Sixth Circuit Unravels Class Settlement That Unfairly Preferred Named Plaintiffs | Practical Law

Sixth Circuit Unravels Class Settlement That Unfairly Preferred Named Plaintiffs | Practical Law

In Vassalle v. Midland Funding LLC, the US Court of Appeals for the Sixth Circuit reversed the district court's order approving a class action settlement on the grounds that the settlement gave the named plaintiffs preferential treatment and only a perfunctory award to the unnamed class members. The Sixth Circuit further held that two class certification requirements under Federal Rule of Civil Procedure (FRCP) 23 were not met, making the district court's certification of the class improper.

Sixth Circuit Unravels Class Settlement That Unfairly Preferred Named Plaintiffs

Practical Law Legal Update 3-525-0695 (Approx. 3 pages)

Sixth Circuit Unravels Class Settlement That Unfairly Preferred Named Plaintiffs

by PLC Litigation
Published on 11 Mar 2013 • USA (National/Federal)
In Vassalle v. Midland Funding LLC, the US Court of Appeals for the Sixth Circuit reversed the district court's order approving a class action settlement on the grounds that the settlement gave the named plaintiffs preferential treatment and only a perfunctory award to the unnamed class members. The Sixth Circuit further held that two class certification requirements under Federal Rule of Civil Procedure (FRCP) 23 were not met, making the district court's certification of the class improper.
On February 26, 2013, the US Court of Appeals for the Sixth Circuit issued an opinion in Vassalle v. Midland Funding LLC, holding that a class action settlement approved by the district court which gave the named plaintiffs preferential treatment and only a perfunctory award to the unnamed class members was unfair and reversed. The Sixth Circuit found, because the disparity in relief between the named and unnamed plaintiffs was so great, that the district court had abused its discretion in approving the settlement.
The class action alleged that the defendant debt collector Midland Funding LLC had, among other things, used fraudulent affidavits in its suits against debtors which claimed personal knowledge of the debtors' debts that the affiants did not possess. The district court agreed, but before the matter proceeded to trial, a settlement was reached and submitted to the district court for approval. The proposed settlement, among other things, provided that:
  • Midland would pay $5.2 million into a fund for the class. After attorneys fees, this would result in a payment of $17.28 for each class member.
  • The four named plaintiffs would receive incentive awards of $2,000 each and have their debts forgiven.
  • Midland would implement procedures for the creation of affidavits that would prevent the complained-of fraudulent practices.
  • A classwide release would occur, under which each class member who did not opt out would release Midland from all future causes of action related to the fraudulent affidavits.
The district court approved the settlement. On appeal, the Sixth Circuit reversed, finding that the settlement unfairly gave preferential treatment to the named plaintiffs and only a perfunctory award to the unnamed class members. In support of its decision, the Sixth Circuit noted:
  • The forgiveness of debt owed to the defendant, which was the primary benefit of the settlement, was given only to the named plaintiffs, and the classwide release meant that class members could not pursue future actions based on Midland's fraudulent affidavits.
  • The named plaintiffs received a $2,000 incentive award on top of the forgiveness of their debts, whereas the unnamed class members received at most $17.38 each, a de minimis award.
The Sixth Circuit further found that both the adequacy of representation and the superiority requirements for class certification under FRCP 23 were not satisfied.
In order to adequately represent the class, the Sixth Circuit requires that a class representative must, among other things, vigorously pursue the interests of the class. The Sixth Circuit found that the class representatives had no interest in pursuing the unnamed class members' most pressing interest: the ability to use Midland's fraudulent affidavits to contest their debts when sued. The class representatives had an interest in the approval of the proposed settlement because their debts would be forgiven, while the unnamed class members had a countervailing interest in having the proposed settlement rejected so they could use the false affidavits against Midland in court.
The Sixth Circuit also found that class litigation was not superior to litigation of the individual claims because:
  • The unnamed class members had an interest in individually controlling their litigation with Midland.
  • The class members could have collected damages under state law that would exceed the monetary relief they would receive in the proposed settlement.
Because the adequacy of representation and superiority requirements of FRCP 23 were not met, the Sixth Circuit found that the district court abused its discretion in certifying the class.
This decision provides a cautionary tale to counsel considering a class settlement. Counsel must be aware that there are limits to the amount of preference permitted to named plaintiffs, and that minimal awards to unnamed class members may not only result in the rejection of the settlement terms by the court, but may destroy the adequacy of representation.
Court documents: