Linda WONG, individually and on behalf of all others similarly situated, Plaintiff-Appellee, v. ACCRETIVE HEALTH, INC., et al., Defendants-Appellees. Appeal of James J. Hayes.
No. 14-2191
United States Court of Appeals, Seventh Circuit
Decided Dec. 9, 2014
Rehearing En Banc Denied Jan. 26, 2015
Both jury and judge made mistakes. The jury split the damages 50-50 between Nelson Brothers the company and the brothers themselves, even though the Nelsons’ only loss to date is the $47,869 they repaid for the loan they received from their relatives. The losses could be greater should the Nelson brothers ever have to pay back the balance of the $161,000 loan from their relatives, but the parties have not addressed that question.
The judge incorrectly found that the Nelsons had paid the $55,714.82 in attorneys’ fees incurred to clarify the guarantees and the $83,354 in attorneys’ fees incurred to clarify the mechanics’ liens. In fact, Patrick Nelson testified that Nelson Brothers LLC had paid both of those sums, and Freeborn & Peters doesn‘t contest that. And remember that the judge deemed $161,000 (the principal of the loan from the relatives), rather than $47,869 (what the brothers repaid) as the brothers’ loss from having to obtain the loan—without determining whether they would ever be asked to repay it.
Nelson Brothers was entitled by way of damages to all of its expenditures, after the discount for its contributory negligence: $1,530,248.71 [ ($1,283,373.11 + $141,000 + $120,000 + $55,714.82 + $83,354) × (1—.091)]. The Nelsons were entitled to their expenditures (net of their contributory-negligence offset), but their only expenditure was the partial repayment of the loan to them by their relatives, $47,869, which after the jury‘s adjustment for their contributory negligence adjustment was only $39,889.24. Yet the judge decided that Nelson Brothers should be awarded $786,880.85 and the brothers $249,957.33. This overcompensates the brothers—awarded $249,957.33 though entitled to only $39,889.24—and under-compensates Nelson Brothers, awarded only $786,880.85 but entitled to $1,530,248.71. Nevertheless, because the plaintiffs as a whole were awarded only $1,036,838.18, which is much less than the $1,530,248.71 to which they‘re entitled, yet they aren‘t asking for more, and because the brothers and their company appear to be interchangeable, the errors made by jury and judge seem harmless. Cf. Fisher v. Agios Nicolaos V, 628 F.2d 308, 318-21 (5th Cir. 1980); International Paper Co. v. Busby, 182 F.2d 790, 792-93 (5th Cir. 1950). In any case, the errors don‘t harm the defendant, which can‘t (so far as we know) care whether it writes a check to the Nelsons or to their LLC. Nor is there any evidence that any creditors of Nelson Brothers will be harmed by this division of damages between the company and its owners. Nor are the plaintiffs complaining about the damages they‘ve been awarded.
AFFIRMED.
* Judge Ilana Diamond Rovner did not participate in the consideration of this petition.
James J. Hayes, Annandale, VA, pro se.
Leonid Feller, Attorney, Kirkland & Ellis LLP, Chicago, IL, for Defendants-Appellees.
Before FLAUM, MANION, and HAMILTON, Circuit Judges.
MANION, Circuit Judge.
The Indiana State Police Benefit System, as lead plaintiff in a class action, sued Accretive Health, Inc., and two of its officers under
I. Background
Accretive is a nationwide company that provides cost control, revenue cycle management, and compliance services primarily to not-for-profit healthcare providers. Underlying the suit are two contracts Accretive entered into with Minnesota-based Fairview Health Systems worth several million dollars each. The first contract, called a Revenue Cycle Operations Agreement (“RCA”), accounted for approximately 12% of Accretive‘s revenue during the class period. Accretive‘s second contract with Fairview, called a Quality and Total Cost of Care (“QTCC”) contract, was the first of its kind and was held out by Accretive as the future for healthcare services. The Indiana State Police Benefit System (“ISPBS”) alleged that Accretive provided its services through overly aggressive collection practices and with inadequate regulatory compliance, conduct that was both illegal and in violation of its contracts with Fairview. ISPBS further alleged that Accretive concealed this fact and instead represented that it complied with the law and its contractual obligations in an effort to artificially inflate the price of Accretive common stock.
