United States Court of Appeals

for the Seventh Circuit

____________________

No. 98-2021

____________________

James B. Ragan and Timothy W. Monsees,

Class Members-Appellants,

v.

George Cusack and Marian Hart, et al.,

                                                                                                Plaintiffs-Appellees,

and

Bank United of Texas,

                                                                                                Defendant-Appellee.

______________________________________________________________

Appeal from Orders of District Judge James B. Zagel Denying Motion to

Intervene and Approving Class Settlement and Request for Attorneys’ Fees ______________________________________________________________

BRIEF OF CLASS MEMBERS-APPELLANTS

Joseph A. Power, Jr.,                                                 F. Paul Bland, Jr. (Counsel of Record)

Power, Rogers & Smith, P.C.                                     Leslie A. Brueckner

35 West Wacker Drive                                               Arthur H. Bryant

Suite 3700                                                                  Trial Lawyers for Public Justice, P.C.

Chicago, IL 60601                                                     1717 Massachusetts Ave., N.W.

(312) 236-9381                                                           Suite 800

Washington, D.C. 20036

(202) 797-8600

June 3, 1998   

CERTIFICATE OF INTEREST

            The undersigned, counsel of record for James B. Ragan and Timothy W. Monsees, furnishes the following list in compliance with Circuit Rule 26.1:

1. The full name of every party or amicus the attorney represents in the case:

            James B. Ragan and Timothy W. Monsees.

2. Neither James B. Ragan nor Timothy W. Monsees is a corporation.

3. In addition to undersigned counsel and Leslie A. Brueckner and Arthur H. Bryant of Trial Lawyers for Public Justice, Mssrs. Ragan and Monsees are represented by:

Joseph A. Power, Jr.,

Power, Rogers & Smith, P.C.

35 West Wacker Drive

Suite 3700

Chicago, IL 60601

                                                                                    Respectfully submitted,

                                                                                    ______________________

                                                                                    F. Paul Bland, Jr.

                                                                                    Trial Lawyers for Public Justice, P.C.

1717 Massachusetts Ave., N.W.

Suite 800

Washington, D.C. 20036

(202) 797-8600

June 3, 1998

CERTIFICATE OF COMPLIANCE WITH VOLUME LIMITATION

             I, F. Paul Bland, Jr., counsel for appellants James B. Ragan and Timothy W. Monsees, hereby certify pursuant to Circuit Rule 32(d)(2) that the Brief of Appellants complies with the type volume limitation. The “Document Properties” function of Wordperfect for Windows 8.0, the word-processing system used to prepare this brief, indicates that the brief (which is set in 12.5 size typeface) is well below the word and line limitations prescribed by this Court.

                                                                                    Respectfully submitted and certified,

                                                                                    ______________________

                                                                                    F. Paul Bland, Jr.

                                                                                    Trial Lawyers for Public Justice, P.C.

1717 Massachusetts Ave., N.W.

Suite 800

Washington, D.C. 20036

(202) 797-8600

June 3, 1998 

CERTIFICATE OF COMPLIANCE WITH APPENDIX

             I, F. Paul Bland, Jr., counsel for appellants James B. Ragan and Timothy W. Monsees, hereby certify pursuant to Circuit Rule 30 that all of the materials required by Circuit Rule 30 are included in the Appendix accompanying the Brief of Appellants. The Small Appendix attached to the end of this brief includes the order appealed from and the transcript of the hearing in which the district court set forth its reasoning. The Appellants’ Appendix, separately bound and filed in connection herewith, contains all other materials required by Circuit Rule 30.

                                                                                    Respectfully submitted and certified,

                                                                                    ______________________

                                                                                    F. Paul Bland, Jr.

                                                                                    Trial Lawyers for Public Justice, P.C.

1717 Massachusetts Ave., N.W.

Suite 800

Washington, D.C. 20036

(202) 797-8600

June 3, 1998

TABLE OF CONTENTS

Statement of Subject Matter and Appellate Jurisdiction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

Issues Presented for Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

Statement of the Case. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3

            The Proposed Settlement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

            The Settlement Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

                        1.         The Ragan Objectors’ Submissions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8

                        2.        The Settling Parties’ Responses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

                        3.        The Fairness Hearing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Summary of Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

Argument. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

I.         The District Court Abused Its Discretion By Approving the Settlement as

            Fair, Adequate, and Reasonable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

            A.        Standard of Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21

B.The District Court Abused Its Discretion By Disregarding the Settling Parties’ Burden of Proving the Settlement’s Fairness and Supporting Its Ruling with Findings of Fact that Lacked Any Basis in the Record. . . . . . . . .24

1.The Settling Parties Failed to Meet their Burden of Demonstrating that the Discount Certificates Have Any Value.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

                        2.         The District Court Improperly Supported Its Ruling with Findings that Lacked Any Basis in the Record.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

II.        The District Court Abused Its Discretion in Ordering that the Discount Certificate Redemption Rates be Filed Under Seal.. . . . . . . . . . . . . . . . . . . . . . . . . . . .30

            A.        Standard of Review.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30

            B.        The District Court Abused Its Discretion By Disregarding the Presumption of Public Access to Court Records and Ordering that the Redemption Rates be Filed Under Seal Where There Was No Showing that Secrecy Was Required. . . . . . . . . . . . . . . . . . . . . . . . . . 31

III.       The District Court Erred and Abused Its Discretion By Denying the Ragan Objectors’ Motion to Intervene.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

            A.        Standard of Review. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

            B.        Intervention Should Have Been Granted in Order to Protect the Ragan Objectors’ Right to Seek Appellate Review.. . . . . . . . . . . . . . . . . . . . .  37

Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

TABLE OF AUTHORITIES

Page

CASES

Amchem Products, Inc. v. Windsor, ___ U.S. ___, 117 S. Ct. 2231 (1997). . . . . . . . . . . . . . .23

Armstrong v. Board of School Directors, 616 F.2d 305 (7^th Cir. 1980). . . . . . . . . . . . . . . . . . 22

Bank of America Nat. Trust v. Hotel Rittenhouse, 800 F.3d 339 (3d Cir. 1986). . . . . . . . . . . 31

Bay, et al., v. Citicorp. Mortgage, Nos. 90 C 5357, 91 C 3137, and

            91 C 7020 (N.D. Ill.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9, 11, 14, 17

Bell v. Prudential Home Mortgage Company, Inc., Case No. GV 94-2717-G. . . . 9, 11, 14, 17

Blanchard v. Edgemark Financial Corp., 175 F.R.D. 293 (N.D. Ill. 1997). . . . . . . . . . . . . . .22

In re Brand Name Prescription Drugs, 115 F.3d 456 (7^th Cir. 1997). . . . . . . . . . . . . .21, 38, 40

Buchet v. ITT Consumer Financial Corp., 845 F. Supp. 684 (D. Minn. 1994),

            amended by 858 F. Supp. 944 (D. Minn. 1994) . . . . . . . . . . . . . . . . . . . . . 25, 34-35, 39

In the Matter of Continental Illinois Securities Litigation, 732 F.2d 1302

            (7^th Cir. 1984). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31, 33, 34

Dusterhoft, et al. v. Security Federal Bank, 96-CV-547. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

E.E.O.C. v. National Children’s Center, Inc., 98 F.3d 1406 (D.C. Cir. 1996) . . . . . . . . . . . . 31

Gautreax v. Pierce, 690 F.2d 616 (7^th Cir. 1982). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22, 30

In re General Motors Corp. Engine Interchange Litig., 594 F.2d 1106 (7^th Cir.),

            cert. denied, 444 U.S. 870 (1979) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22, 30

Grove Fresh Distributors, Inc., v. Everfresh Juice, Co., 24 F.3d 893

            (7^th Cir. 1994) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31-34

Grunin v. Int’l House of Pancakes, 513 F.2d 114 (8^th Cir.), cert. denied,

            423 U.S. 864 (1975) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Joy v. North, 692 F.2d 880 (2d Cir. 1982) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .34

Nissei Sangyo American Ltd. v. United States, 31 F.3d 435 (7^th Cir. 1994) . . . . . . . . . . . . . . 37

