Kolby v. ARS National Services, 1/25/17, 9C
Plaintiffs filed a class action against ARS for debt collection abuse under the FDCPA, and purported to represent a class of four million people nationwide. In class actions under FDCPA, the named plaintiff can recover $1000 in statutory damages, but the total recovery for absent class members is subject to a cap, the lesser of $500,000 or 1% of defendant’s net worth. ARS said that its net worth was $3.5 million, but that wasn’t verified by plaintiffs’ counsel. The parties stipulated to refer the matter for all purposes to the magistrate judge, who helped the parties reach a settlement. Under the settlement, plaintiffs would each get $1000, the attorneys would get fees of $67,500 (a modest amount in class litigation), and ARS agreed to a cy pres award of $35,000 (1% of $3.5M) to a local veteran’s charity in San Diego. ARS also agreed to an injunction regarding the abusive practice in question, although it adopted a corrected practice shortly after the lawsuit was filed. The parties agreed to conditional certification under FRCP 23(b)(2), meaning class members wouldn’t get notice or be permitted to opt out. An objector appeared and challenged the settlement as not being fair, adequate and reasonable. The magistrate approved the settlement, and objector appealed. Held: Reversed.
First, 9C disagreed with the objector’s argument that a magistrate judge does not have the authority to approve a class settlement unless absent class members have all stipulated to the magistrate judge. This conclusion was based on a common sense and practical reading of 28 U.S.C. 636(c). An amicus curiae filed a brief arguing that 636(c) is unconstitutional as applied to class actions because in federal court each party as an personal right to an Article III judge. The Court refused to reach the due process challenge because a due process violation in this context would impact the preclusive effect of the judgment, and the court was reversing the judgment for other reasons.
Second, the court held that the settlement was not adequate, fair and reasonable. The injunctive relief was worthless because the company had already changed its practice, the injunction was limited in time, and there was no showing that class members would still be contacted by defendant and therefore no showing that that they would benefit from the injunction. Moreover, the class would not receive notice of the settlement or receive damages. Nonetheless, their damage claims were being waived, including their claims under state law and without a showing that state law had a similar cap on damages. Finally, the cy pres award was to go to a local veteran’s organization, with no showing of a geographic nexus to the nationwide class or a nexus between the charity’s activities and protecting consumers from bad debt collection practices.