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Civil Justice Report
No. 6  August 2002


Anatomy of a Madison County (Illinois) Class Action: A Study of Pathology, continued

VII. The Action Moves to the United States

As noted, while the Canadian proceedings were ongoing and after Interclaim perceived its strategy to be in jeopardy, in December 1999, Interclaim opened discussions with, and on February 14, 2000, entered into an agreement with, the Charleston, South Carolina, law firm of Ness, Motley, Loadholt, Richardson & Poole (“Ness Motley”) to bring a class action proceeding on behalf of the victims of the criminal enterprise. Ness Motley has attained great fame and fortune, first in asbestos litigation and later as the lead law firm in the multistate actions against the tobacco industry. Its fees for the latter approximate $2 billion over a 25-year period.[100]   The firm has attained enormous political power and has used its dominance in asbestos litigation coupled with its political power to block proposed congressional legislation that would create an administrative alternative to asbestos litigation and limit compensation to only those who have suffered actual injury.[101]  In carrying on its activities, the firm has sometimes engaged in ethically dubious practices. For example, its role as class counsel in two of the largest asbestos litigation settlements and its representation in individual and state tobacco litigations have exhibited a clear disregard for ethical rules governing concurrent conflicts of interests.[102

A. The Interclaim–Ness Motley Retainer Agreement

The retainer agreement entered into in February 2000 with Ness Motley provided that:

    (1)  Interclaim retained Ness Motley as attorney on its behalf and on behalf of the 29   specific victims who had entered into power-of-attorney agreements with   Interclaim;
    (2)  Ness Motley was to commence and prosecute to “final end,” legal proceedings  against Down and others in whatever U.S. jurisdiction it considered appropriate to  recover the damages suffered by the victims of Down’s criminal enterprise   including the Interclaim victims;
    (3)  Ness Motley was to advance costs of the litigation that it would seek to recover as   part of the proceedings. Ness Motley estimated that the cost of mailing notices to   the class of victims, which it undertook to pay for, would approximate $1 million;
    (4)  In addition to whatever compensation Ness Motley would be awarded by a U.S.   court, Interclaim would pay Ness Motley a fee equal to 25 percent of the net  compensation that Interclaim received after expenses under the terms of the   agreement with the Interim Receiver that the Canadian Bankruptcy Court had  approved;
    (5)  Prior to the payment of any compensation to either Ness Motley or Interclaim,  independent counsel for the U.S. class of Down victims would be retained to  evaluate the reasonableness of the compensation agreement between Interclaim   and the Interim Receiver; and
    (6)  Ness Motley agreed to keep all documents and information provided to it by   Interclaim confidential except as required to be disclosed as part of the legal  proceedings to be commenced.[103

B. How Madison County Was Selected

Under the terms of the retainer agreement, Ness Motley was to select the venue in which to bring the class action. Ness Motley asked Interclaim to identify potential class representatives for three jurisdictions: Madison County (Illinois), Brooklyn (New York), and Huntington (West Virginia).[104]  Ness Motley thereafter decided to file the class action in Madison County and asked Interclaim to provide the names and addresses of victims who resided in specific Madison County zip codes.[105]  Ness Motley then contacted those listed to enlist them as named plaintiffs in the class action it would bring. One such encounter is described in a news article as follows:

    Foster Frederick…was at home [in Madison County] watching TV one afternoon when a lawyer came from the city to see him. “He said I’d been cheated,” said Frederick, a retired Granite City steelworker. “I didn’t even know it until he told me.” Now Frederick is among the name plaintiffs in a lawsuit against a lottery company….The 2-year-old case is still pending, court records show, but Frederick didn’t know that. “I haven’t heard a word since that lawyer came over,” he said.[106

On March 10, 2000, after having obtained the agreement of two others on the Interclaim list to serve as named plaintiffs, Ness Motley filed a class action complaint in Madison County on behalf of all persons residing in the United States who had sent money to one of Down’s enterprises, listing three of the Madison County victims as lead plaintiffs.[107]  The complaint alleged that Down and others had unlawfully solicited monies as part of a deceptive scheme intended to defraud plaintiffs, in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.[108

C. The Temporary Restraining Order and the Initiation of Settlement Negotiations

As previously indicated, on July 28, 2000, the British Columbia bankruptcy court set aside its December 18, 1998, ex parte appointment of the Interim Receiver. This order was provisionally stayed, pending review by the Court of Appeal for British Columbia later during the month of August 2000. Given the very real possibility that the Court of Appeal might lift the provisional stay and thereby release the frozen Down group assets worldwide, on August 4, 2000, Interclaim and Ness Motley moved on an emergency basis in the Madison County court to secure those same assets through entry of a temporary restraining order (the “TRO”) against certain members of the Down group. The TRO sought was intended to enjoin Down and others listed, in part, as controllers of properties he owned from directly or indirectly transferring any interest in the assets previously frozen in connection with the Canadian bankruptcy proceedings. Based substantially on information and evidence provided by Interclaim to Ness Motley, Madison County Circuit Court Judge Nicholas Byron entered an order on August 7, 2000, directing Down and three others not to directly or indirectly dispose of or transfer any interests they had in the assets previously frozen by the Interim Receiver in connection with the Canadian bankruptcy proceeding.[109]  That TRO was in place before the Canadian asset freeze was set aside. A hearing was scheduled for August 18, 2000, before Judge Byron to extend the August 7, 2000, TRO by converting it into a preliminary injunction, thereby extending the freeze to the trial of the matter.

Interclaim, on behalf of the class, intended to present expert testimony on Down’s efforts to launder and conceal the proceeds of his criminal enterprises and thus support the assertion that, in the absence of a preliminary injunction continuing the asset freeze, there existed a high risk that Down would secrete his assets to make them unavailable to satisfy any judgment. At that point, the litigation took an unexpected turn, at least from Interclaim’s perspective. En route to the hearing, Interclaim learned on August 16, 2000, that Ness Motley and Down had postponed the preliminary injunction hearing. Upon inquiry, Interclaim learned that Down had initiated settlement negotiations with Ness Motley at some earlier period. On August 17, 2000, Down made it a condition of any further negotiations that Interclaim not only be excluded from the negotiations but from access to knowledge of the substance of the negotiations as well. Ness Motley agreed to Down’s conditions.[110]  These negotiations culminated in a settlement that will be analyzed in detail in Part VIII, infra. Before doing so, however, the Interclaim-Down relationship needs to be set out as necessary context.

