Metropolitan News-Enterprise


Thursday, January 26, 2017


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Panel Overturns Debt Collection Class Action Settlement




The Ninth U.S. Circuit Court of Appeals yesterday overturned a class action settlement, saying it should not have been approved because it will confer no benefit on absent class members and would decimate their chances of recovery in a separate class action pending in another district.

 With Judge Paul Watford writing the opinion, the panel put the kibosh on an agreement that would have resolved claims brought on behalf of 4 million consumers against ARS National Services, Inc., a debt collection agency. The complaint alleged that the company violated the Fair Debt Collection Practices Act by leaving voicemail messages in which the callers failed to disclose that they worked for the company, that ARS is a debt collector, or that the purpose of the call was to collect a debt.

The class on behalf of which suit was brought was made up of everyone in the United States who received those calls. The plaintiffs sought damages under the act, which, in a class action, permits the named plaintiffs to recover their actual damages plus $1,000 each, while other class members can recover aggregate damages of no more than $500,000 or one percent of the defendant’s net worth, whichever is less.

ARS contended its net worth was $3.5 million, meaning damages for absent class members would have been capped at $35,000.

Magistrate Judge

The case was assigned to Magistrate Judge Karen S. Crawford of the Southern District of California for purposes of settlement discussions. The parties eventually agreed to have Crawford conduct all proceedings.

The settlement would have paid the three named plaintiffs, each of whom stipulated that they suffered no actual damages, $1,000 each. Rather than pay the remaining class members less than a penny each, the defendant agreed to pay $35,000 in cy pres damages to a local charity.

ARS agreed to pay class counsel $67,500 in fees. The company, which had revised its voicemail message earlier, agreed to an injunction requiring it to use the revised message for at least two years.

The settlement agreement also included an explicit bar against participation by any class member in any other class action against the company, although individual actions were not barred.

Class Member Objects

A class member, Bernadette Helmuth, objected to the settlement. Helmuth is the named plaintiff in a similar, but smaller, class action in the Southern District of Florida, which has been stayed pending the outcome of the California-based action.

Her objections included the assertion that class members would receive nothing of value in return for giving up the opportunity to get money out of another class action. Crawford rejected the objections and approved the settlement as fair and reasonable.

Helmuth appealed, and the National Association of Consumer Advocates filed an amicus brief, in which it argued that the magistrate judge lacked jurisdiction because absent class members did not consent to her hearing the merits. To the extent that 28 U.S.C. §636(c), which allows the parties to a civil proceeding to stipulate to having the magistrate judge hear the entire case, does not require absent class members to join the stipulation, it violates Article III of the Constitution, NACA argued.

Article III provides that judges shall serve life tenure and may not have their salaries cut, which the Supreme Court has cited as a means of protecting judicial independence. Because magistrate judges have neither life tenure nor a guarantee that their salaries will not be reduced, the high court has held, they are limited to performing subordinate judicial duties in the absence of a waiver.

Watford said it was unnecessary to adjudicate the constitutional question, however, because “[a]ny violation of the absent class members’ due process rights would affect only the preclusive reach of the resulting class judgment in subsequent litigation,” and not the magistrate’s jurisdiction to hear the pending case.

Settlement Called Unfair

Turning to the merits, however, Watford agreed with the objector that it would be unfair to require class members to give up their right to seek damages in another class action without giving them something in return. The injunctive relief, he said, was essentially worthless to most class members because it would only benefit consumers contacted by ARS in the future, not those called in the past, he said.

It is possible, he acknowledged, that some would receive calls during the two-year injunction period in a continuing effort to collect the same debts. But the proposition is dubious, he reasoned, in light of how old the debts would be, saying the burden was on the plaintiffs to quantify the number through empirical evidence.

Judge Michelle T. Friedland and visiting District Judge J. Frederick Motz of the District of Maryland concurred in the opinion.

The case is Koby v. Helmuth, 13-56964.


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