## Facts

- Beneficial National Bank funded refund anticipation loans (RALs) marketed to H&R Block tax-preparation customers; borrowers alleged the RALs were high-cost, short-term loans.
- Multiple nationwide class actions challenged the RAL program; a Texas case was well advanced, had survived dispositive motions, and was nearing trial with estimated exposure around $2 billion.
- Beneficial approached three solo attorneys with no significant pending RAL actions, who filed a new putative class action in the Northern District of Illinois and quickly negotiated a settlement.
- The settlement capped class recovery at $25 million; most class members would receive $15 each (with some increased to $30 per loan after the district court’s suggestion).
- Class counsel sought approximately $4.25 million in attorneys’ fees.
- The settlement allowed H&R Block to join and obtain releases without additional payment to the class beyond the negotiated amounts.
- The settlement released RAL-related claims on a nationwide basis, including claims asserted in other pending litigation.
- Class notice did not disclose the existence or advanced posture of the Texas litigation that would be released.
- The district court permitted class counsel’s fee submission to be made under seal and reviewed in camera, limiting class members’ ability to evaluate and object to the fee request.
- The district court approved the settlement as fair, reasonable, and adequate, denied objections and intervention requests, and awarded fees.

## Issues

1. Whether the district court abused its discretion under Rule 23(e) by approving the settlement without sufficient independent scrutiny of its fairness, reasonableness, and adequacy.
2. Whether circumstances of counsel selection, negotiation, and the fee arrangement indicated inadequate representation or possible collusion (including a “reverse auction” risk).
3. Whether the settlement’s nationwide release improperly extinguished valuable, pending claims in other actions without adequate compensation or disclosure.
4. Whether the court erred by approving notice that omitted material information about related litigation, considering fee materials in camera, and denying intervention in ways that undermined protection of absent class members.

## Decision

- The Seventh Circuit reversed approval of the settlement and reversed the attorneys’ fee award, and remanded for further proceedings.
- The court held the district judge failed to act with the required care toward absent class members and did not adequately investigate warning signs that the settlement might be collusive or grossly inadequate.
- The court faulted the process for withholding from class members material information about other advanced litigation and for preventing meaningful objections to fees through sealed, in camera submissions.

## Legal Principles

- In a class settlement, the district court must act as a fiduciary for absent class members and independently evaluate settlement value and fee reasonableness under Rule 23(e).
- Structural conflicts exist because class counsel’s fees and class recovery are linked; courts must be alert to settlements trading low class relief for favorable fee treatment.
- Where circumstances suggest a potential “reverse auction” (defendants negotiating with weaker counsel to obtain broad releases cheaply), heightened judicial scrutiny is required.
- Class notice must provide information necessary for informed opt-out decisions, including material information about other related litigation being released and its procedural posture.
- Fee requests funded from (or effectively reducing) class relief should be transparent and subject to adversarial testing; procedures that prevent class members from assessing the basis for fees can be improper.

## Conclusion

The Seventh Circuit required a more searching, evidence-based review of class settlements and attorneys’ fees when warning signs of inadequate representation and undercompensated, broadly released claims are present, and it rejected approval procedures that kept class members from making informed choices and meaningful objections.


Reynolds v. Beneficial Nat’l Bank, 288 F.3d 277 (7th Cir. 2002)