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/raid1/www/Hosts/bankrupt/CAR_Public/990611.MBX C L A S S A C T I O N R E P O R T E R Friday, June 11, 1999, Vol. 1, No. 91 Headlines * H. xx: Business Groups Back New Interstate Jurisdiction Act * S. 837: Defendants Dislike States Certifying National Suits 3COM CORP.: Shepherd & Geller File Complaint in California ASSOCIATES FINANCIAL: May Demand Collateral Protection Insurance FIDELITY NATIONAL: Negotiates to Avoid CA Atty. General's Suit FIRST UNION: Milberg Weiss Files Complaint in North Carolina FIRST UNION: Schiffrin & Barroway File Suit in North Carolina FIRST UNION: Signet Retirees & Workers Complaint About Merger FIRST USA: Visa Card Users Lose Using Balance-Transfer Checks HOLOCAUST SURVIVORS: Class Notices Delay Swiss Banks Settlement MCKESSON HBOC: Krislov Firm Files Complaint in California MCKESSON HBOC: Morris and Morris File Complaint in Georgia MINNESOTA MINING: Case Continues, But Some Claims Dismissed NATIONSWAY TRANSPORT: Employees Sue Company Officers for Wages POLAROID CORPORATION: Cauley Firm Files Suit in Massachusetts UNIFUND CORP.: Illinois Class Representatives Must Weigh Offers WASHINGTON MUTUAL: Asks What Law Applies to Nationwide Action ********* * H. xx: Business Groups Back New Interstate Jurisdiction Act ------------------------------------------------------------- Insurance companies have joined a wide range of business groups in backing legislation that they say would reduce frivolous class action lawsuits. Called the Interstate Class Action Jurisdiction Act, the legislation would make it easier for defendants in class action lawsuits to move cases from state courts to federal courts. The bipartisan bill is sponsored by Reps. Bob Goodlatte, R-Va.; Rick Boucher, D-Va.; Ed Bryant, R-Tenn.; and Jim Moran, D-Va. The legislation, which at press time had not been given a bill number, also has 26 cosponsors. Industry representatives supporting the bill say something must be done to correct abuses in class action lawsuits. "The number of state court class action lawsuits has grown dramatically in the last two to three years and the record shows that many state courts do not give a fair shake to either class action defendants or class members, particularly if they are from other states," said Carroll Campbell, president of the American Council of Life Insurance. "Too often," he said, "the only people who appear to benefit are the class action lawyers." "In recent years, class actions have become a hotbed for abuse," added Melissa Shelk, vice president of federal affairs with the American Insurance Association. "Class actions are flooding into certain state courts because those courts tend to favor local lawyers in cases against out-of-state companies or because those courts are ill-equipped to handle such cases." At a press briefing, Rep. Goodlatte said the legislation helps fulfill the original purpose of federal courts. "Federal courts were actually designed by the framers of the Constitution to handle large cases that crossed state boundaries," he said. "This measure will put these suits in the jurisdiction where they belong." In addition to ACLI and AIA, other groups supporting the bill include the Alliance of American Insurers, the U.S. Chamber of Commerce and the National Association of Manufacturers. Specifically, the legislation grants federal courts jurisdiction over most class actions in which there is "minimal diversity," which means that any member of the proposed plaintiff class is a citizen of a different state than any defendant. Under these circumstances, any party could move a class action from a state court to a federal court. In addition, current federal law that bars transferring state court cases to federal courts after one year would not apply to class actions. However, federal jurisdiction would not apply to certain circumstances, such as limited scope cases involving fewer than 100 class members or less than $ 1 million or cases against state governments. In addition, federal courts could not hear cases in which the substantial majority of plaintiff class members are citizens of the same state as the primary defendants and the claims will be governed under the laws of that state. (National Underwriter (Life/Health/Financial Services); May 24, 1999) * S. 837: Defendants Dislike States Certifying National Suits ------------------------------------------------------------- (The following is a portion of the prepared statement of Gerard T. Noce, Esq., on behalf of the Defense Research Institute and the Missouri Organization of Defense Lawyers, before the Senate Commerce, Science and Transportation Committee concerning Senate Bill 837.) Finally, there is the issue of state courts certifying nationwide class actions. Both the Senate and House Judiciary Committees have held hearings on the problems created by this practice: - the "drive-through certifications" of classes, in which a judge rubber-stamps approval, giving a plaintiffs' lawyer the leverage to force a settlement of even the most frivolous or de minimus claims; - the use of discount coupon settlements, in which defendants provide virtually worthless coupons to buy their own products, or reversionary settlements, in which defendants retain any money not paid out through the settlement's arduous claim procedure; both of which provide real monetary benefits only to the plaintiffs' attorneys, not to consumers; - "reverse auction" settlements, by which defendants negotiate with various plaintiffs' attorneys to purchase res judicata for the cheapest price. Only federal legislation can solve these problems. Whenever class actions are filed, as they frequently are, before rural small-town judges who do not have the time or inclination to question class certifications, there is risk that businesses will be blackmailed into settling frivolous claims. And these state court judges, who do not have law clerks or staff attorneys to assist them as federal judges do, also lack the resources to scrutinize settlement agreements, leading to appalling instances of consumers being short-changed. But most importantly, the mere fact that class actions involving the same subject matter can filed simultaneously by different lawyers in different state courts inevitably leads to the "reverse auction" process in settling meritorious claims on the cheap. S. 353, a bipartisan bill now pending in the Judiciary Committee, would make a huge step toward ending these abuses by moving multi-state class actions into the federal courts. (Federal News Service; JUNE 9, 1999) 3COM CORP.: Shepherd & Geller File Complaint in California ---------------------------------------------------------- The Law Firm of Shepherd & Geller, LLC filed a class action in the United States District Court, Northern District of California, on behalf of all individuals and entities that purchased 3COM CORPORATION common stock (Nasdaq:COMS) between September 22, 1998 and March 2, 1999. The complaint charges that 3COM and certain of its officers and directors violated the federal securities laws by making numerous false and misleading statements about the Company's financial condition, causing the stock to trade at artificially inflated prices. While inflating the price of the stock, the Complaint alleges that Company insiders engaged in insider selling, reaping millions of dollars in illegal profits. When the truth was uncovered, the stock price fell, damaging shareholders. To learn more, contact Paul J. Geller at 888-262-3131 or at pgeller@classactioncounsel.com or Scott R. Shepherd at 610-891- 9880 or 877-891-9880 or at sshepherd@classactioncounsel.com via email. ASSOCIATES FINANCIAL: May Demand Collateral Protection Insurance ---------------------------------------------------------------- Consumers who allege they suffered a monetary loss as a result of their lenders' adding the cost of force-placed collateral protection insurance to their original loan amount do not have a sufficient "investment injury" or "acquisition injury" to sustain Racketeer Influenced and Corrupt Organizations Act claims. The borrowers must show that the investment of racketeering profits caused the complained injury. Weathersby, et al. v. The Associates Financial Services Co. Inc., et al., No. 98-1551 "J" (1) (E.D. La. 4/28/99). William and Gladys Weathersby obtained consumer loans from The Associates Financial Services Co. Inc., which were secured by real or movable property. When the borrowers learned that the lender charged them for CPI they filed a class action complaint against The Associates, Associates Financial Life Insurance Co., Associates Insurance Co., Associates Investment Co., Associates Corp. of North America and Associates First Capital Corp. Their complaint claimed that the defendants fraudulently force-placed CPI on their loans and charged the cost of the allegedly overpriced insurance to their original loan amount. According to the plaintiffs, the defendants' practice of force-placing insurance violated 1962(a), (b), and (d) of the RICO Act and caused them to lose money by paying the overpriced CPI. The defendants responded with a motion to dismiss for failure to state a claim. Investment Injury Requirement Section 1962 (a) of RICO makes it unlawfully for any person who has received income derived from a pattern or racketeering activity to invest that income or its proceeds in an enterprise which is engaged in interstate commerce. To state a claim under the "investment injury" section of the Act, a "plaintiff must adequately allege some nexus between his injury and the alleged RICO violation." Consumers must support their claim that an injury flowed from the defendants' racketeering income into the enterprise with specific facts, said the U.S. District Court for the Eastern District of Louisiana. It is not enough, explained Judge Carl J. Barbier to merely make allegations that track the language of the Act. Nor is it sufficient, said the court, "[t]o merely allege a monetary loss, even as a result of fraud" or "to allege that the defendants invested the money obtained through an alleged RICO fraud into the alleged enterprise." Because the Weathersbys failed to plead an "investment injury," the district court held that they failed to state a claim under 1962(a). Acquisition Injury Requirement The court next addressed whether the plaintiffs made a case for a violation of 1962(b), often referred to as the "acquisition injury" requirement. That section makes it illegal for any person to use racketeering activities to acquire or maintain any interest or control over an enterprise engaged in activities affecting interstate commerce. To adequately plead an "acquisition injury," the statute requires a plaintiff to show his injuries were proximately caused by a RICO person in control of an enterprise through racketeering activities. According to the district court, the Weathersbys failed to meet their burden of proof. The court stated that nowhere did the borrowers allege that Associates acquired or maintained control of the alleged enterprise, presumably the force-placed insurance, by virtue of the plaintiffs' alleged monetary injury. Thus, the court concluded that this claim failed as well. Because the Weathersbys' claims under 1962 (a) and (c) failed, their