"Fairness Is Judged at the Time of Settlement": Sixth Circuit Affirms Arm’s‑Length, Pro Rata Class Settlement and Rejects Unproven “Reverse Auction” Allegations in Michigan Surplus‑Proceeds Takings Litigation

Introduction

In Wayside Church v. Van Buren County, the U.S. Court of Appeals for the Sixth Circuit affirmed a district court’s certification and approval of a global class settlement resolving constitutional takings claims against 43 Michigan counties in the Western District of Michigan. The class action alleged that counties violated the Fifth Amendment by retaining surplus proceeds after tax-foreclosure sales. The case sits at the intersection of a rapidly evolving takings jurisprudence (Rafaeli, Hall, Tyler, and Freed) and class action settlement standards under Federal Rule of Civil Procedure 23.

The opinion—authored by Judge Readler and joined by Judges Kethledge and Bloomekatz—holds that the settlement was fairly negotiated, provides adequate relief, and treats class members equitably. Crucially, the court emphasizes that settlement fairness must be assessed as of the time of agreement, not with the benefit of subsequent favorable legal developments. The court also rejects “reverse auction” collusion theories absent concrete proof, approves inclusion of lienholders within the settlement class, and upholds a lodestar-based fee award with a modest multiplier.

Judge Kethledge concurred, expressing profound concern that the settlement’s terms leave class members with roughly 64 cents on the dollar of surplus principal (with no prejudgment interest and class-paid fees), but he ultimately agreed that the deferential standard of review and the unique posture of the case justified affirmance.

Summary of the Opinion

The Sixth Circuit affirms the district court’s:

Certification of a settlement class under Rule 23(a) (numerosity, commonality, typicality uncontested; adequacy contested and upheld);
Approval of a settlement guaranteeing class members 80% of their surplus proceeds, resulting in an average actual recovery of 64 cents on the dollar after fees and costs;
Rejection of objections alleging collusion and a “reverse auction,” concluding objectors presented speculation rather than concrete evidence;
Approval of a pro rata distribution that treats all class members equitably, despite variations in claim strength;
Inclusion of lienholders as class members because liens confer non-contingent property interests impaired by foreclosure;
Attorney’s fees of $7.8 million, supported by a $6.85 million lodestar and a 1.14 multiplier, as reasonable under both the lodestar and percentage-of-fund perspectives.

In evaluating fairness, the court stresses the settlement’s timing: it was executed in December 2022 amid a live circuit split between Hall (Sixth Circuit) and Tyler (Eighth Circuit), before the Supreme Court granted and decided Tyler (May 2023) and before the Sixth Circuit recognized prejudgment interest as part of compensation in this context (Freed, September 2023). Against litigation risks, delays, and individualized defenses, the settlement fell within the “ballpark of reasonableness.”

Analysis

Precedents Cited and Their Influence

Rafaeli, LLC v. Oakland County, 952 N.W.2d 434 (Mich. 2020): The Michigan Supreme Court held that former owners retain a property interest in surplus proceeds after tax foreclosure and that counties violate the state constitution by keeping those proceeds. Rafaeli provided the state-law backbone for recognizing a property interest that informed the federal takings analysis.
Hall v. Meisner, 51 F.4th 185 (6th Cir. 2022): Hall established that, under the Takings Clause, Michigan counties effect a federal taking by retaining or gifting surplus proceeds after foreclosure, and that state law cannot erase traditionally recognized property rights in surplus proceeds. Hall framed the federal liability landscape favorably for former owners within the Sixth Circuit.
Tyler v. Hennepin County, 143 S. Ct. 1369 (2023): Tyler resolved the Hall–Tyler circuit split in favor of the Sixth Circuit’s approach, confirming that keeping surplus proceeds states a valid federal takings claim. Although Tyler ultimately strengthened the class’s position, the Sixth Circuit here stresses that the settlement predated Tyler’s decision and cannot be judged with hindsight.
Freed v. Thomas, 81 F.4th 655 (6th Cir. 2023): Freed held that former owners may recover interest on surplus proceeds as part of “just compensation.” Importantly, Freed was decided one day after the settlement claims period closed; thus, while dispositive for future cases, it could not govern the fairness assessment of this earlier settlement.
Knick v. Township of Scott, 139 S. Ct. 2162 (2019): Overruling Williamson County, Knick opened the federal courthouse doors to federal takings claims without prior state litigation. This shift rebooted lawsuits like Wayside, which had originally been dismissed under the old ripeness regime.
Amchem Products, Inc. v. Windsor, 521 U.S. 591 (1997); In re Dry Max Pampers Litig., 724 F.3d 713 (6th Cir. 2013): These authorities supply the heightened scrutiny applied to settlement-only classes and emphasize the court’s duty to ensure fairness, reasonableness, and adequacy.

Collectively, these cases shaped both the rights at stake (Rafaeli, Hall, Tyler, Freed) and the procedural posture permitting class settlement (Knick) while framing the standard of review for the settlement’s approval (Amchem, Dry Max).

Legal Reasoning

1) Adequacy of Representation (Rule 23(a)(4) and Rule 23(g))

The court treats the adequacy inquiry under Rule 23(a)(4) and the fairness inquiry under Rule 23(e)(2) as overlapping in the settlement context: both focus on alignment of interests and vigorous, conflict-free representation by qualified counsel. The court credits class counsel’s:

Experience in complex class litigation and early leadership in federal challenges to Michigan’s tax-foreclosure scheme;
Decade-long advocacy, including extensive discovery, motion practice, and over 30 mediation sessions across 18 months with the Sixth Circuit’s mediation office;
Good-faith correction of communication and notice missteps (initial postcard deficiencies cured by long-form notice; reminder mailings; robust publication), which yielded a strong claims rate (claims filed for 3,728 parcels, representing roughly 74% of available surplus dollars; more than 50% claim participation overall).

Two class representatives died during the case; the court found their later substitution acceptable and typical, distinguishing cases involving concealment or forgery. Adequacy demands competence, not perfection.

2) Settlement Fairness, Reasonableness, and Adequacy (Rule 23(e)(2))

The court emphasizes four core concerns: adequate representation; arm’s-length negotiations; adequacy of relief; and equitable treatment among class members.

Arm’s-length negotiations: The lengthy, court-supervised mediation process with a neutral mediator strongly evidenced procedural fairness. Confidentiality, required by circuit rules, did not suggest collusion.
Adequacy of relief at the time of settlement: The settlement guaranteed 80% of surplus proceeds (about 64% net). At execution (December 2022), key uncertainties remained: a live circuit split (Hall vs. Tyler); a pending cert petition in Tyler (granted January 2023); and unresolved issues such as the availability of prejudgment interest (not decided until Freed). Additionally, some class members faced individualized defenses (res judicata, statutes of limitation, equitable defenses). Given protracted delays, aging claimants, and real litigation risks, a guaranteed, near-term recovery fell within the “ballpark of reasonableness.”
Equitable treatment: A uniform pro rata distribution—each claimant receiving the same percentage of surplus principal—aligned interests between named and absent class members and avoided preferential treatment. Variations in claim strength, standing alone, do not render a settlement inequitable; such differences, if material, are typically addressed at the certification stage under Rule 23(b)(3), not by demanding individualized recoveries in settlement.

3) Rejection of “Reverse Auction” and Collusion Allegations

Objectors argued defendants orchestrated a “reverse auction,” selecting more pliant counsel to secure a cheaper deal. The court rejected this on multiple grounds:

Objectors produced speculation rather than “concrete evidence” of collusion (no smoking-gun communications; no lopsided fee-to-relief ratio; no one-sided terms);
Parallel litigation (Grainger v. Ottawa County) was not in a stronger posture—class certification was denied and intervention attempts had failed—undercutting any suggestion that settling Wayside circumvented a “stronger” case;
Wayside’s plea to add new defendant counties was denied as unnecessary because the case proceeded as a defendant-class action with Van Buren as representative; the posture kept other counties within reach for settlement.

4) Inclusion of Lienholders

The court approved inclusion of lienholders within the settlement class definition (“non-contingent” interests included “any type of lien”). Mortgagees and other lienholders hold present, vested rights impaired by county foreclosures (e.g., the right to foreclose)—thus they qualify as rights holders entitled to share in surplus proceeds.

5) Attorney’s Fees

Although § 1983 cases ordinarily allow fee-shifting under § 1988, the settlement took fees from the common fund. The district court applied both the percentage-of-fund and lodestar methods, approving $7.8 million based on a $6.85 million lodestar with a 1.14 multiplier (risk and results). The Sixth Circuit found the award reasonable and not disproportionate to class relief, especially given the adversarial mediation process.

