PEARSON, et al v. RITE AID CORPORATION, et al

Filing 198

MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE STEWART DALZELL ON 6/7/2016. 6/8/2016 ENTERED AND COPIES MAILED AND E-MAILED. (SEE PAPER # 207 IN 10-MD-1360) (ems)

IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
IN RE: RITE AID CORPORATION
SECURITIES LITIGATION
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This Document Relates To
CLASS ACTIONS

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MDL Docket No. 1360
MASTER FILE No. 99-1349

MEMORANDUM
Dalzell, J.
I.

June 7, 2016

Introduction
We consider here former Rite Aid executive Franklin C. Brown's motion to enforce the

permanent injunction this Court entered on August 16, 2001 as part of the Settlement Agreement
approved in this class action securities fraud case brought against Rite Aid Corporation
(hereinafter "Rite Aid") pursuant to the Private Securities Litigation Reform Act of 1995
(“PSLRA”), 15 U.S.C. § 78u-4. Brown is a Released Party under that Settlement Agreement.
When we issued the permanent injunction (or "Complete Bar Order" as it is referred to in the
Settlement Agreement), we wrote that:
[T]he Complete Bar Order precludes actions that are ‘based upon,
arising out of or relating to the Settled Claims.’ Obviously, the
question of whether any particular claim is, for example, ‘related’
to the Settled Claims is naturally one that must be made on a caseby-case basis with close attention to the specifics of the individual
claim.
In re Rite Aid Corp. Sec. Litig., 146 F. Supp. 2d 706, 725 (E.D. Pa. 2001).
Fourteen months after the injunction was entered, Rite Aid sued Brown in the Court of
Common Pleas of Cumberland County, Pennsylvania, alleging breach of fiduciary duty, breach
of contract, fraud, and civil conspiracy after he was charged in an Indictment in connection with
his fiduciary duties to Rite Aid (hereinafter the “Cumberland County Action”). The litigation

has languished for years in that court as Brown served jail time, and so it is presently only at the
summary judgment stage. In late 2015 and early 2016, after reviewing our August 16, 2001
permanent injunction, Brown’s newly-retained counsel now moves to enforce the Complete Bar
Order in an attempt to extricate Brown from this fourteen-year old state court case.
We have jurisdiction over this matter pursuant to Paragraph 15 of the Settlement
Agreement.1 For the reasons set forth below, we will grant Brown’s motion to enforce.

II.

Legal Standard
Federal courts have the power and duty to enforce permanent injunctions issued by final

judgments or orders, and this power includes the ability to stay or enjoin proceedings in a state
court in order to “protect or effectuate its judgments.” 28 U.S.C.A. § 2283; see also Nat’l R.R.
Passenger Corp. v. Pennsylvania Public Utility Commission, 342 F.3d 242, 255 (3d Cir. 2003).
But, principles of comity, federalism, and equity always restrain a federal court’s ability to
enjoin state court proceedings, and an over-inclusive injunction of a state court proceeding would
run afoul of well-established principles of equity and federalism. See In re Diet Drugs
(Phentermine/Fenfluramine/Dexfenfluramine) Products Liab. Litig., 369 F.3d 293, 306-310 (3d
Cir. 2004).

III.

Factual and Procedural History
In 1999, Rite Aid shareholders brought a securities class action against the company after

it publicly announced disappointing earnings results for that year.2 In re Rite Aid Corp. Sec.

