Nacchio Civil Class Action Appeal: Part 2 (Insufficient Findings)

Part 2 of this three-part series addresses one of the two principal legal issues present in New England Health Care Employees Pension Fund v. Woodruff, No. 06-1482 , in which several Qwest shareholders originally brought a class action complaint in 2001 alleging various federal securities laws violations by Qwest and its employees. In a 2 to 1 split decision, the 10th Circuit remanded the case to U.S. District Judge Robert Blackburn to determine whether the $400 million settlement by the plaintiffs and Qwest of the class-action case was “fair, reasonable, and adequate” to the extent Fed. R. Civ. P. 23(e)(1)(C) applies to Nacchio and his CFO when they were excluded from the settlement. Id. at *15 (Majority Opinion).

In the majority opinion, Judge Kelly and Judge Baldock held that the court need not address the legal merits of the PFJ [Partial Final Judgment], but only two procedural issues which it decided in Nacchio’s favor: (1) whether Nacchio and Woodruff had standing to contest the private contractual provisions between the plaintiffs and Qwest; and (2) whether the District Court’s provided sufficient findings in the case. Judge Briscoe responded with a vigorous dissent which, frankly, is compelling on each of these two issues.

Since the standing issue requires an analysis of what truly is motivating Qwest, the plaintiffs, and Nacchio as further complicated by indemnification agreements with Qwest, this post tackles the District Court “insufficient findings” issue first. The last post in the series tackles the very obtuse, but critical, “standing” issue to contest the fairness of the settlement agreement between Qwest and the plaintiffs.

The majority opinion first noted that a district court’s approval of a class action settlement is reviewed for an abuse of discretion. Citing the lack of a clear listing of the findings of fact and conclusions of law necessary for appellate review, the majority opinion held that the District Court’s decision was insufficient based upon its following review of the district court’s conduct:

The district court here, after summarizing Mr. Nacchio and Mr. Woodruff’s contentions and explaining the challenged provisions, simply “overrule[d]” Mr. Nacchio and Mr. Woodruff’s objections, noting only that the provisions were “either legally required, or [were] legally appropriate” in the case“[b]ased on the reasons stated, arguments advanced, and authorities cited by Qwest in its reply.” Moreover, the district court’s order did not address a supplemental brief filed by Mr. Nacchio and Mr. Woodruff (apparently filed without objection) responding to that reply. (Emphasis added). Id. at *13.

Consequently, the majority decision explicitly stated that on remand, the district court “should illuminate its overruling of Mr. Nacchio and Mr. Woodruff’s objections to the settlement.” Id. at *14. Implicitly, the majority opinion indicates that Nacchio’s fairness hearing over the settlement was unfair and an abuse of its discretion since the district court did not seem to read or adequately consider Nacchio’s objections in the supplemental brief.

The dissenting opinion directly countered the majority opinion’s concern that Nacchio’s supplemental brief was not read or considered by asserting the following in a footnote:

The majority is incorrect that the district court never read or considered Non-Settling Defendants’ Supplemental Brief. At the fairness hearing, which occurred after Non-Settling Defendants submitted their Supplemental Brief, the district court instructed the parties that their “papers” had been “carefully read and considered by the court, and its most competent and able staff.” Hearing Transcript, ROA, Vol. III, at 939. To be fair, the district court did not say, “I have read your Supplemental Brief,” but we usually do not require a district court to provide such an explicit acknowledgment of a party’s submission to the court. Footnote 4 at *10 (Dissenting Opinion).

Moreover, the dissenting opinion cited a recent 10^th circuit case that Judge Briscoe viewed as almost identical to the current case for the conclusion that “the district court’s consideration and analysis, while not perfect, were more than adequate in this case.” Id. at *8). The majority decision meticulously first listed the factors to show adequate consideration and analysis in In re Integra Realty Res., Inc. (In re Integra II) , 354 F.3d 1246, 1268 (10th Cir. 2004) . Next, the dissenting opinion listed the almost identical steps the district court took to adequately consider the fairness of the settlement between the plaintiffs and Qwest.

Finally, the dissenting opinion made two significant observations: (1) the district court devoted 2.5 pages out of a 12 page opinion to Nacchio’s objections; and (2) even though the district court adopted Qwest’s Reply Brief for the court’s “reasons, arguments advanced, and authorities cited,” Qwest’s Reply Brief “nevertheless contained appropriate legal and factual support for the district court’s conclusions and analysis, and we can adequately discern the basis for the district court’s decision.” Id. at *11.

Consequently, Judge Briscoe wanted the 10^th Circuit to hear the case on the legal merits and thereby avoid “needless delay” to a case already six years old. With the majority decision, however, it is likely that the District Court will simply combine all of its reasoning and support into one document sufficient to have the Tenth Circuit again hear the case on the legal merits—whether the terms of the private agreement between Qwest and the plaintiffs that excluded Nacchio and his CFO was fair and did not cause “plain legal prejudice” related their contract rights. This legal issue is the subject of the next post.

If the same panel of judges (Kelly, Baldock, and Briscoe) were to hear the case again, the prediction is another 2 to 1 decision in favor of Nacchio based upon the legal arguments raised in the majority opinion. However, then the plaintiffs and Qwest could seek an en banc review by the entire 10th Circuit if they can show that the case involves a question of exceptional importance under Fed. R. App. P. Rule 35(b)(2).