Duhaime v. Metzenbaum

• Court: Court of Appeals for the First Circuit
• Decided: June 28, 1999
• Docket: 98-2139
• Status: Published

Opinion

USCA1 Opinion

                 United States Court of Appeals

                     For the First Circuit


No. 98-2139



                     RICHARD DUHAIME, ET AL.,



                      Plaintiffs, Appellees,



                                v.



        JOHN HANCOCK MUTUAL LIFE INSURANCE COMPANY, ET AL.



                     Defendants, Appellees,

                                

                     HOWARD M. METZENBAUM,

                                

                           Appellant.


APPEAL FROM THE UNITED STATES DISTRICT COURT

                                

               FOR THE DISTRICT OF MASSACHUSETTS

                                

       [Hon. George A. O'Toole, Jr., U.S. District Judge]


Before

                                

                    Selya, Boudin, and Stahl,

                        Circuit Judges.


Brian Wolfman, with whom Alan B. Morrison and Public Citizen

Litigation Group, were on brief for appellant.

     John G. Fabiano, with whom Peter A. Spaeth, Hale and Dorr LLP,

Ralph C. Ferrara, Edwin G. Schallert, and Debevoise & Plimpton,

were on brief for appellees.


June 28, 1999


STAHL, Circuit Judge.  This appeal is an offshoot of a

massive securities fraud, fraud, and breach of fiduciary duties

class-action lawsuit brought against John Hancock Mutual Life

Insurance Company, John Hancock Variable Life Insurance Company,

and John Hancock Distributors, Inc.  (collectively "John Hancock"). 

The underlying suit, filed in September 1995 on behalf of nearly

four million present and former policyholders, challenged a number

of John Hancock's sales and marketing practices from 1979 through

the mid-1990s.  On June 6, 1997, the putative class entered into a

Stipulation of Settlement with John Hancock.  Eventually, the

district court certified the class and approved the settlement,

explaining its reasoning in a comprehensive opinion.  See Duhaime

v. John Hancock Mutual Life Ins. Co., 177 F.R.D. 54 (D. Mass. 1997)

("Duhaime I").  Because the particulars of the lawsuit and the

settlement terms are largely irrelevant to our analysis, we refer

interested readers to Duhaime I and confine our focus to facts

pertinent to this appeal.

  After the details of the proposed settlement were

communicated to the class in late June 1997, seventy-seven absent

class members (i.e., class members not named as parties) came

forward and filed written objections.  Among the objectors were

appellant Howard M. Metzenbaum and sixteen policyholders

represented by attorney Diane Nygaard.  We follow the lead of the

parties and refer to the Nygaard-led group as the "Rose Objectors." 

  Metzenbaum initially took issue with various aspects of

the class notice and with the structure of the proposed counsel-

fees award, but after negotiating changes to the notice procedures

that satisfied his concerns in this area, he chose to press only

his counsel-fees objection.  The Rose Objectors filed sweeping

objections to nearly all aspects of the proposed settlement.  On

October 24, 1997, the district court held a hearing to evaluate the

fairness of the settlement.  See Fed. R. Civ. P. 23(e).  Metzenbaum

and the Rose Objectors appeared to present their arguments in

opposition.  On December 31, 1997, the court filed separate

memoranda and orders approving the settlement, see Duhaime I, 177

F.R.D. at 72, but altering to some degree the fee-payment structure

conceived by the settling parties, see Duhaime v. John Hancock

Mutual Life Ins. Co., 989 F. Supp. 375, 378-80 (D. Mass. 1997)

("Duhaime II").  In doing so, the court largely sustained

Metzenbaum's objections, see id., but rejected the Rose Objectors'

complaints as lacking in merit, see Duhaime I, 177 F.R.D. at 71-72.

  Shortly after the district court approved the settlement,

Attorney Nygaard, acting on behalf of the Rose Objectors, filed a

request for counsel fees in the district court and a notice of

appeal from the court's approval of the settlement.  When

Metzenbaum's counsel learned of the appeal, he telephoned Nygaard

and asked that she serve him with copies of the appellate briefs. 

