Opinion
Civil Action No. 02-8045.
May 13, 2004
MEMORANDUM
Robert Chartener, individually and on behalf of all others similarly situated, (herein "Plaintiff") has filed a Complaint against Provident Mutual Life Insurance Company ("Provident"), Robert Kloss, Bernard Anderson, Dorothy M. Brown, Robert Casale, Nicholas DeBenedictis, Philip C. Herr, II, J. Richard Jones, John Nealsey, Charles Orr, Harold Sorgenti, Mehran Assadi, Mary Finelli, Alan Hinkle, Joan Tucker, and Linda Springer ("Defendants"), alleging breach of fiduciary duty and violation of Section 921-A of the Pennsylvania Mutual-to-Stock Conversion Act, 40 Pa. Stat. § 921-A. Jurisdiction is premised upon diversity of citizenship, pursuant to 28 U.S.C. § 1332(a)(1). Presently before this Court is Defendants' Motion to Dismiss Plaintiff's claims pursuant to Federal Rule of Civil Procedure 12(b)(6). For the reasons that follow, Defendants' Motion to Dismiss will be granted.
I. Background
The background of this case is set out in a detailed fashion in this Court's Memorandum of October 21, 2003 and in the state court's final order. Final Order and Judgment in Butler v. Provident Mutual Life Ins. Co., et al., No. 780 and Provident Mutual Life Insurance Co. v. Kloss, No. 788, ¶ 3, 8-9 (Pa. Comm. Pl., April 1, 2003) ("Final Order"). Thus, only a summary of the facts is included here. In January of 1998, Provident developed a plan to convert from a mutual insurance company to a stock insurance company. In January of 1999, Provident policyholders filed an action challenging the conversion plan in the Philadelphia Court of Common Pleas.Butler v. Provident Mutual Life Ins. Co., et al., No. 780 ( Pa. Comm. Pl.). In July of 2000, a second class action by Provident policyholders was filed in regard to Provident's attempts at conversion. Provident Mutual Life Insurance Co. v. Kloss, No. 788 (Pa. Comm. Pl.). (As in the pleadings, the plaintiffs inButler and Kloss will be collectively referred to as the "Butler plaintiffs").
In 2001, Provident converted and then merged with Nationwide Financial Services, Inc. The Butler plaintiffs ultimately settled with Provident in October of 2002, with the preliminary approval of the state court. The settlement was given final approval by Judge Steven Levin of the Philadelphia Court of Common Pleas in April of 2003. The Butler settlement agreement provides for both a mandatory non-opt-out class of Provident policyholders as well as a broad release of other claims related to Provident's conversion and merger. (Final Order at ¶ 3, 8-9). Class member Paul Wexler initially pursued an appeal in the Pennsylvania Superior Court addressing the adequacy of consideration for the settlement agreement, the breadth of the release provision, and whether the class should have been afforded opt-out rights. Butler, et al. v. Provident Mutual Life Ins. Co., et al., No. 1634 EDA 2003.
In September of 2002, Plaintiff Chartener made a demand on Provident's Board to revoke the change-in-control agreements that Provident created to give its management additional payments in the event of a successful conversion and, subsequent to the Provident Board's denial of this demand, filed the Complaint in the instant case. Upon learning of the settlement agreement between Provident and the Butler plaintiffs, Plaintiff's counsel appeared before the state court to clarify that his claims regarding compensation agreements were excluded from the settlement, which the state court declined to do in its final approval of the settlement. Findings of Fact and Conclusions of Law Regarding Class Settlement in Butler v. Provident Mutual Life Ins. Co., et al., No. 780; Provident Mutual Life Insurance Co. v. Kloss, No. 788, ¶ 192 (Pa. Comm. Pl., April 1, 2003) ("Class Settlement Findings").
