The class action plaintiffs are paid $150 million in 35 years, if at all. The plaintiffs’ lawyers are paid fees of $5 million in 2 years. Is this right? The case was settled with an experienced and respected mediator. Yet the Fifth Circuit was quite concerned about the payment of legal fees and sent the case back to the District Court for reconsideration of this and other issues. Jones v. Singing River Health Services Foundation, 865 F. 3d 285 (2017). The Fifth’s concern about payment of class counsel’s fees may have been misplaced.
An Underfunded Plan
One of the largest hospital and health systems in Mississippi was on the ropes. With the Great Recession of 2008 and changes in the reimbursement for medical care, it was losing money fast: a loss of $40 million in 2014 alone.
The system’s governing board decided to save money by shorting the pension plan. In 2009, the employer stopped making required contributions. (But the employees continued to pay in 3% of wages.) Finally, the employer threw in the towel and terminated the plan. The employer had failed to contribute a required $55 million from 2009 to plan termination in 2014.
The plan was seriously underfunded even without this contribution; it was short $305 million in 2015. The employees were seriously at risk, and the plan was not covered by the federal pension insurance program because it is a local government plan.
Lawsuits & more lawsuits
There were lots of lawsuits, in both state and federal courts. For the most part they were consolidated in a Federal District Court class action. Plaintiffs made many claims including constitutional violations, fiduciary breach, fraud and others. The financial facts were that the employer did not have the money to bring the plan up to a sound funding level.
After working with a respected and experienced mediator, the employer agreed to contribute to the plan the $55 million (plus interest) that should have been contributed before plan termination.
But cash was not available, so the settlement provided that the money would be contributed over the next 35 years, with 6 % interest. That brought the total to $150 million.
Under the settlement, class counsel would get about $6.5 million, which was later reduced by the District Court to about $5 million. Also, under the settlement the employer would make its contribution to the plan over 35 years, yet the lawyers would get their fees in 2 years.
The District Court approved the settlement. Several hundred class members objected, for reasons including the timing of payment of the attorneys’ fees.
The Fifth Circuit did not like the fee arrangement
One key issue for the Fifth was the timing of payment of class counsel’s legal fees.
The Fifth recognized that the District Court had applied a heightened standard of care when reviewing the fee arrangement. Nevertheless, the Fifth said that “[p]erhaps the most intriguing fact is that class counsel arranged for their agreed, complete payout of fees . . .before the end of 2018 and thus alleviated any significant future risk of nonpayment. Meanwhile the Plan participants bear considerable risk and, worse, uncertainty.” Moreover, the Fifth said that class counsel “could have accepted payments over [the] prescribed duration [of payment to the plan].” Additionally, “class counsel’s agreed payout is dubious.”
Evaluating the risks of plaintiffs and the risks of class counsel
The Fifth Circuit focused on the relative risks of plaintiffs and class counsel and strongly suggested that class counsel should have taken on the same risk as plaintiffs. Was that appropriate?
Before the employer ceased contributions, the plaintiffs were already living with the risk of not being paid their full pensions because the pension plan was significantly underfunded. It was already underfunded by much more than the $55 million of contributions that the hospital failed to make. The lawsuit was never going to provide a secure pension. There were very strong reasons to be concerned about the employees. But the issue here is whether the Fifth Circuit was right to strongly suggest that class counsel should assume the same risk as plaintiffs and be paid over 35 years.
When class counsel took on this case, they accepted the usual risk of non-payment if they did not win or get a decent settlement for plaintiffs. However, if counsel knew before taking the case that they would also have to take on the plaintiff’s existing risk of payment in addition to its risk from legal representation, they may well have declined the case. A precedent such as this also could affect the ability of future plaintiffs to get representation in other cases. Moreover, if class counsel were to be paid over 35 years, they certainly would ask for much higher fees to reflect the delay and would look to sell this receivable (at a discount). The net result of a delayed payment may be that class counsel would come out close to the same place as under the original arrangement while the plaintiffs would not be better off.
Was the Fifth Circuit right about the legal fees?
This was a very unfortunate case for the employees — it is quite uncertain that they will get their full pensions. Yet this case could not have changed that fact – the economics and the law were against them. But contrary to the suggestion of the Fifth Circuit, class counsel should not be required to take on the pre-existing risk of the employees. Counsel’s risk should be tied to their legal work. In this regard, their fees were closely scrutinized and the trial court reduced them by 25%. While heightened scrutiny of fee arrangements is quite appropriate, in this case, there is a strong argument for concluding that the timing of payment of their fees was fair and appropriate.