Isaac Aron v. Crestwood Midstream Partners, et al

Filing

PUBLISHED OPINION FILED. [16-20742 Dismissed for Lack of Jurisdiction] Judge: CES , Judge: EGJ , Judge: JLW [16-20742]

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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
No. 16-20742

United States Court of Appeals
Fifth Circuit

FILED
July 17, 2017

LAWRENCE G. FARBER

Lyle W. Cayce
Clerk

Plaintiff
v.
CRESTWOOD MIDSTREAM PARTNERS L.P.; CRESTWOOD MIDSTREAM
GP, L.L.C.; ROBERT G. PHILLIPS; ALVIN BLEDSOE; MICHAEL G.
FRANCE; PHILIP D. GETTIG; WARREN H. GFELLER; DAVID
LUMPKINS; JOHN J. SHERMAN; DAVID WOOD; CRESTWOOD EQUITY
PARTNERS L.P.; CRESTWOOD EQUITY GP L.L.C.; CEQP ST SUB L.L.C.;
MGP GP, L.L.C.; CRESTWOOD MIDSTREAM HOLDINGS L.P.;
CRESTWOOD GAS SERVICES GP, L.L.C.,
Defendants - Appellees
v.
DAVID G. DUGGAN,
Appellant
---------------------------------------------------ISAAC ARON, Individually and on Behalf of All Others Similarly Situated,
Plaintiff - Appellee
v.
CRESTWOOD MIDSTREAM PARTNERS L.P.; CRESTWOOD MIDSTREAM
GP, L.L.C.; ROBERT G. PHILLIPS; ALVIN BLEDSOE; MICHAEL G.
FRANCE; PHILIP D. GETTIG; WARREN H. GFELLER; DAVID
LUMPKINS; JOHN J. SHERMAN; DAVID WOOD; CRESTWOOD EQUITY
PARTNERS L.P.; CRESTWOOD EQUITY GP L.L.C.; CEQP ST SUB L.L.C.;

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MGP GP, L.L.C.; CRESTWOOD MIDSTREAM HOLDINGS L.P.;
CRESTWOOD GAS SERVICES GP, L.L.C.,
Defendants - Appellees
v.
DAVID G. DUGGAN,
Appellant

Appeal from the United States District Court
for the Southern District of Texas
Before STEWART, Chief Judge, and JOLLY and WIENER, Circuit Judges.
E. GRADY JOLLY, Circuit Judge.
The class members get nothing. The attorneys get their fees. A class
member objects, but untimely. Consequently, we lack appellate jurisdiction.
More specifically, this appeal arises from the district court’s approval of
a zero-dollar class action settlement and award of attorneys’ fees in a
consolidated lawsuit stemming from a merger between two Delaware entities:
Crestwood Midstream Partners LP (“Midstream”) and Crestwood Equity
Partners LP (“Equity”). In the class action lawsuit, Isaac Aron, a Midstream
unitholder and the class representative, alleged that Midstream’s directors
breached their fiduciary duty in approving the merger and that Equity’s
preliminary proxy statement omitted material information in violation of
federal securities laws and Securities and Exchange Commission (“SEC”)
rules. The parties settled for additional disclosures, confirmatory discovery,
and attorneys’ fees. David Duggan, a class member, objected to the settlement.
The district court approved the parties’ settlement and awarded Aron
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attorneys’ fees over Duggan’s objection. Duggan appeals. We DISMISS for
lack of appellate jurisdiction.
I.
On May 5, 2015, Midstream and Equity entered into a merger agreement
in which Midstream would become a wholly-owned subsidiary of Equity and
Midstream’s unitholders would receive 2.75 common units of Equity for each
unit of Midstream that they owned. The agreement was, however, subject to
a vote by Midstream’s unitholders.
Fifteen days later, Lawrence Farber, a Midstream unitholder, filed a
putative class action against sixteen named defendants, most notably
Midstream and Equity, asserting that: (1) Midstream’s directors breached
their fiduciary duty by attempting to sell Midstream by means of an unfair
process and for an unfair price; and (2) Equity aided and abetted such
breaches.
In June 2015, Equity filed a preliminary proxy statement with the SEC
related to the merger.

