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October 22, 2014

Lofton v. Wells Fargo (2014) 2014 WL 5358364

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The First District holds a trial court has continuing jurisdiction to monitor class action settlements, and to issue injunctive relief to consider whether ethical violations preclude an attorney fee award to class counsel.

Two law firms filed class actions in two courts alleging employees of Wells Fargo Home Mortgage were misclassified as exempt employees.  The law suit filed in Los Angeles Superior Court by Initiative Legal Group (ILF) was decertified as a class action, and ILF re-filed on behalf of 600 individual plaintiffs; the San Francisco action proceeded as a class action.  All cases were coordinated for mediation.  Wells Fargo agreed to create a common fund for the class, and establish a second common fund to resolve the claims of individual ILG clients.

An ILG attorney attended the hearing in San Francisco Superior Court to approve the class settlement.  He remained silent when class counsel told the court the 600 individuals represented by ILG would opt out of the class settlement.   The ILG attorney said its only concern was approval of the class settlement would mean its clients were represented by class counsel, and ILG could not communicate with its clients; the court resolved this issue. 

Contrary to the representations made at the class settlement hearing, ILG assisted its clients in claiming benefits as class members.  Subsequently, ILG sent a letter to its clients and informed them of the second common fund and told them ILG “thought” this fund was for its attorneys’ fees.  ILG offered to pay a nominal amount from the settlement fund to each client to resolve any doubt.  After its client David Maxon objected, ILF increased the payout offer to its clients.  Under either of ILF’s proposals, it stood to collect millions in attorneys’ fees without court oversight.  Maxon filed an action against ILG arguing its actions breached its fiduciary duties

In the San Francisco class action, Maxon requested a temporary restraining order to require ILG deposit the settlement proceeds into a secure escrow account under the control and supervision of the court.  Maxon argued the class action court should review ILG’s claim for attorneys’ fees because judicial approval is required for all attorneys’ fees paid in class actions.

ILG attorney Marc Primo responded that the ILG-filed action pertained to claims that did not overlap with the class action.  The settlement with Wells Fargo was negotiated by ILG to resolve its fee claims, and remaining individual claims.  ILG and Wells Fargo agreed their settlement was contingent upon final approval of the Lofton class settlement, but was not part of the Lofton settlement.

The trial court granted the requested relief, finding ILG engaged in egregious misconduct and bad faith, and counsel for Wells Fargo and the class had turned a blind eye.

The Court of Appeal rejected ILG’s argument the court did not have jurisdiction.  San Francisco Superior Court had exclusive concurrent jurisdiction over the class action and the ILG-filed action, which included equitable powers over attorneys’ fees.  The trial court’s authority and obligation included protecting its decision to approve the settlement, and to ensure ILG did not unduly profit at class members’ expense.

In approving the class action settlement, the trial court retained jurisdiction over all aspects of it, including, under C.C.P. § 664.6, personal and subject matter jurisdiction over the parties and the case.  The Lofton settlement was incomplete because the trial court had been falsely told the ILG clients would opt out of the class settlement.  The court was never advised of a change in this plan, or that the supplemental common fund settlement was primarily for ILG’s attorney’s fees.

ILG attorneys, as officers of the court and under principles of general tort law, owed a duty not to mislead the court and absent class members.

Maxon maintained ILG concocted the theory about an unreleased claim, and offered its clients a nominal amount, only after ILG could not complete a deal with Wells Fargo to recover the entire fund as its fees.

The attorneys’ fees provision of ILG’s contract provided for the greater of one third of the recovery or an hourly fee.  The substantial amount in the supplemental common fund could not be justified by the nominal sum ILG offered its clients, and it contradicted the fee agreement.  ILG told its clients the fee was for claims primarily, if not entirely, resolved in the Lofton settlement.  The class was entitled to the protection of the court to review ILG’s claim for fees in variance with their fee agreement, and in disproportion to the recovery obtained.

The Court of Appeal questioned whether ILG was entitled to any fees.  The actions it filed were duplicative, and did not contribute to the result in the class action.  In determining a reasonable fee a court may consider attorney misconduct and breaches of professional ethics.  Further, the court retained the power to order ILG disgorge some or all of the fees already received

The Court rejected ILG’s argument that a claim for damages was sufficient protection for the class.  Neither the class members nor ILG’s clients should be burdened by a separate civil suit against ILG to protect the settlement funds pending resolution of its potential misconduct.

The Court held ILG’s First Amendment Rights were not a barrier to relief.  A court may limit constitutionally protected commercial speech in class action litigation.  Balancing ILG’s need to communicate with its former clients, against the genuine concern ILG’s further communications could cause substantial harm to the former clients’ interests, the temporary restrictions were appropriate.

Nor did ILG’s temporary restriction from enforcing releases it obtained from its former clients preclude relief.  Faced with serious allegations the court was within its power to maintain the status quo.  Moreover, ILG could request a preliminary injunction prohibiting Maxon from pursuing the other action until resolution of the outstanding class action issues.

The court did not infringe on the privacy rights of ILG’s former clients by requiring ILG to disclose their names and addresses.  Disclosure of contact information in a class action setting rarely poses a serious invasion of privacy, particularly if the information has previously been released.

Mediation confidentiality did not preclude evidence of ILG’s wrongdoing.  Any potential error was harmless because there was substantial admissible evidence, including ILG’s correspondence with its clients, Primo’s declaration, and the record of the settlement approval proceedings in this class action.

The Court would not construe ILG’s correspondence with its clients as a settlement offer to resolve claims based on its misconduct. Moreover, introduction of the correspondence was not precluded by the Evidence Code because it was offered to show imminent harm, not to prove liability.

Comment:  Class actions depend on forthright counsel and court oversight.  Where the system breaks down courts will not hesitate to deprive attorneys remuneration for their efforts, a heavy price to pay for questionable ethics.



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