Thursday, September 26, 2019

Mass Tort Deals - Chapter 5

Chapter 5 in Elizabeth Chamblee Burch's Mass Tort Deals brings together so many things.  It's got arbitration, securities filings, banks, conflicts of interest, and so much more. (You can see some of the prior posts on this here.)

Let's start with arbitration.  Burch gets the reality that arbitration contracts today are essentially imposed on the public by more powerful businesses.  She's also correct that these agreements essentially cause the law to slowly, wither and lose its influence.  I've written about this and compared it to a dark shadow.  As arbitration supplants judicial resolution, industries insulate themselves from the threat of negative court rulings.  This procedural structure may allow bad practices to go on for far longer than they would have if courts actually decided cases.  It may also perpetuate injustices within arbitration forums.  Defendants may even argue that a claim should be denied because no precedent supports it.  Yet the precedent cannot come into existence if an industry has entrenched itself with arbitration provisions.  The lack of any precedent for relief should not doom claims in instances where courts can only rarely rule.

Mass tort settlement deals essentially shunt victims into a private dispute resolution world full of conflicts, repeat players with skewed incentives, and little public or judicial oversight.  The settlement deals appear to be nothing more than vehicles for forcing injured persons to submit to some sort of private dispute resolution system.  Burch captures the major difference between these settlements and ordinary ones nicely.  Usually, when you settle a case, your client knows how much cash she will receive. In these settlements, she may only be aware that some allocation formula has been established or how many points someone in her situation might receive.  She suggests conditioning the release of claims on actual settlement offers--not the offer of a program where you may or may not recover anything.

And on to securities filings, banks, and conflicts of interest.  Burch describes how some lawyers in this space sit on the board of Esquire Financial, which holds Esquire Bank. Esquire has lawyers as investors and lawyers on its board.  For example, Chris Seeger sat on Esquire Financial's board for a number of years. Lawyers sitting on corporate boards raise all sorts of complex ethical issues.  I've written about these issues before.  Essentially, a board member will owe fiduciary duties to the corporation.  What happens when those duties sit in tension with the obligations the lawyer owes to her clients?  Sometimes, the bank's interests might conflict with a client's interests.

These different interests appear to sit in tension with Esquire Bank.   It's securities filings reveal that it profits from "delays in inherent in claims administration" because these delays give it "loan and deposit opportunities."  For example, many NFL players, in line to receive concussion-related settlement funds, took out loans from Esquire.  Loans can be a good thing.  People who need money should be able to borrow it at reasonable rates and then turn around and pay it back when the settlement funds arrive.  Of course, the bank may end up making more money if the settlement funds take longer than expected to appear.  Ordinarily, we might see these transactions as fair because most banks don't any influence over how long it will take a particular settlement program to actually disburse funds.

Mass tort lawyers affiliated with Esquire Bank as investors and board members may have some influence over payment processes and timelines in mass tort settlements.  If they shape these processes to run swiftly, their clients may benefit but their financial interests in the bank may not do quite as well.  If they build in slow timetables--perhaps to "protect" their clients with additional procedures, the bank may profit substantially from delays. Slow, rigorous procedures would root out fraud and protect more of the settlement pool for legitimate claims.  How to balance these concerns will be a judgment call. We would hope that lawyers in these situations would balance these considerations entirely in the interests of their clients without regard to any financial ramification for the bank and, derivatively, their own stock holdings.  But the conflict still exists and it appears to be the sort of conflict that would need to be disclosed to clients.  Because attorney-client retainer agreements are private, we don't have any insight as to whether these conflicts were actually disclosed to clients.

Regardless, judges should probably not put lawyers in these ethically complex positions in charge of mass tort deals.  Burch explains that these situations should cause "alarm bells" to go off because in addition to tensions with their own client interests, the lawyers may also engage in anti-competitive behavior to freeze other lenders out of providing services on these deals.  Although some predatory lenders have been barred from lending on these kinds of claims, Esquire and another firm with connections to it were allowed to lend despite offering similar terms to the prohibited lenders.

The chapter contains so much more, researched in meticulous detail.  This series really cannot do it justice.  Seriously, buy the book.  Whenever we summon the collective courage to write real rules for these kinds of cases, put Burch in charge of the committee.  We'll have her suggestions for reforms next week.

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