The preliminary proxy, among other things,

summarized the merger agreement, explained the events leading up to the
agreement, and summarized the financial analyses of Tudor, Pickering, Holt
& Co. Advisors, LLC (“Tudor”), one of the financial advisors to the Midstream
Conflicts Committee. Two parts of the proxy addressing Tudor’s financial
analyses are particularly relevant. First, in the Contribution Analysis section,
the proxy stated that the contribution analysis indicated a range of implied
exchange ratios in the merger of 1.432x to 4.179x, as compared to the exchange
ratio of 2.750x. Second, in the Unaudited Financial Projections section, the
proxy included a table showing unaudited financial projections 1 from 2015 to

The financial projections were for: (1) earnings before interest, tax, depreciation, and
amortization (“EBITDA”); (2) distributable cash flow; (3) distributable cash flow per LP unit;
(4) distributions per LP unit; and (5) growth capital expenditures.
1

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2019 for Equity, Midstream, and the pro forma combined entity that would
result from the merger. Importantly, the proxy stated that each financial
forecast “included a base case 2 . . . , as well as an upside case[ 3] and a downside
case,[ 4] resulting from adjustments by . . . management to the applicable base
case.” But the relevant table included only one case and never identified
whether it reflected the base, upside, or downside case.
On July 6, 2015, Farber amended his complaint to add the claim that the
preliminary proxy violated SEC Rule 14a-9 5 and Section 14(a) of the Securities
Exchange Act of 1934 6 because it was materially misleading and omitted
material facts unitholders needed to properly evaluate the proposed merger.
Fifteen days later, Aron filed his own putative class action against the
Farber suit defendants, alleging that Midstream and Equity violated
Securities Exchange Act §§ 14(a) and 20(a) 7 and Rule 14a-9. Pertinently, Aron
contended that the preliminary proxy violated Section 14(a) and Rule 14a-9
because it omitted material facts regarding, among other things, key inputs
and assumptions of the financial analyses performed by Tudor.

2

The expected financial scenario.

3

The most optimistic financial scenario.

4

The most pessimistic financial scenario.

This Rule prohibits false or misleading statements with respect to any material fact
or the omission of any material fact in proxy statements. 17 C.F.R. § 240.14a-9(a) (stating
that a proxy statement shall not “contain[] any statement which, at the time and in the light
of the circumstances under which it is made, is false or misleading with respect to any
material fact, or which omits to state any material fact necessary in order to make the
statements therein not false or misleading”).
5

Section 14(a) provides that “[i]t shall be unlawful for any person . . . in contravention
of such rules and regulations as the Commission may prescribe . . . to solicit . . . any proxy . .
. in respect of any [registered, non-exempt] security . . . .” 15 U.S.C. § 78n(a)(1).
6

7

Section 20(a) provides for joint and several liability. 15 U.S.C. § 78t(a).

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Equity filed two amendments to the preliminary proxy in July and
August 2015. While they provided some of the information Farber and Aron
sought, these amendments did not provide the requested data underpinning
Tudor’s financial analyses.
On August 28, 2015, Equity filed its final proxy with the SEC. Notably,
Equity did not change the Contribution Analysis and Unaudited Financial
Projections sections.
Three days later, Midstream announced that it would hold a special
meeting for unitholders to vote on the proposed merger on September 30, 2015.
Shortly thereafter, Farber and Aron jointly moved for a preliminary injunction,
seeking to enjoin the unitholder vote until Midstream and Equity disclosed the
“material” information they had allegedly omitted from the final proxy in
violation of federal securities laws and regulations.
The district court consolidated Aron and Farber’s cases. Farber then
filed a voluntary notice of dismissal.

