FOR PUBLICATION

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

GERALD K. SMITH, as Plan Trustee 

for and on behalf of the Estates of

Boston Chicken, Inc., BC Real

Estate Investments, Inc., and all

Boston Chicken affiliates,

Plaintiff-Appellee,

v.

ARTHUR ANDERSEN LLP, a limited

liability partnership,

Defendant,

and

M No. 03-16791 ERRILL LYNCH & CO., Inc., a

corporation; MERRILL LYNCH D.C. Nos.

PIERCE FENNER & SMITH INC., a CV-01-00218-PGR 

corporation; DEUTSCHE BANC CV-01-00246-PGR

SECURITIES, INC., a corporation dba CV-02-01162-PGR

Deutsche Banc Alex.Brown; CV-02-01248-PGR

MORGAN STANLEY & CO., Inc., a

corporation,

Defendants-Appellants,

BELL, BOYD & LLOYD, a limited

liability corporation; PEDERSEN &

HOUPT, a professional corporation,

Defendants-Appellees.

v.

MARK W. STEPHENS,

Third-partyplaintiff-Appellee. 

11715
GERALD K. SMITH, as Plan Trustee 

for and on behalf of the Estates of

Boston Chicken, Inc., BC Real

Estate Investments, Inc., and all

Boston Chicken affiliates,

Plaintiff-Appellee,

v.

ARTHUR ANDERSEN LLP, a limited

liability partnership; MERRILL

LYNCH & CO., Inc., a corporation;

MERRILL LYNCH PIERCE FENNER &

SMITH INC., a corporation;

DEUTSCHE BANC SECURITIES, INC., a

corporation dba Deutsche Banc No. 03-16803

Alex.Brown; MORGAN STANLEY & D.C. Nos. CO., Inc., a corporation; BELL,

CV-01-00218-PGR BOYD & LLOYD, a limited liability 

CV-01-00246-PGR corporation; PEDERSEN & HOUPT, a CV-02-01162-PGR professional corporation, CV-02-01248-PGR Defendants,

and

SCOTT A. BECK, an individual, and

the marital community of Scott A.

Beck, and his spouse; SAAD J.

NADHIR, an individual, and the

marital community of Saad J.

Nadhir, and his spouse,

Defendants-Appellants,

v.

MARK W. STEPHENS,

Third-partyplaintiff. 

11716 SMITH v. ARTHUR ANDERSEN LLP
GERALD K. SMITH, as Plan Trustee 

for and on behalf of the Estates of

Boston Chicken, Inc., BC Real

Estate Investments, Inc., and all

Boston Chicken affiliates,

Plaintiff-Appellee,

v.

ARTHUR ANDERSEN LLP, a limited

liability partnership; MERRILL

LYNCH & CO., Inc., a corporation;

MERRILL LYNCH PIERCE FENNER &

SMITH INC., a corporation;

DEUTSCHE BANC SECURITIES, INC., a No. 03-16899

corporation dba Deutsche Banc D.C. Nos. Alex.Brown; MORGAN STANLEY & CV-01-00218-PGR CO., Inc., a corporation; PEDERSEN  CV-01-00246-PGR & HOUPT, a professional CV-02-01162-PGR corporation, CV-02-01248-PGR Defendants,

OPINION and

BELL, BOYD & LLOYD, a limited

liability corporation,

Defendant-Appellee,

PEER PEDERSEN, an individual and

the marital community of Peer

Pedersen and his spouse,

Defendant-Appellant,

v.

MARK W. STEPHENS,

Third-partyplaintiff-Appellee. 

SMITH v. ARTHUR ANDERSEN LLP 11717
Appeal from the United States District Court

for the District of Arizona

Paul G. Rosenblatt, District Judge, Presiding

Argued and Submitted

February 8, 2005—San Francisco, California

Filed August 30, 2005

Before: J. Clifford Wallace, Johnnie B. Rawlinson, and

Jay S. Bybee, Circuit Judges.

Opinion by Judge Wallace

11718 SMITH v. ARTHUR ANDERSEN LLP
COUNSEL

Ronald L. Marmer, C. John Koch, Jenner & Block LLP, Chicago, Illinois, and Don Bivens, Paul L. Stoller, Meyer, Hendricks & Bivens, P.A., Phoenix, Arizona, for defendantappellant Saad J. Nadhir. 

George B. Curtis, Gregory J. Kerwin, Gibson, Dunn & Crutcher LLP, Denver, Colorado, and Martin Galbut, Galbut &

Hunter, P.C., Phoenix, Arizona, for defendant-appellants Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith,

Inc., Deutsche Banc Securities, Inc., and Morgan Stanley &

Co., Inc. 

C. Barry Montgomery and David E. Stevenson, Williams

Montgomery & John Ltd., Chicago, Illinois, for defendantappellant Peer Pedersen. 

Leo R. Beus, Nicholas J. DiCarlo, and Christine R. Taradash,

Beus Gilbert PLLC, Scottsdale, Arizona, for plaintiff-appellee

Gerald K. Smith. 

Martin Glenn, O’Melveny & Meyers LLP, New York, New

York, and Amy J. Longo, O’Melveny & Meyers LLP, Newport Beach, California, for plaintiff-appellee Mark W. Stephens. 

Mark C. Dangerfield and Michael K. Kennedy, Gallagher &

Kennedy, LP, Phoenix, Arizona, for defendant-appellee

Pedersen & Houpt. 

11722 SMITH v. ARTHUR ANDERSEN LLP
James R. Condo, Snell & Wilmer LLP, Phoenix, Arizona, and

Richard A. Derevan, Marc L. Turman, Snell & Wilmer LLP,

Irvine, California, for defendant-appellee Bell, Boyd & Lloyd.

OPINION

WALLACE, Senior Circuit Judge: 

Gerald K. Smith, in his capacity as Plan Trustee for the

Bankruptcy Estate of Boston Chicken, Inc. and various related

entities (the Trustee) filed an action alleging a variety of

claims. Later, the Trustee filed motions seeking district court

approval of settlements reached with certain of the defendants

and requesting bar orders enjoining the non-settling defendants from asserting certain claims against the settling defendants. Over objection of some of the non-settling defendants,

the district court granted the approval motions resulting in this

appeal. 

The district court had jurisdiction pursuant to 28 U.S.C.

§ 1334. We hold that we have appellate jurisdiction and

affirm. 

I.

The Trustee’s 225-page Second Amended Complaint (complaint) asserts 45 separate claims under state and federal law

against certain of Boston Chicken’s former officers and directors, attorneys, auditors, and investment bankers. The complaint refers to Scott A. Beck, Saad J. Nadhir, and Mark W.

Stephens, who were officers and/or directors of Boston

Chicken, as the “Individual Defendants.” Defendants Merrill

Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith, Inc.,

Deutsche Banc Securities, Inc., d/b/a Deutsche Banc Alex.

Brown, and Morgan Stanley & Co., Inc. are the “Underwriter

Defendants.” The defendants other than the Individual DefenSMITH v. ARTHUR ANDERSEN LLP 11723
dants and PricewaterhouseCoopers (which was Boston Chicken’s post-bankruptcy auditor) are the “Professional

Defendants.” 

