Fordham Law


Rule 23 Requisites Not Lower at Settlement; Discrimination Class Fails Under Dukes

Howard Erichson in Bloomberg BNA, August 15, 2013

Media Source

By Jessie Kokrda Kamens

A proposed settlement class seeking to resolve mortgage discrimination allegations could not pass muster under the class commonality requirements outlined in Wal-Mart Stores Inc. v. Dukes, the U.S. Court of Appeals for the Third Circuit affirmed Aug. 12 (Rodriguez v. Nat'l City Bank, 3d Cir., No. 11-8079, 8/12/13).

Judge Kent A. Jordan affirmed the district court's rejection of the settlement, and clarified that courts should engage in a rigorous analysis to ensure that the Fed. R. Civ. P. 23 class certification requirements are satisfied at the settlement stage.

“The Rule 23 inquiry is certainly not meant to discourage settlement, but it is more than a rubber stamp, and thus it will sometimes result in the undoing of a settlement,” the three-judge panel said. “The fact that it did so in this instance is therefore not in itself a basis for reversing the denial of class certification.”

The appeals court disagreed with the plaintiffs' argument that the court should occupy a limited role in deciding whether to certify a settlement class.

‘Encouraging' Development for Settlement Classes?

Howard M. Erichson, law professor at Fordham Law School in New York who writes extensively about complex litigation, told BNA in an email Aug. 13 that it was “encouraging” that the appeals court was taking class certification requirements seriously for settlement classes.

Erichson said the appeals court backpedaled a bit from its decision in Sullivan v. DB Invs., Inc., 667 F.3d 273 (3d Cir. 2011) (en banc) (12 CLASS 1160, 12/23/11), where the Third Circuit spoke of treating settlement classes differently from litigation classes.

“This is a positive development because settlement class actions put class members at a disadvantage if they do not have the leverage of a certifiable class,” he said. For example, if a class is certifiable, then a plaintiff can respond to an inadequate settlement proposal by threatening to go to trial, he said.

Erichson also called it “troubling but unsurprising” that this case shows that the Dukes decision lowers the chances for class certification in discrimination cases.

Settlement Class Certification Denied

Lead plaintiffs John Rodriguez, Jennifer Worthington, Bobby Crouther, Jesus Conchas and Rosa Maria Conchas are black and Hispanic borrowers who obtained mortgage loans from defendant National City Bank in 2006 or 2007.

They filed a nationwide class action alleging that the bank had an established pattern or practice of racial discrimination in financing home purchases, which allegedly led to increased charges levied against the class members.

The proposed class asserted violations of the Fair Housing Act, 42 U.S.C. § 3605, and the Equal Credit Opportunity Act, 15 U.S.C. § 1691.

The defendants filed a motion to dismiss, and the U.S. District Court for the Eastern District of Pennsylvania denied the motion.

The parties engaged in extensive discovery, and began settlement negotiations. During the negotiations, the plaintiffs produced regression analyses showing a disparate impact, where blacks and Hispanics paid hundreds of dollars more for their loans than similarly situated Caucasians. The regression analyses were not submitted for the court's review.

The parties decided to settle, and the bank agreed to pay $7 million to benefit the class in exchange for the release of the class members' claims. Each class member would receive $200, two organizations would receive $75,000 to provide counseling to the settlement class, and class counsel would receive $2.1 million in fees. The bank did not admit to wrongdoing.

The district court preliminarily approved the settlement in 2010.

After the U.S. Supreme Court decided Wal-Mart Stores Inc. v. Dukes, 131 S. Ct. 2541 (2011) (12 CLASS 519, 6/24/11), the district court ordered a round of supplemental briefing to address the impact of the decision on class certification.

Ultimately, the district court denied the plaintiffs' motion for final settlement approval, holding that the plaintiffs' proposed settlement class failed to satisfy Rule 23(a)'s commonality and typicality requirements.

The court said that the plaintiffs would likely have to show the disparate impact and analysis for each loan officer, or at a minimum each group of loan officers working for a specific supervisor, in order to demonstrate commonality.

