Opinion
No. 98 C 2550
July 21, 2000
MEMORANDUM OPINION AND ORDER
A proposed settlement might bring an end to ten years of class action litigation. This is upsetting to some attorneys, a relief to others. Before me are two class actions that have reached a settlement agreement with Beneficial National Bank and HR Block over the practices involved in tax refund anticipation loans (RALs). Certain class members object and move to intervene. The gist of the objections is that the agreement is the result of collusive bargaining that inadequately protected the class, and the agreement does not provide enough to the class. Some attorneys believe they would be better class champions than the ones who brokered the deal. Meanwhile, the defendants, particularly HR Block, believe they have purchased peace with honor and hope to close the door on a decade of RAL litigation.
Beneficial National Bank is now Household Bank, f.s.b.
I previously granted objector Lynne Carnegie's motion to intervene on August 10, 1999.
I. Background
A. RALs
HR Block provides tax preparation services to its customers. For a fee, Block will electronically file a customer's tax return with the Internal Revenue Service. Electronic filing enables the tax payer to obtain a refund (if one is owed) in a short time, around two weeks. For some, this is not fast enough. For those customers, Block arranges loans secured by the anticipated refund. Beneficial National Bank provides these loans to customers screened by Block. With a RAL, a customer can receive loan proceeds within a few days. The loan is paid off by the actual refund from the IRS, which is deposited into an account from which Beneficial receives customer authorization to withdraw funds. Beneficial charges a finance fee for the loan which is disclosed to the customer. What is not disclosed, however, is that Beneficial pays Block a license fee for every loan Block refers to Beneficial and that Block owns an interest in the loan itself.
The refund is not necessarily a result of overpayment of taxes through withholdings during the year. Some people become entitled to a refund once an earned income tax credit is applied to their income. For these tax payers, the refund is not indicative of an interest-free loan made to the government, but a benefit to which they were not entitled until the close of the tax season.
RALs are expensive. They are short-term, perhaps as short as four days, and have high interest rates. At oral argument on the motion for final approval, much was made of the demographics of defendants' customer base. Those in need of high-priced short-term loans are often in dire straits financially and cannot wait a few extra days for the refund. Like "payday" loans, RALs and the lenders associated with them are often characterized as predatory, usurious and exploitative.
While RALs may make little sense to many consumers in this age of electronic filing and rapid government response, the product has a thirty-year history. According to one version of events, in the spring of 1969, Beneficial decided to offer income tax preparation services to customers. The bank believed that these clients would learn of a tax bill owed the government and would be in need of funds immediately to pay the IRS. Instead, Beneficial learned that many people had refunds coming to them. Beneficial began advertising a loan that would eliminate the wait for a refund check. See Beneficial Corporation v. Federal Trade Commission, 542 F.2d 611, 613 (3rd Cir. 1976). Another tale credits one Irving Freedman with the idea of refund loans secured by an assignment of refund checks. He came up with a business plan, submitted it to Beneficial in 1968 and sued the bank a few years later for allegedly stealing his idea. Freedman v. Beneficial Corp., 406 F. Supp. 917, 920 (D. Del. 1975).
B. A Decade of RAL Litigation
The first class action RAL case appears to be Washington v. HR Block, 90 CH 2312 (Cook County Cir. Ct.), and involved a class of RAL recipients who did not receive the IRS refunds on the date they thought they would. Block prevailed on summary judgment and so began a war of attrition waged by plaintiffs against Block and the lenders' practices.
No matter where cases were filed (Block says it has defended twenty-two class actions since 1990), the general complaint against the tax preparation service is one of consumer fraud, misrepresentation, or breach of fiduciary duty. Plaintiffs have also alleged violations of the Truth in Lending Act ("TILA," 15 U.S.C. § 1601, et seq.), breach of contract, usury, the National Bank Act, 12 U.S.C. § 21, et seq., and RICO, 18 U.S.C. § 1961, et seq. As plaintiffs have narrowed their legal theories over the years, the crux of the accusation is that Block fraudulently failed to disclose that it receives a fee from the lender and failed to disclose that it has an ownership interest in the loans. The TILA claims asserted against Beneficial generally attack the adequacy of disclosures and the timing of them.
Through a subsidiary, Block Financial, Block purchased a 49.99% stake in a pool of RALs.
No case has gone to final judgment against Block or a RAL lender. In ten years, Block and Beneficial have won motions to dismiss or for summary judgment or defeated class certification in the state and federal courts of Alabama, California, Georgia, Illinois, Louisiana, Missouri, New Mexico, New York, Pennsylvania and South Carolina. In the papers submitted to me for preliminary and final approval of this settlement, Block and Beneficial list numerous cases in which they have won significant victories. The story presented is one of numerous plaintiffs assailing RAL practices with little success.
Block and Beneficial would like to paint a picture of nigh-invulnerability. While the win-loss record clearly weighs in defendants' favor, some lawyers have scored victories against them. The Court of Appeals of Maryland has found that a finder of fact could reasonably infer an agency relationship between Block and a customer with respect to the RAL. Green v. HR Block, Inc., 355 Md. 488, 517, 735 A.2d 1039, 1055 (Md. 1999). Assuming plaintiff could prove the existence of an agency relationship to a jury, Green held that failing to disclose the benefits Block derives from a RAL breaches its fiduciary duty. Id. at 520. The court also found that the materiality of the omission was a question of fact for the jury under the state's deceptive practices statute. Id. at 525.
