FYI: 8th Cir Reverses Class Cert Due to Individualized Issues of Economic Loss

The U.S. Court of Appeals for the Eighth Circuit recently reversed and remanded a trial court's certification of a class under Federal Rule of Civil Procedure 23(b)(3).

 

In so ruling, the Eighth Circuit concluded that:

 

1.  Determining economic losses in this case would entail individualized inquiry inconsistent with the predominance requirement of Rule 23; and

 

2.  Because economic loss could not be presumed, ascertaining which class members sustained injuries meant that individual issues predominated over common ones; and

 

3.  By defining the class to include only those customers who were harmed by the defendant company's alleged failure to seek best execution (a so-called "fail-safe class"), the trial court certified a class in which membership depended upon having a valid claim on the merits. Such a class was impermissible because it allowed putative class members to seek a remedy but not be bound by an adverse judgment.

 

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

 

A customer of a company offering brokerage services to retail investors filed suit against the company and two other defendants for securities fraud in federal court. The lead plaintiff was appointed for a group of investors who purchased and sold securities through the company between 2011 and 2014. The plaintiffs alleged that the company's order routing practices violated the company's "duty of best execution" by systematically sending customer orders to trading venues that pay the company the most money, rather than to venues that provide the best outcome for customers.

 

The trial court determined that the plaintiffs' expert had developed an algorithm that could make automatic determinations of economic loss for each customer. The court thus certified a class consisting of "[a]ll clients of [the company] between September 15, 2011 and September 15, 2014 who placed orders that did not receive best execution, in connection with which the company received either liquidity rebates or payment for order flow, and who were thereby damaged."

 

The Eighth Circuit granted the defendants permission to appeal the class certification order. See Fed. R. Civ. P. 23(f). The Appellate Court reviewed the order for abuse of discretion. IBEW Local 98 Pension Fund v. Best Buy Co., 818 F.3d 775, 779 (8th Cir. 2016).

 

In general, to justify certification of a class in an action for damages, a plaintiff must meet all the requirements of Federal Rule of Civil Procedure 23(a) and satisfy one of the three subsections of Rule 23(b). The trial court here certified a class based on Rule 23(b)(3), which requires that "questions of law or fact common to class members predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy."

 

The plaintiffs alleged that the company violated § 10(b) of the Securities Exchange Act and Rule 10b-5. Section 10(b) forbids the use, in connection with the purchase or sale of a security, of "any manipulative or deceptive device or contrivance in contravention of" regulations promulgated by the SEC for the protection of investors. 15 U.S.C. § 78j(b). The SEC promulgated Rule 10b-5 to enforce § 10(b). Rule 10b-5 prohibits making an untrue statement of material fact or omitting to state a material fact in connection with the purchase or sale of a security. 17 C.F.R. § 240.10b-5(b).

 

To recover damages for violations of § 10(b) and Rule 10b-5, a plaintiff must prove "(1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation." Amgen Inc. v. Conn. Ret. Plans & Tr. Funds, 568 U.S. 455, 460-61 (2013).

 

The Eighth Circuit here determined that the economic loss allegedly caused by the company's order routing practices was "the difference between the price at which [customers'] trades were executed and the 'better' price allegedly available from an alternative trading source." Newton v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 259 F.3d 154, 178 (3d Cir. 2001). To justify class certification, the Court concluded that the plaintiffs' must show that they can establish this type of economic loss for a class of plaintiffs in a manner consistent with the predominance requirement of Rule 23.

 

In Newton, the Third Circuit affirmed the denial of class certification in a best execution case. Id. at 162. The Third Circuit observed that "[w]hether a class member suffered economic loss from a given securities transaction would require proof of the circumstances surrounding each trade, the available alternative prices, and the state of mind of each investor at the time the trade was requested." Id. at 187. The alleged injuries arose out of the execution of "hundreds of millions of trades." Id. at 190. Because "[d]etermining which class members were economically harmed would require an individual analysis into each trade and its alternatives," the Third Circuit concluded that individual questions were "overpowering." Id. at 189.

 

The Eight Circuit found Newton's reasoning persuasive.

 

Here, the plaintiffs' expert proposed to establish through an algorithm that a better price was obtainable for each executed trade by comparing the trade's actual price with the National Best Bid and Offer (NBBO) price. The NBBO represents the highest price a buyer was willing to pay, and the lowest price a seller was willing to accept, for a particular stock at a given time. But the Eight Circuit noted that sometimes a trade fails to execute at the NBBO price through no fault of the broker. For example, volatile or otherwise unusual market conditions can prevent a trade from executing at that price.

