Friday, February 10, 2017

FYI: Cal App Ct Rejects Borrower's HBOR "Dual Tracking" and SPOC Allegations

The Court of Appeals of California, Second Appellate District, recently held that a borrower failed to state a cause of action for alleged violations of the "dual tracking" and "single point of contact" provisions of California's Homeowners Bill of Rights (HBOR, Calif. Civ. Code, '§§ 2923.6, 2923.7) because:

(1) the borrower did not allege acceptance of a loan modification agreement within 14 days after receiving it; and
(2) the borrower's allegations demonstrated that the servicer assigned a customer service representative to process the loan modification application.

The Court also dismissed the borrower's allegations of lack of standing to foreclose, illegal substitution of trustee, and fraud as meritless and held that the doctrine of res judicata applied to the borrower's new theory of wrongful foreclosure which was premised on the same primary right as past litigation that had resulted in final judgments allowing foreclosure proceedings to go forward.

Of note, the Court prefaced its ruling by stating:

"'The purpose of the law of contracts is to protect the reasonable expectations of the parties.' (Ben-Zvi v. Edmar Co. (1995) 40 Cal.App.4th 468, 475.) This principle applies to the law of 'mortgages.'  A person who borrows money from a bank to purchase or refinance a home has a reasonable expectation that the bank will fund the loan. The bank has a reasonable expectation that monthly mortgage payments will be made. Here, appellant's reasonable expectations were met. The bank's were not. Nonpayment of the mortgage for approximately eight years while the borrower remains in possession is an egregious abuse. Respondent argued, and the trial court agreed, that appellant is 'gaming the system.' The game is over."

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

This lawsuit was the fifth in a series of state and federal lawsuits brought by a borrower since 2009 challenging a servicer's efforts to foreclose upon his real property. The lawsuits concerned similar allegations of claimed wrongful foreclosure procedures and the bank's standing to foreclose.

In 1992, the borrower acquired residential property. He subsequently obtained a $500,000 loan from a lender, and executed an adjustable interest rate promissory note in favor of the lender. A deed of trust was recorded to secure the loan.

Sixteen years later, the Federal Deposit Insurance Corporation, as receiver for the lender, and a bank entered into a Purchase and Assumption Agreement whereby the bank purchased all right, title, and interest in the assets of the lender. The agreement also stated that the bank specifically purchased all mortgage servicing rights and obligations of the lender.

A year later, in 2009, the borrower defaulted on the loan, and the bank's foreclosure trustee recorded a notice of default and a notice of trustee's sale.

Before the foreclosure sale, the borrower filed a complaint against the foreclosure trustee and the bank, alleging that the notice of default was not properly recorded, that it was not filed in compliance with Cal. Civil Code section 2923.5, and that the notice of sale was not properly recorded. The trial court dismissed the action without leave to amend.  The borrower appealed and the Court of Appeal, affirmed the trial court's judgment of dismissal.

In 2011, the foreclosure trustee recorded a second notice of trustee's sale. The borrower filed a second action against the foreclosure trustee, alleging that the notice of default was defective and that the bank violated section 2923.52 by giving premature notice of sale. The trial court dismissed this action. The borrower appealed, and the Court of Appeal affirmed the trial court's judgment of dismissal.

In 2012, the foreclosure trustee recorded another notice of trustee's sale. In response, the borrower filed a third lawsuit against the bank, this time in federal court. In part, he repeated allegations made in his previous state court cases regarding the misspelling of his first name. The borrower also challenged bank's right to nonjudicial foreclosure.

The trial court granted the bank's motion to dismiss the action without leave to amend.  The borrower appealed, and the U.S. Court of Appeals for the Ninth Circuit affirmed the dismissal without leave to amend. See Gillies v. JPMorgan Chase Bank N.A. (Gillies III) (9th Cir. 2016) 644 Fed.Appx. 716.

In 2015, a new foreclosure trustee recorded a notice of trustee's sale setting a foreclosure sale of the property. The borrower responded by filing yet another complaint alleging violations of the California Homeowners Bill of Rights (HBOR), lack of standing to foreclose, unlawful substitution of trustee, fraud, injunctive relief, and damages. He also obtained a temporary restraining order and filed an application for a preliminary injunction.

Once again, the bank demurred, asserting that the borrower's allegations did not state facts sufficient to constitute a cause of action. The trial court sustained the demurrer without leave to amend, vacated the temporary restraining order, denied the borrower's request for a preliminary injunction, and dismissed the borrower's action. The borrower appealed again,

For his first cause of action, the borrower alleged that the bank violated the "dual-tracking" prohibition of HBOR, Cal. Civil Code ' 2923.6 (c), by proceeding with the foreclosure while his loan modification application was pending. He also alleged that the bank did not assign "a single point of contact," as required by ' 2923.7 (a).

As you may recall, Cal. Civ. Code § 2923.6(c)(2) permits a "mortgage servicer, mortgagee, trustee, beneficiary, or authorized agent" to record a notice of default or notice of sale or conduct a trustee's sale if a borrower does not accept a first lien loan modification offer within 14 days of the offer.