subsection (d) claim failed as well, ruled the court. Judge Barbier explained that a plaintiff may only maintain a 1962(d) claim if they also have a viable claim under subsections (a), (b) or (c). The borrowers lacked any viable claim under the Act and therefore, the court granted the defendants' motion to dismiss without prejudice. Dawn Adams Wheelahan of New Orleans represented the plaintiffs. William N. Withrow and C. LeeAnn McCurry of Troutman, Sanders LLP in Atlanta, Stephen Winthrop Rider, Anthony J. Rollo Jr. and Lauren Zimmerman Garvey of McGlinchey Stafford PLLC in New Orleans represented The Associates. (Consumer Financial Services Law Report; May 28, 1999) FIDELITY NATIONAL: Negotiates to Avoid CA Atty. General's Suit -------------------------------------------------------------- Fidelity National Financial Inc. (NYSE: FNF) announced positive developments in the class action lawsuit filed by the California Attorney General against the entire title and escrow industry in California. As a result of extensive meetings and discussions with Fidelity, the Attorney General issued a letter stating it expected a quick resolution of the matter as it relates to Fidelity and does not expect to serve Fidelity with a formal complaint or proceed with litigation. The Attorney General had filed a lawsuit on behalf of the California Controller and the California Department of Insurance naming Fidelity National Title Insurance Company, a subsidiary of Fidelity National Financial, Inc. as one of the industry defendants. However, as a result of their meetings, the parties expressed confidence the issues regarding Fidelity are likely to be resolved on a fast-track basis and without litigation. In a letter to Fidelity dated June 4, 1999, Brian Taugher, Deputy Attorney General stated, "We expect that the issues will be resolved with Fidelity quickly and without litigation. The auditors are working rapidly toward completion, and we expect to reconcile all outstanding issues to our mutual satisfaction, concluding Fidelity's involvement. We have not and do not anticipate serving Fidelity with the complaint." The letter also expressed appreciation for the assistance Fidelity had given state auditors and stated that "Fidelity was named as a defendant because the audits were close to completion, and not because the company is more culpable than any other title insurance company." William P. Foley, II, Chairman of the Board and Chief Executive Officer of Fidelity stated, "Fidelity always has been a good corporate citizen and very sensitive to the laws, rules and regulations which govern our industry and business practices. We believe this matter will be disposed of in a quick and cooperative manner, as we continue to discuss the issues raised in the lawsuit with the Office of the Attorney General, the Department of Insurance and the Office of the Controller. We have never compromised nor exploited our customers or consumers in the price of our products or the quality of our service. Similarly, we anticipate a resolution of this action by the State of California would serve as a basis of the resolution of the recent class-action lawsuit filed in Federal court." Headquartered in Irvine, California, Fidelity National Financial, Inc. is a diversified real estate services company engaged in doing business in 49 states, the District of Columbia, Puerto Rico, the Bahamas and the Virgin Islands. Fidelity, through its principal subsidiaries, issues title insurance policies and performs other title-related services such as escrow, collection and trust activities, real estate information and technology services, trustee sales guarantees, credit reporting, attorney services, flood certifications, real estate tax services, reconveyances, recordings, foreclosure publishing and posting services and exchange intermediary services in connection with real estate transactions. FIRST UNION: Milberg Weiss Files Complaint in North Carolina ------------------------------------------------------------ Milberg Weiss Bershad Hynes & Lerach LLP filed a class action lawsuit on June 8, 1999, in the United States District Court for the Western District of North Carolina on behalf of all persons and entities who purchased the common stock of First Union Corp. (NYSE: FTU) between August 14, 1998 and May 24, 1999. The complaint charges First Union, and certain of its officers and directors with violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 as well as Rule 10b-5 promulgated thereunder. The complaint alleges that defendants issued a series of materially false and misleading statements concerning the Company's operations, operating results and integration of operations with CoreStates Financial Corporation and the Money Store Inc. Because of the issuance of a series of false and misleading statements the price of First Union common stock was artificially inflated. To learn more, contact Steven G. Schulman or Samuel Rudman at 800-320-5081 or at endfraud@mwbhlny.com via email. FIRST UNION: Schiffrin & Barroway File Suit in North Carolina ------------------------------------------------------------- Schiffrin & Barroway, LLP filed a class action lawsuit in the United States District Court for the Western District of North Carolina on behalf of all persons and institutions who purchased the common stock of First Union Corporation (NYSE: FTU) from August 14, 1998, through May 24, 1999. The complaint charges First Union and certain of its officers and directors with issuing a series of false and misleading statements concerning the Company's operating results and integration of the CoreStates Financial Corporation and