On October 21, 2003, this Court granted a motion to stay by Defendants, pending the outcome of Mr. Wexler's appeal inButler, saying:
The case at bar and the Pennsylvania class action involve claims against the same Defendants. Plaintiff in this case is also a member of the Pennsylvania class. Both cases raise claims arising from Provident's efforts at conversion and both cases require the application of state law to resolve plaintiffs' claims. The overlap between this action and the one pending in state court makes a stay of the proceedings before this Court appropriate until the state court proceedings are resolved because this Court will necessarily have to engage in an analysis of whether Plaintiff's claims are subject to res judicata or collateral estoppel and such an analysis is premature until the state court proceedings become final. . . . It is clear that the final outcome of state court proceedings will have a substantial affect on, if not dispose of, some or all of Plaintiff's claims before this court.
Op. at 4-5. On December 3, 2003 Mr. Wexler voluntarily withdrew his appeal in Butler. Accordingly, on January 5, 2004 at the request of the parties, this Court lifted the stay and ordered supplemental briefing on Defendants' Motion to Dismiss. That briefing was completed on March 15, 2004.
II. Legal Standard
When deciding a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), the Court may look only to the facts alleged in the complaint and its attachments. Jordan v. Fox, Rothschild, O'Brien Frankel, 20 F.3d 1251, 1261 (3d Cir. 1994). The Court must accept as true all well-pleaded allegations in the complaint and view them in the light most favorable to the plaintiff. Angelastro v. Prudential-Bache Sec., Inc., 764 F.2d 939, 944 (3d Cir. 1985). A Rule 12(b)(6) motion will be granted only when it is certain that no relief could be granted under any set of facts that could be proved by the plaintiff. Ransom v. Marrazzo, 848 F.2d 398, 401 (3d Cir. 1988). To decide a motion to dismiss, courts can consider the allegations contained in the complaint, exhibits attached to the complaint and matters of public record, including government agency records. See Pension Benefit Guar. Corp. v. White Consol. Indus., 998 F.2d 1192, 1196 (3d Cir. 1993).
III. Motion to Dismiss
In support of their Motion to Dismiss, Defendants argue that Plaintiff's claims are barred by res judicata and collateral estoppel and, in the alternative, that Plaintiff's collateral challenge to the settlement agreement is improper, and cannot succeed on the merits. Plaintiff argues that, as he is raising a collateral challenge based on inadequate class representation, his claim is not barred.
As noted in this court's October 21, 2003 opinion, Plaintiff's complaint makes no mention of due process or inadequate representation. Plaintiff's complaint raises two counts: breach of fiduciary duty and violation of Section 921-A of the Conversion Act, 40 Pa. Cons. Stat. § 921-A. Thus, Plaintiff's inadequate representation claim is not properly before the Court. However, as the following discussion of Third Circuit law illustrates, even if Plaintiff had properly raised a due process claim, such a claim would still be precluded.
A. Release and Res Judicata
Defendants argue that Plaintiff's suit must be dismissed because it is barred by res judicata and collateral estoppel. A civil suit can be precluded by the earlier settlement of another suit due either to the doctrine of res judicata or due to a release in the earlier settlement. Nottingham Partners v. Trans-Lux Corp., 925 F.2d 29, 32 (3d Cir. 1991). The defense of release, which is essentially issue preclusion, requires (1) that the release apply to this Plaintiff, (2) that the release encompasses the claims being asserted in this Court, and (3) that the release was legally enforceable. Id. The separate defense of res judicata "`prohibits reexamination not only of matters actually decided in the prior case, but also those that the parties might have, but did not assert in that action.'" Williams v. Lehigh County Dep't. of Corrections, 19 F. Supp.2d 409, 411 (E.D. Pa. 1998) (quoting Edmundson v. Borough of Kennett Square, 4 F.3d 186, 189 (3d Cir. 1993)). Res judicata requires the following three factors: (1) a final judgment on the merits in a prior suit involving (2) the same parties or those in privity with them, and (3) a subsequent suit based on the same cause of action. Id. at 411.
Plaintiff contends that he is not bound by the doctrine of res judicata because he is entitled to make a collateral attack on the Butler settlements, based on his argument, which, as noted above, is raised only in the briefs on this motion and not in the Complaint, that the Butler plaintiffs were not adequate class representatives. For this proposition, Plaintiff relies onHansberry v. Lee, 311 U.S. 32, 41-42 (1940), a case holding that the Due Process clause requires that the named plaintiff in a class action must adequately represent absent class members.
