~4-
discovery and engaged in “lengthy and hard-fought” negotiations to
arrive at this “excellent” settlement, (Plaintiffs’ Memorandum in
Support of Preliminary Approval at 3, 12 n.6), but these are simply
conclusions. We have been given no information (except conclusory
statements) about the extent of discovery, what it has disclosed as
to the likelihood of recovery, or what defenses there might be.

An alternative ground for denying preliminary approval of the
proposed settlement is that there has been no actual settlement
agreement between the parties. Plaintiffs and defendants’
insurance carrier, Illinois National Insurance Company (“Illinois
National”), have not persuaded us that the carrier has the right to
settle this matter without the defendants’ consent.

Illinois National’s standard form policy contained a “hammer
clause,” which provided that the insurer could make any settlement
of a claim it deemed expedient with respect to the insured, subject
to the insured’s written consent. (Plaintiffs’ Memorandum in
Support of Preliminary Approval, Ex. B.) The parties to the policy
at issue here agreed to delete the “hammer clause.” Plaintiffs
argue that the deletion of the “hammer clause” is “proof positive”
that the insurance company can settle these claims over the
defendants’ objection. They also contend that the provision of the
policy that gives the insurer the right to “effectively associate”
in the defense of claims, “including but not limited to negotiating

a settlement,” confers upon the insurer the right to settle claims.


-~7-
or non-core; (2) the most efficient use of judicial resources; (3)
whether there would be delay and related costs to the parties; (4)

uniformity of bankruptcy administration; (5) prevention of forum

shopping; and (6) other related factors. See Levey v. McIntyre (In

re J. O’Brien Leasing, Inc.), No: 97 C 3821, 1997 WL 414099, at *2

(N.D. Til. July 17, 1997) (citing South St. Seaport Ltd.

Partnership v. Burger Boys, Inc. (In Re Burger Boys, Inc.), 94 F.3d

755, 762 (2d Cir. 1996)). We agree with Judge Holderman’s finding
that the claims sought to be withdrawn are core proceedings in that
they involve the administration of the bankruptcy estate and
require application of the Bankruptcy Code, and we do not believe
that allowing the reference to stand negatively affects any of the
other relevant factors.

c. All Writs Act Motion

The plaintiffs ask us to enjoin the trustee’s adversary action
and invoke the All Writs Act, 28 U.S.C. § 1651(a), which empowers
the court to issue all writs that are “necessary or appropriate in
aid of” its jurisdiction. The All Writs Act “empowers federal
courts to fashion extraordinary remedies when the need arises.”
Ivey v. Harney, 47 F.3d 181, 185 (7th Cir. 1995).

Plaintiffs’ premise is that further prosecution of the
adversary action will stop the settlement “dead in its tracks” and
will deny the shareholder class “access to the $22 million placed

in escrow pursuant to the Class settlement agreement.”


-3-

DISCUSSION

A. Preliminary Approval of Proposed Settlement

Rule 23(e) of the Federal Rules of Civil Procedures requires
court approval of any settlement that causes the dismissal of a
class action. See Ped. R. Civ. P. 23(e); Reynolds v. Beneficial
Nat’l Bank, 288 F.3d 277, 279 (7th Cir. 2002). “Before such a
settlement may be approved, the district court must determine that
a class action settlement is fair, adequate, and reasonable, and
not a product of collusion.” Reynolds, 288 F.3d at 279 (quoting
Joel A. v. Giuliani, 218 F.3d 132, 138 (2d Cir. 2000)). Judges
must exercise “the highest degree of vigilance in scrutinizing
proposed settlements of class actions.” Id. The primary question
is whether the proposed settlement amount is reasonable, given the
risk and likely return to the class of continued litigation. See
id. at 280.

