___________

                                No. 95-2560
                                ___________


Thomas E. Robertson, Jr., As        *
Trustee of the Farmer's Co-op       *
of Arkansas and Oklahoma, Inc.,     *
& as Rep. of a class of members     *
depositors, and equity security     *
holders, who are similarly          *
situated to him trust Farmer's      *
Co-op of Arkansas and Oklahoma,     *
Inc.,                               *
                                    *
           Plaintiff,               *
                                    * Appeal from the United States
Bob Reves, *                        District Court for the
                                    * Western District of Arkansas.
           Appellee,                *
                                    *
Elwood B. Courtney, Sr.; Carl       *
Greuel; Jack Shackleford,           *
                                    *
           Plaintiffs,              *
                                    *
Robert H. Gibbs, in his own         *
right & as the natural guardian     *
of two minor children, Robert H.*
Gibbs, Jr., Thomas A. Gibbs,        *
                                    *
           Appellee,                *
                                    *
Thomas H. Hester; Susanne A.        *
Hester, in her own right; Joe S.*
Hester, Executor of the Estate      *
of J.G. Hester; Lee P. Bennett;     *
Viola A. Bennett, in her own        *
right; Merle Walker; Adalene        *
Walker, in her own right;           *
Rosetta Dickinson, in her own       *
right; Herbert Chisum,              *
                                    *
           Plaintiffs,              *
                                    *
Frances Graham, in her own          *
right,                              *
                                    *
           Appellee,                *
                                    *
George Wasson; Paula Jarrett,         *
                                      *
           Plaintiffs,                *
                                      *
     v.                               *
                                      *
Jack E. White; J.E.W., Inc.;          *
Valley Feeds, Inc.; Citizens          *
Bank & Trust, Company of Van          *
Buren, Arkansas; Gene                 *
Kuykendall, doing business as         *
Kuykendall & Kuykendall; Fred         *
Kuykendall, doing business as         *
Kuykendall & Kuykendall; Oran         *
Moody, Jr., doing business as         *
Moody & Moody, Individually;          *
Michael O. Moody, doing business*
as Moody & Moody, individually,       *
                                      *
           Defendants,                *
                                      *
Arthur Young & Co., now Ernst &       *
Young LLP, *
                                      *
           Appellant,                 *
                                      *
Hal Brewer; Waldo Price; Truman       *
O. Boatright; J.O. McClure;           *
Hugh Winfrey, Jr.; L.M. Creech;       *
Charles Bane; E.H. Pritchett;         *
Robert Plunkett; Ralph McClure;       *
Jimmy Don Gooch; Jerry Metzger;       *
W.J. Rimmer; Ball, Mourton &          *
Adams; E.J. Ball; Kenneth R.          *
Mourton; Stephen E. Adams,            *
                                      *
           Defendants.                *

                                  __________

                   Submitted:     December 13, 1995

                         Filed:   April 12, 1996
                                  __________

Before MAGILL, BRIGHT, and MURPHY, Circuit Judges.

                                  ___________


MAGILL, Circuit Judge.




                                     -2-
     This appeal concerns the degree to which a defendant is entitled to
damages offsets in the calculation of rescissory damages offsets.


     In 1986, following a trial in federal district court, a jury found
that the accounting firm of Arthur Young had committed securities fraud in
connection with the sale of notes issued by Farmer's Co-operative of
Arkansas and Oklahoma, Inc. (Co-op).    After appeals stretching over several
years, the district court awarded the plaintiff class of Co-op noteholders
(Class) $5.4 million in rescissory damages.


     Arthur Young appeals the award of damages, arguing that the district
court overstated the damages because of two erroneous legal conclusions.
First, the court increased the damages by the amount that the Class would
refund to several settling defendants pursuant to a Mary Carter agreement.1
Second, the court failed to reduce the class damages by the amount of
interim bankruptcy distributions.      Based on the principles of rescissory
damages, we affirm in part and reverse in part, and remand to the district
court with instructions.


                                       I.


     Organized   in   1946,   the   Farmer's   Co-operative   of   Arkansas   and
Oklahoma, Inc., for most of its existence, operated as a




     1
      Mary Carter agreements are settlement agreements where the
exact amount of the settlement is not fixed. Rather, the
ultimate value of the settlement depends on the amount plaintiff
recovers from other defendants, either through settlement or
court-awarded damages. See generally Lisa Bernstein and Daniel
Klerman, An Economic Analysis of Mary Carter Settlement
Agreements, 83 Geo. L.J. 2215 (1995). Some definitions of Mary
Carter agreements further require that the settling defendant
remain a party to the suit. See, e.g., Hoops v. Watermelon City
Trucking, Inc., 

, 639-40 & n. 2-3 (10th Cir. 1988);
In re Mosher, 

, 402 (6th Cir. 1994).

