Free Motion for Partial Summary Judgment - District Court of Colorado - Colorado

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DISTRICT COURT, CITY AND COUNTY OF DENVER, STATE OF COLORADO

1437 Bannock Street Denver, Colorado 80202

EDWARD C. SEBESTA, et al,, Plaintiffs,
v.

Case No. 01CV6281

RICHARD E. SCHADEN, et al.,
Defendants.

COURTROOM 9

ORDER

This case is before me on Plaintiffs' "Motion to Approve Final Settlement and Award Attorneys' Fees," filed January 8, 2004. Based on my review of the briefs, and of the evidence and arguments of counsel presented at the fairness hearings held on January 15,2004 and March 11,2004, I find and conclude as follows.'

1.

INTRODUCTION This class action arose out of an effort by the majority shareholders of The Quizno's

Corporation, then a publicly-held Colorado corporation, to take the corporation private by way of a cash-out merger offer made to the minority shareholders, at $8.50 per share. The stock was

1 did not review a box of documents the objectors submitted on March 12, 2004, the day after the second fairness hearing, and indeed that submission is HEREBY STRICKEN. This box of documents was submitted afier the close of evidence, without my direction or invitation.

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trading on NASDAQ as a small cap, and on the effective date of the cash-out, which all parties agree is the relevant valuation dateDecember 21,2001-it was trading at approximately $7.00

per share. The successor entity completed the cash-out merger, the minority shareholders received $8.50 per share, and Quizno's thus went private. Some, though not all, of the minority shareholders exercised their rights of dissent under

55 7-1 13-101 et seq., and eventually brought an action to have the court appraise the "fair value"
of their shares pursuant to that statute ("the appraisal action"). The appraisal action was filed in

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this Court on March 19,2002, and was assigned to Courtroom 1, Judge Robert L. McGahey, Jr., presiding. The Quizno S Corporation v. Fagan, Denver District Court Case No. 02CV2598. One of the minority shareholders who had not preserved his dissenters' rights, Edward C. Sebesta, filed this shareholders' class action on November 13, 2001, on his behalf and on behalf of all other non-dissenting minority shareholders, asserting that the majority shareholders, Quizno's and the Quizno's board of directors violated their fiduciary duty to the minority shareholders by making the $8.50 tender offer rather than accepting what Plaintiffs claim was a

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bona fide offer of $9.50 from a third party.2 After the appraisal action was commenced but before it was resolved, and before my predecessor addressed the class certification issues in this case, the parties entered into a "Stipulation for Settlement," filed October 22, 2003 ("Settlement"). It is the fairness of that

Settlement, and the reasonableness of the related request for attorneys fees and costs, that are at issue here.

2

The complaint actually refers only to the third party offer of $10.63 per share for all of the minority shares; but that offer was amended to $9.50 per share for any of the minority shares. Settlement, p.2.

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Under the terms of the Settlement, all class members are to receive an immediate initial payment of $1.00 per share (representing the difference between the $8.50 tender price and the $9.50 offer from the third party). In addition, the class members are to receive an "incremental award" of cash based on the following diminishing sliding scale, depending on the final outcome of the appraisal action: Per Share Value from Appraisal Action Incremental Award Per Share 45% of the amount above $15.00, plus 25% of the arnount above $20.00, plus 20% of the arnount above $25.00, plus 15% of the amount above $30.00, plus 10% of the amount above $35.00, plus 5% of the amount above $40.00. O Settlement 7 3.' Both the initial $1. O per share payment and any incremental per share payment represent figures before the payment by class members of any approved costs and attorneys fees. Upon court approval of the Settlement, this shareholders' class action is to be dismissed with prejudice, and Plaintiffs are to release Defendants from any and all claims relating to the ownership of Quizno's stock.

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After the parties entered into the Settlement, Judge McGahey issued a written ruling in the appraisal action, finding the "fair value" of the shares to be $32.50 per share. Order dated

January 8, 2004. If this appraisal value ends up being the final value: the total per share
payment to the class (before deduction for attorneys fees) will be as follows:

h l t h o u g h in isolation, this schedule of incremental payments may appear ambiguous (do the words "plus" mean the payments are cumulative over the ranges, and, if so, only up to the ceiling of each range?), the Settlement contains an example that dispels all of these potential ambiguities. In any event, there is no dispute between the proponents and opponents of the Settlement about the mechanics of calculating the incremental payment.
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The Settlement is clear that the incremental payment is to be based on the "final non-appealable" value established in the appraisal action. Settlement 7 3. Judge McGahey's valuation is not final, both because there is an unresolved issue about attorneys fees in the appraisal action, and because, even once that valuation is final in the district court, counsel for Defendants have represented that they intend to appeal.