The Money Store, Inc. acquisitions. To learn more, call Andrew L. Barroway, Esq. at 888-299-7706 or 610-667-7706 or write info@scbclasslaw.com via email. FIRST UNION: Signet Retirees & Workers Complaint About Merger ------------------------------------------------------------- Claiming the merger of a Signet Bank retirement plan into a First Union plan violated plan documents and the Employee Retirement Income Security Act (ERISA), a proposed class action representing 5,000 Signet retirees and former workers has asked a Virginia federal court for more than $150 million in damages. Franklin et al. v. First Union Corp. et al., No. 99-CV-344 (ED VA, complaint filed May 5, 1999). The dispute centers on the July 8, 1997, merger of Signet and First Union. As part of the merger, Signet's $250 million 401(k) plan was merged into First Union's plan. The result was a liquidation of investment holdings in the Signet plan and reinvestment in proprietary First Union mutual funds. The plaintiffs say the plan merger cost them at least $150 million. Under the Signet plan, employees were allowed to invest in eight investment vehicles, including three non-proprietary mutual funds the Vanguard Index Trust 500 Portfolio, the American Century/Twentieth Century Ultra Investors Fund and the Capital One Financial Corporation Stock Fund. Those three funds held $100 million of Signet's 401(k) assets. The remaining $150 million was equally split between the Signet Company Stock Fund and several Signet proprietary mutual funds. The plaintiffs claim First Union's proprietary funds contained significantly higher fees and costs, which made substantial profits for the bank, but eroded the investment earnings of 401(k) plan participants. The Signet merger, the suit alleges, "was part of First Union's invariable pattern or practice of liquidating the 401(k) plan and non-proprietary investment vehicles of the dozens of companies it has acquired (some 80 companies since 1984) and transferring the proceeds into the First Union Plan and First Union proprietary investment vehicles in order to maximize corporate profits." The plaintiffs say First Union's actions breached several fiduciary duties under ERISA and caused "massive financial harm" to Signet plan participants and beneficiaries. Additionally, the suit claims that Signet retirees were not told they could "roll over" their 401(k) holdings into Individual Retirement Accounts, where they could reinvest in the same three non-proprietary funds. Finally, the suit claims the plan merger never actually took place because First Union failed to properly amend the Signet plan as required by the plan's documents and ERISA. "The acts taken were thus not only unauthorized but also illegal under the terms of the Signet Plan which, because it was not properly amended or 'merged' out of existence, still exists as a matter of law today, albeit improperly drained of all its assets," the complaint asserts. The suit seeks a declaration that the plan merger is "null and void," removal of the First Union fiduciaries as fiduciaries of the Signet plan and appointment of an independent fiduciary, disgorgement of investment earnings, restitution, other unspecified equitable relief and reasonable attorneys' fees. (Bank & Lender Liability Litigation Reporter; May 19, 1999) FIRST USA: Visa Card Users Lose Using Balance-Transfer Checks ------------------------------------------------------------- A Fort Lee NJ man who believed he would save money by using balance-transfer checks from America's biggest Visa lender ended up with hundreds of dollars in unexpected fees, a federal class- action lawsuit alleges. Paul Dimick says First USA Bank issued him a Visa card in March 1998 that allowed him to transfer balances using the bank's checks, with a maximum transaction fee of $ 25. Six months later, he says, First USA sent him a letter that lowered Dimick's interest rate from 4.9 percent to 3.9 percent, and said he would save by using new checks. But Dimick failed to notice fine print that also raised the transaction fee on checks to 3 percent of the total amount, according to his lawsuit, filed in U.S. District Court in Newark. Dimick alleges he transferred $ 12,422 from another credit card and was surprised to learn he had incurred a $ 373 charge. His lawyers say the bank's letter violated the federal Truth in Lending Act and the state Consumer Fraud Act. "The notice was improper," said Michaelene Loughlin, one of his attorneys. "They didn't make it conspicuous the way it was supposed to be under the Truth in Lending Act. The disclosure must be made clearly and conspicuously." A spokesman for First USA, David Webster, would not discuss the specific allegations, but said: "We always comply with the Truth in Lending laws, and applicable state and federal laws." The lawsuit said the Delaware-based company should have notified Dimick with larger print and such language as "Summary of Changes" or "Transaction Finance Charges. "Those headings came in a two-page description of the account included with his original card, it said. "They tried to slip one by him, and it worked," said Dimick's second lawyer, Richard J. Doherty. "If they're going to disclose the change in finance charges, they have to do it in a way that you can understand." Dimick did not return phone messages left on his answering machine. Doherty described Dimick as an executive with a New Jersey company that manufactures pipeline equipment. He said Dimick was very angry after getting the charge, complained without success, and is paying the fees under protest. "He just kind of ran into the seamless bureaucracy, and he couldn't