Court Opinion

ID: 2964411
Source: CourtListenerOpinion
Date Created: 2015-09-21 21:25:14.241228+00
Date Added: 2024-06-11T11:42:55.383218
License: Public Domain

USCA1 Opinion

	

          D    e    c    e    m    b    e    r 2    4    , 1    9    9    6
                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT

                                 ____________________

          No. 96-1357

              CITY PARTNERSHIP COMPANY, A NEW YORK GENERAL PARTNERSHIP,
                          ON BEHALF OF ITSELF AND ALL OTHERS
                          SIMILARLY SITUATED, ETC., ET AL.,

                                Plaintiffs, Appellees,

                                          v.

                      ATLANTIC ACQUISITION LIMITED PARTNERSHIP,
                  A MASSACHUSETTS LIMITED PARTNERSHIP, ETC., ET AL.,

                                Defendants, Appellees,

                                 ____________________

                  THOMAS P. GORMAN, JOHN CARLSON, ANDREW N. BECKER,
                BARRONIAN-IRA ROLLOVER, RICHARD AND EMILY BARRONIAN, 
              HAROLD E. AND WANJA M. BIRKEY, MARVIN W. AND CHARLOTTE L.
          GREENUP, ESTATE  OF ROBERT  AND DOLORAS HANSON,  JOHNNY'S SEAFOOD
          COMPANY, PROFIT SHARING TRUST, GRAY LUMBER COMPANY PROFIT SHARING
          TRUST, BARBARA ENGLE, JAMES P. DUFFY, H.C. HARNED, RICHARD HODSON
                                  AND MARCELLA LEVY.

                               Intervenors, Appellants.
                                 ____________________

               The published opinion of  this Court issued on November  26,
          1996, is amended as follows:

               Page 3, last line:  delete the underscore at "inter alia."

               Page 7, second  full paragraph, line 1:  Delete "Atlantic's"
          and insert "Intervenors'" in its place.

                            UNITED STATES COURT OF APPEALS
                                FOR THE FIRST CIRCUIT
                                 ____________________

        No. 96-1357

              CITY PARTNERSHIP COMPANY, A NEW YORK GENERAL PARTNERSHIP,
                          ON BEHALF OF ITSELF AND ALL OTHERS
                          SIMILARLY SITUATED, ETC., ET AL.,

                                Plaintiffs, Appellees,

                                          v.

                      ATLANTIC ACQUISITION LIMITED PARTNERSHIP,
                  A MASSACHUSETTS LIMITED PARTNERSHIP, ETC., ET AL.,

                                Defendants, Appellees,

                                 ____________________

                  THOMAS P. GORMAN, JOHN CARLSON, ANDREW N. BECKER,
                 BARRONIAN-IRA ROLLOVER, RICHARD AND EMILY BARRONIAN,
          HAROLD E. AND WANJA M. BIRKEY, MARVIN W. AND CHARLOTTE L. GREENUP,
            ESTATE OF ROBERT AND DOLORAS HANSON, JOHNNY'S SEAFOOD COMPANY
           PROFIT SHARING TRUST, GRAY LUMBER COMPANY PROFIT SHARING TRUST,
             BARBARA ENGLE, JAMES P. DUFFY, H.C. HARNED, RICHARD HODSON,
                                  AND MARCELLA LEVY.

                               Intervenors, Appellants.
                                 ____________________

                     APPEAL FROM THE UNITED STATES DISTRICT COURT

                          FOR THE DISTRICT OF MASSACHUSETTS

                      [Hon. Patti B. Saris, U.S. District Judge]
                                            ___________________

                                 ____________________

                                        Before

                               Torruella, Chief Judge, 
                                          ___________

                     Coffin and Campbell, Senior Circuit Judges.
                                          _____________________

