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Farms v. Speaks

United States Court of Appeals, Fourth Circuit

February 28, 2019

SHARP FARMS; ROBERT W. MAY; TUCKER FARMS INC.; WORTHINGTON FARMS, Inc., Objectors - Appellants,
v.
TERESA M. SPEAKS; TOBY SPEAKS; STAN SMITH; EDDIE BROWN; ROBERT POINDEXTER; MIKE MITCHELL; ROY L. COOK; ALEX SHUGART; H. RANDLE WOOD; ROBIN ROGERS; DANIEL LEE NELSON, Plaintiffs - Appellees, and U.S. TOBACCO COOPERATIVE INC., f/k/a Flue-Cured Tobacco Cooperative Stabilization Corporation, Defendant-Appellee. DAN LEWIS, Potential Intervenor - Appellant,
v.
TERESA M. SPEAKS; TOBY SPEAKS; STAN SMITH; EDDIE BROWN; ROBERT POINDEXTER; MIKE MITCHELL; ROY L. COOK; ALEX SHUGART; H. RANDLE WOOD; ROBIN ROGERS; DANIEL LEE NELSON, Plaintiffs - Appellees, and U.S. TOBACCO COOPERATIVE INC., f/k/a Flue-Cured Tobacco Cooperative Stabilization Corporation, Defendant-Appellee.

          Argued: October 31, 2018

          Appeal from the United States District Court for the Eastern District of North Carolina, at Raleigh. James C. Dever, III, District Judge. (5:12-cv-00729-D)

         ARGUED:

          Charles Alan Runyan, RUNYAN & PLATTE, Beaufort, South Carolina, for Appellants.

          Gary K. Shipman, SHIPMAN & WRIGHT, LLP, Wilmington, North Carolina, for Appellees

          Teresa Speaks, et al. Derek L. Shaffer, QUINN EMANUEL URQUHART & SULLIVAN, LLP, Washington, D.C., for Appellee United States Tobacco Cooperative Inc.

         ON BRIEF:

          Andrew S. Platte, RUNYAN & PLATTE, Beaufort, South Carolina, for Appellants

          Sharp Farms, Robert W. May, Tucker Farms, Inc., and Worthington Farms, Inc. John L. Coble, MARSHALL, WILLIAMS & GORHAM, LLP, Wilmington, North Carolina, for Appellant

          Dan Lewis. William G. Wright, SHIPMAN & WRIGHT, LLP, Wilmington, North Carolina; Namon Leo Daughtry, DAUGHTRY, WOODARD, LAWRENCE & STARLING, Smithfield, North Carolina, for Appellees

          Teresa Speaks, et al. Lee M. Whitman, Tobias S. Hampson, WYRICK ROBBINS, Raleigh, North Carolina; Jonathan Cooper, QUINN EMANUEL URQUHART & SULLIVAN, LLP, Washington, D.C., for Appellee United States Tobacco Cooperative Inc.

          Before GREGORY, Chief Judge, THACKER, and QUATTLEBAUM, Circuit Judges.

          GREGORY, CHIEF JUDGE:

         This appeal of a class-action settlement concerns a longstanding dispute between U.S. Tobacco Cooperative, Inc., an agricultural cooperative of flue-cured tobacco growers in North Carolina, and a class of plaintiffs consisting of current and former Cooperative members. From its inception in 1946, the Cooperative administered a federal price-support program designed to stabilize tobacco prices for member growers through purchasing their unsold tobacco at a guaranteed minimum price and marketing the tobacco to buyers. With a mixed record of success, the price-support program ultimately came to an end in 2004, when Congress enacted the Fair and Equitable Tobacco Reform Act ("FETRA"). By this point, the Cooperative had accumulated a capital reserve fund of hundreds of millions of dollars generated from the tobacco the members delivered or the fee assessments they paid to the Cooperative as members participating in the price-support program.

         On October 31, 2012, the plaintiffs ("Speaks plaintiffs") filed a class-action complaint against the Cooperative, seeking a declaratory judgment, distribution of the reserve funds to members, and judicial dissolution of the Cooperative as an alternative form of relief. They argued that after Congress enacted FETRA and the price-support program ended, the Cooperative's primary purpose ceased to exist, and it should be forced to distribute the reserve funds and be judicially dissolved. The parties eventually mediated the case in May 2017 and moved for the district court to certify the class and approve their $24 million settlement as fair, reasonable, and adequate for the class members. The district court did so.

