A proposed $3 million settlement of claims against financial adviser Donald DeWaay is flawed and should be rejected, according to a court filing in Decatur County District Court, where the businessman and his shuttered Clive--based brokerage face possible class-action lawsuits.
Attorneys for James Zazzali, a former chief justice of the New Jersey Supreme Court who has been appointed to settle claims against DeWaay and other broker-dealers resulting from the bankruptcy of a real estate investment trust, filed a 149-page memorandum Wednesday objecting to the proposed settlement.
According to the document, DeWaay and his company could face nearly $20 million in claims from an estimated 273 clients who made investments in Idaho-based DBSI Inc., a real estate investment trust with holdings across the country. The company and related entities filed for bankruptcy protection in 2008. It was incorporated in Delaware, where the bankruptcy case was filed and where Zazzali has been attempting to recoup investments via a federal lawsuit.
Because he was the appointed trustee over those claims, Zazzali said he represents the single-largest creditor against DeWaay and at the very least should have been notified about the Iowa case and a final settlement hearing that was held over three days in late January and early February.
Lawyers for DeWaay argued in the Delaware case that claims stemming from the DBSI placements could prove financially lethal for DeWaay and his businesses.
"As such, it is inexplicable that class counsel failed to place the trustee on notice of this litigation, the proposed class certification and settlement, or the fairness hearing that commenced on January 30, 2013," Zazzali said in the court document.
According to the Zazzali's filing, the proposed settlement in the Iowa case is nearly identical to a settlement that DeWaay's attorneys tried to reach in the federal lawsuit in Delaware. That bid was rejected by Zazzali, according to the Iowa court filing.
"Prior to commencement of the Iowa litigation, DeWaay had constructed and fully briefed a motion for class certification seeking precisely the same relief that the Iowa plaintiffs seek in this litigation," according to the court document.
Under the proposed settlement, DeWaay would provide about $925,000 of the $3 million, with insurance companies making up the difference. Plaintiffs' attorneys would take about $750,000 out of the settlement, an amount Zazzali said is excessive.
The Iowa lawsuit was filed in January 2012 after DeWaay reached a settlement with one investor and others dropped their claims in favor of filing the class-action cases. Those investors were represented by attorney Scott Adkins, who also was involved in the earlier negotiations with Zazzali in Delaware, according to court documents.
"While the trustee does not suggest here that counsel for the settling parties have engaged in collusion in reaching the proposed settlement agreement, it cannot be denied that much of the effort required to advance a proposed limited fund class action settlement had already been completed by DeWaay and the trustee in the Delaware litigation before the actions in this court even commenced," according to the court filing. "Nor can it be asserted that the settlement proposed to this court was the product of arms-length litigation efforts expended by class counsel to bring the DeWaay defendants to the table -- a fact which militates very strongly against the proposed settlement and the exorbitant fees sought by class counsel."
Zazzali also argues the proposed settlement fails to tap into all available revenue sources. DeWaay would walk away from the case with "two vacation homes, investments in certain limited partnerships exceeding $800,000 and an investment account worth $1.83 million intact," and his advisory business, DeWaay Capital Management, still a going concern, according to the filing.
Zazzali is represented in Iowa by Weinhardt & Logan P.C. of Des Moines.