Counsel for the plaintiffs in Green also scored one for a class in Pennsylvania. In Basile v. HR Block, Inc., 729 A.2d 574, 582 (Pa.Super.Ct. 1999), the appellate court found that as a matter of fact, Block was an agent for the plaintiffs and as a matter of law, owed plaintiffs a fiduciary duty in all matters affecting their tax filing and refund. The court remanded to the trial court for a finding concerning the extent to which Block's nondisclosures violated its duty. Id. at 582. The court also found that detrimental reliance under its unfair trade practices statute could be presumed and was not a bar to class certification against Block. Id. at 584. This victory may be fleeting; the Pennsylvania Supreme Court accepted discretionary review of the case. Basile v. HR Block, Inc., 560 Pa. 717, 745 A.2d 1216 (1999). Meanwhile, Block was unable to defeat class certification in a Texas state court action alleging, among other theories, breach of fiduciary duty. See HR Block, Inc. v. Haese, 992 S.W.2d 437, 439 n. 6 (Tex. 1999).
In Affatato v. Beneficial Corp., 1998 WL 472494 at * 3 (E.D.N Y 1998), Judge Gershon denied Beneficial's motion to dismiss. The court found that there was a question as to whether Beneficial was required to make TILA disclosures at the time of the RAL application. Beneficial made its disclosures at the time the customer endorsed the loan check. Counsel for the plaintiffs in Affatato reports that this is the first case to accord some merit to the theory that a RAL is consummated at the time of application.
The settlement agreement before me threatens to end all this litigation. Plaintiffs' counsel in Affatato, Haese, Basile and Green lead the charge of objectors.
Except for Basile, which is excluded from the settlement class.
C. Zawikowski and Turner
Another group of plaintiffs' counsel filed two suits against Beneficial and Block in 1998 in this court. The Miller Faucher firm, with Francine Schwartz and Howard Prossnitz, filed Zawikowski v. Beneficial, No. 98 C 2178, and Daniel Harris filed Turner v. Beneficial, No. 98 C 2550. The Turner case (which is against Beneficial only) was reassigned to me on a finding of relatedness to Zawikowski, but the two cases were not consolidated. The complaints alleged violations of TILA, the Illinois Consumer Fraud Act, breach of contract, breach of fiduciary duty and violation of RICO. As in other RAL cases, the complaints attacked the license fee paid by Beneficial to Block and the adequacy of disclosures made.
On motions to dismiss, I enforced arbitration clauses in the loan documents. Zawikowski v. Beneficial, 1999 WL 35304 (N.D. Ill. 1999). This dismissed Block from the Zawikowski case entirely; Cheryl Reynolds, Nannie Triplett and DeCarlo Turner remained as plaintiff class representatives. I denied the motions to dismiss with respect to the TILA, RICO, breach of contract, unjust enrichment and consumer fraud act claims.
II. The Settlement
The case against Beneficial was very much alive when, in February 1999, Daniel Harris informed the court that settlement negotiations were underway. In October, 1999, the parties entered a settlement agreement and plaintiffs filed an amended complaint in November. The settlement and the amended complaint brought Block back into the case as a defendant.
A. The Terms
The class is defined as all persons who obtained a RAL from Block or Beneficial from January 1, 1987 to October 26, 1999. The class excludes Pennsylvania residents who have claims against Block and customers of Jackson-Hewitt who received a RAL from Beneficial.
See Basile, discussed supra at 5. Jackson-Hewitt customers may be covered by another settlement agreement, approved in Adams v. Jackson Hewitt, Inc., No. 95 CH 11825 (Cook Cty. Cir. Ct.).
The settlement provides for a fund of $25 million dollars against which class members may file a claim for a pro rata share of the fund up to $15 per class member. Any money left in the fund after the claim period reverts to the defendants. The cost of sending notice to the class, administering claims and attorneys' fees for plaintiffs' counsel are excluded from the fund and must be borne by defendants. In addition to cash, the class (and the public as a whole) receives prospective relief in the form of disclosures made at the time of a person's application for a RAL. The disclosures state the amount of the license fee between Beneficial and Block, the amount of document preparation, administrative and/or surcharge fees to be paid by the customer and the amount of electronic filing and/or tax preparation fees. Beneficial agrees to make TILA disclosures at the time of RAL application. Pursuant to the agreement, these disclosures have been made since January 1, 2000. In return for this money and injunctive relief, the class releases defendants from any and all actual and potential claims, known or unknown, that the class representatives asserted or could have asserted against defendants arising out of RALs obtained through October 26, 1999.
The license fee paid by Beneficial to Block during the class period ranged from $3-$9.
Defendants agree to pay no more than $4.25 million in attorneys' fees.
