288 F.3d 277 (7th Cir. 2002), 00-3122, Reynolds v. Beneficial Nat. Bank
|Citation:||288 F.3d 277|
|Party Name:||Reynolds v. Beneficial Nat. Bank|
|Case Date:||April 23, 2002|
|Court:||United States Courts of Appeals, Court of Appeals for the Seventh Circuit|
Argued Feb. 12, 2002.
Roger W. Kirby (argued), Kirby, McInerney & Squire, New York City, Ronald L. Futterman, Futterman & Howard, Chicago, IL, for Lynne Carnegie.
Henry Monaghan (argued), Columbia University Law School, Naomi Katz, Holland & Knight, New York City, for Ronnie Haese and Nancy Haese.
Matthew E. Van Tine (argued), Marvin A. Miller, Miller, Faucher & Cafferty, Chicago, IL, Daniel M. Harris, Chicago, IL, Francine Schwartz, Arlington, Heights, IL, Charles M. Thompson, Thompson Hutsler, Birmingham, AL, John J. Pentz, Sudbury, MA, for Cheryl Reynolds, Nannie Triplett and DeCarlo Turner.
Burt M. Rublin (argued), Ballard, Spahr, Andrews & Ingersoll, Chicago, IL, James D. Adducci, Adducci, Dorf, Lehner, Mitchell & Blankenship, Chicago, IL, Daniel R. Young, Bryan Cave, Kansas City, MO, for Beneficial Nat. Bank and Beneficial Tax Masters, Inc.
David H. Latham, Chicago, IL, N. Louise Ellingsworth, Daniel R. Young, Bryan Cave, Kansas City, MO, Mark W. Brennan (argued), for H&R Tax Services, Inc.
Lawrence W. Schonbrun, Berkeley, CA, for Pearl Martinez.
Howard B. Prossnitz, Chicago, IL, for DeCarlo Turner.
Steven E. Angstreich (argued), Levy, Angstreich, Finney, Baldante, Mann & Burkett, Philadelphia, PA, William H. London, Michael B. Hyman, Much, Shelist, Freed, Denenberg, Ament & Rubenstein, Chicago, IL, Thomas C. Cronin, Cummins & Cronin, Chicago, IL, Kenneth W. Behrend, Behrend & Ernsberger, Pittsburgh, PA, for Geral Mitchell, Ann Westfall, Lester Westfall, Rachel Ramsey and Donna L. Lonzo.
Francine Schwartz, Arlington Heights, IL, pro se.
Howard Brian Prossnitz, Birndorf & Birndorf, Chicago, IL, for Nannie Triplett.
Howard Brian Prossnitz, Birndorf & Birndorf, Chicago, IL, pro se.
R. Stephen Griffis, Birmingham, AL, Charles M. Thompson, Thompson Hutsler, Birmingham, AL, John J. Pentz, Sudbury, MA, for Janice Williams, Ann Abercrombie and Karen Boden.
Daniel A. Edelman, James O. Latturner, Amy A. Breyer, Edelman, Combs & Latturner, Chicago, IL, for Belinda Peterson.
Christened V. Anyone, Chicago, IL, for Roy Carbajal.
Steven E. Angstreich (argued), Levy, Angstreich, Finney, Baldante, Mann & Burkett, Philadelphia, PA, William H. London, Much, Shelist, Freed, Denenberg, Ament & Rubenstein, Chicago, IL, Frank H. Tomlinson, Pritchard, McCall & Jones, LLC, Birmingham, AL, for Tommy Jones and Tommy Vaughn.
Before CUDAHY, POSNER, and ROVNER, Circuit Judges.
POSNER, Circuit Judge.
We have consolidated for decision a number of appeals from orders by the district court approving a settlement of consumer-finance class action litigation, denying petitions to intervene, and awarding attorneys' fees. "Federal Rule of Civil Procedure 23(e) requires court approval of any settlement that effects the dismissal of a class action. Before such a settlement may be approved, the district court must determine that a class action settlement is fair, adequate, and reasonable, and not a product of collusion." Joel A. v. Giuliani, 218 F.3d 132, 138 (2d Cir. 2000). The principal issue presented by these appeals is whether the district judge discharged the judicial duty to protect the members of a class in class action litigation from lawyers for the class who may, in derogation of their professional and fiduciary obligations, place their pecuniary self-interest ahead of that of the class. This problem, repeatedly remarked by judges and scholars, see, e.g., Culver v. City of Milwaukee, 277 F.3d 908, 910 (7th Cir. 2002); Greisz v. Household Bank (Illinois), N.A., 176 F.3d 1012, 1013 (7th Cir. 1999); Rand v. Monsanto Co., 926 F.2d 596, 599 (7th Cir. 1991); Duhaime v. John Hancock Mutual Life Ins. Co., 183 F.3d 1, 7 (1st Cir. 1999); John C. Coffee, Jr., "Class Action Accountability: Reconciling Exit, Voice, and Loyalty in Representative Litigation," 100 Colum. L.Rev. 370, -385-93 (2000); David L. Shapiro, "Class Actions: The Class as Party and Client," 73 Notre Dame L.Rev. 913, 958-60 and n. 132 (1998), requires district judges to exercise the highest degree of vigilance in scrutinizing proposed settlements of class actions. We and other
courts have gone so far as to term the district judge in the settlement phase of a class action suit a fiduciary of the class, who is subject therefore to the high duty of care that the law requires of fiduciaries. Culver v. City of Milwaukee, supra, 277 F.3d at 915; Stewart v. General Motors Corp., 756 F.2d 1285, 1293 (7th Cir. 1985); In re Cendant Corp. Litigation, 264 F.3d 201, 231 (3d Cir. 2001); Grant v. Bethlehem Steel Corp., 823 F.2d 20, 22 (2d Cir. 1987).
