FYI: 3rd Cir Upholds Denial of Class Cert on "Ascertainable Loss" and Causation Deficiencies

The U.S. Court of Appeal for the Third Circuit recently affirmed a denial of class certification, holding that the plaintiffs' theory was insufficiently supported by class-wide evidence to demonstrate the fact of damages whether on the issues of "ascertainable loss" or "causal relationship", and failed to establish that common questions would predominate over individual questions.

 

A copy of the opinion is available at:  Link to Opinion

 

A group of former law students filed a class action against their law school, alleging that the school violated the New Jersey Consumer Fraud Act (NJCFA) and the Delaware Consumer Fraud Act (DCFA) by allegedly intentionally publishing and marketing misleading employment statistics of its graduates.  More specifically, the students alleged that between 2005 and 2011, the school reported that 90-97% of its students were employed after graduation, when in fact, only 50-70% of graduates during that time were actually employed in full-time legal positions, which the school knew. 

 

The law students alleged that publishing these misleading statistics enabled the school to charge its students inflated tuition – that is, higher tuition than what the school would have been able to charge had accurate employment statistics been published instead.  The students sought damages equal to the amount of the alleged tuition overpayments.

 

The district court below denied class certification to the students, holding that the students could not meet Federal Rule of Civil Procedure (FRCP) 23(b)(3)'s requirement that common questions predominate over individual questions because they had not shown that they could prove the students' damages by common evidence.  The district court noted that the students' proposed theory of damages relied on a "fraud-on-the-market" theory, which state courts had consistently rejected outside of the federal securities fraud context. 

 

The students filed for interlocutory review of the denial of class certification under FRCP 23(f), which the Third Circuit granted.

 

As you may recall, an NJCFA/DCFA claim consists of "(1) an unlawful practice, (2) an ascertainable loss, and (3) a causal relationship between the unlawful conduct and the ascertainable loss."  See Gonzalez v. Wilshire Credit Corp., 25 A.3d 1103, 1115 (N.J. 2011).

 

The Third Circuit addressed three alleged errors raised by the students:

 

First, the students argued that the district court below applied an improperly burdensome legal standard under FRCP 23(b)(3) by scrutinizing their class-wide evidence prior to full merits discovery.

 

The Third Circuit began its analysis by finding that, contrary to the students' argument, it was entirely appropriate for the district court below to examine the students' theory of damages and proof supporting it, since ascertainable loss and a causal relationship are core elements of liability under the NJCFA/DCFA. 

 

The Court noted that the district court below was properly concerned with the students' ability to demonstrate the fact of damage from the "ascertainable loss" and "causal relationship" elements class-wide.

 

Next, the students alleged that the district court erroneously attributed significance to the fact that some graduates do obtain full-time legal employment, supposedly ignoring that the students' actual theory of damages – i.e., that all putative class members were charged inflated tuition, regardless of employment outcomes -- is unrelated to the students' actual employment outcomes.

 

The Third Circuit agreed with the students to the extent that the district court discussed the full-time legal employment of some graduates in reaching its decision below, but found that this error was harmless.  The Court noted that the inflated tuition argument was not adequately supported by class-wide evidence, precluding class-wide certification. 

 

Finally, the students alleged that the district court below erred in equating their theory of damages with the non-cognizable "fraud-on-the-market" theory, contending that they had sufficient enough to support a non-reliance-based inflated tuition theory.

 

Here, the Third Circuit agreed with the students that "fraud-on-the-market" was not the correct terminology for the students' theory; rather, it belongs to the "price-inflation" category of theories. 

 

However, the Court noted, like the fraud-on-the-market theory, the price-inflation theory has been consistently rejected by New Jersey and Delaware state courts outside of the federal securities fraud context.  These state courts have held that the ascertainable loss and causal relationship elements of the NJCFA and DCFA are not met by a price inflation theory.  See, e.g., Int'l Union of Operating Eng'rs Local No. 68 Welfare Fund v. Merck & Co., Inc., 192 N.J. 372, 389, 929 A.2d 1076 (N.J. 2007) (per curiam); Teamsters Local 237 Welfare Fund v. Astra Zeneca Pharm. LP, 136 A.3d 688 (Del. 2016).

