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

Heading: collusion.

Text: 94 A district court must reject a settlement agreement no matter how acceptable it may otherwise be, if it is not free from collusion or fraud. Saltzman v. Technicolor, Inc., 51 F.R.D. 178, 186 (S.D.N.Y.1970); Haudek, 23 Sw.L.J. at 772. As noted above, the district court here found, in effect, that the settlement was free from collusion between the parties. 95 Maldonado's main contention respecting collusion is that, as stated in the objection he filed below, the proposed settlement is a fraudulent means by which defendants are attempting to obtain a 'blanket release' from all claims asserted in stockholders' derivative actions brought on behalf of Zapata against directors and former directors for no consideration. 38 96 Maldonado's concern is, as it has consistently been, that the settlement might possibly bar those portions of his own derivative actions which are based on the circumstances surrounding the 1974 modifications to the stock option plan. As above-noted, plaintiffs' second amended complaint plainly charges in its Background Facts section that the July 1974 changes in the stock option plan and the interest-free loans then extended, as well as the additional amounts loaned without interest in 1975 to cover the optionees' tax liability from exercise of the options, were detrimental to Zapata and a wasting of its assets, and that the 1977 and 1978 proxy statements failed to disclose the illegal loans and the reasons for the July 1974 stock option amendments. The Background Facts allegations were all incorporated by reference in each of the specific causes of action asserted, including the first, regarding section 14(a) violations in the 1977 and 1978 proxy statements, the second, regarding loans in violation of article 2.02 A(6), Tex.Bus.Corp. Act, and the fifth, regarding failure to superintend, exercise independent judgment, and employ adequate controls. However, before the initiation of settlement negotiations, plaintiffs, in a brief filed in August 1979 in opposition to a motion to dismiss, took the position that the Texas four year statute of limitations applied to the loan transactions, and inferentially admitted that it barred their suit as to the 1974 loans and option amendments. 39 We believe that those matters were indeed barred by limitations, a conclusion which Maldonado does not dispute. Moreover, as we have indicated, recovery on the stock option acceleration (and the loans, apart from article 2.02 A(6)), was problematical, even apart from limitations considerations, in light of the determination by Judge Weinfeld and the Second Circuit that this was accomplished by the valid action of fully informed, disinterested directors. And, as noted hereafter, the probabilities additionally strongly favored the 1975 loans also being barred by limitations and the inapplicability of article 2.02 A(6). Further, the Investigation Committee had recommended dismissal of the action as in the best interest of Zapata, a recommendation determined in the New York action to have been made independently, in good faith, and upon proper investigation. Under these circumstances, plaintiffs and Zapata were not obliged to further litigate these claims when, had they done so, it was virtually inevitable that no recovery would have been obtained. 97 Further, what we are dealing with here is not a release but rather a judgment rendered pursuant to a settlement agreement. The settlement agreement calls for a dismissal with prejudice of all claims on behalf of Zapata against the individual defendants asserted or which could have been asserted in this lawsuit. This language calls for a court judgment, and uses language typically employed to describe the res judicata effects of a judgment. See Restatement (Second) of Judgments § 24(1) (1982) 40 ; Nilsen v. City of Moss Point, 701 F.2d 556, 560 (5th Cir.1983); Aerojet-General Corporation v. Askew, 511 F.2d 710, 715 (5th Cir.), appeal dismissed and cert. denied sub nom. Metropolitan Dade County v. Aerojet-General Corp., 423 U.S. 908, 96 S.Ct. 210, 46 L.Ed.2d 137 (1975) (... all claims and defenses that were actually raised or could have been raised). See also Maldonado v. Flynn, supra, 417 A.2d 378. The judgment called for by the settlement agreement--and it would appear that any preclusion must rest on the judgment, not the agreement per se --decrees that [t]his action is dismissed with prejudice as to all defendants. This, again, is the customary formulation. Even if a judgment of dismissal is expressly based on limitations, this does not necessarily mean it is not on the merits or that it lacks the normal full preclusive effect. Nilsen, 701 F.2d at 562-63. We do not find any improper broadening of the settlement or judgment. 41 98 Moreover, even broad releases, though not to be encouraged, do not necessarily render settlements of derivative actions improper. It is not uncommon for general releases to be granted in settlements of derivative suits. Ruskay v. Waddell, 552 F.2d 392, 394-95 n. 4 (2d Cir.), cert. denied, 434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977). See also In re Corrugated Container Antitrust Litigation, 643 F.2d 195, 221 (5th Cir.1981), cert. denied, 456 U.S. 998, 102 S.Ct. 2283, 2308, 73 L.Ed.2d 1294 (1982) (a court may release not only those claims alleged in the complaint and before the court, but also claims which 'could have been alleged by reason of or in connection with any matter or fact set forth or referred to in' the complaint). 99 We therefore hold that the asserted breadth of the settlement agreement and judgment thereon does not, of itself, establish that the settlement was collusive or fraudulent. 100