Civil Justice Report
No. 6 August 2002
Anatomy of a Madison County (Illinois) Class Action: A Study of Pathology
- “There can be no doubt that all of the prosperous economies [in the world] are market economies, and those who understand these economies know that the market is, at the least, a major source of their prosperity….To realize all the gains from trade…there has to be a legal system and political order that enforces contracts, protects property rights, carries out mortgage agreements, provides for limited liability corporations, and facilitates a lasting and widely used capital market that makes the investments and loans more liquid than they would otherwise be.” Mancur Olson, Power & Prosperity (2000), at 173.
- In re Synthroid Marketing Litigation, 201 F. Supp. 2d 861, 872 n.6 (U.S.D.C. N.D. Ill. 2002).
- The “Study” referenced here is by John H. Beisner and Jessica Davidson Miller, “They’re Making a Federal Case Out of It...in State Court,” Civil Justice Report, Center for Legal Policy at the Manhattan Institute (Sept. 2001). A follow-up study has been done, updating the Madison County class action filings. See John H. Beisner and Jessica Davidson Miller, “Class Action Magnet Courts: The Allure Intensifies,” Civil Justice Report, Center for Legal Policy at the Manhattan Institute (June 2002).
- The Study, id. at 7. The principal towns in Madison County are Granite City, population 31,301; and Alton, population 30,446. Id. at 12.
- Noam Neusner, “The Judges of Madison County,” U.S. News & World Report, Dec. 17, 2001, at 39.
- “Consider the case of Strasen v. Allstate Insurance. The case alleges that Allstate uses a faulty database to decide appropriate medical treatment and payment for certain kinds of claims. Similar cases have been filed across the country, all seeking nationwide class action status. None succeeded before, but in Madison [County], one did.” Id.
- The Study, supra n. 3 at 12–19.
- Id. at 5.
- 60 Minutes segment entitled “Con Man,” by correspondent Mike Wallace, broadcast Nov. 7, 1999, on CBS.
- Affidavit of Douglas O. Pulling, U.S. Postal Inspector, in U.S. v. All Funds…at Smith Barney et al., U.S. District Court, Western Dist., Washington, No. C97-093, May 30, 1997, filed with the court on June 6, 1997 (hereinafter, “Pulling Affidavit”).
- A survey done by the Federalist Society found that between 1988 and 1998, class action filings increased by 338 percent in federal courts, while the increase in state courts was more than 1,000 percent. See “Analysis: Class Action Litigation, a Federalist Society Survey,” Class Action Watch (Federalist Society for Law & Public Policy Studies, Washington, D.C.) 1, no. 1 (1999), at 3.
- One reason that class action filings are counted as only one or two civil cases when, in fact, the putative class consists of thousands and even millions of individuals is that, in most states, a filing fee must be paid for each civil case filing. Payment of the fee determines the number of civil case filings for statistical purposes. Plaintiffs’ class action attorneys typically pay filing fees only for each named plaintiff. Accordingly, the class action counts for statistical purposes as one or perhaps two or three civil actions. In addition, most states do not count a civil action as filed until a jury or first witness is sworn at the commencement of a trial—events that very rarely occur in class actions.
- See, generally, Walter Olson, The Litigation Explosion (1991).
- There was a little girl/Who had a little curl/Right in the middle of her forehead/When she was good/She was very good indeed/But when she was bad she was horrid.—Henry Wadsworth Longfellow
- For an analysis of aggregative litigation, see Lester Brickman, “Lawyers’ Ethics and Fiduciary Obligation in the Brave New World of Aggregative Litigation,” 26 Wm. & Mary Envtl. L. & Pol. Rev. (2001), at 243 (hereinafter, Brickman, “Aggregative Litigation”).
- See Deborah R. Hensler et al., Class Action Dilemmas: Pursuing Public Goals for Private Gain (2000), at 71.
- In a recent survey of public confidence in various institutions, including the medical profession, the executive branch, the U.S. Supreme Court, lower federal courts, judges and the judiciary, and the Congress, the category of “legal profession/lawyers” placed second-lowest, with only 19 percent indicating that they were “extremely” or “very” confident in the profession. Only the news media placed lower, with 16 percent confidence. “Public Perceptions of Lawyers: Consumer Research Findings,” ABA Sec. of Litigation, Apr. 2002, at 6. In that same survey, 57 percent indicated that “lawyers are more concerned with their own self-promotion than their client’s best interests.” Id. at 7. “[T]he greatest number of complaints arise around lawyers’ fees….Consumers say that lawyers charge too much.” Id at 14. A U.S. News poll found that “69 percent of Americans believe lawyers are only sometimes honest or not usually honest and 56 percent say lawyers use the system to…enrich themselves.” Stephen Budiensky, “How Lawyers Abuse the Law,” U.S. News & World Report, Jan. 30, 1995, at 50, 51.
- Class Action System Survey, U.S. Chamber of Commerce, Institute for Legal Reform, poll conducted on May 11–12, 2002. See www.litigationfairness.org, last consulted on June 27, 2002. In response to the question of who benefits most from the current class action lawsuit system, 45 percent answered, the lawyers who represent the alleged victims; 28 percent, the lawyers who represent the companies being sued; and only 5 percent answered, people who are part of the class action lawsuits. Id. at 4. The survey also asked: Who benefits least from the current class action system? The results were: 38 percent answered, consumers who buy the company’s products; and 30 percent answered, the people who are part of class action lawsuits. Id. at 5. Of the 45 percent who had received notices in the mail that they may be eligible to share in a class action settlement, 50 percent thought that the notice was unclear, and 69 percent said that they had not bothered to take steps required by the notice to share in the settlement; of those who did take such steps, 67 percent answered that they had not received something of meaningful value to them, considering their effort to comply with the notices. Id. at 3.
- Fed. R. Civ. P. 23.
- Fed. R. Civ. P. 23 (a).
- For a history of the 1966 amendment and an analysis of its effects, intended and unintended, see Brickman, “Aggregative Litigation,” supra n. 16 at appendix (at 310).
- See Reynolds v. Beneficial National Bank et al., 288 F. 3d 277 (2002), describing a notice of settlement sent to 17 million persons, “most of whom ignored them.” Id. at 282.
- 51 F. 3d 1293 (7th Cir. 1995). For a discussion of the implications of Rhone-Poulenc, see Lester Brickman, “Class Action Reform: Beyond Rhone-Poulenc Rorer,” Research Memorandum 10, Manhattan Institute (Oct. 1995).
- 249 F. 3d 672 (7th Cir. 2001).
- See Brickman, “Aggregative Litigation,” supra n. 16 at 258–65.
- State courts often certify class actions where federal courts, upon identical facts, have refused to do so. See in re Masonite Corp. Hardboard Siding Products Liability Litigation,170 F.R.D. 417 (E.D. La. 1997) and Naef v. Masonite Corp., No. CV-94-4033 (Cir. Ct., Mobile County, Ala.) (denial, and grant, of certification of identical nationwide classes of purchasers of allegedly defective home siding). Some state courts aid class action lawyers by certifying nationwide classes before the defendant is even served with process—so-called drive-by certification. See Brickman, “Aggregative Litigation,” supra n. 16 at 260; Linda S. Mullenix, “Abandoning the Federal Class Action Ship: Is There Smoother Sailing for Class Actions in Gulf Waters?” 74 Tul. L. Rev. (2000), at 1709, 1716; see also Sweet v. Ford Motor Co., No. L-10463 (Cir. Ct., Blount County, Tenn.), order dated July 10, 1996; Davidson v. Bridgestone/Firestone, Inc., No. 00C2298 (8th Cir. Ct., 20th Jud. Dist. Nashville, Tenn.), order dated Aug. 18, 2000; Farkas v. Bridgestone/Firestone, Inc., No. 00-CI-5263 (Cir. Ct., Jefferson County, Ky.), order dated Aug. 18, 2000.
- Matsushita Electric Industrial Co., Ltd. v. Epstein, 616 U.S. 367, 116 S. Ct. 873 (1996).
- 321 Ill. App. 3d 269, 746 N.E. 2d 1242 (Ill. App. 5 Dist. 2001).
- According to the court, “[f]ormer and current representatives of state insurance commissioners testified that the laws in many…states permit and in some cases encourage the use of non-OEM parts as an effort to encourage competitive price control.” Id. at 1254. The court, however, dismissed this evidence on the basis that the local jury had found that “inferior” aftermarket replacement parts had been used and that no state had sanctioned the use of “inferior” parts. Id. However, the court appears to be using “inferior” to mean “non-original equipment manufacturer parts” that therefore were not of “like kind and quality” as State Farm had promised in its contracts of insurance. Id. at 1247. Accordingly, on the basis of this tautological legerdemain, use of non-OEM parts was, by definition, the use of “inferior” parts.
