Seventh Circuit Court of Appeals Commentary : In Their Opinion : Lawyer & Attorney Michael E. Rigney : Kelley Drye & Warren Law Firm

IN RE: TRANS UNION CORPORATION PRIVACY LITIGATION (December 27, 2011)

Over a decade ago, a number of class actions were filed against Trans Union Corp. for violating the Fair Credit Reporting Act. The cases were consolidated and eventually settled for $75 million. Judge Gettleman (N.D. Ill.) entered an order that allowed Trans Union to be reimbursed from the $75 million fund for the settlement of, and the attorneys fees for, a separate Texas state court case. Class counsel appealed, asserting that they should get a portion of the Texas lawyers' fees because they are the ones that created the large fund. The Texas lawyers are not parties in the district court proceedings and have not sought intervention in the district court. Instead, they filed a motion in the Seventh Circuit asking not for intervention but to be added to the appellate docket as an appellee.

In their opinion, Seventh Circuit Judges Posner, Kanne, and Wood granted the motion and added the Texas lawyers as parties to the appeal. The Court viewed the Texas lawyers' position with some skepticism. It believed that they wanted to be heard on appeal so they can defend the district court's decision to let Trans Union pay it out of the $75 million fund. On the other hand, they do not want to be parties and be subject to the district court's scrutiny of its contingent fee agreement or an order of the district court to return some of the fees received. The Texas lawyers clearly have a right that is at risk on this appeal. They therefore have a right to be a party. But, as a party, the district court will have the opportunity -- indeed, the obligation -- to make inquiry into the reasonableness of fees.

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PURCELL v. BANK OF AMERICA (October 3, 2011)

Kristine Purcell brought suit in state court against Bank of America under the Fair Credit Reporting Act and state law. She alleged that the bank reported to credit agencies that she was delinquent in her loan payments, when it knew she was not. The Bank removed the case to federal court and sought judgment as a matter of law on the FCRA claim. It argued that the Act did not provide a private damages claim for their alleged conduct. It also moved to dismiss the state claims with prejudice on preemption grounds. Judge Moody (N.D. Ind.) agreed with the Bank and dismissed the FCRA claim but concluded that the state law claims were not preempted. He dismissed them without prejudice. The Bank appeals.

In their opinion, Seventh Circuit Chief Judge Easterbrook and Judges Bauer and Sykes reversed and remanded. Section 1681t(a) of the Act provides that state law claims are not preempted except as provided in subsection (b). Subsection (b) states that no requirement or prohibition relating to furnishing information to credit agencies may be imposed "under the laws of any State." The district court concluded that "laws" means only statutes, not common law. The Court disagreed. As long ago as 1938, in Erie R. R. v. Tompkins, the Supreme Court held that the word "laws" in the Rules of Decision Act included all sources of law, including the common law. The Court also found support in the Dictionary Act and in Congressional drafting manuals. The Court rejected the district court's reliance on a perceived inconsistency within the Act if "laws" included all common law. In the Court's view, the subject sections were compatible and did not support the district court's conclusion. Therefore, the “laws” reference in FCRA includes the common law and the state law claims are preempted.

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IN RE: TRANS UNION CORP. PRIVACY LITIGATION (January 14, 2011)

A number of Fair Credit Reporting Act class actions against Trans Union were consolidated in the Northern District of Illinois. Lawyers for some of the plaintiffs ("MDL Counsel") agreed with Trans Union in 2006 to settle the case for $40 million (including $20 million cash). Dawn Wheelahan was counsel for another set of plaintiffs. She and counsel for yet a third set of plaintiffs ("Texas Counsel") opposed the settlement and persuaded the district court to reverse its earlier approval of the settlement. A few years later, the case settled for $110 million (including $75 million cash). The settlement agreement capped lawyers' fees at $18.75 million (17% of the settlement amount), which the lawyers asked for. Judge Gettleman (N.D. Ill.) reduced the fees to $10.83 million but then referred the matter to a special master and approved the special master's recommendation of a $13 million award, allocated 63% to MDL counsel, 22% to Wheelahan, and 15% to Texas counsel. Wheelahan appeals.