D. Settlement Context: The Interclaim-Down Relationship

Most class actions are entrepreneurial undertakings by lawyers seeking substantial fees. Because of this intrinsic quality, opportunities for self-interested behavior in class actions abound. In particular, class counsel have substantial incentives to sell out the interests of the class by adopting a settlement strategy more consistent with their own financial self-interest than with that of the class.[111]  To counter these incentives, judges in class actions serve as fiduciaries to absent class members[112]  and, in theory, reject proposed settlements unless they are “fair, adequate and reasonable and…[are] not the product of collusion between the parties.”[113]  In fact, however, on the whole, the judiciary has failed to fulfill its role as fiduciary to the class.[114]  Thus, courts routinely approve fee requests that substantially overcompensate lawyers,[115]  allowing them to appropriate to themselves more than a rightful and efficient share of the common fund, thus reducing the compensation provided to the class and the deterrence effect of the litigation. Other examples of such failures abound.[116]  In recent years, even as many federal courts have begun to more fully assume their statutory and fiduciary obligations, many state courts remain unduly receptive to class lawyers’ interests.

While the incentive for plaintiffs’ lawyers to collude with defendants and their counsel exists in virtually all class actions, in the Madison County proceeding under review, there were additional incentives that need to be exposed to properly comprehend the resulting settlement agreement. In particular, Down’s motivations at the time of the August 7, 2000, class action TRO asset freeze need to be illuminated.

It is not unusual for defendants in class actions to dispute the allegations of wrongful conduct; so, too, in this proceeding. But that hardly captures Down’s position. Over the course of ten years, Down had successfully amassed proceeds of $150 million or more by engaging in enterprises directed against elderly Americans—enterprises that U.S. officials have labeled deceitful and fraudulent. In the process, Down repeatedly ignored consent orders he entered into to cease and desist from such activity. He did have to give up more than $12 million of his ill-gotten gains and serve six months in a federal minimum-security prison, but that appeared to be the maximum price he had to pay for becoming a centi-millionaire. The day following his first night in prison, Down awakened to find that approximately $100 million of his assets located in Switzerland, Barbados, the British Virgin Islands, the Channel Islands, Papua New Guinea, Canada, and the United States had been frozen by ex parte court orders at the behest of an entrepreneurial asset recovery firm, Interclaim. Prior to that point, he was probably unaware of Interclaim’s existence. Thereafter, Interclaim conducted vigorous litigation against Down in Canadian courts, at substantial expense to both Down and Interclaim. Interclaim, motivated by the prospect of sharing in a substantial recovery, may well have seen itself as the victims’ avenging angel. To Down, however, Interclaim must have appeared to be the devil incarnate.

Even as the tide of litigation turned in Down’s favor, merely prevailing would likely have seemed to be insufficient. Under Canadian “loser pays” rules, if Down ultimately prevails in the Canadian litigations, he will no doubt seek reimbursement of attorney costs of several million dollars.[117]  In addition, he will likely seek payment from the approximately $3.5 million of bonds that Interclaim posted with regard to the frozen assets. To maximize his likelihood of prevailing in the Canadian litigations and imposing substantial costs on Interclaim, however, Down will have to resolve the Madison County class action in a manner not only consistent with his interests but so as not to represent an economic gain for Interclaim. Minimizing any payment to the class and also maximizing the infliction of harm on Interclaim, however, would be the diametric opposite of the objective of any U.S. lawyer that had entered into the Interclaim-Down retainer agreement[118]  to represent Interclaim and Down’s victims. That lawyer’s obligation would be to maximize the class’s recovery and, consistent therewith, fully protect the interests of its client, Interclaim.

E. The Settlement: An Abbreviated Version

The settlement between Ness Motley and Down (“the Settlement”) provided that Down would potentially make available a total of at least $6 million to pay compensation to victims of his enterprises who filed valid claims; $2 million to Ness Motley as an attorneys’ fee; and $2 million to pay the cost of notifying the victims of the Settlement. The Settlement specifically excluded Interclaim and the 29 victims who had entered into power-of-attorney relationships with Interclaim from the class, thereby excluding them from any recovery under the terms of the Settlement. The Settlement also detailed how, and in what form, notice was to be given to the victims of Down’s enterprises as well as the proof-of-claim form that they would have to file.

A more detailed discussion of the Settlement is set forth in Part VIII infra.

F. The Form of the Settlement: A Settlement Class Action

In proceeding to seek approval of their settlement, Ness Motley and Down decided to forgo a full evidentiary hearing regarding the class certification issue and to use instead the “settlement class action” method. Here, the parties stipulate to a temporary settlement class to facilitate settlement[119]  as a prelude to seeking certification of the class and settlement approval simultaneously. The class so formulated may not necessarily meet the requirements for certification of a class and is recognized solely for the purpose of concluding a settlement.

In furtherance of that strategy, the parties agreed to a settlement and stipulated to a temporary settlement class on June 19, 2001.[120]  They then sought and obtained the conditional certification of a settlement class from the Madison County court.[121]  The parties amended that stipulation and agreement in November 2001[122]  and jointly moved for preliminary approval, including a request for conditional certification of a settlement class. Judge Byron approved the motion,[123]  holding:

    In determining whether a settlement class should be conditionally certified for purposes of settlement only, and whether the terms of the Settlement are fair, adequate, and reasonable…the Court has fully considered the comprehensive terms of the Settlement, the statements of counsel, and all other matters of record brought to the Court’s attention. Based thereon, the Court concludes that there is probable cause to believe that the Settlement is fair, adequate, and reasonable and that it falls within the range of possible approval. It is, therefore, Ordered as follows:

    1. This court for settlement purposes only and based upon the well-pleaded facts,   has jurisdiction over this case for purposes of settlement. The settlement is properly   before this Court for preliminary approval…and preliminary approval is hereby   GRANTED.[124

In thus granting preliminary approval for both the constitution of the class and the terms of the settlement, Judge Byron gave his approbation to the various exclusions from the class of Interclaim and all those it represented as well as to the form of the proposed Notice of Settlement, the Proof of Claim, and the Plan of Notice that were part of the settlement. Pursuant thereto, he ordered that all members of the settlement class seeking to receive a distribution of funds had to provide their name and address to the Settlement Administrator on or before April 12, 2002, and had to return the Proof of Claim Form and other required documentation postmarked by June 28, 2002. Anyone included in the class wishing to object at the final settlement hearing had to file a notice with the clerk of the court on or before May 3, 2002.[125]  Finally, in November 2001, the settlement hearing to consider final approval was scheduled for June 6, 2002. (These dates have been superseded by later events.)[126

The creation of a temporary settlement class by stipulated order does not relieve the court of its ultimate responsibility of determining the appropriateness of certifying the class and the choice of class representative according to the requirements set forth under Illinois law that parallel those set out in Federal Rule 23. Indeed, because the approval is sought jointly, the dynamics of adversarial litigation are absent at that point. Therefore, in a stipulated settlement class context, the court is required to take a more active role as the guardian of the interests of absent class members[127]  and to examine, with “undiluted, even heightened attention,” compliance with the certification rules.[128

G. The Motion to Intervene

After informing Interclaim in August 2000 that it had entered settlement negotiations with Down, Ness Motley excluded Interclaim from being present at the talks, at the insistence of Down. Thereafter, Ness Motley appraised Interclaim of the broad parameters of the proposed settlement. Interclaim objected to the terms of the proposed settlement as being grossly unfair to the class and to Interclaim. Ness Motley also indicated that as a condition of the settlement, it had agreed that Interclaim would be excluded from recovering any portion of the proposed settlement and that it would withhold the substance of any of the settlement discussions from Interclaim. One month later, on September 19, 2000, Ness Motley wrote Interclaim to formally withdraw from representation of Interclaim.[129

