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Matched Legal Cases: ['§ 1105', '§ 1291', '§ 1', '§ 1144', '§ 50', '§ 30', '§ 258', '§ 258']

957 F2d 1020 Masters Mates Pilots Pension Plan and Irap Litigation Cullen v. K Riley | OpenJurist
957 F. 2d 1020 - Masters Mates Pilots Pension Plan and Irap Litigation Cullen v. K Riley	Home957 f2d 1020 masters mates pilots pension plan and irap litigation cullen v. k riley
957 F2d 1020 Masters Mates Pilots Pension Plan and Irap Litigation Cullen v. K Riley 957 F.2d 1020
14 Employee Benefits Cas. 2569
In re MASTERS MATES & PILOTS PENSION PLAN AND IRAP LITIGATION.Andrew CULLEN; George Bomareto; Paul McGuire; HaroldBeck; A.J. Morales; Guy Chadbourne; Francis E. Kyser; MM& P Pension Plan; MM & P Individual Retirement AccountPlan; Pete Prevas; Paul H. Nielsen; Florin Dente; JamesN. Haverfield; John M. Hayes; Lynn Martin, Secretary ofthe United States Department of Labor; Arthur Holdeman,Plaintiffs-Appellees,v.Franklin K. RILEY, Defendant-Appellant,Robert J. Lowen; Lloyd M. Martin; Paul Bardyn; MichaelDiPrisco; Richard Evans; James R. Hammer; Martin F.Hickey; Edward Morgan; Robert Murphy; Anthony Naccarato;Robert W. Parker; Michael Swayne; Allen Taylor; WilliamI. Ristine; Edmund Davis; James Hayes; Allen C. Scott;Francis E. Keyser; Henri L. Nereaux; David York; JohnSokolowski; David A. Boyle; David C. Haa; Charles Landry;Ernest Swanson; Marine Midland Bank, N.A.; Robert Parker;Allen C. Taylor; Proskauer, Rose, Goetz & Mendelsohn;Carmina J. Bracco, Defendants-Appellees,Tower Asset Management Inc., Tower Capital Corporation;Tower Securities, Inc.; Andrew A. Levy; W.Randolph Wheeler; Walter Levering, Defendants,Bert Epstein, Seham, Klein & Zelman, Esqs.; Martin Seham;IOMM & P, Appellees,Federal Insurance Company, Appellant.
Nos. 947, 948, Dockets 91-6276, 91-6288.
Argued Dec. 18, 1991.Decided Feb. 21, 1992.As Amended March 18, 1992.
The backdrop to this litigation previously has been set forth fully. See Lowen v. Tower Asset Management, 829 F.2d 1209 (2d Cir.1987). We will describe only those facts necessary to provide an understanding of the issues before us.
The Secretary of Labor (Secretary) and the plan participants and beneficiaries (private plaintiffs) have engaged in extensive litigation under ERISA's civil enforcement provisions to recover losses from Tower, trustees, counsel and auditors of the plans. Under ERISA, breaching fiduciaries are jointly and severally liable. See 29 U.S.C. § 1105(a)(2) (A fiduciary "shall be liable for a breach of fiduciary responsibility of another fiduciary with respect to the same plan ... if, by his failure to comply with section 1104(a)(1) ... he has enabled such other fiduciary to commit a breach."). The settlement before us would affect a number of actions that are pending.2
Aetna                           $7,500,000
Republic                        $5,250,000
Counsel                         $5,625,000
Custodial Trustee               $1,950,000
Auditors                        $1,575,000
The district court entered its Order and Final Judgment pursuant to Fed.R.Civ.P. 54(b). We have jurisdiction pursuant to 28 U.S.C. § 1291.
A. Settlements and the Standard of Review
Typically, settlement rests solely in the discretion of the parties, and the judicial system plays no role. See Mengler, Consent Decree Paradigms: Models Without Meaning, 29 B.C.L.Rev. 291, 291-92 (1988) (Mengler); see also Fed.R.Civ.P. 41(a)(1) (dismissals by plaintiffs by stipulation of parties). Certain settlements require judicial approval, however, see, e.g., Fed.R.Civ.P. 23(e) (class actions); Fed.R.Civ.P. 23.1 (shareholder derivative suits), and on other occasions parties are unwilling to drop litigation unless a court invokes its equitable powers to enforce their agreement. See, e.g., Mengler at 291-92 & n. 1 ("Sometimes parties to a suit for damages, rather than dismissing and settling privately, will file their settlement with the court.") (citation omitted). A consent decree is no more than a settlement that contains an injunction. Laycock, Consent Decrees Without Consent: The Rights of Nonconsenting Third Parties, 1987 U.Chi.Legal F. 103, 103 (Laycock); Mengler at 292.