 

In Merck, consumers were allegedly overcharged for prescription medications.  There, the New Jersey Supreme Court rejected the consumers' attempt "to prove only that the price charged for Vioxx was higher than it should have been as a result of defendant's fraudulent marketing campaign, and… thereby to be relieved of the usual requirements of proving an ascertainable loss."  See Int'l Union of Operating Eng'rs Local No. 68 Welfare Fund v. Merck & Co., Inc., 192 N.J. at 1088.  There, the rejection of the consumers' price inflation theory removed it as a potential common question entirely, leading the New Jersey Supreme Court to hold that individualized questions about how the diverse group of class members reacted to the alleged fraud predominated instead, precluding class certification.  Id. at 1087-1088.

 

Thus, the Third Circuit held that the students in the case at hand failed to meet the predominance requirement of Rule 23(b)(3) because the only class-wide evidence of damages offered by the students supported the non-cognizable theory of price inflation, and as such, the students were properly denied class certification.

 

Accordingly, the district court's denial of class certification was affirmed.

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: Ill App Ct (3rd Dist) Confirms Foreclosure on Mortgagors' Tenancy By The Entirety When Only One Borrower Signed Note

The Appellate Court of Illinois, Third District, recently held that that a mortgagee could foreclose on a husband and wife's property held as tenants by the entirety despite that only the husband signed the note. 

 

In reaching its decision, the Court relied on the fact that the wife signed the mortgage with her husband, and was aware of the existence and the substance of the note. 

 

A copy of the opinion is available at:  Link to Opinion

 

The borrowers, husband and wife, purchased a home in Illinois. The borrowers acquired the real estate as tenants by the entirety and occupied the property continuously as their marital residence.

 

Subsequently, the husband signed a promissory note.  The wife did not sign the note.  On the same day, the borrowers executed a mortgage against their interest in the real estate to secure payment of a loan. Unlike the note, both the husband and wife signed the mortgage.

 

The lender filed a complaint to foreclose against the borrowers.  The complaint sought to enforce the rights of the lender by foreclosing the interests of both the husband and wife in the real estate.

 

The mortgage servicer was substituted as plaintiff in the foreclosure action.  The mortgage servicer filed an amended complaint, including a copy of the note signed by the husband.  The note was stamped as a certified copy of the original and indorsed in blank by the lender.  The amended foreclosure complaint also included a copy of the mortgage signed by the husband and wife.

 

The borrowers raised two affirmative defenses.  The first affirmative defense alleged the mortgage could not be foreclosed as to the wife's interest in the property because only the husband signed the note and the borrowers owned the property in a tenancy by the entirety.

 

The second affirmative defense alleged that the copy of the note attached to the amended complaint did not comply with the Illinois Mortgage Foreclosure Act 735 ILCS 5/15-1506(b).

The mortgage servicer filed a motion to strike the borrowers' affirmative defenses.  With this motion, the servicer attached a different copy of the note that had a void marking.

 

The trial court denied, without prejudice, the servicer's motion to strike the first affirmative defense.  In its ruling, the trial court allowed the servicer to amend the motion to strike the first affirmative defense to better address the legal aspects of the argument. 

 

The servicer filed a renewed motion to strike the borrowers' first affirmative defense.  The servicer also filed an affidavit of one of its employees explaining how the servicer came into possession of the note. The affidavit stated the servicer came into possession of the note by way of purchase of assets as receiver for the lender.  The bill of sale attached to the affidavit was dated prior to the filing of the amended complaint.  

 

The trial court granted the servicer's motion to strike the first and second affirmative defense.  The servicer moved for summary judgment, the borrowers did not respond to the motion, and the trial court granted summary judgment.  The servicer then moved for an order confirming the sale of the foreclosed property. 

 

The borrowers filed a motion to deny confirmation of the sale.  The trial court denied the borrowers' motion to deny confirmation.  The borrowers appealed. 

 

The Appellate Court first analyzed whether the servicer could foreclose the mortgage against the wife's interest in the real estate.  The Court held that the note and corresponding mortgage were valid despite the fact that only the husband signed the note.  The Court explained that it is common for notes and the corresponding mortgages to be signed by different parties.  This was especially true in this situation because the note and mortgage documents were signed together, executed contemporaneously, and intended to complement each other. 

