Filed: Dec. 17, 2010
Latest Update: Feb. 21, 2020
Summary: IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED December 16, 2010 No. 09-31156 Lyle W. Cayce Clerk IN RE: KATRINA CANAL BREACHES LITIGATION - PLAINTIFFS CLASS, Plaintiffs - Appellees v. BOARD OF COMMISSIONERS OF THE ORLEANS PARISH LEVEE DISTRICT; ORLEANS LEVEE DISTRICT; BOARD OF COMMISSIONERS OF THE LAKE BORGNE BASIN LEVEE DISTRICT; LAKE BORGNE BASIN LEVEE DISTRICT; BOARD OF COMMISSIONERS OF THE EAST JEFFERSON LEVEE DISTRICT; EAST JE
Summary: IN THE UNITED STATES COURT OF APPEALS FOR THE FIFTH CIRCUIT United States Court of Appeals Fifth Circuit FILED December 16, 2010 No. 09-31156 Lyle W. Cayce Clerk IN RE: KATRINA CANAL BREACHES LITIGATION - PLAINTIFFS CLASS, Plaintiffs - Appellees v. BOARD OF COMMISSIONERS OF THE ORLEANS PARISH LEVEE DISTRICT; ORLEANS LEVEE DISTRICT; BOARD OF COMMISSIONERS OF THE LAKE BORGNE BASIN LEVEE DISTRICT; LAKE BORGNE BASIN LEVEE DISTRICT; BOARD OF COMMISSIONERS OF THE EAST JEFFERSON LEVEE DISTRICT; EAST JEF..
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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
December 16, 2010
No. 09-31156 Lyle W. Cayce
Clerk
IN RE: KATRINA CANAL BREACHES LITIGATION
-----------------------------------
PLAINTIFFS CLASS,
Plaintiffs - Appellees
v.
BOARD OF COMMISSIONERS OF THE ORLEANS PARISH LEVEE
DISTRICT; ORLEANS LEVEE DISTRICT; BOARD OF COMMISSIONERS
OF THE LAKE BORGNE BASIN LEVEE DISTRICT; LAKE BORGNE
BASIN LEVEE DISTRICT; BOARD OF COMMISSIONERS OF THE EAST
JEFFERSON LEVEE DISTRICT; EAST JEFFERSON LEVEE DISTRICT;
ST PAUL FIRE & MARINE INSURANCE COMPANY,
Defendants - Appellees
v.
MARY BRINKMEYER; MICHELLE LEBLANC; THOMAS C. STUART,
Interested Parties - Appellants
-----------------------------------
consolidated w/
No. 09-31188
IN RE: KATRINA CANAL BREACHES LITIGATION
No. 09-31156
No. 09-31188
-----------------------------------
LESLIE SIMS, JR.; ROSA MARQUEZ; FLOYD AARON III; HASSAR
SLEEM; MADELINE BERTUCCI; ET AL,
Plaintiffs - Appellants
vs.
BOARD OF COMMISSIONERS OF THE ORLEANS LEVEE DISTRICT;
SEWERAGE AND WATER BOARD OF NEW ORLEANS; EAST
JEFFERSON LEVEE DISTRICT; ORLEANS LEVEE DISTRICT; UNITED
STATES ARMY CORPS OF ENGINEERS; ST. PAUL FIRE & MARINE
INSURANCE COMPANY,
Defendants - Appellees
-----------------------------------
VERA D. RICHARD; ET AL,
Plaintiffs - Appellants
vs.
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
Defendants - Appellees
-----------------------------------
ELIZABETH H. DEPASS; ET AL,
Plaintiffs - Appellants
vs.
BOARD OF COMMISSIONERS OF THE ORLEANS LEVEE DISTRICT;
SEWERAGE AND WATER BOARD OF NEW ORLEANS; EAST
JEFFERSON LEVEE DISTRICT; ORLEANS LEVEE DISTRICT; UNITED
STATES ARMY CORPS OF ENGINEERS; ST. PAUL FIRE & MARINE
INSURANCE COMPANY,
Defendants - Appellees
-----------------------------------
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No. 09-31156
No. 09-31188
MARIE ADAMS; ET AL,
Plaintiffs - Appellants
vs.
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
Defendants - Appellees
-----------------------------------
LINDA C. BOURGEOIS; ET AL,
Plaintiffs - Appellants
vs
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
Defendants - Appellees
-----------------------------------
KEITH C. FERDINAND, M.D., A.P.M.C.; ET AL,
Plaintiffs - Appellants
vs.
