25 Million Class Settlement Thrown Out

In an opinion highly critical of action attorneys in general and a $4.25 million fee award in particular, the Seventh Circuit has set aside a settlement in litigation involving refund anticipation loans made by a major tax preparation service. The court reversed a $25 million action settlement in Reynolds v. Beneficial National Bank, 288 F.3d 277 (2002), holding that the district court did not examine the settlement with the care that it deserved. The Seventh Circuit's opinion came in a consumer finance action arising H&R Block's refund anticipation loans made jointly with the Beneficial National Bank. Taxpayers were able to receive loans Beneficial based on the amount of their federal income tax refunds. About 20 actions filed nationwide in the last decade have alleged that the annual interest rates on those loans violated usury rates, sometimes reaching a lofty 100 percent on loans that may have been outstanding for only a few days. Most of the suits, the Seventh Circuit noted, had failed on one ground or another, but at least, one Texas action was slated for trial by the late 1990s. In September 1997, two lawyers who had run unsuccessful action suits based on the refund anticipation loans had lunch with Beneficial's lead lawyer in defending against the class action avalanche, as the Seventh Circuit's Judge Posner described it. A third lawyer not previously involved in the litigation also attended. The third attorney later testified at the fairness hearing on the action settlement that the four lawyers had discussed, in general terms, the settlement value of all claims involving refund anticipation loans against Beneficial. That attorney also testified that Beneficial's lawyer speculated that he could settle all the claims for $23 to $25 million, but Beneficial's attorney vociferously denied ballparking such a figure, according to the Seventh Circuit. All three attorneys attending the lunch, along with a law firm they retained, later filed two actions suits against Beneficial based on the refund anticipation loans. About a year later, a settlement on behalf of one would have created a $25 million settlement fund. Beneficial and Block, which had been brought into the litigation at Beneficial's insistence, also agreed to make certain disclosures to future customers about the financial arrangements between them, to bear the cost of notifying members and to pay counsel's legal fees of $4.25 million their own coffers rather than the settlement funds. The district judge approved the settlement, but he struck a provision that would allow money left in the fund at the end of the claimants' filing period to revert to Beneficial and Block. The court also required that the maximum pay-out per claimant be raised $15 to $30 for members of the who had received two or more loans. The principal question before the Seventh Circuit was whether the district court properly discharged its duties to protect the members from lawyers for the who may, in derogation of their professional and fiduciary obligations, place their pecuniary self-interest ahead of that of the class, the court stated. Various objectors to the settlement contended that the agreement was the product of a reverse auction, in which defendants facing a group of actions pick the most ineffectual lawyers to negotiate a settlement, hoping that the district court will approve a weak settlement that then will preclude other claims against them. As the theory goes, a reverse auction leaves the ineffectual lawyers happy to sell out a they cannot really help much in exchange for generous attorney's fees, and the defendants are happy to pay those fees to be rid of all the litigation. …