On September 29, 2000, Ness Motley agreed to dismiss with prejudice one of the named defendants in the Madison County proceeding who was the nominal owner or controller of many of the Down group’s assets.[130]  In the estimation of Interclaim, that dismissal was likely to have vitiated the effect of the TRO preserving Down’s assets previously entered by the Madison County court.[131]  Alarmed by these events and upon learning that a hearing was scheduled before the Madison County court to certify the class and preliminarily approve the settlement,[132]  Interclaim, in March 2001, on behalf of itself and the 29 victims of Down’s enterprises specifically excluded from the class under the terms of the Settlement, filed a motion to intervene in the class action proceeding, claiming that Ness Motley had not adequately represented their interests.[133]  Interclaim further alleged in its supporting memorandum that, by agreeing to dismiss claims against one of the Down defendants who was the nominal owner of properties that had been the subject of asset freezes and the TRO, and by virtue of the fact that several of those properties had recently been sold with the proceeds therefore no longer accessible to the class, the interests of all class members were being adversely affected. Illinois law provides for intervention as of right in the circumstances set forth in Interclaim’s motion;[134]  nonetheless, Judge Byron denied the motion to intervene on the grounds that Interclaim would, the court concluded, be “disruptive” to the proceedings.[135]  Shortly thereafter, concerned about the ongoing dissipation of assets, Interclaim, on behalf of itself and the 29 putative class members who were excluded from the Settlement, requested the court to permit an expedited appeal of the order denying intervention.[136]  This was denied, without comment, on July 6, 2001.[137

Interclaim has brought suit against Ness Motley in U.S. District Court in Chicago, claiming breach of fiduciary duty, misappropriation of confidential information, and breach of contract.[138]  Ness Motley moved to dismiss the complaint, and a U.S. District Court, after extensively reviewing the facts pled, denied Ness Motley’s motion on October 29, 2001.[139

H. The Effect of the Negotiation of the Settlement on Ness Motley’s Fiduciary Obligation to Interclaim

As indicated,[140]  on December 4, 2000, Interclaim sued Ness Motley in U.S. District Court, claiming breach of fiduciary obligation, breach of contract, and misappropriation of confidential information. While that suit, which is ongoing, is not a subject of this article, elements of that litigation are germane to a discussion of the issues raised by the terms of the Settlement agreement. Moreover, the effect of the negotiation of the Settlement upon Ness Motley’s fiduciary obligation to Interclaim may be seen as relevant to an analysis of whether Ness Motley additionally breached its fiduciary obligation to its conscripted clients: the victims of Down’s enterprises.

When Ness Motley and Down initiated settlement negotiations and Ness Motley acceded to Down’s demands that Interclaim be excluded from the negotiations, a conflict of interest arose between Ness Motley and Interclaim. Ness Motley sought to unburden itself of that conflict by terminating Interclaim as its client on September 18, 2000.

Ness Motley contends that this action was not only justified but mandatory. In its view, when Down offered a fair settlement to the putative class but with the condition that Interclaim be excluded, that created a conflict of interest between Ness Motley and Interclaim. Ness Motley contends that it had the obligation to the putative class to consider the settlement on the basis of the class’s best interests and to withdraw from its representation of Interclaim.[141]  A brief examination of the relevant rules of professional ethics and fiduciary obligation is therefore in order.

When Ness Motley entered into an agreement with Interclaim to represent Interclaim and the victims of Down’s enterprises, it was governed by the following rules of professional ethics:

    Rule 1.7(a):

    A lawyer shall not represent a client if the representation of the client will be directly adverse to another client, unless: (1) the lawyer reasonably believes the representation will not adversely affect the relationship with the other client; and (2) each client consents after disclosure.[142

    Rule 1.7(b):

    A lawyer shall not represent a client if the representation of that client may be materially limited by the lawyer’s responsibilities to another client or to a third person by the lawyer’s own interests unless: (1) the lawyer reasonably believes the representation will not be adversely affected; and (2) the client consents after disclosure.[143

When Down demanded that Interclaim be excluded from settlement negotiations, Ness Motley was obligated to determine whether such exclusion was in the interests of its clients. If it concluded, as it reasonably must have, that excluding Interclaim was adverse to the interests of Interclaim, it was obligated to secure Interclaim’s consent before proceeding. Even if Ness Motley concluded, in the face of the evidence discussed in this monograph, that excluding Interclaim was in the interests of the class[144]  that it was seeking to represent, it still had, under the rules set forth above, fiduciary and ethical obligations to Interclaim. If Interclaim had refused to waive its rights, Ness Motley would have had to reject the demand as adverse to the interests of the client, Interclaim. If Ness Motley believed that by rejecting the demand, it was injuring the interests of the class, then it had an obligation to withdraw from representing the class and to seek the appointment of other counsel to represent the class. What it could not do in apparent violation of Rule 1.7 is what it did do: withdraw from representing Interclaim and continue to represent the class.

Once Ness Motley withdrew from representing Interclaim, Interclaim became a “former client” and therefore an additional ethical rule applied:

    Rule 1.9(a):

    A lawyer who has formerly represented a client in a matter shall not thereafter: (1) represent another person in the same or a substantially related matter in which that person’s interests are materially adverse to the interests of the former client, unless the former client consents after disclosure.[145

After terminating its representation of Interclaim—and Interclaim having thus ascended to the rank of “former client”—Ness Motley’s continued representation of the class in the same matter became materially adverse to the interests of its former client. By failing to either obtain Interclaim’s approval or to withdraw from representing the class, Ness Motley appears to have therefore also violated Rule 1.9(a).

VIII. The Settlement Agreement: In Detail

Under the terms of the settlement agreement,[146]  Down agreed to create two pools of money to compensate the victims: the first pool was $5.5 million; the second pool, $500,000. In addition, he agreed to pay Ness Motley $2 million plus expenses and to pay the costs of notifying class members.

The first pool, $5.5 million, would be paid to claimants who could produce credit-card receipts, a money order, or canceled checks as evidence of payments to any of Down’s enterprises and who could otherwise satisfy the onerous claim qualification procedure. Any monies not claimed under these terms would not be paid out by Down. In the event that valid proofs of claim were filed exceeding $5.5 million but not exceeding $10 million, the $5.5 million would be shared ratably by the claimants. If the total of the valid proofs of claim exceeded $10 million, Down had the right either to pay $10 million and thereby satisfy all valid claims to the first pool, irrespective of the amount claimed in excess of $10 million, or to terminate the stipulation of settlement.

The second pool, $500,000, was to be paid to claimants who submitted claims but did not provide the documents required to make a claim against the first pool. Any funds not paid out to claimants would be available to those claiming against the first pool and, if not successfully claimed, would revert to Down.

