Opinion ID: 355121
Heading Depth: 1
Heading Rank: 3

Heading: approval of the settlement of the action

Text: 49 The Project responded to notice of the proposed settlement of the Gulf shareholders' consolidated derivative action, which it received as owner of two shares of Gulf stock, by filing objections to the settlement proposal on behalf of itself and three other Gulf shareholders who, with the Project, are the plaintiffs in the derivative action instituted on behalf of Gulf which, as we have seen, is presently pending in the District Court for the District of Columbia. The three other Gulf shareholders referred to in the Project's notice of objections to the settlement subsequently denied any intention to oppose the settlement agreement. The Project took the depositions of two defendants, two attorneys who had represented Gulf in 1974 in the negotiations aimed at terminating the derivative action in the District of Columbia, and an attorney for the plaintiffs. It was denied permission to take defendant Wild's deposition. 9 The five depositions which were taken were filed in the district court and the Project presented its objections orally at the settlement hearing. The Project appeals at our No. 77-1157 from the district court's order of November 18, 1976, approving the settlement and its order of November 19, 1976, awarding the plaintiffs' attorneys' and accountants' fees and reimbursement of expenses. Shareholder Holloway also appeals from the fee order of November 19th and the objections of both the Project and Holloway to that order are discussed in Part IV of this opinion. 50 The Project seeks reversal of the district court's order of November 18th approving the settlement on the following grounds: (1) that the district court abused its discretion in approving the proposed settlement in view of the fact that it provides for a general release of the individual defendants' liability to Gulf which purports to release them from liability for matters asserted against them in the suit being prosecuted by the Project in the District Court for the District of Columbia in which they are named defendants, (2) that the district court abused its discretion in approving the proposed settlement in view of the fact that it provides for the reimbursement by Gulf of the litigation expenses, including attorneys' fees, of the individual defendants, (3) that the district court erred in approving the settlement because it conferred no net benefit on Gulf, and (4) that the district court failed to subject the settlement to an independent judicial scrutiny. To the consideration of these objections we now turn. 51 The Project's original complaint against Gulf, Wild and other directors and officers of Gulf, filed March 27, 1974, in the District of Columbia court, sought, as we have stated earlier, to recover for Gulf the fines and costs incurred by Gulf as a result of the unlawful corporate contributions, totaling $125,000, to the campaigns of three contenders for the presidency of the United States in 1972. The suit was dismissed in conjunction with the court's approval of the terms of a stipulation entered into by the parties on June 27, 1974, under which Wild agreed to pay Gulf $25,000 in exchange for Gulf's release of all claims against him and under which the board of directors of Gulf agreed that the corporation would not rehire Wild, other than on an emergency basis, for five years following the dismissal of the complaint without the board's approval and notification of the rehiring of Wild to the plaintiffs' counsel. On August 3, 1976, as we have seen, the order of dismissal was vacated and the action was reinstated. 52 An amended complaint was filed in the District of Columbia suit on August 4, 1976. The amended complaint sought, in addition to the relief requested in the original complaint, the costs and damages to Gulf resulting from fraud allegedly perpetrated by the defendants against Gulf and the court in connection with the procurement of the judgment subsequently vacated. The complaint averred the basis of the fraud to be the deliberate failure of Gulf officials to notify Gulf shareholders of the terms of the settlement agreed to in 1974 before its approval by the court, Wild's appropriation from Gulf's funds under his control during the settlement negotiations of the $25,000 with which he intended to discharge his liability to Gulf under the terms of the 1974 settlement, and Gulf's rehiring of Wild in August 1974. 53 The Project concedes that the settlement of the claims in controversy in the suit now before us will eliminate their further litigation in the District Court for the District of Columbia under the doctrine of res judicata, citing Stella v. Kaiser, 218 F.2d 64 (2d Cir. 1954), cert. denied, 350 U.S. 835, 76 S.Ct. 71, 100 L.Ed. 745 (1955). 