People of the State of New York, et al., v. GMAC Mortgage Corp., et al.,

            90 Civ. 7924 (S.D.N.Y.) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Press-Enterprise Co. v. Superior Court, 464 U.S. 501 (1984) . . . . . . . . . . . . . . . . . . . . . . . . 33

Research Corp. v. Asgrow Seek Company, 425 F.2d 1059 (7^th Cir. 1972) . . . . . . . . . . . . . . . 38

Robinson, et al., v. Marine Midland Mortgage Corp., Case No. 95-C-5635 . . . . . . . . . . . . . 15

Solid Waste Agency v. U.S. Army Corps of Engineers, 101 F.3d 503

            (7^th Cir. 1996) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38

United Airlines, Inc. v. McDonald, 432 U.S. 385 (1977).. . . . . . . . . . . . . . . . . . . . . . . . . . . . .39

United States v. 36.96 Acres, 754 F.2d 855 (7^th Cir. 1985).. . . . . . . . . . . . . . . . . . . . . . . . . . . 37

United States v. Corbitt, 879 F.2d 22 (7^th Cir. 1989) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Wuebben v. Colonial Saving, Case No. 96-CV-3412 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

STATUTES

12 U.S.C. § 2609 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

28 U.S.C. § 1291 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

28 U.S.C. §§ 1331 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1

REGULATIONS

58 Fed. Reg. 64066 (December 3, 1993) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

59 Fed. Reg. 53,890 (October 26, 1994), promulgating 24 C.F.R. §§ 3500.17 . . . . . . . . . 4, 29

RULES

Fed. R. Civ. P. 23(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5-6

Fed. R. Civ. P. 23(b)(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5-6

Fed. R. Civ. P. 24(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Fed. R. Civ. P. 24(b)(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37

OTHER AUTHORITIES

Moore’s Federal Practice, Manual for Complex Litigation (Third) § 23.14

            (Matthew Bender 1997) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Newburg & Conte, 1 Newburg on Class Actions § 11.42 (3d ed. 1993) . . . . . . . . . . . . . . . . .22

Note, In-Kind Class Action Settlements, 109 Harv. L. Rev. 810 (1996). . . . . . . . . . . . . . . . . .23

“Overcharging on Mortgages: Violations of Escrow Account Limits by

            the Mortgage Lending Industry -- A Report by Attorneys General of

            California, Florida, Iowa, Massachusetts, New York, and Texas”

            (April 24, 1990), reprinted in Overcharging on Mortgages: Escrow

            Account Limits: Hearings Before the Senate Comm. on Governmental

            Affairs, 102^nd Cong., 1^st Sess., at 83-101 (1991) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Brian Wolfman and Alan Morrison, Representing the Unrepresented in Class

            Actions Seeking Monetary Relief, 71 N.Y.U. L. Rev. 439 (1996) . . . . . . . . . . . . . . . . 23

STATEMENT OF SUBJECT MATTER AND APPELLATE JURISDICTION

            This is an appeal from orders of the district court: (1) approving the proposed class action settlement and request for attorneys’ fees; (2) ordering that certain information pertaining to the settlement be filed with the court under seal; and (3) denying the Ragan Objectors’ motion to intervene. According to plaintiffs-appellees, the district court had subject matter jurisdiction pursuant to 28 U.S.C. §§ 1331 (federal question) because the class complaint alleged a federal claim under the Real Estate Settlement Procedures Act, 12 U.S.C. § 2609. This Court has jurisdiction pursuant to 28 U.S.C. § 1291 because the district court’s order approving the settlement was a final decision disposing of all claims with respect to all parties. The orders appealed from were all entered in the district court on March 24, 1998, Short Appendix attached to this brief, (“S.A.”) 239-41, and the Notice of Appeal was filed on April 21, 1998. Appellants’ Appendix, separately bound, (“A.A.”), 245-250.

INTRODUCTION

            This is a challenge to a class action settlement involving excess funds held in mortgage escrow accounts maintained by defendant Bank United of Texas (“Bank United”). As repayment for lost interest on those funds, the sole relief provided by the settlement is a $175 “discount certificate” that can be applied only against the closing costs of a new or refinanced mortgage with Bank United. Class members who do not use their discount certificates will receive no value from the deal, the certificates cannot be used in conjunction with any other discounts or promotions offered by Bank United, and there is nothing in the settlement to prevent Bank United from manipulating the terms of its loans to strip the discount certificates of any real value to the class. In exchange for this relief, Bank United will get a total release of all liability for all claims relating to its mortgage escrow overcharges, and class counsel will receive $400,000 in attorneys’ fees.

            Appellants James B. Ragan and Timothy Monsees (the “Ragan Objectors”) are class members who moved to intervene in the case and objected to the proposed settlement on the ground, inter alia, that the discount certificates could provide little or no relief to the class. Despite the absence of any evidence in the record to support the settling parties’ claim that the certificates in fact would provide “substantial” value to the class, the district court approved the settlement as fair, adequate, and reasonable, and granted class counsel’s request for $400,000 in attorneys’ fees. The court also ordered that the redemption rates for the discount certificates be filed under seal, thereby preventing the public from knowing whether this settlement ever provides any real relief to the class, and denied the Ragan Objectors’ motion to intervene.

ISSUES PRESENTED FOR REVIEW

            1. Did the district court abuse its discretion in approving the settlement as fair, adequate, and reasonable where: (a) the settling parties did not present any evidence to demonstrate that the discount certificates would provide meaningful relief to the class; (2) the objectors presented evidence that the settlement could, in fact, provide little or no relief to the class; and (3) to support its ruling, the district court made findings of fact regarding the benefits of the settlement that lacked any evidentiary support in the record?

            2. Did the district court abuse its discretion in ordering sua sponte that the redemption rates for the discount certificates be filed with the court under seal, thereby denying public access to the information, where the sealing order was unsupported by any findings that the presumption of public access was overcome by a compelling need for secrecy and the settling parties never even argued that the filing should be under seal? 

            3. Did the district court err and abuse its discretion in denying the Ragan Objectors’ motion to intervene where the motion was filed on a timely basis for the sole purpose of protecting the Ragan Objectors’ right to seek appellate review of any decision approving the settlement?

STATEMENT OF THE CASE

            This class action was filed in March 1994 on behalf of a nationwide class of current and former mortgagors of Bank United of Texas. The complaint alleges that, in the course of servicing its customers’ residential mortgages, Bank United required homeowners to maintain “cushions” in their escrow accounts that exceeded certain contractual and statutory limits. A.A. 012. This practice allegedly deprived homeowners of millions of dollars, in violation of the Real Estate Settlement Procedures Act, various state laws, and the class members’ contracts with Bank United. A.A. 13-17. The complaint sought damages (repayment of class members’ money and interest thereon) and injunctive relief (reformation of Bank United’s accounting practices).

            This case followed in the wake of a campaign by Congress and the attorneys general of many states to reform escrow practices in the mortgage lending industry. In 1990, several attorneys general published a comprehensive report on the problem. See “Overcharging on Mortgages: Violations of Escrow Account Limits by the Mortgage Lending Industry -- A Report by Attorneys General of California, Florida, Iowa, Massachusetts, New York, and Texas”(April 24, 1990), reprinted in Overcharging on Mortgages: Escrow Account Limits: Hearings Before the Senate Comm. on Governmental Affairs, 102^nd Cong., 1^st Sess., at 83-101 (1991) (“1991 Senate Hearings”). Following this report, the attorneys general of 17 states joined in bringing a test case against GMAC Mortgage Company, one of the largest mortgage banks in the country. See 1991 Senate Hearing at 10-11. While this action was pending, Congress followed up with lengthy hearings on the problem of mortgage escrow overcharges, focusing on the need for federal governmental action to address the problem. See 1991 Senate Hearing; Overcharging on Mortgages: Escrow Account Limits: Hearings Before the Subcomm. on Housing and Community Development of the House Banking, Finance and Urban Affairs Comm., 102^nd Cong., 1^st Sess. (1991). In fact, during his testimony before the Senate, New York Attorney General Robert Abrams specifically urged Congress “to press HUD for the early adoption of a rule to correct the widespread abuses that are occurring.” 1991 Senate Hearing at 11.  