do anything about it," Doherty said. "He felt that if this happened to him, First USA was perpetrating this on a number of people, and it wasn't fair." Webster, a vice president of corporate affairs, said the rate offer sent to Dimick and other cardholders was discontinued in December. He would not disclose how many people received it. "That offer was a test," Webster said. "We test lots of different offers for consumers all the time. The purpose of tests was to learn and produce better products that are of interest to card members." The company now caps its transaction fee at $ 50 for balance transfers, he said. First USA has about 57 million customers and $ 70 billion in loans. (The Record; June 9, 1999) HOLOCAUST SURVIVORS: Class Notices Delay Swiss Banks Settlement --------------------------------------------------------------- It will be at least a year before payments to Nazi victims are made from the $1.25 billion Swiss banks settlement, according to a court calendar approved last week by a federal judge in Brooklyn. The distribution plan is expected to be approved next May 30 by the judge, Edward Korman. That would be nearly two years after it was first announced that the two major Swiss banks, Credit Suisse and UBS, agreed to settle class-action lawsuits against them for hoarding Jewish Holocaust-era accounts. The delay is due, in part, to specific American legal requirements in class-action lawsuits. These call for a series of steps to notify, and then to take into account the opinions of, potential beneficiaries about how the settlement should be distributed. In the case of the Swiss settlement, additional time is required because of the complicated logistics of translating materials into two dozen languages and notifying Nazi victims around the world. Nearly 900,000 potential beneficiaries soon will receive a legal notice, by mail and in newspaper ads, about their possible eligibility for some of the funds. The notification is expected to cost some $25 million - about the same amount sought by the survivors attorneys for legal fees, according to court documents. Beneficiaries have until October 22 to indicate if they do not want to be included in the suit, according to Korman's calendar. This phase, known as "opting out," is extremely important. Those who do not opt out forego all future claims against all Swiss banks, the Swiss National Bank, Swiss industry and the Swiss government. The plan to distribute the settlement will be proposed to Korman by Judah Gribetz, the court-appointed special master. Gribetz has scheduled a legally mandated "fairness hearing" on the settlement for November 29, at which time survivors can comment on allocations. Last year, Melvyn Weiss, one of the survivors' lawyers in New York, said that public forums will be held in Israel, the US, Europe, South America and Australia to solicit comments. However, no such forums have been officially scheduled. There are the five categories of beneficiaries in the settlement: the so-called "Volcker Committee" class of depositors and heirs of the hoarded or unclaimed Swiss bank accounts; those whose assets were looted and then laundered through the Swiss banks; two categories of slave laborers; and refugees who were turned away by Switzerland during World War II. The Volcker Committee group may get its funds before next May. The committee has completed a forensic audit of those accounts, and has established a tribunal in Zurich to match the Holocaust-era dormant accounts to individual claimants. The Zurich tribunal is being headed by Thomas Buergenthal, a survivor of Auschwitz who is now a prominent human rights lawyer. (Jerusalem Post; 06/06/99) MCKESSON HBOC: Krislov Firm Files Complaint in California --------------------------------------------------------- The law firm of Krislov & Associates, Ltd. filed a class action complaint captioned Ingall v. McKesson HBOC, Inc. et al., Case No. C-99-2724WHO, in the United States District Court for the Northern District of California on behalf of all persons and entities who have suffered loss as a result of having been issued shares of McKesson HBOC, Inc. (NYSE: MCK) common stock during the period October 19, 1998 through April 27, 1999, including those whose shares of HBO & Company (formerly Nasdaq: HBOC) were converted into McKesson HBOC shares following McKesson's January 12, 1999 merger with HBOC. The action also alleges claims on behalf of persons and entities who purchased McKesson common stock during the period October 19, 1999 through April 27, 1999. The Complaint is brought against McKesson and certain of its current and former officers and directors of HBOC. The Complaint alleges violations of under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5. Specifically, the Complaint alleges that the defendants issued false and misleading financial statements that artificially inflated the McKesson's income and earnings per share. To learn more, contact Clinton A. Krislov or William M. Sweetnam at 312-606-0500 or clint@krislovlaw.com via email. MCKESSON HBOC: Morris and Morris File Complaint in Georgia ---------------------------------------------------------- A class action lawsuit was filed by Morris and Morris on June 4, 1999 in the United States District Court for the Northern District of Georgia, Atlanta Division, seeking to pursue remedies under the Securities Exchange Act of 1934, on behalf of all who purchasers of the common stock of McKessonHBOC Corp. or its predecessor McKesson Corp (NYSE:MCK) between November 27, 1998, and April 28, 1999, except for persons who received McKesson stock in exchange for shares of HBO & Company ("HBOC") in