         But this is not the whole picture. At the time the Speaks plaintiffs filed their complaint in October 2012, a parallel class action against the Cooperative was making its way through North Carolina state court. That case was brought several years earlier, and it included a class of member growers (the "Fisher-Lewis plaintiffs") who form a subset of the Speaks class in this appeal but whose claims to the reserve fund are arguably much stronger than the claims of the Speaks plaintiffs. Indeed, a North Carolina court, reviewing a proposed settlement for the Fisher-Lewis plaintiffs in 2006, concluded that $76.8 million in relief was not even in the "ball park" of being fair, reasonable, and adequate for class members.

         The Speaks plaintiffs filed their October 2012 complaint just as the Fisher-Lewis plaintiffs were gathering momentum-they had substantially survived a motion to dismiss and moved for class certification before the state court. Acknowledging that the preexisting Fisher-Lewis proceedings could affect their case, the Speaks plaintiffs then stayed the case for several years while those proceedings played out. During this time, the Fisher-Lewis plaintiffs met with more success, achieving class certification and successfully defending against the Cooperative's appeal challenging certification. Within two weeks of the North Carolina Supreme Court's decision affirming class certification, however, the Speaks parties began their own settlement negotiations. They reached a tentative settlement for $24 million within five months-a settlement that included the Fisher-Lewis certified class and extinguished its claims.

         Before this Court are the Objectors-Appellants-Fisher-Lewis class members who objected to the Speaks settlement-and would-be intervenor Dan Lewis. Lewis contends that the district court abused its discretion in denying his motion to intervene in Speaks. Because he filed his appeal with this Court far beyond the 30-day appeal deadline prescribed by statute, we must dismiss his appeal for lack of jurisdiction.

         The Objectors claim, at bottom, that they got a raw deal. They first contend that the district court abused its discretion in certifying the Speaks settlement class under Federal Rule of Civil Procedure 23(a), arguing that the Speaks class counsel and class representatives cannot and did not adequately protect their interests in this case. The Objectors also challenge the district court's final approval of the $24 million settlement as fair, reasonable, and adequate under Rule 23(e). Finally, they argue that the district court erred in denying certain Fisher-Lewis class members' attempts to opt out the entire Fisher-Lewis certified class from Speaks.

         We affirm the district court's denial of the attempted group opt-out. But after a careful review of this record-which spans nearly 15 years and 5, 000 pages-we cannot agree that the Objectors' interests were adequately protected or that a $24 million settlement is fair, reasonable, and adequate for the class. For this reason, we reverse the district court's order certifying the class and granting final approval of the class-action settlement and remand for further proceedings consistent with this opinion.

         I.

         A.

         Historical Background

         Created in 1946, U.S. Tobacco Cooperative, Inc. is an agricultural cooperative of flue-cured tobacco growers organized under the North Carolina Cooperative Marketing Act.[1] N.C. Gen. Stat. §§ 54-145 to 54-166. The Cooperative's purpose is to "engage in any activity involving or relating to the business of receiving, grading, processing, drying, packing, storing, financing, marketing, selling, and/or distribution, on a cooperative basis, of flue-cured tobacco or products or by-products derived therefrom of its members." J.A. 345.

         Under North Carolina law and the Cooperative's governing documents, the Cooperative may establish a capital reserve. See N.C. Gen. Stat. § 54-151(5); J.A. 366- 67 (articles of incorporation), J.A. 3200 (1947 bylaws), J.A. 3503-04 (1967 bylaws). In the 1970s, the Cooperative's Board of Directors established such a reserve to "prepare for [] rainy days" in the event federal subsidies ended. J.A. 3963. The plaintiffs in this lawsuit are a class of current and former members of the Cooperative who brought an action for dissolution of the Cooperative and distribution of excess capital reserves.[2] J.A. 262-90.

