ROBERTO A. LANGE, District Judge.
The above-named Plaintiffs and Defendants (jointly "the Parties"), on November 4, 2015, have filed a Joint Motion to Lift Stay and for Preliminary Approval of Class Settlement. Doc. 64. At the Parties' request, this Court originally set a hearing to occur on November 20, 2015. Doc. 69. A number of governmental and private parties objected to the proposed class certification and requested that this Court delay consideration of the motion. Docs. 73, 74, 75, 76, 77, 82. This Court postponed the hearing and reset the hearing for December 18, 2015, in an effort to accommodate the Parties, objectors, and intervenors and to allow for fair consideration of the pending motion. Docs. 79, 88. Three days before the December 18 hearing, one of the named Plaintiffs-Christi W. Jones-filed her own objection to Preliminary Approval of Class Settlement through separate counsel and a supporting declaration. Docs. 96, 96-1. Also on December 15, the Parties filed a Notice of Amendments to Stipulation and Agreement of Settlement with two addenda altering the settlement terms in a manner designed to address misgivings that prompted objections from the Federal Trade Commission (FTC) and certain state officials. Docs. 97, 97-1.
On December 18, 2015, this Court conducted a lengthy hearing to consider argument from counsel for Plaintiffs Heldt, Curtis, and Martin; separate counsel for Jones; Defendants' counsel; and counsel for the Intervenors. Doc. 113. This Court lifted the stay it had entered, questioned each counsel to probe factual and legal issues, and ultimately provided some of its thoughts to counsel about the need for additional information to justify any possible order approving a national class and preliminary settlement. Doc. 113. Both before the December 18 hearing and afterwards, this Court has given considerable thought to the pending motion and believes it best to rule on the pending motion as a means of providing written guidance as to what might be necessary to justify grant of class certification and preliminary approval of any settlement.
Plaintiffs filed a Class Action Complaint in this case on July 11, 2013, seeking declaratory, injunctive, and monetary relief against the Defendants. Doc. 1. Plaintiffs alleged that Defendants had charged illegal and usurious interest rates and used deceptive and misleading marketing and loan documents as part of a program to make fast and low-barrier loans to financially weak and desperate people. Doc. 1. Plaintiffs alleged that Defendants charged effective annual percentage rates of between 89.68% and 342.86%. Doc. 1. The four named Plaintiffs—two of whom are from Texas, with the other two from Minnesota and Virginia—alleged a civil conspiracy, violation of usury laws of their home states, and violations of certain of their home state consumer protection laws. Doc. 1. The Plaintiffs sought certification of a national class and subclasses for the three states in which they reside. Doc. 1. Through an Amended Class Action Complaint, Plaintiffs added as a Defendant WS Funding, LLC, a wholly owned subsidiary of CashCall, Inc. Doc. 30.
This is not the first case before this Court involving the Defendants' subprime lending programs. This Court previously has authored two lengthy opinions in a case brought by the FTC against certain of these Defendants and other related parties.
This also is not the first time that this Court has considered legal and factual issues in this case. On March 31, 2014, this Court issued a lengthy Opinion and Order on Pending Motions, which discussed at length the venue selection provision in Plaintiffs' loan agreements selecting Cheyenne River Sioux Tribal Court, the issues of tribal court exhaustion and jurisdiction, and the varying arbitration provisions in the loan agreements.
Defendants initiated a suit in the Cheyenne River Sioux Tribal Court to seek a declaratory judgment on whether there was tribal court jurisdiction over non-Indian borrowers like the Plaintiffs. The parties engaged in discovery, "during which [P]laintiffs have taken various depositions and received nearly 12,000 pages of documents." Doc. 64 at 5. The parties participated in two mediation sessions, one on June 9, and the other on July 14, 2015. Doc. 64 at 5. The parties then reached a Stipulation and Agreement of Settlement ("Settlement Agreement"), which called for dismissal of the tribal court action and the filing of the motion now under consideration. Doc. 64 at 5.
The Settlement Agreement contemplated certification of a national class consisting of:
Doc. 64 at 14; Doc. 64-3 at 10. The proposed national class would include approximately 348,000 individuals from 47 states and the District of Columbia. Doc. 64 at 15-16; Doc. 64-3 at 10. The primary benefits that class members would receive under the proposed Settlement Agreement are:
Given the nature of subprime lending and the Defendants' lending program, many of the loans made by the Defendants proved to be altogether uncollectible. During the hearing, the Parties revealed that approximately 170,000
The Settlement Agreement's 18% interest rate reduction on remaining loans
The Settlement Agreement called for each of the four Plaintiffs to receive a $5,000 payment for their time and trouble in participating in the litigation, subject to this Court's approval. Doc. 64-3 at 13. Plaintiffs' lawyers would receive up to $3.5 million under the Settlement Agreement, subject to this Court's approval. Doc. 64-3 at 13.
