USCA1 Opinion

r 2

, 1

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

____________________

No. 96-1357

CITY PARTNERSHIP COMPANY, A NEW YORK GENERAL PARTNERSHIP,

ON BEHALF OF ITSELF AND ALL OTHERS
SIMILARLY SITUATED, ETC., ET AL.,

Plaintiffs, Appellees,

v.

ATLANTIC ACQUISITION LIMITED PARTNERSHIP,

A MASSACHUSETTS LIMITED PARTNERSHIP, ETC., ET AL.,

Defendants, Appellees,

____________________

THOMAS P. GORMAN, JOHN CARLSON, ANDREW N. BECKER,

BARRONIAN-IRA ROLLOVER, RICHARD AND EMILY BARRONIAN,
HAROLD E. AND WANJA M. BIRKEY, MARVIN W. AND CHARLOTTE L.
GREENUP, ESTATE

OF ROBERT

AND DOLORAS HANSON,

JOHNNY'S SEAFOOD

COMPANY, PROFIT SHARING TRUST, GRAY LUMBER COMPANY PROFIT SHARING

TRUST, BARBARA ENGLE, JAMES P. DUFFY, H.C. HARNED, RICHARD HODSON

AND MARCELLA LEVY.

Intervenors, Appellants.
____________________

The published opinion of

this Court issued on November

26,

1996, is amended as follows:

Page 3, last line:

Page 7, second

delete the underscore at "inter alia."

full paragraph, line 1:

and insert "Intervenors'" in its place.

Delete "Atlantic's"

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT
____________________

No. 96-1357

CITY PARTNERSHIP COMPANY, A NEW YORK GENERAL PARTNERSHIP,

ON BEHALF OF ITSELF AND ALL OTHERS
SIMILARLY SITUATED, ETC., ET AL.,

Plaintiffs, Appellees,

v.

ATLANTIC ACQUISITION LIMITED PARTNERSHIP,

A MASSACHUSETTS LIMITED PARTNERSHIP, ETC., ET AL.,

Defendants, Appellees,

____________________

THOMAS P. GORMAN, JOHN CARLSON, ANDREW N. BECKER,

BARRONIAN-IRA ROLLOVER, RICHARD AND EMILY BARRONIAN,

HAROLD E. AND WANJA M. BIRKEY, MARVIN W. AND CHARLOTTE L. GREENUP

ESTATE OF ROBERT AND DOLORAS HANSON, JOHNNY'S SEAFOOD COMPANY
PROFIT SHARING TRUST, GRAY LUMBER COMPANY PROFIT SHARING TRUST,
BARBARA ENGLE, JAMES P. DUFFY, H.C. HARNED, RICHARD HODSON,
AND MARCELLA LEVY.

Intervenors, Appellants.
____________________

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

[Hon. Patti B. Saris, U.S. District Judge]

___________________

____________________

Before

Torruella, Chief Judge,

___________

Coffin and Campbell, Senior Circuit Judges.

_____________________

____________________

Glen DeValerio, with

______________

whom Harry A. Garfield, II, Kimberly Mast

_____________________ _____________

Gaines, Berman, DeValerio & Pease and Harold B. Obstfeld were on br

______ _________________________
__________________
for plaintiff, appellees.
Deborah L. Thaxter, P.C.,
___________________________

with

whom

Gregory P.
Deschen
_____________________

Christopher R. Goddu and Peabody & Brown were on brief for defendan
____________________
_______________
appellees.
Robert W. Powell, with
_________________

whom Carl D. Liggio,

_______________

Michael S. Poul
_______________

Robert W. Powell, Dickinson, Wright, Moon, VanDusen & Freeman, Tho

________________ ____________________________________________ ___
G. Shapiro, Edward F. Haber,
___________ ________________

Shapiro, Grace, Haber & Urmy, Edw

______________________________ ___

Heboton, Lynda J. Grant and Goodkind, Labaton, Rudsoff & Suckarow L

_______ ______________
_______________________________________
were on brief for intervenors, appellants.

____________________

November 26, 1996

____________________

CAMPBELL,

Senior

Circuit

Judge.

Plaintiffs,

_______________________

Intervenors Thomas

Gorman,

et al.,

("Intervenors")

appeal

from the district court's approval of a settlement of a class

action

against

Atlantic

Acquisition

("Atlantic"),

the general

partner

partnerships.

The Intervenors

Limited

in a

Partnership

series of

limited

allege that the settlement is

not fair, reasonable or adequate.

