A judge has granted final approval of a $39.3 million settlement in a class-action lawsuit that alleged real estate brokers received kickbacks for referring clients to Property I.D. Corp., a company that produces natural hazard disclosure reports.
More than 300,000 Californians who bought natural hazard disclosure reports from Property I.D. when they listed their homes with Coldwell Banker, Prudential California Realty, RE/MAX, Century 21 or ERA Real Estate between 1996 and 2006 could be eligible for full refunds.
But some who bought the allegedly overpriced reports are complaining that the law firm that filed suit on their behalf is set to walk away with the lion’s share of the settlement — nearly $10 million.
At least one alleged victim says he’s prepared to appeal the settlement — a move that might delay the process of paying out the more than 40,000 claims received so far.
The lawsuit involves allegations that Property I.D. and several real estate brokerages formed sham "affiliated businesses" to share profits from the sale of overpriced natural hazard disclosure reports. After deducting $50 per report to cover expenses, Property I.D. allegedly split the remaining $50 profit with referring brokers (see story).
Although Property I.D. and the brokers it partnered with denied wrongdoing, they agreed to settle the case to avoid further disruption of their business and the expense of continuing a nearly four-year-long court battle, the settlement agreement said.
Under the Real Estate Settlement Procedures Act, those who feel they were wronged could seek triple damages. But the defendants in the case have not admitted to violating RESPA. Those who submit a claim under the terms of the settlement will receive only what they paid for a Property I.D. report — in most cases $99 or $114.
The deadline for filing a claim is March 27, according to a Web site created to help administer the settlement, but the Dec. 15 deadline for requesting to be excluded from the settlement has already passed.
Objections to settlement
Some who object to the settlement say the total amount paid out by Property I.D. and the real estate brokers named as co-defendants will end up being far less than the announced figure of nearly $40 million. That’s because only those who submit a claim can receive refunds, and any unclaimed funds will revert to the defendants or their insurance companies.
In legal filings opposing the settlement, attorneys representing those objecting to its terms said the settlement figure was inflated in order to generate a bigger payday for Lieff Cabraser Heimann & Bernstein, the San Francisco-based law firm that filed the class-action suit in July 2005.
Opponents say they object to a "reversion clause" that allows the defendants to take back any unclaimed funds. That means after attorneys take their cut, only a fraction of what remains may end up being paid out to the alleged victims, critics said.
The reversion clause is particularly suspect, critics said, because of a "clear sailing" agreement that stipulated the defendants would not oppose Lieff Cabraser’s proposal to set aside nearly one-fourth of the settlement for attorneys’ fees and expenses.
"It appears that the actual amount to be paid out to class members will be far, far smaller than the touted totals, with most of the claimed recovery going back to defendants" and lawyers who filed the suit against them, said one objection filed on behalf of a potential claimant, "A. Alfi."
A reversion clause not only creates "perverse incentives" for defendants to impose restrictive eligibility conditions on awards, but motivates defendants and the lawyers suing them to "agree to an inflated settlement amount as a basis for counsel fees," said Alfi’s attorney, Howard Strong, in a court filing.
Based on the number of claims filed through the first week in December after an extensive publicity campaign by Lieff Cabraser, alleged victims stood to collect less than $5 million from the settlement.
Although more claims could still come in, the total amount to be paid out as of December was no more than $15 million, with two-thirds of that going to attorneys who sued Property I.D.
The lead attorney for alleged victims in the case, Lieff Cabraser partner Barry Himmelstein, did not respond to requests for comment. But Himmelstein defended the settlement terms in several court filings.
Himmelstein argued that the settlement was the product of "lengthy and detailed settlement negotiations" overseen by an independent mediator, and that the parties did not discuss attorneys’ fees until after reaching an agreement on the total settlement amount.
The affiliated businesses formed by Property I.D. and its real estate brokerage partners generated $39.8 million in revenue from the sale of reports, "which could conceivably produce a judgement of almost $120 million," if the businesses are found to have violated RESPA, Himmelstein acknowledged.
But Himmelstein said proving that issue at trial could prove risky, and that the settlement "is too favorable to gamble on continued litigation," in part because of the defendants’ limited ability to pay more in the future.
He said that after examining Property I.D.’s financial statements, he had "no doubt that a judgment against Property I.D. of $39.8 million or more would render the company insolvent."
