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Malchman v. Davis

decided: May 2, 1983.

NATHAN MALCHMAN, GERTA CONWAY, WILLIAM DEAUTRIELL, AND LOUIS STONE, PLAINTIFFS-APPELLEES,
v.
LEONARD DAVIS, SOPHIE DAVIS, COLONIAL PENN GROUP, INC., COLONIAL PENN FRANKLIN INSURANCE COMPANY, INTRAMERICA LIFE INSURANCE COMPANY, NATIONAL ASSOCIATION PLANS, INC., AMERICAN ASSOCIATION OF RETIRED PERSONS, NATIONAL RETIRED TEACHERS ASSOCIATION, CARRIE B. ALLEN, ORANDA BANGSBERG, BERNARD BERGGREN, JUNE BIGGAR, ARTHUR BOUTON, OLAF KAASA, CLARA L. KLEWENO, FLOYD E. TUMBLESON, J. LEONARD JOHNSON, C. E. CARMICHAEL, AMERICAN ASSOCIATION OF RETIRED PERSONS INSURANCE TRUST, DOROTHY M. CRIPPEN, JAMES J. BROWNING, LLOYD I. SINGER, CYRIL F. BRICKFIELD, AND JOHN J. MACWILLIAMS, DEFENDANTS-APPELLEES, MOUNTAIN PLAINS CONGRESS OF SENIOR ORGANIZATIONS, MR. AND MRS. HUGH A. GROVES, FRANCIS SEELY, ESTELLE WHITTLE, HENRY WHITTLE, MR. AND MRS. BURTON W. ATKINSON, MR. AND MRS. C. E. DIETRICH, HARRIET MILLER, AND ALICE VAN LANDINGHAM, OBJECTORS-APPELLANTS



Appeal from approval of settlement by the United States District Court for the Southern District of New York, Thomas P. Griesa, Judge, in class action suit for federal antitrust violations.

Lumbard, Oakes, and Newman, Circuit Judges.

Author: Oakes

OAKES, Circuit Judge:

This appeal is by objectors to the settlement of a class action antitrust suit. The settlement, while giving certain injunctive relief against some of the defendants, also waives any claim for damages for the defendants' past conduct by several million members of the plaintiffs' classes. Coordinately, the settlement agreement covers a state court lawsuit for breach of fiduciary duty and conflict of interest arising out of the same facts. The settlement awards counsel fees and expenses totaling $2,325,000 for the two law firms representing the plaintiffs. The settlement was approved by the United States District Court for the Southern District of New York, Thomas P. Griesa, Judge, after a hearing and in an order which stated conclusions but made no specific findings. Our duty to review this important settlement cannot properly be fulfilled because we do not have sufficient analysis of several pivotal issues. We are required to remand this case for further consideration.

BACKGROUND FACTS

This litigation and the companion state court action, Conway v. Davis, No. 10535/76 (N.Y. Sup. Ct., N.Y. Cty.), principally arise from the relationship between Leonard Davis and various corporate entities owned or controlled by him and two nonprofit organizations of elderly persons, the National Retired Teachers Association (NRTA) and the American Association of Retired Persons (AARP).

Dr. Ethel Percy Andrus, a retired California high school principal, founded the NRTA in 1947 to promote the interests of retired teachers. In 1956, at Dr. Andrus's request, insurance broker Leonard Davis persuaded a national insurance company to underwrite a voluntary group health insurance program for the members of NRTA. In 1958, again with Davis's help, Dr. Andrus formed the AARP to serve the interests of Americans over 55 years old. AARP offered voluntary group health insurance to its members similar to NRTA's. Since their founding, the two associations have attracted millions of members and presently have, between them, over 13 million members throughout the United States. Meanwhile, Davis formed the companies that in time became Colonial Penn Group (CPG) to underwrite health insurance policies in group plans and to provide other services to the associations' members. From 1958 on Davis and his companies managed the AARP and NRTA insurance plans. The associations encouraged their members to purchase insurance, travel and other products and services exclusively through Davis-controlled entities, including insurance subsidiaries, group travel companies, and employment agencies. Davis's entities, moreover, had the exclusive right to advertise in the associations' publications and were permitted to do so at what appears to be substantially less than the fair market value of such advertising. CPG also maintained the membership lists of the associations in its computers.

As AARP and NRTA grew, so did Colonial Penn and its various subsidiaries, its total revenues being $171 million in 1972 and $445 million in 1976. The AARP/NRTA health insurance plans generated over $261 million in premiums in 1977. As of January 1, 1976, CPG led 929 major United States corporations in profitability with a five-year average annual return on capital of 33.5%, a figure nearly double the profitability of either IBM or Xerox and three times greater than the median return of 11.3% for the entire insurance industry.

