Tuesday, December 21, 2010

Hurricane Settlement An Imperfect Storm

Twenty-one million dollars is an awful lot of moola.  Sure, it probably won't even buy you one (at least towards the end of that contract) year of Cliff Lee befuddling opposing batters (yeah, we’re still feeling good about that).  But in almost any situation, $21 million would seem like a pretty significant chunk of change. 

But context is everything.

So we think everyone would agree with us, that $21 million seems like a relatively tiny sum compared to the catastrophic devastation wrought by Hurricanes Katrina and Rita a few years ago.  Yet $21 million was the insurance policy limit for a group of defendants in Katrina-related litigation.  And, not coincidentally, $21 million was the amount to be paid to proposed class members pursuant a “limited fund” class that was just bounced by the Fifth Circuit.  See In re Katrina Canal Breaches Litig., No. 09-31156, slip op. (5th Cir. Dec. 16, 2010).

Our skepticism meters zoom whenever we hear "limited fund" in the same sentence as "mass tort."  It all goes back to the Bone Screw Litigation, where the fix was in over a supposed "limited fund" class action involving one of our co-defendants.  The trial court let both sides get away with it, see In re Orthopedic Bone Screw Products Liability Litigation, 176 F.R.D. 158 (E.D. Pa. 1997), and any objectors were either bought off or scared off.  Within a week of the settlement becoming final - guess what happened?  The supposed "limited fund" company was sold for three times the amount of the [fill in adjective] limited fund.  We concluded then that limited fund settlements in mass torts are rife with potential for abuse, and in Katrina Canal, the court of appeals pretty much agreed with us.

The decision provides valuable lessons, not only for parties trying to craft “limited fund” settlement classes, but for lawyers settling any kind of class or mass action requiring judicial approval.


The Katrina Canal appellants were objecting members of a proposed settlement class of New Orleans plaintiffs who alleged damage as a result of the hurricanes.  A gaggle of cases related to this national tragedy were filed and consolidated in the Eastern District of Louisiana - to the lasting benefit of the New Orleans legal industry.  This proposed settlement class involved a subset of those cases specifically focusing on the failure of certain New Orleans area levees and floodwalls in the aftermath of the hurricanes.  The District Court certified a “limited fund” mandatory class pursuant to Rule 23(b)(1)(B), on the questionable assumption that the defendants had no assets beyond their insurance (or at least that they were willing to pay).

In the settlement the class would receive the policy limit of $21 million in exchange for releasing all hurricane-related claims against the settling defendants.  The agreement also provided that class counsel would not seek attorneys’ fees, and would object if other class attorneys sought fees.  But what the bold-faced print giveth, the fine print tooketh away - class counsel reserved the right to seek both "costs" and “enhanced costs.” Slip op. at 5-7.

Yeah, right.

That was the Fifth Circuit's reaction as well.  Applying Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) - decided two years after the Fanning farce - the Fifth Circuit held that the proposed settlement class suffered from two fatal defects:  (1) there was no procedure in place to equitably distribute settlement funds among the class members; and (2) the parties failed to show that the class members would actually receive some benefit from participating in the mandatory settlement class.  Slip op. at 5.

The court began (echoes of Wyeth v. Levine) by telling us all that it was not deciding the fundamental question of whether it is ever constitutional to certify a mandatory limited fund class in the mass tort context.  Slip op. at 9.  This was the question that Ortiz – an asbestos case – left open, although the Supreme Court’s decision explicitly raised serious Seventh Amendment and Due Process concerns.  Id.  These concerns did not lead to a per se ban on limited fund mass tort classes, but Ortiz counseled in favor of rigorous and narrow application of Rule 23(b)(1)(B) in the mass tort context.  Id. at 10.

Perhaps all those levees were actually knocked down by weakly interacting massive particles.

Having avoided the big question, the analysis in Katrina Canal focused on Ortiz’s Rule 23(b)(1)(B) touchstones – particularly the requirement that “the claimants identified by a common theory of recovery [are] treated equitably among themselves.”  Slip op. at 10 (quoting Ortiz, at 839).  In some ways, the Katrina Canal class was less fractured than the proposed class in Ortiz; most significantly, there was no intra-class “temporal conflict,” where some class members sought compensation for present/past injury, and others wanted an ample fund established for future injury.

But in other ways, the Katrina Canal class was just as badly split.  Most significant, the class was a grab bag of various and sundry injuries.  It lumped together property damage, personal injuries of all kinds, and even death.  Compounding that problem, the settlement did not even attempt to delineate a method for distinguishing the claims of these different plaintiffs from each other.  Slip op. at 12.  This vortex of raging ambiguity gave the District Court pause, but not enough to stop it from moving this messy litigation towards resolution.  The Fifth Circuit said, "whoa!"  It found a fatal flaw because, although a class certification expert (paid by the conspiring ... er ... settling parties) testified at the fairness hearing that the administrator could use a grid or matrix to account for different types and degrees of damage, there t'aint any such animal.  Rather, the settlement lacked any structure for creating, or even outlining, this supposed grid, other than providing for the appointment of a “special master.”  Id. at 12-13.  "Trust us" didn't hack it under Rule 23(b)(1)(B).

