Class Action Litigation Newsletter Summer 2020: Fourth, Fifth and Sixth Circuit
Fourth Circuit Class Action Update
Herrera v. Charlotte School of Law, LLC, __ Fed. Appx. __, 2020 WL 3118494 (4th Cir. 2020)
Fourth Circuit applies guidelines for consideration of limited fund class settlements.
Plaintiffs asserted claims against a law school concerning the school’s ABA accreditation. The court approved a class settlement in the amount of $2,650,000.00, comprised of a $2,500,000 portion of an insurance policy and a $150,000 contribution from defendant. The aggregate claims of the class were approximately 40 times the amount of the settlement, but the trial court overruled all objections.
Objectors appealed, and the Fourth Circuit affirmed the limited fund settlement under Fed. R. Civ. P. 23(b)(1)(B). The panel described a “limited fund class settlement” as one where “‘claims ... made by numerous persons against a fund insufficient to satisfy all claims’” are aggregated. The panel adopted the following standard: “1) ‘the totals of the aggregated liquidated claims and the fund available for satisfying them, set definitely at their maximums, demonstrate the inadequacy of the fund to pay all the claims,’ 2) ‘the whole of the inadequate fund was to be devoted to the overwhelming claims,’ and 3) ‘the claimants identified by a common theory of recovery were treated equitably among themselves.’” The panel determined that those conditions were satisfied because (1) the evidence established that defendant had no ability pay the total claims of $105 million and the most that could be contributed to the fund was the $2.5 million insurance policy and $150,000 from defendant, (2) the entirety of the fund, other than attorneys’ fees, was to be paid to class members, and (3) the trial court established a detailed claims process to ensure similarly situated class members were treated equally.
North Carolina Supreme Court establishes standard for “picking off” named class plaintiffs.
Chambers began as a debt collection case filed by the defendant hospital against Chambers, a former patient. Chambers then filed a putative class action against the hospital seeking a declaratory judgment that the hospital only was permitted to recover the reasonable value of the services provided. The hospital dismissed its debt collection action, ceased all attempts to collect the debt and contended that the entire putative class action was now moot. The trial court agreed and dismissed the case, and the Court of Appeals affirmed.
The Supreme Court granted review to consider “whether the unilateral action by Moses Cone to moot the named plaintiff’s individual claim renders the entire case moot when there has been no discovery or ruling on plaintiff’s motion for class certification.” The Court noted that eight out of ten federal circuit courts “have ruled that when a defendant acts to moot the claims of individual named plaintiffs before the court has ruled on a class certification motion, the entire action is not yet moot, and the named plaintiff retains the representative capacity to pursue class certification and a ruling on the merits” to prevent defendants from thwarting class actions. The Court adopted this position, and held that a motion for class certification relates back to the filing of the complaint, even if the individual plaintiff’s claim is moot, if (1) “the plaintiff was given a ‘fair opportunity’ to show that class certification is appropriate”; and (2) “the plaintiff submitted the issue of class certification to the trial court without ‘undue delay.’”
Fifth Circuit Class Action Update
Bonin v. Sabine River Auth. of La., 961 F.3d 381 (5th Cir .2020)
Fifth Circuit clarifies local single event exception to mass action removal under CAFA.
In this case, the Fifth Circuit clarified the local single event exception to a “mass action” under the Class Action Fairness Act (CAFA). The Bonin Court held that the local single event exception was inapplicable to a flood event that, by its very nature, caused flooding in two bordering states. The Court also clarified that unanimous consent of defendants to removal under CAFA is not a requirement.
The case arose from a flood that occurred when the Sabine River, located on the border of Texas and Louisiana, overflowed its banks causing flood damage in the states of Texas and Louisiana. Flood control of the waterway is divided between two state agencies, the Sabine River Authority of Texas (SRA-T) and the Sabine River Authority of Louisiana (SRA-L). These entities control the flow of water on the Sabine River and generate electricity.