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“Jurisdiction is hereby retained over the parties for all matters relating to this action,
including the interpretation, effectuation or enforcement of the Revised Derivative Stipulation
and this Order of Final Judgment and Dismissal;” In re Rite Aid Corp., No. 99-CV-2493, 2001
WL 35964566, at *4 (E.D. Pa. Aug. 16, 2001).
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Litig., 139 F. Supp. 2d 649, 652 (E.D. Pa. 2001). The parties settled that case, and we approved
the parties’ Settlement Agreement with two Revised Orders of Final Judgment that we issued on
August 21, 2001. In re Rite Aid Corp. Sec. Litig., No. 99-CV-1349, 2001 WL 35963382, at *3-4
(E.D. Pa. Aug. 16, 2001). The Agreement included a Complete Bar Order which provided that:
7. In accordance with Section 4(f)(7)(A) of the Private Securities
Reform Act of 1995, 15 U.S.C. § 78u-4(f)(7)(A), each of the
Released Parties is by virtue of this Settlement DISCHARGED
from all claims for contribution that have been or may hereafter be
brought by or on behalf of any of the Non-Settling Defendants or
any of the Settling Defendants based upon, relating to, or arising
out of the Settled Derivative Claims insofar as such Settled
Derivative Claims arise under the federal securities laws.
Accordingly, (a) the Non-Settling Defendants and the Settling
Defendants are hereby permanently barred, enjoined and restrained
from commencing, prosecuting or asserting any such claim for
contribution against any Released Party based upon, relating to, or
arising out of the Settled Derivative Claims insofar as such Settled
Derivative Claims arise under the federal securities laws, and (b)
the Released Parties are hereby permanently barred, enjoined and
restrained from commencing, prosecuting or asserting any claim
for contribution against the Non-Settling Defendants based upon,
relating to, or arising out of the Settled Derivative Claims insofar
as such Settled Derivative Claims arise under the federal securities
laws. For purposes of this paragraph 7 and the following
paragraphs 8-10, “Non-Settling Defendants” shall include any
person who the Derivative Plaintiffs, Rite Aid or the Class
Plaintiffs as Rite Aid's assignee may hereafter sue on any claim
based upon, relating to, or arising out of the Settled Derivative
Claims;
8. In accordance with applicable federal and state law (including,
without limitation, 10 Del. C. § 6304(b) and 42 Pa. Cons.Stat. Ann.
§ 8327), and in light of the provisions of paragraph 14(e) of the
Revised Derivative Stipulation, (a) the Non-Settling Defendants
and the Settling Defendants are hereby PERMANENTLY
BARRED, ENJOINED AND RESTRAINED from commencing,
prosecuting, or asserting any claim, however styled, whether for
indemnification, contribution or otherwise, and whether arising
under state, federal or common law, against the Released Parties
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Rite Aid also restated its financial statements for 1997, 1998, and 1999 in October of

1999.
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based upon, arising out of or relating to the Settled Derivative
Claims; and (b) the Released Parties are hereby permanently
barred, enjoined and restrained from commencing, prosecuting or
asserting any other claim, however styled, whether for
indemnification, contribution or otherwise, and whether arising
under state, federal or common law against the Non-Settling
Defendants based upon, arising out of or relating to the Settled
Derivative Claims. Further, in accordance with the applicable
provisions of the Uniform Contribution Among Joint Tortfeasors
Act (10 Del. C. § 6302(c) and 42 Pa.C.S.A. § 8324(c)) plaintiffs,
as assignees of Rite Aid, are hereby permanently barred, enjoined
and restrained from commencing, prosecuting, or asserting any
claim of Rite Aid to recover contribution from the Non-Settling
Defendants as joint tortfeasors;
Id. at *3. Settled Claims were defined as “any claim that had been or could be raised in the
Actions or the acts, facts or events alleged in the Actions or in connection with, based upon,
arising out of, or relating to the Settlement.” In re Rite Aid Corp. Sec. Litig., 146 F. Supp. 2d at
720. Rite Aid was a Settling Defendant under the Agreement and Brown was a Released Party
by virtue of his position as an officer of Rite Aid.3
In 2002, a Grand Jury sitting in the United States District Court for the Middle District of
Pennsylvania returned an Indictment against Brown and other former Rite Aid executives,
charging them with broad conspiracies to defraud the Government, Rite Aid, and its Board of
Directors, and with obstructing justice by concealing the fraud. See, e.g., Indictment, United
States v. Martin L. Grass, et al., No. 02-CR-146 (M.D. Pa. 2002). Brown was alleged to have
distributed compensation to himself without approval from Rite Aid’s Board, falsely inflated
Rite Aid’s stated income, disseminated false financial statement through public disclosures and
Security and Exchange Commission (“SEC”) filings, lied to the SEC, forged documents, and
tampered with witnesses. Id. Brown was subsequently convicted by a jury on numerous Counts

