/raid1/www/Hosts/bankrupt/CAR

/raid1/www/Hosts/bankrupt/CAR_Public/000106.MBX C L A S S A C T I O N R E P O R T E R Thursday, January 6, 2000, Vol. 2, No. 4 Headlines AMERICAN BANKERS: Appeals Court Upholds Class of Credit Card Insurance BANK ONE: Zwerling, Schachter Files Securities Suit in Illinois COCA-COLA: Black Exec Is Promoted As Company Defends Racial Bias Suit DRUG MANUFACTURERS: Kansas Health Centers Get Share of Settlement EQUIFAX CHECK: Ap Ct Tosses Out Settlement That Pays Members Nothing GEORGIA BLUE: Wellpoint Extends Merger Agreement for Securities Suit GUN MANUFACTURER: Ct Dismisses Bridgeport Case against Smith & Wesson HMO: 5th Cir Says ERISA Doesn’t Require Disclosure of Physician Schemes HMO: Jury Issues Award of $80M; Case May Form Crux for Fed Class Action PAYDAY LENDERS: 7th Cir Says Postdated Check Can Be Security under TILA PONZI SCHEME: Kutak Rock Says Schools Suit Takes Aim at Its Deep Pocket SKECHERS USA: Announces Filing of Securities Suit in CA SKECHERS USA: Kirby McInerney Files Securities Suit in CA USAIR 427: Il. Case Settled in Nov. Hours before Trial; 5 of 18 Remain Y2K LITIGATION: MI School District Sues to Recover Costs from MASB-SEG ********* AMERICAN BANKERS: Appeals Court Upholds Class of Credit Card Insurance ---------------------------------------------------------------------- Consumers who purchased credit card insurance but whose claims were denied because of restrictions contained in fine print won a victory. The Appellate Division of the State of New York, First Department, unanimously affirmed the decision of Justice Ira Gammerman of the Supreme Court of the State of New York which certified a nation-wide class of consumers who purchased credit card insurance from American Bankers Insurance Group, Inc., American Bankers Insurance Company of Florida, and Bankers American Life Assurance Company. The consumer class action suit charges these companies' advertising material and solicitations are deceptive because the large typeface promises coverage if the insured cardholder dies, becomes disabled or becomes unemployed, but then the fine print restricts the availability of that coverage for a variety of reasons, including the state of the customer's residence, the age of the customer, and whether or not the customer is self-employed, so that when a claim for insurance is made, the claim is denied. Contact: Emily Madoff, Esq., Lawrence D. Levit, Esq., WOLF POPPER LLP, 845 Third Avenue, New York, NY 10022-6689, Telephone: 212-451-9622, 212-451-9621, Toll Free: 877-370-7703, Facsimile: 212-486-2093, E-Mail: emadoff@wolfpopper.comor llevit@wolfpopper.com Website: http://www.wolfpopper.com BANK ONE: Zwerling, Schachter Files Securities Suit in Illinois --------------------------------------------------------------- Zwerling, Schachter & Zwerling, LLP ("Zwerling Schachter") has filed a class action lawsuit in the United States District Court for the Northern District of Illinois on behalf of investors who purchased Bank One Corp. (NYSE: ONE) ("Bank One" or the "Company") securities between October 22, 1998 and November 10, 1999 (the "Class Period"). The lawsuit charges Bank One and several of its officers with violations of the federal securities laws. The complaint alleges that defendants issued a series of false and misleading statements concerning the Company's operations, revenue, and earning trends. Specifically, Bank One is alleged to have misled the market concerning its financial results by improperly recognizing revenue from its wholly-owned subsidiary, First USA, which, in turn, improperly recorded revenue from late fees, penalties, and interest by failing to post credit card payments on time. Following a series of disclosures beginning August 24, 1999, the Company's stock price declined from a Class Period high of $63.563 to $34.625 at the end of the Class Period. Contact: Zwerling Schachter by telephone at 800-263-7337 (Paul C. Whalen, Esq. or Ms. Jayne C. Nykolyn), via e-mail at zlaw96@ix.netcom.com with reference made to Bank One, or visit website at http://www.zsz.com COCA-COLA: Black Exec Is Promoted As Company Defends Racial Bias Suit --------------------------------------------------------------------- Carl Ware, Coca-Cola's highest-ranking black executive, has changed his mind about retiring after being promoted to head a new global public affairs division. New company President Douglas Daft said Ware is being given an important new assignment at a time when the company needs his skills. "Carl's principal role is to ensure that the Coca-Cola Co. continues to be welcome around the world and that we apply 'community' and 'neighbor' equally to those who live next door, or on the next continent," Daft said in a statement. "We must think locally and act locally, and no one understands that better than Carl." In early November, Ware, 56, announced his retirement four days after Ivester divulged a reorganization of top management. Ivester's action was criticized by some company observers, especially since Coca-Cola has been embroiled in the well-publicized discrimination suit. With the Ware decision coming on the heels of other missteps, some company observers said, key board members then pressured Ivester to resign. Company observers said the move on January 4 is an attempt to eliminate the negative fallout from a decision by Chairman M. Douglas Ivester that effectively demoted Ware in a management restructuring. Ivester has since announced his own retirement, which some have partially blamed on the fallout from Ware's demotion. Analysts also said the first major announcement by Daft is aimed at improving Coke's image as it defends itself against a racial discrimination lawsuit. The company has denied the allegations in the suit. An attorney for the plaintiffs, who are seeking class-action status, said the company needs to do more. "I think the real question for Daft is not making one promotion, but whether he will have the guts and vision to put an end to the barriers thwarting the careers of African-Americans throughout the company," said plaintiffs' attorney Cyrus Mehri. (The Atlanta Journal and Constitution January 5, 2000) DRUG MANUFACTURERS: Kansas Health Centers Get Share of Settlement ----------------------------------------------------------------- About $ 4 million is on its way to Kansas community health centers as part of a 1998 settlement of class-action litigation against more than 20 brand-name prescription drug manufacturers. The litigation, which comprised lawsuits filed in Kansas and around the country, contended that drug companies had charged higher prices to retail pharmacies than to certain managed-care organizations. The settlement has been approved for Kansas, nine other states and the District of Columbia. Missouri is not included. About $ 250,000 of the money earmarked for Kansas will go to Southwest Boulevard Family Health Care, 340 Southwest Blvd. in Kansas City, Kan. The money will be used to help pay for prescription drugs for non-Medicaid, established patients at the center, regardless of income or insurance coverage. Most of the center's non-Medicaid patients don't have health insurance. Distribution of the money began recently, said Bernard Persky of New York, a lead attorney for plaintiffs in the case. He said the total multistate settlement amounted to nearly $ 65 million. After attorneys' fees and other costs, more than $ 40 million will be distributed to participating community health centers. In terms of the settlement, a community health center is defined as a nonprofit, community-run facility that provides health services to area residents, regardless of insurance coverage or ability to pay. More information about the program is available at (800) 790-8476 and the Web site http://www.rxconsumerlit.com(USA Today January 5, 2000) EQUIFAX CHECK: Ap Ct Tosses Out Settlement That Pays Members Nothing -------------------------------------------------------------------- Suggesting that the plaintiff attorney and the class representative in a debt-collection lawsuit were trying to benefit themselves at the expense of class members, a federal appeals court panel has tossed out a settlement reached in the action. In an opinion made January 4, a panel of the 7th U.S. Circuit Court of Appeals also criticized the magistrate judge who approved the settlement in a class-action lawsuit accusing Equifax Check Services Inc. of violating the Fair Debt Collection Practices Act. The panel said the only thing the settlement would have done for many of the class members would have been to cut them off at the knees. “The settlement called for the named plaintiff, Lawrence Crawford, to receive $ 500 in damages and a $ 1,500 incentive award" for serving as the class representative, the panel said. The panel said the settlement also called for Equifax to pay reasonable attorney fees -- later determined to be $ 78,000 -- for the services of Crawford's lawyer, Christopher V. Langone of Chicago. Other terms of the settlement included Equifax' agreement to never again use the form letters that the plaintiffs claimed violated the law and to donate $ 5,500 for the Legal Clinic of Northwestern University Law School to use in protecting consumers' rights, the panel said. The panel said the settlement also allowed class members other than Crawford to pursue their own lawsuits against Equifax -- so long as those suits did not proceed as class actions. The panel noted that the settlement did not provide for monetary damages for any of the approximately 214,000 unnamed class members whose interests Crawford was designated to represent. And the panel said those class members were not personally notified of the class certification or the settlement and were not allowed to opt out of the settlement. Even without considering the lack of notice or an opt-out provision, the panel said, the settlement is substantively troubling. "Crawford and his attorney were paid handsomely to go away; the other class members received nothing (not even any value from the $ 5,500 donation') and lost the right to pursue class relief," Judge Frank H. Easterbrook wrote for the panel. The panel reversed an order by U.S. Magistrate Judge Sidney I. Schenkier approving the settlement under Rule 23(e) of the Federal Rules of Civil Procedure. The panel also reversed an order in which Schenkier had blocked two people pursuing separate class actions against Equifax from intervening in the suit filed by Crawford in order to object to the settlement. Joining in the opinion were Chief Judge Richard A. Posner and Judge Ilana Diamond Rovner. Lawrence Crawford v. Equifax Payment Services Inc., et al., Nos. 99-1973 and 99-2122. Both Langone and Chicago attorney David L. Hartsell, who represented Equifax in the suit, said that they were disappointed by the panel's decision. Langone said the relief contained in the settlement would have fulfilled the primary purpose of the Fair Debt Collection Practices Act, 15 U.S.C. sec1692, to bring a halt to abusive and unfair debt-collection practices." But if the act is interpreted to deny the kind of injunctive relief sought by the plaintiffs under Rule 23(b)(2) of the Federal Rules of Civil Procedure, Langone said, that strikes a blow to consumer rights." And Langone said that a monetary settlement in the case would have netted each class member only a dollar or two in damages -- damages that would have been reduced to zero once Equifax exercised its setoff rights. Hartsell also noted that the class members would have been limited by the Fair Debt Collection Practices Act to a minimal amount of damages. But under the settlement hammered out by the attorneys with the help of Schenkier, class members could have filed their own suits seeking up to $ 1,000 in damages, Hartsell said. In June 1997, Crawford filed the suit that led to the January 3’s decision by the 7th Circuit panel. Beverly Blair brought a similar action six months later and Latressa Wilbon filed a third in August 1998. The panel said all three plaintiffs sought to represent a class of debtors who had received letters from Equifax that allegedly violated certain provisions of the Fair Debt Collection Practices Act. The Blair and Wilbon suits were consolidated before U.S. District Judge Paul E. Plunkett, who in February 1999 certified both as class actions, the panel said. The panel said Schenkier a week later certified Crawford's suit as a class action and, at the same time, tentatively approved the settlement in the case. Because the Crawford class