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
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
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"
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
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
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
*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,
or call 800/474-2371.