Ferrell v. Buckingham Property Management ( 2021 )

1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 FOR THE EASTERN DISTRICT OF CALIFORNIA 10 11 KEVIN FERRELL and CHERYL BAKER, No. 1:19-cv-00332-NONE-SAB on behalf of themselves and others, 12 ORDER DECLINING TO ADOPT FINDINGS Plaintiffs, AND RECOMMENDATIONS AND 13 DENYING MOTION FOR FINAL v. APPROVAL OF CLASS ACTION 14 SETTLEMENT AND MOTION FOR BUCKINGHAM PROPERTY ATTORNEYS’ FEES, COSTS AND 15 MANAGEMENT, INCENTIVE AWARDS 16 Defendant. (Doc. Nos. 32, 33, 36) 17 18 19 Plaintiffs Kevin Ferrell and Cheryl Baker, individually and on behalf of others, filed 20 motions for final approval of their class-action settlement agreement in this case and for 21 attorneys’ fees and costs on January 6, 2021. (Doc. Nos. 32 & 33.) The assigned magistrate 22 judge issued findings and recommendations, recommending that their motions be granted, on 23 February 10, 2021. (Doc. No. 36.) The findings and recommendations were served on the parties 24 and contained notice that any objections to them were to be filed within fourteen (14) days from 25 the date of service. (Id. at 60.) No objections were filed, and the time for filing objections has 26 passed. On June 11, 2021, the court entered an order directing the parties to file supplemental 27 briefing addressing concerns that the undersigned had with respect to the pending motions. (Doc. 28 ///// 1 No. 37.) The parties filed supplemental briefing, together with declarations, on June 25, 2021. 2 (Doc. No. 38.) 3 In accordance with the provisions of 28 U.S.C. § 636(b)(1)(C), this court has conducted a 4 de novo review of this case. For the reasons that follow, the court declines to adopt the pending 5 findings and recommendations. 6 DISCUSSION 7 A. Reversion of Employee’s PAGA Portion 8 Briefly described, the maximum payment under the settlement agreement is $600,000. 9 (Doc. No. 19-1, Exhibit 1 (“Settlement Agreement”) ¶ 34.) A portion of that $600,000 is 10 allocated to the “Class Settlement Amount,” from which members of the proposed class are paid 11 their Individual Class Payments, which are based on how many weeks participating employees 12 worked for defendant during the relevant period (“Workweeks”). (Id. ¶¶ 10, 67, 69(a).) At least 13 63% of that amount (the Minimum Distribution Floor) must be distributed to the class; if under 14 63% of the Workweeks are claimed, then claimants’ shares are increased pro rata. Any 15 unclaimed Workweeks beyond 63% of the Class Settlement Amount—called the Remainder— 16 revert to defendant. (Id. ¶¶ 52, 35, 67.) Thus, the maximum possible reversion is 37% 17 (100%−63%) of the Class Settlement Amount. (Id. ¶ 67.) 18 Only 147 members of the class participated, accounting for 24.15% of the Workweeks. 19 (Doc. No. 35-2 ¶ 17.) Thus, 24.15% of the Class Settlement Amount has been claimed—far short 20 of the 63% minimum threshold. Those who claimed an amount have thus had their proposed 21 amounts increased pro rata, and 37% is scheduled to revert to defendant. (See id.; Settlement 22 Agreement ¶ 67.) Based upon the above, the parties now propose setting a $324,556.03 Class 23 Settlement Amount, with 63% of that ($204,470.30) being distributed to the participating class 24 members. (Doc. No. 35-2 ¶¶ 19, 23.) 25 After reviewing the Settlement Agreement and the pending findings and 26 recommendations, the court ordered the parties to submit additional briefing addressing the issue 27 of whether the reversion is permissible here because plaintiffs’ claims include civil penalties 28 ///// 1 brought under the Private Attorney General Act (“PAGA”). (Doc. No. 37.) PAGA prescribes the 2 distributions for civil penalties received for claims brought thereunder: 3 [C]ivil penalties recovered by aggrieved employees shall be distributed as follows: 75 percent to the Labor and Workforce 4 Development Agency . . . and 25 percent to the aggrieved employees. 5 Cal. Lab. Code § 2699(i). 