holding that plaintiffs “survey here fails to show that burden of proof standards do not vary or that differences in state unjust enrichment laws are insignificant”
How later courts described this case
- holding that plaintiffs “survey here fails to show that burden of proof standards do not vary or that differences in state unjust enrichment laws are insignificant”
- affirming denial of class certification where plaintiffs failed “to demonstrate that state law variations” did not defeat predominance
- denying Rule 23(b)(1)(A) certification because preliminary questions of state law determined whether defendant was a fiduciary to individual plaintiffs, so no risk of dissimilar outcomes creating conflicting standards of conduct
- applying Restatement § 145 to breach of fiduciary duty claim and concluding that injury “occurred in the states where plaintiffs maintain their principal places of business”
Written by the judges who cited it.
The opinion
Case: 09-40997 Document: 00511263748 Page: 1 Date Filed: 10/14/2010
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT United States Court of Appeals
Fifth Circuit
FILED
October 14, 2010
No. 09-40997 Lyle W. Cayce
Clerk
CASA ORLANDO APARTMENTS, LTD., Relating to Pine Haven Apartments;
JASPER HOUSING DEVELOPMENT COMPANY, Relating to Pine View
Apartments; ALFRED PORKOLAB, JEAN J. PORKOLAB; ALAN B.
PORKOLAB, as Trustee for the Porkolab Family Trust No. 1, Relating to Lowell
Apartments, Lorain, Ohio,
Plaintiffs - Appellants
versus
FEDERAL NATIONAL MORTGAGE ASSOCIATION,
Defendant - Appellee
Appeal from the United States District Court
for the Eastern District of Texas
Before KING, HIGGINBOTHAM, and GARZA, Circuit Judges.
PATRICK E. HIGGINBOTHAM, Circuit Judge:
This is an interlocutory appeal from the district court’s refusal to certify
a class. Plaintiff Appellants are mortgagors whose mortgages for low-income
multi-family housing were held or serviced by the Federal National Mortgage
Association (“Fannie Mae”) and insured by the Department of Housing and
Urban Development (“HUD”). Plaintiffs sued Fannie Mae on behalf of
themselves and those similarly situated for breach of fiduciary duty. The district
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No. 09-40997
court denied class certification under all three prongs of the Federal Rules of
Civil Procedure Rule 23(b). For the reasons stated below, we AFFIRM.
I.
Since 1969, HUD has required mortgagors participating in its insurance
program to sign a Regulatory Agreement. This Agreement mandated that
mortgagors establish two funds with the mortgagee: 1) a Reserve Fund for
Replacements (“Reserve Fund”) and 2) a Residual Receipts Fund (“Residual
Fund”).1 The Reserve Fund ensured that the mortgagor had money available to
effectuate repairs on the HUD-insured property. The Residual Fund provided
additional liquidity to ensure payments on the loan and protect HUD’s interests.
According to the Agreement, the Reserve Fund was to be under the control of the
mortgagee (Fannie Mae) and the Residual Fund would be under the control of
the Federal Housing Commissioner. Disbursements from the Reserve Fund
were only to be made after receiving written consent from the Commissioner.
The Commissioner could also direct disbursements from the Residual Fund for
any purpose he saw fit. After repayment of the loan, mortgagees were to refund
any remaining amounts in the Funds to the mortgagors.
The Reserve Fund provision of the Agreement specifically contemplated
that those funds may take the form of cash deposit or guaranteed investment.
Fannie Mae gave mortgagors certain investment options for both their Reserve
Fund and Residual Fund moneys. Some mortgagors chose to partially or fully
1
The Regulatory Agreement established a fixed amount for regular deposits into the
Reserve Fund. The Residual Fund was predicated upon surplus cash. In many instances,
there was no surplus cash available to be deposited into the Residual Fund. Therefore, at
least some of the class members only had Reserve Funds.
2
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No. 09-40997
invest these funds accordingly. Others elected to retain the liquidity and not
invest any such funds. These “uninvested funds” are the subject of this lawsuit.
Appellants contend that the Regulatory Agreement created a fiduciary
relationship between Fannie Mae and class members, with Fannie Mae holding
the Reserve and Residual Funds in trust for class member mortgagors.
Appellants further contend that Fannie Mae breached its fiduciary duties by
engaging in self-dealing with mortgagors’ uninvested funds, resulting in unjust
enrichment.
