Fistek v. Kelley

UNITED STATES COURT OF APPEALS
For the Fifth Circuit
Consolidated Nos. 94-20930 & 95-20230
7547 PARTNERS, ON ITS OWN BEHALF AND ON BEHALF OF UNITHOLDERS OF
KELLEY OIL & GAS PARTNERS, LTD.,
Plaintiff-Appellant,
VERSUS
THEODORE J. FISTEK, LOUIS F. CAMARDELLA, ETHEL WEISHAUPT,
Plaintiffs-Appellees.
and
KELLEY OIL CORP., DAVID L. KELLEY, KELLEY OIL & GAS PARTNERS,
LTD., KEMPER SECURITIES, INC., JOE M. BRIDGES, BROMLEY DEMERRITT,
FAIR COLVIN, JR., WILLIAM J. MURRAY, ALAN N. SIDNAM, FRANK G.
LYON, RALPH P. DAVIDSON, and JOHN J. CONKLIN, JR.,
Defendants-Appellees.
Appeals from the United States District Court
For the Southern District of Texas
(H-94-CV-3378 & CA-H-94-3381)
April 29, 1997
Before GARWOOD, BARKSDALE, and DENNIS, Circuit Judges
DENNIS, CIRCUIT JUDGE.*
This appeal arises from the fallout of a consolidation of
*
Pursuant to Local Rule 47.5, the court has determined that this opinion should not be
published and is not precedent except under the limited circumstances set forth in Local Rule 47.5.4.
defendant appellees, Kelley Oil and Gas Partners (“Kelley
Partners”), and Kelley Oil Corporation (“Kelley Oil”). Kelley
Partners was a publicly traded limited partnership. Its general
partner was Kelley Oil. In the summer of 1994, Kelley Oil proposed
the consolidation of Kelley Partners and Kelley Oil into a new
corporation. Shortly after the terms of the proposal were
announced, four groups of unitholders of Kelley Partners
(Camardella, Weishaupt, Fistek, and 7547 Partners) filed separate
actions in state court in Texas to enjoin the consolidation.
Kelley Oil successfully removed all of the actions to federal
court. Sometime thereafter, Kelley Oil began settlement
negotiations with all four groups of unitholders. Eventually, all
four actions were consolidated. By early November 1994, the
Camardella, Weishaupt, and Fistek Partners, plaintiffs-appellees
here (“settling plaintiffs”), informally agreed to a settlement
with Kelley Oil. On March 3, 1995, the district court entered a
final order and judgment approving the settlement and dismissing
the suit. 7547 Partners have appealed the judgment contending that
the district court lacked subject matter jurisdiction to issue a
settlement order, that the 7547 Partners were denied due process,
and that the settlement was unfair. We find the 7547 Partners’
contentions unpersuasive and affirm the judgment of the district
court.
Background
Kelley Partners was a limited partnership engaged in the
2
development of oil and natural gas properties, acquisition of
interests in additional producing properties and other related
activities. Ownership interests in Kelley Partners were
represented by units, which were publicly traded on the American
Stock Exchange.1 Kelley Partners’ managing general partner was
Kelley Oil and defendant appellee, David L. Kelley, the chairman
and chief executive of Kelley Oil, was the special general partner
of Kelley Partners. Kelley Oil was a publicly-traded corporation
engaged primarily in managing, developing, acquiring and operating
oil and gas properties. Other defendants-appellees in the case,
Joe M. Bridges, Bromley DeMerritt, Fair Colvin, Jr., William J.
Murray, Alan N. Sidnam, Frank G. Lyon, Ralph P. Davidson, and John
J. Conklin, Jr. are Kelley Oil’s remaining directors. Also a
defendant-appellee in this action is Kemper Securities, Inc., a
Delaware corporation that issued a fairness opinion pursuant to a
consolidation or roll-up of the 1991 Development Drilling Program
(1991 “DDP”), an oil and gas drilling limited partnership, into
Kelley Partners.2 The consolidation of the 1991 DDP was proposed
1
As of September 30, 1994, according to Kelley Oil’s proxy
statement filed pursuant to Schedule 14a of the Securities Exchange
Act of 1934, Kelley Partners’ total partnership equity was over $74
million and its assets totaled $216 million; Kelley Oil’s
shareholder equity totaled $53 million and its assets were valued
at $111 million.
