Karen Kidd Mar. 25, 2016, 10:10am


NEW YORK (Legal Newsline) – The U.S. Court of Appeals for the Second Circuit's recent decision to deny a low-value class action settlement in a Fair Debt Collection Practices Act case is unusual, a Washington, D.C., attorney says.

In the case, Gallego v. Northland Group, Inc., Jeffrey Gallego filed his complaint against debt collector Northland Group and 25 John Does in the U.S. District Court for the Southern District of New York. Gallego alleged Northland was in violation of the FDCPA because it sent debt collection letters that did not include the name of the person to call back.

Ultimately, the court denied a motion for class certification that was filed jointly with a settlement that would have provided members of the class with 17 cents, had all members taken part. The Second Circuit backed the district court's decision.

"The Gallego decision is unusual in two respects," said Kevin Ranlett, a partner in the D.C. firm Mayer Brown and a specialist in consumer litigation and class actions.

"First, it is rare for a court to dismiss a civil complaint for failure to state a claim upon which relief can be granted without the defendant having gone to the expense of preparing and filing a motion to dismiss.

Secondly, the case was unusual in that the court paid close attention to the terms of the settlement, Ranlett said, adding that judges are starting to scrutinize these agreements more.

"When a class action settles, that means that the plaintiff and defendant have agreed that the class should be certified and that the agreed-upon relief is a fair resolution of the class’s claims," Ranlett said. 

"The court is supposed to scrutinize these agreements carefully to ensure that the class really ought to be certified and that the settlement really is fair and reasonable. But too few courts take that responsibility seriously."

Before Northland even filed its response to the complaint, all parties agreed to a settlement on a class-wide basis. Under terms of the settlement, Northland agreed to establish a $17,500 fund, which amounted to about one percent of the company's net worth, giving $1,000 to Gallego and distributing the rest to class members who filed timely claims. The agreement also capped attorney fees at $35,000.

With a class estimated at 100,000, had all applied, each class member would have received less than 17 cents each.

Both sides then moved for conditional approval of the settlement and certification of the conditional settlement class.

That didn't happen. In Judge Alvin Hellesterin's decision, he denied the joint motion to certify the class, stating it was “neither the superior nor fairer method for litigating the issues in the Complaint.”

The court also dismissed the complaint for lack of subject matter jurisdiction and held that Gallego's claims under the FDCPA were not colorable, meaning there was no federal-question jurisdiction.

Gallego appealed to the U.S. Second Circuit Court of Appeals which, in its Feb. 22 decision, vacated dismissal of Gallego's individual federal claims but affirmed the District Court's denial of class certification.

"While we agree with the district court that Gallego's allegations concerning the failure to include the name of a person to call back do not state a claim under the FDCPA, we disagree that the claim is so insubstantial that it does not even support federal-question jurisdiction," the Second Circuit decision said.

"We further conclude that the district court did not abuse its discretion in denying class certification."

The Second Circuit remanded the case to the District Court, which could dismiss the case for failing to state a claim.

It's not unusual for defendants in putative class action lawsuits to settle rather than fight, even in cases as dubious as Gallego v. Northland, Ranlett said.

"I can’t speculate as to why Northland Group chose to do what it did in this case," he said. "However, as a general matter, defendants targeted by class actions often are compelled to settle claims that are meritless - or even frivolous - because the cost of defending against the litigation, especially in today’s world of e-discovery, far exceeds the costs of settlement."

Defendants in consumer-protection lawsuits often choose "knuckling under to a settlement," because "the other choice – fighting back – is very unattractive," Ranlett said. "The costs of defending these lawsuits are enormous, and growing."

Ranlett referred to the infamous 2005 “pants lawsuit,” Pearson v. Chung, in which a Washington, D.C., dry cleaner chose to fight a lawsuit filed by a customer who demanded $67 million in damages over a lost pair of pants.

"The business fought back and won the case at trial – but still ended up having to close the dry cleaning store," Ranlett said.

While the Second Circuit ruled Gallego did have individual federal claims, an individual lawsuit may be enough pressure to convince a company into a settlement, Ranlett said. However, the even darker truth is that class action lawsuits are not always "a conscious calculation on the part of the plaintiff," he said.

"The simple truth of the matter is that most class actions are lawyer-driven," Ranlett said. "And many plaintiffs’ lawyers are seeking the windfall payday that comes from an award of attorneys’ fees in a class settlement, which is often a sizable fraction of the class recovery.

" That’s why some plaintiffs’ lawyers will file class actions even when there’s little hope that a class will be certified or that class members would even benefit at all."

Which makes the lessons in Gallego all the more instructive, Ranlett said.

"The facts that led to the Gallego decision show that class-action abuse is real," he said.

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