Dеfendant-cross-claimant-appellant Dai-wa Securities America, Inc. (“Daiwa”), defendants-counter-defendants-appellants MTC Electronic Technologies Co., Ltd. (“MTC”) and Robert C. Farr, Peter Jensen, Thomas Lenagh, Edilberto V. Pozon, Goodwin Wang, and David Wong (collectively “the individual defendants”) appeal from a judgment of the United States District Court for the Eastern District of New York (John Gleeson, District Judge) approving partial settlements between plaintiffs-appellees and defendants-appellees BDO Dunwoody (“BDO”), and HSBC Bank Canada (“HSBC”) and Ron Driol, an HSBC executive.
Appellants (collectively “the non-settling defendants”) contend that the district court erred in approving the partial settle-
We affirm the district court’s orders in part. We hold that the court’s deferral of the allocation of particular settlement amounts to various elements of damages for purposes of calculation of the non-settling defendants’ judgment credit was not erroneous, and conclude that, in light of the concessions made by plaintiffs on appeal, the non-settling defendants will receive a credit that is at least the settlement amount for common damages. We also affirm, with a slight modification, the district court’s bar order extinguishing the claims of the non-settling defendants for indemnity and contribution, and any other claims where the damage to the non-settling party is measured by its liability to the plaintiffs for claims relating to this action. We vacate and remand that part of the district court’s order relating to the mutuality of the bar order because we find that the magistrate judge, whose recommended ruling the district court adopted, did not fully consider the competing equities involved in the mutual and non-mutual rules. Finally, we agree with the district court that the PSLRA does not apply to any of the added plaintiffs in this action, which was commenced prior to that statute’s effective date.
BACKGROUND
I. The Litigation
MTC was a company based in British Columbia that purportedly had binding joint ventures regarding the operation, manufacture and sale of telecommunications equipment in China. Plaintiffs are a group of investors who purchased shares of MTC common stock between 1992 and 1994. MTC allegedly raised over $70 million in a secondary offering in 1993, which was underwritten by defendant Daiwa. Defendant BDO Dunwoody (“BDO”) was MTC’s auditor during the time period at issue. Plaintiffs allege that MTC’s purported telecommunications joint ventures were fraudulent and materially misrepresented. As a result, plaintiffs claim to have incurred trading losses in MTC stock of more than $15 million.
Nine of the named plaintiffs filed suit against MTC, its principals (Miko Leung and Sit Wa Leung), various MTC officers and directors (the individual defendants), Daiwa and BDO in the Central District of California on January 23, 1995, alleging securities fraud, RICO violations and state law claims of fraud, negligent misrepresentation, and breach of fiduciary duty (“the Kayne action”). Because plaintiffs’ allegations were similar to those of two clаss actions then pending against MTC in the Eastern District of New York, the Kayne action was transferred to Judge Gleeson by the Judicial Panel on Multidistrict Litigation for coordinated pre-trial proceedings. Plaintiffs moved to amend their
II. The Settlements
In late 2000, plaintiffs reached an $8 million settlement with BDO purporting to allocate $4,907,975.50 to out-of-pocket damages and $3,092,024.50 to pre-judgment interest. Plaintiffs also reached a $4,075,000 settlement with HSBC and Driol, allocating $1,300,000 to out-of-pocket damages, $819,000 to prejudgment interest, and $1,956,000 to attorneys’ fees (which are recoverable under RICO). In exchange, plaintiffs agreed to release BDO, HSBC and Driol for аll claims they might have against the settling defendants in any forum, related in any way to the MTC litigation.
These settlements were submitted to the district court for approval, and were referred to Magistrate Judge Chrein for a recommended ruling. The settling parties sought an order finding that the settlements were good faith settlements under California and federal law, barring claims by the non-settling defendants while preserving the claims of the settling defendants, dismissing the claims pending in the Eastern District of New York, and approving the allocation of damages while leaving the determination of any judgment credit for the non-settling defendants until after trial. Although plaintiffs had made settlement contingent on the district court’s adoption of their specific allocations, they subsequеntly agreed to finalize the settlements if the propriety of the allocations within the settlement figure was left to the trial judge.
III. Rulings Below
In a recommended ruling, Magistrate Judge Chrein held that a “capped proportionate share” rule would determine the amount of the judgment credit to which the non-settling defendants are entitled on the state and federal claims. Under such a rule, the credit is the greater of the settlement amount for common damages or the settling defendants’ share of liability as proven at trial. The magistrate judge observed that this “rule ensures that no matter how the settlement funds are distributed as between damages and other elements, the non-settling defendants will never be required to pay more than their proportionate share of an award as determined by the trier of fact.”
