2001 Decisions

Opinions of the United

States Court of Appeals

for the Third Circuit

8-28-2001

In Re: Cendant Corp

Precedential or Non-Precedential:

Docket 00-2684

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Recommended Citation

"In Re: Cendant Corp" (2001). 2001 Decisions. Paper 197.

http://digitalcommons.law.villanova.edu/thirdcircuit_2001/197
Filed August 28, 2001 

UNITED STATES COURT OF APPEALS 

FOR THE THIRD CIRCUIT 

No. 00-2684 

IN RE: CENDANT CORPORATION LITIGATION 

MARTIN DEUTCH, 

Derivatively on Behalf of Cendant Corp., 

 Appellant 

On Appeal from the United States District Court 

for the District of New Jersey 

(D.C. No. 98-cv-01664) 

District Judge: Hon. William H. Walls 

Argued May 22, 2001 

Before: BECKER, Chief Judge, SLOVITER and AMBRO, 

Circuit Judges 

(Filed: August 28, 2001) 
 Bruce E. Gerstein (Argued) 

 Brett Cebulash 

 Garwin, Bronzaft, Gerstein & 

 Fisher LLP 

 New York, NY 10036 

 Elwood S. Simon 

 Elwood S. Simon & Associates 

 Birmingham, MI 48009 

 David M. Taus 

 Francis J. Devito 

 Hackensack, NJ 10166-0153 

 Richard Brualdi 

 Law Offices of Richard B. Brualdi 

 New York, NY 10006 

 Thomas G. Shapiro 

 Shapiro, Haber & Urmy 

 Boston, MA 02109 

 Attorneys for Appellant 

 Martin Deutch 

 Daniel L. Berger (Argued) 

 Max W. Berger 

 Jeffrey N. Leibell 

 Bernstein, Litowitz, Berger & 

 Grossmann 

 New York, NY 10019 

 Jeffrey W. Golan 

 Leonard Barrack 

 Gerald J. Rodos 

 Barrack, Rodos & Bacine 

 Philadelphia, PA l9l03 

 Attorneys for Appellee 

 California Public Employees' 

 Retirement System, et al. 

 Samuel Kadet (Argued) 

 Jonathan J. Lerner 

 Joseph N. Sacca 

 Skadden, Arps, Slate, Meagher & 

 2 
 Flom LLP 

 New York, NY 10036 

 Carl Greenberg 

 Michael M. Rosenbaum 

 Budd, Larner, Gross, Rosenbaum, 

 Greenberg & Sade, P.C. 

 Short Hills, NJ 07078-0999 

 Attorneys for Appellee Cendant 

 Corporation 

 James G. Kreissman (Argued) 

 Jacob S. Pultman 

 Simona G. Strauss 

 Simpson, Thacher & Bartlett 

 New York, NY 10017 

 Herbert J. Stern 

 Joel M. Silverstein 

 Stern & Greenberg 

 Roseland, NJ 07068 

 Attorneys for Appellees HFS Inc. 

 Directors 

 Greg A. Danilow (Argued) 

 Weil, Gotshal & Manges LLP 

 New York, NY 10153 

 Alan N. Salpeter 

 Mayer, Brown & Platt 

 Chicago, IL 60603 

 Douglas S. Eakeley 

 Lowenstein Sandler 

 Roseland, NJ 07068 

 Cadwalader, Wickersham & Taft 

 New York, NY 10038 

 Sills Cummis Radin Tischman 

 Epstein & Gross, P.A. 

 Newark, NJ 07102-5400 

 Attorneys for Appellees CUC 

 Directors 

 3 
OPINION OF THE COURT 

SLOVITER, Circuit Judge. 

Martin Deutch appeals from the District Court's 

judgment and orders approving the settlement of a 

securities fraud class action brought against Cendant 

Corporation, 28 individual defendants, and Ernst & Young, 

an accounting firm. Under the settlement, Cendant agreed 

to pay $2.85 billion in cash to the class and Ernst & Young 

agreed to pay $335 million to the class. In addition, 

Cendant and certain of the individual defendants promised 

to pay the class 50% of any recovery obtained in their 

cross-claims against Ernst & Young. In exchange, the class 

agreed to release any and all claims that could have been 

brought against the defendants in the class action.

A number of class members objected to the settlement. 

Deutch, who was not a member of the class but rather a 

current shareholder of Cendant, also objected and moved to 

intervene as both a current shareholder and as a derivative 

action plaintiff. In two separate opinions filed on August 15, 

2000, the District Court rejected the objections of the class 

members and Deutch respectively and approved the 

settlement. 

The approvals generated a flurry of appeals. The appeals 

of the class members are being disposed of in a separate 

opinion, holding, inter alia, that the District Court did not 

abuse its discretion in rejecting the class members' 

objections to the settlement and plan of allocation. See In 

re Cendant Corp. Sec. Litig., Nos. 00-2520, 00-2683, 00- 

2708, 00-2709, 00-2733, 00-2734, 00-2769 and 00-3653 

(3d Cir. Aug. 28, 2001). In this opinion, we turn to Deutch's 

appeal, which presents distinct issues of law relating to a 

current shareholder seeking to present claims on behalf of 

the settling corporation. 

 4 
I. 

FACTS AND PROCEDURAL POSTURE 

Many of the facts set forth in the following section of this 

opinion will also be set forth and discussed in greater 

length in the principal opinion dealing with the appeals of 

the objecting class members. The abbreviated facts 

included here are those necessary to put Deutch's 

contentions in context. 

A. Discovery of the Misconduct 

On December 17, 1997, CUC International, Inc. ("CUC") 

merged with HFS Inc. ("HFS"). As part of the merger, 

shareholders of HFS stock were issued shares of CUC

common stock pursuant to a Registration Statement dated 

August 28, 1997 and a Joint Proxy Statement/Prospectus. 

The surviving corporation was renamed Cendant Corp.

("Cendant"). Cendant is now one of the world's foremost 

consumer and business service companies, providing 

shopping, dining, travel, mortgage, and real estate

brokerage services. It owns, among other things, Century 

21, Avis, and the Ramada and Howard Johnson hotel 

franchises. 

