Opinion ID: 4553695
Heading Depth: 3
Heading Rank: 1

Heading: Young v. Higbee Co.

Text: Seventy-ﬁve years ago, the Supreme Court applied these ancient principles to class litigation in Young v. Higbee Co., 324 U.S. 204 (1945). In that case, Potts and Boag, two preferred shareholders of the bankrupt Higbee Company, objected to conﬁrmation of the company’s bankruptcy plan. Id. at 206. They argued that the company’s preferred shareholders should have been given priority over a junior debt held by Bradley and Murphy, two of the company’s directors. Id. The district court conﬁrmed the plan over their objection, and Potts and Boag appealed. Id. While their appeal was pending, they sold their preferred shares along with the appeal to Bradley and Murphy for seven times the shares’ market value. Id. at 207. Young, another preferred shareholder, moved in the district court for an accounting of proﬁts from the settlement. Id. at 207–08. The motion was denied and Young appealed. Id. at 208. The Supreme Court reversed the denial, ﬁnding that Potts and Boag’s dismissal had been bought at the expense of the class of shareholders they purported to represent. Id. at 214. The Supreme Court based its decision not on formalistic details of procedure but on the substance of the rights Potts No. 19-3095 9 and Boag had asserted—on behalf of all shareholders similarly situated. Potts and Boag argued that because they had appealed as individuals, “they owed no duty to any stockholders but themselves.” Id. at 209. The Supreme Court disagreed. “Equity looks to the substance and not merely to the form.” Id. In substance, their appeal had been taken on behalf of all preferred shareholders, whose pro rata shares of the bankruptcy estate would have increased if their appeal had been successful. Id. As the only preferred shareholders to appeal conﬁrmation of the plan, Potts and Boag had taken it upon themselves to decide the fate of every preferred shareholder, id., even the fate of the company’s entire reorganization. Id. at 212 n.12. The critical step in the Court’s reasoning was to recognize that the appellants had taken on a ﬁduciary duty to the other shareholders similarly situated: “This control of the common rights of all the preferred stockholders imposed on Potts and Boag a duty fairly to represent those common rights.” Id. at 212. It was a breach of this duty to “trade in the rights of others for their own aggrandizement,” as Potts and Boag had done by privately selling their appeal. Id. at 213. Their proﬁts from that breach thus belonged in equity to all the preferred shareholders. Id. at 214. Finally, the Court concluded, the accounting remedy Young sought was well within the district court’s equitable powers. Id. The private settlement of a class-based objection in Young is not meaningfully diﬀerent from the private settlements of class-based objections in this case. As in Young, the objections to the Pearson II settlement raised by Nunez, Buckley, and Sweeney alleged defects which, if genuine, would have in10 No. 19-3095 jured every member of the class by binding them all to an unfair, unreasonable, or inadequate settlement. Named plaintiﬀs “by deﬁnition” had renounced any defense of the class against such injuries. That’s why the three objectors were permitted to take their appeals in the ﬁrst place. Devlin v. Scardelletti, 536 U.S. 1, 9 (2002). “The situation which enabled them to traﬃc in the interests of others was created by a [rule] passed to protect the interests of all of them.” Young, 324 U.S. at 212; see Devlin, 536 U.S. at 8–9, citing Fed. R. Civ. P. 23(e). These objectors were thus “bound to protect” the common interests of the class which the rule at their own behest had entrusted to them, but they “sacriﬁce[d] those interests” to their own advantage by selling their appeals without beneﬁt to the class. 1 Story, supra, at 320. Equity does not permit them to keep that gain. Id. As in Young, the three objectors’ “representative responsibility” to the class in this case was “emphasized” by the fact that they would have been entitled to seek compensation for their services if their appeals had succeeded. 