B. The Negotiation
On September 3, 1997, Daniel Harris, Francine Schwartz and Howard Prossnitz had lunch with Burt Rublin and James Adducci at the Metropolitan Club in the Sears Tower in Chicago. Schwartz and Prossnitz were plaintiffs' counsel in Adams v. Jackson-Hewitt, No. 95 CH 11826 (Cook Cty. Cir. Ct.), a RAL case in which Beneficial was a defendant, and Harris had been retained by DeCarlo Turner. Rublin and Adducci are counsel for Beneficial. No attorney for Block attended the lunch.
At this Metropolitan Club lunch, which has become the symbol of the objectors for all things sordid about this settlement, the lawyers discussed a global RAL settlement. Details about the conversation are fuzzy these days, but either Schwartz or Prossnitz suggested a global settlement to be worth hundreds of millions of dollars. Rublin said this was unrealistic and may have said that the case would be worth something like $20 million dollars. Harris believes he heard Rublin say the case was worth $23 or $24 million. Both Rublin and Adducci deny ever throwing out any number, and Prossnitz says no offer was made at the time. In the very least, it is clear that the lunch left Harris with the belief that a national class action could be brought against Beneficial and settle for somewhere around $24 million. Adducci called Prossnitz a few weeks later to say that Beneficial was not interested in pursuing the matter.
Prossnitz and Schwartz, with the Miller Faucher firm, filed suit on behalf of Nannie Triplett and Cheryl Reynolds against Beneficial and Block on April 8, 1998, the Zawikowski case. On April 27, 1998, Harris filed suit against Beneficial, the Turner case. There is no evidence of further settlement overtures until June, 1998 when Harris sent a proposed settlement to Adducci. Beneficial rejected this offer of $15 in discount coupons.
On January 20, 1999, Rublin responded to Harris's offer. This occurred nine days after I denied Beneficial's motion to dismiss in part and on the same day that a Magistrate Judge set a discovery schedule in Affatato in the Eastern District of New York. From this point forward, discussions became a two-way street. Harris was no longer met with refusals to settle, but with counter-proposals, to which Harris responded; over time, the parties bandied the terms of a settlement. By the summer of 1999, the prospect of a global RAL settlement seemed very real. The Miller Faucher firm and HR Block were participating in the negotiations. Harris recalls being asked to keep the talks confidential to avoid other plaintiffs' counsel from injecting themselves into the process. The settlement began as a coupon settlement and evolved into a combination of coupons and pro rata share of a cash fund. The amount of the fund and the cap on pro rata shares increased throughout the negotiations until the final agreement was reached — no coupons, $25 million and a $15 pro rata cap. C. The Objectors
In June 1997, a group of plaintiffs' attorneys from around the country met near Chicago's O'Hare airport to discuss RAL litigation and the division of labor in a joint prosecution of RAL cases.
Although Block had been dismissed from Zawikowski, it re-entered the case to become a party to the settlement. In the settlement, plaintiffs agreed to file an amended complaint against Block. During the negotiations, Block redlined a proposed amended complaint. Plaintiffs, however, did not adopt Block's suggestions and filed the new complaint in November, 1999.
A group of objectors accuse plaintiffs' counsel of selling out the class by negotiating this settlement. They say the Metropolitan Club lunch proves the existence of collusion, the subsequent twenty-three months were a song-and-dance of sham negotiations, and defendants sought out these poorly leveraged Chicago attorneys to avoid litigating against superior forces elsewhere. Over the course of a two-day final approval hearing, objectors appeared through counsel to voice their opposition to the settlement.
Intervenor Lynne Carnegie is represented by Roger Kirby, Peter Linden, and Ronald Futterman (the Kirby group). She is pursuing the Affatato case as well as a state court case. See Carnegie v. HR Block, Inc., 703 N.Y.S.2d 27 (1st Dept. 2000). The Kirby group says this settlement represents a so-called reverse auction. Therefore, class counsel are inadequate representatives. It argues that Beneficial and Block sought this settlement out of their fear of Roger Kirby and the ongoing litigation in New York. In addition, it says the TILA and fraud claims against Beneficial could recover damages of around $981 million dollars, representing total RAL revenues earned by Beneficial over the years. The Kirby group notes that it pursues novel TILA theories against Beneficial. It also argues that Turner, Reynolds and Triplett are inadequate class representatives. Most importantly, Kirby says that liability of the defendants could be established in a short trial involving only a few witnesses.
See John C. Coffee, Jr., Class Wars: The Dilemma of the Mass. Tort Class Action, 95 Colum.L.Rev. 1343, 1354, 1370-1373 (1995). Professor Coffee has submitted an affidavit in support of the Kirby group's opposition to this settlement.
Objector Geral Mitchell was represented at oral argument by Steven Angstreich, counsel for the class in Green and Basile. He says the case against Block, based on a breach of fiduciary duty, could recover upwards of $2 billion of disgorged revenues. Like the Kirby group, Angstreich believes statutory consumer fraud claims (Unfair and Deceptive Acts and Practices or UDAP) can succeed without a showing of reliance and recover statutory minimums in a range of $25 to $100 per class member. According to this view, a settlement of $25 million grossly undervalues the case against Block.