            The GMAC litigation was ultimately settled in 1992 with a consent decree that required GMAC and its subsidiaries to refund the excess money held in homeowners’ escrow accounts. See People of the State of New York, et al., v. GMAC Mortgage Corp., et al., 90 Civ. 7924 (S.D.N.Y.) (final judgment entered January 29, 1992). According to class counsel, following the successful conclusion of the GMAC litigation, dozens of other suits were filed by private class-action plaintiffs seeking reformation of mortgage escrow practices. A.A. 26-27.

            Finally, in late 1993 – four months before this lawsuit was filed – the U.S. government issued a proposed regulation that would require banks to change their accounting practices to eliminate excess escrow charges. See 58 Fed. Reg. 64066 (December 3, 1993). That rule, known as “Regulation X,” was promulgated in final form in late 1994. See 59 Fed. Reg. 53,890 (October 26, 1994), promulgating 24 C.F.R. §§ 3500.17. Regulation X required compliance by May 24, 1995, with respect to new accounts, but gave banks three years from that date to change their accounting practices with respect to existing accounts. Id. § 3500(b). Bank United, however, converted all its accounts to the new methodology required by Regulation X in 1995, thereby refunding to its customers the excess amounts held in their escrow accounts. A.A. 066. Because this action effectively rendered moot both the injunctive relief and much of the claims for damages sought in this lawsuit, the only remaining question was whether class members were entitled to damages for the “lost use of money” during the period before Bank United reformed its accounting practices.

            Judging from the district court docket sheet, there was essentially no activity on this case from March 1994, when the case was filed, until September 1996, when class counsel filed a joint motion for certification of this case and at least 14 other virtually identical actions against other mortgage lending institutions. A.A. 004, 018. The lower court granted the motion on January 10, 1997, and certified this case as a class action pursuant to Fed. R. Civ. P. 23(b)(2) and 23(b)(3). A.A. 5. No further filings were made in the case until November 1997, when the parties moved for approval of a proposed settlement that would resolve all the remaining issues in the litigation. A.A. 6.

The Proposed Settlement

            The proposed settlement agreement seeks to release all claims for the lost use of money in exchange for discount certificates worth $175 off the closing costs of any new or refinanced mortgage with Bank United. A.A. 68. Under the Agreement, the certificates are only redeemable on Bank United loans, expire after five years, are nontransferable, and may not be redeemed for cash. Id. Any class member who was more than 30 days late in making any mortgage payment to Bank United, or whose loan was in foreclosure or bankruptcy, is ineligible for the relief. Id. Class members who do not qualify for a loan cannot use the certificates, A.A. 85, and the certificates may not be used in conjunction with any other discount offers made by Bank United. A.A. 84-85. The certificates may only be redeemed though Bank United’s tele-mortgage department through a special “800” number established exclusively for class members’ use. Id.

            The Agreement also restricts public access to information about the number of class members who actually use the certificates. Specifically, it provides that class counsel “shall have the right” to monitor the redemption process, and that “information obtained pursuant to their review will be treated as confidential . . .” A.A. 69. Thus, although the Agreement gives class counsel the right (although not the duty) to review the redemption process, it provides that any information related to those efforts – including, apparently, the number of certificates that are actually redeemed – will remain secret.

            In exchange for this relief, the Agreement releases every conceivable claim class members might have against Bank United (and its affiliates and successors) relating to Bank United’s escrow practices and, in addition, “all claims and causes of action that have been or that could have been brought in this Litigation.” A.A. 75-77. Regarding attorneys’ fees, it states that class counsel will seek a fee “not exceeding” $400,000. A.A. 69-70.        Class Counsel ultimately sought and received the entire amount. A.A. 244.

            Notice of the proposed settlement was given via direct mail to the approximately 150,000 existing mortgagors in the class, and via a one-time notice published in the New York Times for the 200,000 former mortgagors in the class. A.A. 71-72. No additional notice is to be provided under the Agreement, and class members will not receive any actual “discount certificates” in the mail. Instead, class members must present the front page of the actual mailed notice (or the New York Times notice) at closing to get any value from the settlement. A.A. 71-72.

            Although class counsel ultimately attempted to justify the settlement and their attorneys’ fee request on the ground, inter alia, that the lawsuit caused or contributed to Bank United’s decision to change its accounting practices (see infra at Part I-B-2.), there is no mention of any such benefit in the Agreement, the class notice, or in class counsel’s motion for preliminary approval and accompanying brief. A.A. 54-92. (On this point, the Agreement merely recites that “[a]mong other facts disclosed during discovery, Class counsel learned that Defendant had converted to the aggregate method of escrow methodology in 1995 . . .” A.A. 66.) Instead, the only class benefit attributed to this lawsuit in any of these documents is the discount certificates provided by the proposed settlement.

            As to the value of the certificates, class counsel asserted in their brief in support of preliminary approval that “[t]he monetary value of the prospective relief is substantial . . . While not all class members will redeem their credits with the period of redemption, a significant number will. . . . Hence, these credits are of real value and will be used.” A.A. 59. Neither class counsel nor Bank United submitted any evidence, however, that the discount certificates would in fact provide any – much less “substantial” – relief for the class.

The Settlement Proceedings

            On December 2, 1997, the district court granted class counsel’s motion for preliminary approval and scheduled a final hearing for March 4, 1998. J.A. 6. The order further provided that class members who sought to object to the settlement had to file their written objections by February 23, 1998.

            1. The Ragan Objectors’Submissions

            On February 23, 1998, the Ragan Objectors filed their objections to the Agreement, along with several supporting affidavits and exhibits. In addition to the “one-way gag order” that was ultimately stricken from the deal (see n. 3, supra), the objections focused on two flaws in the Agreement: (1) that the provision prohibiting public disclosure of the discount certificate redemption rates is contrary to the public interest; and (2) that the settling parties failed to make any showing that the discount certificates would actually have any value to the class.

            Regarding the secrecy of the redemption rates, the Ragan Objectors submitted an affidavit from a class action expert explaining that disclosure of redemption rates in so-called “coupon settlements” is a key element in the nationwide debate about whether coupon and other class action settlements are proper or abusive. See Affidavit of Beverly Moore, A.A. 151. Mr. Moore, who is the Editor of Class Action Reports, explained that class action “coupons” are often redeemed at extremely low redemption rates, thus providing little or no relief to the class. A.A. 151, 153-156. Despite the strong public interest in disclosure of the redemption rates in such cases, there is a growing trend toward secrecy, making it increasingly difficult to detect and prevent abusive coupon settlements. A.A. 150-51, 152. The Ragan Objectors also advised the court that class counsel had settled at least two other mortgage-escrow cases -- involving Prudential and Citicorp. -- for relief similar to that in this case, but had repeatedly refused to disclose the redemption rates in those cases. A.A. 139-44. Although the redemption period for those settlements has not yet expired, the Ragan Objectors argued the redemption rates to date could nonetheless shed light on the value of the discount certificates in this proceeding.

            Given the strong public interest in disclosure of redemption rates, and the settling parties’ track record of secrecy in other coupon settlements like this one, the Ragan Objectors urged the court to reject the Agreement unless it was amended to require the settling parties to affirmatively disclose, via a publicly-filed report, the discount certificate redemption rates in this case.

            Regarding the substantive adequacy of the Agreement, the Ragan Objectors submitted an affidavit from an expert in the mortgage industry who opined that the combined effect of low redemption rates and potential manipulation of the discount certificates’ value by Bank United could result in class members receiving almost nothing from the deal. See Affidavit of Elizabeth Renuart, A.A. 162-170 (the “Renuart Affidavit”). With respect to redemption rates, the Renuart Affidavit stated, among other things, that (1) over 50 percent of the class consists of former mortgagors who are unlikely to know of the relief in the settlement and, in any event, have no present relationship with Bank United because they sold their homes or refinanced with another lender; (2) up to 42 percent of the class could automatically be excluded from eligibility by the provision eliminating any class member who was behind on a payment for 30 or more days, was in foreclosure, or filed bankruptcy; (3) Bank United’s loans might not be competitive with other lenders; and (4) for various reasons, even current mortgagors are unlikely to have any economic incentive to refinance at this time. A.A. 164-166..

