dismissal of claims purportedly arising from the enforcement of a
class-action judgment against the defendant's attorneys and accountants.
The Court held that: (1) representatives of a class certified in one
action could not assert those class-based claims against new defendants
who had not been parties to the prior class-action litigation; and (2) the
constructive trust imposed in the prior litigation excluded payments to
attorneys and accountants for the fair value of their services.
A copy of the opinion is available at:
http://www.ca1.uscourts.gov/cgi-bin/getopn.pl?OPINION=10-2174P.01A.
This appeal arose out of new lawsuits filed to enforce a judgment in a
prior class action law suit brought by plaintiffs-appellants
("Plaintiffs") against various credit repair and debt consolidation
companies. The class action complaint alleged violations of the federal
Credit Repair Organizations Act, 15 U.S.C. § 1679 et seq. (2006) ("CROA")
and the Massachusetts Consumer Protection Act, Mass. Gen. Laws ch. 93A
(2011).
To enforce the $256 million judgment the Plaintiffs won on behalf of the
class, the District Court set up a constructive trust over all fees
consumers had paid to the defendants. Included in the constructive trust
were any payments made by any of the defendant companies to their managers
or employees "that [were] in excess of the fair value of . . . services
rendered." The District Court also expressly reserved jurisdiction over
"any issues that may arise from the enforcement of the judgment[.]"
When the Plaintiffs found that the class action judgment previously
entered against the credit repair and debt consolidation companies was
"uncollectable," the Plaintiffs filed complaints against the companies'
attorneys and accountants who had not been parties to the earlier class
action litigation. These law suits were styled as class actions on behalf
of the same plaintiff class previously certified in the prior law suit.
In this latest round of litigation, the Plaintiffs alleged that: (1) the
attorney and accountant fees paid by the credit repair and debt
consolidation companies were derived from and traceable to the
constructive trust; and (2) these additional defendants violated the CROA
by participating in the same fraudulent conduct that resulted in the class
action judgment.
The District Court granted the defendants' motions to dismiss, in part
because the Plaintiffs were seeking "class-based relief" but had failed to
seek class certification as required by Rule 23 of the Federal Rules of
Civil Procedure. The First Circuit affirmed.
In discussing the constructive trust claims, the First Circuit held that
the constructive trust ordered by the District Court could not be read as
intending to encompass monies paid out prior to the imposition of the
constructive trust for legal and accounting services rendered in the
ordinary course of business and in exchange for fair value. The appellate
court noted that the constructive trust was originally imposed to reach
money transfers to the friends, families, and associates of the Credit
Repair Companies and specifically encompassed payments that exceeded the
fair value of any services rendered to those companies. The Court of
Appeals also noted that the District Court specifically allowed the credit
repair and debt consolidation companies to pay their attorneys and
accountants for the services provided.
The First Circuit also pointed out that issues related to retroactivity,
fair notice, and equity would arise if the order were read to allow the
constructive trust to reach such payments. The Court ruled that the "most
plausible reading of the constructive trust order . . . is that it was
directed at monies derived from fraudulent acts that might yet be in the
defendants' possession but could be . . . improperly siphoned away to
straws, family members, or employees without receiving fair value before
it could be attached and used to satisfy the judgment." The Court also
noted that there was no determination in the class action litigation that
the lawyers and accountants were liable and that "unjust enrichment"
claims against them could be pursued independently, but not as part of a
proceeding to enforce the class action judgment.
As to the CROA claims against the accountants and lawyers, the Court
rejected the Plaintiffs' repeated argument that they were merely
continuing the prior class action to enforce the judgment. The Court
stated that a certified class in one action may not initiate a new and
separate lawsuit against new defendants "unless and until [the class] is
certified in the new action" in accordance with Rule 23. The Court also
noted that the Plaintiffs did not allege or establish compliance with Rule
23, and that they expressly disclaimed any interest in pursuing the CROA
claims on their own behalf against the lawyers and accountants.
The appellate court also pointed out the District Court's observation that
even if the Plaintiffs had filed the CROA claims as individuals, those
claims which merely referenced the class action judgment failed to meet
the pleading standard articulated in Aschcroft v. Iqbal, 129 S. Ct. 1937,
1949-50 (2009).
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874
Email: RWutscher@mtwllp.com
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