2
In October 1993, Kelley Partners filed a registration
statement with the SEC covering a proposed exchange of units in
Kelley Partners for interests in the assets and liabilities in the
1991 DDP. The fourth amendment to that registration statement was
filed on August 17, 1994 and the registration statement became
3
by Kelley Oil. Kelley Oil was the majority shareholder of the 1991
DDP before the consolidation into Kelley Partners.
In early 1994, Kelley Oil’s Board of Directors (“Board”) began
considering the consolidation of Kelley Oil and Kelley Partners.
In May of 1994, the Board retained Smith Barney to serve as its
financial advisor for the consolidation, and formed a special
committee to determine whether the proposed consolidation was fair
to the public unitholders. The non-management directors on the
Board selected defendants-appellees Conklin and Davidson to serve
on the special committee. Conklin and Davidson were non-management
directors of Kelley Oil who owned significant interests in Kelley
Partners.3 The special committee hired its own financial and legal
advisors who were different from the ones retained by Kelley Oil.
On August 24, 1994, Kelley Oil presented the special committee
with a consolidation proposal (“Original Consolidation Proposal”).
The Original Consolidation Proposal provided that unitholders of
Kelley Partners, other than Kelley Oil (“public unitholders”) would
receive one share of common stock of the successor corporation for
each unit owned in Kelley Partners. Shareholders of Kelley Oil
common stock would receive 1.13 shares of common stock in the
successor corporation for each share owned in Kelley Oil. The
exchange ratios allocated 45% of the new corporation’s voting stock
effective on August 24, 1994.
3
Together they owned 121,669 units of Kelley Partners which
constituted .52% of the outstanding units in Kelley Partners.
4
to the public unitholders and 55% to Kelley Oil shareholders.
Additionally, public unitholders could elect to exchange 50% of
their units for preferred stock of the successor corporation which
would pay an 8% dividend and would automatically convert into
common stock of the successor corporation after four years unless
redeemed at the successor’s option after three years.
The following week four separate suits were filed in state
district court. The 7547 Partners filed a derivative action on
August 26, 1994, seeking to enjoin the 1991 DDP roll-up and the
Original Consolidation Proposal. The Weishaupt class action was
filed on August 29, 1994, and sought the same relief as the 7547
Partners.4 On August 30, 1994, the Fistek and Camardella groups
filed class actions seeking to enjoin the Original Consolidation
Proposal only. All four actions were later removed by Kelley Oil
to the United States District Court for the Southern District of
Texas and the Fistek, Camardella, and Weishaupt actions were
voluntarily consolidated.
Beginning in late September 1994, counsel for and principals
of Kelley Oil commenced settlement negotiations with all four
plaintiffs and their lawyers and investment advisors. On October
25, 1994, face-to-face settlement negotiations were held between
4
Weishaupt was the only plaintiff to name Kemper Securities,
Inc., as a defendant. Weishaupt did not name the individual
members of the Board of Directors of Kelley Oil as defendants. The
other three plaintiffs named Kelley Oil, the individual members of
the Board of Directors of Kelley Oil, and Kelley Partners as
defendants.
5
Kelley Oil and its representatives and the settling plaintiffs and
their representatives.5 Meanwhile, Kelley Oil negotiated
separately with the special committee in an attempt to modify the
Original Consolidation Proposal. The above negotiations produced
a revised consolidation proposal (“Revised Consolidation Proposal”)
which provided that the public unitholders in Kelley Partners would
receive a 53% stake in the successor corporation instead of the 45%
stake they would have received pursuant to the Original
Consolidation Proposal. Additionally, the Revised Consolidation
Proposal contained a provision whereby Kelley Oil would not vote
its units in Kelley Partners in the Kelley Oil/Kelley Partners
consolidation, unless a majority of Kelley Partners’s public
unitholders approved the consolidation.6
Following the Revised Consolidation Proposal, the parties
engaged in discovery. On November 22, 1994, the settling
plaintiffs filed an amended complaint that included class and
derivative claims against defendants-appellees. A hearing was held
the next day concerning procedures relating to the proposed
settlement set forth by the terms of the Revised Consolidation
Proposal. At the hearing, the district court entered an order
approving the class certification for purposes of settlement and
5
The 7547 Partners and their representatives were invited, but
refused to attend the October 25, 1994 negotiations.
6
Kelley Oil owned approximately 16% of the units of Kelley
Partners.
