Featured Expert Contributor — Civil Justice/Class Actions
On July 15, 2016, the U.S. Court of Appeals for the Second Circuit in Mazzei v. Money Store (2016 U.S. App. LEXIS 12994) affirmed a district court’s decision, issued after a jury verdict for the plaintiff, to decertify the underlying class action. Based on its analysis of Federal Rule of Civil Procedure 23’s plain language and the Seventh Amendment, the Second Circuit confirmed that so long as final judgment has not been entered, district courts have the authority to decertify a class post-verdict. Id. at *3.
The plaintiff had entered into a loan agreement with The Money Store and defaulted on the loan, causing the defendant servicer to accelerate the loan, and commence foreclosure proceedings. Id. at *4. Ultimately, the plaintiff paid the balance of the loan and certain fees, including fees incurred after acceleration. Id. at *4–5. The plaintiff subsequently sued the defendants, purporting to represent a putative class of borrowers, for breach of contract based on the defendants’ alleged violation of the mortgage agreement by imposing post-acceleration late fees. Id. at *5. The district court certified a class that included “all borrowers who signed form loan agreements on loans which were owned or serviced by the defendants and who … were charged … (A) late fees after the borrower’s loan was accelerated, and where the accelerated loan was paid off.” Id. at *5–6.
The jury returned a verdict in favor of the plaintiff and the class on the post-acceleration fee claims, awarding the plaintiff $133.80 and the class $32 million plus prejudgment interest. Id. at *6. In the process of the trial, the defendants learned that privity of contract did not exist between certain absent class members and The Money Store. After the jury rendered its verdict but before the district court entered final judgment, the defendants moved pursuant to Rule 23(c)(1)(C) to decertify the class on the ground that the plaintiff failed to prove class-wide privity of contract between The Money Store and the borrowers whose loans it only serviced, but did not actually own. Id. at *6–7. The district court agreed on grounds of typicality and predominance and decertified the class. Id. at *7.
On appeal, the Second Circuit addressed the district court’s power to decertify a class after a jury verdict under Rule 23 and the Seventh Amendment. The Second Circuit rejected the notion that the district court lacked the power under Rule 23 to decertify a class post-jury verdict, relying on the plain language of Rule 23(c)(1)(C): “An order that grants or denies class certification may be altered or amended before final judgment.” Id. at *9–10 (emphasis added). The court then examined the Seventh Amendment and rejected the plaintiff’s argument that decertification after a jury verdict violates both counterparts of the Amendment: (1) the Trial-By-Jury Clause, which preserves the right to a jury trial; and (2) the Re-Examination Clause, which dictates that “no fact tried by a jury, shall be otherwise re-examined in any Court of the United States, than according to the rules of the common law.” Id. at *11–19.
As to the plaintiff’s right to a jury trial, the panel concluded that the decertification did not violate the Seventh Amendment because the plaintiff was to receive the damages awarded to him by the jury. Id. at *12. As to the putative class members, relying on American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1978), the court found no impairment to their right to a jury trial because they could file individual actions for breach of contract against the defendant. Mazzei, 2016 U.S. App. LEXIS 12994 at *12. Moreover, the court declared that the absent class members’ rights are actually protected by the decertification procedure because it ensures “that any class claim that proceeds to final judgment—and thus binds them—is fairly and appropriately the subject of class treatment.” Id. at *14.
The Second Circuit also rejected the plaintiff’s remaining Seventh Amendment argument—that decertification violated the Re-Examination Clause—by examining how a jury’s factual findings affect the district court’s ability to determine class certification by a preponderance of the evidence. Id. at *15–19. Relying on the operation of the framework for Rule 59 motions for a new trial, the court held that “when a district court considers decertification (or modification) of a class after a jury verdict, the district court must defer to any factual findings the jury necessarily made unless those findings were ‘seriously erroneous,’ a ‘miscarriage of justice,’ or ‘egregious.’” Id. at *16. It concluded that this standard—which applies to a Rule 59 motion for a new trial on weight-of-the evidence grounds—applies in the context of decertification, and the Seventh Amendment is not violated just as it is not violated when a district court considers a motion for a new trial. Id. at *17–18. The panel reasoned that this standard respects and makes full use of the work completed by the jury and respects “the trial court’s position as best-situated to evaluate class issues.” Id. at *18–19.
In the end, the Second Circuit affirmed the district court’s decision to decertify the class for plaintiff’s failure to prove typicality and predominance, and using its newly declared standard held that the jury’s finding that the plaintiff established privity of contract between the class members and the defendants was at least “seriously erroneous.” Id. at *19–27.
Class certification is widely accepted as the most significant phase of a class-action lawsuit, as failure to certify a class is often the nail in the coffin for the litigation and a certified class produces high stakes for defendants. In fact, it is uncommon for certified class actions to proceed to trial because the defendants are faced with the risk of a multi-million dollar verdict; the often-contemplated defense strategy is to settle. Now, the Mazzei opinion effectively confirms two things: (1) that a class action plaintiff bears the burden of proving that its putative class comports with the requirements of Rule 23 well beyond the phase of class certification; and (2) all is not lost for defendants in the fight for decertification after a jury renders an unfavorable verdict. Prudent defense counsel may be wise to reconsider an early settlement strategy and continue to develop evidence and argument to support decertification while the parties litigate the merits of the case through to trial.