On March 31, 1998, Cendant filed a Form 10-K Annual

Report with the Securities Exchange Commission ("SEC"), 

which included its 1997 financial statements. On April 15, 

1998, Cendant announced that it had discovered 

accounting irregularities in certain former CUC business 

units and that the annual and quarterly financial 

statements for 1997 would be restated. Cendant also

suggested that financial statements from earlier periods 

might need to be corrected as well. The next day, Cendant's 

stock fell from $35 5/8 a share to $19 1/16 a share - a 

47% drop. The Audit Committee of Cendant's Board of

Directors hired the law firm of Willkie Farr & Gallagher to 

conduct an independent investigation into the irregularities, 

and the law firm in turn hired the accounting firm of 

Arthur Andersen LLP to assist in the investigation. On July 

14, 1998, Cendant announced that CUC's financial 

statements for 1995 and 1996 would also be restated. 

Following this announcement, Cendant's stock dropped to 

 5 
$15 11/16. On August 28, 1998, Cendant filed with the 

SEC a report prepared by Willkie Farr which disclosed, 

among other things, that the 1995, 1996, and 1997 

financial statements materially misstated revenue and 

income. Cendant's stock further dropped to $11 5/8 on the 

next trading day. 

B. The Securities Fraud Class Action 

Numerous plaintiffs claiming to have acquired CUC or 

Cendant securities filed lawsuits against Cendant and 

others alleging, inter alia, federal securities law violations. 

By an order of the Judicial Panel on Multidistrict Litigation 

the suits were transferred to the United States District 

Court for the District of New Jersey and then consolidated. 

The District Court appointed the California Public 

Employees' Retirement System, the New York State 

Common Retirement Fund, and the New York City Pension 

Funds as Lead Plaintiff.1 See In re Cendant Corp. Litig., 182 

F.R.D. 144 (D.N.J. 1998). The District Court later approved 

the law firms of Barrack, Rodos & Bacine and Bernstein 

Litowitz Berger & Grossman LLP to be Lead Counsel for the 

class. See In re Cendant Corp. Litig., 191 F.R.D. 387 (D.N.J. 

1998). 

C. The Amended and Consolidated Class Action 

 Complaint 

On December 14, 1998, the Lead Plaintiff filed an 

amended and consolidated class action complaint 

("Amended Complaint") on behalf of all persons and entities 

who purchased or acquired Cendant or CUC publiclytraded securities, excluding the PRIDES securities, 2 during 

the period of May 31, 1995 through August 28, 1998 

_________________________________________________________________ 

1. We refer to Lead Plaintiff in the singular for the reasons explained at 

In re Cendant Corp. Sec. Litig., Nos. 00-2520 et al., Opinion at 19 n.3. 

2. The term "PRIDES securities" refers to a derivative security based on 

Cendant common stock. The District Court separated all claims brought 

by holders and former holders of the PRIDES securities and appointed a 

different lead plaintiff and counsel. The PRIDES claims were settled on 

March 17, 1999 for $341.5 million in Cendant securities and the District 

Court approved the PRIDES settlement. See In re Cendant Corp. PRIDES 

Litig., 51 F. Supp. 2d 537 (D.N.J. 1999), vacated in part by 243 F.3d 722 

(3d Cir. 2001) (vacating attorneys' fees award). 

 6 
("Class Period"). The Amended Complaint named as 

defendants Cendant, 12 individuals who were former 

officers and/or directors of CUC (the "CUC Individual 

Defendants"),3 16 individuals who were former officers 

and/or directors of HFS (the "HFS Individual Defendants"),4 

and Ernst & Young ("E&Y"), which had been CUC's 

independent public accountant before the merger. 

The Amended Complaint alleged that Cendant (as 

successor to CUC), E&Y, and certain of the CUC and HFS 

Individual Defendants made numerous false and misleading 

statements during the Class Period, in violation of Section 

10(b) of the Securities Exchange Act of 1934, 15 U.S.C. 

S 78j(b), and Rule 10b-5, 17 C.F.R. S 240.10b-5. 

Specifically, a number of SEC filings and press releases 

issued by CUC allegedly overstated its revenues and

operating income for 1995, 1996, and 1997 through 

improper accounting practices, which allegedly violated 

Generally Accepted Accounting Principles and were 

concealed by the defendants. 

The Amended Complaint alleged that all of the 

defendants except Anne Pember and Scott Forbes caused 

the August 28, 1997 Registration Statement issued in 

conjunction with the CUC/HFS merger to contain false and 

misleading statements, in violation of Section 11 of the 

Securities Act of 1933, 15 U.S.C. S 77k. The Amended 

Complaint next alleged that Cendant violated Section 

12(a)(2) of the Securities Act, 15 U.S.C. S 77l(a)(2), by 

selling securities through a false and misleading 

prospectus. The Amended Complaint further alleged 

violations by certain of the individual defendants of Section 

15 of the Securities Act, 15 U.S.C. S77o, Section 20(a) of 

_________________________________________________________________ 

3. The CUC Individual Defendants are Walter A. Forbes, E. Kirk Shelton, 

Christopher K. McLeod, Cosmo Corigliano, Anne M. Pember, Burton C. 

Perfit, T. Barnes Donnelley, Stephen A. Greyser, Kenneth A. Williams, 

Barlett Burnap, Robert P. Rittereiser, and Stanley M. Rumbough, Jr. 

4. The HFS Individual Defendants are Henry R. Silverman, John D. 

Snodgrass, Michael P. Monaco, James E. Buckman, Scott E. Forbes, 

Steven P. Holmes, Robert D. Kunisch, Leonard S. Coleman, Christel 

DeHaan, Martin L. Edelman, Brian Mulroney, Robert E. Nederlander, 

Robert W. Pittman, E. John Rosenwald, Jr., Leonard Schutzman, and 

Robert F. Smith. 

 7 
the Securities Exchange Act, 15 U.S.C. S 78t(a), Section 20A 

of the Securities Exchange Act, 15 U.S.C. S 78t-1, and 

Section 14(a) of the Securities Exchange Act, 15 U.S.C. 

S 78n(a), and Rule 14a-9, 17 C.F.R. S 240.14a-9. 