- See Matthew J. Wald, “Suit Against Auto Insurer Could Affect Nearly All Drivers,” New York Times, Sept. 27, 1998, §1, at 29.
- The court argued that, since the “of like kind and quality” language appeared in most of State Farm’s contracts nationwide, its interpretation of this contractual language was therefore consistent with the laws of all the states. The argument fails, however. The interpretation of a contract of insurance is a matter of state law. States interpreting the identical language in a contract and even in a statute can and do differ as to the meaning or effect of the words. It is also of note that a Maryland state court refused to certify a nearly identical class action brought against the Geico Corporation. See Snell et al. v. the Geico Corp. et al., 2001 WL 1085237 (Md. Cir. Ct., Aug. 14, 2001). Plaintiffs argued that the case they were bringing “is on all fours with [Avery],” id. at 7. The court basically concurred but found that certifying a nationwide class action could result in nullification of the laws and policies of other states with regard to the use of non-OEM parts. The court also rejected the Avery court’s reasoning set forth in supra n. 30. Id. at 10.
- See the Matter of Bridgestone/Firestone, Inc. et al., Westlaw (7th Cir. May 2, 2002), at 9 (“Differences across states may be costly for courts and litigants alike, but they are a fundamental aspect of our federal republic and must not be overridden in a quest to clear the queue in court”); see also BMW v. Gore, 517 U.S. 559, 568–73 (1996), Szabo v. Bridgeport Machines, Inc., 249 F. 3d 672 (7th Cir. 2001); Spence v. Glock, GmbH, 227 F. 3d 308 (5th Cir. 2000).
- U.S. Const., Art. III, § 2.
- 28 U.S.C. § 1332.
- The importance to plaintiff’s counsel of keeping a class action bottled up in state court is illustrated by the following litigation: plaintiff, seeking to institute a commercial litigation against a major international company, interviewed a number of law firms and selected one on the basis of that firm’s reputation and its claimed ability to file the action in a small-county state court in one of the magnet states that attracts high numbers of class action filings. A complaint was filed, and the defendant removed the matter to federal district court. Plaintiff then withdrew its complaint. The same process was replicated a second time and a third time, each time with the same result. On the fourth try, plaintiff was able to get the federal district court to deny removal and to remand the case to state court. Once defendant faced the prospect of trying the case in a state court selected by plaintiff’s counsel, it sued for surrender. Shortly thereafter, a settlement was negotiated in which defendant agreed to provide plaintiff with very substantial compensation. It appears reasonably apparent that the key to plaintiff’s victory was its ability to have the suit tried in state court rather than in federal court. (I was retained as an expert witness in this litigation, which is subject to an order of confidentiality.)
- Among class actions currently being litigated in Madison County are four alleging that standard form contracts used by auto manufacturers offering extended warranty protection plans violate state consumer-fraud laws because the contracts do not make clear that the dealer receives compensation for selling the plan. To ensure that defendants cannot remove these cases to federal court, the class lawyers have included one Illinois car dealer in each case as a defendant. See Beisner and Miller, “Class Action Magnet Courts,” supra n. 3 at 4.
- 28 U.S.C. § 1446 (b).
- See, e.g., Davis v. Carl Cannon Chevrolet-Olds, Inc., 182 F. 3d 792, 793–94 (11 Cir. 1999); Farkas v. Bridgestone/Firestone, Inc., 113 F. Supp. 2d 1107, 1112 (W.D. Ky. 2000).
- See, e.g., Gilmer v. Walt Disney Co., 915 F. Supp. 1001, 1011 (W.D. Ark. 1996); Dupraz v. Aventis CropScience USA Holding, Inc., 153 F. Supp. 2d 1102, 1105 (D.S.D. 2001).
- See Carrie Menkel-Meadow, “Ethics and the Settlements of Mass Torts: When the Rules Meet the Road,” 80 Cornell L. Rev. (1995), at 1159, 1189–90.
- In class actions and other aggregative forms of litigation, there is a conflict between the financial interests of the lawyers and the class they represent. Manual for Complex Litigation (3d) (1995), § 23.24; Judith Resnick et al., “Individuals Within the Aggregate: Relationships, Representation and Fees,” 71 N.Y.U. L. Rev. (1996), at 296, 300 (the economic benefits to lawyers of large-scale litigation are well documented); see also Charles C. Wolfram, “Mass Torts—Messy Ethics,” 80 Cornell L. Rev. (1995), at 1228, 1231 (stating “the class-action plaintiffs’ bar is driven by…easy money—a great deal of it”).
- See Jack B. Weinstein, Individual Justice in Mass Tort Litigation (1995), at 74–76 (stating that “plaintiffs’ attorneys in class and derivative cases…operate with nearly total freedom from traditional forms of client monitoring”).
- See Sarah A. Toops, “Ethically Representing Thousands of Plaintiffs: Conflict Problems in Mass Toxic Harm Cases,” 67 Def. Coun. J. (2000), at 462, 465–66.
- See in re Polybutylene Plumbing Litig., 23 S.W. 3d 428 (Tex. App. 2000), where the appellate court gave its blessing to the enforcement of 37,100 individual fee contracts, most of them providing for a 40 percent contingency fee, totaling $88.8 million in attorneys’ fees, and reversing the district court’s treatment of the case as, in effect, a class action. The lower court also had reduced the fee total to 20 percent for the cases that did not go to trial, and awarded a total fee of $33.1 million (a $55.7 million reduction).
- For a discussion of ethical issues raised by mass tort litigation, see, generally, Toops, supra n. 44.
- For an example of concurrent conflicts of interest in class action claiming, see infra n. 102.
- “We agree with those who argue that lawyer abuse in class actions is rampant and that the current system, far from keeping this abuse in check, is set up to shield lawyers from the consequences of their misdeeds.” Susan P. Koniak and George M. Cohen, “Under Cloak of Settlement,” 82 Va. L. Rev. (1996), at 1051, 1056.
- See Wolfram, supra n. 42, at 1228, 1233 (arguing that class action lawyers are beyond reform, especially given the lack of policing methods and stating that “[w]hat is badly broken, and what badly needs mending, is the basic class action and mass-litigation system of litigation. The only effective way to rid the judicial system of Willie Suttons is to take the profit out of robbing banks.”).
- Paul C. Carrington and Derek P. Apanovitch, “The Constitutional Limits of Judicial Rulemaking: The Illegitimacy of Mass Tort Settlements Negotiated Under Federal Rule 23,” 39 Ariz. L. Rev. (1997), at 461, 469. See Kamilewicz v. Bank of Boston Corp., 92 F. 3d 506 (7th Cir. 1996), reh’g denied, 100 F. 3d 1348, cert. denied, 520 U.S. 1204 (1997); Epstein v. MCA, Inc. 179 F. 3d 641 (9th Cir. 1999); Thomas v. Albright, 77 F. Supp. 2d 114 (D.D.C. 1999); see also Brickman, “Aggregative Litigation,” supra n. 16 at 298–300.
- “[F]ee awards are one of the engines driving mass-tort litigation.” See Advisory Comm. on Civil Rules & Working Group on Mass Torts, Report on Mass Tort Litigation (Feb. 15, 1999), at 30.
- “[Courts have a] judicial duty to protect the members of a class in a class action from lawyers for the class who may, in derogation of their professional and fiduciary obligation, place their pecuniary self-interest ahead of that of the class.” Reynolds et al. v. Beneficial National Bank, 288 F. 3d 277, 279 (2002). “[I]inflated attorneys’ fees are an endemic problem in class action litigation.” Id. at 286. See also Culver v. City of Milwaukee, 277 F. 3d 908, 910 (7th Cir. 2002); Greisz v. Household Bank (Illinois), N.A., 176 F. 3d 1012, 1013 (7th Cir. 1999); Rand v. Monsanto Co., 926 F. 2d 596, 599 (7th Cir. 1991); Duhaime v. John Hancock Mutual Life Ins. Co., 183 F. 3d 1, 7 (1st Cir. 1999); John C. Coffee, Jr., “Class Action Accountability: Reconciling Exit, Voice, and Loyalty in Representative Litigation,” 100 Colum. L. Rev. (2000), at 370, 385–93; David L. Shapiro, “Class Actions: The Class as Party and Client,” 73 Notre Dame L. Rev. (1998), at 913, 958–60 and n. 132. See also infra nn. 112–13.