Equally troubling, the same expert admitted that the administrative complexities inherent in such a goulash settlement could generate costs that consumed the entire limited fund, which might lead the trial court to ditch any pretense of an actual distribution and decide a cy pres distribution provided greater benefit to the class.  Slip op. at 13.

Ah yes, cy pres - the last refuge of a class action settlement scoundrel.  For more on our extremely negative opinion of the entire concept of cy pres, see here.  To us, any reference to "cy pres" is a dead giveaway that whatever the litigation is, it should never have been brought in the first place, because the plaintiffs can't even prove their own damages - let alone causation.  Someday the Supreme Court....  But we digress.

The Fifth Circuit didn't have to decide that question either, because the deficient settlement agreement didn't address this issue in any concrete fashion.  Once again, this minor detail (whether anybody would actually get anything) was turned into a fudge factor - left to the discretion of the special master and the court down the road.  Slip op. at 13.  That made things easy.  Katrina Canal thus held that the settlement class as structured failed to satisfy (or even really address) Ortiz’s constitutional concerns.  The court quite accurately concluded,
This arrangement simply punts the difficult question of equitable distribution from the court to the special master, without providing any more clarity as to how fairness will be achieved.  The lack of any ‘procedures to resolve the difficult issues of treating such differently situated claimants with fairness as among themselves,’ leads us to reverse the district court’s order certifying this class.
Slip op. at 13 (quoting Ortiz, 527 U.S. at 856).  The Katrina Canal court was satisfied with expressing its Rule 23(e) concerns that the potential cy pres plan was wholly lacking in specifics, making it impossible to determine whether the class would benefit in any way from such an award.  Id. at 17.


A second fudge factor built into the settlement also led the Fifth Circuit to reverse the district court’s Rule 23(e) fairness determination that the proposed settlement class provided a benefit to all class members.  Nope.  “[T]here has been no demonstration on the record below that the settlement will benefit the class in any way, either through the disbursement of individual checks or through a cy pres distribution.”  Slip op. at 14 (our emphasis).  What happened?

Remember that we mentioned at the outset, the saga of the $21 million and the various “costs.”  Well, the Fifth Circuit read the fine print.  First, the settlement contemplated that the $21 million would be reduced to account for administrative costs, including notice costs, special master costs, disbursing agent costs, escrow costs, “and other costs, fees, and expenses incurred in the implementation of the Class Settlement Agreement.”  Slip op. at 15.

Hmmmmmm.....

Just what did those “other costs” include?  Like just about everything else in this settlement of woeful countenance, it’s not really clear, although the agreement stated that "costs" could include payment of  both sides’ class experts, in the defendants’ discretion.  Id.  How much was that?  Don't know.  The settlement didn't say, and the District Court wasn't very reassuring, even in approving the deal, “[i]t is a reasonable fear that the mere cost of adjudicating individual claims may swallow the entire settlement.”  Slip op. at 15 (quoting In re Katrina Canal Breaches Consol. Litig., 263 F.R.D. 340, 358 (E.D. La. 2009)).

Approvals that tepid don't stand up well on appeal.
Class counsel’s ability to recover not only "costs," but unspecified “enhanced costs” - fudge factor #3 - caused further problems for the settlement class.  Once again, the agreement was suspiciously vague.  Nothing in the record said what either the costs or “enhanced costs” might entail.  At the fairness hearing, counsel conceded that they couldn't even estimate recoverable costs, allowing that the litigation had been “expensive,” and nobody knew what the plaintiffs’ lawyers would seek.  Slip op. at 16 (“a lot of depositions have been taken, a lot of costs have been incurred").

Sounds ominous.

Even more ominous, at least for the class lawyers, was the Fifth Circuit's response.  It rather quickly concluded that the “enhanced costs” provision was a sham - little more than a disguised request for attorney fees.
We agree with Appellants that any “enhancement” of costs is the functional equivalent of a fee.  We have repeatedly held that a district court abuses its discretion if it approves a class action settlement without determining that any attorneys’ fees claimed as part of the settlement are reasonable and that the settlement itself is reasonable in light of those fees.
Slip op. at 17-18.  Because this disguised attorneys’ fee request had not been specifically approved as reasonable by the district court, it ran afoul of Rule 23(e) requirements.