In a class action settlement, the normal focus is on the fairness, reasonableness and adequacy of the settlement to the plaintiff class. See Mengler at 291; see generally Manual for Complex Litigation § 1.46, at 52-66 (5th ed. 1981) (discussing precautions that should be taken to protect plaintiffs before approval of a class action settlement).3 Where the rights of third parties are affected, however, their interests too must be considered. See Williams v. Vukovich, 720 F.2d 909, 921 (6th Cir.1983) ("In making the reasonableness determination the court is under the mandatory duty to consider the fairness of the decree to those affected."); see also Donovan v. Robbins, 752 F.2d 1170, 1176 (7th Cir.1985) ("Even if no third party complains, the judge has to consider whether the decree he is being asked to sign is lawful and reasonable as every judicial act must be.") (citation omitted); cf. Laycock at 121 (proposing that courts join persons whom a consent decree significantly affects but who are not present); Mengler at 337-42 (same). In other words, where the rights of one who is not a party to a settlement are at stake, the fairness of the settlement to the settling parties is not enough to earn the judicial stamp of approval.
A court can endorse a settlement only if "the compromise is fair, reasonable and adequate." Weinberger v. Kendrick, 698 F.2d 61, 73 (2d Cir.1982), cert. denied, 464 U.S. 818, 104 S.Ct. 77, 78 L.Ed.2d 89 (1983). Courts make this examination on a case-by-case basis. Whether to approve a settlement normally rests in the discretion of a district judge. See Newman v. Stein, 464 F.2d 689, 692-93 (2d Cir.), cert. denied, 409 U.S. 1039, 93 S.Ct. 521, 34 L.Ed.2d 488 (1972). However, as Judge Friendly wrote, there are times when "a higher degree of judicial scrutiny is required." Weinberger, 698 F.2d at 73. Because our decision on the validity of the settlement before us rests on the determination of novel issues of ERISA law, we review the district court's decision de novo. Cf. State of New York v. Lyng, 829 F.2d 346, 349 (2d Cir.1987) ("Because ... we have a complete factual record before us, and the question presented relates solely to a question of law, we undertake plenary review of the merits" of this preliminary injunction motion.).
B. ERISA and Proportional Fault
"ERISA's purpose is to secure guaranteed pension payments to participants by insuring the honest administration of financially sound plans." Pompano v. Michael Schiavone & Sons, 680 F.2d 911, 914 (2d Cir.) (citation omitted), cert. denied, 459 U.S. 1039, 103 S.Ct. 454, 74 L.Ed.2d 607 (1982). The touchstone of the statutory scheme is the reservation to federal authority of the sole power to regulate the field of employee benefit plans. To effect this purpose, section 514(a) expressly preempts "any and all State laws insofar as they may now or hereafter relate to any employee benefit plan." 29 U.S.C. § 1144(a); see generally Ingersoll-Rand Co. v. McClendon, --- U.S. ----, 111 S.Ct. 478, 482-83, 112 L.Ed.2d 474 (1990) (discussing the expansive nature of ERISA preemption).
The scope of ERISA law, however, is not delineated by its statutory confines. "The Supreme Court has left no doubt that 'courts are to develop a "federal common law of rights and obligations under ERISA-regulated plans." ' " Chemung Canal Trust Co. v. Sovran Bank/Maryland, 939 F.2d 12, 16 (2d Cir.) (citations omitted), petition for cert. filed Oct. 22, 1991. Drawing on the principles of the law of trusts, we have held that a system of proportional fault is to be developed as part of the federal common law of ERISA and have specifically incorporated rights to indemnity and contribution into that body of law. Chemung, 939 F.2d at 16, 18 ("[W]e think that even a breaching fiduciary should be entitled to the protection of contribution.... Full responsibility should not depend on the fortuity of which fiduciary a plaintiff elects to sue.").