D. Class Certification, Notice, and Settlement 

 Negotiations 

Concurrent with the filing of the Amended Complaint, 

Lead Plaintiff filed a motion to certify the class pursuant to 

Fed. R. Civ. P. 23(a) and (b)(3), which the District Court 

granted on January 27, 1999. Lead Counsel began 

settlement discussions with Cendant and the HFS 

Individual Defendants in June 1999, and Lead Counsel 

began settlement discussions with E&Y in the subsequent 

months. 

On December 7, 1999, several months after notice to the 

class of the pendency of the class action, Cendant, the HFS 

Individual Defendants, and the Lead Plaintiff advised the 

District Court that they had agreed to a settlement. Shortly 

thereafter, E&Y and the Lead Plaintiff informed the court 

that they too had settled. On March 17, 2000, the settling 

parties executed a Stipulation of the Settlement. 

E. Terms of the Settlement and Plan of Allocation 

The settlement with Cendant and the HFS Individual 

Defendants provides for a payment by Cendant to the class 

of $2,851,500,000 in cash, provides for an additional 

payment of 50% of any recovery by Cendant and the HFS 

Individual Defendants in their cross-claims against E&Y, 

and imposes certain corporate governance changes on

Cendant. These changes include constituting Cendant's 

Board of Directors with a majority of independent directors, 

constituting the Audit, Nominating, and Compensation 

Committees of the Board entirely with independent 

directors, and providing for the annual election of all 

directors. In exchange, the class members would release all 

claims that were filed or could have been filed in the action 

against Cendant, the HFS Individual Defendants, and the 

CUC Individual Defendants. 

As part of the Stipulation of Settlement, Cendant, the 

HFS Individual Defendants, and the Lead Plaintiff agreed to 

 8 
request the District Court to approve the settlement as fair, 

reasonable, and adequate. In addition, these parties asked 

the court to permanently bar all claims for contribution 

pursuant to the Private Securities Litigation Reform Act 

(hereafter "Reform Act"), specifically the provision codified 

at 15 U.S.C. S 78u-4(f)(7)(A), and as may be provided by 

applicable federal and state statutes or common law. 

However, the parties also asked the court to declare that 

the settlement was not a waiver or release of any claims 

that could be brought by Cendant against E&Y or any

current or former officer or director of CUC, HFS, or 

Cendant. 

The E&Y settlement provides for a cash payment of 

$335,000,000 to the class. In conjunction with the Cendant 

and E&Y settlement, the Lead Plaintiff proposed a Plan of 

Allocation covering what each class member would receive 

from the settlement. Neither the E&Y settlement nor the 

Plan of Allocation is at issue in Deutch's appeal. 

F. Settlement Notice, Objections, and Approval 

The District Court granted preliminary approval of both 

settlements on March 29, 2000, and Lead Plaintiff 

proceeded with the required notices of settlement of class 

actions, mailing over 478,000 to class members and 

publishing notices in national newspapers and media. Only 

four class members objected to the settlements and/or the 

Plan of Allocation. 

Martin Deutch, who was not a member of the class but 

rather a current shareholder of Cendant, also objected and 

moved to intervene as a current shareholder and 

a derivative action plaintiff.5 Deutch objected on the 

following grounds: 

_________________________________________________________________ 

5. Deutch had earlier commenced a derivative action in the District 

Court on behalf of Cendant against several of the CUC and HFS 

Individual Defendants who were officers and/or directors of Cendant. 

Deutch alleged that the individual defendants breached their fiduciary 

duty of loyalty because, acting on insider information, they sold over 

four 

million shares of Cendant stock at artificially inflated prices in order 

to 

realize over $180 million for their personal gain, and that they breached 

their fiduciary duties of loyalty, good faith, and due care in mismanaging 

 9 
 (1) Cendant was not adequately represented in the 

 class action because 13 of the 14 members of

 Cendant's board of directors that negotiated and 

 approved the settlement were also defendants in the 

 class action and therefore operated under a conflict of 

 interest; 

 (2) The settlement was grossly unfair to Cendant and 

 its current shareholders because it eliminated valuable 

 contribution claims against the individual defendants 

 without any meaningful payment into the settlement by 

 these defendants; 

 (3) The settlement failed to allocate the portion of 

 Cendant's $2.85 billion settlement that was 

_________________________________________________________________ 

and wasting corporate assets. Deutch also alleged that Bear Stearns 

Companies, Inc. and its subsidiary, Bear Stearns and Co., Inc., were 

grossly negligent in advising HFS on the Cendant merger. 

Several defendants moved to dismiss the complaint. On August 9, 

1999, the District Court held that Deutch need not have made a demand 

to Cendant's board of directors to bring that action because any such 

demand would have been futile. However, the court dismissed the claims 

against the Bear Stearns defendants on the basis that Deutch lacked 

standing to sue on behalf of HFS. See In re Cendant Corp. Derivative 

Action Litig., 189 F.R.D. 117 (D.N.J. 1999). 

After the Cendant settlement was announced, Deutch moved for 

partial summary judgment against the individual defendants, arguing 

that these defendants violated Section 11 of the 1933 Securities Act, 15 

U.S.C. S 77k(f), and were liable to Cendant for contribution under 

Section 11(f) for monies to be paid out in the settlement. On April 14, 

2000, the District Court denied summary judgment, holding that 

Deutch's motion for summary judgment was not ripe for consideration 

because any right to contribution is inchoate until after settlement has 

been approved and Cendant has paid more than its fair share of the 

settlement. See In re Cendant Corp. Derivative Action Litig., 96 F. Supp. 

2d 394, 397 (D.N.J. 2000). The court also noted that Deutch's derivative 

action complaint did not include any allegations pertaining to Cendant's 

decision to settle or the structure of the settlement. See id. at 399. The 

court later imposed Rule 11 sanctions on Deutch's attorney for 

improperly moving for summary judgment. See In re Cendant Corp. 

Derivative Action Litig., 96 F. Supp. 2d 403 (D.N.J. 2000). That action 

remains pending. 

 10 
 attributable to Section 11 claims, which was critical for 

 determining the value of the contribution claims that 

 will remain if the settlement is approved; 

 (4) The settlement constituted an illegal indemnification 

 of individual officers and directors of Cendant, CUC, 

 and HFS; 

 (5) The Notice of Settlement was defective because it 

 did not inform current Cendant shareholders that 

 certain derivative claims would be compromised and 

 that contribution claims by Cendant against the HFS 

 defendants would be barred. 

