Sterling v. Stewart

United States Court of Appeals,
Eleventh Circuit.
Nos. 95-8944, 95-8946 and 95-9001.
Robert STERLING, Jr.; Herbert Hutner, et al., Plaintiffs-Appellants,
Mary Wyman Stone Fraser, et al., Intervenors-Plaintiffs,
William T. Martin; Peter Chapaut; Brent Bumpers, Intervenors-Plaintiffs, Appellants,
v.
Richard STEWART; Robert Fisher, et al., Defendants-Appellees,
Transit Sales and Service, Inc., Intervenor.
Robert STERLING, Jr.; Herbert Hutner, et al., Plaintiffs-Appellants,
Mary Wyman Stone Fraser; Laura Lawton Stone Fraser, et al., Intervenors-Plaintiffs,
v.
Richard STEWART; Robert Fisher, et al., Defendants-Appellees,
William T. Martin; Peter Chaput, et al., Intervenors-Defendants, Appellants.
Robert STERLING, Jr.; et al., Plaintiff-Appellees,
Mary Wyman Stone Fraser; Laura Lawton Stone Fraser, et al., Intervenors-Plaintiffs,
Fraser Family Trust; William T. Martin, et al., Intervenors-Plaintiffs, Appellees,
v.
Richard STEWART; Robert Fisher, et al., Defendants-Appellants,
Transit Communications, Inc., Transit Communications, Services, LP, et al., Defendants-
Appellants,
Transit Sales and Service, Inc., Intervenor, Defendant-Appellant.
Oct. 28, 1998.
Appeals from the United States District Court for the Northern District of Georgia. (No. 1:93-CV-
2811-GET), G. Ernest Tidwell, Judge.
Before BARKETT, Circuit Judge, and GODBOLD and GOODWIN*, Senior Circuit Judges.
GOODWIN, Senior Circuit Judge:
Robert Sterling and other plaintiffs (together "Sterling") appeal the district court's approval
of a settlement terminating their derivative suit. They object that the district court erred in
appointing a receiver, realigning the corporations as plaintiffs, and approving an unfair settlement.
The Defendants request, on cross-appeal, that should this court reverse and remand on any issues,
that it consider whether the district court erred in not dismissing the plaintiffs as parties and in ruling
certain privileged documents admissible. We affirm.1
I. BACKGROUND
Digital TranService Corporation ("DTC") is a long dormant Delaware corporation, with no
current officers or directors and with a voided charter. DTC, however, owns all of the stock of
Digital Communications Limited ("DCL"), a Georgia corporation. While DCL is currently
insolvent, it possesses interests in other operating entities. We will refer to DTC and DCL
collectively as the "Corporations."
The Appellants consist of preferred and common shareholders of DTC. Two separate actions
were commenced by Robert Sterling, Jr., a special preferred shareholder of DTC, and by Mr.
*
Honorable Alfred T. Goodwin, Senior U.S. Circuit Judge for the Ninth Circuit, sitting by
designation.
1
The case was originally argued on March 11, 1998. Submission was vacated on March 25,
1998, and the cause was referred to settlement staff for processing as a possible candidate for
settlement. Mediation failed, and the case was resubmitted for consideration on September 10,
1998.
2
Sterling and twelve other debenture holders of DCL. The first of these actions (the "Preferred
Shareholder Action") asserts both derivative claims on DTC's behalf and direct claims against
Richard Stewart, an officer and director of the Corporations; Robert Fisher, an attorney for the
Corporations; Fisher Financial Corporation; Charles Fraser, DCL's only other director; and various
other businesses (collectively, "Stewart Defendants"). Sterling alleges that Stewart and Fisher
stripped the Corporations of all their assets and misappropriated corporate opportunities, and asserts
common-law and statutory claims for breach of fiduciary duty, breach of contract, fraud, and
conversion, as well as federal law claims under RICO, 18 U.S.C. § 1962(c) & (d). The derivative
claims are also the subject of a separate appeal by William T. Martin, D. Brent Bumpers, and Peter
L. Chaput, three shareholders of DTC common shares (the "Martin Plaintiffs"), who had intervened
in the Preferred Shareholder Action. The appeals of the Sterling and Martin Plaintiffs raise common
issues of whether the district court erred in approving an improper settlement of the derivative
claims by an improperly appointed receiver. Currently, only the derivative claims remain in dispute,
for the district court granted summary judgment to the Stewart Defendants dismissing the direct
claims in the Preferred Shareholder Action, and the second action (the "Debentureholder Action")
settled during the pendency of this appeal.
