The opinion of the court was delivered by: Walls, District Judge
This matter is before the Court on the application of Bruce E. Gerstein of Garwin, Bronzaft, Gerstein & Fisher, LLP, lead counsel ("Lead Counsel") for Plaintiff Martin Deutch ("Derivative Plaintiff" or "Deutch") in the above-captioned matter, brought on behalf of nominal defendant Cendant Corporation ("Cendant"), for approval of the proposed settlement against certain defendants (the "Settlement Agreement") and for attorneys' fees and reimbursement of expenses. Lawrence W. Schonbrun ("Schonbrun"), counsel for shareholder Walter Kaufman, submitted an objection to the proposed award for attorneys' fees and presented his objections before the Court at oral argument on October 21, 2002. Both the settlement and the application for attorneys' fees are approved.
Cendant was formed on December 17, 1997, through the merger of CUC International, Inc. ("CUC") and HFS, Inc. ("HFS"). On April 15, 1998, Cendant announced "accounting irregularities" regarding the past financial performance of CUC. Several actions were filed as a result of this disclosure. This derivative action was first brought on April 27, 1998, and a Verified Amended Derivative Complaint (the "Amended Complaint") was filed on December 7, 1998 by Derivative Plaintiff on behalf of Cendant, naming several defendants. The first group of defendants were Henry R. Silverman, Martin L. Edelman, John D. Snodgrass, James E. Buckman, Michael P. Monaco, Stephen P. Holmes, Robert D. Kunisch, E. John Rosenwald Jr., Christel Dehaan (collectively the "HFS Defendants"), and Leonard S. Coleman, Brian Mulroney, Robert E. Nederlander, Robert W. Pittman, Robert F. Smith, and Leonard Schutzmann (collectively the "Cendant Director Defendants"). These defendants, along with nominal defendant Cendant, are parties to the Settlement Agreement. Other groups of defendants came from CUC: T. Barnes Donnelley, Stanley Rumbough, Jr., Bartlett Burnap, Burton C. Perfit, Robert T. Tucker (along with Robert P. Rittereiser, Frederick Green, Anthony G. Petrello, Stephen A. Greyser, Craig R. Stapleton, and Carole G. Hankin, the "CUC Director Defendants"); and Walter A. Forbes, Christopher K. McLeod, E. Kirk Shelton, and Cosmo Corigliano (the "CUC Officer Defendants"). The Amended Complaint also named Amy Lipton and Bear Stearns, Inc., as defendants, although each were dismissed by order of the Court dated August 9, 1999.
While this action proceeded, certain of Cendant's shareholders prosecuted a securities class action case against Cendant for the accounting irregularities at CUC (the "Class Action"). An agreement to settle the Class Action for $3.2 billion was reached on March 17, 2000, and this Court approved the settlement on August 14, 2000 over Deutch's objections. The Court of Appeals for the Third Circuit affirmed the Court's approval of the settlement on August 28, 2001. This action, therefore, became an effort to recoup from the defendants the $3.2 billion that the corporation paid out in the settlement of the Class Action.
On September 19, 2000, a Cendant shareholder brought a second derivative action in Delaware state court, captioned Resnik v. Silverman, et al., Civil Action No. 18329 (the "Resnik Action"). By order of the Delaware Chancery Court dated May 2, 2001, the Resnik Action was stayed pending the resolution of this case.
Derivative Plaintiff now comes before the Court seeking approval of the Settlement Agreement between him and Cendant, the Cendant Director Defendants, and the HFS Director Defendants (collectively, the "Settling Defendants"). The settlement calls for a payment of $54 million in return for a release of the Settling Defendants from this action and the Resnik action. Significantly, the settlement expressly preserves the claims against CUC Officer Defendants E. Kirk Shelton, Walter A. Forbes, Christopher K. McLeod, and Cosmo Corigliano, and defendants Stuart Bell, Amy Lipton, and Anne Pember, as well as claims against the Reliance Insurance Company, which wrote certain Director and Officer liability policies for Cendant and which is currently in liquidation in Pennsylvania.