 

The Court also held that the mortgage was valid even though the borrowers owned the real estate as tenants by the entirety. Under Illinois law, real estate held as tenants by the entirety protects an innocent spouse against having his or her homestead property sold to satisfy the individual debts of the other spouse.  In this matter, the Court explained, there was no innocent spouse because the wife signed the mortgage, was aware of the amount owed under the note, and consented in the creation of a lien on the real estate to secure payment of the loan.

 

Next, the Appellate Court summarily rejected the borrowers' argument that the trial court erred when it considered the servicer's renewed motion to strike the first affirmative defense.  The Appellate Court noted it was sufficient that the trial court denied the servicer's motion to strike without prejudice and granted leave to amend the motion to better address the legal aspects of the first affirmative defense.

 

Last, the Appellate Court held that the servicer had standing to foreclose on the mortgage for two separate reasons.  In Illinois, the Court held, an action to foreclose may be brought by a mortgagee.  A mortgagee under Illinois law includes a holder of an indebtedness secured by a mortgage. 

 

The Appellate Court held that the servicer had standing was because the note attached in the amended complaint was prima facie evidence that the servicer was the holder of the note indorsed in blank.  Moreover, the Court noted, the borrowers failed to establish that someone other than servicer was the true holder of the note. The Court also held that the servicer had standing to foreclose because in Illinois an action to foreclose may be filed by an agent of the mortgagee and this includes an entity that services mortgages.  

  

The Appellate Court also rejected the borrowers' attack on the legitimacy of the note. The trial court's ruling was supported by the affidavit from the servicer's employee.  The affidavit attested that the servicer acquired the bank's assets, including the loan secured by the borrowers' home, by way of purchase as receiver for the lender before the servicer filed the amended complaint.

 

Accordingly, the Appellate Court affirmed the trial court's judgment.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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FYI: 3rd Cir Says State-Law Claims Not Preempted by Bankruptcy Code's Involuntary Case Provisions

The U.S. Court of Appeals for the Third Circuit recently held that the Bankruptcy Code, 11 U.S.C. § 303(i), does not preempt state law claims brought by non-debtors for damages related to the filing of an involuntary bankruptcy proceeding. 

 

A copy of the opinion is available at:  Link to Opinion

 

The creditors in this action initiated state court litigation against limited partnerships controlled by the debtor, alleging money owed under various leases.  During the state court proceedings, the creditors filed an involuntary bankruptcy proceeding against the debtor and the debtors affiliated medical imaging companies, none of which were defendants in the state court litigation.

 

The debtor transferred the involuntary bankruptcy case to the U.S. District Court for the Southern District of Florida, where the bankruptcy court dismissed the involuntary bankruptcy, finding among other things that two of the alleged creditors who brought the involuntary bankruptcy were not actually creditors of the debtor.

 

The debtor then filed an adversary proceeding against the creditors pursuant to 11 U.S.C. § 303(i), seeking to recover costs, attorney's fees, and damages for the bad faith filing of the involuntary bankruptcy.  Following several years of litigation, the U.S. Court of Appeals for the Eleventh Circuit ultimately reinstated a substantial jury verdict in favor of the debtor.

 

Meanwhile, the debtor's wife and the debtor's affiliated limited partnerships, none of which were parties to the involuntary bankruptcy proceeding, brought suit in federal court to recover damages under Florida law for tortious interference with contracts and business relationships stemming from the involuntary bankruptcy petition filed against the debtor and the debtor's affiliated medical imaging companies. 

 

The plaintiff debtor and his wife alleged that the involuntary bankruptcy petition had caused the debtor's affiliated limited partnerships to be declared in default on their underlying mortgages, leading to the loss of all but one of the properties owned by the limited partnerships, and costing the debtor's wife her interest in one of the limited partnerships.

 

After being transferred to the U.S. District Court for the Eastern District of Pennsylvania on the creditors' motion, the creditors moved to dismiss, arguing that the plaintiffs' state law tortious interference claims were preempted by the involuntary bankruptcy provisions of the Bankruptcy Code.  The trial court agreed and dismissed the complaint.  The instant appeal followed. 

