## Facts

- Purchasers of International Thoroughbred Breeders, Inc. (ITB) securities sued over alleged material misstatements and omissions in four public offerings conducted between 1983 and 1986.
- The action proceeded as a certified class action with subclasses corresponding to the different offerings and asserted claims including Securities Act § 11 liability against ITB, its officers/directors, and underwriting and broker-dealer defendants.
- Plaintiffs reached a partial settlement with ITB and other settling defendants that created a monetary fund for the class.
- The settlement included a court-entered bar order extinguishing any present or future claims by non-settling defendants against settling defendants for contribution or indemnification.
- To offset the bar, the settlement provided that any later judgment against non-settling defendants would be reduced by the settling defendants’ proportionate share of fault (proportionate judgment reduction).
- Non-settling defendants (including the underwriter First Jersey Securities, Inc.) objected, asserting that the bar order improperly eliminated contribution rights and contractual indemnification rights in underwriting agreements with ITB.

## Issues

1. Under what circumstances do non-settling defendants have standing to object to a partial class action settlement.
2. Whether a settlement bar order that extinguishes contribution and indemnification claims, coupled with proportionate judgment reduction, is fair, reasonable, adequate, and legally permissible in a federal securities class action.
3. Whether a bar order may extinguish an underwriter’s contractual indemnification claims against the issuer consistent with federal securities law policy.

## Decision

- The Third Circuit affirmed the district court’s final approval of the partial settlement and entry of the bar order.
- Non-settling defendants could object only upon a showing of “formal legal prejudice”; the court considered the objections because the bar affected asserted contribution/indemnity claims but found no unfair prejudice given the judgment-reduction protection.
- The court upheld the combination of a contribution/indemnity bar and proportionate judgment reduction as a permissible settlement mechanism in complex securities litigation.
- The court upheld extinguishment of contractual indemnification rights, reasoning that enforcing issuer-to-underwriter indemnity for securities-law liability would conflict with deterrence and due-diligence objectives.

## Legal Principles

- Non-settling defendants generally lack standing to challenge a settlement between other parties absent “formal legal prejudice,” such as impairment of a legal claim or right.
- In federal securities class actions, a court may approve a partial settlement that bars all contribution and indemnification claims against settling defendants when accompanied by a proportionate fault judgment-reduction provision.
- A proportionate judgment reduction protects non-settling defendants by limiting any ultimate payment to their adjudicated share of responsibility, serving the core function of contribution without prolonging litigation against settling parties.
- Contractual indemnification that shifts an underwriter’s securities-law exposure to the issuer may be disallowed where it would weaken underwriter diligence and frustrate deterrent aims of the securities laws.
- Appellate review of class settlement approval is for abuse of discretion; the settlement must be fair, reasonable, and adequate.

## Conclusion

The Third Circuit held that a district court may approve a partial settlement in a securities class action that bars non-settling defendants’ contribution and indemnification claims, including certain contractual indemnity claims, where the settlement also reduces any later judgment by the settling parties’ proportionate share of fault and the settlement is otherwise fair, reasonable, and adequate.


Eichenholtz v. Brennan, 52 F.3d 478 (3d Cir. 1995)