In In re Lehman Brothers Securities and ERISA Litigation, 2012 U.S. Dist. LEXIS 65167 (S.D.N.Y. May 3, 2012), Judge Lewis A. Kaplan, for the United States District Court for the Southern District of New York considered the reasonableness of a settlement between various former Lehman Brothers directors and officers and their insurers.  

Beginning his opinion with a reference to Kenny Rogers’ The Gambler, Judge Kaplan observed that when it comes to litigation, one must know when to hold ‘em and when to fold ‘em. In the context of a class action, he noted, a court must act as the surrogate for the plaintiff class in determining whether a settlement is reasonable, and as such, it fell on him to determine whether to allow the parties “to fold ‘em.”  

The class action in In re Lehman Brothers was brought on behalf of investors that had purchased or otherwise held Lehman Brothers securities. Because Lehman Brothers is in bankruptcy, the defendants were former individual officers and directors and directors of the company. Before Judge Kaplan was a $90 million settlement between these directors and officers and Lehman Brothers’ insurer, which would be paid to the plaintiff class. If approved, all claims against the directors and officers would be released, with these individuals paying no amounts from their own pockets.  

Lehman Brothers originally had $250 million in available insurance limits. As a result of defense costs, however, this amount had been reduced to $180 million by the end of 2010. The insurer took the position that it would contribute to a settlement only on the condition that it resolved all claims against the individual defendants. The individual defendants took the position that they would not contribute any amounts toward a settlement other than through available insurance funds. In other words, they would not pay any amounts out of their own pockets. Notwithstanding, the individual defendants agreed to hire a consultant, a retired judge, to determine whether their combined “liquid” and certain limited “non-liquid” assets exceeded $100 million. The consultant concluded that these assets were indeed less than $100 million.

With this background in mind, Judge Kaplan considered whether a $90 million settlement was reasonable under the circumstances. He acknowledged that if the settlement was not approved, the available insurance funds likely would be erode rapidly through payment of defense costs in the various lawsuits pending against Lehman Brothers and their directors and officers. Should that happen, the directors and officers would be forced to rely on their individual assets, whether liquid or illiquid, to defend and/or settle the litigations. The amount sought in these suits, he observed, could easily reach billions of dollars. Judge Kaplan observed that looking only to the individual defendants’ liquid assets did “not permit the Court fully to consider the factors pertinent to approving or rejecting the settlement,” nor was the asset inquiry “as informative as necessary and appropriate for this Court” to consider the reasonableness of the settlement. Accordingly, Judge Kaplan directed that further inquiry be had into the entirety of the individual defendants assets, liquid and non-liquid, so that the court could determine the reasonableness of the settlement.