                                      -3-
traditional farmers' cooperative.           For a nominal fee, any farmer in the
area could become a member, entitled to one share and one vote.                 To raise
money to finance its operating expenses, the Co-op issued            uncollateralized
and uninsured promissory notes that offered payment upon demand and a
higher interest rate than other local investment institutions.


      On February 23, 1984, the Co-op filed for bankruptcy to protect
itself from a run on demand notes triggered by its inability to pay on
those obligations.      The Co-op asserted that three factors caused the
bankruptcy: (1) ineffective management, (2) demand notes used as the
primary source of financing, and (3) financial problems of a gasohol2 plant
it owned.    As a consequence of the bankruptcy filing, the demand notes were
frozen in the bankruptcy estate and were no longer redeemable at will.
Relying on Arkansas and federal law, the purchasers of Co-op demand notes
brought a class action securities fraud suit in the United States District
Court for the Western District of Arkansas against the Co-op's directors
and officers, Arthur Young, and several others.


      Prior to trial, the Class arrived at a settlement with the Co-op's
directors and officers.      According to the settlement terms, International
Insurance Company (International), on behalf of the directors and officers,
agreed to make an initial payment of $5.6 million to the Class.                      The
agreement also contained a "sliding scale" provision, requiring the Class
to   repay   International    an   amount    equal   to   one-half   of   the    Class's
recoveries from nonsettling defendants.        Ultimately, the Class settled with
every defendant but Arthur Young.


      Following a trial in late 1986, a jury found that Arthur Young had
committed fraud against purchasers of notes between




      2
      Gasohol is a fuel consisting of 90% gasoline and 10% ethyl
alcohol.

                                        -4-
February 15, 1980, and the bankruptcy date by issuing misleading audit
reports in violation of § 10(b) of the Securities and Exchange Act of 1934,
15 U.S.C. § 78j(b), and § 67-1256 of the Arkansas Securities Act, Ark.
Stat. Ann. § 67-1256 (recodified at Ark. Code Ann. § 23-42-106 (1987)).
In   audits   performed   for   fiscal   years   1981    and   1982,   Arthur   Young3
misrepresented the value of a gasohol plant owned by the Co-op, creating
the impression that the Co-op had a positive net worth when, in fact, the
net worth was negative.


      A lengthy series of appeals followed.4            During the course of these



      3
      In 1981, the Co-op hired Russell Brown and Company, at that
time the largest accounting firm in Arkansas, to perform a
company audit. However, on January 2, 1982, Russell Brown merged
with Arthur Young and Company. Therefore, the 1981 audit was
performed under the Russell Brown name while the 1982 audit was
performed under the Arthur Young name. Later, in 1989, Arthur
Young merged with Ernst & Whinney to form Ernst & Young.
      4
      Arthur Young appealed the district court's denial of its
motion for judgment n.o.v. We reversed the district court
decision, believing that the demand notes did not constitute a
security for purposes of either the federal or Arkansas security
acts. Arthur Young & Co. v. Reves, 

(8th Cir. 1988).

     The Supreme Court granted certiorari, vacated our decision,
and remanded. It held that the demand notes constituted
securities within the meaning of §3(a)(10) of the Securities
Exchange Act of 1934. Reves v. Ernst & Young, 

(1990).

     On remand from the Supreme Court, we affirmed the judgment
of the district court in all respects except the damage award,
which we reversed and remanded for a new trial to determine
damages. Arthur Young & Co. v. Reves, 

(8th Cir.
1991).

     Prior to the new trial, the Class sought Supreme Court
review on the question of whether summary judgment in favor of
Arthur Young on the claim that it had acted in violation of RICO
was proper. The Supreme Court granted certiorari and affirmed
our holding that Arthur Young did not contravene RICO under the
theory propounded by the Class. Reves v. Ernst & Young, 

(1993).

