plaintiffs who were insiders. Once again, the court rejects this attempt to assert the rights of the settling defendants. That the individual defendants have agreed to waive their defenses cannot be said to prejudice the FDIC in such a way as to stall the proposed settlement. In addition, the FDIC has presented nothing but bare bones allegations concerning "insider plaintiffs." Indeed, the FDIC has withdrawn such allegations against Colson Services, and the plaintiff Former Shareholders of FRITECO, Inc., makes a strong case that the FDIC's arguments are faulty as well.
The court finds nothing collusive about the bargain struck by the plaintiffs and individual defendants. The court has observed the efforts of counsel throughout this litigation and has general knowledge of the hard-fought negotiations that led to the proposed settlement. Simply because the settlement was designed to the advantage of the settling parties, as opposed to the interests of a non-settling third-party is no reason to suspect collusion; counsel for FDIC as much as admitted this at oral argument by conceding that the settling parties position was derived simply from hard-nosed litigating. Further, the FDIC was involved in the negotiations from the very beginning which led to the original $ 7.5 million figure. If indeed there had been any collusion, the FDIC should have put forth some evidence, if only by affidavit. Thus, the court finds no hint of collusion, but this finding bears little on the question of fairness. It is to this central question that the court now turns.
IV. The Fairness of the Proposed Settlement
Under the terms of the proposal, the settlement will fail if the court rejects either of two provisions -- the claims bar or the pro tanto judgment reduction provision. The FDIC has three principal objections to these two key elements of the settlement. First, the FDIC argues that the settlement bar is too broad because it precludes recovery from the officers and directors who are not parties to this litigation and who thus have given nothing to the litigation. Second, the FDIC argues that the settlement bar is too broad because it precludes indemnity and so-called "independent" claims, which, the FDIC argues, cannot be barred in the same way as contribution claims. Third, the FDIC claims that the proposed settlement leaves the FDIC "holding the bag" because it would apply a pro tanto judgment reduction method. The plaintiffs and the individual defendants object strenuously to all of the FDIC's contentions.
The court cannot, however, treat these two provisions of the proposed settlement distinctly. The interplay between the two motivates the FDIC's objections -- the FDIC might be solely liable for $ 27.6 million of the alleged $ 35.2 million in commercial paper claims. The combination of a pro tanto approach and a broad settlement bar creates the maximum exposure for the FDIC, whereas a broad settlement bar in conjunction with a proportional fault approach to judgment reduction would significantly reduce the FDIC's potential loss, but threaten plaintiff's ability to fully recover. Other combinations yield other results and varying risks to parties and non-parties. Thus, although the court will discuss the individual provisions below to some extent, the settlement can only be assessed as a whole. As such, the court will look to the fundamental fairness of the proposed settlement first (rather than last) because this inquiry sheds light on the appropriateness of combining a pro tanto approach with a broad claims bar in this particular case, given the information known to the court at this time.
a. The Fairness Inquiry
Courts adopting the pro tanto judgment reduction method must make a fairness inquiry to insure that the non-settlors are not unfairly prejudiced by the partial settlement. See MFS Municipal Income Trust v. American Medical Int'l, Inc., 751 F. Supp. 279 (D. Mass. 1990); In re Terra-Drill Partnerships Sec. Lit., 726 F. Supp. 655 (S.D. Tex. 1989). In addition, courts considering a contribution and indemnity bar must examine the impact of such a bar on the non-settlor, who will be forced to pay whatever liability is subsequently determined, without recourse to the settling defendants. See In re Masters Mates & Pilots Pension Plan Lit., 957 F.2d 1020 (2d Cir. 1992). In re Nucorp Energy Sec. Lit., 661 F. Supp. 1403 (S.D. Cal. 1987). In both situations, the settlement goes beyond a contract between the settling parties and affects the substantive rights of a third party. Courts have either looked to the "totality of the circumstances," see Nelson v. Bennett, 662 F. Supp. 1324 (E.D. Cal. 1987), or identified a few basic factors which would bear on the settlement's fairness. See Nucorp, 661 F. Supp. at 1408-10. Some of the factors include "participation of an independent magistrate in the settlement negotiations," "the adequacy of the settlement amount in light of the possible uncollectability of any larger trial judgment which might be entered against the settling defendants," "the adequacy of the settlement in light of any uncertainties surrounding the settling defendant's liability," and "whether the settlement amount bears a reasonable relationship to the settling defendant's proportional share of the total damages." Id. at 1408.