- See, generally, Susan P. Koniak and George M. Cohen, “In Hell There Will Be Lawyers Without Clients or Law,” 30 Hofstra L. Rev. (2001), at 129. A particularly egregious example is Kamilewicz v. Bank of Boston Corp., No. 91-1880 (Ala. Cir. Ct., Jan. 24, 1994), where the court approved a method of calculating the class lawyers’ fees that was designed to and did defraud class members. For further discussion of this case, see Brickman, “Aggregative Litigation,” supra n. 16 at 298–303. See also Reynolds et al. v. Beneficial National Bank, 288 F. 3d 277 (2002), where the appellate court overturned the lower court’s approval of both the class settlement and the fee. With regard to the latter, the appellate court stated: “[T]he district judge encouraged the…[lawyers] to submit their fee applications in camera, lest the paucity of the time they had devoted to the case (for which the judge awarded them more than $2 million in attorneys’ fees) be used as ammunition by objectors to the adequacy of the representation of the class. There was no sound basis for sealing the fee applications, let alone for sealing the number of hours each of the settlement class counsel had devoted to the case. The applications are not in the appellate record and we do not know what the total number of hours devoted by the class counsel to this litigation was, but apparently it was a small number. This is not surprising, since the lawyers’ efforts between the filing of the complaint and the settlement negotiations were singularly feeble, illustrated by their responding to the…defendants’ motion to dismiss for lack of personal jurisdiction with a voluntary dismissal of the claims against those defendants.” Id. at 284.
- See supra n. 2; see also Robert G. Bone and David S. Evans, “Class Certification and the Substantive Merits,” 51 Duke L.J. (2002), at 1179 (“Even in relatively routine cases, class action attorneys earn hundreds of thousands, and frequently millions, of dollars in fees.”). Id. at 1262.
- See Brickman, “Aggregative Litigation,” supra n. 16 at 306–7.
- The thesis that very high fees are being routinely obtained in contingency-fee cases without meaningful risk, yielding what I have termed “windfall fees,” is one that I have previously advanced. See Brickman, “Aggregative Litigation,” supra n. 16 at 245; see also Lester Brickman, “ABA Regulation of Contingency Fees: Money Talks, Ethics Walks,” 65 Fordham L. Rev. 1179 (1996), at 1179; Lester Brickman, “Contingent Fees Without Contingencies: Hamlet Without the Prince of Denmark?” 37 UCLA L. Rev. (1989), at 29, 92–93.
- Cf. Bone and Evans, supra n. 54 at 1262.
- See Fruchler v. Florida Progress Corp. et al., No. 99-6167C1-20 (Cir. Ct., Pinellas Cty., Fla.), March 20, 2002 (striking down a proposed settlement of a class action because it “provides nothing for the class members, while assuring Class Counsel of an unopposed opportunity to seek substantial fees”). Id. at 13. “This action appears to be the class action litigation equivalent of the ‘Squeegee boys’ who used to frequent major urban intersections and who would run up to a stopped car, splash soapy water on its perfectly clear windshield and expect payment for the unwanted service of wiping it off.” Id. at 15.
- The reversionary nature of the settlement in the class action that is the subject of this monograph is discussed at Part VIII (B) infra.
- See Motion for Leave to File Amici Curiae and Brief Amici Curiae in Support of Petition, Int’l Precious Metals Corp. v. Waters, 530 U.S. 1223 (2000) (in support of petition for certiorari, June 5, 2000). This was likely the case in Waters, where there was a $40 million reversionary fund settlement that provided that any amount of the fund not claimed by class members and not paid out as attorneys’ fees and expenses was to be returned to defendants. This agreement resulted in awarding class counsel $13,333,333 (one-third of the reversionary fund), whereas the distribution to the class plaintiffs only amounted to $6,485,362.15. In other words, the fee award allowed by the district court was more than twice the amount of the class’s recovery. Int’l Precious Metals, 530 U.S. 1223 (2000). Although the Court dismissed the petition for certiorari seeking to challenge the fee award, Justice Sandra Day O’Connor filed a concurring opinion, explaining her reason for denying the petition for a writ of certiorari. Justice O’Connor agreed that as a result of utilizing the reversionary settlement method, the award of attorneys’ fees was “extraordinary.” Id. at 1223. She also recognized that these settlements “potentially undermine the underlying purposes of class actions by providing defendants with a powerful means to enticing class counsel to settle lawsuits in a manner detrimental to the class [and]…encourage the filing of needless lawsuits.” Id. However, Justice O’Connor asserted that rehearing of this case did not provide a fitting opportunity to redress this injustice because of the existence of a “clear sailing” agreement, which provided that the petitioners would not, “directly or indirectly, oppose [respondents’] application for fees.” Id. Indeed, “as a result of…[these ‘clear sailing’ agreements], courts often lack the information necessary to protect the interests of the class against the conflicts inherent in the settlement process.” Brief of Amici Curiae, id. at 9–10, Waters. Justice O’Connor’s shot across the bow, however, lands far short of doing damage to abusive reversionary settlements. So long as class counsel insist on “clear sailing” provisions, there may never be an opportunity, per Justice O’Connor’s condition, for the court to eliminate this clear abuse.
- Unless otherwise indicated, the details and characterizations of Down’s enterprises are taken primarily from three sources: (a) Pulling Affidavit, supra n. 11; (b) Affidavit of Joseph L. Byers, U.S. Postal Inspector, in U.S. Postal Service and United States of America v. BAJ Marketing., Inc. [, Civil Action No. 98-880, U.S.D.C., District of New Jersey, Feb. 26, 1998; and (c) Plea Agreement between the United States of America and Down, Aug. 19, 1998. Although Down used scores of different names by which to market his enterprises, for the purpose of this narrative description, both the “puzzle” and “lottery” enterprises, described infra, will be referred to as “Down’s enterprises.”
- Affidavit of Robert B. Cialdini, Regent Professor of Psychology at Arizona State University, filed Dec. 15, 1998, in the Matter of the Bankruptcies of James Blair Down, Supreme Court of British Columbia in Bankruptcy, Vancouver Registry Action Nos. 188266VA98, 188277VA98, and 182268VA98 (hereinafter, “Cialdini Affidavit”).
- Title 18, U.S. Code §§ 1301–2.
- Title 18, U.S. Code §§ 1952–53, 1084.
- See affidavit of Mark A. Cohen, formerly Economist and Statistician on Crime, Division of Consumer Protection, U.S. Federal Trade Commission (and now Professor of Economics, Vanderbilt University), filed Dec. 22, 1998, at 8, in the Matter of the Bankruptcies of James Blair Down et al., Supreme Court of British Columbia in Bankruptcy, supra n. 62.
- See Cialdini Affidavit, supra n. 62 at ¶ 9.
- See Pulling Affidavit, supra n. 11 at ¶ 72.
- Matter of the Bankruptcies of James Blair Down et al., 178 D.R.L (4th) 294, 66 B.C.L.R. (3d) 392 (1999), Slip Op. at ¶ 10.
- See, e.g., the Matter of the Complaint Against Universal Network, Inc., P.S. Docket No. 39/56, Oct. 30, 1992; the Matter of the Complaint Against Universal Network, Inc., P.S. Docket No. 40/130, Apr. 12, 1993; the Matter of the Complaint Against Universal Network et al., P.S. Docket No. 40/130, Apr. 6, 1993.
- In the Matter of the Complaint Against Universal Network, Inc. et al., Order, P.S. Docket No. 40/130, Apr. 12, 1993.
- Pulling Affidavit, supra n. 11 at 3.
- U.S. Postal Service v. BAJ Mktg., Inc., supra n. 61.
- People of Illinois v. Triple Eight Int’l Services, Inc., No. 97 CH 04123, Complaint for Injunctive and Other Relief (Cir. Ct., Cook Cty., Ill.), Apr. 3, 1997.
- People of Illinois v. Triple Eight Int’l Services, Inc., Consent Judgment, Cir. Ct., Cook Cty., No. 97 CH 04123, Nov. 9, 1998.
- U.S. v. James Blair Down et al., Second Superseding Indictment, No. CR97-199R, U.S. D.C., West. Dist. Washington, Oct. 17, 1997, p. 61, lines 9–13.