Excluded from the class were the 29 victims who had entered power-of-attorney agreements with Interclaim, those victims who had claimed compensation from the funds seized by the U.S. government in connection with the prosecution of Down in Seattle, Washington (including those whose compensation did not fully reimburse them for their losses), Interclaim, and any person who had at any time entered into any contractual relationship with Interclaim for the collection or recovery of funds on account of having been a victim of Down’s criminal enterprises.

With regard to the deposit of funds with the court for payment to claimants, the agreement provided: “Pursuant to the Letter Agreement the defendant shall use its best efforts to liquidate real estate to pay the obligations under the Stipulation as soon as reasonably practicable, however, the Defendant shall have up to three years following the Final Judgment to fund his obligations under the Stipulation. Interest shall accrue on obligations arising under the Stipulation after January 1, 2001 at the rate of 8% per annum.”[147

Class members were to be notified of the terms of the settlement by ads appearing in newspapers and on television that read:

    ATTENTION

    All persons who purchased Lottery or Puzzle Products on the telephone or through the mail.

    This Notice May Affect Your Legal Rights. Please Read It Carefully.

    You may be a potential class member in a settlement of a class action if you purchased a lottery, sweepstakes or puzzle game ticket for certain contests under various names including B.L.C. Services, Inc., BAJ Marketing, Inc., Marketing Inc. Winners [listing seven other names used by Down]….

    IN ORDER TO PARTICIPATE IN THE SETTLEMENT, YOU MUST HAVE PROOF OF PAYMENT.[148

Down was to pay the expenses of notifying the settlement class, thus relieving Ness Motley of having to pay approximately $1 million for notice costs, which it had undertaken to do in the retainer agreement with Interclaim.

The date for class members opting out or objecting to the settlement was set as May 3, 2002, and the fairness hearing, to give final approval to the settlement and the fee, was originally scheduled for June 7, 2002. As previously noted, these dates have been changed.[149

Down was released from all liability. Any class member who did not affirmatively respond by opting out of the class would be bound by the settlement and would be unable to make claims against Down based upon participation in one of his enterprises.

Ness Motley would apply to the court for an award of attorneys’ fees and reimbursement of costs. Down agreed to pay up to $2 million as a fee to Ness Motley plus expenses and agreed not to challenge such a fee request.

A. The Adequacy of the Settlement

The settlement purports to amount to $6 million for the victims, a lawyers’ fee of $2 million, plus approximately $2 million in notice and administration costs—totaling approximately $10 million. Given the raw materials with which Ness Motley had to work, the $10 million (which, as will be indicated, is in reality only a fraction of that amount) was, at best, woefully inadequate.

Down has pled guilty to conspiracy to soliciting monies through illegal activity using mass solicitations promoted through the use of fictitious names, and he agreed to provide a relatively small amount of restitution to the victims.[150]  As summarized by the Canadian bankruptcy judge: “The Down Organization particularly preyed on elderly Americans, many of whom were apparently so swayed by the promises of congenial telemarketers and convincing mailings that they paid thousands of dollars, sometimes their life savings, to the Down Organization.”[151

To be sure, Down had not been charged with nor had he pled guilty to fraud. Therefore, it would have been necessary to prove that the operative provisions of the Illinois Consumer Fraud and Deceptive Practices Act, upon which the class action complaint was founded, prohibiting the use of any “deception, fraud, false pretense, false promise, misrepresentation or the concealment, suppression or omission of any material fact…in the conduct of any trade or commerce…[which results in persons being] misled, deceived or damaged thereby,”[152]  had been violated. However, a review of Down’s Plea Agreement, the Plea Hearing Transcript, and the Superseding Information giving rise to the plea leads to the conclusion that certain facts and issues relating to the criminal conspiracy to which Mr. Down pled guilty were both stipulated to and judicially accepted after a full and fair hearing.[153]  Accordingly, the effect of the plea agreement in a civil action brought by victims of Mr. Down’s illegal conduct would be to preclude Mr. Down from re-litigating any of these facts or issues.[154]  While Down could certainly argue to the contrary,[155]  on the basis of the foregoing, it is nonetheless at least likely that Down’s illegal conduct would be found to constitute a violation of the Illinois Consumer Fraud and Deceptive Practices Act.[156

It is of further note that one of Down’s enterprises, Triple Eight International Services, a Barbados company, had been the subject of a complaint for injunctive relief brought by the Illinois Attorney General’s Office in 1997.[157]  This complaint was settled by a consent order in which Down’s enterprise, “without trial or adjudication of any issue of fact or law, and without admission of any of the violations of the [Illinois Consumer Fraud and Deceptive Business Practices] Act alleged in the complaint, agreed to be permanently enjoined from engaging in his ‘prize’ enterprises in Illinois and to rescind all prior sales.”[158]  It is not known whether Down continued to market his enterprises in Illinois subsequent to entering into the consent order. If it was determined that he did so, that would be a violation of the Illinois Act. Assuming the contrary, then, though the consent judgment would have been admissible in the class action proceeding, it would not, in and of itself, be an acknowledgment of the commission of predicate acts that violated the Illinois Consumer Fraud and Deceptive Practices Act. Other evidence, however, existed that was strongly supportive of violations of the Illinois Act. For example, the affidavits of the two U.S. Postal Inspectors, previously referred to,[159]  extensively detail acts of “deception, fraud, false pretense, false promise [and] misrepresentation,” that resulted in great damage to tens of thousands of participants in Down’s enterprises. In addition, the exhibits attached to one of the two affidavits provide substantial documentary evidence of deceptive practices and false promises that would appear to have resulted in documented losses of at least $28.5 million.

Additional evidence in support of a violation of the Illinois Act would have been available in the form of the other cease-and-desist orders that Down had ignored and evidence of Down’s worldwide asset secretion efforts. In addition, the Madison County court had issued an order that Down turn over his business records and make himself immediately available for a deposition. Had Down been compelled to turn over his records, such as the various mailing lists he used,[160]  mail contact with the victims of his enterprises could have been established—a frightening prospect for Down, the significance of which will be further analyzed below in Part (C)(3), “Notice to the Class.” Had Down not provided his records or submitted to discovery, he could have faced a default judgment. Finally, in granting a TRO, Judge Byron had held that “a strong prima facie case exists that the Defendants are indebted to the Plaintiffs and putative class members as a result of Defendants’ illegal activities” and that Plaintiff had “demonstrated a likelihood of success on the merits of its claims, both on the law and the facts.”[161

For these reasons, it would have been highly unlikely that Schuppert et al. v. Down et al. would become the first class action lawsuit in living memory to have actually gone to trial in Madison County.[162]  Adding to the compelling circumstances of the action was the great likelihood of a huge verdict against Down if the case did go to trial. Consider the impact of elderly Americans testifying that they had been duped by boiler-room operations into paying over their entire life savings to Down, including such sums as $50,000, $100,000, $200,000, and more, leaving them bereft of assets and unable to pay their bills—and that many of the victims had been hit time and time again in a relentless assault that emptied their bank accounts and left some of them indebted for the rest of their lives.

