Appeal from an order of the United States District Court for the Southern District of New York, Motley, J., denying reversion of a portion of a settlement fund to defendant and reallocating the proceeds of the fund among the plaintiff classes where the number of claimants against the fund proved to be less than had been estimated.
Moore and Gurfein, Circuit Judges and Bonsal, District Judge.*fn*
In late 1975 appellant McDonnell Douglas Corporation ("Douglas") and appellees entered into a preliminary stipulation to settle fifteen actions, of which five were class actions, then pending against Douglas. The preliminary stipulation provided that Douglas pay $5,000,000 as consideration for dismissal of these actions. In early 1976 the parties entered into a definitive stipulation of settlement confirming the agreement to settle these actions for $5,000,000. Attached to this definitive stipulation was an allocation plan which provided for the distribution of the settlement proceeds among the various claimants. Both the preliminary stipulation and the definitive stipulation as well as the allocation plan contained provisions barring reversion of any portion of the settlement fund to Douglas.
Subsequent to the entry of judgment approving the settlement and dismissing the actions, when the actual number of claimants proved to be less than estimated both sides moved in the district court (Motley, J.) to modify the allocation plan. Plaintiff and Douglas moved for equitable reallocation of the settlement proceeds; in addition, Douglas moved for reversion to it of a substantial portion of the fund. Judge Motley denied Douglas' application for reversion and granted the equitable reallocation sought by plaintiffs. This appeal follows.
1. Summary of History of the Litigation through Settlement.
Between 1966 and 1968 holders and former holders of Douglas securities commenced a total of fifteen actions against Douglas based on alleged violations of the federal securities laws, all of which actions were assigned to Judge Motley. Five actions were denominated as class actions, eight were individual actions, and two were derivative actions.
In 1969 the five actions denominated as class actions were certified as class actions by Judge Motley. (47 F.R.D. 11.) Three classes were established: Class 1, persons who purchased Douglas common stock between January 19, 1966 and September 29, 1966; Class 2, persons who converted Douglas 4% debentures due February 1, 1977 into Douglas common stock as of May 3, 1966; and Class 3, persons who purchased Douglas 4 3/4% debentures due July 1, 1991 between July 12, 1966 and September 29, 1966. On June 30, 1970, Judge Motley decided to proceed first with the five class actions and stayed proceedings with respect to the remaining actions.
In 1974 Judge Motley tried the debenture holder (Class 3) action based on alleged violations by Douglas of section 11 of the Securities Act of 1933. After separate trials on liability and damages, the Court found Douglas liable to Class 3 debenture holders under section 11 and assessed damages at $30 per debenture or actual loss if less.
Thereafter, Judge Motley found Douglas liable to the Class 3 debenture holders under section 10 of the Securities Exchange Act of 1934 and Rule 10b-5 and scheduled trial on damages to commence on December 3, 1975.
On December 1, 1975 counsel for Douglas and lead counsel for the plaintiff classes entered into a preliminary stipulation of settlement to cover all of the above-mentioned actions pending against Douglas. Under the terms of the preliminary stipulation it was agreed that Douglas would pay $5,000,000 as consideration for settlement of the five class actions and the eight individual actions; it was further agreed that Douglas would move to dismiss the two derivative actions.
The preliminary stipulation of settlement was expressly conditioned upon final judicial approval pursuant to Rule 23(e) Fed.R.Civ.P. and dismissal of the pending actions. Douglas was to make payment of the settlement consideration on April 30, 1976 if these conditions were met as of that date; otherwise the above sum was to draw interest on behalf of the plaintiff classes as of that date.
The preliminary stipulation of settlement further provided that "if the settlement is finally approved and consummated, no part of the settlement fund will revert to Douglas, regardless of the number and the amount of claims allowed against the fund."*fn1 Finally, it was agreed that the parties would submit a further stipulation of settlement which would include, among other things, a plan for allocation of the settlement proceeds among the three classes.
On December 3, 1975, Judge Motley signed the preliminary stipulation of settlement. On January 23, 1976, the court dismissed the two derivative actions pursuant to Rule 41(b) Fed.R.Civ.P. On January 31, 1976 the Court dismissed the eight individual actions and ordered plaintiffs in those actions included as class members.
On February 11, 1976 the parties executed the definitive stipulation of settlement contemplated in the preliminary stipulation. In language similar to that contained in the preliminary stipulation the definitive stipulation provided that "in no event will any part of the settlement proceeds revert to Douglas, regardless of the number or amount of claims allowed."*fn2 In addition, the definitive stipulation provided for the distribution of the net settlement proceeds remaining after payment of attorneys' fees and disbursements among and within the three classes in accordance with an allocation plan attached to the definitive stipulation.
Under the allocation plan, members of Class 1 who purchased Douglas common stock between March 25, 1966 and June 1, 1966 and who did not thereafter sell their stock prior to June 2, 1966 were to be allowed claims against the fund in an amount of 3% of their purchase price. Members of Class 2 who converted their debentures as of May 3, 1966 (the effective date of conversion) into common stock and who did not sell that common stock prior to June 2, 1966 were to be allowed claims against the fund in an amount of $2.84 per share of common stock (which was 3% of the average price of Douglas common stock as of the date of conversion). Members of Class 3 who purchased Douglas 4 3/4% debentures between July 12, 1966 and September 26, 1966 and who did not sell their debentures prior to September 27, 1966 were to be allowed claims in the amount of $30 per ...