The robustness of the rule preventing non-settling defendants from objecting to a class settlement has received a boost from the Second Circuit.  The class settlement at issue involved the claims of investors against a hedge fund manager for damages and restitution of lost funds as a result of Madoff’s Ponzi scheme.  Only one provision of the settlement was at stake: whether the settlement could allow class members to submit to the jurisdiction of the district court for purposes of the settlement, while expressly precluding them from being deemed to have submitted to the jurisdiction of the district court, or any court in the United States, for any other matter.  The provision was put in place to protect foreign class members from potential clawback actions in the United States.  Non-settling defendants objected on the grounds that the settlement “effectively strip[ped]” them of a preclusion defense in other Madoff-related litigation.

The court acknowledged the general rule that non-settling defendants have no standing to object to a class settlement because they are not affected by it, as well as recognized an exception where non-settling defendants can demonstrate some “formal legal prejudice.”  The court found that in this case, the exception was not met: “effectively” stripping a claim or defense was not the same as “formally” stripping a claim or defense.  The court reasoned that the non-settling defendants could – and did – raise the preclusion defense arising from the settlement in other Madoff-related litigation, and stated that the non-settling defendants’ mere perceived loss of strategic advantage in other litigation did not rise to the level of formal legal prejudice required to invoke the exception.

Bhatia v. Piedrahita, No. 13-1642-cv, Slip op. (2d Cir. June 26, 2014).