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Initial payment: Incremental payment: 45% of $5.00 = $2.25

25% of 5.00 =
20% of 5.00 =

1.25
1 .OO

15% of 2.50 =
Total incremental payment

.375 4.875 4.875

Total payment

$5.875

11.

CLASS NOTIFICATION AND OBJECTIONS
As of the valuation date of December 21, 2001, there were approximately 3.2 million

shares of Quizno's stock issued and outstanding, with approximately 2.45 million owned by the shareholders we are calling the "majority shareholders," including the individually named

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Defendants. Of the remaining approximately 750,000 shares of "minority" stock, roughly 300,000 shares were held by shareholders who did not participate in the appraisal action, and roughly 450,000 shares were held by shareholders who did participate in the appraisal action.

As of December 2 1,2001, it appears there were less than 100 record shareholders in this
class (that is, minority shareholders who did not participate in the appraisal action), but of course that number ignores equitable owners of stock-for example, those whose stock was held in

street accounts. When one includes those beneficial owners, I understand that there are a little

less than 300 members of this putative class.

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My predecessor in this Courtroom, Judge Hyatt, preliminarily approved the Settlement by his Order dated October 31, 2003, and directed that individual notices, in a form he specifically approved, be sent to all class members at their addresses of record. That notice advised class members of the essential claim in this litigation-that Defendants breached their

fiduciary duty by making the merger offer at $8.50 per share when there was allegedly an outside offer for $9.50 per share. It gave class members a deadline within which to file written objections., and advised them that a fairness hearing on the proposed Settlement would be held

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The only class members who filed ob+jcctionswere the named Plaintiff, Edward C. Sebesta, and a handful of his family members and trustees of his family trusts, representing about 2.7% of the shares in the class (collectively, "the Sebesta Group"). Likewise, no class members objected in person at the January 15, 2004, fairness hearing, other than the Sebesta Group. After Judge Hyatt preliminarily approved the Settlement, but before the fairness hearing,

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Judge McGahey rendered his judgment in the appraisal action. Because of that significant intervening event, I determined at the close of the fairness hearing that a supplemental notice should be sent advising class members of the results of the appraisal action, and the impact that Judge McGahey's decision would have, if it became final after any appeal, on the calculation of the incremental payments. Pursuant to my Order dated January 15, 2003, such supplemental notice was sent, once again individually to all class members, and a second fairness hearing was set for March 11,2004. The supplemcntal notice informed class members that they had through February 23,2004, to file written objections andlor notice that they wished to object in person at the second fairness hearing. As before, no class members, other than the Sebesta Group,

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objected to the Settlement in writing, filed notices that they would object in person, or appeared in person at the second fairness hearing to object.

11 1.

THE LAW GOVERNING APPROVAL OF CLASS SETTLEMENTS

C.R.C.P. 23(e) governs the settlement of class actions. It provides, like its federal counterpart, only that no class action shall be dismissed "without the approval of the court [and] notice . , . to all members of the class." There is a rich common law, both state and federal, that has filled-in the sketchy interstices of this language. First, where, as here, a class settlement is being proposed before any class has been certified, the trial court must make a finding that all the certification prerequisites of Rule 23(a), and the requirements for maintenance under Rule 23(b), have been met. Although there are no Colorado cases for this proposition, the federal law is now settled, Amchem Prods., Inc. v.

Winhor, 521 U.S. 591 (1 997), and I accept that federal law for purposes of our identical Rule

23(e).

In particular, I must find: that the class is so numerous that joinder would be
impracticable (Rule 23(a)(l)); that there are questions of law or fact common to the class (Rule
.

23(a)(2)); that the claims or defenses of the representative parties are typical of the claims or defenses of the class (Rule 23(a)(3)); that the representative parties will fairly and adequately protect the interests of the class (Rule 23(a)(4)); and, in the context of a 23(b)(3) action such as this, that the common questions of law and fact predominate over individual questions and that class treatment is superior to other methods for the fair and efficient adjudication of the case (Rule 23(b)(3)). Amchem, supra.

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As for the substance of the Settlement, the United States Supreme Court has described the trial court's role as "protect[ing] class members 'from unjust or unfair settlements affecting their rights by representatives who lose interest or are able to secure satisfaction of their individual claims by compromise."' Marek v. Chesney, 473 U S . 1, 35 (1985), quoting Moreland
v. Rucker Phurmacal Co., 63 F.R.D. 61 1, 615 (WD La. 1974). In fact, federal circuit and

district courts have described this obligation as a "fiduciary" obligation to all the class members (particularly to the absent class members), and have described the inquiry as being whether the f proposed classed settlement is "fair, reasonable and adequate." See, e.g., Culver v. Cily o Milwuikee, 277 F.3d 908, 915 (7thCir. 2002); In re LinerboardAntitrust Litig, 296 F. Supp.2d 568, 577 (E.D. Pas. 2003). When the settlement is reached pre-certification, this fiduciary obligation to protect all the class members is heightened. See, e.g., Bowling v. PJzer, Inc., 143