In March 2016, heavy rains in the border area lead to flooding of the Sabine River despite the mitigation efforts of SRA-L and SRA-T. The flooding led to damages to property owners in Louisiana and Texas. Some 300 property owners in Louisiana and Texas filed suit in Texas state court alleging that their properties were damaged by flooding that was either caused or exacerbated by SRA-T and SRA-L failing to properly regulate water levels in the reservoir and improperly opening the spillway gates.
The case, after being remanded and adding additional private company defendants, was removed to federal court. The removed case included claims against power generating companies (Entergy defendants) that operated the hydroelectric dam on behalf of SRA-T and SRA-L. The Entergy defendants consented to removal under the theory that the case represented a “mass action” under CAFA. SRA-L did not consent to the removal. Plaintiffs argued for remand, which was subsequently denied. Upon the denial of remand and an amendment to the complaint, the Entergy defendants filed a Rule 12(b)(6) motion to dismiss that was granted by the district court. On appeal, plaintiffs argued that the denial of their motion for remand was error. The Fifth Circuit affirmed the decision of the district court as the case was a “mass action” under CAFA.
The Bonin Court examined plaintiffs’ argument that the case fit within an exception to CAFA under which a mass action “shall not include any civil action in which . . . all of the claims in the action arise from an event or occurrence in the State in which the action was filed, and that allegedly resulted in injuries in that State or in States contiguous to that State.” Plaintiffs asserted that the “flooding occurred in Texas, the state where the action was filed” and argued that, while flooding occurred in both Texas and Louisiana, the court should focus only on “the fact that the rainfall and flooding took place in Texas.” Essentially plaintiffs asked the court to ignore the clear language of the statute that “all of the claims in the action arise from an event or occurrence in the State in which the action was filed . . ..” The Bonin Court declined the invitation to parse the statute in such an idiosyncratic manner, concluding that “[e]ven if we say that the March 2016 flooding occurred ‘in Texas.’ We still could not possibly conclude that all of the claims in the suit arose from the flooding event ‘in Texas.’” Thus, the Court concluded that the case did not fit within the exception to a mass action under CAFA.
Additionally, plaintiffs argued that the matter should have been remanded since SRA-L declined to consent to removal. The Court flatly rejected that argument finding that “[u]nder CAFA, mass actions ‘may be removed by any defendant without the consent of all the defendants.’”
Chavez v. Plan Ben Servs., 957 F.3d 542, 545 (5th Cir. 2020)
Fifth Circuit rejects district court’s superficial analysis of class certification under Rule 23(b)(1)(B).
This case arose from a typical “fiduciary misbehavior” claim in which plaintiffs sought to represent “a class of ‘all participants in and beneficiaries of employee benefit plans that provide benefits through [the trusts] . . . .” The claim involved various benefits plans for various employers over a 9-year period. The defendants, Plan Benefit Services, Inc., Fringe Insurance Benefits, Inc., and Fringe Benefit Group (collectively, FBG) contested class certification on numerous grounds including whether it was a fiduciary or charged excessive fees. Despite the number of issues raised by the number of plans and the estimated participants, over 1700, the district court issued a short certification order with only five pages of actual analysis of the complex issues presented.
On appeal, the Chavez Court found that the analysis was inadequate. The Fifth Circuit went out of its way to illuminate that, in the context of a class certification, “a district court must detail with sufficient specificity how plaintiff has met the requirements of Rule 23,” and to emphasize that a class certification is not just a mere review of a complaint as in a motion to dismiss but requires the court to analyze “the facts and law of the case, spurning reliance on generalizations about what types of disputes may be fit for a class.” Reversing, the Chavez court found the district court’s analysis was superficial and did not respond at all to the objections raised by the defendant to class certification.
Sixth Circuit Class Action Update
Johnson v. BLC Lexington, SNF, LLC, No. 19-cv-064, 2020 WL 3578342 (E.D. Ky. July 1, 2020)
Court finds arbitration agreement to be an impediment to class certification.
The Eastern District of Kentucky refused to certify a putative class of skilled nursing residents because, among other things, the facility’s admissions agreement included a provision requiring binding arbitration.
Analyzing plaintiff’s motion for class certification, the court held that the presence of an arbitration provision required it to engage in a “threshold inquiry” of whether the class members’ claims were subject binding arbitration, and that this “threshold inquiry” destroyed both commonality and typicality. In so holding, the court explained that the defendants did not waive their right to enforce the arbitration provision because such a waiver could not occur until the class composition was final.
