Kevin Kloster v. John M. Koehler , 350 F.3d 747 ( 2003 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 02-3780
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In re: BankAmerica Corporation *
Securities Litigation *
*
____________________ *
*
Kevin Kloster, Joseph Hempen, *
* Appeal from the United States
Plaintiffs - Appellees, * District Court for the Eastern
* District of Missouri.
John M. Koehler, David P. Oetting, *
*
Plaintiffs - Appellants, *
*
Selma Kaiser, Brian Markee, Walter *
E. Ryan, Jr., *
*
Plaintiffs - Appellees, *
*
Ernesto Gumapas, Sydney Sorkin, *
Herman Shyken, Carol Mackay, *
Executrix of the estate of Joseph I. Sir, *
*
Intervenors Below - *
Appellees, *
*
Robert A. Hepworth, *
*
Plaintiff - Appellee, *
*
v. *
*
Hugh L. McColl, Jr., James H. Hance, *
Jr., David A. Coulter, Michael E. *
O’Neill, John J. Higgins, Marc D. Oken, *
Bank of America, *
*
Defendants - Appellees, *
*
Allison Desmond, *
*
Objector, *
*
JAS Securities, LLC, Milberg, Weiss, *
Bershad, Hynes & Lerach, LLP, *
Wachovia Bank National Association, *
*
Movants Below. *
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Submitted: June 11, 2003
Filed: December 2, 2003 “Corrected 12/8/03"
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Before MELLOY, HANSEN, and SMITH, Circuit Judges.
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MELLOY, Circuit Judge.
In this class action under the Private Securities Litigation Reform Act of 1995,
15 U.S.C. § 78u-4 (the “Act”), the district court1 determined that it possessed the
1
The Honorable John F. Nangle, Senior United States District Judge for the
Eastern District of Missouri.
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authority to approve a global settlement involving all plaintiff classes notwithstanding
the fact that some members of a lead plaintiff group for one of four certified plaintiff
classes objected to the settlement. We affirm.
I. Background
The plaintiffs in this class action alleged losses caused by misrepresentations
and omissions surrounding the 1998 merger of NationsBank and BankAmerica to
form Bank of America. After consolidating numerous state and federal actions from
multiple jurisdictions, the district court certified four plaintiff classes: the
NationsBank and BankAmerica, Holder and Purchaser classes. Membership in the
classes depended on whether plaintiffs held or purchased NationsBank or
BankAmerica shares during designated periods of time. As required under the Act,
the district court appointed lead plaintiffs or lead plaintiff groups who in turn selected
class counsel. See 15 U.S.C. § 78u-4(a)(3)(B)(i) and (v). The district court also
designated some of these lead plaintiffs as class representatives under Fed. R. Civ.
P. 23.
The district court appointed a seven-member lead plaintiff group to represent
the NationsBank classes. Members of this group included Earl J. Gates, Robert
Hepworth, Pamela Wootton, Appellees Joseph Hempen and Kevin Kloster, and
Appellants John M. Koehler and David P. Oetting. The district court appointed a six-
member lead plaintiff group to represent the BankAmerica classes. Members of this
group included David Fike, Elizabeth Menkes, Patricia A. Thomas, and Appellees
Selma Kaiser, Brian Markee, and Walter E. Ryan, Jr. No members of the lead
plaintiff groups were large institutional investors nor did they have relationships with
one another prior to this litigation. The lead plaintiffs for the NationsBank classes
owned, collectively, less than one tenth of one percent of the outstanding shares in
NationsBank. Institutional investors owned more than forty percent of NationsBank,
but no institutional investor came forward to serve as a lead plaintiff.
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Shortly before trial, class counsel, defendants, and some members of the lead
plaintiff groups participated in a mediation that led to the signing of a memorandum
of understanding with the defendants regarding a $490 million global settlement of
all claims. Under the global settlement, Bank of America was to pay the NationsBank
classes approximately $333 million and the BankAmerica classes approximately $157
million. While many of the circumstances and statements surrounding the mediation
are disputed, it is undisputed that class counsel signed the memorandum of
understanding with the defendants after members of the lead plaintiff group for the
NationsBank class left the mediation.
In response to a motion for the district court’s approval of the global
settlement, three members of the NationsBank lead plaintiff group, Appellants
Oetting and Koehler and Appellee Kloster, filed objections. They alleged that class
counsel instructed them to leave the mediation because it was futile, but that class
counsel remained and reached the proposed global settlement for an amount far below
that which they had authorized. Based on these allegations, they argued that the
district court should not approve the global settlement because: class counsel
negotiated the settlement without their approval as lead plaintiffs; the settlement
provided inadequate compensation to the NationsBank classes; and the settlement
improperly structured compensation to be paid in cash rather than stock thus resulting
in adverse tax consequences and a depletion of the cash reserves of the new, merged
bank (in which most plaintiffs owned shares).