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
Defendants - Appellees
-----------------------------------
MARY CHRISTOPHE; ET AL,
Plaintiffs - Appellants
vs.
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
3
No. 09-31156
No. 09-31188
Defendants - Appellees
-----------------------------------
SUSAN WILLIAMS; ET AL,
Plaintiffs - Appellants
vs.
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
Defendants - Appellees
-----------------------------------
RHEALYNDA PORTER; ET AL,
Plaintiffs - Appellants
vs.
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
Defendants - Appellees
-----------------------------------
XIOMARA AUGUSTINE, doing business as Bright Minds Academy; ET AL,
Plaintiffs - Appellants
v.
ORLEANS LEVEE DISTRICT; UNITED STATES ARMY CORPS OF
ENGINEERS,
Defendants - Appellees
Appeal from the United States District Court
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No. 09-31156
No. 09-31188
for the Eastern District of Louisiana
Before KING, GARWOOD, and DAVIS, Circuit Judges.
KING, Circuit Judge:
Appellants, objecting members of a proposed settlement class of plaintiffs
damaged or injured by Hurricanes Katrina or Rita, seek review of the district
court’s certification of a limited fund mandatory class under Federal Rule of
Civil Procedure 23(b)(1)(B) and its approval of a final class settlement. We hold
that the Supreme Court’s opinion in Ortiz v. Fibreboard Corp., 527 U.S. 815
(1999), requires decertification of the mandatory class because the settlement
fails to provide a procedure for distribution of the settlement fund that treats
class claimants equitably amongst themselves. We further hold that the
settlement is not fair, reasonable and adequate because its proponents fail to
show that the class members will receive some benefit in exchange for the
divestment of their due process rights in a mandatory class settlement. We
therefore reverse.
I. BACKGROUND
In the wake of Hurricanes Katrina and Rita, a plethora of lawsuits were
filed against public and private entities by residents of the greater New Orleans
area who were harmed by the catastrophic flooding caused by levee and
floodwall failures. These complaints were consolidated in the District Court for
the Eastern District of Louisiana as In re Katrina Canal Breaches Consolidated
Litigation, and divided for case management purposes into several categories.
This appeal involves the“Levee” and “MRGO” categories.1
1
The Levee litigation concerns breaches of floodwalls around the outfall canals in and
around New Orleans. The settling levee districts and Boards of Commissioners are the only
remaining defendants in the Levee action.
The MRGO litigation concerns the various failures and overtopping of the levees and
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No. 09-31188
Following the dismissals of various defendants, the Levee and MRGO
plaintiffs sought certification of a limited fund mandatory settlement class under
Rule 23(b)(1)(B) and concomitant approval of a settlement with the defendant
levee districts, their respective Boards of Commissioners, and their insurer, St.
Paul Fire and Marine Insurance Company.2 The putative class consisted of
all Persons (a) who at the time of Hurricane Katrina and/or
Hurricane Rita (i) were located, present or residing in the Hurricane
Affected Geographic Area [Jefferson, Orleans, Plaquemine, and St.
Bernard Parishes], or (ii) owned, leased, possessed, used or
otherwise had any interest in homes, places of business or other
immovable or movable property on or in the Hurricane Affected
Geographic Area, and (b) who incurred any losses, damages and/or
injuries arising from, in any manner related to, or connected in any
way with Hurricane Katrina and/or Hurricane Rita and any alleged
Levee Failures and/or waters that originated from, over, under or
through the Levees under the authority and/or control of all or any
of the Levee Defendants.
The class was further divided into three geographical subclasses corresponding
to the particular levee defendant that allegedly caused its damages. A claimant
could be a member of more than one subclass by virtue of some overlap among
these three areas.
Under the relevant terms of the settlement, the class would receive
roughly $21 million—representing the limits of the available insurance proceeds,
plus interest—in exchange for releasing all claims against the settling
defendants related to the hurricanes and/or levee failures. The levee districts
themselves would not contribute to the settlement. The settlement fund would
floodwalls along the Mississippi River Gulf Outlet, the east bank of the Inner Harbor
Navigational Canal, and the area bordering New Orleans East. The MRGO action continues
to proceed in the district court against the U.S. Army Corps of Engineers and Washington
Group International, Inc., which are not parties to this settlement.
2
The three levee district defendants are the Orleans Levee District, the Lake Borgne
Basin Levee District, and the East Jefferson Levee District.
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No. 09-31156
No. 09-31188
be administered and distributed by a special master under the court’s
supervision. Finally, class counsel would waive their attorneys’ fees, while
retaining the right to seek “enhanced costs.”
