MARTINSBURG -- Legal firms know that the complexity of class action lawsuits can drag such cases out for years; what may not be so obvious is that once the settlement is reached, an entirely new stage of work begins, one that is also complex and can take a lot of time to resolve.

This post-settlement stage, of course, is the administration stage, and it involves many steps and sub-steps: addresses must be confirmed and corrected, checks cut, member inquiries dealt with, and funds efficiently distributed. Member income must be properly reported to the IRS, Social Security administration, and members' states. Unclaimed funds must be accounted for and remitted to state treasuries; systems must be created and maintained to document and respond to member issues.

This is just some of the work entailed in the administration of a class action -- a blend of customer service, accounting skill, tax expertise and system development. If class actions were golf, administration is your firm's short game. You've brought the ball to the green, now its time to sink that ten-footer. In this article I will share the basic stages of an administration with an eye on perfecting your firm's follow through if you choose to handle these tasks yourself. The following discussion should also help you work more smoothly with any firm you've chosen to handle the class action administration.

At our firm, we break administration down into three distinct time periods: The Pre-Disbursement Period, the Disbursement Period, and the Post-Disbursement Period. Each period consists of different priorities, tasks and responsibilities. Below is a brief summary of each.

Pre-Disbursement Period: This stage lasts from three to nine months, depending on the nature of litigation, number of members, accuracy of contact information, and the quality of the data provided by counsel. Address verification is of utmost importance since it is not unusual for this information to be five to ten years old. This is generally done through a test mailing. If a high percentage of the member's addresses are deemed unreliable, it may be necessary to conduct an address search for missing members.

During this pre-disbursement period, some requirements for member disbursements must be assessed, including the nature of the case, number of members, quality of member data, and tax-reporting requirements for each disbursement. Tax reporting can become quite complicated. If, for example, a settlement entails payments for back wages, interest, and punitive damages each member may have to receive a W-2, 1099-Int, and a 1099-Misc. Member data must also be constructed in a manner that will ensure that it is easily integrated into various forms of accounting software and converted to other platforms, such as a call log to record member inquiries and an address log to track address changes.

Here are a few tips for the pre-disbursement period:
Gather as much information as you can about each class member. If your firm is not in direct contact with members (for example, you are using customer order records), then it is likely a high percentage of addresses will be incorrect. This may require an address search; however, an address search without a universal data point (such as a social security number) can be extremely costly and, ultimately, highly inaccurate.

Record class-member contact data in a searchable, password protected database that can be easily merged with other types of software. The database should also be able save data in both comma and tab delimited formats to facilitate its use with such software.

Be sure to use a separate data field for each bit of member information; first, middle, and last names; street address, city, state and zip code, payout amounts and deductions (such as legal fees). This is important because each piece of data may need to be utilized in a different manner by different software. For example, IRS reporting usually will require first and last name to be entered into separate data fields for electronic filing of 1099s or W2s. If your firm has member's first and last names in one field (such as a single column in an excel spreadsheet), all the names will need to be reentered by hand.

Disbursement Period: During the disbursement period checks, notification letters and reports are printed, collated and mailed to members. This operation is labor intensive, akin to a precision-based assembly operation. For example: consider an employment related class action with 5,000 members, some members receiving two checks (wage and interest) and others three checks (wages, interest and punitive damages). Many class members will require a 1099-int, those with punitive damages a 1099-Misc. W2s must also be included (assuming the IRS has released that year's version; otherwise, they will have to be delivered in a separate mailing). This will require up to seven printing cycles (including a cover letter) of 35,000 pages that must be exactly collated, folded, stuffed, and mailed. A single out-of-place page could ruin the entire batch.

The distribution phase also involves a disbursement that will be drawn from a trust account. The majority of this distribution may be regionally centralized. If your class action is distributing over $100,000 and the majority of recipients live in the same geographical area, be sure to notify banks in that area a few weeks prior to the disbursement so they can increase their reserves and schedule additional staff.

Here are a few more tips to smooth the distribution period of your next class action:

Use a post office box for the distribution. This is especially important if your firm is located in the same geographical area as the distribution.

Use a separate phone line for settlement inquiries and have it adequately staffed. Expect calls from 15 to 20 percent of class members to occur within two weeks of the distribution.
Create systems to track and document all inquiries.

Post-Disbursement Period: The post-disbursement period encompasses the remainder of the administration. Activities during this period include reconciling the trust account(s), reporting taxes, remitting unclaimed property to various state treasuries, and preparing a final accounting report for the Court.

One of the major challenges of the post disbursement period, however, involves the time lag between your firm's reporting taxes, the class members filing their tax returns, and IRS computers picking up on miss-reported income. Eight to twelve months after member's income taxes are filed for the settlement year, members who have underreported income will begin to receive notices and a tax bill from the IRS. For many, this bill may be their first notice that they were a member in a class action. For other, the notification will inform them that the income they reported was incorrect: they reported the check amount and not the 1099 or W2 amount. In either case, calls will be received from confused and often upset class members.

These calls will continue for three, four, even five years after disbursement. System and procedures must be maintained to respond, create statements for the IRS, and steer callers to unclaimed property divisions of various state treasuries.

The post-disbursement period can be best managed by:

Documenting steps and procedures necessary to deal with various inquiries. New employees should be trained in these procedures.
Data must remain accessible on a secure server. Addressing member concerns will require access to gross and net disbursement amounts, outstanding checks at the end of the period, member addresses, and a listing of state treasuries to whom unclaimed amounts were remitted.

In this article I have discussed the basic form and challenges of administrating a class action settlement. I did not discuss security procedures as this would require a separate article. If you choose to administrate your own class action, the tips provided will help the process run more smoothly. If, however, you decide that administration may not be the best use of your firm's resources you should now be in a better position to interview administration candidates.

Hersh is the owner of HBS Class Action Administration based in Martinsburg. HBS Class Action Administration has managed the disbursement of over $11 Million to over 10,000 class members in 48 states. He can be reached at (304) 267-2594

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