FYI: 9th Cir Holds Class Counsel Fee Award Improperly Failed to Treat Credits as "Coupons" Under CAFA

The U.S. Court of Appeals for the Ninth Circuit held that the trial court erred in awarding $8.7 million in attorneys' fees in a class action settlement because it did not treat $20 credits issued as part of the settlement as "coupons" under the Class Action Fairness Act ("CAFA").

 

In so ruling, the Court held that, because the trial court included the full face value of the coupons in its calculation of the fee award, the "error require[d] recalculation of the fee award." 

 

Accordingly, the Ninth Circuit vacated the trial court's attorneys' fee award.

 

A copy of the opinion is available at:  Link to Opinion

 

The defendant company ("Company") operates online businesses that sell flowers, chocolates, fruit baskets, and other similar items.

 

The plaintiff and seven other class representatives (collectively, "Plaintiffs") purchased items from a Company business, and were then presented with a pop-up advertisement for $15 off another item from the same website. 

 

Clicking the pop-up enrolled Plaintiffs in the Company's membership rewards program, and transmitted the Plaintiffs' payment information to a separate defendant company (collectively, with Company, "Defendants"), which proceeded to charge Plaintiffs a $1.95 activation fee and recurring $14.95 monthly membership fee.

 

Plaintiffs did not consent to joining the rewards program or having their data transferred to another entity.  Plaintiffs also never received the promised coupons, gift codes, or any other savings benefits. 

 

Plaintiffs filed a putative class action in the Southern trial of California alleging violations of various state laws arising from Defendants' operation of their membership rewards program. 

 

After two years of litigation, the parties agreed to settle.  The proposed settlement provided class members with two forms of relief – monetary reimbursement of membership fees upon submission of a claim, and a $20 credit which did not require the submission of a claim that could be used to purchase items on Defendants' websites. 

 

The settlement established a $12.5 million fund from which Defendants would pay up to $8.7 million in attorneys' fees, $80,000 in enhancement awards to the Plaintiffs, and $200,000 in litigation costs.  The approximately $3.5 million remaining would be available to fund the settlement's administration costs and to reimburse class members for their membership fees "on a pro rata basis up to the full amount owed." 

 

After the refunds were issued, any remaining funds were to be distributed as a cy pres award to several universities.

 

The trial court preliminarily approved the settlement, and the parties informed the court that the class contained approximately 1.3 million consumers. 

 

Class members were notified of the settlement and given a 135-day period to request a refund, during which only about 3,000 class members did so.  Their submitted claims requested a total of $225,000 in cash refunds, leaving approximately $3 million of the settlement's cash fund to be distributed to the cy pres beneficiaries.

 

Separately, class counsel moved for $8.7 million in fees and $200,000 in costs.

 

The trial court subsequently held a final settlement approval hearing at which a class member ("Objector") objected to the settlement.  He argued that the attorneys' fee award did not comply with CAFA's requirements for settlements awarding coupons and that the cy pres award was improper.

 

The trial court rejected the objections and issued a final order approving both the settlement and class counsel's accompanying fee request.  The Objector appealed and the Ninth Circuit vacated and remanded in light of their decision in In re Online DVD-Rental Antitrust Litigation (In re Online DVD), 779 F.3d 934 (9th Cir. 2015). 

 

On remand, the trial court determined that, under In re Online DVD, the credits should not be construed as coupons, and that it was therefore unnecessary to apply CAFA's requirements for coupon settlements.  Using $38 million as the total value of the settlement, the court then approved the $8.7 million attorneys' fee award based on both percentage-of-recovery and lodestar calculations. 

 

The Objector again appealed challenging the attorneys' fee and cy pres awards. 

 

On appeal, the Ninth Circuit held that the Objector's "challenge to the attorney's fees award succeeds because the trial court failed to treat the $20 credits as coupon under CAFA, but we reject the cy pres arguments." 

 

In so ruling, the Court first noted that "CAFA imposes restrictions on attorney's fee awards for class action settlements that provide class members relief in the form of coupons," as it requires trial courts to consider the value of only those coupons "that were actually redeemed" when calculating the total relief awarded to a class. 

 

However, CAFA provides no definition of "coupon," so courts have been left to define the term on their own. 

 

The Ninth Circuit explained that in In re Online DVD, it outlined three factors to guide the inquiry: "(1) whether class members have 'to hand over more of their own money before they can take advantage of' a credit, (2) whether the credit is valid only 'for select products or services,' and (3) how much flexibility the credit provides, including whether it expires or is freely transferrable."