Riley argues that New York law controls the effect of a settlement on the rights to indemnity and contribution. As support, he directs us to Getty Petroleum Corp. v. Island Transp. Corp., 862 F.2d 10 (2d Cir.1988), cert. denied, 490 U.S. 1006, 109 S.Ct. 1642, 104 L.Ed.2d 157 (1989). In Getty, a Lanham Act case, we stated that the New York setoff law applies "to actions brought under federal statutes in New York." Id. at 15 (citation omitted). Getty, however, is inapplicable where federal law is preemptive, and we in fact do not apply Getty in the securities context. See Louis P. Singer v. Olympia Brewing Co., 878 F.2d 596, 599-600 (2d Cir.1989) (federal common law governs setoffs in securities cases), cert. denied, 493 U.S. 1024, 110 S.Ct. 729, 107 L.Ed.2d 748 (1990).
Although Congress did not intend ERISA to preempt all "run-of-the-mill state-law claims," Mackey v. Lanier Collection Agency & Service, 486 U.S. 825, 833, 108 S.Ct. 2182, 2187, 100 L.Ed.2d 2182 (1988), it clearly intended federal law to govern pension plan regulation. See Alessi v. Raybestos-Manhattan, 451 U.S. 504, 523, 101 S.Ct. 1895, 1906, 68 L.Ed.2d 402 (1981) (ERISA's express preemption provisions make "pension plan regulation ... exclusively a federal concern.") (footnote omitted); Shaw v. Delta Air Lines, 463 U.S. 85, 98, 103 S.Ct. 2890, 2900, 77 L.Ed.2d 490 (1983) (ERISA preempts state laws that "relate to" the subject matters that it covers.). Clearly, judgment reduction affects substantive ERISA rights and is part of pension plan regulation. Cf. Singer, 878 F.2d at 599 ("[W]hether to credit a defendant with a setoff affects substantive rather than procedural rights of the parties under the federal securities laws."). We believe that Congress intended us to fill the interstices of ERISA's statutory scheme and that a necessary corollary of our decision in Chemung that indemnity and contribution exist under ERISA is that federal common law governs what is permissible in a settlement of ERISA claims. Therefore, federal common law governs our decision today.
Under the doctrine of joint and several liability, when two or more persons' torts together cause an injury, each tortfeasor is liable to the victim for the total damages. See Zapico v. Bucyrus-Erie Co., 579 F.2d 714, 718 (2d Cir.1978). Common law did not permit mitigation of this rule's blunt effect through contribution, and courts refused to entertain suits by joint tortfeasors who sought partial reimbursement from others who shared blame for their victims' injuries. W. Keeton, Prosser & Keeton on Torts § 50, at 336-37 (5th L.Ed.1984) (Prosser & Keeton). The rationale was that a joint tortfeasor had no one but himself to blame and that courts should not be burdened by having to assess the relative fault of wrongdoers. See Zapico, 579 F.2d at 718.
Today, some jurisdictions do not allow indemnity based on differences in relative fault. See Overseas National Airways v. United States, 766 F.2d 97, 102 (2d Cir.1985) (discussing New York law). We do not consider elimination of this remedy unreasonable when an alternative mechanism exists to distribute damages among solvent joint tortfeasors. We now turn to other means that courts employ to ensure fair distribution of damages.
"It is now widely recognized that fundamental fairness demands a sharing of the liability." Glus v. G.C. Murphy Co., 629 F.2d 248, 252 (3d Cir.1980), rev'd on other grounds, 451 U.S. 935, 101 S.Ct. 2013, 68 L.Ed.2d 321 (1981). One way of ensuring that a joint tortfeasor will not be alone among solvent joint tortfeasors in shouldering the burden of a judgment is to allow him to sue joint tortfeasors for contribution. Seeing merit in this approach, states and commentators have almost universally rejected a per se bar against contribution. See Donovan, 752 F.2d at 1178 ("[T]he common law's rejection of contribution among joint tortfeasors has itself been rejected by most states and most commentators.").