6
scheduled a fairness hearing for February 17, 1995 (“Scheduling
Order”). Additionally, the Scheduling Order enjoined the 7547
Partners from commencing any other actions. Also at the hearing,
Chief Judge Black, pursuant to Fed.R.Civ.Proc. 42, granted a motion
to consolidate the 7547 Partners’ action with the previously
consolidated actions (“Consolidation Order”). Rather than file a
motion to deconsolidate as Judge Black invited them to do, 7547
Partners filed an interlocutory appeal, assigned No. 94-20930, with
this court contesting both the Consolidation and Scheduling Orders
because of their vagueness and overbreadth. A different panel of
this court decided that this appeal should be carried with the
case.7 Lastly, at the November 23, 1994, hearing the court ordered
that notice of the action and of the proposed settlement evidenced
by the terms of the Revised Consolidation Proposal be sent to all
class members of all classes no less than 45 days before the
fairness hearing set for February 17, 1995.
On February 7, 1995, at a special meeting called for the
purposes of voting on the Revised Consolidation Proposal, Kelley
Partners’s public unitholders (non Kelley Oil unitholders) approved
the Revised Consolidation Proposal by a margin of 71% for the
consolidation to 28% against and 1% abstaining.8
7
The interlocutory appeal and the appeal of the final
settlement order dismissing the case, assigned No. 95-20230, were
consolidated by the Clerk of this Court.
8
This outcome was subject to an aggressive proxy fight mounted
by the 7547 Partners.
7
Pursuant to the Scheduling Order of November 23, 1994, a
fairness hearing was held on February 17, 1995. All parties,
including 7547 Partners attended the hearing and presented their
arguments to the court. On March 3, 1995, the district court
entered a final order and judgment which (1) granted leave nunc pro
tunc for the filing of the amended complaint; (2) certified the
consolidated cases as Rule 23(a), 23(b)(1)and Rule 23(b)(2) class
actions and as a derivative action under Rule 23.1; and (3)
approved the settlement in accordance with the terms of the Revised
Consolidation Proposal and dismissed the action. 7547 appeals the
final order and judgment.
Standard of Review
The question of federal jurisdiction is subject to de novo
review. In re U.S. Abatement Corp., 39 F.3d 563, 566 (5th Cir.
1994). All other issues involving the approval of a settlement of
a class action are governed by the abuse of discretion standard.
See Reed v. General Motors Corp., 703 F.2d 170, 172 (5th Cir.
1983).
Analysis
I. Appeal No. 95-20230
A. Jurisdiction
1. Diversity of Citizenship
We find that the district court had jurisdiction over this
action pursuant to Article III of the United States Constitution
8
and 28 U.S.C. § 1332. In cases that are removed to federal court
from state court, such as this one, diversity of citizenship must
exist both at the time of filing in state court and at the time of
removal to federal court. See, e.g., Coury v. Prot, 85 F.3d 244,
249 (5th Cir. 1996). The lack of subject matter jurisdiction may
be raised at any time during pendency of the case by any party or
by the court. Fed.R.Civ.Proc. 12(h)(3). Moreover, the Supreme
Court has held that a party cannot waive the defense and cannot be
estopped from raising it. E.g., Insurance Corp. of Ireland v.
Compagnie des Bauxites de Guinee, 456 U.S. 694, 102 S. Ct. 2099, 72
L. Ed. 2d 492 (1982); Owen Equip. & Erection Co. v. Kroger, 437 U.S.
365, 98 S. Ct. 2396, 57 L. Ed. 2d 274 (1978).
In order to determine whether diversity of citizenship exists
as required by § 1332, we must ascertain the domicile of each party
in all four separate actions when they were originally filed in
state court.9 Appellants, 7547 Partners, a Florida partnership,
concede that there is complete diversity between themselves and
Kelley Oil, the members of the Board of Kelley Oil, and Kelley
Partners, the defendant-appellees named in the suit originally
filed in state court. Likewise, there is no contention of improper
9
In this case it is unnecessary to reexamine the domiciles of
the parties at the time of removal because no changes occurred
between the time the petitions were originally filed in state court
and the time the defendants removed the actions to federal court,
i.e., no claims or parties were added and no one’s domicile
changed.
9
jurisdiction over the Fistek action because Fistek is a citizen of
Ohio and the defendants are identical to the ones in the 7547
Partners action.10 However, for the purposes of determining
diversity in the other actions the domiciles of the parties are the
following: (1) Kelley Oil: a Texas Corporation with its principal
place of business in Texas; (2) Kelley Partners: Kelley Partners
is a nominal party with no real interest in the dispute. See,
e.g., Navarro Savs. Ass’n v. Lee, 446 U.S. 458 (1980); Wolff v.
