A California federal court has rejected a proposed settlement to a class action over alleged material omissions in Option Adjustable Rate Mortgage Loan documentation (Order Denying Plaintiffs’ Motion for Preliminary Settlement Approval in Peel, et al. v. BrooksAmerica Mortgage Corp., et al.).  Lead plaintiffs and defendants, which included several divisions of Washington Mutual, agreed to settle the dispute by creating a settlement fund of $10 million, which would be used to pay class counsels’ fees and costs, incentive payments to the lead plaintiffs, and the costs of providing notice and administrative services to the class (as well, of course, as payments to the members of the class who do not opt out of the settlement).

The Court rejected the settlement because the proposed settlement class was significantly broader that the class originally certified.  Whereas the original class consisted of individuals whose loan documents were characterized by the omissions at issue in the case, the settlement class was broadened to include all individuals who obtained such loans, irrespective of whether their loan documentation omitted materials terms.  Plaintiffs had argued that the expanded class definition was necessary because to identify members of the original class would be extremely difficult without incurring great expense.

The Court was not persuaded that the expanded class and settlement should be approved, noting that it could well include individuals who suffered no injury whatsoever.  While the Court did not expressly focus on the issue in its opinion, it is likely that the Court was concerned that compensating individuals who were actually harmed had taken a back seat to other concerns.  As is always the case, the Court was sensitive to the fact that there is always the possibility of collusion in class action settlements, and that attorneys and lead plaintiffs, who are compensated for their maintenance of a suit, may not be sufficiently concerned about how payments to class members are calculated and distributed, where it does not impact their personal recovery.  While lead plaintiffs and their counsel were likely satisfied with the compensation they were to receive as part of the proposed settlement, it appears not enough concern was paid to compensating those members of the originally certified class who had been injured, and only those injured class members.