Of this scenario, plaintiff lawyers’ dreams are made. Had the right to bring the lawsuit and collect the proceeds been auctioned off to class action lawyers, and had the TRO remained in place freezing Down’s assets, a winning bid of at least $15 million seems not unlikely based upon a projection—reasonable in light of the evidence, circumstances, and amount of assets frozen—of obtaining a settlement or a jury verdict ranging from $50 million to $500 million.

B. The Reality of the Settlement

The settlement was not simply woefully inadequate; it was intentionally misleading as to the amount to be paid to victims of Down’s enterprises. In fact, instead of paying $6 million plus expenses, Down can actually expect to pay only a small fraction of that sum. The reasons for this discrepancy between the amount of the settlement as stated and the actual amount expected to be paid out is a function of the reversionary nature of the settlement.

Generally, class action monetary settlements are of two types: pro-rata and reversionary. In a pro-rata settlement, any amount of the settlement not claimed by class members is redistributed to the class members who file qualifying claims. As indicated above, however, in a reversionary settlement, any amount of a settlement not claimed by class members reverts to the defendant.[163]  The reversionary settlement is a technique employed by class action lawyers to obtain higher fees at the direct expense of class members and with the collusion of the defendant. Here, then, is how it works.

Assume a class action lawyer and a defendant have come to a general agreement to settle the action for $20 million, and that this amounts to five cents on the dollar as a percentage of either class member losses or the value of their injuries. Out of this sum, the lawyer may anticipate that the court will allow him a fee of 25 percent of the recovery, or, as in this illustration, $5 million. Any settlement amounts not claimed will be paid out to remaining claimants, who then would end up with perhaps seven cents on the dollar instead of five. By colluding at the class’s expense, both the class lawyer and the defendant can improve their respective positions.

Instead of a $20 million pro-rata settlement, the parties agree to a $40 million reversionary settlement. The lawyer thus increases his anticipated 25 percent fee to $10 million. To make it palatable to defendant, the defendant must be reasonably assured that in addition to paying the $10 million fee, he will not only not pay out an additional $30 million but, in fact, far less than $10 million, so that his total payment will fall well below the $20 million pro-rata settlement. Because the class lawyer now has a significant financial incentive to self-deal at the class’s expense, he agrees to structure the notice process so that far fewer class members are put on actual notice of the settlement than would otherwise be the case. More important, he agrees to claim-filing requirements that are so onerous that few will be able to file a claim or have the incentive to do so. So structured, it then becomes reasonably predictable that, at most, 20 percent of the claimants will actually file claims—a number consistent with the reality of many reversionary settlements. Therefore, of the $30 million available for payment to class members after a deduction for the lawyers’ fee (and ignoring expenses for purposes of this illustration), $6 million will actually be paid out to class members, for a total payment of $16 million. This constitutes a 25 percent  savings for the defendant when compared with the cost of a pro-rata settlement, and a fee for the lawyer amounting to over 167 percent of the class’s actual recovery.[164

Even this explanation, however, does not fully capture the effects of the Down settlement.

C. Analysis of the Settlement

1. Proof of Claim: The Documentary Requirement

The Proof of Claim Form[165]  contained in the Settlement is simply a compendium of one onerous requirement piled on top of another, apparently for the purpose of minimizing the number of successful claims. To begin, the form requires that evidence of the purchase of either Lottery Products or Puzzle Products had to be included “in the form of either [sic] credit card receipts, money orders or postal receipts, [or] canceled checks.”[166]  Failure to attach such evidence “may result in disallowance of this Proof of Claim.”[167

The form further requires that the exact amount of each element of the claim be set out; if there is any error, the claim “may be disallowed in whole or in part.”[168]  It also requires that the claimant has to submit the actual and complete name of the lottery company or puzzle company to which he sent his money. Down had used 57 different company and trade names in pursuit of his enterprises.[169]  Once again, failure to do so may result in disallowance of the claim.[170]  Even more onerously, if claims were included with respect to lottery products sold by non-Down corporations or “names,” then this could result in the disallowance of the entire claim, including claims for other purchases that were correctly listed on the form.[171]  And still more onerously, if Puzzle Product claims were included that were not one of the Puzzle Companies set forth in the Stipulated Settlement,[172]  then that would result in the disallowance of the entire claim.[173

Finally, a claimant who may have made multiple purchases is required to list each purchase separately, including the date of each purchase and the amount purchased on each such occasion. Any error in a listing submitted by a claimant is cause for disallowing the entire claim, including claims for which the purchase information is correctly listed.[174

One additional feature of the claiming process bears mention. In order to submit the Proof of Claim Form that accompanied the Notice of Settlement, the form has to be notarized. Under Illinois law, class members can verify their claims by signing the claim form under penalty of perjury, thus having the same legal effect as if the form were notarized;[175]  indeed, the Proof of Claim Form so provided.[176]  The requirement of notarization is not one typically imposed on class members submitting proofs of claim. Its appearance here, especially in view of Illinois law and the extensive contemporaneous documentary evidence required for submitting a claim, appears to be to pose just one more barrier to successful claim filing.

2. The Proof of Claim Form in Context

As noted, the Settlement primarily consists of two pools of money (in addition to Ness Motley’s fee): the first of $5.5 million; and the second, $500,000. In order to obtain payment from the first pool, the claimant would have to become aware of the Settlement, send for a claim form, fill it out, and include with it the required documents described above in order to obtain payment. Recall that Down’s lottery enterprises were conducted in the period from 1989 to about January 1996 and that many, if not most, of the victims were of advanced age. In the year 2002, five to ten years after having been defrauded, some out of their life savings, how many of the hundreds of thousands of victims who actually became aware of the settlement[177]  and took steps to obtain a claim form would be likely to have retained a credit-card statement, money-order receipt, or canceled check? It is simply inconceivable that a lawyer representing the class of Down’s victims, given the circumstances here, would agree to such an onerous claim-submission procedure. The fact that any part of the $5.5 million left unclaimed would revert to Down, however, may be instructive in explaining why, in this case, such a procedure was agreed to.

It may be thought that even if the first pool of money was constituted to be mostly unreachable, at least the second pool, though grossly inadequate—consisting of only $500,000—would at least be available to the class. Think again. The second pool is designated as being for payment to those who submitted claims but failed to supply the required documentation. However, the notice published in various newspapers in large bold type—indeed, the largest type in the ad—stated: “IN ORDER TO PARTICIPATE IN THE SETTLEMENT, YOU MUST HAVE PROOF OF PAYMENT.”[178

Accordingly, anyone who was able to learn of the Settlement and who had not retained contemporaneous credit-card, canceled-check, or postal money-order records that went back five to ten years would not likely have sought the detailed Notice of Settlement from the claims administrator.[179]  Here, again, it is simply inconceivable that a lawyer exercising his fiduciary obligation to the class would agree to so restrictive a claiming process with regard to the second pool. The only reasonable conclusion to be drawn from the Proof of Claim Form requirement is that it was constructed to minimize the number of claims that would be eligible for payment.