Wolff, 768 F.2d 642 (5th Cir. 1985). Therefore, in determining
whether complete diversity exists Kelley Partners will be ignored.
(3) Defendants David L. Kelley, Joe M. Bridges, Fair Colvin, Jr.,
and William J. Murray are Texas citizens. (4) Defendants Bromley
DeMerritt and Frank G. Lyon are citizens of Connecticut; (5)
Defendant John J. Conklin is a citizen of New Jersey. (6)
Defendant Ralph P. Davidson is a citizen of the District of
Columbia; (7) Defendant Alan N. Sidnam is a citizen of New York.
7547 Partners do contend however, that complete diversity is
lacking in the Weishaupt and Camardella actions. As for the
Weishaupt action, the appellant’s contention is disingenuous.
Weishaupt is a citizen of New York who sued Kelley Oil, a Texas
Corporation, David L. Kelley, a Texas citizen, and Kemper
10
For the purposes of class actions, the citizenship of the
representative plaintiff and not of all class members is
dispositive. Snyder v. Harris, 394 U.S. 332, 340 (1969); WRIGHT ET
AL., FEDERAL PRACTICE AND PROCEDURE § 3606, at 424 (2d ed. 1984).
10
Securities, Inc., a corporation registered in Delaware with its
principal place of business in Illinois. Obviously, there is
complete diversity of citizenship. As noted above, in cases that
have been removed to federal court diversity of citizenship is
required at two specific time periods only, when the action is
originally filed in state court and at the instant the case is
removed. If diversity is established at the commencement and
removal of the suit, it will not be destroyed by subsequent events.
Freeport-McMoRan, Inc. v. K N Energy, Inc., 498 U.S. 426 (1991)
(the addition or substitution of a nondiverse party pursuant to
Fed.R.Civ.Proc. 25(c) does not destroy jurisdiction of the court).
Cf. Wichita R.R. & Light Co. v. Public Util. Comm’n of Kansas, 260
U.S. 48, 54 (1922); Grisham Park Community Park Organization v.
Howell, 652 F.2d 1227 (5th Cir. 1981) (a subsequent change in
citizenship of a party does not divest a court of jurisdiction).
See also 1 J. MOORE, MOORE'S FEDERAL PRACTICE, § 0.74[1] (1996). The
consolidation that occurred after removal of the four actions to
federal court is a “subsequent event” and as such has no effect on
the court’s jurisdiction.
As for the Camardella action, the appellant’s argument that
complete diversity is lacking because plaintiff-appellee Camardella
and defendant-appellee Alan N. Sidnam are New York citizens is
superficial. In the original state court action Camardella named
Kelley Oil, Kelley Partners, and the members of the Board of
11
Directors of Kelley Oil, including New York citizen Alan N. Sidnam
as defendants. Nevertheless, the removal of the Camardella action
was proper on the grounds of diversity of citizenship because
Sidnam, the only “non-diverse” defendant, was a person whose
citizenship should not have been considered for the purposes of
determining diversity of citizenship.
The law in this circuit is that if a plaintiff cannot
establish a cognizable cause of action against a non-diverse
defendant in state court that defendant’s citizenship will be
disregarded for the purposes of diversity of citizenship. Burden
v. General Dynamics Corp., 60 F.3d 213, 217 (5th Cir. 1995).
Analogously, in determining whether a party has been fraudulently
joined to defeat diversity jurisdiction “[a] court is to pierce the
pleadings to determine whether, under controlling state law, the
nonremoving party has a valid claim against the non-diverse
parties.” LeJeune v. Shell Oil Co., 950 F.2d 267, 271 (5th Cir.
1992) (citing Carriere v. Sears, Roebuck and Co., 893 F.2d 100 (5th
Cir.), cert. denied, 111 S. Ct. 60 (1990)). See also, WRIGHT, ET AL.,
FEDERAL PRACTICE AND PROCEDURE § 3602 at 375 (2d ed. 1984). Therefore,
it must be determined whether an action would lie against Sidnam
under Texas law.
Sidnam’s relationship to Camardella is as follows: Sidnam is
a non-management member of the Board of Directors of the general
partner (Kelley Oil), of a limited partnership (Kelley Partners) of
12
which the plaintiff is a limited partner. In Grierson v. Parker
Energy Partners, 737 S.W.2d 375 (Tex. App.-Houston [14th Dist.]