Cal. Civ. Code § 2923.7(a) requires that "[u]pon request from a borrower who requests a foreclosure prevention alternative, the mortgage servicer shall promptly establish a single point of contact and provide to the borrower one or more direct means of communication with the single point of contact."

The Court of Appeal rejected the borrower's arguments, noting that the allegations of his complaint belied his contention that the bank violated HBOR, because he did not allege that he accepted the loan modification during the four month period after he received the modification agreement and before the servicer recorded the notice of sale. 

In addition, the Appellate Court held that the borrower's allegations demonstrated that the bank assigned a customer service representative to whom the borrower submitted his loan modification application.

For his second cause of action, the borrower alleged that the bank lacked standing to foreclose because he alleged that the note and deed of trust were sold to a third party before the bank assumed the assets of the lender.

The Court of Appeal, taking judicial notice of the agreement between the bank and the Federal Deposit Insurance Corporation, disagreed. It dismissed the borrower allegations as speculation with no reasonable basis.

For his third cause of action, the borrower alleged that the bank was not the beneficiary of his trust deed and could not substitute the servicer as trustee to foreclose his property.

Again, the Court of Appeal disagreed, holding that it was beyond dispute that the bank succeeded to the lender's interest as beneficiary, and affirming the trial court's conclusion that that the borrower did not state a cause of action regarding the substitution of trustee.

In his fourth cause of action, the borrower alleged that the bank committed fraud on each occasion that it noticed a trustee's sale by misstating his name although he admitted that the misspelling was a clerical error.

The Appellate Court concluded that the allegation of fraud did not state a cause of action, observing no reasonable person would be confused by this minor typographical error. It noted that the notices contained the street address of the property and correctly spelled the borrower's surname.

Thus, the Appellate Court held that the trial court properly denied the borrower's motion for a preliminary injunction.

The Court also rejected the borrower's arguments concerning his new theory of wrongful foreclosure, noting that it was the same primary right that the borrower had always claimed and was precluded by the principle of res judicata. See Weikel v. TCW Realty Fund II Holding Co. (1997) 55 Cal.App.4th 1234, 1245.

By now, the borrower had lost three superior court cases, a federal case in the United States District Court, an appeal in the Ninth Circuit Court of Appeals. He also lost an emergency petition for relief in the Ninth Circuit as well as in the United States Bankruptcy Court.

The Court of Appeal admonished the borrower, who was an attorney, for not complying with lawful court orders, and continuing to tax the legal system in an attempt to retain possession of his house.

The Court observed that no litigant has an entitlement to file a lawsuit seeking relief from an alleged wrong and then not follow the court's ruling denying relief. By submitting to the court to resolve a dispute, a litigant who is willing to abide by an order granting relief must be willing to abide by an order denying relief. The sanctity and integrity of a final judgment must be honored or there is no such thing as a final judgment. See People v. Barragan (2004) 32 Cal.4th 236, 255.

The Court of Appeal therefore affirmed the trial court's dismissal of the complaint.


Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

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Friday, February 3, 2017

FYI: 9th Cir Limits Scope of FDCPA "Enforcement of Security Interest" Exception

The U.S. Court of Appeals for the Ninth Circuit recently held that a notice regarding overdue homeowners association (HOA) assessments contained language that overshadowed and conflicted with the homeowner's federal Fair Debt Collection Practices Act (FDCPA) debt validation rights.

Limiting the scope of its ruling in Ho v. ReconTrust Co., NA, 840 F.3d 618, 620 (9th Cir. 2016), the Court rejected the debt collector's argument that in sending the notice regarding overdue HOA assessments, it merely sought to perfect a security interest and was therefore subject only to the limitations under 15 U.S.C. §1692f(6).

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

A debt collection law firm sent a notice to a homeowner on behalf of an HOA seeking to collect an overdue homeowner's assessment fee, as well as late, administrative, and legal fees. The notice also included a warning that failure to pay the assessment fee would result in a lien against the property. The law firm subsequently recorded a lien on the homeowner's property.

The homeowner filed a complaint, alleging that the debt collector's notice violated the FDCPA, the Rosenthal Fair Debt Collection Practices Act, Cal. Civ. Code § 1788 et seq. (Rosenthal Act), and the California Unfair Competition Law, Cal. Bus. & Prof. Code § 17200, et seq. (UCL).

As you may recall, the FDCPA requires a debt collector to send the debtor a written notice that informs the debtor of the amount of the debt, to whom the debt is owed, her right to dispute the debt within thirty days of receipt of the letter, and her right to obtain verification of the debt.  See 15 U.S.C. § 1692g. 

Notice of the debtor's right to dispute the debt and to request the name of the original creditor must not be overshadowed or inconsistent with other messages appearing in the communication 15 U.S.C. § 1692g(b). Overshadowing or inconsistency may exist where language in the notice would "confuse a least sophisticated debtor" as to her validation rights. Terran v. Kaplan, 109 F.3d 1428, 1432 (9th Cir. 1997). In other words, "whether the initial communication violates the FDCPA depends on whether it is likely to deceive or mislead a hypothetical 'least sophisticated debtor.'" Id. at 1431.