The settlement requires Property I.D. to pay out up to $7.5 million — all that’s left of its $10 million in errors and omissions insurance coverage after the cost of its legal defense is subtracted from the policy limit.
The settlement would require Realogy, the deeply indebted parent company of Coldwell Banker, Century 21 and ERA Real Estate, to pay up to $27 million to reimburse clients who purchased Property I.D. natural hazard disclosure reports between July 31, 1996, and June 30, 2006.
Pickford Real Estate Inc., the owner of Prudential California Realty offices in Southern California that participated in the affiliated business arrangements, will pay up to $4.34 million to reimburse home sellers who bought the reports from July 14, 2000, through Aug. 16, 2005.
Roche Enterprises Inc., the former owner of RE/MAX of California and Hawaii Inc., will pay $498,474 to compensate clients who bought Property I.D. reports from Aug. 23, 2000, through Feb. 28, 2003.
Himmelstein cited the Department of Housing and Urban Development’s endorsement of the settlements as further evidence of their fairness. HUD, which filed its own lawsuits alleging the affiliated business arrangements violated RESPA, reached settlements with Property I.D., Realogy and the Pickford defendants that were conditioned on final approval of the class-action settlement.
Judge signs off
In his Jan. 26 final order approving the class-action settlement, U.S. District Judge George King did not address those arguments in detail, saying only that the settlement’s terms were "fair, reasonable and adequate."
In a separate order signed the same day, King awarded Lieff Cabraser lawyers and other attorneys representing the alleged victims in the case $9.47 million in attorneys’ fees and $363,250 in expenses.
King called the $9.83 million attorneys’ award "reasonable under the facts and circumstances" of the case. He noted that it represented 24.3 percent of the total amount available to alleged victims after expenses — slightly less, he said, than the 25 percent benchmark for class-action settlements set by the Ninth Circuit Court of Appeals.
But it remains to be seen how much of the money that remains available to compensate alleged victims — less than $30 million — will actually be paid out.
According to court filings, Property I.D.’s records showed only the addresses of properties it prepared reports for, and not the names of home sellers who purchased the reports. That means the settlement administrator has had to do some detective work to track down the current addresses of the estimated 330,808 people who may be eligible for a refund.
After analyzing property records, last fall the settlement administrator sent claim forms to 249,450 addresses thought to be the current residences of home sellers who bought Property I.D. reports after being referred to the company by their real estate broker.
A notice of the proposed settlement was also published in about 130 newspapers, and the state’s four largest Spanish-language newspapers. A dedicated Web site and toll-free telephone help line were also set up to provide information about the settlement.
According to Lieff Cabraser, nearly three out of four potential claimants have received claim forms in the mail, and the public notice campaign reached 77 percent of California homeowners an average of 1.9 times each.
But by Dec. 8, the settlement administrator had received only 42,556 claims, plus another 19 requests from potential claimants who asked to be excluded from the settlement in order to preserve their right to pursue a claim on their own.
Even if all of those claims are determined to be valid, that would represent only $4.2 million to $4.9 million in payouts to alleged victims, based on refunds of $99 to $114 each.
A spokeswoman for the company administering the settlement, Garden City Group, did not respond to a request for more up-to-date information on the number of claims received so far.
In his objection to the settlement, Strong argued that instead of returning unclaimed funds to the defendants, the money should go to fund housing-related programs funded by groups like the Western Center on Law and Poverty, CAL PIRG, or legal clinics.
Strong said his client, A. Alfi, was out of the country this week and he did not know whether he would file an appeal. But Joseph Darrell Palmer, an attorney who purchased a natural hazard disclosure report from Property I.D. as part of the process of selling a home in El Cajon, said he plans to appeal King’s decision to the Ninth Circuit Court of Appeals.
Palmer, who in his objection to the settlement sought $25,000 in compensation "for his service as a named representative of class members," said that his appeal could result in mediation and a better outcome for alleged victims. (Lieff Cabraser is also seeking $25,000 in incentive fees for each of the seven plaintiffs who served as named representatives of alleged victims in the case).
Palmer noted that although King rejected his request for an "incentive fee," he did seem to have heeded his suggestion that the attorneys’ fees be paid in installments. King ordered that 25 percent of the award to attorneys be withheld until he is satisfied with how the settlement agreement is executed.
A message on the Web site created to help administer the settlement warned that "there may be appeals."
"It’s always uncertain whether these appeals can be resolved, and resolving them can take time, perhaps more than a year," the Web site warned. "Please be patient."
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