         To become a member of the Cooperative, a flue-cured tobacco producer "paid five dollars . . . in exchange for one share of [the Cooperative's common] stock." Fisher v. Flue-Cured Tobacco Coop. Stabilization Corp., 794 S.E.2d 699, 703 ( N.C. 2016) ("Fisher-Lewis"). According to the Cooperative's governing documents, this common stock could be "purchased, owned or held only by producers who shall patronize the corporation in accordance with uniform terms and conditions . . . and only such persons shall be regarded as eligible members of the corporation." J.A. 346. If the common stock passed to someone ineligible for membership, that person had "no rights or privileges on account of such stock," and the Cooperative could "purchase such stock at its book or par value, whichever is less." J.A. 346-47.

         From 1946-2004, the Cooperative administered a federal price-support program for flue-cured tobacco for the benefit of its member growers. Under this program, tobacco producers who could not sell their flue-cured tobacco delivered it to a warehouse, where the Cooperative graded the tobacco and tried to sell it at auction. Fisher-Lewis, 794 S.E.2d at 703. "The auction was subject to a minimum price established annually by the United States Department of Agriculture, and the tobacco would not be sold for less than that price." Id. If the Cooperative could not sell the tobacco, it "would process and store it, while advancing the minimum price less an administrative fee to the tobacco producer." Id. The Cooperative paid the tobacco producers with loans from the Commodity Credit Corporation ("CCC"), an entity owned and operated by the federal government that assisted in administering the price-support program. Id. Any unsold tobacco served as collateral for the CCC's loans. Id.

         During the lifetime of the price-support program, the Cooperative accumulated a reserve of hundreds of millions of dollars from three main sources: (1) the 1967-73 crop years; (2) the 1982-84 crop years; and (3) the Fair and Equitable Tobacco Reform Act of 2004 ("FETRA"), Pub. L. No. 108-357, 118 Stat. 1418. See Fisher-Lewis, 794 S.E.2d at 704.

         First, during the 1967-73 crop years, the Cooperative "received and stored tobacco . . . and eventually sold the tobacco at a price higher than necessary to repay the loans from the CCC," earning a profit on the resale. Fisher-Lewis, 794 S.E.2d at 704. The Cooperative distributed some of these profits to its members in cash and held on to the remainder-about $26.8 million-as reserve funds. Id. The Cooperative issued certificates of interest in the reserve on a pro rata basis to members whose tobacco had created the surplus during those years. Id.

         The second source of the Cooperative's reserve money was the 1982-84 crop years. The Cooperative's profits from this period stem from the passage of the No Net Cost Tobacco Program Act of 1982 ("NNC Act"), [3] which fundamentally changed the structure of the federal price-support system. See Leaf Tobacco Exporters Ass'n, Inc. v. Block, 749 F.2d 1106, 1109 (4th Cir. 1984). Before Congress enacted this law, the CCC's loans to the Cooperative were "non-recourse" because "[t]he Cooperative's failure to earn complete repayment funds [from the member growers] would result in a loss to be absorbed by the CCC: the CCC could sell the collateral [i.e., the growers' unsold tobacco] for its own account after the loan had matured, but it otherwise had no recourse against either the Cooperative or the individual farmers." Id. This system changed with passage of the NNC Act, which applied starting with the 1982 crop year and required member growers to pay an assessment to the Cooperative at the time they delivered their tobacco to serve as additional collateral for the CCC's loans to the Cooperative, a measure intended to limit the federal government's losses. Fisher-Lewis, 794 S.E.2d at 703-04. The Cooperative later used the surplus funds collected from the NNC assessments-funds remaining after the CCC loans had been repaid-to redeem unsold member tobacco from the 1982 crop year that the CCC had held as collateral. Id. The Cooperative sold this tobacco and put in the reserve the $110 million in profit that it earned from the sale. The Cooperative did the same for the 1983 and 1984 crop years. J.A. 3966.

