UPS Corporation v. Cox ( 1999 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
LUCIAN B. COX, III, on his behalf
and on behalf of all the others
similarly situated,
Plaintiff-Appellee,
v.
PARYANK REMESH SHAH; UPS
CORPORATION,
Claimants-Appellants,
and
EUGENE D. DERRY; ROSS COSMETICS
DISTRIBUTION CENTERS,
INCORPORATED; ROGER M.
ROSENBERG; BARRY A. BLOOMFIELD;
SHASHIKANT S. SHETH; MICHAEL E.
No. 98-1357
EMERY; EUGENE H. KARAM; JOHN M.
WATERS; ROSS FREITAS; MEHENDRA
SHETH; KIRIT SHETH; JAMNADAS
SHETH; VIRENDRA SHETH; JAYESH
SHETH; S&J PERFUME COMPANY;
STARION INTERNATIONAL LIMITED,
Defendants,
and
PEARL LEVY; HAIM RONAN; THOMAS
M. KARAM; HAROLD J. KARAM,
Profit Sharing Plan; HAROLD J.
KARAM; RICHARD J. KARAM;
MARGARET KARAM; PRISCILLA W.
KARAM; DANIEL J. KARAM; GLADYS
SAFER; MELISSA FREITAS; GEORGE
O'LEARY; RAMESH DOSHI; JOSEPH
KUNZ; FRED K. MARLER; EDUARDO
HERMOSILLA; FRANCES J. HARRELL; B.
PETER SALEH; JIMMY J. NASSOUR,
Claimants,
WENDELL G. CANTRELL,
Movant.
LUCIAN B. COX, III, on his behalf
and on behalf of all the others
similarly situated,
Plaintiff-Appellee,
v.
GEORGE O'LEARY,
Claimant-Appellant,
and
EUGENE D. DERRY; ROSS COSMETICS
DISTRIBUTION CENTERS,
No. 98-1378
INCORPORATED; ROGER M.
ROSENBERG; BARRY A. BLOOMFIELD;
SHASHIKANT S. SHETH; MICHAEL E.
EMERY; EUGENE H. KARAM; JOHN M.
WATERS; ROSS FREITAS; MEHENDRA
SHETH; KIRIT SHETH; JAMNADAS
SHETH; VIRENDRA SHETH; JAYESH
SHETH; S&J PERFUME COMPANY;
STARION INTERNATIONAL LIMITED,
Defendants,
and
2
PARYANK REMESH SHAH; PEARL
LEVY; HAIM RONAN; THOMAS M.
KARAM; HAROLD J. KARAM, Profit
Sharing Plan; HAROLD J. KARAM;
RICHARD J. KARAM; MARGARET
KARAM; PRISCILLA W. KARAM;
DANIEL J. KARAM; GLADYS SAFER;
MELISSA FREITAS; RAMESH DOSHI;
JOSEPH KUNZ; UPS CORPORATION,
Claimants,
WENDELL G. CANTRELL,
Movant.
LUCIAN B. COX, III, on his behalf
and on behalf of all the others
similarly situated,
Plaintiff-Appellee,
v.
GLADYS SAFER,
Claimant-Appellant,
and
No. 98-1739
EUGENE D. DERRY; ROSS COSMETICS
DISTRIBUTION CENTERS,
INCORPORATED; ROGER M.
ROSENBERG; BARRY A. BLOOMFIELD;
SHASHIKANT S. SHETH; MICHAEL E.
EMERY; EUGENE H. KARAM; JOHN M.
WATERS; ROSS FREITAS; MEHENDRA
SHETH; KIRIT SHETH; JAMNADAS
3
SHETH; VIRENDRA SHETH; JAYESH
SHETH; S&J PERFUME COMPANY;
STARION INTERNATIONAL LIMITED,
Defendants,
and
PARYANK REMESH SHAH; PEARL
LEVY; HAIM RONAN; THOMAS M.
KARAM; HAROLD J. KARAM, Profit
Sharing Plan; HAROLD J. KARAM;
RICHARD J. KARAM; MARGARET
KARAM; PRISCILLA W. KARAM;
DANIEL J. KARAM; MELISSA FREITAS;
GEORGE O'LEARY; RAMESH DOSHI;
JOSEPH KUNZ; UPS CORPORATION,
Claimants,
WENDELL G. CANTRELL
Movant.
