In Re Heritage Bond Litigation
In re HERITAGE BOND LITIGATION,
Daniel M. Harkins, Feldhake, August & Roquemore, Irvine, CA, for Russel Betker, Virginia Betker, Betker Partners One, LP, Betker Partners Three, LP, Lori O‘Shea, and Michael O‘Shea, appellees.
G. Cresswell Templeton, III, Hill, Farrer & Burrill LLP, Los Angeles, CA, for U.S. Trust Corp., N.A., appellee.
Gary Kurtz, Law Offices of Gary Kurtz, Woodland Hills, CA, for Robert A. Kasirer and Debra Kasirer, appellees.
Garland Kelley, Irell & Manella, LLP, Los Angeles, CA, for CBIZ and Century Business Services, appellees.
Before: RAYMOND C. FISHER and RICHARD A. PAEZ, Circuit Judges, and JAMES L. ROBART,* District Judge.
PAEZ, Circuit Judge:
This case arises from the settlement of a complex of securities fraud cases involving the sale of municipal bonds for renovation
The district court, applying the “interrelatedness” test from Wisconsin Investment Board v. Ruttenberg, 300 F.Supp.2d 1210 (N.D.Ala.2004) (following In re U.S. Oil & Gas Litigation, 967 F.2d 489 (11th Cir.1992)), determined that Talley‘s claims were related to and arose out of the litigation involving the Heritage Bonds and, in the five bar orders, specifically barred his claims. In this appeal, Talley challenges the scope of the bar orders and argues that under federal common law, the PSLRA, and section 877.6, the orders should have been limited to claims for contribution and indemnity or disguised claims for such relief.1 Talley concedes that any claims for indemnity, contribution, and comparative fault were appropriately barred by the orders at issue here. He contests the bar orders only to the extent they bar his allegedly independent state law claims. Appellees2 argue that the district court has broad authority to issue bar orders and that this court should apply the “interrelatedness” test to determine that Talley‘s state law claims arise from the same core facts as those extinguished by the district court‘s approval of the settlement agreements.
We have jurisdiction under
I. Background
The underlying litigation in this case involved investor plaintiffs’ securities fraud claims against the individuals responsible for creating, operating, marketing and selling Heritage Bonds; certain defendants’ cross-claims against each other for indemnity and contribution; and Talley‘s separate tort claims against certain co-defendants—his employers and thе creators and operators of the Heritage Bonds.
In the mid-1990s, defendant Robert Kasirer joined with several other entities to develop a series of fraudulent municipal bond offerings (the Heritage Bonds), ostensibly to finance or renovate healthcare facilities in several states. See In re Heritage Bond Litigation, 289 F.Supp.2d 1132, 1137 (C.D.Cal.2003). The principals of the Heritage Bonds offerings included Talley‘s employer, Miller & Schroeder, Inc., which was the underwriter for the offerings. See id. In 1999, investors discovered that the Heritage Bonds principals had been stealing and commingling the bond investors’ funds, that the Heritage Bonds principals had lied about their backgrounds and the nature of the healthcare facilities that were the subjects of the bond offerings, and that Miller & Schroeder‘s principals and lawyers had known of these facts. See id. at 1140.
