Opinion ID: 4553695
Heading Depth: 2
Heading Rank: 1

Heading: Wrongfulness of Objectors’ Conduct

Text: We base our decision here on long-established principles of equity. It has long been axiomatic “that no person shall proﬁt by his own wrong.” Town of Concord v. Town of Goﬀstown, 2 N.H. 263, 265 (1820); see also Liu v. SEC, 140 S. Ct. 1936, 1943 (2020) (same); Restatement (Third) of Restitution and Unjust Enrichment § 3 (Am. Law Inst. 2011) (same). The wrong may take any number of forms, of which fraud is perhaps the paradigm. See, e.g., Liu, 140 S. Ct. at 1941–42. A ﬁduciary’s self-dealing is treated as a “constructive” fraud. 1 Joseph Story, Commentaries on Equity Jurisprudence 304 (1836). As a general rule, “wherever conﬁdence is reposed, and one party has it in his power, in a secret manner, 8 No. 19-3095 for his own advantage, to sacriﬁce those interests, which he is bound to protect, he shall not be permitted to hold any such advantage.” Id. at 320; see also, e.g., Snepp v. United States, 444 U.S. 507, 515 (1980) (same); Restatement (Third) § 43 (same). We have little diﬃculty applying these principles to a private payment made to an objector in exchange for withdrawing the appeal of an objection asserting the interests of the class.
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.
Nunez’s arguments against disgorgement are not persuasive. He chieﬂy argues that his situation is unlike Buckley and Sweeney’s because he was settling both his objection to the Pearson II settlement and his own Nunez action in California. If Nunez were right, he might be entitled to a more precise accounting of his settlement proceeds that reﬂects the value of any individual claim he might have been asserting. See Safeco Ins. Co. of America v. AIG, Inc., 710 F.3d 754, 757 (7th Cir. 2013) (approving objector side deal where only objector’s individual claims were settled), discussed further in Pearson II, 893 F.3d at 985–86; compare Young, 324 U.S. at 209 (“The appeal here . . . was not from a denial of any individual claim of 14 No. 19-3095 Potts and Boag.”), 214 (Potts and Boag liable to account only for “money paid in excess of the stock value”). The problem for Nunez is that the value of the Nunez action at the time it was settled was zero. Nunez was himself a member of the Pearson class. His opportunity to opt out had already passed when he ﬁled his objection to the Pearson II settlement. By settling that objection, Nunez ensured the Pearson II settlement would ﬁnally bind him just as it bound every other class member. Maintaining Nunez thereafter would have been sanctionably frivolous. In any event, after the Pearson II settlement, securing dismissal with prejudice of Nunez required only that defendants take the basically ministerial steps of pleading accord and satisfaction and moving for judgment on the pleadings. See Walton v. United Consumers Club, Inc., 786 F.2d 303, 306–07 (7th Cir. 1986). Nunez’s argument that he was leveraging the class’s claims to settle his own worthless case for $60,000 impairs rather than improves his position. Nunez argues further that we have “no jurisdiction” to interfere with his settlement of Nunez. It is not clear what kind of jurisdiction he supposes us to lack but the supposition is groundless. Nunez brought these issues before this court in the ﬁrst instance by ﬁling his objection and appealing its denial. Under Federal Rule of Appellate Procedure 42(b), we had (but regrettably did not exercise) authority to scrutinize Nunez’s dismissal of his appeal. See Pearson II, 893 F.3d at 987. And the district court had jurisdiction to decide whether that dismissal was part of a “class sellout.” Id. at 986. If Nunez had wanted to avoid this scrutiny, he might have settled Nunez as the entirely separate concern he now insists it was. We have already suggested the likely reason he did not do so: after the No. 19-3095 15 Pearson II settlement, the Nunez case was a dead letter, so Nunez’s only settlement leverage, like Buckley and Sweeney’s, was the value of being a nuisance, getting in the way of defendants’ and other plaintiﬀs’ desires to put Pearson itself to rest.
Buckley’s arguments are also unpersuasive. He argues ﬁrst that Frank lacks standing to appeal. His theory is that because the district court found “nothing untoward about the objector settlements,” Frank cannot “pursue the matter further.” This argument confuses standing with the merits. Contra, e.g., Arreola v. Godinez, 546 F.3d 788, 794–95 (7th Cir. 2008), among many others. We would have little business as an appellate court if a party’s loss in the district court showed lack of standing to appeal. Buckley does no better to argue Frank never had standing to ﬁle his motion in the ﬁrst place. Frank had standing in the district court and has standing now for the same reason that Buckley and the other objectors had standing in the appeals that precipitated Frank’s motion: a class member has standing to defend the class, whose interest he shares, against sell-outs by the self-appointed representatives who control the interests of all. See Devlin, 536 U.S. at 6–9; Young, 324 U.S. at 212 (without addressing standing); In re Subway Footlong Sandwich Litig., 869 F.3d 551, 556 (7th Cir. 2017) (“as a class member who is bound by the settlement, Frank clearly has standing to appeal”). An equitable remedy for breach of the objectors’ limited representative, ﬁduciary duty is just one instance of the “[m]any traditional remedies,” “such as for . . . unjust enrichment,” which “are not contingent on a plaintiﬀ’s allegation of damages beyond the violation of his private legal 16 No. 19-3095 right.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1551 (2016) (Thomas, J., concurring). Buckley argues further that his fee-only objection would not have increased defendants’ liability even if it had been successful. That is correct, and it raises the question: why did defendants pay Buckley to settle his objection? He pleads ignorance, but there is only one reasonable answer: the value to defendants in paying oﬀ Buckley lay in ﬁnally being rid of the Pearson litigation as a whole. And even if class counsel instead of defendants had been the ones to settle with Buckley (on which more in a moment), Buckley’s responsibility to the class depended not on whether defendants would have been required to pay more but on whether the class would have been entitled to receive more. See Young, 324 U.S. at 212 (“the appeal was taken on the assumption[] that the less the junior claimants were awarded the more all the preferred stockholders would receive”). It would have, as Buckley himself demonstrated by appealing the denial of his objection. See Pearson I, 772 F.3d at 786 (“If the class cannot beneﬁt from the reduction in the award of attorneys’ fees, then the objector, as a member of the class, would not have standing to object”). That is because the Pearson II settlement took class counsel fees out of the common fund, a feature correctly advertised at the time of settlement approval as an improvement over the Pearson I settlement. See id. (faulting earlier reversion clause providing that “if the judge reduces the amount of fees . . . the savings shall enure not to the class but to the defendant” as “a gimmick for defeating objectors”). Sustaining Buckley’s objection would have directly beneﬁted the class. Buckley argues along parallel lines that defendants independently paid him from their own pockets, without dipping No. 19-3095 17 into the common fund. The district court relied heavily on this contention in denying Frank’s motion. It would not alter our analysis if it were true. (In Young, neither Potts nor Boag directly picked the pockets of the other preferred shareholders; they held what was not theirs to hold. 324 U.S. at 213–14.) But it is not true as a matter of fact. In the district court, class counsel acknowledged that they had paid $22,500 out of their own fees toward the total of $130,000 paid to settle with the three objectors. Again, under the Pearson II settlement these fees were taken from the common fund. Money that class counsel were willing to part with to ﬁnally resolve the litigation consisted of savings that ought to have enured to the class—not to defendants, the three objectors, or their lawyers. See Pearson I, 772 F.3d at 786.