                                         -5-
appeals, the bankruptcy trustee made five distributions to the noteholders.
In September 1987, the trustee paid noteholders




                                   -6-
the proceeds of the Co-op's settlement with its directors and officers.
The trustee made an additional four distributions to Co-op noteholders as
well as other creditors between December 1988 and January 1990 with the
proceeds from the periodic sales of Co-op's assets.           The trustee made the
later payments on an interim basis, subject to adjustments in the future
to ensure that the final distribution is fair to all the creditors.5


     On November 14, 1994, the case returned to the district court to
retry the issue of damages.      Before the court were questions about the
specific mechanics for calculating damages.        The court found Arthur Young
liable for $5,446,073.38 to the Class.        Crucial to reaching this figure was
the court's conclusion that the damage figure should be adjusted upward to
account for the rebate provision in the settlement agreement and that the
interim bankruptcy distributions to shareholders did not entitle Arthur
Young to a damages offset.


     At the damages trial, it was undisputed that Arthur Young is entitled
to a damages offset for the settlement proceeds.                  The amount of that
offset, however, was contested.         Because of the settlement agreement's
sliding   scale   rebate   provision,   the    value   of   the    settlement   varies
depending on whether it is measured before or after the rebate to
International.    The court held that the value of the settlement must be
measured after the rebate and, therefore, the amount of damages to be paid
by Arthur Young must be adjusted upward to account for the effect of the
sliding scale reimbursement clause.           Following traditional notions of
rescissory damages and the fact that "the Eighth Circuit emphasized that
defendant is to receive an offset for settlement proceeds and settlements
received," Mem. Op. at 12, the court stated that the settlement




     5
      A full description of the background to this litigation is
set forth in Arthur Young & Co. v. Reves, 

(8th Cir.
1991).

                                        -7-
offset must be measured after the operation of the sliding scale provision.
The upward adjustment should be in an amount such that the Class will be
made whole after paying fifty percent of their recovery to International.


        The parties also contested whether Arthur Young should receive a
damages offset for the bankruptcy distributions.   The district court held
that an offset would contravene the Eighth Circuit's directions on damages.
According to the district court, the Eighth Circuit opinion, Arthur Young
v. Reves, 

(8th Cir. 1991) (referred to as Reves II), "simply
does not expressly instruct this court to provide a bankruptcy distribution
offset." Mem. Op. at 13.   In addition, the court noted that such an offset
might violate the collateral source rule.


        Arthur Young challenges the district court's damage calculation,
arguing that the court erred (1) in basing the settlement offset on the
settlement's post-rebate value, and (2) in denying an offset for bankruptcy
distributions received by the Class.


                                    II.


        In an earlier appeal of this case, this Court held that rescissory
damages best suited the harm suffered by the Class.     

.    Rescissory damages serve to place the Class in the same position
they would have been in but for Arthur Young's fraud.    

        Recognizing that rescissory principles underlie the resolution of
questions concerning damage calculations, this opinion considers the two
arguments asserted by Arthur Young in turn.




                                    -8-
                                         A.


     Arthur Young and the Class agree that Arthur Young is entitled to an
offset   for   the   amount   received   by    the   Class   as    settlement.      The
disagreement between the parties lies in the calculation of the amount of
the offset.     The district court, interpreting Reves II, held that Arthur
Young should be allowed an offset only for that part of the initial Mary
Carter agreement that the Class retains after rebating fifty percent to
International.


     Arthur Young offers three grounds for reversing the district court's
decision.      First, it argues that the district court deviated from the
mandate in Reves II.          Second, it claims that the Class procedurally
defaulted on the claim by failing to raise it in earlier appeals.                Third,
Arthur Young asserts that the district court cannot increase the judgment
against it based on the provisions of other settlement agreements.                These
arguments are not compelling.


     We issued no mandate in our Reves II opinion regarding a specific
amount of offset for the directors and officers' settlement.                We stated
that the district court should "credit Arthur Young with the settlement
proceeds allocated to the post-April 22, 1982, demand note purchasers."

.      Arthur Young assumes that the phrase "settlement
proceeds" necessarily refers to the entire amount of the settlement paid
to the Class, without deduction for the Class's obligation to refund fifty
percent of any award to International.           Appellant's Br. at 26.          Arthur
Young errs in this assumption.


     When referring      to   standard   settlements,    the      phrase   "settlement
proceeds" has a clear and unchanging meaning.                  With a Mary Carter
agreement, however, the amount of the proceeds could arguably be one of two
figures: it could be the final apportionment after judgment or it could be
the initial payment.     In our Reves II




                                         -9-
opinion, we did not reach the issue of how "settlement proceeds" should be
defined in this context.


     Rather, we stated that the damage award must "place the Class in the
same position that it would have been in if not for Arthur Young's
fraudulent acts."     