The first lawsuit was filed in June 2001 in the United States District Court fоr the Central District of California, Case No. 01-CV-5752, captioned Betker Partners One, et al. v. U.S. Trust Company, et al. (”Betker lawsuit“).4 The Betkers were investors in the Heritage Bonds. Their claims included securities fraud and control person liability under the Securities Exchange Act of 1934 and violations of the Securities Act of 1933. They also alleged state law claims for breach of fiduciary
In August 2002, the Betker lawsuit and other related class action lawsuits that had been filed around the country were consolidated by the Judicial Panel on Multi-District Litigation and transferred to the Central District of California under the title of In re Heritage Bond Litigation, Case No. 02-ML-1475. See
In December 2002, Talley filed a complaint in the California Superior Court, County of San Diego, No. GIC 802187, against many of the Heritage Bonds co-defendants and others, alleging claims for breach of fiduciary duty, negligence, interference with economic advantage, avoidance of fraudulent transfer, unfair or unlawful business practices, constructive fraud, and violation of
In October 2004, while settlement discussions with the Betkers were in progress, Talley filed a second state court lawsuit in the California Superior Court, County of San Diego, Case No. GIC 836807. This case concerned only Talley‘s affirmative claims for damages and did not include the contribution and indemnity claims that he had previously alleged in his answer and cross-claims in the Betker lawsuit. While the instant appeal was pending, Talley‘s second state court case moved forward through the California court system, and all of his claims were ultimately dismissed pursuant to the bar orders at issue here. See Talley v. Miller & Schroeder, No. D048438, 2007 WL 2660059 (Cal.Ct.App. Sept. 12, 2007). On appeal, “[d]ue to the broad language of all th[e] Bar orders,” the California Court of Appeal affirmed the majority of the trial court‘s dismissal orders.6Id. at *3. The decision allowed Talley to pursue certain of his claims against U.S. Trust Corporation and U.S. Trust Company, N.A. (“U.S.Trust“) аnd Valuation Counselors Group, Inc. (“Valuation“), but, pursuant to the bar orders at issue here,7
By February 2005, Talley‘s settlement with the Betkers was finalized, and Talley was dismissed from the In re Heritage Bond Litigation. During this time, other defendants were also negotiating settlements with the In re Heritage Bond Litigation plaintiffs. As part of the settlements that emerged from these negotiations, each agreement required a good faith settlement determination and bar order pursuant to section 877.6 and a bar order pursuant to the PSLRA. These determinations were an essential part of the settlement agreements because they allowed the court to make a finding that the settling party would pay its fair share of liability to the settling plaintiffs and, if so, to bar any further obligatiоn by that settling defendant to contribute funds to the settling plaintiffs, either directly or indirectly by indemnifying another liable party. See
In November 2004, defendants BHMC Corporation; Care-Continuum, LLC; Health Care Holdings, LLC; JDDJ Holdings, LP; Debra Kasirer; and Robert Kasirer (“Kasirer Defendants“) filed a Motion for Approval of Settlement, Good Faith Determination and Bar Order in the Betker lawsuit before the district court. The motion included a request that the court enter a broad bar order extinguishing any future claims by non-settling defendants against the settling defendants related to or arising out of the In re Heritage Bonds Litigation. Talley filed an opposition to this motion, urging the court to bar only claims for contribution and indemnity. He argued that the bar orders would preclude his independent state court claims against the settling defendants. The district court rejected Talley‘s arguments and granted the motion and entered two orders—one granting preliminary approval and another granting final approval of the settlement—on December 9, 2004. The district court specifically identified Talley‘s state court case in the final order.
In doing so, the district court considered whether the proposed settlement satisfied
Additionally, in response to Talley‘s challenge to the bar orders, the court evaluated the appropriate scope of the orders by reference to the “interrelatedness” test of Wisconsin Investment Board v. Ruttenberg, 300 F.Supp.2d 1210 (N.D.Ala.2004) (following In re U.S. Oil & Gas Litigation, 967 F.2d 489 (11th Cir.1992)), which asks “whether the claims extinguished by the bar order arise out of the same facts as those in the underlying ... securities litigation.” Ruttenberg, 300 F.Supp.2d at 1219. The district court found that “Talley‘s bald assertions that his claims rely on facts that are separate and distinct from the facts alleged in the present securities litigation arе insufficient to support a finding that the proposed Bar Order is overly broad.” Talley filed a Notice of Appeal on January 4, 2005, appealing the final approval order (Appeal No. 05-55072).
In January 2005, defendants Jerold Goldstein; Valuation Counselors Group, Inc.; CBIZ; Bank of New York; U.S. Trust Company; Leo Dierckman; and HFS Consultants in the Heritage Bonds consolidated case each filed an identical Motion for Approval of Settlement, Good Faith Determinations, and Bar Orders. Talley filed an opposition to these motions, asserting the same arguments that he raised in his opposition to the similar motion noted above. The district court held a good faith hearing on the motions and entered two orders granting preliminary approval. The court again rejected Talley‘s arguments. The district court subsequently entered four final orders approving the settlements and bar orders on February 7, 2005.9 The district court specifically identified Talley‘s state court case in the challenged bar orders, with the exception of the Goldstein bar order. Talley filed his second Notice of Appeal on March 2, 2005 appealing the four February 7, 2005 final approval orders (Appeal No. 05-55371).10
In sum, each of the five final settlement approval orders from which Talley appeals includes a broad bar order that specifically bars his state court claims that relate to the In re Heritage Bond Litigation.