                                 ____________________

            Glen DeValerio, with  whom Harry A. Garfield, II, Kimberly Masters
            ______________             _____________________  ________________
        Gaines, Berman, DeValerio & Pease and Harold B. Obstfeld were on brief
        ______  _________________________     __________________
        for plaintiff, appellees.
            Deborah  L.  Thaxter,  P.C.,  with  whom  Gregory  P.   Deschenes,
            ___________________________               _______________________
        Christopher R. Goddu and Peabody & Brown were on brief for defendants,
        ____________________     _______________
        appellees.
            Robert  W. Powell, with  whom Carl  D. Liggio,  Michael S. Poulos,
            _________________             _______________   _________________
        Robert W. Powell, Dickinson, Wright,  Moon, VanDusen & Freeman, Thomas
        ________________  ____________________________________________  ______
        G.  Shapiro, Edward  F. Haber,  Shapiro, Grace,  Haber &  Urmy, Edward
        ___________  ________________   ______________________________  ______
        Heboton, Lynda J. Grant and Goodkind, Labaton, Rudsoff & Suckarow LLP,
        _______  ______________     _________________________________________
        were on brief for intervenors, appellants.
                                 ____________________

                                  November 26, 1996
                                 ____________________

                      CAMPBELL,  Senior  Circuit   Judge.     Plaintiffs,
                                 _______________________

            Intervenors Thomas  Gorman,  et al.,  ("Intervenors")  appeal

            from the district court's approval of a settlement of a class

            action  against  Atlantic  Acquisition   Limited  Partnership

            ("Atlantic"),  the general  partner  in a  series of  limited

            partnerships.  The Intervenors  allege that the settlement is

            not fair, reasonable or adequate.

                          I.  Procedural and Factual History
                          I.  Procedural and Factual History

                      Atlantic  is  the  general  partner  in  twenty-one

            limited  partnerships,  each  of  which  was  established  to

            purchase and lease capital  equipment such as aircraft, ships

            and  construction machinery.   On  August 18,  1995, Atlantic

            made essentially identical tender offers ("the tender offer")

            to the limited partners in each of the partnerships, offering

            to purchase up  to 45%  of the outstanding  units of  limited

            partnership interest  for a total price  of approximately $22

            million.  The  tender offer was to be  financed by an outside

            lender  with  a loan  secured in  part by  Atlantic's general

            partners'  personal  guarantees and  in  part  by a  security

            interest in all the units tendered.

                      On   September  6,   1995,  City   Partnership  Co.

            ("City"),  a limited  partner in  three of  the partnerships,

            filed  the class  action  suit below  on  behalf of  all  the

            limited  partners  of  the  twenty-one  partnerships  against

                                         -4-

            Atlantic  alleging,  inter  alia,  that   Atlantic  had  made

            material  misrepresentations  in  the   disclosure  statement

            accompanying the tender  offer, and that it  had breached its

            fiduciary duty  to the limited partners by  not arranging for

            the  loan to be made to the partnerships and limited partners

            directly.

                      Because of the limited duration of the tender offer

            and  the possibility  that  the financing  would expire,  the

            plaintiffs obtained expedited discovery and began negotiating

            with  Atlantic.     The  Intervenors   participated  in   the

            settlement negotiations and had  access to all the discovery.

            Within a  few weeks, the  plaintiffs and Atlantic  reached an

            agreement and filed a  Stipulation of Settlement on September

            27, 1995.

                      The  settlement  agreement  provided that  Atlantic

            would limit  its  tender  offer to  35%  of  the  outstanding

            units,1 would furnish significant additional  disclosures and

            would increase the tender offer price by almost 7%, a maximum

            premium over the initial  offer of $1.5 million.   In return,

            City  granted   Atlantic  a  broad  release   of  all  claims

            pertaining to the tender  offer, actual and potential, direct

            and derivative.

                                
            ____________________

            1.  No more than 15% of the units of any one partnership were
            actually tendered.  City did not tender its units.

                                         -5-

                      On October  3, 1995,  notice of the  settlement was

            sent out  to all the class  members, a group  of over 31,000.

            The Intervenors  moved to intervene  for the sole  purpose of

            objecting to the settlement on the ground that it contained a

            release  of  the  partnerships' claims  against  Atlantic for

            appropriating  a  partnership  opportunity  for  itself  (the

            "derivative  claims").2    The  Intervenors  argue  that  the

            release of the derivative claims was obtained in exchange for

            little or no consideration.

                      Despite the Intervenors'  objections, the  district

            court  approved the  settlement, and the  Intervenors brought

            this  appeal,  arguing  that  the settlement  was  not  fair,

            adequate or reasonable insofar as it approved the release of 

            the derivative claims.

                                   II.  Discussion
                                   II.  Discussion

                      A  district  court  can  approve  a  class   action

            settlement  only  if it  is  fair,  adequate and  reasonable.

