Sterling v. Stewart

158 F.3d 1199

• Court: Court of Appeals for the Eleventh Circuit
• Decided: October 28, 1998
• Docket: 95-8944
• Status: Published

Opinion

[PUBLISH]

IN THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

------------------------ No. 95-8944 FILED ------------------------ U.S. COURT OF APPEALS D.C. Docket No. 93-CV-2811 ELEVENTH CIRCUIT 10/28/98 THOMAS K. KAHN ROBERT STERLING, JR.; HERBERT HUTNER, et al., CLERK

Plaintiffs-Appellants, Cross-Appellees, MARY WYMAN STONE FRASER, et al.,

Intervenors-Plaintiffs,

WILLIAM T. MARTIN; PETER CHAPAUT; BRENT BUMPERS, Intervenors-Plaintiffs, Appellants,

versus

RICHARD STEWART; ROBERT FISHER, et al., Defendants-Appellees,

TRANSIT SALES AND SERVICE, INC., Intervenor.

------------------------ No. 95-8946 ------------------------ D.C. Docket No. 94-CV-3-GET

ROBERT STERLING, JR.; HERBERT HUTNER, et al.,

Plaintiff-Appellants, Cross-Appellees, MARY WYMAN STONE FRASER; LAURA LAWTON STONE FRASER, et al., Intervenors-Plaintiffs,

RICHARD STEWART; ROBERT FISHER, et al.,

Defendants-Appellees, WILLIAM T. MARTIN; PETER CHAPUT, et al.,

Intervenor-Defendants, Cross-Appellants.

------------------------ No. 95-9001 ------------------------ D.C. Docket No. 93-CV-2811

ROBERT STERLING, JR.; et al., Plaintiff-Appellees, MARY WYMAN STONE FRASER; LAURA LAWTON STONE FRASER, et al.,

FRASER FAMILY TRUST; WILLIAM T. MARTIN, et al.,

Intervenors-Plaintiffs, Appellees-Cross-Appellees,

versus RICHARD STEWART; ROBERT FISHER, et al.,

Defendants-Cross-Appellants,

TRANSIT COMMUNICATIONS, INC., TRANSIT COMMUNICATIONS, SERVICES, LP, et al.,

Defendants-Appellants,

TRANSIT SALES AND SERVICE, INC.,

Intervenor, Defendant-Appellant.

2 ---------------------- Appeals from the United States District Court for the Northern District of Georgia ---------------------- (October 28, 1998)

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.

* 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.

3 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. 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.

4 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 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.

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 Wright & Arthur Miller, Federal Practice and Procedure § 2981, at 5 (1973).

5 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 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

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.

6 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 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

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.

7 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 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

8 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 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

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.

9 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 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

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.

10 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 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

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.

11 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.