Court Outlines What Not to Do as Class Counsel: Seventh Circuit | Practical Law

Court Outlines What Not to Do as Class Counsel: Seventh Circuit | Practical Law

In Eubank v. Pella Corporation, the US Court of Appeals for the Seventh Circuit outlined what class counsel should not do when representing a class and highlighted "warning signs" of a potentially unfair settlement.

Court Outlines What Not to Do as Class Counsel: Seventh Circuit

Practical Law Legal Update 4-570-2965 (Approx. 3 pages)

Court Outlines What Not to Do as Class Counsel: Seventh Circuit

by Practical Law Litigation
Published on 09 Jun 2014 • USA (National/Federal)
In Eubank v. Pella Corporation, the US Court of Appeals for the Seventh Circuit outlined what class counsel should not do when representing a class and highlighted "warning signs" of a potentially unfair settlement.
In a June 2, 2014 opinion, Eubank v. Pella Corporation, the US Court of Appeals for the Seventh Circuit described impermissible behavior by class counsel. The court reversed a district court's approval of a settlement agreement, finding that a host of "danger signs" which should have warned the district court judge that the settlement was unfair to the class existed and warranted remanding the matter for further consideration (No. 13-2091, (7th Cir. June 2, 2014)).
This class action was filed in 2006 for the benefit of purchasers of defective casement windows manufactured by the defendant, Pella Corporation. Paul M. Weiss served as class counsel; Leonard Saltzman, the father-in-law of Weiss, served as the initial lead class representative. Eventually four other class members were named as plaintiffs. When they objected to the contents of the settlement agreement, Weiss chose four different class members to replace them. The settlement agreement provided for, in part:
  • $11 million in attorneys' fees, paid to Weiss, based on the plaintiffs' assertion that the settlement was worth $90 million to the class.
  • Payments of $5,000 or $10,000 to the lead class representatives, including $10,000 to Saltzman.
  • An advance of $2 million in attorneys' fees to Weiss before notice of the settlement was sent to the members of the class.
  • A procedure through which class members could claim a limited amount of damages.
During the time that this matter was pending before the court, Weiss' law firm dissolved, and Weiss faced charges of misappropriation of firm funds and other misconduct. As the settlement negotiations progressed, so too did the ethical investigation into Weiss. Despite the continued objections of the four "defrocked" class representatives (now represented by one of Weiss' former law partners), the district court judge approved the settlement.
The objectors appealed. The Seventh Circuit reversed the judgment, and opined that the district court's decision was "inequitable -- even scandalous." It noted that class counsel clearly supported the settlement to obtain fees, and the defendants supported it to avoid liability, and that almost every "danger sign" of an unfair settlement that district court judges are warned about appeared in this case. The court noted, among other things:
  • The class recovery was potentially as little as $1 million for claims the district court judged estimated were worth $90 million.
  • The awarded attorneys' fees were significantly larger than the aggregate value of the settlement to the class.
  • The relationship between lead class counsel Weiss and lead class representative Saltzman was improper, as class representatives are fiduciaries of the other class members.
  • Weiss' ethical embroilment should have been a compelling reason for removing him from the case. Due to the ongoing disciplinary investigation, it was in his financial best interests to have the settlement signed before the disciplinary hearing issued a sanction that might limit his right to share in the attorney's fee award.
  • Pella Corporation's advance of attorneys' fees to Weiss was suspicious.
Practitioners dealing with class actions should be aware that courts view excessive attorneys' fees and conflicts with suspicion, and will carefully look at settlements for impropriety.
For more information about class actions, see Practical Law's Class Action Toolkit.