Between 1969 and 1995, Fannie Mae invested the so-called uninvested
funds in the overnight federal funds marketplace, retaining the interest proceeds
for itself. Appellants allege that Fannie Mae tried to discourage mortgagor
investments so Fannie Mae could maximize the earning potential of its federal
funds investments. In 1995, Fannie Mae transferred the servicing of its multi-
family mortgages to GMAC Commercial Mortgage Corporation (“GMACCM”).
Under this arrangement, GMACCM created custodial bank accounts using
Fannie Mae mortgagors’ invested and uninvested funds. In return for the large
deposits, the banks offered GMACCM lines of credit well below the market
interest rates. GMACCM shared the financial proceeds of these favorable credit
lines with Fannie Mae, giving Fannie Mae seventy percent of GMACCM’s
benefit. Appellants argue these proceeds were wrongfully obtained and should
be disgorged.
Plaintiff Appellants define their class to include all mortgagors of property
located anywhere in the United States whose mortgages: 1) were insured under
§ 221(d)(3) or § 236 of the National Housing Act; 2) were held or serviced by
Fannie Mae; and 3) required the mortgagors to make deposits in Reserve and
3
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Residual Funds and where such funds were “uninvested” in part or whole for any
period of time. In 1978, Fannie Mae serviced nearly 4,000 potential class
mortgages. By 2004 (when this lawsuit was filed), approximately 1,500 such
mortgages existed. Mortgagors reside in all fifty states, signed the Regulatory
Agreements in various states, and conducted business with Fannie Mae regional
offices in Atlanta, Chicago, Dallas, Los Angeles, and Philadelphia. Fannie Mae
is headquartered in Washington, D.C.
The district court found that the class satisfied the requirements of Rule
23(a) but denied certification under Rule 23(b).2 We review a denial of class
certification for abuse of discretion, deferring to the district court’s ability to
manage pending litigation and conduct the factual inquiry necessary for
certification.3 However, we review de novo the question of whether the district
court applied the proper legal standard.4
II.
Under Rule 23, a class may be certified if it satisfies the requirements of
Rule 23(a) and fits into one of the three categories outlined in Rule 23(b).
Because we find that choice of law issues are relevant to all three categories, we
begin our discussion here.
2
Neither party appealed the Rule 23(a) findings. Therefore, we consider any issues
under 23(a) waived and begin our discussion with 23(b). See In re Tex. Mortgage Servs. Corp.,
761 F.2d 1068, 1073 (5th Cir. 1985).
3
See Allison v. Citgo Petroleum Corp., 151 F.3d 402, 408 (5th Cir. 1998); Jenkins v.
Raymark Indus., 782 F.2d 468, 471-72 (5th Cir. 1986).
4
See Forbush v. J.C. Penney Co., 994 F.2d 1101, 1104 (5th Cir. 1993).
4
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In diversity cases, federal courts must apply the choice of law rules of the
forum state. We review a district court’s choice of law determination de novo.5
Texas courts follow the “most significant relationship” test outlined in the
Restatement (Second) of Conflict of Laws (“Restatement”).6 The choice of law is
evaluated issue by issue.7 In this case, the lynchpin issue is whether Fannie
Mae was in a fiduciary relationship with the plaintiff mortgagors (and
subsequently breached its fiduciary duty). Additionally, Plaintiffs seek relief
under an unjust enrichment theory.
Section 6 of the Restatement lists the general factors that should inform
a choice of law question: (a) the needs of the interstate and international
systems, (b) the relevant policies of the forum, (c) the relevant policies of other
interested states and the relative interests of those states in the determination
of the particular issue, (d) the protection of justified expectations, (e) the basic
policies underlying the particular field of law, (f) certainty, predictability and
uniformity of result, and (g) ease in the determination and application of the law
to be applied.
Since this is a breach of fiduciary duty case, we also consider Restatement
§ 145, which lists the primary factors for choice of law questions in tort cases.
These factors are: (a) the place where the injury occurred, (b) the place where the
conduct causing the injury occurred, (c) the domicile, residence, nationality,
5
See Spence v. Glock, 227 F.3d 308, 311 (5th Cir. 2000).
6
See, e.g., Torrington Co. v. Stuzman, 46 S.W.3d 829, 848 (Tex. 2000); Duncan v.
Cessna Aircraft Co., 665 S.W.2d 414, 420-21 (Tex. 1984).
7
See Duncan, 665 S.W.2d at 421.