The named plaintiff, though, was not required to arbitrate because her husband had “signed the admission agreement without authority to bind her” to the provision. According to the court, this caused her situation to be “not typical” and was an additional reason for why typicality was not met. At the same time, the court concluded that, because the named plaintiff did not personally sign the agreement, she was an inadequate class representative, insofar as “she [was] not subject to a binding arbitration defense like other potential class members might be.” Because of this, and because the typicality and commonality were not met, the court denied the motion for class certification.
Hicks, et al. v. State Farm Fire & Casualty Co., No. 14-cv-53, 2020 WL 3888156 (6th Cir. July 10, 2020)
Sixth Circuit affirms certification of class concerning alleged underpayments on insurance policies based on improper calculation of “actual cash value.”
This case involved claims against an insurer alleging that it miscalculated benefits under replacement-cost homeowners insurance contracts. The insurance contracts required the carrier to pay the “actual cash value at the time of the loss of the damaged part of the property,” up to the policy's liability limit, “not to exceed the cost to repair or replace the damaged part of the property.” The “actual cash value” (ACV) was calculated under the policy by estimating the amount it will cost to repair or replace damaged property and subtracting depreciation and the deductible. If a policyholder owned a house with a ten-year-old roof that was destroyed by hail, “it is not feasible” for the insurer “to buy a ten-year-old roof (or ten-year-old roofing materials) to install on an existing building,” and thus insurers subtract depreciation to arrive at ACV estimates. The insurer determined the ACV first by sending an adjuster to inspect the damage and estimate the reconstruction cost. The adjuster input the reconstruction cost estimate—the “replacement cost value” or RCV—and depreciated costs for both materials and labor. This produced an ACV calculation (RCV minus material and labor cost depreciation), subtracted the insured's deductible, and then State Farm paid that Xactimate estimate to the insured. Insureds did not have to spend this ACV payment or make repairs on their property; if they made no repairs or made repairs for less than the ACV payment, they did not have to return any of the ACV payment to State Farm. If an insured made repairs and incurred costs exceeding the ACV payment, however, the individual could seek further payment from State Farm. After plaintiffs’ homes burned, they submitted claims and received ACV payments and later sued, claiming that the insurer breached the insuring contract by including labor costs in the depreciation deduction.
On appeal from the district court’s order certifying a class, a divided Sixth Circuit panel affirmed. The panel first held that the Rule 23(a) commonality requirement was satisfied, in that “Plaintiffs’ claims share a common legal question central to the validity of each putative class member’s claims: whether State Farm breached Plaintiff’s standard-form contracts by deducting labor depreciation from the ACV payments.” As for Rule 23(b)(3), the panel concluded that the common legal question predominated over any individualized inquiries, disagreeing with defendant’s argument that predominance was not met “because it may have miscalculated ACV payments based on individualized errors unrelated to depreciating labor costs.” Put another way, the insurer was defending against the claims of individual class members by seeking to prove that some insureds were not damaged because it either overestimated ACV payments to such a degree that the deduction of labor depreciation resulted in no damages or it mistakenly reimbursed labor depreciation costs to RCV claimants for more than they were owed. The panel rejected this argument because the insureds did not have to use the ACV payments to rebuild and any overestimation was an error in the insureds’ favor. The panel also explained that, to the extent these overestimations became an issue, the district court could address the issue during later proceedings. Finally, the panel acknowledged the circuit split on whether a district court must conduct a Daubert analysis at the class-certification stage, but ultimately declined to resolve that question as the district court’s order granting class certification did not rely on the challenged expert’s damages formula.
Judge McKeague, however, concurred in the judgment but dissented in part. Specifically, the dissent took issue with the overall lack of rigor in the majority’s Rule 23 analysis and noted that “the majority partly stumbles on the right result, but for the wrong reasons.” The dissent criticized the majority’s encapsulation of the common question, remarking that the district court did not distinguish between two different types of insureds (those who disputed their ACV payments and those who accepted them) and should amend the class definition.