On Appeal from the United States District Court for the Eastern District of Pennsylvania. D.C. Civil Action No. 91-03675.
Before: Mansmann, Scirica and Feinberg*fn* , Circuit Judges
This appeal concerns certain Bell Atlantic Corp. shareholders' objections to the district court's approval of a derivative lawsuit settlement. Appellant-objectors Seymour Lazar, Anne Klein, and Robert Klein*fn1 contend the settlement agreement between defendants and derivative plaintiff Bell Atlantic confers no benefit on Bell Atlantic and benefits only individual defendant directors and plaintiffs' counsel. The objectors' principal claim is that the district court abused its discretion by approving an unfair and inadequate settlement. We believe the settlement was fair both substantively and procedurally. We will affirm.
Subject matter jurisdiction was founded on section 22
of the Securities Act of 1933, 15 U.S.C. § 77v (1988), section 27 of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa (1988), 28 U.S.C. § 1331 (1988), and principles of pendent jurisdiction, 28 U.S.C. § 1367 (Supp. 1991). We have jurisdiction over the district court's approval of the settlement agreement. Binker v. Commonwealth of Pa., 977 F.2d 738, 744 (3d Cir. 1992).
We review the district court's approval of a shareholder's derivative lawsuit for abuse of discretion. Shlensky v. Dorsey, 574 F.2d 131, 147 (3d Cir. 1978); Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 34 (3d Cir. 1971) (where district Judge approves class action settlement "great weight is accorded his views because he is exposed to the litigants, and their strategies, positions, and proofs. He is aware of the expense and possible legal bars to success, . . . he is on the firing line and can evaluate the action accordingly."). II.
A. Bell of Pennsylvania Matter
This lawsuit stems from the April 1990 settlement of consumer fraud claims brought by the Pennsylvania Attorney General and the Pennsylvania Office of the Consumer Advocate against one of Bell Atlantic's subsidiaries, Bell of Pennsylvania.*fn2 Settlement of the Bell of Pennsylvania matter required Bell Atlantic to pay over $40 million in refunds to customers, contributions to a consumer education trust, and legal costs to the Attorney General.
Two groups of shareholder attorneys responded to the announcement of the settlement. The first group, representing shareholder Lazar, brought a derivative action in state court against nominal defendant Bell Atlantic and certain of its officers and inside directors, charging defendants with mismanagement and breach of fiduciary duty. The Lazar suit sought to recover, on behalf of nominal defendant Bell Atlantic, amounts lost due to the alleged misconduct of Bell Atlantic directors and officers.
The second group of shareholder attorneys, representing the plaintiffs in this action, Martha Taub and the Trustees under the will of Beatrice Wilding, made a demand on Bell Atlantic's board to seek recovery from those responsible for the Bell of Pennsylvania matter. In response, Bell Atlantic's board created a special committee that investigated the allegations with independent counsel. Following the investigation, Bell Atlantic's board accepted the committee's recommendation to reject the demand as not in the company's best interests.
When Bell Atlantic rejected the Taub plaintiffs' demand, plaintiffs brought a derivative action in federal court on June 11, 1991. Counts I and II of the complaint asserted federal and state claims on behalf of a class of Bell Atlantic shareholders for failing to disclose requisite information, while count III, the derivative claim, charged the officers and directors with mismanagement and breach of fiduciary duties to Bell Atlantic. Shortly before filing their complaint, the Taub plaintiffs notified Lazar's counsel of the pending suit. Lazar never attempted to intervene.
Defendants struck first, unsuccessfully seeking dismissal of the derivative claim. At the close of discovery, defendants moved alternatively for dismissal or for summary judgment, claiming the board conducted a good faith, reasonable investigation of plaintiffs' demands and that Bell Atlantic's charter insulated the board from damages. The district court found no evidence raising a genuine issue of material fact on the board's good faith in investigating plaintiffs' demands but found the record did not permit a finding as to the reasonableness of the investigation (i.e., whether the board acted in an informed manner and with due care). The district court also found that Bell Atlantic's charter absolved directors of liability for damages resulting from negligent management.*fn3
Both sides prepared for trial. With the class certified, each side submitted pretrial memoranda, trial briefs, proposed findings, and jury instructions. On the Friday preceding the Monday trial date, following extensive negotiations, the parties reached an agreement on settlement. Under the settlement agreement Bell Atlantic agreed to (and did) disclose in its 1992 proxy statement information regarding the Bell of Pennsylvania matter, this litigation, and the Lazar state court litigation. Bell Atlantic also agreed to establish and follow new procedures to monitor sales and marketing programs. The agreement released all claims which were or could have been alleged in the complaint, including all claims arising from the Bell of Pennsylvania consumer fraud litigation. The agreement thereby jettisoned the Lazar state court claim. It also provided for counsel fees and expenses in an amount not to exceed $450,000.
After the parties filed the proposed settlement agreement on March 25, 1992, the district court approved the notice and ordered it sent to all 1.1 million Bell Atlantic shareholders. See Fed. R. Civ. P. 23.1. The notice summarized the litigation's background, the proposed settlement terms, and stated the settlement hearing date.
Before the settlement hearing, twenty-five shareholders, including objector Lazar, protested aspects of the proposed settlement. Plaintiffs furnished requested documents to Lazar's counsel to explore the adequacy of the settlement. At the settlement hearing, counsel for Lazar and counsel for objectors Anne and Robert Klein argued against approval of the settlement. Shortly thereafter, the district court denied all objections, approved the settlement agreement, and awarded fees and expenses to plaintiffs' counsel in the amount of $421,437.19 plus interest. Lazar and the Kleins now appeal.