The Settlement Agreement had a broad release provision extending to all claims of class members "whether arising under local, state, federal or Indian tribal law, whether by statute, regulation, contract, common law, equity or otherwise, whether known or unknown. . . ." Doc. 64-3 at 14. After objections from the FTC and some state officials, an addendum modified the Settlement Agreement clarifying that the release is not intended to "affect any right of any Settlement Class Member to obtain any benefit in connection with any action by or with a federal or state entity." Doc. 97-1 at 5.
The Settlement Agreement naturally gives class members an opportunity to opt out of the settlement upon providing timely notice of an intent to do so, and Defendants preserved a right to withdraw from the Settlement Agreement for "excessive Opt Outs" under an "Opt-Out Limit" undefined by the Settlement Agreement but apparently negotiated between counsel for the parties. Doc. 64-3 at 21-22. For a borrower to opt out of the proposed settlement class is cumbersome:
Doc. 64-3 at 20-21. For a borrower to object to the proposed settlement 1s even more cumbersome:
Doc. 64-3 at 22-23.
The Settlement Agreement set forth direct mail notice to proposed class members with a Claim Form that each class member must return to qualify for a cash award. Doc. 64-3 at 16-18. If a notice is returned within twenty days of the postmark date with a forwarding address, then the notice would be re-mailed to the new address. Doc. 64-3 at 16. Otherwise Defendants have no responsibility to seek out addresses of proposed class members whose notices are returned undeliverable. Doc. 64-3 at 16. Defendants presumably have records to identify those borrowers who have paid interest on loans above the 18% rate and how much each has paid above that level. Those who do not return claims forms and do not opt out sacrifice any ability to recoup interest paid above 18%, unless through state entity litigation, although they may benefit from clearing of adverse credit report and reformation of their existing loan to an 18% interest rate, if there is an unpaid balance.
The proposed Legal Notice to proposed class members, whether intentionally or unintentionally, has aspects that may stifle cash claims. The boldface capital letters on the first page of the Legal Notice advises:
The long-form notice provision provides an estimate "that settlement payments will be between $15 and $100, but could be more. . . ." Doc. 64-3 at 66. Class members have a greater incentive to respond if the reward for responding appears greater. The minimum interest refund is set to be $15, which is a curious number as it would take 466,666 claimants to receive $15 to equal $7 million, and there reportedly are just 170,000 or so class members who paid interest in excess of 18% on the loans.
Of course, the reasonableness of the $7 million amount of the cash payment fund for interest over 18% for a program in which Defendants collected $64 million of interest over 18% hinges on the solvency of the Defendants. The Parties explained that many of the Defendants now are defunct and that the remaining Defendant CashCall, Inc. has depleted resources through settlements with state attorneys general and may well not survive this year as a consequence of ongoing litigation including an enforcement action brought by the Consumer Protection Safety Bureau. However, no financial information on the Defendants has been filed.
The proposed order that the Parties desire to be entered would enjoin all parallel litigation. Doc. 64-5 at 8-9. The Intervenors report that there are class action suits pending in at least Florida, Georgia, North Carolina, Kentucky, Illinois, and Wisconsin, although none seek certification of a nationwide class. The nature and extent of all parallel actions is not clear in this record.
Under Rule 23(e), the settlement of a class action requires court approval, which may issue "only after a hearing and on finding that [the settlement] is fair, reasonable, and adequate." Fed. R. Civ. P. 23(e)(2). Review of a proposed class action settlement generally proceeds in two stages. Fed. Jud. Ctr.,
"At the preliminary approval stage, the `fair, reasonable, and adequate' standard is lowered, with emphasis only on whether the settlement is within the range of possible approval due to an absence of any glaring substantive or procedural deficiencies."
The question of whether a settlement agreement is substantively deficient focuses on the terms of the agreement itself. "The starting place for understanding the substantive requirements for preliminary approval is in reviewing the substantive requirements for final approval."
Preliminarily, it appears that the class Plaintiffs have a strong case against the Defendants for charging a usurious interest rate and that the Defendants ought to be capped at an 18% interest rate. Defendants wrote in their own loan agreements that Cheyenne River Sioux Tribe law governed and the Tribe's Law and Order Code reportedly has an 18% cap on loans above $100. Tribal law likely does not apply to non-Indian borrowers in a program like this anyway, which opens the way for argument to apply usury caps from the borrowers' home states. However, some 62% of the potential class members confront arbitration clauses that thus far courts have enforced, while the remaining approximately 38% of the proposed class members have loan agreements with arbitration clauses that likely cannot be enforced for reasons this Court addressed in a prior Opinion and Order.