In their opinion, Judges Posner, Kanne, and Wood modified and remanded. The Court noted that the special master relied on four things in quantifying the amount of his recommended award: a) an academic study that found an average fee award of 17.6-19.5% in settlements between $79-$190 million, b) a group of securities cases (that have higher discovery costs and therefore should allow for higher fees) from which he extrapolated a fee award of 3.8-23.2% in a settlement this size, c) the fact that the settlement contained $35 million in non-cash value (which he viewed as having less value than cash and on which he awarded only a 5% fee), and d) the risk of losing. The Court found that the special master erred in at least three ways. He did not resolve the wide range of fees in the securities cases or quantify a reduction for the reduced cost of discovery. His reduction of the fee award for the non-cash component of the settlement was arbitrary and unwarranted. His analysis of the risk of losing was weak and inconclusive. The Court noted that simply eliminating the discount on the non-cash value brought the fee award back up to $16.5 million. But it ultimately concluded, because of the combination of errors, that the master’s rationale for reducing the $18.75 million originally requested was not persuasive. Turning to the allocation recommendation, the Court stated that the special master gave MDL Counsel full credit for the $40 million component and 50% credit for the additional $70 million component. The master also noted that MDL Counsel's investment in the case was valued at 4.3 times Wheelahan's investment. The Court noted that this ratio is considerably higher than the fee recommendation and ultimately concluded that the special master's allocation recommendations were appropriate. Against the backdrop of an appropriate allocation but an unsupported reduction in total award, the Court turned to Wheelahan's request. It concluded (applying “rough justice”) that she was entitled to her allocation recommended by the master (22%) but that she was entitled to that percentage of the amount originally requested. Therefore, the Court ordered that she be awarded an additional $1.425 million.

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TALLEY v. UNITED STATES DEPARTMENT OF AGRICULTURE (February 12, 2010)

Wayne Talley used to have a loan from the United States Department of Agriculture. Although he repaid it, the Department reported to a credit bureau that he was delinquent. Four times he complained to the credit bureau -- four times the credit bureau investigated -- four times the Department reported that the loan was repaid – four times the credit bureau fixed his credit report. Each time, however, the Department followed up with the another report of delinquency. Tally brought an action under the Fair Credit Reporting Act for damages for the Department's inaccurate reporting. The Department did not deny that it violated the Act but contended that sovereign immunity precluded any monetary relief. The district court awarded $10,000 in compensatory damages and $20,000 in attorney's fees. The Department appeals.

In their opinion, Chief Judge Easterbrook and Judges Rovner and Tinder affirmed. The Court first addressed jurisdictional issues, both at the district court and appellate court level. The Tucker Act has provisions allocating jurisdiction both at the lower court level (between the district court and the Court of Federal Claims) and at the appellate level (between regional circuits and the Federal Circuit). In order to determine the impact of the Tucker Act, the Court fleshed out the specific argument of the Department. On appeal, the Department conceded an argument that it had made at the lower court that the Department was not a "person" under the Act. It argued simply that the Fair Credit Reporting Act did not expressly authorize monetary relief against the United States. The Court concluded, however, that the Tucker Act waived sovereign immunity generally and authorized money damages for a statutory claim. Although that resolved the merits, the Court now had to circle back to see if there was jurisdiction. The Tucker Act provides that the case should be brought in the Court of Federal Claims if the plaintiff seeks in excess of $10,000. The Court concluded that the $20,000 in attorney's fees should be classified as costs under the Fair Credit Reporting Act and not counted toward the $10,000 threshold. Therefore, the district court had jurisdiction. With respect to appellate jurisdiction, the Tucker Act sends a case to the Federal Circuit if jurisdiction in the district court depended "in whole or in part" on the Tucker Act. The Court concluded that, although the Tucker Act could be a basis for jurisdiction, Talley did not invoke it as such. Because he relied on section 1331 and on the Fair Credit Reporting Act's jurisdictional provisions, appellate jurisdiction was present.

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HUKIC v. AURORA LOAN SERVICES (November 20, 2009)

Avdo Hukic took out a mortgage in 1997. The monthly obligation was $1335. The agreement allowed him to pay taxes and insurance directly -- as long as he provided proof of payment to the lender. Through no fault of his own, his April 1998 payment was processed for $200 less than the required amount. Although the lender notified Hukic of the error, he took no steps to rectify it. Instead. Hukic continued to pay the correct amount each month, but the lender always considered him one month in arrears because of the continuing shortage. At about the same time, the lender advised Hukic that it would start to pay the taxes and insurance unless Hukic provided proof of payment. Hukic did not respond. The lender set up an escrow for the payments and advised Hukic of a new monthly payment amount. Hukic continued to pay the original $1335 each month. The lender, now Aurora Loan Services, reported the mortgage to credit agencies as delinquent in November of 1999. In early 2000, Aurora assigned the loan to Ocwen. Ocwen notified Hukic of his default but continued to pay the taxes and insurance. In January of 2001, Hukic's lawyer advised Aurora that he was paying his taxes directly and complained about negative information on credit reports. Hukic filed a multiple-count suit against Aurora and Ocwen. The court dismissed seven counts and granted summary judgment to the defendants on the Fair Credit Reporting Act, breach of contract and tortious interference with prospective economic advantage counts. Hukic appeals.