- In addition to a total of $118 million generated by the lottery scam as stated in the indictment, Interclaim possesses a list of puzzle victims who remitted in excess of $28.5 million to Down, for a total of at least $147.5 million. See infra n. 83. There is evidence upon which to base a conclusion that the proceeds of Down’s illegal enterprises actually exceeded $200 million. In 1993, Down received $27 million in lottery sales; in 1994, $54 million was received, and in 1995, $70 million. Pulling Affidavit, supra n. 11 at ¶ 96. Adding the $28.5 million from the Merkle list of puzzle victims for the period 1997–98 brings the total to $180 million. This does not include the revenue received for the period 1989–92. In the Pulling Affidavit, Down’s income statement for the 12-month period ending May 1995 is summarized, indicating gross receipts of $70 million. Id. at ¶196. (Down continued to engage in the lottery marketing business until 1996.) Based upon that income statement, the monthly gross “take” was approximately $5.83 million. As Down continued to operate between the months of June and December, 1995, in that period an estimated $32.08 million was generated. Added to the $180 million already calculated, gross revenues of at least $212.5 million are apparent.
- United States of America v. James Blair Down, No. 97-199R, U.S.D.C., West. Dist. Wash., Plea Agreement [hereinafter, “Plea Agreement”], Aug. 19, 1998.
- Re Down, 178 D.L.R. (4th) 294, 66 B.C.L.R. (3d) 392 (1999), at ¶ 14.
- The Interclaim group (“Interclaim”) consists of Interclaim Holdings Limited (“IHL”), an Irish company that holds title to claims that another subsidiary of the corporate group enforces. It is a wholly owned subsidiary of Interclaim (Bermuda) Ltd. and sibling to Interclaim Recovery Limited, the corporate subsidiary that enforces claims that IHL acquires an interest in. Interclaim describes the services on its website as follows: “Interclaim identifies claims, judgments, or debts which have been abandoned by their owners, or which have not been enforced because their owners lack the financial or human capital necessary to conduct effective enforcement proceedings in multiple jurisdictions at the same time. Interclaim takes on the financial risks of claim enforcement by either purchasing such claims or establishing joint ventures with the claim owners.”
Generally, Interclaim acquires claims by either outright purchase or joint venture. It describes the methods on its website as follows: “In an outright purchase, 100% of the title to particular claim is acquired in return for payment to the claim owner of either (a) cash or (b) a contingent payment payable upon the successful enforcement of the claim. When a claim is acquired through joint venture, Interclaim contributes all human and financial capital necessary to enforce the claim, while the claim owner contributes only the title to the claim. In large-scale government corruption or cases where there are multiple, unrelated and/or undercapitalized victims, Interclaim seeks a mandate to recover assets world-wide in return for the payment of a contingent fee. Such fee is often adjusted on a sliding scale.”
As quoted in the Matter of the Bankruptcies of James Blair Down et al., 178 D.L.R. (4th) 294, 66 B.C.L.R. (3d) 392 (1999), Supreme Court of British Columbia (Canada) in Bankruptcy, Reasons for Judgment of the Honorable Mr. Justice Brenner at 4 (hereinafter, “Bankruptcy Proceeding”). On Nov. 7, 2001, Interclaim Recovery Ltd. was placed into voluntary liquidation in Ireland.
- In response to the invitation to assist the victims, after investigation, Interclaim wrote to the U.S. Attorney’s Office in Seattle on Aug. 20, 1998:
“I hope you may be in a position to provide me with the names and contact details of victims whom you may have possibly interviewed and who may be willing to cooperate with Interclaim towards effecting a global recovery of assets currently under the control of Mr. Down (or his related entities and/or associates)….[M]y primary objective is to make contact with victims who may be willing to sell, at face value, their claim against Mr. Blair Down and his corporate structure. The acquisition of, say, two or more such claims would provide us with the requisite legal platform from which to launch our plan of multi-jurisdictional claim enforcement and recovery.”
Bankruptcy Proceeding, id. at 11. A U.S. Attorney then “attached this letter to a letter sent to a number of the potential claimants for the $12 million restitution fund resulting from the plea agreement. He provided a form to be ticked and returned if the potential claimant wanted to be contacted by Interclaim.” Id. The letter included the following:
“We have received a letter from a company named “Interclaim” located in Dublin, Ireland, which describes its business as “multi-jurisdictional claim acquisition and enforcement.” This company has expressed an interest in purchasing the claims of several of the victims of the Down companies. Apparently, this company is considering instituting international litigation against Mr. Down and/or his companies and states it is interested in acquiring certain claims against him ‘at face value’ in order to provide a legal basis to pursue such litigation.”
Bankruptcy Proceeding, id.
- Id. at 15–17.
- The list of 418,846 consisted of names and addresses of individuals who had paid money to Down’s enterprises between May 1996 and June 1998, in response to the puzzle enterprises. The list was purchased from Merkle Data Processing, Inc., which acted in that time period as the sole electronic data processor and principal mailer for Down’s enterprises conducted from Barbados.
“The Merkle list sets forth (a) the names and addresses of certain persons who remitted value to the enterprise at least once during the last 6 months of the approximate May 1996 to June 1998—apparent life cycle of the Puzzle Business; (b) an indication of the amount conveyed by each person thus listed, totaling approximately US$28,512,837 in aggregate value; (c) the date that each amount was paid; (d) the method of payment; and (e) a code indicating the identity of the apparently deceptive solicitation that formed the reason for the sending of a particular sum of value.”
Retainer Agreement between Ness, Motley, Loadholt, Richardson & Poole and Interclaim, Recital at 10, Feb. 14, 2000.
- In June 1999, Interclaim sent a questionnaire to 10,000 individuals randomly selected from the Merkle list. Approximately 82 percent of the 667 who responded indicated that in addition to the puzzle business, they had sent money to the lottery and telemarketing enterprises. Affidavit of Dr. Mark A. Cohen, filed Feb. 17, 2000, in the Matter of the Bankruptcies of James Blair Down et al., Supreme Court of British Columbia in Bankruptcy. The 7.1 percent response rate based upon delivered pieces of mail is “indicative of a significant population of customers who believe they have a valid claim.” Id. at 10. Moreover, because many of the recipients of the survey may have had difficulty in understanding it or did not believe that they could adequately document any losses and therefore did not respond, “the response rate is likely to considerably underestimate the true percentage of the 10,000 surveyed or in the database of 418,846 that believe they have a legitimate claim. Given the fact that the average age of respondents was significantly lower than the average age of individuals in the database, customers who did not respond to the survey but believe they have legitimate claims (or have subsequently passed away) are likely to be older (on average) than age 64.8 years [the average age of the respondents].” Id. at 8.
- For example, according to the Court of Appeal for Alberta, Interclaim established a strong prima facie case that Down owned 26 office buildings and other commercial properties in Alberta, Canada, of an estimated value of CAD$100 million through 26 Alberta numbered companies; the cash equity and subordinated debt, all having derived from a Netherlands holding company, which, in turn, was wholly owned by a holding company domiciled in the Netherlands Antilles that was owned by Down. Each of the 26 numbered Alberta corporations, which held the title to the Alberta real estate, purported to be controlled and owned by Down’s brother and sister-in-law. Down owned a home on St. James Beach in Barbados that was listed by him for sale with Sotheby’s for $17.5 million, through a BVI international business corporation secretly controlled by a Channel Islands trust. Down had a secret Swiss bank account containing $4.5 million. Down also held a $5 million investment in a timber concession in Papua New Guinea through a Guernsey trust. See First Report of the Interim Receiver (Arthur Andersen, Inc.), in the Matter of the Bankruptcies of James Blair Down et al., Supreme Court of British Columbia in Bankruptcy, Feb. 11, 1999 (hereinafter, “First Report of Interim Receiver”); Second Report of the Interim Receiver (Arthur Andersen, Inc.), March 30, 1999 (hereinafter, “Second Report of Interim Receiver”). The U.S. government in 1997 seized $12.3 million of Down’s cash held by two Cayman Islands companies, which were further held by two Cayman Islands Trusts. See Plea Agreement, supra n. 78, supporting documents attached.
- Bankruptcy Proceedings, id. at 12–15. As described by Interclaim (referring to itself as IHL):
“Moving forward with its efforts to secure restitution for the hundreds of thousands of victims of the criminal enterprise, and acting under the power of attorney agreements, IHL retained Canadian law firms to commence involuntary bankruptcy proceedings in Vancouver, British Columbia against the Down group, and a ‘representative proceeding’ (i.e., class action) in Calgary, Alberta on behalf of both [the] fifteen…individuals and all other victims of the criminal enterprise….[T]hese fifteen individual victims, who had executed power of attorney agreements with IHL, were potentially liable on CAD$4 million of bonds posted to facilitate the issuance of asset preservation orders associated with the proceedings in Alberta, as well as further potential (or contingent) adverse costs and damages liability to the Down group.
