Credit Union Client Alert – NC Process for Settlement of a Putative Class Action Dispute

    By Frank A. Hirsch, Jr., Consumer Finance, Credit Union

    NC Process for Settlement of a Putative Class Action Dispute: Terri Moose vs. Allegacy Federal Credit Union

    Sometimes, the short-cut turns out to be the long way around. A North Carolina Business Court opinion by Judge Adam Conrad sheds light on the intricacies and potential pitfalls of settling class action lawsuits under North Carolina law and procedure 2023 NCBE Order 39, Aug. 21, 2023. In the case of Terri Moose vs. Allegacy Federal Credit Union, the plaintiff, Terri Moose, sued as a putative class representative for damages resulting from the practices of Allegacy Federal Credit Union (“Allegacy”) in assessing overdraft fees for debit-card transactions (“APSN” or “Authorize Positive, Settle Negative” transactions).

    The Grounds of the Lawsuit

    Moose’s complaint included individual, and class claims for breach of contract, unjust enrichment, and unfair or deceptive trade practices under N.C.G.S. § 75-1.1.  The lawsuit was pending for nearly three years, and despite its duration, Moose and her legal team never took the necessary steps to certify the class.

    The Proposed Settlement

    Without a certified class, and without a process for class notification, a settlement deal was reached. Both parties jointly moved for an order that would approve the dismissal of Moose’s individual claims with prejudice and the putative class claims without prejudice. Typically, a so-called bilateral settlement of a putative class is allowed, but this is true only if it does not prejudice absent class members. Even in pre-class-certification cases, an individual settlement can trigger notice to putative class and a fairness hearing if there is a complicating barrier such as a statute of limitations issue.

    Both parties denied any collusion and contended that practical considerations drove the decision to settle. Moose’s counsel claimed that they initially had severely overestimated the damages that the putative class would recover if successful, partly because Allegacy stopped assessing overdraft fees for APSN transactions in May 2020.

    Court’s Concerns & Red Flags

    The court expressed significant reservations regarding the proposed settlement, stating that there were too many “red flags” to ignore. Potential issues included the uneven allocation of settlement proceeds between Moose and her counsel, the lack of a fairness hearing, and the possibility of prejudice against absent class members.

    The substantial difference between the settlement payments to Moose and to her counsel may derail the entire case. To settle the case, Allegacy agreed to pay several hundred times more than the four overdraft fees of $150 each that were at issue in the case. Moose’s counsel is poised to receive the lion’s share of the recovery – leaving less than five percent of the total to Moose – raising concerns about whether the settlement serves the class’s best interests or, as the court calls it, a “sweetheart deal.”

    Moody Requires Judicial Supervision

    Even when the parties seek to settle a putative class action case on an individual basis, and seek the dismissal of class claims, North Carolina still requires a measure of judicial supervision of the process. Moody v. Sears Roebuck & Co., 191 N.C. App. 256, 269 (2008) (abuse of the class-action mechanism or prejudice must be tested). These minimal protections cannot be avoided.

    The Path Forward

    The court highlighted the need for more information before reaching a final decision. To accomplish that, the court requires that the parties publicly disclose the settlement agreement, ensuring transparency in the process. Additionally, the court requested supplemental briefing submissions that would provide insights into the size of the putative class, potential costs associated with class-wide settlement, and the extent of damages incurred by Moose and absent class members.

    After gathering the specifics, the court will hold an in-person hearing. This hearing will bring together all relevant parties to discuss whether an additional certification hearing for the class should be held, whether the class should be certified, and whether notice should be given to class members. All counsel of record, even admitted simply for pro hac vice purposes, are to attend the hearing.

    What You Need to Know

    This entire process might end badly for the plaintiffs’ lawyers. Not only will they have to explain the strange settlement and attorney’s fee’s structure, but they will also likely have to go through Rule 23 class certification, notice, and fairness hearing procedures before Judge Conrad signs off on a settlement. This raises the real possibility of objectors at the hearing, of reduction in counsel fees for poor performance, and for conflicts of interest to disqualify any counsel possibly compliant of collusion. These were and are avoidable perils. It appears that this procedural short-cut will result in the lawyers having to spend quite a bit more time justifying the end result. A cautionary tale yet to be told.

    The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2024.