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Brown at different times served as the Executive Vice-President, Chief Legal Counsel,
and Vice-Chairman of the Board of Directors of Rite Aid.
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-- including conspiracy, false statement, obstruction of justice, and witness tampering. See
United States v. Brown, 338 F. Supp. 2d 552, 561 (M.D. Pa. 2004). At his sentencing, Judge
Rambo stated that Brown had, among other things, “orchestrated, organized and led the
extensive obstructive conduct designed to cover up the accounting fraud,” and fabricated a letter
purporting to award him extravagant severance benefits. Sentencing, United States v. Martin L.
Grass, et al., No. 02-CR-146 (M.D. Pa. 2002). Brown’s conviction was affirmed on appeal, see
United States v. Brown, 595 F.3d 498 (3d Cir. 2010), and his collateral attack on his conviction
failed. See United States v. Brown, No. 02-CR-146, 2013 WL 6182032 (M.D. Pa. Nov. 25,
2013).
Rite Aid initiated the Cumberland County Action against Brown in 2002. See Rite Aid.
Corp. v. Brown, No. 02-CV-4922 (Ct. Comm. Pl. Cumberland Cty. 2002). In its Amended
Complaint, filed in 2004, Rite Aid asserted claims against Brown for breach of fiduciary duty,
aiding and abetting, fraud, and conspiracy. Rite Aid also asserted breach of contract claims
under three separate theories: (1) Brown’s obligations as an officer and director, (2) Brown's
deferred compensation agreement, and (3) repayment of advances Rite Aid provided Brown to
defend himself against the criminal charges. In December of 2015, Rite Aid filed a motion for
summary judgment in the Cumberland County Action seeking damages in the amount of $297.4
million, which included:
$60.8 million in legal and other professional expenses incurred by
Rite Aid defending SEC, Department of Justice and civil
proceedings relating to the misconduct of Brown and his coconspirators; $10.9 million in legal fees advanced by Rite Aid to
defend Brown and other former officers relating to proceedings
brought against them; $57.8 million in accounting fees relating to
Rite Aid’s restatement of its financial statements; $6.1 million in
payments made to Brown and other Rite Aid executives for
unauthorized and/or unearned incentive and severance payments;
and $161.8 million paid by Rite Aid to settle shareholder claims
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asserted against the company as a result of the misconduct of
Brown and his co-conspirators.
Decl. of Douglas E. Donley at ¶ 3. Rite Aid has since dropped its claim against Brown for
$161.8 million to settle shareholder claims, leaving $135.6 million in asserted damages.
Brown retained present counsel soon after this filing. Now, after fourteen years of
litigation, Brown asserts that the Cumberland County Action is barred by the Complete Bar
Order.

IV.

Discussion
In determining whether to grant Brown’s motion, we must first decide on the proper

framework to use when analyzing each of Rite Aid’s Cumberland County Action claims, and
then apply that framework to each individual claim. We must then consider Rite Aid’s argument
that Brown has waived any defense he may have under the Complete Bar Order, as it is
untimely. We discuss these issues separately and in turn.

A.