In all of the various formulations of the fairness inquiry, the court has examined the comparative fault of the defendants to ensure that the settlors were paying an amount "reasonably related to the share of plaintiffs' total damages properly attributable to them on the basis of their comparative fault." Nucorp, 661 F. Supp. at 1410. Evidence of relative fault would more than aid the court in its fairness inquiry; it is absolutely crucial. Plaintiffs argue that their interest in obtaining full recovery trumps any concerns about inequities among culpable defendants. While the court agrees that, under a joint and several liability scheme, plaintiffs have the right to recover from whichever defendant can pay and may leave squabbling about relative fault to the defendants, this settlement not only ensures plaintiffs' right to recovery, but also would resolve all disputes between the defendants. The claims bar does not affect the plaintiffs' rights -- it simply fixes the relative liability of the defendants. A pro tanto settlement without a claims bar permits plaintiff the possibility of full recovery and averts prejudice against the non-settlors; although the non-settling defendants may eventually be liable for a disproportionate share of liability, they will theoretically be able to reduce their liability to a level commensurate with their relative fault by seeking contribution from the settling defendants. Were the claims bar combined with a proportional fault judgment reduction provision, the non-settling defendants would not be so concerned about the claims bar because their liability would be confined to their relative fault.
Only the combination of a complete claims bar and the pro tanto judgment reduction method has the potential to leave nonsettlors with an exposure that is out of proportion with relative fault. The presence of a relative culpability factor in the pro tanto fairness inquiry is thus necessary to prevent great prejudice to the non-settlor. Without this part of the inquiry, pro tanto settlements could be tremendously unfair. Because the plaintiffs are assured of potential recovery from the nonsettlor, there is little incentive to squeeze more money out of the settling defendants; plaintiffs have minimal interest in parcelling out liability among defendants appropriately. The settling defendants have a powerful incentive to get out of the case with as small a payment as possible. Although there is a strong federal policy in favor of settling cases, the decision of some defendants to settle is not of such magnitude that all concerns about fairness among defendants should evaporate. Thus, when the pro tanto approach is combined with a complete claims bar, the court must make a close inquiry into the relative fault of the defendants.
Neither the plaintiffs nor the individual defendants have made any persuasive argument to this court regarding the relative culpability of the individual defendants as against the nonsettling FDIC. The individual defendants suggest that they are less likely to be held legally liable than the FDIC, which stands in the shoes of the corporate entity which the individual defendants are alleged to have run into the ground.
The court is not persuaded by these arguments, which do not develop the factual basis on which a court could assess relative culpability. Further, while these arguments technically and abstractly address the percentage chance that the individual defendants will be held liable, they do not account for the possibility that a finder of fact, if the individual defendants are determined to be liable, might assess much of the liability to the actual individuals running the bank, rather than to the bank itself, which is now a drain on the federal treasury. In addition, the claims bar also protects the non-party settlors against whom the FDIC may potentially have claims; although the fact that the FDIC has not brought claims against these other individuals is some evidence that the claims are minimal, the court is not in a position to make a determination that would insulate them from all liability. Having heard absolutely no evidence about the relative culpability of the settling defendants, the non-party settlors, and the FDIC as receiver for NBW, the court is unable to approve the settlement at this time.