Appeals from the United States District Court
for the District of South Carolina, at Spartanburg.
G. Ross Anderson, Jr., District Judge.
(CA-92-1706-7-13)
Argued: January 28, 1999
Decided: July 13, 1999
Before LUTTIG, WILLIAMS, and MICHAEL, Circuit Judges.
_________________________________________________________________
Affirmed in part and vacated and remanded in part by unpublished
per curiam opinion.
_________________________________________________________________
4
COUNSEL
ARGUED: Robert Y. Knowlton, SINKLER & BOYD, Columbia,
South Carolina for Appellants Shah and UPS; Donald Fred Schneider,
FELTMAN, KARESH, MAJOR & FARBMAN, L.L.P., New York,
New York, for Appellants O'Leary and Safer. Arthur Camden Lewis,
LEWIS, BABCOCK & HAWKINS, L.L.P., Columbia, South Caro-
lina, for Appellee. ON BRIEF: Anne D. Zuckerman, LEWIS, BAB-
COCK & HAWKINS, L.L.P., Columbia, South Carolina, for
Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
Claimants-Appellants George J. O'Leary, Gladys M. Safer, Pary-
ank Ramesh Shah, and UPS Corporation1 appeal their exclusion by
the district court from a settlement fund resulting from a class action
securities fraud lawsuit filed against Ross Cosmetics Distribution
Centers, Inc., certain officers and directors, and certain nonemployee
related persons and entities (collectively the Defendants). We affirm
the district court's denial of O'Leary's claim based upon our conclu-
sion that it did not clearly err in finding that he was an "affiliate"
under the settlement agreement entered into by the Plaintiffs and Set-
tling Defendants. We vacate the district court's denial of the claims
of Safer, Shah, and UPS based upon our concern that the district court
may have erred in assigning too broad a definition to "affiliate."
_________________________________________________________________
1 UPS Corporation, which is not affiliated with United Parcel Service,
was formed in December 1991 by Shah for "personal financial reasons."
(J.A. at 627.) Shah and his wife are the equitable owners of the stock.
Shah's wife did not participate in UPS's decisions to purchase shares of
Ross Cosmetics.
5
Because we cannot discern from the record what definition of "affili-
ate" the parties to the settlement agreement adopted, we remand this
case to the district court with instructions to hold an evidentiary hear-
ing to make that determination and to apply this resulting definition
to the claims of Safer, Shah, and UPS.
I.
Between roughly June 12 and July 1, 1992, thirteen lawsuits were
filed in the United States District Court for the District of South Caro-
lina against Ross Cosmetics Distribution Centers, Inc. (Ross Cosmet-
ics or the Company), certain directors and officers of the Company,
and certain nonemployee related persons and entities. By Order of
September 8, 1992 (the September 8 Order), the district court consoli-
dated all of these actions and appointed the law firms of Cohen, Mil-
stein, Hausfeld & Toll and Zwerling, Schachter & Zwerling as
counsel for the plaintiff class (Co-Lead Counsel). The September 8
Order also directed the Plaintiffs2 to file one Consolidated Amended
Complaint. This Complaint was filed on October 8, 1992, on behalf
of all persons who had purchased shares of Ross Cosmetics between
June 25, 1991 and June 11, 1992, (the class). The Complaint alleged
violations of Sections 10(b), 20(a), and 14(a) of the Securities
Exchange Act of 1934 (the Exchange Act), of Rules 10b-5 and 14a-
9 promulgated thereunder, see 17 C.F.R.§§ 240.10b-5 and 240.14a-9,
and of South Carolina state common law.3
_________________________________________________________________
2 The Plaintiffs are Lucian B. Cox, III, Samuel Spielberg, Vincent Tor-
torella, Walter Poppe, Bruce R. Johnstone, James Bryant, Nicholas Sab-
batini, Loretta Kull, Filomena and James Bella, Michael and Rhoda
Galub, Albert Karp, Florence Karp, Limor, Inc., Michael Gavelek, Wil-
liam Morris, Wendell G. Cantrell, Hugh H. Brantley, Oren R. Judy, Jr.,
Billy L. Painter, John and Charlotte Hall, Willie H. and Anna S. Bridges,
Douglas A. Churder, Brenda and Walter Dean, Johnny Joseph Green, Bo
Greer and Pamela Lee Harris, Joseph Daniel Johnson, Terry Millwood,
Susan Potter, Mary Lou Tye, Ceres Vandiver, and Vicki Wilson. (Stipu-
lation of Settlement ¶ A.27.)