Recognizing that the right to contribution deters settlements but still seeking to mitigate the harshness of joint and several liability, some jurisdictions allow for judgment reduction as an alternative to contribution after a court has approved a settlement bar. There are three basic methods for determining how much a judgment against a nonsettling defendant should be reduced in light of a settlement by the remaining defendants. These are the pro rata, the proportionate fault and the pro tanto methods. See, e.g., In re Jiffy Lube Sec. Litigation, 927 F.2d 155, 160 & n. 3 (4th Cir.1991).
The pro rata rule apportions an equal share of the liability to each defendant in a lawsuit. Relative culpability is irrelevant under this approach. When, for example, a plaintiff settles with one defendant in a two defendant case, a judgment against the nonsettling defendant is reduced by one-half, regardless of whether the settling defendant was primarily or only minimally culpable. See id.; Harris, Washington's Unique Approach to Partial Tort Settlements: The Modified Pro Tanto Credit and the Reasonableness Hearing Requirement, 20 Gonzaga L.Rev. 69, 77-78 (1985). This method can deter plaintiffs from settling with fewer than all the parties. See Miller v. Apartments and Homes of New Jersey, 646 F.2d 101, 109 (3d Cir.1981).
Under the proportionate fault method (proportionate method), the "jury assesses the relative culpability of both settling and non-settling defendants, and the non-settling defendant pays a commensurate percentage of the judgment." In re Jiffy Lube Sec. Litigation, 927 F.2d at 160 n. 3. Because the credit determination is made after a determination of liability, the proportionate method is always consistent with fault. The problem with the proportionate method is that a holdout defendant can make settlement difficult for the plaintiffs, who bear the risk of a bad settlement. See id. at 160-61 & n. 3. The proportionate method also makes it difficult for a district court to frame notice to a plaintiff class. Because the amount of setoff is not determined until after trial, it is difficult adequately to convey to a class the worthiness of a proposed settlement. See id. at 161. Moreover, determining the relative fault of each party imposes a considerable burden on a factfinder and "obviate[s] much of the advantage of partial settlement to the judicial system." In re Atlantic Fin. Mgt. Sec. Litigation, 718 F.Supp. 1012, 1018 (D.Mass.1988).
The pro tanto rule, by contrast, reduces a nonsettling defendant's liability for a judgment against him in the amount paid by a settling defendant. The pro tanto method has obvious disadvantages. Like the pro rata method, it can result in judgment reduction that is inconsistent with proportionate fault. Moreover, the pro tanto method leaves "the field of settlement very much open to collusive arrangement between a plaintiff and a favored joint tortfeasor." Gomes v. Brodhurst, 394 F.2d 465, 468 (3d Cir.1967). Some jurisdictions have recognized this problem and applied a pro tanto approach that requires a showing of good faith and a hearing on culpability before approval of a settlement bar. See, e.g., In re Jiffy Lube Sec. Litigation, 927 F.2d at 160 n. 3 ("a hearing focussing on fairness of the settlement to the non-settling defendant is required for approval"). This approach is more likely to be consistent with equitable principles suggesting that damages should be apportioned in accordance with fault. See In re Nucorp Energy Sec. Litigation, 661 F.Supp. 1403, 1408 (S.D.Cal.1987).
As support, the private plaintiffs direct us to our decisions in Singer and In re Ivan F. Boesky Sec. Litigation, 948 F.2d 1358 (2d Cir.1991). Before addressing what we said in Singer and Boesky, we note that those cases involved securities law and not ERISA. Nevertheless, we may look to them for guidance.
Conspicuous by its absence is what Singer did not say. It did not address whether Olympia could sue Loeb Rhoades for contribution in excess of the judgment reduction. That issue was not before us. Cf. USF & G v. Patriot's Point Dev. Authority, 772 F.Supp. 1565, 1571 (D.S.C.1991) ("No bar order was discussed in Singer, and the decision did not address the policy question of what credit method would be required to compensate the nonsettling defendant for the barring of his equitable right to contribution.").
In Boesky, we did not adopt a method of judgment reduction. Although we recognized that settlement bars are often desirable because they facilitate settlement, no specific judgment reduction provision was before us. Boesky, 948 F.2d at 1362, 1364. In fact, we allowed the parties to defer adoption of a specific judgment reduction method, in part because "neither the settling nor the nonsettling defendants object[ed] to these matters being deferred." Id. at 1369. In no way did we intimate that we later would approve a method of judgment reduction that did not conform to Singer. With that said, we now turn to a determination of the matter at hand.