6 Plaintiffs’ counsel has now twice averred that in reaching the final settlement amount of 7 $600,000, the parties took the maximum value of each of plaintiffs’ claims, calculated various 8 discounts, and came to a final agreed-upon value. (Doc. Nos. 19-1 at 20–23 (declaration filed in 9 connection with motion for preliminary approval); 27 (declaration filed in response to 10 undersigned’s order for additional briefing).) In the end, the parties settled on a $5,000 payment 11 for the PAGA civil penalties, with 25%, or $1,250, becoming the Employee’s PAGA Portion. 12 (Settlement Agreement ¶¶ 15, 33, 42, 66; Doc. No. 32-1 at 4.) 13 In its order for supplemental briefing, the court expressed concern that reverting the 14 Employee’s PAGA Portion violates PAGA. (Doc. No. 37 at 2.) Specifically, the court indicated: 15 The Settlement Agreement, (Doc. No. 19-1, Exhibit 1 (“Settlement Agreement”)), allocates $5,000 as the payment under § 2699(i), of 16 which $1,250 becomes the Employee’s PAGA Portion. (Settlement Agreement ¶¶ 15, 33, 42, 66; Doc. No. 32-1 at 4.) However, the 17 Settlement Agreement also permits some of the Employee’s PAGA Portion to revert to defendant. (See Settlement Agreement ¶¶ 10, 18 67.) Is the Employee’s PAGA Portion distributed “to the aggrieved employees,” § 2699(i), when a portion of that amount will revert to 19 defendant? 20 (Doc. No. 37 at 2.) 21 The parties contend that the proposed reversion does not violate PAGA. (Doc. No. 38 at 22 3.) The parties emphasize that the overall proposed payment to employees is $204,470.30, which 23 exceeds the $1,250 Employee’s PAGA Portion, implying that this is all that is required in order to 24 satisfy the requirements of PAGA.1 (Id.) Put another way, the parties contend that money is 25 fungible, and so long as more than $1,250 is distributed to the class and $3,750 to the Labor and 26 ///// 27 1 The parties’ briefing states the participating class members are scheduled to receive $1,750 (see 28 1 Workforce Development Agency, § 2699(i) is satisfied. However, the parties cite no authority in 2 support of their argument in this regard. 3 Instructive on this point is the decision in Millan v. Cascade Water Services, Inc., 310 4 F.R.D. 593 (E.D. Cal. 2015). There, the court considered a motion for preliminary approval of a 5 class-action settlement agreement, which included claims brought under the federal Fair Labor 6 Standards Act (“FLSA”). The court noted that portions of the FLSA award were scheduled to 7 revert to the defendant and found that to be unacceptable in light of FLSA’s purpose: 8 The Court is concerned that a portion of the settlement fund is reversionary. In fact, if fewer than 100% of the absent class members 9 decide to participate in the Settlement, funds revert to the Defendant. Claims made settlements with reversions to a defendant are strongly 10 disfavored. . . . 11 Other courts in this District have noted, and this Court agrees, that where “a statute’s objectives include deterrence, as does the FLSA’s, 12 ‘it would contradict these goals to permit the defendant to retain unclaimed funds.’ ” Khanna v. Inter–Con Sec. Sys. Inc., 2012 WL 13 4465558, at *11 (E.D. Cal. 2012) (quoting, inter alia, Six (6) Mexican Workers v. Arizona Citrus Growers, 904 F.2d 1301, 1308 14 (9th Cir. 1990)). 15 16 Id. at 612 (additional citations following Khanna omitted). The court in Millan denied the motion 17 for preliminary approval and noted that to receive preliminary approval in the future, “the portion 18 of the settlement attributed to FLSA violation cannot revert to the Defendant if unclaimed; the 19 parties may remove the reversion entirely or name an appropriate cy pres recipient for unclaimed 20 funds.” Id. at 613. 21 Deterrence is one of PAGA’s goals. Iskanian v. CLS Transp. L.A., LLC, 59 Cal. 4th 348, 22 379 (2014) (“The solution [to insufficient enforcement of Labor Code] was to enact civil 23 penalties for Labor Code violations significant enough to deter violations.” (internal quotation 24 marks and citation omitted)). In Iskanian, the California Supreme Court considered whether 25 employers could require employees to waive their rights under PAGA in employment contracts. 