Paulson v. McKowen et al

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Chief Judge Philip A. Brimmer
Civil Action No. 19-cv-02639-PAB-NYW
JOHN PAULSON, Individually and on Behalf of all Others Similarly Situated,
Plaintiff,
v.
JOHN R. MCKOWEN,
WAYNE HARDING, and
TIMOTHY BEALL,
Defendants.
ORDER
This matter is before the Court on the Revised Unopposed Motion of Plaintiff for
Preliminary Approval of Settlement, Certification of Class, and Appointment of Class
Representative and Class Counsel [Docket No. 157].
I. BACKGROUND
A. Factual Background
Plaintiff brings a securities class action against defendants. Docket No. 56.
Plaintiff’s amended complaint alleges that McKowen, Harding, and Beall (collectively,
the “individual defendants”) were officers of defendant Two Rivers Water and Farming
Company (“Two Rivers”). Docket No. 157 at 5.
Plaintiff alleges that Two Rivers and McKowen formed GrowCo, Inc. (“GrowCo”)1
1 GrowCo was in bankruptcy when this action was initiated and is not a party to
this action. Docket No. 157 at 5 n.3. On July 6, 2021, the Bankruptcy Court granted
the United States Trustee’s and Debtor’s Stipulated Motion for Entry of Order
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to “capitalize on [the] burgeoning marijuana industry in Colorado.” Docket No. 56 at 5,
¶ 17. To support their operations, defendants offered GrowCo securities to investors
(the “Offerings”). Id. at 6, ¶ 28. With the Offerings, defendants provided “sales
presentations, memoranda of terms, exchange note purchase agreements, exchange
agreements, investor questionnaires, and other documents . . . which purported to
make material disclosures to investors about GrowCo and the Securities Offerings.” Id.,
¶ 27. Plaintiff alleges that the Offering documents omitted material information about
McKowen, including a 1987 disciplinary action, fine, and suspension with the National
Association of Securities Dealers, a 1995 bankruptcy, and a 1992 default judgment in
connection with a complaint before the Indiana Securities division. Id. at 7-8, ¶¶ 30–41.
B. Procedural Background
Defendants dispute these allegations and deny liability for the claims. McKowen
moved to dismiss the complaint, Docket No. 73, on the basis that the inf ormation
underlying the allegations against him “concerned the distant past, was not required to
be disclosed, and was not material to investors’ decisions to purchase GrowCo
securities.” Docket No. 157 at 6. This motion was pending when the parties and
defendants’ insurance carrier, Starstone Specialty Casualty Insurance Company
(“Starstone”), agreed to engage in mediation before retired Denver District Court Judge
William Meyer. Id. at 2-3. The parties ultimately reached a settlement in August 2020,
id. at 7, and on October 9, 2020 plaintif f filed an unopposed motion for preliminary
approval of the settlement, approval of the notice to the class, preliminary certification
Dismissing Chapter 11 Case. In re GrowCo., Inc., No. 19-10512, Docket No. 263 (D.
Colo. Bankr.).
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of the class for the purposes of settlement, appointment of class counsel, and the
scheduling of a fairness hearing. See Docket No. 131.
On January 25, 2021, the assigned magistrate judge granted a motion to
withdraw by counsel for Two Rivers and issued an order to show cause why she should
not impose sanctions against Two Rivers for failure to defend in the absence of legal
representation. Docket No. 137 at 6. On February 24, 2021, the Court entered an
order informing the parties that, because granting the motion for preliminary approval of
the class action settlement would trigger proceedings that necessitated Two Rivers’s
participation, through counsel, the Court would not rule on the motion for preliminary
approval until counsel entered an appearance on behalf of Two Rivers. Docket No.
139. On March 10, 2021, the Court entered an order notif ying the parties that the Court
would deny the motion for preliminary approval without prejudice if Two Rivers did not
enter an appearance on or before March 16, 2021. Docket No. 145.
On March 15, 2021, plaintiff filed a motion for a status conference regarding Two
Rivers’s failure to hire counsel and failure to respond to the order to show cause.
Docket No. 146. Plaintiff requested that the Court hold a status conf erence and, if the
status conference could not be held before March 16, that the Court hold in abeyance a
ruling on the motion for preliminary approval until the Court held a status conference.
Id. at 5. On April 6, 2021, plaintiff filed a motion to dismiss Two Rivers as a party.
Docket No. 149. On June 29, 2021, the Court granted plaintiff’s motion to dismiss Two
Rivers without prejudice. Docket No. 153 at 11. The Court also granted plaintiff leave
to file a revised motion for preliminary approval in light of Two Rivers’ dismissal, Docket
No. 154, which plaintiff subsequently filed. Docket No. 157.