We do not know whether the $25 million settlement that the district judge approved is a reasonable amount given the risk and likely return to the class of continued litigation; we do not have sufficient information to make a judgment on that question. What we do know is that, as in such cases as In re General Motors Corp. Engine Interchange Litigation, 594 F.2d 1106, 1124 (7th Cir. 1979); Ficalora v. Lockheed California Co., 751 F.2d 995, 997 (9th Cir. 1985) (per curiam); Holmes v. Continental Can Co., 706 F.2d 1144, 1150-51 (11th Cir. 1983), and Pettway v. American Cast Iron Pipe Co., 576 F.2d 1157, 1214, 1218-19 (5th Cir. 1978), the judge did not give the issue of the settlement's adequacy the care that it deserved.
This litigation arose out of refund anticipation loans made jointly by the two principal defendants, Beneficial National Bank and H & R Block, the tax preparer. When H & R Block files a refund claim with the Internal Revenue Service on behalf of one of its customers, the customer can expect to receive the refund within a few weeks unless the IRS decides to scrutinize the return for one reason or another. But even a few weeks is too long for the most necessitous taxpayers, and so Beneficial through Block offers to lend the customer the amount of the refund for the period between the filing of the claim and the receipt of the refund. The annual interest rate on such a loan will often exceed 100 percent--easily a quarter of the refund, even though the loan may be outstanding for only a few days. Block arranges the loan but Beneficial puts up the money for it. Not disclosed to the customer is the fact that Beneficial pays Block a fee for arranging the loan and also that Block owns part of the loan.
Beginning in 1990, more than twenty class actions were brought against the defendants on behalf of the refund anticipation borrowers. The suits charged a variety of violations of state and federal consumer-finance laws and also breach of fiduciary duty under state law. Some of the alleged violations appear to be technical. The most damaging charge appears to be that Block's customers are led to believe that Block is acting as their agent or fiduciary, much as if they had hired a lawyer or accountant to prepare their income tax returns, as affluent people do, whereas Block is, without disclosure to them, engaged in self-dealing.
Most of the suits failed on one ground or another; none has resulted in a final judgment against Beneficial or Block. But in the late 1990s several withstood motions to dismiss or motions for summary judgment, and at least one, a Texas suit, was slated for trial.
On September 3, 1997, two lawyers who had prosecuted two of the unsuccessful class actions, Howard Prossnitz and Francine Schwartz, had lunch in Chicago with Burt Rublin, who was and remains Beneficial's lead lawyer in defending against the class-action avalanche. Prossnitz and Schwartz brought with them to the lunch another lawyer, Daniel Harris. Although neither Prossnitz nor Schwartz, nor their friend Harris, had a pending suit against Beneficial (or against Block, which was not represented at the lunch), they discussed "a global RAL settlement" with Rublin. It is doubtful whether Prossnitz or Schwartz
even had a client at this time; and certainly Harris did not. Schwartz later "bought" a client from another lawyer, to whom she promised a $100,000 referral fee. The necessity for such a transaction, when the class contains 17 million members, eludes our understanding.
In the hearing before the district judge on the adequacy of the settlement (the "fairness hearing," as it is called), Harris testified that at the lunch Rublin " 'threw out' a number, for purposes of illustration, of $24 or $25 million." The judge described this testimony (which he elsewhere describes as "Harris believes he heard Rublin say the case was worth $23 or $24 million"), though it is vociferously denied by Rublin, as "credible." There was, however, no actual settlement negotiation at the lunch.
Prossnitz, Schwartz, and Harris, all solo practitioners, brought a substantial law firm, Miller Faucher and Cafferty LLP, into the picture. In April of the following year the foursome filed two class action suits against Beneficial similar to the others that had been filed and that were (those that hadn't flopped) wending their way through the courts of various states. One of the two suits filed also named as defendants H & R Block and three affiliated Block entities, but three of those, including Block itself, were voluntarily dismissed from the suit by the plaintiffs in October 1998 and the fourth was dismissed in February 1999. Shortly after the suits were filed, Harris made a settlement offer to Beneficial that was rejected, but after a hiatus negotiations began. Block was included in the settlement negotiations, despite the fact that there were by then no claims pending against it. It was...
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