Opinion ID: 688777
Heading Depth: 1
Heading Rank: 3

Heading: approval of the derivative settlement

Text: 14 Weinstein raises three objections to the district court's approval of the settlement: The district court failed to provide formal findings of fact and conclusions of law in response to his objections; the $12 million recovery in the derivative settlement was insufficient; and the attorneys' fee award in the derivative lawsuit was excessive. 15
16 Weinstein alleges that the district court failed to respond to his settlement objections with specific findings of fact and conclusions of law as required by Mandujano v. Basic Vegetable Prods., Inc., 541 F.2d 832, 836 (9th Cir.1976) (2-1 decision). In Mandujano we held that Rule 23(e) requires, in addition to notice of the proposed settlement and a hearing on any substantive objections, a reasoned response in the record to settlement objections. Id. at 835-36. The court in Mandujano also stated that [s]uch findings of fact and conclusions of law as may be necessary to support the response must also appear on the record. Id. at 836. 17 In virtually every case since Mandujano, we have refused to remand a settlement even though the district court did not respond to settlement objections with findings of fact and conclusions of law. 3 We hold that in a Rule 23.1 derivative action, a district court that does not respond to objections with findings of fact and conclusions of law must provide a reasoned response elsewhere in the record. Judge Letts has satisfied this procedural requirement. In his order approving the settlement, he stated that the settlement is fair, reasonable and adequate to Pacific Enterprises and its shareholders. This conclusory statement alone would not be satisfactory, but the record reflects that Judge Letts also held an extensive settlement hearing where he responded to Weinstein's objections and explained why the derivative settlement is fair. For example, he stated that the derivative lawsuit would be very difficult to win and that the lawsuits would expose Pacific Enterprises to a substantial risk of bankruptcy. Judge Letts also responded to Weinstein's objections about the attorneys' fee award and ultimately lowered the award from $8 million to $4 million. The entire session is of record, and is a sufficient reasoned response to Weinstein's objections.
18 Under Fed.R.Civ.P. 23(e), the district court determines whether a proposed settlement is fundamentally fair, adequate, and reasonable. Class Plaintiffs v. Seattle, 955 F.2d 1268, 1276 (9th Cir.) (quotation omitted), cert. denied, --- U.S. ----, 113 S.Ct. 408, 121 L.Ed.2d 333 (1992). Weinstein contends that the district court should have rejected the $12 million derivative settlement because it is unjust in light of the potential derivative recovery (allegedly over $1 billion) and compared to the securities settlement ($33 million). We will reverse a district court's approval of a settlement only upon a strong showing that the district court's decision was a clear abuse of discretion. Id. (quotation omitted). 19 We affirm. Judge Letts applied a proper legal standard and his findings of fact were not clearly erroneous. See Marchand v. Mercy Medical Ctr., 22 F.3d 933, 936 (9th Cir.1994). His conclusion that the settlement was fair, reasonable and adequate to Pacific Enterprises was based on evidence in the record. Even if the potential recovery might have been large, the odds of winning the derivative lawsuit were extremely small. California's statute of limitations for breach of fiduciary duty and the Special Litigation Committee's recommendation not to pursue the derivative lawsuit may have adversely terminated the litigation before trial. Even if it had gone to trial, derivative lawsuits are rarely successful. 4 Judge Letts found that the settlement eliminated significant risk. Based on the record, he concluded that continued litigation could have forced Pacific Enterprises into bankruptcy. Finally, Judge Letts relied on independent assessments by Debevoise & Plimpton, a law firm hired by Pacific Enterprises to evaluate the derivative settlement, and by one of the settlement mediators, retired district judge J. Lawrence Irving. Both Debevoise & Plimpton and Judge Irving concluded that the settlement of the derivative claims is in the best interests of Pacific Enterprises and its shareholders. The district court did not clearly abuse its discretion. 20 When reviewing complex class action settlements, we have a strong judicial policy that favors settlements. Class Plaintiffs, 955 F.2d at 1276. Parties represented by competent counsel are better positioned than courts to produce a settlement that fairly reflects each party's expected outcome in litigation. If, however, the settlement negotiations are biased, or skewed by a conflict of interest, we cannot presume that the attorneys have reached a fair settlement. Thus, a district court may not approve a proposed settlement if it is the product of fraud or overreaching by, or collusion among, the negotiating parties. Id. at 1290. 21 As part of their negotiating strategy, the defendants demanded that the two settlements be linked. This raises concerns about the fairness of the derivative settlement. Weinstein contends that individual defendants and the corporation may have used the derivative lawsuit to settle the securities claim. See In re Oracle Sec. Litig., 829 F.Supp. 1176, 1183-84 (N.D.Cal.1993). We recognize that linking the two settlements may give individual defendants an incentive to offer a generous settlement against the corporation in exchange for a small derivative lawsuit recovery. John C. Coffee, Jr., Understanding the Plaintiff's Attorney: The Implications of Economic Theory for Private Enforcement of Law Through Class and Derivative Actions, 86 Colum.L.Rev. 669, 718-719 (1986). Arguably the derivative shareholders receive nothing from the settlement because all of the proceeds from the insurance companies go to the securities plaintiffs. 22 Weinstein also argues that the linked settlement is biased because Milberg Weiss had a conflict of interest in representing both the derivative plaintiffs and the securities plaintiffs. We have carefully considered the argument. Although Spector & Roseman were co-lead counsel for the derivative plaintiffs, the record suggests that Milberg Weiss conducted most of the settlement negotiations for the derivative plaintiffs. Weinstein alleges that because of a conflict of interest, Milberg Weiss was willing to accept a lower derivative settlement so long as the class action produced a large recovery. 5 23 We are concerned about the potential conflicts created by the linked settlement and by Milberg Weiss's dual representation of derivative and securities plaintiffs, but Weinstein failed to raise these issues at any time prior to his appeal. See United States v. Flores-Payon, 942 F.2d 556, 558 (9th Cir.1991). A timely objection could have been properly evaluated before extensive settlement negotiations were concluded. 24
25 Attorneys for the derivative plaintiffs requested attorneys' fees of $8 million out of the derivative settlement of $12 million. The attorneys later lowered their request to $4 million, which the district court approved. Weinstein contends that the attorneys should not receive any fees because of the low recovery in the derivative lawsuit. 26 We review a district court's award of attorneys' fees for abuse of discretion. In re Washington Pub. Power Supply Sys. Litig., 19 F.3d 1291, 1296 (9th Cir.1994). Twenty-five percent is the benchmark that district courts should award in common fund cases. Six (6) Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1311 (9th Cir.1990). The district court may adjust the benchmark when special circumstances indicate a higher or lower percentage would be appropriate. Id. 27 The attorneys for the derivative plaintiffs contend that a $4 million award (thirty-three percent) for attorneys' fees is justified because of the complexity of the issues and the risks. They also argue that the derivative settlement does not reflect the nonmonetary benefits in the derivative settlement. Pacific Enterprises has agreed to resume its dividend and to enact restrictions on future Pacific Enterprises diversifications. Weinstein failed to respond to these arguments. 6 We cannot conclude, on this record, that the district court's award of fees was an abuse of discretion. 28 AFFIRMED.