On Dec. 22, 1998, IHL and the fifteen co-petitioners…commenced involuntary bankruptcy proceedings against Down and two of his co-conspirators in their home city of Vancouver, British Columbia. At Interclaim’s request, the bankruptcy court provisionally appointed Arthur Andersen, Inc. as Interim Receiver and approved an International Claims Enforcement Agreement (“ICEA”) between IRL and the Interim Receiver. Under that agreement, IRL was to (1) fund the operations of the Interim Receiver with up to CAD$3 million of cash and bonds and (2) provide the Interim Receiver with expert and specialized services in identifying, locating and recovering the illicit proceeds worldwide. In return, IRL was to receive a return of its direct costs of up to $2 million, plus 50% of any assets recovered in the bankruptcy up to a maximum of 50% of the proven claims of creditors.
Between Dec. 22, 1998, and Jan. 29, 1999, the Interim Receiver, with…[Interclaim’s] assistance, instituted ex parte concealed asset discovery and preservation proceedings in seven jurisdictions, namely, (a) Alberta, (b) the British Virgin Islands, (c) Barbados, (d) the Bailiwick of Guernsey in the Channel Islands, (e) the Bailiwick of Jersey, (f) the U.S. Bankruptcy Court (Seattle), and (g) British Columbia), to attach and recover assets derived from the criminal enterprise. [Interclaim,] as the Interim Receiver’s agent, posted security for these proceedings in the aggregate amount of CAD$3.5 million. Through these efforts, [Interclaim] and the Interim Receiver preserved approximately CAD$100 million of the Down group’s assets worldwide (inclusive of the value of third-party mortgages). Such assets have an estimated net equity value of Can$50–60 million….” Interclaim Holdings Ltd. v. Ness, Motley, Loadholt, Richardson & Poole, Amended Complaint, U.S. D.C. N.D. Ill., E. Div., May 23, 2001, at ¶¶ 12–14 (5-6).
- Black’s Law Dictionary (4th ed., 1957), at 292.
- I was retained by Interclaim to provide written testimony on the issue of champerty under American law. See in the Court of Queen’s Bench of Alberta, Judicial Centre of Calgary, between Interclaim Holdings et al. and Down et al., Action No. 9901-10422, Affidavit of Professor Lester Brickman, Oct. 27, 1999 (hereinafter, “Brickman Affidavit”).
- Bankruptcy Proceedings, id. at 38. The judge, concerned about the plight of the victims, invited the appellate court to create an exception to the rules regarding champerty so that the action could proceed. Id. at 38–39.
- See Brickman Affidavit, supra n. 88, in which I examined the laws of the states of the 15 co-plaintiffs and concluded that since there had been no assignment of any legal or beneficial right of the co-plaintiff’s ownership of their respective claims to Interclaim, these agreements were not champertous. Id. at ¶¶s 28–98. See also ¶¶s 99–121 for a discussion of the applicability of the doctrine of maintenance.
- Interclaim Holdings Ltd. v. Down, 2001 BCCA 65, 196 D.L.R. (4th) 114, 84 B.C.L.R. (3d) 1 (Ct. App. for British Columbia, Jan. 31, 2001). Previously, the Court of Appeal, in Dec. 1999, had directed the Bankruptcy Court to rule on the remaining interlocutory issues related to Down’s attack on the ex parte interim receivership order of Dec. 18, 1998. Chief Justice Brenner (as he had become), thus issued his supplemental findings on the remaining asset-preservation part of the case on July 28, 2000. These are discussed, infra, in Part VI (C), “The Asset Freezes.”
- The Alberta “freeze” order thus resulted in the “double freezing” of the properties.
- In addition to the CAD$4 million, Interclaim also was responsible for posting bonds of a value of $450,000 in Barbados and $200,000 in the British Virgin Islands.
- Re Down, Court of Queen’s Bench of Alberta, 1999 ABQB, Nov. 23, 1999, Reasons for Judgment of the Honorable Madam Justice Kent.
- 95. Id. at 3. The court also found that for purposes of Rule 42 of the Rules of Court, a class of victims could not be defined, common issues of fact and law were not present, and the requirements of finality were not met.
- The Supreme Court of Canada has since issued a decision in Western Canadian Shopping Centres, Inc. v. Dutton et al. (July 13, 2001),  S.C.J. No. 63 (S.C.J.), holding that Alberta courts must fashion a class action rule that is akin to the modern class action legislation now extant in Ontario and British Columbia, thereby imposing a requirement for the reform of the law in Alberta, accordingly.
- First Report of the Interim Receiver, supra n. 85.
- Second Report of the Interim Receiver, supra n. 85.
- Mr. Justice Hawco’s Jan. 29, 1999, ex parte freeze was based upon a double-barreled foundation, inasmuch as the 29 referenced properties were frozen on the basis of (a) a Request for Judicial Assistance from the Bankruptcy Court in British Columbia to Alberta courts to recognize the Interim Receiver’s asset preservation powers, and (b) the court’s jurisdiction to preserve assets in support of the independent Alberta representative action claim. See supra n. 92.
- See Daynard v. Ness, Motley, Loadholt, Richardson & Poole, P.A., 2002 U.S. Dist. LEXIS 4257 at *3.
- For a description of Ness Motley’s role in turning back an effort to legislate an administrative solution for asbestos litigation, see Brickman, “Aggregative Litigation,” supra n. 16 at 246 n. 13.
- Model Rule 1.7(b) of the Model Rules of Professional Conduct provide that “[a] lawyer shall not represent a client if the representation of the client may be materially limited by the lawyer’s responsibilities to another client…unless (1) the lawyer reasonably believes the representation will not be adversely affected.” Ness Motley was class counsel in two of the largest asbestos litigation settlements. In Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997), the Supreme Court held that conflicts internal to a class consisting of currently injured persons and persons exposed to asbestos in the workplace for whom injury had not yet manifested, the so-called futures, required rejection of class certification. In Ortiz v. Fibreboard Corp., 119 S. Ct. 2295 (1999), decided two years later, the Supreme Court again rejected a massive settlement of asbestos claims because of the concurrent conflicts of interest created by class counsel’s settlement of present claims (“inventory claims”) on different terms from those provided for with regard to future claimants. These decisions implicitly hold that the firm engaged in simultaneous representation of clients with differing interests and that this conflict impaired the firm’s representation of future claimants. See Roger Cramton, “Lawyer Conduct in the ‘Tobacco Wars,’ ” 51 DePaul L. Rev. (2001), at 435, 445–46.
“Concurrent conflicts of interest continued once these plaintiffs’ lawyers moved into the tobacco field. First, they undertook to represent some individual smoking victims who were seeking compensatory and punitive damages against the tobacco companies. Second, after a failed effort to certify a class including all smoking victims nationwide they brought a number of cases involving statewide classes. These cases also sought both compensatory and punitive damages for smoking victims. Then the plaintiffs’ lawyers agreed to represent Mississippi and Florida in reimbursement actions brought by those states against the tobacco companies. These actions, later expanded to include 22 states, were settled in a June 1997 agreement that capped the liability of the tobacco companies to smoking victims and, when implemented by Congress, prohibited punitive damages. The lawyers abandoned the relief that they were claiming on behalf of individual claimants in negotiating the global settlement on behalf of the states. A lawyer violates the concurrent representation conflict of interest rules when the claims of some clients (smoking victims) are subordinated to those of other clients (the states).” Id. at 446 (footnote omitted).
An example of the conflict of interest generated by the representation of an individual smoking victim and the statewide tobacco class actions brought is Ness Motley’s representation of the widow of a barber who died of lung cancer. See Estate of Butler v. Philip Morris, Inc., 94-5-53 (Miss. Cir. Ct., Jones Cty.). See also Milo Geyelin, “Tobacco Plaintiff Files Suit Against Her Ex-Attorney,” Wall Street Journal, Aug. 4, 1997, at B8; Bob Van Voris, “Tobacco Negotiations Created Sharp Client Conflicts,” Nat’l L.J., Aug. 4, 1997, at A8-A9. A subsequent story indicated that Ness Motley entered into a confidential settlement after Ms. Butler brought a $1.5 million damage action against the firm, alleging conflict-of-interest violations. She alleged that the firm did not inform her of the conflicting interests, and she did not consent to them. See Nat’l L.J., Sept. 22, 1997, at A5.