F.R.D. 141 (S.D. Ohio 1992).
Our appellate courts have generally adopted this federal approach. See, c g . , Higley v. Kidder, Peabo& & Co., 920 P.2d 884 (Colo. App. 1996); Helen G. Bonfils Found v. Denver

Post Employees Stock Trust, 674 P.2d 997 (Colo. App. 1983). Courts have identified a number
of factors that should be considered in determining whether a class settlement is fair, reasonable and adequate, including: 1) the strengths of plaintiffs' case; 2) the risk, expense, complexity, and likely duration of further litigation; 3) the risk of maintaining class action status throughout the trial; 4) the amount offered in settlement; 5) the extent of the discovery completed and the stage of the proceedings at the time of settlement; 6) the experience and views of counsel; 7) the presence of a governmental participant; and 8) the reaction of the class members to the proposed settlement. Higley, supru, at 89 1, citing Bonflls, supra, at 999. See generully 4 NEWE ERG ON

CLASS ACTIONS5 11.43(4thed., 2002).

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These factors are not exhaustive, and a trial court must consider on a case-by-case basis all of the circumstances surrounding a proposed class settlement. Id It is also important to acknowledge, especially in a case like this-where proposed settlement-that the class representative is objecting to the

the Rule 23(e) inquiry is almost always made in a strangely

juxtaposed atmosphere. Litigants who were suing each other the last time they were in court are now on the same side hawking the merits of their settlement; class members who once spoke with one voice are now fighting with each other; class counsel who were once prosecuting the

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class members7 claims are now adverse with class members as to fees, which will come out of the common fimd payment to the class. The trial court's fiduciary obligation to vet class settlements for fairness, reasonableness and adequacy is an obligation that is both heightened and often made more difficult precisely because it must be made in this kind of atmosphere, devoid of the usual and comfortable adversary tensions. It is also well-settled, though 1 don't believe there are any reported Colorado cases directly on point, that the burden of proving fairness, reasonableness and adequacy is on the

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proponent of a class settlement. See, e.g., Gulloway v. Southwark Plaza Lld,
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F. Supp. 2d

2003 WL 22657200 (E.D. Pa., Oct. 27,2003); Rievman v. Burlington Northern R. Co., 118

F.R.D. 29,32 (S.D.N.Y. 1987); 4 NEWBURG, supra, at 8 11.42.
IV.

ANALYSIS
A. Certification

I find that all the prerequisites for certification under Rule 23(a) have been met in
n this case, as have the two requirements for maintaining a class under Rule 23(b)(3). T
particular, I am satisfied that this class, which contains slightly less that 300 class members, is

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too numerous to make joinder practicable. There is also no doubt, and I find, that there are issues common to all class members; indeed, the primary issue-did Defendants violate their fiduciary duty by making the $8.50 tender offer in the face of a third party offer of $9.50-is common to all class members precisely because the tender offer was common to all class members. As for typicality, although it is certainly true that the class representative, Mr. Sebesta, is now objecting to the Settlement and wishes to assert new and more vigorous claims, I find that his original claim was identical to, and therefore quite representative, of all class

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members' claims. Finally, I am satisfied that Mr. Sebesta would have fairly and adequately protected the interests of all class members with respect to the current complaint. As for maintainability, I find that the common issues as originally pleaded would have greatly predominated over individual issues. In fact, as is almost always the case in this kind of shareholder class action, a single claim litigated by one class member would have looked virtually identical, at least on the liability side, to full class litigation. Even as to damages, the individual differences between shareholders, under the case as originally pleaded, are almost all just a matter of arithmetic, reflecting the different number of shares. Finally, I am also satisfied that maintaining the originally-pleaded case as a class action would have been far superior to litigating hundreds of individual shareholder suits.

B.

Fair, Reasonable and Adequate Before I address each of the BnnJils factors, I think it worth mentioning that this

shareholders' class action not only involves a parallel appraisal action, but also involves a corporation that was publicly traded on the relevant valuation date. As 1 indicated in my colloquy with counsel at both fairness hearings, it is difficult for me to understand why the

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"value," "fair value," "market value" or any other valuation moniker one might choose could be significantly different than the price at which the stock was freely trading on an open market. I say this with a full appreciation of our Supreme Court's decision in Pueblo Bancorporation v.
Lindoe, Inc., 63 P.2d 353 (2003), which holds that "fair value" under the dissenters rights7

statute is not the same as "market value" precisely because the minority shareholders are not willing sellers. In a sense, fair value must compensate the minority for being forced out of an ongoing concern, and I understand that this is the principal way in which fair value differs from