The complaint alleges the following core facts. Boston

Chicken was insolvent from its inception, which the defendants knew or should have known. Rather than acknowledge

this fact and seek bankruptcy protection, the defendants

sought to keep the firm afloat for various reasons (retaining

their corporate positions, salaries and fees, preserving the

value of their investments in Boston Chicken and related entities, etc.). This was accomplished by, among other things,

misrepresenting (not necessarily intentionally) the firm’s

financial condition to its outside directors and investors who

participated in the firm’s various securities offerings. The

Individual Defendants, as high-ranking corporate officials,

had the authority to implement this plan; the Professional

Defendants, as advisors to the firm and underwriters of its

securities, provided the services and resources necessary to

make it happen. Accordingly, the complaint alleges in part

that the Individual Defendants breached the fiduciary duties

they owed to Boston Chicken and made false and misleading

misrepresentations to Boston Chicken’s Board of Directors.

The complaint also alleges that the Professional Defendants

are liable for breach of certain contracts with Boston Chicken,

breach of fiduciary duties owed to Boston Chicken and professional malpractice. 

Furthermore, the complaint charges that had these misrepresentations and breaches not occurred, the funds obtained

through the capital markets might not have been forthcoming,

and the outside directors might have chosen to enter bankruptcy at an earlier date. In that situation, Boston Chicken’s

assets would not have been squandered on an unviable business plan (or on the defendants’ compensation and fees), and

the firm would not have been encumbered with additional

debt obligations that it had no realistic chance of repaying. In

summary, the complaint alleges that the defendants engaged

11724 SMITH v. ARTHUR ANDERSEN LLP
in a course of conduct that plunged Boston Chicken deeper

and deeper into insolvency. 

In October 1998, Boston Chicken and various related entities filed for bankruptcy protection under Chapter 11 of the

Bankruptcy Code. In May 2000, the bankruptcy court confirmed Boston Chicken’s Third Amended Plan (Debtor’s

Plan), under which certain of Boston Chicken’s assets were

sold to the McDonald’s Corporation, Boston Chicken was dissolved, and the Trustee was appointed as the representative of

the bankruptcy estates. The Trustee commenced a number of

lawsuits, all of which are now consolidated into one proceeding in the United States District Court for the District of Arizona (the Trustee’s Action). 

Before Boston Chicken had entered bankruptcy, over 20

securities class actions were filed in the United States District

Court for the District of Colorado. The class actions, which

alleged various claims under state and federal securities laws

and were based largely on the same conduct at issue in the

Trustee’s Action, were later consolidated into one proceeding

in Colorado (the Class Action). The Class Action was transferred to the United States District Court for the District of

Arizona in November 2002 and consolidated with the Trustee’s Action “for discovery and pretrial purposes only” in

March 2003. However, in May 2003 the consolidation order

was vacated and the Class Action was transferred back to Colorado, while the Trustee’s Action remained in Arizona. The

Class Action remains in Colorado, and is not before us. 

During 2003, the Trustee reached settlements with three of

the defendants in the Trustee’s Action (collectively, including

the Trustee, the Settling Parties): Bell Boyd & Lloyd (BB&L)

and Pedersen & Houpt (P&H), both of which served as counsel to Boston Chicken, and Stephens, one of the Individual

Defendants. The Trustee filed joint motions with each of the

settling defendants seeking district court approval of these

three settlements (Approval Motions). The proposed orders

SMITH v. ARTHUR ANDERSEN LLP 11725
submitted with the Approval Motions contained provisions

enjoining the non-settling defendants from pursuing certain

claims against the settling defendants (bar orders), as well as

provisions reducing any future judgment rendered in the

Trustee’s Action against the non-settling defendants by the

pro rata share of fault attributable to each settling defendant

(judgment reduction credits). 

Nadhir, Peer Pedersen (another of Boston Chicken’s directors), and the Underwriter Defendants (collectively, the NonSettling Defendants), as well as certain other parties, objected

to the Approval Motions. Their objections generally were not,

however, focused on the fairness of the settlements or the

terms of the proposed orders. Rather, they objected principally because each Approval Motion sought “findings of fact,

a bar order, and a permanent injunction” against the NonSettling Defendants, even though, they asserted, the district

court “lack[ed] jurisdiction to do anything more than to dismiss the plan trustee’s claims.” 

The Non-Settling Defendants presented two arguments in

support of this jurisdictional challenge. First, they contended

that the Trustee was in effect asserting claims of Boston

Chicken’s creditors, which it lacked standing to do under

Caplin v. Marine Midland Grace Trust Co., 406 U.S. 416

(1972). This same argument had been presented to the district

court in connection with a motion to dismiss an earlier version

of the complaint, but was rejected. See Smith ex rel. Estates

of Boston Chicken v. Arthur Andersen LLP, 175 F. Supp. 2d

1180, 1203 (D. Ariz. 2001). Second, they argued that the

Securities Litigation Uniform Standards Act of 1998

(SLUSA) deprived the district court of subject matter jurisdiction over the Trustee’s Action. This argument, too, had

already been rejected by the court in several different contexts. 

The district court held two hearings on the Approval

Motions. The first, held on August 19, 2003, addressed the

11726 SMITH v. ARTHUR ANDERSEN LLP
Trustee’s settlements with BB&L and Stephens. The district

court approved the settlements and overruled the jurisdictional objections. Later, the district court entered an “Approval and Bar Order” with respect to the BB&L settlement

in the form proposed in the BB&L Approval Motion. The district court did not enter an Approval and Bar Order regarding

the Stephens settlement. However, the record contains a minute entry dated August 19, 2003 indicating that the Stephens

Approval Motion was granted. 

A hearing on the P&H settlement was set for August 26,

2003. On that day, P&H filed a reply in support of its

Approval Motion, which argued that the objecting defendants

themselves had no standing to challenge the proposed settlement because “a non-settling defendant, in general, lacks

standing to object to a partial settlement.” Waller v. Fin.

Corp. of Am., 828 F.2d 579, 582 (9th Cir. 1987). This was the

first time the Settling Parties had challenged the Non-Settling

Defendants’ standing on this ground. At the hearing, the district court ruled that the Non-Settling Defendants “have no

standing to object” to the Approval Motion, overruled the

Non-Settling Defendants’ jurisdictional objections, and

granted the Approval Motion. The court later entered an

Approval and Bar Order regarding the P&H settlement. 

The Non-Settling Defendants appealed from effectively all

the orders of the district court related to the three settlements,

and we consolidated their appeals. 

II.

The Non-Settling Defendants raise the same jurisdictional

objections based upon Caplin and SLUSA that they raised in

response to the Approval Motions. However, the Settling Parties argue that we may not reach the Non-Settling Defendants’

objections because (1) appellate jurisdiction does not exist

over this appeal and (2) the Non-Settling Defendants lack

standing to object to the settlements. We first address our

SMITH v. ARTHUR ANDERSEN LLP 11727
appellate jurisdiction, and then the Non-Settling Defendants’

standing.