This Court cannot fully evaluate Defendants' financial conditions. The complexity and expense of further litigation appears great and reportedly could exhaust what remains of the assets of the possibly only remaining solvent Defendant, CashCall, Inc. The amount of opposition to the settlement at this point is substantial including one of the four named Plaintiffs, although the addenda eliminated the opposition of the FTC and at least some state officials to the Settlement Agreement. More information is necessary to better evaluate these factors.
Parties seeking to certify a class action under the Federal Rules of Civil Procedure must meet two sets of requirements. First, the parties must satisfy the four threshold requirements set forth in Rule 23(a). Fed. R. Civ. P. 23. Second, the parties must demonstrate that the case fits within one of the categories of Rule 23(b).
Courts also have recognized two "implicit" requirements that must be satisfied before a class is certified: the class description must be sufficiently definite and the class representative must be a member of the class.
Rule 23(a) provides:
Fed. R. Civ. P. 23(a). The prerequisites of Rule 23(a) are referred to as numerosity, commonality, typicality, and adequacy of representation. District courts must undertake a "rigorous analysis" to ensure that all the requirements of Rule 23(a) have been met.
Although referred to as the "numerosity" requirement, the central focus of Rule 23(a)(1) is the impracticability of joinder.
Here, the Parties contend that the numerosity requirement is met because the Plaintiffs' allegations "implicate the approximately 384,278 loans that Western Sky made between 2010 and 2013, and that the proposed nationwide class settlement would encompass each of the approximately 348,000 borrowers of those loans." Doc. 64 at 15-16. The Intervenors do not make any argument concerning the numerosity requirement and indeed acknowledge that class action litigation is appropriate albeit on a state-by-state basis in their view.
Rule 23(a)(2) is satisfied if there are "questions of law or fact common to the class." Fed. R. Civ. P. 23(a)(2). For purposes of the Rule, "[e]ven a single [common] question will do."
The Parties assert that Rule 23(a)(2) is satisfied because the members of the class share a common factual circumstance of having obtained loans that were originated, serviced, and collected in a uniform manner according to policy and procedures implemented by defendants on a nationwide basis. Doc. 64 at 16. The Intervenors argue that there is an absence of commonality because the usury caps vary from state-to-state and are difficult to determine in certain states. Doc. 93 at 31. The Intervenors also argue that the fact that some state attorneys general have settled with Defendants separately to benefit borrowers within those states defeats commonality. The Intervenors in short submit that separate classes ought to be certified in state-by-state-by-state litigation, rather than one national class.
Intervenors' arguments, although not without some merit, do not defeat commonality. Usury rates vary among states and may in some states be a challenge to apply, but they are not indeterminable. An addendum to the Settlement Agreement sets the allowable interest rate on existing loans at no more than 18% or at such lesser rate as allowed by the borrower's home state usury rate. The common issues of law—violation of the usury restriction in the Cheyenne River Sioux Tribe's Law and Order Code and of state usury restrictions—unites the class. The common issues of fact of the loan terms and lending methods and program unite the class. Whether to certify a national class or a system of subclasses for those who have received refunds through state attorneys general actions or for those who are in states with usury rates lower than 18% is an issue on which this Court need not presently rule because preliminary certification is being denied for other reasons. However, there is sufficient commonality to support a national class.
Rule 23(a)(3) requires that the "claims or defenses of the representative parties" be "typical of the claims or defenses of the class." Fed. R. Civ. P. 23(a)(3). "This requirement is generally considered to be satisfied if the claims or defenses of the representatives and the members of the class stem from a single event or are based on the same legal or remedial theory."
The Parties contend that they satisfy the typicality requirement because the representative parties were harmed in a manner similar to the proposed class and because the representative parties have not asserted any claims different from or antagonistic to the proposed class. Doc. 64 at 17. The Intervenors disagree, arguing that because the representative parties are raising claims under the laws of only four states—California, Minnesota, Texas, and Virginia—the claims of the representative parties are not typical of the claims of many absent class members. Doc. 93 at 34. According to the Intervenors, they and other absent class members raise claims under other states' usury and consumer protection laws. Doc. 93 at 34. The Intervenors claim that these laws vary widely in their scope and potential remedies. Doc. 93 at 34.
A mere difference between the damages available to the representative parties and the damages available to the class will not defeat typicality.
