MICHAEL P. McCUSKEY, District Judge.
Judge Posner recently wrote for the Seventh Circuit:
In re Trans Union Corp. Privacy Litig., 629 F.3d 741, 742-43 (7th Cir.2011) (emphasis in original). In the present case, Defendant Bank of America NA (BANA) took over the servicing of mortgages for approximately 14,000 homeowners from Taylor, Bean & Whitaker (TBW), a company that (as it later came to light) had been engaging in all manner of financial shenanigans. In doing so, BANA and Ginnie Mae promised that if the homeowners made mortgage payments to TBW during the transition, BANA would credit their accounts. This seems generous, but it is also fair because BANA didn't give the homeowners any notice of the transition until well after the homeowners were supposed to stop paying TBW.
But then TBW filed for bankruptcy and BANA alleges that the FDIC seized the lockbox bank that held borrower's payments, so many of the mortgage payments were either frozen or disappeared into TBW.
A number of the homeowners individually filed lawsuits against BANA, trying to hold them accountable for the missing payments. Those cases were combined into the class action here. Over the past two and a half years, this case has been litigated heavily. Several months ago, class counsel and defendant's counsel presented this court with a settlement agreement. In general terms, BANA promised to: credit all the homeowners' accounts for the full amount of their missing payments; waive or refund late fees; issue an IRS Form 1098 so the homeowners could take the extra interest deduction that they weren't able to earlier; and set up a telephone hotline to provide informational assistance. Of course, BANA has proclaimed mightily that it never had those payments to begin with, so it would be crediting those accounts about $7.5 to $15 million out of its own pocket. But it should have known or discovered a certain amount of risk when it performed their due diligence on TBW before they took over the servicing the mortgages, and after all, the mortgage business is still relatively decent money.
In return, the settlement releases BANA from all liability. Furthermore, BANA will pay class counsel's fees of $2 million. Now, far be it for this court to delve too deeply into the horse-trading that went on between the parties during the settlement negotiations, but the facts here sound a lot like a case in which the Seventh Circuit chastised the district court for having "sold the claimants down the river". Certainly it is not as bad as what happened in a case where the class members had to pay class counsel's legal fees, Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348 (7th Cir.1996). But for a settlement where BANA is required to do what it should have done two years ago (and which, incidentally, it has already started to do, whether out of the goodness of its heart or not) — and to compensate class members for two years' trouble just $38,000 and class counsel $2,000,000 is not something that would strike a jury in downstate Illinois as a particularly good bargain. This isn't to say that anyone thinks that BANA set out to hoodwink the homeowners. But as one class member said while opting out of the settlement: "If we thought for one split second that $150 would get noticed by the huge conglomerate known as Bank of America, it might be worth it, but you know about a snowball's chance in hell."
This case is before the court for ruling on the Motion for Final Approval of Settlement (#99) filed by the BANA and BAC Home Loans Servicing, LP, (BAC)
This court has jurisdiction pursuant to 28 U.S.C. § 1332(d), the Class Action Fairness Act (CAFA). The case was commenced on March 5, 2010, after CAFA's effective date of February 18, 2005. CAFA requires, with certain exceptions not relevant here, minimal diversity, an amount in controversy exceeding $5,000,000, and at least 100 proposed plaintiff class members. 28 U.S.C. §§ 1332(d)(2), (d)(5); Hart v. FedEx Ground Package Sys. Inc., 457 F.3d 675, 679 (7th Cir.2006). Plaintiff Jeanette
Plaintiffs Vought, Skutack, and Frock, as well as all members of the Class and Subclass, each had home mortgages that were serviced by TBW until approximately August 2009.
On August 24, 2009, TBW filed for bankruptcy. When the FDIC seized the lockbox bank controlled by TBW (Colonial Bank), Plaintiffs' mortgage payments were frozen. BANA's counsel explained that as of the time of the final fairness hearing, the reconciliation process had not yet been fully resolved despite the passage of over two years. Thus, while BANA had not received those funds, they still hoped to in the future.
During this period, BANA assured Plaintiffs that during the transition, if TBW received a payment in a timely fashion instead of BANA, no late fee or adverse credit reporting would be imposed. For instance, on BANA's website, a newswire was published on August 27, 2009, indicating, in pertinent part:
This language was echoed by Ginnie Mae, which issued a statement indicating, in pertinent part:
Despite both of these notices, BANA failed to properly credit Plaintiffs' home mortgage accounts for timely payments made to TBW ("uncredited payments", termed "missing payments" in the Settlement Agreement at § 1.21). The vast majority of these uncredited payments had in fact been made by Plaintiffs for their August 2009 mortgage payments.
The failure to properly credit Plaintiffs' home mortgage accounts resulted in many adverse effects. Plaintiffs were assessed late fees on their uncredited payments. Plaintiffs allegedly suffered adverse credit impact after BANA reported the uncredited payments to credit reporting agencies. Also, because Plaintiffs were not treated as having made the uncredited payments by BANA in 2009, all Plaintiffs received mortgage interest statements that underreported the amount of interest paid in 2009 by Plaintiffs. Finally, some Plaintiffs made written requests to BANA to properly credit their accounts for their uncredited payments, to little avail. BANA, in its Motion for Approval, indicated that it had attempted to block credit reporting for all delinquent accounts. However, due to certain oversights during processing, BANA also admits that this block was not applied equally to all accounts. Although this court is aware of the general nature of these issues, the parties have not provided an exact accounting of the number or percentage of Plaintiffs who were affected by each of these adverse effects, or the degree to which the credit block was not universally applied.
On March 5, 2010, Plaintiffs Wayne Vought (now deceased) and Jeanette Vought filed a class action complaint in this court (#1). On April 2, 2010, Plaintiff Roger E. Frock filed a class action complaint in the United States District Court in the Southern District of Ohio. On May 18, 2010, Plaintiffs Mark Skutack and Daneen Skutack filed a class action complaint in the United States District Court in the Eastern District of Pennsylvania. On July 8, 2010, these three separate actions were consolidated in the present case (#28).