The district court granted the debt collector's motion to dismiss, concluding that the notice "complied with the clarity and accuracy requirements" of the FDCPA, and therefore "did not threaten to take action that could not legally be taken" as prohibited by the FDCPA. The district court dismissed the homeowner's state law claims as dependent on her FDCPA claims.

The homeowner appealed, arguing that the notice violated § 1692g for two reasons.

First, she contended that the notice demanded payment sooner than the expiration of the requisite thirty-day dispute period provided under 15 U.S.C. § 1692g.

Second, she claimed that by threatening to record a lien within thirty-five days, irrespective of whether she disputed the debt, the law firm failed to effectively explain her right to dispute the debt.

The debt collector countered that it was only enforcing a security interest and not attempting to collect a debt, and therefore the notice needed to comply only with the FDCPA's obligations relating to enforcement of security interests under 15 U.S.C. § 1692f(6).

The debt collector also argued that even if it were subject to the notice requirements under 15 U.S.C. § 1692g, it complied with the statutory requirements because it sent the notice to perfect the HOA's right to record an assessment lien against the homeowner's property under California Civil Code § 5660.

The Ninth Circuit disagreed, noting that the FDCPA defines "debt" as "any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment." 15 U.S.C. § 1692a(5).

Contrary to the debt collector's contentions, the Ninth Circuit held that the overdue HOA assessment fee was clearly a debt under § 1692a(5), because it related to the homeowner's household and arose from her membership in the HOA.

The Court then examined whether the debt collector was subject solely to § 1692f(6).  The debt collector argued that, based on the definition of a "debt collector" under 15 U.S.C. § 1692a(6), entities engaged in the enforcement of security interests are subject only to § 1692f(6). The Ninth Circuit disagreed.

In a recent ruling, the Ninth Circuit held that where a California foreclosure trustee is engaged solely in the enforcement of a security interest and not in debt collection it is subject only to § 1692f(6) rather than the full scope of the FDCPA.  Ho v. ReconTrust Co., NA, 840 F.3d 618, 620 (9th Cir. 2016). However, the Court observed that "[i]f entities that enforce security interests engage in activities that constitute debt collection, they are debt collectors." Id.

The Ninth Circuit concluded that the debt collector sent the notice to collect payment of a debt – i.e., the amounts due to the HOA.  Even though the debt collector also sought to perfect the HOA's security interest and preserve its right to record a lien in the future, the Court held that the effort to collect payment made the debt collector subject to the full scope of the FDCPA, including § 1692g and § 1692e.

Turning to the homeowner's argument that the notice did not provide her with the required thirty days in which to dispute the debt, the Court observed that notice's demand for payment within thirty-five days of the date of the letter was inconsistent with her right to dispute a debt within thirty days of receipt of the letter. See 15 U.S.C. § 1692g(a); Cal. Civ. Code § 5660.

The Ninth Circuit held that the least sophisticated debtor, when confronted with such a notice, would reasonably forgo her right to thirty days in which to dispute the debt and seek verification. The Court ruled that infringement of the debtor's right to thirty days in which to dispute the debt therefore plausibly violated  15 U.S.C. § 1692g.  See Terran, 109 F.3d at 1434.

The homeowner additionally argued that the least sophisticated debtor might not understand, on the basis of the notice, that upon notifying the debt collector of a dispute, all debt collection activities would "cease . . . until the debt collector obtains verification of the debt . . . and a copy of such verification . . . is mailed to the consumer by the debt collector." 15 U.S.C. § 1692g(b).

In California, under the Davis-Stirling Act, a homeowners' association may not record a lien with a county recorder's office contemporaneously with mailing the demand letter, but instead must provide notice of the debt at least thirty days prior to recording a lien, during which time a debtor-homeowner may dispute the debt.  Cal. Civ. Code § 5660.

The Ninth Circuit explained that the obligations imposed on the HOA pursuant to the FDCPA, including the provision requiring suspension of debt collection activities pending debt verification, were thus consistent with the requirements the HOA must satisfy pursuant to the Davis-Stirling Act.

Contrary to the debt collector's contentions, the Ninth Circuit held that the HOA's right to record a lien thirty days after providing notice under Cal. Civ. Coe § 5660 was not absolute, but instead was dependent on whether the homeowner disputed the debt. Pursuant to the Davis-Stirling Act, if the homeowner disputed the debt and requested an informal dispute resolution proceeding, the HOA must participate in dispute resolution "prior to recording a lien." Cal. Civ. Code § 5670.

The Court agreed that the debt collector's threat of recording of a lien was a debt collection activity, which under the FDCPA must cease if the debtor disputes the debt and the debt collector had not yet mailed verification of the debt to the debtor. In allegedly failing to do so, the Court held that the debt collector's threat of filing a lien would overshadow the homeowner's right to dispute the debt, in violation of 15 U.S.C. § 1692g.

The Ninth Circuit held that a least sophisticated debtor would likely (and incorrectly) believe that even if she disputed the debt and the debt collector had not yet mailed verification of the debt to her, the debt collector would record a lien on the thirty-fifth day after the date of the letter, and as a result would reasonably forgo her right to thirty days in which to dispute the debt and seek verification.

Accordingly, the Court held that the alleged infringement of the debtor's right to thirty days in which to dispute the debt plausibly violated 15 U.S.C. § 1692g.