Interpreting the Complete Bar Order

The threshold question before us relates to how we should analyze the language of the
Complete Bar Order when determining whether the Settlement Agreement bars Rite Aid’s claims
in the Cumberland County Action against Brown. In analyzing the Complete Bar Orders
contained in settlement agreements for PSLRA actions, federal courts have applied two separate
tests. The first is the interrelatedness test, which states that “[t]he propriety of the settlement bar
order should turn upon the interrelatedness of the claims that it precludes, not upon the labels
which parties attach to those claims.” In re U.S. Oil & Gas Litig., 967 F.2d 489, 495-96 (11th
Cir. 1992). The Eleventh Circuit articulated this test in response to a non-Settling Defendant’s
attempt to bring an “allegedly independent causes of action for fraud and negligence” against one
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of the Settling Defendants in a PSLRA case. Id. at 495. There, the court noted that “a rose by
any other name is still a rose,” and that the non-Settling Defendant’s fraud and negligence claims
“are nothing more than claims for contribution or indemnification with a slight change in
wording.” Id. (quoting South Carolina Nat. Bank v. Stone, 749 F. Supp. 1419, 1433 (D.S.C.
1990)). The Ninth Circuit in In re Heritage Bond Litig., 546 F.3d 667, 678-680 (9th Cir. 2008),
best articulated a similar, but distinct, independent claims test, stating that the “only claims that
could appropriately be barred by [a Complete Bar Order], in addition to those for contribution
and indemnity, were ‘disguised’ claims for contribution or indemnity …” (citing Gerber v. MTC
Elec. Techs. Co., 329 F.3d 297, 306-07 (2d Cir. 2003)). The court went on to note that disguised
indemnification and contribution claims were ones where “damages are calculated based on
…defendants’ liability to the plaintiffs,” and thus the “distinction turns not on the presence of
independent claims, but on whether the injured party can assert independent damages.” Id. at
679 (internal citations and quotations omitted); see also Gerber, 329 F.3d at 307 (“The issue, in
other words, is less one of independent claims than independent damages.”).
To be sure, the language of the Complete Bar Order here, contained in the Settlement
Agreement that Rite Aid freely agreed to, is broader than the two tests described above. The
Complete Bar Order reads in relevant part that:
the Non–Settling Defendants and the Settling Defendants are
hereby PERMANENTLY BARRED, ENJOINED AND
RESTRAINED from commencing, prosecuting, or asserting any
other claim, however styled, whether for indemnification,
contribution or otherwise, and whether arising under state,
federal or common law, against the Released Parties based upon,
arising out of or relating to the Settled Claims…
In re Rite Aid Corp. Sec. Litig., 2001 WL 35963382, at *3-4 (emphasis added). But Rite Aid’s
decision to sign the Settlement Agreement creates an important distinction between this case and

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the cases cited above. In In re U.S. Oil & Gas Litig and In re Heritage Bond Litig., non-Settling
Defendants who had opted out of the Complete Bar Orders at issue were asserting claims against
Settling Defendants. Here, Rite Aid agreed to settle so as to limit the amount of its liability and
end the litigation. It is far different for Rite Aid, as a Settling Defendant, to attempt to
circumvent the Complete Bar Order that it agreed to by asking us to now adopt the independent
claims test than it would be for a non-Settling Defendant to try to eschew a Complete Bar Order
that it never agreed to. We will therefore focus on the language of the Complete Bar Order in
determining whether Rite Aid's Cumberland County Action claims against Brown are barred.

B.

Analyzing Rite Aid’s Claims In The Cumberland County Action

We must separately analyze each of Rite Aid’s Cumberland County Action claims and
determine whether they are “based upon, arising out of or relating to the Settled Claims.” Those
claims, contained in the Amended Complaint, are: (1) breach of fiduciary duty, (2) aiding and
abetting the breach of fiduciary duty, (3) fraud, (4) conspiracy, (5) breach of contract relating to
Brown’s obligations as an officer and director, (6) breach of contract relating to his deferred
compensation agreement, and (7) breach of contract relating to the repayment of advances Rite
Aid provided Brown and other executives to defend themselves in the criminal proceedings.

1.

Breach of Fiduciary Duty

Rite Aid first avers that Brown breached his fiduciary duty when he engaged in the
criminal conduct described in the Indictment. Cumberland County Action Am. Compl. at ¶ 15.
Brown was convicted on numerous counts -- including conspiracy, making false statements, and
obstruction of justice. Indictment, United States v. Martin L. Grass, et al., No. 02-CR-146 (M.D.
Pa. 2002). Those convictions arose from Brown distributing compensation to himself without

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approval from Rite Aid’s Board, falsely inflating Rite Aid’s stated earnings, disseminating false
financial statements through public disclosures and SEC filings, lying to the SEC, and forging
documents. On its face, this count from the Cumberland County action relates to Rite Aid’s
damages requests for $60.8 million in legal and other professional expenses Rite Aid incurred in
defending itself against SEC, Department of Justice and civil proceedings related to the
misconduct of Brown and his co-conspirators, and $57.8 million in accounting fees related to
Rite Aid’s restatement of its financial statements.
It is clear from both the language of the Amended Complaint and the damages claimed in
the motion for summary judgment in the Cumberland County Action that this count is “based
upon, arising out of or relating to the Settled Claims” here. Shareholders initiated this matter
when Rite Aid reported disappointing earnings results in 1999 and subsequently restated its
financial documents for fiscal years 1997, 1998, and 1999. Brown’s alleged breach of his
fiduciary duty directly related to Rite Aid's disappointing earnings results and restatement of its
financial documents. In fact, it was one of the underlying roots of the Cumberland County
Action. We therefore find that Rite Aid’s breach of fiduciary duty claim in the Cumberland
County Action is barred by the Complete Bar Order.

