IOLTA Committee claims collusion in class action

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With its recent grant of sua sponte review, the Supreme Judicial Court has shown an interest in exploring whether the IOLTA Committee can seek to unwind a class action settlement if it believes the parties conspired to deplete a residual fund to which Mass. R. Civ. P. 23 would otherwise allow it to lay claim.

The case, Ortins, et al., v. Lincoln Property Company, et al., involves a landlord’s practice of charging $250 rental application fees and $150 “rekey” fees in violation of the Massachusetts Security Deposit Law, G.L.c. 186, §15B.

With the help of mediators from JAMS, the parties began negotiating a settlement after the plaintiffs prevailed on a motion for summary judgment, entitling thousands of potential claimants to a minimum of $400 each. Still pending was a trial on whether the defendants had violated Chapter 93A, which had the potential to double or triple those damages.

According to the parties, they reached a proposed settlement to pay class members potentially over $4 million, though the IOLTA Committee argues that the settlement was structured to ensure both that the defendants would pay nowhere near that amount while still ensuring that there would be no residual fund.

When it receives residual funds, the IOLTA Committee distributes the money to organizations that promote access to justice, such as the Massachusetts Legal Assistance Corp., Massachusetts Bar Foundation and Boston Bar Foundation, which then provide grants to support legal aid to low-income individuals and families.

Were a settlement like the one in Ortins reached today, Rule 23(e)(3) now makes clear the type of notice the IOLTA Committee must receive.

“No later than 30 days prior to the entry of judgment or any hearing approving any compromise that creates residual funds,” a plaintiff must give notice to the IOLTA Committee “for the limited purpose of allowing the committee to be heard on whether it ought to be a recipient of any or all residual funds.”

Ten days prior to the entry of judgment or such hearing, the plaintiff must file a certification that the IOLTA Committee received the required notice.

But those time limits were added to the rule in 2023, two years after the settlement in Ortins received its initial judicial approval. The IOLTA Committee says the parties in Ortins first brought it into the loop about the settlement when they filed a joint motion for an order approving final distribution of unclaimed settlement funds to the designated recipients of the cy pres awards in 2023.

As part of that distribution, the cy pres recipients — two housing-related nonprofits — were to receive six-figure awards, while $500,000 was to be returned to the defendants, part of what the IOLTA Committee now suggests was a quid pro quo to not oppose the plaintiffs’ attorneys’ $1 million fee request.

In the IOLTA Committee’s telling, Superior Court Judge Janice W. Howe had reservations about the arrangement but felt bound by the “law of the case” established by Judge John T. Lu, who initially approved the settlement.

Specifically, Howe noted that the proposed settlement had been reached and approved in violation of Rule 23(e), both due to the lack of notice given to the IOLTA Committee and because the rule prohibits the return of residual funds to defendants, the IOLTA Committee says.

But in the parties’ telling, the settlement was “fair, reasonable and the result of arms-length negotiation.” There is no legal basis to disturb such a settlement, and public policy favors finality in these circumstances, they argue.

Unnecessary step?

One of the IOLTA Committee’s main problems with the settlement agreement is that it included what it calls an “unnecessary and meaningless” “claims-made” distribution process, under which class members must respond affirmatively to a notice sent by mail rather than simply receive a check automatically.

In its brief, the IOLTA Committee notes that requiring class members to participate in a “claims made” process is often appealing to defendants.

“This is because response rates in such settlements are typically low, meaning fewer class members claim their share, reducing the defendant’s potential liability,” the brief reads.

But here, the “claims made” distribution process was unnecessary, the IOLTA Committee argues.

“Class Counsel and Defendant Landlords already have the names, addresses and exact settlement amounts owed to thousands of Class Members,” the brief reads.

The process they used allowed the defendant landlords to retain payments belonging to absent class members that should have been part of the residual funds distributed under Rule 23(e)(2), the IOLTA Committee argues.

In the 2021 decision Marks v. Realty Associates Fund X.L.P., Superior Court Judge Brian A. Davis rejected a proposed class action that, like Ortins, had required an unnecessary “claims made” process, the IOLTA Committee argues.

However, the parties to the settlement agreement say that Marks is distinguishable because the defendants in Marks had up-to-date contact information for the class members, while the claims administrator in Ortins merely had last known addresses of the class members. Even still, the claims administrator in Ortins achieved a 69 percent “notice success rate” using standard industry tools, according to the plaintiffs’ brief.

The IOLTA Committee’s attorney, Douglas W. Salvesen of Andover, was unavailable for comment.

One of the plaintiffs’ attorneys, Orestes G. Brown of Danvers, declined to comment in advance of oral arguments. The defendants’ attorney, Jeffrey C. Turk of Braintree, did not respond to requests for comment.

Defendants often ask for a claims-made settlement with a reversion of unclaimed funds to the defendant, said Joshua W. Gardner of Boston, who has brought and defended numerous cases involving unfair business practices as the leader of his firm’s class action practice. But in Massachusetts, where class members cannot opt out of a settlement, requiring class members to nonetheless fill out and return a claim form is usually unnecessary and just results in fewer class members receiving compensation, he said.

“I, and most plaintiff-side class action lawyers, will not agree to a reversion going back to a defendant,” Gardner said. “Allowing any unclaimed funds to revert back to a defendant is often at odds with plaintiff counsel’s role of ensuring the highest settlement amount for the class and ensuring that as many class members as possible receive compensation.”