Nygaard agreed to put Metzenbaum's counsel on the service list, but

added that the appeal soon would be settled on "very, very good"

terms for her clients.  Shortly thereafter, the Rose Objectors

withdrew with prejudice both their appeal and their still-pending

request for counsel fees.    

  At this point, Metzenbaum became concerned that something

was amiss because the Rose Objectors apparently had secured a side

settlement more favorable than the class settlement and no court

had evaluated the fairness of the side settlement.  In Metzenbaum's

view (elaborated below), a post-judgment settlement of this nature

violates both the letter and spirit of Fed. R. Civ. P. 23(e):  "A

class action shall not be dismissed or compromised without the

approval of the court, and notice of the proposed dismissal or

compromise shall be given to all members of the class in such

manner as the court directs."  See also In re General Motors Corp.

Pick-Up Truck Fuel Tank Prods. Liab. Litig., 55 F.3d 768, 804-19

(3d Cir. 1995) (Rule 23(e) scrutiny entails a detailed inquiry into

whether the proposed class action settlement is fair, reasonable,

and adequate).  Metzenbaum's counsel wrote to Nygaard, class

counsel, and John Hancock's counsel, advising them that the side

settlement should be presented to the district court and asking for

disclosure of its terms.  Counsel for the so-called "settling

parties" responded that disclosure and approval were not required

under the circumstances.  The responses indicated that, in addition

to resolving the claims of the Rose Objectors, the side settlement

also resolved claims of other clients of Attorney Nygaard who had

opted out of the class.  The responses did not, however, disclose

the terms of the side settlement or even the parties to the side

settlement.  Metzenbaum suggests that class counsel, as well as

John Hancock, may have been involved in negotiating the side

settlement, and we accept the suggestion for purposes of this

appeal.  

  Metzenbaum then served discovery on John Hancock,

Nygaard, and class counsel, but received replies stating that the

discovery requests were untimely and that, as an absent class

member, he was not a "party" entitled to discovery.  Consequently,

Metzenbaum moved the district court to compel post-judgment

discovery under Fed. R. Civ. P. 37 and, in the event the court did

not regard him as a party entitled to discovery, to permit him to

intervene as a party under Fed. R. Civ. P. 24.  In making his

motion, Metzenbaum informed the court that, should the requested

discovery reveal a substantial difference between the side

settlement with the Rose Objectors and the settlement offered to

the class, he would file a motion under Fed. R. Civ. P. 60(b)

asking the court either to require John Hancock to offer the same

deal to all class members, including himself, or to abrogate the

Rose Objectors' side settlement and require that the proceeds be

disbursed to the class.  John Hancock opposed the motion, pointing

out, inter alia, that the class settlement was entirely unaffected

by the side settlement with the Rose Objectors.  The court denied

Metzenbaum's motion by margin order.  This appeal, which only John

Hancock actively opposes, followed.

  In framing their appellate arguments, the parties have

sounded broad themes and taken a number of controversial positions. 

Metzenbaum asserts that Fed. R. Civ. P. 23(e) applies even to

settlements concluded on appeal; that in the circumstances

presented here, he was entitled to invoke Fed. R. Civ. P. 37's

enforcement provisions post-judgment; that absent class members

such as himself are "parties" to class actions entitled to

discovery; and alternatively, that he was entitled to intervene as

a party in the district court either as of right, see Fed. R. Civ.

P. 24(a), or by court permission, see Fed. R. Civ. P. 24(b).  John

Hancock counters that Metzenbaum lacked Article III standing in the

district court because he failed to allege an injury in fact, i.e.,

that he has suffered, or imminently will suffer, an invasion of a

concrete, particularized, and legally protected interest, see Lujan

v. Defenders of Wildlife, 504 U.S. 555, 560 (1992); that absent

class members are not parties to class actions; that Metzenbaum's

allegations fail to establish an entitlement to intervention,

either as of right or by court permission; and that the district

court in any event properly declined Metzenbaum's request for

discovery because the material sought could provide no basis for

upsetting the judgment.  