The Stewart Defendants retained the law firm of Rogers and Hardin as counsel, and, for the
Corporations, hired Bondurant, Mixson and Elmore as counsel (the "Bondurant Firm"), which had
previously advised Stewart and Fisher of their fiduciary obligations to DCL affiliates. The
Bondurant Firm moved the court for the appointment of an independent, special litigation committee
after receiving conflicting directives from DCL directors Stewart and Fraser. The final motion
requested, however, a "special master," and the district court appointed what it called a "managing
3
receiver,"2 J. Ralph Beaird, Esq., former Dean of the University of Georgia School of Law. The
court gave Beaird all the power necessary to manage the litigation, including the power to employ,
advise, and direct corporate counsel as well as the authority to receive, consider, and make
recommendations regarding settlement offers.
In his investigation, Beaird sent a 98-item questionnaire to all parties soliciting information,
which some of the plaintiffs chose not to answer. Beaird also met with all counsel, interviewed
Stewart, Fraser, and Fisher, and reviewed numerous documents produced by discovery. On the basis
of this investigation, Beaird submitted a 75-page document outlining a proposed settlement and
moved that the Corporations be realigned as plaintiffs. The district court, after a fairness hearing
held on May 1, 1995, approved the settlement of the corporate claims, and concluded that the
settlement substantially exceeded a fair and adequate return on the Corporations' claim. The
plaintiffs' appeals followed.
II. STANDARD OF REVIEW
Federal law governs the appointment of a receiver by a federal court exercising diversity
jurisdiction. National Partnership Inv. Corp. v. National Housing Dev. Corp., 153 F.3d 1289, 1291-
92 (11th Cir.1998). This court reviews the appointment for abuse of discretion. SEC v. First Fin.
Group, 645 F.2d 429, 440 (5th Cir.1981).
Whether the district court applied the correct burden of proof for the settlement is a question
of law reviewed de novo. Reich v. Davis, 50 F.3d 962, 964 (11th Cir.1995). "Determining the
2
A receiver is a neutral court officer appointed by the court, usually to "take control, custody,
or management of property that is involved in or is likely to become involved in litigation for the
purpose of ... undertaking any [ ] appropriate action." 12 Charles Alan Wright, Arthur R. Miller
& Richard L. Marcus, Federal Practice and Procedure § 2981, at 5 (1973).
4
fairness of the settlement is left to the sound discretion of the trial court and we will not overturn the
court's decision absent a clear showing of abuse of that discretion." Bennett v. Behring Corp., 737
F.2d 982, 986 (11th Cir.1984).
III. DISCUSSION
On appeal, Sterling contends that the district court erred (1) in appointing a managing
receiver instead of a special litigation committee; (2) in realigning the Corporations as plaintiffs in
the derivative suit; and (3) in concluding that Beaird conducted an adequate, independent
investigation that yielded a fair settlement. First, Sterling argues that the district court erred in
appointing a receiver, which is guided by federal law, rather than a special litigation committee,
which is likely guided by state law.3 In the instant case, Beaird represented the Corporations,
pursued the claims he thought meritorious, and offered a proposed settlement to extinguish the case.
Second, Sterling objects to the district court's decision to realign the Corporations as plaintiffs,
arguing that realignment was improper because the Corporations were still antagonistic to the
Stewart Defendants and because they appeared to be in collusion with one another.4
Third, Sterling advances the argument that the district court did not evaluate the proposed
settlement with the appropriate level of scrutiny, which it would have applied if a special litigation
3
See, e.g., Crown Crafts, Inc. v. Aldrich, 148 F.R.D. 547, 548-49 (E.D.N.C.1993) (choosing
state law as governing the appointment of a special litigation committee). A special litigation
committee represents the corporation. When directors are accused of wrongdoing in a derivative
action, they typically appoint a disinterested person or persons to evaluate the merits of the claim
and pursue it if worthwhile.