After sending notice to, and soliciting objections from, the hundreds of
thousands of eligible class members, the district court received a total of ten
objections. No institutional investors objected. The joint objection from Appellants
Oetting and Koehler and Appellee Kloster was the only objection filed by any
members of the NationsBank lead plaintiff group. Regarding the other NationsBank
lead plaintiffs, Appellee Hepworth supported the global settlement; Gates died prior
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to the mediation; Hempen was not available for comment; and Wootton stated that
she would defer to the decision of the group.
Faced with the fractured positions of the NationsBank lead plaintiff group, the
lack of a singular voice to advocate a position for the group, and the lack of clear
guidance in the Act regarding the power of a fraction of one lead plaintiff group to
disapprove settlement, the district court looked to cases under Fed. R. Civ. P. 23 to
determine the proper weight to place on the objections from Oetting, Koehler, and
Kloster. The district court held a fairness hearing and issued an order in which it
determined, inter alia, that it had the authority to approve the settlement even over the
objections raised by the three members of the NationsBank lead plaintiff group.
In determining that it had the authority to conduct a fairness/adequacy review
and approve the settlement over Appellants' objections, the district court emphasized
its duty to act in the best interest of class members. It noted that Appellants’
estimations of the settlement value of the case were so high as to be “bordering on
fantasy.” It expressed concern that, because the global settlement amount far
exceeded what had been previously offered to the separate classes, the Appellants
potentially were jeopardizing a favorable settlement. The district court was intimately
familiar with the case, having spent over three years with the case prior to ruling on
the settlement. In light of this familiarity, the district court clearly expressed its
opinion that, based on working with the attorneys in the case, this was not the kind
of lawyer-driven, lawyer-initiated lawsuit that fails to protect class interest and that
Congress targeted with the Act.
Ultimately, the district court approved the settlement as fair and adequate by
applying those factors we have listed as relevant in the context of Rule 23 fairness
determinations. See Van Horn v. Trickey, 840 F.2d 604, 607 (8th Cir. 1988). In
particular, the district court noted the adequacy of the settlement in light of the
apparent merits of the plaintiffs’ cases and in light of the risks and the high level of
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uncertainty that the litigation would entail if allowed to proceed to trial. The district
court further noted the absence of objections from institutional investors and the
relatively slight number of shares owned by the objecting lead plaintiffs.
On appeal, Appellants Koehler and Oetting argue that we should reverse the
district court’s decision and hold that the district court erred as a matter of law in
approving the global settlement over their objections. They interpret the Act as
prohibiting the district court from approving a settlement unless the district court
either receives approval from the lead plaintiff, or lead plaintiff group, or disqualifies
the lead plaintiff for acting in a manner inimical to class interests. All parties concede
that the Act does not expressly provide for such a requirement, and Appellees argue
that we should not read such a requirement into the Act.
Alternatively, Appellees argue that we are not required to address the broader
issue of how much power the Act grants to lead plaintiff groups to control and settle
litigation. Appellees characterize the narrow issue presented for review as relating
only to whether the district court abused its discretion when it acted to approve a
settlement over objections from some members of a fractured lead plaintiff group that
failed to speak with one voice. In other words, Appellees argue that this case does
not concern the relative roles that class counsel, lead plaintiffs and the supervising
district court should play under the Act, but rather, is simply a case about how a
district court is to deal with a fractured lead plaintiff group.
We note that NationsBank lead plaintiff group member Kloster changed his
position after the district court proceedings and now appears before us as an appellee
to argue in support of the global settlement. Further, as expressly conceded by
Appellants during oral argument, the district court’s findings of fairness and adequacy
are not contested on appeal. Therefore, the only issue on appeal is whether the
district court properly determined that it had the authority, over the objections of
Koehler and Oetting, to review and approve the settlement.
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II.
