United States: The Enforcement Of Nationwide Class Settlements To Bar Related Class Actions: An Example Of Finality And Preclusion

Article by Roland C. Goss, Phillip E. Stano and Shaunda Patterson-Strachan¹

This article was originally printed in the Summer 2004 issue of Class Actions & Derivative Suits, Volume 14/Number 3.

In Deborah Berardinelli v. General American Life Insurance Company, 357 F.3d 800 (8^th Cir. 2004), the United States Court of Appeals for the Eighth Circuit affirmed the issuance of an injunction, originally issued to enforce a nationwide class action settlement,² to bar class member Berardinelli from prosecuting a new putative class action in state court in New Mexico. While the claims alleged in the complaints filed in the two lawsuits were different, the Court found that the settlement nevertheless encompassed and barred the claims asserted in the later New Mexico action. This article illustrates the impact of the finality and preclusion of nationwide class action settlements on independently filed putative class actions.

Over the past ten years or so, life insurance companies have been faced with a wave of class action lawsuits challenging the manner in which they sell their policies. Berardinelli implicates the resolution of two different challenges to insurance companies’ so-called "vanishing premium" and "modal premium" billing practices.

A. "Vanishing premium" class actions

In the early 1990s, "vanishing premium" life insurance lawsuits began to be filed. These lawsuits describe a sales practice in which life insurance is sold on the basis that monies paid as premiums are invested, with the investment account generating sufficient income at some point in time to maintain the policy in force. If the investment income reaches this level of return, the obligation to continue paying premiums supposedly "vanishes."

Vanishing premium lawsuits allege that agents sold such policies pursuant to illustrations which projected investment income, and which showed prospective purchasers when the "vanish" point might be reached. In some instances, the "anticipated" vanish point arrived, but the obligation to pay premiums did not "vanish" because, due to market changes or other factors, the investment income was insufficient to maintain the policy in force. Disappointed policy owners, contending that the sales practice was fraudulent, filed class action lawsuits in state courts and federal courts.

In fact, the term "vanishing premium lawsuit" is a misnomer, since not only does the premium obligation not "vanish," a typical vanishing premium class action lawsuit also alleges sales practice abuses unrelated to "vanish" issues. For example, these lawsuits typically allege that life insurance was inappropriately sold not as life insurance, but rather as an investment, a retirement account or a college funding account, and that new policies were sold as replacements for existing policies without appropriate disclosures. Collectively, these suits are sometimes referred to as "market conduct" suits because they pertain to the way the insurer and/or its sales force markets policies to insureds or applicants. They are further frequently referred to as "traditional" market conduct suits because this collection of allegations was the first of many regarding insurance sales practices.

Virtually every United States domiciled life insurance company with surplus in excess of $2 billion has been sued in either a class action or individual vanishing premium case. Many of these class actions have resulted in class settlements, although class certification was contested and denied in some cases, while other cases have been dismissed or resulted in summary judgment for the insurance company.

Beginning in 1998, a series of class action lawsuits were filed in New Mexico state court which challenge the sufficiency of disclosures made by insurance companies relating to the manner in which insurance premiums were paid. Commonly referred to as modal premium cases, they involve the practice of "modal billing," whereby an insurance company provides its insured with a choice to pay the policy premium for a policy annually, semi-annually, quarterly, or monthly. These cases allege that the insurer failed to adequately disclose charges or fees associated with modal premium billing or express the resulting price differential as an annual percentage rate.³ Several of these lawsuits have resulted in class-wide settlements.

Like many life insurance companies, General American Life Insurance Company ("General American") was named as a defendant in both vanishing premium and, subsequently, modal premium class actions.

From 1996 – 2003, General American was named in a number of vanishing premium actions filed in both state and federal courts. On May 28, 1997, the Judicial Panel on Multidistrict Litigation entered an Order establishing a Multi-District Litigation ("MDL") proceeding pursuant to 28 U.S.C. §1407, in the United States District Court for the Eastern District of Missouri, styled General American Life Insurance Company Sales Practices Litigation.⁴ As a result of transfer Orders, this MDL proceeding eventually included actions originally filed against General American in the Northern District of Alabama, the Central District of California, the District of Colorado, the District of Massachusetts, the Northern District of Mississippi, the Southern District of Mississippi, the Eastern District of Missouri, the Middle District of North Carolina, the Western District of Pennsylvania and the Eastern District of Texas.