26 The court concluded that PAGA rights cannot be waived because such waivers violated two 27 public policies. Id. at 383. First, because “[a]ll contracts which have for their object, directly or 28 indirectly, to exempt anyone from responsibility for his own fraud, or willful injury to the person 1 or property of another, or violation of law, whether willful or negligent, are against the policy of 2 the law,” id. at 382 (quoting Cal. Civ. Code § 1668), the effect of permitting waivers would be to 3 exempt employers from responsibility of their own injuries to their employees. Second, PAGA’s 4 private enforcement mechanism is in effect a qui tam action, and the real party in interest is the 5 state. Id. Such an action is “fundamentally a law enforcement action designed to protect the 6 public and not to benefit private parties.” Id. at 381 (internal quotation marks and citation 7 omitted). Because individuals may not “waive the advantage of . . . a law established for a public 8 reason . . . by a private agreement,” id. at 382–83 (quoting Cal. Civ. Code § 3513), the California 9 Supreme Court held that employees could not waive their right to sue under PAGA.2 10 Iskanian therefore stands for the proposition that PAGA civil penalties exist to deter 11 employment-law violations. Following that logic, the 25% portion must be allocated to aggrieved 12 employees, and employees cannot, by a private agreement, waive their right to those funds. 13 Doing so would exempt employers from their own violations of the law and waive the advantage 14 of a law established for a public reason by private agreement.3 15 Here, as mentioned above, the parties appear to contend that the money being distributed 16 to the class is fungible, and because more than $1,250 will be distributed to participating class 17 members overall, application of the reversion clause to the entire settlement amount (as opposed 18 to just the non-PAGA amount) is appropriate. (Doc. No. 38.) Under this reasoning, requiring a 19 separate share for the Employee’s PAGA Portion appears to place form over substance. But there 20 is a substantial flaw in that logic. The Settlement Agreement specifically allocates $5,000 to 21 PAGA civil penalties, designated as the “PAGA Settlement Amount” in the Settlement 22 Agreement. (Settlement Agreement at ¶ 66.) That entire amount is included within the 23 Maximum Settlement Amount of $600,000. (Id. at ¶ 34.) A number of items are then to be 24 2 Iskanian points to a broader problem with the reversion provision. In their motion for final 25 approval, plaintiffs argue that the reversion provision in their settlement agreement is appropriate because “California courts have held that reversion can be appropriate where (as here) deterrence 26 is not a factor.” (Doc. No. 32-1 at 22 (citing Cundiff v. Verizon Cal., Inc., 167 Cal. App. 4th 718, 728–29 (2008).) But here, deterrence is a factor with respect to the PAGA payment. 27 3 The logic and analysis employed by the district court in Millan is also in accord with this 28 1 deducted from that $600,000, including attorney’s fees, costs, incentive awards, the settlement 2 administrator fees, and $3,750 LWDA payment of the $5,000 PAGA civil penalties. What 3 remains after those deductions is the “Net Settlement Amount.” (Id. at ¶ 36.) The Net Settlement 4 Amount is then divided into two separate buckets. Ninety-five percent (95%) of the Net 5 Settlement Amount is allocated to the Class Settlement Amount. (Id. at ¶ 10.) This includes the 6 $1,250 “Employee’s PAGA Portion” of the PAGA Settlement Amount. (See id.)4 That entire 7 Class Settlement Amount (including the $1,250) is subject to the above-described 63% minimum 8 distribution floor. Thus, the $1,250 Employee’s PAGA Portion is whittled down by the 9 reversionary clause along with all of the other components that make up the Class Settlement 10 Amount.5 11 As mentioned, under the current Settlement Agreement’s arrangement, the $1,250 12 Employee’s PAGA Portion is a part of the Class Settlement Amount by definition and is not 13 distinguished in any way from the overall Class Settlement Amount, which is subject to the 14 reversion provision and the 63% Minimum Distribution Floor. (Settlement Agreement at ¶¶ 10, 15 69(a).) The parties appear to suggest that because they are distributing at least $1,250 to the 16 class, the court should construe the distribution(s) as including the entire Employee’s PAGA 17 Portion. However, that is not what the Settlement Agreement says. It does not treat the 18 Employee’s PAGA Portion differently from the rest of the Class Settlement Amount when 19 calculating the reversion. 