I.
I.

Atlantic

limited

Procedural and Factual History

Procedural and Factual History

is

partnerships,

the

each

purchase and lease capital

and

construction machinery.

general

of

partner

which

was

in

twenty-one

established

to

equipment such as aircraft, ships

On

August 18,

1995, Atlantic

made essentially identical tender offers ("the tender offer")

to the limited partners in each of the partnerships, offering

to purchase up

to 45%

partnership interest

million.

lender

The

with

partners'

of the outstanding

for a total price

tender offer was to be

a loan

personal

secured in

limited

of approximately $22

financed by an outside

part by

guarantees and

units of

in

Atlantic's general

part

by a

security

interest in all the units tendered.

On

("City"),

filed

limited

September

a limited

the class

partners

1995,

partner in

action

of

6,

the

three of

suit below

twenty-one

-4-

City

on

Partnership

Co.

the partnerships,

behalf of

partnerships

all

the

against

Atlantic

alleging,

inter

material

misrepresentations

accompanying the tender

fiduciary duty

the

alia,

in

that

the

Atlantic

disclosure

offer, and that it

to the limited partners by

had

made

statement

had breached its

not arranging for

loan to be made to the partnerships and limited partners

directly.

Because of the limited duration of the tender offer

and

the possibility

that

the financing

would expire,

the

plaintiffs obtained expedited discovery and began negotiating

with

Atlantic.

The

Intervenors

settlement negotiations and had

Within a

few weeks, the

agreement and filed a

participated

in

the

access to all the discovery.

plaintiffs and Atlantic

reached an

Stipulation of Settlement on September

27, 1995.

The

would limit

settlement

its

tender

agreement

offer to

provided that

35%

of

units,1 would furnish significant additional

the

Atlantic

outstanding

disclosures and

would increase the tender offer price by almost 7%, a maximum

premium over the initial

offer of $1.5 million.

City

granted

Atlantic

pertaining to the tender

broad

release

of

In return,

all

claims

offer, actual and potential, direct

and derivative.

____________________

1.

No more than 15% of the units of any one partnership were

actually tendered.

City did not tender its units.

-5-

On October

sent out

3, 1995,

to all the class

The Intervenors

notice of the

members, a group

moved to intervene

settlement was

of over 31,000.

for the sole

purpose of

objecting to the settlement on the ground that it contained a

release

of

appropriating

"derivative

the

partnerships' claims

partnership

claims").2

The

against

opportunity

for

Intervenors

Atlantic for

itself

argue

that

(the

the

release of the derivative claims was obtained in exchange for

little or no consideration.

Despite the Intervenors'

court

this

approved the

appeal,

objections, the

settlement, and the

arguing

that

district

Intervenors brought

the settlement

was

not

fair,

adequate or reasonable insofar as it approved the release of

the derivative claims.

II.
II.

settlement

district

only

Discussion
Discussion

court

can

is

fair,

if it

approve

class

adequate and

action

reasonable.

Durrett v. Housing Authority of the City of Providence, 896

_______
_____________________________________________

F.2d 600, 604 (1st Cir. 1990).

When sufficient discovery has

____________________

2.

According

to

both

City

partnership units were worth far

price.

Atlantic

from its
on the
claim

thus had the

the

Intervenors,

more than the tender

potential to

the
offer

profit greatly

offer to buy the limited partners' units, depending

number of units

that

any such

actually tendered.
profit really

partnerships themselves and wish

claims

and

against Atlantic in

The Intervenors

belongs to

to pursue the partnerships'

a derivative suit,

partnerships' behalf.

-6-

the limited

suing on the

been provided and the

there

is

a presumption

United States v.
______________

1027,

1036

Exxon, 697
_____

parties have bargained at arms-length,

in favor

of

the settlement.

Cannons Engineering Corp.,

__________________________

(D. Mass.

F. Supp.

1989) (quoting

677, 692

F.2d 79 (1st Cir. 1990).

720 F.

See
___

Supp.

City of New York v.

__________________

(S.D.N.Y. 1988)),

aff'd, 899
_____

Upon

assertions are

review, our

role,

"is not

correct, but merely to

to decide

whose

ascertain whether the

district court clearly abused its discretion in approving the

settlement."

1974).

only

of

Great deference is given to the trial court.

"It is

when one side is so obviously correct in its assertions

law and

require it

that

Greenspun v. Bogan, 492 F.2d 375, 381 (1st Cir.

_________
_____

to

district

it would

to compromise

approve

discretion."

review,

fact that

the

Id.
___

unreasonable to

extent of

the settlement,

to the

settlement

Despite the

the Intervenors

court's

be clearly

argue that

approval of

released claims which it

the

would

be

an

abuse

of

deferential standard of

we should

overturn the

settlement because

did not raise in its

City

complaint and

because City was faced with a conflict of interest.

The first argument is easily dispensed with.

well-settled

settlement

that

that

"in

would

questions at the core of

the

release

of a

claim

order

to

achieve

prevent

comprehensive

relitigation

a class action, a court

based

-7-

on

the

It is

of

settled

may permit

identical

factual

predicate as that underlying the claims

action

even though the claim was not presented and might not

have been

Ltd.
____

in the settled class

v.