Intervenors' arguments against typicality parallel their arguments against commonality. The four named Plaintiffs have claims typical of proposed class members. At least one of those Plaintiffs did not pay interest beyond 18%, while others did pay interest beyond 18% on the loans. Surely if other of the Intervenors somehow were included as lead plaintiffs, some of Intervenors' typicality arguments would dissipate. Intervenors' arguments prompt this Court to ponder subclasses as a means to better administer a possible class action and to consider typicality at some greater depth, but the biggest problem with certifying the class is not typicality.
Rule 23(a)(4) requires that the representative parties "fairly and adequately protect the interests of the class." Fed. R. Civ. P. 23(a)(4). "[T]he purpose of Rule 23(a)(4) is to ensure due process for absent class members. . . ."
The Parties contend that Rule 23(a)(4) is met because the claims of the class representatives do not conflict with the claims of the class and because class counsel has extensive experience in class action litigation and is very familiar with this case. The Intervenors disagree. Doc. 64 at 17-18.
Ruling on adequacy of representation is tricky here because only three of the four named Plaintiffs still support the Settlement Agreement. Christi W. Jones now objects to the Settlement Agreement because she thought loan forgiveness ought to be part of the terms and because she originally was led to believe that it was part of the terms. Doc. 96. She effectively is preemptively opting out, leaving only three named Plaintiffs as potential class representatives.
This Court has misgivings about the reasonableness of the Settlement Agreement. The Parties urge that preliminary approval be granted and that deferral of a determination of reasonableness await responses from class members as part of consideration of final approval. The Parties allude to instances where other judges have preliminarily approved class action settlements containing similar provisions, albeit likely when neither intervenors nor a named plaintiff objected. Both at the hearing on preliminary approval and in this Opinion and Order's recitation of proposed settlement terms and the notice, this Court has signaled its apprehensions about certain aspects of the terms that could suppress monetary claims, of the handling of those borrowers who have received some recoupment of interest through state litigation, and the reasonableness of the amount of the pool for cash claims. Bluntly put, there are signs here that the Plaintiffs' attorneys, who hope to receive a fee of as much as $3.5 million, have not adequately represented the class in the negotiation of the Settlement Agreement or notice form. Indeed, on very short notice, counsel for the Intervenors has presented more detail on litigation against the Defendants and the Defendants' business in what amounts to zealous and highly effective advocacy on behalf of the Intervenors.
It would be ideal to include the Intervenors and their counsel in another round of negotiation to get broader class representation to evaluate whether $7 million is an appropriate settlement fund given the financial standing of the Defendants, to broaden the named class members to implement some means of dealing with class members who already have benefitted monetarily from state litigation, and to modify the notice and claims procedure to maximize likely responses. However, the Intervenors' unrealistic position that no certification of any sort of a national class is appropriate or other intransigence may render that impossible, as might the Parties' willingness to risk what this Court might do upon resubmission of a modified Settlement Agreement addressing all or most of the concerns expressed. Further, time might be short as Defendants remaining assets may be depleted. At any rate, there exists an absence of a showing of adequacy of representation, so the Motion for Preliminary Approval of Class Settlement is denied without prejudice to refiling. Because there may be refiling of another such motion, this Court continues with analysis under Rule 23(b).
To be certified, a proposed class must satisfy Rule 23(a) and fit within one of the three types of class actions defined by Rule 23(b). Fed. R. Civ. P. 23. Here, the Parties contend that the proposed class fits within Rule 23(b)(3). A class must meet two requirements to qualify for certification under Rule 23(b): "Common questions must `predominate over any questions affecting only individual members'; and class resolution must be `superior to other available methods for the fair and efficient adjudication of the controversy.'"
Fed. R. Civ. Pro. 23(b)(3). Because the class in this case is proposed to be certified for settlement purposes, this Court "need not inquire whether the case, if tried, would present intractable management problems" under Rule 23(b)(3)(D).
Intervenors' brief focuses mainly on the predominance requirement. Doc. 93 at 18-37. This requirement "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation."
It is well-settled that variations in state laws may defeat predominance in a nationwide class action.
The general rule that variations in state law destroy predominance in multistate actions is relaxed when the class is being certified for settlement: "Although the Rule 23(b)(3) requirements may be a barrier to certification when the differences in state law are analyzed, one exception to this conclusion is when a settlement class is involved because manageability concerns are not implicated in that setting. Consequently ... courts have been more receptive to certification of multistate settlement classes." Wright et al.,
For the reasons explained herein, it is hereby
ORDERED that the Joint Motion to Lift Stay is granted and that the Joint Motion for Preliminary Approval of Class Settlement, Doc. 64, is denied without prejudice to refiling.