The U.S. Court of Appeals for the Fifth Circuit recently held that claims of an opt-out class in a previously-settled California state class action that released any existing federal Fair Labor Standards Act claims by mortgage loan officers against lenders that failed to pay them overtime were precluded by res judicata because the previous opt-out state court settlement met due process requirements, and the FLSA did not expressly or impliedly create an exception to the Full Faith and Credit Act, 28 U.S.C. § 1738.

A copy of the opinion in Raymond Richardson, et al v. Wells Fargo Bank, N.A., et al is available at: Link to Opinion.

In 2005, a group of mortgage loan officers sued two national banks and their affiliated mortgage companies in California state court, alleging that the loan offices were misclassified as exempt employees and not paid overtime, in alleged violation of the FLSA. The case was removed to federal court and the parties reached a settlement during mediation in February 2011.

In March 2011, another lawsuit (the “Lofton” case) was filed in California state court raising state law claims based on the same failure to pay overtime due to misclassification. One of the state law claims relied on alleged FLSA violations as its basis.

In April 2011, the Lofton court preliminarily approved a $19 million settlement. The settlement process involved the sending of notices to class members, who had to either opt out or in by completing and returning the appropriate form.

The terms of the Lofton settlement released any claims existing under the FLSA, and the Lofton court granted final approval of the settlement in July 2011, finding that class members “who have not opted out of the Settlement are bound by the release.” The judgment was not appealed.

In the federal case, one of the lenders moved for summary judgment, arguing that the plaintiffs “were precluded by the Lofton settlement because none of [them] had opted out.”

The trial court granted the lender’s motion for summary judgment, holding that “the waiver of FLSA claims as part of the Lofton settlement has res judicata effect even though it was accomplished through an opt out class action.” The trial court also held “that there was no due process violation that would preclude the application of res judicata because the interests of the Lofton class representative and class counsel were always aligned with the interests of the California Plaintiffs…” and, in addition, the Lofton judgment was final as of July 27, 2011 for purposes of res judicata. The plaintiffs appealed.

On appeal, the Fifth Circuit began by explaining that “a plaintiff asserting that preclusion should not apply because the prior class action settlement violated due process has the burden of proving a due process violation.”

The Court then turned to address “the question of whether the Lofton settlement — in which a state court approved an opt out class action settlement that released FLSA claims — can preclude the California Plaintiff’s FLSA claims at issue in this appeal.”

The Court began its analysis with the federal Full Faith and Credit Act, 28 U.S.C. §1738, which “mandates that the ‘judicial proceedings’ of any State ‘shall have the same full faith and credit in every court within the United States … as they have by law or usage in the courts of such State … from which they are taken.”

The Fifth Circuit found “instructive” the Supreme Court of the United States’ two-part test in Matsushita Elec. Indus. Co. v. Epstein: “(1) whether the ‘state law indicates that the particular claim or issue would be barred from litigation in a court of that state,’ and (2) whether the FLSA expressly or impliedly creates an exception to the Full Faith and Credit Act such that we should not give preclusive to the judgment of the state court.”

Addressing the first prong of the Matsushita test, the Fifth Circuit reasoned that “[u]nder California law, ‘res judicata applies if (1) the decision in the prior proceeding is final and on the merits; (2) the present proceeding is on the same cause of action as the prior proceeding; and (3) the parties in the present proceeding or parties in privity with them were parties to the prior proceeding.’”

The Court pointed out that as part of the settlement process in Lofton, the notice warned class members that if they did not opt out by a date certain, they would be bound by the settlement. “Critically, the California Plaintiffs did not opt out.”

Because the Lofton court found that the notice process satisfied due process requirements, the settlement terms were “fair, reasonable and adequate,” and then gave final approval to the settlement, the Court concluded that “standard California preclusion rules would bar the FLSA claims raised in the instant action unless the FLSA creates an exception to how preclusion rules apply.”

The plaintiffs argued that “FLSA claims released as part of an opt out class action settlement can never be given preclusive effect against absent class members (unless they opt in) because they are not parties, or in privity with a party, with respect to the release of FLSA claims… [B]ecause an FLSA collective action requires that a party opt in under 29 U.S.C. § 216(b) in order to be bound by the collective action, they never became parties to the release of their FLSA claims given that they did not opt in.”