the Jan. 12, 1999 merger of McKesson and HBOC. The class action complaint alleges a fraudulent scheme and deceptive course of conduct by certain individuals, officers and directors first of HBOC and later of McKesson, who disseminated materially misleading statements. Specifically, these individuals oversaw HBOC operations prior to the merger of McKesson and HBOC, and McKesson's healthcare software business after the merger, and publicly reported supposedly skyrocketing software revenues at HBOC and McKesson. As these individuals knew or recklessly disregarded, however, these revenue figures were artificially inflated through the use of improper accounting techniques including the recording of sales revenue on non-final contingent software sales. These false and misleading revenue figures caused the price of McKesson stock to be artificially inflated, injuring purchasers of McKesson stock. To learn more, contact Patrick F. Morris, Esq. or James A. McShane, Esq. at 800-296-0410 or morrisandmorris@compuserve.com via email. MINNESOTA MINING: Case Continues, But Some Claims Dismissed ----------------------------------------------------------- A Minneapolis federal court has denied a motion by Minnesota Mining and Manufacturing Co. (3M) to dismiss a class action alleging the company's investments in volatile collateralized mortgage obligations (CMOs) caused $80 million in losses to the 3M pension plan. Harley v. Minnesota Mining and Manufacturing Co., No. CivA4-96-488 (D MN, March 31, 1998). 3M gained some relief, however, when the court dismissed one of the plaintiffs' claims alleging CMO investments were prohibited transactions under federal pension law. The plaintiffs are all 3M pension fund participants or beneficiaries. The claims in this case were filed under the fiduciary duties provisions contained in the Employee Retirement Income Security Act (ERISA), specifically the general standard of care in Sec. 1104(a)(1)(B), and the prohibited transactions provision in Sec. 1106(b)(1), which was struck down by the court. The court also held that in light of Hughes Aircraft Co. v. Jacobson (U.S., 1999), a question of whether or not a surplus in the 3M pension plan invalidates the plaintiffs' claim for damages could be entertained in further motions for summary judgment. CMOs are mortgage-backed debt securities that are divided into classes known as "tranches," with each class, or tranche, carrying a different risk factor. The values of some tranches are pegged to the performance of derivative factors such as interest rates, and CMOs generally are sensitive to mortgage prepayments and interest rate fluctuations. In 1990, 3M's pension asset committee decided to invest $20 million in Granite Corporation, a New York hedge fund that held millions of dollars worth of CMOs. The 3M fund is a define d- benefits plan, i.e., a plan based solely on company contributions and investment performance where beneficiaries receive an annuity based on actuarial calculations. The plaintiffs claim Granite's offering materials fully disclosed that CMO investments carry "substantial risks," but that these warnings were ignored by the plan committee, which approved the $20 million investment following a "brief" meeting. Several years later, in February and March 1994, the Federal Reserve Board raised interest rates several times unexpectedly. Granite's CMO portfolio, composed of bonds containing derivative factors pegged to interest rates, plunged in value. Granite's consequent bankruptcy forced 3M to "write off" its entire investment. The plaintiffs later claimed in their District of Minnesota suit that losses to the plan totaled $80 million. The court notes that 3M "does not quarrel" with this figure. In striking down 3M's motion for summary judgment seeking dismissal of the suit in its entirety, the court said ERISA's general duty of care imposed a duty on the fund to both fully investigate the CMOs before investing and to obtain outside expertise to monitor their performance. The prohibited transaction charge was based on allegations that Granite's investment adviser, David Askin and Askin Capital Management (ACM), improperly increased the price of the CMOs to receive higher fees and commissions. The plaintiffs claimed that under ERISA, the 3M-fund committee had a duty to discover the alleged price manipulation. The court noted, however, that ERISA considers such transactions to be prohibited unless they are made in return for "reasonable compensation." In granting 3M's motion to dismiss the charge, the court said the plaintiffs had failed to show that ACM's compensation was "unreasonable." Finally, turning to the damages question, the court said triable material facts existed as to whether or not the 3M Fund's CMO losses were paid from surplus plan assets or from core assets. Under Hughes, use of surplus plan assets by an employer does not deprive beneficiaries of their ERISA benefits or rights. However, if the loss was debited to core assets and that cost affected the rate of benefits, then ERISA was violated. The court said 3M had not clearly established that the fund actually had a surplus, and gave the parties the option to address the issue in further motions for summary judgment. (Derivatives Litigation Reporter; May 20, 1999) NATIONSWAY TRANSPORT: Employees Sue Company Officers for Wages -------------------------------------------------------------- Former employees of NationsWay Transport filed suit against owner Jerry McMorris and other company officers for wages lost after the company declared bankruptcy May 20. Attorney Evan S. Lipstein is asking the Denver District Court to certify