D&G Law

Sixth Circuit Overturns Class Settlement Due to Preferential Treatment for Class Reps

Donaldson & Guin, LLC - securities fraud litigation blogIt is and always has been a sine qua non of class actions that there be no preferential treatment for the representative plaintiffs who file the suit. Except in securities cases, where Congress has prohibited the practice, most courts allow the class representatives to receive a modest “incentive award” award as fair compensation for the time they put into the litigation, gathering documents, preparing for and providing deposition or trial testimony, meeting with and guiding counsel,¬†and for the general headache. Such modest awards are generally viewed as allowable because they only compensate the plaintiffs for things they had to do that were not required of other class members. But aside from such court-approved allowances, settlements must not favor the representative plaintiffs in any meaningful way, lest the settement be subject to attack as collusive.

The parties to the settlement in Vasselle v. Midland Funding LLC, ___ F.3d ___, 2013 WL 673517 (6th Cir. Feb. 26, 2013) just found this out the hard way. Vaselle involved claims against Midland Funding for “robo-signing” affidavits in connection with home foreclosures. Midland’s affidavits represented that the affiant had personal knowledge that the homeowner owed money and had not paid, when in fact, Midland employees were signing hundreds of such affidavits a day without having any personal knowledge of the loans or the homeowners’ payment status. Plaintiffs sued under the Fair Debt Collection Practices Act and common law.

The parties settled for $5.2 million (about $18 per class member), plus fees and administrative costs and an injunction requiring Midland to improve its collection processes. That part of the settlement was fine and good. But the terms also waived collection of the class representatives’ debt, while prohibiting class members from using the falsity of Midland’s affidavits to oppose collection/foreclosure efforts against them. That is much more than a nominal difference in treatment; i.e., saving one’s home from foreclosure or not. And the Sixth Circuit saw it the same way. Settlement overturned due to inadequate representation by the named plaintiffs.

This should be easy to fix on remand, but it is a reminder that it behooves neither plaintiffs nor defendants to overstep their bounds in any classwide settlement.