1982).

presentable in the

class action."

Western Union Corp., 675

____________________

See also
_________

Epstein, __ U.S. __,

_______

Delaware law);

F.2d

TBK Partners,
_____________

456, 460

Matsushita Electric Industrial Co.

____________________________________

116 S. Ct. 873, 879

Nottingham Partners
___________________

v. Trans-Lux Corp., 925

________________

Cir. 1991); Class Plaintiffs v.

________________

Seattle,
_______

1268,

F.2d

denied, 506 U.S. 953 (1992).

______

v.

(1996) (discussing

F.2d 29, 33-34 (1st

955

(2d Cir.

1287-88 (9th

Cir.

1992),

City of
_______

cert.
_____

There is some dispute as to whether or not City did

in fact bring the derivative claims in its class action suit.

But

regardless

of whether

it

did or

arose from

the

same

claims

clearly

City's

claims alleging

claims stemmed

to

the derivative

factual predicate

misrepresentations and

Atlantic's disclosure statements

fiduciary duties

not,

the limited

omissions in

and breaches of

partners.

as

Atlantic's

All

of

these

from problems with the tender offers and were

releasable by the class action settlement.

Intervenor's second argument,

of interest,

of

is potentially more troublesome.

conflict

suspect.

alleging a

of

interest

would

render

conflict

The presence

the

settlement

As the Ninth Circuit has written, "If, however, the

settlement negotiations

are biased, or skewed

by a conflict

of

interest,

we

cannot

presume that

the

attorneys

have

-8-

reached

fair

settlement."

In re Pacific Enterprises
____________________________

Securities Litigation, 47 F.3d 373, 378 (9th Cir. 1995).

_____________________

Other

courts have

recognized

a potential

for

conflict

this.

of

interest in

situations

somewhat analogous

to

In Pacific Enterprises, for example, the Ninth Circuit

___________________

reviewed

district

settlement of both

securities class

court's

approval

a derivative class

action lawsuit.

of

simultaneous

action lawsuit and

The court

questioned the

wisdom of allowing one party to represent both derivative and

securities

class

action

plaintiffs.

It

pointed

to

the

corporate officer defendants' incentive in such situations to

trade

a larger

liability,

securities settlement

thereby sparing

for

themselves at

lower derivative

the corporation's

expense.

The potential conflict problem here is not the same

as that in

Pacific Enterprises.
___________________

If there was a conflict, it

arose from a difference in interest between those unitholders

who would accept

Atlantic's newly-sweetened offer

and those

who would choose to stay on as limited partners.

The purpose

of

improve its

the class

tender

action was

to force

offer by, inter alia,

Atlantic to

raising its price.

Those who

accepted the offer by selling their units benefited from

enhanced price.

tender

benefit

Those who

remained limited

offer being limited to

and

lost

out

on

35% of all

whatever

-9-

the

partners--the

units--did not so

rewards

successful

derivative suit might

the possibility of a

have conferred

upon all

unitholders,

derivative suit having been surrendered

in the settlement.

It

decide, infra
_____

follows that there may be

although we do not

conflict of interest

should one

party

like City represent both tender offer and derivative claims.3

If

such a party wished

might

to tender its

partnership units, it

have an incentive to offer to trade a lower derivative

recovery

for a higher offer

price because once

it sold its

units

it

would

recovery.

no

longer

benefit

from

the

derivative

Similarly, if such a party did not wish to tender,

it would have an incentive to trade a lower offer price for a

higher derivative

recovery.

However, in order

for there to

be a meaningful conflict of interest in the representation of

derivative and tender offer claims, there would first have to

be

derivative

claims of

substance.

In

this

case,

the

district court approved the settlement only after considering

arguments over whether or

not the derivative claims had

any

____________________

3.

The question

conflict of
the

of whether

this situation would

interest is not an

easy one.

limited partners had tendered

units that

Atlantic had

would have

been purchased

partner

would

then be

for example,

more than the

agreed to

buy, the

on a pro

able to

If,

sell

present a

35% of the

owners' shares

rata basis.

Since

no

all her

shares, some

incentive to preserve the

the

derivative claims

potentially ad

retained shares' value by pursuing

might well

hoc nature of the

remain.

Because of

the

conflict determination, we

prefer not to attempt to formulate at this time hard and fast

rules requiring

separate representation of

tender offer and

derivative claims in a class action.

-10-

value,

claims

and

were

Intervenors.

did so

in

championed

circumstances

by

an

where the

independent

derivative

party,

the

Although

stating

that

district

the

City

derivative

court did

making its

submitted

not

decision.

an

expert's

claims

rely on

were

City's

The Intervenors,

as

value and submitted their

support.

ruling.

