On 12 August 2013, the Federal Court of Australia upheld an appeal by the Australian Securities & Investments Commission (ASIC) against the Federal Court's previous approval of the settlement of the Storm Financial class action against Macquarie Bank. Storm Financial collapsed in 2009 leaving thousands of "mums and dads" investors out of pocket. The proceedings were settled in May 2013, with much media coverage.
The central argument in the appeal was that an arrangement put in place whereby 35% of the total settlement pool was set aside for plaintiffs represented by the firm Levitt Robinson was not fair or reasonable. A large majority (but not all) of the Levitt Robinson clients (Funding Group Members) made a financial contribution to the funding of the class action. Another group of plaintiffs were not represented by Levitt Robinson and had not contributed to the funding of the class action (Unrepresented Group Members).
The case is significant in that it is the first occasion when ASIC has intervened in the settlement of a class action. Further, this is the first time that an Australian court has overturned the approval of a class action by a lower court.
The Federal Court upheld the appeal for two principal reasons:
- the Court found there to be an inequality of opportunity afforded to those not represented by Levitt Robinson to share in the funders' premium on the terms offered to clients of that firm. That inequality was further exacerbated by the offer of highly attractive terms to a small group of Levitt Robinson clients after the settlement was announced on 15 March 2013, and
- the Court held that the calculation of the 35% premium by reference to success fees normally charged by commercial litigation funders was also unfair.
Background to the decision
The original case, Richards v Macquarie Bank Ltd (No4), was a proceeding commenced by Mrs Richards as a representative proceeding under Pt IVA of the Federal Court of Australia Act on 24 December 2010. It was a representative proceeding on behalf of approximately 1,050 clients of Storm Financial who had borrowed money from Macquarie Bank on advice from Storm and had then subsequently lost money during the global financial crisis (during which Storm went into liquidation).
A settlement was reached in March 2013, providing for the distribution of $82.5 million to the Funding Group Members. Section 33V of the Federal Court of Australia Act provides that:
- A representative proceeding may not be settled or discontinued without the approval of the Court.
- If the Court gives such an approval, it may make such orders as are just with respect to the distribution of any money paid under a settlement or paid into the Court. (Emphasis added.)
The settlement reached in March 2013 provided for the distribution of $82.5 million. Almost $29 million of that amount (35% of the total sum) was to be set aside as a "funders' premium" and distributed among the 317 Funding Group Members in proportion to their losses. Therefore, under the settlement, of the total settlement pool of approximately 1,050 group members, about 317 would receive approximately 42% of the quantum of their lost equity contributions and be reimbursed their legal costs. The remaining members of the settlement pool, the Unrepresented Group Members, would only recover 17.6% of their claims to lost equity.
An application for approval of the settlement was brought before Justice Logan. A number of Unrepresented Group Members opposed the granting of approval of the settlement primarily in relation to the unequal treatment of group members arising by reason of the 35% premium arrangement. ASIC also opposed the application on similar grounds. On 3 May 2013, Justice Logan approved the settlement. ASIC appealed against the approval of that settlement to the full court of the Federal Court.
Reasons for the judgment
In reaching its decision, the Appeals Court adopted the following reasoning:
- The Appeals Court noted its responsibility to approve the settlement of class actions and described its function as protective. The Court noted that the role it assumes is akin to that of a guardian and not unlike the role a Court assumes when approving settlements of claims brought by infants or other legally disabled people. In that context, the Court saw its role as protecting those group members who were not represented by Levitt Robinson.
- Levitt Robinson set aside 35% of the settlement pool for the benefit of the Funding Group Members. The 35% figure was based on what commercial litigation funders normally take as their fee for funding litigation of this nature. The Court held that hiving off 35% of the settlement pool was not reasonable because of the differences between the circumstances of commercial third party litigation funders and the position of the Funding Group Members.
- The decision to fund the litigation had been taken by group members in the hope that they might recover some of their lost contributions. The decision to fund the litigation was not taken on the basis of an expectation of payment of "a premium". This is to be contrasted with the normal role by a litigation funder.
- The proposed premium would represent a return of 525% on the money actually contributed by the Funding Group Members, and such a return was seen to be disproportionate.
- The proposed funding premium was to be distributed according to losses suffered, and not by reference to the level of financial contribution made. The Court considered this approach to add a further level of disproportion.
- Subsequent to the settlement being reached, 14 clients of Levitt Robinson who had made no financial contribution were given the chance to pay a relatively low amount ($500) to make them Funding Group Members and thus entitle them to the premium payment. That this opportunity was not offered to Unrepresented Group Members was held to be neither fair nor reasonable.
Implications of the decision
The Court was highly conscious of the fact that overturning the trial judge's approval of the resolution of these proceedings put the entire settlement at risk. Given the obvious desire of the Court to see proceedings as difficult and protracted as the Storm Financial class action resolved, puts in context the extent to which the Court believed that the arrangements put in place by Levitt Robinson were neither fair nor reasonable. The Court was at pains to say that it did not wish to discourage potential plaintiffs from embarking on a funding arrangement of this type, which they saw as an important alternative to commercial litigation funding.
While this case probably turns on its own particular facts, the key principle to be drawn from the outcome is that all parties to class action litigation (including insurers) need to be very mindful of the relationships put in place by plaintiffs' solicitors for distribution of settlement funds to the plaintiffs. The certainty that defendants (and insurers) would wish to see from the settlement of such proceedings will be at risk if it appears that one particular class of plaintiffs may benefit disproportionately compared to other plaintiffs in the broader group.
John would like to acknowledge the assistance of Christopher Perry, Paralegal, in the preparation of this article.
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