Seventh Circuit: Yes, ethics do matter

July 8, 2014

Richard PosnerLike the lead character in a television drama, an attorney — the lead class counsel in a putative class-action lawsuit — engineered what the 7th U.S. Circuit Court of Appeals called a “scandalous” class-action settlement in which he represented his father-in-law as a named plaintiff, removed other named plaintiffs drawn from the class who were unsympathetic to the settlement and inserted others more agreeable; and negotiated a hefty on his firm’s $11 million fee that he had arranged with the defendant. (Eubank v. Pella Corp., et al., No. 13-2091, 2014 WL 2444388 (7th Cir. 06/02/14).)

The attorney’s multiple ethical problems read like a movie serial, with one impropriety superimposed on another, leading federal appeals court to hold the settlement unwarranted, reverse the district court’s approval, and remand the case back to the court below. Judge Richard A. Posner delivered a scathing indictment of the defendants.

“[C]lass counsel, un-governed as a practical matter by whether the named plaintiffs or the other members of the class, have an opportunity to maximize their attorney’s fees … at the expense of the class,” Judge Posner reasoned. “From the selfish standpoint of class counsel and the defendant, therefore, the optimal settlement is one modest in overall amount but heavily tilted toward attorney’s fees.”

The appellate panel listed point after point of the class counsel’s malfeasance with the apparent approval of the defendant. Here are a few examples among nearly a dozen:

  • It was improper for the lead class counsel to be the son-in law of the lead class representative, as class representatives are fiduciaries who cannot have such conflicts of interest without the informed consent of the class members, which here was not sought. [The original named plaintiff] and [the defendant] argued that he was the only one of five named plaintiffs to have a conflict of interest. But the four other original class representatives that had opposed the settlement were replaced, selected by the conflicted lead counsel.
  • “[Class counsel] was unfit to represent the class,” concluded the appellate panel. “When class counsel have demonstrated a lack of integrity, a court can have no confidence that they will act as conscientious fiduciaries of the class.”
  • The district court judge was informed of the many objections to the notice sent to class members, but declined to modify it, calling it “fair” and a “neutral communication” from the court. “It was not neutral and did not provide a truthful basis for deciding whether to opt out,” Judge Posner wrote. “[The original named plaintiff] and [the defendant] point out that the notice of the settlement sent to the class provoked few objections. Of course not; it was not intended to; it was incomplete and misleading.”

Perhaps most importantly, the opinion provides a precise picture of the multiple issues that courts must consider when asked to approve a class settlement.

“In sum, almost every danger sign in a class action settlement that our court and other courts have warned district judges to be on the lookout for was present in this case,” Judge Posner emphasized. “Most were not even mentioned by the district judge, and those that were received a brush-off, which resulted only in frustration.”