Connaughton v. Day (Cir. Ct. Mont. Co.)

Filed: December 9, 2019

Opinion by: Judge Anne K. Albright

Holding: Plaintiffs alleging securities fraud were denied class certification because, despite demonstrating commonality of questions of law and fact, they failed to show that joinder of approximately 35 putative claimants was impracticable or that their claims were typical or their representation adequate, given the variety in the source, nature of and reliance on information received by the plaintiffs and putative class members.

Facts: The four Original Defendants were individuals and entities accused of procuring investors for a Ponzi scheme run by three non-parties, the MLJ Group. The second amended complaint named 14 New Defendants and additional related claims.

Plaintiff’s Amended Motion for Class Certification requested certification of a class of all persons who invested in securities, in the form of promissory notes, by lending money to borrowers of the MLJ Group. The requested class excluded individuals who profited off the Ponzi scheme and those affiliated with any Defendant.

The Amended Motion was served via counsel on the Original Defendants, but there were no Affidavits of Service for the New Defendants. The Original Defendants responded to the Amended Motion and participated in prior discovery; the New Defendants did not do either.

Analysis: The Court held that the Amended Motion did not meet the threshold requirements of Maryland Rule 2-231(b). As to the first numerosity requirement, the Court accepted an Original Defendant’s estimate that the putative class would be made up of 35 members, and the Plaintiffs provided only conclusory arguments for why joinder would be impracticable. As to second requirement of commonality, the Court was satisfied that Plaintiffs identified seven common questions of law and fact.  

As for the third typicality requirement, some Plaintiffs were contacted regarding the transaction by a non-party accountant rather than a Defendant. Other putative class members contacted by the Defendants themselves did not receive scripted, uniform information. The variety in the sources of information, the information received, and the reliance on the information makes the Plaintiffs’ claims less typical.

As for the fourth adequacy requirement, because the Plaintiffs may have relied on statements of the non-party accountant rather than a Defendant, the named Plaintiffs cannot adequately represent the putative class. Additionally, the accountant is both a potential target of claims and putative class member. Thus, only one of the four threshold requirements of Maryland Rule 231(b) was met.

The Plaintiffs also failed to meet the requirements of Maryland Rule 2-231(c)(3). As for the predominance requirement, fraud claims are not normally susceptible to class treatment because there could be too much variety regarding the degree of reliance placed on representations. This appears to be case here given the role of the non-party accountant and the receipt of unscripted information, as discussed above. As for the superiority of class action requirement, considering the pre-set trial schedule, the fact that the New Defendants were not given a chance to address these questions, and that more time would not cure the other failings of the Amended Motion, Plaintiff’s argument fails.

Thus, Plaintiffs’ Amended Motion for Class Certification was denied.

The full opinion is available in PDF.

James Dillon v. BMO Harris Bank, N.A. (4th Circuit)

Filed: May 10, 2017

Opinion by: Judge Barbara Milano Keenan

Holding: An arbitration agreement containing choice-of-law provisions applying tribal law and disclaiming the application of federal and state law was held to be unenforceable because (1) by its unambiguous language, it triggered the prospective waiver doctrine, which disallows arbitration agreements that prevent litigants from vindicating federal substantive statutory rights as contravening public policy; and (2) the provisions could not be severed as they went to the essence of the agreement and were negotiated by a party, not in good faith, with superior bargaining power.

Facts:  Plaintiff, a resident of North Carolina, applied for and received a “payday loan” in 2012. “Payday loans” are short, unsecured consumer loans for small amounts and with generally high interest rates (sometimes in excess of 400%). The loan was offered through the website of Great Plains Lending, LLC (the “Company”), which was wholly owned by a federal tribe.  Plaintiff executed a contract (the “Contract”) that contained a loan agreement and an agreement to submit disputes to arbitration. Both agreements contained choice-of-law provisions that required the application of tribal law and disclaimed the application of state or federal law.

Plaintiff filed a putative class action lawsuit in district court, claiming that the Company and other tribal lenders had issued unlawful loans. Instead of suing the lenders for violating state usury laws, Plaintiff sued the financial institutions that facilitated the electronic lending transactions. Plaintiff claimed that the institutions constituted an enterprise whose members, including Defendant BMO Harris (“Defendant”), conducted and participated in the collection of unlawful acts in violation of the Rackeeter Influenced and Corrupt Organizations Act.