3 The factual basis of the claims was that a group of individuals (the
Core Sheth Families), who owned the company that was the sole supplier
of fragrances and perfumes to Ross Cosmetics, secretly and in violation
of the federal securities laws gained a majority of Ross Cosmetics stock
6
On August 28, 1993, the Plaintiffs and the Settling Defendants4
entered into a Stipulation of Settlement (the Stipulation), which pro-
vided for payment of $9.5 million to the class. Pertinent portions of
the Stipulation defined the class in the following manner:
4. "Class" shall mean all Persons who purchased the
common stock of Ross Cosmetics during the Class Period
[June 25, 1991 through June 11, 1992, inclusive]. Excluded
from the Class are the Excluded Persons (defined below in
¶A.16). Also excluded from the Class are those individuals
who exercise rights of exclusion pursuant to the Hearing
Order.
....
16. "Excluded Persons" shall mean the Defendants and
Ernst & Young, members of their immediate families, any
Person in which any Defendant or Ernst & Young has a con-
trolling interest or which is related to or affiliated with, and
the legal representatives, heirs, successors-in-interest or
assigns of all of the foregoing.
(Stipulation of Settlement ¶¶ A.4, A.16). Nowhere in the Stipulation
_________________________________________________________________
by the commencement of the class period and that the Defendants
shielded this fact from public view. The Complaint alleges that the
Defendants created the illusion that Ross Cosmetics was a well-managed,
independent, financially viable company owned by a majority of unaffili-
ated stockholders that was experiencing tremendous growth and profit-
ability when in reality it was a puppet of the Core Sheth Families that
lacked the economic viability to operate but for the affiliation with the
Core Sheth Families. As a result of this alleged fraud, the Plaintiffs
alleged that they paid artificially inflated prices for Ross Cosmetics com-
mon stock.
4 The Settling Defendants are Michael E. Emery, Eugene H. Karam,
John M. Waters, Shashikant Sheth, Mehendra Sheth, Kirit Sheth, Jamna-
das Sheth, Jayesh Sheth, Virendra Sheth, S&J Perfume Co., Starion
International Ltd., Ross Cosmetics Distribution Centers, Inc., and Barry
A. Bloomfield. (Stipulation of Settlement ¶ A.38.)
7
was the term "affiliated" defined. By Order of September 30, 1993
(the September 30 Order), the district court, pursuant to Rule 23(e) of
the Federal Rules of Civil Procedure, preliminarily approved the
terms of the Stipulation and settlement provided for therein (the Set-
tlement) and certified the class in accordance with the terms of the
Stipulation. The September 30 Order directed that a notice with a
claim be mailed to all class members and that a hearing be held on
December 15, 1993, to consider the fairness, reasonableness, and ade-
quacy of the Settlement. The September 30 Order also designated Co-
Lead Counsel as Settlement Counsel to process all Proofs of Claim
and administer the Settlement.
Notice dated October 15, 1993, with attached claim forms, was
sent to class members notifying them of the class certification and a
proposed partial class settlement. The notice included an exclusion
provision substantially the same as the one in the Stipulation:
Excluded from the Class are Ernst & Young and the defen-
dants in the Action, any subsidiary or affiliate of any of
them, any person or entity who is a shareholder (other than
a shareholder of Ross Cosmetics), partner, officer, director,
or controlling person of any of them, any entity in which
any of them has a controlling interest, members of the fami-
lies of each of them and the legal representatives, heirs, suc-
cessors or assigns of any of them. Also excluded from the
Class will be any purchaser of Ross Cosmetics common
stock during the Class Period, who requests exclusion.