5
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place of incorporation and place of business of the parties, and (d) the place
where the relationship, if any, between the parties is centered.
Plaintiffs highlight the Restatement’s comments, which instruct that when
a case involves unfair profit rather than a plaintiff’s pecuniary loss, the location
of the injury is less important than the location of defendant’s conduct.8
Plaintiffs further advocate that there is no place central to the relationship
between Fannie Mae and its borrowers, claiming that each dealt with one
another from their respective principal places of business. Therefore, Plaintiffs
conclude that the place of the conduct causing the injury and the residence of the
parties are the most important factors in this case. Since Plaintiffs reside in all
fifty states, Appellants believe we should give greater weight to Fannie Mae’s
principal place of business, Washington D.C. In addition, Fannie Mae’s
headquarters is where the conduct causing the breach of fiduciary duty
arose—the District of Columbia is where the idea to invest the Funds developed
and where policies were created to implement this idea. Thus, Plaintiffs urge
us to apply D.C. law to all class members.
In analyzing the Restatement factors de novo, we agree with Plaintiffs that
the primary purpose of the tort rule involved here leads us to place less
importance on where the injury occurred, as disgorgement is not meant to
compensate for a loss. But the Restatement’s comments also instruct us not to
over-emphasize this restriction.9 A breach of fiduciary duty still causes an
8
Restatement (Second) of Conflict of Laws § 145 cmt. f (1971) [hereinafter Restatement].
9
See Restatement § 145 cmt. c (“Undoubtedly, the relative weight of these two objectives
[deterrence or compensation] varies somewhat from rule to rule, and in the case of a given rule
it will frequently be difficult to tell which of these objectives is more important.”).
6
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injury, and in this case, those financial injuries occurred in the states where
plaintiffs maintain their principal places of business.
For the second factor, we generally agree with Plaintiffs’ assertion that the
District of Columbia is where the conduct causing the injury occurred.10 The
third factor, domicile of the parties, is also not in dispute.
We disagree, however, with Plaintiffs’ assessment of the fourth
Restatement factor—where the parties’ relationships were centered. The
relationship in dispute in this case is a fiduciary obligation that Plaintiffs
contend arose from the signing of the Regulatory Agreement and other mortgage
documents. Plaintiffs advocate that a trust relationship is created when the
parties manifest an intent to create such a relationship. According to Plaintiffs,
the trust intent exists in the Regulatory Agreement, Mortgage Deed/Deeds of
Trust, and Mortgagee’s Certificate. Therefore, the manifestation of that intent
must have taken place where and when the parties signed these documents.11
Additional evidence of manifested intent would occur when and where Plaintiffs
10
Although the idea for the investments may have been generated in the District of
Columbia, we acknowledge that some uncertainty exists regarding the location of the conduct
causing the injury. Prior to 1995, the actual investing took place in overnight markets in New
York. Under the current GMACCM arrangement, the Funds are held in Philadelphia. Thus,
at least some of the conduct causing the injury may have occurred outside of Washington.
However, since we need not resolve that issue to conclude that D.C. law does not apply to each
plaintiff, we assume that the conduct did occur in the District of Columbia.
11
While we recognize this is not a breach of mortgage agreement case, we note the
importance of the mortgage documents to the claims of this case. Those documents allegedly
established the fiduciary relationship. In choice of law analysis for breach of mortgage
agreement and unjust enrichment, “the location of the mortgaged properties is the single most
significant consideration.” Schmidt v. Interstate Federal Savings & Loan Ass’n, 74 F.R.D. 423,
428 (D.D.C. 1977). Thus, in a case where the mortgage agreement is pivotal, as it is here, the
location of the mortgaged property may play a greater role than it would otherwise in a breach
of fiduciary claim.
7
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delivered deposits (the trust corpus) for the Reserve and Residual Funds.
According to the record, one of the named Plaintiffs (the Porkolabs) made
deposits to the Atlanta Fannie Mae office, while another (Jasper) conducted
business with the Los Angeles office. There is no indication that these Plaintiffs
had direct contact with the Washington, D.C. office or manifested an intent to
create a trust there.
Plaintiffs assert that this case should follow the choice of law analysis in
a Texas appellate case involving securities fraud.12 There, the defendant resided
in New York, which is also where the misconduct occurred. Similarly, Fannie
Mae’s principal place of business is in Washington D.C., where the misconduct
occurred. However, Plaintiffs misapply Greenberg. There, the court noted that
none of the defendant’s conduct “occurred in, or was directed to” the forum state,
Texas.13 In contrast, Fannie Mae conducted business in several regional offices
outside of Washington. Moreover, the defendant in Greenberg had no knowledge
that it was dealing with Texans and no expectation that Texas laws might apply.