The best settlement structure in Massachusetts state court is the simplest and fairest: send preliminary notice to class members that they will be getting a check and explain how the class members can object, Gardner added.

“After any objections are heard and the settlement is approved, do not require an unnecessary form; just send the checks out,” he said. “If checks are not cashed, the remaining amount should go to IOLTA.”

What IOLTA would have said

While the 30-day notice provision may not have been incorporated into Rule 23 in 2023, the IOLTA Committee argues that it was an error even in 2021 for the Superior Court to have approved the proposed settlement agreement before it received notice. That error was not harmless, it adds.

The lack of notice prevented the IOLTA Committee from objecting to what it says are violations of Rule 23, including the reversion provision to pay back $500,000 of what it characterizes as “residual funds” to the defendants in violation of Rule 23(e)(2).

The parties to the settlement agreement do not characterize the $500,000 as “residual funds” at all, instead seeing it as merely part of an arms-length bargain to which Judge Lu gave his seal of approval.

They argue that Rule 23(e)(3) makes clear that the IOLTA Committee is allowed to intervene in such bargains only for a “limited purpose”: to be heard on whether it ought to be a recipient of any or all residual funds. But it lacks standing to challenge a settlement more broadly, they argue.

Rule 23(e) is an important rule that we never overlook, and the IOLTA Committee’s concern that they were left out in this case is a valid one. But to suggest the settlement was collusive based only on a lack of notice seems to be a stretch.

— Joshua Garick, Reading

It is the role of the judge, not the IOLTA Committee, to serve as the guardian of the absent parties’ interests, the parties add.

“By appealing the approval of the Settlement and claiming that it was unfair and unreasonable after the extensive scrutiny performed by Judge Lu, IOLTA appears to challenge this longstanding doctrine and instead wishes to insert itself as the ‘guardian’ of the absent class members,” the defendants’ brief reads. “To dislodge the Court of its role as the ‘guardian’ and insert IOLTA into this role would not only be wholly inappropriate but would misconstrue the express language of Mass.R.Civ.P. 23(e).”

In the IOLTA Committee’s absence, the Superior Court failed to recognize the “collusive nature” of the proposed settlement agreement, the committee argues. It claims that the settlement in Ortins bears all the hallmarks of collusion — a disproportionate allocation of the settlement fund to class counsel, the inclusion of the “clear sailing” provision for the plaintiffs’ attorneys’ fees request, and the provision allowing unclaimed funds to revert to the defendants rather than benefiting the class.

But the plaintiffs argue that the settlement was not only “fair, reasonable and adequate” but an “exceptional result,” one that both secured the class full or double refunds of their out-of-pocket losses and achieved an end to the challenged fees.

In defense of their fees, the plaintiffs’ attorneys note that courts in Massachusetts routinely approve fee awards of one-third of the gross settlement amount, while the $1 million fee in Ortins represents 24 percent of the total settlement value.

The IOLTA Committee also diverges from the parties on the definition of the phrase “relief granted,” which the IOLTA Committee construes as referring to the sum total of awards members of the class were eligible to receive, whether claimed or not, while the parties say it refers to the amounts actually claimed by the class members and other recipients.

To the IOLTA Committee, construing “relief granted” as the parties do is “creative drafting” designed to avoid the implications of creating a residual fund. But the defendants counter that the judges knowingly signed off on an arrangement that did not create a residual fund, a decision that “cannot now be disputed or contested.”

Skepticism of ‘collusion’

Boston attorney Michael Brier said the argument that the settlement agreement was collusive “is probably not the argument that will get the Superior Court’s judgment overturned on appeal, if any.” The abuse-of-discretion bar is a high one, he noted.

Reading lawyer Joshua Garick acknowledged that, on the one hand, the IOLTA Committee is right to object — to a point.

“Rule 23(e) is an important rule that we never overlook, and the IOLTA Committee’s concern that they were left out in this case is a valid one,” he said. “But to suggest the settlement was collusive based only on a lack of notice seems to be a stretch.”

He noted that the focus of Rule 23(e) is the residual funds, not the attorneys’ fees.

“If Lincoln Properties was willing to commit over $4 million to resolve this case, hold them to that,” Garick said. “But don’t penalize the attorneys who brought a difficult case that required them to litigate liability, certify a class, notify class members about a settlement to give them an opportunity to object, and then have to prove to two judges — notwithstanding any class member objections — that the settlement is fair, adequate and reasonable. They earned every bit of that fee.”

If the SJC reaches the issue — the appellees are arguing that the IOLTA Committee did not adequately preserve it below — Brier said he would be interested in seeing where the court lands on whether the $500,000 is impermissible under Rule 23(e).

The rule defines “residual funds” as “funds that remain after the payment of all approved class member claims, expenses, litigation costs, attorneys’ fees, and other court-approved disbursements to implement the relief granted,” and requires that the residual funds be disbursed to nonprofits or IOLTA, he noted.

“There does seem to be some tension between this language and the $500,000 reverter because it is questionable whether the reverter represents a disbursement ‘to implement the relief granted,’” Brier said. “And Rule 23 plainly favors cy pres awards, even if the court has the discretion to approve an award that does not include residual funds at all.”