.      The offset for the settlement
proceeds should result in no unjust enrichment for the Class and no
undeserved benefit for Arthur Young.          In order to achieve these results,
the district court properly adjusted the damages upward to insure that the
damages awarded made the Class whole.          To do otherwise would ensure that
the Class is undercompensated by the amount of the settlement rebate.


     Arthur   Young    is   also   mistaken    in   claiming   that   the   Class   had
previously defaulted on this issue.           The Class questioned the manner in
which the district court applied the sliding scale to the settlement
credits in its first appeal.       Arthur Young acknowledges this, but, relying
on Primary Care Investors, Seven, Inc. v. PHP Healthcare Corp., 

(8th Cir. 1993), believes that the single sentence argument on the
rebate issue is inadequate to maintain the claim.6


     Arthur Young's argument misses the point: until this appeal, how the
settlement offset should be calculated remained an open issue.              In earlier
appeals the Class never conceded that the offset for settlement proceeds
should be based on the initial settlement payment - in fact it argued
exactly the opposite, albeit in a single sentence.         In Reves II we remanded
the case to the district court for a new trial on damages.            

.   We therefore conclude that the question of how to calculate the
settlement offset was properly within the purview of the district




     6
      In Primary Care Investors, we held that a "cursory and
summary statement" that failed to provide any "hint as to the
nature of the asserted error" could result in a waiver of a claim
on subsequent appeal. Primary Care 

.

                                        -10-
court and is properly before us on appeal.


      Finally, Arthur Young argues that the court cannot make its liability
contingent on the Class's settlement with other defendants.      According to
Arthur Young, the settlement operated like insurance for the Class,
offering the benefit of a guaranteed multi-million dollar recovery, but the
drawback that any future recovery would be shared with International.
Because it had no voice in defining the terms of the settlement, Arthur
Young feels that its liability should not be affected by it.


      This argument misses the mark.    Arthur Young is jointly and severally
liable, with the other defendants, for the injuries suffered by the Class.
See TBG, Inc. v. Bendis, 

, 929-30 (10th Cir. 1994) (White, J.,
concurring).    The Class cannot obtain double recovery from both Arthur
Young and the settling defendants, and therefore Arthur Young's liability
to   the Class must be offset by the final amount received from the
settlement.     The provisional Mary Carter agreement of $5.6 million,
however, is not final.   It is subject to reduction, because fifty percent
of the Class's recovery in court must be refunded to International.
Allowing Arthur Young to rely on the provisional amount for its offset
would effectively reduce the Class's recovery and the total liability of
all the defendants.   This we cannot do.


                                       B.


      The district court also held that Arthur Young was not entitled to
an offset for the five distributions made by the bankruptcy trustee to the
Class.   Reaching this conclusion based on our opinion in Reves II, the
court stated that "the Eighth Circuit opinion simply does not expressly
instruct this court to provide a bankruptcy distribution offset in any
portion of the opinion."   Mem. Op. at 13.    We disagree.   To be consistent
with the principle that rescissory damages "contemplate a return of the
injured party




                                   -11-
to the position he occupied before he was induced by wrongful conduct to
enter into the transaction," Arthur Young must be allowed an offset for
these distributions.   

n. 34.


     When we held that rescissory damages were the proper remedy, we
explicitly acknowledged that this form of remedy would allow Arthur Young
to be treated as noteholders, entitled to distributions by the bankruptcy
trustee, once final judgment was entered.       As this Court stated, "we do
believe that rescissory damages are fair to both parties: the Class
receives funds immediately, and Arthur Young has an opportunity to recoup
from the Co-op's bankruptcy estate the damages it paid to the Class."

.


     Although saying that Arthur Young steps into the position of the
bondholders once final judgment is entered does not necessarily mean that
it is also entitled to an offset for bankruptcy distribution made to the
Class prior to final judgment, there is only a small gap in reasoning
between the first proposition and the second.    Garnatz v. Stifel, 

(8th Cir. 1977), cert. denied, 

(1978), bridges this gap.
There we stated that rescissory damages "seek[] to return the parties to
the status quo ante the sale.   In effect, the plaintiff is refunded his
purchase price, reduced by any value received as a result of the fraudulent
transaction."   

     The implication of Garnatz for this case is clear.       The Class has
received some value as a result of buying the Co-op notes:     they received
a partial return of their principal through bankruptcy distributions.7    To
the degree that the Class recovers




     7
      Had the Co-op voluntarily decided to cease business and
sold its assets to raise funds to repay creditors, there would be
no question but that the noteholders were receiving a return on
their investment. The same is true of the bankruptcy
distributions.

