Court Cuts Class-Action Firm’s Fees to $0 after Unveiling Concealed Settlement Scheme

Guest Commentary

by Chelsie Kidd, a 2015 Judge K.K. Legett Fellow at the Washington Legal Foundation and a student at Texas Tech School of Law.

A California Superior Court judge recently turned a class-action law firm’s worst nightmare into reality when she denied the firm over $5 million in attorneys’ fees. In Lofton v. Wells Fargo Home Mortgage, Judge Mary Wiss found that Initiative Legal Group (“ILG”) “attempted to arrogate to itself more than $5 million in class action attorneys’ fees without court approval.”

Source: WikiMedia Commons
Source: WikiMedia Commons

The events leading up to Judge Wiss’ denial of attorneys’ fees began in 2005 when ILG filed a wage-and-hour class action on behalf of home mortgage consultants against Wells Fargo in Mevorah v. Wells Fargo Home Mortgage. Plaintiffs asserted claims for unpaid overtime, meal- and rest-break violations, and waiting-time penalties. Ultimately, ILG failed to obtain class certification in Mevorah. Undeterred, ILG filed numerous additional class-action suits against Wells Fargo, but each action asserted claims that overlapped with those alleged in Mevorah. ILG was “on the verge of filing a new motion for class certification when Wells Fargo agreed to attend mediation.” In early 2011, only after ILG and Wells Fargo reached a claims-made, non-reversionary class settlement,the Lofton action was filed solely for the purpose of seeking court approval of the settlement. ILG encouraged and directed its clients to make claims from the Lofton settlement (even telling some of its clients to send form directly to ILG and not the claims administrator).

The court approved the settlement, which awarded Class Counsel $6,333,333 in attorneys’ fees and $249,278.78 in litigation costs. The settlement defined the Lofton Class as “all persons who, at any time from February 10, 2001 up to and including March 26, 2011, are or were employed by Wells Fargo Bank, N.A.” as home mortgage consultants in the State of California and “classified by Wells as exempt from overtime.” Therefore, all of ILG’s clients were members of the proposed Lofton Class and nearly all of ILG’s clients submitted claims in Lofton. Thus, “given the ILG Clients’ participation in the Lofton Settlement and failure to opt out of Lofton Class, all of the claims in the ILG Actions were extinguished by the Lofton Settlement.”

Even though the court issued a final approval of the settlement, ILG and Wells Fargo continued to negotiate for over a year without the ILG clients’ knowledge, consent, or authorization. The “actual” settlement was reached and ILG sent its clients a letter explaining that ILG would receive more than $5.5 million in attorneys’ fees and costs, and the ILG clients would receive $750 each. The letter justified the $750 award by telling the clients it had brought the following claim:

Wells Fargo[ ] fail[ed] to produce employment records under Labor Code Section 226(b) in Mather et al. v. Wells Fargo Bank, N.A. (‘Mather action’). Arguably, this claim was not released by the Lofton settlement. Labor Code section 226(f) provides for a maximum penalty of $750…Accordingly, we have agreed that by signing the enclosed form, you will receive $750 and our fees will be remaining approximately $5,520,000.

The letter included an enclosed form, “Confidential Individual Release and Acknowledgment,” which provided that in order to receive the $750 the client must sign and agree to the allocation of attorneys’ fees.

After the majority of the ILG clients signed confidential releases, Wells Fargo deposited the agreed-to amounts and the ILG clients received the $750 each, for a total of $431,250. But none of the payments made to the ILG clients or to ILG were disclosed to any court when the class-action lawsuits were dismissed.

ILG thought it had gotten away with its scheme, but one class member, David Maxon, was not happy with the apportionment of the award so he moved to intervene in the Lofton action and sought a temporary restraining order to freeze the unapproved attorneys’ fees. The court granted Mr. Maxon’s motion to intervene and issued a temporary restraining order. The matter eventually came before Judge Wiss and she concluded that the $5,425,500, which ILG claimed it was entitled to as attorneys’ fees, belonged to the Lofton class members. Judge Wiss stated that “if ILG wished to keep any of the funds as attorneys’ fees, it was required to seek Court approval of its purported fee award,” which ILG should have been aware of. Furthermore, Judge Wiss rejected the notion that ILG was entitled to the attorneys’ fees because some ILG Clients “agreed” to the fee allocation. The judge made it clear that “[a]pproval of the ILG’s class action attorneys’ fees was the exclusive province of this Court, not ILG’s clients.”

Additionally, ILG argued that the court could not order the distribution of funds without a trial on the issue and that, due to attorney-client and mediation privileges, ILG could not “defend” itself. Judge Wiss rejected both arguments by stating the obvious—that no trial is necessary because “Courts routinely determine the entitlement to class action attorneys’ fees through motions” and ILG could have defended itself in ways that protected its confidential information. Thus, the court correctly concluded that in the absence of an offer of evidence to support ILG’s claim to attorneys’ fees, the court can only conclude none exists.

This case took the notion of class actions as “lawyer-driven litigation” to a new extreme. It demonstrates the need for robust judicial oversight of the oft-abused class-action device, especially at the settlement stage. In addition, ILG’s manipulative scheme shows that some members of the bar have lost sight of the fact that the judiciary created class actions for the benefit of aggrieved individuals and judicial efficiency, not avaricious attorneys.

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