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II. PRELIMINARY APPROVAL OF CLASS ACTION SETTLEMENT
Approval of a class action settlement under Federal Rule of Civil Procedure 23
takes place in two stages. In the first stage, the Court preliminarily certifies a settlement
class, preliminarily approves the settlement agreement, and authorizes that notice be
given to the class so that interested class members may object to the fairness of the
settlement. In the second stage, after notice is given to the putative class, the Court
holds a fairness hearing at which it will address (1) any timely objections to the
treatment of this litigation as a class action, and (2) any objections to the fairness,
reasonableness, or adequacy of the settlement terms. Fed. R. Civ. P. 23(e)(2); see,
e.g., McReynolds v. Richards-Cantave, 588 F.3d 790, 803 (2d Cir. 2009).
“Preliminary approval of a class action settlement, in contrast to final approval, is
at most a determination that there is . . . ‘probable cause’ to subm it the proposal to
class members and hold a full-scale hearing as to its fairness.” In re Crocs, Inc. Sec.
Litig., No. 07-cv-02351-PAB-KLM, 2013 WL 4547404, at *3 (D. Colo. Aug. 28, 2013)
(quoting Davis v. J.P. Morgan Chase & Co., 775 F. Supp. 2d 601, 607 (W .D.N.Y.
2011)). A proposed settlement of a class action should therefore be preliminarily
approved where it “appears to be the product of serious, informed, non-collusive
negotiations, has no obvious deficiencies, and does not improperly grant preferential
treatment to class representatives.” See In re Motor Fuel Temperature Sales Practices
Litig., 286 F.R.D. 488, 492 (D. Kan. 2012) (internal quotation marks omitted). Although
the standards for preliminary approval of a class action settlement are not as stringent
as they are in the second stage, id., the standards used in the second stage inform the
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Court's preliminary inquiry. Therefore, it is appropriate to review those standards.
District courts have broad discretion when deciding whether to certify a putative
class. Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338, 350 (2011); Shook v. Bd. of Cnty.
Comm’rs of the Cnty. of El Paso (“Shook I”), 386 F.3d 963, 967 (10th Cir. 2004). A
district court may only certify a settlement class if it is “satisfied, after a rigorous
analysis,” that the requirements of Rule 23 are met, and frequently a district court’s
“‘rigorous analysis’ will entail some overlap with the merits of the plaintiff’s underlying
claim.” Dukes, 564 U.S. at 350-51; see also In re Initial Pub. Offerings Sec. Litig., 471
F.3d 24, 41 (2d Cir. 2006) (holding that “the obligation to make [Rule 23] determinations
is not lessened by overlap between a Rule 23 requirement and a merits issue, even a
merits issue that is identical with a Rule 23 requirement”).
A district court may certify a class action if the proposed class satisfies the
prerequisites of Fed. R. Civ. P. 23(a) as well as the requirements of one of the three
types of classes identified in Rule 23(b). In the typical case where the plaintiff applies
for class certification, plaintiff bears the burden of proving that Rule 23’s requirements
are satisfied. DG ex rel. Stricklin v. Devaughn, 594 F.3d 1188, 1194 (10th Cir. 2010)
(citing Shook I, 386 F.3d at 968). Here, plaintiff moves for certification for the purposes
of settlement and the remaining defendants do not oppose the motion. Docket No. 157
at 1. Rule 23(a) requires that (1) the class be so numerous that joinder is impracticable;
(2) there are questions of law or fact common to the class; (3) the claims of the
representative party are typical of those of the class; and (4) the representative parties
will fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a); In re
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Literary Works in Elec. Databases Copyright Litig., 654 F.3d 242, 249 (2d. Cir. 2011).
A class action may be sustained if these requirements are satisfied and the class meets
the requirements of one of the categories of Rule 23(b). Fed. R. Civ. P. 23(b).
Plaintiff asks the Court to certify a settlement class under Rule 23(b)(3). Docket
No. 157 at 16, 19. Under that provision, plaintiff must show that “questions of law or
fact common to class members predominate over any questions affecting only
individual members” and that a class action “is superior to other available methods for
fairly and efficiently adjudicating the controversy.” Fed. R. Civ. P. 23(b)(3). In
determining predominance and superiority under Rule 23(b)(3), the Court considers the
following factors: (A) the class members’ interests in individually controlling the
prosecution or defense of separate actions; (B) the extent and nature of any litigation
concerning the controversy already begun by or against class members; (C) the
desirability or undesirability of concentrating the litigation of the claims in the particular
forum; and (D) the likely difficulties in managing a class action. Fed. R. Civ. P.
23(b)(3)(A)–(D). To certify a settlement class, the Court need not inquire whether the
case, if tried, would present difficult management problems under Rule 23(b)(3)(D).
Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997). However, all of the other
Rule 23 requirements apply and demand heightened attention in the settlement context
because the Court generally lacks an opportunity to adjust the class as the case
unfolds. Id. If the proposed settlement class satisfies the requirements of Rules 23(a)
and (b), then the Court must separately evaluate whether the settlement agreement is
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“fair, reasonable, and adequate” under Rule 23(e).2 Fed. R. Civ. P. 23(e)(2); In re Am.
Int’l Grp., Inc. Sec. Litig., 689 F.3d 229, 238 (2d Cir. 2012).