Rule 23.1 governs a court's analysis of the fairness of a settlement of a shareholder derivative action: "The action shall not be dismissed or compromised without the approval of the court, and notice of the proposed dismissal or compromise shall be given to shareholders or members in such manner as the court directs." In evaluating the settlement of a derivative action, the courts of this district should consider the factors applied initially to class action settlement agreements, and later to derivative actions. Bell Atlantic Corp. v. Bolger, 2 F.3d 1304, 1315 (3d Cir. 1998), citing Shlensky v. Dorsey, 574 F.2d 131, 147-149 (3d Cir. 1978). Thus, courts are required to "independently and objectively analyze the evidence and circumstances before it in order to determine whether the settlement is in the best interest of those whose claims will be extinguished." In re Cendant Corp. Litig., 264 F.3d 201, 231 (3d Cir. 2001) (internal quotation omitted). Under Rule 23(e), which governs the evaluation of a class action settlement, the District Court acts as a fiduciary guarding the rights of absent class members and must determine that the proffered settlement is "fair, reasonable, and adequate." Id.
In analyzing the Settlement Agreement, the Court must apply the nine-factor test developed in Girsh v. Jepson, 521 F.2d 153, 157 (3d Cir. 1975). They are:
1. The complexity, expense, and likely duration of the litigation.
2. The reaction of the class to the settlement.
3. The stage of the proceedings and the amount of discovery completed.
4. The risks of establishing liability.
5. The risks of establishing damages.
6. The risks of maintaining the class action through the trial.
7. The ability of the defendants to withstand a greater judgment.
8. The range of reasonableness of the settlement fund in light of the best possible recovery.
9. The range of reasonableness of the settlement fund in light of all the attendant risks of litigation. Id.
The proponents of a settlement bear the burden to demonstrate that these factors weigh in favor of settlement. In re Cendant, 264 F.3d at 232.
Here there has been no objection made to the settlement itself; Schonbrun at oral argument stated that his sole objection was to the amount of the attorneys' fees, not to the settlement. Nevertheless, as required, the Court will examine each of the factors.
The complexity, expense, and likely duration of the litigation. This factor is designed to capture "the probable costs, in both time and money, of continued litigation." In re Cendant, 264 F.3d at 234 (citation omitted). Derivative Plaintiff contends, "Continued prosecution of this action through trial and subsequent appeals against the vigorous, determined, and resourceful opposition of the individual defendants would undoubtedly require significant time and would entail enormous additional effort and expense with no promise of any greater recovery than that earned in the Settlement." Derivative Plaintiff argues that this case, unlike the Class Action, "involves complexities unique to derivative lawsuits, such as: (a) futility of demand issues; (b) the effect of the [Special Litigation Committee] on the future viability of this action; (C)) the effect of the indemnification provisions contained in Cendant's by-laws on the defendants' liability and type of damages; (d) whether each individual defendant breached his or her fiduciary duties; (e) whether causation and damages can be established with respect to each individual defendant; and (f) whether insurance would ultimately cover any claims brought by Derivative Plaintiff." Derivative Plaintiff points out that this case is more complex than the Class Action, "where liability of the Company was basically assured from the outset."
This litigation was filed in 1998 and has been the subject of large-scale discovery and extensive motion practice, including appeals to the Third Circuit. Even after this activity, issues remain against the Settling Defendants, and proof of liability against the Settling Defendants is a complex question and is far from certain. Unlike the settlement of the Class Action claims against Cendant, in this case the liability of the Settling Defendants is not a foregone conclusion, meaning that significant time and energy would be required to prosecute this case; this settlement is akin the settlement of the class action claims against Ernst & Young, in which the Third Circuit found that disputed questions of liability and damages "would involve fairly complex and protracted litigation." See In re Cendant, 264 F.3d at 234 (holding that factor weighed against approval of settlement with Cendant, whose liability was established, but in favor of approval of settlement with Ernst & Young, which denied liability and possessed a variety of defenses). The Court finds that this factor weighs in favor of approving the Settlement Agreement.