In sum, the Ninth Circuit concluded that the homeowner had plausibly alleged a claim under the FDCPA (15 U.S.C. § 1692g), and therefore reversed the trial court's dismissal of that claim as well as her related claims under 15 U.S.C. 1692e(5), the Rosenthal Act, and the UCL.



Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Thursday, February 2, 2017

FYI: 9th Cir Holds Company Willfully Violated FCRA By Including Liability Waiver in Disclosure Document

In a case of first impression, the U.S. Court of Appeals for the Ninth Circuit recently held that a prospective employer violated the federal Fair Credit Reporting Act ("FCRA") by including a liability waiver in the same document as the statutorily required disclosure notice for obtaining a job applicant's consumer report.

In so ruling, the Ninth Circuit held that the company's conduct was "willful" as a matter of law, because the language of the statute clearly contradicted the company's interpretation, and whether or not the company "actually believed that its interpretation was correct is immaterial."

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

The plaintiff applied for a job with the defendant company in 2011. As part of the process, he signed a "Pre-employment Disclosure Release," which informed him that his credit history and other information would be considered by the company in deciding whether to hire him, authorized the company to obtain the applicant's consumer report, and waived his right to sue for violations of the FCRA.

In May of 2014, the plaintiff filed a putative class action in federal court on behalf of himself and any persons whose consumer report was obtained by the company after receiving the subject disclosure within the two-year statute of limitations period.

The complaint alleged that the liability waiver violated FCRA, at 15 U.S.C. § 1681b(b)(2)(A)(i), because FCRA requires that the disclosure document consist "solely" of the disclosure.  The complaint did not seek to recover actual or compensatory damages, but instead sought to recover statutory and punitive damages, as well attorney's fees and costs.

The district court dismissed the complaint without prejudice for failure to state a claim because "willfulness" was insufficiently pled. The amended complaint recited the same facts, but added citations to Federal Trade Commission (FTC) opinion letters and district court opinions that allegedly supported plaintiff's argument that the company knew or should have known that its disclosure document violated the FCRA.

The district court again dismissed the complaint, this time with prejudice, because the plaintiff still had not sufficiently pled willfulness, reasoning that the FTC opinion letters "were informal staff opinions, not authoritative guidance[,]" and the district court opinions cited were inapposite because they were decided after the disclosure document at issue had been given to the plaintiff. The plaintiff appealed.

On appeal, the Ninth Circuit began its analysis by finding that plaintiff had standing to sue because he alleged more than a "bare procedural violation," which if "divorced from any concrete harm," fails to satisfy the standing test established by the Supreme Court in Spokeo, Inc. v. Robins.

This, the Ninth Circuit held, is because the "disclosure requirement at issue, 15 U.S.C. § 1681b(b)(2)(A)(i), creates a right to information by requiring prospective employers to inform job applicants that they intend to procure their consumer reports as part of the employment application process. The Ninth Circuit held that the authorization requirement § 1681b(b)(2)(A)(ii), creates a right to privacy by enabling applicants to withhold permission to obtain the report from the prospective employer, and a concrete injury when applicants are deprived of their ability to meaningfully authorize the credit check.

By providing a private cause of action for violations of section 1681b(b)(2)(A), the Court held that Congress recognized the harm such violations cause, thereby articulating a 'chain[] of causation that will give rise to a case or controversy.'"

The Ninth Circuit then turned to the question of whether the defendant company violated the FCRA by incorporating a liability waiver into the required disclosure notice, a matter of first impression in the federal appellate courts. The Court concluded that this practice violated the FCRA.

First, the Court looked to the plain meaning of the statutory text, rejecting the company's argument that the language was inconsistent and ambiguous. The Ninth Circuit held that "[a]llowing an authorization on the same document as the disclosure is consistent with the purpose of the [FCRA]. … Had the statute required disclosure without conditioning the procurement of a consumer report on the job applicant's authorization, it would have failed to give the applicant control over the procurement of the personal information contained in the consumer report. On the other hand, had the statute conditioned the procurement of a report on the job applicant's authorization without mandating clear disclosure by the prospective employer Congress's purpose would have been frustrated because applicants would not understand what they were authorizing. The disclosure and authorization clauses therefore work in tandem to further the congressional purpose of protecting consumers from 'improper invasion[s] of privacy.'"

The Court also found that the FCRA did not implicitly authorize including a liability waiver in the same document as the disclosure, reasoning that just because Congress allowed the disclosure document to be combined with the authorization "does not mean that the statute contains other implicit exceptions as well."

Relying on the common law maxim of statutory interpretation "expressio unius est exclusio alterius," the Ninth Circuit rejected the company's argument that "a liability waiver is an implicit exception to the 'solely' requirement in 15 U.S.C. § 1681b(b)(2)(A)(i)." In addition, "an implied exception permitting the inclusion of a liability waiver on the same document as the disclosure does not comport with the FCRA's basic purpose … [and] would frustrate Congress's goa of guarding a job applicant's right to control the dissemination of sensitive personal information."

