Ethics in Brief

Ethics in Brief is designed to present ethical issues that practitioners might well face on a daily basis. It is a service of the Legal Ethics Committee of the San Diego County Bar Association for SDCBA members.

Debtors Must Wait to Truly Get Their Fresh Start Due to Conflicts of Interest

One of the ultimate goals for a bankruptcy practitioner is to obtain a “fresh start” for their debtor clients through a bankruptcy discharge. Sometimes that fresh start is frustrated by creditors who continue to report negative entries to credit reporting agencies for debts already discharged in bankruptcy. The frustration is magnified when credit reporting agencies don't correct the error.

In the case of Radcliffe v. Experian Info. Solutions Inc., 11‑56376, 2013 WL 1715422 (9th Cir. Apr. 22, 2013) plaintiff consumers, that had gone through bankruptcy, sued the three major credit reporting agencies for issuing consumer credit reports containing negative entries for debts that were discharged under the Federal Credit Reporting Act.  The district court approved a $45 million settlement of the class action suit.  The settlement fund was to be distributed to the class members on a tiered basis, with the class representatives getting a $5,000 incentive award if they supported the settlement.  The class representatives suffered actual damages ranging from $750 to $26, making the incentive an inducement to class representatives to put their interest in receiving $5,000 over objectivity to the merits of any settlement.

The Ninth Circuit Court of Appeals reversed the district court’s approval of the settlement finding that the absent class members weren’t adequately represented by either the class representatives or class counsel.  The panel concluded that the incentive provision was supposed to encourage the class representatives to support the settlement. That incentive, the court held, changed the motivation for the class representatives. “Instead of being solely concerned about the adequacy of the settlement for the absent class members, the class representatives now had a $5,000 incentive to support the settlement regardless of its fairness and a promise of no reward if they opposed the settlement.”  The incentive created a conflict of interest and undermined the adequacy of the class representatives.

The court also expressed concern about the disparity in the size of the incentive awards, stating that this alone might be reason enough to disqualify the class representatives. “There is a serious question whether class representatives could be expected to fairly evaluate whether awards ranging from $26 to $750 is a fair settlement value when they would receive $5,000 incentive awards.”

Finally, the court held that class counsel was not adequate to represent the class.  Counsel  had a fiduciary responsibility to represent the interests of the class as a whole, and the conditional incentive rewards created a conflict of interest between the class representative who would receive the incentive award and the absent class members who would not.  Because of the actual conflict, they were not entitled to the $16 million in attorneys’ fees for their legal efforts during the conflicted representation.

The case has been remanded for further proceedings. Meanwhile, discharged debtors will have to wait to get their true fresh start.

--Radmila A. Fulton

**No portion of this summary is intended to constitute legal advice. Be sure to perform independent research and analysis.  Any views expressed are those of the author only and not of the SDCBA or its Legal Ethics Committee.**