            Durrett v. Housing Authority  of the City of  Providence, 896
            _______    _____________________________________________

            F.2d 600, 604 (1st Cir. 1990).  When sufficient discovery has

                                
            ____________________

            2.  According  to   both  City  and   the  Intervenors,   the
            partnership units were worth far  more than the tender  offer
            price.   Atlantic  thus had the  potential to  profit greatly
            from its  offer to buy the limited partners' units, depending
            on the  number of units  actually tendered.   The Intervenors
            claim  that  any such  profit really  belongs to  the limited
            partnerships themselves and wish  to pursue the partnerships'
            claims  against Atlantic in  a derivative suit,  suing on the
            partnerships' behalf.

                                         -6-

            been provided and the  parties have bargained at arms-length,

            there  is  a presumption  in favor  of  the settlement.   See
                                                                      ___

            United  States v.  Cannons  Engineering Corp.,  720 F.  Supp.
            ______________     __________________________

            1027,  1036  (D. Mass.  1989) (quoting  City  of New  York v.
                                                    __________________

            Exxon, 697  F. Supp.  677, 692  (S.D.N.Y. 1988)),  aff'd, 899
            _____                                              _____

            F.2d 79 (1st Cir. 1990).  

                      Upon  review, our  role,  "is not  to decide  whose

            assertions are  correct, but merely to  ascertain whether the

            district court clearly abused its discretion in approving the

            settlement."  Greenspun v. Bogan, 492 F.2d 375, 381 (1st Cir.
                          _________    _____

            1974).   Great deference is given to the trial court.  "It is

            only  when one side is so obviously correct in its assertions

            of  law and  fact that  it would  be clearly  unreasonable to

            require it  to compromise  to the  extent of  the settlement,

            that  to  approve  the  settlement  would  be  an   abuse  of

            discretion."  Id.        Despite the  deferential standard of
                          ___

            review,  the Intervenors  argue that  we should  overturn the

            district  court's  approval of  the  settlement because  City

            released claims which it  did not raise in its  complaint and

            because City was faced with a conflict of interest.  

                      The first argument is easily dispensed with.  It is

            well-settled  that  "in  order  to  achieve  a  comprehensive

            settlement   that  would  prevent   relitigation  of  settled

            questions at the core of  a class action, a court  may permit

            the  release  of a  claim  based  on  the  identical  factual

                                         -7-

            predicate as that underlying the claims  in the settled class

            action  even though the claim was not presented and might not

            have been  presentable in the  class action."   TBK Partners,
                                                            _____________

            Ltd.  v.  Western Union  Corp., 675  F.2d  456, 460  (2d Cir.
            ____      ____________________

            1982).    See  also  Matsushita Electric  Industrial  Co.  v.
                      _________  ____________________________________

            Epstein, __ U.S. __,  116 S. Ct. 873, 879  (1996) (discussing
            _______

            Delaware law);  Nottingham Partners  v. Trans-Lux  Corp., 925
                            ___________________     ________________

            F.2d 29, 33-34 (1st  Cir. 1991); Class Plaintiffs v.  City of
                                             ________________     _______

            Seattle,  955  F.2d  1268,  1287-88 (9th  Cir.  1992),  cert.
            _______                                                 _____

            denied, 506 U.S. 953 (1992).
            ______

                      There is some dispute as to whether or not City did

            in fact bring the derivative claims in its class action suit.

            But  regardless  of whether  it  did or  not,  the derivative

            claims  clearly  arose from  the  same  factual predicate  as

            City's  claims alleging  misrepresentations and  omissions in

            Atlantic's disclosure statements  and breaches of  Atlantic's

            fiduciary duties  to  the limited  partners.   All  of  these

            claims stemmed  from problems with the tender offers and were

            releasable by the class action settlement.