324 U.S. at 212– 13; see 1 Story, supra, at 450–51, 482–83 (contribution for beneﬁt to common fund) (“one shall not bear the burthen in ease of the rest”); Restatement (Third) § 29 (same). On the same principle, named plaintiﬀs each received $5,000 incentive awards under the Pearson II settlement, and Frank was awarded $180,000 in attorney fees for the substantial class beneﬁts he had achieved by objecting to the Pearson I settlement. See Fed. R. Civ. P. 23(e)(5)(B) advisory committee’s note (“Good-faith objections can assist the court . . . . It is legitimate for an objector to seek payment for providing such assistance under Rule 23(h).”). No. 19-3095 11 As in Young, the objectors here had a duty to object only in “good faith,” 324 U.S. at 210–11 & n.9, that is, not for an improper purpose. See Vollmer v. Publishers Clearing House, 249 F.3d 698, 709 (7th Cir. 2001) (ﬁnding evidence that putative intervenor-objector “was put forward by his attorneys solely to enable them to collect fees in this action”), applying Fed. R. Civ. P. 11(b)(1). Buckley attempts to distinguish Young on the basis of this statutory requirement, and more generally as oﬀering no more than a “narrow interpretation” of one section of the bankruptcy laws. The asserted distinction is not genuine and, as noted, Young’s reasoning was based not on the details of bankruptcy procedure but on the general equitable principles cited above. It is squarely on point here. Finally, in one important respect the facts here are even more egregious than in Young. There, the Court observed that the purposes of the bankruptcy laws would be ﬂouted if Potts and Boag, by selling out for seven times the market value of their preferred shares, were allowed to receive “$7.00 for every $1.00 paid to other preferred stockholders.” 324 U.S. at 210. Even less could the “fair, reasonable, and adequate” settlement demanded by Rule 23(e)(2) be achieved in this case. Sweeney’s settlement gave him $96, and Nunez and Buckley $577, for every $1 received by other class members—in exchange for absolutely nothing. 2 We thus read Young to impose a limited representative or ﬁduciary duty on the class-based objector who, by appealing 2 These estimates assume that every class member would receive $104, the maximum recovery possible under the agreement before adjusting for excess or deficiency of the settlement fund after all claims had been submitted. 12 No. 19-3095 the denial of his objection on behalf of the class, temporarily takes “control of the common rights of all” the class members and thereby assumes “a duty fairly to represent those common rights.” 324 U.S. at 212. This case turns on a simple either/or proposition whose logic ﬂows directly from Young. These objectors made sweeping claims of general defects in the Pearson II settlement. Either those objections had enough merit to stand a genuine chance of improving the entire class’s recovery, or they did not. If they did, the objectors sold oﬀ that genuine chance, which was the property of the entire class, for their own, strictly private, advantage. If they did not, the objectors’ settlements of meritless claims traded only on the strength of the underlying litigation, also the property of the entire class, to leverage defendants’ and class counsel’s desire to bring it to a close. Either way, the money the objectors received in excess of their interests as class members “was not paid for anything they owned,” id. at 213, and thus belongs in equity to the class. Id. at 214. The record here indicates that merit was a matter of indifference to these objectors. Compare what they said to what they did. What they said was that the Pearson II settlement was either entirely worthless or a collusive reprise of the Pearson I settlement. In his objection, Nunez asserted that his counsel had “sole settlement authority” to settle the claims of the Pearson subclass he sought to represent in Nunez. That would have meant the Pearson II settlement was at best unenforceable as to that subclass and at worst void in its entirety. See Brewer v. Nat’l R.R. Passenger Corp., 649 N.E.2d 1331, 1333– 34 (Ill. 1995) (settlement unenforceable if negotiated without authority); Kepple and Co. v. Cardiac, Thoracic and Endovascular No. 19-3095 13 Therapies, S.C., 920 N.E.2d 1189, 1193 (Ill. App. 2009) (entire contract void if essential term unenforceable). Only a little less sweepingly, Buckley contended that class counsel were being overcompensated at the class’s expense to the tune of 13 percentage points of the common fund, or $975,000, in part as a result of billing for hours spent defending the same “selﬁsh deal” we vacated in Pearson I. 772 F.3d at 787. What the objectors did, however, was to advance these superﬁcially plausible objections in the space of four pages each, light on citations to law and fact, and to sell them—before speaking a word in their defense—at discounts from face value ranging from 94 percent (Buckley) to 99.2 percent (Nunez). For his part, Sweeney could not even correctly identify the subject matter of the litigation. The objectors’ conduct testiﬁes that, whatever merit their objections might have had, the objectors themselves did not believe them or take them seriously, from the day they were ﬁled to the day they were settled.