20 Reversion of any portion of a PAGA civil penalty is impermissible under the holding in 21 Iskanian and under the logic employed by the district court in Millan. A settlement agreement 22 4 The remaining 5% is allocated to the FLSA settlement (id. ¶ 27), which is not subject to the 23 63% Minimum Distribution Floor (id. ¶ 69(b)). 24 5 On one hand, given counsel’s two declarations stating that the $600,000 maximum settlement 25 amount was arrived at by considering the likelihood of succeeding on each of plaintiffs’ claims, (Doc. Nos. 19-1 at 20–23; 27), the overall settlement amount may have been $1,250 higher solely 26 because of the Employee’s PAGA Portion. If this is the case, it provides another reason why subjecting the Employee’s PAGA Portion to reversion cannot be allowed. On the other hand, the 27 parties argue that defendant’s financial situation warrants a lower settlement amount, suggesting that the Maximum Settlement Amount was negotiated in part merely to reflect the maximum 28 1 that allocates funds to PAGA civil penalties and then permits some those same funds to revert to a 2 defendant indirectly exempts an employer from its violation of the law. Such an agreement is 3 “against public policy and may not be enforced.” Iskanian, 59 Cal. 4th at 382 (quoting Cal. Civ. 4 Code § 1668). Moreover, it is clear that PAGA is “a law established for a public reason [and] 5 cannot be contravened by a private agreement.” Id. at 383 (quoting Cal. Civ. Code § 3513). 6 Thus, much as an employee waiving his or her right to sue under PAGA is impermissible as 7 contravening a law established for a public reason, so too is an employee permitting reversion of 8 funds won under PAGA’s civil penalties that are to be distributed specifically to aggrieved 9 employees. 10 Fortunately, it seems likely that this situation will be fairly easy to remedy. Under the 11 current Settlement Agreement, the calculations begin with the $600,000 Maximum Settlement 12 Amount. Attorney’s fees, costs, incentive awards, settlement administrator fees, and the $3,750 13 LWDA portion of the $5,000 PAGA civil penalties are then deducted from the $600.000. Next, 14 95% of what remains is placed into the Class Settlement Amount, resulting in a Class Settlement 15 Amount of $324,556.03. As mentioned, this Class Settlement Amount includes the Employee’s 16 PAGA Portion. Of that $324,556.03, 63% (or $204.470.30) will be distributed to the 17 participating class members, with the remainder (less some tax payments) reverting to defendant. 18 In the end, under the current arrangement, the participating class members will receive shares 19 from a fund of $204,470.30. 20 To cure the PAGA violation here, the parties could amend their Settlement Agreement to 21 treat the $1,250 Employee’s PAGA Portion not as part of the Class Settlement Amount but 22 instead as a deduction from the Maximum Settlement Amount. Doing so would result in a 23 slightly lower Class Settlement Amount of $323,306.03.6 Applying the Minimum Distribution 24 Floor (63%) to that amount one arrives at $203,682.80. Under this alternative arrangement, the 25 class members would also receive the full $1,250 portion allocated to them under Labor Code 26 ///// 27 ///// 28 1 § 2699(i) as part of the PAGA penalties. Thus, class members would receive shares from a 2 slightly higher total fund of $204,932.80.7 3 The difference between these two scenarios is small in this case: $462.50. To reiterate, 4 the PAGA issue here is caused by the fact that under the current Settlement Agreement, funds that 5 are allocated to the Employee’s PAGA Portion are subject to reversion, resulting in a $462.50 6 lower total distribution than would otherwise occur. Despite the de minimis nature of the issue in 7 this case, the parties, not the court, must