The district court issued a preliminary order of certification for settlement
purposes, to which Appellants—two groups of dissenting class
members—objected. First, Appellants argued that the proposed class did not
qualify as a Rule 23(b)(1)(B) class under the standards established by the
Supreme Court in Ortiz v. Fibreboard Corp. Second, Appellants averred that
certifying a mandatory settlement class in a mass tort damages action violates
due process. Finally, Appellants opposed the settlement on the grounds that the
content of the notice was deficient and misleading, and that the settlement itself
provided no benefit to the class while allowing counsel to seek an enhancement
of costs.
Following the subsequent class certification and settlement fairness
hearing, the district court certified the class and approved the settlement. In
certifying the class, the court first determined that the Rule 23(a) prerequisites
for all class actions had been met.3 The court next analyzed whether the class
complied with the “stringent standards” for 23(b)(1)(B) classes set by the
Supreme Court in Ortiz. Noting that the Supreme Court had explicitly refrained
from deciding the constitutionality of a mandatory mass tort class certification,
the district court held that certification under Rule 23(b)(1)(B) was proper
because all three Ortiz requirements—a fund demonstrably insufficient to
satisfy all claims, devotion of that fund to the payment of claims, and intra-class
3
These prerequisites are numerosity, commonality of issues, typicality of the class
representatives’ claims in relation to the class, and the adequacy of the representatives and
their counsel to represent the class. See FED. R. CIV. P. 23(a); Langbecker v. Elec. Data Sys.
Corp., 476 F.3d 299, 306 n.10 (5th Cir. 2007). The parties do not dispute that these
requirements are met in this case.
7
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No. 09-31188
equity in distribution of the fund—had been met. Finally, the district court
approved the settlement based on its determination that notice was reasonable
and that the settlement was fair, adequate, and reasonable under this circuit’s
six-factor test in Reed v. General Motors Corp., 703 F.2d 170 (5th Cir. 1983): the
court found no evidence of fraud or collusion behind the settlement; litigation
would be immensely complex; the cases had been proceeding for nearly four
years; success on the merits would be difficult; plaintiffs were settling for the
maximum amount they could win through litigation; and class counsel and class
representatives all agreed to the settlement.
In this consolidated appeal, Appellants renew their challenges to the
district court’s class certification and approval of the settlement.
II. DISCUSSION
A. Certification of the Class Under Rule 23(b)(1)(B)
We review a district court’s decision to certify a class for abuse of
discretion. Langbecker v. Elec. Data Sys. Corp., 476 F.3d 299, 306 (5th Cir.
2007) (citation omitted). A district court abuses its discretion, inter alia, when
it “rests its legal analysis on an erroneous understanding of governing law.”
Id.
(citation omitted).
In addition to satisfying the prerequisites of Rule 23(a), a class must also
meet the requirements of one of the subdivisions of Rule 23(b) in order to be
certified. At issue here is subdivision (b)(1)(B), which provides for certification
of a mandatory class, whose members have no right to opt out, when
prosecuting separate actions by or against individual class members
would create a risk of . . . adjudications with respect to individual
class members that, as a practical matter, would be dispositive of
the interests of the other members not parties to the individual
adjudications or would substantially impair or impede their ability
to protect their interests . . . .
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No. 09-31156
No. 09-31188
FED. R. CIV. P. 23(b)(1)(B). A “limited fund” action, which aggregates numerous
claims against a fund insufficient to satisfy them all, is one type of class action
traditionally encompassed by Rule 23(b)(1)(B). Ortiz, 527 U.S. at 834; 2 ALBA
CONTE & HERBERT NEWBERG, NEWBERG ON CLASS ACTIONS § 4.9 at 33–34 (4th ed.
2002) (hereinafter “NEWBERG”).
The nub of this case, as it was in Ortiz, is the certification of the class
under Rule 23(b)(1)(B) on a limited fund rationale. We do not decide the general
constitutional question, left open in Ortiz, whether a mandatory limited fund
rationale could—under some circumstances—be applied to a settlement class of
tort claimants. 527 U.S. at 864. Such circumstances do not exist here because
the settlement does not “seek equity by providing for procedures to resolve the
difficult issues of treating . . . differently situated claimants with fairness as
among themselves,”
id. at 856, and thereby fails to satisfy one of “the essential
premises of mandatory limited fund actions,”
id. at 848.