If plaintiff meets the requirements for preliminary approval, the Court will direct
notice to all class members who would be bound by the proposal and hold a fairness
hearing to determine if
it is fair, reasonable, and adequate after considering whether: (A) the
class representatives and class counsel have adequately represented the
class; (B) the proposal was negotiated at arm’s length; (C) the relief
provided is for the class is adequate, taking into account: (I) the costs,
risks, and delay of trial and appeal; (ii) the effectiveness of any proposed
method of distributing relief to the class, including the method of
processing class-member claims; (iii) the terms of any proposed award of
attorney’s fees, including timing of payment; and (iv) any agreement
required to be identified under Rule 23(e)(3); and (D) the proposal treats
class members equitably relative to each other.
Fed. R. Civ. P. 23(e)(2). Though the standards for preliminary approval are not as
stringent as those for final approval, the final approval standards inform the Court’s
preliminary inquiry and thus it is appropriate to review them.
A court’s review for final approval is to “focus[] on whether ‘(1) the settlement
was fairly and honestly negotiated, (2) serious legal and factual questions placed the
litigation’s outcome in doubt, (3) the immediate recovery was more valuable than the
mere possibility of a more favorable outcome after further litigation, and (4) [the parties]
believed the settlement was fair and reasonable.’” Elna Sefcovic, LLC v. TEP Rocky
Mountain, LLC, 807 F. App’x 752, 757 (10th Cir. 2020) (unpublished) (quoting Tennille
v. W. Union Co., 785 F.3d 422, 434 (10th Cir. 2015)).
2 The Supreme Court in Amchem cautioned that the fairness inquiry under Rule
23(e) does not supplant the Rule 23(a) and (b) requirements, but instead “function[s] as
an additional requirement.” 521 U.S. at 621.
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III. ANALYSIS OF PROPOSED SETTLEMENT AGREEMENT
A. Settlement Agreement
The motion for preliminary approval seeks certification of a settlement class
consisting of
All persons or entities who currently hold claims based on Securities of
GrowCo, and who purchased or otherwise acquired the securities through
Offerings listed below, during the time period beginning October 2014
through December 2017 (the “Class Period”), and suffered Alleged
Losses. For the avoidance of doubt, persons or entities who purchased or
otherwise acquired the securities during the Class Period who have
assigned the securities to VitaNova Partners, LLC are not excluded as
Class Members by virtue of such assignment:
Name Type Approximate
Amount Raised
Date Range
GrowCo Partners 1, LLC Equity $ 3,349,151 December 2014 - January 2015
$4 Million Note Debt $ 4,000,000 March 2015 - September 2015
GCP Super Units LLC Equity $ 5,297,157 July 2015 - October 2017
$1.5 Million Note Debt $ 100,000 April 2016
$6 Million Note Debt $ 6,000,000 March 2016 - July 2016
$7 Million Note Debt $ 2,977,000 January 2016 - September 2017
$2 Million Note Debt $ 1,080,000 February 2017 - September 2017
$2 Million Note Debt $ 440,000 June 2017
Docket No. 157 at 3; see also id. at 31-32, 34, ¶¶ 1.i, 1.s. There are no subclasses.
The following persons are excluded from the Class:
(1) the Defendants; (2) the officers and directors of Two Rivers and
GrowCo during the Class Period as set forth in Exhibit E to the Settlement
Agreement for securities purchased at the time or after they were officers
or directors; (3) any judge or judicial officer who may hear any aspect of
this Action and his or her law clerks; and (4) except as provided in the
Settlement Agreement, all persons or entities released in the Settlement.
Also excluded from the Settlement Class are the persons and/or entities
who validly request exclusion from the Settlement Class within the time
period set by the Court in the Preliminary Approval Order.
Id. at 3-4.
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In exchange for the release of all claims of the Settlement Class against all
defendants, the Settlement Agreement provides that Starstone will pay $1.5 million for
the benefit of the Class. Id. at 7. The parties agree that this amount provides a
“substantial and immediate benefit to the Class” and is appropriate given that GrowCo
is in bankruptcy and Two Rivers’s financial situation makes it unlikely that it would be
able to satisfy a judgment. Id. at 8. The parties arrived at this amount after reviewing
defendants’ insurance policy, which covers claims up to $2 million minus the cost of the
defense. Id. The $1.5 million figure “represents substantially all of the remaining
insurance coverage net of defense costs to date.” Id. Plaintiff also considered that, if
he persisted with litigation, “the amount of insurance coverage available to satisfy a
judgment would be substantially less than the Settlement because as defense costs
increase, available funds for settlement decrease.” Id.
Class Members who wish to object to the fairness, reasonableness, or adequacy
of the Settlement Agreement may do so up to fourteen days before the fairness
hearing, and subject to the requirements set out in this Order. Id. at 38, ¶ 6. Class
Members who fail to object shall be deemed to have waived any objections. Id. In
addition, potential Class Members who wish to exclude themselves from the Class must
submit a written statement requesting exclusion no later than twenty-one days after the
date on the notice pursuant to the term s of the notice. Id. at 39, ¶ 8.