On May 10, 2010, Defendant filed a Motion to Dismiss, seeking to dismiss the complaint filed by Wayne and Jeanette Vought (#11). On July 15, 2010, Magistrate Judge David G. Bernthal issued a Report and Recommendation recommending that Defendant's Motion to Dismiss be denied (#29). On July 20, 2010, Wayne and Jeanette Vought, Mark and Daneen Skutack, and Roger E. Frock filed their First Amended Consolidated Complaint
On August 19, 2010, Defendant filed a Motion to Dismiss (#37) seeking to dismiss the First Amended Consolidated Complaint (#30). On September 24, 2010, 2010 WL 4683599, Judge Bernthal issued a Report and Recommendation (#50) recommending that Defendant's Motion to Dismiss (#37) be denied. On October 27, 2010, 2010 WL 4683596, this court accepted the Report and Recommendation (#50) and denied Defendant's Motion to Dismiss (#37). On January 5, 2011, Plaintiffs filed their Second Amended Consolidated Complaint (#63). This Second Amended Consolidated Complaint (#63), which is the operative complaint here, contained the following five claims alleged by Plaintiffs: (1) breach of contract; (2) breach of contract, based on the theory that Plaintiffs were intended third-party beneficiaries; (3) unjust enrichment; (4) requests for injunctive relief; (5) violation of the Real Estate Settlement Procedures Act (RESPA). In addition, on behalf of class members who have homes in Illinois, Plaintiffs alleged a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.
On January 24, 2011, Defendant filed a Motion to Dismiss (#66), seeking to dismiss the third party beneficiary breach of contract claim contained in Plaintiffs' Second Amended Consolidated Complaint (#63). On April 7, 2011, Judge Bernthal issued a Report and Recommendation (#73) recommending that Defendant's Motion to Dismiss (#66) be granted. On April 29, 2011, the parties filed a Joint Motion to Stay (#81) in order to conduct settlement negotiations. On May 3, 2011, this court granted the parties' Motion to Stay (#81).
The parties have represented to this court that there was extensive discovery completed in this case. Specifically, Plaintiffs aver that they propounded discovery on Defendant in the form of Requests for Production of Documents and Interrogatories. Defendant also propounded similar discovery on the named Plaintiffs. The parties were unable to resolve certain discovery disputes without seeking the assistance of this court. Thus, on September 15, 2010, and April 13, 2011, Plaintiffs filed two Motions to Compel Discovery Responses (#44; #74). The parties were able to negotiate a Protective Order (#49) that resolved the initial Motion to Compel Discovery Responses (#44). The second Motion to Compel Discovery Responses (#74) was withdrawn by Plaintiffs. Although this court has not viewed the discovery in this case, the parties represent to this court that "Defendant[] produced over 230,000 pages of documents which were indexed, reviewed, individually coded and data-based by Class Counsel." (#103 p. 11).
Plaintiffs and Defendant participated in two separate day-long mediation sessions. The first session was held on July 19, 2011, before Richard P. Sher. The parties indicate that although progress was made during this initial mediation, the process was ultimately unsuccessful. After the parties remained in contact after the first failed mediation attempt, they agreed to participate in a second mediation on October 6, 2011, with Judge Donald P. O'Connell (Ret.).
The agreed settlement consists of two classes, defined as follows:
(#85 exh. 1). The only qualitative distinction between the Class and Subclass is that members of the Subclass were "subsequently credited with payments" whereas members of the Class have not yet been credited.
The settlement provides for equitable relief to all Class Members and, additionally,
In addition, up to three forms of monetary relief are available as part of this proposed settlement to Class Members who submit a claim form. Plaintiffs who qualify for all three types of relief and submit a verified claim form are entitled to recover up to $150.00 as follows:
(#85, Agreement § 1.06). Both Plaintiffs and Defendant represent that the only difference in relief to which Class and Subclass Members are entitled is the payment of $50 available to Class Members who made a written request to BANA for crediting of the missing payment, and who, as of December 1, 2011, had not had their account credit (#116, p. 4; #117, p. 3).
Regarding the relief that Class Members who request exclusion from the settlement agreement shall receive, Defendants have assured this court that
(#116, p. 1) This statement was repeated in substantially similar form by Plaintiffs (#117, p. 2).
The proposed settlement provides that Class Counsel will receive $2,000,000.00 in attorneys' fees and expenses if approved (Settlement, § 3.07). This agreed amount of attorneys' fees and expenses does not diminish the amount received by class members, as it is independent from the equitable and monetary relief. Section 2.26 of the Agreement also includes a clear sailing clause, wherein
On January 5, 2012, Plaintiffs filed a Motion for Preliminary Approval of Class Action Settlement Agreement and Notice to Class (#85). On January 30, 2012, this court held a preliminary approval hearing and heard arguments by the parties in support of their requests to: (1) grant preliminary approval of the Class Action Settlement Agreement; (2) approve the form of Class Notice agreed upon; (3) designate counsel to represent the Class and Subclass; and (4) set dates for optouts, objections and return of claim forms, and for a final fairness hearing. Based on the filings and oral arguments made by the parties, this court concluded that the proposed class met the requirements of Rule 23 of the Federal Rules of Civil Procedure and that the proposed settlement was within the range of possible approval. The court, therefore, granted the Motion for Preliminary Approval of Class Action Settlement Agreement and Notice to Class (#85).
On January 30, 2012, this court entered a Preliminary Approval Order (#86). In the Order, the court: (1) granted preliminary approval for the proposed settlement after finding that it was within the applicable range of fairness and reasonableness; (2) conditionally certified a Class and Subclass for settlement purposes; (3) appointed class counsel for the Class and Subclass; (4) approved the proposed form of mailed notice to the Class and Subclass, to be directed to the last known address of each Class and Subclass member as shown in Defendant's records, by March 15, 2012; (5) set a July 17, 2012, deadline for claim forms to be postmarked; and (6) set a May 11, 2012 deadline for objections or requests for exclusions from the proposed settlement. Additionally, this court scheduled the final fairness hearing on May 31, 2012.
