Magazine article American Banker

Weekly Advisers: For Banks, Class Actions Have Become a Fact of Life

Magazine article American Banker

Weekly Advisers: For Banks, Class Actions Have Become a Fact of Life

Article excerpt

One feature of the legal system that often affects banks is the class action.

Class actions let people sue as a class if all have the same claim, and the court awards the lawyers their fee from the defendant as part of the settlement.

An offshoot of the class action is the derivative suit, in which the defendant, if it loses, is forced to reimburse a company for its losses rather than pay individual claimants. Again, legal fees are paid by the defendant, so those who sue on behalf of their company are not deterred by cost.

Recently the number of class actions has been soaring. And in each case, the defendant faces losing both a lot of money and its good reputation.

Community bankers in particular say class actions -- often related to the Community Reinvestment Act -- take up an inordinate amount of their time.

Why are there so many? One reason is that we have so many lawyers. By gambling on a legal action, they could win a big award. And the worst they can do is waste their time. Rarely does a court impose fines or assess court fees on a lawyer for filing a frivolous suit.

So lawyers have worked with clients to develop cases that range from serious infringements of customer and stockholder rights to the tiniest examples of bank mistakes, like printing information incorrectly on a credit card description letter.

How can bankers handle the problem of excess litigation?

First, as attorney Bernard J. Karol of the New York firm of Carter, Ledyard and Milburn pointed out in this newspaper recently, managers need to anticipate that disappointed customers and investors may sue. …

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