Opinion ID: 3030162
Heading Depth: 3
Heading Rank: 1

Heading: General Objections

Text: [1] Appellants object to the offset provision based on general principles of equity and receivership. We believe that the offset provision together with the other terms of the distribution plan represent an administratively workable and equitable method of allocating the limited assets of the receivership. The offset provision imposes a reasonable compromise that balances the goal of encouraging CCL clients to seek thirdparty recoveries and rewarding them for their efforts, and the goal of distributing the limited assets of the receivership in a roughly equal fashion. These goals conflict. Eliminating the offset provision would make for a more inequitable distribution of assets by recognizing more loss than these appellants actually suffered. The Ninth Circuit has noted that equity demands equal treatment of victims in a factually similar case. In United States v. Real Property Located at 13328 and 13324 State Highway 75 North, 89 F.3d 551 (9th Cir. 1996), an investment advisor pleaded guilty to defrauding his customers and a fund was established to partially reimburse the customers for their losses. The district court approved an SEC-administered plan to distribute the fund to the defrauded customers on a pro rata basis. One customer wanted to receive all the proceeds of a particular real estate sale, claiming that the funds to purchase this property could be traced to it. We held that allowing this 1354 EIGHTH DISTRICT ELECTRICAL PENSION v. LENNON claim in lieu of a pro rata distribution “would frustrate equity,” and agreed with the district court that “the equities demand that all [customers] share equally in the fund of pooled assets in accordance with the SEC plan.” Id. at 553. Quoting the original Ponzi scheme case, we held that “this is a case where ‘equality is equity.’ ” Id. at 554 (quoting Cunningham v. Brown, 265 U.S. 1, 13 (1924)). We have also approved of offset provisions in cases involving similar equitable considerations. In our view, these cases support the district court’s decision in the pending case, despite some factual distinctions. In In re Cement and Concrete Antitrust Litigation, 817 F.2d 1435 (9th Cir. 1987), rev’d on other grounds, 490 U.S. 93 (1989), we approved of an offset provision in a antitrust class action settlement. The class action alleged a conspiracy to fix prices for cement. The district court approved a plan providing that amounts recovered by any class member from nonsettling defendants would offset that class member’s share of the settlement fund. We noted that without such an offset there would exist “the possibility that class members with claims against nonsettling defendants could secure double recovery: collect from the settlement fund for purchases made from settling defendants, and also collect against the nonsettling defendants under another settlement or a judgment.” Id. at 1439. We held that “in adopting the offset provision, the district judge forged an equitable solution and did not abuse his discretion,” id. at 1440, and that the offset provision “in effect applies an equitable weighting to claims,” id. at 1439. In re Equity Funding Corp. of America Securities Litigation, 603 F.2d 1353 (9th Cir. 1979), also involved a class action settlement fund. The suit arose out of the securities fraud perpetrated by Equity Funding Corporation of America (EFCA) and its related companies. EFCA filed for bankruptcy in a separate proceeding, and the class action suit proceeded against accountants and other defendants. The district court approved a settlement plan under which members of the EIGHTH DISTRICT ELECTRICAL PENSION v. LENNON 1355 plaintiff classes would “ ‘share and share alike’ ” in the settlement based on their “ ‘net adjusted losses.’ ” Id. at 1357. The plan provided for an offset which reduced the amount of the class member’s net losses by the value of cash and stock received under the EFCA bankruptcy reorganization plan. The district court and the Ninth Circuit approved of the offset provision. While the offset provision was adopted in part to address a peculiar issue concerning the appropriate recovery of one group of class members,7 the provision was also approved on the basis of the district court’s more general belief “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.” Id. at 1363. The district court’s approval of the plan derived in part “from the fact that claims of the class members far exceeded the sums in the settlement fund,” id. at 1365, a fact also present in the pending case. We note that Equity Funding and Cement and Concrete involved 100 percent offset provisions, while the pending case only involves a 50 percent offset provision. So any arguments that the offset provision in the pending case would improperly penalize those clients who made efforts to pursue claims in other proceedings would have applied with even greater force in Equity Funding and Cement and Concrete, yet we approved the 100 percent offset provisions in those cases. The parties make no persuasive argument that some CCL clients are less deserving of compensation under the distribution plan because they were more sophisticated than other cli- 7 The offset provision addressed the district court’s concern that, due to the timing of certain securities offerings, debenture holders had been assigned a relatively high priority as compared with other fraud claimants in the bankruptcy plan, but had claims in the class action which arguably were weaker than the claims of other class members. Equity Funding, 603 F.2d at 1365-66. 