A.

28 U.S.C. § 1292(a)(1) provides appellate jurisdiction over

“[i]nterlocutory orders of the district courts . . . granting . . .

injunctions.” Each of the two Approval and Bar Orders

entered by the district court permanently enjoins the NonSettling Defendants from asserting certain claims against the

settling defendants. Although no Approval and Bar Order was

entered in relation to the Stephens settlement, a minute entry

indicates that the Stephens Approval Motion, which sought

entry of a bar order, was granted. Because the Non-Settling

Defendants appeal from the specific entry of a requested

injunction, we have jurisdiction pursuant to section

1292(a)(1). Paige v. California, 102 F.3d 1035, 1038 (9th Cir.

1996); see also FDIC v. Geldermann, Inc., 975 F.2d 695, 697

(10th Cir. 1992) (“Because the district court’s bar order

expressly enjoins the Defendants from suing the Settlors for

contribution or indemnity, it is an ‘interlocutory order[ ] . . .

granting . . . injunctions . . .’ under 28 U.S.C. § 1292(a)(1)”

(alterations in original)). 

However, the Non-Settling Defendants do not directly challenge the injunctions. They do not argue, for example, that the

district court abused its discretion by entering the bar order.

Cf. Resolution Trust Corp. v. Rice (In re Consol. Pinnacle W.

Sec. Litig./Resolution Trust Corp.-Merabank Litig.), 51 F.3d

194, 197 (9th Cir. 1995). Rather, they are using this appeal

from the injunctions to challenge the Trustee’s standing and

the district court’s subject matter jurisdiction. The question

therefore arises whether we have “pendent appellate jurisdiction” over these issues. 

[1] “Under 28 U.S.C. § 1292(a)(1), we may exercise interlocutory appellate jurisdiction over the district court’s . . .

injunction and pendent jurisdiction over any ‘otherwise non11728 SMITH v. ARTHUR ANDERSEN LLP
appealable ruling [that] is ‘inextricably intertwined’ with or

‘necessary to ensure meaningful review of’ the order properly

before us on interlocutory appeal.’ ” Hendricks v. Bank of

Am., N.A., 408 F.3d 1127, 1134 (9th Cir. 2005) (citations

omitted) (alterations in original). As in Hendricks, we need

not decide whether the Trustee standing and SLUSA issues

are “inextricably intertwined” with the injunctions, “because

we conclude that ‘review of [these two defenses] is necessary

to ensure meaningful review of’ the district court’s . . . injunction.” Id. (alterations in original), quoting Swint v. Chambers

County Comm’n, 514 U.S. 35, 51 (1995). 

[2] We have stated that “[r]esolution of subject matter jurisdiction . . . is ‘necessary to ensure meaningful review of’ the

district court’s interlocutory rulings because if appellate

courts lack jurisdiction, they cannot review the merits of these

properly appealed rulings.” Meredith v. Oregon, 321 F.3d

807, 816 (9th Cir.), amended by 326 F.3d 1030 (9th Cir.

2003); see also Hendricks, 408 F.3d at 1134; Wong v. INS,

373 F.3d 952, 960-61 (9th Cir. 2004). Here, the Non-Settling

Defendants characterize their arguments based upon Caplin as

challenges to the Trustee’s Article III standing; those arguments therefore implicate the district court’s subject matter

jurisdiction. See Cetacean Cmty. v. Bush, 386 F.3d 1169,

1174 (9th Cir. 2004) (“A suit brought by a plaintiff without

Article III standing is not a ‘case or controversy,’ and an Article III federal court therefore lacks subject matter jurisdiction

over the suit”). Similarly, the Non-Settling Defendants’

SLUSA arguments challenge the district court’s subject matter jurisdiction over the state-law claims in the Trustee’s

Action. We therefore have pendent jurisdiction over both of

these issues, which “call[ ] into question the district court’s

‘authority to rule on a party’s motion for a[n] . . . injunction.’ ” Hendricks, 408 F.3d at 1134 (emphasis in Hendricks),

quoting Meredith, 321 F.3d at 816.

B.

[3] The Settling Parties argue that the Non-Settling Defendants do not have standing to challenge the settlements

SMITH v. ARTHUR ANDERSEN LLP 11729
because “a non-settling defendant, in general, lacks standing

to object to a partial settlement.” Waller, 828 F.2d at 582

(citations omitted). We review this issue de novo. See id.

In Waller, we explained that there is “a recognized exception to the general principle barring objections by non-settling

defendants to permit 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. at 583 (citations omitted). It is well established that such prejudice exists where a

settlement “purports to strip [a non-settling defendant] of a

legal claim or cause of action, an action for indemnity or contribution for example.” Id. (citations omitted); see also Weinman v. Fid. Capital Appreciation Fund (In re Integra Realty

Res., Inc.), 262 F.3d 1089, 1102 (10th Cir. 2001); In re Vitamins Antitrust Class Actions, 215 F.3d 26, 31 (D.C. Cir.

2000); Eichenholtz v. Brennan, 52 F.3d 478, 482 (3d Cir.

1995); Agretti v. ANR Freight Sys., Inc., 982 F.2d 242, 247

(7th Cir. 1992); Alumax Mill Prods., Inc. v. Congress Fin.

Corp., 912 F.2d 996, 1002 (8th Cir. 1990). 

The Non-Settling Defendants contend that they have suffered prejudice because, among other reasons, they are

enjoined from pursuing indemnification, contribution, and

certain other claims. Furthermore, they argue that the judgment reduction credits do not fully eliminate this prejudice. 

In opposition, the Settling Parties contend that the NonSettling Defendants waived these arguments by failing to

raise them in the district court. We disagree with this contention for two reasons. First, Nadhir’s counsel did argue at the

August 26, 2003 hearing on the P&H settlement that the NonSettling Defendants had standing because the settlement

stripped them of indemnity and contribution claims. Although

the Non-Settling Defendants did not make one of the particular arguments they advance here, i.e., that the judgment reduction credits do not fully extinguish any harm caused by the

bar orders, we will not preclude them from bolstering their

11730 SMITH v. ARTHUR ANDERSEN LLP
defense to the Settling Parties’ challenge to their standing. See

Lake v. Lake, 817 F.2d 1416, 1424 (9th Cir. 1987) (where

defendant raised issue of personal jurisdiction in district court

and plaintiffs responded, defendant could not prevent plaintiffs from arguing that issue on appeal or “strengthening their

argument”). 

Second, although we usually do not consider issues raised

for the first time on appeal, there are exceptions to this rule.

For example, we will consider such an issue where “there are

exceptional circumstances why the issue was not raised in the

trial court.” United States v. Echavarria-Escobar, 270 F.3d

1265, 1267-68 (9th Cir. 2001); see also United States v.

