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In re Cendant Corp. Securities Litigation

June 21, 2000


The opinion of the court was delivered by: William H. Walls, U.S.D.J.



Walls, District Judge

Janice and Robert Davidson move on behalf of themselves and various trusts as trustees *fn1 to clarify the definition of the In re Cendant Securities Litigation class (the "CalPERS class") or, in the alternative, to extend their time to request exclusion from the class ("opt out") pursuant to Federal Rule of Civil Procedure 6(b). Cendant Corporation ("Cendant") cross-moves to enforce this Court's March 29, 2000 Injunction against continued prosecution by the Davidsons of their arbitration proceeding against Cendant. For the reasons below, the class is defined to include the Davidsons' interests and Cendant's motion is granted.


CUC International, Inc. ("CUC") acquired by merger Davidson & Assoc. ("DAI"), a company largely owned by Janice and Robert Davidson, in July 1996. The Davidsons (including various trusts) received CUC stock which was subject to certain resale restrictions in connection with the acquisition. The Davidsons became directors of CUC and officers and directors of CUC's DAI subsidiary. In January 1997, CUC dismissed the Davidsons from their positions as corporate officers. Then in May 1997, CUC and the Davidsons entered into a Settlement Agreement to resolve pending employment disputes related to the dismissal; as part of the consideration the Davidsons received stock options with a strike price equal to the price of CUC stock on April 17, 1997. They also resigned from the CUC board. In December of that year, CUC merged with HFS to form Cendant Corporation.

On April 15, 1998, Cendant announced that it had uncovered accounting irregularities in the financial reports of CUC. The present class action was initiated April 16, 1998 (the "CalPERS action"). At the end of 1998, the Davidsons demanded arbitration to recover damages or to rescind the 1997 Settlement Agreement and the 1996 sale, charging that the CUC stock received by them was improperly valued. In response, Cendant filed an action for declaratory and injunctive relief in the Central District of California alleging that the Davidsons' claims were not arbitrable because barred by the 1997 Settlement Agreement. The district court rejected the argument and Cendant appealed to the Ninth Circuit (appeal sub judice). The parties have agreed to stay arbitration except for ongoing discovery until the appeal is resolved. The Davidsons also filed a "protective" complaint in the Central District of California to preserve their right to litigate if the Ninth Circuit bars arbitration. The Judicial Panel on Multi-District Litigation ("MDL") transferred that action to this Court for pre-trial purposes.

On August 6, 1999, this Court approved notices for potential class members in the pending CalPERS class action. See Order Concerning Notice of Pendency of Class Action. Those notices were published in The Wall Street Journal, The New York Times (National edition) and on the Dow Jones Business Newswire. The notice defined the CalPERS class as "all persons and entities who purchased or otherwise acquired publicly traded securities (other than PRIDES) of either (i) Cendant Corporation ("Cendant") or (ii) CUC, International, Inc. ("CUC") during the period beginning May 31, 1995, through and including August 28, 1998, and who were injured thereby." See Notice of Pendency of Class Action (Oct. 8, 1999) ("class notice") at ¶ 1. Excluded from the Cendant Class are: "(i) defendants; (ii) members of the family of each individual defendant; (iii) any entity in which any defendant has a controlling interest; (iv) officers and directors of Cendant and its subsidiaries and affiliates; (v) the legal representatives, heirs, successors, or assigns of any such excluded party." See Class Notice at ¶ 6. The notices directed those who wished to be excluded from the class to send such requests not later than December 27, 1999.

In October 1999, class notices were mailed using the "addresses of all known potential Class members from databases maintained by CUC and Cendant in the ordinary course of business." CD Brf. at 8. According to Cendant, it mailed at least ten class notices to the Davidsons and the trusts at three separate addresses (two in Palos Verdes, CA; one in Torrance, CA). Those addresses corresponded with the stock transfer records maintained by Cendant and CUC. The United States Postal Service did not return the Torrance notices but did return the Palos Verdes notices. Although the claim administrator searched for any new addresses on file with the postal service, no new information was listed.

The Davidsons assert they never received the class notices. Cendant maintains that these California addresses are the ones of record for these shareholders and are also the addresses to which it sent the 1999 and 2000 Cendant proxy statements. Plaintiffs counter that Cendant "should have known" of a new Nevada address and add "[w]e began receiving Cendant shareholder information at that [Nevada] address prior to August 1999." Dav. Aff. at ¶ 12.

Three weeks before the opt-out deadline on December 7, 1999, Cendant and Lead Counsel announced a proposed settlement of the CalPERS action. This announcement received extensive press coverage. In February 2000, while negotiating a stipulation to continue pre-hearing dates established in the stayed California arbitration, Cendant's counsel declared that the Davidsons failed to opt out of the CalPERS class. Furthermore, any recovery for stock claims in the California arbitration would be limited to amounts the Davidsons and trusts received in the proposed CalPERS settlement.