 

The Eighth Circuit also observed that there is no definitive list of unusual market conditions that account for transactions that depart from the best available price. As a result, the Court held that the algorithm's use of published market data would not identify all legitimate exclusions, and the experts would have to use their own judgment to identify further exclusions on a trade-by-trade basis. A trier of fact would then have to individually determine the appropriateness of particular exclusions.

 

Furthermore, the Eighth Circuit remarked that the duty of best execution requires that brokers "use reasonable efforts to maximize the economic benefit to the client in each transaction." Id. at 173. This duty regulates a broker's process of routing orders for execution, but does not guarantee a specific outcome "Because economic loss cannot be presumed, ascertaining which class members have sustained injury means individual issues predominate over common ones." Id. at 190.

 

Therefore, the Eighth Circuit concluded that, despite advances in technology, individual evidence and inquiry was still required to determine economic loss for each class member, precluding class certification under Rule 23(b)(3).

 

The Eighth Circuit also found an independent problem with the class as defined by the trial court: it was an impermissible "fail-safe class." The class consisted of "[a]ll clients of [the company] . . . who placed orders that did not receive best execution, in connection with which [the company] received either liquidity rebates or payment for order flow, and who were thereby damaged." The Court determined that this definition incorporated two contested elements of liability: failure to seek best execution and economic loss.

 

In the Court's view, by defining the class to include only those customers who were harmed by the company's alleged failure to seek best execution, the trial court certified a class in which membership depended upon having a valid claim on the merits.

 

The Eighth Circuit held that such a class was impermissible because it allowed putative class members to seek a remedy but not be bound by an adverse judgment. Orduno v. Pietrzak, 932 F.3d 710, 716 (8th Cir. 2019). The Court also concluded that fail-safe classes are unmanageable, see Fed. R. Civ. P. 23(b)(3)(D), "because the court cannot know to whom notice should be sent." Orduno, 932 F.3d at 717.

 

Accordingly, the Eighth Circuit reversed the trial court's order certifying a class and remanded for further proceedings consistent with its ruling.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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 (2d Dist) Upholds Commercial Judgment Enforcement Against Two Officers of Corporate Guarantors

The Appellate Court of Illinois, Second District, recently affirmed the trial court's entry of judgment in favor of the plaintiff mortgagee in a commercial mortgage foreclosure case, and against two corporate officers of two corporate guarantors.

 

The Court concluded that the trial court had discretion as to the nature of the sanction to impose against the two corporate officers personally for violating a restraining provision inherent in judgment enforcement proceedings in Illinois, and a finding of contempt was not a prerequisite to imposing a sanction.

 

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

 

This case arose from the plaintiff's commercial mortgage foreclosure case against three of the appellants, the mortgagor and two guarantors. Following the foreclosure, the trial court entered judgment against the guarantors.

 

Thereafter, the plaintiff issued judgment enforcement proceedings against the guarantors. The plaintiff mortgagee subsequently filed a motion for entry of judgment against two of the other appellants, two corporate officers of the guarantors, for violating the citations.

 

The trial court granted the motion and the corporate officer guarantor appellants appealed from this order. Additionally, during the proceedings, the appellant-intervenor, a mortgage servicing company, filed a petition to intervene, arguing that it had a right to have its alleged superior lien interest tried and determined. The trial court denied the petition. The appellant-intervenor mortgage servicer appealed from that order. The Second District consolidated the appeals.

 

The corporate officer guarantor appellants first contended on appeal that the trial court erred in reinstating the citations on April 25, 2017. They argued that the trial court was without authority to vacate the April 19, 2017 dismissal because the citations automatically terminated, pursuant to Rule 277(f), when they were dismissed without extension.

 

In Illinois, judgment enforcement proceedings automatically terminate six months after the cited party's first appearance, unless the trial court grants an extension. Rule 277(f) provides:

 

A proceeding under this rule continues until terminated by motion of the judgment creditor, order of the court, or satisfaction of the judgment, but terminates automatically 6 months from the date of (1) the respondent's first personal appearance pursuant to the citation or (2) the respondent's first personal appearance pursuant to subsequent process issued to enforce the citation, whichever is sooner. The court may, however, grant extensions beyond the 6 months, as justice may require. Orders for the payment of money continue in effect notwithstanding the termination of the proceedings until the judgment is satisfied or the court orders otherwise.