The settling parties have essentially two arguments to counter this conclusion. First, they argue, the federal policy of encouraging settlements is "overriding." See Nelson, 662 F. Supp. at 1334-35; Alvarado Partners v. Mehta, 723 F. Supp. 540, 550 (D. Colo. 1989). Without a contribution bar, defendants would be unlikely to settle because they would remain threatened by third party liability. See Nucorp, 661 F. Supp. at 1408. Plaintiffs, on the other hand, need the pro tanto approach, which provides the certainty that they may fully recover their losses. Any other result, argue the settlors, would unduly benefit recalcitrant non-settlors. Further, the non-settlor would be able to frustrate a settlement which both plaintiffs and certain defendants desire.
When combined with the need to ensure that plaintiffs are wholly compensated, the settlors argue that society is willing to bear unfairness between culpable parties. Although the court would like these consolidated cases settled as much as any party, the court must disagree that settlement overrides all equities. Simply because a defendant vigorously contests its liability, as the FDIC does here, does not mean that it should be punished excessively. Awarding costs and attorneys' fees, if the defendant's position proves to be untenable, usually serve this function well.
The settlors' second argument is more difficult to rebut. Implicit in all that the settlors have said both in their briefs and at oral argument is the idea that, regardless of the principled legal distinctions which the court might seek to make, reality should trump. The settlors represent that the individual defendants cannot possibly pay more than the $ 7.6 million tendered in the settlement and that the FDIC has no claims against the non-party settlors. Thus, there is no unfairness to the FDIC; neither the plaintiffs nor the FDIC could get a better deal at any time in the future, because the director' and officers' liability policy will simply waste away into the pockets of local lawyers. Indeed, argue the settlors, not approving the settlement would prejudice the FDIC because the insurance policy would be frittered away by the ongoing litigation, such that the FDIC would be on the hook for even greater liability if it were found to be jointly and severally liable. Under this theory, any consideration of relative fault simply drops out of the equation because relative fault is immaterial when, at the end of the litigation, the FDIC, as a joint and severally liable defendant, could recover no more than the $ 7.6 million in contribution or indemnity (or from independent claims) from the individual defendants.
In this situation, it is better that one of the culpable defendants (here the FDIC), rather than the innocent plaintiff, be victim to the shortfall caused by the individual defendants' financial situation. Under the factors laid out in Nucorp, the court should thus focus only on the settling defendants' ability to pay and ignore relative fault.
At least one other court has considered the proportionate fault in a case where the settling defendants only asset was a liability insurance policy. See Nelson, 662 F. Supp. at 1338 (considering whether settlement fell "within the reasonable range of their potential liability"). Nevertheless, the argument might be persuasive if the court found that anything more from the individual defendants would simply be blood from a stone. At this juncture, the court cannot so conclude. Counsel for one of the individual defendants has admitted that his client is a "paper millionaire" but will not be contributing anything to the settlement except some portion of the liability policy.
Further, the non-party settlors apparently have substantial assets, perhaps in excess of $ 100 million.
To bar the FDIC from obtaining relief from these parties is simply not fair. The settlors argue that, if the FDIC had claims, they should have brought them, but the court cannot create a statute of limitations out of thin air and enforce it against the FDIC; that is essentially what the settlors would have the court do.
Plaintiffs have told this court that they do not believe that they could get a better deal, given all of their financial considerations. By objecting to this settlement, the FDIC is essentially saying that they are willing to take their chances; the court does not believe that, at this stage, the reality of the parties' financial situation is so clear that the court can override this decision.
b. Additional Concerns
1. The FDIC
The court would also note two other concerns about the settlement. The arguments justifying the pro tanto approach are strong.
The court agrees that it does encourage settlement and ensures that plaintiffs recover; in this sense, the pro tanto method is a direct corollary to the rule of joint and several liability -- plaintiffs should be able to recover from whatever wrongdoer can pay.
The potential injustice, however, of the pro tanto approach and the expansive claims bar is particularly great when the non-settling defendant is the FDIC. The court has not welcomed those of the FDIC's arguments during this motion or during its consideration of the D'Oench issue which amounted to little more than "we are the FDIC and we win." Nonetheless, when considering the weight to be given to the various federal policies at stake -- encouraging settlements, compensating plaintiffs, deterrence under the securities laws, etc. -- the court cannot ignore the federal policy in favor of making the FDIC whole. Plaintiffs' arguments that the court should compensate plaintiffs before it concerns itself with equities among defendants must be tempered when the defendant being prejudiced is the FDIC, who, in some sense, is also an innocent and who represents the beleaguered federal treasury.
