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Thursday, July 9, 2009

Class Member Who Fails to Submit Claim Form May Not Sue Class Counsel

This case arises out of an unfortunate situation, but the plaintiff here was on the wrong track, and the Court reached the only proper result. Regardless, this case illustrates one reason why claims made settlements are a bad idea, and neither class representatives nor class counsel should ever agree to them.

In Martorana v. Marlin & Saltzman (July 1, 2009, 2d Dist., Div. 7) (full text available here) the plaintiff was a senior adjuster for Allstate Insurance Company. An overtime class action was filed in 2000 and settled in 2005. The Court preliminarily approved the settlement, and class notice went out. The settlement required class members to file a claim in order to receive any benefit of the settlement.

The plaintiff was a class member and would have received $65,000 if he had filed a claim. Unfortunately, he had been diagnosed with prostate cancer and, perhaps because of his condition, he did not timely file a claim and received nothing.

In 2007, the plaintiff sued Allstate and class counsel, alleging that they should have agreed to a more thorough notice procedure and should have contacted him before the claim filing deadline to find out why he had not filed a claim. Allstate and class counsel demurred. The Court sustained Allstate's demurrer and sustained class counsel's demurrer with leave to amend, reasoning that class counsel could be liable if they had an "active role" in the plaintiff's failure to timely file a claim.

The plaintiff filed a first amended complaint against class counsel, again alleging that they had a duty to negotiate a better class notice mechanism and to contact him individually prior to the claim deadline. He did not allege that class counsel knew that he was sick or had caused him to miss the claim deadline. The court sustained the demurrer without leave, holding that class counsel had duties to the plaintiff as a class member, but that they did not breach any such duty.

The Court of Appeal affirmed. First, the Court held that the plaintiff was collaterally estopped by the orders granting approval from alleging that class counsel should have negotiated a different notice procedure. 
When the trial court granted final approval of the settlement in the action, it necessarily found that the notice procedure agreed upon by the parties complied with the requirements of due process and that the settlement itself was fair, adequate, and reasonable. To the extent that Martorana had any objection to either the settlement or the notice procedure, he had an opportunity to file a written objection with the trial court and to appear at the fairness hearing.
Slip opinion at p. 9. The plaintiff did not timely object and he could not attack the trial court's due process finding in his malpractice action.

Second, the Court held that the plaintiff could not allege that class counsel committed malpractice "based solely on their failure to provide more notice to him than was required by the judicially-approved settlement notice procedure. Based on the allegations in Martorana‟s complaint, such conduct by Class Counsel cannot support a malpractice action as a matter of law." Slip opinion at p. 12.

As in Janik v. Rudy, this is a case that never should have been filed, and there's no question that the Court of Appeal here got it right. Class counsel, whom I respect tremendously, undoubtedly worked hard to do a good job for the class reps and class members and they did not deserve this case as a thank you.

On the other hand, this case illustrates one of the reasons why I hate claims made settlements. Defendants like them because they can demand that any money that is not claimed by class members should revert to them. Defendants also like these settlements because they force class counsel's fees down, particularly when a small number of class members file claims.

Reversionary settlements never make sense, as a matter of policy or practice. If the class representative and the defendant agree to a gross settlement figure, none of that money should go back to the defendant. If money cannot be distributed to class members because they cannot be found, then the money must go to a cy pres beneficiary under CCP 384. Courts should keep their oversight role clearly in mind, should subject reversionary settlements to particular scrutiny, and absent truly extraordinary circumstances should deny approval of these settlements.

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