Congress enacted the Private Litigation Securities Reform Act of 1995 to
address problems related to class action securities litigation. In particular, Congress
sought to create mechanisms to ensure the protection of class members’ interests in
securities litigation that was widely perceived as being lawyer-instituted and lawyer-
driven. See In re Cendant Corp. Litig., 264 F.3d 210, 254-68 (3rd Cir. 2001)
(providing a discussion of the history behind the adoption of the Act and the
potentially conflicting interests of class counsel and class members). One way in
which the Act provides this protection is by requiring the district courts to appoint a
lead plaintiff or lead plaintiff group to represent aggrieved shareholders and requiring
these lead plaintiffs to select counsel. See 15 U.S.C. § 78u-4(a)(3)(B)(i) (“the court
shall . . . appoint as lead plaintiff the member or members of the purported plaintiff
class that the court determines to be most capable of adequately representing the
interests of class members . . . the ‘most adequate plaintiff’”); 15 U.S.C. § 78u-
4(a)(3)(B)(v) (“The most adequate plaintiff shall, subject to the approval of the court,
select and retain counsel to represent the class.”). To further ensure that class
members’ interests and not the interests of class counsel drive the litigation, the Act
contains a rebuttable presumption that the most adequate plaintiff is the “person or
group of persons that . . . has the largest financial interest in the relief sought by the
class.” 15 U.S.C. § 78u-4(a)(3)(B)(iii)(I)(bb).2
While the Act is explicit on the lead plaintiff’s authority to select and retain
counsel, it is silent on the other responsibilities and rights that lead plaintiffs have to
2
Although we noted that the lead plaintiffs in this case are not institutional
investors and do not have the largest financial interest in the relief sought by the
classes, the district court’s selection of lead plaintiffs is not the subject of this appeal.
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control, direct, and manage class action securities litigation. In particular, the Act
says nothing about whether the lead plaintiff must either approve a settlement or be
replaced for actions inimical to class interests before a district court may review and
approve a proposed settlement. In addition, it says nothing regarding how a district
court should deal with a fractured lead plaintiff group that advocates inconsistent
positions.
We agree with Appellees that the present case does not squarely present the
broad question of whether the Act grants a lead plaintiff or lead plaintiff group
sufficient control over litigation to block a district court’s approval of a proposed
settlement. Looking at the narrow issue that is presented, namely, what weight a
district court must give to objections from a fraction of a fractured lead plaintiff
group, we find no guidance in the Act and find that the district court properly relied
on decisions under Rule 23 when it determined that it possessed the necessary
authority to approve the settlement.
“Under Rule 23(e) the district court acts as a fiduciary who must serve as
guardian of the rights of absent class members.” Grunin v. Int’l House of Pancakes,
513 F.3d 114, 123 (8th Cir. 1975). It is appropriate for the district court to serve this
role as guardian for absent class members because the district court is heavily
involved in the management of class actions and, therefore, “‘is exposed to the
litigants, and the strategies, positions and proofs.’” Id. (quoting Ace Heating &
Plumbing Co. v. Crane Co., 453 F.2d 30, 34 (3d Cir. 1971)). In light of this exposure
to the litigants and litigation, we defer to district courts’ approvals of settlement
agreements in class actions under an abuse of discretion standard:
Our review of the settlement approved by the district court in this case
is guided by the principle that: Such a determination is committed to the
sound discretion of the trial judge. Great weight is accorded his views
because he is exposed to the litigants, and their strategies, positions and
proofs. He is aware of the expense and possible legal bars to success.
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Simply stated, he is on the firing line and can evaluate the action
accordingly.
Elliot v. Sperry Rand Corp., 680 F.2d 1225, 1227 (8th Cir. 1982) (per curiam)
(internal citations omitted).
We believe this abuse of discretion standard is also appropriate for our review
of the district court’s decision to approve the global settlement over the objection of
Appellants Koehler and Oetting. The Act does not expressly divest the district court
of its Rule 23(e) authority or discretion by explicitly granting a veto power to lead
plaintiffs. Further, it seems clear that the Act was intended to supplement rather than
replace Rule 23. This strongly suggests that Congress did not intend to remove
discretion from the district courts or usurp the district courts’ traditional
responsibility to guard the interests of absent class members.
Reviewing the district court’s decision only for abuse of discretion, then, we
find that the district court, which was intimately familiar with this lengthy and
complex matter, did not abuse its discretion in overruling the objections of a fraction
of the NationsBank lead plaintiff group. The district court properly determined that
it bore a responsibility to safeguard the interests of class members, expressly noted
that this case was not lawyer-driven, understood the risks attendant to trial and the
strengths and weaknesses of the plaintiffs’ cases, and emphatically noted what it
viewed as the unrealistic expectations of the objecting lead plaintiffs. In light of
these determinations and the absence of guidance in the Act, it was not an abuse of
discretion for the district court to proceed under Rule 23 and approve the settlement
over Appellants’ objections. We leave for another day a determination of how much
control over litigation the Act confers on a singular lead plaintiff or unified lead
plaintiff group.
Accordingly, the judgment of the district court is affirmed.
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