            Redemption rates aside, the Renuart Affidavit further stated that the discount certificates could have little or no value even to class members who do succeed in using them because, among other things: (1) the Agreement imposes no obligation on Bank United to treat class members like all other applicants for Bank United loans, leaving Bank United free to inflate the costs charged to class members to offset the discount offered by the certificates A.A.166-67. (2) different underwriting criteria could also be employed to either deny class members refinancing altogether or to charge them higher points and fees A.A.168; and (3) the value of the certificates would further be diminished for class members who are forced to incur broker fees that could outstrip the face value of the certificates A.A. 167-68. Given these variables, the Renuart Affidavit concluded that class members who do choose to refinance might actually be better off not using their certificates at all. A.A. 169.

            In light of the Renuart Affidavit’s conclusion that the discount certificates might have no value to the class, the Ragan Objectors urged the lower court to reject the deal unless: (1) the settling parties provided affirmative proof that the certificates would provide meaningful relief to the class, including by disclosing the discount certificate redemption rates from the Citicorp and Prudential cases; and (2) the Agreement was amended to prohibit Bank United from rendering the discount certificates worthless to the class.

            2. The Settling Parties’ Response

            Neither class counsel nor Bank United submitted any evidence in response to any of the arguments raised by the Ragan Objectors. Instead, they each submitted a brief, unaccompanied by any affidavits or other evidence, arguing that the settlement should be approved as is. See Memorandum in Support of Plaintiffs’ Motion for Approval of Proposed Class Action Settlement, A.A. 171-203 (Plaintiffs’ Memo”); Defendant’s Memorandum in Response to Objections, A.A. 204-214 (“Defendant’s Memo”).

            Regarding the disclosure of redemption rates, Bank United’s sole argument was that compiling this information would add “very substantial administrative expenses to Bank United’s present tele-mortgage operations.” A.A. 207. Bank United did not make any claim, however, that such disclosure would involve any trade secrets or other confidential commercial information. Class counsel’s only response on this point was to reiterate that they have the right to monitor the redemption of discount certificates. A.A. 184. They did not make any claim that disclosure of the redemption rates would be burdensome or otherwise improper.

            The settling parties also did not submit any evidence to refute the Ragan Objectors’ arguments, supported by the Renuart Affidavit, that the discount certificates might actually provide little or no value to the class. Instead, class counsel relied exclusively on their brief supporting the settlement, which sought approval “based on upon the highly beneficial relief achieved for members of the Plaintiff class and the reasonableness of the attorneys’ fees applied for.” A.A. 171. To prove that the discount certificates provide “highly beneficial relief” to the class, class counsel simply multiplied the total number of class members by the face value of the certificates, yielding a total predicted settlement value of $29,225,000. A.A. 175. They added that, “[e]ven if a percentage of the coupons are redeemed, the benefits and potential value conferred on the class is undoubtedly substantial.” Id. There was no effort to explain what percentage of the coupons might be redeemed, or what the “undoubtedly substantial” relief to the class might entail.

            Class counsel also urged the court grant them an award of $400,000 in attorneys’ fees based on the total value of the settlement of the class. A.A. 192-233. Here, again, class counsel’s assessment of total settlement value was based on an assertion that “a reasonable percentage of the credits will be redeemed during the five year redemption period,” yielding “substantial” benefits to the class. A.A. 233. No effort was made to quantify the actual predicted benefits to the class or its relationship to the requested $400,000 fee.

            As for Bank United, it did not even attempt to predict the total settlement value in its brief. Instead, it criticized the Ragan Objectors for failing to prove that the discount certificates would be without value. A.A. 208. Bank United’s brief went on to reject the Ragan Objectors’ request that the Agreement at least be amended to forbid Bank United from manipulating its pricing and underwriting policies to strip the certificates of any value, saying that amendment would be “a material, unacceptable change to the Settlement Agreement.” A.A. 208. As to the Ragan Objectors’ request that the settling parties at least be required to disclose the certificate redemption rates in the Citicorp and Prudential cases, Bank United stated that this information is “irrelevant to the fairness and reasonableness of this settlement.” A.A. 207.

            Neither class counsel nor Bank United made any claim in any document filed with the Court that the lawsuit played any role in causing Bank United to reform its accounting practices to refund the escrow overcharges held in class members’ accounts. There was no attempt to justify either the settlement or the $400,000 attorneys’ fee request on any ground other than the value of the discount certificates to the class.

            3. The Fairness Hearing

            On March 4, 1998, the court held a fairness hearing to determine whether to issue final approval of the settlement. Before hearing argument on this case, the court preliminarily approved two other class action settlements negotiated by the same class counsel as this case that offer “discount certificates” similar to those involved here, and gave final approval to a third such settlement. There was no evidence presented to support the value of the coupons in any of these cases.

            The court then turned its attention to this case. Here, again, the settling parties offered no evidence, either via live or written testimony, to support their claim that the discount certificates would provide substantial value to the class. S.A. 215-238. Instead, class counsel argued that the settlement should be approved because the lawsuit already provided a valuable benefit to the class by forcing Bank United to change its accounting policies, S.A. 217,221-22, and that the discount certificates should be viewed as “the cherry on top of a very full cake.” S.A. 222. Bank United’s counsel argued that the plaintiffs’ claims were so weak that the court “can and should approve the settlement virtually regardless of whatever value is attributed to these certificates.” S.A. 224. Neither party made any attempt to prove that the lawsuit in fact contributed to Bank United’s decision to change its accounting practices (indeed, Bank United never suggested or conceded that this was in fact the case), or that the plaintiffs’ claims were weak enough to justify a potentially valueless settlement.

            After hearing argument, the court issued an oral decision approving the settlement and the request for $400,000 in attorneys’ fees. S.A.228-38. Regarding the substantive adequacy of the settlement, the court stated that “I have no reason to believe that the certificates have no value.” S.A. 233. To the contrary, the court held that, “the dynamics of the mortgage industry, which I have considered in this and other cases in which refinancing certificates are given, lead me to believe that there will be some reasonable rate of redemption. I have come to the conclusion that at the very minimum one can safely assume a redemption rate of 10 percent.” S.A. 233. Based on this predicted redemption rate, the court held that the settlement was worth “perhaps three million dollars overall.” S.A. 233.

            In addition, despite the absence of any evidence on this point, the court found that “the change in [Bank United’s] mortgage practices was at least in some degree due to the acts of counsel.” S.A. 237. See also S.A. 238 (“[a]though one cannot attribute, as perhaps Mr. Reed and Mr. Zimmerman think, the entirety of the action of Housing and Urban Development to their lawsuits and their advocacy, I am satisfied that at least to some degree acts of counsel played some role in at the very minimum in forcing HUD to confront the issue. And I think they are entitled to claim some credit for that action.”) Based on the combined value of the discount certificates and the lawsuit’s alleged role in forcing a change in Bank United’s accounting practices, the court concluded that “this is a fair, just and reasonable settlement for the members of the class.” S.A. 238.

            In so ruling, the court also rejected the Ragan Objectors’ argument that the settling parties should at least be required to disclose the discount certificate redemption rates in the virtually-identical Citicorp and Prudential cases. S.A. 234. The court stated that, although this “might well under certain circumstances have been a good idea,” id., it was “a little too late in the day set for this hearing to suggest that I look into this, particularly [since] the [Ragan] objectors knew of the prior significance of this data on January 23^rd, 1998, and engaged in a series of apparently unsuccessful requests for this information.” id. The court stated that the Ragan Objectors should have intervened earlier in the Citicorp case to obtain the redemption rates from that settlement, rather than raising the issue in their objections to the proposed settlement. Id.

            As to the Ragan Objectors’ argument that the Agreement permits Bank United to strip the discount certificates of their value by manipulating class members’ loans, the court held that, although the objection “had some force,” S.A. 219, “[a]s I read the settlement agreement, I do not believe it would be permissible as the agreement stands for Bank United to do this, and I believe that class counsel would make appropriate motions; and if in fact there were discrimination of this sort based solely upon the use of the certificate or membership in the class, I would prohibit Bank United from doing so.” S.A. 235.