On May 24, 2012, L. Stephens Tilghman signed an affidavit that was filed as Exhibit B to Plaintiffs' Memorandum in Support of the Motion for Final Approval (#103 exh. 2). As of the date of the affidavit, notices were sent, via First Class Mail, to 14,868 class members at their last known addresses. Out of the total 14,868 mailings, 2,815 recipients were construed to be members of the Class and 12,049 recipients
On May 31, 2012, the court held a final fairness hearing. Eric Holland argued for the class members, and Jeffrey Russell argued for BANA. The court also allowed argument on the record from Gregg Renegar for objectors Chris Risener and LaCrista Bagley, who have filed a separate individual suit in the U.S. District Court for the Western District of Oklahoma and Emil Lippe for amicus Paula Randall, who opted out and was pursuing an individual action. Due to the risk of potential collusion between the two parties with standing, this court decided that hearing the arguments of objectors and excluded parties would provide an alternative perspective.
Following the final fairness hearing, the court issued an order directing the parties to answer certain questions (#114). Among other things, these questions sought both empirical data regarding the Class's recovery under the settlement agreement as well as a clarification of each party's legal position pursuant to the framework approved in Isby v. Bayh, 75 F.3d 1191 (7th Cir.1996). Defendant, Plaintiffs, and amicus provided their responses on July 25, 2012 (#116, #117, and #118). Amicus filed a supplemental response on September 7, 2012 (#119).
As of July 23, 2012, five days after the court-mandated deadline of July 17, 2012, the settlement claims administrator had received 1,279 claim forms. Of the Class Members, 266 claims were received for the $50 written request payment, 81 claims for the $75 credit reporting payment, and 25 claims for the $25 tax payment. For Subclass Members, 217 claims were received for the $75 credit reporting payment and 93 claims for the $25 tax payment. (#116 p. 2; #117 p. 2).
BANA represents that as of their July 25, 2012 filing, it has already credited "the majority of Class Members" and that there are "a small number of Class Members whose loan accounts require additional investigation for whom BANA is in the process[] of crediting payments. BANA estimates this figure to be approximately 300 accounts." (#116 p. 11). As discussed above, about 81% of the accounts had been credited by the end of May, 2012. It is unclear whether BANA is still in the process of crediting the accounts that have not yet been credited, excluding those 300 accounts requiring additional information, or whether it has stopped crediting accounts pending the resolution of this motion. Also, it is unclear whether BANA meant
Under Rule 23(e)(2) of the Federal Rules of Civil Procedure, a court may approve a settlement in class action litigation only if it finds, after a hearing, that the settlement is "fair, reasonable, and adequate." In evaluating the fairness of a settlement, a court must consider: (1) the strength of plaintiffs' case compared to the amount of defendants' settlement offer; (2) an assessment of the likely complexity, length and expense of the litigation; (3) an evaluation of the amount of opposition to settlement among affected parties; (4) the opinion of competent counsel; and (5) the stage of the proceedings and the amount of discovery completed at the time of settlement. Synfuel Tech., Inc. v. DHL Express (USA), Inc., 463 F.3d 646, 653 (7th Cir.2006), citing Isby v. Bayh, 75 F.3d 1191, 1199 (7th Cir.1996). Although Plaintiffs have exhorted that it is "well-established" that "compromises of disputed claims are favored by the courts," Williams v. First Nat. Bank, 216 U.S. 582, 595, 30 S.Ct. 441, 54 L.Ed. 625 (1910) and that the Seventh Circuit has held that "[f]ederal courts naturally favor the settlement of class action litigation," Isby v. Bayh, 75 F.3d 1191, 1196 (7th Cir.1996), this is only half the story. It is also true that "district judges must therefore exercise the highest degree of vigilance in scrutinizing proposed settlements of class actions to consider whether the settlement is fair, adequate, and reasonable, and not a product of collusion." Mirfasihi v. Fleet Mortg. Corp., 450 F.3d 745, 748 (7th Cir. 2006) (internal quotation marks omitted). This is because "the district judge in the settlement phase of a class action suit [is] a fiduciary of the class, who is subject therefore to the high duty of care that the law requires of fiduciaries." Reynolds v. Beneficial Nat. Bank, 288 F.3d 277, 280 (7th Cir.2002). Thus, the court has taken the greatest care to analyze each factor carefully and to explain its reasoning in detail.
The Seventh Circuit has said that the "most important factor relevant to the fairness of a class action settlement is ... the strength of plaintiff's case on the merits balanced against the amount offered in the settlement." Synfuel, 463 F.3d at 653 (editing marks omitted). In making this comparison, the Seventh Circuit recommends that district courts "quantify the net expected value of continued litigation to the class" by "estimating the range of possible outcomes and ascribing a probability to each point on the range." Reynolds v. Beneficial Nat'l Bank, 288 F.3d 277, 284-85 (7th Cir.2002). Although a precise valuation is not expected in all cases, this court must make a "ballpark valuation". Id. at 285. As will soon become evident, the value estimates and estimation structure provided by the parties are not entirely clear. In some places, they are, as best as can be reconciled, self-contradictory. Thus, the opinion has attempted to make sense of the filings and has given parties the benefit of the doubt whenever possible.