4
Sterling erroneously asserted that the district court had substituted the Corporations in place
of the shareholders upon realignment. In fact, the district court unambiguously denied the
Corporations' motion to substitute and dismiss the other plaintiffs. See District Court Order of
October 27, 1994, at 5.
5
committee were appointed instead. While receivers benefit from the general presumption that
district courts favor settlement, see In re Chicken Antitrust Litigation, 669 F.2d 228, 238 (5th
Cir.1982), courts usually subject settlements proposed by special litigation committees to more
rigorous scrutiny, as established by state law, see Joy v. North, 692 F.2d 880, 888-89 (2d Cir.1982).
Sterling points to the stringent standards of Delaware law, and contends that the court should have
applied "its own independent business judgment" and a higher standard of review. Zapata Corp.
v. Maldonado, 430 A.2d 779, 789 (Del.1981); see Aronson v. Lewis, 473 A.2d 805 (Del.1984).
The Stewart Defendants, on the other hand, contend that the Beaird was properly appointed,
and that he acted appropriately in his investigative capacity. The district court recognized that
Beaird effectively performed as a special litigation committee. See District Court Order of
November 15, 1994, at 8 ("[a]lthough appointed by the court, the receiver's role is analogous to that
of a special litigation committee because he is independent and authorized to act on behalf of the
Corporations"). Next, the Stewart Defendants argue that once Beaird decided to pursue the
derivative claims against the defendants and negotiate a settlement offer, the Corporations were
properly realigned as plaintiffs, considering that no evidence of collusion between Beaird and the
defendants was ever established. Finally, Stewart asserts that the district court did not err in
approving the settlement and in finding Beaird's investigation as unbiased and adequate and the
settlement as fair.
Before turning to the issues of the receiver's appointment and the Corporations' realignment,
we must first evaluate whether the district court erred in approving the settlement offer, and whether
appointing a special litigation committee would have necessarily produced a different result.
Sterling asserts that to make such a determination, the court should first inquire into the
6
independence and good faith of the receiver and the adequacy of his investigation. Then Sterling
requests that the court determine whether the settlement offer was fair, under Delaware law. We
address Sterling's concerns in turn.
A. Beaird's Investigation
Sterling argues that Beaird's use of the Bondurant Firm produced a biased result, because
Bondurant had represented the defendants in a prior matter and thus possessed a potential conflict
of interest. See Stepak v. Addison, 20 F.3d 398 (11th Cir.1994) (suggesting that potential for
lingering allegiance by corporate counsel or theoretical conflict of interest requires disapproval of
dismissal of claims). Stepak is distinguishable, however, because this case involves an effort to
recover on, rather than dismiss, corporate claims, and because the Bondurant Firm had not
represented the defendants in the same subject matter of the corporate claims, as did counsel in
Stepak.5 Thus, Stepak is not controlling, and Sterling must show an actual conflict of interest or
evidence of bias to prevail, see In re Chicken Antitrust Litig., 669 F.2d 228, 237 (5th Cir. Unit B
1982) ("It is up to the objectors [to the choice of counsel] to point to a trade-off of their rights and
actual prejudice."). Because Sterling offers no such direct evidence, Beaird's choice of the
Bondurant Firm does not mandate reversal.
Sterling also contends that Beaird acted in bad faith by insulating his investigation from the
plaintiffs, and that he conducted an inadequate investigation. We find that these assertions lack
merit, for the district court permitted the plaintiffs to conduct Beaird's deposition, limited only by
the attorney-client privilege, and found that the receiver engaged in a diligent investigation of the
5
Bondurant did represent the defendants in a previous dealing, but the district court properly
found that it "did not involve the same subject matter of the challenged transaction in this case."
District Court Order of June 6, 1995.
7
case. See District Court Order of November 15, 1994, at 3. Absent any concrete evidence proving
otherwise, we conclude that Beaird acted in good faith and that the investigation was adequate.
B. Fairness of the Settlement
Having concluded that Beaird was independent, acted in good faith, and conducted an
adequate investigation, we now address Sterling's next concern, whether the district court erred in
determining that the settlement was fair.
Sterling contends that Beaird underestimated the legal merit of the corporate claims.