                                   -12-
its principal, its injuries are necessarily reduced.                    Under the theory of
damages adopted by the Court on prior appeals, Arthur Young is required to
pay a judgment only to the degree necessary to reestablish the status quo
before the fraud-induced note purchase.


        The Class makes three arguments for disallowing Arthur Young an
offset for the bankruptcy distributions.                First, it asserts that prior
court    decisions    in     this    matter      preclude    an    offset   for    bankruptcy
distributions.    This interpretation of Reves II puts form over substance.
While it is true that the opinion made no express mention of an offset for
bankruptcy distribution, this is of no consequence.                    We were clear in our
intent--Arthur       Young     should       receive    the        benefit   of     bankruptcy
distributions.       If a final judgment had been quickly reached, then
distributions would have gone directly to Arthur Young.                     Since this case
has dragged on and distributions have been made, however, the benefit must
come to Arthur Young through an offset in the judgment instead.


        Second, the Class asserts that Randall v. Loftsgaarden, 

(1986), disallows an offset for the bankruptcy distributions.                     With respect
to §10(b) of the Securities Exchange Act, Loftsgaarden holds that the Act
aims not only to compensate defrauded investors, but also to deter fraud
and manipulative practices and encourage full disclosure of material
information.    

        Consequently, rescission is not the sole measure
of   damages   available      in     §   10(b)   actions.         In   instances   where   the
application of rescissory damages result in a undeserved windfall remaining
with the defendant, it is proper to use the defendant's profits as the
measure of damages.        

     This alternative measure of damages may
cause the plaintiff to receive more than necessary to make him whole for
the economic loss caused by the defendant's fraud.


        Loftsgaarden does not require this Court to deny Arthur Young an
offset for the bankruptcy distribution.               See 

                                              -13-
allows the court, within the bounds of § 28(a) of the Securities Exchange
Act, to award the § 10(b) plaintiff more than is necessary to effect
restitution in certain circumstances.           This case does not present such a
circumstance.    The application of a rescission theory of damages does not
result in a windfall or unjust enrichment to Arthur Young.           Rather, Arthur
Young will likely have a million dollar judgment to pay even with the
offset.     It cannot be said that Arthur Young will have less incentive to
comply with § 10(b) and the other securities laws after this case is
resolved.
     Finally,     the   Class   turns   to   Arkansas    law,   asserting   that   its
collateral source rule bars Arthur Young from receiving any credit for the
distributions.    The Class cites several cases describing the operation of
the rule.     Traditionally, under this rule, if an injured person receives
compensation for his injuries from a source wholly independent of the tort-
feasor, the payment should not be deducted from the damages which he would
otherwise collect from the tort-feasor.         See, e.g., Green Forest Pub. Sch.
v. Herrington, 

, 718 (Ark. 1985).


     Arkansas law has extended the application of the collateral source
rule beyond the sphere of common law tort.         See Bell v. Estate of Bell, 

, 881 (Ark. 1994).            The Class, however, has cited no case
applying the rule to securities laws in particular.              Assuming, however,
that the rule can be applied to securities fraud actions, it does not apply
to the bankruptcy distributions at issue.               Here, the Class accrues a
benefit because they are creditors of a bankrupt business.            The source of
the benefit is in no way collateral to the fraud action.           Indeed, the Class
received the partial return of principal directly due to their ownership
of the notes at issue.


                                         III.


     We affirm the district court in part, holding that Arthur




                                         -14-
Young is entitled to an offset equaling the final value of the Class's Mary
Carter agreement with International.   We also reverse the district court
in part, holding that Arthur Young is entitled to an offset equaling the
value of bankruptcy distributions received by the Class.   We leave to the
court's discretion whether interest is due on this bankruptcy distribution
offset.


     The district court should direct the parties to submit revised damage
calculations in light of this decision.8   The reports should rely on the
same benchmark dates and clearly indicate what, if any, interest rate is
applied in each time period.


     A true copy.


           Attest:


                 CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.




     8
      The resolution of the two legal questions leaves unanswered
what the actual damages award to the Class should be. Arriving
at a quantitative measure of damages is difficult. The expert
analyses provided by the parties arrive at significantly
different damage figures. In addition, the numbers are difficult
to compare because the experts chose different benchmarks from
which to measure damages. Matters are further confused by the
district court's unexplained damage figure of $5,446,073.38.

                                   -15-