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A federal judge has decided not to approve a proposed settlement that would resolve a class action lawsuit against an auto finance company, holding that the deal was unfair to consumers.

U.S. District Judge Michael Baylson of the Eastern District of Pennsylvania denied a request for approval filed by attorneys representing 327,924 people claiming to have received illegal automated phone calls from Flagship Credit Acceptance.

Baylson wrote in his opinion that he took issue with three aspects of the $4 million settlement, proposed on behalf of lead plaintiff Robert Ward.

"First, the lack of information available to counsel to inform their view and advise the class of the strengths and weaknesses of the case given the early posture in which the parties reached agreement; second, the emphasis on Flagship's inability to pay more than $4 million when no underlying financial information was provided to the class members, compounded by the court's belief, after in camera review of the financials, that this statement is inaccurate; and third, the court's skepticism that $4 million is a fair settlement in this case, given that it will result in a de minimis per claimant recovery of $35.30," Baylson said.

The class members alleged the subprime lender placed automated and prerecorded phone calls in violation of the Telephone Consumer Protection Act. According to Baylson, settlement negotiations commenced immediately in federal magistrate court in New Jersey, and an agreement was reached in February 2018.

When the case came to Pennsylvania, Baylson granted preliminary approval, but asked the parties for more information. One question was whether Flagship would be able to withstand the $4 million judgment—or could afford more.

"Flagship's most recent press release reported that its portfolio of managed receivables has grown to $2.9 billion, so class members may reasonably be left wondering why a company with almost $3 billion in assets can only afford a $4 million settlement," Baylson said.

"Flagship explained that disclosing financial information to the class members may put it at a competitive disadvantage and/or negatively affect its prospects in a future equity event, but these concerns cannot excuse total silence on the topic of Flagship's ability to pay," Baylson continued. "The only information class members had was class counsel's representation that Flagship 'was not willing or able to pay more to settle the case, would have paid nothing if it prevailed, and if plaintiff prevailed [Flagship] would go bankrupt.' The court cannot agree to the accuracy of the last part of that communication."

Class counsel also claimed that Flagship didn't have insurance coverage, but made no inquiries about it, Baylson said.

He continued, "The court is not prepared to accept at face value class counsel's claim that there was no insurance, which weighs against finding Flagship is not able to withstand a greater judgment."

The class members are represented by Sergei Lemberg of Lemberg Law in Wilton, Connecticut. Flagship is represented by Gerald Arth of Fox Rothschild. Neither responded to requests for comment.