The court applied New York law based predominantly on reasonable
expectations.14 Here, Fannie Mae knew it was conducting business with
plaintiffs in a variety of states. Plaintiffs also knew Fannie Mae operated out
of regional offices. Additionally, the Regulatory Agreement, which Plaintiffs rely
on for the creation of fiduciary duty, specifically notes that Fannie Mae could
12
Greenberg Traurig v. Moody, 161 S.W.3d 56 (Tex. App.—Houston [14th Dist.] 2004,
no pet.).
13
Id. at 74.
14
Id.; see also Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 822 (1985) (noting that
parties’ expectations constitute “an important element” of considering whether a choice of law
conclusion is fair and constitutional).
8
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No. 09-40997
bring suit in “any court, State or Federal.” Thus, in contrast with Greenberg,
reasonable expectations in this case do not so clearly point to the application of
a single jurisdiction’s laws.
Likewise, we are not persuaded that the analysis in Grant Thornton v.
SunTrust Bank15 compels us to apply D.C. law to all plaintiffs. In that case, the
court found that analysis under the Restatement §§ 148 or 145 did not
definitively point to a single jurisdiction.16 Thus, the court relied on
consideration of the § 6 general conflict of law factors rather than the tort-
specific factors. The SunTrust court found that the policies of the forum state,
Texas, protected investors better than the policies of other states. Here, we do
not find that the § 6 factors, in conjunction with § 145, lead us to a single
jurisdiction applicable for all plaintiffs.
Instead, applying the Restatement’s factors highlights the need for
multiple state laws to apply to this class. The relevant policies of the interested
states and the forum state similarly discourage self-dealing by fiduciaries, but
they establish different standards for showing fiduciary duty and sometimes
different remedies.17 Neither party had a justified expectation that one state’s
law would apply over another. Moreover, the needs of the interstate system
15
133 S.W.3d 342 (Tex. App.—Dallas 2004, pet. denied).
16
The court conducted its primary analysis using § 148 for fraud or misrepresentation
cases. But it also concluded that it would reach the same result following § 145 for torts,
which is what we use here.
17
See Part III, infra.
9
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direct us not to ignore relevant states’ interests in fiduciary law by applying D.C.
law to all matters of this case.18
While the conduct causing a breach of fiduciary duty may have occurred
in the District of Columbia, there would be no fiduciary duty without activity
that occurred in other locations. Since the existence of a fiduciary relationship
is critical to this lawsuit, we find that the District of Columbia cannot have the
most significant relationship to the issues unless the fiduciary relationship was
created and maintained there. Given the Plaintiffs’ interactions with the
regional offices (including making payments to regional offices), we find that the
intention to create a trust (such as giving property to the trustee) manifested
outside of Washington D.C. for many of the Plaintiffs. As a result, there is no
single jurisdictional law that can be applied to the class as a whole.
We make a similar finding with respect to the unjust enrichment claim.
Following Texas law, we again turn to the Restatement for guidance on how to
examine unjust enrichment claims.19 The Restatement offers five factors to be
considered in choice of law decisions for unjust enrichment: 1) the place where
the parties’ relationship was centered; 2) the place where defendants received
the benefit or enrichment; 3) the location where the act conferring the
enrichment or benefit was done; 4) the parties’ domicile or place of business; and
5) the jurisdiction where a physical thing substantially related to the enrichment
18
See, e.g., Caton v. Leach Corp., 896 F.2d 939, 943 (5th Cir. 1990) (“Texas has a
significant interest in remedying civil injury to Texas citizens through tort liability and also
in defining the outer limits of tort liability.”).
19
See Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 403 (5th Cir. 2004) (“Texas courts
use the ‘most significant relationship’ test set forth in the Restatement . . . for all choice of law
cases except contract cases in which the parties have agreed to a valid choice of law clause.”);
id. at 405 (applying Restatement § 221).