1987, no writ), a similar relationship existed between Grierson,
president of a corporation, Parker Energy Technology Corporation,
that was the general partner of Parker Energy Partners. Parker
Energy Partners sued the corporation and Grierson for breaching
fiduciary duties owed to the partnership. First, the Texas court
acknowledged that under Texas Law, when a corporation serves as a
general partner it owes fiduciary duties to the partnership and the
limited partners. Grierson, 737 S.W.2d at 377 (citing
Tex.Civ.Stat.Ann. art. 6132a, §10 (Vernon 1970); Tex.Civ.Stat.Ann.
art. 6132b § 21 (Vernon 1970)). However, the court recognized that
corporate officers such as members of the Board of Directors, only
owe fiduciary duties to the shareholders of the corporation they
are elected to represent and to the corporation itself and not to
third parties such as a partnership and its limited partners, with
one exception. Id. (citing Castleberry v. Branscum, 721 S.W.2d
270, 271-72 (Tex. 1986); Bell Oil & Gas Co. v. Allied Chemical
Corp., 431 S.W.2d 336, 340 (Tex. 1968)). The exception is that
corporate officers may not knowingly participate in the breach of
a fiduciary duty toward third parties even if the act is committed
while serving as an agent of the corporation. Id. at 377-78
(emphasis added). In Grierson, the court could not find any proof
in the pleadings and evidence indicating that Grierson knowingly
13
participated in the breach of fiduciary duties toward the
partnership and accordingly held that Grierson was not liable for
breach of a fiduciary duty.
Therefore as mandated by Texas law, we must determine whether
Sidnam knowingly participated in the breach of fiduciary duties
owed to Kelley Partners. Camardella’s complaint does not allege
any facts demonstrating that Sidnam knowingly participated in
Kelley Oil’s breach of fiduciary duties. Moreover, the record does
not indicate that Sidnam knowingly participated in Kelley Oil’s
alleged breach of fiduciary duties. We thus conclude that under
Texas law, Camardella could not have sustained a cause of action
against Sidnam and consequently Sidnam’s citizenship will not be
considered for the purposes of ascertaining diversity of
citizenship.
2. Amount in Controversy
Our analysis is not at an end in determining whether the court
properly exercised jurisdiction until we determine that the
jurisdictional amount is satisfied. In addition to requiring that
the parties to an action be diverse, 28 U.S.C. § 1332 necessitates
that the amount in controversy be more than $50,000. This
determination is more nebulous in cases like the present which
primarily seek injunctive relief. “The amount in controversy, in
an action for declaratory or injunctive relief, is the value of the
right to be protected or the extent of the injury to be prevented.”
14
Webb v. Investacorp, Inc., 89 F.3d 252, 257 (5th Cir. 1996)(quoting
Leininger v. Leininger, 705 F.2d 727 (5th Cir. 1983)). The value
of the right sought to be protected, by each of the four actions
filed, was to preserve Kelley Partners, an entity with $216 million
in assets, from being consolidated with Kelley Oil. There is no
need to do empirical calculations or seek evaluations from
investment bankers to determine the financial impact of the
consolidation because it is obvious that the value of enjoining a
merger of such large entities easily exceeds $50,000. Accordingly,
the district court properly exercised jurisdiction over the parties
pursuant to 28 U.S.C. 1332.
B. 7547 Partners’ Due Process Arguments
1. Was the Consolidated Class Action Properly Certified
Under Sections (b)(1) & (b)(2) and Not Under (b)(3) of
Fed.R.Civ.Proc. 23?
In order to systematically address whether the appellant was
denied due process because it was not allowed to opt out and was
not given adequate notice, we must first determine whether this
action was properly certified under Rule 23(b)(1)&(b)(2) and not
under 23(b)(3). It is not contested that this action may be
certified pursuant to 23(b)(1). Rule 23(b)(1) permits
certification of a class action if the prosecution of separate
actions might result in inconsistent or varying adjudications that
15
would “establish incompatible standards of conduct for the party
opposing the class.” Fed.R.Civ.Proc. 23(b)(1)(A); or if
prosecutions of separate actions “would create a risk of . . .
adjudications with respect to individual members of the class which
would . . . be dispositive of the interests of the other members
not parties to the adjudications or substantially impair or impede
their ability to protect their interests.” Fed.R.Civ.Proc.