3. Notice to the Class

The use of a reversionary settlement and an onerous “Proof of Claim” process hardly exhausts the myriad ways in which the Ness Motley–Down Settlement is intended to minimize recovery by class members. Another elaborate ruse is the Plan of Notice.[180]  On its face, the Plan of Notice appears intended to promote the widest possible dissemination of notice of the Settlement, by providing for widespread advertising of a Summary Notice of Settlement previously described.[181]  Were there more effective means of notice? Recall that when Interclaim purchased certain trade debts of Down’s enterprises, it acquired a mailing list of 418,846 “Puzzle Contest” victims who had sent money to Down (the “Merkle” list).[182]  As previously indicated, a sampling of the list appeared to suggest that approximately 50 percent of the Puzzle Contest victims had also been victimized by the Lottery enterprises.[183]  In addition to the Merkle list, Down’s enterprises kept detailed, computerized records that contained the names, addresses, account numbers, phone numbers, order numbers, transaction dates, purchase amounts, and other contemporaneous data with regard to purchases from Down’s enterprises.[184]  Confirmation of the existence of such lists is contained in the Plan of Notice, which rejects the use of such lists (called “the data base in the possession of the Lottery Companies”) for the reasons set out below.

Thus, by use either of the Merkle list or the apparently more complete lists that Down had in his possession or otherwise had access to, it would have been possible to mail actual notice of the settlement directly to a large percentage of the victims of Down’s enterprises. This strategy was specifically rejected in the Ness Motley–Down Settlement. As described in the Plan of Notice:

The Settling Parties developed an approach designed to communicate the best notice practicable under all circumstances, having regard to a number of factors which included the following:

    (a)  the fact that the data base in the possession of the Lottery Companies is said to be   more than five years old and is unreliable to the extent that it has never been   updated and obviously will contain incorrect addresses for anyone who has   moved;
    (b)  the data bases themselves were reportedly culled and therefore may reflect only a   portion of the Members of the Settlement Class;
    (c)  that the cost of direct notification and administration of claims of substantial  numbers of the Members of the Settlement Class will likely be greater than the   value of the purchase of the Lottery and Puzzle Product and as such it is not  economically rational to incur notice costs greater than the amount of the claim;
    (d)  the fact that a fund of almost $12,000,000.00 previously made available to persons   who purchased lottery tickets from the Lottery Companies was not fully drawn  down by claims notwithstanding notification of same and as such, and for other  reasons known to the Settling Parties, it is arguable that there is disinterest in  potential Members of the Settlement Class to try to obtain any compensation;
    (e)  the fact that the vast majority of the purchases of Lottery and Puzzle Products were  for amounts of less than $75.00 and there is evidence to suggest that purchasers of   the Lottery and Puzzle Products were aware of the nature of the purchases they   were making and the risks associated with the purchase of such products; and
    (f)  the fact that there is not an unlimited budget available for notification and it is in  the interests of the Members of the Settlement Class, and the primary object of this   settlement, that resources be applied to satisfaction of claims being advanced by  Members of the Settlement Class as opposed to finding every person who could   advance a claim no matter how trivial.[185

The assertion in paragraph (c) above that direct notification “is not economically rational” because notice costs would exceed the amount of the claim is unsustainable. Notice costs using either the Merkle list or Down’s lists would approximate one dollar per name. The smallest documented loss in the Merkle list was five dollars. Individual lottery losses were substantially higher, and, in any event, none appear to be less than the lowest amount lost in the Puzzle Prize contests. Finally, the Merkle list and Down’s lists could have been utilized in such a manner as to send direct notice only to those whose losses exceeded a certain sum, e.g., ten dollars.

The assertion that the age of the database (“more than five years old”) made it unreliable is refuted in an affidavit from the head of two direct marketing services companies, who stated:

    Since every year in America millions of people move to another address or die, keeping current name and address files is a constant challenge. The direct marketing industry, cataloguers, retailers and others who sell products and services to the public by mail and telephone have developed computerized databases and techniques to deal with the problem. The government, the U.S. Postal Service and numerous companies have developed resources that make it possible to determine whether an address currently receives mail delivered by the U.S. Postal Service, whether an occupant has moved from one address and whether a person is now deceased.

    Every day, the United States Postal Service receives Change of Address (COA) data filed by relocating postal customers. These COAs submitted from individuals, families, businesses, and postal carriers are the source of the National Change of Address (NCOA) database and are transmitted daily from Computerized Forwarding Systems across the United States to the U.S. Postal Service National Customer Support Center (NCSC) in Memphis, Tennessee.

    Approximately 40 million of these COAs are filed annually. Records are retained on the NCOA file for a three-year period from the customer’s move-effective date, and on average, the NCOA file contains approximately 110 million permanent change-of-address (COA) records filed with the U.S. Postal Service. The NCOA database is updated every week.

    Several private firms provide additional matching services against proprietary Change of Address files in cooperation with magazine publishers, catalog companies, insurance companies and others which can match postal customer moves for five years or more. Files of deceased individuals are also often available from the same sources. Also there are specialized “skip chasing” services offering to track down debtors who have moved to avoid creditors which can be used [sic] find others who cannot be otherwise located.

    It is my belief based on my experience and knowledge of the list maintenance techniques in common use in the direct marketing industry that a name and address file compiled in 1998 may be updated such that a majority and perhaps substantially higher percentage of the names and addresses may be contacted by mail. Further, it is my professional opinion that businesses in the ordinary course would rely [sic] such an updated list for commercial purposes.[186

The conclusion is therefore inescapable that, though actual notice was quite feasible, it was rejected because it would have been too effective. In order to secure the objectives of the reversionary Settlement, it was necessary to use the least effective means of notice[187]  and the most arduous claim process.[188

Judge Byron’s preliminary approvals of the Stipulation and Agreement of Settlement on June 19, 2001, and Amended Stipulation and Agreement of Settlement in November 2001 (including the Plan of Notice and the rejection of the use of actual mailing lists in favor of newspaper and TV advertisements) have recently been the subject of critical media attention.[189]  Even though the media attention was modest, it was also unprecedented, and it apparently subjected the local class action bar and the court to unwanted scrutiny. On May 24, 2002, Judge Byron ordered Ness Motley’s local counsel to review Interclaim’s Merkle list and report back to the court.[190]  On June 7, 2002, at a hearing before Judge Byron, local counsel reported that it had performed a statistical analysis on the Merkle list, using a sample size indicating a confidence level of 95 percent, with the result that “68.7 percent of the addresses were still viable addresses….If you remove the impact of…deceased individuals from the analysis, the viable address percentage increased to 80.8 percent.”[191]  On the basis of local counsel’s report, Judge Byron ordered that a postcard be mailed to those listed in the Merkle list, summarizing the summary notice and listing a toll-free number to phone to obtain a complete notice from the claims administrator.[192]  Judge Byron also postponed the Settlement Fairness Hearing scheduled for June 7, 2002, until August 14, 2002. Local counsel for Ness Motley, apparently concerned that the media focus on Schuppert could pose a danger to the entire Madison County class action enterprise, was quoted as saying, “[I]f the settlement doesn’t look fair, he won’t ask the judge to approve it—even if that means disagreeing with the attorney who retained him on behalf of Ness Motley.”[193