During the final fairness hearing, this court asked both parties to provide estimates of the value of continued litigation to the class. In regards to the likelihood of success on the merits of their claims, Plaintiffs' counsel responded that their case "is by no means risk-free" (#103 p. 19). In order to discuss the likelihood of success on the merits, each claim must be separately addressed. Plaintiffs have taken the position that at some point before
As a preliminary matter, the hurdle of class certification poses a significant risk because if class certification were denied, the value of each individual plaintiff's case would be reduced to a point such that litigation would be infeasible. In their motion filed before the proposed settlement agreement, Plaintiffs sought to certify the Class and Subclass pursuant to Rules 23(a), (b)(2), and (b)(3) (#77, p. 1). As a prerequisite, a proposed class must be 1) so numerous that joinder of all members is impracticable; 2) there are questions of law or fact common to the class; 3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and 4) the representative parties will fairly and adequately protect the interests of the class. Rule (b)(2) class actions may be maintained if the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole. Rule (b)(3) class actions may be maintained if the court finds that the questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.
BANA notes that it would aggressively contest class certification on the grounds that 1) there were large factual variations surrounding individual borrowers' circumstances; 2) that the plaintiffs would have difficulty demonstrating actual damages as BANA had already begun to voluntarily credit the missing payments, supplying its own funds to make those payments; and 3) BANA had initiated other voluntary steps, including suspending credit reporting and the cessation of late fees and defaults (#100, p. 9). Further, BANA notes that
(#116, p. 7). These objections are, to a limited degree, valid, but in this court's opinion, not so strong that they cannot be overcome. Regardless, as class certification has not yet been fully litigated, this opinion, which analyzes the sufficiency of the settlement agreement, will proceed assuming that the class is certified.
Regarding the breach of contract and unjust enrichment claims, class counsel noted that they could prevail on only one of those two causes of action because the legal underpinnings of these two were mutually exclusive. After lengthy questioning from the bench, class counsel grudgingly estimated the likelihood of prevailing on the breach of contract or unjust enrichment claim to be around 50% (Transcript of Final Fairness Hearing, 61:13-62:5 (hereinafter "Tr.")). At the hearing, BANA concurred with Plaintiffs' estimate of success (Tr. 76:16-18; 82:19-21). Later, in its response to this court's post-hearing questions, BANA estimated that Plaintiffs' probability of prevailing on the breach of contract claim to be 25% and on the unjust enrichment claim to be 30% (#116, p. 8), but does not fully describe whether this includes an estimate for the probability of certification. To support their lower estimate, BANA noted that it had fairly solid legal defenses for this claim. Regarding breach of contract, BANA noted that it was in fact TBW's duty to forward the payments to BANA (#100, p. 9), that no actual contract existed between BANA and the borrower-plaintiffs, and thus, they had no legal duty to compensate them for any payments made (Tr. 83:24-84:1; #116, p. 8). Similarly, in regard to the unjust enrichment claim, BANA would argue that it never received the misdirected payments; rather, since the FDIC seized the lockbox bank, the funds were either misappropriated by TBW, or were in the possession of the FDIC. (Tr. 77:1-13; #116 p. 8).
In contrast, Plaintiffs uprated their estimate of prevailing on the breach of contract claim to 75%, assuming that class certification will be approved (#117, p. 5). Similarly, counsel for excluded party Randall emphasized BANA's promises to Plaintiffs and Class Members when he argued the following:
(Tr. 127:7-128:1).
In commenting for the record, the court also noted that jurors in this court are "extremely conservative jurors", averse to awarding large verdicts (Tr. 66:23-69:14) ("[Y]our comment about likelihood of success also ties into the success of getting a
Thus, after carefully considering the arguments from counsel and this court's prior experience, this opinion adopts an estimate of the chance of Plaintiffs prevailing to be 75%.
The probability of success must be gauged against the value of each outcome to create an expected value or range of expected values. Regarding the equitable relief of crediting the mortgage accounts, Plaintiffs have estimated that the value of crediting the mortgage accounts to be between $7.5 and $15 million (Tr. 19:5-9). Defendant did not dispute this range (#115, p. 5). As the court could not find on the record a mathematical rationale for this number, this court has conducted its own rough estimate. Presuming that the facts claimed by the named plaintiffs are in fact representative of the class, which they should be, the value of each class member's monthly mortgage payment would range approximately between $500 (plaintiff Frock, #63 ¶ 6) and $1,200 (plaintiffs Vought, #63 ¶ 5). There are 14,868 class members in this case. Thus, the estimated range of benefit for crediting each Class Member's account is between $7.5 million and $18 million, thereby comporting with the estimate provided by Plaintiffs.
The value of crediting or refunding late fees similarly requires an estimate by the court. BANA attested at the final fairness hearing that the amount of late fees that would be either waived or refunded to approximately $3 million, without providing any mathematical reasoning (Tr. 79:15-17). Defendant's counsel also explained that this was the first time that Plaintiffs were informed of this number, and Plaintiffs did not contest this number. However, BANA also attested that 1) they "did not assess any late fees on the accounts during the 60-day period beginning on the effective date of transfer of the servicing. Any late fees were assessed after the 60-day period and only because BANA had not received confirmation concerning which borrowers' payments had been received by TBW," (#116, p. 9); that 2) that BANA did not receive the late fee funds in "most instances" (#116, p. 8); and that 3) "approximately 58% of Class Member accounts have" received the relief of waiving or refunding unpaid late charges as of BANA's filing on July 25, 2012" (#116, p. 12). Either late fees were predominantly not assessed and accordingly were not waived or refunded, or late fees were predominantly assessed and thus
The value of issuing IRS Form 1098 to class members similarly requires an estimate by the court as no estimate was provided by the parties. Based on counsel's representations, it appears that the 1098s were issued to settlement class members in the tax year 2011. The methodology to derive an estimate is of greater difficulty and uncertainty than the previous two forms of relief as there are numerous assumptions that do not apply equally to all class members. First, an IRS Form 1098 will only have any value to those settlement class members who itemized their deductions for tax year 2011. For those individuals who do itemize, they will have varying impacts on their final tax liability. For instance, an individual who is in the 35% marginal tax bracket will benefit more significantly than an individual who is in the 15% marginal tax bracket. However, setting aside the inherent guesswork in estimating the value to the class, this court will assume, based on an aggregate analysis of 2005 tax year returns, that 35% of the settlement class itemized their deductions in 2011.