9a The Project contends, however, that the claims of fraud based upon Wild's so-called sham payment to Gulf and Gulf's rehiring of Wild are distinctly different from any claims pleaded in the suit before us and would survive the settlement of this suit were it not for the release provisions of the settlement. The parties to the suit before us disagree, being of the view that the issues and claims raised in the District of Columbia case are all duplicative of those raised in the consolidated action before us. 54 The Project asserts that it was error for the district court to approve the broad release provisions of the settlement because they wrongfully seek to settle serious issues of fraud being litigated in another forum. At the least, the Project submits, the court should have independently evaluated the Project's separate and distinct claims. 55 We cannot agree that the district court failed to take into account and evaluate the claims presented in the Project's District of Columbia suit. The record before the court included a copy of the Project's amended complaint pending in the District Court for the District of Columbia, depositions taken by the Project in furtherance of the successful establishment of the claims asserted in the complaint and a copy of the McCloy Report which contains an objective discussion of Gulf's rehiring of Wild and of Wild's payment to Gulf of borrowed corporate funds. The Project was given every opportunity to present and support its position in this regard. 56 So far as the releases are concerned, we note that general releases executed extrajudicially are ordinarily enforced by the courts according to their terms. See Ruskay v. Waddell, 552 F.2d 392, 396-398 (2d Cir. 1977); Three Rivers Motors Co. v. Ford Motor Co., 522 F.2d 885, 895-896 (3d Cir. 1975); DeHart v. Richfield Oil Corp., 395 F.2d 345, 348 (9th Cir. 1968). Such releases are binding in Pennsylvania even as to claims unknown at the time of the execution of the releases if that was their intended scope. Three Rivers Motors Co. v. Ford Motor Co., supra at 896; Sears, Roebuck and Co. v. Jardel Co., 421 F.2d 1048, 1050-1051 (3d Cir. 1970). We think, therefore, that the district court was not precluded from approving the settlement of this shareholders' derivative action because it included an agreement by the parties to release claims other than those pleaded in the complaint where it found, as it did here, that the settlement as a whole was fair and reasonable. See 3B Moore's Federal Practice p. 23.1-141. See also Winkelman v. General Motors Corp., 48 F.Supp. 490, 495-496 (S.D.N.Y.1942). We think that the question of the actual effect of the general releases on the District of Columbia suit is one to be resolved in that proceeding. See Delahanty v. Newark Morning Ledger Co., 26 F.Supp. 327, 328-329 (D.N.J.1939). We are not persuaded to the contrary by the opinion of the district court in Herbst v. International Tel. & Tel. Corp., 72 F.R.D. 85, 91-92 (D.Conn.1976), cited by the Project. 57 The Project contends that Gulf's agreement under the terms of the settlement to reimburse and indemnify the individual defendants for their reasonable litigation expenses incurred in the present suit or in defense of other claims related to the matter in suit was unjustified and excessive, since it rendered the settlement of no net benefit to Gulf especially when considered in the light of Gulf's agreement not to oppose the award, payable by Gulf, of not in excess of $625,000 for the fees and expenses of the plaintiffs' attorneys and accountants. The Project argues that for this reason also the district court erred in approving the settlement. The attack of the Project and Holloway upon the actual award of $607,777.95 for such fees and expenses is discussed in Part IV of this opinion. For present purposes we may assume, in considering whether the district court abused its discretion in approving the settlement, that the recovery by Gulf would be subject to a payment by Gulf for such fees and expenses of $625,000, 10 the figure in which Gulf acquiesces. 58 With respect to Gulf's agreement to reimburse the defendants' litigation expenses we see no abuse of discretion by the district court when it declined on that account to disapprove the settlement which it found otherwise beneficial to Gulf. For Gulf would appear to be obligated under its bylaws thus to indemnify those defendants whose good faith in connection with the transactions involving the payment of corporate funds for political purposes had not been disproved. The agreement of Gulf in the settlement to do what it was already obligated to do regardless of the settlement cannot be considered in determining the extent of the settlement's benefit to it even though it should elect to use funds derived from the settlement to meet its obligations. Moreover, those defendants who were insured under the North River Insurance Company policy relinquished in the settlement their right to claim reimbursement under the policy. This was an additional consideration which in itself supported Gulf's agreement to assume this obligation. 