The Fifth Circuit recently vacated a class action settlement that included unsecured and uncollateralized future payments to the plaintiffs, while providing a swift and complete payout of fees to class counsel. The case concerned a defined benefits pension fund created and owned by the Singing River Health System (SRHS), a community hospital owned by Jackson County, Mississippi. Following the 2008 financial crisis, SRHS encountered financial difficulties, failed to make all but one contribution to the plan, and ultimately froze the plan in 2014. The plaintiffs, a class of pension plan participants, brought suit, and a settlement was ultimately reached. The district court held a fairness hearing and approved the settlement, which required SRHS to pay approximately $150 million into a retirement trust over a 35-year schedule. At the fairness hearing, approximately 250 objectors challenged the settlement, arguing that it was illusory because, among other things, it promised an extraordinarily long-term, unsecured, and unpredictable proposed payout, while at the same time, providing a rapid payment schedule for attorneys’ fees.
Reviewing the settlement approval under an abuse-of-discretion standard, the Fifth Circuit found much of the district court’s determinations sound. However, in analyzing whether the settlement was fair, reasonable, and adequate, the court found that the district court focused too narrowly on SRHS’s proffered payments and not enough on the hospital’s ability to sustain those payments or how the settlement would impact individual beneficiaries. Specifically, the court found inadequate the “very brief treatment of these issues” and acceptance of “boilerplate summations by the hospitals’ CFO […] that SRHS ‘should be able’ to make its scheduled settlement payments….” Overall, the court found that the information provided at the fairness hearing failed to establish that SRHS, still in precarious shape, would be able to handle the escalating annual installment payments required under the settlement. Further, the court took issue with class counsel’s arrangement for a complete payout of fees from SRHS before 2018, therefore alleviating any future risk of nonpayment to counsel. On this point, the court found “disturbing” that “counsel assured themselves a multimillion-dollar bird in hand, while leaving the class members two in the bush[.]” In all, the court determined that the record provided no assurance to the class members that the plan would not run out of money to pay the claims well before 2051. As a result, it vacated the settlement approval and remanded with the aim of providing the class members greater transparency about the settlement’s weaknesses.
Jones v. Singing River Health Servs. Found., No. 16-60550 (5th Cir. July 27, 2017).