 

 As you may recall, 11 U.S.C. § 303(i) of the Bankruptcy Code provides that if an involuntary bankruptcy petition is dismissed, a debtor may recover attorney's fees, costs, and damages from its creditors.  In relevant part, § 303(i) reads:

 

(i) If the court dismisses a petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment-

(1) Against the petitioners and in favor of the debtor for-

(A) costs; or

(B) a reasonable attorney's fee; or

(2) against any petitioner that filed the petition in bad faith, for-

(A) any damages proximately caused by such filing; or

(B) punitive damages     

 

See 11 U.S.C. § 303(i).

 

The Third Circuit began its analysis by noting that this is a case of alleged field preemption, which "occurs when a field is 'reserved for federal regulation, leaving no room for state regulation,' and 'congressional intent to supersede state laws is clear and manifest.'"  See Elassaad v. Indep. Air, Inc., 613 F.3d 119, 126 (3d Cir. 2010) (quoting Holk v. Snapple Beverage Corp., 575 F.3d 329, 336 (3d Cir. 2009). 

 

In a case of field preemption, the Third Circuit noted, the court begins with a presumption against preemption that is only overcome when "a Congressional purpose to preempt… is clear and manifest."  See Farina v. Nokia Inc., 625 F.3d 97, 117 (3d Cir. 2010). 

 

To discern the preemptive intent of Congress, the court examined the text, structure, and purpose of the statute and the surrounding statutory framework.  See Medtronic, Inc. v. Lohr, 518 U.S. 470, 486 (1996). 

 

Here, the relevant inquiry was whether it was Congress's "clear and manifest intent" to preempt state law causes of action for non-debtors based on the filing of an involuntary bankruptcy petition. 

 

The Third Circuit carefully examined the text, structure, and purpose of §303(i), finding Congressional silence as to non-debtor remedies, no structural indication of field preemption, and that it would be inconsistent with the remedial purpose § 303(i) to preempt state law remedies for non-debtors who can similarly be harmed by involuntary bankruptcy petitions.  Accordingly, the Court found that field preemption did not apply to the circumstances here.

 

Rejecting the creditors' argument that Congress could have written § 303(i) such that it also provided for non-debtor remedies, as it did when enacting the provisions of 11 U.S.C. § 362(k)(1) relating to violation of the automatic stay, the Court acknowledged that while this was a plausible argument, Congressional silence does not demonstrate the "clear and manifest" intent necessary to establish field preemption. 

 

The Third Circuit also rejected the creditors' argument that permitting state law claims against creditors would be inconsistent with the comprehensive nature of the Bankruptcy Code and open the floodgates to state courts rewriting bankruptcy law, noting that the creditors could cite only a handful of cases where non-debtors had brought state tort claims against petitioning creditors, which substantially undermined their argument that the floodgates of litigation would be opened absent preemption.

 

Finally, the Third Circuit acknowledged that its ruling could not be reconciled with the Ninth Circuit's decision in In re Miles, 430 F.3d 1083 (9th Cir. 2005). 

 

In Miles, non-debtors were allegedly harmed by an involuntary bankruptcy and brought state law claims against the petitioning creditors in state court.  There, the creditors successfully removed the case to federal bankruptcy court.  The Ninth Circuit held that the state law tort claims were removable to federal bankruptcy court because they were "completely preempted" by § 303(i).  See In re Miles, 430 F.3d at 1093.  Finding the case properly removed to federal bankruptcy court, the Ninth Circuit affirmed the dismissal of the complaint because the non-debtors lacked standing under § 303(i) to recover damages. 

 

Here, the Third Circuit refused to follow the Ninth Circuit's ruling in Miles, stating that the Ninth Circuit's Miles analysis is inconsistent with the presumption against preemption, which requires that congressional intent to preempt state law must be "clear and manifest." 

 

Going further, the Third Circuit noted that the Supreme Court has never recognized "complete preemption" in the Bankruptcy Code, and the Ninth Circuit appears to be the only circuit finding such preemption.  See In re Repository Techs, Inc., 601 F.3d 710, 724 (7th Cir. 2010) (declining to follow Miles). 

 

Thus, the Third Circuit held that Bankruptcy Code § 303(i) does not preempt state law claims by non-debtors for damages based on the filing of an involuntary bankruptcy petition. 

 

Accordingly, the Third Circuit reversed the trial court's dismissal of the plaintiffs' complaint and remanded for further proceedings.

 

 

 

 

Ralph T. Wutscher
Maurice 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@MauriceWutscher.com

 

Admitted to practice law in Illinois

 

 

 

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