The Ninth Circuit also rejected the company's argument that the FCRA contains explicit language allowing combination of the disclosure with the liability waiver because "a liability waiver is one type of authorization." The Court refused to speculate about the breadth of the term "authorization" because "Congress told us exactly what it meant when it described the authorization as encompassing only 'the procurement of [a consumer] report."

Even if the statute were not as clear as the Court thought it to be, the Court reasoned that the company's argument was "inconsistent with the plain meaning of the term 'authorize.' … A consumer may authorize the procurement of a consumer report or waive an employer's liability, but he may not 'authorize' a 'waiver.'"

The company also argued that "its inclusion of the liability waiver was permissible because even with the waiver, the disclosure was still 'clear and conspicuous.'" However, the Ninth Circuit found this argument to be irrelevant "[b]ecause the question of whether a disclosure is 'clear and conspicuous' within the meaning of Section 1681b(b)(2)(A)(i) is separate from the question of whether a document consists 'solely' of a disclosure…."

Having found that FCRA was violated, the Ninth Circuit addressed whether the violation was willful, finding that it was willful as a matter of law.

First, it explained that the Supreme Court has clarified that "willfulness" includes "actions taken in 'reckless disregard of statutory duty,' in addition to actions 'known to violate the Act.'"

The Ninth Circuit rejected the company's argument that it did not act willfully because the statute's text is unclear, finding that the company's reading of the statute was not objectively reasonable because "the FCRA unambiguously bars a prospective employer from including a liability waiver on a disclosure document provided a job applicant pursuant to Section 1681b(b)(2)(A)."  The Court held that the statute clearly contradicted the company's interpretation, whether or not the company "actually believed that its interpretation was correct is immaterial."

The Court found that because the company "ran an 'unjustifiably high risk of violating the statute… [and] acted in 'reckless disregard of statutory duty … [i]ts violation of the FCRA was therefore willful under 15 U.S.C. § 1681n."

Finally, the Ninth Circuit rejected the company's argument that the FCRA's two-year statute of limitations barred the plaintiff's claim because he discovered the violation when the disclosure was given to the plaintiff, reasoning that "a prospective employer does not violate Section 1681b(b)(2)(A) by providing a disclosure that violates the FCRA's disclosure requirement. … The employer violate the FCRA only where, after violating its disclosure procedures, it 'procure[s] or cause[s] to be procured' a consumer report about the job applicant."

The Court concluded that since the FCRA "unambiguously bars the inclusion of a liability waiver on the same document as a disclosure made pursuant to 15 U.S.C. § 1681b(b)(2)(A)[,] [the company] willfully violated the statute by procuring [plaintiff's] consumer report without providing a disclosure 'in a document that consist[ed] solely of the disclosure.'"

Accordingly, the trial court's dismissal order was reversed the case remanded.


Eric Tsai
Maurice Wutscher LLP
 
71 Stevenson Street, Suite 400
San Francisco, CA 94105
Direct: (415) 529-7654
Fax: (866) 581-9302
Mobile: (714) 600-6000
Email: etsai@MauriceWutscher.com

Admitted to practice law in California, Nevada and Oregon




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Monday, January 16, 2017

FYI: 9th Cir Rejects "Administrative Feasibility" or "Ascertainability" Class Cert Requirement

The U.S. Court of Appeals for the Ninth Circuit recently held that class action plaintiffs are not required to demonstrate that there is an administratively feasible way to determine who is in a class in order for the class to be certified.

In so ruling, the Ninth Circuit noted that the Sixth, Seventh, and Eighth Circuits have similarly ruled. See Sandusky Wellness Ctr., LLC, v. Medtox Sci., Inc., 821 F.3d 992, 995–96 (8th Cir. 2016); Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015); Mullins v. Direct Digital, LLC, 795 F.3d 654, 658 (7th Cir. 2015), cert. denied, ––– U.S. ––––, 136 S.Ct. 1161, 194 L.Ed.2d 175 (2016). 

Although the Court focused on the Third Circuit's contrary ruling, the First, Second, Fourth, and Eleventh Circuits have also held to the contrary.  See, e.g., In re Nexium Antitrust Litig., 777 F.3d 9 (1st Cir. 2015); Brecher v. Republic of Argentina, 806 F.3d 22 (2d Cir. 2015), EQT Prod. Co. v. Adair, 764 F.3d 347 (4th Cir. 2014); Byrd v. Aaron's Inc., 784 F.3d 154 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F. 3d 300 (3d Cir. 2013); Karhu v. Vital Pharmaceuticals, Inc., Case No. 14-11648 (11th Cir 2015)(unreported).

The Ninth Circuit held that a separate "administrative feasibility" or "ascertainability" prerequisite to class certification was not compatible with the language of Rule 23.  In addition, the Court opined that Rule 23's enumerated criteria already address the policy concerns that had motivated some courts to adopt a separate administrative feasibility or ascertainability requirement, and Rule 23 did so without undermining the balance of interests inherent in certifying a class. 

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

Consumers who purchased cooking oil products labeled "100% Natural" filed putative class actions asserting state-law claims against the manufacturer in eleven states. The cases were consolidated in this action.