But Aron moved for a temporary

restraining order, expedited preliminary injunction hearing, and preliminary
injunction.
The district court granted Farber’s motion to dismiss all of his claims
against Midstream and Equity and set a hearing on Aron’s motion.
The day before the scheduled hearing and after arm’s-length
negotiations, Aron, Midstream, and Equity reached a proposed settlement.
Midstream and Equity agreed to: (1) disclose financial projections that they
omitted from the proxy statement; (2) allow Aron to conduct discovery to
confirm that the proposed settlement was fair, adequate, and reasonable and
to terminate the settlement if he determined that it was not fair; and (3) not
oppose Aron’s application for an award of attorneys’ fees and expenses not to
exceed $575,000, which Midstream or its successor(s)-in-interest or their
respective insurer(s) would pay. Aron, in turn, agreed to a general release of
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the known and unknown claims that class members possessed in their capacity
as Midstream unitholders.
A week before the merger vote, Midstream supplemented the final proxy
statement with an addendum to the Unaudited Financial Projections section
that: (1) explained that the relevant table contained base case projections; and
(2) provided additional tables showing the upside and downside case
projections (together, the “supplemental disclosures”).

The supplemental

disclosures showed that Midstream’s financial growth projections for EBITDA
and distributable cash flow increased at a significantly greater pace than
Equity’s under the upside case compared to the base case—facts relevant to
the fairness of the 2.75 exchange ratio.
Midstream’s unitholders voted to approve the merger on September 30,
2015.
Meanwhile, Aron reviewed both public and confidential documents
related to the merger and consulted with a financial expert to evaluate the
claims in his lawsuit. Then, in February and May 2016, Aron deposed a
member of Midstream’s Conflicts Committee, a managing director at Tudor,
and Equity’s senior vice president and chief financial officer.
After completing discovery and reviewing and analyzing his claims with
an expert, Aron concluded that his claims were not viable and that the
proposed settlement terms were fair, reasonable, and adequate. He therefore
entered into a stipulation of settlement and release.
In an order signed June 21, 2016, the district court preliminarily
approved the stipulation and certified the settlement class. The court found
that the settlement warranted notice to the class and scheduled a fairness
hearing for October 7, 2016, at which time it would hear any objections and
consider whether to give final approval to the settlement. The court then
formally approved the form and content of the proposed notice, ordering
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Midstream to mail a copy of the notice “[w]ithin fourteen (14) business days
following entry of [the] Order” to all members of the class who could “be
identified with reasonable effort.” Further, the court ordered that all record
holders who were not also beneficial owners of Midstream units must forward
notice to the beneficial owners or provide the notice administrator with a list
of the names and address of the owners. The notice administrator was then
required to use reasonable efforts to give notice to beneficial owners. The order
also specifically stated that the court would consider only objections submitted
in accordance with the procedure that it detailed in the order. 8 The order also
clearly stated that non-compliant objectors would “be deemed to have waived
[their] objection(s) (including any right of appeal) and [would] be forever barred
from making any such objection(s) . . . unless otherwise ordered by the Court.”
On June 22, 2016, the clerk entered the order, and the district court reset
the fairness hearing for October 14, 2016.
Midstream’s notice administrator, A.B. Data, Ltd., was responsible for
mailing notice. A.B. Data mailed 50,145 notices to unitholders, starting with
its initial mailing on July 13, 2016 9—the fourteenth business day after the
clerk entered the order.

The notice explained how to object and that, if

objectors did not object in the prescribed manner, they would “be deemed to
have waived such objection and [would] forever be barred from raising such
objection in the Action or any other action or proceeding.” However, the notice,

The court required objectors to file with the court and serve upon specified counsel
no later than twenty-one calendar days prior to the hearing: (1) written notice of the intention
to appear; (2) proof of membership in the class by way of brokerage statement, account
statement, or other document evidencing ownership of Midstream units; (3) a detailed
summary of any objection(s); (4) the grounds for or reasons why they desired to appear and
be heard; and (5) all documents or writings they wanted the court to consider.
8

