Second Circuit Affirmed District Court’s Approval of Class Action Settlement—Overcharge and RICO Claims—General Business Law §349 Claim—Settlement Involved Maintenance of “Best Practices,” Audit of Leases, Claims Process for Damages, Supervision by a Court Appointee, $25 Million Payment to Non-Profits for Tenant Assistance Services, $1.25 Million in Attorney Fees and $200,000 in Expenses

This appeal involved the issue of “when a class-action settlement requires subclassing of the plaintiff class to ensure adequacy of representation pursuant to Federal Rules of Civil Procedure [FRCP] 23(e) and (a)(4).” The district court had certified the plaintiff classes, which included “more than 20,000 current and former occupants” of New York City rent-regulated apartments. The settlement that had been approved by the district court “provides no damages relief for claims that tenants were overcharged rent by prior landlords, rather than by defendants, or for claims for rent overcharges that predate July 11, 2004″ (excluded claims). The appellant objectors to the settlement, asserted that “the lack of separate representation for tenants with Excluded…Claims during settlement negotiations violated Rule 23 and constitutional due process….” The U.S. Court of Appeals for the Second Circuit (court) held that the settlement was “fair, reasonable, and adequate, as required by Rule 23(e)(2),” and affirmed.

The plaintiffs had alleged that the defendants had conspired to “fraudulently increase rents” in over 400 city buildings, in violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) “and the New York Consumer Protection Act…, which prohibits ‘[d]eceptive acts or practices in the conduct of any business,’ N.Y. Gen. Bus. Law §349(a).” The plaintiffs cited city rent regulations, violations of tenant succession laws, alleged misrepresentations of rent payment histories, and the filing of meritless eviction suits and/or other harassment of tenants. The defendants had allegedly sought to raise rents above legal levels and “drive tenants out of rent-regulated units,” so that such units could be sold or rented at “higher, market-rate monthly rent.”

The plaintiffs’ proposed class included “[a]ll persons who, at any time from July 11, 2004 to the date of certification, leased an apartment in the City…owned…by the [defendants].” The district court certified “two classes: an injunctive-relief class comprising all current residents of rent-regulated apartments owned by [defendants], and a damages class comprising ‘all persons who, at any time between July 11, 2004 and…[April 27, 2010], were tenants in rent-regulated apartments…directly or indirectly owned in whole or in part by’ [defendants].”

The district court found that the proposed injunctive relief class met Rule 23(a)’s requirements as to “numerosity, commonality, representativeness, and adequacy of representation,—as well as Rule 23(b)(2)’s requirement that injunctive relief be appropriate to the class as a whole.” Although the proposed damages class met Rule 23(a)’s requirements, it did not satisfy Rule 23(b)(3)’s requirement that “questions of law or fact common to the members of the class predominate, given the members’ individualized issues relating to injury and causation.” However, the district court had certified a class “that was limited to certain common liability issues that did satisfy Rule 23(b)(3)’s predominance and superiority requirements.” Actions “may be brought or maintained as a class action with respect to particular issues.”

Prior to the commencement of discovery on the merits, the parties had “extensive settlement negotiations under the supervision of a magistrate judge….” The parties were represented by prominent law firms and class counsel had been assisted by “an expert in New York landlord-tenant law….”

Pursuant to a settlement which had been approved by the magistrate judge, the defendants “agreed to maintain ‘best practices,’ enforced by a court-appointed claims administrator, with respect to: setting initial rents for new tenants and rent increases for existing tenants; eviction proceedings against tenants; repairs and tenant services; and staff training.” The defendants were required “to undergo an audit of a random sample of its leases issued from 2008 to 2010 and, depending on the outcome of that audit,” defendants could be required to “submit to a more extensive audit of all its leases from that period.” The defendants also agreed to establish a claims administration process (CAP) “to pay damages for past rent overcharges as well as for ‘harassment’ claims.” The CAP would be administered “by a court appointee.”