On June 28, 2000, the District Court conducted a 

fairness hearing at which the objectors were given an 

opportunity to be heard. On August 15, 2000, the District 

Court issued two opinions rejecting the objections and 

approving the Cendant and E&Y settlements and the Plan 

of Allocation. See In re Cendant Corp. Sec. Litig., 109 F. 

Supp. 2d 235 (D.N.J. 2000) (rejecting the class members' 

objections); In re Cendant Corp. Sec. Litig., 109 F. Supp. 2d 

273 (D.N.J. 2000) (rejecting Deutch's objections). 

In the corresponding judgment approving the Cendant

settlement, the court ordered that "[a]ll actions and claims 

for contribution are permanently barred, enjoined and 

finally discharged (i) as provided by 15 U.S.C.S 78u4(f)(7)(A), and (ii) as may be provided by applicable federal 

or state statutes or common law." App. at 16. Moreover, the 

court noted that "this Judgment shall not be deemed a 

waiver or release of and shall not preclude Cendant . . . 

from asserting any claims . . . against E&Y, its present or 

former officers, directors, partners and employees, or 

against any current or former officers or directors of CUC, 

HFS or Cendant, either in the form of a cross-claim, 

counterclaim, third-party complaint, or other form." App. at 

16. 

Deutch filed a timely appeal. On appeal, he makes the 

following arguments: 

 (1) The District Court erred by refusing to consider 

 whether the settlement was fair to Cendant, where the 

 corporation was effectively unrepresented in connection 

 11 
 with the settlement because its board of directors faced 

 personal liability in the class action and therefore 

 operated under a conflict of interest; 

 (2) The District Court erred by entering a contribution 

 bar order in favor of the HFS Individual Defendants 

 without first determining whether their payment into 

 the settlement was sufficient to extinguish their 

 liability; 

 (3) The District Court failed to analyze the fairness or 

 adequacy of the HFS Defendants' settlement separately 

 in order to ensure that the settlement did not impair 

 the rights of Cendant, which will lose valuable 

 contribution rights; 

 (4) The District Court erred by denying Deutch's 

 motion to intervene as of right under Fed. R. Civ. P. 

 24(a) in order to protect Cendant's and its current 

 shareholders' rights to contribution; 

 (5) The District Court erred by approving the Notice of 

 Settlement which failed to notify current Cendant 

 shareholders that Cendant's contribution claims were 

 being abrogated under the settlement; 

 (6) The District Court allowed Cendant to assume the 

 bulk of the settlement payment, thereby permitting an 

 illegal indemnification of individual defendants for the 

 substantial federal securities law claims pending 

 against them; 

 (7) The District Court failed to determine what portion 

 of the settlement was attributable to Section 11 of the 

 1933 Securities Act, 15 U.S.C. S 77k. 

II. 

DISCUSSION 

A. Jurisdiction and Standard of Review 

We have jurisdiction under 28 U.S.C. S 1291. We will 

uphold a district court's approval of a class action 

settlement unless there has been an abuse of discretion. 

 12 
See In re General Motors Corp. Pick-Up Truck Fuel Tank 

Prod. Liability Litig., 55 F.3d 768, 782-83 (3d Cir. 1995) 

(hereafter In re GM Trucks). 

B. Relevance of Settlement's Fairness, Reasonableness, 

 and Adequacy to Cendant 

Deutch's principal objection to the settlement is that the 

District Court evaluated it without considering Cendant's 

interests. Deutch contends that the District Court was 

required by Fed. R. Civ. P. 23(e) to consider the settlement's 

fairness, reasonableness, and adequacy with regard to 

Cendant because the majority of its board of directors 

suffered a serious conflict of interest at the time the board 

agreed to settle. He alleges that 13 of Cendant's 14 board 

members at that time faced personal liability in the class 

action, effectively making Cendant an unrepresented party 

in the settlement.6 

The District Court rejected Deutch's view of its 

responsibility. It stated that Rule 23 "requires court 

scrutiny of settlements to protect absent class member," 

and that "[t]he standard is whether the settlement is fair, 

reasonable and adequate to the class." In re Cendant Corp. 

Sec. Litig., 109 F. Supp. 2d at 280. The court noted that in 

In re Prudential Ins. Co. of Am. Sales Practices Litig., 148 

F.3d 283 (3d Cir. 1998), we stated that "Rule 23(e) imposes 

on the trial judge the duty of protecting absentees, which is 

executed by the court's assuring the settlement represents 

adequate compensation for the release of the class claims." 

Id. at 316 (quotation omitted). It cited other courts of 

appeals' decisions that had taken a similar view. See, e.g., 

In re Jiffy Lube Sec. Litig., 927 F.2d 155, 159 (4th Cir. 

1991) ("[F]or Rule 23(e) to be satisfied, the court must 

determine only that sufficient compensation is being paid to 

the class, without necessarily speculating as to the 

_________________________________________________________________ 

6. Deutch has not specified the individual defendants to whom he 

referred but it appears, from the subsequent derivative action filed in 

Delaware by his counsel on behalf of a different plaintiff, that they are 

Henry Silverman, Martin Edelman, John Snodgrass, James Buckman, 

Michael Monaco, Stephen Holmes, Brian Mulroney, Robert Nederlander, 

Robert Pittman, Robert Smith, Leonard Coleman, Leonard Schutzman, 

and Robert Schutzman. 

 13 
appropriateness of the contributions of the various settling 

defendants."); In re Warner Comm. Sec. Litig. , 798 F.2d 35, 

37 (2d Cir. 1986) ("If the total compensation to class 

members is fair, reasonable, and adequate, the court is not 

required to supervise how the defendants apportion liability 

for that compensation among themselves."). 

The District Court declined to apply the "entire fairness" 

standard advocated by Deutch, which the court believed 

would require it to "substitute its judgment for the 

judgment of Cendant's board to determine whether the 

settlement is in the company's best interest." In re Cendant 

Corp. Sec. Litig., 109 F. Supp. 2d at 280. Instead, it held 

that any claim that the Cendant settlement is unfair to 

Cendant and its current shareholders should be brought as 

a derivative action under Delaware corporate law. See id. 

Deutch argues that our decision in Eichenholtz v. 

Brennan, 52 F.3d 478 (3d Cir. 1995), requires consideration 

of the interests of persons other than class members. 