The next month, this Court preliminarily approved the proposed settlement. Its Order provided that "[p]rosecution by any Class member of any action or claim that is subject to the release and dismissal contemplated by the Cendant settlement or the E&Y settlement is hereby enjoined." Hearing Order at 2 (Mar. 29, 2000).

Motion, Cross-Motion and Arguments

Plaintiffs move either (1) to clarify the order certifying the CalPERS class to exclude their interests or (2) to extend their time to opt out of the class under Federal Rule of Civil Procedure 6(b) (excusable neglect). They assert they are not members of the Cendant Class because (1) the shares are not "publicly traded" as defined by the class notice because they were acquired as unregistered shares in a merger transaction and (2) as former officers and directors of CUC, they were excluded from class membership. The latter argument is based on the contention that "the apparent intent [of those defining the class] was to exclude from the Class all named defendants, as well as persons who might be defendants." Dav. Brf. at 15. Plaintiffs add that even if they are Class members, this Court cannot dispose of their claims because those claims are the subject of ongoing arbitration. They further maintain that the time to opt out should be extended for "excusable neglect," since they never received class notice, did not believe themselves Cendant class members and Cendant did not take the position they were members until February 2000.

Cendant objects and cross-moves to enforce this Court's March 29, 2000 Order which set hearing dates for the proposed CalPERS settlement and enjoined prosecution "by any Class Member of any action or claim that is subject to the release and dismissal contemplated by" the settlement. Ord. at 2. Cendant argues that the Davidsons' continued prosecution of their arbitration violates this injunction.

Cendant asserts that plaintiffs are class members because the CUC stock acquired by plaintiffs is "publicly traded." They explain, "[t]his is best demonstrated by the fact . . . that, once CUC issued a registration statement covering these shares [received in the July 1996 sale of DAI], in October 1996, the Davidsons and the Trusts sold over 20 million of their approximately 32 million CUC common shares within a month and proceeded to sell another 6.6 million shares over the course of the next fourteen months, all through trades in the public markets and all during the class period." CD Brf. at 16; Greenberg Decl. Ex. C. Cendant avers that all parties considered restricted stock acquired through sale/merger of subsidiaries "publicly traded" because the Plan of Allocation for the CalPERS settlement specifically contemplates payments to Class Members who, like the Davidsons, acquired restricted CUC stock through stock exchanges. The Plan of Allocation specifically includes the DAI merger as an example of a covered transaction. Greenberg Decl. Ex. L.

Also, according to defendant, the Davidsons, as former CUC directors, do not fall within the class exclusion for Cendant directors; Cendant did not exist any time during the Davidsons' tenure. Cendant formed seven months after the Davidsons left CUC. Cendant emphasizes that the class notice includes those who acquired publicly traded stock "either of Cendant Corporation or of CUC International, Inc." in the class yet only excludes Cendant directors and officers from the class.

Cendant adds that plaintiffs, represented by experienced counsel, are not entitled to an extension of time to opt out because notices were sent to the correct addresses of record. Further, the class notice was published in major newspapers, and the settlement received extensive press coverage.

Finally, Cendant states that this Court has the power under the All Writs Act, 28 U.S.C. § 1651(a) and the Anti-Injunction Act, 28 U.S.C. § 2283, to enjoin arbitration activity by class members. Federal courts may issue injunctions "where necessary in aid of jurisdiction." Cendant quotes In re PaineWebber Ltd. Partnership Litig., No. 94-8547, 1996 WL 374162, at *3 (S.D.N.Y. July 1, 1996): "`where a federal court is on the verge of settling a complex matter, and state court proceedings may undermine its ability to achieve that objective,' the situation is sufficiently analogous to an in rem action that a stay of parallel state court proceedings is appropriate."

CalPERS Lead Counsel join the discussion and represent that the CUC shares acquired in the DAI sale/merger are "publicly traded," but as former CUC directors the Davidsons are excluded from the class. *fn2 They base their argument on the structure of the CUC/HFS merger where CUC was the surviving company renamed Cendant. Lead Counsel also declares that they "did not prosecute this action to protect the interests of Cendant's officers and directors, whether they served before or after the CUC/HFS merger." LC Brf. at 6. Defendant Ernst & Young agrees with the contention that Lead Counsel and Cendant intended former CUC officers to be eligible as class members but recommends that the CUC/Cendant distinction not extend to other actions. See Letter at 2 ("Accordingly, E&Y respectfully submits ...

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