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market value. Fair value may also deviate from the share price as a result of things like control premiums, minority discounts5or imbedded or created inefficiencies in the market. When one of my colleagues finds that the fair value of publicly traded stock is, for dissenters' rights purposes, 400% above the price at which the stock was trading, albeit rather thinly,6 on an open and free market, that is a circumstance I cannot ignore in evaluating the fairness of a class settlement calling for a payment of roughly 200% above the trading price. I cannot ignore the possibility, as the Sebesta Group argues, that the market price was $7.00

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precisely because Defendants engaged in a campaign designed to depress the price in order to reduce the cost of going private, behavior which could lead to liability well beyond the $1 . O per O share currently sought under the existing complaint. But contemplating that possibility, and proving it, are two quite different things, and in the end, as I discuss in more detail below, T am satisfied that the discrepancy between Judge McGahey7s appraisal and the settlement price was the product of risks that the settling parties

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The Court in Pueblo Bancorporation expressly rejected the notion that fair value for dissenters' rights purposes should be discounted to reflect that minority shares are less marketable than controlling shares.

6

Counsel for Quimo's represented at one of the fairness hearings that the stock's average daily trading volume before the cash-out merger was on the order of 1,000 shares.

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freely, knowingly and intelligently accepted, after advice and representation by class counsel well within the range of professional reasonableness. The Sebesta Group's objections, when all is said and done, are more about regret for not having participated in the appraisal action, and settler's remorse driven by Judge McGahey's appraisal, than they are about legitimate concerns that the Settlement is fundamentally unfair andor that class counsel was fundamentally ineffective.

1. The Strength of Plaintiffs' Case

I agree with the Sebesta Group that in order to discharge my fiduciary duty to all
class members, I must look not only at the complaint as it exists today, but also must consider the possibility that additional claims could be asserted. Based on counsel's written and oral representations about the nature of these additional claims, they appear to fall into two categories: 1) expanding the factual allegations of breach of fiduciary duty to essentially include the allegations made, and apparently to some degree accepted by Judge McGahey, in the appraisal action; and 2) claims for fraud, both at common law and under state securities laws.7

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But all the claimsexisting and informally proposed-suffer

from some significant risks.

First, because the proposed settlement was submitted before any ruling on class certification, Plaintiffs face the non-trivial hurdle of getting this class certified. I believe the Sebesta Group's additional claims will present new and significant certification issues quite apart from the identity of the representative and counsel. Typicality and commonality as to the new claims for fraud are not at all obvious to me, given that the Sebesta Group itself-having tried unsuccessfully to participate in the appraisal action-may
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be facing a reliance barrier that

At the hearing, counsel for the Sebesta Group conceded that claims under the federal securities acts would be barred by the statute of limitations.

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I ;:

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other class members will not face. For those same reasons, predominance and superiority of the new fraud claims will not be self-evident, and could present difficult certification hurdles. Both the existing and proposed additional claims also face significant substantive hurdles. Let me start with the existing claim of breach of fiduciary duty. For all the reasons I discussed above regarding the fact that Quizno's stock was publicly traded, and putting aside the question of the appraisal action, I think Plaintiffs would have had a very difficult time

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convincing jurors, let alone me at motions, that a cash-out tender offer $1.50 above the trading price somehow rises to the level of a breach of fiduciary duty, especially with the overlay of the business judgment rule. It is true that Plaintiffs' case got considerably easier on this point with Judge McGahey's ruling. But that ruling also created new challenges for Plaintiffs. By focusing on the appraisal action, I believe Plaintiffs increase the chance that their claim might be dismissed in its entirety on the ground that the appraisal action was their exclusive remedy-a

risk which I think was already substantial quite apart from the particular outcome of the

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appraisal action. The additional claims likewise face serious obstacles. First, the Sebesta Group would need to get over the hurdle of obtaining leave to add these additional claims, though T admit, in the event 1 were to reject the Settlement, that would likely not be a difficult hurdle. Both sets of new claims would suffer from the same problems as the existing fiduciary duty claim, which I've already discussed. The new claims would also suffer from new problems. Rased on the Sebesta Group's allegations at the fairness hearings, and especially the second one, my understanding is that the new claims would be grounded on the central

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allegation that Defendants intentionally depressed the trading price of the stock in anticipation of the cash-out merger. As I've already said, making that allegation and proving it are two very different things. Although Judge McGahey seems to have been persuaded to some extent, it is important to understand the full context, and limits, of his opinion. First, precisely because fair value is not synonymous with market value, Judge McGahey's findings have limited value in this case. Moreover, the focus of his opinion was the testimony of the various experts, and in fact, although he found the relationship between

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Quizno's and their experts "incestuous," he also found the opinions of the dissenters' experts to be "substantially flawed." His finding of bad faith was made in connection with the dissenters' request for attorneys fees. There is plenty of space between the proposition that the corporation's position in the appraisal case was made "arbitrarily, vexatiously or not in good faith" under $ 7-1 13-302(2)(b), and the proposition that the corporation's valuation was part of a fraudulent scheme to depress the share price.