 

The Ninth Circuit then noted that the trial court relied on an additional factor not present in In re Online DVD, and found that the credits should not be construed as coupons in part because it concluded that the settlement was "stronger than" the settlement in In re Online DVD in terms of how closely the relief matched class members' alleged injury.

 

The Ninth Circuit disagreed with this reasoning, noting that "the trial court's inclusion of this factor conflated the coupon analysis with whether the settlement was fair and reasonable."

Moreover, "[r]egardless of the substance of the underlying claim or injury, CAFA prevents settling parties from valuing coupons at face value without accounting for their redemption rate.  Accordingly, the trial court erred by incorporating an improper factor into its analysis of whether the credit was a coupon under CAFA." 

 

Applying the correct legal standard, the Ninth Circuit held that the "only logical conclusion" was that the credits were coupons under CAFA.  Thus, because the trial court included the full face value of the coupons in its calculation of the fee award, the "error require[d] recalculation of the fee award." 

 

As the Court explained, "[w]hen a fee award in a coupon settlement is calculated using the percentage-of-recovery method, CAFA requires that any calculation of the size of the settlement fund . . . be determined using the redemption rate of the coupons."  Because it did not have the redemption information, the Ninth Circuit would not approve the trial court's percentage-of-recovery evaluation.

 

The settling parties argued that the award could still be upheld based on the trial court's lodestar calculation.

 

However, the Ninth Circuit determined that "the trial court . . . went astray when it reverse-engineered the lodestar multiplier using a value of the settlement that included the full face value of all the $20 coupons." 

 

The Ninth Circuit therefore held that "the attorney's fee award must be vacated," and "the award should be recalculated in a manner that treats the $20 credits as coupons under CAFA." 

 

The Court next addressed the Objector's argument that cy pres should not be used to distribute the remaining settlement funds.

 

The Ninth Circuit disagreed, and held that "it was not an abuse of discretion for the trial court to approve the use of cy pres . . . or to approve these particular recipients."

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 5th Cir Confirms MERS Assignment Not Defective Due to Dissolution of Originating Lender

The U.S. Court of Appeals for the Fifth Circuit recently held that a purported defect in the assignment of a security instrument — that it was executed solely as "nominee," and not as beneficiary – did not affect the rights of the beneficiary and its successors and assigns to foreclose the subject property, and entered judgment in favor of the mortgagee.

 

A copy of the opinion is available at:  Link to Opinion

 

In May 2007, a lender ("Lender") extended a mortgage loan, evidenced by a promissory note executed by the borrower and secured by a Texas Home Equity Security Instrument ("Deed of Trust") to the borrower and his wife's ("Borrowers") property.  Mortgage Electronic Registration Systems, Inc. ("MERS") was the named beneficiary in the Deed of Trust.

 

The Lender later was dissolved and its assets were transferred to a related entity ("Lender's Successor"), and eventually placed in receivership by the FDIC, who sold substantially all of its assets to another bank in the spring of 2009.  Borrowers made their loan payments until December 2009, when their last attempted payment was returned.

 

In January 2011, MERS assigned the Deed of Trust to a different entity ("Trustee").  The next month, the mortgage servicer for the Trustee ("Servicer") notified Borrowers that the mortgage loan was being accelerated for failing to cure the default.  Borrowers still did not make any payments.

 

In April 2011 the Trustee filed a declaratory action in federal district court seeking authorization to conduct a non-judicial foreclosure sale of the Borrower's property pursuant to Texas law.  Following a bench trial, the presiding magistrate judge concluded that the assignment was void and invalid, and the Trustee as assignee did not possess the right to foreclose the Deed of Trust.

 

On appeal by the Trustee, the Fifth Circuit concluded that the magistrate incorrectly concluded that when MERS' assignment of the Deed of Trust to the Trustee as 'nominee for [Lender],' did not provide authorization for it to assign the Deed of Trust. 

 

To the contrary, the Fifth Circuit held that, under Texas law and federal precedent, because MERS was named beneficiary on the original Deed of Trust, it had the authority to transfer its right to bring a foreclosure action to a new mortgagee by valid assignment, and did so in this instance.  Deutsche Bank Nat'l Tr. Co. v. Burke, 655 F. App'x 251, 252 (5th Cir. 2016). 

