Michael Jiannaras v. Mike Alfant ( 2016 )

This opinion is uncorrected and subject to revision before
publication in the New York Reports.
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No. 64
Michael Jiannaras,
Plaintiff,
v.
Mike Alfant, et al.,
Appellants,
et al.,
Defendant;
Kathleen M. Ackerman, et al.,
Non-Party Respondents.
Frederick Liu, for appellants.
Martin E. Karlinsky, for nonparty-respondents.
PIGOTT, J.:
At issue on this appeal is a proposed settlement of
class action litigation arising out of the merger of defendants
On2 Technologies, Inc. and Google, Inc. The proposed settlement
would release and extinguish any and all damage claims relating
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to the merger without affording class members an opportunity to
"opt out," thereby prohibiting class members from pursuing any
individual claims that are separate and apart from the class
settlement. We hold that because the proposed settlement in this
instance would deprive out-of-state class members of a cognizable
property interest, the courts below properly refused to approve
the settlement.
Google and On2 (a former publicly-held Delaware
corporation domiciled in New York State) entered into a merger
agreement on August 4, 2009. After announcement of the merger,
plaintiff, the owner of common shares of On2 stock, brought a
class action in Supreme Court on behalf of himself and other
similarly situated On2 shareholders. He alleged that On2's board
of directors had, among other things, breached its fiduciary duty
to its shareholders. He sought mostly equitable relief.1 Other
On2 shareholders commenced similar actions in the Delaware Court
of Chancery.
Thereafter, the plaintiffs in the New York and Delaware
actions agreed with On2 and its directors to settle all claims
1
Plaintiff sought a declaration that the action was
maintainable in class form; a certification as class
representative; a declaration that the merger agreement was
entered into in breach of fiduciary duties and was unlawful and
unenforceable; rescission of the merger agreement; an injunction
against consummation of the merger unless Google and On2
implemented a procedure to obtain the highest price and made full
disclosure of material facts; a constructive trust over
consideration improperly received; and attorneys' fees.
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with respect to the merger. The parties filed a stipulation of
settlement with Supreme Court that provided for, among other
things, dismissal of the New York and Delaware actions in their
entirety, with prejudice, and a release of "any and all" merger-
related claims. The settlement did not provide for opt-out
rights. The court preliminarily certified the proposed
settlement class pursuant to CPLR article 9, subject to final
determination after a fairness hearing.
Over two hundred shareholders filed objections to the
proposed settlement, alleging, as relevant to this appeal, that
the omission of an opt-out right deprived out-of-state
shareholders their ability to pursue claims arising from the
merger.
Following a hearing, Supreme Court found the settlement
to be fair, adequate, reasonable and in the best interest of the
class members. Nevertheless, the court refused to approve the
settlement because it did not afford out-of-state class members
the opportunity to opt out. On appeal, the Appellate Division,
with one Justice dissenting, affirmed (124 AD3d 582 [2d Dept
2015]). We agree with the Appellate Division that this case is
governed by our holding in Matter of Colt Indus. Shareholder
Litig. (77 NY2d 185 [1991]), and we decline an invitation to
overrule that case.
Opt-out rights ensure that class members will have the
option of pursuing individual actions for redress. In Phillips
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Petroleum Co. v Shutts (472 U.S. 797 [1985]), the United States
Supreme Court held that due process requires opt-out rights in
actions "wholly or predominately" for monetary damages.
After Shutts, this Court in Matter of Colt considered
whether a Missouri corporation with no ties to New York, had a
due process constitutional right to opt out of a New York class
action in which the relief sought in the complaint was largely
equitable in nature. We held that "there is no due process right
to opt out of a class that seeks predominantly equitable relief"
(Colt, 77 NY2d at 195). Nonetheless, we determined that the
trial court erred as a matter of law by approving the settlement
that purported to extinguish rights of non-resident class members
to bring an action for damages in another jurisdiction (id. at
197). We noted that once "the parties presented the court with a
settlement that . . . required the class members to give up all
claims in damages, the nature of the adjudication changed
dramatically" (id. at 199). In essence, while it was initially
permissible to decline to afford class members the opportunity to
opt out when the complaint demanded predominently equitable
relief, the trial court erred "by seeking to bind [class members]
with no ties to New York State to a settlement that purported to
extinguish its rights to bring an action in damages in another
jurisdiction" (id. at 197).
