By Tom Hals
WILMINGTON, Del, Feb 6 (Reuters) - A novel proposal to
subject class action and derivative lawsuit settlements to a
"market test" has been rejected by the same Delaware judge who
initially floated the idea.
Travis Laster of the Court of Chancery ruled that objectors
would not be able to tear up a legal settlement over a Canadian
Imperial Bank of Commerce investment fund and jumpstart the
litigation in a bid for a bigger recovery.
Laster had proposed in May that if the objectors really
thought the case was settled too cheaply, then essentially they
should put their money where their mouth was.
He said he would allow them to take over the case but they
had to come up with the cash to cover the original settlement.
That way, if they did worse in continuing the litigation, the
value of the original settlement would be preserved.
The lawsuit was a derivative action, meaning that the
plaintiffs were stepping into the shoes of the investment fund.
Any money received through a settlement or a judgment would be
paid into the fund and the partners would only benefit
indirectly. In his May opinion, Laster suggested the same
procedure could be used in class actions.
Laster viewed the proposal as a way to subject a settlement
to an objective market test, rather than the views of a judge.
To the surprise of many involved, the objectors to the CIBC
settlement accepted his idea and said they would provide a bond
and planned to proceed with the litigation.
The defendants objected and had argued for Laster to approve
the original settlement.
On Wednesday, Laster rejected the objectors' proposal in an
11-page ruling. In part, Laster said the proposal fell short
because the objectors relied on a litigation finance firm,
Burford Capital, which had said it viewed the case as a business
development opportunity and wanted to promote Laster's idea.
While Laster found the objectors' proposal superior to the
original settlement, he wrote that the outsize recovery for
Burford and some objectors was not in the interest of the
investment fund.
On the first $10 million recovered beyond the original
settlement, Burford and some of the objectors who also provided
financing would have received 43 percent.
Burford said in a statement it was disappointed with the
ruling, but said the Laster's consideration of the finance on
the merits showed "that litigation finance has clearly come of
age in Delaware."
The case is James Forsythe v. CIBC ESC Fund Management et
al, Delaware Court of Chancery, No. 1091.
For the plaintiffs: Seth Rigrodsky of Rigrodsky & Long and
Herbert Milstein of Cohen Milstein Sellers & Toll.
For the defendants: Stephen Norman of Potter Anderson &
Corroon and Kenneth Nachbar of Morris, Nichols Arsht & Tunnell.
For the objectors: Stephen Jenkins of Ashby & Geddes and
Steven Mintz of Mintz & Gold.
For the nominal defendant CIBC Employee Private Equity Fund
(U.S.): Henry Gallagher of Connolly Gallagher.
For Burford Capital Ltd: Gregory Williams of Richards Layton
& Finger.
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