(J.A. at 535.) Nowhere in the notice was the term"affiliate" defined.
The notice gave all class members until November 30, 1993, to
request exclusion from the class. Claimants-Appellants received the
notice and did not seek exclusion from the class. Following a hearing
on December 15, 1993, the district court issued an Order and Final
Judgment approving the Settlement as fair, reasonable, and adequate.
After Ernst & Young filed an opposition to the proposed distribu-
tion to certain claimants, the district court held an evidentiary hearing
on October 23, 1996, regarding postsettlement activities (the October
23 Hearing). At this hearing, the district court defined "affiliate" as
"people who are [in] some way associated with this massive fraud."
8
(J.A. at 211.) The district court held that the Settlement Counsel were
responsible for the investigation of claims to the Settlement and that
the investigation was deficient in many respects. The district court
concluded that further investigation into certain paid and contested
claims was necessary and that it should exercise general supervisory
powers over the postsettlement activities and administration of claims
in the class action. As part of that power, the district court appointed
a court investigator (the Court Investigator) to investigate and issue
a report to the court on certain previously paid claims and contested
claims. The Court Investigator's report recommended that the district
court find, inter alia, that George J. O'Leary was an affiliate of Ross
Freitas, the former President of Ross Cosmetics and a defendant in the
suit, and his claim should therefore be rejected; that Gladys M. Safer
should be deemed an affiliate of Freitas, and her claim should there-
fore be rejected; and that Paryank Ramesh Shah and UPS Corporation
should be deemed affiliates because of Shah's "knowledge of previ-
ously undisclosed information relative to Ross Cosmetics['s] manage-
ment structure," and their claims should therefore be rejected. (J.A. at
660.)
On September 2, 1997, the district court held a hearing on the
Court Investigator's report, providing Claimants-Appellants with the
opportunity to present evidence related to their contested claims (the
September 2 Hearing). At this hearing, the Court Investigator stated
that he was not sure of the working definition of the term "affiliate,"
but he had defined it as "individuals who conducted business or finan-
cial transactions with one of the defendants or one of the named com-
panies." (J.A. at 233.) The Court Investigator's definition was
challenged by two expert witnesses on behalf of Settlement Counsel,
who defined "affiliate" based upon the definition in the federal securi-
ties laws, which contemplates control. Both experts rejected the Court
Investigator's definition of "affiliate." One of these experts stated that
applying the federal securities law concept of "affiliate," he saw no
reason not to pay the claims of O'Leary, Shah, and UPS.
At the end of the hearing, the district court appointed a Special
Counsel to the class (Special Counsel) and instructed him to work
with the Court Investigator and Settlement Counsel for the class to
review claims made by Claimants-Appellants and others against the
settlement fund. The district court issued an Order dated October 22,
9
1997 directing, inter alia, that Special Counsel contact O'Leary,
Safer, Shah, and UPS to resolve their pending claims. On January 20,
1998, the Special Counsel filed his Report and Recommendations to
the district court.
On February 10, 1998, the district court issued an Order adjudicat-
ing the claims of O'Leary, Safer, Shah, and UPS (the February 10
Order). In the February 10 Order, the district court stated that "affili-
ated" and/or "control" persons as defined by Rule 12b-2 are excluded
persons.5 Citing Zimmerman v. Bell, 800 F.2d 386, 390 (4th Cir.
1986) and other cases as support, the district court stated that in addi-
tion, "all persons who had knowledge of any of the wrongdoings
alleged in the Complaint would not be entitled to any recovery." (J.A.
at 359.) The district court denied O'Leary's claim based upon its con-
clusion that he was an affiliate of Ross Freitas under the federal secur-
ities law definition in Rule 12b-2.6 The district court denied Safer's
claim based upon its conclusion that she had a "close connection or
an alliance with Ross Freitas." (J.A. at 369.) Applying its
"knowledge-of-wrongdoing" standard to Shah and UPS, the district
court concluded that Shah and UPS would not be entitled to recovery
_________________________________________________________________
5 Rule 12b-2, promulgated under the Exchange Act, defines "affiliate"
and "control" in the following manner:
An "affiliate" of, or a person "affiliated" with, a specified person,
is a person that directly, or indirectly through one or more inter-
mediaries, controls, or is controlled by, or is under common con-
trol with, the person specified.