4. Limitations on the Class

As noted, the Settlement Agreement excluded from the class: (1) the 15 victims who had granted Interclaim a power of attorney to pursue their claims and who were co-petitioners with Interclaim in the Canadian proceedings; (2) any other victims who had at any time formed a contractual relation with Interclaim for the pursuit of claims against Down; (3) all victims who had made claims against the fund created as part of the plea agreement entered into by Down in the civil and criminal proceedings brought in Seattle, Washington, irrespective of whether the amounts they obtained from the fund fully reimbursed their losses; and (4) Interclaim.

By agreeing to exclude groups of victims without any apparent justification except that Down apparently so demanded, Ness Motley breached its fiduciary duty to those excluded class members, including the 29 victims specifically excluded who had suffered a net loss of $660,964 and who had specifically retained Ness Motley, through Interclaim, in the February 14, 2000, Retainer Agreement.[194]  Moreover, once it became known to Ness Motley that Down was insisting on excluding groups of victims without any substantive justification, it became incumbent on Ness Motley to inform the court and request the appointment of separate counsel to represent the interests of those class members.[195]  The failure to have done so would appear to invalidate the Settlement under recent U.S. Supreme Court rulings.[196

5. The Letter Agreement

As a part of the initial Stipulated Settlement[197]  entered into on June 19, 2001, Down agreed to pay the notional settlement amount (the two pools amounting to $6 million) and Ness Motley’s fees and expenses of administering the claim process, in accordance with the terms of the Settlement and “[s]ubject to the terms of the Letter Agreement. ”[198]  The Letter Agreement is defined as “that agreement between Defendant’s Counsel and Plaintiff’s Counsel which will be filed under seal and attached as Exhibit ‘C’ hereto.”[199]  It provides:

    The terms of this Letter Agreement are to remain confidential and under seal of the Court and are to be disclosed to the Court but no other person shall have access to it without the prior approval of the Court on notice to James Blair Down by virtue of the confidential nature of the contents of this Letter Agreement.

    .

    .

    .

    By virtue of the nature of the assets of Mr. Down, substantial time may be required in order to realize the full value of the assets and to overcome the damaging effect of the false and misleading statements that were made by Interclaim in relation to the assets. While the parties recognize that it is in everyone’s best interests to discharge the obligations under the Settlement Agreement as soon as possible, time may be required so as to satisfy the obligations that arise under the Settlement Agreement.

    You have agreed to dissolve by consent the Temporary Restraining Order granted in Madison County on August 7, 2000 as a term of the Order of Preliminary Approval.

    Pending approval and performance of the Settlement Agreement the parties have agreed to the following terms:

    [A]s soon as reasonably practicable after the preliminary approval of the Settlement Agreement and provided that there are no appeals or other proceedings, which might affect the validity of the Order of Preliminary Approval, Mr. Down will cause sufficient money to be paid into trust with this firm in order that the Plan of Notice approved by the court can be implemented for the term and on the conditions prescribed by the Court….

    [I]n the event that dispositions of [property]…are such that proceeds are not readily available, Mr. Down shall have up to three years from the date of the Final Judgment or the final conclusion of any appeals therefrom or after any other court application has been finally concluded and all appeals therefrom are exhausted to discharge his obligations to pay the amounts due to Members of the Settlement Class and fees awarded under a fee petition filed by the lawyers for Class Counsel. Obligations under the Settlement Agreement shall be paid in the following order of priority: first to Administrative Costs and costs of notice, second to amounts due to Settlement Class Members on account of valid proven claims and third to fees and expenses of Class Counsel….

    [I]n the event that Mr. Down is able to pay the amounts of proper proven claims of class members prior to the disposition of [certain]…[p]roperties…, such payments shall be sufficient to satisfy his obligations under the Settlement Agreement to the class members and the Settlement Agreement shall be deemed to be fully performed with respect to his obligations to the class members notwithstanding that sufficient monies are not available to satisfy the claims of Class Counsel. In such circumstance, Mr. Down shall be obligated to pay the fees of Class Counsel but the Settlement Agreement and the releases contemplated thereby shall remain in full force and effect.[200

(a) Discussion of the Letter Agreement

Thus, contrary to what an informed reader of the Stipulation and Agreement of Settlement would conclude, the Settlement did not require Down to fund the two pools of money upon receiving court approval of the Stipulated Settlement. Instead, Down would have at least three years and possibly far longer to do so. Moreover, he would not have to post security for his promise to fund the settlement pools three or more years thereafter.

Such a provision in a class action settlement agreement is extremely unusual, if not unique. No class action settlement reported in case reports, journals, or the media has included a provision that both allows defendant to defer payment and does not require security for defendant’s promise to pay into the settlement fund. Indeed, it is certainly possible, as the Settlement is structured, that under the terms of the Letter Agreement, Down will never have to fully fund both settlement pools. On the assumption that the dissemination of the Notice of Settlement will inform relatively few of the victims of Down’s enterprises and that the onerous Proof of Claim Form will preclude or dissuade many of those so informed from asserting claims or result in invalidation of claims filed, Down can reasonably expect to actually pay very little into the settlement funds.

Moreover, because the Letter Agreement substantially varies the terms of the Settlement, if one of the victims of Down’s enterprises who filed a claim and provided the obligatory release[201]  later contested the Settlement on the grounds that it fraudulently omitted a material term, most courts would invalidate the Settlement on that basis.

Such realization probably accounts for why the parties decided to amend the Stipulation of Settlement. Thus, on November 20, 2001, five months after the original Settlement, Down and class counsel amended their Settlement[202]  and added the following language to a paragraph providing for the payment of the settlement monies into the court for distribution per the terms of the agreement:

    Funding of the obligations under the Stipulation is being carried out through the liquidation of real estate. Pursuant to the Letter Agreement the Defendant shall use its best efforts to liquidate real estate to pay the obligations under the Stipulation as soon as reasonably practicable, however, the Defendant shall have up to three years following the Final Judgment to fund his obligations under the Stipulation. Interest shall accrue on obligations arising under the Stipulation after January 1, 2001 at the rate of 8% per annum.[203

Notwithstanding this apparent attempt to mitigate the risk of a prospective claim being brought by a victim of Down’s enterprises (who had submitted a claim and release, and who might assert that the release was obtained fraudulently), the Letter Agreement remains a bizarre feature of the Settlement. Despite the more detailed reference in the Amended Settlement, it remains filed “under seal.” No rational reason can be conjured up to explain this secrecy except possibly the desire to keep class members from learning the full details of the Letter Agreement or perhaps affording the court a modicum of protection for its anticipated approval of the settlement class and Stipulated Settlement by keeping the document secret.