Pursuant to a settlement stipulation, the MDL Court entered an Order on August 28, 2000 granting a motion for preliminary approval of a proposed class settlement. Notice of the proposed settlement was provided to the class, and members of the putative class were afforded the opportunity to exclude themselves from the class or file objections to the proposed settlement. A fairness hearing was held on the proposed settlement on December 15, 2000. On December 19, 2000, the MDL Court entered an Order granting final approval to the proposed settlement, as well as a Final Judgment. The approval of the settlement became final when the only appeal, filed by an objector, was dismissed.

The class notice, sent to the putative settlement class members, advised them that if they did not exclude themselves from the settlement class, and the settlement was approved, they would be barred from suing General American for policy-related claims encompassed by the settlement release.

The class notice described the settlement release contained in the proposed settlement, and the consequences to class members of the approval of the settlement.

The settlement release, which was contained in the settlement stipulation, as approved by the MDL Court, released

To assist in effectuating the settlement release, the Final Judgment included a permanent injunction against class members

Approximately two years after the entry of the Final Judgment and Final Approval Order in the vanishing premium MDL action, Deborah Berardinelli filed a class action lawsuit against General American in New Mexico state court, alleging modal premium claims. She was the sole representative of the putative class. It was ultimately undisputed that Deborah Berardinelli was a member of the MDL Court’s settlement class, that she received actual notice of the proposed settlement, that she did not opt out of the settlement class, that she did not file any objections to the proposed settlement, that she accepted benefits under the vanishing premium settlement and that she did not appeal the Final Order approving the vanishing premium settlement.

In response to her Complaint, General American returned to the MDL Court in Missouri and moved to enforce the settlement stipulation and Final Judgment which enjoined Berardinelli and other class members from bringing released claims regarding their policies. In the District Court, Berardinelli opposed General American’s motion by asserting that the MDL Court lacked personal jurisdiction over her and that the modal premium claims she asserted in New Mexico did not come within the purview of the vanishing premium settlement. The MDL Court, however, enjoined Berardinelli from further prosecution of her modal premium suit in New Mexico. On appeal before the Eighth Circuit, in addition to asserting that the release was not broad enough to encompass and give the Final Judgment res judicata effect as to her modal premium claims, Berardinelli mounted a collateral attack on the MDL settlement by asserting that the notice of the proposed class action settlement and the representation of the class in the MDL proceeding by class counsel several years earlier had been inadequate, and thus, due process precluded the terms of the vanishing premium settlement and Final Judgment from being binding as to her. As discussed in greater detail below, the Eighth Circuit rejected these contentions.

One of the major goals of defendants in class settlements is to obtain finality and preclusion as to all of the potential claims of members of the settlement class. Settling defendants reasonably wish to put all such claims behind them for good. It is not unusual for a class settlement to include an injunction precluding members of the settlement class from instituting, maintaining, participating in or receiving any benefits from any other lawsuits alleging claims that are encompassed by the class settlement.

There are two general ways in which such preclusion may be secured when members of a settlement class file a subsequent action in another court that advances claims encompassed by the settlement release. First, some courts in which members of settlement classes have filed such actions against the settling defendant have granted summary judgment to the settling defendant, based upon principles of release and res judicata, essentially enforcing the preclusive effect of the prior class action settlement in the subsequent action. New York Life adopted this strategy to enforce its vanishing premium settlement, which had been approved by a New York state court, in subsequent actions filed by settlement class members in federal court in South Carolina and state courts in California and Iowa. See Manji v. New York Life Ins. Co., 945 F.Supp. 919 (D. S.C. 1996)(granting summary judgment to "enforce" prior nationwide class settlement approved by New York state court); Trabert v. New York Life Ins. Co., CL 2345-0296, in the Iowa District Court for Jefferson County (July 1, 1997) (same); Lorenzana v. New York Life Ins. Co., BC134201, in the Superior Court of the State of California, County of Los Angeles (January 6, 1997)(same).