the lawsuit as a class action, which could ultimately include about 3,500 employees. Lipstein and two other attorneys, John D. Beckman and Kip B. Shuman, named 57 employees as plaintiffs and expect more to join the suit. "By the time we got to the courthouse to file the suit, I had about 20 more calls from employees," Beckman said. So far, the attorneys are asking for about $450,000, a sum that will grow if other employees join the suit. Neither McMorris nor NW Vice President Cal Wolfe would comment on the lawsuit. Other officers named in the suit were Harold R. Roth, George R. Roberge, James R. Feehan, Mike Hampton and Lester Smith. In the Chapter 11 bankruptcy case in Phoenix, the unpaid employees are considered unsecured creditors who are unlikely to be reimbursed. But under Colorado law, the officers of a company are personally liable for back wages, even if the company they headed is in bankruptcy, Lipstein said. "We named only individuals," Beckman said. "If you sue the corporation, you're stuck in bankruptcy court." The lost wages have heightened employee bitterness about the shutdown of the company. Employees picketed the Colorado Rockies game Friday night because McMorris owns the baseball team. Some said they resented the fact that they were made to work the final day of business, even though McMorris had already decided to close the company. Meantime Monday, a skeleton crew of drivers and dockworkers continued delivering freight, including four truckloads of McMorris' personal property. Four padlocked trailers containing possessions of McMorris' late son Michael were shipped to the owner's home near Timnath. McMorris said his son's possessions had been stored at the Denver terminal in extra trailers, which had to be emptied after the bankruptcy filing May 20. Michael McMorris died of cystic fibrosis in 1996. Wolfe said McMorris also had some leased computer equipment at his home that had to be returned. Customers who have been awaiting shipments tied up in the bankruptcy are also beginning to recover their merchandise. Brenda Hart, who operates a Boulder mail-order business, said she had to go to the NW loading dock when she could not get through on the telephone. About $8,000 worth of Peruvian pottery shipped by truck from Miami made it as far as the Denver terminal when NW shut down. Hart paid a moving company to complete the last leg of the shipment. (Rocky Mountain News; 06/08/99) POLAROID CORPORATION: Cauley Firm Files Suit in Massachusetts ------------------------------------------------------------- The Law Offices of Steven E. Cauley, PA filed a class action lawsuit on June 8, 1999 in the United States District Court for the District of Massachusetts on behalf of all persons and entities who purchased the common stock of Polaroid Corporation (NYSE: PRD) between April 16, 1997 and August 28, 1998. The complaint charges Polaroid, and certain of its officers and directors with violations of the Securities Exchange Act of 1934. The complaint alleges that defendants issued a series of materially false and misleading statements concerning the Company's operations and operating results. Because of the issuance of a series of false and misleading statements the price of Polaroid common stock was artificially inflated. For more information, contact Steven E. Cauley, Scott E. Poynter, or Gina M. Cothern at CauleyPA@aol.com or 888-551-9944. UNIFUND CORP.: Illinois Class Representatives Must Weigh Offers --------------------------------------------------------------- In the first Illinois case to address the applicability of Fed. R. Civ. P. 68 to class actions, the U.S. District Court for the Northern District of Illinois ruled that "Rule 68 does not on its face exempt class actions from its application." Named class representatives, therefore, must seriously consider defendants' offers of settlement. Taylor v. Unifund Corp., No. 98 C 5921 (N.D. Ill. 4/30/99). Debra Taylor filed a class action against Unifund Corp. alleging that it deceptively attempted to collect time-barred debts in violation of the Fair Debt Collection Practices Act. When Unifund made a Rule 68 offer of judgment in the amount of $1,000, Taylor filed a motion to strike claiming that such an offer was inappropriate in a class action lawsuit. Rule 68 provides that defendants may make an offer of judgment at any time more than 10 days before trial and gives the plaintiff 10 days to respond to the offer. If the offer is not accepted, it is deemed withdrawn. The rule additionally states that if the offer is withdrawn and "the judgment obtained by the offeree is not more favorable than the offer, the offeree must pay the costs incurred after the making of the offer." To support her motion to strike, Taylor cited U.S. Supreme Court Justice William Brennan's dissent in Marek v. Chesny, 473 U.S. 1 (1985). In that dissent, Justice Brennan voiced his concerns of using Rule 68 in class action litigation because Rule 23(e) requires the court to approve any settlement and the class representative in rejecting an offer could cause exposure for the class in costs and fees. This argument did not persuade the district court however. Writing for the court, Judge Wayne R. Andersen explained that the federal rules of civil procedure, including Rule 68, govern all suits of a civil nature unless exempted by Rule 81 and Rule 81 does not specifically exempt class actions from Rule 68's scope. Therefore, the district court denied Taylor's motion and gave her 10 days to respond to Unifund's offer. Christopher Langone of Chicago represented the plaintiff. Scott C. Frost and Alan Ehrenberg of Ehrenberg & Frost P.C. in Chicago