- Retainer Agreement between Ness Motley and Interclaim, Feb. 14, 2000.
- Interclaim, utilizing the mailing list of 418,846 persons who had responded to puzzle-contest solicitations (see supra n. 83), was able to identify 72 of these individuals residing in Huntington, 2,239 in Brooklyn, and 334 in Madison County. Fax transmissions from Interclaim to a law firm affiliated with Ness Motley, March 2, 1999, and Dec. 2, 1999 (on file with the author).
- Fax transmission from Interclaim to Ness Motley, Feb. 2, 2000 (on file with the author).
- Christi Parsons, “Downstate County Is ‘Plaintiffs’ Paradise,’ ” Chicago Tribune, June 17, 2002, at 1.
- Schuppert et al. v. Down et al., Class Action Complaint, 3d Judicial Cir., Madison Cty., Ill., No. 00-L-223 (March 10, 2000) (hereinafter, “Schuppert v. Down”). This was later superseded by Plaintiffs’ First Amended Class Action Complaint, filed June 19, 2001.
- 815 Ill. C.S. 505/1 et seq.
- Schuppert v. Down, Order of Aug. 7, 2001.
- This account of the actions of Interclaim and Ness Motley is drawn largely from Interclaim et al. v. Ness, Motley, Loadholt, Richardson & Poole, U.S. D.C., N.D. Ill. East. Div. No. 00C7620 (filed Dec. 4, 2000), Amended Complaint, filed May 23, 2001 (hereinafter, “Interclaim Amended Complaint”). The facts alleged in the Interclaim Amended Complaint were adopted for purposes of denying, in its entirety, Ness Motley’s motion to dismiss Interclaim’s suit for breach of fiduciary duty, misappropriation of confidential information, and breach of the retainer agreement. See Interclaim v. Ness Motley, U.S. Dist. Ct., N.D. Ill., East Div. No. 00C7620, Memorandum Opinion and Order, Oct. 29, 2001 (Hon. Rebecca R. Pallmeyer). In the Complaint, Interclaim alleged that, despite having entered secret negotiations with Down, Ness Motley continued to meet with Interclaim to obtain confidential information based on Interclaim’s unique knowledge of the concealed ownership, locations, and movement of Down’s assets, even as Ness Motley was deliberately withholding from Interclaim information about the settlement negotiations. As related by Interclaim:
“Interclaim provided Ness Motley with summary and analytical materials it has generated regarding the Down group’s lottery sales and money laundering activities. The materials included a chart identifying the financial institutions used by the Down group as well as known account and transaction information specific to each institution. The materials also included a table of the Down group’s known assets (including a separate table setting out leads to other Down assets) and a chart tracking the global movement of moneys flowing from Down-operated businesses in the United States, Canada, and Barbados to and through numerous accounts around the world. Moreover, Interclaim produced confidential written work product from its firm of forensic accountants in Calgary, Alberta [namely, the firm of Allen & Taylor,] who had analyzed thousands of documents pertaining to the ownership and finance of the Down group’s vast Alberta real estate holdings. Without these materials, Ness Motley lacked the detailed factual basis on which to conduct meaningful settlement talks.”
Interclaim Amended Complaint, id. at ¶ 31. Interclaim maintains that by hiding its intent to exclude Interclaim from the settlement negotiations, Ness Motley exploited its privileged relationship with Interclaim in order to obtain information with which to respond to various of Down’s assertions, including that he was an “owner” of only a small portion of the frozen assets. Interclaim Amended Complaint, id. at ¶ 31.
- Manual for Complex Litigation (3d) (1995), 23.24.
- See United States v. City of Miami, 614 F. 2d 1322, 1331 (5th Cir. 1980); Int’l Union of Elec. Workers v. Unisys Corp., 858 F. Supp. 1243, 1264 (E.D.N.Y. 1994), stating that the court “has the fiduciary responsibility of ensuring that the settlement is fair and not a product of collusion, and that the class members’ interests [are] represented adequately” (quoting in re Warner Communications Secs. Litig., 798 F. 2d 35, 37 [2d Cir. 1986]). See also supra n. 52.
- Cotton v. Hinton, 559 F. 2d 1326, 1330 (5th Cir. 1977).
- See, generally, Koniak and Cohen, supra n. 53.
- In re Synthroid Marketing Litigation, 201 F. Supp. 2d 861, 872 n.6 (U.S.D.C. N.D. Ill., 2002) (stating that there is data suggesting that “courts routinely overcompensate attorneys in class actions”).
- Most “coupon” settlements fall into this category. In a coupon settlement, class members receive a right to purchase defendant’s products or services at a discount while the class attorneys’ fees are to be paid in coin of the realm, not coupons. See, generally, Christopher R. Leslie, “A Market-Based Approach to Coupon Settlements in Antitrust and Consumer Class Action Litigation,” 49 UCLA L. Rev. (2002), at 991. Usually, in such settlements, the notional value of the settlement vastly exceeds the aggregate fair market value of the discount right “coupons.” Moreover, where the coupon needs to be applied for by class members by filing a claim, the number of coupons projected to be issued as part of the settlement administration process typically is far in excess of the actual number applied for because many, if not most, class members do not consider it worth their while to submit completed claim forms in order to obtain the coupons. See, e.g., Coordinated Class Action Lawsuits of Naevus Int’l, Inc. et al. v. AT&T Corp. and AT&T Wireless Services Inc., Notice of Proposed Settlement, Supreme Court, N.Y. Cty. (June 3, 2002), in which the allegation was that AT&T Wireless provided an inferior level of service to its customers than that promised in its advertisements. The proposed settlement provided for 80 minutes of additional air time to those having an active account with the company, and a calling card with 240 pre-paid minutes or an entitlement to a 24 percent discount on wireless telephone equipment accessories for those not having an active account. The proposed fee, which the company agreed not to contest, was $5 million.
A simple, if not elegant, resolution of the particular abuses that permeate coupon settlements would be to require that class counsel receive payment in the form of coupons that they can then market in order to monetize the coupons. Ironically, it appears that the principal reason that courts do not adopt such a strategy, apart from the strong opposition from class counsel, is that it is often exceedingly difficult to calculate the value of the coupons. At the same time, of course, courts are awarding class counsel substantial fees based upon class counsel’s claims as to the value of the coupons.
- In fact, on Sept. 18, 2001, Chief Justice Brenner of the Supreme Court of British Columbia, in Bankruptcy, ordered Interclaim to pay approximately CAD$1.8 million in costs awarded to Down for his having successfully set aside the interim receivership order. Interclaim posted CAD$400,000 as security required to perfect its appeal of this costs award. The costs appeal is scheduled to be heard in Sept. 2002. On July 10, 2002, Chief Justice Brenner stayed Interclaim’s bankruptcy petition.
- See supra Part VII (A).
- Temporary settlement classes are generally used to facilitate settlement and avoid expenses attendant to a full evidentiary hearing regarding the class certification issue. See, e.g., in re Beef Industry Antitrust Litigation, 607 F. 2d 167 (5th Cir. 1979); Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S. Ct. 2231, 138 L. Ed. 2d 689 (1997).
- Stipulation and Agreement of Settlement, June 19, 2001, Schuppert et al. v. Down et al., No. 00-L-223, Cir. Ct., 3d Judicial Cir. of Ill., Madison Cty.
- Order of Preliminary Approval, Schuppert v. Down, June 19, 2001.
- Amended Stipulation and Agreement of Settlement, Nov. 20, 2001, Schuppert v. Down.
- Second Order of Preliminary Approval, Schuppert v. Down, Nov. 2001.
- Id. Only one victim of Down’s enterprises filed a Notice of Objection by this deadline. See infra n. 184. He is represented by counsel and has set out multiple grounds of objection to the terms of the proposed settlement.
- See infra Part IX.
- See John Macey and Geoffrey Miller, “The Plaintiffs’ Attorney’s Role in Class Action and Derivative Litigation: Economic Analysis and Recommendations for Reform,” 58 U. Chi. L. Rev. (winter 1991), at 1.
- Amchem, 521 U.S. at 620.
- In the letter, Ness Motley stated that it felt compelled to do so “even if to the detriment of Interclaim.” Letter from Ness Motley to Interclaim, dated Sept. 18, 2000 (on file with the author). The letter attributed Ness Motley’s withdrawal to the advice of ethics experts whom Ness Motley had consulted.