THE STATE COURT LITIGATION

Lederer v. Colonial Penn Group, the original state court complaint, dated May 4, 1976, was a class action on behalf of insurance-buying members of AARP and alleged principally that the class was overcharged for insurance policies purchased from CPG. The complaint charged the defendants including Davis, CPG, and various people connected with the associations with fraud and breach of fiduciary duty. The complaint sought only injunctive relief and no damages. The action was brought by a firm known as Kaufman, Taylor, Kimmel & Miller (Kaufman-Kimmel). When a motion to dismiss was scheduled for oral argument, Shea & Gould, then known as Shea, Gould, Climenko & Casey, appeared as co-counsel for the plaintiffs and the original complaint was dismissed upon consent with leave to replead.

In July 1977, an amended complaint was served and filed in New York State Supreme Court with Gerta C. Conway as an additional plaintiff. The amended complaint also alleged fraud and breach of fiduciary duties to AARP members who then held group health insurance, approximately 2.5 million persons. Defendants were Davis and his wife, controlling stockholders of CPG, CPG's chairman, AARP, members of its board and trustees of its insurance trust, and AARP's attorneys. Defendants moved to dismiss the amended state complaint.

The defendants took the initiative in the litigation, serving the plaintiffs with interrogatories and requests for production of documents. The defendants vigorously attacked the adequacy of the named plaintiffs as class representatives: each plaintiff was deposed and interrogatories were answered. Though plaintiffs did take a lengthy deposition of Harriet Miller, a former Executive Director of AARP who had filed a separate suit against Leonard Davis and others following her discharge, and thirteen other depositions, the plaintiffs never served interrogatories on any of the defendants or requested admissions from any of them in the state case. When plaintiffs served defendants with requests for production of documents in July 1978, defendants sought an order preserving confidentiality. As of early 1979, plaintiffs had obtained little or no discovery information from defendants. A stipulation of settlement was entered into on November 3, 1980, covering both the state court and the federal actions. That stipulation will be discussed in further detail below.

THE FEDERAL LITIGATION

This action, alleging violation of the federal antitrust laws, was filed by both the Shea & Gould and the Kaufman-Kimmel firms in October 1977 on behalf of plaintiffs Lederer, Conway, and Nathan Malchman. This suit was also filed as a class action only on behalf of insurance-buying members of AARP and named essentially the same defendants as did the state court action. Like the state court action it sought injunctive relief and not restitution or money damages. No discovery at all was undertaken by plaintiffs in this action. In September of 1980, CPG and the associations made an agreement including the following provisions: (1) the associations would select a group health insurance carrier commencing July 1, 1981; (2) the associations would accept advertising from companies other than CPG in their publications; (3) the associations would significantly revise their operating procedures thereby granting -- indeed, granting -- authority to the associations' boards of directors to select and supervise the associations' insurance plans, an assertion of independence in keeping with the associations' unilateral decisions to limit the rights of Honorary Presidents including Leonard Davis and to eliminate the provisions for the continuation of the trustees of the associations' insurance trust in office for life with the right to designate their own successors; (4) CPG would pay the associations a total of $6,866,664 and would spend not less than an additional $4.5 million to promote membership in the associations during the period January 1, 1980, through June 30, 1981; (5) CPG would transfer the custody and maintenance of the associations' membership lists to the associations; (6) CPG would no longer engage in Chapter activities; (7) CPG could no longer claim association endorsement for its products without permission; and (8) CPG was barred from advertising in CPG publications if another underwriter was selected.

Neither the defendants' motion to dismiss nor class certification had been acted upon when the parties presented the district court with the stipulation of settlement on November 6, 1980. The stipulation of settlement was filed with an affidavit of Michael Lesch, Esq., the Shea & Gould attorney for the plaintiffs, and a number of other documents, including the September 1980 agreement entered into by CPG and the associations. The bulk of the stipulation of settlement primarily confirmed the arrangements in the September 1980 agreement but added the following terms:

1. Competitive bidding procedures for the placing of insurance by the associations were agreed upon as was an eight-year period of duration for the consent decree and a five-year period for the duration of the group insurance contract placed in 1981 with Prudential Insurance Co.;

2. Complete and final termination of both state and federal actions;

3. Amendment of the state and federal complaints to include NRTA as a defendant and to broaden the plaintiff class to all persons who as of November 1, ...


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