10
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was situated at the time of the enrichment.20 The primary factor in this analysis
is also where the parties’ fiduciary relationship was centered, which we conclude
will be different for each plaintiff. The second and third factors point to
Washington, D.C. but also to Pennsylvania and New York, where the Funds
were invested and Fannie Mae held accounts. The fourth factor leads to
jurisdiction in all fifty states and the District of Columbia. For the fifth factor,
there is likely not a physical “thing” related to the enrichment in this case, but
if one exists, it is the investment account located in the District, New York, or
Philadelphia. In evaluating these factors, we conclude there are not sufficient
contacts to apply D.C. law to each plaintiff’s unjust enrichment claim.
To summarize, we find that D.C. law should not be applied to all Plaintiff
class members in either the fiduciary law or unjust enrichment claims.
III.
The choice of law finding most closely interacts with the Rule 23(b)(3)
analysis. To obtain certification under (b)(3), the court must find “that the
questions of law or fact common to class members predominate over any
questions affecting only individual members, and that a class action is superior
to other available methods for fairly and efficiently adjudicating the
controversy.” Here, Plaintiffs seek to certify a nationwide class for a state
common law claim. “In a multi-state class action, variations in state law may
swamp any common issues and defeat predominance.”21 In order for common
issues to predominate and justify a (b)(3) certification, each state must have the
20
Restatement § 221(2).
21
Castano v. Amer. Tobacco Co., 84 F.3d 734, 741 (5th Cir. 1996).
11
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same standards for establishing a fiduciary relationship and breaching the
resulting duty.
The district court found that the policies of the interested states varied
considerably with regard to the fiduciary duties of an escrow administrator. On
appeal, Plaintiffs argue that such a finding is irrelevant because they do not rely
on traditional fiduciary relationships previously affirmed by state law. Instead,
Plaintiffs contend that the Regulatory Agreement and specific circumstances of
this case created a fiduciary duty between Fannie Mae and the mortgagors, even
if such a duty might not exist in an ordinary escrow account. Plaintiffs allege
that this duty would exist in any jurisdiction.
To support their claim, Plaintiffs provided a fifty-one jurisdiction survey
and noted that in every jurisdiction a fiduciary relationship is established
through the manifestation of an intent to create such a duty. Moreover,
Plaintiffs assert that self-dealing is a violation of fiduciary duty in every state.
In examining the state laws further, we find that determining when a trust or
fiduciary relationship has been created (and breached) is not as uniform as
Plaintiffs propose.
While the basic principles of fiduciary law may be the same throughout the
country, the nuances vary, and those nuances affect the outcome of claims.22 In
Illinois, for example, a valid express trust requires: 1) intent of the parties to
create a trust as shown by a writing or by circumstances; 2) a definite subject
matter of trust property; 3) ascertainable beneficiaries; 4) a trustee; 5)
specifications of a trust purpose and how the trust is to be performed; and 6)
22
See, e.g., Rohlfing v. Manor Care, 172 F.R.D. 330, 341 (N.D. Ill. 1997) (disussing the
importance of nuances in fiduciary law).
12
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delivery of the trust property to the trustee.23 In a case relying on these
standards, the court found there was no trust because checks were payable
directly to the defendant rather than to the escrow account.24 Thus, under
Illinois law, the way the mortgagors’ checks were submitted to Fannie Mae
would be relevant in determining whether a trust relationship existed.
Under Texas law, a “fiduciary relationship is an extraordinary one and will
not be lightly created.”25 Thus, ordinarily “an express trust does not arise unless
the owner of property has shown an unequivocal intention to create a trust.” 26
If “the person to whom the settlor’s wish is addressed has a clear discretion to
act as he thinks fit,” no trust is created.27 Under the Regulatory Agrement, the
Commissioner may direct the Residual Funds for any purpose he determines.
Thus, under Texas law, a trust would not be created with those funds.
The District of Columbia has a simpler standard, requiring that “the
settlor need only manifest an intention to impose upon herself or upon a
transferee of the property equitable duties to deal with the property for the
23
See In re Estate of Wilkening, 441 N.E.2d 158, 163 (Ill. App. 1982).
24
Hamilton Bancshares, Inc. v. Leroy, 476 N.E.2d 788, 790-91 (Ill. App. 1985).
25
Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App.—Houston [14th Div.] 1997, pet.
denied).
26
Chapman Children’s Trust v. Porter & Hedges, L.L.P., 32 S.W.3d 429, 438 (Tex.
App.—Houston [14th Div.] 2000, pet. denied).
27
Alexander v. Botsford, 439 S.W.2d 414, 417 (Tex. Civ. App.—Dallas 1969, writ ref’d
n.r.e.).