Finally, based on this court's understanding of the party's arguments, neither party has suggested that a legally supportable judgment awarding partial liability on these missed payments is viable. Based on Defendant's affirmative defenses, the class members would be entitled to either full recovery or no recovery. Therefore, the range of expected values to credit class member's uncredited payments is between $5.625 million (75% chance at $7.5 million) and $11.25 million (75% chance at $15 million), given a 25% chance that the jury will find for BANA, with zero recovery. For late fees, the expected value is $1.125 million (75% of $1.5 million). Last, for the IRS Form 1098, $439,000. The total expected value to the class for the equitable relief provided after a trial is therefore between $7.2 million to $12.8 million, the variance arising solely from the uncertainty over the mean value of the class's mortgage payment.
Plaintiffs have taken the position that regarding the breach of contract claim, the dollar range of recovery on the contract-based claim, excluding the value of the remedial relief, is $3,717,000, $1,486,800, and $0 (high, medium, and low.) The estimated likelihood of these recoveries is 20%, 20%, and 60%, respectively (#117, p. 4). Plaintiffs did not provide any rationale for these valuations in their Response on July 25, 2012. Further, as they do not account for the probability of prevailing, but rather are estimates only of the award assuming that they prevail, the analysis for these numbers must also take into account a 50% chance of prevailing in order to be consistent both with counsel's testimony at the final fairness hearing as well as with BANA's estimate. Plaintiffs' expected value for the monetary relief therefore comes to $520,380.
As discussed above, BANA's estimates of recovery under RESPA, provided that Plaintiffs prevail, are 10% at $500,000; 40% at $266,000; and 50% at $100,000. Both Plaintiffs and Defendant agree that the primary defense to the RESPA claim would be that many of class members' letters did not qualify as statutory RESPA
Plaintiffs' position is that the probability of success on this claim is 75%, with a probability of a full recovery of $500,000 to be 25%; 20% at $148,680, and 55% at $0 (#117, pp. 4, 5) for an expected value of $116,052.
Accordingly, the net expected value of continued litigation, estimated by counsel, ranges between $7.3 million (lower bound for the equitable relief, $7.2 million plus BANA's estimate of damages, limited to $103,200 as per their argument) and $13.4 million (upper bound for equitable relief plus Plaintiffs' estimate of damages from the breach of contract, $520,380, plus Plaintiff's estimate of damages from the RESPA, $116,052).
With a settlement, the outcomes are guaranteed; the probabilities of both injunctive and monetary relief are pegged at 100%. The expected value of the injunctive relief is therefore the full value of the agreed-upon concessions as estimated by counsel and discussed above, $7.5 to $15 million.
As for the monetary relief, a theoretical calculation of "potential value" may be made. However, given that such a prescriptive analysis falls far from the observed number of claims actually filed, and given that there is no cy pres residual in the settlement agreement, it is more practical to examine the monetary amount that would actually be paid rather than a hypothetical value that represents no actual value to the class.
The first type of monetary relief is a $50 payment for class members who paid TBW a mortgage payment but did not receive credit for it as of December 1, 2011. The agreement caps this form of relief at $500,000. However, as of July 23, 2012, which is after the court-mandated deadline, the administrator only received 266 claims for this type of relief. The second type is $75 for class members who reported an adverse effect on their ability to obtain, extend, or continue credit. Of this type, 81 claims were received from class members and 217 claims for subclass members. Finally, the last type is $25 for members who itemized deductions in 2009. Of this type, 25 claims were received from class members and 93 from subclass members. Accordingly, out of the $500,000 maximum liability (for the first type only), under the terms of the settlement agreement, BANA would be obligated to provide $38,600 in monetary relief to the class.
Therefore, the total actual value of the settlement to the class is approximately $7.5 to $15 million. This range is not substantially different from the net expected value of continued litigation, with an estimated 75% chance of plaintiffs prevailing, as discussed above. Discounting the future value of continued litigation to the present value is mostly irrelevant since the vast bulk of the calculated value is in injunctive relief, and as of May 2012, BANA claimed that they had credited at least 81% of class members. As for calculating the future value of the monetary
Beyond the straightforward balancing calculation, there are other circumstances that raise concern regarding the strength of Plaintiffs' case. First, it appears that all injunctive relief will be provided to all individuals who made payments that were not credited by BANA. Even individuals who exclude themselves from the proposed settlement will receive all injunctive benefits, including crediting of the uncredited payments, reversal of late fees, the issuance of a new form 1098 in tax year 2011, and credit reporting corrections (Agreement § 3.01; #116 p. 1). In other words, the only difference between an individual who opts out of the proposed settlement and an individual who does not opt out is that class members who stay with the default have the potential to recover up to $150.00 in monetary relief and will receive the letter describing the missing payment issue and subsequent crediting of accounts (#116 p. 1). This seems like an odd result if BANA believed that they have no obligation to take these steps independent of this proposed settlement. Why unilaterally provide a remedy that, on its face, appears to admit liability, if not obligated to do so? The parties assert that processing all the class members in a block and not selectively crediting those who have not opted out is simply more efficient, and that the time cost required to not credit those who exclude themselves outweighs the cost of applying the credit. This may be true. But even though the proposed settlement is not final, BANA has also declared that it has already provided the injunctive relief to a majority of the potential class members (again, 81% as of late May, 2012). This also seems strange considering that the proposed settlement agreement is neither final nor binding on the parties.
