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Mirfasihi v. Fleet Mortgage — Defense of Class Action Cases

Class Action Settlement Approval of Nationwide Class Action Reversed and Remanded for District Court Failure to Analyze Value of Class Claims Under the State Laws of Each Applicable Jurisdiction Seventh Circuit Holds

On June 19, 2006, the Seventh Circuit Court of Appeals considered for the second time a proposed class action settlement of a nationwide class action against Fleet Mortgage brought under the Truth in Lending Act (TILA), the Fair Credit Reporting Act (FCRA) and various state laws. Mirfasihi v. Fleet Mortgage Corp., ___ F.3d ___, 2006 WL 1667802 (7th Cir. 2006) (“Fleet II”). As explained below, the class action involved two classes: a “telemarketing class,” and an “information-sharing class.” The Seventh Circuit previously reversed district court approval of a proposed settlement of the class action claims because “the district court failed to consider adequately the value of the claims of the so-called ‘information-sharing class’ (a class of consumers whose privacy interests were purportedly intruded upon, but who did not suffer any out-of-pocket damages).” Slip Opn., at 1-2 (citing Mirfasihi v. Fleet Mortgage Corp., 356 F.3d 781 (7th Cir. 2004) (“Fleet I”).

The class action involved claims that Fleet sold mortgage information to third-party telemarketers, and that Fleet “was an active collaborator in drafting the script that the telemarketers used and allowed direct billing of the fees for the telemarketers’ products onto the mortgage bill of its customers, without obtaining pre-approval from customers.” Slip Opn., at 2. The “telemarketing class” consisted of 190,000 people who purchased financial products from the telemarketers; the “information-sharing class” consisted of 1.4 million Fleet borrowers whose information had been sent to telemarketers but who had not purchased any services from them. Id., at 2-3.

The class action settlement approved by the district court in Fleet I provided for payments to the telemarketing class, but the information-sharing class “was left out in the cold and received nothing.” Slip Opn., at 3. (The terms of the class action settlement are detailed in Fleet I and Fleet II; we focus here only on the monetary recovery for each class.) Fleet I reversed the district court’s approval of the class action settlement because “the district court failed to consider with adequate specificity the reasonableness of an entire class receiving a ‘big fat zero’ in the settlement.” Slip Opn., at 4 (citing Fleet I, at 785). “Specifically, the district court did not canvass all potential avenues of recovery to determine whether the information-sharing class’s claims were indeed essentially hopeless (and thus worthless) under the pertinent controlling law.” Slip Opn., at 4.

On remand, a second settlement of the class action was presented for district court approval. The proposal altered the terms of the class action settlement in Fleet I in various ways (including ways that did not impress the Fleet II court, see e.g., Slip Opn., at 6-7) , but it continued to provide nothing for the information-sharing class. Nevertheless, “The district court approved the settlement, holding that valuing the information-sharing class’s claims at zero was fair and reasonable because . . . they suffered no actual damages, and, as a result, probably have no recovery under various states’ consumer protection statutes . . ., and moreover, the claimants faced significant hurdles in obtaining class certification.” Slip Opn., at 4.

While the Seventh Circuit was concerned about certain changes to the class action settlement, it found itself again focusing on the fact that the information-sharing class was to recover nothing: “Our concern remains the proper valuation of the information-sharing class’s claims,” Slip Opn., at 7. In this regard, the Court identified two significant problems with the district court’s analysis. First, the district court reviewed the information-sharing class’s claims under the laws of Illinois, Maryland, Massachusetts and Wisconsin only, even though the class action settlement affected the rights of information-sharing class members in other states, as well. Id., at 7-8. Second, the district court acknowledged that under Massachusetts law, Fleet’s alleged conduct “’create[s] a legal right, the invasion of which, without more, constitutes injury,’ and ‘under circumstances where there has been an invasion of a legally protected interest, but no harm for which actual damages can be awarded . . . the statute provides for the recovery of minimum [statutory] damages’ in the amount of twenty-five dollars.” Id., at 8 (italics added).

Fleet II was concerned, then, that information-sharing class members “may” be entitled to statutory damages under Massachusetts law, and perhaps the laws of other states that were no analyzed by the district court. Slip Opn., at 9 Because a $25 per violation statutory penalty would equate to a $35 million award for the 1.4 million class members of the information-sharing class, the Seventh Circuit believed a more detailed analysis of every applicable jurisdiction was required in order for the district court to conclude that the claims of the information-sharing class were worthless.

Moreover, the choice-of-law issues in nationwide class actions are rarely so uncomplicated that one can delineate clear winning and losing arguments at an early stage in the litigation. . . . And it would seem that the legal uncertainty resulting from the complicated choice-of-law issues in this case should not cut solely against the value of plaintiff’s claims here, but should also be a factor in considering the value of Fleet’s defenses. Slip Opn., at 9-10 (citations omitted).

In reversing and remanding, the Seventh Circuit provided the district court with the following guidance: “a claim analysis under these circumstances would require consideration of (1) the probability of the information-sharing class having grounds of recovery under any applicable law; (2) the probability of such favorable law applying to the entire information-sharing class (rather than differing subsets); and (3) the probability of winning on the merits.” Slip Opn., at 10. The Fleet II opinion is well worth reading.

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