59 As we have said, the Project urges that the settlement was of no net benefit to Gulf when considered in the light of the agreement to reimburse the defendants' litigation expense and the allowance of the fees and expenses of the plaintiffs' attorneys and accountants. We have shown that the defendants' litigation expenses may not properly be considered in this connection. It remains to consider whether the settlement was of net benefit to Gulf when considered in the light of its agreement not to oppose its payment of plaintiffs' counsel fees and expenses up to $625,000. 60 The district court found as a fact that the fund to be derived by Gulf from the settlement was made up of the following: 61 (a) The rescission of certain stock option rights held by three of the defendants representing a total of 143,750 shares of Gulf stock, which rights were valued by Bernd Bildstein, a certified public accountant, at $857,726.61. 62 (b) The denial of incentive compensation awards in the aggregate amount of $370,000 held by four of the defendants, which might have been paid under Gulf's Incentive Compensation Plan for 1975. 63 (c) The denial to two of the defendants of a total of $250,000 worth of shares of Gulf stock previously awarded to them under the Incentive Compensation Plan. 64 (d) The denial to certain nondefendant Gulf employees, with their consent, of benefits aggregating $23,882.28 due and payable to them under the Incentive Compensation Plan. 65 (e) The withholding by Gulf from a former employee not a defendant of future annual payments of $3,918.20 each due him for the remainder of his life under an existing agreement. 66 (f) The refund to Gulf of certain illegal or unauthorized contributions from Gulf funds in the amount of $57,261.55. 67 (g) The receipt from North River Insurance Company of the sum of $2,000,000. 68 On the basis of these findings, the district court concluded that the settlement fund was quantifiable and was in excess of $3,500,000, pointing out that this figure resulted from the simple arithmetical exercise of adding up the individual items which we have detailed. Deducting from this sum the amount of $625,000 which Gulf agreed not to oppose for plaintiffs' counsel fees and expenses would leave a net pecuniary benefit to Gulf in excess of $2,875,000, an amount quite adequate, as we shall see, to justify an award of reasonable counsel fees. 69 We turn then to consider the district court's determination that the settlement conferred a pecuniary benefit in excess of $3,500,000 upon Gulf. In passing, we note that the district court determined that substantial nonmonetary benefits accrued to the corporation under the settlement in the form of provisions in the agreement for the establishment of internal corporate reforms designed to prevent the making of unlawful political contributions and to insure that contributions by Gulf to support the propaganda efforts in the United States of foreign political interests are approved by the Gulf board of directors and disclosed to Gulf's shareholders. 70 It is argued that the district court erred in assigning a value in excess of $3,500,000 to the monetary benefit obtained for Gulf under the settlement and in finding that the nonmonetary benefits to Gulf were substantial. It is contended that the court erred in valuing the defendants' releases of their claims against Gulf resulting from the cancellation of bonuses and stock option rights at the face value of the rights released. It is argued that no evidence was offered in the district court to show to what extent, if any, the shareholders' derivative suit influenced the board of directors of Gulf when on July 13, 1976, the board cancelled the bonuses and stock options in question. Further, it is argued that there was no evidence offered to indicate that the individual defendants affected by the board's action would have pursued their claims against the corporation or would have been successful if they had chosen to do so. 71 We think the district court was justified in evaluating the defendants' releases of their claims against Gulf at the face value of the cancelled rights giving rise to the claims. Entirely aside from the question of whether or not the board's action on July 13, 1976, was influenced by the pendency of the shareholders' derivative suit and the settlement negotiations, then in progress, the resulting claims against Gulf constituted valuable rights. Their release may well have represented a monetary benefit to Gulf greater than their face value in view of the costs of litigation and other considerations. The failure of the defendants to prosecute the claims up to the time of the settlement is not a significant factor in determining their value as long as the claims remained viable. The district court's acceptance of the face value of the claims as the value to Gulf of the releases was, therefore, not erroneous. 72 It is also contended that the district court erred in not reducing the amount of the monetary benefit to Gulf resulting from the settlement by the cost to Gulf of the McCloy Report and by Gulf's obligation to pay its own attorneys approximately $255,000, the cost of their services in connection with the present suit and the defendants' attorneys' fees amounting to approximately $1,500,000. 