Last month, Global Fitness Holdings LLC and its four managers were held in civil contempt for failure to comply with a final order approving a class action settlement. Gascho v. Global Fitness Holdings, LLC, S.D. Ohio No. 2:11-cv-436 (Aug. 8, 2017). Global Fitness entered into a class action settlement resolving claims that it had engaged in deceptive billing practices. As part of the settlement, Global Fitness agreed to pay $2.39 million in attorneys' fees and to cover the administrator's expenses. Just two days prior to the payment deadline, however, Global Fitness informed the court that it could not make those payments because it no longer had sufficient funds. The plaintiffs then sought and obtained the civil contempt order.
At the heart of the court's contempt decision is the principle that, when the terms of a settlement agreement are approved and incorporated into a court order, a breach of the agreement is also a violation of the court order. Most settlement agreements are not approved by or incorporated into a court order; thus a breach is typically limited to the parties to the settlement contract. But class action settlements are different; they must be approved by the court under Rule 23(e). And final approval of the settlement agreement had been entered in Gaucho.
class action settlement argued it had an inability to pay the attorneys' fees and administrator expenses because, by the time such amounts were due, it had simply run out of money as a result of obligations to other creditors, business expenditures and other expenses. But the court found that once Global Fitness entered into the settlement agreement, it became obligated to take reasonable steps to perform its end of the agreement. It failed to do so, and was in breach not only of the settlement agreement, but also of the court's final approval order. The court found no evidence that Global Fitness took any steps to ensure compliance with its payment obligations – "it did not set aside or save any money for the payment, it did not modify its spending habits, and it did not communicate to Plaintiffs' counsel or the Court once it knew there would be insufficient funds to fulfill the promised payments."
The court found not only Global Fitness in civil contempt, but four of its board managers to be in contempt as well, under the principle that a command to the corporation is a command to those responsible for the conduct of its affairs. It found that each of the four managers also failed to offer any evidence showing they took any steps, let alone "all reasonable steps," to comply with the payment obligations in the final approval order.
The civil contempt order is currently on appeal to the Sixth Circuit. But the court's ruling should be a strong warning to corporate officers and managers to ensure their company's compliance with a class action settlement agreement that has been approved by the court. A failure to comply constitutes both a breach of the agreement as well as a violation of a court order subjecting the company and its officers and managers to potential further liability.
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