WEST PALM BEACH, Fla. (Legal Newsline) - Early this year, Howard Bernstein helped direct $1.7 million to 11 charities near his home in Lake Worth, FL -- among them, the Kravis Center for the Performing Arts in West Palm Beach.
His actions received glowing write-ups in the local papers - the kind one cuts out, enshrines between glass and frames in silver. He was appropriately modest about his role.
“This isn’t about me,” he told the Sun Sentinel.
However, in addition to the money sent to charities, Bernstein pocketed $25,000 for his role as lead plaintiff in a class action lawsuit against Chase Bank that settled in 2014.
And the law firm that he founded back in Ohio took in almost $2 million of a $5 million settlement that seems to have provided little relief to class members who never knew about the agreement.
“Where is the social utility in this?” said Richard Painter, the S. Walter Richey Professor of Corporate Law at the University of Minnesota Law School.
“The system is supposed to make the class whole, not enrich law firms.”
Bernstein alleged that Chase improperly allocated his and other Florida cardholders’ payments to their promotional loan balances rather than their credit card purchase balances. The case was heard in circuit court in Palm Beach County.
A study of court records shows Ohio firm Dworken & Bernstein earned $2 million – 40% of the settlement. Out of that amount, $25,000 was given to Bernstein, whose picture is still featured on the firm’s website, though he has retired and is no longer a shareholder.
Add in the $1.7 million that was leftover and designated as cy pres funds to be given to charities, and only $1.3 million remains.
The settlement also called for the establishment of an $850,000 settlement administration fund which, if fully funded, left only $450,000 out of $5 million for class members.
It is unclear if the administration fund was fully funded.
Patrick Perotti, partner at Dworken & Bernstein, said the low payout rate to the class was because of the nature of the suit.
“In a wage-and-hour case, the people it affects are right on top of it,” Perotti said. “They know the instant there is a judgment.
“Most of the members of the class in this case didn’t know there was an award.”
When asked how the case arose, he said Bernstein called him when he discovered something not right about his Chase statement.
“He said ‘Pat, can they do this?’” Perotti said. “I told him they most certainly can’t.”
Perotti added that in search of other cases, the firm scours reports and announcements from the Consumer Financial Protection Bureau, the Federal Trade Commission, and the offices of state attorneys general. And they receive some cases from businesses targeting other businesses.
“We have instances where corporate lawyers come in and ask us to pursue their competitors for wrongdoing,” he said.
“If everyone played by the rules, we wouldn’t need class action cases in the first place.”
The circumstances of this settlement are hardly remarkable, as the firm is not alone in touting its cy pres payouts.
The cozy dealings in class action cases and winning public praise for dishing out leftover money to charities, legal experts say, increasingly constitutes the norm.
The system survives, even thrives, because the exorbitant fees collected by the local heroes go unnoticed, with the spotlight shining on the donations to alma maters, community groups, shelters and hospitals, experts say.
“When a class attorney settles a class action, he or she is not only negotiating class recovery, but is also negotiating his or her own fee,” said Ted Frank, founder of the Center for Class Action Fairness.
“A defendant may be willing to spend a certain amount of money to settle a class action to avoid the expense and risk of litigation, but that money must be divided between the class and their attorneys. Every dollar going to the attorneys does not go to the class, and vice versa.”
Frank cites another recent case in which Facebook settled a suit by establishing a charity run by a Facebook board member - one that the board member was going to create and fund anyway.
“The class received no benefit,” Frank said. “The only expense to Facebook was the $3.2 million fee paid to the class attorneys. If the charitable contribution is one that the defendant was making anyway, the effect on the defendant is one of a change of accounting entries rather than any cost to the defendant or benefit to the class aside from the attorneys' fees. “
CCAF has been fighting back, winning landmark appellate decisions on the question of cy pres dating back to 2011.
Its efforts are starting to rub off on judges. Frank said some federal courts are starting to crack down on such abuses, but they are doing so inconsistently.
“The parties are still trying to get away with the same shenanigans,” he said.
Painter says the trend has become alarming over the past 20 years, and it’s corrupted the very essence of the class action suit.
“Used to be more like the (Volkswagen) case is today where the class was really harmed,” Painter said.
“More and more we’re talking about cases where the loss to the consumer is minimal, as little as a nickel. The consumer, the class, really doesn’t have a dog in the hunt. It’s all about the lawyers.”
Painter said there was nothing illegal about a former partner acting as lead plaintiff in a case that benefited his old firm.
One federal appeals court might have had a different opinion.
The U.S. Court of Appeals for the Seventh Circuit ruled in 2014 that lead plaintiffs in class actions are responsible for monitoring the class lawyers in order to ensure class members - not lawyers - get the best deal possible.
Judge Richard Posner wrote the court’s opinion that struck down a class settlement because the lead plaintiff was the father-in-law of the lead attorney, Paul Weiss.
“Class representatives are, as we noted earlier, fiduciaries of the class members, and fiduciaries are not allowed to have conflicts of interest without the informed consent of their beneficiaries, which was not sought in this case,” Posner wrote.