Harvey v. Morgan Stanley Smith Barney LLC

Background

Matthew Lucadano and Tracy Chen were objectors and proposed intervenors in the class settlement that the court had previously approved. The Ninth Circuit affirmed the approval on most material terms, and the court stated that the settlement was final and that all initial and later distributions had been paid to class members.

Lucadano and Chen moved to vacate the attorney-fee award to counsel for named plaintiff Brandon Harvey, prevent further attorney-fee payments from the settlement fund, and require counsel to return fees already paid. Their motion relied on a temporary agreement under which Morgan Stanley would abandon a Financial Industry Regulatory Authority (FINRA) arbitration that it had filed against Harvey. The lawyers did not disclose that agreement to the court, the class, or Lucadano and Chen.

Harvey and Morgan Stanley argued that Lucadano and Chen were barred by a stipulation from challenging the fee payments, were not entitled to receive the agreement, and could not obtain relief under Federal Rule of Civil Procedure 60(b) or 60(d)(3). The court chose to address the motion on its merits instead.

Court’s analysis

The court found that the material terms of the class settlement were negotiated with the assistance of a retired judge before anyone discussed Morgan Stanley’s agreement to abandon the FINRA arbitration. After those terms were agreed upon, Morgan Stanley offered to include the arbitration walkaway while the parties were drafting a memorandum of understanding. Harvey agreed, and the walkaway was included in that memorandum.

The court held that agreeing to the walkaway did not create a conflict between Harvey or his counsel and the class. It explained that an agreement concerning a named party’s personal claim, like a later-negotiated attorney-fee agreement, does not automatically create a conflict when it is made after negotiation of the class’s substantive relief has concluded.

The court nevertheless stated that the walkaway was a “side-agreement” covered by Rule 23(e)(3), which requires such agreements to be disclosed during the process for approving a class settlement. The court said disclosure would allow the court to consider the agreement when deciding whether the settlement is fair, reasonable, and adequate.

The court found that the nondisclosure had limited impact because Harvey and Morgan Stanley removed the walkaway from the settlement agreement before submitting it for approval. The FINRA arbitration remained pending. The court also stated that it had applied heightened review to the settlement because it was approved before the class was formally certified, had considered Chen’s objections, and would have approved the settlement even if the walkaway had been disclosed.

The court rejected the argument that Morgan Stanley used the walkaway as leverage to reduce the settlement of Chen’s Private Attorneys General Act claims. The memorandum of understanding set the value of those claims at $500,000 whether or not Chen agreed to participate on the proposed terms, and the court had previously found that amount fair, reasonable, and adequate.

Finally, the court stated that even if the walkaway had created a temporary conflict, the conflict ended when Harvey and Morgan Stanley executed the final settlement agreement. That agreement contained an integration clause stating that prior agreements or understandings were no longer enforceable. The court did not decide whether counsel’s statements to the Ninth Circuit that no side agreement “ever existed” were accurate.

Disposition

The court denied Harvey and Morgan Stanley’s motion to strike the Humenik Declaration. It also denied the motion to strike Morgan Stanley’s opposition brief based on the argument that Morgan Stanley lacked standing to oppose the fee-disgorgement request.

The court denied Lucadano and Chen’s motion to vacate the attorney-fee award, deny further attorney-fee payments, and order disgorgement of attorney fees already paid to counsel for Harvey. The opinion does not add a with-prejudice or without-prejudice qualification to that denial.