Ortiz involved a large class of asbestos claimants suing a manufacturer,
Fibreboard, which had in turn sued its two insurance carriers for funds to pay
the claimants. See
id. at 821–23. Eleventh hour negotiations between class
counsel, Fibreboard and the two insurance companies produced a settlement
fund of $1.525 billion, funded nearly entirely by the insurance companies and
contingent on certification under Rule 23(b)(1)(B) as a mandatory limited fund
class. See
id. at 823–25. The district court certified the class under Rule
23(b)(1)(B), reasoning that, without certification and settlement, the class ran
the risk that the insurance companies would prevail against Fibreboard in their
pending coverage cases, leaving a much smaller fund available to the class. See
id. at 827–28. We affirmed. Flanagan v. Ahearn (In re Asbestos Litig.),
90 F.3d
963 (5th Cir. 1996), vacated and remanded,
521 U.S. 1114 (1997). On remand
for further consideration in light of Amchem Products, Inc. v. Windsor,
521 U.S.
9
No. 09-31156
No. 09-31188
591 (1997), we again affirmed. Flanagan v. Ahearn (In re Asbestos Litig.), 134
F.3d 668 (5th Cir. 1998), reversed by Ortiz,
527 U.S. 815.
The Supreme Court reversed. The Court expressed “serious constitutional
concerns that come with any attempt to aggregate individual tort claims on a
limited fund rationale,” Ortiz, 527 U.S. at 845:
First, the certification of a mandatory class followed by settlement
of its action for money damages obviously implicates the Seventh
Amendment jury trial rights of absent class members.
...
Second, and no less important, mandatory class actions aggregating
damages claims implicate the due process “principle of general
application in Anglo-American jurisprudence that one is not bound
by a judgment in personam in a litigation in which he is not
designated as a party or to which he has not been made a party by
service of process,” it being “our ‘deep-rooted historic tradition that
everyone should have his own day in court.’ ”
Id. at 845–46 (quoting Hansberry v. Lee,
311 U.S. 32, 40 (1940); Martin v. Wilks,
490 U.S. 755, 762 (1989)) (citations omitted).
In light of these concerns, the Court counseled against “adventurous
application of Rule 23(b)(1)(B),” id. at 845, stressing that a limited construction
of the Rule, “stay[ing] close to the historical model . . . avoids serious
constitutional concerns raised by the mandatory class resolution of individual
legal claims . . . .”
Id. at 842; see also 5 NEWBERG § 17:15 at 339. The Court
described this “historical model” of a limited fund as “a ‘fund’ with a definitely
ascertained limit, all of which would be distributed to satisfy all those with
liquidated claims based on a common theory of liability, by an equitable, pro rata
distribution.”
Ortiz, 527 U.S. at 841. From its discussion of the historical model,
the Court identified three “presumptively necessary” characteristics of a
traditional limited fund.
Id. at 842. Those characteristics are:
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(1) “the totals of the aggregated liquidated claims and the fund
available for satisfying them, set definitely at their
maximums, demonstrate the inadequacy of the fund to pay all
the claims,” id. at 838;
(2) “the whole of the inadequate fund [is] to be devoted to the
overwhelming claims,” id. at 839; and
(3) “the claimants identified by a common theory of recovery [are]
treated equitably among themselves,” id.
The Court’s phrasing and discussion of this third requirement differs
noticeably from the other two requirements in that it departs from a strict
interpretation of the traditional limited fund. To cleave to the traditional model
of a true limited fund, the third element of intra-class equity should require that
the class claims be capable of liquidation and pro rata distribution. See
id. at
841 (describing classic limited fund actions as “present[ing] straightforward
models of equitable treatment, with the simple equity of a pro rata distribution
providing the required fairness”). However, the Court contemplated that the
unattainability of straightforward pro rata distribution would not necessarily
disqualify a class action from adhering to the historical model, as long as the
settlement otherwise provided for fair distribution amongst the claimants in the
class:
Fair treatment in the older cases was characteristically assured by
straightforward pro rata distribution of the limited fund. While
equity in such a simple sense is unattainable in a settlement
covering present claims not specifically proven, . . . at the least such
a settlement must seek equity by providing for procedures to resolve
the difficult issues of treating such differently situated claimants
with fairness as among themselves.
Id. at 855–56 (internal citation omitted).
The settlement proponents argue, and we agree, that this class does not
suffer from the particular defects that led the Ortiz Court to find the “procedures
to resolve the difficult issues” unsatisfactory in that settlement. The Court
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identified two structural conflicts obstructing the fairness of distributions within
that class. The first conflict was between present claimants—whose interest was
in generous immediate payments—and future claimants, whose interest was to
ensure an ample fund for the future. Id. at 856. This type of temporal conflict
between present and future classes is not applicable in this case, which involves
an identified class that has suffered a presently identifiable harm. The other
conflict in Ortiz was between class members whose claims accrued before the
lapse of the insurance policy providing the bulk of the insurance funds, giving
them more valuable rights to the insurance proceeds, and those who were
injured after this policy lapsed.