This initial mailing was made to the 4,534 names and addresses on a mailing list
A.B. Data compiled from a record owner list and a database of domestic brokerage firms,
banks, financial institutions, and other nominee purchasers.
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which was undated, mistakenly stated that the fairness hearing would be held
on October 7, 2016, instead of the later amended date, October 14.
No objections were filed prior to September 23, 2016, the deadline to
object to the settlement. One objection—Duggan’s—was, however, filed about
two weeks past the deadline on October 3, 2016.
This objection first asserted “good cause” for its untimeliness. Duggan
stated that, although the notice was dated June 21, 2016, he did not receive it
until “sometime in August.” But he was not, he asserted, able to file his
objection before the submission deadline of September 16th 10 because he had
to go on “a long-planned European vacation” from September 7–21, 2016.
Turning to the merits of his objection, Duggan argued that, in the context of
mergers and securities class actions, disclosure-only settlements were often
strike suits that “sold out” the class and were designed to accrue attorneys’
fees. Thus, the district court should follow In re Walgreen Co. Stockholder
Litigation, 832 F.3d 718 (7th Cir. 2016), and In re Trulia, Inc. Stockholder
Litigation, 129 A.3d 884, 894 (Del. Ch. 2016), and not approve the settlement—
that is, unless the court found that “the supplemental disclosures address[ed]
a plainly material misrepresentation or omission.” And, he argued, neither the
notice nor the supplemental disclosures asserted a plainly material
misrepresentation or omission in the proxy statements.
On October 14, 2016, the district court conducted the fairness hearing.
The hearing focused on Duggan’s objection. The district court interrogated
counsel at length about her concern that this was “a scenario where every
single time there’s . . . a merger on the table, that somebody is going to say that
there hasn’t been enough disclosed, and that’s just sort of like the new game in