  As to whether Metzenbaum had Article III standing, we

think it sufficient to observe that the line of argument set forth

in the motion to compel (and on appeal) necessitates a discussion

of the possibility of a fraud, see infra at 16-18, and that

Metzenbaum, as a class member, has standing to press such an

argument because he has a concrete, particularized, and legally

protected interest in both faithful representation by class counsel

and in not being defrauded by an adverse party, cf. Fed. R. Civ. P.

60(b)(3) (recognizing "fraud . . . misrepresentation, or other

misconduct of an adverse party" as a basis for seeking relief from

judgment).  As to the potentially difficult issues of Metzenbaum's

"party" status and right to intervention in order to obtain

discovery, we think they are extinguished for purposes of this case

by our answer to a narrower, logically antecedent question:  Must

a district court scrutinize and approve as fair an appellate side

settlement between the parties who have reached a court-approved

settlement of a class action and separately represented class

members who had objected to the settlement prior to its approval? 

Metzenbaum contends that Fed. R. Civ. P. 23(e) and/or general class

action principles derived from the case law give class members like

himself an interest in such scrutiny and approval.  But as we

explain below, Metzenbaum reads the authority he cites too broadly. 

Where, as here, the class settlement is unaffected by the side

settlement and there has been no demonstration of a fraud, absent

class members like Metzenbaum simply have no unconditional right to

have a court review and approve as fair the terms of such a side

settlement.

  We start with Metzenbaum's contention that Fed. R. Civ.

P. 23(e) explicitly requires court approval of the side settlement. 

Assuming arguendo that the Rule somehow applies post-judgment to

the compromise of an appeal from a district court's approval of a

class-action settlement, but see Fed. R. Civ. P. 1 ("These rules

govern the procedure in the United States district courts . . . .")

(emphasis supplied), we reject the argument on plain language

grounds.  Rule 23(e) only requires court approval of the dismissal

or compromise of "[the] class action" itself; it in no way suggests

that negotiated resolutions of disputes peripheral to the class

action need be approved.  It is for precisely this reason that

courts have declined to require full Rule 23(e) approval of

separate merits settlements that class-action defendants have

negotiated with absent class members.  See, e.g., In re General

Motors Corp. Engine Interchange Litig., 594 F.2d 1106, 1138-40 (7th

Cir. 1979) (judicial examination of such separate merits

settlements is not to ensure the fairness of the settlements, but

only to ensure that the settlement offers provided the absent class

members with sufficient information to make an informed decision

whether to settle or proceed); In re Shell Oil Refinery, 152 F.R.D.

526, 536 (E.D. La. 1989) (same); see generally 2 Herbert Newberg &

Alba Conte, Newberg on Class Actions  11.75, at 11-199 (3d ed.

1992); 7B Charles Alan Wright, et al., Federal Practice and

Procedure  1797, at 377-78 (2d ed. 1986); cf. Weight Watchers of

Philadelphia v. Weight Watchers Int'l Inc., 455 F.2d 770, 773 (2d

Cir. 1972) (Friendly, J.) (declining to require full Rule 23(e)

approval of settlements with potential class members prior to class

certification).  Such individual side settlements are just that  

side settlements; they are not a settlement of the class action

itself.

  Metzenbaum also argues that general class action

principles support his proposed disclosure and approval

requirement.  In support of his position, Metzenbaum cites a number

of complex litigation cases in which, even though Fed. R. Civ. P.

23(e) did not strictly apply, courts either have required court

scrutiny of or actually scrutinized agreements peripheral to the

class action.  Unlike the just-mentioned In re General Motors Corp.

and In re Shell Oil Refinery cases (where, despite the

inapplicability of Rule 23(e), courts scrutinized side settlements

with absent class members to ensure that those class members made

informed settlement decisions), the cases Metzenbaum cites all

involved circumstances in which there were systemic incentives for

class counsel or the named class plaintiffs to act in disregard of

fiduciary duties owed to absent class members in concluding these

peripheral agreements.

  For example, noting "the danger that the lawyers might

urge a class settlement at a low figure or on a less-than-optimal

basis in exchange for red-carpet treatment on fees," Weinberger v.

