$95.7 Wells Fargo Settlement Offer in Question as Objector Raises New Issues

San Jose, CAOn September 23, the U.S. District Court for the Northern District of California heard objections to a $95.7 million offer made by Wells Fargo to settle consolidated class action lawsuits brought by Wells Fargo Home Mortgage Consultants (HMCs). The lawsuits allege that the bank violated California state labor laws by failing to either provide or pay for rest breaks for its HMCs.

The consolidated lawsuits, Kang v. Wells Fargo Bank NA and Barreras v. Wells Fargo Bank NA (formerly known as Ibarra v. Wells Fargo Bank NA) have a long and tangled procedural history. The questions now arising from that history threaten to upend a settlement that would otherwise cover as many as 5,377 California HMCs.

Similar allegations; procedural differences; and a collection of problems

In both Kang and Barreras, the wage underpayment was the byproduct of a complicated compensation scheme under which Wells Fargo clawed back hourly wages and vacation time from the HMCs’ earned sales commissions. The differences in the lawsuits’ procedural posture are important however:

• Barreras was originally filed in the Central District of California. Thereafter, it was removed to the Northern District, for the purpose of consolidation with Kang;
• Although the basic allegations of both lawsuits are similar, Barreras covers a different set of plaintiffs, who were Wells Fargo HMCs during an earlier time, than the Kang plaintiffs;
• The Barreras plaintiffs have already settled with Wells Fargo, and some individuals have already received payment. That settlement was for a total of $24.4 million;
• The global $95.7 million settlement offer, if approved by the Northern District, would replace and supersede the previous $24.4 million Barreras settlement.

Through his attorneys, Kirk Fyson has objected to approval of the $97.7 settlement on several grounds. Among others, these include a charge of dilution and an allegation that approval would violate the rules that require that individuals be permitted to “opt-out” of a settlement.

Fyson, it should be understood, has a history with the Kang lawsuit. On September 14, the District Court denied his motion to intervene in the lawsuit.

Dilution  

“Dilution” is a concept that may be easier to grasp in the context of a corporate shareholder lawsuit. It basically refers to the loss in control that a shareholder suffers when a corporation issues more stock.

For example:  If a corporation has 100 shares, each worth $10, and Investor A owns 20 shares, her shares are worth $200. Moreover, she has a 20 percent ownership interest in the corporation. Ownership of a substantial portion of stock often comes with power and influence in making corporate decisions.

If the corporation then issues 100 more shares and Investor B buys 20 of them, the dollar value of Investor A’s shares remains at $200. However, Investor A’s ownership interest drops to 10 percent. Investor A has lost a measure of power and influence. Perhaps that was what was most important to her. The value of Investor A’s investment has been diluted by the issuance of more stock.

Fyson argues, by analogy, that the interest of the Barreras plaintiffs has been diluted because the number of plaintiffs included in the global settlement has increased. The Northern District appears to have summarily dismissed this argument by noting that the overall amount of money to be distributed has been increased.

The opt-out problem

Fyson’s opt-out argument seems to gained more traction with the court. Under federal class action rules, individuals covered by a class action settlement must have the opportunity to decide to opt-out, or not participate in it. Presumably, such an individual believes that he or she has a chance at a bigger financial recovery by pursuing an individual lawsuit.

Fyson pointed out to the court that the individual plaintiffs in Barreras had the opportunity to opt-out of the $24.4 million settlement. They did not, however, have the opportunity to opt-out of the $95.7 million global settlement that superseded and replaced it.

Can the Northern District re-open the decision to consolidate the two lawsuits?

The opt-out problem seemed to seriously trouble U.S. District Judge Beth Freeman. She admitted that she's been "balled up in the complexity" of the litigation, and suggested that the settled Barreras case should not have been consolidated with Kang. The Northern District would likely not have jurisdiction of certain of the issues raised in the Barreras lawsuit. She further left the door open to considering the jurisdiction issue and may ask for further briefing. This may set settlement approval back for an extended period of time, or scuttle it altogether.