The term "control" (including the terms "controlling," "con-
trolled by" and "under common control with") means the posses-
sion, direct or indirect, of the power to direct or cause the
direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, or other-
wise.
17 C.F.R. § 240.12b-2 (1998).
6 Although the district court did not specifically mention Rule 12b-2 in
its discussion of O'Leary's claim, we surmise that it excluded his claim
under the Rule 12b-2 definition of "affiliate" based upon its discussion
of the control Freitas possessed over O'Leary's stock brokerage account,
its omission of any discussion of knowledge of wrongdoing by O'Leary,
and its unequivocal conclusion that O'Leary was an affiliate of Freitas.
10
because Shah had "inside information unavailable to the public" of
the involvement of the Core Sheth Families in the management of
Ross Cosmetics gained through his contact with the Core Sheth Fami-
lies and he made all investment decisions on behalf of UPS. (J.A. at
372.) These four claimants filed notices of appeal, and their cases
were consolidated for appeal to this Court. We address their claims
in turn.
II.
The district court applied the standard federal securities law defini-
tion of "affiliate" in Rule 12b-2 to exclude the claim of O'Leary from
the Settlement. Because both Claimants-Appellants and Appellees do
not dispute that an "affiliate" as defined in Rule 12b-2 is excluded
from the Settlement, our task is limited to determining whether the
district court clearly erred in its factual finding that O'Leary was an
affiliate of Ross Freitas. We will set aside the district court's factual
finding that O'Leary was an affiliate of Freitas as clearly erroneous
only if we, after considering all of the evidence, are "left with the def-
inite and firm conviction that a mistake has been committed." United
States v. United States Gypsum Co., 333 U.S. 364, 395 (1948). In
making this determination, "we must give due regard to the opportu-
nity of the district court to judge the credibility of witnesses." Multi-
Channel TV Cable Co. v. Charlottesville Quality Cable Corp., 65
F.3d 1113, 1122 (4th Cir. 1995).
The district court based its finding that O'Leary was an affiliate of
Freitas upon evidence that (1) O'Leary executed an unlimited power
of attorney dated June 4, 1992, authorizing Freitas to trade stock in
O'Leary's brokerage account, (2) O'Leary lived at the same address
as or with Carolyn Safer Kenner, a Ross Cosmetics corporate officer,
(3) O'Leary traded through the same brokers as Kenner and Freitas
and used the same account executive, and (4) Ralph McNamara, a
long time friend of Freitas made inquiries about the status of
O'Leary's account, Freitas's account, Safer's account, and the
account of a Freitas-Safer stock partnership. The district court further
pointed out that O'Leary failed to provide any additional evidence in
support of his claim after the September 2 Hearing on the report of
the Court Investigator.
11
At the October 23 Hearing, O'Leary testified that he did not have
day-to-day dealings with Freitas and did not discuss any of the Ross
Cosmetics stock transactions with Freitas. O'Leary also testified that
no one made trades in his account without his instructions or consent.
As the arbiter of credibility, the district court was free to discredit this
self-serving testimony. See Cebollero v. Commissioner, 967 F.2d 986,
992 (4th Cir. 1992). Moreover, O'Leary's grant to Freitas of an
unlimited power of attorney to trade in his account belies his claim
that Freitas was merely a social contact. That the record does not indi-
cate that any trading by Freitas actually occurred is irrelevant because
the federal securities law defines "control" as possession of power to
direct or cause the direction of the management and policies of a per-
son, not the actual use of such power. See 17 C.F.R. § 240.12b-2
(1998) (Rule 12b-2 definition). In light of these facts, the district
court's finding that O'Leary was an affiliate of Freitas was not clearly
erroneous because it was not against the clear weight of the evidence
considered in light of the entire record. See Jiminez v. Mary Washing-
ton College, 57 F.3d 369, 379 (4th Cir. 1995). We therefore affirm the
district court's denial of O'Leary's claim.
III.