Id. at 857. The settlement before us avoids this
second concern through the creation of sub-classes providing that the funds from
one insurance policy providing coverage to a particular levee district will not be
available to any class member who does not have a claim against that levee
district. Nevertheless, freedom from the particular infirmities identified in Ortiz
is insufficient to issue a clean bill of health for intra-class equity here.
The class members in this case suffered a wide variety of injuries, ranging
from property damage to personal injury and death, and no method is specified
for how these different claimants will be treated vis-à-vis each other. The
district court acknowledged that fairness of distribution was a significant
concern in this settlement. The issue was addressed during the fairness hearing,
where the court received an amicus brief, and heard testimony, from Dean
Edward Sherman—a class action expert—who suggested the use of grids or
matrices to differentiate between the various class members, using factors such
as the particular kind of damage suffered—death, personal injury, property
damage—to create, in essence, subclasses of claimants. Sherman suggested that
these categories could be further subdivided; for example, by partitioning the
category of property damage according to the extent of damage, as measured by
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No. 09-31156
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the depth of water that caused the damage. While opining that such a method
would be fairly inexpensive given the existence of certain data already available
to the court, Sherman also stated that, should the administrative costs
associated with this differentiation threaten to consume the fund, the court
might find that the class would benefit more from a cy pres distribution that was
related in some way to the levees, such as levee protection or beautification.
None of these procedures made their way into the settlement agreement.
Instead, the settlement provides for the appointment of a special master to
“provide to the Court a recommended disposition and protocol with regard to the
remaining [settlement fund], and treatment of Claims of Class members.” 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,” id. at 856, leads us to reverse the district court’s order certifying
this class. By failing to meet one of the three “essential premises of mandatory
limited fund actions” identified by the Supreme Court in Ortiz,
id. at 848, this
settlement class strays too far from the historical model to avoid the Court’s
constitutional concerns.
B. Approval of the Settlement under Rule 23(e)4
The objecting class members separately challenge the district court’s
approval of the class action settlement on the grounds that the settlement does
not benefit the class, allows counsel to seek an enhancement of actual costs, and
provided inadequate and misleading notice to the class members. We review the
4
We address Appellants’ challenges to the settlement to deal with the possibility that
the problem with certification is somehow remedied and the settlement is reinstated.
13
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No. 09-31188
district court’s approval of the settlement for an abuse of discretion. Newby v.
Enron Corp., 394 F.3d 296, 300 (5th Cir. 2004) (citation omitted).
1. Benefit to the Class
Rule 23(e)(2) states that a court may approve a settlement proposal that
would bind class members “only after a hearing and on finding that it is fair,
reasonable, and adequate.” FED. R. CIV. P. 23(e)(2). Six factors guide our review
of a decision to approve a class action settlement agreement:
(1) evidence that the settlement was obtained by fraud or collusion;
(2) the complexity, expense, and likely duration of the litigation; (3)
the stage of the litigation and available discovery; (4) the probability
of plaintiffs’ prevailing on the merits; (5) the range of possible
recovery and certainty of damages; and (6) the opinions of class
counsel, class representatives, and absent class members.
Newby, 394 F.3d at 301 (citing
Reed, 703 F.2d at 172; Parker v. Anderson,
667
F.2d 1204, 1209 (5th Cir. 1982)). Based on its wealth of experience in Hurricane
Katrina litigation and the evidence it received before and during the certification
and settlement hearing, the district court found that all six factors weighed in
favor of approving the settlement.
Without quarreling with the district court’s findings, we nevertheless
conclude that this settlement is not fair, reasonable, and adequate under Rule
23(e) because there 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. “The court must be assured
that the settlement secures an adequate advantage for the class in return for the
surrender of litigation rights against the defendants.” 4 NEWBERG § 11:46 at
133; see also id. at 142–43 (“Often, the settlement benefits are somewhat
speculative in nature and capable of only approximate valuation. Nevertheless,
the settlement may be approved if it is clear that it secures some adequate
advantage for the class.” (emphasis added)); In re Compact Disc Minimum
14
No. 09-31156
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Advertised Price Antitrust Litig., 216 F.R.D. 197, 221 (D. Me. 2003) (holding that
“a settlement is not fair where all the cash goes to expenses and lawyers, and
the [class] members receive only discounts of dubious value,” even when the
lawsuit itself has dubious value).
