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DirectBuy Holdings Accord Rejected by Judge as Too ‘Meager’

May 16 (Bloomberg) -- DirectBuy Holdings Inc.’s settlement of a nationwide class-action lawsuit over its sales practices was rejected as being too “meager” by a federal court in Connecticut.

The plaintiffs claims were “substantially undervalued,” U.S. District Judge Janet C. Hall in Bridgeport, Connecticut, said today in a written opinion. The accord would require DirectBuy to provide as much as $55 million in free memberships to members to settle claims that the consumer club marked up the supplier and manufacturer prices of its goods.

“The court does not view these claims as so weak that it would be reasonable to settle claims arguably worth over $2 billion for, at most, only a hundredth of this amount,” Hall wrote.

The ruling followed opposition from attorneys general in 37 states who argued last month that the agreement offered no real benefit to consumers. The settlement’s value is vastly overstated and the deal should be rejected entirely, Connecticut Attorney General George Jepsen said April 12 in court papers.

DirectBuy, based in Merrillville, Indiana, franchises stores and charges customers membership fees of $2,900 to $7,000 in exchange for the right to buy appliances and furniture at wholesale prices.

The company allegedly received millions of dollars in kickbacks from manufacturers, resulting in members’ paying more than the discount price, according to court papers.

Company Response

DirectBuy didn’t admit any wrongdoing in the agreement. Michael Georgeff, a spokesman for the company, didn’t immediately return a phone call and e-mail seeking comment.

Fewer than 1 percent of the settlement class members objected to the deal, with those who did complaining “vociferously,” Hall wrote.

“Many of the objectors view their claims to be worth at least the value of their membership initiation fees, which cost them thousands of dollars,” the judge wrote.

Lawyers for the plaintiffs’ failed to take into account the impact of state consumer protection law claims, which would be given up as part of the settlement agreement.

“Investigations by state attorneys general are under way in at least a couple states, and, in some states, consumer protection actions can be brought on behalf of consumers,” Hall wrote.

Jeffrey Nobel, an attorney for the plaintiffs, didn’t immediately return a phone call and e-mail seeking comment.

DirectBuy bonds fell today on news of the ruling. The company’s $335 million of 12 percent notes due in February 2017 fell as much as 5 cents to a mid-price of 42 cents on the dollar, according to a person with knowledge of the quotes in the market, who declined to be identified because the trading is private.

The case is Wilson v. DirectBuy Inc., 09-00590, U.S. District Court, District of Connecticut (Bridgeport).

To contact the reporter on this story: Sophia Pearson in Wilmington, Delaware, at spearson3@bloomberg.net.

To contact the editor responsible for this story: Michael Hytha at mhytha@bloomberg.net.

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