In Re: Prudential Insur. ( 1998 )

Opinions of the United
1998 Decisions States Court of Appeals
for the Third Circuit
7-23-1998
In Re: Prudential Insur.
Precedential or Non-Precedential:
Docket 97-5155,97-5156,97-5217,97-5312
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Recommended Citation
"In Re: Prudential Insur." (1998). 1998 Decisions. Paper 170.
http://digitalcommons.law.villanova.edu/thirdcircuit_1998/170
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Volume 2 of 2
Filed July 23, 1998
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
Nos. 97-5155, 97-5156, 97-5217 & 97-5312
IN RE: PRUDENTIAL INSURANCE COMPANY
AMERICA SALES PRACTICE LITIGATION AGENT ACTIONS
RICHARD P. KRELL, MDL transfer, N.D. Ohio,
DNJ Civil Action No. 95-6062
v.
PRUDENTIAL INSURANCE COMPANY OF AMERICA
Richard P. Krell, as well as Objectors
Elizabeth Bajek, Amanda Bajek,
Helen Bartsch, Mark Ciconte,
Raymond Dolce, Margaret Dolice,
Louise Duggan, Peter Duggan,
Charles Duncan, Mary Howe, Mary Krell,
William Morris, Diana Racer, Thomas Racer,
Gweneth Reidel, The Estate of Carl J. Scalzo,
Marie Scalzo, Terry Sligar, Alice Smith,
Jerry Smith, and William Walton,
Appellants at Nos. 97-5155/5156/5312
IN RE: PRUDENTIAL INSURANCE COMPANY
AMERICA SALES PRACTICE LITIGATION AGENT ACTIONS
RICHARD JOHNSON,
Intervenor-Plaintiff in District Court
Richard E. Johnson,
Appellant at No. 97-5217
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil Action No. 95-cv-04704)
Argued January 26, 1998
Before: SCIRICA, ROTH and RENDELL, Circuit Judges
(Filed July 23, 1998)
A. The Girsh Factors
Although Krell has not directly challenged the court's
analysis with respect to each of the nine Girsh factors, we
will examine each of them in turn.
1. The complexity and duration of the litigation
Citing the myriad complex legal and factual issues which
would arise at trial, the district court found the "anticipated
complexity, costs, and time necessary to try this case
greatly substantiate the fairness of the settlement."
Fairness Opinion, 962 F. Supp. at 536. The court found
that litigation would require expensive and time consuming
discovery, would necessitate the use of several expert
witnesses, and would not be completed for years.
Consequently, the court concluded this factor weighed in
favor of settlement.
We agree. Examining the sheer magnitude of the
proposed settlement class as well as the complexity of the
issues raised, we conclude the trial of this class action
would be a long, arduous process requiring great
expenditures of time and money on behalf of both the
parties and the court. The prospect of such a massive
undertaking clearly counsels in favor of settlement. 61
2. The reaction of the class to the settlement
This factor attempts to gauge whether members of the
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61. We also note that no parties have objected to this portion of the
district court's analysis.
66
class support the settlement. Although the response rate in
a 23(b)(3) class action is relevant to the fairness
determination, see, e.g., Bell Atlantic, 2 F.3d at 1313 n.15
(3d Cir, 1993); Shlensky v. Dorsey, 574 F.2d 131, 148 (3d
Cir. 1978), "a combination of observations about the
practical realities of class actions has led a number of
courts to be considerably more cautious about inferring
support from a small number of objectors to a sophisticated
settlement." G.M. Trucks, 55 F.3d at 812 (citation omitted).
The district court found that, of the 8 million
policyholders to whom Prudential sent the class notice,
approximately 19,000 policyholders or 0.2 per cent of the
class opted out.62 The court also noted that approximately
300 policyholders filed objections to the settlement. The
court found the small percentage of opt outs and objectors
was "truly insignificant," and noted that the "most
vociferous objectors to the Proposed Settlement are a
handful of litigants represented by counsel in cases that
compete with or overlap the claims asserted in the Second
Amended Complaint." Fairness Opinion, 962 F. Supp. at
537. Consequently, the court concluded the limited number
of objections filed also weighed in favor of approving the
settlement. Id. at 537-38.
We see no abuse of discretion. While we do not read too
much into the low rate of response, we believe the district
court properly analyzed this factor.63
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62. The court found that approximately 700 of those who opted out
wrote "to indicate they do not feel they were misled in the purchase of
their insurance, are satisfied with their policies, and do not want to
participate in the action against Prudential." Fairness Opinion, 962 F.
Supp. at 537 n.61.