The Claims Administrator, selected by Class Counsel, will administer the process
of receiving, reviewing, and denying claims under Class Counsel’s supervision and will
determine each claimant’s pro rata share of the Settlement Amount upon a Class
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Member’s showing of loss. Id. at 40, ¶¶ 12–14. The $1.5 million Settlement Fund will
be used to pay, among other things, attorneys’ fees and expenses, costs and expenses
reasonably and actually incurred in connection with locating and providing notice to
potential Class Members, assisting with filing claims, and administering and distributing
the Settlement Fund. Id., ¶ 15.
B. Numerosity
Rule 23(a)(1) requires that the class membership be sufficiently large to warrant
a class action because the alternative of joinder is impracticable. Fed. R. Civ. P.
23(a)(1). Some courts have held that numerosity may be presumed after a certain
number; however, the Tenth Circuit has never adopted a minimum presumption of
numerosity. Trevizo v. Adams, 455 F.3d 1155, 162 (10th Cir. 2006) (upholdin g district
court ruling that a group of eighty-four class members was insufficient to warrant class
certification).
Here, the proposed Class Counsel has obtained a list of all known GrowCo
investors in the Offerings from GrowCo’s bankruptcy counsel. Docket No. 157 at 17.
This list “includes the names of over 80 investors,” which the parties believe “easily
satisfies numerosity.” Id. Given Trevizo, the sheer number of Class Members does not
create a presumption of numerosity; however, given that defendants do not object to
this estimate and that the Tenth Circuit has found fewer potential claimants can satisfy
numerosity, see, e.g., Rex v. Owens ex rel St. of Okla., 585 F.2d 432, 436 (10th Cir.
1978) (“Class actions have been deemed viable in instances where as few as 17 to 20
persons are identified as the class.”), the Court agrees that joinder of at least 80
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investors would be impracticable and that the numerosity requirement is met.
C. Commonality
Rule 23(a) requires a district court to ensure that “there are questions of law or
fact common to the class.” Fed. R. Civ. P. 23(a)(2). Factual differences in the claims of
the individual class members should not result in the denial of class certification where
common questions of law exist. Devaughn, 594 F.3d at 1195. Commonality requires
that the plaintiff demonstrate that the class members have “suffered the same injury”
such that the claims of the class are based on a common contention and that the
determination of the truth or falsity of this contention “will resolve an issue that is central
to the validity of each one of the claims in one stroke.” Dukes, 564 U.S. at 350. In
other words, plaintiffs must have a common question of fact or law that will connect
many individual claims to the relief sought by the class. Ellis v. Costco Wholesale
Corp., 657 F.3d 970, 981 (9th Cir. 2011). Even a single common question will satisfy
commonality. Dukes, 564 U.S. at 359.
Here, there are many common questions of law and fact. The parties explain
that plaintiff’s claims concern common alleged omissions from GrowCo offering
documents about Mr. McKowen’s background and there are questions about whether
the alleged omissions were material to GrowCo investors’ decisions to invest. Docket
No. 157 at 17. These issues of fact and law are common to all Class Members’ claims.
Thus, although the alleged omissions and misrepresentations may have impacted
Class Members differently, whether these omissions and misrepresentations are
material is a factual and legal question that is common to the entire class and is
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capable of class-wide resolution. Dukes, 564 U.S. at 350 (“What matters to class
certification . . . is not the raising of common ‘questions’ – even in droves – but rather,
the capacity of a class-wide proceeding to generate common answers apt to drive the
resolution of the litigation.” (citation omitted)). The relief in this case will not require an
examination of unique circumstances, apart from the standard Claims Administrator
determination and calculation. Accordingly, the Court finds that the proposed Class
satisfies the commonality requirement. Fed. R. Civ. P. 23(a)(2).
D. Typicality
Rule 23(a)(3) requires that the “claims or defenses of the representative parties
are typical of the claims or defenses of the class.” Fed. R. Civ. P. 23(a)(3). The
typicality requirement ensures that the absent class members are adequately
represented by the lead plaintiff such that the interests of the class will be fairly and
adequately protected in their absence. Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147,
157 n.13 (1982). Typicality “is satisfied when each class member’s claim arises from
the same course of events, and each class member makes similar legal arguments to
prove the defendant’s liability.” Marisol A. v. Giuliani, 126 F.3d 372, 376 (2d Cir. 1997).
The interests and claims of the lead plaintiff and the class members need not be
identical to satisfy typicality and, provided the claims of the lead plaintiff and class
members are based on the same legal or remedial theory, differing fact situations of the
class members do not defeat typicality. Devaughn, 594 F.3d at 1199.
Nevertheless, “it is well-established that a proposed class representative is not
‘typical’ under Rule 23(a)(3) if ‘the representative is subject to a unique defense that is
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likely to become to become a major focus of the litigation.’” Marcus v. BMW of N. Am.,
LLC, 687 F.3d 583, 599 (3d Cir. 2012).
The parties explain that there is no conflict of interest between plaintiff and the
proposed Class. Plaintiff and the proposed Class Members “suffered losses in
connection with their investments in GrowCo securities during the Class Period.”