23(b)(1)(B). Both provisions of Rule 23(b)(1) obviously apply to
the present case.
Appellant does contest, however, that the class should not
have been certified under 23(b)(2). Rather, it asserts that the
class action should have been certified under 23(b)(3). Rule
23(b)(2) provides that a class action is appropriate when “the
party opposing the class has acted or refused to act on grounds
generally applicable to the class,” and the representatives are
seeking “final injunctive relief . . . ” (emphasis added). The
basis for the appellant’s contention is that the relief sought by
the settling plaintiffs was primarily for money damages thereby
making Rule 23(b)(2) inapplicable. This contention is misplaced.
It is true that the settling plaintiffs in the amended complaint
did assert a claim for incidental money damages. However,
requesting incidental money damages does not preclude the
certification of this case under Rule 23(b)(2) if the primary
relief sought is injunctive. Forbush v. J.C. Penney Co., Inc., 994
16
F.2d 1101, 1105 n.3 (5th Cir. 1993); Parker v. Local Union No.
1466, 642 F.2d 104, 107 (5th Cir. 1981); Johnson v. General Motors
Corp., 598 F.2d 432, 437 (5th Cir. 1979); Jones v. Diamond, 519
F.2d 1090, 1100 n.17 (5th Cir. 1975) (“So long as the predominant
purpose of the suit is for injunctive relief, the fact that a claim
for damages is also included does not vitiate the applicability of
23(b)(2).”) The primary relief sought in the present case was
undoubtedly to enjoin the consolidation of Kelley Partners and
Kelley Oil. All four of the original actions filed in state court
primarily sought injunctive relief. Likewise, in the settling
plaintiffs’ amended complaint, the first type of relief sought is
injunctive. The prayer for incidental monetary damages follows
five paragraphs after the claim for injunctive relief. Therefore,
we find that the district court did not abuse its discretion in
finding that the action was one primarily seeking injunctive relief
and certifying the class under Rules 23(b)(1)&(b)(2).
Moreover, we also find that the district court did not abuse
its discretion in declining to certify this case under Rule
23(b)(3). “Unlike subdivisions (b)(1) and (b)(2), which provide
for the bringing of a class action based on the type or effect of
the relief being sought, Rule 23(b)(3) authorizes a class action
when the justification for doing so is the presence of common
questions of law or fact and a determination that the class action
is superior to other available methods for resolving the dispute
17
fairly and efficiently.” 7A WRIGHT et al., FEDERAL PRACTICE AND PROCEDURE
§ 1777 (2d ed. 1986).11 However, if a class action can be certified
under 23(b)(2), then it should not also be certified under
23(b)(3). Bing v. Roadway Express, Inc., 485 F.2d 441, 447 (5th
Cir. 1973)(“Although this suit arguably could have been brought as
a (b)(3) action, (b)(2) actions generally are preferred for their
wider res judicata effects.”); DeBoer v. Mellon Mort. Co., 64 F.3d
1171 (8th Cir. 1995), cert denied, sub nom. Crehan v. DeBoer, 116
S. Ct. 1544 (1996) (“When either subsection (b)(1) or (b)(2) is
applicable, however, (b)(3) should not be used, so as to avoid
unnecessary inconsistencies and compromises in future
litigation.”); 7A WRIGHT et al. FEDERAL PRACTICE AND PROCEDURE § 1775 at
491.
A significant effect of certifying an action pursuant to
23(b)(1) and (b)(2) and not (b)(3) is that class members have no
11
Rule 23(b)(3) states:
[An action may be maintained as a class action if] the court
finds that the questions of law or fact common to the members
of the class predominate over any questions affecting only
individual members, and that a class action is superior to
other available methods for the fair and efficient
adjudication of the controversy. The matters pertinent to the
findings include: (A) the interest of members of the class in
individually controlling the prosecution or defense of
separate actions; (B) the extent and nature of any litigation
concerning the controversy already commenced by or against
members of the class; (C) the desirability or undesirability
of concentrating the litigation of the claims in the
particular forum; (D) the difficulties likely to be
encountered in the management of a class action.
18
opt out rights. See Phillips Petroleum Co. v. Shutts, 472 U.S.
