The Class-Action Gambit

It’s taken a long time in coming, but federal judges are in the process of cleaning up the perennial abuses of the class-action lawsuit business. Many of the law firms specializing in filling such lawsuits clearly contrive to maximize the fees they receive while minimizing the recompense to their thousands of clients. Although not as grotesque as the now-notorious Michael Avenatti, who made his living by filing spurious claims against large corporations, they nonetheless serve their hapless clients poorly while systematically lining their own pockets.

In California, U.S. District Court Judge Lucy Koh recently blocked approval of a $50-million settlement over a customer-data breach at Yahoo, Inc., in which she deemed a request by plaintiff’s’ attorneys for an additional $37.5 million in compensation to be excessive. She also criticized Yahoo for a lack of transparency concerning how many people were affected, as well as their attempt to avoid liability in an unrelated breach.

Another noteworthy case, adjudicated by the U.S. appeals court in Chicago, targeted Subway sandwich shops. It involved a teenage customer who claimed to receive an 11-inch long sandwich instead of the 12 inches the company advertised. Plaintiff’s lawyers sought $520,000 in fees for negotiating an agreement requiring Subway to issue a statement agreeing to “achieve better bread-length uniformity” on its foot-long sandwiches. The court derided the class-action settlement as “utterly worthless,” and ruled such deals amounted to nothing more than a “racket” for lawyers.

In November, 2018, the federal court in Northern California revised its guidelines for proposed class-action cases, giving judges more leeway to reject settlements not sufficiently remunerating the intended beneficiaries. The new rules require parties to provide adequate information as to how the settlements are reached, along with ample evidence the class members are sufficiently rewarded. As stated by Thomas Loeser, an attorney with the plaintiff law firm Hagens Berman Sobol Shapiro of Seattle, “Judges will want a genuine assessment of the value of the case. The new guidelines will make all class settlements better because judges will be equipped to detect marginal cases.”

With the new rules to be instituted, perhaps the abuses of the past will be just that – abuses of the past. For those of you never involved in any such incidents, you may find it unthinkable class-action clients might be so taken advantage of. If you believe this, you should view a framed document, behind glass, impressively mounted on my office wall. The upper section is a paragraph of explanation, wherein a portion of it states:

ATTM SETTLEMENT

“This payment represents your (pro-rata) settlement amount resulting from the resolution of the AT&T Mobility Wireless Data Services Sales Tax Litigation. The funds contained in the check are a refund of your taxes that were covered by the settlement. This settlement is final. Depositing this check does not obligate you to any future product or service.”

At the lower portion is a check from the account “ATTM Settlement,” dated September 20, 2016, payable to me as a member of the class action, in the sum of “Zero Dollars and One Cent.” The amount of fees the attorneys who negotiated this settlement received is not something I know – or care to know. This memento is prominently displayed in my office as a constant reminder those of us who do not take an active role in seeking to redress our grievances will receive what we deserve … as close to nothing as our advisors can arrange.

According to a recent article by Bloomberg reporter Edvard Pettersson, who specializes in high-stakes litigation in the financial, entertainment, and gambling industry, the purported purpose of a class-action lawsuit is to allow a single plaintiff to sue on behalf of a larger group of people harmed by the same action, but unwilling or unable to take the company to court over a relatively small claim. When a suit is elevated from an individual claim to class action, most businesses are loath to going to trial, where they risk losing in a huge jury verdict. It’s for this reason most companies are eager to arrange a settlement with the plaintiffs’ lawyers. In the majority of instances the deals entered into provide a tolerable payment by the companies, favorable compensation for the plaintiffs’ attorneys, but few if any benefits for the people adversely affected. Is it any wonder the courts are finally taking action to more adequately compensate the true victims in these cases?

Despite the encouraging actions by the courts, it’s my belief the individual claimants will not receive the consideration due. The combined influence of the bar associations, the major law firms, and the companies susceptible to being named in such litigation will work together to prevent any real variation in the system as it currently operates. All that will occur will be a plethora of lip service and a host of innocuous modifications of procedures resulting in no substantive changes. In short, it will remain business as usual.

If what I predict proves to be accurate, how can persons impacted in any way by the actions of major companies protect themselves? I have an answer; permit me to offer a pair of testimonials.

In September 2005 an associate and I made an offer to acquire an apartment complex in Indio, Calif. We came to terms with the seller and entered into a purchase agreement, including a provision wherein we accept and honor the existing mortgage loan by making all future payment on it … known as an assumption agreement. The mortgage loan permitted this assumption, though subject to approval by the noteholder, Capmark Services, Inc., a subsidiary of General Motors Acceptance Corp. (GMAC), located in Atlanta, Georgia. After a tentative approval by Capmark, we paid them a $6,000 application fee and anticipated a prompt close of escrow.

In early October Capmark denied our assumption and informed us they intended to retain our application fee. Our response: My associate and I each filed $3,000 small claims actions against them, with both trail dates set for November 24. In early November they phoned to offer $3,000 as a settlement; I said no. A week later they phoned to offer $4,500 as a settlement; again I said no. Three days before the trial date they phoned to announce they were forwarding our full $6,000. Their check arrived November 22 and we cancelled our lawsuits. Obviously they never intended to send a representative from Georgia to argue a losing case before a small claims judge in California.

A second case involved a $550.000 loan I obtained from Deutsche Bank on a San Bernardino apartment. Page 1 of the loan document contained the provision: “The interest rate shall be 5.875 percent per annum.” A clause on page 3 stated: “The amount of the monthly interest shall be calculated on the basis of a 360-day year consisting of twelve 30-day months.” By the latter provision, the annual rate became 5.957 percent. During the 5-year period I held the loan, they enforced the higher rate despite my request they accept the lower rate. Accordingly, I overpaid by $2,944.64. My response: After paying off the loan in September 2015 I filed a small claims suit against Deutsche for the full amount of the overpayment. The trial was held in San Bernardino County where I represented myself. The result: The court awarded me the full amount.

A final word: Copies of the checks from both Capmark and Deutsche are framed and hanging on my office wall, just below the one cent ATTM check. They are my constant reminder we need not permit the massive public corporations to cheat or intimidate us. We will only be taken advantage of if we permit ourselves to be.

Al Jacobs, a professional investor for nearly a half-century, issues weekly financial articles in which he shares his financial knowledge and experience. You may view them on http://www.roadwaytoprosperity.com.

al@beachcomber.news