It is undisputed by the parties that Plaintiff was a member of the Butler class, that the Butler class judgment is final, and that the release in Butler, by its terms, encompasses the claims that Plaintiff brings before this Court. Thus, as to the release defense, the only issue in dispute is whether the release of Defendants included in the Butler class settlement properly applies to and binds Plaintiff in this case. If the release defense properly applies, then this court need not reach the issue of res judicata. Nottingham, 925 F.2d at 32.
B. Grimes v. Vitalink
The Third Circuit addressed the question of whether a class settlement release applies to a subsequent suit in Grimes v. Vitalink, 17 F.3d 1553 (3d Cir. 1994). In Grimes, the plaintiffs attempted to raise a due process challenge in federal court to a class action settlement previously approved by a state court. The court in Grimes found that the plaintiffs were bound by the release included in the settlement because the class was not an opt out class. The Third Circuit further found that, because the same predicate facts were addressed in the state court judgment, plaintiffs' claims in federal court, including an inadequate representation claim, were included in the state court settlement's release, and therefore precluded in federal court.
The district court in Grimes, which was affirmed by the Third Circuit's decision, addressed a motion to dismiss that had been converted into a motion for summary judgment. While this Court is only considering a motion to dismiss, the legal principles delineated by the Third Circuit still apply. The precise question presented to the Third Circuit in Grimes was whether a state court has the power to allow parties to a court-approved settlement release exclusive federal claims arising from the same transaction as the state law matters, even though the state court would not have jurisdiction to hear those federal claims.
The Grimes court went on to consider the plaintiffs' argument that they were raising a collateral challenge based on due process. The court held that, because plaintiffs were given notice of the class settlement and the opportunity to be heard regarding that settlement, there was no due process violation.Grimes, 17 F.3d at 1560-61. Specifically, the court addressed the situations of two distinct plaintiffs. The first plaintiff. Mr. Grimes, raised a challenge to the adequacy of representation in state court and appealed the issue through the state courts. The court found that this plaintiff had been afforded due process and was bound by the settlement because his litigation in state court clearly showed he had received both notice and the opportunity to be heard. Id. at 1558-59. The second plaintiff, Mr. Holbrook, did not appear before the state court, but did receive notice of the settlement and thus did have the opportunity to be heard, in addition to having the requisite minimum contacts with the forum for jurisdiction. The court found that the second plaintiff was also afforded due process and was bound by the settlement. Id. at 1559-60.
The First Circuit has also addressed this circumstance. InNottingham Partners v. Trans-Lux Corporation, 925 F.2d 29 (1st Cir. 1991), Plaintiffs to a class action settlement in state court attempted to challenge the settlement in federal court. The Plaintiffs had attempted to opt out of the class in state court, and were denied, and the state court settlement included a release provision. The court in Nottingham found that the release provision was a valid defense because it applied to Plaintiffs, encompassed the claims asserted by Plaintiff in federal court, and was legally enforceable. In addition, the court found that Plaintiffs had been given both notice of the class settlement and the opportunity to be heard regarding the settlement, so the release was fairly applied to them. On these grounds, the court found that Plaintiffs federal claims were precluded and, thus, dismissed.
C. Application to Mr. Chartener
Defendants in this case contend that the Grimes andNottingham decisions are directly on point and that Plaintiff in this case is barred from raising his claims for the reasons set forth in those opinions. Plaintiff contends that Grimes andNottingham do not control because, unlike in those cases, Plaintiff here did not raise his challenge to the adequacy of representation in state court, but, rather, attempts to raise it here as a collateral due process challenge to the class action settlement. Plaintiff contends, relying on In re Real Estate, 869 F.2d 760 (3d Cir. 1989), that he was not required to raise his inadequate representation claim in the state court and that he has the right to raise that challenge in this forum. As the following discussion will explain, Plaintiff misconstrues both the posture of the case before this Court and the relevant case law.