Objectors Ronnie and Nancy Haese hail from Texas. There they are named plaintiffs in a class action against Block and are represented by Edward Carstarphen. See Haese, supra at 5. Counsel, like Angstreich, argues that the settlement is grossly inadequate with respect to Block for it undervalues potential claims that could result, under Texas law, in total forfeiture of RAL fees. Carstarphen believes he could succeed against Block under a commercial bribery theory (the fee paid by Beneficial to Block) and recover punitive damages in addition to the forfeiture.
The Haeses also raise a jurisdictional argument concerning my authority to enter a release of their claims in light of a Texas state court having certified their class prior to the settlement in this case. Notice has been sent to the class, and the time to opt-out has ended. The Texas order certifying the class was not a final judgment entitled to Full Faith and Credit under 28 U.S.C. § 1738; therefore, I do not believe the existence of the Haese case changes the minimum jurisdictional requirements of Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812, 105 S.Ct. 2965, 2974 (1985).
Several objectors fall outside the category of seasoned RAL litigators and instead raise points on the adequacy of the relief in the settlement. They say that recipients of multiple RALs should be entitled to more than a mere pro rata share, attorneys' fees should be tied to the actual benefit received by the class, and the incentives to maximize class relief should not be diminished by allowing plaintiffs' attorneys to negotiate the fee issue separate from the substantive relief. One problematic feature of this settlement, according to many, is the reversion of unclaimed funds back to defendants. The objection is that this makes the $25 million an illusory amount, the class is not guaranteed the entire fund.
A third group of objectors is represented by Robert Cummins. In addition to objecting to the claim form process and moving to disqualify class counsel for inadequate representation, Cummins proposes being named class counsel himself. He is willing to wager his fees on his ability to achieve more for the class than the settlement provides.
With this background in mind, I now consider the merits of final approval of this settlement.
III. Final Approval
Before I approve a class action settlement, I must be satisfied that it is lawful, fair, adequate and reasonable. Toward that end, I consider: the strength of plaintiff's case on the merits, the complexity, length and expense of continued litigation, the amount of opposition to the settlement, the presence of collusion in gaining a settlement, the stage of the proceedings and the amount of discovery completed. Isby v. Bayh, 75 F.3d 1191, 1199 (7th Cir. 1996); General Elec. Capital Corp. v. Lease Resolution Corp., 128 F.3d 1074, 1082 (7th Cir. 1997); see also Joel A. v. Giuliani, ___ F.3d ___, 2000 WL 942918 at * 4 (2nd Cir. July 10, 2000).
I am charged with protecting the interests of class members, not class counsel. Therefore, I must make sure that the protections of Fed.R.Civ.P. 23(a) and 23(b)(3) are satisfied, in addition to assessing the reasonableness of the bottom line. The Supreme Court requires heightened attention to the adequacy of representation by counsel and class representatives when considering final approval of a class action settlement. Ortiz v. Fibre board Corp., 527 U.S. 815, 119 S.Ct. 2295, 2329 n. 31 (1999) (citing Amchem Products, Inc. v. Windsor, 521 U.S. 591, 626 n. 20, 117 S.Ct. 2231, 2251 n. 20 (1997)).
No objector argues about numerosity, commonality or typicality. This is no surprise since most objectors are represented by class action counsel seeking to pursue their own suits. The heart of the Rule 23 objection is adequacy of representation. If counsel in these cases were acting purely in their own self interest by negotiating a settlement collusively with defense counsel with no regard to the class, then final approval is not appropriate. See Greisz v. Household Bank (Illinois), N.A., 176 F.3d 1012, 1014 (7th Cir. 1999) (refusing to certify' class action based on incompetence of class counsel).
A. Adequacy of Representation — Collusion and The Reverse Auction
Class actions present both collective action and agency problems. In small claims consumer actions, no one plaintiff has a sufficient interest to sue to recover for a corporation's unlawful practices, even though in the aggregate, the company may be causing great harm. Government regulation could represent the interests of the group (in many cases it does, e.g., food and drug regulations), but the costs of this would be borne by all taxpayers. In many cases this would result in government auditors discovering lawful conduct at great public expense. So, the class action allows a single representative to sue on behalf of a group. This is a solution to the collective action problem, but requires agents (the class representative and counsel) to pursue the interests of the principal (the class). Now, the interests of the agents do not align perfectly with those of the class. An attorney may settle a case for far less than its value in an effort to recover fees quickly. It is this incentive that defendants target when they engage in Professor Coffee's reverse auction. A weak attorney, one who does not have the bargaining power to attack defendants, may fall prey to the desire to settle with little regard to the class as a whole. Did that happen here?
Harris, Prossnitz and Schwartz approached Beneficial to discuss a RAL settlement at the Metropolitan Club in September, 1997. The instant cases had not been filed yet, but were contemplated. Prossnitz and Schwartz had just settled the Jackson-Hewitt case and were familiar with RAL litigation. Indeed, Schwartz attended the O'Hare meeting earlier that summer where Kirby and Angstreich, among others, discussed dividing the pie against Block and Beneficial.