The same can be said here. While the complaint seeks
predominately equitable relief, the settlement would also release
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any damage claims relating to the merger by out-of-state class
members. The broad release encompassed in the agreement bars the
right of those class members to pursue claims not equitable in
nature, which under Shutts and Colt, are constitutionally
protected property rights. Defendants attempt to distinguish
Matter of Colt by the scope of the release in that case, which
included release of claims related to a prior leveraged buyout in
addition to merger-related claims (Colt, 77 NY2d at 190). While
it is true that the provision was included in the release in
Colt, it was not relied upon in this Court's holding (see id. at
197 ["The settlement in this case gave class members relief that
was essentially equitable in nature, but exacted as a price for
that relief a concession that class members could not pursue
damage claims based on the merger" [emphasis added]). At no
point did this Court make any attempt to tie the opt-out rights
to the fact that the objecting shareholder held shares at the
time of the earlier leveraged buyout. Instead, we noted only
that, at the time of the merger, the shareholder held a specific
number of Colt shares (see id. at 188). Accordingly, the
releases in Matter of Colt and this case are not distinguishable
for purposes of our opt-out analysis. Thus, we perceive no error
in the refusal of the courts below to approve the settlement that
did not include an opt-out provision.
Defendants urge us to distinguish "incidental damages"
sought from individualized damage claims. Relying primarily on
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Wal-Mart Stores, Inc. v Dukes (131 S. Ct. 2541 [2014]), they argue
that if the legal damage claims are merely "incidental" to
"predominantly equitable relief" it is permissible to bind
out-of-state class members.
Wal-Mart is instructive for distinguishing federal
class actions from those brought under New York law. Federal
Rule of Civil Procedure 23 (b) (2) applies to actions for
equitable and declaratory relief and does not contain a right to
notice or to opt out of class actions commenced pursuant thereto.
The Supreme Court held that claims for monetary relief may not be
certified under rule 23 (b) (2) "at least where. . .. the
monetary relief is not incidental to the injunctive or
declaratory relief" (id. at 2557). In other words,
"individualized monetary claims" belong in another provision,
rule 23 (b) (3), where the opportunity for class members to opt
out is available. The Court reserved decision on whether due
process requires opt-out rights of a Rule 23 (b) (2) settlement
if the monetary relief sought is "incidental" to the injunctive
or declaratory relief (see id. at 2560), but the Court' s
language suggests some skepticism as to whether any monetary
damages could qualify as "incidental" (see id. ["We need not
decide in this case whether there are any forms of 'incidental'
monetary relief that are consistent with the interpretation of
rule 23 [b] [2] we have announced and that comply with the Due
Process Clause" [emphasis added]).
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Wal-Mart has no bearing on the resolution of this
appeal, however. Here, plaintiff sought class certification
under article 9 of New York's CPLR. As we recognized in Matter
of Colt, "[u]nlike Rule 23," which defines three types of class
actions and requires notice and opt-out rights only as to one
type of class, the New York statute "contemplates . . .that a
Judge may choose to exercise discretion to permit a class member
to opt out of a class" (Matter of Colt, 77 NY2d at 194 citing
CPLR 903, 904). Indeed, the CPLR authorizes trial courts to
expand due process rights where a class settlement would
extinguish out-of-state class members' damages claims separate
from class-wide equitable relief. Notably, the settlement
agreement here, as in Matter of Colt, impinges on the right of
out-of-state class members to pursue any and all claims for
damages relating to the merger, not only claims that may be
considered incidental.
Accordingly, the order of the Appellate Division should
be affirmed, with costs, and the certified question answered in
the affirmative.
* * * * * * * * * * * * * * * * *
Order affirmed, with costs, and certified question answered in
the affirmative. Opinion by Judge Pigott. Chief Judge DiFiore
and Judges Rivera, Abdus-Salaam, Stein, Fahey and Garcia concur.
Decided May 5, 2016
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