Opinion ID: 423534
Heading Depth: 3
Heading Rank: 2

Heading: The Range of Possible Recovery.

Text: 108 In In re Corrugated Container Antitrust Litigation, supra, a class action antitrust damage suit, this Court held that, before exercising its discretion in passing on the fairness, reasonableness, and adequacy of a settlement agreement, the district court must first establish the range of possible damages that could be recovered at trial, and, then, by evaluating the likelihood of prevailing at trial and other relevant factors, determine whether the settlement is pegged at a point in the range that is fair to the plaintiff settlors. 643 F.2d at 213. See also In re Corrugated Container Antitrust Litigation, 659 F.2d 1322, 1327 (5th Cir.1981), cert. denied, 456 U.S. 998, 102 S.Ct. 2283, 73 L.Ed.2d 1294 (1982). Relying on the Corrugated Container cases, Maldonado argues that the district court erred in failing to conduct an analysis of the claims asserted in the Texas action so as to arrive at estimates of the range of possible recovery that plaintiffs would realize if they prevailed at trial on each claim. 109 The proponents of the settlement agreement herein provided the district court with their arguments and positions respecting the merits of the claims being asserted and compromised, the risks of litigation, and the benefits of the compromise. They did not, however, provide the court with an express estimate of the range of possible monetary recovery should plaintiffs prevail at trial. Nor did the court insist on being provided with such an estimate or expressly make such an estimate itself. Yet, it is apparent from the court's Memorandum and Order approving the settlement agreement, that it accepted the proponents' contentions that there were serious legal and factual obstacles to recovery on each cause of action, and that this being the case, the probable recovery did not outweigh the costs, both legal and otherwise, that would be incurred by Zapata, should the action be prosecuted to a successful conclusion. 110 Although our Corrugated Container decisions plainly establish that a proper evaluation of a proposed settlement agreement should include an estimate of the range of possible monetary recovery on the claims being compromised, we hold that the district court's failure to expressly make such an estimate here, though perhaps erroneous, under the circumstances does not require reversal, especially in view of the relevant factors favoring approval of the settlement and since the analysis actually conducted by the court was sufficient, in the context of this case, to allow it to discharge its function of passing on the fairness of the settlement. See Desimone v. Industrial Bio-Test Laboratories, Inc., 83 F.R.D. 615, 619, 620 (S.D.N.Y.1979); Weiss v. Drew National Corp., 465 F.Supp. 548, 551 (S.D.N.Y.1979). Moreover, in his challenges to the settlement below, Maldonado did not assert that it was inconsistent with some likely range of recovery espoused by him. 111 We also observe in respect to this matter that a derivative suit of the type before us presents certain considerations not involved as significantly in a class action suit for money damages such as Corrugated Container. We have previously adverted to one such differentiating factor (see note 42, supra ). Further, and perhaps of more significance, where, as here, the derivative suit is largely an attack on past corporate management practices, as well as on some present officers and directors, the dollar amount of a possible judgment, which is essentially the sole goal in the class action damage suit, is not the sole, and may well not be the most important, matter to be considered, for the effects of the suit on the functioning of the corporation may have a substantially greater economic impact on it, both long- and short-term, than the dollar amount of any likely judgment in its favor in the particular action. While this is certainly not invariably the case, we believe Judge Black concluded that it was in this instance (as in substance did the Investigation Committee and the plaintiffs), and that such a conclusion was not an abuse of his discretion under these circumstances. The evaluation of such an economic impact is necessarily judgmental and imprecise and normally does not lend itself to meaningful quantification. 43 112
113 Respecting plaintiffs' cause of action under section 14(a) of the Exchange Act, relating to misleading omissions in the 1977 and 1978 proxies for election of directors, their complaint sought injunctive relief only, 44 thus, no estimate of the range of possible recovery in regard thereto was even required since no damages for its violation were sought. The district court noted that Zapata had disclosed the substance of the allegations pertaining to the alleged section 14(a) violation, namely, the complaints respecting the conduct of Flynn, in its February 1981 proxy statement. Moreover, by the time of the settlement, Flynn had long been removed from the management of Zapata. According to the plaintiffs, the problem that this cause of action sought to correct therefore no longer existed. 45 114
115 As to the causes of action asserted under sections 13(a) and 13(b) of the Exchange Act, plaintiffs' complaint again sought only to enjoin defendants from violating their provisions. No damages were sought, and an analysis of the range of possible recovery therefore was not required. The district court stated that it was unknown whether private litigants had standing to seek injunctive relief under either section. See Abbey v. Control Data Corp., 603 F.2d 724, 730-31 (8th Cir.1979) cert. denied, 444 U.S. 1017, 100 S.Ct. 670, 62 L.Ed.2d 647 (1980) (section 13(a)). See also Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979) (no implied cause of action for violations of reporting requirements of section 17(a)). With regard to section 13(b), in Hall's affidavit, and at the settlement hearing, plaintiffs conceded that they had found no evidence that Zapata had made any illegal foreign payments, and that given the substantive corrective accounting and control procedures and practices that had been instituted after the commencement of their lawsuit, further violations were unlikely, thus rendering moot their request for injunctive relief. Respecting section 13(a), which concerned a failure to make a disclosure on Zapata's 1978 form 10-k, filed with the SEC, in connection with Zapata's impending purchase of a substantial block of its own stock from the Crane Company, plaintiffs conceded that this had also been subsequently disclosed. 46 116