If the court had not pushed the fairness hearing back a week in its subsequent order,
this date would have been the submission deadline instead of September 23rd.
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town, and . . . [whether there] should be attorneys’ fees for disclosure” if that
were the case. The court concluded, however, that “everybody believes that the
attorneys’ fees are fair and warranted in this particular case.” The court then:
approved the class action settlement, granted certification of the settlement
class, awarded attorneys’ fees and expenses of $575,000, and entered final
judgment.
Duggan has timely appealed. He contends that we have jurisdiction to
hear the merits of his appeal, arguing that he has Article III standing and that
the untimeliness of his objection to the settlement did not constitute a waiver
of his right to appeal. Turning to the merits of his objection, he argues that
the district court erred in approving the settlement because: (1) it applied an
incorrect legal standard; (2) it did not determine whether the supplemental
disclosures provided a material benefit to the class, much less a plainly
material benefit; (3) the supplemental disclosures were immaterial as a matter
of law; (4) the court’s finding that notice was constitutionally satisfactory was
clearly erroneous; and (5) the court abused its discretion in awarding attorneys’
fees because the settlement achieved no value for the class.
II.
A.
We begin by addressing the threshold issue of our appellate jurisdiction.
Where, as here, an appellant is a “nonnamed member of a class certified under
Federal Rule of Civil Procedure 23(b)(1)” who has not “intervene[d] in the
litigation,” the underlying question is “whether [the] appellant should be
treated as a party for purposes of appealing a judgment when it was not a party
in the proceedings below,” not whether the appellant has Article III standing
or prudential standing. E.g., Devlin v. Scardelletti, 536 U.S. 1, 3–4, 6–7 (2002);
Official Comm. of Unsecured Creditors of WorldCom, Inc. v. S.E.C., 467 F.3d
73, 77 (2d Cir. 2006) (citation omitted).
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The Supreme Court has often underscored that “only parties to a lawsuit,
or those that properly become parties, may appeal an adverse judgment.” E.g.,
Devlin, 536 U.S. at 7 (citation omitted); Marino v. Ortiz, 484 U.S. 301, 304
(1988) (citing FED. R. APP. P. 3(c) (“The notice of appeal shall specify the party
or parties taking the appeal.”)). But then the Devlin Court came along and
concluded that it should carve out a limited exception to this well-established
rule: “[N]onnamed class members . . . who have objected in a timely manner to
approval of the settlement at the fairness hearing have the power to bring an
appeal without first intervening.” Devlin, 536 U.S. at 14. Central to this
appeal, however, the Court stated that its holding did not address a case in
which an objector made an “untimely objection[].” Id. at 13. That situation
“implicates basic concerns about waiver that should be easily addressable by
courts of appeals.” Id. We rise to the assigned task.
B.
Duggan provides three reasons why his failure to comply with the notice
does not constitute waiver of his appeal. First, even though he failed to file a
notice of appearance in the district court, Duggan contends that this failure is
not a waiver because the district court’s notice stated that objectors need not
appear at the fairness hearing and he did not appear. Second, Devlin did not
create a jurisdictional rule forbidding the district court from considering his
objection. And because the district court considered the merits of his objection,
we may infer that: (1) Duggan satisfied the court’s objection procedures; and
(2) the court implicitly allowed the filing deadline to be extended. Finally,
Duggan argues, Aron, the appellee, has waived his argument against Duggan’s
objection by failing to move to strike Duggan’s objection in the district court.
Notwithstanding Duggan’s arguments, we conclude that we lack
jurisdiction over this appeal because Duggan, a nonparty, non-intervenor,
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waived his right to appeal by filing an untimely, procedurally deficient 11
objection.
Turning to Duggan’s arguments, the fact that the district court
considered the merits of Duggan’s objection before dismissing it does not cure
the waiver problem for Duggan. The district court’s June order stated that
objectors who filed noncompliant objections would “be deemed to have waived
[their] objection(s) (including any right of appeal) . . . unless otherwise ordered
by the Court.” The court, in approving the settlement agreement, did indeed
interrogate the parties relating to the subject matter of Duggan’s objection, but
it neither indicated that it had accepted, approved, or waived the objection’s
procedural defects. It certainly did not hold that Duggan had good cause for
failing to timely submit his objection. Moreover, waiver of appellate rights
does not turn on how a district court chooses to address a late or deficient
objection. As Devlin recognized, “waiver of objections below” is “the type of
issue[] . . . typically addressed only by an appellate court.” Devlin, 536 U.S. at
14. And the issue of waiver essentially turns on whether waiver “was made
knowingly and voluntarily.” See United States v. Anglin, 215 F.3d 1064, 1068
(9th Cir. 2000), superseded on other grounds by United States v. Lo, 839 F.3d
777 (9th Cir. 2016); see also United States v. Walters, 732 F.3d 489, 491 (5th
Cir. 2013) (citation omitted). This test is easily applied here because Duggan
duly received specific notice of the objection requirements, yet knowingly failed
to comply with those requirements.
Furthermore, Duggan’s argument that Aron was required to move the
district court to strike Duggan’s objection as a predicate to raising Duggan’s
procedural failures is unpersuasive. Duggan bases his argument upon the

Duggan’s objection was procedurally deficient because he did not file with the court,
or serve upon counsel, written notice of his intent to appear at the fairness hearing.
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unpublished case Younce v. Barnhart, 98 F. App’x 305 (5th Cir. 2004). In
Younce, the magistrate judge ruled in favor of a Social Security claimant,
Younce, reversing the Commissioner of Social Security’s denial of benefits. See
id. at 305–06. The district court rejected the magistrate judge’s report and
recommendation and, instead, affirmed the Commissioner’s denial of benefits.
Id. at 305. Younce appealed, arguing that the district court had “erred by
considering the Commissioner’s untimely objections to the magistrate’s”
report. Id. We held that Younce had “no basis to complain of the district court’s
[decision] . . . even though [the Commissioner’s] objections were untimely”
because the “court was free to reject the . . . report . . . in [the] absence of the
filing of objections.” Id. at 306. Duggan’s argument hinges on our additional
statement—made without any citation—that “if Younce felt aggrieved by the
district court’s acceptance of [late] objections . . . , his proper course was to file
a motion to strike, a motion for an extension of time to file a counter written
objection, or a motion for reconsideration.” Id.
We find Younce completely inapposite. The case does not touch upon the
rights of a nonparty to appeal the judgment of a district court. Nor does it in
any other way address appellate jurisdiction as such. Younce addressed the
plenary powers that district courts possess over their magistrate judges—i.e.,
whether a district court is constrained from exercising its power to reject a
magistrate’s report when the losing party before the magistrate fails to timely
object to the report. Id. at 306. And its statement with respect to motions to
strike seems gratuitous: the Commission likely did not have to file any
objections at all given the fact that the district court did not accept, but instead
rejected, the magistrate judge’s report. See id.; Douglass v. United Servs. Auto.
Ass’n, 79 F.3d 1415, 1430 (5th Cir. 1996) (en banc) (setting out the rule raised
in Younce: if parties do not object to a magistrate’s report in a timely manner,
this Court will apply plain error review to any of “the unobjected-to proposed
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factual