         Third, the Cooperative added to its reserve fund after Congress enacted FETRA in October 2004 and ended the federal price-support program. See Fisher-Lewis, 794 S.E.2d at 704. In implementing FETRA, the CCC called the Cooperative's outstanding loans and took title to the tobacco that had been pledged as collateral for the loans. J.A. 4014. The CCC repaid the loans through selling some of the tobacco as well as taking possession of the NNC assessments and applying them to the loan balance. J.A. 3966- 67. The CCC returned the remaining tobacco-about 83 million pounds-to the Cooperative, and the Cooperative eventually sold the tobacco for $81 million, adding this sum to its reserve fund. J.A. 3966-67; see also Fisher-Lewis, 794 S.E.2d at 704.

         When the price-support program ended in 2004, the Cooperative began culling its membership rolls as part of an effort to develop a business plan that would enable it to remain financially viable and to continue providing benefits for members at a time when its primary function-administering price supports-had ceased to exist. J.A. 4708-09. This membership reduction occurred in two phases. First, the Cooperative removed about 713, 072 members listed on the membership rolls who it determined were deceased, had stopped farming by 1984, or had no financial relationship with the Cooperative. J.A. 1781, 4709. Second, the Cooperative removed 89, 994 of the remaining 90, 840 members who elected not to sign a marketing agreement with the Cooperative for 2005. J.A. 1781, 2384. In a letter to members, the Cooperative explained that members who decided to withdraw their membership by declining to sign the marketing agreement were no longer entitled to a share of the capital reserve.

         In 2004, the Cooperative had about 800, 000 members. J.A. 4378. By the time it finished culling the rolls, the Cooperative had eliminated 99% of its membership, reducing the number of members from 803, 912 to 846. J.A. 1781. This reduction caused the reserve-consisting of more than $300 million-to increase from $427.00 per member to $365, 000 per member. J.A. 1761.

         B.

         Parallel Litigation

         There are two main lawsuits relevant to this appeal. First is the Fisher-Lewis proceeding in North Carolina state court. The second-this case-is the Speaks proceeding in North Carolina federal court. To provide the background necessary for disposing of this appeal, we trace the history of each proceeding through the district court's final approval of the Speaks settlement in February 2018.

         1.

         Fisher-Lewis (State Court)

         In January 2005, a group of current and former Cooperative members, including appellant and would-be intervenor Dan Lewis, filed a putative class action in North Carolina Superior Court after the Cooperative cancelled their memberships and extinguished their accrued interest in the reserve when they failed to enter into the marketing agreement with the Cooperative ("Lewis").[4] J.A. 4451-52. The plaintiffs argued that the Cooperative "expelled hundreds of thousands" of members and asserted control over the reserve fund in a deliberate attempt "to create a 'last man standing' scenario in which a few hundred remaining member[s] potentially have the benefit of hundreds of millions of dollars in assets which have been created through the efforts of all members[s], including [p]laintiffs." J.A. 1827. The plaintiffs were represented by Gary K. Shipman and William G. Wright, counsel for the Speaks plaintiffs in this case. J.A. 59, 4713.

         One month later, in February 2005, another group of farmers filed a similar lawsuit in North Carolina state court ("Fisher").[5] These plaintiffs were represented by C. Alan Runyan and Philip Isley, counsel for Objectors and would-be intervenor Lewis. J.A. 4713.

         In September 2005, almost nine months after Lewis was filed, the Lewis plaintiffs, represented by Shipman and Wright, entered into a preliminary settlement agreement with the Cooperative for $76.8 million in cash and $212 million in book allocations. J.A. 311. But the Fisher plaintiffs, who would be included in the settlement, objected to these settlement terms, and the state court in May 2006 denied preliminary approval of the settlement without prejudice on the basis that the record was insufficiently developed to resolve outstanding concerns and that the evidence that had been presented "does not support a finding or conclusion that the proposed Settlement is within the necessary 'ball park' of being fair, reasonable and adequate." J.A. 311-12. Given the inadequacy of the record, the court ordered the parties to engage in additional discovery on the merits of the proposed settlement. J.A. 311-12. A few days later, the Cooperative filed a preliminary notice of intent to terminate the proposed settlement. J.A. 4455.

         In September 2007, Shipman and Wright moved to withdraw as counsel for the Lewis plaintiffs because of disagreements with co-counsel. J.A. 4714. The court granted this motion on October 8, 2007. J.A. 4458. Also in October, the Lewis and Fisher plaintiffs made a settlement offer for both cases, and the parties began settlement negotiations that extended through July 2008 and included at least one mediation. J.A. 4458.