The settlement provides that the following administrative costs may be
paid out of the $21 million settlement fund:
Notice Costs, Special Master fees and costs, Escrow Agent costs and
fees, CADA [Court Appointed Disbursing Agent] fees and costs, the
fees and costs of any Person retained by the Special Master or
CADA, and other costs, fees and expenses incurred in the
implementation of the Class Settlement Agreement (including but
not limited to the costs and fees of all experts of the Parties up to an
amount to be agreed to by the Settling Defendants in their sole and
absolute discretion).
No estimate was given as to what these costs might be. Nevertheless, the court
recognized that “[i]t is a reasonable fear that the mere cost of adjudicating
individual claims may swallow the entire settlement.” In re Katrina Canal
Breaches Consol. Litig., 263 F.R.D. 340, 358 (E.D. La. 2009).
The settlement further provides class counsel with the right to seek
reimbursement of “enhanced” costs and expenses, and counsel of any class
member with the right to seek attorneys’ fees:
Class counsel and counsel of any Class Member shall have the right
to seek an award from the [settlement fund] for fees, costs and
expenses (including any enhancement of costs and expenses as may
be awarded by the Court) and shall have the right to make an
application to the Court for same . . . . Class Counsel agree to
recommend to the Court that no attorneys’ fees should be awarded
from the [settlement fund], and shall oppose any such request(s).
There is no indication in the record as to what these attorneys’ costs and
expenses will be. At the certification and fairness hearing, class counsel could
not provide any estimate of the costs incurred thus far, other than to admit that
litigation had been “expensive.” Class counsel conceded, and the court accepted,
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No. 09-31188
that “a lot of depositions were taken, a lot of costs were incurred, and we don’t
know what the plaintiffs are going to seek.”
We have previously affirmed a district court’s approval of a settlement in
which costs and attorneys’ fees had not been determined as of the date of
settlement. See Newby, 394 F.3d at 300. However, we were able to definitively
state in that case, upon a record that was “exceptionally well-developed,”
id. at
307, that the class would receive some monetary benefit from the settlement.
See
id. at 304 (“It is untrue that there will be nothing left in the [settlement
fund] for the class members.”). This was in part because there was a separate
sub-fund of $15 million set apart for past and future litigation expenses. Here,
we are unable to definitively state, based on the record below, that the class will
receive any benefit from the settlement. Moreover, Newby did not concern a
mandatory class. “Because limited-fund classes do not permit opt-outs,
certification for settlement imposes particularly stringent standards.” Federal
Judicial Center, Manual for Complex Litigation § 21.132 at 252 (4th ed. 2007).
We hold that the district court erred by approving the settlement without
any assurance that attorneys’ costs and administrative costs will not cannibalize
the entire $21 million settlement. In doing so, we express no opinion as to
whether such a result would occur; but the burden is on the settlement
proponents to persuade the court that the agreement is fair, reasonable, and
adequate for the absent class members who are to be bound by the settlement.
4 NEWBERG § 11:42 at 118; AMERICAN LAW INSTITUTE, PRINCIPLES OF THE LAW:
AGGREGATE LITIGATION § 3.05(c) at 204 (2010) (hereinafter “AGGREGATE
LITIGATION”). In our judgment, the settlement proponents have not met this
burden because they have failed to provide any basis for their assertion that
there will be money remaining after payment of these costs to effect even a cy
pres distribution, let alone a monetary distribution.
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No. 09-31188
Nor do we consider whether a cy pres distribution of the settlement fund,
without any monetary distribution, would be fair, reasonable, and adequate
under Rule 23(e). That decision would be premature here, where the very
possibility of such a distribution is in question. Furthermore, without any
specific proposal for a cy pres distribution before us, we are unable to determine
whether such a distribution would be “for the next best use which is for indirect
class benefit,” 4 NEWBERG § 11:20 at 28, and would be for uses “consistent with
the nature of the underlying action and with the judicial function,” In re Agent
Orange Prod. Liab. Litig., 818 F.2d 179, 186 (2d Cir. 1987).
2. Enhancement of Costs
We agree with Appellants that any “enhancement” of costs is the
functional equivalent of a fee. See Fogleman v. ARAMCO, 920 F.2d 278, 286 (5th
Cir. 1991) (“To the extent that counsel charges a party more than actual cost for
any service, be it reproduction of documents or telephone calls, counsel is
recovering additional fees.”). 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. See, e.g., Strong v.