6. Right to Object to the Settlement

As is typical in class action settlements, members of the settlement class are permitted to appear at the Settlement Hearing, in person or by counsel, to be heard in opposition to the fairness and reasonableness of the Amended Stipulation of Settlement and/or the application for legal fees.[204]  However, unlike in other class action settlements, in Schuppert, that right to object is conditioned on the prior provision of “sworn evidence of the purchase of Lottery Products or Puzzle Products in the form of either credit card receipts, money order or postal receipts, cancelled  checks or other evidence of payment.”[205]  Thus, all class members who do not have such documentation and who may wish to object to the requirement that, in order to submit a claim they would have to produce one of the listed documents, would be excluded from objecting to the Settlement and fee request (though, as noted, they could still participate in the second compensation pool).

7. Ness Motley’s Fee

Under the terms of the Letter Agreement, Down’s obligations to class members shall be deemed fully performed, provided he:

    is able to pay the amounts of proper proven claims of class members notwithstanding that sufficient monies are not available to satisfy the claim of Class Counsel. In such circumstance, Mr. Down shall be obligated to pay the fees of Class Counsel but the Settlement Agreement and the releases contemplated thereby shall remain in full force and effect.[206

On its face, the Letter Agreement thus provides that if Down fails to pay Ness Motley the agreed-upon $2 million fee (assuming court approval), the settlement with the class remains fully binding, provided Down has paid their “proper proven claims.” Moreover, Down’s promise to pay Ness Motley’s fee is unsecured. Thus, if Down fails to pay the fee, Ness Motley will have to bring an action against Down and will have to locate Down’s assets—seemingly reposed in complex structures in many countries—to collect on any judgment.

No reported class action settlement allows the defendant to thus delay paying class counsel’s fee, let alone accept an unsecured promise to pay.

For these reasons, it is appropriate to treat the arrangement entered into between Down and Ness Motley, as stated in the Letter Agreement, with considerable skepticism. Indeed, anyone who believes that Ness Motley accepted a settlement in which payment of its fee could be delayed three years or more—and that requires it to rely on the unsecured promise of someone well versed in concealing his assets after he has obtained the benefit of a full release of liability from the underlying class—has obviously been standing out in the Madison County sun for too long. Whatever the reality is with regard to payment of Ness Motley’s fee, it is highly improbable that it is that which is set forth in the Letter Agreement.[207

IX. Schuppert v. Down: A Case in Progress

In the face of the undoubtedly unwanted publicity about the Settlement in Schuppert v. Down,[208]  the rapid progress that Ness Motley and Down were making in moving the class action though the judicial process, a hallmark of Madison County class action claiming, was interrupted. As of the writing of this monograph, new deadlines and dates have been set as follows for Schuppert v. Down:

1) class members objecting to the Settlement must file notice with the court by August 2, 2002; 2) class members seeking to opt-out of the Settlement must so notice the court by August 2, 2002; 3) class members filing claims must submit them by September 6, 2002; and, most critically; 4) the fairness hearing originally scheduled for June 7, 2002, has been rescheduled to August 14, 2002.

On that date, August 14, 2002, approval by Judge Byron will cast the Settlement, including the Plan of Notice, in concrete. It will be impervious to attack[209] —except to direct appeal by an objecting class member to Illinois appellate courts, which have never heretofore disturbed a Madison County class action proceeding.

X. Conclusion

This monograph began with a reference to the “rule of law” that subtends our economic system.[210]  It now concludes with the observation that in Madison County, the rule of law has been displaced by the “rule of class action lawyers.”

Even more disturbing than the Plan of Notice and Proof of Claim—each designed apparently to minimize the number and amount of claims—is the fact that the settlement was agreed to by one of the leading class action law firms, which apparently had acted in full confidence that it owed no fiduciary obligation to the class members it had undertaken to represent. Moreover, that in bringing the action in Madison County, it was thereby expressing confidence that the courts in that county would summarily approve the settlement and fee request while paying only lip service, at best, to the mantra that the court must be the guardian of the interests of class members.[211

While the glare of publicity may subvert the apparent intention to subject the elderly victims of Down’s mass-marketing schemes to a second victimhood, such publicity rarely attends even the most abusive of class action settlements.

A solution to the lack of due process in state court class claiming necessarily includes a facilitated process for removing class actions filed in state courts to federal courts. The analysis of the Settlement in this monograph adds to the already substantial evidence that respect for the rule of law requires that defendants have the opportunity to bypass the “class action magnet courts”[212]  that stand, like speed traps, astride the nation’s litigation highways.

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Center for Legal Policy.

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CJR 6 PDF (226 kb)

SUMMARY:
The Manhattan Institute released today a case study by Professor Lester Brickman of Cardozo Law School on how class action litigation in state courts allows attorneys to profit at the expense of their clients. Professor Brickman shows how the law firm of Ness, Motley, Loadholt, Richardson & Poole ('Ness Motley') struck a settlement agreement with a convicted felon for a $2 million dollar attorneys’ fee and woefully failed to protect the interests of its clients--hundreds of thousands of elderly Americans.  

PRESS RELEASE

WHAT THE PRESS SAID:

Court Has Dubious Record As a Class-Action Leader, New York Times, 8-15-02
Victims may get hit again | Settlement weighed in class-action suit, Belleville News-Democrat, 8-14-02

TABLE OF CONTENTS:

ABOUT THE AUTHOR

EXECUTIVE SUMMARY

I. Introduction

II.  The Class Action Phenomenon

III. Class Actions: Uses and Abuses

IV.  Down’s Enterprises

A. Cease-and-Desist Orders

B. The Criminal Prosecution

V. The Interclaim Group

VI.  The Canadian Litigations

A. The Bankruptcy Action

B. The Alberta Representative Action

C. The Asset Freezes

VII. The Action Moves to the United States

A. The Interclaim–Ness Motley Retainer Agreement

B. How Madison County Was Selected

C. The Temporary Restraining Order and the Initiation of Settlement Negotiations

D. Settlement Context: The Interclaim-Down Relationship

E. The Settlement: An Abbreviated Version

F. The Form of the Settlement: A Settlement Class Action

G. The Motion to Intervene

H. The Effect of the Negotiation of the Settlement on Ness Motley’s Fiduciary Obligation to Interclaim

VIII.  The Settlement Agreement: In Detail

A. The Adequacy of the Settlement

B. The Reality of the Settlement

C. Analysis of the Settlement

1. Proof of Claim: The Documentary Requirement

2. The Proof of Claim Form in Context

3. Notice to the Class

4. Limitations on the Class

5. The Letter Agreement

(a) Discussion of the Letter Agreement

6. Right to Object to the Settlement

7. Ness Motley’s Fee

IX.  Schuppert v. Down: A Case in Progress

X. Conclusion

NOTES

 


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