The magistrate judge also rejected the non-settling defendants’ argument that the PSLRA applied to the claims of the nineteen plaintiffs who joined the suit by amendment after the statute’s effective date. The magistrate judge found that the PSLRA.did not apply to those plaintiffs because the Kayne action was “commenced” on the date they filed the original complaint, not the date the plaintiffs were added.
The parties filed objections and requests for clarification, which were considered by the district court. Judge Gleeson adopted the magistrate judge’s recommendations in their entirety with one modification, holding that “if a judgment is obtained against a nonsettling defendant, the judgment reduction shall not necessarily be calculated by using the full amounts of the settlements. Rather, allocations of amounts within those gross figures (to damages, prejudgment interest and attorneys’ fees) shall be subject to the discretion of the trial court.”
MTC, the individual defendants, and Da-iwa have aрpealed. Plaintiffs have responded to the appeal on the question of the calculation of the judgment credit, the district court’s deferral of that calculation, and the applicability of the PSLRA. BDO has responded on the issue of the scope and non-mutuality of the bar order and the applicability of the PSLRA.
DISCUSSION
I. Standard of Review
“A court can endorse a settlement only if ‘the compromise is fair, reasonable and adequate.’ ” In re Masters Mates & Pilots Pension Plan & IRAP Litig.,
II. The Judgment Credit
We begin by noting the first of several issues that are not in dispute in this appeal. No party challenges the magistrate judge’s determination that the non-settling defendants’ judgment credit will be calculated using a “capped proportionate share” formula. Under this rule, the credit given for the settlements will be the
Desрite the parties’ agreement on the method of calculation of the credit, the non-settling defendants argue that the district court’s orders create a possibility that they will receive less than the full amount of the settlement as a judgment credit, allegedly in violation of the one satisfaction rule. They also contend that they are entitled to know the amount of their credit, not merely the method of calculation, before trial. For the reasons that follow, we disagree.
The settling parties here attempted to allocate the settlements to three elements of “damages” purportedly suffered by the plaintiffs: out-of-pocket damages, prejudgment interest, and attorneys’ fees.
Despite these concessions, the non-settling defendants express concern that the district court held that “if a judgment is obtained against a nonsettling defendant, the judgment reduction shall not necessarily be calculated by using the full amounts of the settlements.” The district court’s order is accurate, however, insofar as only the portion of the settlement attributable to common damages will be credited. See Masters, 957 F.2d at 1031 (“Absent a showing that damages are not common, a nonsettling defendant whose rights against settling defendants are to be barred is entitled to judgment reduction at least in the amount paid by all settling parties.”); Singer,
We also conclude that the non-settling defendants are not entitled to any greater degree of certainty about the amount of their judgment credit than they already have. Consistent with In re Jiffy Lube Securities Litigation,
If ... it is determined [that] Plaintiffs are not entitled to prejudgment interest, all portions of the settlements allocated to prejudgment interest could be used as an offset against any award of out-of-pocket damages. The same holds true for the attorneys’ fees portion of Plaintiffs’ settlement with the Bank if Plaintiffs do not prevail at trial on their RICO claims against the Non-settling Defendants.
III. Scope of the Bar Order
With respect to the scope of the bar order entered by the district court, the parties’ disagreement is again quite limited. The non-settling defendants do not dispute that the district court properly barred their contribution and indemnification claims. See Masters,
In Masters, we addressed the extin-guishment of indemnity and contribution claims under a pro tanto recovery rule, and required a hearing on the fairness of the settlement to “protect the due process rights of third parties” in recognition of the possibility of collusion between the settling parties.
Daiwa argues that the bar order imper-missibly extinguishes “independent claims” that do not relate to any duty owed by BDO to plaintiffs, but rather involvе a relationship between BDO and Daiwa based on the issuance of the comfort letters by BDO to Daiwa. If, however, Dai-wa proves at trial that it acted as it did in reasonable reliance on BDO’s comfort letters, the jury’s apportionment of liability to BDO, and the judgment credit that results from that apportionment, will adequately protect Daiwa for any damages it owes to plaintiffs. To the extent that Dai-wa and the other non-settling defendants were injured by their reliance on the comfort letters only inasmuch as they owe damages to plaintiffs as a result of that reliance, those claims were properly extinguished.
This resolution of the scope of the bar order corresponds with BDO’s position that those claims where damagеs are calculated based on the non-settling defendants’ liability to the plaintiffs should be barred. More problematic is BDO’s alternative position that it is entitled to peace of mind on all claims arising out of the duties it may have breached with respect to the certification of the MTC financial statements, without regard for whether Daiwa might have a claim for damages that goes beyond its liability to the plaintiffs. It may well be, as BDO argues, that the non-settling defendants are only damaged to the extent they are liable to the plaintiffs in the underlying litigation. If, however, Daiwa were to prove that it sustained independent reputational damages or losses relating to the cost of defense arising out of a breached contractual or fiduciary relationship with BDO, it has not been compensated for those losses by the judgment credit, and any such claims should not be extinguished. See TBG, Inc. v. Bendis,
We express no view on the likely merit of any claims for independent damages that the non-settling defendants may assert. We also recognize that the orders’ reference to claims “arising out of or reasonably flowing from the claims or allegations in the Kayne action” may have been intended to encompass only claims where damages are based on liability owed by the non-settling defendants to the Kayne plaintiffs. In light of the position taken by BDO in this appeal, and in the absence of any finding from the courts below that no such claims exist, however, a modification to the bar orders is necessary to ensure that the only claims that are extinguished are claims where the injury is the non-settling defendants’ liability to the plaintiffs.