II. Discussion
A. Standard of Review
A district court may approve a proposed settlement in a class action only
B. Mootness
As discussed above, Talley‘s state law claims were dismissed pursuant to the bar orders challenged here. Talley, 2007 WL 2660059. The California Court of Appeal affirmed the superior court‘s dismissal “[d]ue to the broad language of all th[e] Bar orders.” Id. at *3. Appellees argue that because Talley‘s state law claims have been dismissed and the dismissal has been affirmed, this appeal is moot. We disagree.
The Court of Appeal stated clearly that its reliance on the bar orders was premised on its view that it was bound by the broad language of the orders because the bar orders should be considered final while Talley‘s federal appeals were pending. See Talley, 2007 WL 2660059, at *3, 16 (“Plaintiff has appealed that [bar] order to the Ninth Circuit Court of Appeals, and appeal is pending, but for our purposes, under the rule of Levy v. Cohen (1977) 19 Cal.3d 165, 172, 137 Cal.Rptr. 162, 561 P.2d 252 ... it is currently deemed to be final. We must consider ourselves bound by the broad language of that Bar order.“). The court followed the federal res judicata rule applied by the California Supreme Court in Levy, 19 Cal.3d at 172, 137 Cal. Rptr. 162, 561 P.2d 252, that “a judgment or order, once rendered, is final for purposes of res judicata until reversed on appeal or modified or set aside in the court of rendition.” See Talley, 2007 WL 2660059, at *16 (quoting Levy, 19 Cal.3d at 172, 137 Cal.Rptr. 162, 561 P.2d 252). By specifying that it affirmed the dismissal of Talley‘s claims solely on this basis, the court implied that modification of the bar orders could revive Talley‘s claims.
We therefore agree with Talley that this appeal is not moot because we can still grant relief in his favor. We have previously held that “[a]n appeal is moot when, by virtue of an intervening event, a court of appeals cannot grant any effectual relief whatever in favor of the appellant.” United States v. Strong, 489 F.3d 1055, 1059 (9th Cir.2007). However, “[t]he party asserting mootness bears a heavy burden of establishing that there is no effective relief remaining for a court to provide.” Id. (internal quotation marks and citations omitted).
Although the federal courts are unable to grant Talley the ultimate relief he seeks—reinstatement of his state law claims—he has outlined several procedures he could follow in state court, such as filing a motion under
C. Scope of the Bar Orders
Talley argues that, to the extent that they would bar him from bringing independent, non-indemnity or contribution claims in the superior court, the five bar orders challenged in this appeal exceed the scope allowed by the contribution bar provisions of the PSLRA,
We have already acknowledged the authority of a district court under federal common law to issue bar orders barring future claims for contribution and indemnity as part of its approval of a proposed settlement in a class action securities fraud case, once it has found that the settlement satisfies the requirements of Rule 23. See Resolution Trust, 51 F.3d at 197; Kaypro, 884 F.2d at 1231; In re First Alliance Mortgage Co., 471 F.3d 977, 1004 (9th Cir. 2006) (“In Kaypro, this court concluded under federal common law that a partial pre-trial settlement in a securities case, pursuant to which non-settling defendants’ rights to contribution are satisfied and further contribution barred, may be approved under Rule 23 if the liability of non-settling defendants is limited to their actual percentage of liability for the amount of total damages determined at trial.“). We have not, however, previously addressed the question of whether the bar order
i. Private Securities Litigation Reform Act Section 4(f)(7)(A)
As we have previously acknowledged, “Congress passed the PSLRA [in 1995] because it was distressed with the proliferation and cost of allegedly meritless federal securities class actions. The PSLRA sought to curb abusive and frivolous securities suits by imposing new procedural and substantive requirements.” U.S. Mortgage, Inc. v. Saxton, 494 F.3d 833, 841 (9th Cir.2007); see also In re Silicon Graphics Inc. Secs. Litig., 183 F.3d 970, 978 (9th Cir.1999) (noting that Congress enacted the PSLRA in part to prevent abusive securities fraud class actions designed “to impose costs so burdensome that it [was] often economical for the victimized party to settle“). “Its provisions limit recoverable damages and attorney‘s fees, provide а `safe harbor’ for forward-looking statements, impose new restrictions on the selection of (and compensation awarded to) lead plaintiffs, mandate imposition of sanctions for frivolous litigation, and authorize a stay of discovery pending resolution of any motion to dismiss.” Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S. 71, 81 (2006).