Class counsel has failed to demonstrate why the proposed
settlement is fair, adequate, and reasonable. Plaintiffs simply
have not given us sufficient information to enable us to make a
reasonable assessment of the damages to the plaintiffs, the
evidence supporting and rebutting plaintiffs’ claims, or the
percentage of actual damages each class member would recover if the
settlement were approved. Furthermore, plaintiffs tell us nothing
about what assets the defendants have beyond the insurance

proceeds. Plaintiffs state that they have conducted extensive


~5-
(Id. at 4, 5.) We are not persuaded. The elimination of the
“hammer clause” appears to be an indication that the insurer’s
right to settle claims was taken away, not enhanced. And the
“right to associate” clause does not provide that the insurer has
the right to settle over the insured’s objections. Moreover,
plaintiffs and the insurer have cited no relevant authority for the
proposition that, absent any express policy provision, the insurer

has the authority to settle claims without the insured’s consent.

B. Withdrawal of the Reference

Plaintiffs move to withdraw the reference to the bankruptcy
court of adversary proceeding no. 02 A 00589. The same motion was
made by the plaintiffs in the case of Megliola v. Sutton, 02 C
4021, which was pending before Judge Holderman. Without realizing
that we had granted a motion for relatedness, and that the
Executive Committee of the court had transferred his case to us,
Judge Holderman denied the motion to withdraw the reference in an
opinion he filed on July 2, 2002. When the parties brought this to
our attention, we conferred with Judge Holderman, and he agreed
that his decision should be vacated. Accordingly, we entered an
order on July 17, 2002 vacating his opinion.

The motion is now fully briefed, and the parties make the same
arguments they made before Judge Holderman. (The shareholders have
filed a reply brief, which Judge Holderman did not have, which

makes somewhat more explicit their arguments as to why the motion


-e-
(Plaintiff’s Memorandum in Support of Motion to Enjoin at 6.)
Because we have declined to approve the proposed settlement, there
is no settlement that is “threatened” by the trustee’s action, and
thus no basis for the extraordinary relief sought by plaintiffs.
CONCLUSION

For the foregoing reasons, plaintiffs’ motion for preliminary
approval of the proposed class action settlement is denied.
Plaintiffs’ motion to withdraw the reference to the bankruptcy
court of adversary proceeding no. 02 A 00589 is denied.
Plaintiff’s motion pursuant to the All Writs Act to enjoin

prosecution of the adversary complaint in no. 02 A 00589 is denied.

DATE: August 2, 2002

ENTER:

John f. Grady, United States “U Judge


Minute Order Form (06/97)

United States District Court, Northern District of Illinois

Name of Assigned Judge Sitting Judge if Other
or Magistrate Judge John F. Grady than Assigned Judge
CASE NUMBER 00 C 6676 DATE August 2, 2002
CASE Doug Sutton, et al. v. MarchFirst, Inc., et al.
TITLE
[In the following box (a) indicate the party filing the motion, e.g., plaintiff, defendant, 3rd party plaintiff, and (b) state briefly the

MOTION: nature of the motion being presented]

DOCKET ENTRY:

qd) a Filed motion of [ use listing in “Motion” box above.]

(2) o Brief in support of motion due

@) o Answer brief to motion due . Reply to answer brief due

(4) o Ruling/Hearing on set for at

(5) a Status hearing[held/continued to] [set for/re-set for] on set for _ at.

(6) a Pretrial conference[held/continued to] [set for/re-set for] on set for at

(7) Oo Trial[set for/re-set for] on at

(8) a [Bench/Jury trial] [Hearing] held/continued to at

(9) o This case is dismissed [with/without] prejudice and without costs[by/agreement/pursuant to]

OO FRCP4(m) © O General Rule 21 © FRCP41(a)(1) O FRCP41(a)(2).

(0) «x [Other docket entry} The motions of plaintiffs for (1) preliminary approval of a proposed class
action settlement [72-1]; (2) to withdraw the reference to the bankruptcy court of adversary proceeding
no. 02 A 00589 [87-1, 88-1]; and (3) pursuant to the All Writs Act to enjoin prosecution of the adversary
complaint in no. 02 A 00589 [74-1]. For the reasons explained below, the motions are denied. ENTER
MEMORANDUM OPINION.

(11) [For further detail see order (on reverse side of/attached to) the original minute order.]

No notices required, advised in open court. Document
No notices required. number of notices Number
x Notices MAILED by judge’s staff.