In district court, Defendant sought to compel arbitration pursuant to the terms of the Contract and relying on the Federal Arbitration Act (“FAA”). The district court held the Contract unenforceable because it denied the applicability of all federal and state law. Defendant appealed.

Analysis: Pursuant to the FAA, the Court has jurisdiction to review de novo the order denying the motion to compel arbitration. The FAA provides that arbitration agreements are valid and enforceable, except upon grounds at law or in equity for the revocation of any contract. Consistent with such contract principles, the Supreme Court has held that arbitration agreements that operated as prospective waivers of a party’s right to pursue statutory remedies are unenforceable as violating public policy. This prospective waiver doctrine keeps courts from enforcing arbitration agreements that prevent a litigant from vindicating federal substantive statutory rights. 

A mere foreign choice-of-law provision is insufficient to trigger the application of the doctrine. A court must first analyze whether, as a matter of law, “the choice-of-forum and choice-of-law clauses operate in tandem as a prospective waiver of a party’s right to pursue statutory remedies.” Where it is unclear, the arbitrator should decide in the first instance whether a litigant is deprived of those remedies, and the waiver issue is not ripe until a federal court is asked to enforce the arbitrator’s decision. 

In Hayes v. Delbert Services Corp., 811 F.3d 666 (4th Cir. 2015), the Court applied the prospective waiver doctrine to a contract governing an internet payday loan by another federal tribe lender. The choice-of-law provision disclaimed the application of any law other than that of the tribe. The Hayes Court held that this language flatly and categorically renounced the authority of federal statutes. The provision was not severable from the contract because it went to its essence; the animating purpose of the agreement was to circumvent federal law. Another disclaimer of the application of federal and state law in the contract lent support to this position.

Here, Defendant argued that the waiver issue was not ripe as it had not yet come before an arbitrator. Plaintiff countered that the issue was ripe because the language of the choice-of-law provision was unambiguous, thus triggering the prospective waiver doctrine. The Court agreed with Plaintiff. The choice-of-law and other provisions in the Contract are similar or identical to the provisions in Hayes; these applied the law of the federal tribe or disclaimed the application of federal and state laws as to the Contract and lender. As in Hayes, the Contract was an unambiguous attempt to apply tribal law to the exclusion of federal and state law.

The Court held that the choice-of-law provisions could not be severed from the Contract. Severance is allowed only if the provision is not essential to the agreement and the party seeking to enforce the remainder of the agreement negotiated it in good faith. Restatement Second of Contracts § 184 (1981). Here, as in Hayes, the provision went to the essence of the agreement. The Court did not accept Defendant’s request to grant Plaintiff access to federal substantive rights because this would essentially allow Defendant to rewrite the Contract and defeat the purpose of the Contract entirely.

Additionally, the Company used its superior bargaining power to avoid the application of state and federal law, and Section 184 does not permit redrafting where superior bargaining power is used to extract a promise offensive to public policy. Thus, the Company did not meet the second prong to negotiate in good faith.  

The full opinion is available in PDF. 

Yang v. G&C Gulf Inc. (Cir. Ct. Mont. Cnty)

Filed: November 14, 2016

Opinion by: Ronald B. Rubin

Holding:

A putative class of defendant parking lot owners merited certification under Md. Rule 2-231 because it met the necessary requirements under sections (a) and (b) of the rule, given that the parking lot owners executed nearly identical contracts with the Defendant towing company to tow vehicles from their lots without their prior permission and with the discretion to demand up-front payment in exchange for the return of a vehicle, under the same broad grant of authority. Moreover, two named Plaintiffs’ vehicles were towed from the named Defendant lot owner.

Facts:

The original Plaintiff sued the Defendant towing company and its owner alleging that the Defendant towing company (1) engaged in “sweep” or “trespass” towing without obtaining the permission of the lot owner in advance of each tow and (2) improperly asserted a possessory lien on the towed vehicles, essentially holding them for ransom until the vehicle owner paid the towing fees in exchange for the vehicle’s release.