Docket No. 157 at 17. Therefore, they share the same interest in maximizing their
recovery from defendants. Id. (citing In re Polaroid ERISA Litig., 240 F.R.D. 65, 77
(S.D.N.Y. 2006) (“Where plaintiffs and class members share the common goal of
maximizing recovery, there is no conflict of interest between the class representatives
and other class members.”)). Plaintiff also argues, “Plaintiff and Class Counsel have,
and will continue to, vigorously protect the interests of the Class. Plaintiff and Class
Counsel devoted significant time and resources to initiating, prosecuting, and
negotiating an exceptional resolution to this Action.” Id. at 18.
Typicality “limit[s] the class claims to those fairly encompassed by the named
plaintiff’s claims,” Gen. Tel. Co. of the N.W., Inc. v. E.E.O.C., 446 U.S. 318, 330
(1980), which allows self-interested litigation by the named plaintiffs to necessarily
advance the interests of the class as a whole. 1 William B. Rubenstein, Newberg on
Class Actions (“Newberg”), § 3:29. The named plaintiff has similar claims to other
potential Class Members and is not subject to any “unique defense[s],” see Marcus,
687 F.3d at 599, and the pursuit of the requested relief for Mr. Paulson himself will
advance the interests of the class as a whole. See Newberg, § 3:29. Therefore, the
Court agrees that Mr. Paulson, as named plaintiff, brings claims that are typical of the
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proposed class.
E. Adequacy of the Representation
Rule 23(a)(4) requires that the class representative “fairly and adequately protect
the interests of the class.” Fed. R. Civ. P. 23(a)(4). As the Supreme Court has noted,
the “adequacy-of-representation requirement tends to merge with the commonality and
typicality criteria of Rule 23(a), which serve as guideposts for determining whether
maintenance of a class action is economical and whether the named plaintiff’s claim
and the class claims are so interrelated that the interests of the class members will be
fairly and adequately protected in their absence.” Amchem, 521 U.S. at 626 n.20
(internal quotations omitted). As such, the “inquiry under Rule 23(a)(4) serves to
uncover conflicts of interest between named parties and the class they seek to
represent.” Id. at 625. To be an adequate class representative, the “representative
must be part of the class and possess the same interest and suffer the same injury as
the class members.” Id. at 625-26. The Court has found that the named plaintiff brings
claims typical of the proposed class and face the same potential harms. See Section
III.D, supra.
The Tenth Circuit has identified two questions relevant to the adequacy of
representation inquiry: “(1) do the named plaintiffs and their counsel have any conflicts
of interest with other class members and (2) will the named plaintiffs and their counsel
prosecute the action vigorously on behalf of the class?” Rutter & Wilbanks Corp. v.
Shell Oil Co., 314 F.3d 1180, 1187–88 (10th Cir. 2002) (citation om itted). Adequate
representation depends on, among other factors, an absence of antagonism between
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the representatives and absentees, and a sharing of interest between representatives
and absentees. Ellis, 657 F.3d at 985.
With regard to the first adequacy factor, the Court finds that the interests of the
Class are fairly and adequately protected by Mr. Paulson. As explained above, the
parties state that there is no conflict of interest between plaintiff and the proposed
Class, as plaintiff and the potential Class Members suffered the same sorts of losses
due to their investments with GrowCo. Docket No. 157 at 17 (citing In re Polaroid, 240
F.R.D. at 77). Further, there is nothing in the record to show any conflict of interest
between Mr. Paulson and the rest of the Class. Moreover, there is nothing in the
Settlement Agreement that raises obvious concerns regarding interclass conflicts. See
Amchem, 521 U.S. at 611–12 (noting interclass conflict between the exposure-only
asbestos plaintiffs and those already afflicted with asbestos related disease). There is
also no evidence that one set of potential Class Members is at risk of benefitting from
the Settlement Agreement to the detriment of another set of Class Members.
Accordingly, the Court finds at this preliminary stage that Mr. Paulson is able to control
the litigation and to protect the interests of the Class as a whole. Class Members will
be able to challenge this issue at the fairness hearing if they believe otherwise.
With regard to the second adequacy factor, the parties explain that Mr. Paulson
and the proposed Class Counsel – Goldman, Scarlato & Penny, P.C. and Schindler,
Anderson, Goplerund & Weese, P.C. – “have, and will continue to, vigorously protect
the interest of the Class.” Docket No. 157 at 18. Mr. Paulson and the proposed Class
Counsel have “devoted significant time and resources to initiating, prosecuting, and
negotiating an exceptional resolution” to the litigation, and “Class Counsel has
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extensive experience and expertise in prosecuting complex securities litigation and
class action proceedings throughout the United States.” Id. In addition, there are no
questions regarding the competency of Class Counsel or Class Counsel’s ability to
prosecute this action and, to the extent any such questions do arise, they will be
considered at the fairness hearing. Accordingly, because Mr. Paulson does not have a
conflict of interest with the rest of the Class and Class Counsel have preliminarily
shown that they can vigorously litigate on behalf of the Class, the Court finds that
plaintiff has satisfied Rule 23(a)(4)’s requirements. Rutter, 314 F.3d at 1188.