 

Ill. S. Ct. R. 277(f) (eff. Jan. 4, 2013).

 

The Second District held that the corporate officer guarantor appellants' contention is both forfeited and without merit. After the citations were dismissed on April 19, 2017, the plaintiff mortgagee filed a motion to vacate the default judgment pursuant to section 2-1301(e) of the Code (735 ILCS 2-1301(e)). Section 2-1301(e) states that "the court may in its discretion, before final order or judgment, set aside any default, and may on motion filed within 30 days after entry thereof set aside any final order or judgment upon any terms and conditions that shall be reasonable." Id.  Thus, the Court concluded that a trial court retains the inherent power to vacate any of its judgments within 30 days upon good cause shown. Trojan v. Marquette National Bank, 88 Ill. App. 2d 428, 437-38 (1967).

 

Additionally, the Second District agreed with the trial court that the plaintiff mortgagee provided a reasonable explanation for failing to appear in court on April 19 and that its motion to vacate was timely filed several days later. Also, the Court noted that the appellants never argued at trial that the citations expired, even after the dismissal was vacated. Thus, the Court held that the citations did not automatically terminate under Rule 277(f).

 

The corporate officer guarantor appellants' next contention on appeal was that the trial court erred in finding that the subject account transfers violated the citations' restraining provision.

 

Under Illinois law, a judgment creditor may "prosecute supplementary proceedings for the purposes of examining the judgment debtor or any other person to discover assets or income of the debtor not exempt from the enforcement of the judgment… and of compelling the application of non-exempt assets or income discovered toward the payment of the amount due under the judgment." See 735 ILCS 5/2-1402(a). During the course of supplementary proceedings, a judgment creditor may serve a citation to discover assets on a third party, requiring it to freeze assets. Id. § 2-1402(f).

 

To protect assets from improper transfers, Illinois permits a citation to discover assets to include a restraining provision that "prohibit[s] the party to whom it is directed from making or allowing any transfer or other disposition of, or interfering with, any property not exempt from the enforcement of a judgment therefrom... until the further order of the court or the termination of the proceeding, whichever occurs first." Id. §2-1402(f)(1). In the present case, the Second District found that the citations issued to the guarantors contained language similar to the restraining provision in the statute.

 

The Illinois legislature has carved out two exceptions to the section 2-1402(f)(1) restraining provision. The first exception pertains to transfers of property "exempt from the enforcement of a judgment therefrom." 735 ILCS 5/2-1402(f)(1). The second exception applies to property of the judgment debtor in the hands of third parties that is in excess of an amount that is "double… the balance due sought to be enforced by the judgment creditor." Id.

 

In the present case, the corporate officer guarantor appellants did not argue that the transferred funds at issue fell within either exception to the statute. Instead, they argued only that the funds "did not belong to" the guarantors. However, the Second District observed that the statute did not allow the corporate officer guarantor appellants to independently assess any priority interests related to the operating accounts and act as they deemed proper. See Vendo Co. v. Stoner, 108 Ill. App. 3d 51, 57-58 (1982). Instead, the statute required the judgment debtor to hold the property in its possession in status quo until the judgment creditor's rights could be determined. Kirchheimer Brothers Co. v. Jewelry Mine, Ltd., 100 Ill. App. 3d 360, 362 (1981).

 

The Second District noted that the facts here were similar to those in City of Chicago v. Air Auto Leasing Co., 297 Ill. App. 3d 873 (1998), in that the appellants argued that transfers were made in the ordinary course of business for accounting reasons and that, even though the funds were transferred in and out of the guarantors' operating accounts, the funds never belonged to them. Id. at 876. However, similar to the holding in Air Auto, the Court here held that the statute did not contain an exception for fund transfers that are an accounting pass-through or only for accounting purposes. Id. at 878.

 

The corporate officer guarantor appellants' next contention on appeal was that the trial court erred in finding the two corporate officers personally liable for violating the citations' restraining provision.  They argued that the officers were not issued any citations, as the citations were issued only to the guarantors. Thus, because the officers did not possess any assets of the guarantors, they were not "third parties" within the meaning of section 2-1402(f)(1) (735 ILCS 5/2-1402(f)(1) and thus could not be held personally liable. The corporate officer guarantor appellants further argued that, pursuant to the statute, the only recourse against the officers would be a finding of contempt, not a personal judgment.