Antonakeas, 255 F.3d 714, 721 (9th Cir. 2001). We conclude

that exceptional circumstances exist in this case. The Settling

Parties did not cite the general rule, stated in Waller, that nonsettling defendants lack standing to challenge partial settlements until August 26, 2003, which was the day of the hearing on the P&H settlement and one week after the hearing on

the BB&L and Stephens settlements. It is therefore unsurprising that the Non-Settling Defendants did not invoke the “formal legal prejudice” exception to the general rule prior to that

time. Given the Settling Parties’ own torpor in challenging the

Non-Settling Defendants’ standing, we will permit the NonSettling Defendants to argue that the judgment reduction credits do not eliminate the prejudice caused by the bar orders. To

hold otherwise would create an incentive for a party to withhold its challenges to its opponent’s standing until the last

possible moment and then contend that its opponent “waived”

any response to those challenges by not anticipating and

countering them in the district court. 

The Settling Parties also argue that the Non-Settling Defendants waived the argument that they have standing to challenge the settlements by not making that argument in their

opening briefs. However, we may consider an issue not raised

in the appellant’s opening brief if it is raised in the appellee’s

brief. See, e.g., Koerner v. Grigas, 328 F.3d 1039, 1048 (9th

SMITH v. ARTHUR ANDERSEN LLP 11731
Cir. 2003); United States v. Franco-Lopez, 312 F.3d 984, 993

n.6 (9th Cir. 2002). That is the case here. We therefore now

proceed to consider the Non-Settling Defendants’ arguments

that they have standing. 

[4] As explained above, one exception to the general rule

that non-settling defendants lack standing to challenge settlements is that standing exists where the settlement purports to

strip the non-settling defendant of a “legal claim or cause of

action, an action for indemnity or contribution for example.”

Waller, 828 F.2d at 583 (citations omitted). The Settling Parties contend, in effect, that there is an exception to this exception, under which a non-settling defendant who is subject to

a bar order will nonetheless lack standing if the settlement

includes a “judgment reduction credit” reducing any subsequent judgment against the non-settling defendants by the

proportion of fault attributable to the settling defendants. In

support of this argument, the Settling Parties cite Zupnick v.

Fogel, 989 F.2d 93 (2d Cir. 1993) and School District of Lancaster v. Lake Asbestos of Quebec Ltd. (In re School Asbestos

Litigation), 921 F.2d 1330, 1333 (3d Cir. 1990). 

[5] Neither Zupnick nor School Asbestos Litigation holds

that a judgment reduction credit always eliminates any formal

legal prejudice caused by a bar order. Indeed, the same court

that decided School Asbestos Litigation held in a later case

that non-settling defendants did have standing to object to a

settlement where the district court had imposed a bar order,

see Eichenholtz, 52 F.3d at 482-83 & n.8, even though the settlement agreement contained a “proportionate fault judgment

reduction provision” similar to that involved here, see id. at

481. We interpret Zupnick and School Asbestos Litigation as

standing for the proposition that a judgment reduction credit

may divest non-settling defendants of standing if it is written

in such a way as to ameliorate any harm caused by other provisions in the settlement agreement. See Zupnick, 989 F.2d at

99 & n.3 (no standing where settlement agreement “fully protect[ed]” the non-settling defendants’ contribution and indem11732 SMITH v. ARTHUR ANDERSEN LLP
nity rights by providing that “Plaintiffs and the Class agree to

reduce or satisfy any judgment obtained either by settlement

or after trial against Non-Settling Defendants, or any of them,

to the extent necessary to extinguish any claims of such NonSettling Defendants for indemnity or contribution from [the

settling defendant], as may be determined by the Court or

jury”); Sch. Asbestos Litig., 921 F.2d at 1333 (similar). We

will therefore examine the specific provisions at issue to

decide whether the Non-Settling Defendants have standing. 

The P&H Approval and Bar Order provides in part (emphasis added): 

5. The non-settling parties are permanently barred

and enjoined from asserting or continuing to prosecute, either directly or in any other capacity, any and

all Claims (as defined in the Settlement Agreement)

whether directly, indirectly, derivatively, representatively, or in any other capacity (excluding claims to

enforce the terms of the Settlement Agreement),

against P&H. The Released Claims are compromised, settled, and released as against P&H by virtue

of this Approval and Bar Order. 

6. By virtue of the “good faith” nature of the Settlement Agreement approved by this Court, P&H is

discharged from all Released Claims for contribution, indemnification or the like that have been or

may later be brought by or on behalf of any of the

non-settling parties based upon, relating to or arising

out of the Released Claims as defined in the Settlement Agreement. Accordingly, the Other Defendants

are permanently barred, enjoined and restrained

from asserting or continuing to prosecute any such

Claim, however styled, whether for contribution,

indemnity or otherwise, and whether arising under

state, federal or common law against P&H, based

upon, arising out of, or related to the Claims. 

SMITH v. ARTHUR ANDERSEN LLP 11733
7. With respect to any judgment that might be

entered on any cause of action or claim in this

action, or any pending future adversary proceeding,

contested matter or civil action in which the Trustee

is also a party, in which there is or may be a determination of fault on the part of P&H, including but not

limited to a determination of fault based on joint and

several liability, the non-settling parties shall receive

a pro rata judgment reduction credit. In recognition

of the Settlement Payment, and in light of the Parties’ intent to provide P&H with comprehensive, full

and complete finality with regard to any and all

claims that could be asserted against P&H as a result

of his conduct or prior dealings with the Debtor or

the Debtors’ respective bankruptcy estates, any

resulting judgment reduction credit shall be applied

so as to preclude recovery by any party for any

amount of pro rata fault attributable to P&H. . . . 

Similar language is contained in the BB&L Approval and

Bar Order and the proposed form of order submitted by Stephens. 

[6] We conclude that the judgment reduction credit does

not eliminate the formal legal prejudice caused by the bar

orders. The Non-Settling Defendants are enjoined from asserting any claim for “contribution, indemnity or otherwise” that

is “based upon, arising out of, or related to” the released

claims. Although the judgment reduction credit, which is

equal to “any amount of pro rata fault attributable to” the settling defendants, might offset the Non-Settling Defendants’

loss of potential contribution claims, it is not clear that it

would compensate them for the elimination of “indemnity or

other[ ]” claims. 

[7] That the Non-Settling Defendants have not articulated

the precise nature of the “indemnity or other[ ]” claims they

are barred from asserting does not demonstrate a lack of for11734 SMITH v. ARTHUR ANDERSEN LLP
mal legal prejudice. We are not reviewing an order entering

summary judgment or dismissing a complaint, where a more

searching inquiry into the factual and legal basis of a claim

might be productive. Rather, we are determining whether the

Non-Settling Defendants have standing, and we have stated

that a non-settling defendant has standing where a settlement

purports to strip it “of a legal claim or cause of action.” Waller, 828 F.2d at 583. The plain language of the Approval and

Bar Orders extends beyond contribution claims, and we cannot conclude at this stage that the language precluding “indemnity or other[ ]” claims, which the Settling Parties

requested the district court to include in the Approval and Bar

Orders, is of no practical effect. Moreover, the Non-Settling

Defendants have had little opportunity to identify in concrete

terms the exact ways in which the bar orders prejudice them

because the Settling Parties did not assert challenges to the

Non-Settling Defendants’ standing under Waller until the day

of the hearing on the P&H settlement. We hold that the NonSettling Defendants had standing to object to the settlements.