 

Importantly, the Appellate Court further explained that merely because "the assignment did not state that MERS was acting in its capacity as beneficiary does not change our analysis," and it had "not found a single case from any Texas state court that has made this distinction." Id. at 254, n.1.  Accordingly, the final judgment in Borrower's favor was vacated and remanded with instructions to determine whether the Mortgagee met the remaining requirements to foreclose under Texas law.  Id.

 

On remand, while acknowledging that the Borrowers' remaining challenges to foreclosure lacked merit, the trial court magistrate judge defied the mandate and contravened the law of the case doctrine by concluding that the Fifth Circuit committed error in its prior opinion, and that failure to correct the error would result in manifest injustice. 

 

Specifically, the trial court determined that the Fifth Circuit "clearly erred" in concluding that MERS assigned the Deed of Trust because it executed the assignment as "nominee," suggesting it was acting only in an agency capacity for a principal, rather than its capacity as beneficiary.  Because the Lender's Successor was placed in receivership prior to assignment and the Trustee failed to show that the FDIC, as receiver, sold the loan to another bank, the magistrate further concluded that there was no existing successor. 

 

Thus, the magistrate judge concluded that no existing principal existed capable of assigning a right to foreclosure, and MERS' purported assignment of such right as "nominee" was "void and absolutely invalid."  The Trustee timely appealed.

 

On the instant appeal, review of the magistrate judge's interpretation of the prior remand order was de novo, including whether the law-of-the-case doctrine or mandate rule (requiring a trial court to effect the appellate mandate) determined any of the lower court's actions on remand. Gen. Universal Sys., Inc. v. HAL, Inc., 500 F.3d 444, 453 (5th Cir. 2007) (quoting United States v. Elizondo, 475 F.3d 692, 695 (5th Cir. 2007)).  The instant second panel explained that it would only "reexamine issues of law addressed by a prior panel opinion in a subsequent appeal of the same case" if "(i) the evidence on a subsequent trial was substantially different, (ii) controlling authority has since made a contrary decision on the law applicable to such issues, or (iii) the decision was clearly erroneous and would work a manifest injustice," noting that the third exception has rarely been employed.  Hopwood v. Texas, 236 F.3d 256, 272 (5th Cir. 2000).

 

Here, the trial magistrate judge construed this third exception to the law of case doctrine as a license to disagree with the Fifth Circuit if it was "clearly erroneous" and would "work a manifest injustice" if not overruled.  However, the Fifth Circuit reasoned that such conduct "would lead to chaos if routinely done," and that even if the trial court had the authority to overrule the very legal point previously decided on appeal, absence intervening law or new facts, this case did not represent such extraordinary circumstances.  Id. at 272-273.

 

The Appellate Court noted that MERS indisputably had authority to assign its beneficiary rights under the Deed of Trust to the Bank under its permissible role as beneficiary and nominee thereunder, and validly did so despite its description as "nominee" on the assignment.  Harris Cty. V. MERSCORP Inc., 791 F.3d 545, 558-59 (5th Cir. 2015). 

 

Even if acting only as nominee, it was still not erroneous to conclude that MERS validly assigned the Deed of Trust on behalf of an existing successor of Lender's Successor (as the trial court purported), because the FDIC necessarily had power to assign the rights under the note, including foreclosure rights.  12 U.S.C. § 192; Concierge Nursing Ctrs., Inc. v. Antex Roofing, Inc., 433 S.W.3d 37, 45 (Tex. App.—Houston [1st Dist.] 2013, pet. denied) ("The word 'assign' or 'assignment' in its most general sense means the transfer of property or some right or interest from one person to another.").

 

Lastly, the Fifth Circuit held that even if its prior opinion were "dead wrong," no manifest injustice would result from following the mandate — to the contrary, the Appellate Court noted, the Borrowers continued to live in the home without making payments since December 2009.  

 

Because it was undisputed that MERS as beneficiary under the Deed of Trust had the right to initiate foreclosure proceedings and transfer that right via valid assignment, the purported defect in the assignment as declared by the magistrate judge did not change the fact that MERS and its successors and assigns were entitled to foreclose Borrower's property, and no injustice would occur in allowing the foreclosure to proceed.

 

Accordingly, the Fifth Circuit reversed and rendered judgment in favor of the Trustee.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct:  (312) 551-9320
Fax: (312) 284-4751

Mobile:  (312) 493-0874
Email: rwutscher@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Indiana   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Texas   |   Washington, DC

 

 

NOTICE: We do not send unsolicited emails. If you received this email in error, or if you wish to be removed from our update distribution list, please simply reply to this email and state your intention. Thank you.

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