 

In Kennedy v. Four Boys Labor Services, Inc., 279 Ill. App. 3d 361 (1996), a trial court held that a defendant corporation's transfers were fraudulent and ordered the director to turn over the proceeds received from the transfers. Id. at 365. When the director did not comply with this order, the trial court, pursuant to Rule 277(h), entered judgment against the director for the full amount of the underlying judgment. Id. Rule 277(h) states that "any person who fails to obey a citation, subpoena, or order or other direction of the court issued pursuant to any provision of this rule may be punished for contempt… The court may also enforce its order against the real and personal property of that person." Ill. S. Ct. R. 277(h).

 

The appellate court in Kennedy held that, pursuant to Rule 277(h), the trial court had the discretion as to the nature of the sanction to impose for violation of the turn-over order and that it was not an abuse of discretion for the trial court to enter a money judgment against the director for the entire amount of the underlying judgment. Kennedy, 279 Ill. App. 3d at 371

 

Based on the ruling in Kennedy, the Second District here did not find it necessary to interpret section 2-1402(f)(1) to determine whether the corporate officers were "third parties" or whether the trial court's sanction was appropriate under the statute.

 

According to the Court, the citations issued to the guarantors prohibited anyone acting on their behalf from allowing any transfer or other disposition of any property subject to the citations' restraining provision. The Court concluded that, under Rule 277(h), the trial court had the discretion as to the nature of the sanction to impose against the officers for violating the restraining provision and that a finding of contempt was not a prerequisite to imposing a sanction. Id. The Court thus affirmed the sanctions imposed against the officers.

 

Finally, the mortgage servicer appellant-intervenor argued that the trial court erred in denying its petition to intervene.

 

An appeal is considered moot where it presents no actual controversy or where the issues have ceased to exist. Richardson v. Rock Island County Officers Electoral Board, 179 Ill. 2d 252, 256 (1997). A moot appeal must be dismissed. Commonwealth Edison Co. v. Illinois Commerce Comm'n, 2016 IL 118129, ¶ 21.

 

In the present case, the trial court terminated the citations after it entered judgment against the corporate officers. Because the Second District affirmed that determination, it could not grant the appellant-intervenor any effectual relief, as there was no longer a supplementary proceeding in which to intervene. The Court thus dismissed the appeal as moot.

 

Accordingly, the Second District affirmed the trial court's entry of judgment in favor of the plaintiff and dismissed the mortgage servicer appellant-intervenor's appeal as moot.

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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: 8th Cir Rejects FDCPA Claims Relating to Assignment of Collection Services Agreement

The U.S. Court of Appeals for the Eighth Circuit recently affirmed summary judgment in favor of debt collectors over claims of purported violations of the federal Fair Debt Collection Practices Act, 15 U.S.C. 1692, et seq. ("FDCPA").

 

In so ruling, the Eighth Circuit concluded that the assignment of a contract from one debt collector to its successor entity put it into privity with the original collector's agreement with a medical services provider to satisfy Minnesota's third-party debt collector's written contract requirements, and the successor entity could legally take action to collect that debt on behalf of the provider. 

 

The Eighth Circuit further concluded that the debt collectors did not threaten to take actions they could not legally take or attempt to collect a debt by unfair or unconscionable means in violation of sections 1692e(5) and 1692f(1) because the Treasury Department regulations governing hospital facilities and organizations did not apply to the debt collectors.

 

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

 

A consumer ("Consumer") obtained services from a healthcare provider ("Provider"), who denied her application for financial assistance to pay for her services.  The healthcare provider retained a debt collector ("Debt Collector 1") to collect the outstanding debt, and sent a letter to the Consumer in November 2017 (the "November 2017 Letter") informing her that "the below listed account(s) has been turned over to us by our client, who has given you an opportunity to satisfy this obligation" – without mention of the provider's financial assistance policy.

 

In January 2018, all of Debt Collector 1's contracts, assets, employees, obligations, and rights including its written agreement with the medical provider for debt collection services, were assigned or transferred to a successor entity ("Debt Collector 2") and all accounts were consolidated under Debt Collector 2's name. In March 2018, Debt Collector 2 sent a similar letter to the Consumer (the "March 2018 Letter") seeking to collect the outstanding medical debt and omitting information regarding the Provider's financial assistance program.

 

At all relevant times the Provider was subject to the Minnesota Attorney General's requirement to enter into written contracts with any third-party debt collection agency, which required the debt collectors to comply with federal law, and the Provider to confirm that patients are provided reasonable opportunity to apply for charitable care or other need-based relief.