117 Concerning the alleged violation of article 2.02 A(6) of the Texas Business Corporation Act, which concerns the interest-free loans made to Zapata senior officers in connection with their 1974 exercise of the options and resultant taxes, 47 the district court stated that it was unclear whether Texas law, which did not authorize such loans to a domestic corporation's officers and directors, or Delaware law, section 143 of the Delaware Corporation Law, 48 which permitted such loans, applied to a Delaware corporation with its headquarters in Texas. Although neither the parties nor the district court made an express estimate of the range of possible recovery in connection with this cause of action, we feel that the court's failure to do so was harmless, in view of the strength of defendants' arguments that no recovery was available respecting the loans. See Corrugated Container, 659 F.2d at 1325. 118 As previously mentioned, the July 1974 loans were all repaid in March 1975, and in any event it is clear that recovery in respect to them was barred by limitations. Of the sums loaned in 1975, about seventy percent had been repaid prior to the settlement. 49 We believe the probabilities likewise most strongly favored any recovery in respect to these transactions also being barred by limitations. 50 119 Additionally, it would seem highly likely that in this action, which concerns the strictly internal affairs of a Delaware corporation, section 143 of the Delaware Corporation Law which authorizes such loans (see note 48, supra), rather than article 2.02 A(6) of the Texas Business Corporation Act (see note 47, supra) which is a limitation on powers granted Texas corporations, would be applicable. In this connection, it is important to note that article 2.02 A(6) has been authoritatively construed not to render loans by a Texas corporation to its officers or directors either illegal or against public policy, and not to constitute a positive prohibition of such loans but, rather, merely a limitation on a specific power granted. Whitten v. Republic National Bank of Dallas, 397 S.W.2d 415, 418 (Tex.1966). While Zapata was headquartered in Houston, Texas, it was certainly not a de facto or local Texas corporation; it was a sprawling giant with extensive operations, facilities, and properties in numerous states as well as diverse overseas locations, whose stock was traded on the New York stock exchange. De facto it was plainly a national, or international, not simply a Texas, entity. Under these circumstances we believe it most unlikely that Zapata's loans to its directors and officers, despite having been made in Texas, would be held to be intrastate in Texas under articles 8.01 or 8.02(A), Tex.Bus.Corp. Act, 51 so as to be governed by article 2.02 A(6), rather than Delaware law, at least for purposes other than defining the rights of third parties. While there seem to be no Texas decisions directly in point, general expressions in Texas opinions have long given recognition to the primacy of the state of incorporation respecting internal corporate affairs. 52 Under these circumstances, a federal court in Texas would assume that Texas courts would follow the general rule. Glazer v. Glazer, 374 F.2d 390, 407 (5th Cir.), cert. denied, 389 U.S. 831, 88 S.Ct. 100, 19 L.Ed.2d 90 (1967). As reflected in Restatement (Second) of Conflict of Laws § 302, this recognizes the undesirable lack of uniformity, frustration of expectations, and impracticality in having matters which involve a corporation's organic structure or internal administration, governed by different laws, id. comment e, and that as to such matters the local law of the state of incorporation should be applied except in the extremely rare situation where a contrary result is required by the overriding interest of another state in having its rule applied. Id. comment g. See Glazer v. Glazer, supra; National Lock Co. v. Hogland, 101 F.2d 576, 587 (7th Cir.1938). 53 120
121 Finally, with regard to plaintiffs' cause of action based on the defendants' alleged breach of fiduciary duties to Zapata, the district court noted plaintiffs' contentions that after a lengthy and thorough investigation, there was no concrete evidence that any of the directors were aware of Flynn's alleged wrongful and improper actions, 54 and that, in view of the strength of the Delaware business judgment rule, recovery from them in connection with their decisions respecting Flynn's compensation and the 1974 amendments to the stock option plan was highly questionable. 55 As to Flynn, the settlement between him and Zapata respecting his employment contract took into consideration many of the questionable items on past expense accounts and use of the Corporation's assets. 56 122 Given the clear, acknowledged weaknesses, and in some respects, lack of evidentiary and legal support, on which to base a recovery by the Corporation on this cause of action, 57 the failure of the district court to arrive at an estimate of the range of possible recovery was harmless, especially in light of the difficulty in relating Flynn's misconduct to any injury suffered by Zapata, and in placing a damage figure on any such injury. See Weiss, 465 F.Supp. at 551; Desimone, 83 F.R.D. at 620. 123
124 As to the benefits of the settlement, the district court noted that continuation of the action would result in additional fees and costs to Zapata, and that the benefits facilitated by its commencement and maintenance would not be further enhanced by its continued prosecution. The court noted that the parties' conclusion that any possible benefit to Zapata from pursuing the causes of action would be more than offset by the additional cost of litigation was based on an intelligent and prudent evaluation of their case. 125
126 In view of the above, we feel that the analysis conducted by the district court was sufficient under all the circumstances, especially in view of the fact that the assertions made regarding the difficulties as to maintenance of the plaintiffs' lawsuit were largely uncontradicted, and in the absence of any evidence or argument offered by Maldonado on which a more detailed analysis or estimate of the range of possible recovery could be made. 58 127