The Ninth U.S. Circuit Court of Appeals this week overturned a $45 million class action settlement involving the three major credit-reporting agencies. The settlement reportedly would have been the second-largest in a case involving the Fair Credit Reporting Act.

The plaintiffs, individuals who had gone through bankruptcy, sued Equifax Information Services LLC, Experian Information Systems Inc and TransUnion LLC in 2005 and 2006 claiming violations of the FCRA and California law. The complaints alleged the defendants had illegally reported debts after they were discharged, in many cases preventing the debtors from obtaining loans, housing rentals or jobs.

The court said plaintiff's lawyers created an unacceptable conflict of interest by negotiating a deal where their named clients would receive $5,000 apiece as long as they didn’t object to far smaller awards for the other class members.

Judge Ronald Gould, writing for the Ninth Circuit, scolded lawyers at prominent firms Lieff Cabraser and the National Consumer Law Center for knowingly setting up the conflict and failing to alert the court about it.

Because the named plaintiffs stood to make $5,000 by agreeing to the settlement, which promised some $16 million in fees for the lawyers, and as little as $26 if they didn’t, Gould said, “class counsel did not adequately represent the interests of the class.”
   
A settlement on non-monetary relief, under which the defendants agreed to new procedures that would presume the discharge of certain pre-bankruptcy debts, was reached in 2008 and drew no objections. The monetary settlement that was the subject of this week’s ruling was reached in 2009.
   
Under that agreement, the three defendants would have contributed $45 million to a settlement fund. After payment of expenses - including the more than $16 million in attorney fees - and incentive awards, any absent class members claiming actual damages would receive between $150 and $750 each depending on the type of damage they were claiming, while those who submitted claim forms but did not allege actual damages would receive “convenience” payments.

U.S. District Judge David O. Carter of the Central District of California had originally found the settlement to be fair and adequate.

But Gould distinguished the agreement from class-action settlements with incentive awards that the court had approved in the past.

Judge Sam Haddon went further in a concurrence: “Class counsel were singularly committed to doing whatever was expedient to hold together an offer of settlement that might yield, as it did, an allowance of over $16 million in lawyers’ fees.”

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