included all members of the Blair and Wilbon classes, Equifax asked Plunkett to decertify the classes in the consolidated case, the panel said. The panel said Plunkett declined to take that step in a decision that was affirmed by the 7th Circuit. Blair v. Equifax Check Services Inc., 181 F.3d 832 (1999). A few weeks after the settlement in the Crawford suit was tentatively approved, Blair and Wilbon attempted to intervene in the case because they deemed the settlement terms inadequate, the panel said. The panel agreed with that assessment, saying that class members other than Crawford receive no relief for harms that may already have been done" They gain nothing (the settlement does not include a concession of liability that would facilitate individual suits), but lose something: the possibility of any collective proceeding for damages," the panel said. Because these are small-stakes cases, a class suit is the best, and perhaps the only, way to proceed." But Schenkier blocked Blair and Wilbon from challenging the settlement when he refused to allow them to intervene in the case, the panel said. The panel said Schenkier determined that Blair and Wilbon had waited too long to file their motions to intervene. Schenkier also concluded that allowing the two to intervene would cause prejudice" by upsetting the settlement, the panel said. Schenkier was wrong on both counts, the panel said. The panel said unnamed class members seldom have any reason to intervene until learning of the terms of a (potentially inadequate) settlement or problems in the class definition." And while acknowledging that an appeal by Blair and Wilbon ultimately could lead to the rejection of the settlement, the panel said that is the way the system is supposed to work. The possibility that we would see merit to their appeal cannot be called prejudice'; appellate correction of a district court's errors is a benefit to the class," the panel said. The panel said Schenkier also erred in approving the settlement. Magistrate Judge Schenkier concluded that Crawford's attorney was a vigorous champion of the class, despite the appearance that for $ 78,000 he sold out the class," the panel said. Even so, the fact that one class member receives $ 2,000 and the other 200,000+ nothing is quite enough to demonstrate that the terms should not have been approved under Rule 23(e)." (Chicago Daily Law Bulletin January 4, 2000) GEORGIA BLUE: Wellpoint Extends Merger Agreement for Securities Suit -------------------------------------------------------------------- Wellpoint Health Networks Inc. has extended its $500 million cash merger agreement with Cerulean Cos. Inc., the holding company of Blue Cross and Blue Shield of Georgia, until Dec. 31, 2000. The companies cannot close the deal prior to getting a decision from the Georgia Supreme Court over a class-action suit brought by policyholders of the Georgia Blue prior to its conversion into a not-for-profit. In 1996, policyholders were offered shares of Cerulean in the Georgia Blue conversion, but only half, roughly 70,000, accepted the offer. In 1998 the rest sued to receive Cerulean shares. While the suit delays the deal closing, it will not affect its valuation, said a Wellpoint spokesman, except that it will dilute the amount of cash Cerulean shareholders will receive, currently about $4,000 each. The court decision is expected during 2000. After the court renders its decision, the Georgia insurance commission also must approve the deal. (Fulton County Daily Report January 5, 2000) GUN MANUFACTURER: Ct Dismisses Bridgeport Case against Smith & Wesson --------------------------------------------------------------------- A judge's dismissal of Bridgeport's lawsuit against gun manufacturers has disappointed the city's officials and attorneys, but not diminished their devotion to the cause. "This issue is not going to go away," Bridgeport Mayor Joseph P. Ganim declared after Superior Court Judge Robert F. McWeeny held that Bridgeport lacks standing to sue the gun industry. "We are going to continue to pursue it." The Waterbury judge's Dec. 10 decision in Ganim v. Smith & Wesson Corp. " does not exonerate the gun industry," says plaintiffs' co-counsel Brian J. Siebel. "It simply suggests the city's not the right party to bring the case." In fact, Siebel, of the Center to Prevent Handgun Violence in Washington, D. C., says he is encouraged by language in McWeeny's ruling that "says the state would have a stronger case. ..." "It almost invites the attorney general to file suit," he says. It's an invitation that will have to wait for a response. Attorney General Richard Blumenthal, who filed an amicus brief in Ganim urging the court to hear Bridgeport out, says his office is reviewing McWeeny's ruling, and considering the possibility of initiating a separate legal action. "A decision to begin a lawsuit of this kind has to be approached with utmost caution," he says. That decision, he says, depends in part on the progress of negotiations with the gun manufacturers aimed at improving gun safety and changing the way firearms are marketed. Those talks took on a new urgency this month when the Clinton administration threatened to support a possible class action against the firearms industry by public housing authorities. Blumenthal says the federal government's expected entry into the negotiations will provide a "powerful impetus" toward a settlement. "A settlement is not on the immediate horizon," he says, "but the federal government has to be regarded as a star player." Bridgeport is one of 29 cities and counties that have charged the gun industry with producing unsafe weapons and failing to stop them from falling into the hands of criminals. The plaintiffs are seeking injunctive relief and millions of dollars in damages for the money they have spent on police protection, emergency services and health care for their citizens. The lawsuits have generated activity in state legislatures as well as the courts. Ten states have passed laws barring cities or counties from bringing claims against gun manufacturers, or to shield the gun industry from liability in suits that have been filed. Another dozen states have similar legislation pending. Ganim is one of three complaints to have been dismissed