Eichenholtz involved a securities fraud class action brought 

against International Thoroughbred Breeders ("ITB"), 

individual members of ITB's Board of Directors, and three 

registered brokers. ITB and the individual board members 

negotiated a settlement with the class, which contained a 

provision that would prevent the non-settling defendants 

from commencing any claim for contribution or indemnity 

against the settling defendants. The non-settling defendants 

appealed from the district court's approval of the settlement 

as being fair, reasonable, and adequate to the class and 

ITB. 

In our opinion on appeal, we stated that "[w]here the 

rights of third parties are affected, it is not enough to 

evaluate the fairness of the settlement to the settling 

parties; the interests of such third parties must be 

considered." Id. at 482. That is the language on which 

Deutch relies, but he takes it out of context. In response to 

the argument by the settling parties that the non-settling 

defendants had no standing, we held that the non-settling 

defendants did have standing to object because they

claimed to have "suffered a cognizable prejudice by the 

approval of the partial settlement." Id. at 483. We ultimately 

held that the non-settling defendants would not be 

 14 
prejudiced because they would be responsible only for their 

portion of the liability. See id. at 487. Therefore we affirmed 

the district court's approval of the partial settlement. 

Cendant does not stand in the position of a non-settling 

defendant or an unrepresented third party whose rights are 

affected by the settlement. Quite the contrary. Cendant is 

a settling defendant. Therefore, Eichenholtz does not control 

our disposition of this case. 

Deutch also cites to Judge Newman's concurrence in In 

re Warner Comm. Sec. Litig., 798 F.2d 35, 37 (2d Cir. 1986). 

In that case, a class member who still owned stock in 

Warner Communications, Inc. sought to overturn the 

district court's approval of a securities fraud class action 

settlement against Warner, one of its subsidiaries, and 

certain of their officers and directors. The class member 

argued, much like Deutch argues now, that the district 

court should have compelled a greater contribution from 

the individual defendants. The Court of Appeals for the 

Second Circuit affirmed the district court's approval of the 

settlement after noting that the district court's fiduciary 

duties covered the class members and not the defendants. 

See id. at 37. 

In a separate concurring opinion, Judge Newman agreed 

with the majority that "normally, once a district court is 

satisfied that the total compensation paid to class members 

in settlement of a class action is fair and reasonable, the 

court need not be concerned as to how the defendants 

apportion liability for the settlement among themselves." Id. 

at 38 (Newman, J., concurring). He then noted: 

 [I]n a case such as this, where the apportionment 

 between corporate and individual defendants can have 

 economic significance for a shareholder-claimant, some 

 scrutiny of the portion contributed by a corporate 

 defendant normally would be appropriate. In such 

 circumstances, a settlement might well be shown to be 

 unreasonable to a shareholder if the corporate 

 defendant contributed so much more than a fair share 

 as to cause a discernable incremental pro rata decline 

 in the value of the shareholder's stock below the 

 reduction attributable to a fair contribution. 

 15 
Id. Judge Newman's view apparently did not convince his 

colleagues but he ultimately concurred with the judgment 

of the majority because the Delaware Court of Chancery 

had already determined in a derivative action that the 

allocation of the settlement's burdens between the 

corporation and the individual defendants was fair. See id. 

To the extent that Judge Newman's view was that the

fairness of the allocation between the corporation and other 

defendants is an issue to be considered in a derivative 

action, we agree. Deutch's allegations that Cendant was 

unrepresented in the settlement negotiations because a 

majority of its board of directors operated under a conflict 

of interest and that Cendant's board members breached 

their duty of loyalty are best made in a shareholder 

derivative action. See, e.g., Wolf v. Barkes, 348 F.2d 994, 

996 (2d Cir. 1965) ("A new derivative suit against 

management for fraud or waste in releasing corporate 

claims for inadequate payment can redress improper 

settlements even without setting them aside."); In re Warner 

Comm. Sec. Litig., 618 F. Supp. 735, 753 (S.D.N.Y. 1985) 

("If [the objector] believes that the settlement is unfair to 

Warner he should pursue his objection in the Delaware 

Chancery Court . . . . This Court is concerned solely with 

the fairness of the settlement to the class."), aff'd, 798 F.2d 

35 (2d Cir. 1986) (noting that the Delaware Chancery Court 

had already resolved the issue of apportionment of the 

burdens of the settlement between the corporations and 

their officers). 

Significantly, counsel for Cendant informed us at oral 

argument that the same counsel for Deutch in this appeal 

has commenced a derivative action in Delaware Chancery 

Court on behalf of a different Cendant shareholder. That 

action, entitled Resnik v. Silverman et al., Civ. A. No. 18329 

(Del. Ch. filed Sept. 19, 2000), includes the allegation that 

13 of the HFS Individual Defendants breached their duties 

of loyalty and good faith by causing Cendant to obtain 

releases of their personal liability when settling the class 

action. Thus, the derivative action plaintiff will have an 

opportunity to make the same argument that Deutch is 

trying to make here. 

 16 
In so holding, we are not convinced by Deutch's 

contentions that the state law derivative action will be 

inadequate to protect Cendant's rights. Deutch asserts that 

a derivative action is not the functional equivalent of a 

contribution claim, but, as his counsel conceded at oral 

argument, the alleged damages in the derivative action are 

similar to those in a contribution claim. 

Deutch also argues that a state law derivative action 

plaintiff will face significant roadblocks to Cendant's 

recovery from the directors for their fair share of liability. 

He first notes that a derivative action plaintiff will have to 

satisfy the demand requirement. See Aronson v. Lewis, 473 

A.2d 805, 811-12 (Del. 1984) (recognizing that the demand 

requirement "exists at the threshold, first to insure that a 

stockholder exhaust his intracorporate remedies, and then 

to provide a safeguard against strike suits"). This is a 

generally applicable requirement for any derivative action 

and does not make the derivative action inadequate. Next, 

Deutch complains that Delaware law allows Cendant's

officers and directors to seek indemnification. If so, that 

reflects the policy of the state corporation law but does not 

provide a basis for objection by current shareholders to a 

class action settlement. 