The consumers moved to certify eleven classes defined to include all persons who resided in the States of California, Colorado, Florida, Illinois, Indiana, Nebraska, New York, Ohio, Oregon, South Dakota, or Texas who had purchased the manufacturer's products within the applicable statute of limitations periods established by the laws of their state of residence (the "Class Period") through the final disposition of this and any and all related actions.

The manufacturer opposed class certification on the grounds that there would be no administratively feasible way to identify members of the proposed classes because consumers would not be able to reliably identify themselves as class members.  Thus, the manufacturer argued that the class was not eligible for certification.

Although the trial court acknowledged that the Third Circuit and some district courts had refused certification in similar circumstances, it declined to join in their reasoning. Instead, the trial court held that, at the certification stage, it was sufficient that the class was defined by an objective criterion -- here, whether class members purchased manufacturer's oil during the class period.

The trial court ultimately granted the consumers' motion for class certification in part, and certified eleven statewide classes to pursue certain claims for damages under Federal Rule of Civil Procedure 23(b)(3).  The manufacturer then appealed to the Ninth Circuit pursuant to Rule 23(f).

As you may recall, Federal Rule of Civil Procedure 23 governs class action procedure in federal court.  Parties seeking class certification must satisfy each of the four requirements of Rule 23(a) — numerosity, commonality, typicality, and adequacy — and at least one of the requirements of Rule 23(b). See Ellis v. Costco Wholesale Corp., 657 F.3d 970, 979–80 (9th Cir. 2011).

Rule 23(a), which is titled "prerequisites," provides that one or more members of a class may sue or be sued as representative parties on behalf of all members only if: (1) the class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.  Rule 23(a) does not mention "administrative feasibility."

The manufacturer argued that the Court should reverse the class certification because the district court did not require the consumers to proffer a reliable way to identify members of the certified classes here, which included consumers in eleven states who purchased the cooking oils labeled "100% Natural" during the relevant period.

The manufacturer argued that, in addition to satisfying these enumerated criteria, class proponents must also demonstrate that there is an administratively feasible way to determine who is in the class. The manufacturer claimed that the consumers did not propose any way to identify class members and could not prove that an administratively feasible method existed because consumers do not generally save grocery receipts and are unlikely to remember details about individual purchases of a low-cost product like cooking oil.

The Ninth Circuit rejected the manufacturer's argument, holding that Rule 23(a)'s omission of "administrative feasibility" was meaningful. Relying on Silvers v. Sony Pictures Entm't, Inc., 402 F.3d 881, 885 (9th Cir. 2005), the Court concluded that because the drafters specifically enumerated "prerequisites," Rule 23(a) constituted an exhaustive list.

The Court of Appeals also took guidance from language used in other provisions of the Rule, noting, for example, in contrast to Rule 23(a), that Rule 23(b)(3) provides, "The matters pertinent to these findings include," followed by four listed considerations. FED. R. CIV. P. 23(b)(3).

Relying on Russello v. United States, 464 U.S. 16, 23, 104 S.Ct. 296, 78 L.Ed.2d 17 (1983), the Ninth Circuit reasoned that if the Rules Advisory Committee had intended to create a non-exhaustive list in Rule 23(a), it would have used similar language. The Court noted that where Congress includes particular language in one section of a statute but omits it in another section of the same act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion. See Russello v. United States, 464 U.S. 16, 23, 104 S. Ct. 296, 78 L.Ed.2d 17 (1983).

Moreover, Ninth Circuit noted that Rule 23(b)(3) requires a court certifying a class under that section to consider the likely difficulties in managing a class action, and held that imposing a separate administrative feasibility requirement would render that manageability criterion largely superfluous, a result that contravenes the familiar precept that a rule should be interpreted to give effect to every clause.

The Ninth Circuit also relied on the Supreme Court precedent of Amchem Products, Inc. v. Windsor, 521 U.S. 591, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997). In Amchem, the Supreme Court considered whether a settlement-only class could be certified without satisfying the requirements of Rule 23.  In holding that it could not, the Supreme Court underscored that the Federal Rules of Civil Procedure result from "an extensive deliberative process involving a Rules Advisory Committee, public commenters, the Judicial Conference, the Supreme Court, and Congress." Id. at 620, 117 S.Ct. 2231.

Noting that in Amchem, the Supreme Court warned that the "text of a rule thus proposed and reviewed limits judicial inventiveness" and admonished that "courts are not free to amend a rule outside the process Congress ordered," the Ninth Circuit concluded that the lesson of Amchem Products was plain: "Federal courts ... lack authority to substitute for Rule 23's certification criteria a standard never adopted." Id. at 622, 117 S.Ct. 2231.

In sum, the Ninth Circuit concluded that the language of Rule 23 does not impose a freestanding administrative feasibility prerequisite to class certification, and, mindful of the Supreme Court's guidance, the Court of Appeals declined to interpose an additional hurdle into the class certification process delineated in the enacted Rule. 

The Ninth Circuit recognized that the Third Circuit requires putative class representatives to demonstrate "administrative feasibility" as a prerequisite to class certification. See Byrd v. Aaron's Inc., 784 F.3d 154, 162–63 (3d Cir. 2015); Carrera v. Bayer Corp., 727 F.3d 300, 306–08 (3d Cir. 2013). The Court noted that the rationale that the Third Circuit has given for imposing an administrative feasibility requirement is the need to mitigate the administrative burdens of trying a Rule 23(b)(3) class action.

