- OCC Publishes New Action Settlement Notification Requirements
- May 19, 2006 | Author: Brad William Seiling
- Law Firm: Manatt, Phelps & Phillips, LLP - Los Angeles Office
The Office of the Comptroller of the Currency has issued a Bulletin clarifying the settlement notification requirements for regulated financial institutions under the Class Action Fairness Act of 2005, 28 U.S. C. § 1711 et seq. ("CAFA"). The FDIC issued similar guidance in a Financial Institution publication in December 2005 (FIL-126-2005). Among other changes, CAFA requires defendants in class action lawsuits to provide notice of a proposed class action settlement to specified government regulatory agencies. These new settlement notification requirements add another level of scrutiny to class action settlements and may pose new challenges to financial institutions seeking to settle class action lawsuits.
CAFA made significant changes in two areas of class actions procedure -- jurisdiction and settlements. Congress gave class action defendants greater access to federal courts. Previously, courts would not aggregate the claims of individual class members for purposes of determining whether the case met the $75,000 jurisdictional minimum requirement for federal court diversity jurisdiction. Courts could only consider the amount in controversy of a named plaintiff's individual claim, even if that plaintiff purported to represent a class consisting of thousands (or millions) of allegedly similarly situated individuals.
For financial institution defendants, these jurisdictional rules meant that they almost never could remove a putative class action lawsuit from state court to federal court, because the individual amounts in controversy for class actions in the financial institutions industry (for example, a lawsuit challenging the propriety of a fee imposed on credit card accounts) almost never would exceed the jurisdictional threshold, even though the potential total exposure to the institution was millions (even billions) of dollars. These former jurisdictional rules meant that class action plaintiffs' lawyers could file and keep cases in state courts, which often were less favorable forums for defendants.
Under CAFA, Congress amended the federal diversity jurisdiction and removal statutes to establish diversity jurisdiction in class action lawsuits where the aggregate amount in controversy exceeds $5 million and any one member of the class has diverse citizenship with any one defendant. These changes make it much easier for a defendant to remove a putative class action lawsuit to a potentially more favorable federal court forum. For this reason, CAFA's jurisdictional changes are unquestionably a good thing for financial institutions and other class action defendants.
The other significant changes enacted through CAFA relate to class action settlements. These changes may not prove to be as beneficial to defendants. Congress sought to rein in the use of coupon settlements. Under these settlements, class members typically would not receive any benefit unless they purchased new goods or services from the defendant. These settlements had been criticized by many courts and commentators as collusive deals between class counsel and defendants that sold out members of the general public. Under CAFA, the amount of fees awarded to class counsel in a coupon settlement is now limited to a percentage of the coupons actually redeemed, as opposed to the value of the coupons offered. 28 U.S.C. § 1712(a).
This provision makes coupon settlements much less attractive to plaintiffs' counsel, as it is well known that the redemption rate in coupon settlements is rarely more than 25%. These settlements benefited both plaintiffs' counsel and defendants. Plaintiffs' counsel could point to the value of the coupons to justify a high attorney fee award, while defendants could limit the cost of settlement (and possibly even benefit through a settlement that required class members to buy more of its goods or services in order to participate in the settlements).
In addition to placing new limits on class action settlements, CAFA also requires defendants to give notice of the proposed settlement to specified regulatory agencies, including the U.S. Attorney General and attorneys general in states in which class members reside. These new notification requirements apply to federal and state depository institutions, depository institution holding companies, foreign banks, and nondepository institution subsidiaries of any of these entities that are defendants in proposed class action settlements. 28 U.S.C. §1715. Financial institutions reaching class settlements must provide information to the OCC. The court may not issue a final settlement order until 90 days after the appropriate federal and state officials are served.
This notification requirement adds an additional level of regulatory scrutiny to class action settlements. All class settlements must receive court approval. In addition, it is not uncommon for interested private parties (usually disgruntled members represented by counsel who specialize in challenging settlements) to oppose settlement approval or to seek modification of the settlement reached between the defendant and class counsel. CAFA now invites additional parties to the class action settlement table. CAFA does not, however, define the precise role that government regulators may play once they receive notice. Nothing would prevent a regulatory agency from appearing in court to challenge the proposed settlement or to seek modifications to the settlement. In addition, the regulators may choose to open an independent investigation of the practices that gave rise to the class action and pursue regulatory sanctions against the defendant. Settling class actions has always been a complicated process for defendants seeking to obtain maximum protection from future lawsuits while limiting costs. CAFA's new notice requirements may complicate the process even further.
OCC Notification Requirements
The OCC's recent Bulletin sets forth the specific information that a settling financial institution must provide to the OCC and the timing for providing that information. Within 10 days of filing the proposed settlement with the court, notice should be sent to the institution's supervisory office and to the Director, Litigation Division of the OCC in Washington, D.C. The notice to the OCC must include the following information: (1) a copy of the complaint and any materials filed with the complaint; (2) notification of any scheduled judicial hearing in the case; (3) the proposed or final notice to be sent to class members; (4) the proposed or final class settlement; (5) any other contemporaneous agreements between class counsel and counsel for the defendants; (6) any final judgment or notice of dismissal; (7) if feasible, the names of class members who reside in each state and their proportional share of the settlement or, if that is not feasible, a reasonable estimate of the number of class members in the state and their share of the settlement; and (8) any written judicial opinion relating to the matters required to be provided. The OCC's Bulletin provides no insight into how the OCC intends to use this information once it is provided. It is unclear whether the OCC intends to intervene actively in the class action settlement approval process or to use the information to monitor litigation impacting regulated institutions. It is also unclear whether or not the OCC will use information obtained through the settlement notification process to open its own investigation into the challenged practices. The ultimate impact of the new notification requirements will depend on how vigorously the OCC (and other regulatory agencies) intend to police class action settlements. At a minimum, any party seeking to settle a class action lawsuit will need to consider how the proposed settlement will appear to its regulators. Failure to account for possible regulatory concerns about a proposed settlement could prove to be a costly mistake that could delay and possibly prevent settlement of the case.