Our sister court, in considering whether AT & T, as a defendant in a class action, would have stopped charging certain contested taxes but for a settlement agreement in that case, wrote:
In re AT & T Mobility Wireless Data Services Sales Tax Litigation, 789 F.Supp.2d 935, 960 (N.D.Ill.2011). Certainly, if BANA were to have credited the accounts regardless of the settlement (or for that matter, the suit), that remedy should not be considered part of the benefit for forfeiting the right to sue. Analogously, but less on all fours, the Supreme Court recently held that attorney fees may not be awarded to the prevailing party under the catalyst theory if that party "failed to secure a judgment on the merits or a court-ordered consent decree, but has
However, this perspective should also be tempered. For example, under the Federal Rules of Evidence, evidence of remedial measures is not admissible to prove negligence or culpable conduct. Fed.R.Evid. 407. The primary reason is to "not discourage[e] them from taking[] steps in furtherance of added safety." Id., advisory committee's note. Similarly, to disincentivize BANA from taking actions for non-litigation-related reasons, such as to improve customer relations or to take advantage of beneficial tax timing, would be unfair. Regardless, the fact that BANA not only voluntarily and unilaterally credited mortgagees before it was required to, but also credited those individuals who opted out, suggests that it tacitly recognizes, even if it will not admit as much, that its position is not as strong as it lets on.
This court is also concerned that the settlement agreement has no terms directing that unclaimed funds be distributed in some fashion. Termed, variously, a "cy pres remedy" or "fluid recovery", "the reason for appealing to cy pres is to prevent the defendant from walking away from the litigation scot-free because of the infeasibility of distributing the proceeds of the settlement." Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 784 (7th Cir.2004). In Mirfasihi, the Seventh Circuit reversed an approval of a settlement agreement because the agreement included, among other questionable features, "the reversion of unclaimed refunds to the putative wrongdoer." Id. at 785. Indeed, "[a] reversion provision might encourage a more generous settlement offer." Id. Recovery of $25, $50, or $75 for months of trouble, conditioned on having a written letter and tax forms from three years ago hardly seems generous. Here, the bench went so far as to specifically question Defendant's counsel on this issue. In response to the suggestion that the unclaimed residual be distributed to a nationwide pro bono legal aid group assisting in mortgages, Mr. Russell stated that "it's hard to see how that is really something that the class members themselves would be asking for" (Tr. 146:5-7). And in response to the court's follow-up question about distributing the residual among the class members who actually filed claims, Mr. Russell intimated that "[n]ot to be cynical about this; but often that's done in order to, you know, raise the number so that you can pay attorneys' fees. And we didn't do that in this case." (Tr. 146:12-15). There is also the concern that were the full capped value to be split among all the claimants, that each would receive a windfall (although $733 per claimant does not strike the court as grossly unjust.)
Accordingly, as the strength of Plaintiffs' claim is high and the expected value of continued litigation very close to the actual value of the settlement, this factor weighs neither for nor against approving the settlement.
The second factor that must be considered is the likely complexity, length and expense of continued litigation. Obviously, if this court approves the proposed agreement, the present lawsuit would end and class members would realize immediate benefits as a result. This realization could also be delayed if this decision is challenged on appeal, however unlikely. Alternatively, it is nearly guaranteed that if this settlement is not approved that protracted and costly litigation would ensue. For instance, at the time the parties requested a stay to work towards a settlement, Plaintiffs had filed a Motion to Certify a Class, Appoint Class Representatives, and Appoint Class Counsel (#77). Defendant has asserted that they would vigorously oppose the certification of the proposed class, and any decision would inevitably be appealed. If the class were certified, further discovery would be required and dispositive motions would be filed, requiring lengthy work by both parties and the bench. In addition, the parties have estimated that a trial in this case would require at least three weeks. After a verdict at trial, it is likely that there would be post-trial motion practice and appeals. Overall, the significant complexity of the issues this case presents, the increased length of time that would be necessary to resolve this case by continued litigation, and the corresponding dramatic increase in costs weigh in favor of approving the proposed settlement.
The third factor to consider is the amount of opposition to a proposed settlement among affected parties. As of the deadline for exclusion and objections, seventeen class members have requested to be excluded from the proposed settlement. This is a scant 0.11% of the class. Additionally, only three members of the Settlement Class filed written objections to the proposed settlement (#105, #106, #113), which is 0.02% of the class. In total, between class members who either requested
The court was greatly concerned when it received an unsolicited letter directly from named plaintiff Roger Frock (#108) on June 18, 2012. His correspondence stated, in pertinent part:
In response, this court ordered Plaintiff Frock's counsel to respond to the issues raised by the letter and establish whether counsel even had authority to enter into a binding settlement (Text Order of June 18, 2012). On June 20, 2012, Eric Holland, counsel for plaintiff Frock, submitted a declaration responding to the order. Among several other asseverations, Mr. Holland indicated that "Mr. Frock confirmed that he continues to agree with and support the settlement, regarding it as fair, adequate and reasonable to him and the class." (#109 ¶ 7). Barely one week later, Plaintiff Frock sent a second letter directly to the court (#112). The entire substance of that correspondence is reproduced below:
Dear Honorable Judge Michael McCuskey:
Notably, several, if not all, of Plaintiff Frock's concerns had already been addressed in the settlement agreement filed with this court on January 5, 2012. Paragraph 2.28 of the agreement requires that "Defendant further agrees that the incentive award payment to Plaintiff Frock will not be applied to reduce the outstanding balance of his mortgage, and Plaintiff Frock agrees to cooperate in providing Defendant with a deed in lieu of foreclosure and possession of the subject property securing his Loan." Although there is no direct evidence of untoward behavior, and although this court is loath to pry into the sausage-making process of drafting settlement agreements, Frock's sudden change of heart raises a suspicious judicial eyebrow.