BellSouth Telecomm. Inc.,
137 F.3d 844, 849 (5th Cir. 1998) (“To fully discharge
its duty to review and approve class action settlement agreements, a district
court must assess the reasonableness of the attorneys’ fees.” (citation omitted));
Piambino v. Bailey,
610 F.2d 1306, 1328 (5th Cir. 1980) (holding that the district
court has a “responsibility to assess the reasonableness of attorneys’ fees
proposed under a settlement of a class action,” and that, where it abdicates its
responsibility to do so, “its approval of the settlement must be reversed on this
ground alone”).
17
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No. 09-31188
As noted above, we have also previously affirmed a district court’s
approval of a settlement agreement in which attorneys’ fees were unknown at
the time of approval. See Newby, 394 F.3d at 300. In that agreement, as here,
attorneys retained the right to request fees and reimbursement of past and
future litigation expenses, to be paid from the gross settlement fund upon
approval of the district court. Again, however, we were able to definitively state
in that case that there would be money remaining in the settlement fund after
payment of those costs and fees. See
id. at 304. Because there is no such
assurance here, it was error for the district court to approve the settlement.
3. Notice to the Class
Rule 23(e) states that a court must “direct notice in a reasonable manner
to all class members who would be bound by the proposal” before approving a
settlement.5 FED. R. CIV. P. 23(e)(1). Appellants argue that the notice apprising
the class of the proposed certification and settlement was inadequate and
misleading because it: (i) failed to provide class members with any way of
estimating the amount of money that they could expect to receive in exchange
for releasing their claims, nor warned them that it was unlikely that they would
receive any recovery at all; (ii) wrongly represented that class counsel would not
be seeking attorneys’ fees from the settlement fund; and (iii) incorrectly informed
class members that they were barred by law from receiving compensation from
the levee districts.
5
Rule 23(c), which relates to class certification, separately states that “[f]or any class
certified under Rule 23(b)(1) or (b)(2), the court may direct appropriate notice to the class.” FED.
R. CIV. P. 23(c)(2)(A) (emphases added). Rule 23 therefore does not specify any notice
requirement for 23(b)(1)(B) actions beyond that required by subdivision (e) for settlement
purposes. See 3 NEWBERG § 8:21 at 230; but see In re Orthopedic Bone Screw Prods. Liab.
Litig., 246 F.3d 315, 327 n.11 (3d Cir. 2001) (stating that “Ortiz seems to imply (although it
specifically declined to rule) that the level of notice required for a [mandatory settlement] is
the same as is required in a Rule 23(b)(3) [opt-out] action: the best notice practicable”).
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Under Rule 23(e), a settlement notice need only satisfy the “broad
reasonableness standards imposed by due process.” Petrovic v. Amoco Oil Co.,
200 F.3d 1140, 1153 (8th Cir. 1999) (citation and internal quotation marks
omitted); 3 NEWBERG § 8:18 at 223 (“[T]he court’s formulation of an adequate
notice procedure under Rule 23(e) is limited only by constitutional due process
considerations.”). The minimum of due process, as interpreted by the Supreme
Court, is that “deprivation of life, liberty or property by adjudication be preceded
by notice and opportunity for hearing appropriate to the nature of the case.”
Mullane v. Central Hanover Bank & Trust Co.,
339 U.S. 306, 313 (1950). Notice
of a mandatory class settlement, which will deprive class members of their
claims, therefore requires that class members be given information reasonably
necessary for them to make a decision whether to object to the settlement.
a. Possibility of Cy Pres Distribution
We have previously held, in the context of non-mandatory class
settlements, that a notice “is not required to provide a complete source of
settlement information,” Maher v. Zapata Corp., 714 F.2d 436, 452 (5th Cir.
1983) (citations and emphasis omitted), and that a court does not abuse its
discretion by omitting estimates of unit recovery if it concludes that such
estimates were “too unreliable to submit,” Adams Extract Co. v. Pleasure Hours,
Inc. (In re Corrugated Container Antitrust Litig.),
643 F.2d 195, 224 (5th Cir.
1981). However, we find that the court did not direct reasonable notice to the
class here because—assuming that a cy pres distribution was permissible and
feasible—the notice did not inform class members of the possibility that they
would not receive any direct benefit from the settlement. See AGGREGATE
LITIGATION § 3.07 at 220, comment b (“Nothing in this Section [on cy pres
settlements] would require that a settlement actually recover money for class
members, so long as the class is apprised of that fact in a properly constructed
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settlement notice.” (emphasis added)). By failing to apprise class members of this
information, the notice did not provide interested parties with knowledge critical
to an informed decision as to whether to object to class certification and
settlement.
