class action settlement can’t surrender state agency/CFPB’s rights to recover

Consumer Protection Division v. Linton, 2019 WL 1770524, No.
2609 (Md. Ct. Spec. App. Apr. 22, 2019)
The court explains:
The class action settlement at issue
here involves vulnerable people who were poisoned by lead in their homes.
Before they ever saw television ads for Access Funding, LLC (“Access”), they
had the right to receive hundreds of thousands or millions of dollars over time
as damages for their injuries. When they responded to Access’s ad, they
received fraudulent and conflicted financial “advice,” and Access induced them
into agreeing to assign their revenue streams to Access for pennies on the
dollar in cash. Now, as a condition of a settlement meant to redress the fraud,
class members must agree to assign to Access their full rights to restitution,
all in exchange for a four percent lump-sum payment. This includes their rights
to restitution the Consumer Protection Division of the Office of the Maryland
Attorney General (the “Division”) and the United States Consumer Financial
Protection Bureau (the “Bureau”) might recover. The settlement also would
release Access and its affiliates and principals from liability for public
restitution claims.
Even if the court’s role wasn’t to see whether the
settlement was “a good deal,” this didn’t work. 
Although the settlement process was mostly fair, it interfered with the Division’s
and Bureau’s enforcement authority, and thus the approval was reversed.
Between 2013 and 2015, Access obtained judicial approval to
acquire 163 structured settlements from 100 victims, and obtained $33.8 million
in future payment rights (with a present value of approximately $25.5 million)
in exchange for $7.7 million in cash. Judicial approval for transfer of
structured settlement payments is required, and the court has to find that the
transferor “received independent professional advice concerning the proposed
transfer[.]”But an adviser is not “independent” if they are, among other
things, “affiliated with or compensated by the transferee[.]” Access referred its
potential clients to Charles Smith, a lawyer; in petitioning for approval of
the transfers, Access represented that Mr. Smith had provided the transferors
with independent professional advice. “In fact, Access had paid Mr. Smith for
each victim he ‘advised,’ more than $50,000 overall … and practiced law with
Access’s former attorney.”
The Division ultimately sued Access and its related
entities, Access’s executives, and Mr. Smith, alleging violations of the
Maryland Consumer Protection Act (MCPA) by failing to inform the victims that
it was affiliated with Mr. Smith and that Mr. Smith was not an independent
adviser, by converting future rights to payment into cash on grossly unfair
terms, and by misleading victims about their rights under Maryland law. Linton also
sued on behalf of 100 victims who sold their structured settlements, alleging negligence,
misrepresentation, fraud, constructive fraud, and civil conspiracy. The
settling parties proposed a settlement fund of $1.1 million, from which the class’s
attorneys would receive $330,000 in fees. The proposed settlement barred the class
from “receiving any benefits from any lawsuit or arbitration proceeding arising
out of or related to any of the Released Claims,” and compels the Class to
“irrevocably assign and transfer … any recovery based on the equitable
remedies of restitution, disgorgement of profits or damages obtained by [the
CFPB or the Division] for the benefit of each Settlement Class Member.”
Moreover, the settlement releases all of the Class’s claims against the Class
Action Defendants, as well as any claims against certain people involved in Access
(even though none of them was named in the suit).
The parties indicated that there was nothing much other than
a $1 million insurance policy for the class; counsel for Access stated that
Access and its related entities had “no assets” and were “basically insolvent.”
Counsel for Mr. Smith represented that he had only a “few thousand dollars”
other than the assets he held with his wife as tenants by the entireties.  Although one defendant might have had $5
million in assets, class counsel indicated that he had a strong defense to the
conspiracy asserted against him because he had provided legal advice in the
scope of his employment. The court declined to consider the financial resources
of three three executives who were not defendants in the class action, but the
court declined to do so.
In addition, class counsel argued that arbitration
requirements in the structured settlement transfer agreements would require class
members to arbitrate their claims individually and that litigating serial
claims would deplete Access’s declining limits insurance policy, making settlement
in the class’s best interest.  The trial court
ultimately agreed.
Nonetheless, the settlement interfered too much with the
Division and Bureau’s enforcement authority.  It “effectively preempted a major portion of
the pending claims.” Restitution and damages aren’t the same thing, “even if
the process of calculating them might (and often does) lead to the same result.
Damages are, well, damages, and compensate a party for their losses.
Restitution also, but primarily, seeks to prevent bad actors from being
enriched unjustly—an enforcement purpose properly commended to public
authorities, not private plaintiffs.” Requiring the plaintiffs to assign any
recovery from the Division/Bureau right back to the defendants “directly thwarts
the Division’s ability to combat unjust enrichment.”
This isn’t a great result, because Access’s declining-limits
insurance policy (which decreases as litigation costs mount) might be the only
concrete set of assets realistically available to fund a recovery. But the Division
and Bureau have to deal with this sort of question all the time, and the
settlement shouldn’t have included terms that “resolved or interfered with”
their enforcement authority.
A few minor points: the Division asked the court to require
the notice to inform prospective members that the settlement amount was
equivalent to only 4% of each prospective member’s loss. If the purpose of the
notice was objectivity, “language describing the extent of the Class’s
financial compromise would serve that purpose, even if it might dissuade
recipients from agreeing to the settlement.”  However, the majority didn’t resolve whether
the settlement was substantively fair; given what it did hold, the best
approach was to send it back for the parties to negotiate anew.  Still, a 96% discount on the value of claims
was “concern[ing],” as was the depth of the record on the financial fairness of
the settlement and the court’s decision not to consider whether any assets of
the non-defendant executives, who were getting releases from the settlement,
were available to fund the settlement. “The way Access treated its customers,
for its own benefit, provides ample reason to be skeptical of unsupported
representations it might make to the court about its finances. And yet despite
a months-long investigation and subpoena power, the Division could only express
skepticism, and couldn’t yet back it up.”
The dissent would have allowed the settlement and would have
held that releasing/assigning personal rights from public enforcement didn’t
sufficiently interfere with public enforcement authority to be barred. The
Division could still levy civil or criminal penalties.
Notably, a key reason the dissent would have held that the
settlement was substantively fair was the unfairness to which the victims had
already been subjected: they might well have been compelled to go to individual
arbitration rather than to litigate class claims because of the arbitration
provisions in the structured settlement transfer agreements. It’s a powerful
example of the knock-on effects of arbitration provisions in consumer fraud
cases.
The dissent also noted that Access apparently sold the
structured settlement rights, and if the transferees were bona fide purchasers,
the Division might well not be able to reclaim the rights as restitution.

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