Third Attempt to Obtain Court Approval of Class Action Settlement Succeeds and Court Rejects Claim of Collusion Between Class Counsel and Defense Attorneys
Plaintiffs filed a class action against H&R Block (as tax preparer) and against Beneficial National Bank (as lender) arising from loans made based on the anticipated tax refund the borrowers would receive claiming that defendants’ failure to disclose that Beneficial paid H&R Block a $7 license fee for every loan referred by H&R Block. Defense attorneys vigorously contested the class action, and after a decade of litigation a settlement was reached and approved by the district court. Zawikowski v. Beneficial Nat’l Bank, 2006 WL 1051879 (N.D. Ill. July 28, 2000, Case No. 98 C 2178). The Illinois federal court approved a settlement of that class action, but the Seventh Circuit reversed. See Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277 (7th Cir. 2002). The Illinois federal district court rejected a second attempt at settlement because the proposed settlement was not fair and reasonable. The court also concluded that class counsel’s representation of the class was inadequate. See Reynolds v. Beneficial Nat’l Bank, 260 F.Supp.2d 680 (N.D. Ill. 2003). Under the guidance of new class counsel and a new class representative, the parties reached yet another proposed settlement, this one winning district court approval. Carnegie v. Household Int’l, Inc., 445 F.Supp.2d 1032 (N.D. Ill. 2006).
Following its obligation to give “careful scrutiny” to any proposed class action settlement, the district court held that it must examine the “‘probability of plaintiff prevailing on its various claims, the expected costs of future litigation, and hints of collusion,’” and that it must “determine the litigation value of the case and assess the settlement against that value.” Carnegie, at 1034 (citations omitted).
Under the terms of the new settlement, defendants would pay approximately $40 million; after payment of class counsel’s fees and costs, and administrative costs, about $30 million would be distributed to roughly 1.7 million class members. Because all funds will be disbursed, the recovery of each class member will turn on the number of valid claim forms tendered. The minimum distribution would be $15 for each Refund Anticipation Loan (RAL), but could be as high as $80 per RAL if the administrator does not receive any additional claims. Carnegie, at 1034.
In approving the settlement, the district court was influenced by the fact that it received only six objections to the proposed settlement despite extensive notice of the settlement, one of which was rendered by moot by the number of claims filed as of the date of the court hearing and one of which was submitted by one who lacked standing to object because he was not a member of the class. Carnegie, at 1035. The remaining four objections were “by attorneys previously excluded from further representation of the class in this case.” Id.
One objector claimed that the settlement value was too low because the RICO damages were worth $93 million, making treble damages $279 million. The district court held (1) “the potential for treble damages should not be taken into account,” and (2) “the likelihood of plaintiffs obtaining a damage award in this amount is less than 50 percent.” Carnegie, at 1035. The court noted that this objector’s counsel previously argued in support of a less favorable settlement “that the RICO claim had only a one to five percent likelihood of success, covering a larger time period, and that ‘the expected value of the damages for this action is $2.6 million to $13 million.’” Id. n.5. The court also rejected a claim that class counsel colluded with defense attorneys. Id., at 1035-36.
The remaining objections dealt with the contract claim and the RICO claim. The contract claim involved a $7 license fee allegedly returned to H&R Block by Beneficial as part of each loan. The court readily disposed of this objection because each class member will receive at least twice that amount. Carnegie, at 1036. As to the RICO claim, the court detailed its reasoning for finding the settlement to be fair and reasonable, id., at 1036-37.
Finally, the district court considered and approved class counsel’s request for attorney fees and costs, concluding that they were reasonable. Carnegie, at 1038. The court also rejected a claim by original counsel for the class that new class counsel provided only “incremental” benefit to the class, and refused to award fees to those attorneys that it had previously found to be inadequate representatives of the class. Id.