DAN MARGOLIES Columnist

Questioning its fairness, a Texas court has rejected a settlement of claims that Hyundai Motor Co. overstated the horsepower of 1.3 million vehicles.

The ruling last week by state court judge Gary Sanderson in Beaumont, Texas, came after 29 law firms in 18 other nationwide class actions against Hyundai said the proposed deal was grossly inadequate.

"We argued that the plaintiffs' lawyers in Texas conducted no discovery and did no due diligence in cutting this deal, which was preliminarily approved by the Beaumont court," said lawyer Norm Siegel of Stueve Siegel Hanson Woody LLC, in Kansas City. His firm represents plaintiffs in a California class-action against Hyundai.

"We, along with other firms around the country, intervened in the action and were permitted to take discovery into the fairness of the settlement," Siegel said.

Siegel said the proposed settlement called for Hyundai to offer coupons worth no more than $500 on future purchases or oil changes and would have cost Hyundai just $6 million. Meanwhile, lawyers for the plaintiffs in Texas stood to make $2 million in fees.

Hyundai, in a written statement, said it was disappointed that the court vacated a settlement "that had been negotiated over many months and stood to offer valuable benefits to owners of the affected Hyundai vehicles."

Hyundai said it had conducted "a thorough internal investigation" and "voluntarily made a broad and public disclosure of its mistakes."

"As is all too common in this day and age in the United States, however, Hyundai's voluntary disclosure was met with litigation," the company said.

Sanderson originally approved the settlement, but reversed course after citing evidence presented by Siegel and other lawyers that Hyundai may have deliberately inflated the horsepower of the vehicles.

In his ruling, Sanderson said the lawyers had submitted evidence that the horsepower ratings "were approved by high-level decision makers at Hyundai, and that Hyundai's actions may have been influenced by a desire to enhance its competitive standing in the marketplace."

The cases stem from Hyundai Motor America's acknowledgement last September that it had published incorrect horsepower ratings for 1.3 million vehicles in marketing materials dating back more than a decade. The Fountain Valley, Calif.-based company is a subsidiary of Hyundai Motor Co. in South Korea.

The incorrect ratings, which Hyundai said were the result of sloppy record keeping, ranged from a 9.6 percent discrepancy for 1997 and 1998 2.0-liter Sonatas to a 2.3 percent discrepancy for the 1992-1994 models of the same vehicle.

Hyundai initially said it would offer warranty extensions to some 400,000 owners of models whose power shortage exceeded 4 percent.

The automaker, however, quickly found itself swamped in litigation throughout the country. The proposed settlement in Texas would have barred any future claims.

In rejecting the settlement, Sanderson noted that it was entered into without the benefit of any investigation by the settling lawyers and before Hyundai was required to produce documents in the other pending class actions.

Siegel said he and his fellow lawyers turned down an offer by Hyundai to settle the California class action because they didn't have the chance to conduct discovery into whether the misrepresentations were intentional or, as Hyundai claimed, the product of mistakes.

"Hyundai then ran off to Beaumont, Texas, and found lawyers who were willing to settle the case for coupons and a $2 million fee," he said.

After the lawyers were allowed to intervene in the Texas case, Hyundai was required to turn over documents and submit top executives to questioning under oath.

Siegel said he took the deposition of Hyundai Motor America Chief Executive Finbarr O'Neill, who resigned Tuesday to become chief executive of Mitsubishi Motor Corp.'s North American unit. O'Neill is generally credited with turning around Hyundai's image in the United States, where its name was once associated with cheap and unreliable vehicles.

O'Neill's deposition and other evidence was sealed at Hyundai's request, but the court is considering a motion to unseal it.

In the meantime, Siegel and other lawyers say that the documents and testimony show that O'Neill and other Hyundai executives approved the use of uncorroborated horsepower numbers and that Hyundai is continuing to overstate those numbers.

In its statement, Hyundai said it was "prepared to defend its conduct" and was confident it would prevail in court.