We believe that the District Court correctly identified the 

applicable law - under Fed. R. Civ. P. 23(e), courts must 

determine whether the settlement is fair, reasonable, and 

adequate to the class. The fiduciary duty to the class exists 

because the very nature of the class action device prevents 

many who have claims from directly participating in the 

litigation process. See In re GM Trucks, 55 F.3d at 805 

("Rule 23(e) imposes on the trial judge the duty of

protecting absentees."); see also 2 Herbert Newberg & Alba 

Conte, Newberg on Class Actions S 11.46, at 11-105 to 11- 

106 (3d ed. 1992) ("The court must be assured that the 

settlement secures an adequate advantage for the class in 

return for the surrender of litigation rights against the 

defendants."). Deutch has not persuaded us that the

court's fiduciary duty under Rule 23(e) should be extended 

to include defendant corporations even if they may be 

controlled by individuals who have conflicts of interest. 

 17 
Deutch has made several other arguments that require 

little discussion. He argues that the Notice of Settlement 

was deficient because it failed to inform current Cendant 

shareholders that the settlement would eliminate Cendant's 

rights to contribution. However, Deutch fails to show that 

current Cendant shareholders who were not part of the 

class should have been notified of the settlement. Rule 23(e) 

requires only that "notice of the proposed dismissal or 

compromise [of the class action] shall be given to all 

members of the class." Because there is no requirement 

imposed by Rule 23(e) or our case law to inform current 

shareholders of corporate defendants of the settlement or 

the allocation, we reject Deutch's objection to the Notice of 

Settlement. 

Deutch also argues that the District Court erred by

denying his motion to intervene as of right, because he had 

a right to intervene as a derivative action plaintiff to protect 

Cendant's rights to contribution.7 Under Fed. R. Civ. P. 

24(a), an applicant can intervene as of right "when the 

applicant claims an interest relating to the property or 

transaction which is the subject of the action and the 

applicant is so situated that the disposition of the action 

may as a practical matter impair or impede the applicant's 

ability to protect that interest, unless the applicant's 

interest is adequately represented by existing parties." 

Inasmuch as we have declined to hold that Cendant was 

unrepresented in the settlement negotiations, we see no 

reason why Deutch is entitled to intervene in order to object 

to the settlement on behalf of Cendant. As we noted above, 

the proper forum for Deutch's allegations is a derivative 

_________________________________________________________________ 

7. In addition, Deutch argued before the District Court that he could 

intervene as of right in order to protect his interest as a current 

Cendant 

shareholder. The District Court rejected this argument, stating that the 

logical result would be that a corporation could not settle any lawsuit 

against it without first obtaining the approval of every shareholder. See 

In re Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 277. Although Deutch 

listed this issue in his statement of issues on appeal, he did not argue 

the point in his brief and therefore we will not consider it. See Travitz 

v. 

Northeast Dep't ILGWU Health & Welfare Fund, 13 F.3d 704, 711 (3d Cir. 

1994) ("When an issue is not pursued in the argument section of the 

brief, the appellant has abandoned and waived that issue on appeal."). 

 18 
action against Cendant's board members for breach of 

fiduciary duties. Therefore, the District Court did not err in 

denying Deutch's motion to intervene as of right in the 

class action and granting him only permissive intervention 

under Rule 24(b). 

C. Allocation of the Burdens of Settlement 

Deutch's remaining contentions stem primarily from his 

belief that Cendant may have paid more than its fair share 

of the settlement to the benefit of the HFS Individual 

Defendants. He argues first that the District Court should 

not have released the HFS Individual Defendants from 

certain contribution claims that could have been brought 

by Cendant without first determining whether the HFS 

Individual Defendants paid their fair share into the 

settlement. 

The District Court's order approving the settlement

provides that "[a]ll actions and claims for contribution are 

permanently barred, enjoined and finally discharged (i) as 

provided by 15 U.S.C. S 78u-4(f)(7)(A), and (ii) as may be 

provided by applicable federal or state statutes or common 

law." App. at 16. The court added that "this Judgment shall 

not be deemed a waiver or release of and shall not preclude 

Cendant . . . from asserting any claims . . . against E&Y, its 

present or former officers, directors, partners and

employees, or against any current or former officers or 

directors of CUC, HFS or Cendant, either in the form of a 

cross-claim, counterclaim, third-party complaint, or other 

form." App. at 16. 

In entering the contribution bar, the District Court 

believed itself bound by the settlement discharge provision 

of the Reform Act which provides: 

 A covered person who settles any private action at any 

 time before final verdict or judgment shall be 

 discharged from all claims for contribution brought by 

 other persons. Upon entry of the settlement by the 

 court, the court shall enter a bar order constituting the 

 final discharge of all obligations to the plaintiff of the 

 settling covered person arising out of the action. The 

 order shall bar all future claims for contribution arising 

 out of the action - 

 19 
 (i) by any person against the settling covered person; 

 and 

 (ii) by the settling covered person against any person, 

 other than a person whose liability has been

 extinguished by the settlement of the settling covered 

 person. 

15 U.S.C. S 78u-4(f)(7)(A). 

Deutch reads the language of subsection (ii) to mean that 

"only a person who has paid to extinguish his own liability 

- i.e., one whose liability is not extinguished by the 

payment of another - is entitled to a contribution bar." Br. 

of Appellant at 32. In his view, because the HFS Individual 

Defendants have not paid their fair share into the 

settlement, they are not entitled to a contribution bar but 

rather are liable for contribution claims from Cendant. 

We acknowledge at the outset that there is some question 

as to the scope of the contribution bar imposed by the 

District Court. The District Court's order does not identify 

by name those parties who are covered by the contribution 

bar. However, in its opinion denying Deutch's motion to 

intervene as of right the court stated, "[a]ll parties concede 

that the HFS Individual Defendants are covered by the 

contribution bar for Section 10(b) claims and outside HFS 

defendant-directors for Section 11 claims as well. Disputed 

is the impact of the bar on the CUC Individual Defendants 

who arguably are not parties to settlement but whose 

liability to the plaintiff class is extinguished by the 

settlement as structured." In re Cendant Corp. Sec. Litig., 

109 F. Supp. 2d at 277 n.4. 

The issue of the contribution bar is raised by Deutch 

because he argues that the District Court erred in imposing 

a contribution bar in favor of the HFS Individual 

Defendants without first determining if they had paid their 

fair share into the settlement. However, we believe this is 

an inappropriate time to flesh out the various uncertainties 

with respect to the scope of the contribution bar. Because 

no party has yet filed a claim for contribution, the District 

Court was not required to decide the issue raised here by 

Deutch. 