73 The argument that the $3,000,000 which it cost Gulf to produce the McCloy Report should offset the amount of the settlement fund benefiting Gulf is without merit. Gulf's commitment to undertake the report was made before the derivative actions consolidated in the suit before us were filed and its obligations to finance the report exists independently of the present suit. The plaintiffs' use of the report to aid them in bringing about the settlement of the derivative action does not change that result. This item of expense to Gulf, therefore, cannot offset the figure arrived at by the district court as constituting the monetary benefit to Gulf under the settlement. 74 The argument that the net benefit to Gulf under the settlement terms should be determined in the light of the aggregate of the attorneys' fees resulting from the litigation and payable by Gulf is also without merit. Gulf is obligated to compensate its own attorneys for their services regardless of the outcome of the shareholders' derivative suit or the existence of a settlement fund. This separate obligation of Gulf should, therefore, have no effect on the amount of the fund constituting a benefit to Gulf for purposes of the plaintiffs' entitlement to attorneys' fees. We have already pointed out that Gulf's existing obligation to indemnify the defendants for their counsel fees and other litigation expenses resulting from the present suit and the matters involved in it cannot be considered in determining the net benefit to be derived by Gulf from the settlement. 75 The district court, therefore, was justified in not reducing the size of the monetary benefit derived by Gulf from the settlement by the cost of the McCloy Report, its independent obligation to compensate its own attorneys or its obligation under the settlement to reimburse the defendants for their attorneys' fees. The findings of fact of the district court in this regard have adequate support in the record. We conclude that the court did not err in determining that the monetary benefit to Gulf was in excess of $3,500,000. 76 Turning to the district court's determination that the settlement was fair and reasonable, we bear in mind that the scope of our review is very limited. For the district court has wide discretion in making that decision, Bryan v. Pittsburgh Plate Glass Co., 494 F.2d 799, 801 (3d Cir.), cert. denied, 419 U.S. 900, 95 S.Ct. 184, 42 L.Ed.2d 146 (1974), as long as the court takes into account all of the relevant factors. See Girsh v. Jepson,521 F.2d 153, 156-157 (3d Cir. 1975). While in Girsh v. Jepson we discussed the necessity of considering such factors in determining the fairness of the settlement of a class action in order to protect the rights of absent members of the class of plaintiffs, it is clear that the same factors are relevant in a shareholders' derivative suit. It is true, of course, that the interests of the class of shareholders in such a suit are indirect, rather than direct, and are subject to the vicissitudes of the corporate business. But their interests must nonetheless be considered with those of the corporation itself and the standards annunciated in Girsh v. Jepson for class suit settlements have accordingly been applied, although perhaps with somewhat less rigor, in the settlement of shareholders' derivative suits. See In re Pittsburgh L.E.R. Co., Etc., 543 F.2d 1058, 1070 (3d Cir. 1976). Indeed Girsh v. Jepson itself involved both class and derivative claims. See also Greenspun v. Bogan, 492 F.2d 375, 378 (1st Cir. 1974); Norman v. McKee, 431 F.2d 769, 774 (9th Cir. 1970), cert. denied, 401 U.S. 912, 91 S.Ct. 880, 27 L.Ed.2d 811 (1971). 77 The principal factor to be considered in determining the fairness of a settlement concluding a shareholders' derivative action is the extent of the benefit to be derived from the proposed settlement by the corporation, the real party in interest. In re Pittsburgh & L.E.R. Co., Etc., 543 F.2d 1058, 1068 (3d Cir. 1976). The adequacy of the recovery provided the corporation by the settlement must be considered in the light of the best possible recovery, of the risks of establishing liability and proving damages in the event the case is not settled, and of the cost of prolonging the litigation. See Girsh v. Jepson, 521 F.2d 153, 156-157 (3d Cir. 1975). 78 Given the amount of unlawfully disbursed corporate funds alleged to total $18,800,000 and taking into consideration the risks of establishing liability and damages, set forth at length in the district court's findings of fact and conclusions of law, we cannot say that it was an abuse of the district court's discretion to conclude that $3,500,000 represented a fair and reasonable settlement amount even without taking into consideration the additional nonmonetary benefits to Gulf referred to but not valued by the district court. The value of the Project's claim for damages for fraud, asserted by the Project to be $150,000 to $160,000, excluding punitive damages, which may have to be given up by Gulf under the release provisions of the settlement, clearly is not so great as materially to affect the fairness determination. Likewise the payment of up to $625,000 in plaintiffs' counsel fees and expenses which was contemplated by the settlement was, as we have seen, not sufficient to deprive Gulf of a net benefit from the settlement. For this payment would still leave a net pecuniary benefit to Gulf from the settlement of upwards of $2,875,000 without regard to the nonmonetary benefits which it also received. This figure, which is approximately 15% of the maximum amount of unlawfully disbursed corporate funds alleged to be involved in the suit, can hardly be said to provide a grossly inadequate benefit to Gulf in view of the uncertainties of this litigation. See City of Detroit v. Grinnell Corp., 495 F.2d 448, 455 (2d Cir. 1974). Certainly it disproves the contention that no net benefit will be derived by Gulf from the settlement. 