Reversing the lower court's ruling approving a putative class action settlement, the U.S. Court of Appeals for the Sixth Circuit recently held that: (1) certification of a nationwide settlement class was improper; and (2) the nationwide settlement agreement involving claims under the federal Fair Debt Collection Practices Act was unfair, unreasonable and inadequate.
In so ruling, the Court noted, among other things: (1) the great disparity under the settlement agreement between the monetary relief for the named plaintiffs, and the relief available to unnamed class members; (2) the interests of class representatives were actually antagonistic to those of the unnamed class members; and (3) the notice to class members did not satisfy due process requirements, because the notice failed to explain the significance of the release of unnamed class members' claims against the defendants debt collectors.
A copy of the opinion is available at: http://www.ca6.uscourts.gov/opinions.pdf/13a0050p-06.pdf
Defendants debt collection agencies ("Debt Collectors") and several plaintiffs debtors ("Debtors") sought approval in federal district court of a nationwide class settlement that settled three related class-action lawsuits alleging violations of the federal Fair Debt Collection Practices Act and state law. In those lawsuits, one of which was originally filed in federal court and two of which were removed, Debtors asserted claims against the defendant Debt Collectors based in large part on the alleged use of affidavits incorrectly claiming that the affiant had personal knowledge of the debt owed by each Debtor. In certain instances, the use of these affidavits resulted in state-court judgments against some of the Debtors.
The parties in the three actions eventually reached a settlement agreement and presented it to the lower court. Providing for both monetary and injunctive relief, the settlement included a stipulation as to certification of a class roughly defined as those persons who were sued by the Debt Collectors, in actions in which the alleged false affidavits were used in connection with the debt collection lawsuits. In addition, the settlement included a class-wide release whereby those class members who did not opt out would release Debt Collectors "from all causes of action . . . which the class now has . . . against the Released Parties, arising out of or relating to the Released Parties' use of affidavits in debt collection lawsuits." This provision essentially precluded the unnamed class members from using the false affidavits against the Debt Collectors to contest their debts in state court.
The settlement also provided that the four named plaintiffs were to receive $8,000 among them, and that Debt Collectors would pay $5.2 million into a settlement fund. Out of this fund, eligible unnamed class members who filed claims received just over $17.00 each.
In addition, the Debt Collectors also agreed to release the debts owed by the named plaintiffs, but reserved the right to continue pursuing the unnamed class members for their allegedly unpaid debts.
As for injunctive relief, the Debt Collectors agreed to implement procedures for one year to prevent the use of improper affidavits, a process to be overseen by a retired federal judge.
The district court ultimately certified the class under Federal Rule of Civil Procedure 23(b)(3) and granted final approval of the settlement. Eight unnamed class members appealed, arguing that the settlement was unfair, unreasonable, and inadequate, and that the notice to prospective class members did not satisfy due process.
The Sixth Circuit reversed the lower court's order approving the settlement, vacated the judgment certifying the nationwide settlement class, and remanded, ruling among other things that the settlement's preferential treatment of the named plaintiffs over the unnamed class members made the settlement inherently unfair.
As you may recall, to certify a class action, a court must find that the class satisfies the requirements of numerosity, commonality, typicality, and adequacy of representation. See Federal Rule of Civil Procedure 23(a). If certification occurs pursuant to Rule 23(b)(3), the class must satisfy the additional requirements of superiority and predominance.
Noting that in order to be approved, a settlement must be "fair, reasonable, and adequate," the Sixth Circuit stressed that a federal court must apply seven factors in making that assessment: (1) the risk of fraud or collusion; (2) the complexity, expense and likely duration of the litigation: (3) the amount of discovery engaged in by the parties; (4) the likelihood of success on the merits; (5) the opinions of class counsel and class representatives; (6) the reaction of absent class members; and (7) the public interest. See UAW v. General Motors Corp., 497 F.3d 615, 631 (6th Cir. 2007).
In addition, in evaluating the fairness of a settlement involving differing relief to named class representatives and unnamed class members, the Sixth Circuit analyzed the settlement in terms of whether it "gives preferential treatment to the named plaintiffs while only perfunctory relief to unnamed class members," thereby rendering the settlement unfair. See Williams V. Vukovich, 720 F.2d 909, 925 n.11 (6th Cir. 1983); Holmes v. Continental Can Co., 706 F.2d 1144, 1148 (11th Cir. 1983).
Thus, applying these eight factors to the settlement in this case, the Appellate Court concluded that the class settlement completely failed to satisfy the test for fairness, reasonableness, and adequacy even though the lower court had weighed the seven factors and found each satisfied. In so ruling, the Sixth Circuit noted among other things that under the settlement agreement in this case: (1) the named plaintiffs received the primary benefit of the settlement in that their debt to the Debt Collectors was forgiven; (2) the unnamed class members were prevented from using the false affidavits against the Debt Collectors in any other lawsuit, thus assuring that there would be a collection judgment against them; (3) the named plaintiffs received an $8,000 incentive payment to be split among the four of them while the unnamed class members received about $17.00 each; (4) the injunctive relief was of little value as it was only to last one year and did not actually prohibit the Debt Collectors from using false affidavits, but merely required a change in policies.
As for the certification of the nationwide settlement class, the Court similarly concluded that certification was inappropriate in this case, because the representation and superiority prongs under Rule 23(a) and (b)(3) were, in the Court's view, clearly not satisfied.
In reaching this determination, the Sixth Circuit looked at whether the representatives had common interests with unnamed class members and would vigorously prosecute the interests of the class through qualified counsel. See In re American Med. Sys., Inc., 75 F.3d 1069, 1083 (6th Cir. 1996). The Court also looked at whether class counsel were qualified to undertake the class litigation.
Thus, while noting that a number of factors mitigated in favor of finding adequate representation, the Sixth Circuit ultimately concluded that two factors were dispositive on the issue: (1) the class representatives had no interest in vigorously prosecuting the unnamed class members' ability to use the false affidavits against Debt Collectors to contest their debts in court; and (2) class representatives actually had an interest antagonistic to the interest of the unnamed class members, specifically, the class representatives sought to have the settlement approved in order that their own debts would be forgiven. Accordingly, the Court determined that adequacy of representation was lacking.
With respect to the "superiority" requirement under Rule 23(b)(3), the Court reasoned that two factors weighed against finding the superiority factor satisfied: (1) unnamed class members had a strong interest in individually controlling the defense of the state-court judgments against them; and (2) class members could have collected damages under state law that would have significantly exceeded the monetary relief available to them from the settlement in this case. See Young v. Nationwide Mutual Ins. Co., 693 F.3d 532 (6th Cir. 2012) (considering the superiority factor partly in light of the economic feasibility of individual lawsuits and whether there was a threshold issue common to all class members).
Finally, the Sixth Circuit also ruled in part that the notice to class members failed to satisfy due process, because the notice did not explain the fact that the release of claims negated class members' ability to vacate the allegedly fraudulently-obtained judgments against them in state court. Notably, the Court observed that the failure to explain the consequences of the release of claims was the principal ground on which a class member might opt out or object to the settlement in an effort to protect their greatest interest. The Court thus concluded that class notice in this case did not "fairly apprise . . . the prospective members of the class of the terms of the proposed settlement." UAW v. General Motors Corp., 497 F.3d 615, 630 (6th Cir. 2007).
Accordingly, the Sixth Circuit reversed the district court' order approving the settlement, vacated the class certification, and remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher LLP
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