2.

Aiding And Abetting Breach Of Fiduciary Duty

Rite Aid next brings a claim for aiding and abetting breach of fiduciary duty, alleging that
Brown aided other former Rite Aid executives by helping them breach their fiduciary duties to
the company. Cumberland County Action Am. Compl. at ¶¶ 19-21. Like the previous claim,
this count relates to Rite Aid’s damages request for $60.8 million in legal and other professional
expenses it incurred by defending itself against SEC, Department of Justice and civil proceedings

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relating to the misconduct of Brown and his co-conspirators, and $57.8 million in accounting
fees relating to Rite Aid’s restatement of its financial statements.
As we said in our analysis of the previous breach of fiduciary duty claim, it is clear from
both the language of the Amended Complaint and the damages claimed in the motion for
summary judgment in the Cumberland County Action that this aiding and abetting count is
“based upon, arising out of or relating to the Settled Claims” here. Rite Aid shareholders
initiated this matter when Rite Aid reported disappointing earnings results in 1999 and
subsequently restated its financial reports for fiscal years 1997, 1998, and 1999. Brown’s
alleged aiding and abetting of two former executives’ breaches of their fiduciary duties was
directly related to Rite Aid's disappointing earnings results and restatement of its financial
reports. In fact, it was one of the underlying roots of the Cumberland County Action. We
therefore find that Rite Aid’s aiding and abetting breach of fiduciary duty claim against Brown in
the Cumberland County Action is barred by the Complete Bar Order.

3.

Fraud

Rite Aid also asserts a claim of fraud against Brown, citing his Indictment. This claim
supports Rite Aid’s damages requests for $60.8 million in legal and other professional expenses
and $57.8 million in accounting fees relating to Rite Aid’s restatement of its financial statements.
As we previously stated, Brown’s conviction arose from his inflating his compensation without
approval from Rite Aid’s Board, falsely inflating Rite Aid’s stated earnings, disseminating false
financial statements through public disclosures and SEC filings, lying to the SEC, and forging
documents. These actions, which form the basis for the fraud claim in the Cumberland County
Action, are related to the Settled Claims since Rite Aid’s liability in the PSLRA class action

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stemmed from Brown's and other Rite Aid officers' corporate malfeasance. Rite Aid’s fraud
claim against Brown is thus barred.

4.

Conspiracy

Rite Aid next avers a conspiracy claim against Brown, citing the allegations from its
Amended Complaint and the Indictment and again claiming the aforementioned damages.
Specifically, Rite Aid states that Brown conspired with Martin Grass and Franklyn Bergonzi to
defraud Rite Aid and its Board of Directors. Again, all of these actions Brown performed in
concert with Grass and Bergonzi were directly related to the Settled Claims in this PSLRA class
action, and thus Rite Aid’s conspiracy claim is barred.

5.

Breach of Contract – Obligations as Director and Officer

Rite Aid additionally asserts a breach of contract claim relating to Brown’s obligations as
a director and officer of the company. This claim is all but identical to Rite Aid’s breach of
fiduciary duty claim against him. As we said when analyzing that count, it is clear from both the
language of the Amended Complaint and the damages claimed in the motion for summary
judgment that this count is “based upon, arising out of or relating to the Settled Claims” here.
Rite Aid shareholders initiated this matter when Rite Aid reported disappointing earnings results
in 1999 and subsequently restated its financial documents for fiscal years 1997, 1998, and 1999.
Brown’s alleged breach of contract – specifically regarding his obligations as a director and
officer of Rite Aid, was directly related to the disappointing earnings results and restatement of
financial documents. In fact, it was one of the underlying roots of the action. We therefore find
that Rite Aid’s breach of contract claim relating to Brown’s obligations as a director and officer
is barred.

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6.

