A new way for class actions to evade federal court? Not so fast, says judge

December 22, 2015

Plaintiffs’ lawyers trying to bring big-money class actions before friendly state-court judges is such an old story that Congress passed a law to prevent it. The Class Action Fairness Act of 2005 allows defendants to remove to federal court just about every class action in which more than $5 million is at issue. And when some entrepreneurial litigators in Arkansas and Texas devised a way to get back to state court by stipulating to class damages of less than $5 million, the U.S. Supreme Court put a quick stop to their gamesmanship, in the unanimous 2013 decision in Standard Fire v. Knowles.

Now some of the same plaintiffs’ lawyers are once again being accused of class action forum shopping – but this time, the insurance company defendant supposedly went along with their trick.

In a show-cause order issued Monday, Chief U.S. District Judge P.K. Holmes of Fort Smith, Arkansas, demanded that all of the lawyers involved in a property insurance class action against USAA explain why they stipulated to a settlement of the case in Polk County Circuit Court a day after agreeing to dismiss the federal-court case. “The clear inference,” Judge Holmes wrote, “is that counsel wished to evade the federally-mandated review of the class and the proposed settlement by this court in particular.”

Both sides, according to the judge, had good reason to avoid scrutiny of the settlement. The deal, which received final state-court approval on Dec. 18, resolves potential claims by a class of as many as 15,000 homeowners who said USAA improperly deducted certain depreciation costs from their insurance recoveries. Plaintiffs’ lawyers are due to receive $1.85 million in fees and costs – nearly half of the total recovery available to the class, according to Judge Holmes. USAA, meanwhile, agreed to put up only about $3.4 million, and whatever is unclaimed by class members after what Judge Holmes described as “onerous claims requirements” will revert to the insurance company.

“It is now clear,” the federal judge said, “that counsel on both sides at some point prior to dismissal of the case from this court determined that Polk County presented a more favorable forum for review of any negotiated settlement. This forum shopping is inimical to our system of justice and violates the spirit of the laws governing the jurisdictions of the state and federal sovereigns.”

Judge Holmes ordered all of the lawyers in the case to show why they shouldn’t be hit with Rule 11 sanctions. On the plaintiffs’ side, those lawyers include Matthew Mustokoff of the national class action firm Kessler Topaz Meltzer & Check and Matt Keil and John Goodson of Keil & Goodson, one of the firms that used to stipulate damages to stay out of federal court before the Supreme Court’s decision in Standard Fire v. Knowles. USAA, meanwhile, is represented by Mitchell Williams and Robinson & Cole. Those two firms seem to have changed their minds about class actions in Arkansas state court: In the Knowles case, they represented Standard Fire in its lower-court protests against remand to state court.

Judge Holmes’ show-cause order followed a first-rate piece on the USAA state-court settlement by Arkansas Business, which found two other recent cases in which Keil & Goodson, an Arkansas firm, reached state-court class action settlements quickly after stipulated dismissals of parallel federal-court suits.

The USAA case was before Holmes for about 17 months, after the insurer removed the class action to federal court. During that time, the two sides repeatedly told the judge they were negotiating a settlement. But according to the federal judge, plaintiffs’ lawyers and the insurer apparently decided not to ask him to approve their settlement after he raised concerns in a separate class action against Cameron Mutual Insurance Company. In the Cameron case – which involved the same named plaintiffs, plaintiffs’ lawyers and allegations as the USAA class action – Holmes ended up approving attorneys’ fees of one-third of the actual recovery to the class but only after insisting upon some structural improvements to the proposed deal.

“Counsel in this case would have been aware, therefore, of the kind of terms the court would consider fair, reasonable, and adequate,” the judge said in his show-cause order. “The court can only conclude that counsel anticipated that this court would be diligent in its duty to protect the interests of absent class members and would be unlikely to approve a settlement that advanced the interests of class counsel (a large fee award with a clear sailing provision) and defense counsel (a claims made settlement with onerous claims requirements and a reversionary fund) while largely failing to protect the interests of the class.”

Judge Holmes, who said he cannot impose monetary sanctions in these circumstances but also said he retains authority over the lawyers even though the case before him was dismissed, said he will hold a hearing to give all of them a chance to explain themselves. That hearing has not yet been scheduled.

I emailed all of the plaintiffs’ and defense lawyers listed on the docket to ask for a response to the show-cause order. None got back to me.

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