A class action decision from the Seventh Circuit could be used by analogy to stop one member of a creditor class from appealing a confirmation order and withdrawing the appeal in return for a payment made to that creditor alone.
In the class action context, Circuit Judge David F. Hamilton called it “objector blackmail.” He said that disgorgement is a remedy authorized in a 1945 bankruptcy decision by the Supreme Court, Young v. Higbee Co., 324 U.S. 204 (1945).
The August 6 decision is an extraordinary endorsement of courts’ equity powers, in an era when appellate courts are reluctant to create equitable remedies not sanctioned by statute. The opinion is another example of the Seventh Circuit’s fearless propensity to break new ground.
Three Class Members Object
Three members of a class objected to settlement of a class action. The court approved the settlement, and the three class members appealed. After several rounds of litigation and appeal, it was revealed that the three objectors withdrew their appeal in return for $130,000 paid to them, not to the class.
Another member of the class filed a motion asking the district court to require disgorgement. The district court denied the motion, saying that the three objectors engaged in no wrongdoing and had taken nothing from the common fund. The appeal to the Seventh Circuit followed.
The Supreme Court’s Venerable Bankruptcy Opinion
Judge Hamilton based his opinion largely on Young, where two preferred shareholders appealed an order confirming a reorganization plan under Chapter X of the former Bankruptcy Act. They argued that the junior debt should have been subordinated to the interests of preferred shareholders. While the appeal was pending, the two objectors sold their claims to holders of junior debt for seven times more than they were to receive under the plan, and the appeal was withdrawn.
Another preferred shareholder moved for an accounting from those who settled. The Supreme Court reversed denial of the motion for an accounting.
Judge Hamilton characterized the two objectors in Young as having dismissed the appeal “at the expense of the class of shareholders they purported to represent.” Id. at 214. He said that the two assumed fiduciary duties to the class because they “had taken it upon themselves to decide the fate of every preferred shareholder.” Id.
According to Judge Hamilton, the Supreme Court ruled that “[t]heir profits from that breach thus belonged in equity to all the preferred shareholders.” Id. He therefore “read Young to impose a limited representative or fiduciary duty on the class-based objector who, by appealing the denial of his objection on behalf of the class, temporarily takes ‘control of the common rights of all’ the class members and thereby assumes ‘a duty fairly to represent those common rights.’” Id. at 212.
In the appeal before him, Judge Hamilton said that the “best remedy” would have required paying the settlement into the common fund for distribution to all class members. However, the expense of another distribution would have “swallowed the benefits.”
Judge Hamilton reversed and remanded for the district court to devise a remedy, insinuating that a contribution to a charity might be appropriate.
Does Young Survive in Bankruptcy?
Would Young be viable today if a member of a class under a chapter 11 plan were to settle after raising an issue on appeal applicable to the entire class? Did the adoption of the Bankruptcy Code 33 years later undercut the vitality of Young in the bankruptcy context?
These days, the Supreme Court bars bankruptcy courts from using Section 105(a) to invent remedies contrary to provisions in the Bankruptcy Code. If a creditor is a party in interest with a right to appeal under the Code, can a court take away the ability to settle? Might a debtor prefer to settle for a farthing and avoid the greater expense of an appeal?
If a similar case arises in the bankruptcy context, the outcome will tell us how much equitable power still resides in the bankruptcy court.
A class action decision from the Seventh Circuit could be used by analogy to stop one member of a creditor class from appealing a confirmation order and withdrawing the appeal in return for a payment made to that creditor alone.
In the class action context, Circuit Judge David F. Hamilton called it “objector blackmail.” He said that disgorgement is a remedy authorized in a 1945 bankruptcy decision by the Supreme Court, Young v. Higbee Co., 324 U.S. 204 (1945).
The August 6 decision is an extraordinary endorsement of courts’ equity powers, in an era when appellate courts are reluctant to create equitable remedies not sanctioned by statute. The opinion is another example of the Seventh Circuit’s fearless propensity to break new ground.
Three Class Members Object
Three members of a class objected to settlement of a class action. The court approved the settlement, and the three class members appealed. After several rounds of litigation and appeal, it was revealed that the three objectors withdrew their appeal in return for $130,000 paid to them, not to the class.
Another member of the class filed a motion asking the district court to require disgorgement. The district court denied the motion, saying that the three objectors engaged in no wrongdoing and had taken nothing from the common fund. The appeal to the Seventh Circuit followed.