For good measure, Katrina Canal rejected the class notice as insufficient to satisfy Due Process.  That's not really surprising, as the source of the same structural problems that sank the settlement doomed the notice as well.  The Fifth Circuit found the notice misleading in two ways.  First, the notice failed hid the possibliity of cy pres distribution from the class members.  That was important, because cy pres effectively deprives individual plaintiffs of some or all of their recovery.  The further failure to estimate the costs and administrative fees associated with the settlement exacerbated the court's concern that the notice concealed the possibility that the settlement might well be worth zero to any of the class members.  Slip op. at 20.  Second, the court zeroed in on the - we'll be nice and use the court's adjective, "inaccurate" - notice language regarding attorneys’ fees:
Class counsel will not request any attorneys’ fees from the settlement fund. However, Class Counsel may ask the Court for reimbursement of their costs and expenses out of the settlement fund. Other counsel for settlement class members may also request costs and expenses.
Slip Op. at 21.  This language, the court held, failed to tell class members that their attorneys may seek hidden fees in the guise of “enhanced costs,” and failed to tell class members that, although lead counsel was not requesting fees qua fees, other attorneys may seek fees, as opposed to mere “costs and expenses.”  Id.

So what are the lessons learned?

First, if possible at all, it's really, really hard to certify a mandatory class in the mass tort context, because effectively denying an individual his or her right to seek individualized redress seems, well, un-American.  This is especially true because – as defense-minded jurists and lawyers constantly say – individual differences among tort plaintiffs make a class action an impractical and unfair solution, for both plaintiffs and defendants.  In your traditional personal/property injury case, mass tort plaintiffs are snowflakes, just like the rest of us: every one is different.  A mandatory class is like a glacier, erasing those differences in a giant mass that seeks to crush everything before it.

Second, in those rare situations (if any) where a limited fund settlement may be the only solution, any settlement has to take into account and address those differences up front.  The can can't be kicked down the road to some special master or an “administrator” to gin up some way to dole out the limited pool of money.  Instead, come into court with a concrete plan that makes a good faith effort to take into account the individual class members' situations, and equitably distributes the limited fund accordingly.  In the drug/device context, we've seen plenty of  “grids” and “matrices” that attempt, with varying degrees of success, to sort the more injured from the less injured.  The Fifth Circuit’s opinion strongly suggests that a limited fund settlement class without these features is doomed to fail.

Third, beware hidden costs – don't try to hide them.  That’s just a good rule in everyday life, but is even more important in limited fund settlements.  It wasn’t enough in Katrina Canal for plaintiffs’ lead class counsel to forego attorneys’ fees, because the ruse was transparent.  It left open the possibility of undefined costs, including “enhanced costs” (a good title for a history of baseball's recent home run era).  Those enhanced costs may have been legit, or, as the Fifth Circuit found, another name for hidden attorneys’ fee awards, which require judicial approval.  In any event, any settlement, especially of the limited fund variety, needs to at least guesstimate the range of costs at play, give the basis for those costs, and any reasons they may be higher or lower.  When you’re dealing with a pot that's obviously far short of an amount that would compensate the putative class for personal and property losses (questionable in a class context to begin with) – beware including settlement terms that threaten to eat up a significant and uncertain amount of that pot as “costs.”  This goes double in any settlement that contemplates so much additional “administration” down the road.

Fourth, cy pres ain’t a magic word, and may not be proper at all. Sure, plaintiffs’ class lawyers love to throw it around as a panacea – “don’t worry, judge, we trust you to put the money to good use.”  But there can be real problems with a settlement plan that includes an ill-defined or undefined cy pres component, especially where the total pot is small enough that it is unclear the class is getting a benefit at all.  An agreement must:  (1) be honest about the likelihood of a cy pres distribution, and (2) contain safeguards to prevent the money from going to class counsel's law school or some junk science mill.

Fifth, class notice must specifically apprise class members of their rights.  Even - especially - in a mandatory limited fund context, class members have the right to object, as happened here, and a good class notice satisfies Due Process.  If there's a zero option, don't hide it.  When it comes time to talk about what class members may (or may not) receive, and what class lawyers may (or may not) receive in the settlement, it is even more important to use as much precision as possible.

Sixth, these rules are important for both sides of the class settlement dance.  Often, when working on a proposed settlement class, one side or the other (or both) may be tempted to let some issues hang because it's too hard to reach consensus, or too hard, if not impossible, to craft a settlement that's equitable to the settling parties without cratering the settlement.  Putting together an agreement that won't pass judicial muster just wastes a lot of lawyer time and money.  The stakes are heightened in a limited fund case, and so is the level of judicial scrutiny.  In those situations, and really, in any class settlement context, it is prudent for defense lawyers to examine the issues arising from intra-class settlement distribution plans, plaintiff-side legal fees, and administrative costs, rather than throwing up their collective defense-minded hands and saying, “here’s the total amount we’re paying, you figure out how to chop up the money.”  If the settlement falls apart, or is torn apart as in Katrina Canal, defense side aquiescence in leaving tough issues for some later time and place doesn't do our clients any favors.

Seventh, it would be a good idea for the parties in Katrina Canal to become familiar with the ALI's "Principles of the Law of Aggregate Litigation" §3.08 (2010), which addresses what procedures should be followed when a proposed settlement is rejected.

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