Great Northern Nekoosa Corp., 925 F.2d 518, 524 (1st Cir. 1991), we

have directed district courts to exercise their equitable

jurisdiction to review counsel-fee arrangements negotiated in

connection with class-action settlements   even where the counsel

fees are not taken from a common fund but are instead paid

separately by a class-action defendant, see id. at 523-25. 

Similarly, courts in two recent mass-tort settlements appear to

have required approval of settlements struck between clients of

class counsel who were not members of a class and a party opposing

the class.  See Georgine v. Amchem Prods., Inc., 157 F.R.D. 246,

294-99, 307-10 (E.D. Pa. 1994), rev'd on other grounds, 83 F.3d

610, 622 (3d Cir. 1996), aff'd 521 U.S. 59 (1997); In re Asbestos

Litig., 90 F.3d 963, 978-80 (5th Cir. 1996), cert. granted and

judgment vacated on other grounds, 117 S. Ct. 2503 (1997).  In each

instance, the court acted out of concern that class counsel's

simultaneous representation of the class and individual clients

outside the class might have given rise to a conflict of interest. 

See Georgine, 157 F.R.D. at 299; In re Asbestos, 90 F.3d at 980. 

And the Fourth Circuit, having reached the controversial conclusion

that Rule 23(e) does not apply prior to class certification, see

Shelton v. Pargo, Inc., 582 F.2d 1298, 1302-04 (4th Cir. 1978),

nonetheless held that pre-certification voluntary dismissals of

claims by the named plaintiffs of a putative class should be

evaluated under the Rule 23(e) paradigm pursuant to the district

court's "supervisory power over and . . . special responsibility in

actions brought as class actions," id. at 1306.  In Shelton, the

concern was that a named plaintiff may succumb to self-interest and

settle in such a way as to harm the interests of absent class

members.  See id. at 1304-06 & nn. 17-19. 

  But we see no inherent risk of victimization of the

uninformed, convergence of interests of putative adversaries, or

conflict of interests between or among those to whom fiduciary

duties are owed, in an appellate side settlement of the type

Metzenbaum challenges.  Tellingly, Metzenbaum does not explain how

a party to or attorney involved in such an appellate side

settlement might be tempted to act in derogation of a fiduciary

duty.  This of course means that Metzenbaum has not specified how

class counsel   the only persons potentially involved in the side

settlement with fiduciary duties to absent class members like

himself   faced systemically generated incentives to violate such

a duty in compromising the Rose Objectors' appeal.  Instead,

Metzenbaum derives from the cases just described a broader

principle:  a generalized concern on the part of courts that

"similarly-situated class members [be] treated similarly and that

monies paid by the defendants for purposes of settlement inure to

the benefit of all class members."  Appellant's Brief at 16; see

also id. at 17, 19, and 23.  Using this principle as his point of

departure, Metzenbaum argues that the injury he suffered is his

alleged unequal treatment (in terms of settlement results) vis-a-

vis the Rose Objectors.   

  Metzenbaum's statement of the applicable principle is

sound insofar as it implies that courts are concerned with adequate

and similar results for all similarly situated class members in a

class action settlement.  See, e.g., In re General Motors Corp., 55

F.3d at 808 ("One sign that a settlement may not be fair is that

some segments of the class are treated differently from others."). 

Yet this is only because different recoveries for similarly harmed

persons who have remained within the class and are represented by

class counsel (or high attorney-fee awards negotiated in connection

with paltry class settlements) can constitute powerful evidence

that a fiduciary obligation has not been honored.  See In re

General Motors Corp., 594 F.2d at 1139 ("Rule 23(e) requires

judicial approval of class action settlements to guard against

possible ineffective representation of absentees' interests by the

representative parties."); see also, e.g., In re General Motors

Corp., 55 F.3d at 809 (courts should "withhold approval from any

settlement that creates conflicts among the class"); Weinberger,

925 F.2d at 524-25 (discussing oversight of attorney-fee agreements

as necessary to prevent class-harming conflicts of interest between

the plaintiff class and class counsel); 7B Wright, et al., Federal

Practice and Procedure  1797, at 340-41 (discussing oversight of

settlements involving representative parties as necessary to ensure

that the representative parties had not become fainthearted or

settled solely out of self-interest).  But to the extent that

Metzenbaum reads cases like Weinberger, Georgine, In re Asbestos,

and Shelton as broadly directing courts entertaining class actions

to ensure similar recoveries by all similarly harmed persons within

the original class, regardless of the litigation decisions they

have made, he is wrong.  