The regression analyses were inadequate because there may be non-credit-related reasoning that individual loan officers contemplated that was not based on race, the district court said.

The plaintiffs appealed the settlement rejection. After the rejection, the defendants were released from the settlement according to its terms, and they opposed the plaintiffs' appeal.

Rule 23 Requirements Same for Settlement Class

On appeal, the plaintiffs argued that the district court exceeded the “limited role” of the court in its decision to deny certification of the settlement class. The Rule 23 requirements operate “in tandem with a strong presumption in favor of voluntary settlements,” the plaintiffs contended.

But the Third Circuit said that this policy favoring settlements “cannot alter the strictures of Rule 23.”

“[W]hether class action representatives are seeking certification for the purpose of settlement or with the intent to litigate, the members of the proposed class must meet the threshold requirements of Rule 23(a),” the appeals court said.

Rigorous Analysis Required

The plaintiffs implied that a “rigorous analysis” was inappropriate in the context of a class action settlement, the appeals court said. The plaintiffs pointed to Sullivan v. DB Invs., Inc., where the appeals court instructed courts not to delve into the underlying merits to determine if individual claims are viable.

They also cited Ehrheart v. Verizon Wireless, 609 F.3d 590 (3d Cir. 2010) (11 CLASS 572, 6/25/10), where the appeals court emphasized the “restricted, tightly focused role that Rule 23 prescribes for district courts.”

The appeals court distinguished those cases.

“[W]hile both decisions advised courts not to assess whether plaintiffs' claims would be capable of succeeding if the case were to go to trial, neither limited the ability of district courts to consider the merits of a case when necessary for a Rule 23 determination,” the appeals court said.

Evidentiary Burden at Certification

The plaintiffs also argued that the district court should not have focused on the quantity of evidence, considering that the parties agreed to settle before the record was fully developed.

The appeals court responded that it is not enough for the parties to suggest that commonality would have been demonstrated with a more developed record. “One cannot say, in effect, ‘we could show commonality if we had to.' The short answer is, ‘you do have to.'”

This burden is not “onerous,” but it requires “an affirmative showing” that the class members share a common question of law or fact, the Third Circuit continued.

No Commonality Here

The appeals court agreed with the district court's determination that the proposed class lacked commonality. Rule 23 commonality requires that there be questions of law or fact common to the class.

The appeals court noted that this case “bears a striking resemblance” to the class in Dukes. In Dukes, the Supreme Court found there was no commonality for a class of 1.5 million current and former female employees alleging that Wal-Mart's discretionary corporate policy had a discriminatory effect on supervisors' pay and promotion decisions.

Here, the plaintiffs alleged the bank's “discretionary pricing policy” had the effect of loan officers charging blacks and Hispanic borrowers a disproportionately greater amount of non-risk related charges than similarly situated Caucasian persons.

In order to demonstrate a common harm, the proposed class had to show that National City's grant of discretion to loan officers was a “specific practice” that affected all class members in the same general fashion, the Third Circuit said.

The plaintiffs argued that their regression analyses show the loan officers' common mode of exercising discretion was discriminatory.

But the appeals court said a loan officer may have set an individual borrower's interest rate and fees for non-discriminatory reasons, such as whether the loans were intended to benefit family members who were not borrowers, or whether borrowers misrepresented their income or assets.

The Third Circuit said the plaintiffs also fell short on demonstrating that the purported discriminatory policy affected all class members in a common way. Because the proposed class was nationwide, the pricing policy may have resulted in a disparity in charges in some areas but not others, the appeals court said.

The plaintiffs asserted that their regression analyses controlled for regional differences, but the appeals court said the plaintiffs did not introduce their analyses in the record. The plaintiffs have not met their burden to establish commonality, the court concluded.

Judges Anthony J. Scirica and D. Michael Fisher joined in the opinion.

Counsel for the parties did not respond to requests for comment.

Peter A. Muhic of Kessler, Topaz, Meltzer & Check in Radnor, Pa., argued for the plaintiffs.

David H. Pittinsky of Ballard Spahr in Philadelphia argued for the defendants.