31 October 2017: Is one year after settlement approval too late to try and deduct new legal expenses and taxes from a class action settlement fund?
- Court and judge: Digby J in the Supreme Court of Victoria
- Citation and link: Camping Warehouse v Downer EDI – Administrator’s second application for judicial advice  VSC 660 (31 October 2017) (Digby J)
Executive summary: Nearly two years after a settlement scheme was devised, the plaintiff’s lawyer (as scheme administrator) requested four new types of costs. The Court granted two of the costs (tax and accounting fees), and denied two (expert costs and more generous administration costs).
n February 2016, day four of trial, a settlement agreement was reached in the shareholders’ class action against Downer EDI. Court approval granted in May 2016 included:
1. Establishment of a Settlement Fund, which the plaintiff’s lawyer (Elliot Legal) and the defendants’ lawyer (Colin Biggers & Paisley) be joint trustees of.
2. The plaintiff’s lawyer be the Administrator of the Settlement Distribution Scheme, for specified remuneration.
A year later, in May 2017, the plaintiff’s lawyer asked for greater financial provision: ongoing monthly payments for their work, and reimbursement to them of:
A. Tax liabilities on the interest accruing on the settlement sum
B. Accounting costs of tax compliance
C. Costs of Expert Review of decisions regarding claims on the Settlement Sum (by potential beneficiaries of the class action)
What the plaintiff’s lawyers won – tax expenses and costs
As to the tax liability the plaintiff’s lawyer asserted that:
I. The Trustees had been burdened with the tax obligation only because although the scheme expressly stated dealt with any leftover from the Settlement Fund left (to be returned to the defendant), it did not clarify who benefitted from interest;
II. The burden was $1,250 for the YE 30 June 2016, and in the order of $140,000 for the YE 30 June 2017; and
III. Tax legislation indemnifies trustees for tax liabilities on trust income, and that ought be the position here.
The defendant’s lawyer agreed.
The Court noted its powers in relation to settlements, which included making “such orders as it thinks fit” (s33V(ii)) and “any order [it] thinks appropriate or necessary to ensure justice is done in the proceeding”. It also noted that the Settlement Scheme did not expressly or impliedly contradict the position in the tax legislation, and it would be “unreasonable and inappropriate” for the Trustees to have to pay the tax, when the remainder of the Settlement Fund was going back to the defendant (along with any interest accrued).
On the other hand, the Court also considered that plaintiff’s lawyers had undertaken “not to seek to recover from the Settlement Sum …any costs incurred in connection with the Claims of the individual Group Member’”.
Ultimately, the Court decided that indemnification from the tax burden and accounting costs were “necessary, appropriate and in accord with the scheme”. It also considered that tax liability which arose from interest income was not a cost covered by the undertaking.
What the plaintiff’s lawyers lost – more fees and reimbursement of Expert expenses
The Settlement Scheme provided that the plaintiff’s lawyer be paid “…fees for contact with class and provision of administration services to each class member payable out of the Fund - agreed as $22 per shareholder per annum…in respect of each shareholder……up to and including the month in which the funds clear for each individual shareholder...”
The issue before the Court concerned which shareholders that provision allowed the $22 to be levied for, after the 1 March 2017 deadline for registering for part of the Settlement Sum: Was it only the shareholders who had registered and were to be paid, or was it $22 for every shareholder who had engaged in relevant trades whether they were involved in the settlement procedure or not (which was as high as 10,757). The plaintiff’s lawyer argued for the later saying that despite the shareholders to be paid having become a fixed group, the lawyers continued to answer queries from other shareholders who had failed to register by the 1 March 2017 deadline and therefore wouldn’t receive any payment, and such work had not been previously provided for. The defendant’s lawyer disagreed, submitting that the wording permitted $22 to be charged only for shareholders registered and yet to be paid.
The plaintiff’s lawyer also raised an argument that not having the greater fee would make it “unsustainable …to apply sufficient personnel and infrastructure [potentially causing] distress to class members who have failed to register in time…giving rise to a risk that the administration of justice would be brought into disrepute.”.
The issue more or less boiled down to principles of contractual implementation, having regard to the wording of the Settlement Scheme, having regard to the broader context.
The Court noted that persons who hadn’t registered by the deadline had no rights against the settlement proceeds and no reason to communicate with the plaintiff’s lawyer. The Court accepted the operation urged by the defendant’s lawyer as the plain meaning of the agreement, and labelled the approach of the plaintiff’s lawyer as “likely to generate a windfall fee…because…probably only be …about 585 registered shareholders after 1 March 2017…. unlikely that the parties would have intended ….fee in relation to more than the 10,000 potential shareholders relevant at an earlier point of time”.
As to costs of Expert Reviews, (in the order of $6,000 per review), the settlement terms included that “Where an Expert Review is undertaken …the Expert’s costs of the Expert Review will be borne by [the plaintiff’s lawyer]”. The plaintiff’s lawyer claimed that didn’t rule out indemnification from the Settlement Fund. His Honour disagreed, saying: “I see no merit in [the plaintiff’s lawyer]’s submission that it did not anticipate” those costs and settlement scheme wording is unambiguous in requiring the plaintiff’s lawyer to bear those costs.
Things to think about
Firstly, the judgment seems predicated on the fact that a portion of the Settlement Sum would be leftover and returned to the defendant. At face value, this begs questions about whether the participating class members entitlements should have been more, and / or why there wasn’t involvement by more shareholders.
Secondly, the plaintiff’s lawyers’ interests in the application were their own pockets: more fees plus protection from tax burdens and other costs. To that extent, their interests weren’t aligned with the plaintiff or class members and may have involved a conflict of interest. Yet the judgment shows no sign of that conflict being accounted for, or independent representation of the plaintiff and class members, whether by a contradictor or otherwise. To be fair, the judge in this case was sufficiently thorough and robust to knock back some of the requests, apparently protecting the integrity of the scheme and the class members’ interests. But will that always be enough?
At any rate, the take home message is the importance of
1. Well thought through cost provisioning when devising a settlement scheme, so there are no surprises for any stakeholders or awkward last minute attempts at claiming fees by lawyers handling the administration; and
2. Not over-reaching when claiming costs.