Opinion ID: 774669
Heading Depth: 2
Heading Rank: 2

Heading: Trustees' Suit for Fraudulent Transfer or Unlawful Dividend

Text: 7 Plaintiff Jeffrey A. Weinman (Trustee) filed the present suit in 1994, in his capacity as Trustee for the unsecured creditors' Trust, seeking to recover the value of the ShowBiz shares for Integra's estate in bankruptcy. The defendants were all beneficial recipients of ShowBiz shares following the 1988 spinoff. The Trustee asserted a variety of claims, alleging that the spinoff constituted a fraudulent transfer pursuant to the Texas Fraudulent Transfer Act, Texas Bus. & Com. Code Ann. 24.001-.012, and in addition sought relief pursuant to several provisions of the United States Bankruptcy Code, 11 U.S.C. 105, 544, 550, 1123, and 1145. The Trustee attempted service of the complaint on more than 800 known defendants by first-class mail, and he then filed a motion to have the action certified as a defendant class action. After conducting a hearing to consider objections from putative class members, the bankruptcy court certified a defendant class of ShowBiz stock recipients under Rule 23(b)(1). 8 In addition, the bankruptcy court designated seven representative defendants. These representatives consisted of Fidelity, three other institutional investors, two individual investors, and the Unofficial Protective Committee of ShowBiz Stockholders (Unofficial Committee), 4 which is made up of clients represented by attorney I. Walton Bader (Bader). The Unofficial Committee appears in the caption in appeals numbered 99-1344, 99-1416, 99-1468, and 99-1546. 5 Although not listed elsewhere in the record, Bader alleges that the Appellants in case number 99-1344 are members of the committee. The same individuals appear in case number 99-1416. 9 The bankruptcy court then ordered the class representatives to meet, discuss the appointment of class counsel, and report their selection back to the court. Further, the court designated procedures for notifying defendants of the action, and approved a form of notice which was mailed in June 1995. 10 The class representatives were unable to agree on who should serve as class counsel. Fidelity was the largest recipient of ShowBiz shares in the spinoff, receiving 377,520 shares of ShowBiz stock, or approximately ten percent of the total. Fidelity had initially requested to be excluded from serving as a representative party out of concern that its duties to shareholders might conflict with its responsibilities to the class members. In addition, Fidelity informed the court that its exposure differed significantly from that of many of the other class members, both because of the large number of shares it received and because it sold its ShowBiz stock at the relatively high average price of $37.65 per share. Nevertheless, the three remaining institutional investors ultimately nominated Fidelity to act as the sole class representative to appear on behalf of the class. 6 Although Fidelity had opposed designation of the class, it told the court it would vigorously protect its own interests, and that by doing so it believed it would protect interests it had in common with other class members. However, Fidelity disclaimed any acceptance of fiduciary duties to the members of the class. 11 The Unofficial Committee proposed that a committee of attorneys representing different groups of defendants appear on behalf of the class. Fidelity objected to this arrangement, arguing it would be impossible for it to work effectively with Bader and submitting seven reported cases detailing what it believed to be questionable or unethical conduct by Bader. Fidelity stated that it had no objections to sharing defense time so that Bader could appear before the court on behalf of the Unofficial Committee, however. 12 Ultimately, the bankruptcy court rejected the proposal for a committee of class counsel. Bader then petitioned the court for the Unofficial Committee members to be relieved from their status as representative defendants and to proceed exclusively and independently under Bader's representation, and the court rejected this request as well. The court also denied Bader leave to file an interlocutory appeal of his request to proceed independently from the class. 7 Following Fidelity's designation as lead counsel, the district court withdrew the suit from the bankruptcy court. The case was nevertheless remanded to the bankruptcy court for pretrial matters. 13 Fidelity began its defense of the class by filing a preliminary dispositive motion raising the statute of limitations and other threshold defenses. See In re Integra, 198 B.R. at 353. The bankruptcy court denied the motion as well as a subsequent motion for leave to appeal. See id. at 365. Fidelity then entered into settlement negotiations. The parties eventually submitted a proposed settlement to the court that would have held each class member liable for the lesser of either: (1) $7.00 per share; or (2) the amount the class member received when and if they sold the stock. The proposed settlement also established procedures for class members to raise a limited number of individual defenses and to litigate issues which were not common to class members. 14 The district court approved a form notifying class members of the settlement's provisions and instructing them how to file objections. The vast majority of defendants filed no objections. Many of those that did were concerned by the absence of a right to opt out of the settlement. After additional negotiation with Fidelity, the Trustee consented to modify the agreement to provide for such rights. The district court did not order that class members be notified of this new provision prior to approving the settlement, however. 15 The district court conducted a fairness hearing pursuant to Fed. R. Civ. P. 23(e) in March 1998, and Bader appeared on behalf of his clients and objected that the settlement was excessive and unfair. The remaining Appellants in this case apparently did not appear to object to the settlement or otherwise seek to intervene in the action to protect their rights. Despite Bader's objections, the district court approved the settlement agreement, and entered individual judgments against those class members who neither opted out of the settlement nor raised individual defenses. The district court also entered a minute order stating that Fidelity could take immediate possession of any settlement funds paid by settling defendants. 8