10 May 2018

Increased scrutiny of class action settlements and distribution schemes

This article was written by Peta Stevenson, Priscilla Lal and Jordan English.

Class action settlements and settlement distribution schemes are increasingly being scrutinised by courts. There have been two recent developments in this space which are worth noting: 

  1. A group member has lodged an application for leave to appeal against a settlement approval in a class action proceeding relating to the failed Banksia finance company. The Court of Appeal also refused an application for security for costs.
  2. In a recent decision of the Federal Court, Lee J has indicated that the Court should be vigilant to ensure that settlement distribution schemes operate with a “minimum of costs and a maximum of efficiency”. The judgment contains some important observations about the utility of independent costs assessors, whether solicitors should administer settlement distribution schemes, and reimbursement payments made to applicants in group proceedings.

Banksia Group Settlement Approval Appeal

Continuing the trend of judicial scrutiny of class action settlements, a group member has recently lodged an application for leave to appeal against the settlement approval in a class action relating to the collapse of Banksia Securities Limited. The Supreme Court of Victoria had approved the settlement of claims made in the Banksia Group Proceeding, pursuant to which $64 million was to be paid into a trust account for the solicitors for the plaintiff and distributed according to a settlement distribution scheme.

The proposed appeal contends that the settlement approval involved:

  1. error in that the admission of materials in support of the settlement approval were largely provided on a confidential basis, contrary to the principle of open justice;
  2. a denial of procedural fairness to group members in the consideration of their objections to the settlement;
  3. error in concluding that the settlement sum was fair and reasonable; and
  4. error in approving the funder’s commission and legal fees.

The application for leave to appeal is due to be heard in the Court of Appeal of the Supreme Court of Victoria on 8 June 2018. It is only the second appeal against the approval of a class action settlement to be heard in Australia (the first being Australian Securities and Investments Commission v Richards [2013] FCAFC 89, in which ASIC appealed the settlement of the Storm related class action against Macquarie Bank).

On 7 May 2018, the Court of Appeal dismissed an application security for costs (Botsman v Bolitho [2018] VSCA 111). Lauren Bolitho, the lead plaintiff, sought security from the appellant group member in the amount of $184,630.60. The Court was ultimately not satisfied that the group member could not meet an adverse costs order. In considering whether an order for security would stultify the appeal, the Court noted that the group member was unwilling to put her home up in order to provide security. However, it considered this factor did not carry great weight in circumstances where it was not the order for security that would create that risk, but rather any costs order that may be made against her in respect of her application for leave to appeal.

Lifeplan decision

In Lifeplan Australia Friendly Society Limited v S&P Global Inc [2018] FCA 379, Lee J approved the proposed settlement of a representative proceeding brought by Lifeplan, its subsidiary, and another company against S&P Global Inc and Standard & Poor’s International LLC (S&P). The proceeding arose out of ratings made by S&P of synthetic collateralised debt obligations. The proceeding was one of a number of related proceedings set to test the limits of a credit rating agency’s liability for the ratings assigned to financial products. The applicants claimed statutory compensation pursuant to the Corporations Act 2001 (Cth) and the Australian Securities and Investment Commission Act 2001 (Cth), and damages at common law for negligence, negligent misstatement, and deceit. The claims of the applicants and group members totalled $62 million.

A unique feature in this case was that the named applicants had funded the litigation. As Lee J observed, this was “far from an insignificant matter” in its scale. The evidence suggested that “but for the applicants funding themselves, [the] litigation would only have been brought with the involvement of a litigation funder” and had a settlement agreement been reached in those circumstances that “the potential recovery for the applicants and group members would have been diminished by a very significant sum”.

Ultimately, Lee J was satisfied that the settlement fell “within a range” that could be regarded as fair and reasonable and in the interests of group members. His Honour was also satisfied that the settlement distribution scheme provided a fair and reasonable mechanism for the distribution of the settlement fund to the applicants and group members in a way that “maximises efficiency and minimises cost to group members”. However, in considering whether to approve the settlement, his Honour made a number of interesting observations.

Utility of independent costs assessor

The applicants sought to recover $4.9 million in legal costs, an amount which Lee J considered to be “quite reasonable” for a matter that had reached the stage of readiness for hearing.

His Honour did not require the applicants to adduce evidence from an independent cost assessor in order for them to justify the amount of legal costs. His Honour stated:

“Without, I hope, slipping into overstatement, I regard such evidence as next to useless. I have seen many examples, but I am yet to see a cost assessor retained by a solicitor who has formed the robustly independent view that the fees charged by his retaining solicitor were unreasonable.”

While it was not required in this case, Lee J suggested that in less clear-cut cases, it may be that the Court should appoint a referee to inquire and provide a report to the Court.

Appointment of applicants’ solicitors as administrators of settlement distribution scheme

The applicants sought orders that their solicitors be appointed as administrators of the settlement distribution scheme. Justice Lee was reluctant to accede to this request and expressed concerns as to the amounts that would be charged by legal representatives as administrators of the settlement distribution scheme.

Although his Honour ultimately approved the appointment of the applicants’ solicitors, Lee J stressed that this was due to the unique features of this case (which included the small size of the class) and “in a number of cases this would not be the appropriate course to take.” Indeed, his Honour suggested that the time may be close at hand at which it may be appropriate for the Court to consider inviting tenders for service providers to arrange for the most cost-effective way of distributing settlement funds.

Applicants’ Reimbursement

The settlement distribution scheme proposed that the applicants receive $250,000 by way of a reimbursement for the costs incurred in acting in a representative capacity. Justice Lee noted that this amount was “very large compared to the sorts of sums paid to applicants in other Part IVA proceedings”.

Despite some misgivings, Lee J was ultimately persuaded, in the unique circumstances of this case, to approve the reimbursement. In particular, his Honour emphasised that the applicants had funded the litigation themselves, obviating the need for a litigation funder. However, his Honour stressed that “this acquiescence should not be taken to be a precedent for future cases”.

Takeaways

Settlement continues to be the predominant way that class actions, and in particular securities class actions, are resolved. As settlement agreements and distribution schemes continue to be subject to judicial scrutiny, the remarks of Lee J are worth bearing in mind. His Honour’s comments suggest an increased focus on ensuring that settlements and settlement distribution schemes maximise efficiency and minimise the costs to group members, and go so far as to propose ways to ensure this occurs.

The decision comes before the Victorian Law Reform Commission (VLRC) and Australian Law Reform Commission are each set to publish reports on proposed reforms to their respective litigation funding and group proceeding frameworks. The position taken by his Honour is consistent with submissions made to the VLRC for regulation dealing with the assessment of legal costs in class actions, particularly his Honour’s suggestion that the Court appoint a referee independently of the parties.

Six other class actions involving S&P, relating to different financial products, continue in hearing before the Federal Court.

As for the Banksia Group Proceedings, the appeal will be watched closely and will be only the second time an appellate court has been asked to consider the class actions approval regime.

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