Impact

Though designated “not recommended for publication,” the opinion has significant persuasive value in several respects:

Temporal vantage point for fairness: Courts will evaluate settlement fairness as of execution and preliminary approval—not with hindsight informed by subsequent favorable rulings (here, Tyler and Freed). This is especially salient in fast-moving doctrinal environments.
Reverse auction claims require evidence: Allegations of collusion must be supported by concrete proof; mere competition among overlapping class actions, confidential mediations, or unfavorable comparisons to other cases do not suffice.
Pro rata equity amid varied claim strength: Equal-percentage distributions can be equitable even when claim strength varies, provided named plaintiffs receive no preferential treatment and the settlement reflects the interests of the class as a whole.
Inclusion of lienholders: Courts may treat mortgagees and other lienholders as class members with compensable interests in surplus proceeds after foreclosure.
Attorney’s fees in § 1983 settlements: While fee-shifting is the norm at judgment, parties may structure settlements with fees from the common fund; reasonableness will be assessed under lodestar and percentage benchmarks, with modest multipliers within acceptable ranges.
Practice guidance for settlement classes: Lengthy, neutral, court-supervised mediation; prompt corrective notice when needed; substitution of class representatives; and transparent, proportionate fee requests all weigh heavily in favor of approval.

At the same time, the concurrence underscores a cautionary note: future courts should not treat this settlement’s discounted terms (no prejudgment interest, class-paid fees, 20% reduction of surplus principal) as a template in ordinary takings cases. The concurrence stresses the uniqueness of the historical barriers created by Williamson County (since overruled by Knick) and the grievous harms suffered by claimants, many of whom are elderly or low-income.

Complex Concepts Simplified

Takings Clause and Surplus Proceeds: When the government sells tax-foreclosed property for more than the tax debt owed, the excess (surplus) belongs to the former owner. Keeping that surplus is a “taking” requiring just compensation.
Williamson County and Knick: Williamson County required takings plaintiffs to seek compensation in state court before suing in federal court; Knick overruled it, allowing direct federal suits. This shift restarted federal litigation like Wayside.
Rafaeli/Hall/Tyler/Freed sequence: Rafaeli (Mich. Supreme Court) recognized a property interest in surplus proceeds; Hall (Sixth Circuit) recognized a federal taking when counties keep surplus; Tyler (U.S. Supreme Court) agreed with Hall; Freed (Sixth Circuit) held that interest on surplus proceeds is part of just compensation.
Reverse Auction: A supposed tactic where defendants settle with the weakest class counsel for the lowest amount to preclude stronger suits. Courts require concrete evidence, not conjecture, to sustain this claim.
Rule 23(a) Adequacy vs. Rule 23(e) Fairness: Adequacy focuses on whether the class’s interests are aligned with those of the representatives and whether counsel is qualified and conflict-free; fairness asks whether negotiations were at arm’s length and the relief is appropriate. In settlement-only classes, these inquiries overlap substantially.
Pro Rata Distribution: Each class member receives the same percentage of available recovery, promoting intra-class equity and alignment between named and absent class members.
Lodestar and Multipliers: Lodestar equals reasonable hours times reasonable rates; courts may apply a modest multiplier to reflect risk and results. Courts also cross-check with the percentage-of-fund method.
Defendant Class: A procedural device where one or more defendants are sued as representatives of a class of similarly situated defendants, enabling global resolution across multiple entities without naming each as a separate defendant.

Conclusion

Wayside Church v. Van Buren County offers a detailed blueprint for evaluating settlement-only class actions amid shifting legal terrain. The Sixth Circuit underscores that courts must assess fairness as of the time of settlement, resist hindsight bias, and demand concrete proof before crediting serious collusion allegations like “reverse auction.” Pro rata distributions can be equitable despite differences in claim strength, inclusion of lienholders is appropriate where liens are non-contingent interests affected by foreclosure, and reasonable, modestly enhanced lodestar fees can be approved even in § 1983 settlements that otherwise would permit fee-shifting at judgment.

The concurrence, however, supplies an important normative and doctrinal reminder: in takings cases, full “just compensation” ordinarily includes the entire surplus and prejudgment interest, with attorney’s fees typically shifted under § 1988. The settlement’s departure from those ideals reflects the sui generis path of these Michigan cases—long stymied by Williamson County and resolved only after years of uncertainty, delay, and human cost. For future litigants and courts, the opinion’s enduring contributions are its method of fairness evaluation, its evidentiary demands for collusion challenges, and its pragmatic acceptance of pro rata equity—while its specific financial terms should not become a model where legal barriers and timing pressures are absent.