so far. Com-plaints brought by Cincinnati and Miami-Dade County also have been dismissed. A complaint filed by Atlanta has been allowed to proceed in Georgia state court. Bridgeport sued more than 30 defendants, including gun manufacturers, distributors and retailers, to recover damages for the costs of police and fire protection and medical and social services "necessitated by gun injuries to persons who are not parties to this litigation," McWeeny writes in his 35- page ruling. The essential issue before him, the judge writes, is whether those are injuries for which the city could recover. "It is recognized at common law," he writes, "that a plaintiff who complains of harm resulting from misfortune visited upon a third person is generally held to stand at too remote a distance to recover." McWeeny notes, and the plaintiffs' attorneys have acknowledged, that the gun litigation is patterned in part on lawsuits filed by the states against cigarette manufacturers. That litigation resulted in a $206 billion national settlement in November 1998. The judge muses that the Ganim plaintiffs "must have envisioned such settlements as the dawning of a new age of litigation during which the gun industry, liquor industry and purveyors of 'junk' food would follow the tobacco industry in reimbursing government expenditures and submitting to judicial regulation." He says they envisioned wrong. "The tobacco litigation," the judge writes, "has not succeeded in eradicating the rule of law on proximate cause, remoteness of damages and limits on justiciability." McWeeny notes that a number of federal appellate courts have dismissed what he calls "'me-too' cases," such as complaints filed against tobacco companies by insurers. Unlike the cities in the gun litigation, or the insurers in the tobacco cases, he writes, the states that sued the tobacco companies were authorized to do so by state law and by "the state's unique role relative to protection of its citizens." But McWeeny says there is no state law that permits Bridgeport to recoup expenditures or obtain injunctive relief on behalf of its citizens. In addition, he finds, state law pre-empts municipalities from acting in areas, such as firearms regulation, where the Legislature has demonstrated an intent to "occupy the entire field." The judge says any harm suffered by the city is too remote and indirect to allow for recovery, and also finds Bridgeport does not have common law grounds to sue. The judge raises several policy reasons to bolster his findings. For one thing, he says, it would be too difficult to ascertain damages. "Calculating the impact of gun marketing on teen suicide and diminution of property values in Bridgeport would create insurmountable difficulties in damage calculation," he writes. "Plain-tiffs cannot seriously maintain that reasonable certainty in calculating their damage claims is within the realm of possibility." Still another policy factor weighing against the plaintiffs, McWeeny says, is that other plaintiffs are available to bring suit. Those directly injured by firearms, he writes, "would be able to proceed under traditional tort or perhaps nuisance theories of redress." "In this case," McWeeny writes, "the nefarious conduct of the gun industry should be addressed in a traditional tort suit in which the direct victims would have to overcome the industry's claims of proximate cause, assumption of risk and contributory negligence." "Moreover, with respect to the medical expense claim, the state through Medi-caid reimbursement certainly would be in a better position ... to seek recoupment." McWeeny also dismisses a nuisance claim, finding that the city's ordinances don't provide for such a remedy. Plaintiffs' attorney Siebel says the Center to Prevent Handgun Violence represents individual victims of gun violence in other cases and would do the same in Connecticut. But Siebel says Bridgeport can make a strong case on appeal as it is. For one thing, he says, he believes McWeeny is wrong on the nuisance claim. "If a city cannot bring a nuisance action, who can?" Siebel asks. "This would irretrievably weaken public nuisance law." "The defendants," he says, "can't defend these cases on the merits, so they throw up arguments desperately seeking to avoid having their conduct looked at in a court of law." Bridgeport Mayor Ganim also is not giving up. "This is a national issue that impacts every person and every city or town in the country," he says. "This industry is not going to walk away without accepting responsibility for its past actions," and "being ordered, or agreeing, to take corrective action in the future." Plaintiffs' lead counsel Bourke G. Spellacy, of the Hartford firm of Updike, Kelly & Spellacy, says he will file an appeal by the end of the month, and will seek a hearing before the Connecticut Supreme Court. "This is round one of what I expect will be a long fight," he says. (The Connecticut Law Tribune December 27, 1999) HMO: 5th Cir Says ERISA Doesn’t Require Disclosure of Physician Schemes ---------------------------------------------------------------------- The Court of Appeals for the Fifth Circuit affirmed on January 4 the dismissal of a case alleging that several Texas HMOs, including Aetna U.S. Healthcare, violated ERISA by allegedly failing to disclose their financial arrangements with the physicians in their networks. In his opinion in Ehlmann vs. Kaiser et al, Chief Judge Reynaldo G. Gasza wrote that the lower court "correctly dismissed Ehlmann's claim for the breach of a duty to disclose [physician compensation schemes] because ERISA imposes no such duty." David F. Simon, Chief Legal Officer of Aetna U.S. Healthcare, said, "This federal appellate decision rejecting a failure to disclose theory is yet another blow to the viability of the recent class actions brought against HMOs." (Source: Aetna U.S. Healthcare) HMO: Jury Issues Award of $80M; Case May Form Crux for Fed Class Action ----------------------------------------------------------------------- HMO giant Humana must pay more than $ 79.6 million for cutting off special care coverage to a 9-year-old girl suffering from cerebral palsy, a jury ruled on January 4 in one of the largest verdicts in Palm Beach County history. The ruling could have