- Interclaim Amended Complaint, id. at ¶ 41.
- Indeed, by approximately March 29, 2001, six of the 12 remaining Down “frozen” commercial real-estate assets in Alberta, worth in excess of CAD$10 million, had been sold in apparent violation of the Madison County TRO. This appeared to have been facilitated by the dismissal of one of the named defendants. Id.
- After Ness Motley formally withdrew from its representation of Interclaim, Interclaim hired local counsel in Madison County to monitor the proceedings. A weekly examination of the case file disclosed that a hearing was scheduled for March 2001, to preliminarily approve the settlement and provisionally certify the class. Interclaim then made a motion to intervene in the proceedings and requested that it be heard at the time scheduled for the preliminary approval of the settlement. Interclaim’s motion to intervene was heard and denied in March 2001, as detailed above in the text. Ness Motley and Down decided not to proceed with the hearing to preliminarily approve the settlement and certify the class while Interclaim’s counsel was present. That hearing did take place on June 19, 2001, at which Judge Byron preliminarily approved the settlement and certified the class. No notice was provided to Interclaim, which was not present at the June 19, 2001, hearing. Moreover, nothing appeared in the record of the case in the relevant time period to alert Interclaim or anyone else of the fact that such a hearing would take place on June 19, 2001.
- Motion of Interclaim to Intervene, March 27, 2001, Schuppert v. Down.
- Illinois law provides for intervention in a judicial proceeding as of right “when the representation of the applicant’s interest by existing parties is or may be inadequate and the applicant will or may be bound by an order or judgment in the action.” 735 Ill. C.S. § 5/2-408 (a)(2). That statute also provides for intervention as of right where the movants are “so situated as to be adversely affected by a distribution or other disposition of property in the custody or subject to the control or disposition of the court or a court officer.” § 2-408(a)(3).
- Schuppert v. Down, Order of Apr. 3, 2001. The court did not explain how making Interclaim a party would be “disruptive.”
- Schuppert v. Down, Intervenors’ Consolidated Motion for Entry of an Appealability Finding and Memorandum in Support, May 3, 2001. Under Illinois law, an appeal of an order denying intervention can only take place after a final judgment is entered in the class action. However, under Illinois Supreme Court Rule 304(a), a court may make a special finding that there is no just reason for delaying an Intervenor’s appeal, allowing for immediate appeal therefore from the court’s order of Apr. 3, 2001, denying its Motion to Intervene.
- Schuppert v. Down, Order of July 6, 2001.
- See Interclaim Amended Complaint, id.
- Memorandum Opinion and Order, supra n. 110. While that litigation, which is ongoing in U.S. District Court in Northern Illinois, is not a subject of this article, the pleadings have provided some information that has been incorporated into this monograph.
- See supra nn. 110, 138.
- See supra n. 129.
- Illinois Rules of Professional Conduct, Rule 1.7(a); see also South Carolina Rules of Professional Conduct, Rule 1.7(a), setting forth virtually the same requirement. The retainer agreement with Ness Motley provided that the laws of South Carolina would govern the interpretation of the agreement. Because the alleged unethical conduct took place in Illinois, however, both Illinois’ and South Carolina’s rules of ethics may apply. For purposes of this brief analysis of the applicable rules of ethics, the ethics rules of both states will be considered.
- Illinois Rules of Professional Conduct, Rule 1.7(b). Again, the South Carolina Rules are substantially identical.
- Germane to the issue of whether excluding Interclaim was in the interest of the class is the conclusion of the ethics expert whom Ness Motley consulted at the time of the drafting of the retainer agreement with Interclaim, that Interclaim “seems clearly entitled to reasonable compensation since, but for its efforts, the class takes not a dime.” See letter from John P. Freeman, Esq., to Ness Motley, Jan. 11, 2000 (on file with the author).
- Illinois Rules of Professional Conduct, Rule 1.9(a); South Carolina Rule 1.9(a) is virtually identical.
- See Amended Stipulation and Agreement of Settlement, Schuppert v. Down, dated Nov. 20, 2001, filed with the court on Nov. 29, 2001 (hereinafter, “Amended Stipulation”).
- Id. at ¶26.
- Id. at Summary Notice of Settlement, Exhibit G, Amended Stipulation (emphasis in original).
- See infra Part IX.
- See supra Part IV (B).
- Bankruptcy Proceeding, supra n. 80.
- 815 Ill. C.S. 505/2.
- See Affidavit of Gary Klein, sworn to on Sept. 21, 1999, in Interclaim et al. v. Down et al., Action No. 9901-01422 in the Court of Queens Bench, Alberta, Canada. Mr. Klein states that Down’s plea agreement results in the following facts being conclusively established as a matter of law:
“(a) That “beginning at least as early as 1990, and continuing through on or about January, 1996,” James Blair Down knowingly and willfully conspired with others…to commit offenses against the United States by conducting an unlawful lottery marketing business from Canada and Barbados and knowingly and willfully agreeing, among other things, to solicit remittances of monies from United States residents for the purchase of chances, shares and interests in lotteries;
(b) That in furtherance of the unlawful conspiracy, James Blair Down and his conspirators, acting from Canada, Barbados and elsewhere, individually and through the various business entities created by James Blair Down for such purposes,…all of which were under the direction of, and responsible to, James Blair Down, caused such unlawful solicitations to be sent by mass mailings signed and promoted through fictitious names, and seeking money from United States residents for participation in such lotteries;
(c) That in furtherance of the unlawful conspiracy, James Blair Down, aided by his co-conspirators, also operated telephone rooms in Vancouver, British Columbia, Kelowna British Columbia, and Toronto, Ontario, from which telemarketers, many of whom used fictitious names, unlawfully solicited and obtained payment by United States residents for the purchase of, inter alia such chances and interests in lotteries conducted in Canada, Australia, Spain, Ireland and various States within the United States;
(d) That it was a further part of the unlawful conspiracy that various trade names were established and used by the co-conspirators to promote and market the sale of lottery interests to United States residents, including the trade names “Lottery Connections,” “Winners,” “New Eagle Network,” “International Fortune Bureau” and “Project Rainbow”;
(e) That it was also part of the unlawful conspiracy that James Blair Down and his co-conspirators, among other things, received remittances in Canada from United States residents for the purchase of interests in lotteries, despite being contacted by law enforcement agencies in the United States as early as 1992, and being advised that the use of the mails and facilities of interstate and foreign commerce to market and sell interests in such lotteries to United States residents and to receive remittances from United States residents, violated United States law, and furthermore despite receiving multiple notices from the United States Customs Service and the United States Postal Service that these activities violated United States law;
(f) That it was a further part of the unlawful conspiracy that James Blair Down established, operated, controlled and directed the various entities listed above in these unlawful activities, as part of his role in this criminal enterprise, and that he employed and paid his co-conspirators and directed their actions in identifying customers and unlawfully marketing lottery interests; and
(g) That it was a further part of the unlawful conspiracy that James Blair Down and all of his co-conspirators, acting from Canada and Barbados, engaged in activities designed to induce and cause United States residents to remit monies to them in Canada and elsewhere for the purchase of chances, shares and interests in lotteries in violation of United States law.”
¶ 35, pp. 28–30.
- See Affidavit of Richard W. Brewster, former chief of the Criminal Division of the U.S. Attorney’s Office in the Eastern District of N.Y., Dec. 16, 1998, filed in the Matter of the Bankruptcy of James Blair Down, Supreme Court of British Columbia in Bankruptcy, asserting that the Canadian court “ought to find that [Down’s] guilty plea to be dispositive of…[certain] facts, thus precluding any attempt by the defendant to deny these same facts.” Id. at ¶ 30, including that as “part of the unlawful conspiracy that…Down and all of his co-conspirators, acting from Canada and Barbados, engaged in activities designed to induce and cause United States residents to remit monies to them in Canada and elsewhere for the purchase of chances, shares and interests in lotteries in violation of United States law.” Id. at ¶ 33(g).
- Based upon his Canadian litigation posture, Down could argue that his Plea Agreement did not constitute an admission of violation of the Illinois Act. A principal premise for such an argument could be that all the victims of Down’s enterprises would need to have their narrative assessed on an individual basis before the court could conclude that when they sent money to Down’s enterprises, they were relying upon false or misleading statements made by those enterprises. However, the Illinois Act does not require a showing that each victim relied upon a false statement by Down’s enterprises in choosing to send money to that enterprise.