III.

We turn now to the merits of the Non-Settling Defendants’

challenges to the district court’s jurisdiction. We first address

their attacks on the Trustee’s standing, and then consider their

SLUSA arguments.

A.

The Non-Settling Defendants contend that the Trustee lacks

standing to assert the claims in the Trustee’s Action pursuant

to the Supreme Court’s Caplin decision. We review this issue

de novo. See Williams v. Cal. 1st Bank, 859 F.2d 664, 666

(9th Cir. 1988). 

We emphasize that the only issue before us is whether the

district court had authority to grant the Approval Motions.

The Non-Settling Defendants argue that such authority was

SMITH v. ARTHUR ANDERSEN LLP 11735
absent because (1) Caplin divests the Trustee of standing; (2)

Caplin and its progeny establish constitutional principles of

standing and therefore implicate subject matter jurisdiction,

see City of Sausalito v. O’Neill, 386 F.3d 1186, 1197, 1199

(9th Cir. 2004) (explaining that standing involves both Article

III limitations and non-constitutional limitations, and that the

“non-constitutional standing inquiry is not whether there is a

‘case or controversy’ under Article III, and thus does not go

to our subject matter jurisdiction”); and (3) since the requirements of Article III have not been met, the district court not

only lacked jurisdiction to adjudicate the Trustee’s claims, but

could not even grant the interlocutory Approval Motions. 

We address first the issue of the Trustee’s standing and

then address the Non-Settling Defendants’ principal objections. 

1.

[8] A bankruptcy trustee is the representative of the bankrupt estate, and has the capacity to sue and be sued. See 11

U.S.C. § 323. Among the trustee’s duties is the obligation to

“collect and reduce to money the property of the estate.” Id.

§ 704(1). The “property of the estate” includes “all legal or

equitable interests of the debtor in property as of the commencement of the case,” id. § 541(a)(1), including the debtor’s “causes of action.” United States v. Whiting Pools, Inc.,

462 U.S. 198, 205 n.9 (1983) (internal quotation marks and

citation omitted). Thus, “[u]nder the Bankruptcy Code the

trustee stands in the shoes of the bankrupt corporation and has

standing to bring any suit that the bankrupt corporation could

have instituted had it not petitioned for bankruptcy.” Shearson

Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 118 (2d Cir.

1991) (citations omitted). 

[9] However, “[i]t is well settled that a bankruptcy trustee

has no standing generally to sue third parties on behalf of the

estate’s creditors, but may only assert claims held by the

11736 SMITH v. ARTHUR ANDERSEN LLP
bankrupt corporation itself.” Id. (citation omitted); see also

Steinberg v. Buczynski, 40 F.3d 890, 893 (7th Cir. 1994)

(“[T]he trustee is confined to enforcing entitlements of the

corporation. He has no right to enforce entitlements of a creditor”). This principle derives from the Supreme Court’s decision in Caplin, “in which the Court concluded that a

reorganization trustee under Chapter X had no standing under

the old Bankruptcy Act to assert, on behalf of the holders of

the debtor’s debentures, claims of misconduct against a third

party.” Williams, 859 F.2d at 666; see also Rochelle v. Marine

Midland Grace Trust Co., 535 F.2d 523, 527 (9th Cir. 1976)

(stating that Caplin held that “a reorganization trustee has no

standing to maintain [an] action on the part of any person or

entity other than his debtor corporation”). As we explained in

Williams, the holding of Caplin remains valid under the current version of the Bankruptcy Code, and is equally applicable

to both reorganization and liquidation trustees. See 859 F.2d

at 666-67. 

Although the line between “claims of the debtor,” which a

trustee has statutory authority to assert, and “claims of creditors,” which Caplin bars the trustee from pursuing, is not

always clear, the focus of the inquiry is on whether the

Trustee is seeking to redress injuries to the debtor itself

caused by the defendants’ alleged conduct. See, e.g., Scholes

v. Lehmann, 56 F.3d 750, 753 (7th Cir. 1995) (explaining that

a bankruptcy trustee may sue only to redress injuries to the

debtor in bankruptcy). If the debtor suffered an injury, the

trustee has standing to pursue a claim seeking to rectify such

injury. But, “[w]hen a third party has injured not the bankrupt

corporation itself but a creditor of that corporation, the trustee

in bankruptcy cannot bring suit against the third party.” Steinberg, 40 F.3d at 893. 

[10] Here, the Trustee alleges that the defendants breached

contracts with or duties owed to Boston Chicken, and that if

they had not concealed Boston Chicken’s financial condition

from its outside directors and the investing public, the firm

SMITH v. ARTHUR ANDERSEN LLP 11737
might have filed for bankruptcy more promptly. In that situation, additional assets might not have been spent on a failing

business. This allegedly wrongful expenditure of corporate

assets qualifies as an injury to the firm which is sufficient to

confer standing upon the Trustee. See Official Comm. of

Unsecured Creditors v. R.F. Lafferty & Co., 267 F.3d 340,

350 (3d Cir. 2001) (“[P]rolonging an insolvent corporation’s

life through bad debt may . . . cause the dissipation of corporate assets. Th[is] harm[ ] can be averted, and the value within

an insolvent corporation salvaged, if the corporation is dissolved in a timely manner, rather than kept afloat with spurious debt”). Therefore, we conclude that the Trustee has

standing.

2.

Unpersuaded, the Non-Settling Defendants present a host

of challenges to the Trustee’s standing, all of which suffer

from a common defect: a failure to refute the argument that

the Trustee is seeking to redress injuries suffered by Boston

Chicken as a result of the defendants’ alleged conduct. We

address their principal arguments in turn. 

The Non-Settling Defendants first argue that our decision

in Williams compels the conclusion that the Trustee lacks

standing because the creditors are the “real parties in interest”

in the Trustee’s Action. In Williams, we held that a trustee

lacked standing to assert claims that had been assigned to the

trustee by the debtor’s investors because, among other reasons, “the assignments notwithstanding, the investors plainly

remain[ed] the real parties in interest in [the trustee’s]

actions.” Williams, 859 F.2d at 666. Here, in contrast, the

Trustee is not attempting to assert claims that were assigned

to him by Boston Chicken’s creditors, but rather seeks to rectify injuries to Boston Chicken itself. Nothing in Williams

suggests that creditors are the “real parties in interest” in an

action pursuing compensation for injuries to the corporate

debtor. 

11738 SMITH v. ARTHUR ANDERSEN LLP
Second, the Non-Settling Defendants argue that “if [Boston

Chicken] took on more debt than it could repay, it is [Boston

Chicken’s] creditors—the ones who actually lost that money

by lending it to [Boston Chicken]—who were injured.” In

their view, the additional debt that Boston Chicken incurred

and cannot now repay as a result of the defendants’ alleged

conduct does not establish a harm to Boston Chicken remediable by the Trustee. In response, the Trustee argues that he

has alleged a cognizable harm to Boston Chicken. He invokes

the “deepening insolvency” theory, exemplified by the Third

Circuit’s decision in Lafferty, under which an insolvent corporation is deemed to suffer a “distinct and compensable injury

when it continues to operate and incur more debt.” Kittay v.