The district court excluded the claims of Shah and UPS from the
Settlement based upon its finding that Shah had knowledge of wrong-
doings alleged in the Complaint gained through his contact with the
Core Sheth Families and excluded the claim of Safer from the Settle-
ment based upon its finding that she had a close connection or an alli-
ance with Ross Freitas. Because these grounds of exclusion deviate
from the Rule 12b-2 definition of "affiliate" that is accepted by all
parties to this litigation, the issue that we must address for these
claims is whether these grounds of exclusion were appropriate.
Claimants-Appellants argue that their fundamental due process rights
will be violated if they are excluded from the Settlement based upon
any definition of "affiliate" other than the Rule 12b-2 definition
because they relied upon the latter in refraining from instituting their
own suits and may now be prevented from suing individually due to
the expiration of the applicable statute of limitations. Appellees
counter that the district court appropriately exercised its equitable
powers in excluding claimants who were associated with wrongdoing
12
or a wrongdoer from the settlement fund.7 The district court's action
can logically be interpreted either as adding other grounds of exclu-
sion to the Stipulation or interpreting "affiliate" to include individuals
who had knowledge of wrongdoing and/or a close connection with a
wrongdoer. We address each of these possibilities in turn.
A.
The first possibility is that the district court added "knowledge of
. . . wrongdoings alleged in the Complaint" and/or a "close connection
or an alliance" with a wrongdoer as another ground of exclusion
under the Stipulation. We can dispose of this possibility rather easily.
Although Rule 23(c)(1) of the Federal Rules of Civil Procedure pro-
vides that a district court may alter or amend the class "before the
decision on the merits," that rule is inapplicable, absent egregious
error, where the district court has already entered a final judgment
approving a settlement of the class action suit. See Jeff D. v. Andrus,
899 F.2d 753, 758 (9th Cir. 1989). Moreover, the district court's
power to approve or reject class action settlements under Rule 23(e)
of the Federal Rules of Civil Procedure does not permit it to modify
_________________________________________________________________
7 Appellees also make two waiver arguments, neither of which is per-
suasive. First, Appellees argue that Claimants-Appellants waived any
objection to the district court's definition of"affiliate" by not appealing
from the December 15 Order approving the settlement. The December 15
Order never defined "affiliate," however, so it is not clear what
Claimants-Appellants could have appealed. Second, Appellees argue that
Claimants-Appellants waived any objection to the district court's defini-
tion of "affiliate" put forward at the October 23 Hearing. In its February
10 Order, however, the district court made no finding that any of the
Claimants-Appellants was "associated" with the alleged fraud, and, in
fact, adopted a different and even broader definition of "affiliate." More-
over, an appeal of the district court's definition at the October 23 Hear-
ing would have constituted an interlocutory appeal, which is disfavored.
See 28 U.S.C.A. § 1291 (West 1993); Gardner v. Westinghouse Broad-
casting Co., 437 U.S. 478, 480 (1978). As this Court has noted, "A single
appeal following final judgment facilitates orderly litigation and compre-
hensive appellate review of all issues presented, many of which are
dependent upon or related to other issues in the suit." Carson v. Ameri-
can Brands, Inc., 606 F.2d 420, 422 (4th Cir. 1979) (en banc), rev'd on
other grounds, 450 U.S. 79 (1981).
13
the terms of a negotiated settlement. See Evans v. Jeff D., 475 U.S.
717, 727 (1986). In this case, the district court made its earliest hint
of excluding individuals with knowledge of wrongdoing or a close
connection with a wrongdoer at the October 23 Hearing, nearly three
years after it had approved the Settlement. We do not believe that the
omission from the Stipulation of an explicit exclusion of individuals
with knowledge of wrongdoing and/or a close connection with a
wrongdoer constitutes egregious error sufficient for the district court
to alter the class. However noble a goal it might have been to exclude
these individuals from sharing in the Settlement, the district court was
not empowered unilaterally to add this additional ground of exclusion
to the Stipulation after it had approved the Settlement.
B.