63. Krell argues that the low response rate was the result of inadequate
notice. We disagree. As discussed infra S V.C.2, we believe the class
notice adequately apprised the class members of their right to enter an
appearance, file objections, or opt out of the proposed class, and
provided a detailed explanation of the procedures for doing so.
67
3. The stage of the proceedings and amount of
discovery completed
The parties must have an "adequate appreciation of the
merits of the case before negotiating." G.M. Trucks, 55 F.3d
at 813. To ensure that a proposed settlement is the product
of informed negotiations, there should be an inquiry into
the type and amount of discovery the parties have
undertaken. Krell contends that class counsel's discovery
was insufficient to support the proposed settlement,
claiming that Lead Counsel's pre-settlement discovery
consisted only of 70 boxes of documents received in August
1996 pursuant to informal letter requests, and a number of
meetings with Prudential's chairman, Arthur Ryan. Krell
questions how Lead Counsel could have been in "second
stage settlement negotiations" before receiving Prudential's
production of over 1 million documents, videotapes, audio
tapes and computer tapes in mid-August. Finally, Krell
contends there was no vigorous, adversarial discovery
because "virtually all of Prudential's discovery obligations"
were stayed between October 1995 and September 10,
1996, and the parties didn't agree on a free exchange of
information until August 20, 1996, only a few weeks before
the proposed settlement was announced.
The district court found that "counsel for plaintiffs and
Prudential did not commence serious settlement
discussions until 18 months of vigorous litigation had
transpired," noting the parties had filed and argued a
multitude of motions, including consolidation motions,
jurisdictional motions, motions to stay competing class
actions, case management motions, and Prudential's
motion to dismiss under F.R.C.P. 12(b)(6). Fairness
Opinion, 962 F. Supp. at 538 n.62. In addition to its in-
court efforts, the district court concluded that class
counsel's pursuit of discovery also supported the
settlement. The court found class counsel reviewed a
multitude of documents provided by Prudential,64
conducted its own interviews with hundreds of current and
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64. This discovery included over 1 million documents, 160 computer
diskettes, 500 audio and video tapes. Fairness Opinion, 962 F. Supp. at
541.
68
former Prudential employees, took twenty depositions, and
had access to all of the materials collected by the Task
Force. Id. at 541. The district court also found class
counsel took sufficient time to review the discovery
materials it collected, noting that class counsel refused to
discuss settlement on two separate occasions because it
believed it needed further discovery. Id. (citing Weiss Aff.
PP 49, 101-02.) Finally, the court found class counsels' "use
of informal discovery was especially appropriate in this case
because the Court stayed plaintiffs' right to formal
discovery for many months, and because informal discovery
could provide the information that plaintiffs needed." Id. at
542. Based on the foregoing, the district court concluded
"the volume and substance of Class Counsel's knowledge of
this case are unquestionably adequate to support this
settlement." Id. at 541. We see no error here.
4. The risks of establishing liability and damages
The fourth and fifth Girsh factors survey the possible
risks of litigation in order to balance the likelihood of
success and the potential damage award if the case were
taken to trial against the benefits of an immediate
settlement. Examining plaintiffs' ability to establish liability
and damages at trial, the court concluded "the risks of
establishing liability weigh in favor of approving the
settlement." Id. at 540.
We believe the district court properly examined the risks
faced by the putative class. The court found plaintiffs would
face a difficult burden at trial demonstrating, inter alia, (1)
class members were deceived by Prudential's written
disclosures and illustrations; (2) their contract claims were
not barred by the parol evidence rule because they conflict
with the unambiguous language in the insurance contracts;
(3) the necessary reliance to support their federal securities
claims; and (4) their federal securities claims were not
barred by the one year statute of limitations and the three
year statute of repose. Id. at 539. As further evidence of the
barriers facing plaintiffs, the district court took notice of a
similar life insurance sales practice case in Alabama state
court in which the judge overturned a substantial jury
verdict against Prudential. Id. (citing Key v. Prudential Ins.
69
Co. of America, Civ. No. 93-479 (Al. Cir. Ct. Dec. 28, 1995)).
We believe the district court offered substantial reasons for
its findings.
a. Replacement Claims
Krell argues the district court failed to consider
separately the likelihood of success at trial for those class
members who alleged "replacement claims," contending
those claims require a lesser degree of proof and may be
established by an objective review of the documents in
Prudential's files. Both Prudential and Lead Counsel
contend that "replacement policyholders faced similar
burdens to those of other Class Members in establishing
liability and damages against Prudential."65 Prudential Brief
at 35.
