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February 20, 2005
CAFA flashback: Kamilewicz v. Bank of Boston
One major benefit of the Class Action Fairness Act is that it will require plaintiffs' attorneys in class action suits to receive benefits only equivalent to the actual value provided to the class. This, notwithstanding criticism from the litigation lobby, is clearly pro-consumer, because consumers, rather than lawyers, will be getting the bulk of any nuisance settlements resulting from meritless class actions. A second benefit is that it creates clear federal jurisdiction in nationwide class actions--an issue that was previously a huge problem for corporations sued in state courts. Such corporations couldn't guarantee that a nationwide settlement they reached in one state court would be recognized in another state court. Federal settlements, due to the Constitution's Supremacy Clause, don't have this problem. The infamous Hoffman class action (No. CV-91-1880 (Ala. Cir. Ct. Jan. 24, 1994)) illustrates both of these issues.
In that Alabama case, plaintiffs' attorneys represented a nationwide class against BancBoston over the calculation of interest for escrow accounts. They argued that the benefits to a class member of getting their escrow funds released to them a month earlier was the entire value of the funds--after all, the plaintiff might be able to double his money! As a law review article explains:
Class counsel asked for attorney's fees equaling 33 1/3% of all the money the bank was wrongfully holding in escrow; that is, one-third of all the excessive cushion money. The trick was in characterizing all that money as money recovered by this lawsuit. Had there been no lawsuit, 100% of the excess cushion would have been returned to class members at the time their mortgages were repaid. Therefore, what the lawsuit recovered for each class member was (in addition to the back interest) only the difference between the value of the excess cushion money in the class member's hands today and the value of the money had the bank held it until the mortgage was paid off. The lawsuit and class counsel did not "recover" the excessive cushion money being held in escrow because that money was never lost. All that the class members had lost by the bank's allegedly wrongful acts was the use of that money today and the use of that money in years past.S. Koniak & G. Cohen, Under Cloak of Settlement, 82 Va. L. Rev. 1051, 1063 (1996).
The settlement prohibited BancBoston from objecting to attorneys' fees; the notice sent to the class didn't warn them that their attorneys would seek to use this methodology to calculate fees. Thus, in the resulting fairness hearing, a judge agreed, and awarded funds, to be deducted out of the escrow accounts, based on this exaggerated calculation. The attorneys won up to $8.76 for each of the plaintiffs--and obtained a deduction of 5.32% of each class member's escrow accounts to pay for the attorney fees. Thus an Alabama court dictated that Maine resident Dexter Kamilewicz received a $2.19 credit and a $91.33 debit for attorney's fees in his Florida bank account. Worse, Kamilewicz got sued by his purported attorney when he publicly objected to the ripoff. Unfortunately, the federal courts failed to intervene, notwithstanding an eloquent dissent from Judge Easterbrook in Kamilewicz v. Bank of Boston Corp., 100 F.3d 1348 (7th Cir. 1996). The Vermont Supreme Court wrote:
The Hoffman case is an example of what the former Chief Justice of the Alabama Supreme Court has characterized as a "drive-by" class action. See Mitchell v. H & R Block, Inc., 783 So. 2d 812, 818 (Ala. 2000) (Hooper, C.J., dissenting) (decision shows that Alabama court is "intent upon remaining the poster child for . . . abuse of the judicial system [by] 'drive-by' class certification"); see also L. Mullenix, Abandoning the Federal Class Action Ship: Is There Smoother Sailing for Class Actions in Gulf Waters?, 74 Tul. L. Rev. 1709, 1715 (2000) (prevailing sense among some practitioners is that in Gulf states "judges are more than willing to certify almost anything that walks through the courtroom doors"). For whatever reason, Alabama has been a magnet forum for national class actions, even when Alabama has no connection with the vast majority of the plaintiffs or with the defendants. Class counsel could have filed Hoffman in virtually any state where they could find a willing plaintiff and affirmatively chose Alabama. That choice may have more to say about how the forum treats class counsel than how it treats the interests of class members. See Kahan & Silberman, [The Inadequate Search for "Adequacy" in Class Actions: A Critique of Epstein v. MCA, Inc., 73 N.Y.U. L. Rev. 765, 775 (1998)].State v. Homeside Lending, Inc., 2003 VT 17. The Vermont Supreme Court refused to give full faith and credit to the judgment in Alabama--and thus Bank of Boston found itself subject to yet another suit for the same issues.
Other coverage of Hoffman: M. Shadur, The Unclassy Class Action, 23 No. 2 Litig. 3 (Winter 1997); S. Koniak & G. Cohen, Under Cloak of Settlement, 82 Va. L. Rev. 1051, 1068 (1996); B. Meier, Math of a Class-Action Suit: 'Winning' $2.19 Costs $91.33, N.Y. Times, Nov. 21, 1995, at A1; J. Quinn, Fighting the System, Everywhere, Newsweek, Oct. 2, 1995, at 71.
Posted by Ted Frank at 09:10 AM
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