                      Intervenor's second argument,  alleging a  conflict

            of interest,  is potentially more troublesome.   The presence

            of  a  conflict  of  interest  would  render  the  settlement

            suspect.  As the Ninth Circuit has written, "If, however, the

            settlement negotiations  are biased, or skewed  by a conflict

            of  interest,  we  cannot  presume that  the  attorneys  have

                                         -8-

            reached  a  fair  settlement."   In  re  Pacific  Enterprises
                                             ____________________________

            Securities Litigation, 47 F.3d 373, 378 (9th Cir. 1995).  
            _____________________

                      Other  courts have  recognized  a potential  for  a

            conflict  of  interest in  situations  somewhat analogous  to

            this.  In Pacific Enterprises, for example, the Ninth Circuit
                      ___________________

            reviewed  a  district  court's  approval  of  a  simultaneous

            settlement of both  a derivative class  action lawsuit and  a

            securities class  action lawsuit.   The court  questioned the

            wisdom of allowing one party to represent both derivative and

            securities  class  action  plaintiffs.   It  pointed  to  the

            corporate officer defendants' incentive in such situations to

            trade  a larger  securities settlement  for  lower derivative

            liability,  thereby sparing  themselves at  the corporation's

            expense.  

                      The potential conflict problem here is not the same

            as that in  Pacific Enterprises.  If there was a conflict, it
                        ___________________

            arose from a difference in interest between those unitholders

            who would accept  Atlantic's newly-sweetened offer  and those

            who would choose to stay on as limited partners.  The purpose

            of  the class  action was  to force  Atlantic to  improve its

            tender  offer by, inter alia,  raising its price.   Those who

            accepted the offer by selling their units benefited from  the

            enhanced price.    Those who  remained limited  partners--the

            tender  offer being limited to  35% of all  units--did not so

            benefit  and  lost  out  on  whatever  rewards  a  successful

                                         -9-

            derivative suit might  have conferred  upon all  unitholders,

            the possibility of a  derivative suit having been surrendered

            in the settlement.

                      It  follows that there may be    although we do not

            decide, infra      a  conflict of interest  should one  party
                    _____

            like City represent both tender offer and derivative claims.3

            If  such a party wished  to tender its  partnership units, it

            might  have an incentive to offer to trade a lower derivative

            recovery  for a higher offer  price because once  it sold its

            units  it  would  no   longer  benefit  from  the  derivative

            recovery.  Similarly, if such a party did not wish to tender,

            it would have an incentive to trade a lower offer price for a

            higher derivative  recovery.  However, in order  for there to

            be a meaningful conflict of interest in the representation of

            derivative and tender offer claims, there would first have to

            be  derivative  claims of  substance.    In  this  case,  the

            district court approved the settlement only after considering

            arguments over whether or  not the derivative claims had  any

                                
            ____________________

            3.  The question  of whether  this situation would  present a
            conflict of  interest is not an  easy one.  If,  for example,
            the  limited partners had tendered  more than the  35% of the
            units that  Atlantic had  agreed to  buy, the  owners' shares
            would have  been purchased  on a pro  rata basis.   Since  no
            partner  would  then be  able to  sell  all her  shares, some
            incentive to preserve the  retained shares' value by pursuing
            the  derivative claims  might well  remain.   Because of  the
            potentially ad  hoc nature of the  conflict determination, we
            prefer not to attempt to formulate at this time hard and fast
            rules requiring  separate representation of  tender offer and
            derivative claims in a class action.  

                                         -10-

            value,  and  did so  in  circumstances  where the  derivative

            claims   were  championed  by   an  independent   party,  the

            Intervenors.  

                      Although  City  submitted  an   expert's  affidavit

            stating  that  the  derivative  claims  were  worthless,  the

            district  court did  not  rely on  City's  advocacy alone  in

            making its  decision.  The Intervenors,  who represented only

            the derivative claims, vigorously argued  that the derivative

            claims had  value and submitted their  own expert's affidavit

            as  support.    The  court examined  both  affidavits  before

            ruling.   Thus  for the  purposes  of making  this  threshold

            decision, the two sets  of claims were each represented  by a

            different party.   The Intervenors' participation  eliminated

            the risk that a conflict  problem would skew the presentation

            of the valuation issues and the court's holding  is therefore

            subject  to the usual abuse  of discretion standard of review

            for approval of class action settlements.  See Greenspun, 492
                                                       ___ _________

            F.2d at 381.