Tenants with rent overcharge claims may recover their “actual damages or, if they can prove willfulness on the part of [the defendants], double damages.” Tenants who assert harassment claims, “may recover the greater of a pre-set penalty ranging from $500 to $1500 or their actual damages.” The “informal” claims process permits tenants to prove their claims “through a simple form and [tenants] are not required to adhere to traditional rules of evidence.” The defendants also agreed to pay $2.5 million to community legal services and non-profit organizations for provision of tenant assistance with respect to the CAP, class counsel fees of $1.25 million and $200,000 in expenses.

The settlement excluded certain claims, i.e., it “provided for damages…only for rents set by [the defendants] after July 11, 2004″ and “under the [CAP], it would be ‘a defense to any allegation of overcharge’ that [the defendants had] ‘relied on a rent registered by a prior owner with the [NYS Div. of Housing and Community Renewal]…or contained in documentation from a prior owner of the[…]building.”

After an “extended notice period with substantial outreach to class members, only about 1 percent of the class members opted out or objected to the settlement.” Following a fairness hearing, the district court approved the settlement. It held that “notice of the proposed settlement was adequate, …the settlement was fair, adequate, and reasonable…, and…there were no intra-class conflicts.” The appellants challenged the “fairness, adequacy and reasonableness of the settlement and the adequacy of the class members’ representation.”

The court found that the district court had carefully analyzed each of the following required factors:

(1) the complexity, expense and likely duration of the litigation; (2) the reaction of the class to the settlement; (3) the stage of the proceedings and the amount of discovery completed; (4) the risks of establishing liability; (5) the risks of establishing damages; (6) the risks of maintaining the class action through the trial; (7) the ability of the defendants to withstand a greater judgment; (8) the range of reasonableness of the settlement fund in light of the best possible recovery; [and] (9) the range of reasonableness of the settlement fund to a possible recovery in light of all the attendant risks of litigation.

The court found that on balance, the factors “weighed heavily in favor of final approval of the Settlement Agreement” and “the district court’s well-reasoned conclusion” did not constitute “an abuse of discretion.”

The appellants argued that a settlement before “merits discovery ‘infected the analysis of virtually every other…factor’ to their detriment.” However, the court found that “the discovery conducted was sufficient to permit the district court to evaluate the claims and settlement” and that objectors do not have an “automatic right to discovery or an evidentiary hearing in order to substantiate their objections.” The district court had “treated the objections seriously, delaying the fairness hearing…, requiring revised notice and a 20-building sampling, and ordering the parties to answer…questions about the effects of the settlement on various hypothetical class members—actions that imposed significant cost and burden on [defendants] and on Class Counsel.” The district court had rejected the objectors’ request for lease and rent registration histories for every building in the sampling “because the objectors could not articulate why they needed the information to substantiate their objections.”

Moreover, the district court had found that there was “a ‘substantial chance’ that a motion to decertify the class would succeed were the settlement to be rejected.” The defendants planned to make such motion if the settlement was rejected based on “the large size of the class, the complicated and diverse claims…, and the heightened legal uncertainty necessarily injected by significant recent Supreme Court authority relevant to the propriety of class certification.” The district court had not “abused its discretion in finding that the class faced significant risks of decertification,” that “decertification would drastically reduce the chances of any member of the class achieving meaningful relief” and such litigation risks “weighed heavily in favor of the fairness of a settlement under which plaintiffs achieved substantial benefits that (as in any settlement) fell short of what they might have hoped to achieve.”

The district court had not simply “rubberstamped” the settlement based on “boilerplate findings,” but had “written a…careful opinion” after “airing” and “examining” the objections. The court believed that the appellants were essentially arguing that the settlement “did not get enough for the class.”

The appellants argued that the settlement discriminated against members with “excluded…claims” and that created “a fundamental conflict of interest among these two subclasses” that required separate counsel. However, such conflict was not “raised at the certification stage.” The appellants argued that the class conflicts arose after certification, during the settlement negotiations. The court found that in the subject “factually complex” context, there was no “fundamental conflict between class members necessitating separate representation.”

