Opinion ID: 369045
Heading Depth: 3
Heading Rank: 1

Heading: Validity of the Offset as a question of Law.

Text: 41 Appellants have cited no cases and we have not located any precedent which hold that, under any federal statute or applicable rule of law, it would be Per se erroneous for a district court to offset a class member's recovery in a securities settlement fund by the amount of cash and stock he received pursuant to a plan of reorganization in a related but separate bankruptcy action. Indeed, we have found nothing remotely touching on this issue at all. 42 In the present situation, despite the fact that counsel for the plaintiff classes had obtained one of the largest monetary settlements or judgments in the history of securities class actions, the settlement fund was not sufficient to satisfy the claimed losses of all of the class members. Still, the settlement contributions from each of the defendants were adjudged to be fair and reasonable by the MDL Court and the appellants have not questioned the validity of the amounts contributed, or their fairness. A problem therefore arose as to the equitable allocation of the large settlement fund among the even larger claims of the various class members. 43 In responding to the problem, the MDL Court properly observed that those claimants who had participated in the reorganization proceeding had already received a varying degree of partial recovery for those losses which formed the basis of their claims in the securities litigation. Class 8 claimant-shareholders in the Chapter X proceeding had participated in the Plan of Reorganization because of their standing as victims of fraud and violations of the Securities Acts by EFCA. See Matter of Equity Funding Corp. of America, 416 F.Supp. 132, 151 (C.D.Cal.1975). Their claims in the securities litigation were founded on the same underlying theories, I. e. fraud and violations of the Securities Acts by the MDL defendants. More importantly, their damages rested upon the same losses which they claimed in the reorganization proceeding, I. e. those resulting from their acquisition of EFCA securities. Class 6 claimant-debentureholders had received cash and stock under a different theory of recovery in the reorganization proceeding. Nevertheless, like the claimant-shareholders, the damages which the debentureholders sought in the securities litigation were founded upon their acquisition of the debentures for which they had received substantial remuneration in the Chapter X proceeding. Given the above situation, we do not find it Per se erroneous for the MDL Court to approve and adopt an offset provision which considered the prior recovery by claimants in a related bankruptcy proceeding in order to fairly allocate the settlement funds among class members in the securities litigation. 44 Appellants have raised three arguments against any use of an offset of a prior bankruptcy recovery. (1) They contend that the offset violates the integrity of the Chapter X proceeding because the proportionately greater recovery which the debentureholders obtained pursuant to the bankruptcy laws and with the approval of the Reorganization Court is turned to their disadvantage in the securities settlement. (2) It is argued that the federal securities laws do not permit such an offset (although no particular statute is cited), and the cases referred to by appellants are not applicable herein. Reference is made to purportedly general rules (a) that the measurement of fraud damages is determined at the time such damages occur and subsequent unrelated fluctuations in the value of the securities are irrelevant, (b) that a judgment against one joint tortfeasor is not a bar to an action against another for the same damages although only one satisfaction may be obtained, and (c) that the post-reorganization debt recovery of a creditor does not reduce his fraud claim against a third party. (3) Because recoveries in a civil proceeding would supposedly not be offset in a subsequent bankruptcy proceeding, appellants assert that the mere fortuity of the Chapter X reorganization's being resolved first should not act to their detriment and adversely affect their recovery in the securities settlement. 45 As to the first argument that the integrity of the Chapter X proceeding is compromised by the offset provision, we find that the MDL Court in applying the offset did not seek, nor was the result in fact, to alter or affect the Reorganization Plan. Rather, the MDL Court approved the use of the offset as a means of determining an equitable distribution of the securities settlement funds among the various claimants in the securities class action. The cash and stock which the debentureholders and others had received in the reorganization proceeding were not reduced or modified by the MDL Court. Thus, the results of the bankruptcy proceeding were not directly disturbed. 46 In order to find some detrimental, indirect effect upon the integrity of the bankruptcy proceeding, we would be forced to conclude that the appellants were denied a fair share of the securities settlement solely because of their prior bankruptcy recovery. We cannot and do not reach such a conclusion herein. The offset provision was applied to all class members, including shareholders, who received any cash or stock from the reorganization proceeding. Debentureholders were not singled out for different treatment. Consequently, what appellant-debentureholders are really objecting to is not an offset provision Ipso facto, but rather the fact that the offset provision used by the MDL Court had a greater adverse effect upon their recovery than on the other class members. The real focus of inquiry is not upon an offset provision in general, but whether the MDL Court had a sufficient and valid reason for curtailing the debentureholders' participation in the settlement fund to a greater degree than the other claimants. As discussed below, the debentureholders' failure to share in the settlement proceeds on an equal basis with the other class members stems from the MDL Court's appraisal of their entitlement to the settlement funds as compared with the other claiming classes. 47 Appellants' second contention that their recovery in the bankruptcy proceeding was used to deflate their securities claims mistakes the steps by which the MDL Court reached its decision herein. Appellants have emphasized the continued liability of joint tortfeasors in securities cases despite increases in the value of the stock, partial recovery from one joint tortfeasor, or the post-reorganization debt recovery by a creditor who also alleges fraud or securities violations in regards to the acquisition of debentures. However, the offset provision was not applied for the purpose of lowering the claims of debentureholders in order to benefit any joint tortfeasor. Rather, the use of the offset was for the purpose of allocating the available settlement funds among the various claimants. We therefore find the appellants' arguments on these issues to be irrelevant to the situation before us. Moreover, the MDL Court did not find that the debentureholders had an equal claim to the settlement fund as other plaintiff classes. Thus, its decision to more severely limit the debentureholders' participation in the settlement was based upon a comparison of those claims with the other classes rather than a mere evaluation of the debtentureholders' general claims by itself. 48 Appellants' final argument, that no offset would have been made in the bankruptcy proceeding if the securities litigation had been resolved first, is essentially a Non sequitur. The decision to effectuate an offset did not arise from the mere fortuity that the bankruptcy proceeding had already been decided by the time the MDL Court was faced with the problem of allocating the settlement funds. The court's approval of the offset resulted from the fact that the claims of the class members far exceeded the sums in the settlement fund and from the court's conclusion that the debentureholders' claims were inferior to those of the other classes as regards the settlement proceeds as a whole. Given those two elements, an offset provision or some other form of reduction would have been applied to decrease the debentureholders' participation in the settlement fund notwithstanding the status of the related bankruptcy proceeding. 49