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In re Baldwin-United Corp.

August 19, 1985


Appeal of an order of the Southern District of New York, Charles L. Brieant, Jr., Judge, enjoining the State of New York and "all other persons having knowledge of th[e] Order" from bringing suits in state courts that would effect the rights of plaintiffs in numerous federal class actions consolidated in a multi-district litigation assigned to the Southern District. Appellants, 30 states of the Union that are not parties to or intervenors in the underlying suit plus one state (Maine) that intervened below, contend that the injunction is overbroad, without authority, and in violation of the sovereign immunity of the states.

Before: Pratt and Mansfield, Circuit Judges, and Macmahon, District Judge.*fn*

Author: Mansfield

MANSFIELD, Circuit Judge:

Thirty-one states appeal a preliminary injunction issued in the Southern District of New York by Judge Charles L. Brieant, Jr., in the course of a consolidated multi-district, class action against various broker-dealers who sold securities of the now-bankrupt Baldwin-United Corporation and its insurance subsidiaries. Appellants, with the exception of the State of Maine, were neither parties to nor intervenors in the district court proceedings below. They object on procedural and constitutional grounds to the injunction, which enjoins them as "persons having actual knowledge of this Order," from "commencing any action or proceeding" against any defendants in the multi-district litigation (MDL 581) that "may in any way affect the right of any plaintiff or purported class member in any proceeding under" MDL 581. Appellees include both the plaintiffs and the defendants in the federal class action. Because we find that the issuance of the injunction was within the scope of the district court's power and was not an abuse of its discretion, we affirm.

MDL 581, pending before Judge Brieant, represents the consolidated proceedings of more than 100 federal securities lawsuits. Plaintiffs, some 100,000 holders of Baldwin single-premium deferred annuities (SPDAs), have asserted claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 against 26 broker-dealers and related individuals who sold the SPDAs by representing them to be safe and desirable investments. Many of the plaintiffs have also raised pendent state law claims, such as consumer protection actions under statutes providing private rights of recovery. All these claims are designed to obtain additional recoveries beyond the amounts that plaintiffs will eventually receive under a rehabilitation plan for Baldwin's insurance subsidiaries that took effect in May 1984. Of the 100,000 or so in the plaintiff class less than 400 chose to opt out of the action.

During the past two years the district court has coordinated settlement talks between the parties. Negotiations proved successful as to 18 of the 26 broker-dealer defendants and stipulations of settlement were signed in $140 million to the plaintiffs in exchange for a release of all the plaintiffs' federal claims against the settling defendants as well as any claims available to each plaintiff under relevant state laws. This money is to be used in a Global Enhancement Plan, the terms of which are being separately negotiated by the parties. The Plan would provide the SPDA holders with a replacement investment property that would supplement their recovery under a rehabilitation plan. If no such agreement should be reached, the settlement money would be distributed as a lump sum to SPDA holders. Only about 50 individual plaintiffs objected to this settlement. For the purposes of ruling on these settlements, the district court provisionally approved class status.

On hearing of the proposed settlements the representatives of 40 states in the National Association of Attorneys General (NAAG), concluded that the proposal did not adequately compensate plaintiffs for their federal and state law claims. The states were also concerned about violations by the Baldwin companies of various state regulatory and criminal laws enforced by each state's attorney general. Following a meeting of the concerned NAAG members, the Maine Attorney General petitioned on behalf of the relevant NAAG subcommittee to be added to the service list in the suit. One month later, the district court preliminarily approved the settlement and scheduled a hearing on its fairness.

Meanwhile, between the time when the stipulations of settlement were signed and the year's end, some 10 states had issued subpoenas or other requests for information from various defendants. The states' objective, as revealed in some draft complaints and conceded by them upon oral argument of this appeal,*fn1 is to enforce state laws authorizing them in their representative capacities to seek restitution and monetary recovery from the defendants to be paid over to those of the states' citizens who are plaintiffs in the consolidated class actions before Judge Brieant. In addition, some states may wish to pursue other state remedies, including prospective injunctive relief and enforcement of state criminal and regulatory laws designed to guard against repetition of the conduct forming the basis of the consolidated federal actions.

After an unsuccessful meeting in late January 1985 between certain state representatives and the defendants in which the states sought a higher settlement figure in exchange for the termination of all proposed state administrative proceedings and civil litigation against the defendants, 22 states, including about half of the appellant states, submitted an amicus brief opposing the settlements as inadequate. No state intervened except Maine, which did so for the purpose of commenting on the fairness of the settlement. In mid-February, several defendants received from the State of New York notices of its intent to bring a suit seeking restitution for New York citizens who held Baldwin SPDAs. These defendants moved the district court to enjoin the imminent New York actions.

Following the grant of a temporary restraining order and a hearing on the need for injunctive relief, the district court on February 26, 1985, orally approved an injunction. The judge stated that the injunction was necessary "in aid of preserving [the court's] jurisdiction" pursuant to the All-Writs Act, 28 U.S.C. ยง 1651 (1982) and Fed. R. Civ. P. 23(d). In support of this conclusion he found that the impending suits in state court "are likely to impair this federal court's jurisdiction and . . . to impair the judgments to be made in these on-going cases, both as to the adequacy and fairness of the settlements proposed by the parties to the settling action, and insofar as concerns the conduct and adjudication of the eight nonsettling actions." In this view, the settlement negotiations would be "frustrated by reason of the existence of competitive litigation, [such that] it would simply be impossible to implement them if they be approved, or to proceed with the class actions if . . . this court concludes to proceed on the merits." The judge further found that the existence of actions in state court would jeopardize its ability to rule on the settlements, would substantially increase the cost of litigation, would create a risk of conflicting results, and would prevent the plaintiffs from benefiting from any settlement already negotiated or from reaching a new and improved settlement in the federal court.

Recognizing the states' interests in enforcing their laws, Judge Brieant stated that it was to be "absolutely clear that the injunction will not extend to the enforcement of the criminal law against anybody who may be deemed to have violated it, and it will not extend to a request of a state court for prospective injunctive relief as to any business practice on the part of any defendant." The court provided that it is eventually denied class action status, it would modify the injunction so that the states would be free to bring actions representing non-party class members.

A proposed order was drawn up by defendants and served on the New York Attorney General, as representative of the amici states, on the Maine Attorney General as the NAAG representative, and on various state insurance officials. At the hearing about the form of the order, the defendants sought to bind all persons with notice of the order, while the State of Maine submitted language that would only have enjoined those acting "in concert" with New York.

Judge Brieant issued the injunction on March 19, 1985. The order enjoins the New York Attorney General and "all other persons having actual knowledge of th[e] Order" from

"commencing any action or proceeding of any kind against any defendant . . . on behalf of or derivative of the rights of any plaintiff or purported class member . . . or which action or proceeding may in any way affect the rights of any plaintiff . . . or which action or proceeding seeks money damages arising out of the sale to any plaintiff . . . [of the Baldwin annuities] . . . ...

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