In Re Phar-Mor, Inc. Securities Litigation. Ivan Bowen, II Robert J. Carr Vernon L. Carson Merle T. Carson Robert M. Chase Stephen M. Ehrlichman Robert J. Frisby Ronald Goldberg Cecile Guthman Howard D. Hirsh Revocable Trust Walter Jacobson Diane Dybsky Jacobson Robert A. Judelson Edward L. Lembitz Profit Sharing Plan Marc Levenstein Angela Levenstein Maurice Sporting Goods, Inc. Protective Insurance Company Robert A. Riesman, Jr. Phillip E. Rollhaus, Jr. Jeanette M. Shea Trust Spiegel, Inc. Supplemental Employee Retirement Plan for the Benefit of John J. Shea Jack Shire Helen Shire Bernard M. Sussman Revocable Trust Glen R. Traylor Union League Boys & Girls Clubs Richard E. Weiss John B. Whitted, Jr. Stein Roe Investment Trust Olympus Private Placement Fund, L.P. Vencap Holdings (1987) Pte Ltd. Odyssey Partners, L.P. Kemper Total Return Fund Kemper Growth Fund Kemper Small Capitalization Equity Fund Kemper Investment Portfoliosgrowth Portfolio Kemper Investment Portfoliostotal Return Portfolio Kemper Investo
Docket: 98-3206
Court: Court of Appeals for the Third Circuit; March 30, 1999; Federal Appellate Court
Ivan Bowen, II and other plaintiffs (collectively "Bowen plaintiffs") appealed a January 13, 1998 order from the U.S. District Court for the Western District of Pennsylvania, which granted Giant Eagle, Inc. and other defendants (collectively "Giant Eagle defendants") a declaration that they had not violated a settlement agreement with the Bowen plaintiffs. The district court's ruling aimed to enforce that agreement. The case stems from Phar-Mor, Inc.'s announcement in 1992 of a $350 million accounting charge due to alleged fraud by its employees, leading to its bankruptcy and resulting in multiple lawsuits from investors, including those known as "Rule 144A purchasers," who acquired $110 million in stock during a private placement in October 1991. The appellate court determined that the district court lacked subject matter jurisdiction over the motion, leading to a vacate and remand of the case.
Four groups of plaintiffs, identified as the T. Rowe Price plaintiffs, MFS plaintiffs, Bowen plaintiffs, and Allstate Insurance Company, filed individual complaints in the Phar-Mor multidistrict litigation. The Bowen plaintiffs invested approximately $83 million in a private placement offering and initiated a securities fraud lawsuit against multiple parties, including Phar-Mor and Giant Eagle, in the Northern District of Illinois. Following a transfer order on February 17, 1993, the case was consolidated in the Western District of Pennsylvania.
In 1995, the Rule 144A purchasers reached individual settlements with Giant Eagle, culminating in a Settlement Agreement with the Bowen plaintiffs on August 4, 1995. Under this agreement, Giant Eagle agreed to pay the Bowen plaintiffs $9.09 per dollar invested, totaling over $7.5 million, and included a "most favored nations" clause ensuring that if Giant Eagle settled with any other Rule 144A purchaser on better terms, the Bowen plaintiffs would also receive those terms.
The Settlement Agreement was approved by the Pennsylvania district court, which dismissed the action against Giant Eagle with prejudice. Post-dismissal, Giant Eagle paid the Bowen plaintiffs the agreed amount. After Giant Eagle settled with all other Rule 144A purchasers, the Bowen plaintiffs sought information regarding these settlements to assess potential additional payments under the most favored nations clause. Alleging a breach of this clause due to insufficient information provided by Giant Eagle, eighteen of the original Bowen plaintiffs filed a lawsuit in Illinois state court on September 26, 1997, which was later removed to the Northern District of Illinois. In response, Giant Eagle filed a motion on October 6, 1997, in the Pennsylvania district court that had approved the original Settlement Agreement.
The motion to enforce filed by the Giant Eagle defendants sought a declaration of compliance with the Settlement Agreement and requested enforcement of a previous dismissal order from August 4, 1995. The Bowen plaintiffs countered that the district court lacked subject matter jurisdiction to consider this motion. In a January 13, 1998 order, the district court granted the motion, determining that the Giant Eagle defendants had not breached the most favored nations clause and reaffirming its earlier dismissal order. The court did not address the jurisdictional arguments raised by the Bowen plaintiffs. Subsequently, a one-sentence order on March 3, 1998, denied the Bowen plaintiffs' motion for reconsideration, leading them to appeal.
The court's jurisdiction was based on 28 U.S.C. 1291. The appellate court reviews the issue of subject matter jurisdiction de novo. The Bowen plaintiffs argued that the district court improperly exercised jurisdiction over the enforcement motion, referencing the Supreme Court's decision in Kokkonen v. Guardian Life Insurance Co. They contended that the dismissal order's language did not sufficiently incorporate the Settlement Agreement to establish jurisdiction. Giant Eagle argued that the court's language was adequate for incorporation and that any ambiguity should defer to the court's intent to retain jurisdiction.
Ultimately, the appellate court agreed with the Bowen plaintiffs, concluding that the district court lacked subject matter jurisdiction to rule on the motion to enforce. Citing Kokkonen, the court emphasized that a federal district court cannot enforce a settlement agreement unless the obligation to comply is explicitly included in the dismissal order or there is an independent basis for jurisdiction. In this case, the court found that the dismissal order did not meet those criteria, and therefore, the district court had no jurisdiction to enforce the Settlement Agreement.
Parties' obligation to comply with the Settlement Agreement was not included in the dismissal order, as it lacked a provision retaining jurisdiction and did not incorporate the agreement's terms, including the most favored nations clause. References to the settlement in the dismissal order were deemed insufficient for incorporation, as established in previous cases (e.g., Miener, Scelsa, Hagestad, Lucille). Despite district court approval of the Settlement Agreement, mere approval does not confer subject matter jurisdiction for enforcement, according to Kokkonen. Arguments for deferring to the district court's intent were rejected, as unexpressed intent cannot confer jurisdiction. The remaining discussions about potential due process violations were deemed unnecessary since the district court lacked jurisdiction to enforce the motion. Consequently, the court vacated the district court's order and remanded with instructions to dismiss. Additionally, Giant Eagle was implicated due to its controlling interest in Phar-Mor, evidenced by shared directors and significant ownership of voting shares by its subsidiary.