In its effort to reform litigation and settlement of securities fraud class actions, Congress also included the provision at issue here, which makes the entry of a bar order against future claims for contribution mandatory upon a court‘s approval of a settlement in such a case.13
Gerber was not decided under the PSLRA. Gerber, 329 F.3d at 309-10. Prior to adoption of the PSLRA, federal courts determined the appropriate scope of bar orders issued in partial settlements of class action cases by reference to federal common law evolving from
Appellees urge us to affirm the district court‘s application of the approach taken by the Eleventh Circuit in In re U.S. Oil & Gas Litigation, 967 F.2d 489 (11th Cir. 1992).14 In determining the scope of the challenged bar orders, the district court relied upon the holding of In re U.S. Oil & Gas Litigation, as applied in Ruttenberg, 300 F.Supp.2d at 1219, that
[t]he propriety of the settlement bar order should turn upon the interrelatedness of the claims that it precludes, not upon the labels which parties attach to those claims. If the cross-claims that the district court seeks to extinguish through the entry of a bar order arise out of the same facts as those underlying the litigation, then the district court may exercise its discretion to bar such claims in reaching a fair and equitable settlement.
In re U.S. Oil & Gas Litigation, 967 F.2d at 496.
However, the Eleventh Circuit called this “interrelatedness” test and its opinion in In re U.S. Oil & Gas Litigation into question with its decision in AAL High Yield Bond Fund v. Deloitte & Touche, LLP, 361 F.3d 1305 (11th Cir.2004). In AAL, certain non-settling defendants in a securities fraud class action suit challenged the district court‘s bar orders as impermissibly broad under the PSLRA contribution bar when they precluded the non-settling defendants from bringing future claims against settling co-defendants. Id. The AAL court explicitly distanced itself from In re U.S. Oil & Gas Litigation by explaining that its holding in that case had narrow applicability because it had barred the cross-claims at issue there only because they were disguised contribution and indemnity claims, not truly independent claims. AAL, 361 F.3d at 1312 (noting that In re U.S. Oil & Gas Litigation “expressly declined to address the issue of `truly independent claims‘“). The court also declined to consider Ruttenberg as persuasive authority because of its reliance on In re U.S. Oil & Gas Litigation. Id. Because we find the reasoning of AAL persuasive, we likewise decline Appellees’ invitation to adopt the federal common law rule articulated in In re U.S. Oil & Gas Litigation to determine the appropriate scope of a bar order issued pursuant to the PSLRA.15
Instead, we hold that the correct standard for determining the appropriate scope of a bar order issued pursuant to the
Like the instant case, Gerber addressed a challenge by certain non-settling defendants in a securities fraud class action to the district court‘s approval оf a settlement bar order “extinguishing any claims against [certain co-defendants] relating to or arising from the allegations of [the] litigation.” Gerber, 329 F.3d at 300. The parties did not contest the authority of the district court to bar claims for contribution and indemnity and conceded that “a `disguised’ contribution or indemnity claim, such as a negligence claim where the injury to the non-settling defendants was their liability to the plaintiffs, could be barred.” Id. at 305. Instead, the appellants argued that the district court‘s bar order was impermissibly broad only insofar as it barred independent claims. Id. The Gerber court determined under federal common law that if a non-settling defendant is able “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 [thе settling defendant], it has not been compensated for those losses by the judgment credit, and any such claims should not be extinguished [by the bar order].” Id. at 306.
In addressing which claims should not be precluded, the court explained that the only claims that could appropriately be barred by such an order, in addition to those for contribution and indemnity, were “disguised” claims for contribution or indemnity—those “in which the injury is the non-settling defendant‘s liability to the plaintiff,” or “where damages are calculated based on the non-settling defendants’ liability to the plaintiffs.” Id. at 305-06. This distinction turns not on the presence of “independent `claims‘” but on whether the injured party can assert “independent `damages.‘” Id. at 306-07. Having determined that the bar order was impermissibly broad, the court remanded to the district court with instructions to determine whether any such claims existed and to modify the bar order to “ensure that the only claims that are extinguished are claims where the injury is the non-settling defendants’ liability to the plaintiffs.” Id. at 307.