Plaintiffs contend Lazar lacks standing to appeal the district court's order because Lazar is not a named party and failed to intervene under Fed. R. Civ. P. 24. Plaintiffs concede Lazar had standing to object to the settlement in the district court but contend he does not have standing to appeal from a court order approving the settlement. In their view, if Lazar believed his interests were inadequately protected by named plaintiffs, then he should have moved to intervene. Failure to intervene, they claim, constitutes an implicit admission that named plaintiffs adequately represented Lazar's interests. Plaintiffs contend we should adopt a "no-intervention, no-standing" rule for appeals by unnamed members of class or derivative actions who object to settlement agreements.
Generally, "only parties to a lawsuit, or those that properly become parties, may appeal an adverse judgment." Marino v. Ortiz, 484 U.S. 301, 304, 98 L. Ed. 2d 629, 108 S. Ct. 586 (1988) (per curiam); Fed. R. App. P. 3(c) ("The notice of appeal shall specify the party or parties taking the appeal"). But it is not settled whether an objecting member of the class or derivative litigation who is not a named party may appeal the court's approval of the compromise. According to two leading treatises, "[a] member of the class who appears in response to the court's notice, given pursuant to the Rule [23.1], and objects to the dismissal or compromise has a right to appeal from an adverse final judgment although he did not become a formal party of record." 3B James W. Moore, Moore's Federal Practice, P 23.1.24 (objector's right to appeal derivative suit settlement); P 23.80 (objector's right to appeal class action settlement) (1993); 7C Charles A. Wright, et al., Federal Practice & Procedure, § 1839, at 182 (1986) ("an objector to the settlement may appeal the court's approval of the compromise"); see also Webcor Elecs. v. Whiting, 101 F.R.D. 461, 465 n.11 (D. Del. 1984) ("The law is now settled that objectors may appeal a court's decision approving a settlement").
Notwithstanding these certitudes, the Fifth, Eighth, and Eleventh Circuits have ruled that an unnamed class member lacks standing to appeal an order approving a settlement between the named parties of a class action suit.*fn4 See Loran v. Furr's/Bishop's Inc., 988 F.2d 554, 554 (5th Cir. 1993) (appellate court lacks jurisdiction to consider appeal by class member who has not attempted to intervene as a named party);Croyden Assocs. v. Alleco, Inc., 969 F.2d 675, 679 (8th Cir. 1992) ("unnamed class members who object to a settlement must move to intervene, and they will be denied standing to appeal when they have not done so"), cert. denied, 122 L. Ed. 2d 650, 113 S. Ct. 1251 (1993);
Walker v. City of Mesquite, 858 F.2d 1071, 1072 (5th Cir. 1988) (unnamed members of certified plaintiff class lacked standing to challenge a consent decree the district court had ordered approving a settlement between the named parties); Guthrie v. Evans, 815 F.2d 626, 627 (11th Cir. 1987) ("a class member who is not a named plaintiff does not have standing to appeal the final judgment in [a] class action").
The reasons underlying these decisions denying unnamed class members standing to appeal are that (1) the objector may move to intervene under Fed. R. Civ. P. 24(a)(2), and the denial of the motion to intervene of right is appealable;*fn5 (2) the objector may collaterally attack the settlement approval by filing a separate suit challenging the adequacy of the class representation; (3) if the class is certified under Rule 23(b)(3), the individual class member may opt out; and (4) if each class member can appeal individually, the litigation would become unwieldy, and the purpose of class actions would be defeated. Croyden, 969 F.2d at 678; cf. Marino, 484 U.S. at 304 (affirming dismissal of petitioner's suit as impermissible attack by nonparties because the "better practice is for such a nonparty to seek intervention for purposes of appeal").*fn6
The Ninth and Seventh Circuits follow a different approach. Without much elaboration, they have consistently allowed unnamed, non-intervening class members standing to appeal approval of settlement agreements. For example, in Armstrong v. Board of School Directors, 616 F.2d 305, 327-28 (7th Cir. 1980), the court permitted an objecting unnamed class member to appeal from a class action judgment. Accord Patterson v. Stovall, 528 F.2d 108, 109 n.1 (7th Cir. 1976). The Ninth Circuit in Marshall v. Holiday Magic, Inc., 550 F.2d 1173, 1176 (9th Cir. 1977), stated that unnamed class members appealing from the district court's approval of a class action settlement had legal rights affected by the settlement and thus had standing to sue. Accord In re Cement Antitrust Litig., 688 F.2d 1297, 1309 (9th Cir. 1982), aff'd, 459 U.S. 1190, 75 L. Ed. 2d 425, 103 S. Ct. 1172 (1983); Dosier v. Miami Valley Broadcasting Corp., 656 F.2d 1295, 1299 (9th Cir. 1981) (dissatisfied class member could have challenged settlement by direct appeal). See also Cohen v. Young, 127 F.2d 721, 724 (6th Cir. 1942) (although settlement objector did not appeal order denying motion to intervene, objector was entitled to appeal order approving settlement because "appellant appeared in court in answer to the court's notice to show cause why the settlement should not be approved").
Although our circuit's position has not been articulated, it is suggested in Ace Heating & Plumbing Co. v. Crane Co., 453 F.2d 30, 32-33 (3d Cir. 1971), and implicit in our prior cases. See In re Pittsburgh & Lake Erie R.R. Co. Sec. & Antitrust Litig., 543 F.2d 1058, 1064-67 (3d Cir. 1976) (whether district court's order approving settlement was viewed as denial of pledgee's standing to object, or as rejection on the merits, pledgee had standing to object to settlement of derivative claim even though it did not intervene; settlement reversed on merits as unfair).
Ace involved challenges to a district court's order approving settlement of a nationwide antitrust class action. Appellees challenged appellants' standing to appeal the order approving the settlement and contended appellees ratified or waived objections to the settlement by failing to opt out of the ...