797, 811 n.3 (1985) (Opt out rights are “limited to those class
actions which seek to bind known plaintiffs concerning claims
wholly or predominantly for money damages.”); Kincade v. General
Tire & Rubber Co., 635 F.2d 501, 507 (5th Cir. 1981)(“For several
reasons we find that the right to opt out, which is denied when a
Rule 23(b)(2) case is tried, also need not be provided when such
a case is settled.”). See also In re Asbestos Litigation, 90 F.3d
963, 987 & n.16 (5th Cir. 1996).
Another effect of not being certified under 23(b)(3)is that
notice need not comport with the requirements of Fed.R.Civ.Proc.
23(c)(2), which requires that notice be the “best notice
practicable under the circumstances. . . .” Instead, for classes
certified under sections (b)(1) or (b)(2) of Fed.R.Civ.Proc. 23,
notice is within the complete discretion of the court.
Fed.R.Civ.Proc. 23(d)(2)(“notice be given in such manner as the
court may direct....”). Here, the Scheduling Order issued by the
district court on November 23, 1994, provided that notice be given
to members of the class:
No later than 45 days prior to the date of the Settlement
Hearing [February 17, 1995], Kelley Oil, at its expense shall
mail, by first class mail, postage prepaid, a Notice of
Pendency of Class Actions, Proposed Settlement of Class and
Derivative Actions and Settlement Hearing . . . to all Class
members and current Unit owners shown on the transfer records
maintained by or on behalf of Kelley [Partnership] to have
been record or beneficial holders of the Units .... Upon
request by a record holder who is a Class member or current
Unit owner, Kelley Oil shall provide, at its expense,
19
additional copies of the Notice to record holders to be
forwarded to beneficial owners who are Class members or
current Unit holders who were not mailed the Notice, or
alternatively, shall mail the Notice to such beneficial owners
identified by record holders for this purpose....
The district court found that Kelley Oil complied with the
above:
[T[he prescribed notice was sent on December 29, 1994, by
first class mail, postage prepaid, to all record holders of
units in Kelley Partners during the period of time from August
25, 1994, through December 23, 1994. Pursuant to the express
terms of the notice, all record holders who were not
beneficial owners were instructed to transmit the notice to
the beneficial holders of units in Kelley Partners.
Furthermore, an additional 14,091 copies of the notice were
mailed or delivered on December 29, 1994, to all persons and
institutions which held units of Kelley Partners on behalf of
the beneficial owners during the period of time from August
25, 1994, through the date of the mailing, who were also
instructed to forward the notice by first class mail at Kelley
Oil’s expense to the beneficial owners.
The appellant makes two contentions on appeal: (1) the way in
which notice was sent to the beneficial owners who were not owners
of Kelley Partners units as of December 23, 1994, was improper; and
(2) notice by publication would have been preferable. We find both
of these contentions unpersuasive. We conclude that the district
court did not abuse its discretion in finding that mailing or hand
delivering 14,091 copies of the notice to the proxy departments of
all banks, brokers, nominees, and other institutions with
instructions to forward to beneficial owners of Kelley Partners
units at Kelley Oil’s expense was sufficient. The record indicates
that at least 212 institutions holding in excess of 14.7 million
units received copies of the notice. One institution, whose
20
clients held approximately three-fourths of all units, attested
that it mailed 9320 copies of the notice to all of their clients’
beneficial holders of units in Kelley Partners. Additionally, the
appellant has not submitted affidavits from any of Kelley Partners
unitholders attesting to the fact that they did not receive notice;
appellant merely speculates that some beneficial owners may not
have received notice.
We also find that the district court did not abuse its
discretion in failing to require that notice be published.
Appellant adduces no proof that publication of the class action and
possible settlement would have provided more unitholders with
notice. As one commentator points out individual notices “are
[generally] more effective in eliciting responses than are
published notices.” NEWBERG & CONTE, NEWBERG ON CLASS ACTIONS, § 8.38 (3d
ed. 1992). The same commentator, citing empirical data, notes that
in contrast, “the average citizen will not see or read a class
settlement notice, even when it is published (usually in fine
print) on the financial pages of a newspaper such as the New York
Times or Wall Street Journal or in papers of general circulation,
as is the common practice.” Id.
2. Was the Permanent Injunction in the District Court’s
Final Order and Judgment Overbroad?