national implications because the information gathered in this case is the crux for a federal lawsuit filed in Miami against Humana that is under consideration for class-action certification. The suit filed on the behalf of two Riviera Beach police officers, a West Palm Beach landscaper and two Texas residents alleges the company misrepresents its coverage and engages in racketeering. "This case was basically contempt of court, and the punitive award imposed by the jury reflects the increasing outrage of Americans who are denied care by their HMOs," said Ralph Nader, head of watchdog group Public Citizen and a frequent critic of managed care. A Palm Beach County judge had entered a default judgment against Humana Health Insurance Co. in March after the company repeatedly failed to turn over documents requested by the legal team for the family of Loxahatchee girl Caitlyn Chipps. Circuit Court Judge James T. Carlisle ruled that Humana falsely represented coverage to the Chipps family and intentionally cut off Caitlyn's special care coverage with disregard for her well being, and that this wasn't an isolated case. The default judgment was upheld by the 4th District Court of Appeal and was denied a hearing by the Florida Supreme Court. The only thing left for a jury to decide was how much to award the Chipps family in compensatory and punitive damages based on a three-week penalty hearing and Carlisle's decision. After two days of tense deliberations with the six jurors bitterly split for most of that time, the jury decided to award the Chipps $ 1,115,052 in compensatory damages and $ 78.5 million in punitive damages. The Chipps' attorneys had been asking for a verdict of more than $ 100 million to send a message to Humana, which they told jurors had at least $ 1.7 billion in net assets. But juror Michael David Anderson, 32, said he and another juror only wanted to award the Chipps family between $ 1 million and $ 2 million in compensatory damages. The other four jurors, who were pushing for a more than $ 100 million verdict, wouldn't listen. Humana spokeswoman Pam Gadinsky said an appeal of the verdict is imminent. Glenn Waldman, Humana's lead attorney, had argued that the company with more than 400,000 clients in Florida made mistakes in cutting off special care coverage to Caitlyn and a handful of other children. Those mistakes didn't qualify as a pattern of conduct, he maintained. He argued that Humana should only have been accountable for the $ 14,000 in actual damages. Mark Chipps, a deputy with the Palm Beach County Sheriff's Office, filed suit against Humana in 1996 after the company took Caitlyn off a special case management plan and moved her to regular coverage. He said that when the Sheriff's Office was switched to Humana coverage in 1994, he had been assured that Caitlyn would receive the same level of coverage as her previous plan. The change left the Chipps family picking up the tab for then-5-year-old Caitlyn's speech, occupational and physical therapy, Mark Chipps said. Even therapy claims that fell under Humana's regular coverage were being denied, Leopold argued. Leopold said that during the course of preparing for the trial, he uncovered evidence of at least 100 catastrophically ill children who had been taken off Humana's special care coverage and moved to regular coverage. Among those children was an 8-year-old boy with brain damage and a blind, quadriplegic 7-year-old boy. "In Louisville, Ky., the word came from corporate to weed out the pediatric patients so they could save more money on the more acutely injured catastrophically ill," Leopold said. "You can't do that to people. You can't treat children like that who are already catastrophically ill." Leopold said he hopes the jury award causes other HMOs to realize that they should be watching out for their clients' interests, rather than solely their own. Leopold said that at Carlisle's last hearing on the default judgment, Humana took the case so lightly that the attorneys attended by phone. But Nader predicted abuses by managed care organizations would continue "unless legislatures start doing their jobs and stop the divisiveness about reforming HMOs." Susan Pisano, spokeswoman for the American Association of Health Plans, said she fears lawyers are beginning to capitalize on anti-HMO sentiment. Juror Anderson said there was a lot of anger in the jury room. Anderson said he fears the verdict's outcome. (Sun-Sentinel (Fort Lauderdale, FL) January 5, 2000) PAYDAY LENDERS: 7th Cir Says Postdated Check Can Be Security under TILA ---------------------------------------------------------------------- Because the "economic substance" of post-dated checks provide remedies to creditors not available under the terms of payday loan agreements, they can serve as collateral or security for such loans under the Truth in Lending Act. Smith v. Cash Store Management Inc., et al., No. 99-2472 (7th Cir. 10/27/99). Valerie Smith obtained eight payday loans from The Cash Store Management Inc. by providing Cash Store with post-dated checks. Each of her loan agreements read, "Security: Your post-dated check is security for this loan" and listed on the front, in bold type, the finance charge and annual percentage rate. Upon making the loans to Smith, Cash Store stapled a receipt to the top, left-hand corner of each loan document. In red ink, the receipt used the terms "deferred deposit extension fee" or "deferred deposit check fee" instead of the term "finance charge." Smith filed a class action under the TILA alleging that the receipts obscured the required disclosures and failed to report the finance charge and APR in conspicuous terms. She further contended that Cash Store's loan agreements failed to accurately disclose its security interest in violation of the TILA because a post-dated check cannot create a security interest in Illinois. Trial Court's Decision The U.S. District Court for the Northern District of Illinois dismissed Smith's complaint for failure to state a claim. It held that Cash Store's stapling the receipts to the front of the loan documents "could not reasonably confuse or mislead Smith as to the terms of the loan." Further, the District Court ruled that payday lenders may take post-dated checks as security because