subject to reduction, because fifty percent

of the Class's recovery in court must be refunded to International.

Allowing Arthur Young to rely on the provisional amount for its offset

would effectively reduce the Class's recovery and the total liability of

all the defendants. This we cannot do.

B.

The district court also held that Arthur Young was not entitled to

an offset for the five distributions made by the bankruptcy trustee to the

Class. Reaching this conclusion based on our opinion in Reves II, the

court stated that "the Eighth Circuit opinion simply does not expressly

instruct this court to provide a bankruptcy distribution offset in any

portion of the opinion." Mem. Op. at 13. We disagree. To be consistent

with the principle that rescissory damages "contemplate a return of the

injured party
 Had the Co-op voluntarily decided to cease business and 7

sold its assets to raise funds to repay creditors, there would be

no question but that the noteholders were receiving a return on

their investment. The same is true of the bankruptcy

distributions.

-12-

to the position he occupied before he was induced by wrongful conduct to

enter into the transaction," Arthur Young must be allowed an offset for

these distributions. Reves, 937 F.2d at 1335 n. 34.

When we held that rescissory damages were the proper remedy, we

explicitly acknowledged that this form of remedy would allow Arthur Young

to be treated as noteholders, entitled to distributions by the bankruptcy

trustee, once final judgment was entered. As this Court stated, "we do

believe that rescissory damages are fair to both parties: the Class

receives funds immediately, and Arthur Young has an opportunity to recoup

from the Co-op's bankruptcy estate the damages it paid to the Class."

Reves, 937 F.2d at 1336.

Although saying that Arthur Young steps into the position of the

bondholders once final judgment is entered does not necessarily mean that

it is also entitled to an offset for bankruptcy distribution made to the

Class prior to final judgment, there is only a small gap in reasoning

between the first proposition and the second. Garnatz v. Stifel, 559 F.2d

1357 (8th Cir. 1977), cert. denied, 435 U.S. 951 (1978), bridges this gap.

There we stated that rescissory damages "seek[] to return the parties to

the status quo ante the sale. In effect, the plaintiff is refunded his

purchase price, reduced by any value received as a result of the fraudulent

transaction." Id. at 1361.

The implication of Garnatz for this case is clear. The Class has

received some value as a result of buying the Co-op notes: they received

a partial return of their principal through bankruptcy distributions. To 7

the degree that the Class recovers
-13-

its principal, its injuries are necessarily reduced. Under the theory of

damages adopted by the Court on prior appeals, Arthur Young is required to

pay a judgment only to the degree necessary to reestablish the status quo

before the fraud-induced note purchase.

The Class makes three arguments for disallowing Arthur Young an

offset for the bankruptcy distributions. First, it asserts that prior

court decisions in this matter preclude an offset for bankruptcy

distributions. This interpretation of Reves II puts form over substance.

While it is true that the opinion made no express mention of an offset for

bankruptcy distribution, this is of no consequence. We were clear in our

intent--Arthur Young should receive the benefit of bankruptcy

distributions. If a final judgment had been quickly reached, then

distributions would have gone directly to Arthur Young. Since this case

has dragged on and distributions have been made, however, the benefit must

come to Arthur Young through an offset in the judgment instead.

Second, the Class asserts that Randall v. Loftsgaarden, 478 U.S. 647

(1986), disallows an offset for the bankruptcy distributions. With respect

to §10(b) of the Securities Exchange Act, Loftsgaarden holds that the Act

aims not only to compensate defrauded investors, but also to deter fraud

and manipulative practices and encourage full disclosure of material

information. Id. at 664. Consequently, rescission is not the sole measure

of damages available in § 10(b) actions. In instances where the

application of rescissory damages result in a undeserved windfall remaining

with the defendant, it is proper to use the defendant's profits as the

measure of damages. Id. at 663. This alternative measure of damages may

cause the plaintiff to receive more than necessary to make him whole for

the economic loss caused by the defendant's fraud.

Loftsgaarden does not require this Court to deny Arthur Young an

offset for the bankruptcy distribution. See id. Rather, it
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allows the court, within the bounds of § 28(a) of the Securities Exchange

Act, to award the § 10(b) plaintiff more than is necessary to effect

restitution in certain circumstances. This case does not present such a

circumstance. The application of a rescission theory of damages does not

result in a windfall or unjust enrichment to Arthur Young. Rather, Arthur

Young will likely have a million dollar judgment to pay even with the

offset. It cannot be said that Arthur Young will have less incentive to

comply with § 10(b) and the other securities laws after this case is

resolved. 

Finally, the Class turns to Arkansas law, asserting that its

collateral source rule bars Arthur Young from receiving any credit for the

distributions. The Class cites several cases describing the operation of

the rule. Traditionally, under this rule, if an injured person receives

compensation for his injuries from a source wholly independent of the tortfeasor, the payment should not be deducted from the damages which he would

otherwise collect from the tort-feasor. See, e.g., Green Forest Pub. Sch.

v. Herrington, 696 S.W.2d 714, 718 (Ark. 1985). 

Arkansas law has extended the application of the collateral source

rule beyond the sphere of common law tort. See Bell v. Estate of Bell, 885

S.W.2d 877, 881 (Ark. 1994). The Class, however, has cited no case

applying the rule to securities laws in particular. Assuming, however,

that the rule can be applied to securities fraud actions, it does not apply

to the bankruptcy distributions at issue. Here, the Class accrues a

benefit because they are creditors of a bankrupt business. The source of

the benefit is in no way collateral to the fraud action. Indeed, the Class

received the partial return of principal directly due to their ownership

of the notes at issue. 

III.

We affirm the district court in part, holding that Arthur
 The resolution of the two legal questions leaves unanswered 8

what the actual damages award to the Class should be. Arriving

at a quantitative measure of damages is difficult. The expert

analyses provided by the parties arrive at significantly

different damage figures. In addition, the numbers are difficult

to compare because the experts chose different benchmarks from

which to measure damages. Matters are further confused by the

district court's unexplained damage figure of $5,446,073.38.

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Young is entitled to an offset equaling the final value of the Class's Mary

Carter agreement with International. We also reverse the district court

in part, holding that Arthur Young is entitled to an offset equaling the

value of bankruptcy distributions received by the Class. We leave to the

court's discretion whether interest is due on this bankruptcy distribution

offset.

The district court should direct the parties to submit revised damage

calculations in light of this decision. The reports should rely on the

8

same benchmark dates and clearly indicate what, if any, interest rate is

applied in each time period.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.