Under the heading “Who’s Included?” the class notice described the
membership of the proposed settlement class as all those who either lived or had
property in the greater New Orleans area and were harmed by Hurricanes
Katrina and Rita. Under the heading “What Does the Settlement Provide?” the
notice then stated:
A settlement fund that includes all insurance money available to the
Settling Defendant will be established in the amount of $20,839,115
(plus any additional interest) for the benefit of the Settlement Class,
as well as to cover costs, and expenses. The settlement fund (plus
any interest) will be divided among the Subclasses as follows:
Subclass 1 - $2,371,467; Subclass 2 - $5,924,284; and Subclass 3 -
$12,543,363. . . .
If the settlement receives final Court approval, an independent
“Special Master” appointed by the Court will recommend how to
administer the settlement fund for the benefit of the Settlement
Class. The Court may request that a second notice be issued to
Settlement Class members explaining how the settlement fund will
be used or administered.
This language does not clearly inform class members of the real possibility,
acknowledged by all parties, that there may be a cy pres distribution in lieu of
any direct distribution of funds to the class members. This is particularly
problematic because no estimate is given of the costs and expenses that will be
paid out of the settlement fund, a sum that may greatly reduce the amount
available for distribution to the class. Stating that the fund will be administered
“for the benefit of the Settlement Class,” and hinting that the settlement fund
may be “used” rather than “administered,” is insufficient to communicate the
possibility of a cy pres distribution, which is a key aspect of the settlement that
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No. 09-31188
might have led more members to object. Therefore, contrary to the district
court’s judgment, the notice did not contain “all necessary information for any
class member to become fully apprised and make any relevant decisions.” In re
Katrina, 263 F.R.D. at 360.
b. Attorneys’ Fees
We also find that the notice was misleading insofar as it informed class
members that class counsel and other counsel for class members would not seek
any attorneys’ fees from the settlement. Under the heading “How will the
lawyers be paid?” the notice stated:
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. Requests for costs and expenses will be
made after the settlement is granted final approval by the Court.
The Court may award more or less than the actual costs and
expenses.
The settlement agreement, however, provides both class counsel and other
counsel with the right to seek “enhanced” costs. As explained above, an
enhancement of actual costs and expenses is essentially a fee, and unless class
counsel will not seek any such “enhanced” costs, it is inaccurate to assert that
they will not request any attorneys’ fees from the settlement fund. See
Fogleman, 920 F.2d at 286; 3 NEWBERG § 8:32 at 265 (“In regard to attorneys’
fees, the [Rule 23(e)] notice should at a minimum generally apprise class
members that fees will be sought and awarded by the court at the settlement
hearing or a subsequent hearing and indicate whether the defendants or the
settlement fund will bear such costs.”). Moreover, it is unfaithful to the
settlement agreement to omit the fact that all counsel may seek such fees; simply
stating that the court “may award more . . . than the actual costs and expenses”
implies that any such action would be entirely sua sponte.
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No. 09-31188
c. Legal Limits to the Fund
In the same section describing the settlement fund, the class notice stated:
“Please note that, under law, the Settlement Class can get no additional money
or property in this settlement because the Settling Defendants are governmental
bodies.”
Appellants are correct that this statement is slightly misleading, although
in our judgment the district court’s approval of this language does not rise to the
level of abuse of discretion. As political subdivisions of the State of Louisiana,
the levee districts’ assets are statutorily exempt from seizure to satisfy a
judgment against them. LA. CONST. art. XII, §10(C); LA. REV. STAT.
§ 13:5109(B)(2); see Specialty Healthcare Mgmt., Inc. v. St. Mary Parish Hosp.,
220 F.3d 650 (5th Cir. 2000) (recognizing and enforcing the Louisiana anti-
seizure provisions). Nor are the levee districts subject to a writ of mandamus
requiring them to appropriate additional funds to satisfy potential judgments in
this case. See Hoag v. Louisiana,
889 So. 2d 1019, 1023 (La. 2004) (citations
omitted). However, Louisiana law does not prevent the levee districts from
appropriating additional money to contribute to the settlement. See LA. REV.
STAT. § 13:5109(B)(2)). Therefore, perhaps a more precise statement would have
been that, “under law, the Settlement Class can exact no additional money or
property from the Settling Defendants in this settlement because the Settling
Defendants are governmental bodies.”
However, the statement as written is accurate in its essential point: that
$21 million is the most that the class can expect to receive in the settlement.
The choice of words, while less than one hundred percent accurate, does not
render the notice so clearly misleading that the district court abused its
discretion in approving this portion of the notice.
III. CONCLUSION
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For the reasons stated above, we reverse the district court’s order
certifying this mandatory limited fund class and approving the class settlement.
The judgment of the district court is therefore REVERSED.
23