         The Fisher and Lewis cases were consolidated in May 2009 ("Fisher-Lewis"). J.A. 4458. The plaintiffs at this time filed a second amended and consolidated complaint alleging the following fourteen claims for relief: (1) conversion; (2) breach of contract; (3) imposition of a constructive trust; (4) accounting; (5) distribution; (6) declaratory judgment; (7) fraud; (8) in the alternative, fraud in the inducement; (9) ultra vires; (10) breach of contract; (11) breach of contract accompanied by a fraudulent act; (12) unfair trade practices; (13) dissolution; and (14) judicial dissolution. J.A. 1837-52. The Cooperative filed a motion to dismiss in July 2009.

         On March 30, 2012, the North Carolina Superior Court granted the motion to dismiss on three of the fourteen claims: fraud, fraud in the inducement, and breach of contract accompanied by a fraudulent act. J.A. 1860-68. The court otherwise denied the Cooperative's motion. On July 9, 2012, the Fisher-Lewis plaintiffs filed a third amended and consolidated complaint, dropping the three claims that had been dismissed and removing the claims for dissolution and judicial dissolution. J.A. 1918-52.

         Also on July 9, 2012, the Fisher-Lewis plaintiffs filed a motion for class certification under Rule 23 of the North Carolina Rules of Civil Procedure. J.A. 1869- 1916. The court granted the motion and certified the Fisher-Lewis class in February 2014. J.A. 2463-78. The Cooperative appealed this decision, and the North Carolina Supreme Court affirmed the amended certification order on December 21, 2016. See Fisher-Lewis, 794 S.E.2d at 703. The certified Fisher-Lewis class consisted of the following:

All individuals, proprietorships, partnerships, corporations, or their heirs, representatives, executors or assigns, and other proper entities that have been members/shareholders of the Flue-Cured Tobacco Cooperative Stabilization Corporation . . . at any time from its inception through the end of crop year 2004, and any heirs, representatives, executors, successors or assigns, and;
(a) had not requested cancellation of their membership and whose membership was cancelled by Stabilization without a hearing, and/or
(b) were issued a certificate of interest in capital reserve by Stabilization for any of the tobacco crop years between and including 1967-1973, and/or
(c) delivered, consigned for sale, or sold flue-cured tobacco and paid an assessment for deposit into the No Net Cost Tobacco Fund or No Net Cost Tobacco Account during any tobacco crop years between and including 1982-2004.

Fisher-Lewis, 794 S.E.2d at 704 (alteration in original).

         In upholding class certification, the North Carolina Supreme Court concluded that there were no conflicts among this class that would prevent class certification because "each class member's share of recovery could be determined fairly based upon that member's patronage interests in [the Cooperative]"-i.e., each member's profit contribution to the Cooperative's reserve fund. Id. at 708.

         2.

         Speaks (Federal Court)

         On October 31, 2012, three months after the Fisher-Lewis plaintiffs' motion for class certification in state court, a different group of tobacco growers represented by Shipman and Wright-former Lewis counsel who withdrew in 2007-filed this lawsuit, a putative class action against the Cooperative in the Eastern District of North Carolina. J.A. 32-70. The Speaks plaintiffs brought claims for a declaratory judgment, distribution to members under N.C. Gen. Stat. § 55A-13-02(c), and an alternative statutory claim for judicial dissolution of the Cooperative under N.C. Gen. Stat. § 55A-14-30. J.A. 52-59, 4460. The proposed Speaks class encompassed the class certified in Fisher-Lewis.

         On December 5, 2012, the parties jointly moved for a temporary stay pending the state court's decision on the class-certification motion in Fisher-Lewis. J.A. 71-73. The court granted the stay on December 17, 2012. J.A. 74-75. For the next five years, the Speaks parties continually sought-and were granted-temporary stays, and they occasionally provided the court with status reports. The Cooperative never filed an answer to the complaint, and no adversarial discovery took place. J.A. 9-14. The parties informed the court during this period that "[r]esolution of the class issues in [Fisher-Lewis] continues to be relevant to [p]laintiffs in the action before this Court and, if [d]efendant's anticipated appeal in [Fisher-Lewis] is rejected or class certification is upheld on appeal, this federal action may become moot." J.A. 89.