the checks only give the lenders certain rights to the funds in the borrowers' checking account. (See Consumer Financial Services Law Report, July 23, 1999, p. 10). Receipt Smith appealed the decision to the 7th U.S. Circuit Court of Appeals. The 7th Circuit first addressed Smith's contention that the receipts obscured the required federal disclosures and characterized the finance charges in a misleading way. Upon review of the record, the TILA, and Regulation Z, the 7th Circuit concluded that "Whether or not Cash Store's practices run afoul of Regulation Z is a factual issue, and the [D]istrict [C]ourt therefore erred in dismissing the receipt of claims under Rule 12(b)(6)." In reversing this portion of the District Court's ruling, the Circuit Court noted that its holding did not preclude the defendant from arguing in a motion for summary judgment that Smith cannot prove her TILA claim. Security Interest Next, the 7th Circuit considered the issue of whether the Cash Store's statement, "Your post-dated check is security for this loan" was a lawful disclosure. To answer this question, said the court, it had to determine if the post-dated checks could serve as loan collateral. Regulation Z defines security as "an interest in property that secures performance of a consumer credit obligation and that is recognized by state or federal law." Illinois law defines it as "an interest in personal property ... which secures payment or performance of an obligation." Using these definitions, Smith argued to the 7th Circuit that the post-dated checks could not serve as collateral or security because the negotiable instruments were merely additional evidence of her indebtedness under the loan agreements. She contended the checks were only a second promise to repay the loans, identical to the first promise. Although the court agreed with Smith that the post-dated checks did not operate as an assignment of her bank account and had no intrinsic value, it was not persuaded that the checks gave Cash Store no interest that it did not already have. Writing for the 7th Circuit, Judge Flaum opined that the checks had extrinsic legal value in that they gave the holder rights and remedies not available under the payday loan agreements. Judge Flaum explained that the post-dated checks allowed Cash Store to negotiate them to someone else, present the checks for payment or pursue bad check litigation. These options created some value in the instruments and allowed them to serve as collateral and security for the loans. Thus, the 7th Circuit affirmed the District Court's dismissal of the security interest claim. Judge Daniel Manion dissented from the 7th Circuit's decision to reverse the lower court's decision on Smith's receipt claim. Daniel Edelman of Edelman, Combs & Latturner in Chicago represented the plaintiff. Paul E. Greenwalt III and Paula J. Morency of Schiff, Hardin & Waite in Chicago represented the defendants. (Consumer Financial Services Law Report December 29, 1999) PONZI SCHEME: Kutak Rock Says Schools Suit Takes Aim at Its Deep Pocket ----------------------------------------------------------------------- The only reason school districts sued Kutak Rock and its attorneys over an alleged Ponzi scheme orchestrated by money manager John Gardner Black is that the law firm is "a convenient deep pocket," Kutak's lawyers recently told a state court in Pennsylvania. The Daniel Boone Area School District filed suit last September against Kutak and its attorneys -- including Bruce M. Serchuk, a former Kutak lawyer who is now the senior technical attorney for the Internal Revenue Service's tax-exempt bond branch. The suit claims that Kutak and Serchuk set up Devon Capital Management, Inc. and Financial Management Services Inc. for Black and then conspired with him to use the two companies to defraud investors. It seeks class action status to represent not just Daniel Boone, but about 49 other school districts in Pennsylvania and Maryland that lost a total of about $70 million from investments managed by Black and the companies. But in a 28-page response filed Dec. 22 with the court in Blair County, Pa., Kutak's lawyers claim the charges are completely meritless and urge the court to dismiss them. The school districts, they say, produced no evidence that Kutak gave misleading or false information to any of the school districts. In addition, they maintain the suit's charges are not valid under state law. "Should it become necessary, Kutak Rock will welcome the opportunity to refute plaintiff's unsubstantiated and baseless factual assertions in their entirety," the firm said. Meanwhile in related litigation, Kutak moved a malpractice suit filed against it, its lawyers, and Serchuk out of bankruptcy court and into a federal court in Pittsburgh. Carl P. Izzo Jr., the court-appointed bankruptcy trustee responsible for collecting and distributing to investors the assets from the now defunct Devon and FMS, filed the suit against the firm in November. F. Joseph Warin, a lawyer with Gibson, Dunn & Crutcher here, which is representing Kutak and its co-defendants, said that a federal court is the "more appropriate" venue for the suit. But lawyers for Izzo with Fox, Rothschild, O'Brien & Frankel in Lansdale, Pa., said they will try to get the suit moved back to bankruptcy court. In its response to the Daniel Boone suit, Kutak said the complaint "repeatedly mischaracterizes and misrepresents the manner in which Kutak Rock represented these entities." The key factual allegations in the suit -- that Kutak prepared documents used to defraud investors, that it opined the collateralized investment agreement program set up by Black was legal, and that it was aware of a collateral shortfall -- "are based on nothing more than 'information and belief,'" the firm told the court. The school district knows the allegations are not accurate because none of the 80 depositions taken in related cases supports them, lawyers for Kutak said. "Kutak submits that it was sued by this class of school districts for no reason other than that it is perceived to be a convenient 'deep pocket,'" the lawyers said. The suit fails to show an attorney-client or fiduciary relationship between Kutak and the school districts, Kutak said. There is no evidence