Second Circuit Rules in Gallego v. Northland Group, Inc.

In Gallego v. Northland Group, Inc., Docket No. 15-1666-cv (2d Cir., Feb. 22, 2016), a Second Circuit panel considered the proposed class settlement of a Fair Debt Collection Practices Act (FDCPA) claim that would pay attorney fees of $35,000 and establish a class fund of $17,500 to be shared among approximately 100,000 class members, or whatever subset filing timely claims. The district court denied preliminary approval of the settlement after finding that a class action was not "superior" to individual action and dismissed the FDCPA claim after concluding that the claim was so lacking in merit, it could not support federal question jurisdiction. On appeal, the Second Circuit panel decided that the district court did not abuse its discretion by finding that Rule 23(b)(3)'s superiority requirement was not met by a class that promised only 16.5 cents per class member if 100 percent of the class participated in the settlement. The panel found no solace in the plaintiff's explanation that the expected low 5 percent take rate would result in higher payments—"[a]n expected low participation rate is hardly a selling point for a proposed classwide settlement . . . ." Citing the Supreme Court's decision in Shapiro v. McManus, 136 S. Ct. 450, 455 (2015), the panel reversed the dismissal of the FDCPA claim. Instead, the panel remanded for consideration whether the case should be dismissed on the merits for failure to state an actionable FDCPA claim. 

Gallego reiterates the difficulty in certifying a settlement class that promises de minimis value to class members, especially for statutory claims like FDCPA claims that allow for significant individual penalty recoveries (under the FDCPA, $1,000 per individual claim). Gallego also illustrates the difference between meeting the low federal jurisdiction threshold and surviving a Rule 12(b)(6) merits challenge.

^{William J. Holley II is a partner with Parker Hudson Rainer & Dobbs in Atlanta, Georgia.}

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