The "Millennium Bug": Financial Class Actions For the New Century

Edward C. Anderson, Esq.*

Almost since the adoption of the current Rules of Civil Procedure in the 1960's, the practices of financial institutions have been the subject of the vast majority of Rule 23 "class" actions. Although a few of the highest profile "class" claims have involved mass torts or medical devices, the day-to-day expenses and risks of mundane Rule 23 claims have been borne by these businesses. Claims related to financial transactions are ideally suited for Rule 23 treatment, largely because of their intended uniformity. Moreover, Plaintiffs' class action counsel determined early on that, in addition to claims that were easily "bundled," more importantly, the defendants were able to pay.

As lawyers became more familiar with the economic advantages of the new Rules, these lawsuits proliferated in the late 1970's, through the 1980's, and into the 1990's. Because of the open-ended nature of "notice pleading," the imposed cost of unlimited "discovery" and the unbounded risk inherent in these actions, almost none are litigated to completion. Unless the motion for consolidation or "class treatment" can be defeated, these actions invariably settle, most often with substantial fees for the plaintiffs' counsel.

These claims are particularly susceptible to Rule 23 treatment because financial institutions conduct a large number of essentially identical transactions, thereby guaranteeing the "typicality" of each transaction and "representative" nature of every customer, thus meeting the base requirements of Rule 23. Many commentators have argued that this consolidation of minor and hyper-technical claims has been among the greatest abuses of Rule 23. Nonetheless, all attempts to significantly modify Rule 23 have been beaten back.

The target defendants have done their best to create practical barriers to these actions, which include exhaustive legal preparation for every type of transaction and computerized calculation and preparation of documents, assuring that each transaction is identical and error-free.

Unfortunately, every step to guarantee uniformity also assures that any technical violation or a claimed technical violation against one customer will be "typical" of similar transactions, and that any such customer will be "representative" of other claimants.

Today, the preparatory legal review has become more and more sophisticated and effective, in large part because of the computerization of the available information. On the other hand, a fatal flaw is about to shake the other pillar of defense against class actions, the computerized nature of transactions themselves.

Because the world of the law operates at such a leisurely pace, attorneys are often not truly cognizant of the speed with which technology has moved in the past two decades. The software underpinnings of computerized financial transactions are essentially only two decades old. Buried in those foundations is a "bug" which will soon create millions of miscalculations and erroneous notices.

For the uninitiated, the "Year 2000" problem relates back to the scarcity of electronic memory, just a few short years ago. To conserve such memory, early programmers used only two digit spaces to designate the year ("97" for "1997"). Calculations related to time periods were made by comparing one of these information blocks to another. Over the course of the few intervening years, new programming languages and computer applications adopted this convention. This idiosyncrasy became more deeply imbedded in all types of programs. Only recently, programmers have realized that when, for the first time, the first two, unrecorded, digits change, many programs would be incapable of distinguishing "2000" from "1900" or, even, "1000". This incapacity will lead to vast arrays of erroneous calculations. Tens of thousands of programmers and information systems specialists are currently engaged in crash programs to identify each such glitch and correct it. Many experts believe that not enough time remains to find and cure all of these programming errors.

This situation virtually assures that, beginning in January 2000, various banks, finance companies, and other financial institutions will send out millions of notices, statements, calculations, and demands that will contain erroneous calculations. Although these institutions will undoubtedly watch these situations closely and act promptly to cure any error that is called to their attention, these notices will technically violate the myriad regulations that apply to such transactions.

While many other businesses will also suffer from these problems, financial institutions have two additional qualifications for massive litigation:

1. A detailed regulatory framework; and,

2. The ability to pay.

These errors by financial institutions will violate: Federal Reserve regulations, licensing standards, state usury codes, consumer protection statutes, rate and fee limitations.

And, of course, each of these transactions will be "typical" and "representative".

How will the legal profession react? According to the ABA Journal, attorneys have recognized this problem and lawyers are interested "in letting you fail, then suing". The ABA and Lloyd's of London predict that, in the U.S., there will be ONE TRILLION DOLLARS of litigation related to "Year 2000" problems. According to the Journal, "the millennium bug will keep legions of lawyers busy for years litigating suits brought...against its victims."

Financial institutions can examine history to determine against whom this Trillion Dollars of litigation will be brought. Certainly there will be a variety of claims about software related to "fitness of purpose", warranties, and actual damages. Most of the "real" claims which arise out of these inadequacies in historical software will be resolved by negotiation, based upon reasonableness, damages, and capacity to pay. Only in the most extreme circumstances will a lawsuit about substantive issues be necessary. Financial institutions may be involved in some of these "real" disputes.

However, more importantly than problems or disputes, lawsuits require cooperative plaintiffs and defendants who can pay. For the attorneys looking for large numbers of malleable plaintiffs and defendants who can pay, the easy claims will be:

Consumer finance regulation violations

TIL and Reg Z errors

RESPA and REG X miscalculations

Usury overcharges

FDCPA timing miscues


These are all violations (no matter how harmless and inadvertent) for which there is no defense and to which are attached various penalties or statutory damages (together with attorneys' fees).

It is possible that financial institutions can invoke indemnity claims, third-party claims, cross-claims, joinder, and a variety of other tools to mitigate "Year 2000" losses. However, in the final analysis, in tens of thousands of cases, a financial institution will stand as the primary defendant, bearing the costs of the costs and risks of the entire lawsuit. And, in the end, most of the cases which make up that One Trillion Dollars worth of lawsuits will settle, transferring billions of dollars from stockholders, borrowers, and depositors to the lawyers.

The opening decade of the new millennium will be a very good one for trial lawyers. How painful it will be for any specific financial institution will depend upon the steps taken in the intervening few months.

*Ed Anderson is a Director of the National Arbitration Forum. The Forum supports the movement of "millennium bug" issues and all other financial claims to arbitration. For more information, contact or call 800/474-2371.


2001 The Federalist Society