findings

and

legal

conclusions

accepted

by

the

district

court”), superseded by statute on other grounds, 28 U.S.C. § 636(b)(1). Duggan
attempts to bootstrap his jurisdictional untimeliness argument to a case based
on irrelevant facts, irrelevant procedure, and irrelevant law.
In sum, Duggan’s reasons for his several failures are lame. Duggan
opted to go on vacation, which may well have seemed like a good idea at the
time. He submitted his procedurally deficient objection, however, after he
returned from vacation and ten days after the actual deadline. Such choices
have consequences. Devlin’s specific exception for nonparty objectors is limited
to those who have “who have objected in a timely manner.” Devlin, 536 U.S.
at 14. In short, what we have decided today is consistent with the application
of Devlin to nonparty objectors. 12

Duggan fails to qualify for the Devlin

exception, and, because Duggan is also a nonparty to the judgment below, we
have no appellate jurisdiction over his claims.

E.g., Abeyta v. City of Albuquerque, 664 F.3d 792, 796 (10th Cir. 2011) (holding “that
the Devlin exception . . . will only apply where the nonparty has a unique interest in the
litigation and becomes involved in the resolution of that interest in a timely fashion both at
the district court level and on appeal”); In re UnitedHealth Grp. Inc. S’holder Derivative
Litig., 631 F.3d 913, 916–17 (8th Cir. 2011) (“A shareholder—or an unnamed class member
for that matter—must file a timely objection pursuant to district court procedure, or else he
loses any right he would have otherwise had to appeal a settlement agreement.”); In re
Plastics Additives Antitrust Litig., No. 08-3358, 2009 WL 405522, at *1 (3d Cir. Feb. 19, 2009)
(“For an unnamed class member to have standing to appeal a decision in a class action, he or
she must have properly raised objections to that decision during the pendency of the
litigation.”); In re Integra Realty Res., Inc., 354 F.3d 1246, 1251, 1257–58 (10th Cir. 2004)
(holding that a class member waived his right to appeal because he did not strictly comply
with the objection procedure laid out by the district court); Grinberg v. Maria’s Holding Corp.,
No. B244535, 2013 WL 6061764, at *6 & n.9 (Cal. Ct. App. Nov. 18, 2013) (looking to Integra
and UnitedHealth Grp. in holding that it had no appellate jurisdiction over an appeal to a
settlement brought by an unnamed class member who filed an untimely objection and was
not permitted to intervene); Velma-Alma Indep. Sch. Dist. No. 15 v. Texaco, Inc., 162 P.3d
238, 242 (Okla. Civ. App. 2007) (“Devlin and Integra make plain that to preserve an objection
to a class settlement agreement, and to be considered a party, for purposes of appeal, the
objecting party must present his objection at the settlement fairness hearing by following
whatever directions are given in the notice to secure the right to present those objections at
the hearing.”).
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III.
For the reasons we have set out above, this appeal, for lack of appellate
jurisdiction, is DISMISSED.

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