Notified counsel by telephone.
Docketing to mail notices.
Mait AO 450 form. 0
Copy to

courtroom.

KAM deputy’s Ot os
initials Dateftime recetvedsin:? |] -]
central Clerk’s Office mailing deputy iniiats

‘(Reserved for use by the Court)


~6-
to withdraw the reference requires the interpretation of federal
securities laws.)

After a thorough consideration of the parties’ arguments, we
conclude that the motion to withdraw should be denied. The
shareholders bear the burden of persuasion on their motion, and
they have failed to sustain that burden. As Judge Holderman found,
the shareholder plaintiffs’ motion is governed by In re Vicars
Insurance Agency, 96 F.3d 949 (7th Cir. 1996). Mandatory
withdrawal of the reference is appropriate only if non-Title li
issues “require the interpretation, as opposed to mere application,
of the non-Title 11 statute, or when the court must undertake
analysis of significant open and unresolved issues regarding the
non-Title 11 law.” Id. at 954. Plaintiffs argue that
interpretation of the securities laws is required in order to
decide the issues in the adversary proceeding, but they fail to
spell out what issue needs interpretation as opposed to simple
application of the securities laws, or what “open and unresolved
issues” are involved. They briefly allude to an indemnification
issue, but do not explain what the exact indemnification issue is
that is “open and unresolved” or needs interpretation, or in what
sense it is unresolved or requires interpretation.

The second question is whether there should be a permissive
withdrawal for “cause.” We should consider several factors, the

first of which is the most important: (1) whether the claim is core


00-6676.021-JCD August 2, 2002

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION

DOUG SUTTON and PRESCOTT
NOTTINGHAM, on behalf of
themselves and all others
similarly situated,

Plaintiffs,

v.
No. 00 C 6676
ROBERT F. BERNARD,
ROBERT T. CLARKSON, and
BERT B. YOUNG,

Defendants.

MEMORANDUM OPINION

Before the court are several motions of the shareholder
plaintiffs: (1) a motion for preliminary approval of a proposed
class action settlement; (2) a motion to withdraw the reference to
the bankruptcy court of adversary proceeding no. 02 A 00589; and
(3) a motion pursuant to the All Writs Act to enjoin prosecution of
the adversary complaint in no. 02 A 00589. For the reasons
explained below, the motions are denied.

BACKGROUND

In this class action litigation, the shareholder plaintiffs
allege securities fraud against three officers of Marchfirst, Inc.
(“Marchfirst”), a Chicago-based consulting corporation that is now

under bankruptcy protection. The complaint alleges that defendants

[We


~2-
misled the investing public and thereby artificially inflated the
price of Marchfirst’s stock by publicly issuing materially false
and misleading statements and omitting to disclose material facts
necessary to make those statements not false and misleading. This
conduct, plaintiffs assert, violated § 10(b) of the Securities
Exchange Act of 1934 (the “1934 Act”), 15 U.S.C. § 78j(b), and Rule
10b-5 promulgated under that section, 17 C.F.R. § 240.10b-5, and §
20(a) of the 1934 Act, 15 U.S.C. § 78t(a).

Plaintiffs now move for preliminary approval of a proposed
settlement reached with defendants’ insurance carrier for $22
million. Defendants object to the proposed settlement and contend
that their insurance carrier has no right to settle over their
objection. Several intervenors, former independent directors of
Marchfirst, also object to the proposed settlement. In addition,
plaintiffs move to withdraw the reference to the bankruptcy court
of the bankruptcy Trustee’s adversary action pending against the
plaintiffs.’ Plaintiffs also move to enjoin prosecution of the
Trustee’s adversary action. In addition to reading the briefs on

these motions, we heard oral argument on July 31, 2002.

vu In the adversary action, the Trustee filed a motion to enjoin
plaintiffs from prosecuting this class action and to prohibit them from making
any attempts to obtain possession of or control over the proceeds of the
directors and officers’ liability insurance policy issued to Marchfirst by
Illinois National Insurance Company. The Trustee also seeks a declaration that
the proceeds of the policy are property of the bankruptcy estate of Marchfirst.