that Kutak gave any legal advice to the school districts, or that it signed or endorsed any of the documents at issue in the case, it said. In addition, the suit fails to show that Kutak had a legal obligation or fiduciary duty to disclose any information to the school districts, it said. While Kutak's payment for its services was based in part on the business done by Black's companies, the firm's lawyers told the court, "No principle of law supports the claim that a law firm paid for its professional services from a percentage of funds under management stands in a 'fiduciary relationship' to third parties," the firm said. Even if some of the documents at issue can be attributed to Kutak, the negligence charges must be dismissed because the suit does not allege that the school districts read, reviewed, or relied on the documents, Kutak said. Further, there is no evidence that any of Kutak's actions contributed to the investment decisions made by Devon or FMS or to the losses suffered by investors, it said. The charges that Kutak and Serchuk aided and abetted fraud must be dismissed because they are not recognized as causes of action under Pennsylvania law, the law firm said in its filing. Kutak is not liable for state securities law violations because it played no part in offering or selling securities, it added. Lawyers for the school district have 30 days to respond to Kutak's filing. (The Bond Buyer January 5, 2000) SKECHERS USA: Announces Filing of Securities Suit in CA ------------------------------------------------------- SKECHERS USA, Inc. (NYSE:SKX), announced on January 5 that a class action lawsuit has been filed in federal district court in Los Angeles, California on behalf of persons who purchased securities of SKECHERS in the Company's June 9, 1999 initial public offering or thereafter on the open market prior to June 15, 1999. The lawsuit alleges violations of the federal securities laws and names as defendants SKECHERS and two of its officers and directors. The lawsuit also names as defendants the lead underwriters involved in the initial public offering. The lawsuit alleges that SKECHERS failed to disclose a threatened lawsuit prior to the initial public offering. Although the lawsuit has been filed, it has not yet been served on SKECHERS. After reviewing the complaint, SKECHERS vehemently denies the allegations and believes that all material disclosures required by the federal securities laws were made on a timely basis. Robert Greenberg, Chairman and CEO of SKECHERS, commented that, "The lawsuit is completely without merit. The Company will vigorously defend itself and we are confident that our action will be completely vindicated by the courts." SKECHERS, based in Manhattan Beach, California, designs, develops and markets branded footwear for men, women and children sold to department stores and specialty retailers, as well as directly to consumers through 42 company-owned SKECHERS retail stores, mail order and electronic commerce. The company sells its products in more than 100 countries and territories throughout the world. SKECHERS USA: Kirby McInerney Files Securities Suit in CA --------------------------------------------------------- The following is an announcement by the law firm of Kirby McInerney & Squire, LLP on January 5, 2000: PLEASE TAKE NOTICE THAT a class action lawsuit has been commenced in the United States District Court for the Central District of California on behalf of all purchasers of Skechers U.S.A., Inc. common stock in the June 9, 1999 public offering for those securities, or thereafter, in the open market on or before June 15, 1999 (the "Class Period"). The action asserts claims against Skechers U.S.A., Inc. (NYSE: SKX), certain of its directors and officers, and certain securities brokerage firms that served as underwriters for the June 9, 1999 offering. The action asserts claims for violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and rule 10b-5 of the Securities and Exchange Commission, as well as sections 11, 12(2) and 15 of the Securities Act of 1933, by reason of material misrepresentations and omissions during the Class Period concerning claims asserted against the Company by a competitor. Contact: Ira M. Press, Esq. Mark Strauss, Esq. Danielle Feman, Paralegal KIRBY McINERNEY & SQUIRE, LLP 830 Third Avenue 10th Floor New York, New York 10022 Telephone: (212) 317-2300 or Toll Free (888) 529-4787 E-Mail: dfeman@kmslaw.com USAIR 427: Il. Case Settled in Nov. Hours before Trial; 5 of 18 Remain ---------------------------------------------------------------------- Since USAir Flight 427 crashed outside Pittsburgh on Sept. 8, 1994, Demetrio and a cadre of lawyers for families of the dead had spent years building cases against the airline and jet manufacturer Boeing. They hired economists to turn the life of each victim into dollars and cents. They bought the tail of a Boeing 737 for a courtroom exhibit. One lawyer even spent $ 70,000 for a jet part he could find only on a scrap heap in Peru. And in perhaps the most gruesome exercise, the lawyers tried to assess what passengers experienced during those final 21 seconds -- from the time the 737's rudder likely jammed and the jet rolled onto its back until it barreled nose-first into the ground, killing all 132 aboard. Someone, they vowed, would pay for the lives that were lost. Like more than 90% of lawsuits filed after commercial jet crashes, Demetrio's case would be settled before a jury heard the story. Only hours before a trial was to begin in Illinois state court in November, the family of Marshall Berkman, a Pennyslvania manufacturing executive, agreed to the largest settlement ever paid to the estate of a commercial airline crash victim: $ 25.2 million. The Settlement By November, more than five years had passed since the crash of Flight 427. Donna Rae Peters had settled her suit confidentially more than two years earlier. Of the 18 lawsuits handled in Illinois state court, only five remained. With their liability trial set to begin in those cases, Lebovitz and Chicago lawyer Michael Demetrio, Thomas' brother, hatched a grand plan. If it worked, they hoped it would bring the remaining cases to a quick and lucrative close. They wanted to erect the tail of a 737, nearly