Second, the settling defendant can return to the settlement court and seek an injunction to prevent settlement class members from participating in lawsuits in other courts that involve claims that were encompassed in the class settlement. See e.g., Henson v. Ciba-Geigy Corp., 261 F.3d 1065 (11^th Cir. 2001)(stating in dicta that settlement court could by injunction force dismissal of state court action filed by settlement class member which was concluded by the approved settlement);⁵ Thompson v. Edward D. Jones & Co., 992 F.2d 187 (8^th Cir. 1993)(affirming injunction prohibiting settlement class member from pursuing separate action, finding the claims to be included in the settlement release). Such enforcement Orders have precluded class members from pursuing lawsuits in state and federal courts which asserted claims that were encompassed within the settlement release.

Such rulings usually apply to bar settlement class members from asserting, in another lawsuit, the same claims that were alleged in the settlement case. Absent some particular defenses to the enforcement of such an injunction in a given situation, and the possible complications arising out of enforcing a state court settlement with respect to a later lawsuit in federal court, or a federal court settlement with respect to a later lawsuit in state court, these enforcement Orders generally do not embark into legal areas in which there is a great deal of controversy or dispute.

Berardinelli is an example of a variant of these rulings, because the modal premium claims asserted in the later New Mexico class action had not been explicitly alleged in the prior MDL vanishing premium proceeding. Nevertheless, both the MDL Court and the Eighth Circuit found that the modal premium claims were barred by the MDL vanishing premium class settlement because they were encompassed by the expansive settlement release associated with the class settlement.

In a similar case, the United States Court of Appeals for the Seventh Circuit recently affirmed a holding that modal premium claims filed in a United States District Court by a member of a state court approved settlement class were barred by release provisions of the comprehensive settlement agreement reached in Kreidler v. Western-Southern Life Assurance Co., No. 95 CV 157, Erie County, Ohio Common Pleas Court.  The District Court pointed out that although the definition of "Released Transactions" did not explicitly include "modal premium" claims, the claims waived in the release included those relating to "the amount or method of calculation of fees, charges [or] administrative expenses ... as part of the premiums for ... a Policy", "policy charges" and "premium charges."  Tropp v. Western-Southern Life Insurance Co., No. 02 C 8341, 2003 WL 21688245, at *11-12 (N.D. Ill. July 18, 2003).  Affirmed, Tropp v. Western-Southern Life Ins. Co., 2004 WL 1858369 (7th Cir. Aug. 20, 2004). 

For both the District Court and the Eighth Circuit in Berardinelli, the case also essentially came down to an interpretation of the scope of the settlement release. Neither Court had any difficulty with the concept of a release encompassing claims in addition to those actually asserted in the settled action. The Court of Appeals held that "[t]here is no doubt that a person, as a matter of contract, may release, in exchange for consideration she deems adequate, claims existing at the time but not known to her." Id. at 804.⁶

The courts found it unnecessary to use descriptive terms of art, such as "modal premium claims," to bring such claims within the scope of the settlement release, so long as the settlement release adequately described the substance and the factual basis of the modal premium claims. Both courts found that the settlement release clearly encompassed all claims relating to the payment of premiums under the policies included in the settlement class, and that modal premium claims came within this category of released claims. Since it was undisputed that Berardinelli’s policy was included in the settlement class, the settlement’s injunction applied, and barred the modal premium claims.

The Court of Appeals interpreted the settlement release as it would a normal contract, finding that

357 F.3d at 803.

The Court of Appeals therefore concluded that the settlement of the vanishing premium class action in the MDL court was sufficiently comprehensive to bar Berardinelli’s later modal premium class action in New Mexico state court. This conclusion is in accord with the general judicial policy of encouraging the voluntary settlement of disputes and protecting the finality of final judgments, and the practice of upholding such settlements even when they employ broad language.⁷

The Eighth Circuit also pointed out that "in class actions more than the usual requirements of res judicata, as applied in the traditional lawsuit between or among individuals, must be met." 357 F.3d at 804. In this regard, the Court of Appeals noted that a class member cannot be bound by a settlement enjoining the prosecution of released claims unless certain due process requirements were satisfied. Berardinelli had argued that the notice of class action settlement was constitutionally inadequate to inform her that the settlement encompassed her claims because it did not contain the word "modal" and that her interests had not been adequately represented in the underlying MDL proceeding.