I am persuaded that this "smoking gun" lunch was nothing more than an adversarial, arms-length discussion of RAL litigation. Even if counsel for Beneficial, Mr. Rublin, revealed his assessment of the value of a global RAL case, subsequent events do not support the accusation that this lunch was collusive. Beneficial did not make a settlement offer until January, 1999. During the summer of 1999, Harris was apparently willing to accept a settlement at terms less favorable to the class, but Miller Faucher continued to press for more. In the end, it took two years (starting at the lunch) to negotiate a settlement of over $20 million dollars. The Kirby group's attempt to label the lunch as a moment in time when the parties cemented a deal is unreasonable. No such inference can be drawn. The evidence suggests these plaintiffs' counsel negotiated for many months (sometimes with internal disagreement) in order to extract $25 million out of the defendants — it was not offered as a fait accompli.
Harris's testimony that Rublin "threw out" a number, for purposes of illustration, of $24 or $23 million is credible and not particularly suspicious. His testimony on this point is that Rublin was not making a proposal and everyone seems to agree that no settlement offer was made by defendants at the lunch.
During the negotiations, other RAL cases may have influenced defendants' willingness to up the offer. Benificial was briefing class certification and summary judgment in Affatato and Block was losing a few rounds in Green and Basile. That these events put pressure on the defendants is not improper. Nor is the defendants' desire to negotiate with the Chicago lawyers instead of the Kirby group. The Court was informed that settlement talks were occurring; they were not secret. Harris invited Kirby to participate, but Kirby refused (a reasonable reaction). However, just because defendants had productive negotiations with Chicago counsel does not mean they were collusive.
Although the settlement talks were conducted at arms-length, class counsel could be considered inadequate if they were disarmed (in a weak negotiating position) and unable to benefit the class. Here, objectors note the lack of discovery pursued against Beneficial and Block, and the fact that Block had been dismissed from the case.
In January, 1999, plaintiffs did have leverage over Beneficial; the case was alive, albeit narrower than before. Plaintiffs were not so disadvantaged that they settled at the drop of a hat. It took nine months, from January to October, to get everyone on board. Moreover, there is no evidence that other plaintiffs' counsel rejected settlement offers comparable to this one. If defendants never before offered $25 million, then that suggests these plaintiffs achieved more for the class than other attorneys. Nor is the failure to propound discovery against Beneficial or Block damning to counsel's assessment of these cases. There are numerous reported decisions in RAL cases and many cases that have failed to overcome motions to dismiss. Clearly, discovery is not essential. Indeed Roger Kirby sent a letter to Beneficial in August, 1998 indicating that he had a settlement value in mind before he received any discovery in Affatato. In this letter, Kirby stated he intended to increase his settlement offer a million dollars a day to penalize defendants for slow document production. Kirby placed a memo in his files memorializing his assessment of the case, but chose not to share this pre-discovery assessment with defendants or this court. Whatever Kirby's number, the objectors cannot argue with a straight face that discovery is required to "arm" a plaintiff when settling a RAL case.
I do not mean to suggest that the fact that there were no other bidders means this was not a reverse auction; the reverse auction phenomenon could occur when defendants single out one plaintiffs' attorney without soliciting others for settlement.
Kirby's claim that he could establish liability in a short trial with a few witnesses also belies the argument that class counsel needed voluminous discovery to assess the case. The Kirby group has had discovery against the defendants, and I assume they have put their best case forward at the final approval hearing. Plaintiffs' counsel in the settling cases reviewed the Affatato discovery before agreeing to the settlement. Therefore, I do not believe additional discovery, urged by Cummins, is necessary.
Because of my dismissal order, plaintiffs could not threaten litigation against Block. This certainly is a sign of weak bargaining power. However, lawyers can free ride on the efforts of others and observe the progress of RAL cases against Block. An experienced attorney need not have a pending case against Block in order to learn about Block's business practices, various legal theories asserted against it, and the likelihood of success on the merits. In the context of RAL litigation, Block often wins, therefore the fact that plaintiffs lost a motion to dismiss does not, by itself, disarm them from negotiating. Despite losing the motion to dismiss against Block and minimal discovery from Beneficial, counsel possessed an adequate degree of information to pursue a RAL case. These attorneys are experienced class action litigators, and I find they are competent to represent the class.
However, objectors also argue that plaintiffs' counsel inadequately represent the class because they have low-balled the value of the case, undervaluing claims against Block. I discuss this argument in terms of the fairness of the settlement. This requires an assessment of the strengths of plaintiffs' theories and is best considered in light of the settlement as a whole. Counsel did not collude with defendants, and I am persuaded that they had sufficient information to form a genuinely held belief as to the value of RAL litigation. Absent a finding of collusion or reverse auction, I do not believe it is my place "to prescribe the modalities of negotiation." Mars Steel Corp. v. Continental Illinois Nat. Bank and Trust Co. of Chicago, 834 F.2d 677, 685 (7th Cir. 1987). If the final settlement is fair and adequate then counsel adequately represented the class — "the proof of the pudding [is] indeed in the eating." Id.