Sterling, however, fails to rebut Beaird's central premise, that the Corporations' likelihood of success
for the usurpation of corporate opportunity claim was very low. The Corporations were in a poor
financial state, and, in Beaird's opinion, did not have the financial ability to pursue the corporate
opportunity. As he stated in his report, Beaird relied primarily on the fact that the opportunity was
not feasible, and the Corporations' risk of losing at trial was too high. As the district court properly
concluded: "The claims based on the [usurpation of corporate opportunity] probably have some
worth, but the Receiver has shown that the defendant's defenses as to those claims also have real
merit." District Court Opinion of June 6, 1995, at 25.
Sterling also argues that the district court erred because it did not apply "vigorous scrutiny"
in evaluating Beaird's settlement decision as directed by Delaware law, Joy v. North, 692 F.2d 880(2d Cir.1982); see, e.g., Zapata Corp. v. Maldonado, 430 A.2d 779 (Del.1981), but instead relied
on a less stringent mandate from Cotton v. Hinton, 559 F.2d 1326, 1330 (5th Cir.1977) (stating that
"the District Court must find that the settlement is fair, adequate, and reasonable") and the six-factor
8
test for fairness under Bennett v. Behring Corp., 737 F.2d 982 (11th Cir.1984).6 For further support,
Sterling points to language in the district court's order stating that the court did not believe that it
was bound by the more stringent Delaware standard because those cases dealt with the dismissal,
not settlement, of corporate claims.
However, it appears that the court held Beaird's investigation and settlement decision to a
high burden of proof, much higher than that set forth in Cotton. For instance, the district court took
notice of the extensive document discovery, depositions, and interviews that Beaird conducted, and
the opportunity Beaird offered to all parties to respond to a comprehensive questionnaire. On the
other hand, in Cotton the court approved a settlement even though little formal discovery had been
conducted. See 559 F.2d at 1332. Furthermore, the district court carefully reviewed Beaird's
analysis of the underlying facts, the defendants' defenses, and the appellants' presentations at the
fairness hearing to conclude that the settlement decision was indeed fair.7
Thus, the district court did not err by applying too lenient a standard in reviewing the
adequacy of the investigation and the fairness of the settlement. In addition, the court did not abuse
its discretion in concluding that the settlement decision was fair, because of the apparent low
6
In evaluating whether a settlement is fair, the court should examine the following factors:
(1) the likelihood of success; (2) the range of possible discovery; (3) the point on or below the
range of discovery at which settlement is fair, adequate and reasonable; (4) the complexity,
expense and duration of litigation; (5) the substance and amount of opposition to the settlement;
and (6) the stage of proceedings at which the settlement was achieved. See Bennett, 737 F.2d at
986.
7
The district court found that any settlement recovery above 15% of maximum recovery
would be fair, so it concluded that Beaird's settlement for approximately 25% of the maximum
recovery was fair, adequate, and reasonable. District Court Order of June 6, 1995, at 34-35.
9
likelihood of the corporate claims' success. Consequently, the district court did not err in approving
Beaird's settlement decision as independently and adequately investigated and fair to the plaintiffs.
C. Realignment of Corporations
Considering that Beaird, as representative of the Corporations, was free from conflict of
interest or collusion, we agree with the district court's decision to realign the Corporations as
plaintiffs. This court recognizes that it should retain a corporation as a party defendant only where
the corporation has been found to be "actively antagonistic" to the plaintiffs' interest. Duffey v.
Wheeler, 820 F.2d 1161, 1163 (11th Cir.1987). No evidence indicates that Beaird or the
Corporations were "actively antagonistic" against the shareholders' interests, or contradicts the
district court's finding that the Defendants did not show any "hint of collusion or that the
Corporations [would] not adequately pursue the corporate claims in good faith." District Court
Order of October 27, 1994, at 5. Accordingly, the district court did not err in deciding to realign the
Corporations as plaintiffs.
D. Receiver's Appointment
Given our conclusion that Beaird acted properly, and that the district court reviewed his
investigation and settlement decision with sufficient scrutiny, we need not decide whether the
district court erred in appointing a receiver instead of a litigation committee, for any such error has
been rendered harmless.
We affirm the trial court's judgment, and hold that the issues raised in Stewart's cross-appeal
are moot.
AFFIRMED.
10