represented the Unifund. (Consumer Financial Services Law Report; May 28, 1999) WASHINGTON MUTUAL: Asks What Law Applies to Nationwide Action ------------------------------------------------------------- Washington Mutual Bank has asked the California Supreme Court to decide what is the appropriate choice-of-law analysis for a nationwide class certification in a suit against the bank which involves an underlying contractual choice-of-law provision. Washington Mutual Bank, FA et al. v. Briseno, No. S070418 (CA Sup. Ct., petition for review filed April 6, 1999); see Bank & Lender Liability LR, April 7, 1999, P. 10. The class action, led by Jayne A. Briseno, claims American Savings Bank (ASB) (n/k/a Washington Mutual Bank) "grossly overcharged" homeowners whose hazard insurance had lapsed for collateral protection insurance. The class action complaint alleges breach of contract, breach of the implied covenant of good faith and fair dealing, unfair business practices under the federal Unfair Practices Act, unjust enrichment, imposition of a constructive trust, and conversion. According to Briseno, standard residential loan contracts, like those used by ASB, require borrowers to buy hazard insurance. If the borrower fails to maintain the insurance, the bank may continue the insurance policy by paying the premium on the lapsed policies and charging the premium to the loan amount. Instead, Briseno claims, ASB allows the original policy to lapse, place s the property on a blanket policy and charges the borrower for the coverage. In these cases, ASB charges a premium typically two to five times more than the premium on the lapsed policy would have been, she claims. For example, she says ASB charged her $1,980 annually for collateral protection insurance; the premium on her original policy was only $516. On Feb. 24, 1999, the California Court of Appeal ruled choice- of-law clauses are not choice-of-forum clauses, and as such did not prevent certification of a nationwide class action. But Washington Mutual Bank, formerly known as American Savings Bank, argues to the state Supreme Court that the appellate court inappropriately applied the governmental interest test. According to the petition for review, the state Supreme Court remanded the case to the appeals court, which was supposed to apply the choice-of-law analysis in Nedlloyd for enforcing contractual choice-of-law provisions. The Nedlloyd test determines whether the chosen state has a substantial relationship to the parties or their transaction or whether there is any other reasonable basis for the parties' choice of law. If either test is met, "the court must determine whether the chosen state's law is contrary to a fundamental policy of California," Washington Mutual claims. If no such conflict exists, the court must enforce the parties' choice of law. Under Nedlloyd, the relevant inquiry is whether a chosen state's law conflicts with a fundamental policy of California, the bank claims. According to the petition for review, the appeals court disregarded Nedlloyd and instead discussed the governmental interest test described in Clothesrigger, Inc. v. GTE Corp. (CA Ct. App., 1985). The governmental interest test determines whether another state's law would conflict with California law. Such an analysis constitutes a conflict of law test, instead of the choice-of-law test proscribed in the writ petition, the bank claims. By applying the governmental interest test, and not Nedlloyd, the appeals court failed to address the issue presented by the writ petition, Washington Mutual Bank claims. Therefore, the bank requests in its petition for review that the state Supreme Court decide whether the lower court abused its discretion by failing to engage in the proper choice-of-law analysis. The bank also claims that, since Nedlloyd governs, the trial court should have been ordered to engage in the proper choice-of-law analysis on remand. The bank also argues the state Supreme Court should hear this case to protect the uniformity of decisions. Trial courts may be misled into following the court's analysis that "at most a choice-of-law clause raises the potential that another state's law might apply," Washington Mutual argues. The opinion articulates a rule that directly contradicts Nedlloyd, the bank argues. The appeals court also erred by improperly shifting the burden of demonstrating commonality of law to the party resisting class certification, Washington Mutual claims. The opinion contradicts well-established law that on a motion for class certification, the party seeking certification bears the burden of showing that common issues of law do predominate. Finally, the Washington Mutual Bank argues there is no rationale for the court's determination to favor public policy protecting consumers. Nedlloyd reflects a fundamental public policy worthy of protection, which is the right of parties to be assured that the provisions of their contracts will be enforced, the bank contends. The bank also claims such a ruling will open California courts to the burden of numerous nationwide class actions. (Bank & Lender Liability Litigation Reporter; May 19, 1999) ********* S U B S C R I P T I O N I N F O R M A T I O N Class Action Reporter is a daily newsletter, co-published by Bankruptcy Creditors' Service, Inc., Princeton, NJ, and Beard Group, Inc., Washington, DC. Peter A. Chapman, Editor. Kent L. Mannis, Project Editor. Copyright 1999. All rights reserved. ISSN 1525-2272. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The CAR subscription rate is $575 for six months delivered via e-mail. 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