three stories tall, outside the courthouse in Chicago. Beside it, weather and judge permitting, they would present their opening statement, demonstrating to jurors why they believed the tail's rudder malfunctioned and brought the jet down. Thomas Demetrio doubted the judge would allow it. Too many distractions. He would ask nonetheless, "just to tweak" lawyers for US Airways and Boeing. But only hours before the trial was to begin, Lebovitz, the Demetrio brothers and other lawyers settled the state court cases, including the record Berkman deal. The liability case they had spent years preparing would never be heard. Like most cases that end in settlements, much about the negotiations is a closely guarded secret. Lebovitz says only that Boeing and US Airways pushed for settlement talks the week of the trial. But Thomas Demetrio says he always believed a jury would hear his case. In part, he says, that was because the first settlement offer he received in the Berkman case didn't come until the week before the trial was to start. It was for $ 7.5 million, and Demetrio's answer was terse. "I said, 'It's rejected,' and they then asked, 'Is there going to be a counter)?' " No, Demetrio says he told defense lawyers. Early the next week -- the week of trial Chief Judge Donald O'Connell began supervising the settlement talks. Only then, Demetrio says, did the discussions become serious. For 10 hours over two days, O'Connell explored settlement options in private conferences with the lawyers. If $ 20 million were offered, would it be accepted? he asked Demetrio. No, Demetrio said. He told the judge he needed at least $ 25 million, a sum Demetrio says now that he never expected, "not in a hundred years." Finally, less than 24 hours before trial, the defendants made their final offer: $ 25.2 million. Demetrio wasted no time settling. The Berkman case was by far the largest settlement among the lawsuits. Although other cases settled for between $ 5 million and $ 10 million, one lawyer estimates that most families received between $ 1.25 million and $ 2 million. Demetrio and Lebovitz think the crash of EgyptAir Flight 990 three days earlier may have helped prompt their settlements. Phil Condit, Boeing's chairman and CEO, says the crash had no impact. But the lawyers reason that Boeing wanted to avoid the publicity a trial would generate, especially so soon after another deadly accident. Who paid what share of the settlement also is unknown, even to lawyers for the families. Settlement checks often are drawn on nondescript accounts maintained by insurance underwriters representing the defendants. In part, that's because neither the airline nor the jet builder wants it publicly known what amount of blame it has conceded. Of the 84 suits from the crash of Flight 427, four -- all federal court cases in Pennsylvania -- remain unsettled. No trial date has been set for those suits. Defense lawyers routinely blame lawyers for the families for prolonging the suits. And families' lawyers admit that waiting until just before trial usually ensures top-dollar settlements. But to their clients, they say, the lawsuits are more about justice than money. "The lawsuit can't undo the damage," Lebovitz says. "But it can provide hope that someone else will not have to suffer the same loss, the same terror, the same misfortune these families did." Now, with 217 dead in the Oct. 31 crash of EgyptAir Flight 990, lawyers have begun preparing scores of new lawsuits. As the litigation from Flight 427 demonstrates, the process will be haunting and complex -- and certain to last for years. Y2K LITIGATION: MI School District Sues to Recover Costs from MASB-SEG ---------------------------------------------------------------------- Royal Oak School District v. MASB-SEG Property/Casualty Pool Inc. A Michigan school district has filed suit on behalf of 400 districts seeking coverage for Year 2000 remediation expenses under a commercial general liability (CGL) policy issued by MASB-SEG Property/Casualty Pool Inc. (School District of the City of Royal Oak v. MASB-SEG Property/Casualty Pool Inc. (MI Cir. Ct., Oakland Cty., complaint filed Nov. 18, 1999)). The School District of the City of Royal Oak claims coverage under the terms of a CGL policy issued by MASB covering July 1, 1998, through July 1, 1999, and July 1, 1999, through July 1, 2000. The complaint seeks certification of a class consisting of about 400 districts in Michigan that purchased coverage under the same CGL policy. According to the complaint, Royal Oak has incurred substantial expenses for Y2K remediation of information technology systems, embedded chips, HVAC control systems, telephone systems, and other equipment. The district alleges the MASB policy provides coverage for loss of "computer programs and other magnetic recording, or storage media for electronic data processing to reproduce, replace, or restore" such programs and records. According to the complaint, an exclusion for mechanical failure, faulty construction, or design error was specifically marked as "deleted." MASB has tried to rely on a "Y2K exclusion" that was mailed to Royal Oak after the most recent policy took effect and did not include a reduction in premium, according to the complaint. Royal Oak notified the insurer of the claim on Oct. 28, 1999. The complaint contains three counts: breach of contract, declaratory judgment, injunctive relief, and injunctive relief under the Michigan Consumer Protection Act. The complaint was filed by Dale R. Burmeister of Harvey Kruse, P.C. in Troy, MI, and Phillip J. Goodman of Phillip J. Goodman, P.C., in Birmingham, MI. (Computer & Online Industry Litigation Reporter December 21, 1999) ********* S U B S C R I P T I O N I N F O R M A T I O N Class Action Reporter is a daily newsletter, co-published by Bankruptcy Creditors' Service, Inc., Princeton, NJ, and Beard Group, Inc., Washington, DC. Theresa Cheuk and Peter A. Chapman, editors. Copyright 1999. All rights reserved. ISSN 1525-2272. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The CAR subscription rate is $575 for six months delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are $25 each. For subscription information, contact Christopher Beard at 301/951-6400. * * * End of Transmission * * *