Breach of Contract – Deferred Compensation Agreement

Rite Aid’s next claim relates to Brown’s actions in giving himself and other Rite Aid
executives deferred compensation agreements that were not approved by Rite Aid’s Board of
Directors. This count is tied to Rite Aid’s damages request for $6.1 million in unauthorized
incentive and severance payments to Brown and other officers. We find that Brown’s actions
regarding his and others’ unauthorized deferred compensation agreement cannot be neatly
separated from the voluminous bad acts that form the basis of the PSLRA litigation. As in many
of its Cumberland County Action claims, Rite Aid relies heavily on the Indictment and
subsequent conviction of Brown to substantiate this count. It is instructive that the Government,
when prosecuting Brown, did not characterize each of his transgressions as separate occurrences,
but instead portrayed his actions as part of a larger, comprehensive, and cohesive scheme to
defraud both Rite Aid and its shareholders. We agree with this portrayal, and find that Brown’s
actions regarding the issuance of unauthorized incentive and severance payments are related to
the Settled Claims and thus barred.

7.

Breach of Contract – Advanced Repayment Undertaking

Rite Aid claims $10.9 million in damages for legal fees it advanced to Brown to assist
Brown and other Rite Aid executives in the defense of their criminal charges. For the reasons
stated in our analysis of Rite Aid’s deferred compensation claim against Brown, we find that the
advanced payment claim is similarly barred.

C.

Rite Aid’s Claim of Waiver

Finally, Rite Aid avers that, even if the Complete Bar Order applies to all of its claims in
the Cumberland County Action, Brown has waived any defense arising out of the Settlement
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Agreement by failing to assert said defenses during the previous fourteen years of the
Cumberland County litigation. We reject this argument. The issue here is not whether Brown
waived an available defense.4 Brown is not asserting an affirmative defense by bringing this
motion -- he is asking that we enforce our Complete Bar Order and final judgment from 2001.
Thus, the question becomes whether this Court has the power to enforce its own Order, which is,
in this case, the Settlement Agreement. The answer to that question is, of course, an unequivocal
“Yes.”
Federal courts have broad equitable powers to order an effective remedy and ensure its
implementation. See Resident Advisory Bd. v. Rizzo, 530 F. Supp. 383, 388 (E.D. Pa. 1980)
(citing Hills v. Gautreaux, 425 U.S. 284, 293-94 (1976)). Moreover, federal courts have inherent
powers to protect and effectuate their prior judgments. Id. As the Supreme Court stated in Nken
v. Holder, 556 U.S. 418, 428 (2009), “[w]hen a court employs the extraordinary remedy of
injunction…it directs the conduct of a party, and does so with the backing of its full coercive
powers.” (internal citations and quotations omitted).
In this matter, the Complete Bar Order enjoins Settling Defendants from bringing actions
against Released Parties if those actions are based upon, arising out of, or relating to the Settled
Claims. When we employed the “extraordinary remedy of injunction” in this case, we were
directing the parties’ future conduct. The Complete Bar Order is part of the Settlement
Agreement, where we entered final judgment in favor of the plaintiffs and against the defendants.
We certainly still have the power to ensure that Rite Aid is following that Order.
To be sure, we cannot ignore the principles of comity and federalism when deciding to
enjoin a state court proceeding. We recognize that the Court of Common Pleas for Cumberland

4

See Resp. Opp’n Mot. at 14, citing Pa. R. Civ. P. 1032(a).
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County has exercised jurisdiction and spent significant time and resources over the past decade
and a half adjudicating the Cumberland County Action. But here, the interests of federalism
must prevail. We as a federal court issued a final injunction that Rite Aid violated when it
commenced the Cumberland County Action. The enforcement of our lawful mandate trumps the
efforts of our brethren in the Pennsylvania courts, as our Orders would have no meaning if they
could be avoided by parties who would violate our Orders by being able to commence actions in
other jurisdictions. We therefore reject Rite Aid’s waiver argument.

V.

Conclusion
Rite Aid has brought the Cumberland County Action against Brown in violation of the

Complete Bar Order in the Settlement Agreement which it freely agreed to fifteen years ago in
this PSLRA class action. But we cannot allow a violation of this Court's Order to continue. We
will grant Brown’s motion to enforce the permanent injunction order and enjoin Rite Aid from
further pursuing the Cumberland County Action.

BY THE COURT:

_/s/ Stewart Dalzell, J.
Stewart Dalzell, J.

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