amend the agreement on their own. See Hanlon v. 8 Chrysler Corp., 150 F.3d 1011, 1026 (9th Cir. 1998), overruled on other grounds by Wal-Mart 9 Stores, Inc. v. Dukes, 564 U.S. 338 (2011) (“Neither the district court nor this court have the 10 ability to delete, modify or substitute certain provisions. The settlement must stand or fall in its 11 entirety.” (internal citations and quotations omitted)); Staton v. Boeing Co., 327 F.3d 938, 960 12 (9th Cir. 2003) (quoting id.). If the only changes made to the Settlement Agreement are to correct 13 this PAGA issue, the class will not need to be provided with further notice. In this regard, courts 14 do not require notice of minor amendments to settlement agreements to absent class members if 15 the amendments make the agreement more favorable to the class. See Schneider v. Chipotle 16 Mexican Grill, Inc., 336 F.R.D. 588, 596 (N.D. Cal. 2020) (“The Court also finds that additional 17 notice of the amendment to the settlement is not warranted because, given the limited nature of 18 the amendment and the fact that it made the settlement more favorable, no reasonable class 19 member who chose not to opt out after receiving notice of the original settlement would decide to 20 opt out based on the modified and improved settlement.”); In re Anthem, Inc. Data Breach Litig., 21 327 F.R.D. 299, 330–31 (N.D. Cal. 2018) (“[W]hen the modification [made after a final approval 22 hearing] makes the settlement more valuable to the class, courts have routinely concluded that 23 notice [of the modification] is unnecessary.”). 24 B. Signs of Collusion 25 The court has previously expressed hesitations about possible collusion between the 26 parties with respect to this settlement. (See Doc. Nos. 24 (findings and recommendations, 27 recommending granting preliminary approval); 26 at 2 (order for additional briefing); 28 at 7–9 28 1 (order adopting findings and recommendations to grant preliminary approval and noting that “The 2 parties are forewarned that if it appears defendants are likely to receive an unwarranted windfall 3 from the reversion, the court is unlikely to grant final approval of the settlement.”); 36 (findings 4 and recommendations, recommending granting final approval, and discussing reversion at 5 length); 37 (ordering additional briefing concerning aspects of reversion).) 6 The magistrate judge discussed the possibility of collusion in depth in the pending 7 findings and recommendations. (Doc. No. 36 at 38–45.) In addition, the undersigned inquired 8 about relative response rates between defendant’s current and former employees. (See Doc. No. 9 37.) If response rates were lower among current employees, that would possibly indicate that 10 defendant pressured class members over whom it has authority not to participate. However, in 11 fact, the response rate is higher among current employees. (Doc. No. 38-1.) Moreover, 12 defendant’s president has filed a declaration stating that defendant had taken several affirmative 13 steps to increase the response rate among its current employees. (Doc. No. 38-2.) The court 14 therefore adopts the findings and recommendations’ reasoning concerning the potential for 15 collusion. 16 C. Other Aspects of Settlement Agreement 17 The court briefly notes that it finds the Settlement Agreement is otherwise fair, reasonable 18 and adequate. At the final approval stage, courts reviewing proposed settlement agreements must 19 ensure that the agreements are fair, reasonable, and adequate. Fed. R. Civ. P. 23(e)(2). In making 20 that determination, courts must consider whether: 21 (A) the class representatives and class counsel have adequately represented the class; 22 (B) the proposal was negotiated at arm’s length; 23 (C) the relief provided for the class is adequate, taking into account: 24 (i) the costs, risks, and delay of trial and appeal; 25 (ii) the effectiveness of any proposed method of distributing 26 relief to the class, including the method of processing class- member claims; 27 (iii) the terms of any proposed award of attorney’s fees, 28 including timing of payment; and 1 (iv) any agreement required to be identified under Rule 23(e)(3); and 2 (D) the proposal treats class members equitably relative to each 3 other. 