Certain newsworthy events eventually uncovered Accretive‘s alleged improper and unlawful conduct. On January 19, 2012, the Minnesota Attorney General sued Accretive for failure to comply with healthcare, debt collection, and consumer protection laws. In response to the lawsuit, Accretive announced on March 29, 2012, that it was winding down its RCA contract well short of its five-year term and expecting a loss of $62 to $68 million in revenue. On April 24, 2012, the Minnesota Attorney General released a voluminous and damaging report on Accretive‘s business practices. Three days later, on April 27th, Accretive announced that Fair-
Accretive moved to dismiss all claims on the grounds that the alleged misrepresentations were mere puffery or immaterial omissions not actionable as securities fraud and that ISPBS did not adequately allege scienter. The motion was fully briefed, and the district court held a hearing on the motion. After the hearing, the parties submitted the case to an established mediation firm and participated in an in-person session with an experienced mediator. After five weeks of negotiation, before the district court ruled on the motion to dismiss, the parties agreed to the mediator‘s proposal of $14 million to settle all claims against Accretive.
The district court granted ISPBS‘s motion for preliminary approval of the class settlement and plan of distribution and denied Accretive‘s motion to dismiss as moot. The proposed settlement of $14 million amounted to $0.20 per share, or $0.14 per share once attorneys’ fees and expenses were deducted. Notice of the proposed settlement and plan of distribution was sent to over 34,200 potential class members and published in Investor‘s Business Daily and over the Business Wire. Only one individual opted out of the class settlement, and only Hayes filed an objection.
At the fairness hearing, the district court granted final approval to the class settlement and plan of distribution and overruled Hayes‘s objection. The district court awarded attorneys’ fees of 30% of the settlement proceeds, or $4.2 million, and expenses in the amount of $63,911.14. Hayes did not attend the proceedings.
II. Discussion
A district court may approve a class action settlement if it finds it to be fair, adequate, and reasonable.
Hayes raises five arguments on appeal: 1) the settlement recovers too low a percentage of class members’ potential damages; 2) the plan of distribution provides settlement funds to those who were not damaged by the alleged fraud; 3) a district court lacks sufficient information to judge the fairness of a class action settlement prior to ruling on a motion to dismiss; 4) we should adopt a rule that attorneys’ fees in class action settlements are deducted from each claim paid by the settlement fund at a set rate per share, what he calls “per share terms”; and, 5) we should direct the district court on remand to replace the lead plaintiff with the named plaintiff and himself. We address each argument in turn.
Hayes‘s first argument has two parts. First, he contends that the district court erred by approving the settlement because the
Next, Hayes relies on our guidance in Reynolds v. Beneficial Nat‘l Bank, 288 F.3d 277, 284-85 (7th Cir. 2002), that the district court should “quantify the net expected value of continued litigation to the class, since a settlement for less than that value would not be adequate.” Id. In this case, ISPBS did not provide the district court with a damage estimate from which it could “estimat[e] the range of possible outcomes and ascrib[e] a probability to each point on the range” as laid out in Reynolds. Id. at 285. As ISPBS explained to the district court, for the court to have quantified the case in this manner would have required testimony by a damages expert. Any such testimony would have been hotly contested by Accretive. This would have resulted in a lengthy and expensive battle of the experts, with the costs of such a battle borne by the class—exactly the type of litigation the parties were hoping to avoid by settling.
Rather, the district court followed our general, longstanding guidance on the matter, namely, that when conducting a fairness determination relevant factors include: “(1) the strength of the case for plaintiffs on the merits, balanced against the extent of settlement offer; (2) the complexity, length, and expense of further litigation; (3) the amount of opposition to the settlement; (4) the reaction of members of the class to the settlement; (5) the opinion of competent counsel; and (6) stage of the proceedings and the amount of discovery completed.” Gautreaux v. Pierce, 690 F.2d 616, 631 (7th Cir. 1982) (citing Armstrong v. Board of School Directors, 616 F.2d 305, 314 (7th Cir. 1980)); see also E.E.O.C. v. Hiram Walker & Sons, Inc., 768 F.2d 884, 889 (7th Cir. 1985) (restating factors), Isby, 75 F.3d at 1199 (same), and Synfuel, 463 F.3d at 653 (same). We have
The district court considered numerous documents provided by the parties concerning these factors. Accretive was prepared to vigorously contest the lawsuit, having raised potentially valid defenses. Accretive‘s motion to dismiss was fully briefed and argued before the district court. Further litigation almost certainly would have involved complex and lengthy discovery and expert testimony. Insurance proceeds to fund a settlement or judgment were a limited, wasting asset, i.e., further defense costs would have reduced those funds. Of the over 34,200 potential class members identified, only one individual opted out and only Hayes objected to the settlement. The counsel who negotiated the settlement during mediation, and ultimately agreed to the mediator‘s proposal, are highly experienced. Although formal discovery had not commenced, ISPBS had access to extensive public documents, such as the Minnesota Attorney General‘s report (which included internal company documents otherwise unobtainable up to this point in the proceedings), the Minnesota Department of Health‘s findings, U.S. Senate hearing transcripts, and a number of potential witness interviews. Finally, and importantly, the settlement was proposed by an experienced third-party mediator after an arm‘s-length negotiation where the parties’ positions on liability and damages were extensively briefed and debated. So, although we have said that a district court generally should attempt “to quantify the net expected value of continued litigation,” Reynolds, 288 F.3d at 284, it was not an abuse of discretion to approve the settlement without doing so here. Unlike Reynolds, there were no “suspicious circumstances.” Id. The settlement was reached through extensive arm‘s-length negotiations with an experienced third-party mediator, the parties contentiously litigated a motion to dismiss, and the district court considered the other factors above.