            Regarding the Ragan Objectors’ request that class counsel be required to file periodic public reports of the discount certificate redemption rates in this case, the court sua sponte “order[ed] class counsel to maintain records of the redemption rates and to file them under seal in this court.” S.A. 236 (emphasis added). The court did not provide any explanation for its decision to require that the redemption rates be filed under seal, and left the question of whether such records ought to be available for use in other cases “for another day.” S.A. 236.

            Finally, the court denied the Ragan Objectors’ motion to intervene, holding that “I do not think that under the prevailing law in this circuit intervention is required to appeal. . . .” S.A. 237. The court added that the Ragan Objectors are not, in any event, entitled to intervene as of right “because there is nothing, even the most minimal showing, [that] James Ragan and Timothy Monsees may be affected by my order today.” Id. Permissive intervention was similarly inappropriate, the court held, “at this stage of the proceedings and under the particular circumstances which are before me.” Id.

SUMMARY OF ARGUMENT

            The proponents of a class action settlement have the burden of proving that the proposed settlement is fair and adequate. This is particularly important where, as here, the only relief provided is a coupon that has no value unless the class members purchase something else from the defendant who allegedly wronged them -- something else that the class members may neither want nor need.

            In this case, the defendant did not claim that any class members would redeem their coupons. Class counsel did so claim, asserting both in their briefs and at oral argument that the coupons would provide “substantial” benefits to the class members. Neither of the settling parties, however, offered any evidence to support this assertion. There was no testimony at the fairness hearing from any fact or expert witnesses in support of the settlement, and neither settling party ever submitted any affidavits, documents or other evidence of any type to support their claims that many class members would ever use this coupon. By contrast, the Ragan Objectors – who have no burden of proof here – were the only parties to put actual evidence before the district court on the subject. The Ragan Objectors offered testimony from an expert on the mortgage banking industry that the coupons could yield “little or no” relief to the class, and also cited a published opinion noting that the coupons offered in other class action coupon settlements were redeemed by as few as 0.002% of the class members.

            The settling parties’ refusal to offer evidence in support of the coupons was particularly striking in light of the fact that this settlement was only the then-latest of a series of similar coupon settlements negotiated among the same counsel involving similar allegations of improper mortgage escrow accounting methods by different banks. Class counsel told the district court that a substantial number of class members would redeem the coupons provided by this settlement, but they did not want to tell the district court how many class members had used the coupons provided by the settlements in their earlier similar cases.

            In the absence of any supporting evidence in the record, the district court abused its discretion by approving the settlement as fair, adequate, and reasonable. First, there was simply no basis in the record for the district court’s conclusion that at least 10% of the class members would redeem the coupons in this case. Indeed, the settling parties refused to introduce any evidence about what the redemption rates were likely to be -- and the district court denied the Ragan Objectors’ efforts to force disclosure of redemption rates in similar cases settled by the same counsel.

            Equally unsupported (and unsupportable) was the district court’s conclusion that Bank United could not render the settlement worthless by manipulating the terms of class members loans or charge class members more than its other customers, since the settlement prohibited the coupons from being used in conjunction with other Bank United discounts. There was no evidence in the record to support this conclusion. Moreover, the settlement agreement, by its terms, did not preclude Bank United for taking these actions and Bank United refused to amend the agreement so it would!

            Finally, while the trade-off of coupons for the class members’ damages claims could not be justified by any actions the government of Bank United might have taken in response to class counsel’s actions, there was no evidence in the record to support the district court’s conclusion that class counsel had somehow helped cause the government to adopt Regulation X (which required all banks to change their mortgage escrow accounting practices) and helped cause Bank United to change its practices (to comply with Regulation X). The district court identified no evidence supporting either of these propositions, and indeed neither factual claim had ever been made – much less proven – in any written submission of the parties in this case. Neither the Agreement nor the notice to the class ever asserted that class counsel had done these things. And in any case, Regulation X had been proposed by the government before this case was ever filed.

            In addition to approving this settlement without the benefit of evidence, the district court also abused its discretion by taking the unprecedented step of entering a secrecy order to prevent the public from learning how many class members will redeem the coupons in this case. Acting sua sponte, the district court entered an order sealing the redemption rates for the coupons in this case. In so doing, the district court not only ignored the strong presumption in favor of public access to such information, it also articulated no justification whatsoever for this secrecy order.

            Finally, the district court erred in denying the Ragan Objectors’ motion to intervene. The district court asserted that the objectors did not need to intervene in order to appeal its decision on the fairness of the settlement. This conclusion is incorrect, however, and contrary to this Court’s holding in In re Brand Name Prescription Drugs, 115 F.3d 456, 457 (7^th Cir. 1997). Accordingly, the district court’s denial of the motion to intervene was plain error.

ARGUMENT

I.         The District Court Abused Its Discretion By Approving the Settlement as Fair, Adequate, and Reasonable. 

            A. Standard of Review

            A class action settlement may be approved only where the court finds the settlement fair, adequate, and reasonable. See Armstrong v. Board of School Directors, 616 F.2d 305, 313 (7^th Cir. 1980). A district court’s decision approving a class action settlement is reviewed on appeal for abuse of discretion. See id.

            In evaluating whether the district court abused its discretion in this case, the core governing principle is that the burden of proving the fairness of a proposed class action settlement is always on its proponents, without the benefit of any presumption to aid in meeting this burden. See Newburg & Conte, 1 Newburg on Class Actions § 11.42, at 11-94 (3d ed. 1993) (citing, inter alia, In re General Motors Corp. Engine Interchange Litig., 594 F.2d 1106 (7^th Cir.), cert. denied, 444 U.S. 870 (1979)). See also Gautreax v. Pierce, 690 F.2d 616, 630-31 (7^th Cir. 1982); Blanchard v. Edgemark Financial Corp., 175 F.R.D. 293, 300 (N.D. Ill. 1997). To meet this burden, a settlement’s proponents must give the court “enough information to be able to fully and fairly consider the proposed settlement . . ..” Moore’s Federal Practice, Manual for Complex Litigation (Third) § 23.14, at 184 (Matthew Bender 1997). Counsel owe a “duty of candor” to the court to “disclose all facts bearing on the fairness of the settlement, including those that may be adverse to their position.” Id. at 268.

            The court, meanwhile, has an independent duty to closely scrutinize class settlements to safeguard the rights of absent class members. See Grunin v. Int’l House of Pancakes, 513 F.2d 114, 123 (8^th Cir.), cert. denied, 423 U.S. 864 (1975). “Even if no objections have been filed and no adverse appearances made, the court should make a sufficient record and enter specific findings to satisfy a reviewing court that it has made the requisite [fairness] inquiry

. . ..” Manual for Complex Litigation (Third) § 30.41, at 262. In any event, “[t]he judge must guard against the temptation to become an advocate . . . in favor of the settlement because of a desire to conclude the litigation . . ..” Id. § 23.14 at 184. In Amchem Products, Inc. v. Windsor, ___ U.S. ___, 117 S. Ct. 2231 (1997), similarly, the Supreme Court held that the rights of absent class members must be "the dominant concern" of the court, especially in the settlement context. The Supreme Court held that courts should provide "undiluted, even heightened attention in the settlement context" to certain Rule 23 requirements in order "to protect absentees . . . ." Id.

            A court’s duty to closely scrutinize class action settlements is especially important in the context of cases that are settled for “coupons” redeemable only for a discount off of one of the defendant’s other products, rather than monetary relief. As several commentators have recognized, “[i]n-kind settlements create a troubling situation in which the reviewing courts must act as blindfolded fiduciaries.” Note, In-Kind Class Action Settlements, 109 Harv. L. Rev. 810, 811 (1996). See also Brian Wolfman and Alan Morrison, Representing the Unrepresented in Class Actions Seeking Monetary Relief, 71 N.Y.U. L. Rev. 439, 501 (1996) (arguing that Rule 23 should require courts “to apply special scrutiny where the relief provided in the settlement is not the type of valuable, fungible relief provided in Rule 23(b)(3) cases litigated to judgment”). Absent special scrutiny of coupon deals, such settlements can easily be used as a vehicle to enrich class counsel and the defendant at the expense of the class.