  We simply have no tradition of court intervention to

ensure that similarly victimized plaintiffs who have retained

separate counsel and have made different litigation decisions get

similar results.  Cf., e.g., Fed. R. Civ. P. 23(c)(2) (requiring

that notice to the class explicitly inform class members that they

may opt out of the class action).  Similarly harmed plaintiffs

often secure separate representation and subsequently enter into

materially different settlements with a common defendant.  In such

situations, the settling parties have no legally protected interest

in having a court scrutinize each settlement to ensure that all

plaintiffs receive similar consideration for their releases.  A

fundamental assumption of our adversary system is that adversaries

represented by persons with presumably undivided loyalties will

tend to negotiate acceptably fair resolutions of their disputes. 

As we have implied, courts oversee class-action settlements only

because factors unique to the class-action context   the already-

noted tendency towards a coincidence of interests between class

representatives and the party opposing the class, and the chasm

between representatives and faceless, absent class members   call

into question whether the representatives' loyalties are in fact

undivided. 

  We come then to the basic question:  Are Metzenbaum and

the Rose Objectors so "similarly situated" that we should view any

difference in their ultimate recoveries as evidence of a

systemically induced breach of a fiduciary duty owed to Metzenbaum

and absent class members?  We think the answer clearly is "no." 

Although Metzenbaum and the Rose Objectors are members of the same

class and originally were represented by the same class counsel,

they eventually secured separate representation through which they

took decidedly different positions with respect to the proposed

settlement and opposite positions with respect to the final

judgment.  So long as there was no fraud, that the Rose Objectors

might have obtained something in return for eventually dropping

their efforts to disrupt the settlement constitutes no cognizable

injury to Metzenbaum, who has received or will receive the full

benefit of the bargain to which he acquiesced and which the

district court deemed fair under Fed. R. Civ. P. 23(e).

  In his appellate brief, Metzenbaum hints at but does not

fully develop two additional rationales for court intervention

which might be taken as alternatives to his similar-results-for-

the-similarly-harmed argument.  The first is that courts should

intervene to prevent possible extortion; the second is that courts

should intervene to prevent possible fraud.  Before we conclude, we

believe it important to say a few words about each of these two

arguments.

  The Rose Objectors had little to lose in pressing their

appeal.  If they had lost, they would have remained entitled to the

relief secured by the class.  If they had won, they almost

certainly would have brought about a more favorable settlement for

the class.  See 2 Newberg on Class Actions  11.14, at 11-18 ("In

general, after a class is certified, particularly in a class action

for damages, there is a great likelihood of settlement before trial

because of the increased assessment by defense counsel of exposure

to substantial liability.").  In the class-action context, such

little-to-lose situations sometimes cause concern because they

raise the specter of extortive legal proceedings pressed "not to

redress real wrongs, but to realize upon their nuisance value." 

Cohen v. Beneficial Loan Corp., 337 U.S. 541, 548 (1949)

(acknowledging the incentives management sometimes has to settle

"strike suits" brought as shareholder derivative actions).  While

we have no reason to believe that the Rose Objectors or Attorney

Nygaard extorted their appellate settlement, we recognize that a

class member and his or her attorney conceivably could object to a

proposed settlement solely to set up an appeal designed to obtain

a nuisance value recovery and/or advantageous fee arrangement.  We

also recognize that, in Weinberger, a concern with deterring

extortionate settlements partially informed our decision to subject

to district court scrutiny all fee arrangements negotiated in

connection with class-action settlements.  See 925 F.2d at 524-25. 

  Metzenbaum mentions the possibility of extortion in

connection with the side settlement of the Rose Objectors' appeal. 