While many of the opt-out letters were pro forma, this court received a letter requesting exclusion from James and Barbara De Poppe on April 20, 2012. Their letter is instructive. The relevant portions of their letter are reproduced here for context:
On May 10, 2012, Risenar and Bagley filed a joint Objection to Settlement Agreement (#91). These objectors are named plaintiffs in a case pending before the United States District Court for the Western District of Oklahoma — a case based on the same underlying facts as the case before this court. The initial complaint filed by objectors was dismissed in its entirety and at this point, their second amended complaint has been reduced to one count after dismissal of the remaining counts by the district court. The remaining count in objector's case is a claim against BAC Home Loans Servicing, LP, for an alleged violation of the Fair Credit Reporting Act ("FCRA"). At this point, there has been no discovery conducted in objectors' case. Objectors argue that the "amount of money the class members will receive is an absolute insult as compared to the totality of the damages the class has sustained." Factually, the situation that Risenar and Bagley describe is similar to that experienced by other parties who have filed documents with this court. They made a payment to TBW that was not credited by Defendant, and following this uncredited payment, they "received dunning notices and threats of foreclosure."
On May 30, 2012, Kenneth and Gayla Conway filed an Objection to Settlement Agreement (#105). In their objection, the Conways explained the difficulties they encountered in dealing with Defendant relating to the uncredited payment. They explained that they received numerous letters containing threats of foreclosure, which are attached to their objection. Additionally, they explained how they eventually were forced to take an early hardship withdrawal from their 401k account to attempt to avoid foreclosure. In commenting on the fairness of the proposed settlement, they explained:
The aggressive comments by objectors, and, disturbingly, Plaintiff Frock, are troubling. While the quantity of objections is sparse, the force of each is strong enough that the court weighs these objections against approval.
The opinion of competent counsel is another relevant consideration in determining whether a proposed settlement is fair, reasonable and adequate. Synfuel, 463 F.3d at 653. Class counsel submitted declarations describing their qualifications.
Further, "[t]he history of the litigation is a good indication in itself of lack of collusion." Armstrong v. Bd. of Sch. Directors of City of Milwaukee, 471 F.Supp. 800, 811 (E.D.Wis.1979) aff'd, 616 F.2d 305 (7th Cir. 1980) overruled on unrelated grounds by Felzen v. Andreas, 134 F.3d 873 (7th Cir. 1998). In Armstrong, the Seventh Circuit affirmed a motion granting approval of a settlement agreement because "there [was] nothing in the record to suggest any other conclusion and that the fees paid to class counsel, without more, will not support an inference of collusion in view of the district court's express finding that the amounts paid were less than the court would have awarded had the issue been presented." Armstrong, 616 F.2d at 325-26. Because the court is not so certain that the negotiated fees here would have been less than would have been awarded, in light of a complete absence of other evidence of collusion, it weighs this factor neutrally.
The final factor is the stage of proceedings and the amount of discovery completed. Synfuel, 463 F.3d at 653. This aspect of the case considers "how fully the district court and counsel are able to evaluate the merits of plaintiffs' claims." Armstrong, 616 F.2d at 325, overruled on unrelated grounds by Felzen v. Andreas, 134 F.3d 873 (7th Cir.1998). Thus, the inquiry is whether the claims' merits may be adequately evaluated.
Additionally, Plaintiffs' Memorandum in Support of Motion for Final Approval (#103) refers to the Preliminary Expert Report of Thomas A. Tarter, which was included in Plaintiffs' Motion for Class Certification (#78). In that preliminary report, Mr. Tarter explained that "many documents that are routinely produced in residential mortgage lending and loan servicing litigation have not been produced.... The aforementioned documents are important and if produced, in my professional judgment will demonstrate how residential mortgage loan servicing industry practices were violated." (#78 exh. 1, p. 21-22.)
As Motions to Dismiss have already been briefed and ruled on, some preliminary legal claims have been eliminated. See Schulte v. Fifth Third Bank, 805 F.Supp.2d 560, 589 (N.D.Ill.2011) ("[T]he filing of Defendant's motion to dismiss suggests that the parties began the litigation in an adverse posture."). However, this court suspects that if the case were to proceed, both parties would pursue further discovery. Also, summary judgment motions have neither been briefed nor adjudicated. Thus, the merits in this case are far from clear and cannot be compared with one in which the settlement is produced on the eve of trial, where counsel would have been in a better position to negotiate and this court in a better position to rule. Because the inquiry in the "the stage of proceedings" does not focus on the efficiencies resulting from premature adjudication, this factor weighs
This settlement is not egregiously unfair. Compensation would not be paid in coupons, cf. In re Mexico Money Transfer Litig., 267 F.3d 743, 748 (7th Cir.2001). The class members would not suffer a loss from the maladroit deployment of a common fund, in which they might be liable for their own counsel's fees, cf. Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348 (7th Cir.1996). No class went home empty-handed, receiving only "emotional satisfaction," cf. Mirfasihi v. Fleet Mortg. Corp., 356 F.3d 781, 783 (7th Cir.2004). There do not appear to be any misalignment of interests within a single class, cf., Amchem Products, Inc. v. Windsor, 521 U.S. 591, 626, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). There was no evidence to suggest that a reverse auction had occurred, in which "the defendant in a series of class actions picks the most ineffectual class lawyers to negotiate a settlement with in the hope that the district court will approve a weak settlement that will preclude other claims against the defendant." Reynolds v. Beneficial Nat. Bank, 288 F.3d 277, 282 (7th Cir.2002). Surely the expected value of the injunctive relief of continued litigation matches closely with the settlement amount; both give a full remedy. But the likelihood of this outcome also occurring in front of a jury is very high (although surviving appellate review perhaps somewhat less.) Instead, the two primary fairness concerns are "the reversion of unclaimed funds to the putative wrongdoer" and the high multiple of attorneys' fees to the class's monetary recovery. Mirfasihi at 785.
