Aug 09

The Second Circuit Blesses Post-Jury Verdict, Pre-Judgment Decertification

This post was co-authored by Carla Graff, a summer associate with Montgomery McCracken and Charles B. Casper, a partner and chair of Montgomery McCracken’s Class Action Defense Practice Group.

How long does the judicial obligation to ensure proper class certification last? According to the Second Circuit, it lasts until final judgment is entered—even after a jury verdict in favor of a class so long as the district court defers to the jury’s factual findings the same as it would when considering a motion for a new trial. Here, the judge properly decertified a class after a jury verdict because the verdict rested on a seriously erroneous factual finding. Mazzei v. Money Store, No. 15-2054, 2016 WL 3876518 (2d Cir. Jul. 15, 2016). Affirming the district court’s action overturning a verdict for a class of homeowners who claimed their mortgage servicer charged them late fees their contracts did not allow, the Second Circuit sent a clear message that class certification requirements must remain satisfied until final judgment, and that a district court may decertify a class even after a jury returns its verdict.

Plaintiff Joseph Mazzei sued TMS Mortgage, Inc., a mortgage lender and loan service provider previously known as The Money Store. Mazzei claimed The Money Store breached its contracts with borrowers by imposing unauthorized late fees after it accelerated loans in default. (Accelerating a loan makes the entire balance immediately due. Since no more monthly payments are due, they cannot be late.) The Southern District of New York certified a class of borrowers who were assessed post-acceleration late fees under loans The Money Store originated (and thus owned), and under loans it did not originate but merely serviced on behalf of the originating lenders

After the jury awarded $32 million plus pre-judgment interest to Mazzei and the class, The Money Store moved to decertify under Federal Rule of Civil Procedure 23(c)(1)(C), which allows a class certification order to “be altered or amended before final judgment.” Privity between the parties is essential to a breach of contract claim, and The Money Store claimed the evidence failed to establish class-wide privity of contract. The defendant conceded it was in privity with class members whose loans it originated, but denied privity with class members whose loans it merely serviced. The district court agreed and granted the motion to decertify.

The Money Store originated Mazzei’s loan, so the court entered judgment for him on his individual claim, but decided he failed to satisfy Rule 23’s typicality and predominance requirements for the many class members not in privity with The Money Store. Mazzei, 308 F.R.D. at 112. Mazzei appealed, claiming that the court lacked power to decertify after the jury returned a verdict, and doing so violated class members’ Seventh Amendment right to trial by jury.

The Second Circuit disagreed and affirmed the district court’s actions. First, relying on the text of Rule 23(c)(1) and case law from the 1980s, the Second Circuit found that courts not only have the power to decertify a class until final judgment, but the duty to do so if Rule 23’s requirements do not remain satisfied. District courts have an affirmative duty to monitor the propriety of a certified class in light of evidentiary developments and to ensure class requirements are met throughout the life of the litigation. The power to decertify derives from that obligation. Mazzei, 2016 WL 3876518, at *3.

The court swept aside Mazzei’s Seventh Amendment arguments. He raised no Seventh Amendment issue at all on his personal claim because he received his individual damages ($133.80) on the jury’s verdict. Id. at *4. And the class members’ right to a jury trial remained unimpaired because they would be free to bring their own individual claims before a jury later on. Under American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1978), the statute of limitations for absent class members’ claims was tolled from the time Mazzei filed his complaint encompassing their claims until the district court decertified the class (typically until the court denies class certification), so they can still file individual claims. Indeed, the court observed, decertification actually protected the class members’ Due Process and Seventh Amendment rights by ensuring that the judgment could bind them only if the class representative met all of Rule 23’s requirements.

Under the Seventh Amendment, “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.” U.S. Const. amend. VII. But the district court respected its common-law boundaries by setting aside the jury’s finding that servicing-only borrowers were in privity of contract with The Money Store only upon concluding the verdict would result in “manifest injustice” because the finding underlying it rested on no evidence. Mazzei, 308 F.R.D. at 112. This met the “seriously erroneous” test the Second Circuit applies to Rule 59 motions for a new trial generally. Mazzei, 2016 WL 3876518, at *5 (“seriously erroneous, a miscarriage of justice, or egregious”) (internal quotations omitted).

And decertification, rather than substituting a servicing-only class representative, was required because the court found it impossible to sort out the borrowers whose loans The Money Store originated from those it merely serviced. “[C]lass wide resolution to the privity question was not possible … without class-wide evidence that class members were in fact in privity with The Money Store.” Id., at *9 (emphasis in original). Therefore, according to the Second Circuit, decertification was the only solution.

Lessons for Counsel

The opinion provides a few key takeaways for both plaintiff and defense counsel in class actions. First, defendants should persevere in their opposition to class certification right up to the moment a class-wide judgment is entered. If you have evidence that Rule 23 requirements are not met, introduce it at trial. If the plaintiff’s evidence fails to establish all Rule 23 requirements, move for decertification at the close of the evidence and, if necessary, after the jury returns its verdict. Second, plaintiffs should be vigilant to ensure that their evidence at trial supports the court’s class certification order. Don’t assume that you’re home free once the court grants your class certification motion.

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