But in doing so, he neither argues that extortion might have caused

class counsel to bargain away some portion of the class's

negotiated recovery nor seeks to assert a third-party interest  

e.g., the interest John Hancock (the party most obviously

positioned to press an extortion argument under the circumstances)

might have in not being subjected to an extortionate appeal   on

grounds that John Hancock is unlikely to seek court review of the

side settlement.  Instead, Metzenbaum merely suggests that

extortion of this type will cause a party opposing a class action

to hold back funds that otherwise might have been offered to the

class in the class settlement.  Disclosure and approval is needed,

he suggests, to ensure that the class has access to these funds in

settlement negotiations.

  We think that this line of argument is answered by what

we already have stated.  Courts examine the fairness of certain

class-related settlements because it is thought that, fiduciary

obligations notwithstanding, circumstances unique to the complex

litigation context sometimes tempt class counsel and/or named class

plaintiffs to conclude settlements that are not in the best

interests of absent class members.  In these situations, courts

assess whether the settlements are fair, reasonable, and adequate,

see, e.g., In re General Motors Corp., 55 F.3d at 804-19, because

fair settlements can more confidently be regarded as having been

negotiated in compliance with the class representatives' fiduciary

duties.  But so long as the class settlement remains unaffected,

nothing about the settlement of an extortionate appeal by

separately represented, objecting, absent class members logically

calls into question whether the class has been faithfully served by

its representatives.  Such a settlement thus would not give a class

member the right to invoke Fed. R. Civ. P. 23(e) and its related

doctrines as a means of creating a bigger settlement pie post-

judgment, at least under the rationale alluded to here.     

  Of course, matters could be different if there were some

indication that the side settlement of an appeal was a vehicle for 

implementing or furthering a fraud.  Unlike an appellate side

settlement which at the very most merely hints that the class might

have been able to obtain more in the class settlement, a fraud-

masking appellate settlement should be understood to involve

affirmative deceit upon the class or court   e.g., use of the

recipient of the appellate settlement as a payment conduit between

the party opposing the class and class counsel in an end run around

a lower court's counsel-fees ruling.  Seizing on the many cases

which mention the prevention of "collusion" between class counsel

or class representatives and the party opposing the class as a

justification for court scrutiny of class-action settlements and

peripheral agreements negotiated in connection with class-action

settlements, see, e.g., In re General Motors Corp., 55 F.3d at 805;

Weinberger, 925 F.2d at 924-25; Georgine, 157 F.R.D. at 311,

Metzenbaum appears to suggest that appellate side settlements of

the sort we consider should be subject to scrutiny and approval as

a means of detecting whether they are masking a fraud.

   But after final judgment has entered, our strong

interest in the finality of judgments leads courts to intervene in

a search for evidence of fraud only if there has been some showing

that a fraud actually has occurred.  See H.K. Porter Co. v.

Goodyear Tire & Rubber Co., 536 F.2d 1115, 1118-22 (6th Cir. 1976)

(discovery in aid of a motion attacking a final judgment on the

basis of fraud should be permitted only if there is some evidence

of fraud); see also Midwest Franchise Corp. v. Metromedia

Restaurant Group, Inc., 177 F.R.D. 438, 440 (N.D. Iowa 1997) (prima

facie showing of fraud required); United States ex rel. Free v.

Peters, 826 F. Supp. 1153, 1154 (N.D. Ill. 1993) (same).  Plainly,

there has been no such showing here.  In making this point, we

emphasize that a court's obligation to scrutinize class-action

settlements and some agreements peripheral to class-action

settlements for evidence of collusion, see, e.g., In re General

Motors Corp., 55 F.3d at 805; Weinberger, 925 F.2d at 924-25, does

not in some way trump the systemic interest in finality of

judgments   an interest that might be thought particularly strong

in the class-action context, see Valerio v. Boise Cascade Corp., 80

F.R.D. 626, 647 (N.D. Cal. 1978) (finality considerations are "even

more pressing in the class action context" because of the number of

people the final judgment affects).  Thus, it does not open the

door to post-judgment discovery where there is nothing more than

speculation that a fraud might have occurred. 

  Affirmed.  Costs to appellees.