The objectors also attack the adequacy of the named plaintiffs, Reynolds, Triplett and Turner. As for standing, there is no dispute that Reynolds has standing to release claims against Block and that Triplett and Turner have standing to release claims against Beneficial. The real objection is that these plaintiffs are not as knowledgeable about the settlement and posture of their lawsuits as are their attorneys. This is not uncommon in class actions, and the burden of representation is generally placed on class counsel. See Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 372, 86 S.Ct. 845, 850 (1966) (class representative who could not identify defendants, describe their misconduct, or understand the complaint can rely on counsel). Although the plaintiffs' depositions suggest that they do not understand the specifics of the settlement or its negotiation, there is no suggestion that these plaintiffs are not interested. Indeed, Turner appears to be more concerned with the amount of her incentive award than the merits of the settlement to the rest of the class. The fact that class counsel did not inform the named plaintiffs of some important details does not disqualify the representative or the counsel. Delegation to attorneys is to be expected.
I note that intervenor Carnegie is similarly under-informed about the nature of the settlement which she opposes.
Therefore, I conclude that class counsel and the named plaintiffs satisfy the requirements of Fed.R.Civ.P 23(a) and 23(b)(3) such that the terms of the settlement may be evaluated for their adequacy and reasonableness.
B. Reasonableness of Settlement
Although an inquiry into the reasonableness of this settlement necessitates an evaluation of the strength of plaintiffs' claims, I must "refrain from resolving the merits of the controversy or making a precise determination of the parties' respective legal rights." Isby v. Bayh, 75 F.3d at 1196-1197 (7th Cir. 1996).
1. The Case Against Beneficial
The Kirby group believes Beneficial violates TILA when it fails to make TILA disclosures at the time of the RAL application; the theory is that the transaction is consummated at application. The only court that suggests this theory may be viable is Affatato, 1998 WL 472494 (E.D.N Y 1998). Other courts have held the timing of Beneficial's disclosures to be filly compliant with TILA. Beckett v. HR Block, Inc., 1994 WL 698505 at *3 (ND. ILL. 1994); Cades v. HR Block, Inc., 43 F.3d 869, 876 (4th Cir. 1994); Basile v. HR Block, Inc., 897 F. SUPP. 194, 197 (E.D. Pa. 1995) (Basile I).
If the Kirby group is correct, its TILA theory is still not a slam dunk. Beckett, Cades and Basile I all hold that a RAL is not consummated at the time of application. Perhaps the theory has blossomed with time and thought, sufficient to cast doubt on the earlier consummation precedent. But surviving the motion to dismiss in Affatato does not guarantee victory. Weighed against the risk of loss is the settlement in this case, which provides for TILA disclosures at the time of application. This injunctive relief is significant and to which the Kirby group assigns no value. This is somewhat surprising since the settlement forces Beneficial to conform its business the group's novel theory.
The Kirby group also attacks the adequacy of Beneficial's disclosures and annual percentage rate (APR) calculations. It says that the APR is underestimated since it is calculated based on a loan of 2 weeks, when in actuality the duration of the loan is less. Beneficial also fails to disclose that its APR is an estimate. All these TILA violations give rise to a billion dollar case, says Kirby. Unfortunately, the objectors have not created a record here sufficient to evaluate the merits of these claims in terms of probability of success.
Although I granted the Kirby group three days of court time to present witnesses, the objectors opted not to flesh out their attack on the proponents' theories of liability and damages. Instead, they have made conclusory assertions, unchanged since preliminary approval, that the TILA violations require damages in the amount of the total finance fee charged by Beneficial which may be around $981 million. There is no question that Beneficial provides a loan; it provides a service. I am not persuaded that a viable damage theory exists that would require the entire finance fee to be considered damages. Therefore, there are real risks that recovery would not approach hundreds of millions of dollars.
There is also a question concerning proof of actual damages under TILA. Individual determination of actual damages may not be a bar to class certification, Chandler v. Southwest Jeep-Eagle, Inc., 162 F.R.D 302, 310 (N.D. Ill. 1995), but it creates uncertainty and sheds doubt on Kirby's damage hypothesis.
There are also statute of limitations problems that one court has held were a bar to these TILA claims. Rizzo v. HR Block, No. 95-1001-CV-W-4, Slip Op. at 10 (W.D. Mo. 2000).
Instead of pursuing claims contingent on untested, novel legal theories, the class here receives immediate relief I do not believe class counsel undervalued TILA claims against Beneficial, or the parallel claims arising under UDAP statutes. These claims are not tested, and in some forms have been rejected outright. No case has gone to judgment against Beneficial and no sensible damage theory has been proposed to render $25 million unreasonable.
A violation of TILA is also a violation of UDAP statutes. The Kirby group also argues that Beneficial violates UDAP when it fails to disclose the loan pooling arrangements. Again, according to it, this violation mandates compensatory damages in the amount of the entire finance fee charged, and again, I am underwhelmed by this argument.
I reject the argument that Beneficial settled in Chicago because it was afraid of Kirby. At oral argument, Futterman hypothesized that Beneficial checked out its opponent in New York and learned of his victory in the Ninth Circuit in Epstein v. MCA, Inc., 50 F.3d 644 (9th Cir. 1995) (Matsushita). of course, by the time settlement talks were pursued in earnest in Chicago, Kirby's success in Matsushita had been vacated. Epstein v. MCA, Inc., 179 F.3d 641 (1999). I find it unlikely that a corporate defendant would look to Matsushita in 1999 and feel it needed to avoid litigating against Kirby in a RAL case in which the great weight of precedent was on its side.