The second possibility is that the district court interpreted "affili-
ate" to include knowledge of wrongdoing and/or a close connection
or an alliance with a wrongdoer. A settlement agreement is a contract
and must be interpreted as such. See United States v. ITT Continental
Baking Co., 420 U.S. 223, 238 (1975). Because contract construction
is a question of law, we review the district court's interpretation of the
Stipulation de novo. See Nehi Bottling Co. v. All-American Bottling
Corp., 8 F.3d 157, 161-62 (4th Cir. 1993). The Stipulation states that
all terms "shall be governed and interpreted according to the laws of
Delaware without regard to its conflict of law rules, unless otherwise
superseded or governed by federal law in which case federal law shall
take precedence." (Stipulation of Settlement¶ Q.10.) In federal secur-
ities litigation, this Court gives effect to a choice-of-law provision in
a contract absent evidence that the provision is unreasonable. See
Allen v. Lloyd's of London, 94 F.3d 923, 928 (4th Cir. 1996). Finding
no unreasonableness here, we apply Delaware law to determine the
definition of "affiliate" unless the definition of "affiliate" is governed
by federal law, in which case we apply federal law.
When interpreting a contract under Delaware law, a court's author-
ity is limited to giving effect to the parties' intentions, as evidenced
by the terms of the contract. See Burge v. Fidelity Bond & Mortgage
Co., 648 A.2d 414, 420 (Del. 1994). Under the plain language
approach to contract interpretation, where the relevant contract provi-
sion is clear and unambiguous, a court should give effect to the provi-
14
sion's plain meaning. See Myers v. Myers, 408 A.2d 279, 280 (Del.
1979). When the provision at issue, however, is"fairly susceptible of
different interpretations or may have two or more different meanings,
there is ambiguity." Eagle Indus. v. DeVilbiss Health Care, Inc., 702
A.2d 1228, 1232 (Del. 1997). In an ambiguous situation, "the inter-
preting court must look beyond the language of the contract to ascer-
tain the parties' intentions." Id.Our task, therefore, is to determine whether the term "affiliate" in
the Stipulation is ambiguous. In standard legal parlance, "affiliate"
denotes a close connection or association between two persons. See,
e.g., Black's Law Dictionary 58 (6th ed. 1990) (defining "affiliate" as
"signif[ying] a condition of being united; being in close connection,
allied, associated, or attached as a member or branch"). Rule 12b-2,
the definition advanced by Claimants-Appellants, defines "affiliate"
in a similar, but more narrow, fashion:
An "affiliate" of, or a person "affiliated" with, a specified
person, is a person that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under
common control with, the person specified.
The term "control" (including the terms "controlling," "con-
trolled by" and "under common control with") means the
possession, direct or indirect, of the power to direct or cause
the direction of the management and policies of a person,
whether through the ownership of voting securities, by con-
tract, or otherwise.
17 C.F.R. § 240.12b-2 (1998). With these definitions in mind, we turn
to the claims at issue.
The district court excluded the claims of Shah and UPS from the
Settlement on the ground that Shah had knowledge of wrongdoing
alleged in the Complaint gained through his contact with the Core
Sheth Families. The district court excluded Safer's claim from the
Settlement on the ground that she had a close connection or an alli-
ance with Freitas. In essence, the district court applied the standard
legal definition of "affiliate" to deny the claims of Safer, Shah, and
UPS. This definition is certainly a plausible one. The context in which
15
"affiliate" is used in the "Excluded Persons" section of the Stipulation
and in the class notice sent to class members confirms that the parties
intended to exclude persons with some connection to Defendants or
Ernst & Young from the Settlement.8 See Stipulation of Settlement
¶ A.16 ("Excluded Persons shall mean the Defendants and Ernst &
Young, . . . any Person in which any Defendant or Ernst & Young has
a controlling interest or which is related to or affiliated with . . . .");
Class Notice (J.A. at 535) ("Excluded from the Class are Ernst &
Young and the defendants in the Action, any subsidiary or affiliate of
any of them . . . ."). The participants' other uses of "affiliate" during
the settlement proceedings reiterate that "affiliate" implies a close
relationship between two persons. See Letter from Co-Lead Counsel
to Gladys Safer of 12/12/94 (J.A. at 584) (describing Carolyn Safer
Kenner, a former Ross Cosmetics officer, as "a business partner and
an affiliate of" Freitas); Stipulation of Settlement ¶ A.30 (defining
"Released Parties" as, inter alia,"the Settling Defendants, . . . each
and every one of their predecessors, present or former successors,
assigns, affiliates . . . .").