The parties reached a settlement, and the court severed claims against the owner. The court also certified a plaintiffs’ class, consisting of all persons whose vehicles were non-consensually towed by the Defendant towing company from a private parking lot from April 16, 2012, to January 7, 2016, and implicated 24,023 tows.

Plaintiffs then filed a second amended class complaint naming as an additional Defendant an owner of several Montgomery County parking lots who entered into a towing contract with the Defendant towing company and seeking to establish a defendants’ class, consisting of the 500 or more parking lot owners who entered into contracts allowing the Defendant towing company to patrol and “trespass tow” vehicles at will. They claimed that the Defendant towing company towed more than 26,000 vehicles from the lots of those in the putative class. Soon after, Plaintiffs filed another amended class complaint and a motion to add two additional named Plaintiffs who owned cars parking in lots owned by the Defendant lot owner, which was granted.

Analysis:

Certification of a class is governed by Md. Rule 2-231. Proponents must show that a putative class meets the four requirements of section (a) and one of the alternatives under section (b). The Court held, rather summarily, that the putative class met both requirements of sub-section (b)(1), regarding the risk that separate prosecutions would (1) result in inconsistent adjudications with respect to individual members of the class that would establish incompatible standards of conduct for the opponents or (2) result in adjudications of individual members that would be dispositive of the interests of other non-party members, or substantially impair or impede their ability to protect their interests.

The Court also held that the putative class met the requirements of section (a).  The first requirement, that the class is so numerous that joinder of all members is impracticable, was met because at least 573 lot owners entered into standardized, substantially similar written agreements with the Defendant towing company that granted general authority to tow vehicles from their lots. The second requirement, of common questions of law or fact, was met because common questions included: whether the lot owners owed a duty to the Plaintiffs by virtue of the contract; whether the lot owners had a duty to permit the vehicle owners to retake their vehicles without up-front payment; whether a possessory or storage lien and credit card fees were improperly imposed; and the conformity of the towing receipts to applicable laws.

The third requirement, of whether the representative’s claims or defenses are typical of the class, was met because each car was towed from the lot by the Defendant towing company pursuant to a contract with the lot owner. That the contracts are not identical is irrelevant because each contained a grant of authority to “tow at will” without specific, prior authorization of the lot owner. Thus, the claims arise from the same alleged practice or course of conduct by the Defendant towing company, which was expressly authorized by members of the putative class.

The fourth requirement, whether the representative parties will fairly and adequately represent the class interests, was met because the Defendant lot owner rarely specifically authorized a tow, but rather, relied on the Defendant towing company’s discretion and allowed it to require full, up-front payment in exchange for return of a vehicle. The Defendant lot owner's reluctance to represent the class was irrelevant, given his interest and ability in doing so.

The Court then highlighted two special issues with the putative defendant class: the Plaintiffs’ standing to sue and whether the putative defendant class would survive a more rigorous analysis for typicality and commonality, the third and second requirements of section (a), respectively.

The Court examined federal case law interpreting Federal Rule 23 and noted that, generally, a plaintiff representative must possess a claim against each member of the putative class; in other words, every named plaintiff must possess a claim against every putative class defendant in order to be certified.  This is a difficult standard for private parties, and a common regulatory scheme, without more, is typically insufficient.

The Court then cited Master Financial, Inc. v. Crowder, 409 Md. 51 (2009), regarding plaintiffs who obtained home loans from lenders and wanted to sue entities that purchased the loans from the lenders. The Master court posed the question as one of standing or availability of a juridical link, and noted that the purchasers did not purchase the loans of the named plaintiffs, but rather those of unnamed class members. The argument for certification was that by violating the statutory rights of these unnamed members, the purchasers are juridically linked to the named plaintiffs or the other defendants. Ultimately, the Master court did not adopt a juridical link theory.

The Court factually distinguished Master from this case. The Court noted that the plaintiffs in Master, unlike Plaintiffs here, were not yet certified as a class. Moreover, the Plaintiffs, whose cars were towed by the Defendant towing company and two named Plaintiffs’ cars were towed from a lot owned and operated by the Defendant lot owner. The Plaintiffs were certified before the Defendant lot owner was added as a defendant. Unlike the purchasers in Master, the Defendant lot owner in this case is well-representative of his class. He has every incentive to defend against the claims that are legally and factually identical to those of the putative class members, and hinge on the nearly-identical contracts with the Defendant towing company. The members have a right to intervene if they are dissatisfied with the Defendant lot owner’s representation.  