The district court did not believe that "replacement
claims" are easier to prove and therefore required separate
consideration. Fairness Opinion, 962 F. Supp. at 522. We
agree. Krell offers no authority or analysis to support this
blanket assertion. In addition, the findings of the Multi-
State Task Force undermine Krell's argument.
The primary focus of the Multi-State Task Force was the
practice known as "churning" or "twisting," which it defined
as "the sale of any policy based upon incomplete or
misleading comparisons." Task Force Report at 35.
According to the Multi-State Task Force Report, the
transactions most frequently the subject of churning or
twisting complaints were financed sales and abbreviated
payment plans. Replacement transactions are a
subcategory of financed sales in which at least 25% of an
existing policy's value is used to fund the purchase of a
new policy. Id. (citing the current NAIC Replacement Life
Insurance and Annuities Model regulation, adopted in
1984).
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65. Prudential also notes that Ohio state courts have found that a
violation of state replacement laws does not give rise to a private cause
of action. Prudential Brief at 36 (citing Springfield Impregnators, Inc.
v.
Ohio State Life Ins. Co., No. C.A. 3090, 1994 WL 95219 at *9 (Ohio Ct.
App. Mar. 23, 1994); Strack v. Westfield Cos., 515 N.E.2d 1005, 1007-8
(Ohio Ct. App. 1986)).
70
The Task Force Report makes clear that "none of these
types of sales, financed, replacement or abbreviated pay, is
in violation of the replacement regulation if properly done."
Id. at 36 (emphasis omitted). It also notes that, during the
late 1970s and early 1980's, the previous industry-wide
disinclination for replacement sales began to give way. In
1978, for example, the National Association of Insurance
Commissioners modified its model replacement regulations
to reflect the growing acceptance of replacement sales,
provided those sales were accompanied by necessary
information and disclosure to allow consumers to"make an
informed choice."66 Id. at 39-40.
Turning to its examination of Prudential, the Task Force
acknowledged its goal was "to determine whether during
the sale of new policies, those involving financing or
replacement, consumers were adequately advised of the
potential failings of the new policies or the funding basis on
which they were sold." Id. at 45. The Report notes that
although all of the required disclosure forms may have been
completed and filed by Prudential, "[o]ne must look beyond
the required forms to determine whether or not
presentations were accurate and not misleading." Id. In its
discussion of the remediation protocol, the Task Force
explained "the documentation received from Prudential did
not always support the consumer's assertion," and
consequently "[w]hat was or was not agreed upon at the
time of sale became a question of fact." Id. at 189; see also
id. at 191 (noting that while "some replacements may have
been appropriate . . . misrepresentation is never
appropriate," and thus "the challenge is to distinguish
appropriate replacement activity.")
Consequently, it appears that misrepresentation, rather
than compliance with bookkeeping requirements, was the
primary concern of the Task Force examination of
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66. The Task Force also noted that, in 1985, the Federal Trade
Commission acknowledged that many older insurance policies were
"candidates for replacement." Task Force Report at 42-3 (quoting Michael
P. Lynch and Robert J. Mackay, Life Insurance Products and Consumer
Information, Staff Report, Bureau of Economics, Federal Trade
Commission, Washington, D.C. (November 1985)).
71
Prudential's replacement sales. As the Task Force Report
states, it is incorrect "to assume that in any and every case
where a replacement was not identified or the regulatory
requirements were not met, the policyholder did not
understand the transaction or that it was not properly
explained." Id. at 17. We also find it significant that the
state insurance regulators who crafted the initial Task
Force Report did not incorporate a lesser burden of proof or
otherwise distinguish "replacement claims" from other types
of claims.67 Consequently, we believe the district court
properly considered the role of replacement claims when
analyzing the fourth and fifth Girsh factors.68
5. The risks of maintaining the class action t hrough
trial
Under Rule 23, a district court may decertify or modify a
class at any time during the litigation if it proves to be
unmanageable. In re School Asbestos Litigation, 789 F.2d at
1011 (3d Cir. 1986); G.M. Trucks, 55 F.3d at 815. In this
instance, the district court concluded that although"this
case is manageable as a class action and [ ] the class action
device is the most appropriate means to adjudicate this
controversy, as the case evolves, maintaining the class
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67. We note that even if the different claims alleged by plaintiffs
require
proof of different elements to establish liability, those differences are
adequately addressed during the ADR process. ADR claims will be
examined using a set of criteria specific to the type of claim filed. For
example, the evidentiary considerations for a churning claim include
misstatements by a Prudential agent concerning the applicable interest
rate on a policy loan, the policyholder's annual income, and the use of
blank, signed disbursement forms. Prudential Alternative Dispute
Resolution Guidelines, Stipulation of Settlement, Ex. B, at 17.