Courts adjudicating such actions must provide notice that a class has been certified and an opportunity for absent class members to withdraw from the class. See Wal–Mart Stores, Inc. v. Dukes, 564 U.S. 338, 362, 131 S.Ct. 2541, 180 L.Ed.2d 374 (2011); accord FED. R. CIV. P. 23(c)(2)(B). The Third Circuit largely justifies its administrative feasibility prerequisite as necessary to ensure that compliance with this procedural requirement does not compromise the efficiencies Rule 23(b)(3) was designed to achieve.  See Shelton v. Bledsoe, 775 F.3d 554, 562 (3d Cir. 2015); Carrera, 727 F.3d at 307.

However, the Ninth Circuit noted that Rule 23(b)(3) already contains a specific, enumerated mechanism to achieve that goal: the manageability criterion of the superiority requirement. Rule 23(b)(3) requires that a class action be "superior to other available methods for fairly and efficiently adjudicating the controversy," and it specifically mandates that courts consider "the likely difficulties in managing a class action." FED. R. CIV. P. 23(b)(3)(D).

The Court also observed that the Seventh Circuit had rejected the Third Circuit's justifications in Mullins v. Direct Digital, LLC, 795 F.3d 654 (7th Cir. 2015), and the Sixth Circuit followed suit in Rikos v. Procter & Gamble Co., 799 F.3d 497, 525 (6th Cir. 2015). Accordingly, the Ninth Circuit concluded that Rule 23's enumerated criteria already addressed the interests that motivated the Third Circuit and, therefore, an independent administrative feasibility requirement was unnecessary.

Moreover, relying on the Seventh Circuit case of Mullins, which observed that requiring class proponents to satisfy an administrative feasibility prerequisite "conflicts with the well-settled presumption that courts should not refuse to certify a class merely on the basis of manageability concerns," the Ninth Circuit concluded that this presumption makes ample sense given the variety of procedural tools courts can use to manage the administrative burdens of class litigation. See Mullins, 795 F.3d at 663.

The Court further noted that Rule 23(c) already enables district courts to divide classes into subclasses or certify a class as to only particular issues. FED. R. CIV. P. 23(c)(4), (5).  The Ninth Circuit also reasoned that adopting a freestanding administrative feasibility requirement instead of assessing manageability as one component of the superiority inquiry would have practical consequences inconsistent with the policies embodied in Rule 23, noting that Rule 23(b)(3) calls for a comparative assessment of the costs and benefits of class adjudication, including the availability of "other methods" for resolving the controversy, FED. R. CIV. P. 23(b)(3).

In addition, following the reasoning of the Seventh Circuit's Mullins, the Ninth Circuit held that a standalone administrative feasibility requirement would invite courts to consider the administrative burdens of class litigation "in a vacuum." See Mullins, 795 F.3d at 663. The Court reasoned that the difference in approach would often be outcome determinative for cases like this one, in which administrative feasibility would be difficult to demonstrate but in which there might be no realistic alternative to class treatment. See id. at 663–64.

The Ninth Circuit therefore concluded that class actions involving inexpensive consumer goods would likely fail at the outset if administrative feasibility were a freestanding prerequisite to certification.

Again citing to the Supreme Court case, Amchem, the Court reasoned that the authors of Rule 23 opted not to make the potential administrative burdens of a class action dispositive and instead directed courts to balance the benefits of class adjudication against its costs. The Ninth Circuit held that it lacked authority to substitute its judgment for the authors of Rule 23. See Amchem Prods., 521 U.S. at 620, 117 S.Ct. 2231.

The Ninth Circuit noted that Third Circuit justified its administrative feasibility requirement as necessary to protect absent class members and to shield bona fide claimants from fraudulent claims. With respect to absent class members, the Third Circuit had expressed concern about whether courts would be able to ensure individual notice without a method for reliably identifying class members. See Byrd, 784 F.3d at 165; Carrera, 727 F.3d at 307.

The Ninth Circuit, however, believed that concern was unfounded, because neither Rule 23 nor the Due Process Clause requires actual notice to each individual class member.

As you may recall, Rule 23 requires only the "best notice that is practicable under the circumstances, including individual notice to all members who can be identified through reasonable effort." FED. R. CIV. P. 23(c)(2)(B). "Rule 23 rule does not insist on actual notice to all class members in all cases and recognizes it might be impossible to identify some class members for purposes of actual notice." See Mullins, 795 F.3d at 665.

Similarly, the Ninth Circuit held, the Due Process Clause does not require actual, individual notice in all cases. See Silber v. Mabon, 18 F.3d 1449, 1453–54 (9th Cir. 1994). Courts have routinely held that notice by publication in a periodical, on a website, or even at an appropriate physical location is sufficient to satisfy due process. See, e.g., Hughes v. Kore of Ind. Enter., Inc., 731 F.3d 672, 676–77 (7th Cir. 2013).

Moreover, the Court observed that the Third Circuit's lack-of-notice concern presumes that some harm will inure to absent class members who do not receive actual notice. 