2. The Case Against Block
Angstreich and Carstarphen believe a case can be made against Block under a breach of fiduciary duty theory. The argument is that Block becomes a fiduciary of its tax preparation clients when it prepares the filings and steers them to RALs; any license fee earned by Block from Beneficial conflicts with this duty and must be disclosed. Counsel argue that the appropriate measure of damages is all revenue earned by Block from RALs. This makes the case against Block worth $2 billion dollars.
The settlement agreement provides for such disclosure.
The only authorities cited to me that support the fiduciary duty theory are Angstreich's victories in Green and Basile. Those cases, however, are not final and require a trier of fact to decide the issues of the scope of agency and whether the failure to disclose breached the duty. Meanwhile, in Texas, Carstarphen believes he can use his state's fiduciary principles to extend tax preparers into the realm of attorneys, physicians and certified public accountants. Block points to a series of cases that hold no agency or fiduciary relationship exists. E.g., Peterson v. HR Block Tax Services, Inc., 971 F. SUPP. 1204, 1213-1215 (ND. Ill. 1997); Beckett v. HR Block, Inc., 306 Ill. App.3d 381, 391-392, 714 N.E.2d 1033, 1040-1041 (1st Dist. 1999); Carnegie v. HR Block, Inc., 703 N.Y.S.2d 27, 29 (1st Dept. 2000).
There are two risks that must be factored against the value of the settlement. The risk that a court (or fact finder) will reject a finding of fiduciary duty and the risk that a court will reject $2 billion in disgorgement. Both risks are very real and Carstarphen (who argued his cause ably), candidly admits the many hurdles the Haeses face. While the Texas Supreme Court has allowed a forfeiture of fees in a case involving an attorney's breach of fiduciary duty to his clients, Burrow v. Arce, 997 S.W.2d 229 (Tex. 1999), no case has been cited to me to support this equitable forfeiture (without proof of actual damages) in a class action involving novel theories of fiduciary duties.
Does a $25 million settlement adequately account for these risks? The answer is yes. The breach complained of is the license fee paid by Beneficial to Block, and the settlement represents more than the fee. See note 7, supra. of course, this settles both the case against Beneficial and the case against Block. Some objectors believe the inclusion of Block in this settlement results in a two-for-one settlement. I disagree. RAL litigation is generally unsuccessful, be it against Beneficial, Block or both, and this settlement remedies the alleged unlawful conduct asserted in all recent RAL cases — the nondisclosure of the license fee. This is unlike cigarette or asbestos litigation, which in the hands of numerous different attorneys, over time and in different jurisdictions, finally achieved a foothold on liability issues. See Insolia v. Philip Morris, Inc., ___; F.3d ___, 2000 WL 772872 at * 4 * 11 (7th Cir. 2000) (citing cigarette liability cases); Ortiz, 119 S.Ct. at 2203 (discussing history of asbestos litigation). Here, a consortium of attorneys have pressed the license fee issue to no avail. Unquestionably, Green and Basile may give Block some pause, but they do not suggest that a billion dollar nation-wide verdict is around the corner.
This excludes Carstarphen and Cummins who do not belong to the group of longstanding RAL litigators. They appear here not in the face of losses but out of a desire to explore the possibilities.
I am not persuaded that the settlement undervalues claims pursuant to UDAP statutes. Angstreich points to the many state laws that provide statutory minimums exceeding $15 per person. However, some states do not allow such recovery in a class action. E.g., Ala. Code § 8-19-10 (f); see also Clement v. American Honda Finance Corp., 176 F.RD. 15, 29 n. 22 (criticizing settlement for failing to inform class members they must opt-out to pursue individual statutory minimum cases). in Clement, Judge Nevas noted that the UDAP claims in that case were not necessarily weak ones. Id. at 29. In this case, the record suggests a UDAP claim, especially one dependent on TILA or an agency theory, is in fact, a weak one. Therefore, the theoretical presence of UDAP damages does not add significantly more value than TILA or breach of fiduciary duty claims.
So why settle? Block had been dismissed from this case based on my enforcement of the arbitration clause in the loan agreement. Other courts have disagreed with this holding, so Block may not have been so confident that my ruling would stand the test of time. The prospect of continued litigation elsewhere and the cost to its goodwill, even if it won every case, makes settlement attractive to Block. This is reasonable and not indicative of a fear that the walls were tumbling down.
I note that the injunctive relief does not require Block to disclose its ownership interest in the loans. Counsel for Block has represented that such disclosures are currently being made voluntarily. That Block did not agree to be bound to do so suggests that it does not fear fixture litigation over This issue; as a defendant, it assigns no value to that issue.
The proponents of the settlement say that in addition to the contrary caselaw on the merits, the value of the settlement must be considered in light of statute of limitations problems, arbitration clauses, and the difficulty of proving actual damages. I agree that this brings the likelihood of a mammoth recovery down significantly. Plaintiffs' expert, Dr. James Adler, evaluated the economic damage of undisclosed document preparation fees charged by defendants from 1988-1995 to be $60 million. This is based on a much less ambitious theory of liability than that offered by the objectors. But in light of the failures racked up by other counsel, I am not persuaded that Adler's analysis is unrealistically low.
Both Lynne Carnegie and Nancy Haese acknowledge that they did not read the loan documents.
