$25 million class settlement thrown out.

• Author: Sanders, Carol McHugh
• Position: Consumer finance class action against tax preparation service

In an opinion highly critical of class action attorneys in general and a $4.25 million fee award in particular, the Seventh Circuit has set aside a class settlement in litigation involving refund anticipation loans made by a major tax preparation service. The court reversed a $25 million class action settlement in Reynolds v. Beneficial National Bank, 288 F.3d 277 (2002), holding that the district court did not examine the settlement with the "care that it deserved."

The Seventh Circuit's opinion came in a consumer finance class action arising from H&R Block's refund anticipation loans made jointly with the Beneficial National Bank. Taxpayers were able to receive loans from Beneficial based on the amount of their federal income tax refunds. About 20 class actions filed nationwide in the last decade have alleged that the annual interest rates on those loans violated usury rates, sometimes reaching a lofty 100 percent on loans that may have been outstanding for only a few days. Most of the suits, the Seventh Circuit noted, had failed on one ground or another, but at least, one Texas class action was slated for trial by the late 1990s.

In September 1997, two lawyers who had run unsuccessful class action suits based on the refund anticipation loans had lunch with Beneficial's lead lawyer in defending against the "class action avalanche," as the Seventh Circuit's Judge Posner described it. A third lawyer not previously involved in the litigation also attended. The third attorney later testified at the fairness hearing on the class action settlement that the four lawyers had discussed, in general terms, the settlement value of all claims involving refund anticipation loans against Beneficial. That attorney also testified that Beneficial's lawyer speculated that he could settle all the claims for $23 to $25 million, but Beneficial's attorney "vociferously denied" ballparking such a figure, according to the Seventh Circuit.

All three attorneys attending the lunch, along with a law firm they retained, later filed two class actions suits against Beneficial based on the refund anticipation loans. About a year later, a settlement on behalf of one class would have created a $25 million settlement fund. Beneficial and Block, which had been brought into the litigation at Beneficial's insistence, also agreed to make certain disclosures to future customers about the financial arrangements between them, to bear the cost of notifying class members and to pay...