Plaintiff relies on In re Real Estate for the proposition that he can pursue an inadequate representation claim in this Court. Even if Plaintiff had properly raised a due process claim in his Complaint, which he did not, In re Real Estate would not support Plaintiff's position. In re Real Estate was a case where plaintiffs attempted to bring a state court challenge to a class action settlement approved by a federal court. That federal court enjoined the state court action, and the Third Circuit ruled that the federal court could not enjoin the state court action because there were not sufficient minimum contacts for the plaintiffs in the federal court forum to support the federal court's jurisdiction. In re Real Estate, 869, F.2d at 771. The case before this Court does not involve this type of jurisdictional defect.
The state court in Butler has already found that Plaintiff in this case was a member of the Butler class, which was not an opt out class, and that the class representation was adequate (Final Order at ¶ 1, Class Settlement Findings at ¶ 51-70). The state court also found that Plaintiff was bound by the terms of the release included in the class settlement (Class Settlement Findings at ¶ 187-93). This release bars members of the Butler class from asserting claims in any other lawsuit or proceeding based on any of the claims that have been or could have been asserted in the Butler litigation or in any future lawsuit or proceeding. (Final Order at ¶ 8).
As in Grimes, there is no question here that Plaintiff is bound by the release provisions of the state court settlement. Also, as in Grimes, the same predicate facts underlying Plaintiff's claims in this case were resolved by the state court judgment. The state court made numerous findings regarding the compensation arrangements relating to the conversion and merger, including the conclusion that,
[T]he Court further finds that there is no evidence in the record for finding that the compensation arrangements of the officers or directors was unfair or resulted in the policyholder-members of Provident receiving any less consideration than they would have received in the absence of such arrangements."
(Class Settlement Findings at ¶ 64).
Plaintiff's argument fails to acknowledge that there were two Plaintiffs raising a challenge in federal court in Grimes: Mr. Grimes, who raised an inadequate representation challenge in state court, and Mr. Holbrook, who did not appear in state court and did not oppose the class action settlement. Grimes at 1555. The court in Grimes found that both Plaintiffs were subject to the release provision approved by the state court. Thus, regardless of whether Plaintiff raised his inadequacy challenge in state court, waived his inadequacy challenge by only raising other grounds, or raised no challenge at all, under Grimes, he is bound by the terms of the release included in the state court settlement.
The Court again notes that Plaintiff's complaint makes no mention of inadequate representation or due process, but only raises a breach of fiduciary duty claim and a claim under the Conversion Act. As this is a Motion to Dismiss, the Court can only consider the claims raised in the Complaint and not claims that are raised solely in the briefing on the motion. Even if all of the facts stated by Plaintiff in his brief are assumed to be true and raised in the Complaint of Plaintiff, his claims are barred by the state court settlement's release and thus will be dismissed.
It is also of note that, even if Plaintiff had properly pled in his Complaint that he was denied due process of law in the state court, his claim would still fail under Grimes. Due process requires that Plaintiff receive notice of the class action settlement and the opportunity to be heard. Grimes at 1558. A review of the state court record shows that Plaintiff was afforded due process. Plaintiff was given notice of the class action settlement and the opportunity to be heard, as evidenced by the fact that Plaintiff was actually heard by the state court when Plaintiff's counsel appeared before it to request that Plaintiff be exempt from the settlement agreement's release. See Transcript of Hearing on the Propriety of the Class Settlement in Butler v. Provident Mutual Life Ins. Co., et al. at 67-98.
IV. Conclusion
For the reasons stated above, Plaintiff's claims before this Court are bound by the release provision in the Butler settlement and thus barred from consideration by this Court. Therefore, Defendants' motion will be granted and Plaintiff's claims will be dismissed with prejudice.
An appropriate Order follows.
ORDER
AND NOW, this day of ____, 2003, it is hereby ORDERED that the Defendants' Motion to Dismiss is GRANTED and Plaintiff's claims are DISMISSED with prejudice.