The complaint did not allege individualized claims of “erroneously charged rents in violation of the stabilization rules.” It was “difficult to see how such claims could possibly be brought on a class basis, since the sole issue in each individual’s claim would be the correctness of that tenant’s rent, based on the specific rent history of that apartment and its conformance to the correct calculation under the rules.” The complaint alleges that “the entire class was victimized by defendants’ conduct of a single RICO enterprise based on fraud and extortion. While the damages suffered by class members will vary, and will in many cases be based on the extent to which the relevant criminal conduct affected the rent paid by individual tenants, defendants’ liability is based on fraudulent or other predicate criminal conduct.” Thus, rent overcharge claims “as such were never part of the case in the first place. The claims that were addressed by the settlement are based on conscious wrongdoing by defendants…, including among other things fraudulent rent overcharges. To the extent that the settlement excludes overcharges resulting from rents erroneously set…by prior landlords…or the RICO enterprise alleged in the complaint, it excludes claims that are far more tenuous against defendants, and that (except to the extent defendants could be shown to have acted with fraudulent intent) were not part of the case at all.”

Additionally, the settlement did not, “by its terms, exclude any tenant, or type of tenant, from the claims process. It provides that no class member can bring Excluded…Claims through that process.” The appellants could not “estimate with any reliability the number of class members,” who have only excluded overcharge claims. Moreover, class members who have leases that pre-date the cutoff, “may still be eligible for harassment or eviction-related damages against [the defendant], or may have rent overcharge claims related to post-2004 illegal rent overcharges.” Thus, appellants had not demonstrated that “a significant number of class members’ claims were excluded from the settlement.”

Since the settlement provides all members of the class with a “considerable benefit of a streamlined claims process,” and it had not been demonstrated that a “significant number of class members [were] excluded from benefitting from that process by the exclusion of certain types of relatively weak claims,” the court could not find that “the exclusion of those claims creates a fundamental conflict among class members sufficient to require the creation of separate subclasses.”

Although the settlement did not provide relief for excluded claims, the settlement did not “extinguish them, or release [the defendants] from liability for overcharge claims under [city] rent regulations.” The appellants could pursue excluded claims “in other fora, presumably New York state courts.” All class members may bring post-2004 overcharge claims through the CAP, “without bearing the burden of proving that any overcharge was based on fraud.”

Additionally, “all class members who presently reside in [the defendant-owned] housing benefit from the injunctive measures provided for in the settlement, which require [the defendant] to…maintain ‘best practices,’ enforced by a court-appointed claims administrator, with respect to setting initial rents, setting rent increases, eviction proceedings, repairs and other services, and staff training.” The court explained that “[a]ll class settlements value some claims more highly than others, based on their perceived merits, and strike compromises based on probabilistic assessments.” The court opined that if the subject compromises “automatically created subclasses that required separate representation,” the class action procedure would be “more cumbersome than it already is, and would create even more transaction costs in the form of legal fees.” The court opined that given “the increased difficulty of litigating the Excluded…Claims, their exclusion from the settlement was reasonable and does not create serious intraclass conflicts or indicate inadequate representation by Class Counsel.”

Additionally, “the rejection of the settlement by all five remaining named class representatives” did not require rejection of the settlement. Judicial precedent holds that the “assent of class representatives is not essential to the settlement, as long as the Rule 23 requirements are met.”

The court characterized the complaint as “a daring and unconventional effort to turn [city] rent violations into RICO claims that could be pursued on a class-wide basis.” The litigation “achieved significant benefits…, particularly in its injunctive aspects, against significant odds.” Although the settlement had certain “unconventional aspects” and left “much to be desired from the standpoint of the more militant members of the class…, those less favorable aspects of the settlement are largely attributable to the precariousness of plaintiffs’ claims.” Thus, the court held that the district court had not exceeded its authority in approving the settlement and that there were not sufficient conflicts of interest or inadequate representation that required the “creation of separately-represented subclasses.” Thus, the court affirmed.

Charron v. Wiener, 12-2834-cv, NYLJ 1202622606870, at *1 (2d Cir., Decided Sept. 30, 2013), Before: Calabresi, Livingston, and Lynch, C.JJ.

Scott E. Mollen is a partner at Herrick, Feinstein and an adjunct professor at St. John’s University School of Law.