Considerations for a vanishing premium claim include whether the
policyholder was advised to disregard notices from Prudential, whether
the policyholder made a "significant financial decision" in reliance on
the
belief that premium payments would cease, and whether the policyholder
received altered or unclear sales materials from an agent. Id. at 26-27.
68. The district court also noted that "[n]one of the four states that
objected to the Proposed Settlement have ever prohibited financed
insurance sales and three of the four did not regulate in any respect
financed insurance sales for great portions of the Class Period." Fairness
Opinion, 962 F. Supp. at 549 n.77.
72
action may become unworkable" and require decertification.
Fairness Opinion, 962 F. Supp. at 540. The court also
noted Prudential had sought to preserve its objections to
class certification, and would likely contest certification if
the case proceeded to trial. Consequently, the court
concluded that there was a risk the case might eventually
be decertified, all of which weighed in favor of settlement.
Although we agree with the district court's analysis and
find there was some risk of decertification which supports
settlement, we pause to comment on the application of this
factor in "settlement-only" class actions following the
Supreme Court's decision in Amchem. Because the district
court always possesses the authority to decertify or modify
a class that proves unmanageable, examination of this
factor in the standard class action would appear to be
perfunctory. There will always be a "risk" or possibility of
decertification, and consequently the court can always
claim this factor weighs in favor of settlement. The test
becomes even more "toothless" after Amchem. The Supreme
Court in Amchem held a district court could take settlement
into consideration when deciding whether to certify a class,
and that, "[c]onfronted with a request for settlement-only
class certification, a district court need not inquire whether
the case, if tried, would present intractable management
problems . . . for the proposal is that there be no trial." 117
S. Ct. at 2248. It would seem, therefore, that after Amchem
the manageability inquiry in settlement-only class actions
may not be significant.
6. The ability of the defendants to withstand a gr eater
judgment
The district court found "Prudential's ability to withstand
a greater judgment is a matter of concern."69 Fairness
Opinion, 962 F. Supp. at 540. Noting that the settlement
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69. Prudential argued that consideration of this factor was unnecessary
because of the uncapped nature of the relief. The district court rejected
this claim, noting that while the compensatory relief was uncapped, the
"punitive damages" component of the settlement- the Additional
Remediation Amount - was limited, and thus the district court was
obligated to examine this factor.
73
was valued between $1 billion and $2 billion, the court
found a larger judgment could negatively impact
Prudential's declining credit rating.70 Id. The court also
expressed concern that, because Prudential is a mutual
insurer, non-class member policyholders could conceivably
be adversely affected by an excessive settlement in the form
of lower dividends. Id.
Krell claims the district court erred by finding that
Prudential could not withstand a greater judgment because
"neither Lead Counsel nor Prudential submitted any
reliable evidence of the true value of the ADR relief." Krell
Brief at 50. Krell speculates that even the $410 million
minimum is inaccurate because it does not account for
"profits, if any" generated by Basic Claim Relief.
We see no error here. As the district court noted, the
value of the proposed settlement is difficult to determine
because both the compensatory relief available under the
ADR and the additional relief available through Basic Claim
Relief are uncapped. The parties' experts offered valuations
between $1 and $2 billion, with an absolute minimum of
$410 million. While these numbers are imprecise, they are
a sufficient basis for the district court to decide whether
Prudential could withstand a greater judgment. In addition,
Prudential's credit rating during the course of the litigation
may be an appropriate indicator, among others, for the
court's consideration, and its decline would support the
court's analysis.
7. The range of reasonableness of the settlement f und
in light of the best possible recovery and all the
attendant risks of litigation
The last two Girsh factors ask whether the settlement is
reasonable in light of the best possible recovery and the
risks the parties would face if the case went to trial. In
order to assess the reasonableness of a proposed settlement
seeking monetary relief, "the present value of the damages
plaintiffs would likely recover if successful, appropriately
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70. The court found that Prudential's credit rating had already declined
during the course of the litigation. Fairness Opinion, 962 F. Supp. at
540.
74
discounted for the risk of not prevailing, should be
compared with the amount of the proposed settlement."
G.M. Trucks, 55 F.3d at 806 (quoting Manual for Complex
Litigation 2d S 30.44, at 252). On appeal, Krell argues the
district court declined to address this issue, instead finding
the analysis unnecessary because all injured policyholders
would receive full compensatory relief.
Krell has mischaracterized the district court's opinion.