                      We  do not  believe the  district court  abused its

            discretion in  approving the settlement and,  by implication,

            determining  that the  derivative claims  were of  little, if

            any, value.4  The  essence of the derivative claims  was that

                                
            ____________________

            4.  At oral argument, counsel for the Intervenors pointed out
            that  the  district court  did not  explicitly find  that the
            derivative  claims  were  worthless.   However,  the  court's
            approval  of  a  settlement  which,  the  Intervenors  agree,
            provided  for a release of  the derivative claims in exchange

                                         -11-

            Atlantic had coopted a  partnership opportunity by making the

            tender  offer on its own behalf instead of the partnerships'.

            The  value  of  this  claim  is  entirely  dependent  on  the

            partnerships'  ability to  make the tender  offer themselves,

            and City's expert's affidavit explained that the partnerships

            were unable to do so.

                      First,  the  partnership agreements  prohibited the

            partnerships from buying  partnership units.   Removing  this

            restriction would have required the approval of the owners of

            a majority of the  units.  Such approval might  not have been

            forthcoming  and  would  at  least have  been  difficult  and

            expensive to obtain.  Also, even if the majority ownership of

            each partnership agreed, the result would have been to coerce

            the dissenting minority  to participate in the  making of the

            tender offer.   By making  the tender offer  itself, Atlantic

            avoided this possibility; only those unitholders  who desired

            to  tender their shares  participated in the  tender offer in

            any way.

                      City's expert also stated in his affidavit that the

            partnerships could  not have  obtained the  necessary outside

            loans  to finance the tender offer.  The loan desired by each

            individual  partnership would  be  too small  to attract  the

                                
            ____________________

            for  no  consideration  after  the  court's   examination  of
            affidavits  exclusively devoted  to  debating the  derivative
            claims'  worth indicates that the court resolved the issue of
            the claims' value against the Intervenors.

                                         -12-

            interest  of  the  sort  of financial  institution  typically

            involved in this type of transaction.  In addition, potential

            lenders would have been much less willing to participate in a

            loan  to the  partnerships without  a cross-collateralization

            agreement, something prohibited by the partnership agreements

            without  the  approval of  the owners  of  a majority  of the

            units.5    Moreover,  the  partnerships lacked  the  sort  of

            developed  credit  history  which  Atlantic had,  making  the

            securing  of a  loan  more  difficult,  and  could  not  have

            supplied  the   personal  guarantees  made   by  the  general

            partners.

                      The Intervenors' expert  believed the  partnerships

            could have obtained financing for the tender offer by forming

            a joint  venture or  by creating  a new  limited partnership.

            The  purpose of establishing either would  be to overcome the

            problems  of small loan size  and inability to  form a cross-

            collateralization  agreement.   The  expert also  thought  it

                                
            ____________________

            5.  Atlantic was able  to provide a security  interest in the
            tendered units from all of the partnerships as collateral for
            the loan.    If  a  partnership's tendered  units  failed  to
            generate sufficient  income  to pay  off  that  partnership's
            proportionate share of  the loan, the lender could use excess
            income from  the other partnerships' tendered  units to cover
            the shortfall.  However, if each partnership obtained its own
            loan  to make  a tender offer  for its own  units, the lender
            would be unable to seek such coverage payments from the units
            of other partnerships and  would thus bear a greater  risk of
            loss.    The  lender  could  eliminate   this  risk  only  by
            persuading   the  partnerships   to  enter   into  a   cross-
            collateralization  agreement  specifically  authorizing  such
            coverage payments.

                                         -13-

            would be possible for  the partnerships to interest  a lender

            in financing  the  tender offers  individually,  despite  the

            small loan size, if all the loans were arranged at once.

                      City's  expert  submitted a  rebuttal  affidavit in

            which he explained why  these schemes were not feasible.   He

            wrote that  the administrative expenses involved  in creating

            a joint venture of  the twenty-one limited partnerships would

            be prohibitive and that creating a new limited partnership to

            make the  tender offers  would be "completely  unworkable and

            uneconomical."  He  also reiterated that  no lender would  be

            interested  in making  loans of  the  size required  for each

            partnership individually, even if  all the loan requests were

            processed at once.

                      Considering the  evidence,  we think  the  district

            court was  justified in  holding that the  partnerships could

            not  have  made the  tender  offers and  that  the derivative

            claims therefore had no value.   Once this determination  had

            been made City's  potential conflict of  interest dissipated,

            and  its  ability to  represent the  interests of  the entire

            class of limited partners ceased to be impaired in any way.

                      Affirmed.
                      _________

                                         -14-