2nd Circuit: Class action can be decertified after jury verdict

July 25, 2016

REUTERS/Brett Coomer/Houston Chronicle/PoolThe 2nd U.S. Circuit Court of Appeals has upheld a district court’s decision to decertify as a class action a suit challenging mortgage late fees after the jury rendered a verdict in favor of the plaintiff.

District courts have the power to decertify a class after a jury verdict and before the entry of final judgment, the panel said. 

But a district court must defer the jury’s factual findings unless they are seriously erroneous, a miscarriage of justice or egregious, it said.

Late fees

In 1994 Joseph Mazzei obtained a mortgage loan from his then employer, the Money Store, according to the opinion. At the time, Money Store was a loan servicer and mortgage lender.

Mazzei received notices of default in 1998 after he missed mortgage payments, the appeals court opinion said.

The Money Store changed ownership in 1999 and Mazzei was laid off, it said.

After the ownership change, the Money Store stopped originating loans and became HomEq Servicing Corp., according to the opinion.

The Money Store’s servicing operator, TMS Mortgage Inc., subsequently notified Mazzei that his loan was in default, accelerated the loan and began foreclosure proceedings, the opinion said.

Mazzei filed for bankruptcy, thereby avoiding the foreclosure sale, it said.

He ultimately paid the full balance of the loan with interest and various default fees, including 10 late fees of nearly $27 each, five of which were incurred after his loan was accelerated, it said.

Class-action suit

In 2001, Mazzei brought a class-action suit against the Money Store, HomEq and TMS Mortgage in the U.S. District Court for the Southern District of New York, alleging they breached his mortgage agreement by charging him post-acceleration late fees. He also said the defendants violated the Truth in Lending Act, 15 U.S.C.A. § 1601, and California’s unfair-competition law, Cal. Bus. & Prof. Code § 17200.

In December 2012 U.S. District Judge John G. Koeltl certified the suit as a class action.

As amended, the class was defined as all similarly situated borrowers who, prior to Nov. 1, 2006, signed loan agreements on loans that were owned or serviced by the defendants and, between March 1, 2000, and June 2, 2014, were charged late fees after their loans were accelerated and paid off the accelerated loans.

On Dec. 19, 2014, a jury returned a verdict in favor of Mazzei and the class on the post-acceleration late fee claims. It awarded Mazzei $133.80 and the class about $32 million plus prejudgment interest.

Decertification

Before judgment was entered, the Money Store moved for decertification of the class or judgment as a matter of law.

According to the 2nd Circuit’s opinion, the class was composed of borrowers whose loans were either owned by the Money Store or serviced by it.

The Money Store argued that Mazzei’s failure to prove class-wide privity of contract between the Money Store and those borrowers whose loans it only serviced but did not own defeated certification on grounds of typicality and predominance.

Judge Koeltl agreed and decertified the class. Mazzei v. Money Store, No. 01-cv-5694, 308 F.R.D. 92 (S.D.N.Y. 2015).

Judge Koeltl entered judgment for Mazzei on his late fee claim.

Appeal

Mazzei appealed, challenging Judge Koeltl’s decision to decertify the class.

Federal Rule of Civil Procedure 23(c)(1)(C) allows a court to alter or amend an order granting or denying class certification before the entry of final judgment, the appeals panel noted.

Because the results of class proceedings are binding on absent class members, district courts have an affirmative “duty of monitoring its class decisions in light of the evidentiary development of the case,” the panel said, citing Richardson v. Byrd, 709 F.2d 1016 (5th Cir. 1983).

The power of district courts to decertify classes before final judgment entered is consistent with the Seventh Amendment to the U.S. Constitution, the panel said.

“As to Mazzei, there is no Seventh Amendment issue at all. Mazzei will receive damages on his individual claim in the amount awarded him by the jury. And he has no constitutional right to represent a class; whether he may do so is purely a matter of Rule 23,” the panel wrote.

There is also no Seventh Amendment issue to the class, the panel said, because the absent class members’ right to trial by a jury is unimpaired by a district court’s decision to decertify the class.

Fact-finding

The panel acknowledged its ruling on the decertification question raised the issue of how a jury’s factual finding impacts the district court’s decision about whether decertification is appropriate.

Adopting the standard that district courts apply in deciding motions for a new trial under Federal Rule of Civil Procedure 59, the panel held that “when a district court considers decertification (or modification) of a class after a jury verdict, the district court must defer to any factual findings the jury necessarily made unless those findings were ‘seriously erroneous,’ a ‘miscarriage of justice,’ or ‘egregious.’”

A district court does not violate the Seventh Amendment by evaluating the trial evidence in ruling on the procedural issue of decertification, the panel said.

It concluded that Judge Koeltl did not abuse his discretion in decertifying the class.

Mazzei v. Money Store et al., No. 15-2054, 2016 WL 3876518 (2d Cir. July 15, 2016).