79 One of the factors to be considered in determining the fairness of a settlement disposing of a class action is the reaction of the members of the class. See Girsh v. Jepson, 521 F.2d 153, 156-157 (3d Cir. 1975). As we have seen, the Girsh criteria apply also to the approval of the settlement of a shareholders' derivative suit. Here the overwhelming majority of Gulf shareholders have not objected to the settlement and Gulf, for the benefit of which the suit was filed, has agreed to its terms. 80 Bearing in mind all of the factors the $2,000,000 contribution to Gulf by its insurer under a directors' and officers' liability insurance policy in exchange for its release from further liability under the policy, 11 the agreements of the individual defendants to give up their claims against Gulf for compensation and stock option rights valued by the district court at approximately $1,500,000, the additional cost of protracted litigation, the risk of successful prosecution of the claims given up, the fact that so very few shareholders objected to the settlement, the corporation's approval of the settlement, and the fact that the settlement provides a substantial net benefit to Gulf after payment of plaintiffs' counsel fees and expenses we cannot say that the district court abused its discretion in approving the settlement as a fair compromise and settlement of the action before it. 81 Since the pecuniary benefits to Gulf under the settlement are adequate to support this conclusion, we need not consider the question of whether the district court erred in categorizing the nonmonetary benefits obtained for the corporation under the settlement as substantial. 82 The Project's assertion that the district court failed to make an independent evaluation of the fairness of the settlement terms is not substantiated by the record. The district court stated at the commencement of the settlement hearing that it had preliminarily approved the proposed settlement. However, there is no indication in the record that the court's preliminary or tentative approval prevented its fair and full consideration of the objections to the settlement presented at the hearing. The Project does not contend that it was denied a full opportunity to present its case. It does assert, however, that the district court adopted and filed on November 19, 1976, as its findings of fact and conclusions of law, findings and conclusions prepared by counsel for the parties to the action and that this practice was disapproved by this court in Roberts v. Ross, 344 F.2d 747 (3d Cir. 1965). 83 In Roberts v. Ross we strongly disapproved the practice of a trial judge announcing his decision and thereafter requesting the prevailing party to prepare findings of fact and conclusions of law to be signed by the judge in support of his previously announced decision. Our views in this regard are in accord with those of many other courts, including the Supreme Court, see United States v. El Paso Natural Gas Co., 376 U.S. 651, 656-657, 84 S.Ct. 1044, 12 L.Ed.2d 12 (1964), and we adhere to them. But that is not this case. Here the district court prior to the hearing directed all the parties, including the objecting shareholders, to present it with proposed findings of fact and conclusions of law and both the Project and the parties to the action did so before the court announced its decision. Thus, the district court had the proposed findings and conclusions of both the parties and the Project before it during the hearing on the approval of the settlement and it obviously considered them in reaching its final decision, adopting those presented by the parties as findings and conclusions which represented its considered views. This is a practice of which we do not disapprove although the adoption of a party's proposed findings and conclusions by the court without change may cause us to examine them more narrowly, as we have done in this case. Roberts v. Ross, 344 F.2d 747, 752 (3d Cir. 1965). We find no error in this regard. 84 We are satisfied that the district court exercised its independent judgment in determining that the settlement was fair and beneficial to Gulf, that the determination did not involve an abuse of the discretion vested in the district court in this regard, and that the order of November 18, 1976, approving the settlement should, therefore, be affirmed. 85