 

The Consumer filed suit against Debt Collector 1 and Debt Collector 2 (the "Debt Collectors") arguing they violated the FDCPA by (i) failing to have a written contract with the Provider as required, (ii) failing to include information about the Provider's financial assistance program in the November 2017 and March 2018 Letters, and (iii) false, deceptive, or misleading information in the March 2018 letter.

 

The trial court granted the Debt Collectors' motion for summary judgment, entering judgment in the Debt Collectors' favor and against the Consumer.  The instant appeal followed.

 

On appeal, the Consumer first argued that the trial court erred by granting summary by improperly relying on disputed facts — specifically, that the records did not evidence a merger between the Debt Collectors, and thus, no contract existed between the Provider and successive entity, Debt Collector 2. 

 

Although both sides argued over facts related to the integration and assignments of contract rights between the Debt Collector entities, the Eighth Circuit reasoned that the issue of whether there was a formal merger was not material if the assignment of contract rights from Debt Collector to Debt Collector 2 created a contract between the Provider and Debt Collector 2 to satisfy the state's written contract requirement.

 

Here, in accordance with Minnesota contract law and assignment, the Eighth Circuit determined that because the trial court established that there was a written agreement between the Provider and Debt Collector 1, that the assignment placed Debt Collector 2 into privity with the original parties.  Cascades Development of Minnesota, LLC v. National Specialty Insurance, 675 F.3d 1095, 1099 (8th Cir. 2012) (quoting Illinois Farmers Ins. Co. v. Glass Serv. Co., 683 N.W.2d 792, 803 (Minn. 2004)) (emphasis omitted) (an assignment "place[s] the assignee in the shoes of the assignor, and provides the assignee with the same legal rights as the assignor had before assignment.").  Accordingly, no dispute over a material fact existed on this issue and entry of summary judgment was appropriate.

 

Next, the Consumer argued that the March 2018 Letter's representation that the Provider "turned over" her account to Debt Collector 2 violated the FDCPA's prohibition against false, deceptive, or misleading information (§ 1692e) because her account was either never turned over or at most assigned to Debt Collector 2 when it sent the March 2018 letter. 

 

This argument also was rejected by the Eighth Circuit based upon its determination that Debt Collector 2 was the valid assignee of the contract between the Provider and Debt Collector 1, and thus could legally take action to collect the debt on the Provider's half. 

 

Even viewing the claims under the lens of the unsophisticated consumer, the purportedly violative language would not be considered false or misleading by a reasonable jury because the November 2017 and March 2018 Letters contained identical language and disclosures of the amounts and owners of the debt, and even included the same contact information and administrator's signature.

 

Lastly, the Eighth Circuit considered the Consumer's claims that the Debt Collectors violated § 1692e(5) and § 1692f(1) of the FDCPA by attempting to collect her debt without notifying her of North Memorial's financial assistance policy.

 

The trial court concluded that because the Debt Collectors "are not hospital organizations" and "do not operate hospital facilities" that the Treasury Department regulations requiring the Provider to include its financial assistance policy in its billing statements did not apply.  The Consumer argues that this interpretation of Section 1692e(5) (which prohibits debt collectors from making a "threat to take any action that cannot legally be taken or that is not intended to be taken") and Section 1692f(1) (outlawing "unfair or unconscionable means" of debt collection, including collecting "any amount" unless "such amount is expressly authorized by the agreement creating the debt or permitted by law") improperly allows a debt collector to engage in an activity the original hospital creditor could not.

 

The Eighth Circuit sided with the trial court, concluding that the Provider assigned only its ability to collect debt to the Debt Collectors, and not its medical billing function, and that the FDCPA does not impute the Provider's requirement to comply with the Treasury Department's medical billing regulations to debt collectors. 

 

Accordingly, because the Debt Collectors did not violate the FDCPA, the Eighth Circuit held that the trial court did not err in granting summary judgment and judgment in their favor was affirmed.

 

 

 

Ralph T. Wutscher
Maurice Wutscher LLP
The Loop Center Building
105 W. Madison Street, 6^th 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

 

 

 

Alabama   |   California   |   Florida   |   Georgia   |   Illinois   |   Massachusetts   |   New Jersey   |   New York   |   Ohio   |   Pennsylvania   |   Tennessee   |   Texas   |   Washington, DC

 

 

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