In addition, the plaintiffs argued that the Lofton settlement should not have preclusive effect because it was not a final judgment given pending appeals related to the settlement and the plaintiffs in the instant case who did not submit claim forms in Lofton were not precluded because they did not receive any money in return for releasing their FLSA claims.

The Fifth Circuit examined the release of FLSA claims in the Lofton settlement, rejecting the plaintiffs’ argument that “because they did not opt into the Lofton settlement, they did not become parties to the Lofton settlement with respect to releasing their FLSA claims.”

The Court reasoned that while “[t]he California Plaintiffs would not have been parties without opting in had Lofton been an FLSA collective action … that was not the case. Instead, Lofton asserted state causes of action in an opt out class action, and the California Plaintiffs became parties to the Lofton settlement because they did not opt out. Thus, they became bound by the settlement terms, including the release of their FLSA claims.”

The Fifth Circuit also rejected the plaintiffs’ argument that “the FLSA creates an exception to how preclusion rules should apply,” concluding that “the FLSA did not create a special exception to the enforceability of judicially approved settlement agreements.”

Turning to the finality of the Lofton settlement, the Court rejected the plaintiffs’ argument that the Lofton judgment was not final because an appeal was pending because “the relevant appeal for preclusion purposes would have been an appeal from the judgment entering the Lofton settlement, which did not occur. Because the judgment became final in 2011 when the time to appeal expired, “[t]he possibility that some later action may be taken to vacate or affect that judgment after the time to appeal has expired does not alter its finality.”

The Fifth Circuit then addressed the plaintiffs who did not file a claim form in Lofton, finding that they “cannot avoid the preclusive effect of their failure to opt out of the Lofton settlement simply because they did not receive a payment.” It distinguished its own 2015 decision in Bodle v. TXL Mortgage Corp., relied upon by the plaintiffs, because “that case does not stand for the proposition that a class member in a prior settlement who failed to return a claim form can avoid the preclusive effects of the settlement as if that class member had opted out.” Thus, the Lofton settlement precluded even the claims of the plaintiffs who did not receive any payment from the Lofton settlement.

The Court concluded that since “the FLSA does not create an exception to how California preclusion law would treat the enforcement of an opt out class action settlement, and the Lofton settlement was a final judgment for preclusion purposes[,] … the California Plaintiffs’ FLSA claims in the instant appeal would be precluded by the Lofton settlement under California law.”

Having found that the Lofton settlement had preclusive effect under California law, the Fifth Circuit addressed the second prong of the Supreme Court’s test in Matsushita: “whether the FLSA creates an exception to the Full Faith and Credit Act, 28 U.S.C. § 1738, such that preclusive effect should not be granted….”

The Court reasoned that since the FLSA does not have any language addressing its relationship to the Full Faith and Credit Act “or the preclusive effect of related state court proceedings[,] … we must determine whether the FLSA creates an implied exception to § 1738 because there is an ‘irreconcilable conflict’ between the two statutes … while keeping in mind that the Supreme Court has ‘seldom, if ever, held that a federal statute impliedly repealed § 1738.”

Because the Lofton class action did not assert any claims under the FLSA, the Fifth Circuit concluded that “the FLSA does not create an implied exception to § 1738. There is no irreconcilable conflict between allowing preclusive effect to a class action settlement that released FLSA claims and the FLSA’s mandate under § 216(b) that FLSA claims cannot be asserted using an opt out class action.”

The Court then turned to the plaintiffs’ final argument, that even if the Lofton settlement precluded their FLSA claims, the district court erred by entering summary judgment because issues of fact existed as to whether the settlement satisfied due process: 1) whether the class had adequate representation by counsel; and 2) whether the notice sent to class members was inadequate.

The Fifth Circuit concluded that neither was enough to find a due process violation, reasoning that the attorneys accused of improperly representing the class were not class counsel in Lofton, “and there is no evidence or allegation that the Lofton class representative or class counsel received a benefit from [the allegedly improper actions of other counsel] separate from the rest of the class.”

In addition, the Court reasoned that the notice sent to the members of the Lofton class “was not constitutionally deficient” because it clearly and specifically released any claims existing under the FLSA and thus was “sufficient to apprise class members that the settlement included the release of FLSA claims.”

Accordingly, the trial court’s judgment was affirmed.