Although a "close connection or an alliance" is a plausible defini-
tion of "affiliate," it is not the only plausible one. Because the Settle-
ment arose from a class action lawsuit brought under the Exchange
Act, the parties to the Stipulation may have intended to limit "affili-
ate" to its definition in Rule 12b-2, a regulation promulgated under
the Exchange Act. The term "affiliate" is thus fairly susceptible of
two different interpretations: (1) the Rule 12b-2 definition of a person
who controls, or is controlled by, another person, and (2) the standard
legal definition of a person with a close connection or alliance with
another person, which encompasses the Rule 12b-2 definition.
Accordingly, we must look beyond the language of the Stipulation to
ascertain the parties' intentions in excluding "affiliates" of the Defen-
dants and of Ernst & Young from the Settlement.
Unfortunately, we are not well-suited to the task before us. We
simply cannot discern from the record the definition of "affiliate"
agreed upon by the parties. Because "affiliate" is fairly susceptible of
two different interpretations, it is appropriate for the district court to
_________________________________________________________________
8 The Stipulation defines "Person" as "any individual, firm, corporation
or other entity." (Stipulation of Settlement¶ A.25.)
16
receive extrinsic evidence to determine what the parties to the Stipula-
tion believed the term "affiliate" to mean. See Eagle Indus., 702 A.2d
at 1233 (holding that trial court may consider extrinsic evidence,
including prior agreements and communications of the parties, in con-
struing ambiguous contractual provision). After determining the defi-
nition of "affiliate" agreed upon by the parties, the district court must
apply this definition to the claims of Safer, Shah, and UPS. We there-
fore vacate the district court's denial of the claims of Safer, Shah, and
UPS and remand to the district court to hold an evidentiary hearing
to determine the definition of "affiliate" adopted by the parties and to
apply this definition to the claims of Safer, Shah and UPS.9
IV.
In sum, we affirm the district court's exclusion of O'Leary from
the Settlement based upon our conclusion that the district court did
not clearly err in finding that he was an affiliate of Freitas under the
federal securities law definition of "affiliate." We vacate the district
court's exclusion of Safer, Shah, and UPS from the Settlement based
_________________________________________________________________
9 "Generally speaking, the practical interpretation of a contract by the
parties to it for any considerable period of time before it comes to be the
subject of controversy is deemed of great, if not controlling, influence."
Old Colony Trust Co. v. City of Omaha, 230 U.S. 100, 118 (1913). Thus,
the district court should credit evidence that indicates what the parties to
the Stipulation understood "affiliate" to mean prior to the hearings held
by the district court. See Sanchez v. Maher, 560 F.2d 1105, 1108 & n.3
(2d Cir. 1977) (upholding district court's reliance on letter written by
defendant over one year after stipulation was entered into as evidence of
meaning of ambiguous provision). We do not believe that a conclusion
by the district court that "affiliate" included individuals who had a close
connection or association with any of the Defendants would violate the
fundamental due process rights of Claimants-Appellants. Unlike the cor-
poration in In re Anthracite Coal Antitrust Litigation, 87 F.R.D. 555(M.D. Pa. 1980), a case relied upon by Claimants-Appellants, Claimants-
Appellants were not misled into believing that they were included in the
plaintiff-class; they were only unsure about the exact meaning of "affili-
ate" adopted by the parties. After receiving the class notice, Claimants-
Appellants easily could have inquired about the definition of "affiliate"
adopted by the parties prior to November 30, 1993, the deadline for
requesting exclusion from the class.
17
upon our conclusion that the district court may have erred in defining
"affiliate" to include more than the federal securities law definition
and in applying this expanded but perhaps not agreed-upon definition
to exclude their claims. Because we cannot discern from the record
what definition of "affiliate" the parties to the Stipulation adopted, we
remand this case to the district court with instructions to hold an evi-
dentiary hearing to make this determination and to apply the resulting
definition to the claims of Safer, Shah, and UPS.
AFFIRMED IN PART, VACATED AND
REMANDED IN PART
18