In their opinion, Judges Bauer, Evans and Williams affirmed. The Court first considered its jurisdiction-and first considered diversity jurisdiction, the basis of the original removal to federal court. The Court pointed out several problems: Aurora was a limited liability company, the citizenship of an L.L.C. is the citizenship of its members, its only member was a federally chartered savings association, the citizenship of a federally chartered savings association was in doubt under the law, a federal statute that clarified an association's citizenship was not enacted until after the date of removal, and the statute clarifying the citizenship question only applied if the association was a party in a lawsuit (instead of, as here, the member of a party). Luckily, the Court was able to bypass those issues because it concluded that the presence of the FCRA claim provided federal question jurisdiction. Since the state law claims arose out of the same nucleus of fact, they were covered by supplemental federal jurisdiction. After rejecting several procedural arguments, the Court addressed the merits. The Court affirmed the summary judgment on the breach of contract, tortious interference and FCRA claims. It concluded that Hukic was in default and that Aurora and Ocwen thus never provided false information to credit agencies. The Court then addressed the dismissal of the defamation claim on statute of limitations grounds. Like the jurisdictional analysis, the Court's analytic path was tortured. It included discussion of the defamation limitations period, the discovery rule, the continuing violation rule and the single publication rule. Concluding that the Illinois Supreme Court would apply neither the single publication rule nor the continuing violation rule to the facts and therefore that Hukic could maintain a claim for defamation for statements made by Aurora within a year of the filing of the suit, the Court nevertheless affirmed the dismissal. Illinois requires that special damages be pled in a defamation per quod case, which this is. Hukic alleged no harm from the reports that are actionable. Finally, the Court affirmed the dismissal of the intentional infliction of emotional distress claim because it did not allege conduct so extreme or outrageous to state a claim under Illinois law.

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MIRFASIHI v. FLEET MORTGAGE (December 30, 2008)

This suit was originally brought years ago on behalf of 1.6 million people whose mortgages were owned by Fleet Mortgage Corporation (“Fleet”). The allegations of the class action complaint are that Fleet shared personal information from the class members’ mortgage files with telemarketers, in violation of the Fair Credit Reporting Act (“FCRA”) and various state laws. The class was divided into a very large class of persons whose information was shared but who purchased nothing as a result (the “non-purchasers”) and a small (~190,000) class of people who did make purchases (the “purchasers”). The court certified the class and approved a settlement in 2002. The settlement provided nothing to the non-purchasers. The Seventh Circuit reversed and remanded, at the request of two intervening objectors. On remand, the court again approved a settlement. Again, the non-purchasers received no direct benefit. The court concluded that their claims were of no value. Fleet was required, in addition to the payment to the purchasers, to make a payment of at least $243,000 to organizations concerned with consumer privacy issues. The Seventh Circuit again reversed on the grounds that the court’s valuation of the non-purchasers’ claims was inadequate. On remand, the court conducted a more thorough survey of the state consumer protection laws and, once again, concluded that the non-purchasers’ claims had no value. The court awarded class counsel $750,000 and objectors’ counsel $18,750 in fees. The objectors appeal.

In their opinion, Judges Bauer, Posner and Williams affirmed. The Court first noted that no member of the non-purchasers class suffered actual harm. Although nineteen states and the District of Columbia allow individual (not class) actions with statutory penalties ranging from $25-$10,000, the parties failed to identify one person who would bring such an action. Although the Court noted that the state law limitations on class actions may not be binding in federal court, it held that the objectors waived any right to raise that issue. The Court also held that the objectors forfeited any claim that FCRA provided a statutory penalty remedy for the non-purchasers, adding, however, that such a claim would be frivolous. Concluding that the non-purchasers’ claims were indeed worthless, the Court approved the $243,000 settlement.

The Court used objectors’ counsel’s request for additional fees to again express its frustration with the inherent conflicts in class actions. (For another recent expression of Judge Posner's frustration, see his opinion in Thorogood here and my summary here.) One of those conflicts resulted in objectors’ counsel exaggerating the value of the non-purchasers’ claims in order to be entitled to an award of fees. Here, objectors’ counsel asked that the $750,00 awarded to class counsel instead be awarded to him. The Court conceded that objectors do frequently assist the class action settlement process, but an award of fees must be balanced by their degree of success. Here, the objectors extended the litigation by years. They improved to some degree the value of the purchasers’ settlement but did not do much to improve the settlement for the non-purchasers. They did not participate constructively in the litigation – in fact, they conducted themselves irresponsibly. The Court approved as “barely justified” the fee awarded below.

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