United States: Now You See It, Now You Don't – Trial Court Vacates Class Certification Post-Trial Wiping Out A $32 Million Award

In Mazzei v. The Money Store, 2016 U.S. App. LEXIS 12994 U.S. (Court of Appeals, 2nd Cir., decided July 15, 2016), plaintiff Joseph Mazzei initiated a class action alleging overcharge of late fees on mortgages. The district court granted class certification of that claim (and denied certification of certain other claims). Plaintiff, for himself and as the class representative, won at trial on his late fee claim. Post-trial the district court determined that the requirements for class certification (Federal Rule of Civil Procedure 23) were not met and decertified the late fee class. This effectively wiped out the $32 million award to the class. The Court of Appeals for the Second Circuit affirmed, holding that the district court has power, consistent with the Seventh Amendment and Rule 23 to decertify a class after a jury verdict and before the entry of final judgment.

Mazzei had obtained a mortgage loan from his  employer, the Money Store, which was at that time a loan servicer and mortgage lender. Mazzei missed payments, was notified that he was in default and that his loan was accelerated so that the entire sum of principal and interest became due. Plaintiff avoided a foreclosure sale by filing for bankruptcy and ultimately paid the full balance of the loan and interest and various default fees. Plaintiff sued challenging the imposition of post-acceleration late fees and attorneys fees as inconsistent with the note he had signed. The district court certified a class defined as:

All similarly situated borrowers who signed form loan agreements on loans which were owned or serviced by the defendants and who from March 1, 2000 to the present . . . were charged: (A) late fees after the borrower's loan was accelerated, and where the accelerated loan was paid off ("Post Acceleration Late Fee Class") . . . .

Order for Certification of Class Action, Mazzei v. Money Store, No. 01-CV-5694 (JGK) (RLE) (S.D.N.Y. Jan. 29, 2013), ECF No. 187; see also Mazzei v. Money Store, 288 F.R.D. 45, 56, 66-69 (S.D.N.Y. 2012). The class definition was later amended on consent to exclude borrowers who signed loan mortgage agreements after November 1, 2006, and (for administrative purposes) to close on June 2, 2014. The certified class action went to trial. The jury returned a verdict in favor of plaintiff and the class on the late fee claims. It awarded Mazzei $133.80, and it awarded the class approximately $32 million plus prejudgment interest.

After trial, and before the entry of judgment, The Money Store  moved for decertification of the class on the class late fee claims or, in the alternative, for entry of judgment. The class was composed of borrowers whose loans were either owned by The Money Store or serviced by it. Both motions were based on Mazzei's failure to prove class-wide privity of contract between The Money Store and those borrowers whose loans it only serviced, and did not own. The district court agreed that Mazzei's failure to prove privity with respect to such absent class members defeated class certification on grounds of typicality and predominance. The district court therefore granted The Money Store's motion for decertification of the class. Mazzei v. Money Store, 308 F.R.D. 92, 106-07, 109-13 (S.D.N.Y. 2015). Judgment was entered for Mazzei on his individual late fee claim.

Mazzei argued that a class may not be decertified after a jury verdict in its favor because such decertification is tantamount to overturning a jury verdict, for which the only procedural avenue available is judgment as a matter of law under Rule 50(b); and decertification would violate the class members' Seventh Amendment right to a jury trial.  The Court of Appeals affirmed the trial court's very unusual order granting post-trial decertification explaining that Federal Rule 23 and case law confirm that a district court may decertify a class after a jury verdict and before the entry of final judgment if it appears that the requirements of Rule 23 are not in fact met. The Court of Appeals held that "The right of absent class members to a jury trial is protected, not impaired, by the Rule 23(c)(1)(C) decertification procedure, which protects their due process rights (and defendants') by ensuring that any class claim that proceeds to final judgment--and thus binds them--is fairly and appropriately the subject of class treatment."  The Court of Appeals further held:

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." ... As to questions of fact that are not necessarily decided by the jury's verdict, the court can make its own factual findings based on the preponderance of the evidence as is usually done when making a determination about class certification.

The Court reviewed the order using the abuse of discretion standard that is applied when reviewing an order granting or denying class certification. On the key issue of an inconsistency between the jury's verdict and the court's decertification order as to whether privity was proven, the Court of Appeals explained:

The jury found that privity was proven; the district court found to the contrary, and determined that typicality and predominance were therefore both lacking. ... [T]he district court was required to defer to the jury's finding of fact as to privity unless the finding was "seriously erroneous," a "miscarriage of justice," or "egregious." It is therefore significant that the district court ruled in the alternative that the evidence for such a finding was legally insufficient. Having found the evidence legally insufficient, the court a fortiori found that the jury's finding was at least "seriously erroneous."

Few class actions proceed to trial. When a class is certified, there is typically tremendous pressure on a defendant to settle rather than to run the risk of a huge adverse verdict. This case is very unusual in that it affirms the rule that even after a jury verdict a trial court may grant decertification at any time up to judgment where it determines that the requirements for class certification were not, in fact, proved.

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