Tuesday, June 21, 2005

Court Orders Mutual Bar Order in MTC Shareholder Litigation

After being instructed by the Second Circuit to “fully consider the competing equities” in evaluating what type of bar order (mutual or non-mutual) to use in a partial settlement of the MTC securities litigation, Judge John Gleeson (E.D.N.Y.) has decided to opt for the mutual bar order (MBO). The Judge had originally approved a non-mutual bar order (NMBO), which favors the settling defendants by preventing the non-settling defendants from seeking indemnity and contribution from them, but not offering the same protection for the non-settling defendants. So its easy to see why the defendants who remained in the case didn’t care much for that plan. Instead, they favored implementing the MBO, which means that if the settling defendant ends up shelling out more than the eventual amount that the jury finds it is liable, the non-settling party’s “payment is reduced by any amount the settling party ‘overpaid.’” In addition, under a MBO, “neither the settling defendant, nor the non-settling defendants, will be able to seek indemnity or contribution against the other.”

In compliance with the instructions handed down to him from on-high, Judge Gleeson analyzed the following five factors in determining whether to utilize the MBO or the NMBO: 1) fairness to the various parties; 2) the risk of collusion; 3) whether one of the non-settling defendants benefited from a NMBO in an earlier related settlement; 4) the PSLRA’s preference for MBO’s; and 5) the settling party’s representations about how it intended to use the NMBO. In a largely fact-specific decision, he found that each factor weighed in favor of using the MBO. In doing so, he observed that “a mutual bar order is by no means unfair – it merely forces a settling party to bear the risk of the settlement it negotiated.” In addition, he found that a settling party receives certain benefits that the remaining defendants do not enjoy, such as “avoiding the risk of the unknown” and “eliminating any further expenses associated with litigation.” Thus, the Judge reasoned it fair that the settling party may wind up paying more in the settlement than the jury eventually says it should have. That’s just the way it goes.

For all the details, you can find the decision, issued May 31, 2005, at 2005 U.S. Dist. LEXIS 10312.

Nugget: “The equities do not favor either the settling parties or the non-settling parties. Nevertheless, the facts and circumstances of this action favor the application of the mutual rule over the application of the non-mutual rule.”

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