Such challenges are not surprising, as they are consistent with a general grievance about the breadth of a release. The applicable analysis, however, is different, as constitutional notions of due process, and not merely rules regarding contract interpretation, are implicated. The Eighth Circuit, however, rejected both of Berardinelli’s contentions.

As to the class notice, the Court of Appeals held:

Id. at 804-805.

With respect to the charge of inadequacy of representation, the Eighth Circuit noted that Berardinelli claimed that the class representative "gave away all modal-billing claims (in the release) and received nothing in exchange for them." Id. at 805. However, the Court of Appeals disagreed:

Id. at 805. It was clear that under the terms of the settlement of the vanishing premium case, Berardinelli received the settlement benefit bargained for in exchange for the settlement release.

In Berardinelli, the Eighth Circuit resolved in favor of General American most every challenge an insurer might expect to battle in the face of an effort to enforce a "vanishing premium" class action settlement as a bar to other premium-related litigation.

As Berardinelli illustrates, it is not unusual for parties who oppose the enforcement of a prior class action settlement to attempt to avoid a settlement bar by asserting arguments that are collateral to the interpretation of the settlement release. For example, parties may contend that: (1) the settlement court lacked subject matter jurisdiction to approve the settlement; (2) they are not bound by the settlement because the settlement court lacked personal jurisdiction over them; (3) the class notice’s description of what claims would be barred by an approved settlement was insufficient; or (4) that class counsel provided inadequate representation to the class.

An exhaustive treatment of these issues is beyond the scope of this article. However, in considering whether to approve a proposed settlement, a settlement court must consider whether it has jurisdiction, the adequacy of the class notice and the adequacy of representation by class counsel. If the settlement court gives these issues the consideration required by applicable law, and requires an adequate factual record for its analysis, there should be a sufficient record to refute these types of contentions. See, e.g., Berardinelli, 357 F.3d at 804-805 (rejecting claims that insufficiency of the class notice and inadequacy of the class representation precluded class member from being bound by the settlement terms and Final Judgment).

Finally, parties may collaterally attack the enforcement bar of a settlement by arguing that the settlement was improperly administered. Most settlement agreements provide that the settlement court retains jurisdiction to interpret and enforce the settlement. Courts have held that such provisions should be respected, rather than allowing an "improper settlement administration" claim to be presented to some other court. See, e.g., In re Prudential Ins. Co. of America Sales Practices Lit., 314 F.3d 99 (3^rd Cir. 2002)(settlement court enjoined prosecution of case by class member in state court which challenged the manner in which its settlement had been implemented); In re Prudential Ins. Co. of America Sales Practices Litig., 261 F.3d 355, 367 (3^rd Cir. 2001)(settlement court properly retained jurisdiction "to enforce an ongoing order against relitigation [and] to protect the integrity of a complex class action settlement"); In re VMS Sec. Litig., 103 F.3d 1317, 1321 (7^th Cir. 1996)(a trial court is "in the best position to interpret its own orders" and recognizing the District Court’s power to retain jurisdiction to "protect and enforce its own judgments"); Alexander v. Chicago Park Dist., 927 F.2d 1014, 1022-23 (7^th Cir. 1991)(finding that the District Court retained jurisdiction over the enforcement of a class settlement and that a claim regarding disbursement of settlement funds fell "squarely within" the Court’s retained jurisdiction). Disputes about the administration of a settlement should be presented to the settlement court when the dispute arises, rather than to another court several years later. If such claims are presented to the settlement court in a timely manner, they may be addressed and the settlement enforced in accordance with such rulings.

Due to the explosion in the number of class actions lawsuits over the past decade, and the number of nationwide class settlements, the issue of whether later actions were precluded by an earlier class settlement may arise with increased frequency. Clear interpretation of the scope of the settlement release and confirmation that due process requirements were satisfied are necessary to properly enforce and preserve the integrity of settlements and to ensure the finality of such settlements.

This article does not constitute legal or other professional advice or services by JORDEN BURT LLP and/or its attorneys.

JORDEN BURT LLP is a law firm with a unique focus on financial services and a national reputation in high stakes litigation, financial regulation and product counseling.