
USCA1 Opinion

	




          D    e    c    e    m    b    e    r 2    4    , 1    9    9    6                            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:  delete the underscore at "inter alia."               Page 7, second  full paragraph, line 1:  Delete "Atlantic's"          and insert "Intervenors'" in its place.                            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 Masters            ______________             _____________________  ________________        Gaines, Berman, DeValerio & Pease and Harold B. Obstfeld were on brief        ______  _________________________     __________________        for plaintiff, appellees.            Deborah  L.  Thaxter,  P.C.,  with  whom  Gregory  P.   Deschenes,            ___________________________               _______________________        Christopher R. Goddu and Peabody & Brown were on brief for defendants,        ____________________     _______________        appellees.            Robert  W. Powell, with  whom Carl  D. Liggio,  Michael S. Poulos,            _________________             _______________   _________________        Robert W. Powell, Dickinson, Wright,  Moon, VanDusen & Freeman, Thomas        ________________  ____________________________________________  ______        G.  Shapiro, Edward  F. Haber,  Shapiro, Grace,  Haber &  Urmy, Edward        ___________  ________________   ______________________________  ______        Heboton, Lynda J. Grant and Goodkind, Labaton, Rudsoff & Suckarow LLP,        _______  ______________     _________________________________________        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   Limited  Partnership            ("Atlantic"),  the general  partner  in a  series of  limited            partnerships.  The Intervenors  allege that the settlement is            not fair, reasonable or adequate.                          I.  Procedural and Factual History                          I.  Procedural and Factual History                      Atlantic  is  the  general  partner  in  twenty-one            limited  partnerships,  each  of  which  was  established  to            purchase and lease capital  equipment such as aircraft, ships            and  construction machinery.   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%  of the outstanding  units of  limited            partnership interest  for a total price  of approximately $22            million.  The  tender offer was to be  financed by an outside            lender  with  a loan  secured in  part by  Atlantic's general            partners'  personal  guarantees and  in  part  by a  security            interest in all the units tendered.                      On   September  6,   1995,  City   Partnership  Co.            ("City"),  a limited  partner in  three of  the partnerships,            filed  the class  action  suit below  on  behalf of  all  the            limited  partners  of  the  twenty-one  partnerships  against                                         -4-            Atlantic  alleging,  inter  alia,  that   Atlantic  had  made            material  misrepresentations  in  the   disclosure  statement            accompanying the tender  offer, and that it  had breached its            fiduciary duty  to the limited partners by  not arranging for            the  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   participated  in   the            settlement negotiations and had  access to all the discovery.            Within a  few weeks, the  plaintiffs and Atlantic  reached an            agreement and filed a  Stipulation of Settlement on September            27, 1995.                      The  settlement  agreement  provided that  Atlantic            would limit  its  tender  offer to  35%  of  the  outstanding            units,1 would furnish significant additional  disclosures and            would increase the tender offer price by almost 7%, a maximum            premium over the initial  offer of $1.5 million.   In return,            City  granted   Atlantic  a  broad  release   of  all  claims            pertaining to the tender  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  3, 1995,  notice of the  settlement was            sent out  to all the class  members, a group  of over 31,000.            The Intervenors  moved to intervene  for the sole  purpose of            objecting to the settlement on the ground that it contained a            release  of  the  partnerships' claims  against  Atlantic for            appropriating  a  partnership  opportunity  for  itself  (the            "derivative  claims").2    The  Intervenors  argue  that  the            release of the derivative claims was obtained in exchange for            little or no consideration.                      Despite the Intervenors'  objections, the  district            court  approved the  settlement, and the  Intervenors brought            this  appeal,  arguing  that  the settlement  was  not  fair,            adequate or reasonable insofar as it approved the release of             the derivative claims.                                   II.  Discussion                                   II.  Discussion                      A  district  court  can  approve  a  class   action            settlement  only  if it  is  fair,  adequate and  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  and   the  Intervenors,   the            partnership units were worth far  more than the tender  offer            price.   Atlantic  thus had the  potential to  profit greatly            from its  offer to buy the limited partners' units, depending            on the  number of units  actually tendered.   The Intervenors            claim  that  any such  profit really  belongs to  the limited            partnerships themselves and wish  to pursue the partnerships'            claims  against Atlantic in  a derivative suit,  suing on the            partnerships' behalf.                                         -6-            been provided and the  parties have bargained at arms-length,            there  is  a presumption  in favor  of  the settlement.   See                                                                      ___            United  States v.  Cannons  Engineering Corp.,  720 F.  Supp.            ______________     __________________________            1027,  1036  (D. Mass.  1989) (quoting  City  of New  York v.                                                    __________________            Exxon, 697  F. Supp.  677, 692  (S.D.N.Y. 1988)),  aff'd, 899            _____                                              _____            F.2d 79 (1st Cir. 1990).                        