Opinion ID: 577164
Heading Depth: 5
Heading Rank: 2

Heading: Adequacy of Chemical Bank's Representation

Text: 80 The Heerey Group contends that in adopting a strategy of recovery that sought maximum settlements or judgments, Chemical Bank sacrificed the interests of late-purchasing Bondholders in favor of those Bondholders who were also MDL 551 Class Members. Thus, the Heerey Group argues its members cannot be bound by the anti-suit injunctions even if they were represented by and privies with the Bank in MDL 551. We review the district court's factual determination that Chemical Bank adequately represented the interests of all Bondholders under the clearly erroneous standard. Fed.R.Civ.P. 52(a); Kruso v. International Tel. and Tel. Corp., 872 F.2d 1416, 1421 (9th Cir.1989), cert. denied, --- U.S. ----, 110 S.Ct. 3217, 110 L.Ed.2d 664 (1990). 81 A trustee will not be disabled from binding the trust beneficiaries to a judgment unless there is fraud or collusion between the representative and the adverse party. Kerrison, 93 U.S. at 160; Truckee-Carson Irrigation Dist., 649 F.2d at 1304 n. 13. More specifically, the Restatement provides in relevant part that: 82 (1) A person is not bound by a judgment for or against a party who purports to represent him if: 83 .... 84 (d) With respect to the representative of a class, there was such a substantial divergence of interest between him and the members of the class, or a group within the class, that he could not fairly represent them with respect to the matters as to which the judgment is subsequently invoked; or 85 (e) The representative failed to prosecute or defend the action with due diligence and reasonable prudence, and the opposing party was on notice of facts making that failure apparent. 86 .... 87 Restatement (Second) of Judgments § 42 (1982). 88 Relying on section 42(1)(d), the Heerey Group contends that from the outset of MDL 551, there was a sharp divergence of interests between those Bondholders who were also MDL 551 Class Members and those Bondholders who purchased their bonds outside the class boundary date. Bondholders who were MDL 551 Class Members sought maximum settlements or judgments and were not concerned with theories of recovery or the allocation of the proceeds between the class and the Bond Fund because as members of both groups, they would be entitled to recover and possibly would be able to double dip from any settlement or judgment. Late-purchasing Bondholders, on the other hand, were not members of both groups and thus were critically concerned with theories of recovery and the allocation of the proceeds between the class and the Bond Fund. The Heerey Group charges that Chemical Bank adopted the strategy of attempting to secure the maximum settlements possible, thereby sacrificing the interests of its members in favor of those Bondholders who were also MDL 551 Class Members. In so doing, the Heerey Group contends Chemical Bank violated its fiduciary duty to further the interests of each Bondholder. 89 We find no merit in this contention. The Heerey Group's argument that Chemical Bank sacrificed the interests of its members in favor of MDL 551 Class Members simply finds no support in the record. Chemical Bank advanced before the district court the theory of recovery most critical to the interests of the Heerey Group; namely, that as late-purchasing Bondholders they received an automatic assignment of the fraud and tort claims held by their predecessors. The theory was opposed by the MDL 551 Class Members, who maintained that the original bond purchasers retained these fraud and tort claims. On December 22, 1987, the district court agreed with the MDL 551 Class Members and dismissed all federal and state claims Bondholders based solely on the theory of automatic assignment. A motion for reconsideration was filed by the law firm of Patterson, Belknap, Webb & Tyler, who had been retained as special counsel by Chemical Bank for the express purpose of protecting the interests of late-purchasing Bondholders. 10 The district court refused to reconsider its ruling. We find that Chemical Bank's actions in advancing this critical theory before the district court, a theory contrary to the interests of and opposed by the MDL 551 Class Members, demonstrate the fairness of Chemical Bank's representation of the Heerey Group. Although it was not successful in prosecuting this theory, the district court specifically noted in considering the question of the adequacy of Chemical Bank's representation that [t]he record shows, and the Court readily acknowledges, that Chemical Bank vigorously opposed that result, both before and after it was reached. In re Washington Public Power, 720 F.Supp. at 1421. We find nothing in the record that would call into question this finding. We therefore conclude that the record does not support the Heerey Group's contention that Chemical Bank sacrificed its members' interests in favor of those Bondholders who were also MDL 551 Class Members. 90 Finally, with respect to section 42(1)(e) of the Restatement, the Heerey Group raises several issues which it claims demonstrate Chemical Bank's failure to defend the action with due diligence and reasonable prudence. We find none of these issues compelling, especially in light of the adequacy of the allocation of settlement to the members of the Heerey Group. See In re Corrugated Container Antitrust Litig., 659 F.2d 1337, 1340 (5th Cir.1981) ([T]he proof of adequate representation is in the adequacy of the settlements.). Here, the district court had dismissed all claims based on the theory that late-purchasing Bondholders received an automatic assignment of the fraud and tort claims. In addition, the district court had dismissed all contract and securities-based claims that WPPSS was the alter ego of its members, and therefore that the Participants were liable for the obligations of WPPSS. As the district court noted, [t]he effect of these decisions was to eliminate significant bases for the claims of Bondholders who purchased bonds after June 15, 1983. In re Washington Public Power, 720 F.Supp. at 1421. Nonetheless, the late-purchasing Bondholders received an allocation of $93.5 million from the Bond Fund plus an additional $47 million in repayment of expenses advanced from the Bond Fund. In light of these favorable settlements, and in the absence of any compelling evidence to the contrary, we hold that the Heerey Group has not made a showing that Chemical Bank failed to act with due diligence and reasonable prudence in representing the interests of the Bondholders. 91