Each of the Non-Settling Defendants is hereby permanently BARRED, ENJOINED and RESTRAINED from commencing, prosecuting, or asserting any claim for indemnity or contribution against BDO (or any other claim against BDO where the injury to the Non-Settling Defendant is the Non-Settling Defendant’s liability to the plaintiffs), arising out of or reasonably flowing from the claims or allegations in the Kayne action, whether arising under state, federal or foreign law as claims, cross-claims, counterclaims, or third-party claims, in the Kayne action, in this Court, in any federal or state court, or in any other court, arbitration proceeding, administrative agency, or other forum in the United States, Canada or elsewhere (collectively, the “Barred Claims”). These Barred Claims include, but are not limitеd to, any and all claims arising out of or reasonably flowing from “comfort letters” issued to Non-Settling Defendant Daiwa by BDO in connection with MTC, to the extent that the injury to the Non-Settling Defendant under any such claim is its liability to the Kayne plaintiffs.8
IV. Non-Mutuality of the Bar Order
The non-settling defendants also object to the fact that the bar orders are “non-mutual,” in that they bar the non-settling defendants from bringing contribution and indemnity claims against settling defendants without imposing a reciprocal bar on the settling defendants, which remain free to seek indemnity or contribution from the non-settling parties. According to the non-settling defendants, if the settling defendants “overpaid for the privilege [of avoiding the risks and expenses of further litigation in this case, they] should not be able to recover from Non-Settling Defendants who undertook those risks and expenses by choosing to
In approving the entry of the non-mutual bar orders here, the magistrate judge cited In re Del-Val Fin. Corp. Sec. Litig.,
The magistrate judge’s expressed view that he was “obliged” to follow a nonbinding district court decision, notwithstanding his concern that such a rule “seem[ed] unfair,” convinces us that a remand for further consideration of the issue is warranted. Before approving a non-mutual bar order, the magistrate judge should have balanced the competing equities.
Ordinarily, in settling a case, the dеfendant bears the risk of overpayment and the plaintiff bears the risk of accepting a damages award lower than what would have been proved at trial. Each side may benefit from the possibility that the other side has paid too much (or accepted too little), and is sure to benefit from the assurance of a fixed payment. The risk is evenly distributed to both settling parties. The one satisfaction rule, however, complicates this balancing where there are multiple defendants but only a partial settlement: if the plaintiff settles with one defendant and goes to trial against another, it loses any benefit from the possibility that the settling defendant overpaid, because the judgment credit ensures that the plaintiff will not recovеr more than its total proven damages. As a result of the one satisfaction rule, if the settling defendant overestimates its proportion of plaintiffs damages, the non-settling defendant pays the plaintiff less than that non-settling defendant’s proven liability. The question, then, is whether non-settling defendant should be entitled to the benefit of the settling parties’ miscalculation. Although neither of the two possible rules is entirely unproblematic, a mutual rule may avoid creating incentives for collusion between the settling parties, while not putting the settling defendant at any unfair disadvantage.
Under BDO’s suggested non-mutual method, the settling defendant knows that it will never pay more than its proportionate fault, because it can seek contribution from the non-settling defendant in the evеnt that its settlement payment is for more than its proportionate fault. The settling defendants thus obtain the benefit of a cap on exposure without any risk that they will have overpaid. The non-settling defendants will have to pay exactly their share of the harm as proven at trial, regardless of the settlement amount, because the non-settling defendants will have to pay back any judgment credit that exceeds their proven liability to the settling defendants on a claim for contribution. The settling plaintiffs bear the risk that they
In contrast, under the non-settling defendants’ proposed mutual rule, a settling defendant retains the risk that it will settle for more than its proportionate share of the harm ultimately proved at trial; in exchange, its maximum exposure is limited to the amount for which it settles. The settling plaintiffs are in the same position as under BDO’s proposed non-mutual rule. Under the mutual rule, however, the non-settling defendants obtain a potential windfall if the settling defendants settle for more than their proportionate share of the harm, because the non-settling defendants’ judgment credit is the greater of the settlement amount or the settling defendants’ proven proportionate share of liability under the one satisfaction rule. On the other hand, there is no analogous risk of collusion. The settling defendant remains no worse off than if the one satisfaction rule were not in place.
