A federal appeals court has thrown out a $45 million class action settlement that was meant to resolve allegations that the three largest U.S. credit-reporting agencies issued incorrect reports about consumers who had gone through bankruptcy.

The 9th U.S. Circuit Court of Appeals in California said $5,000 incentive awards for class representatives were improperly conditioned on the representatives’ support for the accord and were too high relative to what many class members would receive.

Equifax Information Services LLC, Experian Information Systems Inc and TransUnion LLC had been accused of issuing credit reports that said consumers were delinquent in making payments on debts that had actually been discharged in bankruptcy, violating the federal Fair Credit Reporting Act.

About 770,000 consumers submitted claims. Roughly 15,000 who showed they were denied employment, mortgages, housing rentals, or credit or auto loans because of the errors were to recover $150 to $750 each, and the rest were to recover $26 each.

U.S. District Judge David Carter in Santa Ana, California, approved the settlement and an award of about $16.7 million of legal fees in July 2011, court records show.However the 9th Circuit agreed with some objecting plaintiffs that the settlement was not fair, reasonable and adequate.

It said that unlike earlier settlements with incentive awards that had won court approval, this settlement created a “patent divergence of interests” between class representatives and the people they represented.

Source: Reuters  [for more details log on]