Thus

The

court examined

for the

decision, the two sets

different party.

purposes

worthless,

advocacy alone

own expert's affidavit

both

affidavits

of making

this

before

threshold

of claims were each represented

by a

eliminated

problem would skew the presentation

of the valuation issues and the court's holding

subject

in

that the derivative

The Intervenors' participation

the risk that a conflict

the

who represented only

the derivative claims, vigorously argued

claims had

affidavit

to the usual abuse

is therefore

of discretion standard of review

for approval of class action settlements.

See Greenspun, 492

___ _________

F.2d at 381.

We

do not

discretion in

determining

believe the

approving the settlement and,

that the

any, value.4

district court

The

derivative claims

abused its

by implication,

were of

little, if

essence of the derivative claims

was that

____________________

4.
that

At oral argument, counsel for the Intervenors pointed out

the

district court

derivative

claims
a

were

approval

of

provided

for a release of

did not

explicitly find

that the

worthless.

However,

court's

settlement

which,

the

the

Intervenors

agree,

the derivative claims in exchange

-11-

Atlantic had coopted a

tender

The

partnership opportunity by making the

offer on its own behalf instead of the partnerships'.

value

of

partnerships'

this

claim

ability to

is

entirely

dependent

make the tender

on

the

offer themselves,

and City's expert's affidavit explained that the partnerships

were unable to do so.

First,

the

partnership agreements

partnerships from buying

partnership units.

prohibited the

Removing

this

restriction would have required the approval of the owners of

a majority of the

forthcoming

and

units.

would

expensive to obtain.

Such approval might

at

least have

been

not have been

difficult

and

Also, even if the majority ownership of

each partnership agreed, the result would have been to coerce

the dissenting minority

tender offer.

By making

to participate in the

the tender offer

making of the

itself, Atlantic

avoided this possibility; only those unitholders

to

tender their shares

participated in the

who desired

tender offer in

any way.

City's expert also stated in his affidavit that the

partnerships could

loans

not have

obtained the

to finance the tender offer.

individual

partnership would

be

necessary outside

The loan desired by each

too small

to attract

the

____________________

for

no

consideration

affidavits
claims'

after

the

exclusively devoted

court's

to

examination

debating the

of

derivative

worth indicates that the court resolved the issue of

the claims' value against the Intervenors.

-12-

interest

of

the

sort

of financial

involved in this type of transaction.

institution

typically

In addition, potential

lenders would have been much less willing to participate in a

loan

to the

partnerships without

a cross-collateralization

agreement, something prohibited by the partnership agreements

without

the

approval of

units.5

Moreover,

developed

credit

the

the owners

of a

loan

supplied

the

personal

a majority

partnerships lacked

history

securing

of

which

more

the

Atlantic had,

difficult,

guarantees

and

made

sort

of

making

the

not

have

could

by

of the

the

general

partners.

The Intervenors' expert

believed the

partnerships

could have obtained financing for the tender offer by forming

a joint

The

venture or

by creating

a new

purpose of establishing either would

problems

of small loan size

limited partnership.

be to overcome the

and inability to

form a cross-

collateralization

agreement.

The

expert also

thought

it

____________________

5.

Atlantic was able

to provide a security

interest in the

tendered units from all of the partnerships as collateral for

the loan.

If

partnership's tendered

generate sufficient

income

proportionate share of
income from

to make

off

that

failed

to

partnership's

the loan, the lender could use excess

the other partnerships' tendered

the shortfall.
loan

to pay

units

units to cover

However, if each partnership obtained its own

a tender offer

for its own

units, the lender

would be unable to seek such coverage payments from the units

of other partnerships and
loss.

The

persuading

lender
the

collateralization

would thus bear a greater

could

eliminate

partnerships
agreement

to

this

enter

specifically

coverage payments.

-13-

risk
into

risk of
only

authorizing

by

crosssuch

would be possible for

in financing

the

the partnerships to interest

tender offers

individually,

a lender

despite

the

small loan size, if all the loans were arranged at once.

City's

expert

which he explained why

wrote that

submitted a

rebuttal

affidavit in

these schemes were not feasible.

the administrative expenses involved

a joint venture of

He

in creating

the twenty-one limited partnerships would

be prohibitive and that creating a new limited partnership to

make the

tender offers

would be "completely

unworkable and

uneconomical."

interested

He

also reiterated that

in making

loans of

the

partnership individually, even if

no lender would

size required

be

for each

all the loan requests were

processed at once.

Considering the

court was

justified in

not

made the

have

evidence,

holding that the

tender

offers and

claims therefore had no value.

been made City's

and

its

we think

district

partnerships could

that

the derivative

Once this determination

potential conflict of

ability to

the

represent the

had

interest dissipated,

interests of

the entire

class of limited partners ceased to be impaired in any way.

Affirmed.
_________

-14-