F. Rule 23(b)(3)
To qualify for certification under Rule 23(b)(3), class questions must
“predominate over any questions affecting only individual members,” and class
resolution must be “superior to other available methods for the fair and efficient
adjudication of the controversy.” Amchem, 521 U.S. at 615. Rule 23(b)(3) states that
courts should consider the following factors when certifying a class: (A) the interest of
members of the class in individually controlling the prosecution or defense of separate
actions; (B) the extent and nature of any litigation concerning the controversy already
commenced by or against members of the class; (C) the desirability of concentrating
the litigation of the claims in the particular forum; and (D) the difficulties likely to be
encountered in the management of a class action. See Fed. R. Civ. P. 23(b)(3)(A)–(D).
Parallel with Rule 23(a)(2)’s commonality element, Rule 23(b)(3)’s predominance
requirement imposes an obligation upon district courts to ensure that issues common to
the class predominate over those affecting only individual class members. Sullivan v.
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DB Investments, Inc., 667 F.3d 273, 297 (3d Cir. 2011). However, the predominance
criterion is “far more demanding” than Rule 23(a)(2)’s commonality requirement.
Amchem, 521 U.S. at 624. Rule 23(b)(3)’s purpose is to “ensure[ ] that the class w ill be
certified only when it would ‘achieve economies of time, effort, and expense, and
promote . . . uniformity of decision as to persons similarly situated, without sacrificing
procedural fairness or bringing about other undesirable results.’” Cordes & Co. Fin.
Servs., Inc. v. A.G. Edwards & Sons, Inc., 502 F.3d 91, 104 (2d Cir. 2007). Thus, Rule
23(b)(3)’s predominance inquiry tests whether the proposed classes are sufficiently
cohesive to warrant adjudication by representation based on “questions that preexist
any settlement.” Amchem, 521 U.S. at 623. While predominance may be difficult to
demonstrate in mass tort cases in which the “individual stakes are high and disparities
among class members great,” it is a “test readily met in certain cases alleging consumer
or securities fraud or violations of the antitrust laws.” Id. at 625.
In this case, Mr. Paulson and the Class seek compensation for defendants’
alleged material misrepresentations and omissions regarding GrowCo and Mr.
McKowen. Because the common questions of law and fact depend entirely upon the
conduct of defendants, these questions predominate as they are unaffected by the
particularized conduct of individual Class Members. For example, the common legal
questions necessary to establish liability in this case center around whether defendants
made material misrepresentation or omissions in violation of securities laws. Similarly,
the common questions of fact involve whether defendants made the alleged material
representations or omissions. Thus, because the answers to questions regarding
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defendants’ alleged misconduct and the harm caused by such misconduct are common
to all class members and inform the resolution of the litigation but for the Settlement,
the Court finds that common issues of law and fact predominate in this case. Sullivan,
667 F.3d at 300.
Second, the Court finds that a class action settlement is a superior method for
resolving this dispute fairly and effectively. Settlement avoids duplicative litigation,
saving both plaintiff and defendants significant time and legal costs to adjudicate
common legal and factual issues. In addition, settlement is appropriate because
individual recovery for these claims is likely too small to provide an incentive for
individual Class Members to adjudicate individual claims. There is no indication that
similar litigation is currently pending in another forum related to the same time period
that would undermine the class certification requested. There are also no issues
regarding interclass conflicts or disparate compensation methods as all Class Members
will receive pro rata distribution of the Settlement Fund. Thus, given that the Class
Members’ claims arise out of the same series of events, the Court finds that conducting
the class action settlement in this forum would achieve economies of time, effort, and
expense, and promote uniformity of decision to similarly situated persons. Fed. R. Civ.
P. 23(b)(3)(C); Cordes, 502 F.3d at 104. Therefore, because the eighty-plus Class
Members will receive the same type of relief, and have claims that present common
questions of fact and law, the Court finds that class certification is appropriate because
the class questions predominate over individual questions and the settlement class is a
superior method of resolving this litigation. Amchem, 521 U.S. at 623.
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G. Rule 23(e) Factors
Rule 23(e) provides that a proposed settlement may only be approved after a
“finding that it is fair, reasonable, and adequate.” Fed. R. Civ. P. 23(e)(2). In making
this determination, “trial judges bear the important responsibility of protecting absent
class members” and must be “assur[ed] that the settlement represents adequate
compensation for the release of the class claims.” In re Pet Food Prods. Liab. Litig.,
629 F.3d 333, 349 (3d Cir. 2010); see also Amchem, 521 U.S. at 623 (noting that the
Rule 23(e) inquiry “protects unnamed class members from unjust or unfair settlements
affecting their rights when the representatives become fainthearted before the action is
adjudicated or are able to secure satisfaction of their individual claims by a
compromise”) (citations omitted).
To determine whether a proposed settlement is fair, reasonable, and adequate,
courts consider the following factors: (1) whether the proposed settlement was fairly
and honestly negotiated; (2) whether serious questions of law and fact exist, placing the
ultimate outcome of the litigation in doubt; (3) whether the value of an immediate
recovery outweighs the mere possibility of future relief after protracted and expensive
litigation; and (4) the judgment of the parties that the settlement is fair and reasonable.