4 5 Id. 6 Here, consideration of the Rule 23(e)(2) factors would, but for the reversionary clause 7 related to the PAGA aspect of the settlement, incline the court to grant final approval. First, class 8 representatives and counsel have litigated this case for years and, as discussed above, the court 9 does not conclude that they have colluded. See Fed. R. Civ. P. 23(e)(2)(A). Second, the 10 agreement was reached after an arm’s-length negotiation which involved a professional mediator. 11 (See Doc. No. 33-4 ¶ 8.) This also favors approval of the settlement agreement. See Fed. R. Civ. 12 P. 23(e)(2)(B). Third, other than with respect to the PAGA issue identified above, the court 13 agrees with the analysis set forth in the findings and recommendations that the relief provided to 14 the class is adequate. The magistrate judge carefully considered the risks and delay of further 15 litigation, as compared to the amount offered in the settlement. (See Doc. No. 36 at 19–31.) The 16 method of distribution is reasonable; the settlement administrator will distribute payments by 17 check to all payees—including counsel and class members—after the settlement is fully funded. 18 (Settlement Agreement ¶¶ 62(b), 71(g).) The parties have sufficiently established that a delayed 19 funding of the settlement amount is reasonable in this instance. (Doc. Nos. 19-2 ¶¶ 12–13 20 (declaration of defendant’s president concerning need to pay settlement amount over a twelve- 21 month period); 35-1 ¶¶ 5–6 (additional declaration concerning the same).) For purposes of 22 determining the adequacy of the class’s recovery only, see Briseno v. Henderson, 998 F.3d 1014, 23 1024–25 (9th Cir. 2021) (noting the attorneys’ fees must be considered when determining class 24 settlement is adequate), the attorneys’ fees are above the benchmark in this circuit, but the 35% of 25 the settlement amount requested by counsel is not so high to warrant rejection of the settlement 26 itself. Accordingly, the court finds that there is otherwise adequate relief for the class. See Fed. 27 R. Civ. P. 23(e)(2)(C). Fourth, class counsel and plaintiffs filed declarations indicating that there 28 were no other agreements that would need to be disclosed under Rule 23(e)(3). (Doc. Nos. 27 1 | | 70; 33-2 4] 16; 33-3 § 16.) This factor therefore favors approval. See Fed. R. Civ. P. 2 | 23(e)(2)(D). Finally, the settlement proposal treats class members equitably relative to each 3 | other; participating class members are paid based on the number of weeks they worked. See Fed. 4 | R. Civ. P. 23(e)(2)(E). Accordingly, other than with respect to the reverting of the Employee’s 5 || PAGA Portion, the settlement agreement could otherwise be approved. 6 | D. Attorneys’ Fees and Costs and Incentive Awards 7 Because the court is denying the motion for final approval, the court declines to address 8 | the merits of plaintiffs’ motion for attorneys’ fees and costs and incentive awards at this time. 9 | (Doc. No. 33.) Ifthe parties reach another settlement agreement and file renewed motions, the 10 | court will consider attorneys’ fees at that time. 11 CONCLUSION AND ORDER 12 Accordingly, 13 1. The court declines to adopt the magistrate judge’s February 10, 2021 findings and 14 recommendations (Doc. No. 36); 15 2. Plaintiffs’ Motion for Final Approval and Motion for Attorneys’ Fees, Costs and 16 Incentive Awards are DENIED WITHOUT PREJUDICE (Doc. Nos. 32 & 33); 17 3. Ifthe parties submit a revised settlement agreement as part of a renewed motion for 18 final approval, they need not re-brief matters that have previously been briefed but are 19 directed to submit a redlined version of any amended settlement agreement along with 20 targeted briefing addressing any changes made in the settlement; and 21 4. The undersigned will retain this matter, and any renewed motion for final approval of 22 a revised settlement agreement is to be directed to the undersigned. 23 | IT IS SO ORDERED. me □ Dated: _ August 12, 2021 aL Al 7 ye 25 UNITED STATES DISTRICT JUDGE 26 27 28 11