            B.        The District Court Abused Its Discretion By Disregarding the Settling Parties’ Burden of Proving the Settlement’s Fairness and Supporting Its Ruling with Findings of Fact that Lacked any Basis in the Record.

            In this case, the lower court abused its discretion by disregarding the settling parties’ burden to prove the settlement’s fairness and then manufacturing its own justifications for the settlement that lacked any support in the record. This approach enabled the district court to approve a settlement that is nothing more than a marketing bonanza for Bank United and a financial windfall for class counsel. The class, meanwhile, is left with a deal that is patently inadequate on its face.

                        1.         The Settling Parties Failed to Meet their Burden of Demonstrating that the Discount Certificates Have Any Value.

            First, as explained above, class counsel’s main argument in favor of the settlement was that the discount certificates would provide substantial relief for the class. See, e.g., A.A. 171, 175. (arguing that discount certificates would yield “highly beneficial” and “undoubtedly substantial” relief to the class). Despite this oft-repeated claim, neither Bank United nor class counsel ever presented any evidence to support their argument that a “reasonable percentage of the credits will be redeemed during the five year redemption period,” yielding “substantial benefits to the class.” A.A. 203.

            At the same time, the settling parties actively concealed information that might have shed light on the potential redemption rates of the coupons. As noted above, class counsel have settled at least two other mortgage-escrow cases for similar relief as this case. Prior to filing their objections, the Ragan Objectors repeatedly asked the settling parties to disclose the coupon redemption rates from those settlements, yet they refused. The Ragan Objectors then urged the court to reject the settlement absent full disclosure of the redemption rates from class counsel’s other coupon cases. Remarkably, although the lower court admitted that this data could shed light on the value of the settlement here, S.A. 234, it dismissed this objection on the sole ground that the Ragan Objectors raised the issue too late – even though their objections were filed on time and in the precise manner specified in the class notice. As a result, key evidence that might have informed the decisionmaker as to the actual value of the discount certificates in this case was deliberately excluded from the record.

            Thus, the only evidence regarding the settlement’s actual value was set forth by the Ragan Objectors. First, the Ragan Objectors provided the Renuart Affidavit, which opined that the discount certificates could yield little or no relief to the class due to the combined effect of low redemption rates and Bank United’s potential ability to strip the certificates of any value to the class. Second, the Ragan Objectors provided the affidavit of Beverly Moore, the editor of Class Action Reports, who testified that “[i]n the handful of cases where information about coupon redemption rates has been available, I have learned that class action coupons are often redeemed at extremely low rates.” A.A. 151. Third, the Ragan Objectors cited Buchet v. ITT Consumer Fin. Corp., 845 F. Supp. 684 (D. Minn. 1994), amended, 858 F. Supp. 944. In that case, the court noted that the percentage of certificates actually redeemed in four analogous class action settlements was 0.074%; 0.002%; 0.110%; and 0.103%.

            In short, the settling parties -- the parties with the burden of proof -- produced no evidence of any kind to indicate that any class members would use the certificates. The Ragan Objectors, by contrast, produced powerful evidence suggesting that very few would. Under these circumstances, the only defensible decision would have been for the lower court to reject the settlement outright. As we now explain, however, the court took the opposition approach, electing to fill the evidentiary vacuum with “findings” that not even the settling parties had dared to assert as a basis for the settlement’s approval.

            2.         The District Court Improperly Supported Its Ruling with Findings that Lacked Any Basis in the Record.

            Faced with the absence of any evidence to support the settlement, the district court made several factual findings that lack any support in the record. First, regarding the discount certificates, the court simply “assume[d]” a settlement redemption rate of 10 percent, A.A. 233, yielding a predicted total settlement value of $3 million. In so holding, the court made no effort to explain the basis for its conclusion and did not even mention – let alone attempt to rebut – the assertions in the Renuart Affidavit that the discount certificates might yield virtually nothing for the class due to extremely low redemption rates. Instead, it simply pulled the 10 percent redemption rate out of thin air, and then used it as a basis to justify its decision to approve the settlement.

            Second, regarding the Ragan Objectors’ argument that Bank United could render the settlement worthless by manipulating the terms of class members’ loans to strip the discount certificates of any value, the court simply observed that, “[a]s I read the settlement agreement, I do not believe it would be permissible as the agreement stands for Bank United to do this

. . ..” S.A. 219. The court did not cite any provision in the Agreement, however, to support this finding. This is not surprising, since Bank United itself took the position that any amendment to the Agreement that would forbid it from manipulating its pricing and underwriting policies with respect to class members would constitute “a material, unacceptable change to the Settlement Agreement.” A.A. 209. Clearly, then, Bank United interprets the Agreement as permitting it to alter its policies with respect to class members. The court’s contrary position – like its other conclusions about the value of the settlement to the class – lacks any support in the record or in the text of the Agreement itself.

            Third, regarding the Ragan Objectors’ argument that the settlement might prove worthless – or even of negative value – to the class because it cannot be used in conjunction with other discounts offered by Bank United, the court merely asserted that “this is a particularly awkward device if the true purpose of Bank United is to discriminate against class members, because the other discounts, of course, would be universally available.” S.A. 235, 236. Thus, the court appeared to be of the view that Bank United would not exercise its right to disqualify class members from receiving other discount offers because doing so would prove prohibitively “awkward.” This theory, however, was never asserted by Bank United and it ignores the fact that class members – unlike all other Bank United customers – are required to present their discount certificates at closing and then call a special “800” number to redeem their discount certificates. As Bank United undoubtedly recognizes, it would be a relatively easy matter to disqualify class members from receiving the benefit of other discount offers at the time of closing. In addition, as the Ragan Objectors had pointed out, even if Bank United never made any particular effort to discriminate against class members to cancel out the certificates, this provision could render the certificates worthless. Many mortgage banks regularly offer “sales” or “discounts” in sums quite larger than the face value of the coupons in this case, and the “no other discounts” language would render the certificates of negligible or even negative value if Bank United offered any such discounts for normal marketing reasons. In any event, there is no evidence in the record to support the lower court’s conclusion that Bank United would not offer other discounts that canceled out the value of the certificates. Indeed, this conclusion was not even asserted by the settling parties themselves.

            Perhaps recognizing that its conclusions about the settlement’s value lacked any support in the record, the court then articulated another rationale for approving the deal: that class counsel had already achieved a substantial benefit for the class by “play[ing] some role” in forcing the U.S. government to change its regulations regarding mortgage escrow practices. In light of this benefit, the court appeared to take the position that even a valueless settlement would be fair, adequate, and reasonable within the meaning of Rule 23. See generally A.A. 237-38.

            But here, too, the court supplied a basis for the settlement that lacked any support in the record. As explained above, there was no mention of this alleged benefit to the class in any of the myriad documents filed with the court relating to this settlement – including the class notice and the Agreement itself. In fact, the first time this benefit was articulated as a justification for the otherwise paltry settlement terms was at the fairness hearing, where class counsel argued, for the first time, that the settlement should be approved because the lawsuit had already succeeded in forcing Bank United to change its illegal practices. S.A. 221-22. (Bank United, however, was notably silent on this issue.) In keeping with their consistent practice of not even attempting to prove the value of any aspect of this settlement, however, class counsel did not provide any support for this claim.

            This absence of proof is not surprising, since it is virtually impossible that this lawsuit played any role in forcing HUD to regulate mortgage escrow practices. As explained above, “Regulation X” was the outgrowth of a massive campaign by at least 17 attorneys general and Congress to end escrow abuses in the mortgage lending industry. The proposed rule, moreover, was promulgated in late 1993 – three months before this lawsuit was even filed. Thus, it is hard to imagine how this case had anything to do with forcing HUD’s hand in the matter. And the record is devoid of any evidence to support class counsel’s thirteenth-hour claim that this case caused Bank United to reform its escrow practices in advance of the deadline established by Regulation X. Despite this absence of proof, the lower court latched onto this alleged benefit as one of the pillars of its decision to approve the settlement. A.A. 237-38.