Rutter, 314 F.3d at 1188. If the settling parties can establish these factors, courts
usually presume that the proposed settlement is fair and reasonable. In re Warfarin
Sodium Antitrust Litig., 391 F.3d 516, 535 (3d Cir. 2004) (applying an “initial
presumption of fairness” to a proposed settlement where: (1) it is the result of arm's
length negotiations; (2) it is based on sufficient discovery; (3) the proponents of the
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settlement are experienced in similar litigation; and (4) only a small fraction of the class
objected).
It is unclear to what extent a court on a motion for preliminary approval of a
proposed class settlement must delve into these factors. However, based on the
information available to the Court, the Court notes the following, which weighs in favor
of preliminary approval. The proposed Settlement Agreement is the product of
significant negotiations and discussion between the parties. The parties participated in
a preliminary, one-day mediation session before Judge Meyer on July 21, 2020 and
continued settlement discussions with Judge Meyer’s assistance after the mediation.
Docket No. 157 at 29. These negotiations took place after the parties had vigorously
litigated the matter. Id. at 2–3, 5–7 (detailing the course of the litigation). And there is
no evidence that the Settlement Agreement was the result of a collusive agreement
between the parties. The Court finds that the negotiations were done fairly and
honestly.
Plaintiff concedes that there is “no guarantee Plaintiff would prevail on the
motions to dismiss, a motion to certify the class, motions for summary judgment, or at
trial.” Id. at 15. Further, defendants vigorously deny that they have “committed any
violation of the securities laws or any other law or engaged in any of the wrongful acts
alleged.” Id. at 8. Nevertheless, given the “substantial risk that Class members would
not be able to recovery anything at all if the Action were not settled” because GrowCo is
in bankruptcy and Two Rivers’s financial situation makes it “unlikely Two Rivers would
be able to satisfy a judgment,” id., the Court finds that this factor weighs in favor of the
proposed settlement.
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Next, the Court must determine whether the value of immediate recovery
outweighs the mere possibility of future relief. This factor clearly weighs in favor of the
proposed settlement. As explained, the longer negotiations and litigation take, the
more defendants’ insurance company has to pay out of the Settlement Fund to support
the defense, and the less remains available for Class Members. Id. Given the
uncertainty of Class Members’ likelihood of success on the merits and the prospects of
prolonged litigation, the Court finds that immediate recovery outweighs the time and
costs inherent in complex securities litigation, especially when the prospect is some
recovery versus no recovery. See Strougo v. Bassini, 258 F.Supp. 2d 254, 258
(S.D.N.Y. 2003) (noting that it is “beyond cavil that continued litigation in this
multi-district securities class action would be complex, lengthy, and expensive, with no
guarantee of recovery by the class members.” (quotation marks omitted)). Accordingly,
the Court finds this factor weighs in favor of granting preliminary approval.
With regard to the fourth factor, it is evident that the parties believe that the
Settlement Agreement is fair and reasonable. Plaintiff in this case is represented by
experienced counsel who have extensive experience in litigating such matters.
Moreover, the settlement was the result of arms-length negotiations and was reached
with the aid of an experienced mediator.
Certifying the Class will allow the Court to determine whether there are other
members of the class that challenge the fairness of the parties’ proposed Settlement
Agreement. Should any investor find the terms of the Settlement Agreement unfair, he
or she may choose not to join the settlement and to litigate independently or to remain
in the case and file objections to the Settlement Agreement detailing why it is unfair
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under the Rule 23 factors. Cf. Grilli v. Metro. Life Ins. Co., Inc., 78 F.3d 1533, 1536–38
(11th Cir. 1996) (district court did not abuse discretion in denying motion to intervene,
based on the court's conclusion that proposed intervenors could protect their interest
either by opting out of the class and litigating separately, or by remaining in the case
and, if they thought the proposed settlement was unfair, objecting to it); cf. In re Crocs,
Inc. Sec. Litig., No. 07-cv-02351-PAB-KLM, 2013 WL 4547404, at *12 (D. Colo. Aug.
28, 2013) (explaining that party opposing settlement agreement could opt-out or file
objections). The Court finds that the presumption of fairness is sufficient to preliminarily
approve the terms of the proposed partial Settlement Agreement.
IV. NOTICE TO THE SETTLEMENT CLASS
Under Rule 23(e)(1), a district court approving a class action settlement “must
direct notice in a reasonable manner to all class members who would be bound by the
proposal.” Fed. R. Civ. P. 23(e)(1). Rule 23(c)(2)(B) provides, in relevant part, that for
“any class certified under Rule 23(b)(3), the court must direct to class members the best
notice that is practicable under the circumstances, including individual notice to all
members who can be identified through reasonable effort.” Fed. R. Civ. P. 23(c)(2)(B).
