The Scope of Bar Orders in Federal Securities Fraud Settlements

By Kaplan, David | Duke Law Journal, October 2002 | Go to article overview
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The Scope of Bar Orders in Federal Securities Fraud Settlements


Kaplan, David, Duke Law Journal


INTRODUCTION

Parties entering into a partial settlement (1) of a securities fraud class action typically seek, in connection with the court's approval of the settlement, (2) an order barring categories of claims made by or against the settling parties that relate to or arise out of the settled federal securities fraud claims. (3) Before the passage of the Private Securities Litigation Reform Act of 1995 (PSLRA), (4) courts grappled with the equity of orders extinguishing these third parties' rights. (5) Though the majority of courts decided that judicial economy and the federal policy of encouraging settlement merited the entry of a settlement bar order, (6) these courts carefully scrutinized the scope of the requested orders. (7) The PSLRA codified an emerging norm by requiring the entry of an order barring contribution claims made by or against certain settling parties in 10b-5 actions. (8) Yet uncertainty arises when the court is petitioned to enter an order of greater breadth than the statutory model. Uncertainty remains, in part, because Congress did not clarify its intent in requiring a contribution bar. (9)

Increasingly, settlement agreements stipulate effectiveness (10) upon the entry of a bar order containing specific provisions, which often supplement those provided by the PSLRA. (11) Yet, in considering whether to approve a settlement, the court must consider the effect of the settlement as a whole, and is not free to modify, substitute, or delete the provisions of requested orders (12) In addition, courts generally may not consider an appeal of a bar order separately from the entire settlement. (13)

A provision augmenting the PSLRA bar, which is often sought by settling parties, is a bar on all claims for indemnification. (14) Prohibiting indemnification claims surpasses the PSLRA because, although the PSLRA directs the court to bar certain claims for contribution, (15) the Act is silent on indemnity. Undeterred, numerous courts have entered orders barring claims for indemnification, reasoning that although the PSLRA directs the court to bar contribution claims "in the first instance," the statute should not be read to foreclose the entry of a broader order. (16) Courts note that neither the Securities Act of 1933 (Securities Act) (17) nor the Securities Exchange Act of 1934 (Exchange Act) (18) provide indemnity rights, and federal precedent generally regards indemnification as inconsistent with the deterrent purpose of the securities laws. (19) Thus, a bar on indemnification claims is proper.

Unsettled is whether bar orders may prohibit indemnification claims made under state corporation law, (20) as well as so-called "independent" claims premised on, for example, tort or contract theories. (21) If successful, "independent" claims would reallocate the liability of a settlement (or judgment) to another party. Because the liability of a settlement is a precondition to the "independent" claims (as the liability of a settlement establishes a completed tort claim or breach of contract claim), allowing a party to raise state law claims premised on the same facts underlying the settled federal securities action arguably permits an end run around a settlement agreement and/or an indemnification bar. (22) For this reason, a minority of courts refuses to recognize independent claims, and instead regards independent claims as "de facto claims for indemnification" (23) and "nothing more than claims for contribution or indemnification with a slight change in wording." (24) Yet, the majority of courts have concluded that tort--or contract--based claims are legally distinct from contribution and indemnity claims, because such claims require proof of specific elements, such as duty, breach, causation, etc. (25)

This Note outlines the scope of bar orders entered in federal securities fraud settlements. After reviewing the PSLRA bar, this Note analyzes the uncertain purview of an indemnification bar, before considering the courts' contrasting treatment of independent claims.

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