Although in theory, inadequate notice might deny an absent class member the opportunity to opt out and pursue individual litigation, the Ninth Circuit held that in reality, that risk was virtually nonexistent in low-value consumer class actions.  Such cases typically involve low-cost products and, as a result, recoveries were too small to incentivize individual litigation. The Court explained that an administrative feasibility requirement like that imposed by the Third Circuit would likely bar such actions because consumers generally do not keep receipts or other records of low-cost purchases.

The Ninth Circuit further explained that, practically speaking, a separate administrative feasibility requirement would only protect a purely theoretical interest of absent class members at the expense of any possible recovery for all class members in those cases that depend most on the class action mechanism.

The Court concluded that justifying an administrative feasibility requirement as a means of ensuring perfect recovery at the expense of any recovery would undermine the very purpose of Rule 23(b)(3), which was the "vindication of 'the rights of groups of people who individually would be without effective strength to bring their opponents into court at all.' " Amchem Prods., 521 U.S. at 617, 117 S.Ct. 2231.

The Ninth Circuit noted that the Third Circuit had expressed concern that without an administrative feasibility requirement, individuals would submit illegitimate claims and thereby dilute the recovery of legitimate claimants. See Carrera, 727 F.3d at 310.

The Ninth Circuit agreed that the fraud concern of the Third Circuit might be valid in theory, but, relying again on Mullins, it concluded that, in practice, the risk of dilution based on fraudulent or mistaken claims was low. See Mullins, 795 F.3d at 667. The Court pointed to class actions involving low-cost consumer goods, noting that consumers were unlikely to risk perjury charges and spend the time and effort to submit a false claim for a de minimis monetary recovery.

Further, the Court noted that consistently low participation rates in consumer class actions made it very unlikely that non-deserving claimants would diminish the recovery of participating, bona fide class members. 

Finally, observing that the Third Circuit has characterized its administrative feasibility requirement as necessary to protect the due process rights of defendants to raise individual challenges and defenses to claims, the Ninth Circuit, relying on Mazza v. Am. Honda Motor Co., Inc., 666 F.3d 581, 595 (9th Cir. 2012) and Marcus v. BMW of N. Am., LLC, 687 F.3d 583, 594 (3d Cir. 2012), pointed out that at the class certification stage, class representatives bear the burden of demonstrating compliance with Rule 23.
  
The Court reminded the manufacturer that it would have the opportunity to challenge the claims of absent class members if and when they filed claims for damages. The Court explained that at the claims administration stage, other litigants have relied on claim administrators, various auditing processes, sampling for fraud detection, and follow-up notices to explain the claims process, and other techniques tailored by the parties and the court to validate claims. See Mullins, supra, 795 F.3d at 667. The Court explained that Rule 23 specifically contemplates the need for such individualized claim determinations after a finding of liability.

The manufacturer did not explain why such procedures are insufficient to safeguard its due process rights.

Given the existing opportunities to challenge the consumers' case, the Ninth Circuit could see no reason why requiring an administratively feasible way to identify all class members at the certification stage would be necessary to protect the manufacturer's due process rights. See Mullins, 795 F.3d at 670. Although it noted that the manufacturer might prefer to terminate the litigation at class certification rather than later challenging each individual class member's claim to recovery, the Court concluded that there is no due process right to "a cost-effective procedure for challenging every individual claim to class membership." Id. at 669.

Even if the concern were that claimants in cases like this would eventually offer only a self-serving affidavit as proof of class membership, the Court did not see any reason why that issue should be resolved at the class certification stage to protect a defendant's due process rights. The Court explained that if an oil consumer pursued an individual lawsuit instead of a class action, an affidavit describing her purchases would create a genuine issue if the manufacturer disputed the affidavit, and would prevent summary judgment against the consumer. See Mullins, 795 F.3d at 669; accord FED. R. CIV. P. 56(c)(1)(A). Given that a consumer's affidavit could force a liability determination at trial without offending the Due Process Clause, the Ninth Circuit saw no reason to refuse class certification simply because that same consumer presented her affidavit in a claims administration process after a liability determination had already been made.

Moreover, the Court explained that identification of class members would not affect a defendant's liability in every case. For example, in this case, the consumers proposed to determine the manufacturer's aggregate liability by (1) calculating the price premium attributable to the allegedly false statement that appeared on every unit sold during the class period, and (2) multiplying that premium by the total number of units sold during the class period.  This would affect the amount paid to each class member, but not the total amount paid by the defendant.

The Ninth Circuit agreed with the Seventh Circuit that, in cases in which aggregate liability can be calculated in such a manner, "the identity of particular class members does not implicate the defendant's due process interest at all" because "the addition or subtraction of individual class members affects neither the defendant's liability nor the total amount of damages it owes to the class." See Mullins, 795 F.3d at 670; see also Six (6) Mexican Workers, 904 F.2d at 1307.

For these reasons, the Ninth Circuit held that protecting a defendant's due process rights did not necessitate an independent administrative feasibility requirement.

In conclusion, the Ninth Circuit affirmed the trial court's ruling declining to condition class certification on the consumers' proffer of an administratively feasible way to identify putative class members.


Eric Tsai
Maurice Wutscher LLP
 
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