Beazer Homes has announced in its December 22, 2009 filing on Form 8-K (here) that it has settled the subprime-related shareholder’s derivative lawsuit that had been filed against the company, as nominal defendant, and certain of its directors and officers. According to the filing, the case has been settled in recognition of the corporate governance reforms the company has enacted and in exchange for the agreement to pay the plaintiff’s attorneys’ fees of $950,000. As reflected below, this appears to be the first settlement of a subprime-related derivative lawsuit.
The Derivative Lawsuit and Settlement
The plaintiff had filed a shareholders’ derivative complaint in Northern District of Georgia in April 2007. (A separate complaint filed in Delaware was later dismissed.). According to the plaintiff’s amended consolidated derivative complaint (here), the individual defendants breached their fiduciary duties and violated the federal securities laws by ignoring "numerous and obvious ‘red flags’ existing even prior to 2006 that alerted them or would have alerted them had they not consciously disregarded such red flags, to a plethora of improper loan practices at Beazer." The loan practices "eventually led to a vast amount of foreclosures and other problems, materially impacting the company’s stability."
The amended complaint also alleges that the defendants’ mismanagement has led to investigations of the company’s mortgage and accounting practices by the IRS, the Department of Justice, the FBI, HUD, and the SEC.
As part of the settlement and as reflected in the parties’ October 30, 2009 stipulation of settlement (here), Beazer acknowledged "that the commencement, prosecution and settlement of the Derivative Action were material contributing factors in causing the Company to agree to adopt and/or implement the corporate governance reforms and remedial measures" described in an attachment to the stipulation.
In addition, the stipulation provides that "Beazer and the individual defendants shall pay, or cause their insurers to pay, upon Court approval, an aggregate amount of $950,000 to Plaintiff’s Counsel for their attorneys’ fees and reimbursement of expenses."
There is nothing in the agreement to indicate that the company’s insurers have affirmatively agreed to pay these amounts.
Beazer Homes and certain of its directors and officers had also been separately sued in a securities class action lawsuit, that later resulted in a $30.5 million settlement (here), that was, according to the company’s press release at the time, to be funded from insurance proceeds." Subsequent to the class action settlement, certain mutual fund investors in Beazer elected to opt out of the class action settlement and in September 2009 filed their own separate opt-out complaint in the Northern District of Georgia.
Beazer is now engaged in coverage litigation with its third level excess D&O insurer, as reflected in the declaratory judgment complaint that Beazer filed against the carrier on December 17, 2009, in the Northern District of Georgia. According to the coverage lawsuit, Beazer’s third level excess carrier "wrongfully denied coverage for Beazer Homes in connection with the Opt-Out Litigation." The complaint goes on to recite that the carrier’s "sole ground" for denying coverage "is the assertion that Beazer Homes purportedly breached a so-called ‘warranty letter.’" (My recent post discussing "warranty letters" can be found here.}
With Beazer’s top level excess carrier denying coverage and engaged in coverage litigation with the company, it is unclear whether or to what extent insurance is presently available to fund the cash portion of the Beazer derivative settlement, even assuming insurance would otherwise apply to an agreement to pay the plaintiff’s attorneys’ fees.
But setting aside the issues surrounding the availability of insurance to fund the payment of the plaintiff’s attorneys’ fees, there is the overall question of the benefit of litigation that is settled in "recognition of" remedial actions that the company has already taken, undoubtedly due to the onslaught of regulatory and legal problems the company has encountered.
To be sure, the stipulation recites that the derivative litigation was a "material contributing factor" in causing the reforms to be initiated. Some observers may question whether the reforms would have been enacted in any event regardless of the derivative lawsuit, and might even question the social utility of a process the most tangible result of which is the transfer of monies to the plaintiffs’ lawyers who initiated the process. Those same observers would likely also note that the stipulation’s concession about the role of the derivative suit in the implementation of the governance reforms was simply a price the defendants had to pay to put an end the derivative suit, the same as the agreement to pay plaintiffs’ attorneys’ fees.
By my count, there were twenty seven subprime and credit crisis related derivative lawsuits filed, as reflected here. As far as I can determine, the Beazer Homes derivative settlement is the first of the subprime and credit crisis-related derivative suit to settle. There undoubtedly will be other settlements ahead.
Though Beazer Homes derivative suit is not options backdating related, it reflects the same settlement pattern as many of the options backdating derivative suits. As shown on my table of options backdating related derivative lawsuit case resolutions (which can be found here), many of the backdating derivative cases resulted in settlements comprised of an agreement to adopt corporate therapeutics and governance reforms, together with the payment of plaintiffs’ attorneys’ fees.
It remains to be seen whether others of the subprime and credit crisis related derivative suits will settle on the same or similar grounds. The plaintiffs’ lawyers that make their living off of these kinds of cases will have to accept that there will be questions about the value for shareholders and for society from this process, where the most visible thing that is accomplished is the plaintiffs’ lawyers collection of their fees. Of course, the plaintiffs’ lawyers themselves will cite the corporate reforms, a point which in the interest of balance, I acknowledge here.
I have in any event added the Beazer Homes derivative settlement to my tally of subprime and credit crisis related lawsuit resolutions, which can be accessed here.
Break in the Action: The D&O Diary will be on a short break over the next few days. We will resume the "normal" publication schedule after the holidays.
But before I go, I wanted to leave something to make you smile. Here, if you have not yet seen it, is Jill and Kevin’s Wedding Dance. Enjoy. (My oldest daughter says: "I like the bridesmaids’ dresses. They seem like people I would like, too –they dance the same way I do.")