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1 concede that Judge McGahey made two quite general findings that are arguably
pertinent to this case and to the new claims the Sebesta Group wishes to assert: 1) Quizno's made loans to Defendants that "were functionally personal loans"; and 2) Defendants failed to disclose to shareholders, in the proxy statement or otherwise, their pre-merger plans for "'kick ass' growth." But it is one thing for an appraisal judge to talk about personal loans and undisclosed growing plans as adding in some vague and undifferentiated way to the fair value of a corporation's shares for dissenters' right purposes, and quite another for Plaintiffs to prove to a jury that Defendants' actions amounted to a breach of fiduciary duty or fraud.

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The expanded breach of fiduciary duty claim, just like the current breach of fiduciary duty claim, will have to overcome the presumptions of the business judgment rule, as well as the presumption that a publicly traded corporation's value is the value placed on it by the marketplace. To succeed on their fraud claims, Plaintiffs would not only have to prove that there were specific loans and growth plans that were undisclosed to shareholders, they would also have to prove that those loans and growth plans were material. Not all loans are bad for corporations, even ones characterized by appraisal judges as "personal." Likewise, not all

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growth is good; the business pages are full of examples of companies that grew their way right into bankruptcy. Plaintiffs would also have to prove that Defendants intentionally failed to disclose the loans and/or growth plans as part of a scheme to depress the cash-out price. And finally, Plaintiffs would have to prove that they relied on the depressed trading price by deciding not to participate in the appraisal action, a proposition which the Sebesta Group almost certainly could not prove given that they attempted to participate in the appraisal action. All of these issues pose serious, potentially fatal, risks to any expanded breach of

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fiduciary duty or fraud claims.

2. The Risk, Expense, Complexity, and Likely Duration of Further Litigation
I've already addressed some specific risks of continuing with the litigation. The ultimate risk is what it always is for a contingent fee plaintiff in any cas-losing, and having to

pay the other side's costs. As discussed in more detail in Part 1V.B.S below, this litigation was settled at a relatively early stage. If I disapprove of the Settlement and allow Plaintiffs to amend their complaint and proceed with the case, Plaintiffs will face the prospects of incurring substantial costs (which they will have to bear if they lose) and significant delays.

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The costs will include the costs of conducting class discovery, perhaps creating subclasses and re-aligning class representatives and counsel, prosecuting the motion for class certification, notifying class members of their right to opt-out, conducting merits discovery, retaining experts, preparing for trial, litigating motions, prosecuting the trial itself and then, if successful, administering claims. As for duration, given the realities of my docket, and what I know from my own experience in presiding over a class action that actually went to jury trial, I can't imagine this case getting to trial sooner than 18 to 24 months after any decision rejecting the Settlement.

3. The Risk of Maintaining Class Action Status Throughout the Trial

I've discussed the class certification problems the added claims will create in Part

IV.B.1 above. Frankly, if the amended claims were certified, 1 do not believe there is much
chance of losing class certification as the case proceeds. After all, we are talking about a static class of shareholders as of a particular valuation date, who in fact were no longer shareholders after that date. This is not the kind of case where the vagaries of class size or homogeneity are likely to cause the Court to reassess certification once, and if, initial certification is achieved. On the other hand, there may very well be a need to create subclasses and to realign class andlor subclass representatives. Whenever that happens, there is always some non-zero chance of losing certification if subclasses deteriorate into so many constellations of interest that overall commonality, typicality, predominance andor superiority are threatened.

4. The Amount Offered in the Settlement
As discussed above, the Settlement will result in every class member receiving an initial payment of $1.00, representing the difference between the $8.50 tendered as part of the

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cash-out merger and the $9.50 offered by the third party. In addition, each class member will receive an incentive payment in an amount that will depend on the final non-appealable result of the appraisal action. If the current judgment in the appraisal action stands, class members will receive a settlement payment of $5.875 per share, making the total payment $14.375 per share O ($8.50 tender price plus $1 . O initial settlement payment plus $4.875 incentive settlement payment). If one thinks of the Settlement only in terms of additional monies above and beyond the

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$8.50 already paid to the minority shareholders, then the total value of the Settlement is $1,857,657 ($5.875 per share times 3 1 6,197 shares) (again, assuming the appraisal value holds, and without deduction for costs and attorneys fees). This represents 24% of the additional amount that would be recovered using the appraisal value as the measure: $24 per share ($32.50 minus the $8.50 already received) times 316,197 shares = $7,588,728. But if one looks at the entire amount the minority shareholders received and will receive, including the original tender of $8.50, the settlement picture is brighter. Under this view, the settlement value is $4,545,332 ($14.375 per share times 316,197 shares), which amounts to 44% of the appraisal value ($32.50 per share times 3 16,197 shares = $10,276,402). Of course, it bears repeating that comparing the settlement value to the appraisal value is somewhat misleading, because these class members, by definition, failed to perfect their dissenters' rights and are therefore not entitled to the "fair value" of their shares.