Counsel for the FDIC was candid at oral argument that the FDIC advances the pro tanto approach when it is a plaintiff and fights it when it is a defendant.
See FDIC v. Geldermann, 763 F. Supp. 524 (W.D. Okla. 1991), rev'd 1992 WL 281410 (10th Cir. Sept. 14, 1992) (district court approved pro tanto settlement agreement in which FDIC was plaintiff). In Geldermann, for instance, the district court enunciated its belief that the pro tanto approach advanced important government policies behind making the FDIC whole. These equities drop out of the equation, however, when the FDIC is the defendant; indeed, they may even cut the other way. While the court does not believe that these equities would prohibit a court from adopting a pro tanto approach with an expansive claims bar, they do counsel against it in this case.
2. The Bar Against Indemnity Claims
The court does not accept the FDIC's claim that a court may never enter a bar against indemnity claims or so-called "independent" claims. The distinction which the FDIC seeks to make between claims involving joint liability and claims involving duties between tortfeasors is too simplistic. Contribution claims can be "dressed up" as indemnity or "independent" claims and a court need not hesitate to bar such claims. See South Carolina v. Stone, 749 F. Supp. 1419, 1433 (D.S.C. 1990) (barring "independent" claims because "a rose by any other name is still a rose"). Nonetheless, the court questions whether the appropriate conditions for a broad claims bar which includes indemnity claims have been met.
There is little disagreement that contribution bars may be implemented; without them, settlement would be unlikely. To implement a contribution bar, a court must determine that the settlement was made in good faith and that the non-settlors receive an appropriate offset. Indemnity, however, does more than simply share the loss between tortfeasors who each possess a certain percentage of the fault. Rather, indemnity is an equitable principle which requires one party to pay the entire amount of damages owed by another party. See Alvarado Partners, 723 F. Supp. at 549. It is exactly for this reason that many courts have ruled that there can be no indemnity claims under the federal securities laws because indemnity would permit a tortfeasor to escape all liability. See In re Atlantic Fin. Mgt. Inc. Sec. Lit., 718 F. Supp. 1012, 1015 (D. Mass. 1988); Baker, Watts & Co. v. Miles & Stockbridge, 876 F.2d 1101, 1104 (4th Cir. 1989).
Yet this reason also suggests that the inquiry as to whether indemnity claims may be barred must be somewhat more stringent than that for contribution claims. Extinguishing a right of indemnity would give a great benefit to the settling tortfeasor, who might have been liable not only for its own share of the liability, but also might have been required to reimburse other defendants. Unless the court, in its fairness inquiry, finds there are no indemnity claims, or that the only indemnity claims are in the nature of contribution, a bar against indemnity claims seems inappropriate.
At least one court of appeals has found that rights of indemnity cannot be extinguished. See Donovan v. Robbins, 752 F.2d 1170 (7th Cir. 1984).
Although the court does not necessarily espouse the 7th Circuit's per se rule, the court is not at this time prepared to accept a blanket ban on indemnity claims. The majority of courts considering the issue have rejected indemnity in the federal securities law context, but plaintiffs are also seeking common law relief under D.C. law. Further, the parties have not briefed in detail whether the provisions of FIRREA which permit the FDIC to recover from officers and directors of failed banks would affect the federal securities' laws policy against rights of indemnity. See 12 U.S.C.S. 1821 (k). If the court is to eventually reach this issue, further argument on the effects of FIRREA will be necessary.
For the foregoing reasons, it is hereby ORDERED that plaintiffs' and individual defendants' motion for approval of the partial settlement is DENIED.
Royce C. Lamberth
United States District Judge
Date: NOV 3 1992