Appellant asserts without any support, that the district court
abused its discretion in releasing all present and future claims
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against defendants in its final order and judgment. We find the
appellant’s assertion unpersuasive and that the district court did
not abuse its discretion in enjoining all present and future
claims relating to the subject matter of the settled actions or the
consolidated complaint against defendant-appellees. Although the
case involved a bankruptcy reorganization instead of a
consolidation, we find the reasoning of the Second Circuit
persuasive in finding that the district court did not abuse its
discretion in this case:
In turn, the injunction [against future claims] is a key
component of the Settlement Agreement. As the district court
noted, the injunction limits the number of lawsuits that may
be brought against Drexel's former directors and officers.
This enables the directors and officers to settle these suits
without fear that future suits will be filed. Without the
injunction, the directors and officers would be less likely
to settle. Thus, we hold that the district court did not
abuse its discretion in approving the injunction.
In re Drexel Burnham Lambert Group, Inc., 960 F.2d 285, 293 (2d
Cir. 1990).
Likewise, the injunction in the present case is important to
the settlement in that the defendant-appellees were able to settle
the case without the fear of future litigation. By the same token,
the district court did not abuse its discretion in issuing the
consolidation and scheduling orders.
3. Were the Unitholders Adequately Represented?
Similarly, appellant makes groundless assertions that the
district court abused its discretion in finding that the
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unitholders were adequately represented. In this circuit
representation is adequate if the representatives have common
interests with the unnamed members of the class and the
representatives vigorously prosecute the interest of the class
through qualified counsel. Gonzales v. Cassidy, 474 F.2d 67 (5th
Cir. 1973). There are no facts in this case that indicate that the
above criteria were not met. Obviously all unitholders were
interested in seeking the best possible return on their investment;
either by maintaining their position in Kelley Partners or by
receiving the greatest interest possible in the successor
corporation. Additionally, each representative retained competent
counsel whose vigorous prosecution led to the decidedly improved
terms of the Revised Consolidation Proposal.
C. Did the District Court Abuse its Discretion in Approving
the Settlement as Fair, Reasonable, and Adequate?
A district court’s determination that a settlement should be
approved as fair, reasonable, and adequate must be upheld unless it
is found to have constituted a “clear abuse of discretion.” Ruiz
v. McKaskie, 724 F.2d 1149, 1152 (5th Cir. 1984). Appellant cites
several errors made by the district court allegedly constituting
clear abuses of discretion. None, however, are persuasive.
First, the appellant asserts that the settlement was a product
of fraud or collusion in that the defendant-appellee, Kelley Oil,
and the settling plaintiffs systematically excluded 7547 Partners
23
from the litigation that resulted in the settlement. Such a claim
is unfounded because at the fairness hearing on February 7, 1995,
counsel for 7547 Partners unambiguously stated that 7547 Partners
voluntarily excluded themselves from the settlement negotiations:
Mr. Pecht [counsel for Kelley Oil] never intended to cut me
out of any settlement. He was more than happy that I
participate. But I would not participate - I could not in
good consciousness [sic] participate at the levels I knew the
other plaintiff’s [sic] would accept.
Next, appellant contends that the discovery conducted failed
to establish the propriety of the settlement and that they were
deprived of discovery regarding the settlement negotiations.
Appellant cites no authority in support of this contention. On the
contrary, it has been held in the class action context that formal
and/or voluminous discovery is unnecessary and that determining
whether or not to grant discovery requests is well within the
discretion of the court. Cotton v. Hinton, 559 F.2d 1326, 1331-
1333 (5th Cir. 1977).12 Accordingly, we conclude that the district
12
In Cotton, this court stated:
It is true that very little formal discovery was conducted and
that there is no voluminous record in this case. However, the
lack of such does not compel the conclusion that insufficient
discovery was conducted. At the outset, we consider this an
appropriate occasion to express our concern over the common
belief held by many litigators that a great amount of formal
discovery must be conducted in every case.
Discovery in its most efficient utilization should be a
totally extra-judicial process, informality in the discovery
of information is desired. It is too often forgotten that a
conference with or a telephone call to opposing counsel may
often achieve the results sought by formal discovery.
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court did not abuse its discretion in denying 7547 Partners
discovery requests and in approving the settlement based on the
discovery conducted.
After full consideration, we find the appellant’s remaining
contentions regarding the fairness, reasonableness and adequacy of
the settlement to be manifestly without merit. Accordingly, we
conclude that the district court did not abuse its discretion in
finding that the settlement was fair, reasonable, and adequate to
all parties.
Conclusion
For the foregoing reasons, the final judgment and order of the
district court approving the settlement and dismissing the case is
AFFIRMED. Motions denied as moot.
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