In support, the Court cited a Massachusetts opinion holding that plaintiffs who sued a drug store and the pharmaceutical manufacturers whom the plaintiffs had not dealt with directly were entitled to class certification because, as the contracts between the drug store and the pharmaceuticals were largely identical and the administration of the program contracted-for was substantially similar across the board, there was a sufficient link among the defendants.  

The Court also cited a Missouri case stating that class certification is logically antecedent to questions of standing, and that once a class is properly certified, standing requirements must be assessed with reference to the class as a whole, not merely the named plaintiffs.

The Court concluded that the contracts and common regulatory scheme created a juridical link; the link is consistent with Master; and the Plaintiff class has standing to sue the Defendant class.

This opinion is available by PDF.

Shenker v. Polage (Ct. of Special Appeals)

Filed February 1, 2016
Opinion By: Judge Nazarian

Holding:
The amended class action settlement reviewed by the trial court was procedurally and substantively fair, interpreting Md. Rule 2-231(h) consistently with the interpretation by federal courts of Federal Rule of Civil Procedure 23(e), which requires that a reviewing court approve class action settlements that it finds are "fair, adequate and reasonable."

Facts:
Cole Real Estate Investments, Inc. ("CREI") (previously known as Cole Credit Property Trust III ("CCPT III") is a non-traded real estate investment trust that owns real estate throughout the United States.  American Realty Capital Properties, Inc. ("ARCP") is a publicly-traded company that acquires and owns single-

tenant freestanding commercial real estate, principally subject to medium-term net leases.

ARCP had initially made an offer to acquire CCPT III in 2013.  However, CCPT III's board elected instead to acquire a subsidiary and create CREI.  This acquisition triggered a shareholders derivative and class action lawsuit, along with a federal securities claim filed in federal district court.  The acquisition closed in April, 2013, and the pending lawsuits were dismissed following settlement of the shareholders' claims.

ARCP again approached CREI about a merger which culminated in an announcement on October 23, 2013 that the entities intended to complete an $11.2 billion merger.  Shortly thereafter, another series of lawsuits were filed by certain shareholders challenging the legality of the merger.  Negotiations were opened with the shareholders, and an agreement was reached that permitted the plaintiffs to take additional discovery, while permitting the merger to be approved.  This settlement agreement was presented to the circuit court and preliminarily approved by it on August 25, 2014.

However, in October, ARCP unexpectedly announced certain irregularities concerning its financial statements back to 2013.  This resulted in a dramatic drop in ARCP's share price and an SEC investigation and several federal lawsuits by the shareholders, essentially alleging that ARCP engaged in fraud to induce the merger with CREI.  "The complaint asserts that the defendant-directors’ wrongful conduct inflated ARCP securities prices and resulted in the subsequent decline in value of those securities when the fraud was revealed."

The parties engaged in further settlement negotiations and reached an amended settlement that carved out ARCP's officers and directors from release from all claims associated with the merger.  This amended settlement was then presented to the trial court for approval.  Following a full day trial, the trial court found that the amended settlement was fair, adequate, and reasonable.  Five shareholders, including Mr. Shenker objected.  This appeal followed.

Analysis:
Class action settlements in Maryland must be approved by the trial court under Md. Rule 2-231(h).  This rule is interpreted in parallel with Federal Rule 23(e), which requires that class action settlements be both procedurally and substantively fair.  On appeal, a reviewing court applies an abuse of discretion standard to a trial court's decision concerning a class action settlement.

As to procedural fairness, Federal Rule 23 provides several steps that must be taken concerning notice of the proposed settlement.  The Court found that, in accord with the applicable federal and state procedural rule, "[n]otice of the proposed settlement was sent to all class members; the parties filed and the court reviewed briefs in support of and against the revised settlement; and the court heard objections from opposing class members, both in writing and at a hearing (without subject or temporal limitation) designed to address the settlement’s reasonableness, fairness, and adequacy." 