1356 EIGHTH DISTRICT ELECTRICAL PENSION v. LENNON ents, deliberately made riskier investments, have unclean hands, or other reasons. According to the DOL, “which client ultimately invested in which investment and who was left in the lurch when CCL was shut down was more a product of luck and timing than any exercise of discretion or informed investment decision.” All the clients are innocent victims. Eliminating the offset provision could mean a double recovery for some clients, although the parties seem to agree that the chances of a double recovery are small at best, and the offset provision does not eliminate all possibility of a double recovery anyway.8 Even if no double recoveries occur, eliminating the offset provision would mean at the very least that 8 The Electrical Funds claim in their brief that “[n]o ERISA plan will obtain a double recovery, or windfall, by pursuing claims under its own fiduciary liability insurance or bonds.” A double recovery on such claims may not be possible if the insurance company has a right of subrogation. However, while some clients may have recovered insurance proceeds from their own insurance policies subject to a right of subrogation of the insurer, the third-party claims are not limited to such claims. The Oregon Laborers assert that a double recovery is “plainly impossible,” but we fail to see why this is so. Indeed, for all we can tell from this record, a double recovery is possible even with the offset provision in place, since the provision only reduces the amount of the MIMO claim by 50 percent of the third-party recoveries. If, as appellants complain, some third-party claims have not even been brought and tolling agreements have been formed to circumvent the effect of the offset provision, it is impossible at this time to conclude that no double recoveries will occur. The Electrical Funds, for example, claim that some CCL clients have “adopted a more sensible strategy of waiting to pursue their claims until after the Receivership closes.” The DOL argues that “it is possible (and may well be prudent) for CCL investors to delay asserting third-party claims until after the termination of the receivership.” The Oregon Laborers state that “[s]ome claims . . . are subject to investigation and have yet to be litigated.” The district court does state in its opinion and order approving of the distribution plan: “I also acknowledge that some clients may reach a 100% recovery between distributions from the Receiver and recoveries from third parties. If this occurs, the Receiver is to temporarily cap that client’s distribution until all have received a 100% recovery.” However, the court states in the same decision that “[t]he Receiver does not propose to keep the receivership open for any additional period solely to monitor third-party claims,” and that tolling agreements might “be used to stretch out a third-party recovery to a point after the receivership is closed.” Therefore, the possibility of a double recovery exists, whether the result of a conscious effort to circumvent the court’s temporary cap or the offset provision, or any other reason that a client might obtain a third-party recovery after the termination of the receivership. EIGHTH DISTRICT ELECTRICAL PENSION v. LENNON 1357 the partial recoveries for the losses of the innocent CCL clients would be more uneven than recoveries with the offset provision in place. Appellants variously argue that the offset provision creates a free rider problem, in that it penalizes the CCL client who went to the expense of purchasing insurance or who successfully pursues third-party claims, and correspondingly increases the recovery of those clients who did not purchase insurance or who do not successfully pursue third-party claims. They argue that the offset provision creates a disincentive to pursue third-party claims. We do not find these arguments so compelling that we are persuaded to hold that the district court abused its discretion in approving a distribution plan which includes the offset provision. First, as discussed above, the offset provision allows for more equal compensation to innocent CCL clients, and equal treatment is a legitimate goal in itself, even if it to some extent conflicts with other legitimate goals. Second, clients still have an incentive to pursue third-party claims, and are still rewarded for their efforts, or their decision to purchase insurance, since only half of any third-party recovery is deducted from the client’s net loss claim. Third, to the extent that a client incurs expenses in pursuing a third-party claim, these expenses are offset against the amount of the third-party recovery as measured by the receiver.9 Only the net thirdparty recovery is deducted from the receivership claim. 9 We so conclude because paragraph IV(G) of the distribution plan makes reference to net third-party recoveries. The receiver states in his briefing that “[a]ll attorney fees and costs incurred in obtaining the recovery are netted and 50% of that net figure is deducted from the client’s claim in the receivership.” The district court likewise has interpreted the offset provision as “net of costs and fees,” and the Electrical Funds also agree in their briefing that the 50 percent offset is “net of legal expenses.” 1358 EIGHTH DISTRICT ELECTRICAL PENSION v. LENNON