On remand, the district court should consider whether, under the circumstances of this case, which include the possibility that the non-settling defendants benefitted from a similar non-mutual order in the prior 'settlement of the class-action claims, a non-mutual or a mutual bar order is most fair to all the parties involved. We also note that the PSLRA has resolved this dilemma in favor of mutual bar orders. See 15 U.S.C. § 78u-4(f)(7). While, for the reasons discussed below, we conclude that the PSLRA does not control the outcome of this pre-PSLRA case, the congressional determination that a mutual bar order was the better approach may have some bearing on the district court’s resolution of this issue. Finally, we also recognize that at oral argument, counsel for BDO repeatedly indicated that BDO desired a non-mutual bar in order to be allоwed to pursue claims against MTC and its parent corporation, Grande Holdings, and not Daiwa. This too may be relevant to the district court’s consideration as to the scope of any non-mutual bar order on remand.
Accordingly, we vacate and remand that portion of the district court’s order approving a non-mutual bar order in the BDO settlement for further consideration and balancing of the competing fairness issues.
V. Applicability of the PSLRA
Finally, the non-settling defendants argue that the bar orders must be mutual for the claims of the nineteen plaintiffs who were added by amendment to the complaint after the effective date of the PSLRA. The district court properly rejected this argument.
Section 108 of the PSLRA provides that the PSLRA’s provisions relating to settlement “shall not affect or apply to any private action [brought under the Securities and Exchange Act of 1934] commenced before and pending” on December 22, 1995. 109 Stat. 737, 758 (1995). This statutory language refers to “actions,” not
CONCLUSION
In summary, we affirm the bar orders with respect to the settlement judgment credit as construed in light of plaintiffs’ concessions on appeal, deny the non-settling defendants’ request for greater clarification as to the amount of their judgment credit, modify the language of the bar orders to extinguish only those claims for which the harm to the non-settling defendants is their liability to the plaintiffs, and vacate and remand the bar orders only on the issue of the non-mutuality of the orders.
The parties are to bear their own costs.
Notes
. The individual defendants and Daiwa have settled with HSBC and Driol.
. In Singer, the plaintiff had sued two parties for related securities fraud and RICO claims in separate lawsuits in New York and Illinois. Singer,
Although ... the settling defendant may well have considered its possible exposure to treble damages in deciding to settle, it would be entirely speculative for us, absent a finding of liability on the RICO claim, to treble in the settled Illinois case the actual damages awarded in the tried New York case.
Id. at 601. Here, in contrast to Singer, plaintiffs are headed to trial against the non-settling defendants on the RICO and state law claims under which they seek attorneys' fees and prejudgment interest. Thus, whether there will be an award entitling plaintiffs to recover these elements of damages may not be speculаtive. For our purposes, Singer suggests that where a plaintiff loses on a claim at trial, the plaintiff cannot allocate a portion of the settlement to damages for that losing claim in order to reduce a non-settling defendant's judgment credit; instead, the judgment credit is to be the full amount of the settlement for common damages.
. The references to "damages” as allocated in the settlements and the district court's orders are somewhat unclear. The entire settlement amount is a payment of "damages” by the
. Inasmuch as no party has articulated any reason that the credit should be allocated in
. We note two issuеs relating to the commonality of damages that may be relevant to the trial court's calculation of the judgment credit. Plaintiffs have argued that if the non-settling defendants prevail at trial on their theory that they are only responsible for a particular set of injuries that are distinct from the damages caused by the settling defendants, and therefore are not held jointly and severally liable for the harm caused by the settling defendants, there would be no basis for granting a judgment credit in the full settlement amount because the settlement would not represent "common” damages. In addition, plaintiffs maintain that if only some of them were to prevail at trial, the judgment credit should be the greater of (1) the amount that the prevailing plaintiffs received of the settlement, or (2) the settling defendants’ proven share of liability, again because the one satisfaction rule bars recovery for a particular plaintiff only to the extent that the plaintiff has already received compensation for his proven damages. We take no position on these issues at this time.
. The individual defendants and Daiwa reached a settlement with HSBC and Driol, but MTC — which apparently has not settled with these parties — has joined in the arguments made by the individual defendants and Daiwa. We therefore discuss both the BDO and HSBC/Driol settlements, although we note that several arguments relate solely to the relationship between Daiwa and BDO.
. We have the authority to "affirm, modify, vacate, set aside or reverse any ... order of a court lawfully brought before [us] for review ...28 U.S.C. § 2106; see, e.g., Aguinda v. Texaco, Inc.,
. To the extent necessary to protect the rights of any parties to this appeal, the district court is instructed to make a similar modification to the HSBC/Driol settlement bar order.
. The non-settling defendants rely on Adler v. Berg Harmon Associates,