Honda Class Action Defense Cases-Vaughn v. American Honda: Fifth Circuit Rejects Arguments By Parties To Class Action And Reduces Rule 7 Bond Required To Appeal Class Action Settlement From $150,000 To $1,000

Dec 26, 2007 | By: Michael J. Hassen

District Court Abused Discretion by Requiring Any Objector to Class Action Settlement Post $150,000 Bond in Order to Appeal Approval of Class Action Settlement Fifth Circuit Holds

Plaintiffs filed a class action against American Honda Motor alleging that the odometers in certain vehicles overstated the actual mileage. Vaughn v. American Honda Motor Co., Inc., 507 F.3d 295, 297 (5th Cir. 2007). Eventually the parties agreed upon a proposed settlement of the class action, including certification of a settlement class: “The proposed settlement provides some class members various forms of relief, including warranty extensions, lease extensions, lease refunds, and repair reimbursements.” Id. The class action settlement was estimated to cost Honda $115 million, but “[the] value on the open market would be approximately $244 million.” Id. Among the terms of the class action settlement was the requirement that Honda pay $10 million in lease refunds, but did not provide any compensation to class members who had sold or traded their vehicle, id., at 297-98. Various class members objected to the proposed settlement, including one individual (Hawthorn) who had sold his vehicle; the district court overruled the objection and required any objector post a $150,000 bond as part of any appeal. Id., at 297. The objector asked the Circuit Court to reduce the amount of the bond to $1,000.00, and the Fifth Circuit agreed.

In opposing the class action settlement, “Hawthorn specifically objected that the settlement provides no compensation to him or other class members who sold or traded their vehicles. He contends that the settlement should include amounts for ‘diminution in value,’ or value lost on a sale or trade-in due to inflated odometer readings.” Vaughn, at 298. The federal court disagreed and overruled the objection, id. Apparently reflecting the frustration experienced by many class action plaintiff lawyers to the role played by professional objectors, class counsel asked the district court to require an appeal bond under FRAP 7 be posted by any objector who filed a notice of appeal. Id. Based on the “detrimental impact of an appeal as to the entire class,” and the court’s “opinion” that any objector’s appeal will carry with it the “significant possibility” that any appeal will be subject to summary denial and an award of attorney fees and costs under FRAP 38, the district court granted the motion and set the appeal bond at $150,000. Id.

The Fifth Circuit reversed. First, the Circuit Court explained that an appeal bond under FRAP 7 may not be used “as a surrogate for a supersedeas bond” under FRAP 8. Vaughn, at 298-99. The Court also believed that the costs to the class associated with any delays in implementation of the class action settlement “are adequately captured by the settlement.” Id., at 299. Under the terms negotiated by the parties, the class does not receive the benefits of the time-value of money pending final approval of the settlement of the class action lawsuit; to the extent the district court believed the class should receive some such benefit, “it was in error, assuming, without deciding, that interest accrued pending appeal can appropriately be included as part of a bond for costs on appeal.” Id.

The Circuit Court also held that the district court abused its discretion in requiring a $150,000 appeal bond based on its belief that any appeal would fall within the scope of FRAP 38. Vaughn, at 299. The rule permits an appellate court to award attorney fees and costs if the appeal is deemed to have been frivolous. However, “[t]here is no provision in the rules of procedure for a district court to predict that an appellate court will find an appeal frivolous and to set a bond for costs on appeal based on an estimate of what ‘just damages’ and costs the appellate court might award.” Id. It is for the appellate court to determine whether an appeal is frivolous, not the district court, id. In sum, the erred in “us[ing] Rule 7 in conjunction with Rule 38 as a vehicle to erect a barrier to Hawthorn’s appeal in the form of a $150,000 bond for costs on appeal.” Id.

With respect to the amount of an appropriate appeal bond, the objector asked the Fifth Circuit to reduce the bond to $1,000. Vaughn, at 300. The Circuit Court appreciated the parties’ concerns, explaining at page 300: “We recognize that there are competing, significant interests when an objector appeals a proposed class settlement. In some circumstances objectors may use an appeal as a means of leveraging compensation for themselves or their counsel. The detriment to class members can be substantial. On the other hand, imposing too great a burden on an objector’s right to appeal may discourage meritorious appeals or tend to insulate a district court’s judgment in approving a class settlement from appellate review. (Footnote omitted.) Accordingly, the Court granted the motion and reduced the bond amount to $1,000. Id.

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