The district court applied the final two Girsh factors,
although it did not attempt to reduce its analysis to a
concrete formula. The district court found that calculating
the best possible recovery for the class in the aggregate
would be "exceedingly speculative," and in this instance
such a calculation was unnecessary because the
reasonableness of the settlement could be fairly judged. The
court instead examined the nature of the settlement and
the range of possible outcomes for those participating in
either the ADR process or Basic Claim Relief, and
concluded that "an individual's recovery exceeds the value
of the best possible recovery discounted by the risks of
litigation." Fairness Opinion, 962 F. Supp. at 540.
For example, the court found class members who have
clear claims against Prudential will receive scores of "3" and
will "receive a choice between full rescissionary or
compensatory relief plus interest." Thus they will receive
full compensation without paying attorneys fees and
without undue delay.71 The court concluded this relief "is
not only fair, it is exceptional." Id. at 540-41. Those class
members who received a score of "2" - where the evidence
on balance supports the claim - would receive 50% of their
damages without having to pay litigation costs or fees, an
award the court concluded was equivalent to what the
claimant would have received at trial. Id. at 541 ("The 50%
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71. In response, Krell contends that the court's belief that full
compensatory relief is available relies on the flawed "assumption that
100% of the wrongfully replaced policyholders will understand the notice
and form the requisite ``belief ' and complete the 16 page proof of claim
form and thereafter prevail in ADR." Krell Brief at 45. But Krell ignores
the fact that any claim, whether brought at trial or under the ADR
process, will require evidence of deceptive conduct in order to support
liability.
75
award plus 100% interest is equivalent to a full award
minus litigation costs, attorneys' fees, and the price of
delay."). The court also found the settlement was fair for
those receiving a score of "1" in the ADR process and for
those electing Basic Claim Relief - those who would not
have had a claim or not elected to bring one - because the
Basic Claim Relief recovery is greater than what they would
have gotten at trial.72 Id.
We believe the district court adequately addressed these
factors and agree its examination "accounts appropriately
for the nuances of this Proposed Settlement." Id. at 535
n.58. As the court noted, both the structure of the
settlement and the uncapped nature of the relief provided
make it difficult to determine accurately the actual value of
the settlement. Consequently, the traditional calculus
suggested by the Manual for Complex Litigation 2d and
adopted by this Court in G.M. Trucks cannot be applied to
this case. But we cannot find the district court abused its
discretion when it found that the remedies available under
the proposed settlement provided extraordinary relief. When
balanced against the best possible recovery and the risks of
taking this case to trial, these remedies weighed in favor of
the proposed settlement.
It is worth noting that since Girsh was decided in 1975,
there has been a sea-change in the nature of class actions,
especially with respect to mass torts. In this regard, it may
be useful to expand the traditional Girsh factors to include,
when appropriate, these factors among others: the maturity
of the underlying substantive issues, as measured by
experience in adjudicating individual actions, the
development of scientific knowledge, the extent of discovery
on the merits, and other factors that bear on the ability to
assess the probable outcome of a trial on the merits of
liability and individual damages; the existence and probable
outcome of claims by other classes and subclasses; the
comparison between the results achieved by the settlement
_________________________________________________________________
72. The district court also took notice of the procedural safeguards
contained in the ADR process, including the four tier review process
designed to ensure an accurate and fair scoring of class members'
claims. See discussion supra S I.B.1.
76
for individual class or subclass members and the results
achieved - or likely to be achieved - for other claimants;
whether class or subclass members are accorded the right
to opt out of the settlement; whether any provisions for
attorneys' fees are reasonable; and whether the procedure
for processing individual claims under the settlement is fair
and reasonable.73 Of these factors, the only one relevant
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73. See Edward H. Cooper, Mass Torts Model, prepared for the
Conference On Mass Torts, Mass Torts Working Group, Philadelphia, PA
(May 1998).
Other related factors that also may be relevant to this inquiry are
discussed by Judge William Schwarzer in his article, Settlement of Mass
Tort Class Actions: Order Out of Chaos, 80 Cornell L. Rev. 837, 843-44
(May 1995). The factors suggested by Judge Schwarzer include:
(1) Whether the prerequisites set forth in subdivisions (a) and (b)
[of
Rule 23] have been met;
(2) Whether the class definition is appropriate and fair, taking
into
account among other things whether it is consistent with the
purpose for which the class is certified, whether it may be
overinclusive or underinclusive, and whether division into
subclasses may be necessary or advisable;
(3) Whether persons with similar claims will receive similar
treatment, taking into account any differences in treatment between
present and future claimants;
(4) Whether notice to members of the class is adequate, taking into
account the ability of persons to understand the notice and its
significance to them;