Atl. Bank (In re Global Serv. Group LLC), 316 B.R. 451, 457

(Bankr. S.D.N.Y. 2004); see also Lafferty, 267 F.3d at 347

(stating that “deepening insolvency” refers to “an injury to the

Debtors’ corporate property from the fraudulent expansion of

corporate debt and prolongation of corporate life”). 

[11] We need not make any general pronouncements on the

deepening insolvency theory, not least because it is difficult

to grasp exactly what the theory entails. See Limor v. Buerger

(In re Del-Met Corp.), 322 B.R. 781, 807 (Bankr. M.D. Tenn.

2005) (pointing out the “lack of definition of the developing

theory of deepening insolvency” and discussing cases and

commentary). We do, however, agree with the Third Circuit’s

observation in Lafferty that “prolonging an insolvent corporation’s life through bad debt may” dissipate corporate assets

and thereby harm the value of corporate property. 267 F.3d at

350. Thus, we agree that the complaint states a cognizable

harm to Boston Chicken when it alleges that the defendants

“prolonged” the firm’s existence, causing it to expend corporate assets that would not have been spent “if the corporation

[had been] dissolved in a timely manner, rather than kept

afloat with spurious debt.” Id. In so holding, we do not opine

whether the incurrence of additional debt that cannot be

repaid, in and of itself, constitutes a corporate injury remediaSMITH v. ARTHUR ANDERSEN LLP 11739
ble by a trustee. We rely only on the dissipation of assets in

reaching the conclusion that Boston Chicken was harmed. 

It is, of course, true that the dissipation of assets limited the

firm’s ability to repay its debts in liquidation. Acknowledgment of this fact is not, however, a concession that only the

creditors, and not Boston Chicken itself, have sustained any

injury. Instead, it is a recognition of the economic reality that

any injury to an insolvent firm is necessarily felt by its creditors. See Brandt v. Hicks, Muse & Co. (In re Healthco Int’l,

Inc.), 208 B.R. 288, 300 (Bankr. D. Mass. 1997) (“In complaining that directors authorized a transaction which unduly

weakened Healthco, the Trustee is not asserting the claim of

creditors. He alleges Healthco was the victim of poor management causing damage to the corporation which necessarily

resulted in damage to its creditors by diminishing the value of

its assets and increasing its liabilities”). Thus, for example, if

corporate directors mismanage an insolvent firm and cause it

injury, the creditors will feel that injury indirectly. See Prod.

Res. Group, LLC v. NCT Group, Inc., 863 A.2d 772, 776

(Del. Ch. 2004) (stating that even when acts of mismanagement “occur when the firm is insolvent, they operate to injure

the firm in the first instance by reducing its value, injuring

creditors only indirectly by diminishing the value of the firm

and therefore the assets from which the creditors may satisfy

their claims”). The existence of such indirect injury to creditors notwithstanding, it is “axiomatic” that a trustee has

authority to bring “actions against the debtor’s officers and

directors for breach of duty or misconduct.” Koch Ref. v.

Farmers Union Cent. Exch., Inc., 831 F.2d 1339, 1348 (7th

Cir. 1987), citing Pepper v. Litton, 308 U.S. 295, 307 (1939);

see also La. World Exposition v. Fed. Ins. Co., 858 F.2d 233,

246 (5th Cir. 1988); Mixon v. Anderson (In re Ozark Rest.

Equip. Co.), 816 F.2d 1222, 1225 (8th Cir. 1987); Delgado

Oil Co. v. Torres, 785 F.2d 857, 860 (10th Cir. 1986). Moreover, neither our own decision in Williams, nor any of the

other decisions upon which the Non-Settling Defendants principally rely, see Breeden v. Kirkpatrick & Lockhart LLP (In

11740 SMITH v. ARTHUR ANDERSEN LLP
re Bennett Funding Group, Inc.), 336 F.3d 94 (2d Cir. 2003);

Hirsch v. Arthur Andersen & Co., 72 F.3d 1085 (2d Cir.

1995); E.F. Hutton & Co. v. Hadley, 901 F.2d 979 (11th Cir.

1990); Mixon, 816 F.2d 1222, are inconsistent with this analysis, as none of these decisions hold that conduct causing an

insolvent debtor corporation to expend its assets injures only

the creditors and not the corporation. 

Third, the Non-Settling Defendants point out that if the

Trustee succeeds in holding the defendants liable and distributes the recovery to Boston Chicken’s creditors, some creditors might make out better than if they had brought their own

direct fraud claims against the defendants, while others might

fare worse. This may be true, but it is irrelevant to the question of the Trustee’s standing. As Nadhir himself explains in

his brief, this supposed disparity is simply a function of the

reality that any recovery in the Trustee’s Action would be distributed to creditors according to the priority schedule set

forth in the Bankruptcy Code. This does not show that Boston

Chicken itself was not injured by the defendants’ conduct. 

Fourth, the Underwriter Defendants argue that the Trustee

is asserting claims barred by Caplin because the “Trustee’s

damage claim here is measured in terms of Boston Chicken’s

unpaid debt at the time of its bankruptcy filing, instead of any

actual harm to the corporation.” In response, the Trustee cites

dicta in several cases suggesting that the amount of debt

incurred following a false representation of solvency may be

a valid measure of harm. See Fla. Dep’t of Ins. v. Chase Bank

of Tex. Nat’l Ass’n, 274 F.3d 924, 935 (5th Cir. 2001); Tabas

v. Greenleaf Ventures, Inc. (In re Flagship Healthcare, Inc.),

269 B.R. 721, 728 (Bankr. S.D. Fla. 2001). We need not and

do not express any opinion on the appropriate measure of

damages in this case. The only question before us is whether

the Trustee has sufficiently alleged an injury to Boston

Chicken, as distinguished from the question of how to measure the extent of that injury. See Schnelling v. Thomas (In re

Agribiotech, Inc.), 319 B.R. 216, 224 (D. Nev. 2004)

SMITH v. ARTHUR ANDERSEN LLP 11741
(“Whether damages to the creditors is a proper measure of

damages to the debtor is a separate question from whether the

Trustee has standing to assert claims that allege the defendant

harmed the debtor”). Because Boston Chicken has allegedly

suffered an injury, the Trustee has standing. Should the

Trustee succeed in holding the defendants liable on any of the

claims in the Trustee’s Action, questions regarding the proper

measure of damages will be addressed by the district court at

that time. 