The reaction of the class to the settlement. This factor "attempts to gauge whether members of the class support the settlement." In re Prudential Ins. Co. of Am. Sales Practices Litig., 148 F.3d 283, 318 (3d Cir. 1998). Although over 200,000 notices of the settlement were sent out to Cendant's common stockholders and a Summary Notice was published in the Wall Street Journal, only four shareholders (representing less than 0.000009 percent of Cendant's outstanding shares) questioned the settlement, and none filed an official objection with the Court. Given that no formal objection was filed to the settlement itself, there is little doubt that this factor weighs in favor of approval of the Settlement Agreement. See Cendant, 264 F.3d at 235 (finding that only six objections arising from 478,000 notices was a "vast disparity" that "create[d] a strong presumption that this factor weighs in favor of" approving settlement).
The stage of the proceedings and the amount of discovery completed. This factor "captures the degree of case development that... counsel have accomplished prior to settlement. Through this lens, courts can determine whether counsel had an adequate appreciation of the merits of the case before negotiating." In re Cendant, 264 F.3d at 235 (citations omitted). To guarantee that a proposed settlement is the result of informed negotiations, "there should be an inquiry into the type and amount of discovery the parties have undertaken." In re Prudential, 148 F.3d at 319. Derivative Plaintiff's counsel states that it "only settled this case after four years of litigation, including a thorough investigation of the facts and circumstances giving rise to the action; extensive motion practice and appeals; the filing of a separate action in Delaware state court; and comprehensive document and deposition discovery of parties and non-parties." Derivative Plaintiff's counsel further says that "the evidence adduced to date indicated that the defendants other than the [non-settling] CUC Officer Defendants had substantial defenses to liability," including evidence that the settling defendants relied on E&Y's representations as to CUC's financial results, which made proving scienter (as part of insider trading claims) more difficult. Derivative Plaintiff's counsel further points out that the Settlement Agreement is the product of "arm's-length negotiations conducted by capable counsel who are well-experienced in complex securities and derivative litigation."
As noted, this litigation is far along and a substantial amount of discovery has taken place. According to the submissions of Derivative Plaintiff, which are not disputed, counsel through the course of discovery "reviewed upwards of one million pages of documents" and "conducted, attended, and/or reviewed hundreds of depositions, transcripts, and/or deposition exhibits." No observer attempting to be objective could conclude that this case was at an early stage or that the proposed settlement was reached before either party had thoroughly explored its likelihood of success. The Court finds that Derivative Plaintiff has sufficiently developed his case to form "an excellent idea of the merits of its case." In re Cendant, 264 F.3d at 236. This factor weighs in favor of approving the Settlement Agreement.
The risks of establishing liability. "A court considers this factor in order to `examine what the potential rewards (or downside) of litigation might have been had... counsel decided to litigate the claims rather than settle them." In re Cendant, 264 F.3d at 237 (citation omitted). Derivative Plaintiff argues that proving liability against the Settling Defendants is no sure thing due to the defenses potentially available to them. In order to establish liability based on state law claims, Derivative Plaintiff likely would have to prove bad faith on the part of the Cendant Director Defendants. For claims arising under Rule 10b-5, Derivative Plaintiff would have to prove that the Settling Defendants acted with the requisite scienter. Indeed, for all the claims against non-CUC Officer Defendants, including claims of breach of fiduciary duty regarding the CUC-HFS merger and publishing false financial statements, Derivative Plaintiff faced the burden of proving knowledge of the falsity of the financial information. According to the Derivative Plaintiff, the evidence developed during discovery indicated that all of the Settling Defendants met with Ernst & Young, which informed them that CUC's financial reports had been properly prepared and conformed with GAAP, and which later issued an audit report stating as much. The Settling Defendants, therefore, could use their alleged reliance on Ernst & Young to defend against Derivative Plaintiff's claims requiring bad faith or knowledge. Put another way, in Derivative Plaintiff's words, "A reasonable jury might well find that all of these [settling] defendants were entitled to rely on the representations of E&Y and the CUC Officer Defendants with regard to the accuracy of CUC's certified financial statements." Derivative Plaintiff also argues that "if the CUC Officer Defendants were found primarily or wholly responsible, the D&O insurance carriers could have a strong argument to disclaim coverage" for any liability of the Settling Defendants.