- The plea and conviction also establish the legal conclusion that, in violation of United States criminal law, Down committed the offense of unlawfully, knowingly, and willfully conspiring to violate the provisions of 18 U.S.C. § 1953 with respect to the interstate transportation of gambling paraphernalia. Furthermore, these facts and conclusions could have been used offensively by the plaintiffs to prosecute a civil action on the following legal claims: (a) a common law action for “unjust enrichment”; and (b) a common law claim for “monies had and received.” Moreover, to the extent that plaintiffs remitted money to Down for the purpose of purchasing a share or chance in a lottery, such payments were made in accordance with the terms of a contract. Such contracts were “illegal on the ground that the acts of solicitation, formation and performance associated with each of them were contrary to U.S. law.” Affidavit of Anthony Cabot, ¶ 59, Jan. 19, 2000, filed in the Matter of the Bankruptcies of James Blair Down et al., Supreme Court of British Columbia in Bankruptcy. On the assumption that the statutory scheme that rendered all of Down’s contracts with his “customers” illegal was enacted to afford protection to such class of persons, the plaintiffs would be entitled to restitution of their funds to the extent they have not been returned, and in order to obtain restitution, the court could impose a constructive trust on property held by third parties that can be traced to the schemes operated by Mr. Down and his co-conspirators. See id. at ¶¶ 60, 61, 64.
- People v. Triple Eight Int’l Services, Inc., No. 97-CH 04123, Cir. Ct., Cook Cty., Apr., 3, 1997.
- Illinois v. Triple Eight Int’l Services, Inc., No. 97-CH 04123, Consent judgment, Cir. Ct., Cook Cty., Nov. 9, 1998.
- See supra nn. 11, 61.
- See infra n. 184.
- Schuppert v. Down, Order (Granting TRO), Aug. 7, 2000.
- See supra n. 6.
- For a discussion of the legal and policy issues raised by the reversionary settlement, see Motions for Leave to File Amici Curiae and Brief Amici Curiae in Support of Petition, Int’l Precious Metals Corp. v. Waters, 530 U.S. 1223 (2000) (in support of Petition for Certiorari, June 5, 2000), supra n. 60.
- In the Int’l Precision Metals Corp. case, id., the fee was $13.3 million, one-third of the $40 million reversionary settlement, and class members received $6.5 million; so the lawyers’ fee was over 200 percent of the class’s recovery.
- See Proof of Claim Form, Exhibit E, Amended Stipulation.
- Id. at ¶¶ 3.5, 3.8.
- Id. at ¶ 3.4.
- See Lottery Companies, Puzzle Companies, and Trade Names, Exhibit K, Amended Stipulation.
- Id. at ¶ 3.6. “(Note: Ensure the complete name of the Lottery Company is used otherwise this Proof of Claim may be disallowed)” (emphasis in original).
- “(Note: The inclusion of claims in respect of Lottery Products sold by corporations which are not specified Lottery Companies or Puzzle Companies may result in the disallowance of the Proof of Claim in its entirety.)” Id. at ¶ 3.6 (emphasis in original).
- See Exhibit K, supra n. 169.
- Id. at ¶ 3.9.
- See Proof of Claim Form, supra n. 165 at ¶ 3.6.
- Sec.1-109, Ill. Code of Civil Procedure.
- See Proof of Claim Form, Exhibit E, supra n. 165.
- Empirical evidence exists that the actual number is minuscule. See infra n. 187.
- See Abbreviated Notice of Settlement, Exhibit G, Amended Stipulation.
- Had victims of Down’s enterprises seen, recognized, and responded to one of the ads—which only listed nine of Down’s 57 companies and trade names and did not list Down’s name—and obtained the six-page Notice of Settlement, written in dense legalese and small print, and been able to decipher it, they would have been able to learn that even if they did not have the required documentary evidence, they could still submit a claim against the second pool.
- See Plan of Notice, Exhibit I, Amended Stipulation.
- See supra n. 179.
- See supra n. 83.
- See supra n. 84.
- See Notice of Intention to Appear, Proof of Class Membership, and Statement of Objections of John F. Holguin, a class member objector to the proposed settlement, May 3, 2002, filed in Schuppert v. Down, including Exhibit A, which contains supporting documentary evidence.
- Plan of Notice, Exhibit I, Amended Stipulation.
- Declaration of John M. Simms, June 6, 2002, filed in Schuppert v. Down.
- The Down–Ness Motley strategy of using the least effective means of notice is proving highly effective. During the last week of May 2002, Interclaim sent out a postcard to approximately 20,000 puzzle players residing in Illinois and Missouri from its Merkle list of Down victims. The postcard notified the recipient of the impending settlement in Madison County and asked the recipient to phone a toll-free number to obtain more information. As of one week after the mailing was sent, 138 individuals responded. Telephone interviews with the responders indicate that: (1) only one had seen any advertisements about the settlement; (2) virtually none had retained receipts for money remitted to Down; (3) of the 82 responders able to estimate their loss to a Down organization, their claims total approximately $294,000, for an average loss of $3,586; and (4) the remaining 56 responders could not estimate the amount they sent to Down’s enterprises (though, as indicated [see supra n. 184], Down has lists containing just such information). See memo from Irving Cohen of Interclaim to Lester Brickman, July 12, 2002 (on file with the author).
- Quite apart from omitting the various requirements that were apparently included to make the claim process as arduous as possible, a far more expeditious claim process was available. Since Down’s own lists contained all the information needed for a claimant to establish a claim (see supra n. 184), claimants contacted by direct mail who responded could have had their claims presented and certified by the claims administrator, using Down’s own computerized records. Under such a process, claimants would only have to supply their names in order to have their claims processed.
- See Pamela Sherrid, “Class Action Crumbs,” U.S. News & World Report, March 25, 2002, at 24–26 (noting that “two [lists of potential claimants] exists [but] they aren’t being used”); Brian Brueggman, “Settlement Proposal in Madison County, Ill., Fraud Lawsuit Draws Criticism,” Belleville (Ill.) News-Democrat, May 26, 2002; also see Parsons, supra n. 106.
- See Brueggman, id.
- Transcript of Hearing before Hon. Nicholas G. Bryon, June 7, 2002, in Schuppert et al. v. Down et al. at 3 (statement of Mr. Tillery).
- Id. at 16–17.
- See Brueggman, supra n. 189.
- See Interclaim et al. v. Ness Motley, USDC N.D. Ill., Amended Complaint, filed May 23, 2001, Exhibit A, indicating an estimated gross loss of the 29 victims of $1,517,197 and restitution previously received of $856,233.
- See supra Part VII (H).
- See Amchem Products, Inc. v. Windsor, 521 U.S. 511 (1997); Ortiz v. Fibreboard Corp., 527 U.S. 815 (1999) .
- Schuppert v. Down, Stipulation and Agreement of Settlement, June 19, 2001.
- Id. at ¶ 12.1.
- Id. at ¶ 1.16.
- Letter Agreement, Exhibit C, dated June 19, 2001, and filed in the Madison County court on the same date.
- See Release, Covenant Not to Sue, Indemnity and Assignment required for payment to any Settlement Class Member, Exhibit H, Amended Stipulation.
- See Amended Stipulation and Agreement of Settlement, Nov. 20, 2001, filed with the Madison Cty. Cir. Ct. on Nov. 29, 2001.
- Id. at ¶ 2.6
- See Notice of Settlement, Exhibit F at 5, Amended Stipulation.
- Id. This provision was not contained in the original Stipulation and Agreement of Settlement. It may have been added in anticipation of the possibility that publicity could lead to objectors appearing at the fairness hearing.
- Letter Agreement, id. at ¶ (d) (emphasis added).
- It is possible and perhaps even plausible that this bizarre fee-payment feature has some relationship to the suit for breaches of fiduciary obligation and of contract, brought by Interclaim against Ness Motley in U.S. District Court, which was filed on Dec. 4, 2000 (see supra n. 110). The filing of such an action against Ness Motley in Dec. 2000 took place at least six months before the apparent completion of negotiations leading to the execution of the Settlement Agreement and its presentation to the court. If it believed itself vulnerable to a claim of breach of fiduciary obligation and therefore possibly subject to an order of disgorgement of fees received (see Arce v. Burrows, 958 S.W. 2d 239 [Tex. App. 1997]), Ness Motley may have sought to structure a fee that would not be subject to disgorgement. The Letter Agreement may be seen to be so constructed.
- See supra 188.
- See Brickman, “Aggregative Litigation,” supra n. 16 at 298.
- See supra n. 1.
- See supra nn. 52, 127–28.
- See supra n. 3.6