5. The Extent of the Discovery Completed and the Stage of the Proceedings at the Time of Settlement This Settlement was achieved at a relatively early stage in the development of this litigation. Although some discovery apparently took place, 1 understand that neither side

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deposed any fact witnesses, and that Plaintiffs retained no experts and did not depose any named Defendants. All of these circumstances, combined with the fact that the Settlement was struck before certification, operate to increase the skepticism I must bring to this approval process. On the other hand, the litigants had the benefits, at least in theory, of all the information developed and presented in the ongoing appraisal action. In fact, the Settlement was struck afier the conclusion of the presentation of evidence in the appraisal action, though before Judge McGahey's ruling.

6. The Experience and Views of Counsel

I address class counsel's experience in more detail in P r V1.B below. Suffice it at to say here that class counsel was eminently experienced in shareholder class action litigation, that they were appropriately adversary in their approach to this case, and that they have of course expressed their view that the Settlement is fair, reasonable and adequate. Let me also specifically reject the Sebesta Group's suggestion, made at the second fairness hearing, that class counsel has made some kind of self-interested decision to take their fees and run away from more complex aspects of this case. There is not only no credible evidence to support that assertion, it flies in the face of the economic fact that any contingent class counsel's own interest in fees is always inexorably tied up with their clients' recovery. That is, if existing class counsel really believed, as the Sebesta Group's counsel claims to believe, that this case has a reasonable settlement value of closer to $7.5 million than $1.8 million, existing class counsel would have a palpable economic incentive to pursue the complex claims and recover four times the fees.

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Reasonable lawyers not only can differ in settlement evaluations, they almost always do.

I place more credence in the valuation judgment of class counsel of record than I do in the
valuation judgment of counsel sitting on the sidelines claiming they could do better, especially when they now represent the very class representative who approved this Settlement. Mr. Sebesta, like all class members, knew that this Settlement was being struck before the appraisal action was resolved, and indeed the very uncertainty of the appraisal action no doubt lubricated the Settlement. The Settlement specifically contemplates that the class

members may receive an incremental payment depending on the outcome of the appraisal action,

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and it is significant to me that the sliding scale upon which that incremental payment is based covers an appraisal range of from $15.00 to $45.00.' Judge McGahey7s $32.50 valuation fell well within, and in fact almost exactly at the median, of this range. I also think it is significant that in crafting an example to show how the incremental payment scale works, the parties picked a hypothetical appraisal value of $34.00. Settlement 7 3. Both of these facts establish, and I find, that by entering into the Settlement all class members, and indeed all Defendants, freely chose to accept a range of risk with respect to the pending appraisal action. There is no doubt that Plaintiffs had incomplete information when they struck this deal. Settling parties always do. But there is also no doubt that they knew they had incomplete information, and that they freely and voluntarily decided to forego the considerable cost of acquiring more complete information, and to tie the value of this Settlement to the outcome of the pending appraisal action.

If Mr. Sebesta's original consent to the Settlement was the product of being pressured or

Actually, the Settlement contemplated the possibility of an appraisal value infmitely above $45.00; it just did not decrease the step-percentage recovery for such value.

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misled or otherwise bamboozled by class counsel into a premature and inadvisable resolution, I would have expected the Sebesta Group to call him as a witness and to hear his tale of woe fi-om his own lips. Instead, what we got at the first fairness hearing was Mr. Sebesta's pro se statement that he just didn't think the Settlement was fair once the appraisal number came out. At the second fairness hearing, counsel for the Sebesta Crroup made unsupported arguments about class counsel's failure to communicate the true facts to Mr. Sebesta, but elected not to call Mr. Sebesta as a witness. Under all these circumstances, I find that the Sebesta Group's new found objections to the Settlement, and their related assertions that class counsel sold them out, are a post-hoc attempt to re-allocate the risks each side took in settling this case before the judgment in the appraisal action was announced. Everyone can pick the winning horse after the race.

7. The Presence of a Governmental Participant
I am not aware of any,

8. The Reaction of the Class Members to the Proposed Settlement
As I briefly mentioned above, even after the best notice known to the law of class actions-individual notices (sent to approximately 300 shareholdersj a n d even after the class

members were re-notified and advised of the $32.50 appraisal value found by Judge McGahey, not a single shareholder objected to the Settlement, other than the Sebesta Group, which held shares representing approximately 2.7% of this class. In an imperfect world, there is no doubt some truth to the Sebesta Group's argument that the 97.3% of class members who did not object are not necessarily conveying their ringing endorsement of the Settlement. But the whole

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architecture of Rule 23 is grounded on the notion that such notices, and such overwhelming lack of objections, do in fact matter. That is particularly true here, where one might have expected an outpouring of objections, or at least some objections, after the second notice, if the Sebesta Group's view of the appraisal action as confirming the massive fraud committed by Defendants were shared by any other class members. The lack of any such objections tells me the vast majority of class members likely see the Settlement as I see it-a reasonable allocation of risks associated both

with the uncertainties of the current litigation and the (then) uncertainties of the appraisal action, given the reality that all class members, by definition, failed to participate in the appraisal action.