In short, Derivative Plaintiff's counsel makes a number of convincing arguments that the risks of establishing liability against the Settling Defendants is substantial. While the Court will not attempt to assess this case on its merits, it does take note of and recognizes the potentially powerful defenses available to the Settling Defendants. This factor weighs in favor of approving the settlement.
The risks of establishing damages. "Like the fourth factor, `this inquiry attempts to measure the expected value of litigating the action rather than settling it at the current time.'" Cendant, 264 F.3d at 238-239 (citations omitted). Derivative Plaintiff argues that the issue of damages at trial would result in a "battle of the experts" which by its nature is "fraught with uncertainty." Derivative Plaintiff continues: "Moreover, it is quite likely that a reasonable jury would find that most if not all of the harm caused to Cendant was as a result of the conduct of the [non-settling] CUC Officer Defendants in publishing false financial statements." This might, counsel argues, reduce the amount recovered against the Settling Defendants and give the E&O carriers grounds to disclaim coverage. It is difficult for the Court to assess the likelihood of Derivative Plaintiff's ability to establish damages without having access to the full universe of information, including reports of expert witnesses, available to the parties. The Court does recognize, however, the risks inherent in relying on expert testimony and the unpredictability of juries in assessing damages. As the Third Circuit observed in Cendant, where a jury is presented with complex expert testimony on damages, and is "confronted with competing expert opinions of corresponding complexity, there is no compelling reason to think that it would accept [the plaintiff's] determination rather than [the defendant's], which would posit a much lower figure for the... damages." In re Cendant, 264 F.3d at 239. The Third Circuit held that such uncertainty "means that this factor weighs in favor of approval" of a settlement. Id. This factor here weighs in favor of approval of the Settlement Agreement.
The risks of maintaining the derivative action. In the context of a class action, this factor chiefly attempts to weigh the prospects of obtaining and maintaining class certification. In re General Motors Corp. Pick-Up Truck Fuel Tank Prod. Liab. Litig., 55 F.3d 768, 817 (3d Cir. 1995). Such risks do not exist in a derivative action. The chief risk in maintaining this derivative action is that the Special Litigation Committee might choose to reject the case, thereby potentially putting an end to it. A special litigation committee has the authority under certain circumstances to move to dismiss a derivative lawsuit if, in its judgment, further pursuit of its claims would not benefit the corporation. See Kamen v. Kemper Fin. Servs., Inc., 500 U.S. 90, 102, 111 S.Ct. 1711, 1719, 114 L.Ed.2d 152 (1991). That risk is present in any derivative lawsuit, including this case. The SLC has determined that this Settlement Agreement is in the company's best interest. The SLC's adoption of the settlement is significant because it avoids the SLC's potential dismissal of the case. This factor weighs in favor of approval of the Settlement Agreement.
The ability of the individual defendants to withstand a greater judgment. This factor "is concerned with whether the defendants could withstand a judgment for an amount significantly greater than the settlement." Cendant, 264 F.3d at 240. The Court is not in an advantageous position to gauge the ability of the Settling Defendants to pay a larger judgment. See Id. at 241 ("there is inevitably a measure of speculation involved in this determination"). The Court recognizes, however, that the settlement is being paid by Cendant's directors and officers liability insurance carriers, which almost certainly have available to them funds in excess of the settlement amount. Given this likelihood, this factor ...