The reasoning in Gerber is particularly apt in the context of this appeal. Like the
We conclude that the reasoning of Gerber is persuasive and that its holding regarding the permissible scope of bar orders issued in securities fraud class action settlements should be extended to apply to bar orders issued pursuant to the PSLRA. We therefore hold that such bar orders may only bar claims for contribution and indemnity and clаims where “the injury is the non-settling defendant‘s liability to the plaintiff.” Id. at 306. When we apply this standard to the bar orders at issue in this appeal, it is clear that they are impermissibly broad insofar as they bar any genuinely independent claims. See Masters Mates, 957 F.2d at 1033 (finding similar bar order overly broad where it was impossible to predict state law claims potentially arising from litigation because nonsettling defendant should not be forced to give up potential state law claims without compensation). The district court erred in relying upon the “interrelatedness” test to reject Talley‘s challenge to the scope of the bar orders; whether the allegedly independent claims arise from the same facts as the settled ones is not determinative of whether a particular claim is a disguised claim for contribution or indemnity. See TBG, Inc. v. Bendis, 36 F.3d 916, 928-29 (10th Cir.1994). Given the broad language of the orders, “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.” Gerber, 329 F.3d at 307. The modified orders should also reflect that the Gerber standard, rather than the “interrelatedness” test, defines the appropriate scope of the bar orders.
ii. California Code of Civil Procedure Section 877.6
By barring future claims for contribution and indemnity arising out of a partial settlement, section 877.6 seeks to encourage settlement and prevent settling and non-settling parties from bearing more than their proportionate share of liability. See Tech-Bilt, 213 Cal.Rptr. 256, 698 P.2d 159 (explaining the rationale behind the section 877.6 good faith hearing). However, the bar orders adopted by the district court here went beyond both the purpose and the plain language of this statute by barring all claims “arising out of or related to ... any of the transactions or ocсurrences alleged.”
The California Supreme Court has held that, in making a good faith determination,
the intent and policies underlying section 877.6 require that a number of factors be taken into account including a rough approximation of plaintiffs’ total recovery and the settlor‘s proportionate liability, the amount paid in settlement, the allocation of settlement proceeds among plaintiffs, and a recognition that a settlor should pay less in settlement than he would if he were found liable after a trial. Other relevant considerations include the financial conditions and insurance policy limits of settling defendants, as well as the existence of collusion, fraud, or tortious conduct aimed to injure the interests of nonsettling defendants.
Tech-Bilt, 213 Cal.Rptr. 256, 698 P.2d at 166-67. The trial court‘s determination that the settlement is in good fаith operates
In his challenge to the bar orders here, Talley does not claim that the settlements were entered into in bad faith in violation of section 877.6, and he concedes that the district court has the authority to bar claims for contribution or indemnity under this statute. Rather, he argues that the district court exceeded the scope of the statutory settlement bar by drafting the orders to bar claims other than those for contribution and indemnity. We agree.
A finding of good faith under section 877.6, under the terms of the statute, bars only claims of “equitable comparative contribution, or partial or comparative indemnity based on comparative negligence or comparative fault.”
As the California Court of Appeal explained in Cal-Jones:
If the claims between the joint tortfeasors are identical to those made by the plaintiffs or if the damages sought by the joint tortfeasors are those that the court would consider in determining the proportionate liability of the settling tortfeasor, then the claims are indemnity claims regardless of whether one or more of the claims are couched in affirmative language. A claim by a joint tortfeasor seeking neither indemnity nor contribution and which the trial court would not contemplate in determining the proportiоnate liability of a settling tortfeasor is not a claim for indemnity and hence survives a good faith settlement under section 877.6. If a claim is in fact one of indemnity, then it is barred pursuant to section 877.6.
Because the bar orders here extinguish claims other than those for contribution and indemnity or artfully pled claims that amount to claims for contribution and indemnity, they do not pass muster under section 877.6 and must be modified in accordance with the standard set forth in Cal-Jones.
D. Proceedings on Remand
We vacate the challenged bar orders and remand for the district court to modify them in a manner consistent with this opinion. Once the bar orders have been modified, Talley will be able to pursue reinstatement of his claims in the superior court through the available procedures outlined above.
Talley argues that the superior court, rather than the district court, should determine whether his state law claims are truly independent.16 If at the time the
III. Conclusion
We vacate the five challenged bar orders and remand to the district court to modify the bar orders in a manner consistent with this opinion.
VACATED and REMANDED.