The U.S. Supreme Court ruled recently that a state law precluding class actions to recover "penalties" such as statutory interest did not prevent a federal district court sitting in diversity from hearing the same issue in a class action under Federal Rule of Civil Procedure 23. A copy of the opinion is attached.
Under New York law, Allstate Insurance Co. ("Allstate") had 30 days within which to either pay Shady Grove Orthopedic Associate's ("Shady Grove") insurance claim, or deny it. Allstate paid the claim, but did so late and refused to pay statutory interest that accrued on the overdue benefits. Alleging that Allstate routinely refused to pay interest on overdue benefits, Shady Grove filed a diversity suit in the U.S. District Court for the Eastern District of New York to recover the unpaid statutory interest and also sought relief on behalf of itself and a class of all others to whom Allstate owed interest.
The District Court dismissed the case for lack of jurisdiction. The court held that N. Y. Civ. Prac. Law Ann. §901(b) ("§901(b)")--which precludes a class action to recover a penalty--applies in diversity suits in federal court despite Federal Rule of Civil Procedure 23. Because statutory interest is a "penalty" under New York law, the court reasoned, §901(b) prohibited the proposed class action. The Second Circuit concluded that Rule 23 and §901(b) were not in conflict and affirmed. The Supreme Court reversed and remanded, but divided its ruling into five parts, with several concurrences in each part.
In the judgment of the court (Parts I and II-A of the opinion), Justices Scalia, Roberts, Stevens, Thomas and Sotomeyer first noted that Federal Rule 23 would control if it conflicted with §901(b), and that Rule 23 specifically states that "[a] class action may be maintained" where certain conditions are met. The court then rejected the Second Circuit's holding, ruling that since §901(b) establishes specific conditions under which a suit "may not be maintained as a class action," it could not apply in diversity suits. The court further expanded on this, explaining that Rule 23 explicitly empowers a federal court to certify a class in each and every case where the Rule's criteria are met.
The majority also discounted the dissent's claim that §901(b) could coexist with Rule 23. The dissent had characterized §901(b) as applying only to the remedy that might be available in a class action, as opposed to the question of whether a suit could be maintained as a class action. However, the majority disagreed, again noting that "Rule 23 permits all class actions that meet its requirements." Allowing the imposition of additional requirements--such as those presented by §901(b)--would render Rule 23 partially invalid, the majority ruled.
Justices Scalia, Thomas, Sotomeyer and the Chief Justice further concurred in Parts II–B and II–D of the decision, holding that the Rules Enabling Act (28 U.S.C. §2072), rather than the Erie Doctrine, controls the validity of a given rule. Citing Sibback v. Wilson & Co. (312 U.S. 1, 14 (1941)), the court interpreted Section 2072(b)'s requirement that a rule "not abridge, enlarge or modify any substantive right" to mean that a rule will remain valid only as long as it governs "the manner and the means" by which the litigants' rights are enforced. A rule may not alter "the rules of decision by which [the] court will adjudicate [those] rights," or the available remedies.
Finally, in Part II-C, Justice Stevens distinguished the judgment of the court. First noting that under §2072(b), a federal rule cannot govern when the application of that rule would "abridge, enlarge or modify any substantive right," Justice Stevens argued that there could be rare cases of state law so "bound up" or "intertwined" with substantive rights and remedies that the state law could effectively define the scope of the state-created right and that application of a federal rule in such a case could violate the Rules Enabling Act. The plurality disagreed, concluding that the correct analysis was established in Sibback's single test of "whether a Federal Rule regulates substance or procedure" and that Justice Stevens' approach would be unworkable, as it "would allow States to force a wide array of parochial procedures on federal courts so long as they are 'sufficiently intertwined' with a state right or remedy."
Under New York law, Allstate Insurance Co. ("Allstate") had 30 days within which to either pay Shady Grove Orthopedic Associate's ("Shady Grove") insurance claim, or deny it. Allstate paid the claim, but did so late and refused to pay statutory interest that accrued on the overdue benefits. Alleging that Allstate routinely refused to pay interest on overdue benefits, Shady Grove filed a diversity suit in the U.S. District Court for the Eastern District of New York to recover the unpaid statutory interest and also sought relief on behalf of itself and a class of all others to whom Allstate owed interest.
The District Court dismissed the case for lack of jurisdiction. The court held that N. Y. Civ. Prac. Law Ann. §901(b) ("§901(b)")--which precludes a class action to recover a penalty--applies in diversity suits in federal court despite Federal Rule of Civil Procedure 23. Because statutory interest is a "penalty" under New York law, the court reasoned, §901(b) prohibited the proposed class action. The Second Circuit concluded that Rule 23 and §901(b) were not in conflict and affirmed. The Supreme Court reversed and remanded, but divided its ruling into five parts, with several concurrences in each part.
In the judgment of the court (Parts I and II-A of the opinion), Justices Scalia, Roberts, Stevens, Thomas and Sotomeyer first noted that Federal Rule 23 would control if it conflicted with §901(b), and that Rule 23 specifically states that "[a] class action may be maintained" where certain conditions are met. The court then rejected the Second Circuit's holding, ruling that since §901(b) establishes specific conditions under which a suit "may not be maintained as a class action," it could not apply in diversity suits. The court further expanded on this, explaining that Rule 23 explicitly empowers a federal court to certify a class in each and every case where the Rule's criteria are met.
The majority also discounted the dissent's claim that §901(b) could coexist with Rule 23. The dissent had characterized §901(b) as applying only to the remedy that might be available in a class action, as opposed to the question of whether a suit could be maintained as a class action. However, the majority disagreed, again noting that "Rule 23 permits all class actions that meet its requirements." Allowing the imposition of additional requirements--such as those presented by §901(b)--would render Rule 23 partially invalid, the majority ruled.
Justices Scalia, Thomas, Sotomeyer and the Chief Justice further concurred in Parts II–B and II–D of the decision, holding that the Rules Enabling Act (28 U.S.C. §2072), rather than the Erie Doctrine, controls the validity of a given rule. Citing Sibback v. Wilson & Co. (312 U.S. 1, 14 (1941)), the court interpreted Section 2072(b)'s requirement that a rule "not abridge, enlarge or modify any substantive right" to mean that a rule will remain valid only as long as it governs "the manner and the means" by which the litigants' rights are enforced. A rule may not alter "the rules of decision by which [the] court will adjudicate [those] rights," or the available remedies.
Finally, in Part II-C, Justice Stevens distinguished the judgment of the court. First noting that under §2072(b), a federal rule cannot govern when the application of that rule would "abridge, enlarge or modify any substantive right," Justice Stevens argued that there could be rare cases of state law so "bound up" or "intertwined" with substantive rights and remedies that the state law could effectively define the scope of the state-created right and that application of a federal rule in such a case could violate the Rules Enabling Act. The plurality disagreed, concluding that the correct analysis was established in Sibback's single test of "whether a Federal Rule regulates substance or procedure" and that Justice Stevens' approach would be unworkable, as it "would allow States to force a wide array of parochial procedures on federal courts so long as they are 'sufficiently intertwined' with a state right or remedy."
Let me know if you have any questions. Thanks.
Ralph T. Wutscher
Kahrl Wutscher LLP
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