            This approach cannot withstand scrutiny. As this Court held in In re General Motors Corp. Engine Interchange Litig., 594 F.2d 110, 1126 n.30 (7^th Cir.), cert. denied, 444 U.S. 870 (1979), “the proponents of any class action settlement always bear the burden of proof on the issue of fairness . . ..” Under this standard, it is an abuse of discretion for a district court to “assume a [settlement] is prima facie fair and require the objectors to demonstrate its inadequacy.” Gautreaux v. Pierce, 690 F.2d 616, 631 (7^th Cir. 1982).

            But that is precisely what occurred here: the district court simply assumed that the settlement would provide fair relief for the class; buttressed that conclusion with “findings” that lacked any support in the record; and then faulted the Ragan Objectors for failing to affirmatively disprove that the settlement provided fair relief to the class. Not only does this approach turn the burden of proving a settlement’s fairness on its head, but it constitutes a wholesale abandonment of the court’s fiduciary duty to the class. This Court should firmly reject this practice and reverse the district court’s decision approving the settlement.

II.       The District Court Abused its Discretion in Ordering that the Discount Certificate Redemption Rates be Filed Under Seal.

            The lower court also abused its discretion in ordering that the redemption rates for the discount certificates in this case be filed under seal, thereby shielding them from public scrutiny. If this settlement is not overturned and this order is permitted to stand, then the public will never know whether this settlement provides any meaningful relief for the class. There is no justification for this secrecy, which flies in the face of the strong public interest in scrutiny of the judicial process and in access to information about the value of coupon settlements. Thus, at the very least, this Court should reverse the secrecy order and direct that the redemption rates from this case should be filed in a public court record for all the world to see.

            A.        Standard of Review

            A district court’s decision permitting the filing of court records under seal is reviewed on appeal for abuse of discretion. See In the Matter of Continental Illinois Securities Litigation, 732 F.2d 1302, 1316 (7^th Cir. 1984). However, as explained below, the question of whether a district court abused its discretion in sealing court records must be viewed against the backdrop of a strong presumption in favor of access that may only be overcome upon a showing “that suppression ‘is essential to preserve higher values and is narrowly tailored to serve that interest’.” Grove Fresh Distributors, Inc., v. Everfresh Juice, Co., 24 F.3d 893, 897 (7^th Cir. 1994). In light of this presumption, review of a sealing order “is not generally accorded the narrow review reserved for discretionary decisions based on first-hand observations.” Bank of America Nat. Trust v. Hotel Rittenhouse, 800 F.3d 339, 344 (3d Cir. 1986). Accord E.E.O.C. v. National Children’s Center, Inc., 98 F.3d 1406, 1409 (D.C. Cir. 1996). Rather, a sealing order must be overturned unless “exceptional circumstances” require confidentiality. Continental Illinois Securities Litig., 732 F.2d at 1314.

            B.        The District Court Abused Its Discretion By Disregarding the Presumption of Public Access to Court Records and Ordering that the Redemption Rates be Filed Under Seal Where There Was No Showing that Secrecy Was Required.

            In this case, the district court plainly abused its discretion in ordering that the discount certificate redemption rates be filed in a sealed court record that would not be open to public scrutiny. As explained above, the Ragan Objectors argued that the settling parties should be required to disclose, in a public court record, the redemption rates from the discount certificates in this case. In response, the district court sua sponte ordered that the redemption rates from this case be filed under seal, thereby barring public access to the information. The district court did not provide any explanation or findings as to why secrecy was required; instead, it simply stated in open court that the material should be filed under seal, leaving the question of whether litigants in other cases could obtain access to the materials “to another day.” A.A. 236.

            This order cannot withstand even the mildest form of scrutiny. This Court has repeatedly recognized the public’s right of access to court proceedings and documents. See, e.g., Grove Fresh, 24 F.3d 893, 897 (7^th Cir. 1994) (citing cases). The public right of access to court records is rooted in both “common-law traditions predating the enactment of our Constitution” and the First Amendment. Id. Under the common-law, “court files and documents should be open to the public unless the court finds that its records are being used for improper purposes.” Id. (citing United States v. Corbitt, 879 F.2d 22, 228 (7^th Cir. 1989)). The First Amendment right of access is even stronger: it establishes a powerful presumption in favor of access that may only be overcome upon a showing “that suppression ‘is essential to preserve higher values and is narrowly tailored to serve that interest’.” Id. (quoting Press-Enterprise Co. v. Superior Court, 464 U.S. 501, 510 (1984)).

            To enter a sealing order, a court must “balance the public interest underlying [the] presumption [of public access] against [the proponents’] interest in confidentiality.” Matter of Continental Illinois Securities Litig., 732 F.2d at 1313. Any doubt as to whether the presumption may be overcome “must be resolved in favor of disclosure.” Id. And, once disclosure is found to be appropriate, “access should be immediate and contemporaneous . . . [because t]o delay or postpone disclosure undermines the benefit of public scrutiny and may have the same result as complete suppression.” Id.

            In this case, the lower court did not even recognize a presumption of public access to the redemption rates, let alone articulate a justification for disregarding that presumption in favor of a blanket sealing order. Instead, it simply announced that the redemption rates should be filed under seal, without stating any reasons why secrecy was required. The court’s failure to explain its decision is reason enough for this Court to reverse the sealing order. See Press-Enterprise Co. v. Superior Court, 464 U.S. 501, 510 (1984) (when a court finds that the presumption of access has been rebutted by some countervailing interest, that “interest is to be articulated along with findings specific enough that a reviewing court can determine whether the closure order was properly entered.”). Cf. Grove Fresh, 24 F.3d 898 ( “appellate courts have on several occasions emphasized that upon entering orders which inhibit the flow of information between the courts and the public, district courts should articulate on the record the reasons for doing so”).  

            Even if the district court had made specific findings to support its decision, the sealing order would still necessarily have constituted an abuse of discretion. First, there can be no serious question that there is a strong public interest in access to the sealed material. Generally speaking, this Court has recognized that “[p]ublic scrutiny of the judicial process [is] vital to the functioning of the courts.” Matter of Continental Illinois Securities Litig., 732 F.2d at 1314. See also Joy v. North, 692 F.2d 880, 893 (2d Cir. 1982) (without public disclosure, “confidence in the administration of justice would be severely weakened”), cert. denied, 103 S. Ct. 1498 (1983)). Adding to this general interest in open court records is the public’s specific – and compelling – interest in access to information about the redemption rates in class actions cases that are settled for “coupons,” rather than cash. Unrebutted Expert Testimony in the record established that if the public is deprived of access to the discount certificate redemption rates in this case, then there will be no way to determine whether this settlement – and the many others like it – actually provide any concrete benefits to the class. See Moore Affidavit A.A. 150-52. This would both undermine confidence in the judicial system and make it more difficult to predict the benefits of coupon settlements in the future.

            The importance of public access to redemption rates in coupon settlements is illustrated by the decision in Buchet v. ITT Consumer Financial Corp., 845 F. Supp. 684 (D. Minn. 1994), amended by 858 F. Supp. 944 (D. Minn. 1994), which rejected a class action settlement that would have provided class members with discounts on future purchases of defendant's life insurance policies. The settling parties argued that the settlement’s value should be measured according to the face value of the discount certificates. Id. at 693. They also submitted an affidavit from an expert who opined that the value of the certificates could range from $5.3 million to $12.5 million. Id. at 693. The court rejected this evidence, noting that the “true value” of the settlement depends on how many class members actually use the certificates. Id. To determine that value, the court looked to another, virtually similar settlement that revealed minuscule redemption rates, and thereby concluded that the settlement before it should be rejected. Id. at 696. Thus, disclosure of the redemption rates from this case could serve a central role in informing decisionmakers in other, similar cases about the true value of the coupons being offered to the class.