District courts have also been accused of perpetrating the noble lie that while ostensibly protecting the class so as to perpetrate the illusion of fairness, they instead are motivated more by docket-clearing and fear of rebuke by colleagues on the bench as well as future noncooperation from lawyers involved in the deal. See Susan P. Koniak & George M. Cohen, Under Cloak of Settlement, 82 Va. L.Rev. 1051, 1127 (1996). In 1996, a study for the Federal Judicial Center found that about 90% of all the proposed settlements in class actions terminated between 1992 and 1994 in the Eastern District of Pennsylvania, the Southern District of Florida, the Northern District of Illinois, and the Northern District of California were accepted without modification. Thomas E. Willging et al., Empirical Study of Class Actions in Four Federal District Courts: Final Report to the Advisory Committee on Civil Rules 58 (1996). This high rate of approval occurred despite objections to the amount of attorneys' fees and the insufficiency of the award to compensate class members for their losses. Comparably, this court is under no dramatic pressure to clear its docket at this time. Also, as noted at the final fairness hearing, the judge ruling on this motion to approve the settlement likely will not be the one presiding over the trial (Tr. 23-24; 86:21-87:2). Last, district court denials of settlement class actions, while infrequent, are hardly anathema. See, e.g., In re Gen. Motors Corp. Pick-Up Truck Fuel Tank Products Liab. Litig., 55 F.3d 768, 822-23 (3d Cir.1995); In re Ford Motor Co. Bronco II Products Liab. Litig., CIV. A. MDL-991, 1995 WL 222177 (E.D.La. Mar. 15, 1995).
A significant concern is that of the five Synfuel factors, none included an examination
On one hand, the degree of the defendant's risk-averseness, including how much it values closing the book on its mistake by precluding any further lawsuits, is not a part of whether the class was adequately, reasonably, and fairly compensated. Class members had their accounts credited, their late fees reversed, their tax credit retroactively applied. Everything they asked for, they got. Or so argues class counsel. Except that the objectors and excluded individuals who wrote to this court were concerned about getting BANA's attention. One objector was upset because "a corporation like Bank of America is allowed to get so big that the left hand has no clue what the right hand is doing and the hard working American Citizen suffers as the result." And although some class members had their accounts credited within four months, some still have not had their accounts credited, two and a half years later. The comments of objectors and excluded individuals did not ring of gratefulness that their accounts were fixed and that they were receiving between $25 and $150 for their time and effort, but rather disgust at being thrown a pittance. Class counsel argues that those objectors who had suffered substantial negative impact should have excluded themselves. The lack of many objectors must mean (or so the argument goes) that the majority of class members are satisfied with their accounts being returned to the status quo. In fact, they might argue that most of them weren't even injured, as otherwise more of them would have actually filed claims. But excluding themselves defeats the very purpose of a class action. Even if a potential excluded individual could claim consequential damages of a thousand dollars in increased mortgage payments, it would be unlikely to be worth the cost to litigate.
BANA now admits it made a mistake. It didn't acknowledge their error to homeowners early on, maybe because it took some time for the bureaucracy to realize that a mistake had occurred, decide what should be done, and start the remediation process. (This is especially true given that BANA didn't receive the missing payments.) That delay, whether due to lethargy, insouciance, or plain cautiousness, is ultimately what the objectors and excluded individuals seem most angry about. The question is not only whether class action settlements should take into consideration an ostensibly punitive component in the form of higher damages, but more practically, what legal claim or claims, if any, could even support higher damages. Counsel has not discussed those aspects yet, which, at least according to correspondence from class members, it might consider addressing. Besides, this kind of deterrent might properly be the domain of state and federal legislators or regulators, not mass tort law. But see Deposit Guar. Nat. Bank, Jackson, Miss. v. Roper, 445 U.S. 326, 339, 100 S.Ct. 1166, 63 L.Ed.2d 427 (1980) ("The aggregation of individual claims in the context of a classwide suit is an evolutionary response to the existence of injuries unremedied by the regulatory action of government.")
Regardless, high attorneys' fees — that is, a high multiple compared to the monetary
The terms of the settlement, despite the superficially generous $500,000 cap, ended up being a zero-sum framework where the putative attorneys' fees award cannibalized the funds that would otherwise have gone to the class. Presumably, BANA does not care who it pays so long as it maintains its public image and precludes subsequent actions. Other courts have dealt with the problem of overcompensating the claiming class members by capping each individual member's recovery and directing the residual be paid to an alternate cy pres recipient. There might be other solutions.
The combination of a reversionary fund settlement and a clear sailing clause has given other courts reason to pause. Provisions for clear sailing clauses
Int'l Precious Metals Corp. v. Waters, 530 U.S. 1223, 120 S.Ct. 2237, 147 L.Ed.2d 265 (2000). One district court was so disturbed by the combination of these two features it opined that "the presence of [both a reverter clause and a clear sailing clause] in any settlement agreement should present a presumption of unfairness that must be overcome by the proponents of the settlement." Sylvester v. CIGNA Corp., 369 F.Supp.2d 34, 46 (D.Me. 2005) (emphasis in original). In International Precious Metals, Justice O'Connor reluctantly denied certiorari in a challenge to an attorney fee award, noting that because the district court approved the order, petitioners waived any right to challenge the reasonableness of the fee award.
Although this court cannot know for certain how much the class gained (due to BANA's voluntary remediation) or lost (due to unconscious fee-seeking) as a result of class counsel's efforts, it has nonetheless been charged as a fiduciary for the class. In that role, this court finds that the terms of the settlement are neither fair nor adequate to the class members. IT IS THEREFORE ORDERED THAT:
(1) The Motions for Approval (#99 and #101) are DENIED.
(2) Parties are ordered to further mediation with Judge David G. Bernthal.
Additionally, during the final fairness hearing, BANA argued that "[t]here is no promise — there was no representation made by the bank that we would ever credit payments that weren't actually received. So there's no representation out there that we ever — and there's no misrepresentation, in other words — there's no promise made that we would say to you, `Well, you know, if you sent your check somewhere else, we're still going to credit you.' That's just not, not the case. So we think there are real problems with, with the consumer fraud type claims as well." (Tr. 85:3-10). See also (#116 p. 4).