We hold that contribution does not exist after a court approves a fair settlement bar. Otherwise, settlements among fewer than all the parties would be difficult to reach. However, third party participation in an evidentiary fairness hearing and court approval of the settlement bar are necessary to protect the due process rights of third parties. See United States v. International Brotherhood of Teamsters, 948 F.2d 98, 103 n. 2 (2d Cir.1991) ("[A] consent decree may not impose ... obligations [on a nonparty] without affording the affected nonparty a meaningful opportunity to challenge the application of the decree to it.").
Relative fault is not the only factor that district courts should take into account when appraising the fairness of a settlement. The likelihood of the plaintiff's prevailing at trial and the adequacy of the resources of the most culpable party, for example, may also be taken into account. See Manual for Complex Litigation (Second) § 30.46, at 244-45 ("[A] partial settlement providing little relief may be entirely satisfactory if the settling defendant has strong defenses or is impecunious."); In re Nucorp Energy Sec. Litigation, 661 F.Supp. at 1408 (The settlement should be considered "in light of any uncertainties surrounding the settling defendant's liability.") (citation omitted). Consideration of all these factors, including relative fault, in determining what is a fair settlement "guarantee[s] that a settling defendant escapes neither the responsibility for his wrongdoing nor, therefore, the deterrent effect which underlies the right to contribution." Id. at 1408-09.
In Chemung, we stated that indemnity is available for ERISA defendants but did not set forth the circumstances in which it would be available. Traditional trust law has allowed joint tortfeasors to seek indemnity instead of contribution where others are "substantially more at fault." See Restatement (Second) of Trusts § 258; 3 A. Scott, Scott on Trusts § 258.1, at 2210 (3d ed. 1967); Whitfield v. Lindemann, 853 F.2d 1298, 1303 (5th Cir.1988), cert. denied, 490 U.S. 1089, 109 S.Ct. 2428, 104 L.Ed.2d 986 (1989); Free v. Briody, 732 F.2d 1331, 1338 (7th Cir.1984). In Free, the Seventh Circuit expressly incorporated into the federal common law of ERISA a right to indemnity based on differences in relative fault. Free, 732 F.2d at 1336-38. But see Massachusetts Mut. Life Ins. Co. v. Russell, 473 U.S. 134, 146, 105 S.Ct. 3085, 3092, 87 L.Ed.2d 96 (1985) (rejecting the statutory basis through which Free incorporated the right of indemnity into ERISA). It is this form of indemnity--which relates to the distribution of liability among culpable tortfeasors--that Chemung dealt with and on which Riley's potential indemnity claims appear to be based.
C. Malpractice and Other Claims
The Secretary argues that this bar properly may affect malpractice claims because ERISA preempts the New York malpractice claims that Riley is likely to bring. We disagree. If ERISA preempts malpractice or any other such claims that might arise out of this suit, then the settlement bar is unnecessary. Moreover, "arising out of" is an expansive phrase, and we cannot predict all state law claims that might ensue from this litigation. See, e.g., Mackey, 486 U.S. at 830-41, 108 S.Ct. at 2185-91 (ERISA does not preempt all state garnishment statutes because they affect plans covered by the statute.). Moreover, although judgment reduction compensates a nonsettling defendant for his lost rights of indemnity and contribution, it does not necessarily compensate him for other lost claims. Accordingly, we conclude that this overly broad settlement bar might impermissibly affect Riley's rights and thus cannot stand.
We recognize that by compelling evidentiary hearings we may impose an additional burden on district courts. We believe, however, that this task will prove no more burdensome than having district courts examine the merits of nonsettling defendants' individual contribution claims, as the settling parties would have the district court do in this case. Other courts also have concluded that such hearings are appropriate. See, e.g., In re Jiffy Lube Sec. Litigation, 927 F.2d at 160; Patriot's Point, 772 F.Supp. at 1565; Dalton v. Alston & Bird, 741 F.Supp. 157, 160 (S.D.Ill.1990)
Home957 f2d 1020 masters mates pilots pension plan and irap litigation cullen v. k riley