            This is particularly important in this case, given that class counsel appear to be making a habit out of settling mortgage escrow cases for coupons, rather than cash. As noted above, three strikingly similar deals were approved by Judge Zagel on the same day as the fairness hearing in this case (see supra at nn.7-8). Class counsel, moreover, entered into at least two other coupon deals like this one in the past few years. See supra at n.4. Judging from these events, there may be many more coupons deals like this one in the future, involving discount certificates good for money off a new or refinanced mortgage loan. Despite this series of cookie-cutter settlements, the lower court flatly refused to consider the redemption rates from other cases and, making matters worse, ordered that the rates from this case be filed under seal. This pattern of secrecy creates a recipe for class action abuse in the context of a court system that is at least theoretically supposed to be open to the public.

            Against this overwhelmingly strong public interest in disclosure of the discount certificate redemption rates from this case, the settling parties have articulated no interest in secrecy. As noted above, Bank United’s only argument on the topic of redemption rates in this case was that compiling such information would add “very substantial administrative expenses to Bank United’s telemarketing operations.” A.A. 208. Bank United never made any claim nor any attempt to prove that such information was worthy of confidential treatment for any reason. Class counsel, meanwhile, did not even attempt to argue that disclosure would be burdensome or harmful in any respect. Thus, there is no evidence in the record to support a finding that the settling parties’ interest in secrecy outweighs the public’s First Amendment right of access to the material. Absent such evidence, there is no conceivable basis for upholding the lower court’s sealing order. Therefore, even if this Court upholds the settlement, it should at least lift the seal and order that the discount certificate redemption rates be filed in the public court record.

III.      The District Court Erred and Abused Its Discretion By Denying the Ragan Objectors’ Motion to Intervene.

            Finally, the district court both erred and abused its discretion by denying the Ragan Objectors’ motion to intervene, which was filed solely in order to protect their right to seek appellate review of any decision approving the settlement. As explained below, this decision was based on an error of law, and thus should be reversed.

            A.        Standard of Review

            The Ragan Objectors moved to intervene under both Fed. R. Civ. P. 24(a) (intervention as-of-right) and 24(b)(2) (permissive intervention). In order to intervene as a matter of right under Rule 24(a), “a plaintiff must (1) make timely application, (2) have an interest relating to the subject matter of the action, (3) be at risk that the interest will be impaired, as a practical matter, by the action’s disposition and (4) lack adequate representation of the interest by the existing parties.” Nissei Sangyo American Ltd. v. United States, 31 F.3d 435, 438 (7^th Cir. 1994) (internal citations omitted). This Court reviews the timeliness decision for abuse of discretion, while the other factors are reviewed de novo. Id. at 438.

            Permissive intervention, on the other hand, is available “[u]pon timely application “when an applicant’s claim or defense and the main action have a question of law or fact in common.” Fed. R. Civ. P. 24(b)(2). A decision granting or denying permissive intervention may only be reversed on appeal for an abuse of discretion. See United States v. 36.96 Acres, 754 F.2d 855, 860 (7^th Cir. 1985).

            B.        Intervention Should Have Been Granted in Order to Protect the Ragan Objectors’ Right to Seek Appellate Review.          

            In this case, the lower court both erred and abused its discretion in denying the Ragan Objectors’ motion to intervene. As noted above, the Ragan Objectors moved to intervene for the sole purpose of preserving their right to seek appellate review of any decision approving the settlement. The district court denied that motion on the ground that “I do not think that under the prevailing law in this circuit intervention is required to appeal . . ..” S.A. 237. However, in In re Brand Name Prescription Drugs, 115 F.3d 456, 457 (7^th Cir. 1997), this Court reversed its earlier decision in Research Corp. v. Asgrow Seek Company, 425 F.2d 1059, 1060 (7^th Cir. 1972), to hold that unnamed class members must move to intervene in order to seek appellate review of a decision approving a class action settlement. Thus, the lower court’s conclusion that class members do not need to move to intervene in order to preserve appellate standing was a pure error of law that should be reversed.

            The lower court’s other reasons for denying the Ragan Objectors’ motion to intervene are equally lacking in merit. Regarding intervention as-of-right, the court simply stated that the Ragan Objectors were not entitled to intervene because “there is nothing, even the most minimal showing, [that they] may be affected by my order today.” A.A. 237. This holding makes no sense, since the Ragan Objectors are members of the class who will be bound by any final order approving the proposed class action settlement. They are identically situated to every other member of the class, and will be affected by the settlement in exactly the same way. If the district court’s theory was correct, then every class member would automatically be disqualified from seeking intervention as-of-right to protect his or her ability to seek review of a decision approving the settlement. That is not, and cannot be, the law. See Solid Waste Agency v. U.S. Army Corps of Engineers, 101 F.3d 503, 506 (7^th Cir. 1996) (Rule 24(a)(2)’s “interest” requirement is met where the prospective intervenor’s interest is “direct, significant, and legally protectable.”) See also Buchet, 845 F. Supp. at 690 (objecting class members entitled to intervene as-of-right to preserve right to appeal decision approving settlement). Cf. United Airlines, Inc. v. McDonald, 432 U.S. 385, 392-96 (1977).

            The lower court’s ruling on permissive intervention was equally indefensible. As noted above, permissive intervention merely requires a timely showing that the would-be intervenors’ claims have a “question of law or fact in common” with the main action. There is no question that this requirement is met here, since both of the Ragan Objectors are members of the class and their motion to intervene was filed in a timely fashion along with their objections. Nonetheless, the district court held that “I do not believe that permissive intervention is appropriate in this case at this stage of the proceedings and under the particular circumstances which are before me.” A.A. 237. It almost goes without saying that this sort of vague ruling, unsupported by reasoning or findings, constitutes an abuse of discretion warranting reversal.

            Even if the district court’s order denying intervention is permitted to stand, this appeal should still be permitted to go forward. This Circuit has specifically held that unnamed class members who do not want to opt out of a settlement or create a subclass can and should move to intervene for the limited purpose of being able to appeal. See In re Brand Name Prescription Drugs, 115 F.3d at 458. The Ragan Objectors followed that procedure here to the letter by filing a timely motion to intervene seeking to preserve their rights to appellate review. If this Court dismisses this appeal on the ground that intervention was properly denied, then district courts will be able to block appellate review of class action settlements at will, without even providing any cogent reasons for their decisions and without regard to the substantive rights of the class members involved. If this were the law, then class action settlements affecting the rights of millions of persons would be afforded less judicial scrutiny than any other kind of lawsuit in the federal courts. Such a result would run entirely contrary to Rule 23 by stifling meaningful opposition to – and judicial review of – class action settlements. For these reasons, even if this Court affirms the district court’s order denying the Ragan Objectors’ motion to intervene, this appeal should be permitted to go forward.

CONCLUSION

            For the foregoing reasons, the Court should vacate the district court’s decision approving the settlement and request for attorneys’ fees, and remand for further proceedings. If, however, the Court affirms the decision approving the settlement and attorneys’ fee request, it should at least reverse the district court’s decision ordering that the discount certificate redemption rates for this case be filed under seal. In either event, the Court should reverse the lower court’s decision denying the Ragan Objectors’ motion to intervene.

                                                            Respectfully submitted,

Joseph A. Power, Jr.,                                                 F. Paul Bland, Jr. (Counsel of Record)

Power, Rogers & Smith, P.C.                                     Leslie A. Brueckner

35 West Wacker Drive                                               Arthur H. Bryant

Suite 3700                                                                  Trial Lawyers for Public Justice, P.C.

Chicago, IL 60601                                                     1717 Massachusetts Ave., N.W.

(312) 236-9381                                                           Suite 800

Washington, D.C. 20036

(202) 797-8600

June 3, 1998 

CERTIFICATE OF SERVICE

            I, F. Paul Bland, Jr., hereby certify that, on this 2nd day of June, 1998, two true and correct copies of the foregoing Brief of Class Members-Appellants, and of Appellants’ Appendix, were served by overnight mail on counsel for the settling parties as follows:

Charles S. Zimmerman, Esq.

Barry G. Reed, Esq.

5200 Norwest Center

90 South Seventh Street

Minneapolis, MN 55402-4123

(Class Counsel)

Robert J. Pratte, Esq.

Briggs & Morgan

80 South Eighth Street

Minneapolis, MN 55402

(Counsel for Bank United of Texas)

            I declare under penalty of perjury that the foregoing is true and correct. Executed on June 2, 1998.

                                                                        __________________________