| July 11
July 11 In a legal version of "put up or shut
up," a Delaware judge solved a problem of plaintiffs who opposed
a settlement struck on their behalf: Let them keep a lawsuit
alive if they provide money to ensure other plaintiffs get the
payout they expect.
The ruling by Judge Travis Laster of Delaware Chancery Court
in a little-noticed case could have broader reach in the realm
of shareholder and investor litigation. Corporate defendants
often choose to settle lawsuits to get certainty and move on,
but they could face additional legal headaches if small groups
of plaintiffs find creative ways to press ahead with cases even
after an accord with a larger group has been reached.
Laster's ruling was on a case involving accusations that an
investment fund created by Canadian Imperial Bank of Commerce
was run improperly and used as a dumping ground for dud
investments by the bank. A 2005 lawsuit against the general
partner, the investment adviser, the special limited partner and
CIBC sought to recover millions in losses suffered by the fund.
About 490 senior CIBC employees had invested in the fund as
The lawsuit was a derivative action, meaning any judgment or
settlement would be paid into the fund, rather than directly to
the limited partners. A week before trial last year, the
plaintiffs struck a $13.25 million settlement that included
$10.25 million in cash for the fund.
A group of 57 limited partners objected to the pact,
including the named plaintiffs who turned against the
settlement. They argued the defendants could be held liable for
tens of millions of dollars more in potential damages,
outweighing the risks of abandoning the settlement.
In his ruling at the business-focused Chancery Court, Laster
said the settlement was fair, but if opponents believed they
could do better, they could take control of the case, toss out
the accord and continue the litigation.
However, there was a caveat: The objecting plaintiffs had to
come up with money to cover the settlement through a bond. If
they ended up with a smaller settlement or judgment at trial,
the bond would be tapped to preserve the value of the original
settlement that they had opposed.
To the surprise of many lawyers who followed the case, the
objectors said in court documents last week they had found the
money to keep the case going. They said they would post a $13.25
million bond funded in part by a unit of UK litigation finance
firm Burford Capital.
"I've heard judges saying 'put up or shut up,' but I don't
think anyone has put up before," said Adam Savett, the founder
of TXT Capital, an adviser to institutional investors on
securities litigation that's based in Beachwood, Ohio.
Laster, in his May 9 ruling, proposed his solution as a way
to address the problem of diverging interests between
plaintiffs' lawyers and their clients. After having invested
heavily in a case, a lawyer might feel "subconscious pressure"
to accept a settlement on the eve of trial, when the lawyer is
"confronting the specter of an adverse result," Laster wrote.
"If the objectors believe the claims are worth more, they
can act on their belief, put real money on the table, and outbid
Laster, a former litigator in Wilmington, Delaware, has
earned a reputation during his three years on the bench as a
critic of plaintiffs' attorneys who he believes have done a poor
job. In 2010, for example, he took the unusual step of replacing
the plaintiffs' attorneys in a case involving Revlon Inc.
Laster's chambers said the judge had no comment beyond his
CIBC declined to comment on the decision, while Herbert
Milstein, an attorney who negotiated the settlement for the
plaintiffs, called Laster's approach "very unusual." Milstein,
of law firm Cohen Milstein Sellers & Toll, said a court hearing
is likely for later this month to decide how to proceed with the
ON THE BLOCK
In his opinion, Laster noted that several academics have
suggested one way to align the interest of lawyers and clients
would be an open auction of plaintiffs' claims at the outset of
a case. Under that concept, someone who thinks the case has
merit could buy the claims and agree to pay plaintiffs in
exchange for taking control of the case.
By selling their claims, the plaintiffs would quickly get a
payout. The winner of the auction would pursue the litigation
and keep the entire settlement or judgment for themselves. The
defendants could also participate in the auction, and if they
were the high bidder the case would essentially be settled.
The judge based his ruling in part on the writing of New
York University law professor Geoffrey Miller, who has promoted
such a system for years and has discussed ways to establish
minimum bids and the hiring of bankers to round up bidders.
Miller told Reuters he thought that Laster's ruling was the
first time that such an approach had been used. He called it a
potentially valuable resource for judges who face objections to
settlements, provided there are firms willing to provide the
There seems to be little legal precedent for the approach
blessed by Laster, though related issues have come up in
different cases. In 2001 a Chapter 7 trustee for a bankrupt
company, Three Rivers Woods Inc, suggested a creditor who
opposed a settlement of a fraudulent conveyance claim post a
bond if the creditor wanted to continue to litigate. The
creditor refused and the settlement was approved by a judge in
U.S. Bankruptcy Court for the Eastern District of Virginia.
Laster's ruling could have broader reach, said Larry
Hamermesh, a professor at Widener University School of Law in
Wilmington. His approach could be appealing to courts because it
takes the matter and "puts it in the hands of some kind of
market," he said.
Not everyone agrees. Companies that provide directors and
officers liability insurance, which often funds securities class
action settlements, will not be pleased to see settlements
potentially undermined by objectors, said Joseph Monteleone, an
attorney with law firm Tressler, which represents insurers.
"Usually you don't worry about the objectors," he said.
Burford, the litigation finance firm, clearly hopes Laster's
idea catches on. The firm said in court papers it was providing
the money in the CIBC case because it wanted to support the
arrangement even though it considered the potential return
inadequate for the risk involved in the lawsuit.
The case is James Forsythe et al v. ESC Fund Management Co
(U.S.) Inc et al, Delaware Court of Chancery, No. 1091.
For the plaintiffs: Seth Rigrodsky, Brian Long, Gina Serra
of Rigrodsky & Long; Herbert Milstein, Joshua Devore, Joshua
Kolsky of Cohen Milstein Sellers & Toll.
For the defendants: Stephen Norman, Kevin Shannon, Timothy
Dudderar, Daniel Mason of Potter Anderson & Corroon; Kenneth
Nachbar, Megan Cascio, Kevin Coen of Morris, Nichols, Arsht &
For objectors: Richard Renck, Ashby & Geddes; Steven Mintz,
Mintz & Gold.
(Reporting by Tom Hals)