In his second argument, Hayes argues that the district court abused its discretion by approving a plan of distribution that includes class members not damaged by the alleged fraud. His argument relies on Dura Pharmaceuticals, Inc., v. Broudo, 544 U.S. 336, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005), in which the Supreme Court held that “[a] private plaintiff who claims security fraud must prove that the defendant‘s fraud caused the economic loss.” Id. at 338, 125 S.Ct. 1627. In so doing, Dura stated that proof that a plaintiff sold an inflated security at a loss is by itself insufficient to establish loss causation. Id. at 343, 125 S.Ct. 1627. One way of establishing loss causation is to “show both that the defendants’ alleged misrepresentations artificially inflated the price of the stock and that the value of the stock declined once the market learned of the deception.” Ray v. Citigroup Global Markets, Inc., 482 F.3d 991, 995 (7th Cir. 2007). That is the method ISPBS relied upon here. In its amended complaint, ISPBS alleged that the truth of Accretive‘s misrepresentations was revealed over a period of approximately one month in 2012 that covered the disclosures of March 29, April 24, and April 27, and that the timing and magnitude of the declines in Accretive common stock following these disclosures established loss causation. Thus, those class members who sold their Accretive common stock before March 29, 2012, the first cor-
However, the plan of distribution states that class members will be eligible for a distribution if they suffered a net loss from all transactions of Accretive common stock purchased or acquired during the class period. The plan of distribution accounts for, among others, those who purchased stock on or after November 10, 2010 and sold the stock on or after November 10, 2010 through April 26, 2012. This period of time includes those who purchased stock during the class period and sold it before the first corrective disclosure on March 29, 2012, i.e., those who cannot show loss causation. Furthermore, the stock was sufficiently volatile during this period that some of those who sold before March 29, 2012 suffered a net loss. The plan of distribution, then, appears to be overbroad because it appears to provide for those who cannot show loss causation but can show a net loss.
Hayes‘s position is that the district court abused its discretion by approving a plan of distribution that provides for those who cannot show damages, i.e., loss causation, even though it defined the class for purposes of settlement as those individuals who purchased Accretive common stock during the class period “and who were damaged by Defendants’ alleged violations.” (Emphasis added.) Yet, he is mistaken. The plan of distribution, in fact, does not provide for those who cannot show loss causation. An examination of the formula used to calculate settlement distributions reveals that only those who can show loss causation, i.e., those that held their stock until March 29, 2012, will receive a distribution. The claim per share for those who sold before March 29, 2012 will always be zero.2 Thus, the district court did not abuse its discretion by approving the plan of distribution.
Hayes‘s last three arguments are waived on appeal because he failed to raise them at the trial level. See Taubenfeld v. AON Corp., 415 F.3d 597, 599 (7th Cir. 2005); Costello v. Grundon, 651 F.3d 614, 641 (7th Cir. 2011). The waiver of his fourth and fifth arguments is straightforward, but the waiver of his third argument requires some explanation. In the court below, Hayes objected to the settlement on the grounds that the district court could not have adequately determined the settlement‘s fairness because it established neither the legal sufficiency of ISPBS‘s claims nor the class‘s commonality and typicality as required by
Because the district court‘s approval of the settlement and plan of distribution was not an abuse of discretion, we AFFIRM.
MANION
CIRCUIT JUDGE
Notes
If sold on or between November 10, 2010 through April 26, 2012, inclusive, the claim per share shall be the lesser of (i) the inflation in Table A at the time of purchase less the inflation in Table A at the time of sale; and (ii) the difference between the purchase price and the selling price.
Settlement Agreement, Ex. A-1 at 14. Importantly, Table A has one value for the inflation during the time period of November 10, 2010 through March 28, 2012, that is $13.37. Id. at 15. So, the calculation for all claims involving sales before March 29, 2012 (those without loss causation) will always be zero: $13.37 – $13.37 = 0.