04/25/2011 01:34 pm ET Updated Jun 20, 2011

The Class Action Mess In A Nutshell Part II

Sue Yourself For the Privilege of Paying Lawyers' Fees to Class Action Attorneys

Nothing explains the class action lawyers' con game better than the infamous Bank of Boston case. The lawyers alleged that the Bank violated class members' rights by charging customers with home loans excessive fees for holding an excessive portion of the customers' deposits for homeowner's insurance in noninterest-bearing escrow accounts. A settlement was reached in which each class member had their account credited between $2.19 and $8.76 for overpayments from their accounts, and also had those accounts debited up to $91 to cover the costs of the settlement (largely the plaintiff's and defendant's lawyers' fees). For this claimed "benefit" -- a benefit that only a plaintiffs' class action lawyer and a judiciary anxious to clear its docket could believe to be a benefit -- class counsel was awarded $8.5 million in attorneys' fees. Unlike any other class action settlement before or since, the settlement permitted the defendant to charge directly to the customers' accounts the costs of the litigation (class members received a bill for the first and only time in class action history showing how the costs of the litigation were actually paid). The Bank of Boston case exposed for all to see why the class action cure is worse than the disease. You get between $2.19 and $8.76, but it can cost you $91 to get it. Typically, the bill for the cost of class action litigation is hidden from class members and the general public. Consumers pay in the end, they just don't know it because they don't get a bill in the mail like the class members in Bank of Boston did.

Here's another class action scandal you ought to know about. Mr. Smith* filed a class action lawsuit against the ABC Mutual Water Co. over a $28 water bill. His lawsuit alleged that the water company was charging owners of vacant lots in the planned community discriminatory water hookup fees, because they failed to distinguish between owners of vacant lots and owners of developed lots. Unfortunately, the lot owners of both vacant and developed lots were also the water company's sole shareholders (remember it was the ABC Mutual Water Co.). "We hired a lawyer to sue us," Mr. Smith later lamented. The water company, with $500,000 in assets, filed for bankruptcy.

It was projected that when the litigation ended, the property owners would have redistributed up to $2 million in discriminatory water hook-up fees among themselves, mostly in changes of $20 or less over a period of a year. Unfortunately, all lot owners are expected to wind up paying lawyers close to $4 million for that privilege. The lead plaintiff apparently was under the incorrect impression that any monetary judgment would be paid under the water company's insurance policy (It's unclear who or what made him think that and why it wasn't covered). Mr. Smith could collect $200 as a result of the shifted water hook-up fees but could owe as much as $6,000 -- mostly for the legal fees associated with the bill shifting and consequent bankruptcy.

If you think these situations are unique, you're wrong. Consumers are not made aware of how these multi-million dollar settlements are paid for. Bank of Boston put the spotlight on answering the question of "who ultimately pays for the cost of class actions?" Consumers. This is the class action industry in a nutshell.

*Name changed.