Finally, the Non-Settling Defendants argue that any claims

in the Trustee’s Action alleging that the Individual Defendants breached their fiduciary duties while Boston Chicken

was insolvent must be brought by the creditors to whom those

duties were owed and not the Trustee. In advancing this argument, the Non-Settling Defendants rely on the “insolvency

exception,” common to the corporate law of many states,

under which directors of insolvent firms owe fiduciary duties

to creditors. See, e.g., Geyer v. Ingersoll Publ’ns Co., 621

A.2d 784, 787 (Del. Ch. 1992) (“[W]hen the insolvency

exception does arise, it creates fiduciary duties for directors

for the benefit of creditors”). This exception gives creditors of

an insolvent firm standing to assert that directors “breached

their fiduciary duties by improperly harming the economic

value of the firm, to the detriment of the creditors who had

legitimate claims on its assets.” Prod. Res. Group, 863 A.2d

at 792. 

[12] Although creditors may attain standing to assert fiduciary duty claims upon a firm’s insolvency as a matter of state

corporate law, it does not follow that a trustee, who represents

the debtor, lacks standing to assert such claims as a matter of

federal bankruptcy law. Again, the ultimate question in determining whether a trustee has standing is whether the debtor

corporation has been injured. Even when a firm is insolvent,

it may be injured by breaches of fiduciary duty. As the Delaware Court of Chancery has explained: 

11742 SMITH v. ARTHUR ANDERSEN LLP
[E]ven in the case of an insolvent firm, poor decisions by directors that lead to a loss of corporate

assets and are alleged to be a breaches of equitable

fiduciary duties remain harms to the corporate entity

itself. . . . The firm’s insolvency simply makes the

creditors the principal constituency injured by any

fiduciary breaches that diminish the firm’s value and

logically gives them standing to pursue these claims

to rectify that injury. Put simply, when a director of

an insolvent corporation, through a breach of fiduciary duty, injures the firm itself, the claim against

the director is still one belonging to the corporation.

. . . . 

Whether a firm is solvent or insolvent, it—and not

a constituency such as its stockholders or its

creditors—owns a claim that a director has, by failing to exercise sufficient care, mismanaged the firm

and caused a diminution to its economic value. 

Id. at 792-93 (footnotes omitted). 

[13] Thus, the Non-Settling Defendants might be correct

that Boston Chicken’s creditors could have asserted fiduciary

duty claims outside the bankruptcy context similar to those

pressed by the Trustee, but this does not prove that the

Trustee is asserting “creditors’ claims” within the meaning of

Caplin. Rather, it is simply because state law often permits

creditors to pursue derivative claims on an insolvent corporation’s behalf when the corporation itself has been injured by

breaches of fiduciary duty. Because such claims involve

injury to the debtor, a bankruptcy trustee has standing to pursue them. 

[14] We stress that our ruling here is a narrow one. Because

the only issue before us is whether the district court had jurisdiction, we hold only that the Trustee has standing to assert

SMITH v. ARTHUR ANDERSEN LLP 11743
the claims alleged in the Trustee’s Action and do not opine on

any issues related to the merits of those claims. See Cardenas

v. Anzai, 311 F.3d 929, 933-34 (9th Cir. 2002) (citing Davis

v. Passman, 442 U.S. 228, 239 n.18 (1979) for the proposition

that the “question of whether a plaintiff has standing to bring

suit, and thus whether the court has jurisdiction to hear the

controversy, is separate from the question of whether a plaintiff has a cause of action”); Loyd v. Paine Webber, Inc., 208

F.3d 755, 758 & n.3 (9th Cir. 2000) (per curiam) (holding that

trustee had standing because his complaint sufficiently

alleged that defendant law firm’s conduct was a cause of

injury to the debtor corporation, even though the complaint

did not state a claim for legal malpractice, and explaining that

“[w]hether [the law firm’s] conduct rises to the level of legal

malpractice goes to the merits of the lawsuit, not to the preliminary question of standing”). For example, although we

hold that the dissipation of assets constitutes an injury to Boston Chicken, we express no opinion on whether the complaint

states a valid claim for relief based on that injury, whether the

Trustee must prove intentional or merely negligent conduct to

succeed on any of his claims, or whether certain of the Trustee’s fiduciary duty claims are affected by the business judgment rule. In addition, as stated above, we do not decide what

measure of damages might be appropriate if the defendants

are found liable on any claims. For present purposes, we need

hold only that Caplin does not divest the Trustee of standing.

B.

We now turn to the Non-Settling Defendants’ contentions

based upon SLUSA. We review the district court’s interpretation of a statute de novo. SEC v. McCarthy, 322 F.3d 650, 654

(9th Cir. 2003). 

[15] SLUSA is a “federal statute that preempts state-law

securities actions” under certain circumstances. United Investors Life Ins. Co. v. Waddell & Reed Inc., 360 F.3d 960, 962

(9th Cir. 2004). SLUSA amends both the Securities Act of

11744 SMITH v. ARTHUR ANDERSEN LLP
1933 and the Securities Exchange Act of 1934. The 1933 Act

amendments are codified at 15 U.S.C. § 77p. The 1934 Act

amendments, which are functionally identical, are codified at

15 U.S.C. § 78bb. We cite here only the 1934 Act codification. SLUSA provides in part: 

No covered class action based upon the statutory or

common law of any State or subdivision thereof may

be maintained in any State or Federal court by any

private party alleging— 

(A) a misrepresentation or omission of a material

fact in connection with the purchase or sale of a covered security[.] 

15 U.S.C. § 78bb(f)(1)(A). 

The Non-Settling Defendants argue that the Trustee’s

Action is a “covered class action” to which this provision

applies. They contend that SLUSA does not merely provide

an affirmative defense of preemption to the Trustee’s statelaw claims, but divests the district court of subject matter

jurisdiction over those claims and required the court to dismiss the entire case at the moment SLUSA applied. They concede that no federal court has held that SLUSA applies this

way, but argue that this result is required by the language of

SLUSA itself— namely, its command that no “covered class

action” that comes within its scope “may be maintained” in

any federal or state court. We need not decide whether

SLUSA is jurisdictional in this sense because even if it is,

SLUSA did not require dismissal. 

[16] Under SLUSA, either a “single lawsuit” or “group of

lawsuits” can qualify as a “covered class action.” Id.

§ 78bb(f)(5)(B)(i)-(ii). The Non-Settling Defendants invoke

both of these definitions in their challenge to the Trustee’s

Action, and we consider each in turn.

SMITH v. ARTHUR ANDERSEN LLP 11745
1.

Under SLUSA, a “covered class action” includes a “single

lawsuit” in which 

damages are sought on behalf of more than 50 persons or prospective class members, and questions of

law or fact common to those persons or members of

the prospective class, without reference to issues of

individualized reliance on an alleged misstatement or

omission, predominate over any questions affecting

only individual persons or members[.] 

Id. § 78bb(f)(5)(B)(i)(I). The Non-Settling Defendants contend that the Trustee’s Action is brought “on behalf of more

than 50 persons or prospective class members,” i.e., the beneficiaries of the plan trust, because the Trustee does not qualify

as one “person” under the following definition: 

For purposes of this paragraph, a corporation, investment company, pension plan, partnership, or other

entity, shall be treated as one person or prospective

class member, but only if the entity is not established

for the purpose of participating in the action. 

