Fourth Circuit Outlines Burden of Proof for Objector to Class Action Settlement

In 1988 Trust for Allen Children Dated 8/8/88 v. Banner Life Insurance Co., 2022 WL 774731 (4th Cir. Mar. 15, 2022), the Fourth Circuit identified the correct burden of proof required for a party to object to a proposed class action settlement under Federal Rule of Civil Procedure 23(e)(5).

This case involved a group of life insurance policyholders who alleged the defendant life insurance companies had fraudulently increased their cost-of-insurance.  After many years of “contentious litigation involving protracted discovery,” the parties agreed to a settlement in October 2019.  The district court preliminarily certified the class for settlement purposes and preliminarily approved the settlement agreement.

After notifying class members of the proposed settlement and upcoming final fairness hearing, one policyholder, the Allen Trust, objected.  The Allen Trust argued that, in negotiating the settlement agreement, the plaintiffs did not take into account its type of policy, which differed from plaintiffs’ policies.

The district court granted discovery to determine whether the parties’ settlement agreement considered the Allen Trust’s situation.  At the second fairness hearing, the district court overruled the Allen Trust’s objection, certified the class for purposes of settlement, and approved the settlement.

The Allen Trust appealed and argued, among other things, that the district court had improperly placed the burden on it—rather than on the proponents of the settlement—to show why the court should not approve the settlement.  In response, the settlement parties agreed that they carry the burden to show the settlement is fair, reasonable, and adequate; however, the objector still has the burden to “explain its Objection.”  The Fourth Circuit took this opportunity to “clearly describe[] who bears what burdens when a class member objects to a proposed settlement.”  In so doing, it emphasized three points:

First, the “objector to a class settlement must state the basis for its objection with enough specificity to allow the parties to respond and the court to evaluate the issues at hand.”

Second, it is the parties who are in favor of settlement who bear the burden initially to show the proposed class “meets the Rule 23(a) requirements for certification and that a proposed settlement is fair, reasonable, and adequate.”  They must also show why the objection is wrong.  This showing varies depending on the nature of the objection.  If frivolous, the settlement parties “need very little to overcome” this burden.  But “weightier objections will require more.”

Lastly, the court emphasized that the district court always remains the fiduciary of the class.  It is up to the district court to protect the class’s interest from both parties and counsel who are overeager to settle and from frivolous objectors.  In this capacity, the district court may allow an objector to conduct discovery.

The Fourth Circuit found that the district court’s decision had done those three things.  It required the objector to be specific in its objection “while keeping the ultimate burden on the proponents of the settlement to demonstrate its fairness.”

In this ruling, the Fourth Circuit joins its sister courts in the Third, Fifth, Seventh, Eighth, and Eleventh Circuits who similarly place the burden on the parties moving for approval of the settlement to show it is fair, reasonable, and adequate.[1]  It took the extra step, however, to emphasize that the objector still must state with specificity its grounds for objecting—a requirement “somewhat analogous, though not necessarily identical, to the notice pleading required for complaints.”