         The North Carolina Supreme Court affirmed class certification in Fisher-Lewis in late December 2016, and about two weeks later, on January 4, 2017, the Cooperative's counsel contacted Shipman, counsel for the Speaks plaintiffs, about scheduling a conference call to discuss next steps in the Speaks case given the recent decision in Fisher-Lewis. J.A. 4464.

         The conference call took place on January 9, 2017, and the discussions led to an agreement to mediate the Speaks case. J.A. 4464. In the months following the conference call-while the Fisher-Lewis parties were developing the notice plan-the Cooperative's counsel and Shipman discussed selection of a mediator and possible dates for mediation, developed a list of relevant documents and exchanged them, and set a date to submit position papers to the mediator. J.A. 4465-68. The parties ultimately selected the Honorable Frank Bullock, a retired federal judge, to mediate a session that would take place on May 11-12, 2017. J.A. 4716.

         On April 20, 2017, the Cooperative's local counsel explained in an email to the Speaks parties that he had communicated a "courtesy 'heads-up' to Philip Isley [plaintiffs' counsel in Fisher-Lewis]" that the parties had scheduled a mediation in Speaks for May 11-12 with Judge Bullock. J.A. 4583. Local counsel further stated in his email that "[w]e will let you know if anything gets filed by the [Fisher-Lewis] plaintiffs with [the Speaks court] concerning the mediation," and he asked the parties to "please let us know if you hear from the [Fisher-Lewis] plaintiffs as well." J.A. 4583. This courtesy "heads up" was the first time the Speaks parties informed Fisher-Lewis counsel that Speaks was going to be mediated.

         On May 5, 2017, Bob Cherry, counsel for the Fisher-Lewis plaintiffs, wrote a letter to Shipman, counsel for the Speaks plaintiffs, stating that he had been informed that a mediation had been set for May 11 and reminding Shipman that certain class representatives in Fisher-Lewis were Shipman's former clients to whom he owed continuing duties under professional-conduct rules. J.A. 720. Cherry indicated that his letter served as "formal notice" that Shipman's former clients did not consent to his representing the Speaks plaintiffs because such a representation "could be materially adverse" to the interests of the Fisher-Lewis class. J.A. 720-21. Shipman responded that the mediation would occur as planned, that parallel state-federal class actions are "not unique," and that "both the [Fisher-Lewis] case and the Speaks case are free to proceed until there is a final judgment in one of them." J.A. 725.

         On May 10, the day before the mediation, Cooperative counsel sent an email to Judge Bullock noting the parallel state and federal class actions and stating that Fisher-Lewis counsel sent a letter "voicing some concern over the upcoming mediation," concern that Cooperative counsel and Shipman "do not share." J.A. 4585. Cooperative counsel also provided the correspondence between Cherry and Shipman as an attachment to the email.

         After two days of mediation, the parties reached a settlement in principle. J.A. 4350. The Cooperative agreed to pay $24 million in exchange for a release of all claims by the class, including the Fisher-Lewis claims. J.A. 204.

         On September 7, 2017, the Speaks plaintiffs filed a motion to certify the class action and for preliminary approval of the proposed class-action settlement. J.A. 122-92. The plaintiffs amended the motion on September 8, filing a stipulation and agreement of class-action compromise, settlement, and release. J.A. 193-250. Five days later, on September 13, 2017, the district court preliminarily approved the settlement and the notice plan and scheduled a final fairness hearing for January 19, 2018. J.A. 251-61.

         In the months before the hearing, some class members objected to the settlement, including the Objectors-Appellants Sharp Farms, Robert May, Tucker Farms, and Worthington Farms. The Objectors are members of the Fisher-Lewis certified class who were included in the proposed Speaks settlement class.

         3.

         Fisher-Lewis Challenges to Speaks Settlement

         As the parties in the Speaks proceedings moved closer to a final settlement in late 2017, the Fisher-Lewis plaintiffs protested the Speaks ...


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