3. Complexity, Length and Expense of Continued Litigation
As suggested above, continued litigation by plaintiffs everywhere pose significant risks. Block and Beneficial have won many cases and have adopted a litigation strategy of delay and appeal. This increases uncertainty and imposes costs on plaintiffs' counsel. Perhaps defendants have tired of this exercise and are willing to put an end to it now. If the settlement is not approved, however, I have no doubt that the class will not see any relief for many years to come. Some objectors say this is a simple case, but ten years without a judgment suggests otherwise. This weighs in favor of approving the settlement. I decline Cummins's suggestion that he be given an opportunity to try and get more for the class. In any settlement, one can argue that a better deal could be achieved, but at some point the cycle must stop. In this case, I believe ten years is enough, and imposing additional costs of delay and risks of litigation on the class does not outweigh the potential benefits.
4. Opposition to the Settlement
Seventeen million individual notices were mailed and paid for by defendants. Defendants also ran notices in Parade Magazine and USA Today. Statistically, the response has been positive. Almost one million people have filed claims, while 6,126 have opted out. Some courts would consider an opt-out percentage of 0.035% to be surprisingly small if the settlement is as bad as objectors believe. See Mars Steel, 834 F.2d at 680. It is my experience, however, that the numbers do not necessarily reflect approval or disapproval. Some people opt-out because they want nothing to do with the case (or lawyers or courts); others fail to opt-out for the same reason — the paperwork is not worth the effort. Fourteen individual class members have voiced objections via eleven different attorneys (or groups of attorneys). I have addressed the substance of most of these objections above (in addition to evaluating the presence of collusion and the amount of discovery completed, see supra at 13-15).
Several million notices were returned as undeliverable.
5. Miscellaneous Objections
Several other objections may be addressed quickly. First, I find the claim form process to be reasonable. Submitting a form is not burdensome, and given the inability to contact many class members, is an appropriate method to administer the settlement. Second, the class notice was sufficient even though it did not mention other RAL cases or theories of liability; such information could be confusing and misleading whereas the notice provided sufficient contact information for an interested class member to receive additional information. Third, I decline to interpret the scope of the release at this time. Fourth, I enter and continue the petition for attorneys' fees. I agree in part with the suggestion of objector counsel Lawrence Schonbrun and will consider compensation in light of the actual benefit to the class.
6. The Reversion
$25 million is an adequate, reasonable and fair amount of relief to the class. However, as many objectors note, it is not guaranteed. If the amount claimed is less than $25 million, the defendants get to the keep remainder. Reversion of unclaimed funds is typical for settlements of this kind. When the number of claims is uncertain, a reversion allows defendants to assess the risk of claims and often, allocate more to the fund than it would be willing to put in absent a reversion.
One million claims have been filed and another four hundred thousand are estimated to be filed before the claim period ends on December 31, 2000. Therefore, the parties expect approximately $21 million to be claimed; this leaves a relatively small percentage left for reversion, which both softens the objection to it and decreases the defendants' interest in it. The problem remains, however, that the reversion creates uncertainty. In this case, it is the uncertainty of RAL litigation that favors a settlement and demands concrete relief to the class. In other words, a significant factor in favor of a settlement of the sort before me is that it is concrete as opposed to the contingent nature of the alternatives.
A reversion is inappropriate in this case. Clearly, the defendants have accepted a $25 million valuation of the case and are willing to gamble on some being left over. I find, however, that the class as a whole deserves the certainty of the maximum recovery.
IV. Conclusion
Obviously, the objectors value these cases differently than the proponents of the settlement. The record before me, however, is one of victory after victory for Beneficial and Block. The objectors were given an opportunity to present the factual bases for their valuation, but the record remains conspicuously silent. A judgment must be made, and it is one on which reasonable minds may differ. I find that the settlement amount, $25 million, when coupled with important injunctive relief that cures the accused practices, is a fair, adequate and reasonable one — with one important caveat. The total $25 million recovery is adequate as long as that is the true recovery.
I decline to approve the settlement in its current form. If the parties can agree on a settlement that distributes the entire $25 million to claimants, I will reconsider. This may require notice to the opt-outs and an opportunity to opt back in; the parties may decide to structure the disbursement of residual fund monies by way of increased pro rata shares or by allowing recipients of multiple RALs to receive additional compensation. I will of course consider the adequacy and reasonableness of any modification to the proposed settlement. Since the anticipated reversion does not represent a high percentage of the settlement fund, I will enter and continue the motion for final approval to give the parties time to modify the agreement and motion, if they so desire.
The motion to disqualify is denied. The motions to intervene are denied; the arguments of objectors are adequately represented by the Kirby group, and I see no need to complicate the appellate process. However, the Haeses are granted leave to intervene so that Carstarphen may pursue his arguments based on Texas law. The motion for final approval is entered and continued. The petition for attorneys' fees is entered and continued.
of course, this does not limit the scope of the Haeses' intervention. I note that in addition to Carstarphen, the Haeses have enlisted the assistance of Professors Samuel Issacharoff and Henry Monaghan. I have no doubt that the intervention of Carnegie and the Haeses will sufficiently represent the arguments in opposition to this settlement.