 20 
It is not necessary to determine who is covered by the 

contribution bar in order to address Deutch's argument 

that the District Court should have determined if the HFS 

Individual Defendants paid their fair share into the 

settlement before imposing a contribution bar in their favor. 

Nothing in the text of 15 U.S.C. S 78u-4(f)(7)(A) or in the 

legislative history of the Reform Act suggests that there is 

such a requirement, see H.R. Conf. Rep. No. 104-369

(1995), reprinted in 1995 U.S.C.C.A.N. 730; S. Rep. No. 

104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679, and we 

decline to impose one in this case. 

Deutch argues that such a requirement is supported by 

the Reform Act's policy of favoring proportionate liability 

among wrongdoers. The proportionate liability provisions of 

the Reform Act do not support Deutch's argument, as they 

merely state that "a covered person against whom a final 

judgment is entered in a private action shall be liable solely 

for the portion of the judgment that corresponds to the 

percentage of responsibility of that covered person." 15 

U.S.C. S 78u-4(f)(2)(B)(i).8 Thus, when there is a final 

judgment in an action where other defendants have 

previously settled, i.e., a partial settlement,"the verdict or 

judgment shall be reduced by the greater of - (i) an amount 

that corresponds to the percentage of responsibility of that 

[settling] covered person; or (ii) the amount paid to the 

_________________________________________________________________ 

8. The Act further provides: 

 In any private action, the court shall instruct the jury to answer 

 special interrogatories, or if there is no jury, shall make 

findings, 

 with respect to each covered person and each of the other persons 

 claim by any of the parties to have caused or contributed to the 

loss 

 incurred by the plaintiff, including persons who have entered into 

 settlements with the plaintiff or plaintiffs, concerning- 

 (i) whether such person violated the securities laws; 

 (ii) the percentage of responsibility of such person, measured as a 

 percentage of the total fault of all persons who caused or 

 contributed to the loss incurred by the plaintiff; and 

 (iii) whether such person knowingly committed a violation of the 

 securities laws. 

15 U.S.C. S 78u-4(f)(3)(A). 

 21 
plaintiff by that [settling] covered person." 15 U.S.C. S 78u4(f)(7)(B). Such a reduction is appropriate because nonsettling defendants would otherwise be prejudiced if they 

were held fully liable for the entire amount of the verdict or 

judgment. The situation before us is different because there 

has been a full settlement of claims. 

Two of the cases on which Deutch relies, Eichenholtz v. 

Brennan, 52 F.3d 478 (3d Cir. 1995), and TBG, Inc. v. 

Bendis, 36 F.3d 916 (10th Cir. 1994), both involved partial 

settlements in which non-settling defendants would have 

been prejudiced if proportionate fault had not been

determined. However, neither Eichenholtz nor TBG 

discusses the situation where the parties have negotiated a 

full settlement of claims, and where the rationale behind 

proportionate fault reduction in partial settlements 

(avoiding prejudice to non-settling defendants) is 

inapplicable. Indeed, one of the benefits of a full settlement 

is the avoidance of a determination of the merits. See, e.g., 

Young v. Katz, 447 F.2d 431 (5th Cir. 1971) ("In examining 

a proposed compromise for approval or disapproval under 

Fed. R. Civ. P. 23(c) the court does not try the case. The 

very purpose of compromise is to avoid the delay and 

expense of such a trial.") (quotation omitted). Moreover, 

both Eichenholtz and TBG were decided before the 

applicable date of the Reform Act. 

Inapplicable here for the same reasons are United States 

v. Alcan Aluminum, Inc., 25 F.3d 1174 (3d Cir. 1994), and 

Herbst v. International Tel. & Tel. Corp., 72 F.R.D. 85 (D. 

Conn. 1976), where releases of contribution claims were 

negotiated by the parties. That the Reform Act significantly 

changed the law of securities fraud since Herbst and the 

other cases on which Deutch relies cannot be gainsaid. We 

therefore find no support for Deutch's position in the cases 

he cites. 

The District Court's order approving the settlement takes 

great care in preserving to Cendant any claims "against any 

current or former officers or directors of CUC, HFS or 

Cendant, either in the form of a cross-claim, counterclaim, 

third party complaint, or other form." App. at 16. Thus, the 

settlement itself should not prejudice a derivative action 

plaintiff, and the District Court did not err in rejecting 

 22 
Deutch's claim that the court should not impose a 

contribution bar in favor of the HFS Individual Defendants 

without first determining if they have paid their fair share 

into the settlement. 

Deutch relies on language in our decision in Girsh v. 

Jepson, 521 F.2d 153 (3d Cir. 1975)9 to support his 

contention that the District Court was required to analyze 

the value of the contribution of the HFS Individual

Defendants. The language to which Deutch refers 10 was 

directed to our concern that the district court had approved 

a class action settlement without providing an adequate 

record that would enable us to fulfill our review function. 

Unlike the situation in Girsh, there was no deficiency in 

the record in this case. The District Court considered the 

nine Girsh factors before finding the Cendant settlement to 

be fair, reasonable, and adequate. The court recognized 

that questions had been raised about the value of the HFS 

Individual Defendants' contribution and noted that"the 

HFS Defendants have agreed to contribute to the class 50% 

_________________________________________________________________ 

9. In Girsh, we set forth nine factors that should be considered in 

connection with a class action settlement's fairness, reasonableness, and 

adequacy. The nine Girsh factors are: (1) the complexity, expense, and 

likely duration of the litigation; (2) the reaction of the class to the 

settlement; (3) the stage of the proceedings and the amount of discovery 

completed; (4) the risks of establishing liability; (5) the risks of 

establishing damages; (6) the risks of maintaining the class action 

through the trial; (7) the ability of the defendants to withstand a 

greater 

judgment; (8) the range of reasonableness of the settlement fund in light 

of the best possible recovery; and (9) the range of reasonableness of the 

settlement fund to a possible recovery in light of all the attendant risks 

of litigation. See id. at 156-57. 

