Federal Judge Elaine Bucklo rejected a nationwide class settlement in refund loan suits against tax preparer H&R Block and a lender, issuing her ruling on the April 15 tax filing deadline (Reynolds v. Beneficial National Bank, N.D. Ill., No. 98 C 2178, 4/15/03).

Bucklo, of the U.S. District Court for the Northern District of Illinois, determined that the attorneys representing the settlement plaintiffs--some of whom entered settlement nogotiations even before they has a client--were inadequate representatives for the class. The attorneys' failure to conduct sufficient discovery made it impossible to seriously analyze the case, the judge found.

Due to the inadequate representation and lack of discovery, Bucklo said she could not evaluate whether the settlement was fair. The proposed settlement established a $25 million fund to pay pro rata shares up to a maximum of $15 per class member--$30 for those with more than one loan.

In addition to rejecting the proposed settlement, Bucklo said that the plaintiffs' settlement counsel--who included Francine Schwartz, Howard Prossnitz, and Daniel Harris, all of Chicago--could no longer represent the class. She said she would accept presentations at a May 2 status hearing from other attorneys who want to undertake representation.

Refund Anticipation Loans.

The plaintiffs sued Beneficial National Bank, Beneficial Tax Masters Inc., H&R Block Inc., and Block subsidiaries in April 1998, alleging that they were given the impression they were getting a quick income tax refund, when in fact they were getting a refund anticipation loan (RAL) at a high interest rate without appropriate disclosures. They alleged federal claims for Truth in Lending and Racketeering Influenced and Corrupt Organizations Act violations, along with state claims for consumer fraud and breach of contract.

The case was originally assigned to Judge James B. Zagel. The parties presented the proposed settlement to him in 1999, and he approved it in 2000 after it was amended to allow the $30 payment to those with more than one loan.

The objectors appealed, and the U.S. Court of Appeals for the Seventh Circuit reversed in April 2002 (3 CLASS 279, 5/10/03). Concluding that the principal issue was whether the district court had protected the class from possibly self-serving class counsel, Judge Richard A. Posner found that the court, in approving the settlement, "painted with too broad a brush, substituting intuition for the evidence and careful analysis" needed to evaluate the deal. On remand, the case was sent to Bucklo.

Adequacy of Representation.

Bucklo noted that a class action settlement cannot be approved--even if it can objectively be found to be fair--if the adequacy of representation requirement of Federal Rule of Civil Procedure 23 has not been met. She noted that "once a settlement is agreed upon, counsel, adequate or not, will, as in this case, argue for the fairness of the settlement. The court, therefore, does not have the benefit of the adversarial argument that should enable it to reach an objective conclusion on the fairness of the settlement."

The Seventh Circuit, Bucklo said, wrote that the class representation "was almost certainly inadequate," but remanded the case for further review because, she concluded, it did not have sufficient information. The appeals court noted that Schwartz, Prossnitz, and Harris met over lunch with Burt Rublin, attorney for Beneficial, in 1997, to discuss possible settlements before suit was filed. According to the Seventh Circuit, Rublin suggested a settlement in the $24-$25 million range, though Bucklo said the attorneys who testified at the fairness hearing denied this.

However, Bucklo said, "What is particularly important about the lunch was that counsel for plaintiffs, months before they filed a case, and without in some cases even clients to represent, indicated their interest in an early settlement." She also noted that two of the attorneys had represented plaintiffs in a similar RAL case against Beneficial and another tax return preparer, Jackson Hewitt Inc.

In that case, approved by an Illinois court, the settlement gave Jackson Hewitt a nationwide release of all RAL claims in return for $75,000 in attorneys' fees and a $15 credit toward the cost of future tax preparation service to anyone who sent in a claim form. Notice was published four times in USA Today and the Chicago Sun-Times, and the plaintiffs' counsel agreed not to issue press releases or talk to news media about the settlement. Few claims were made, Bucklo said. Rublin represented Beneficial, and the attorneys held the lunch meeting when all were in Chicago for a hearing in that case, according to Bucklo's opinion.

Discovery Issues.

Bucklo's primary concern was with the minimal nature of discovery conducted in the case. According to the judge:

In this case, settlement counsel never served a single set of interrogatories, or a formal request for documents, and never took a single deposition of an employe of Beneficial, H&R Block, or any of the other released lenders. They obtained some documents from defendants and answers to some questions; there are, however no sworn answers or responses.

In fact, the court noted in a footnote, "The only depositions taken in this case were in response to objections to the settlement."

Bucklo concluded that there was very little informal discovery, and almost none of it was conducted before the parties stated that they had settled the case. There was no sworn or verified discovery, she said.

Bucklo noted one "limited" exception to the lack of discovery--some records kept by Schwartz in which she indicated that she had not received sufficient information about fees and number of RALs, and was unwilling to go forward with the settlement unless she got it. "Various statements from other lawyers in this case confirm that Ms. Schwartz'[s] contemporaneous statements that she did not have the discovery necessary to evaluate the fairness of a settlement proposal were more accurate than the statements made to me in counsels' response to my recent order [for more information on discovery]," Bucklo said.

Value of Claims.

The plaintiffs' settlement attorneys contended that the plaintiffs could prevail on the TILA claims, although the defendants disagreed. Both argued to Bucklo that without proof of actual damages, damages in TILA class actions are capped at $500,000--considerably less than the amount in the settlement.

However, Bucklo noted that the case included both RICO claims and state consumer claims, which could be considerably more valuable. The settlement counsel and the defendants argued that the RICO claims had no value.

Bucklo observed that it was difficult to evaluate the RICO claims in light of the lack of discovery. But, she said, a Pennsylvania appeals court found that many Block customers did not understand the rapid refund program and that the company took advantage of the opportunity to abuse their trust for gain (Basile v. H&R Block Inc.,777 A 2d. 95 (Sup. Ct. Pa. 2001)). This finding, coupled with allegations by the New York City Department of Consumer Affairs in a similar case, led Bucklo to conclude, "If true, the allegations in the New York case and the evidence referred to in Basilewould support plaintiffs' claims of intentional ongoing fraud." With that proof, she said, the plaintiffs might well be able to meet the RICO tests.

She also said that other litigation in Texas and Maryland, as well as the Pennsylvania case, indicated that breach of fiduciary duty claims might be successful, and that liability under TILA might also be sufficient to meet liability under state consumer fraud laws.

Bucklo also rejected an argument that the settlement includes injunctive relief that has a "significant" value. While the settlement does provide for the defendants to issue certain disclosures related to license fees paid to Block, customer fees, and TILA requirements, it does not provide for any type of injunction, put a time limit on these disclosures, provide details of the language or type size, or even prohibit the defendants from making oral statements negating the disclosures.