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Fed. R. Civ. P. 23(e) requires court approval of any settlement that effects the dismissal of a class action. Before such a settlement may be approved, a federal district court must determine that a class action settlement is fair, adequate, and reasonable, and not a product of collusion.
Plaintiff consumers filed more than 20 class action lawsuits against defendants, claiming that the bank and the company violated state and federal consumer-finance laws and breached their fiduciary duties by offering tax refund anticipation loans at high interest rates without making full disclosure. Several consumers filed a class action in federal district court that made the same or similar claims and their lawyers negotiated a settlement of that lawsuit. That settlement required defendants to establish a $ 25 million fund that would be used to pay claims submitted by anyone who had taken out a tax refund anticipation loan, a class estimated at 17 million people. The district court approved the settlement with one modification and awarded the consumers' lawyers $ 4.25 million in fees. It also enjoined a lawsuit that had been filed in Texas and denied petitions to intervene that were filed by persons who objected to the settlement. Attorneys representing parties who were not allowed to intervene appealed.
By approving the settlement, did the district judge discharge the judicial duty to protect the members of the class in the class action litigation from lawyers who may place their pecuniary self-interest ahead of that of the class?
At the onset, the court held that the attorneys representing persons who were not allowed to intervene had standing to appeal the trial court's judgment. Ruling on the substantive matter, the court held that the trial court abused its discretion by approving the settlement. According to the court, before a settlement may be approved, the district court must determine that a class action was fair, adequate, and reasonable, and not a product of collusion. In this case, the court held that the trial judge did not give the issue of the settlement’s adequacy the care that it deserved. The court averred that the trial judge should have made a greater effort to quantify the net expected value of continued litigation to the class, since a settlement for less than that value would not be adequate.