In addition, the appellate court's role is "to determine whether the circuit court was well-informed to determine the fairness and adequacy of the settlement, and that it reached a well-reasoned decision."  A review of the trial court memorandum and record supported the conclusion that the trial judge had carefully reviewed the evidence and deposition testimony, along with the pleadings and filings of the parties concerning the merger, before approving the amended settlement.

As to substantive fairness, the trial court is to evaluate the merits of the amended settlement to determine if the settlement is fair and adequate.  A "fair" settlement is one that is not the product of collusion among the parties, which includes factors such as the posture of the case at the time of settlement, the extent of discovery that has been conducted, and the circumstances of the negotiations and the experience of counsel.  The Court found that the trial judge had sufficient information to evaluate the claims of the parties and that the settlement was not the result of collusion among the parties.  The Court held here that further discovery or time would not have yielded more evidence of the absence of evidence of more due diligence to detect the irregular financial statements prior to the merger.

An "adequate" settlement is one where the trial court has weighed the likelihood of the plaintiff's recovery on the merits against the amount offered in settlement.  The trial court is to consider these factors: “‘(1) the relative strength of the plaintiffs’ case on the merits, (2) the existence of any difficulties of proof or strong defenses the plaintiffs are likely to encounter if the case goes to trial, (3) the anticipated duration and expense of additional litigation, (4) the solvency of the defendants and the likelihood of recovery on a litigated judgment, and (5) the degree of opposition to the settlement.’” (quoting In re Montgomery Cty., 83 F.R.D. at 316).  The Court found that the plaintiff's securities claims were speculative, and the damages that might be obtained from them remote, and concluded that the trial court did not abuse its discretion in determining that the settlement was adequate, particularly as ARCP's directors and officers were not released from liability related to the false financial statements under the amended settlement.

The Court also dismissed appellant's due process argument on essentially the same grounds stated above.  The Court affirmed the trial court's approval of the amended settlement. 


The opinion is available in pdf.

Moffit v. Baltimore American Mortgage; Ruble v. The Mortgage Consultants, Inc.; and Fulmore v. Premier Financial Corp. (Maryland U.S.D.C.)

Filed October 9, 2009
Opinion by Judge J. Frederick Motz

Held: Plaintiffs waived their right to seek a remand when they filed a Second Amended and Class Action Complaint in federal court following the removal from state court by the defendants.

Facts: Plaintiffs filed individual complaints in the Circuit Court of Maryland alleging violations of Maryland law. These complaints did not contain allegations with respect to any proposed class action. The Plaintiffs' claims were dismissed by the Circuit Court. The Maryland Court of Appeals reversed.

After remand, plaintiffs' counsel sent a draft amended complaint to defendants' counsel. This complaint contained class action allegations. Plaintiffs' counsel stated in the letter to defendants' counsel that the draft amended complaint containing the class action allegations would be filed unless a settlement were reached.

Defendants believed the draft complaint sent to their counsel met the requirements for the exercise of federal jurisdiction under the Class Action Fairness Act ("CAFA") and filed notices of removal. Thereafter, plaintiffs filed their amended complaint with the class action allegations in the United States District Court for the District of Maryland. Plaintiffs then filed motions to remand on the basis that the complaint that they had filed did not constitute "other papers" under the meaning of 28 U.S.C. §1446(b) (the federal class action removal statute).

Analysis: The Court relied on the proposition in Koehnen v. Herald Fire Ins. Co. 89 F.3d 525 (8th Cir. 1996) that "[a] party that engages in affirmative activity in federal court typically waives the right to seek a remand." Following this principle, the court held that the filing of a complaint setting forth class action claims in the District Court clearly constituted "affirmative activity" in federal court. The Court also relied on the interest of policy in preventing the plaintiffs from "manipulat[ing] the litigation process to deprive this court of jurisdiction it would otherwise have." The Court reasoned that had it ruled on and granted the plaintiffs' motion to remand and then the plaintiffs filed the class action complaint in state court the defendants would have an opportunity to file new notices of removal because the "other papers" issue on which the plaintiffs had based their current motions to remand would be eliminated.

The full opinion is available in PDF.