Id. § 78bb(f)(5)(D). 

Thus, the issue is whether the Trustee was “established for

the purpose of participating in the action”; if it was not, then

the Trustee is a single “person,” and the Trustee’s Action is

not a “covered class action” under the above definition. 

We are aware of no federal appellate decision interpreting

SLUSA’s definition of “person.” However, one district court

has suggested that an entity is not one person if its “primary

purpose” is to pursue causes of action. See Cape Ann Investors LLC v. Lepone, 296 F. Supp. 2d 4, 10 (D. Mass. 2003).

We adopt this sensible definition. The Non-Settling Defen11746 SMITH v. ARTHUR ANDERSEN LLP
dants’ contrary interpretation, under which any entity established “at least in part” for the purpose of pursuing litigation

is not a “person,” is inconsistent with the statute’s plain language, which provides that an entity “shall be treated as one

person” if the entity is not “established for the purpose of participating in the action.” Moreover, that interpretation could

potentially deprive many bankruptcy trustees of the ability to

pursue state-law securities fraud claims on behalf of an estate.

Nothing in SLUSA suggests that Congress intended to work

such a radical change in the bankruptcy laws. 

[17] We agree with the Settling Parties that pursuing causes

of action is not the Trustee’s “primary” purpose. The Debtors’

Plan, under which the Trustee was appointed, provides that

the Trustee will “act as the Estates’ representative for all purposes, and will be responsible for (i) controlling and managing the consideration received from [McDonald’s] and all

Retained Assets, (ii) monetizing Retained Assets, (iii) filing,

prosecuting and settling claim objections, (iv) administering

the disputed claim reserve, (v) prosecuting and settling Estate

causes of action, (vi) making distributions in accordance with

the terms of the Plan, and (vii) winding-up and closing the

Estates” (emphasis added). Because the Trustee is to “act as

the Estates’ representative for all purposes,” and not just for

the purpose of pursuing causes of action, the Trustee is one

person, and the Trustee’s Action is not a “single lawsuit”

barred by SLUSA. 

2.

The Non-Settling Defendants also rely on the provision in

SLUSA defining “covered class action” to include 

any group of lawsuits filed in or pending in the same

court and involving common questions of law or

fact, in which— 

(I) damages are sought on behalf of more than 50

persons; and 

SMITH v. ARTHUR ANDERSEN LLP 11747
(II) the lawsuits are joined, consolidated, or otherwise proceed as a single action for any purpose. 

15 U.S.C. § 78bb(f)(5)(B)(ii). The Non-Settling Defendants

advance a number of different arguments that rely on this definition. Chief among these is the assertion that, when the

Trustee’s Action was consolidated with the Class Action in

Arizona for “discovery and pretrial purposes only” for several

months in 2003, the two actions became a “group of lawsuits”

covered by this definition. In the Non-Settling Defendants’

view, the fact that the district court vacated the order consolidating the cases and transferred the Class Action back to Colorado is irrelevant, because the district court was powerless to

do anything other than dismiss the Trustee’s Action at the

instant SLUSA applied. 

The critical flaw in their argument, however, is its assumption that we may consider the Class Action in determining

whether the Trustee’s Action is part of a “group of lawsuits”

barred by SLUSA. That assumption cannot be squared with

the provision governing the applicability of SLUSA’s amendments: 

APPLICABILITY.—The amendments made by this

section shall not affect or apply to any action commenced before and pending on the date of enactment

of this Act. 

Securities Litigation Uniform Standards Act of 1998, Pub. L.

No. 105-353, § 101(c), 112 Stat. 3227, 3233 (1998). 

[18] As several courts have recognized, this language

“amounts to an express proscription that forbids the application of SLUSA to any case pending on the day SLUSA came

into force,” which was November 3, 1998. W.R. Huff Asset

Mgmt. Co. v. BT Sec. Corp., 190 F. Supp. 2d 1273, 1276

(N.D. Ala. 2001); see also W.R. Huff Asset Mgmt. Co. v.

Kohlberg Kravis Roberts & Co., 234 F. Supp. 2d 1218, 1222

11748 SMITH v. ARTHUR ANDERSEN LLP
(N.D. Ala. 2002) (“This language certainly qualifies as an

‘express command’ that prevents application of SLUSA to

cases pending on the date of SLUSA’s enactment”); In re

BankAmerica Corp. Sec. Litig., 95 F. Supp. 2d 1044, 1046 n.2

(E.D. Mo. 2000) (stating that SLUSA “does not apply to suits

filed prior to November 3, 1998, the effective date of the

Act”). The actions comprising the Class Action were filed and

consolidated before November 3, 1998. Therefore, the applicability provision commands that SLUSA “shall not affect or

apply” to the Class Action. 

If the Non-Settling Defendants are correct that the Trustee’s Action and Class Action are a “group of lawsuits” meeting the definition of a “covered class action” precluded by

SLUSA, dismissal would be required not only of the Trustee’s

Action but of the Class Action as well. See 15 U.S.C.

§ 78bb(f)(1) (providing that “[n]o covered class action” meeting certain requirements “may be maintained in any State or

Federal court”). This, of course, would violate SLUSA’s

applicability provision. 

[19] Therefore, we will not consider the Class Action in

deciding whether the Trustee’s Action is part of a “group of

lawsuits” that qualify as a “covered class action.” Since the

Non-Settling Defendants have not argued that there is another

lawsuit which, together with the Trustee’s Action, is a “group

of lawsuits” constituting a “covered class action,” SLUSA

does not bar the Trustee’s Action. 

In challenging this analysis, the Non-Settling Defendants

cite decisions holding that SLUSA applies to conduct that

occurred prior to SLUSA’s enactment. See, e.g., Prof’l Mgmt.

Assocs., Inc. Employees’ Profit Sharing Plan v. KPMG LLP,

335 F.3d 800, 804 (8th Cir. 2003) (“We thus conclude

SLUSA applies to all actions commenced after its enactment,

even if the challenged conduct predates SLUSA”). The question here is not, however, whether SLUSA can apply to conduct that occurred before November 3, 1998, but whether it

SMITH v. ARTHUR ANDERSEN LLP 11749
can apply to an action that was filed before the effective date.

That question is answered by SLUSA’s applicability provision. 

[20] It is not clear whether the Non-Settling Defendants

argue that, even if the Class Action is disregarded, the several

lawsuits that were consolidated into the Trustee’s Action are

themselves a “group of lawsuits” which constitute a “covered

class action.” Assuming they do make this argument, they are

wrong. A group of lawsuits will not constitute a covered class

action if it does not seek damages “on behalf of more than 50

persons.” 15 U.S.C. § 78bb(f)(5)(B)(ii)(I). Because the

Trustee is a single person, see Part III.B.1, supra, the Trustee’s Action is not a group of lawsuits which qualifies as a

covered class action. SLUSA does not require dismissal of the

Trustee’s Action. 

AFFIRMED.

11750 SMITH v. ARTHUR ANDERSEN LLP