class action settlement can't surrender state agency/CFPB's rights to recover

Consumer Protection Division v. Linton, 2019 WL 1770524, No. 2609 (Md. Ct. Spec. App. Apr. 22, 2019)

The court explains:

The class action settlement at issue here involves vulnerable people who were poisoned by lead in their homes. Before they ever saw television ads for Access Funding, LLC (“Access”), they had the right to receive hundreds of thousands or millions of dollars over time as damages for their injuries. When they responded to Access’s ad, they received fraudulent and conflicted financial “advice,” and Access induced them into agreeing to assign their revenue streams to Access for pennies on the dollar in cash. Now, as a condition of a settlement meant to redress the fraud, class members must agree to assign to Access their full rights to restitution, all in exchange for a four percent lump-sum payment. This includes their rights to restitution the Consumer Protection Division of the Office of the Maryland Attorney General (the “Division”) and the United States Consumer Financial Protection Bureau (the “Bureau”) might recover. The settlement also would release Access and its affiliates and principals from liability for public restitution claims.

Even if the court’s role wasn’t to see whether the settlement was “a good deal,” this didn’t work.  Although the settlement process was mostly fair, it interfered with the Division’s and Bureau’s enforcement authority, and thus the approval was reversed.

Between 2013 and 2015, Access obtained judicial approval to acquire 163 structured settlements from 100 victims, and obtained $33.8 million in future payment rights (with a present value of approximately $25.5 million) in exchange for $7.7 million in cash. Judicial approval for transfer of structured settlement payments is required, and the court has to find that the transferor “received independent professional advice concerning the proposed transfer[.]”But an adviser is not “independent” if they are, among other things, “affiliated with or compensated by the transferee[.]” Access referred its potential clients to Charles Smith, a lawyer; in petitioning for approval of the transfers, Access represented that Mr. Smith had provided the transferors with independent professional advice. “In fact, Access had paid Mr. Smith for each victim he ‘advised,’ more than $50,000 overall … and practiced law with Access’s former attorney.”

The Division ultimately sued Access and its related entities, Access’s executives, and Mr. Smith, alleging violations of the Maryland Consumer Protection Act (MCPA) by failing to inform the victims that it was affiliated with Mr. Smith and that Mr. Smith was not an independent adviser, by converting future rights to payment into cash on grossly unfair terms, and by misleading victims about their rights under Maryland law. Linton also sued on behalf of 100 victims who sold their structured settlements, alleging negligence, misrepresentation, fraud, constructive fraud, and civil conspiracy. The settling parties proposed a settlement fund of $1.1 million, from which the class’s attorneys would receive $330,000 in fees. The proposed settlement barred the class from “receiving any benefits from any lawsuit or arbitration proceeding arising out of or related to any of the Released Claims,” and compels the Class to “irrevocably assign and transfer ... any recovery based on the equitable remedies of restitution, disgorgement of profits or damages obtained by [the CFPB or the Division] for the benefit of each Settlement Class Member.” Moreover, the settlement releases all of the Class’s claims against the Class Action Defendants, as well as any claims against certain people involved in Access (even though none of them was named in the suit).

The parties indicated that there was nothing much other than a $1 million insurance policy for the class; counsel for Access stated that Access and its related entities had “no assets” and were “basically insolvent.” Counsel for Mr. Smith represented that he had only a “few thousand dollars” other than the assets he held with his wife as tenants by the entireties.  Although one defendant might have had $5 million in assets, class counsel indicated that he had a strong defense to the conspiracy asserted against him because he had provided legal advice in the scope of his employment. The court declined to consider the financial resources of three three executives who were not defendants in the class action, but the court declined to do so.

In addition, class counsel argued that arbitration requirements in the structured settlement transfer agreements would require class members to arbitrate their claims individually and that litigating serial claims would deplete Access’s declining limits insurance policy, making settlement in the class’s best interest.  The trial court ultimately agreed.

Nonetheless, the settlement interfered too much with the Division and Bureau’s enforcement authority.  It “effectively preempted a major portion of the pending claims.” Restitution and damages aren’t the same thing, “even if the process of calculating them might (and often does) lead to the same result. Damages are, well, damages, and compensate a party for their losses. Restitution also, but primarily, seeks to prevent bad actors from being enriched unjustly—an enforcement purpose properly commended to public authorities, not private plaintiffs.” Requiring the plaintiffs to assign any recovery from the Division/Bureau right back to the defendants “directly thwarts the Division’s ability to combat unjust enrichment.”

This isn’t a great result, because Access’s declining-limits insurance policy (which decreases as litigation costs mount) might be the only concrete set of assets realistically available to fund a recovery. But the Division and Bureau have to deal with this sort of question all the time, and the settlement shouldn’t have included terms that “resolved or interfered with” their enforcement authority.

A few minor points: the Division asked the court to require the notice to inform prospective members that the settlement amount was equivalent to only 4% of each prospective member’s loss. If the purpose of the notice was objectivity, “language describing the extent of the Class’s financial compromise would serve that purpose, even if it might dissuade recipients from agreeing to the settlement.”  However, the majority didn’t resolve whether the settlement was substantively fair; given what it did hold, the best approach was to send it back for the parties to negotiate anew.  Still, a 96% discount on the value of claims was “concern[ing],” as was the depth of the record on the financial fairness of the settlement and the court’s decision not to consider whether any assets of the non-defendant executives, who were getting releases from the settlement, were available to fund the settlement. “The way Access treated its customers, for its own benefit, provides ample reason to be skeptical of unsupported representations it might make to the court about its finances. And yet despite a months-long investigation and subpoena power, the Division could only express skepticism, and couldn’t yet back it up.”

The dissent would have allowed the settlement and would have held that releasing/assigning personal rights from public enforcement didn’t sufficiently interfere with public enforcement authority to be barred. The Division could still levy civil or criminal penalties.

Notably, a key reason the dissent would have held that the settlement was substantively fair was the unfairness to which the victims had already been subjected: they might well have been compelled to go to individual arbitration rather than to litigate class claims because of the arbitration provisions in the structured settlement transfer agreements. It’s a powerful example of the knock-on effects of arbitration provisions in consumer fraud cases.

The dissent also noted that Access apparently sold the structured settlement rights, and if the transferees were bona fide purchasers, the Division might well not be able to reclaim the rights as restitution.