V.

CONCLUSION ON SETTLEMENT

After considering all the factors detailed above, and the other facts and circumstances surrounding this case, the Settlement and the appraisal action, I find that the Settlement is fair, reasonable and adequate. Class members will receive 100% of the $1.OO per share differential that was the focus of the initial complaint. In addition, if the current appraisal value stands, they will receive an additional $5.875 per share, bringing their total payment (including the $8.50 they already received in the tender offer) to $14.375 per share, or roughly 44% of Judge McGahey's appraised value. This level of settlement is a reasonable reflection of the risks class members faced not only in maintaining, then succeeding, in this class action, but also in predicting the outcome of the appraisal action. I recognize that class members will be receiving considerably less in the Settlement than the plaintiffs in the appraisal action will receive if the appraisal value stands, especially considering that the appraisal plaintiffs will recover their costs and attorneys fees from

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Quizno's, while the class members in this case will have to pay their costs and fees out of the settlement proceeds. But that, of course, is a result first of the class members' failure to timely perfect their appraisal rights, and second of their decision to settle this case before the results of the appraisal action were known. Given the former, I think the latter was entirely reasonable. Plaintiffs' Motion to Approve Final Settlement is GRANTED.

VI.

CLASS COUNSEL'S REQUEST FOR COSTS AND FEES Class counsel seek $8,995 in costs, and fees in the amount of 25% of the payments

(initial and incentive) to be made under the Settlement. For the reasons articulated below, I find that the requested costs and fees were incurred, were necessary, and are reasonable in amount, and therefore order that they be paid to class counsel out of the common fund of Settlement proceeds.

A.

Costs No one has lodged any objections to class counsel's request to be reimbursed for

0

a total of $8,995 in advanced costs. Indeed, in a case of this kind these costs seem quite low (though 1 also recognize they are low because the case was settled so early). With the exception of the travel expenses, the costs class counsel seek (and which are listed in Exhibit C to the Motion to Approve Final Settlement and Award Attorneys7Fees, as supplemented at the second fairness hearing) are on their face necessary and reasonable in amount. As for the travel costs, they seem appropriate given that class counsel is from New York, and that 1 required them to appear for a second fairness hearing.

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B.

Attorneys Fees No one has lodged any objections to the fees class counsel seek, and I find those

fees are eminently reasonable under either the lodestar approach or the percentage approach. Given the remaining uncertainties in the final appraisal number, 1 believe a percentage award is the better approach. Class counsel's fees, calculated on an hourly basis, are approximately $207,000. Class counsel seek a percentage award of 25% of the amounts to be paid under the Settlement (that is,

0

the initial $1.00 per share payment plus the per share incentive payment). Assuming the appraisal value holds, this will result in a fee of $464,019 (25% of $1,856,076). That would be the equivalent of a so-called "lodestar multiplier" of 2.24. Both that lodestar multiplier and the 25% number are reasonable under all of the facts of this case. The rules and case law in Colorado direct a trial court to consider several factors in deciding the reasonableness of any fee: 1) the time and labor required, the novelty and difficulty of the issues involved, and the skill needed to perform the legal services; 2) the likelihood, if

0

apparent to the client, that the acceptance of the particular employment will preclude other employment by the lawyer; 3) the fee customarily charged in the locality for similar legal services; 4) the amount involved and the results obtained; 5) the time limitations imposed by the client or by the circumstances; 6) the nature and length of the professional relationship with the client; 7) counsel's experience, reputation and ability, and 8) whether the fee is fixed or contingent. Rule 1.5(a), Colo. K. Professional Conduct; Tullitsch v. Child Support Serv. Inc.,

926 P.2d 143, 147 (1996).
The general rule is that in order to assess the reasonableness of fees, the starting point is to consider whether the lodestar itself is reasonable-that is, whether the billings rates and hours

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spent are reasonable. See, e.g., Spensieri v. Furmers Alliance Mut. Ins. Co., 804 P.2d 268 (Colo. App. 1990). Unfortunately in this case, although class counsel have provided me with a summary of the hours spent, T cannot make meaningfd findings either on the hours spent or the billing rates, since, as far as can tell from the submitted materials, I have no detail on either. Alternatively, in common fund cases such as this, courts have recognized that either a multiplier to the lodestar, or a straight percentage of the recovery, may be appropriate, again considering all the circumstances of the case and of the representation. Indeed, the weight of the