Upon  review, our  role,  "is not  to decide  whose            assertions are  correct, but merely to  ascertain whether the            district court clearly abused its discretion in approving the            settlement."  Greenspun v. Bogan, 492 F.2d 375, 381 (1st Cir.                          _________    _____            1974).   Great deference is given to the trial court.  "It is            only  when one side is so obviously correct in its assertions            of  law and  fact that  it would  be clearly  unreasonable to            require it  to compromise  to the  extent of  the settlement,            that  to  approve  the  settlement  would  be  an   abuse  of            discretion."  Id.        Despite the  deferential standard of                          ___            review,  the Intervenors  argue that  we should  overturn the            district  court's  approval of  the  settlement because  City            released claims which it  did not raise in its  complaint and            because City was faced with a conflict of interest.                        The first argument is easily dispensed with.  It is            well-settled  that  "in  order  to  achieve  a  comprehensive            settlement   that  would  prevent   relitigation  of  settled            questions at the core of  a class action, a court  may permit            the  release  of a  claim  based  on  the  identical  factual                                         -7-            predicate as that underlying the claims  in the settled class            action  even though the claim was not presented and might not            have been  presentable in the  class action."   TBK Partners,                                                            _____________            Ltd.  v.  Western Union  Corp., 675  F.2d  456, 460  (2d Cir.            ____      ____________________            1982).    See  also  Matsushita Electric  Industrial  Co.  v.                      _________  ____________________________________            Epstein, __ U.S. __,  116 S. Ct. 873, 879  (1996) (discussing            _______            Delaware law);  Nottingham Partners  v. Trans-Lux  Corp., 925                            ___________________     ________________            F.2d 29, 33-34 (1st  Cir. 1991); Class Plaintiffs v.  City of                                             ________________     _______            Seattle,  955  F.2d  1268,  1287-88 (9th  Cir.  1992),  cert.            _______                                                 _____            denied, 506 U.S. 953 (1992).            ______                      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  not,  the derivative            claims  clearly  arose from  the  same  factual predicate  as            City's  claims alleging  misrepresentations and  omissions in            Atlantic's disclosure statements  and breaches of  Atlantic's            fiduciary duties  to  the limited  partners.   All  of  these            claims stemmed  from problems with the tender offers and were            releasable by the class action settlement.                      Intervenor's second argument,  alleging a  conflict            of interest,  is potentially more troublesome.   The presence            of  a  conflict  of  interest  would  render  the  settlement            suspect.  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  a  fair  settlement."   In  re  Pacific  Enterprises                                             ____________________________            Securities Litigation, 47 F.3d 373, 378 (9th Cir. 1995).              _____________________                      Other  courts have  recognized  a potential  for  a            conflict  of  interest in  situations  somewhat analogous  to            this.  In Pacific Enterprises, for example, the Ninth Circuit                      ___________________            reviewed  a  district  court's  approval  of  a  simultaneous            settlement of both  a derivative class  action lawsuit and  a            securities class  action lawsuit.   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  securities settlement  for  lower derivative            liability,  thereby sparing  themselves at  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  the class  action was  to force  Atlantic to  improve its            tender  offer by, inter alia,  raising its price.   Those who            accepted the offer by selling their units benefited from  the            enhanced price.    Those who  remained limited  partners--the            tender  offer being limited to  35% of all  units--did not so            benefit  and  lost  out  on  whatever  rewards  a  successful                                         -9-            derivative suit might  have conferred  upon all  unitholders,            the possibility of a  derivative suit having been surrendered            in the settlement.                      It  follows that there may be    although we do not            decide, infra      a  conflict of interest  should one  party                    _____            like City represent both tender offer and derivative claims.3            If  such a party wished  to tender its  partnership units, it            might  have an incentive to offer to trade a lower derivative            recovery  for a higher offer  price because once  it sold its            units  it  would  no   longer  benefit  from  the  derivative            recovery.  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  of whether  this situation would  present a            conflict of  interest is not an  easy one.  If,  for example,            the  limited partners had tendered  more than the  35% of the            units that  Atlantic had  agreed to  buy, the  owners' shares            would have  been purchased  on a pro  rata basis.   Since  no            partner  would  then be  able to  sell  all her  shares, some            incentive to preserve the  retained shares' value by pursuing            the  derivative claims  might well  remain.   Because of  the            potentially ad  hoc nature 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,  and  did so  in  circumstances  where the  derivative            claims   were  championed  by   an  independent   party,  the            Intervenors.                        Although  City  submitted  an   expert's  affidavit            stating  that  the  derivative  claims  were  worthless,  the            district  court did  not  rely on  City's  advocacy alone  in            making its  decision.  