In addition to the requirements of Rule 23, the Due Process Clause also guarantees
unnamed class members the right to notice of a settlement. DeJulius v. New England
Health Care Emps. Pension Fund, 429 F.3d 935, 943–44 (10th Cir. 2005). However,
due process does not require that each Class Member receive actual notice to be
bound by the adjudication of a representative action. Id. Instead, the procedural rights
of absent class members are satisfied so long as “the best notice practicable [is given]
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under the circumstances including individual notice to all members who can be
identified through reasonable effort.” In re Integra Realty Resources, Inc., 262 F.3d
1089, 1110 (10th Cir. 2001) (citation omitted). Thus, the legal standards for satisfying
Rule 23(c)(2)(B) and the constitutional guarantee of procedural due process are
coextensive and substantially similar. DeJulius, 429 F.3d at 944.
The proposed notice in this case provides potential Class Members with
information regarding the class action, the terms of the Settlement Agreement, the plan
of allocation, attorneys’ fees and expenses, the fairness hearing, how investors can opt-
out of the Class or object to the terms of the Settlement Agreement. Docket No. 157 at
20, 66–75; Fed. R. Civ. P. 23(c)(2)(B)(i)–(vii). Class Counsel have physical addresses
for all Class Members, rendering direct mail the best notice practicable. Docket No.
157 at 20. Based on the foregoing, the Court is satisfied that the parties’ proposed
notice is reasonably calculated to apprise the absent Class Members of the action. In
re Integra, 262 F.3d at 1111.
V. CLASS COUNSEL
When certifying a class, a court “must appoint class counsel.” Fed. R. Civ. P.
23(g). In appointing class counsel, the Court must consider:
(A)(i) the work counsel has done in identifying or investigating potential
claims in the action; (ii) counsel's experience in handling class actions,
other complex litigation, and the types of claims asserted in the action; (iii)
counsel's knowledge of the applicable law; and (iv) the resources that
counsel will commit to representing the class; [and] (B) may consider any
other matter pertinent to counsel's ability to fairly and adequately
represent the interests of the class[.]
Fed. R. Civ. P. 23(g)(1). The Settlement Agreement lists plaintiff’s current attorneys –
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Paul Scarlato and Alan Rosca of Goldman Scarlato & Penny, P.C., and J. Barton
Goplerud and Brian Marty of Shindler, Anderson, Goplerud & W eese, P.C. – as Class
Counsel and Steve Miller of Steve A. Miller, P.C. as “Additional Plaintiff’s Counsel.”
Docket No. 157 at 32, ¶ 1.j. Plaintiff’s attorneys state that they have “extensive
experience and expertise in prosecuting complex securities litigation and class action
proceedings throughout the United States.” Id. at 18. The Court finds counsel have
sufficient experience in class actions and their knowledge of the applicable law, as
exhibited in the case up to this point, weighs in favor of their appointment. Therefore,
the Court finds that it is appropriate to appoint plaintiff’s counsel as Class Counsel and
Additional Plaintiff’s Counsel. Cf. Torres-Vallejo v. Creativexteriors, Inc., 220 F. Supp.
3d. 1074, 1087 (D. Colo. 2016) (appointing one law firm lead counsel and three other
law firms as additional class counsel).
VI. ADDITIONAL PROCEDURES
The Court will adopt the notice, fairness hearing, and opt-out schedule proposed
by plaintiff, with the exception that the fairness hearing will not be set until a date in
April 2022. See Docket No. 157 at 21. Accordingly, the following deadlines apply:
Event Time for Compliance
Deadline for mailing the Notice and
Claim Form to the Settlement Class
(“Notice Date”)
Not later than fourteen (14) days after
the date of entry of the Court’s
Preliminary Approval Order.
Deadline for Class Members to
exclude themselves from the Class
Not later than 30 calendar days after
the Notice Date.
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Filing of papers in support of final approval
of
the Settlement, the Plan of Allocation,
and Lead Counsel’s fee and expense
request
Not later than 21 calendar days
prior to the Fairness Hearing.
Receipt deadline for objections and
requests for exclusion from the
Settlement Class
Not later than fourteen (14)
calendar days prior to the
Fairness Hearing.
Filing of reply papers in support of
final approval of the Settlement, the
Plan of Allocation, and Class
Counsel’s fee and expense request
Not later than seven (7) calendar days
prior to the Fairness Hearing.
Deadline for submitting Claim Forms Postmarked sixty (60) calendar days after
the Notice Date (Class Counsel may, at its
discretion, accept for processing late
Claims).
The parties shall contact the Court’s chambers to set a date for the fairness hearing
within seven days of the entry of this order.
VI. CONCLUSION
For the foregoing reasons, it is
Accordingly, it is
ORDERED that the Unopposed Motion of Plaintiff for Preliminary Approval of
Settlement, Certification of Class, and Appointment of Class Representative and Class
Counsel [Docket No. 157] is GRANTED. It is further
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ORDERED that the parties shall contact the Court’s chambers within seven days
of the entry of this order to set a date for the fairness hearing.
DATED January 19, 2022.
BY THE COURT:
PHILIP A. BRIMMER
Chief United States District Judge
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