00-3122, 00-3178, 00-3181, 00-3182, 00-3367, 01-1239, 01-1617, 01-1654, 01-2231, 01-2339, 01-2445, 01-2747, 01-2785, & 01-3545 Cheryl Reynolds, et al. v. Beneficial National Bank, et al.

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“The various objectors to the settlement, primarily intervening or would-be intervening plaintiffs who have claims that the settlement will release, contend that the settlement agreement is the product of a ‘reverse auction,’ the practice whereby the defendant in a series of class actions picks the most ineffectual class lawyers to negotiate a settlement with in the hope that the district court will approve a weak settlement that will preclude other claims against the defendant… The ineffectual lawyers are happy to sell out a class they anyway can’t do much for in exchange for generous attorneys’ fees, and the defendants are happy to pay generous attorneys’ fees since all they care about is the bottom line-the sum of the settlement and the attorneys’ fees- and not the allocation of money between the two categories of expense. The defendants agreed to pay attorneys’ fees in this case, to the three solo practitioners and the law firm that negotiated the settlement, of up to $4.25 million.

“Although there is no proof that the settlement was actually collusive in the reverse-auction sense, the circumstances demanded closer scrutiny than the district judge gave it. He painted with too broad a brush, substituting intuition for the evidence and careful analysis that a case of this magnitude, and a settlement proposal of such questionable antecedents and circumstances, required.

“Moreover, H & R Block appears to have faced substantial exposure in a Texas class action in which it was accused of breach of fiduciary obligations to its customers. The class in that suit was seeking disgorgement of all the fees paid to Block by the banks that made refund anticipation loans through it. The class argued that such a forfeiture was mandatory if Block was found to have violated its fiduciary duties. Disgorgement was also sought of all other fees that Block had received ‘in connection with each RAL transaction’ – that is, the tax-preparation and electronic-filing fees that Block had charged its RAL customers to file their taxes for them – a form of relief that the class claimed was within the trial court’s equitable discretion. The total amount sought could have reached $2 billion. The class had been certified, the case was proceeding in the Texas courts, and the theory of liability and damages could not be dismissed as frivolous; indeed, the case had been set for trial.

“The judgment approving the class action settlement and awarding attorneys’ fees is reversed and the case is remanded to the district court for further proceedings consistent with this opinion. The injunction against the Texas class action must be vacated in light of our disapproval of the settlement.”

Reversed and Remanded.

Appeals from the United States District Court for the Northern District of Illinois, Eastern Division, Zagel, J.