The Intervenors,  who represented only            the derivative claims, vigorously argued  that the derivative            claims had  value and submitted their  own expert's affidavit            as  support.    The  court examined  both  affidavits  before            ruling.   Thus  for the  purposes  of making  this  threshold            decision, the two sets  of claims were each represented  by a            different party.   The Intervenors' participation  eliminated            the risk that a conflict  problem would skew the presentation            of the valuation issues and the court's holding  is therefore            subject  to the usual abuse  of discretion standard of review            for approval of class action settlements.  See Greenspun, 492                                                       ___ _________            F.2d at 381.                      We  do not  believe the  district court  abused its            discretion in  approving the settlement and,  by implication,            determining  that the  derivative claims  were of  little, if            any, value.4  The  essence of the derivative claims  was that                                            ____________________            4.  At oral argument, counsel for the Intervenors pointed out            that  the  district court  did not  explicitly find  that the            derivative  claims  were  worthless.   However,  the  court's            approval  of  a  settlement  which,  the  Intervenors  agree,            provided  for a release of  the derivative claims in exchange                                         -11-            Atlantic had coopted a  partnership opportunity by making the            tender  offer on its own behalf instead of the partnerships'.            The  value  of  this  claim  is  entirely  dependent  on  the            partnerships'  ability to  make the tender  offer themselves,            and City's expert's affidavit explained that the partnerships            were unable to do so.                      First,  the  partnership agreements  prohibited the            partnerships from buying  partnership units.   Removing  this            restriction would have required the approval of the owners of            a majority of the  units.  Such approval might  not have been            forthcoming  and  would  at  least have  been  difficult  and            expensive to obtain.  Also, even if the majority ownership of            each partnership agreed, the result would have been to coerce            the dissenting minority  to participate in the  making of the            tender offer.   By making  the tender offer  itself, Atlantic            avoided this possibility; only those unitholders  who desired            to  tender their shares  participated in the  tender offer in            any way.                      City's expert also stated in his affidavit that the            partnerships could  not have  obtained the  necessary outside            loans  to finance the tender offer.  The loan desired by each            individual  partnership would  be  too small  to attract  the                                            ____________________            for  no  consideration  after  the  court's   examination  of            affidavits  exclusively devoted  to  debating the  derivative            claims'  worth indicates that the court resolved the issue of            the claims' value against the Intervenors.                                         -12-            interest  of  the  sort  of financial  institution  typically            involved in this type of transaction.  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  the owners  of  a majority  of the            units.5    Moreover,  the  partnerships lacked  the  sort  of            developed  credit  history  which  Atlantic had,  making  the            securing  of a  loan  more  difficult,  and  could  not  have            supplied  the   personal  guarantees  made   by  the  general            partners.                      The Intervenors' expert  believed the  partnerships            could have obtained financing for the tender offer by forming            a joint  venture or  by creating  a new  limited partnership.            The  purpose of establishing either would  be to overcome the            problems  of small loan size  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  a  partnership's tendered  units  failed  to            generate sufficient  income  to pay  off  that  partnership's            proportionate share of  the loan, the lender could use excess            income from  the other partnerships' tendered  units to cover            the shortfall.  However, if each partnership obtained its own            loan  to make  a tender offer  for its own  units, the lender            would be unable to seek such coverage payments from the units            of other partnerships and  would thus bear a greater  risk of            loss.    The  lender  could  eliminate   this  risk  only  by            persuading   the  partnerships   to  enter   into  a   cross-            collateralization  agreement  specifically  authorizing  such            coverage payments.                                         -13-            would be possible for  the partnerships to interest  a lender            in financing  the  tender offers  individually,  despite  the            small loan size, if all the loans were arranged at once.                      City's  expert  submitted a  rebuttal  affidavit in            which he explained why  these schemes were not feasible.   He            wrote that  the administrative expenses involved  in creating            a joint venture of  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."  He  also reiterated that  no lender would  be            interested  in making  loans of  the  size required  for each            partnership individually, even if  all the loan requests were            processed at once.                      Considering the  evidence,  we think  the  district            court was  justified in  holding that the  partnerships could            not  have  made the  tender  offers and  that  the derivative            claims therefore had no value.   Once this determination  had            been made City's  potential conflict of  interest dissipated,            and  its  ability to  represent the  interests of  the entire            class of limited partners ceased to be impaired in any way.                      Affirmed.                      _________                                         -14-