* *

authority seems to be that the percentage approach is superior to the lodestar multiplier approach in most common find cases. See, e.g., Gunther v. Ridgewuy Energy Corp., 223 F.3d 190, 198

(3rd Cir. 2000); NEWBERG, supra, at

9

14.7. To consider the reasonableness of the amounts

under either approach, let me specifically address all the factors set forth in Rule 1.5(a). This case did not consume a significant amount of class counsel's time or labor, and as shareholder class action litigation goes it was not particularly complex or difficult. There was no evidence to suggest that class counsel was forced to refrain from taking other cases. Although there was no evidence presented on this point, the reported cases do suggest that in shareholder class action cases a percentage recovery in the range of 20% to 40% is very common. See, e.g.,

Gottlieb v. Barry, 43 F.3d 474 (loth Cir. 1994); In re M.D.C. Holdings Sec. Litig., 1990 Fed.
Sec. L. Rep. 95,474 (S.D. Cal. 1990). The 25% class counsel seek here is definitely on the low side. Similarly, if one uses the lodestar approach, multipliers of between 2 and 4 are not uncommon, See, e.g., Rubin v. Concord Asselss Group, Inc., 1991 WL 275757 (S.D.N.Y. 1991) ("[iln recent years, multipliers of between 3 and 4.5 have become common"). Here, ussuming the lodestar itself was reasonable (something, as discussed above, I must assume for lack of

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detail), the 2.24 multiplier in this case would certainly be reasonable. Of course, if the appraisal value does not hold, class counsel's percentage fees would be lower, as would the lodestar multiplier. In fact, in the worst case, if the appraisal value ended up being $9.50 or less, class counsel would recover only $79,049.25 in fees (25% of the initial payment of $3 16,197), which would be aJractiona1 lodestar multiplier, meaning class counsel would not even recover their hourly fees, let alone any multiplier, The amount involved in this case is discussed in detail in Part 1V.A above. Although I

a

talked about two ways of viewing the amount of the Settlement, class counsel concedes that it would not be appropriate to base any percentage fee award on amounts that include the $8.50 already unconditionally paid to the minority shareholders. Thus, the 25% requested award would be based on the aggregate of future payments under the Settlement: the $1 .OO per share initial payment, and the incentive payment based on the ultimate appraisal value. There was no evidence of any particular time limitations imposed on class counsel by any class members or by any circumstances. Iikewise, there was no evidence that class counsel enjoyed any professional relationship with any class member prior to the representation in this case. Class counsel are experienced class action litigators. They consist of two law firmsWechsler and Harwood, I,LP, a New York-based firm, and Dyer & Shuman, LLP, as local counsel. Both have significant shareholder class action experience, and both have been praised by federal and state judges, in the context of fee awards and in the context of winning courtordered bids to represent plaintiffs in class actions. See firm r6surnks attached as Exhibit A to the motion for approval.

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Finally, I assume class counsel represented the class on a contingent fee basis, though there is no discussion of this factor in the motion and, as far as I could see, no copy of the fee agreement submitted as an exhibit or attachment. At the first fairness hearing, I do recall class counsel representing that the arrangement was indeed a contingent one, though my notes do not reflect the percentage of the contingent fee or fees. Considering all these factors, and all the other circumstances of this case, I find that a percentage fee of 25% of the payments to be made to the class under the Settlement is a reasonable fee. At the high end, that percentage would translate to a quite modest lodestar multiplier of 2.24. At the low end, class counsel would be getting roughly one-third of their actual hourly fees. Rather than using a fixed lodestar multiplier, I think it is better in this case to award fees on the 25% basis. It is entirely appropriate in this case, as class counsel itself recognizes by seeking a percentage award, for counsel to share in their client's risks-in directions-regarding the final number from the appraisal action. both

VII.

CONCLUSION

The Stipulation of Settlement is HEREBY APPROVED and made an Order of this
Court. Defendants shall, within 20 days after the date of this Order, pay class counsel, out of the initial payment of $3 16,197, a total of $8,995 in costs and $79,049 in fees. The balance of $228,153 shall be paid to class members, also within 20 days affer the date of this Order, in an equal amount per share owned as of December 2 1,2001. Once the appraisal action is final, Defendants shall, within 20 days thereafter, make an additional payment to class counsel in the amount of 25% of the total of incentive payments due

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under the Settlement, and shall pay the balance of 75% of the incentive payments to class members in an equal amount per share owned as of December 2 1,2001. This case is HEREBY DISMISSED WITH PREJUDICE.

DONE THIS

'x~

A

DAY OF

6oQ I
A*

,2004.

BY THE COURT:

Morris B. Hoffman District Court Judge

cc: M. Houston K. Shuman S. Kaufmann F, Cohen M. Berger J. Horowitz