10. We noted: 

 The district court did not specifically deal with the Gluck 

settlement 

 and we are, therefore, at a loss and without the benefit of its 

 analysis as to why $10,000.00 was a fair and adequate settlement 

 of all claims against defendant Gluck. It may be that the 

$10,000.00 

 contribution is overly generous. On the other hand, it may be 

 grossly inadequate. The determination as to the fairness of this 

 aspect of the settlement must depend upon facts still to be 

 developed. 

Id. at 159 (emphasis in original). 

 23 
of any recovery against E & Y." In re Cendant Corp. Sec. 

Litig., 109 F. Supp. 2d at 284. In its opinion rejecting the 

objections of the class members, the District Court stated: 

"The Court recognizes that this recovery is inchoate but 

once again affirms that it is not `illusory.' This does not 

mean that valuation is impossible, but only difficult." In re 

Cendant Corp. Sec. Litig., 109 F. Supp. 2d at 256. As 

Deutch notes, the court stated that it need not consider the 

"added value from recovery against E & Y" before it held 

that the Cendant settlement was fair, reasonable, and 

adequate. Id. This did not amount to an abuse of the 

court's discretion. 

Deutch further argues that the HFS Individual 

Defendants' promise to give 50% of their recovery against 

E&Y to the class was illusory. He states that "the 

settlement creates no obligation for the HFS Defendants to 

prosecute the suit after the settlement is final or to 

guarantee some minimum amount commensurate with 

their liability - even though the other parties have fully 

complied with their obligations." Br. of Appellant at 44. 

However, implicit in the settlement is a promise to make 

a good faith effort to seek recovery against E&Y. See Russell 

v. Princeton Labs., Inc., 50 N.J. 30, 38, 231 A.2d 800, 805 

(1967) ("A contract should not be read to vest a party . . . 

with the power virtually to make his promise illusory."); 

Nolan v. Control Data Corp., 243 N.J. Super. 420, 431, 579 

A.2d 1252, 1258 App. Div. (1990) (implying a good faith 

requirement because a "[l]iteral interpretation of these 

clauses would go far towards making these contracts

illusory, a result which courts usually seek to avoid"); 2 

Joseph M. Perillo & Helen Hadjiyannakis Bender, Corbin on 

Contracts S 5.28, at 149-50 (rev. ed. 1995) ("An implied 

obligation to use good faith is enough to avoid the finding 

of an illusory promise.").11 

Deutch also argues that the District Court was required, 

but failed, to determine the amount paid into the 

_________________________________________________________________ 

11. We note that Cendant and the HFS Individual Defendants 

subsequently did file cross-claims against E&Y and were for the most 

part successful in overcoming E&Y's motion to dismiss. See In re 

Cendant Corp. Sec. Litig., 139 F. Supp. 2d 585 (D.N.J. 2001). 

 24 
settlement to release the claims brought under Section 11 

of the 1933 Securities Act, 15 U.S.C. S 77k(f). He contends 

that this determination was necessary because the 

contribution bar mandated by 15 U.S.C. S 78u-4(f) cannot 

bar "contribution claims for S 11 violations against inside 

directors . . . under any circumstance." Reply Br. of 

Appellant at 16.12 

Once again, we conclude that whether, and to what 

extent, the HFS Individual Defendants are covered under 

the contribution bar is better presented in a contribution 

claim, if any, brought by Cendant, E&Y, or the CUC 

Individual Defendants against those defendants. We need 

only hold that the District Court was not required under 

the Reform Act or Rule 23(e) to apportion the settlement 

according to the plethora of claims raised in the class 

action. See, e.g., Cotton v. Hinton, 559 F.2d 1326, 1330 (5th 

Cir. 1977) ("It cannot be overemphasized that neither the 

trial court in approving the settlement nor this Court in 

reviewing that approval have the right or the duty to reach 

any ultimate conclusions on the issues of the fact and law 

which underlie the merits of the dispute.") (quotation 

omitted). 

Finally, Deutch argues that because Cendant is paying 

the entire cash amount of the settlement, it constitutes an 

impermissible indemnification of the HFS Individual

Defendants for securities law violations. Deutch again cites 

to Eichenholtz, 52 F.3d at 483, where we held that there 

was no express or implied right to indemnification under 

the federal securities laws and recognized that"federal 

courts disallow claims for indemnification because such 

claims run counter to the policies underlying the federal 

securities acts." Id. at 484. 

Ordinarily, indemnification refers to the reimbursement 

by a corporation to its directors and officers for liabilities 

_________________________________________________________________ 

12. Deutch apparently refers to 15 U.S.C. S 78u-4(f)(10), which defines 

"covered person" as "(i) a defendant in any private action arising under 

this chapter [i.e., Section 10(b) claims]; or (ii) a defendant in any 

private 

action arising under section 77k of this title [i.e., Section 11 claims], 

who 

is an outside director of the issuer of the securities that are the 

subject 

of the action." 

 25 
incurred in connection with actions brought against them 

in their official capacities. See, e.g., Kirschbaum v. WRGSB 

Associates, 243 F.3d 145, 156 (3d Cir. 2001). Cendant has 

not reimbursed the HFS Individual Defendants, all of whom 

were directors and/or officers of Cendant at some point 

during the class period. Instead, the settlement provides for 

Cendant to make a direct payment to the class of $2.85 

billion. Deutch has not cited to any case in which a court 

has determined that a full settlement of claims amounted to 

an indemnification of certain defendants. Therefore, we 

decline to hold that the settlement between Cendant, the 

HFS Individual Defendants, and the Lead Plaintiff 

amounted to an indemnification of the HFS Individual 

Defendants. 

III. 

CONCLUSION 

Deutch has not convinced us that his objections to the 

settlement are supported by the applicable law, nor has he 

persuaded us that new rules are required for a derivative 

action plaintiff. Whether Cendant's board members 

breached their fiduciary duties to the corporation is best 

addressed in a derivative action, and not in connection with 

approval of a class action settlement. The District Court 

was not required by Rule 23 or the Reform Act to consider 

the effect of the settlement on Cendant nor was it required 

to determine the relative fault of the defendants before 

approving the settlement. Therefore, we hold that the 

District Court did not abuse its discretion in rejecting 

Deutch's objections to the settlement. 

A True Copy: 

Teste: 

 Clerk of the United States Court of Appeals 

 for the Third Circuit 

 26