13
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benefit of another person.”28 The law of the District of Columbia further requires
the trustee to take title of the trust assets.29
Even assuming that general fiduciary principles are similar across
jurisdictions, Plaintiffs have the responsibility to demonstrate that state law
variations do not preclude the certification of a nationwide class.30 They have
failed to do so with respect to the establishment of fiduciary duty. As an Illinois
district court noted, “Illinois law provides that a plaintiff making a fiduciary
duty claim . . . must establish the existence of a fiduciary relationship by ‘clear
and convincing’ evidence. Do any of the other 12 states involved in this case
impose a similar burden on plaintiffs? [Plaintiff] gives us no indication.” 31
Likewise, Plaintiffs’ survey here fails to show that burden of proof standards do
not vary or that differences in state unjust enrichment laws are insignificant.
For example, to state a claim for unjust enrichment some jurisdictions require
the complainant to prove an actual loss or impoverishment.32 Such a
28
United States v. Taylor, 867 F.2d 700, 703 (D.C. Cir. 1989) (internal citations
omitted); see Fielding v. BT Alex Brown Corp., 116 F. Supp. 2d 59, 63 (D.D.C. 2000); Cabaniss
v. Cabaniss, 464 A.2d 87, 91 (D.C. 1983).
29
Fielding, 116 F. Supp. 2d at 63.
30
See Castano v. Amer. Tobacco Co., 84 F.3d 734 (5th Cir. 1996) (“Appellees see the
‘which law’ matter academic. They say no variations in state . . . laws relevant to this case
exist. A court cannot accept such assertion ‘on faith.’ Appellees, as class action proponents,
must show that it is accurate.”) (quoting Walsh v. Ford Motor Co., 807 F.2d 1000, 1016 (D.C.
Cir. 1986)).
31
Rohlfing v. Manor Care, 172 F.R.D. 330, 341 n.14 (N.D. Ill. 1997).
32
Compare Cmty. Guardian Bank v. Hamlin, 898 P.2d 1005, 1008 (Ariz. 1995) (listing
“impoverishment” as an element of unjust enrichment) and State v. Barclays Bank of New
York, N.A., 563 N.E.2d 11, 15 (N.Y. 1990) (noting that plaintiffs must have “suffered a loss”
to have a claim for unjust enrichment) with County of San Bernardino v. Walsh, 69 Cal. Rptr.
3d 848, 855-56 (Cal. App. 2007) (“The public policy of this state does not permit one to take
14
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requirement may be detrimental to Plaintiffs’ claims, and Plaintiffs give no
indication of why such variances in state law are irrelevant in this matter.
In the class certification hearing below, Plaintiffs’ counsel, to his credit,
confronted this issue candidly, stating, “if you’re not going to apply D.C. law you
probably cannot certify the class as we have asked it.” Even when so ably put,
we are not persuaded by the contention that D.C. law is applicable to all
plaintiffs in this case. We cannot find the district court abused its discretion in
failing to certify under Rule 23(b)(3).
IV.
Rule 23(b)(1) provides that a class action may be maintained if
“prosecuting separate actions by or against individual class members would
create a risk of: (A) inconsistent or varying adjudications with respect to
individual class members that would establish incompatible standards of
conduct for the party opposing the class.”33 Plaintiffs urge that multiple lawsuits
in this case would impose incompatible standards of conduct upon Fannie Mae;
that the Regulatory Agreements require a single standard of conduct from
Fannie Mae that makes this class suited to (b)(1)(A) certification.
advantage of his own wrong regardless of whether the other party suffers actual damage.”
(internal quotations omitted)). Another relevant state law difference is that some states,
including Texas, preclude unjust enrichment claims when a valid, express contract governing
the subject matter exists. See Coghlan v. Wellcraft Marine Corp., 240 F.3d 449, 454 (5th Cir.
2001). Upon review of the merits of this case, a court could find the Regulatory Agreement is
a valid contract, which would foreclose the unjust enrichment claim in some states.
33
Fed. R. Civ. Pro. 23(b)(1)(A). Appellants do not argue that the district court erred in
denying class certification under Rule 23(b)(1)(B). Therefore, any such claim is waived.
15
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Rule 23(b)(1)(A) focuses on class action suitability from the defendant’s
perspective. Interpreting this defense-minded rule, the district court held that
certification of a 23(b)(1)(A) class is improper without the defendant’s consent.
The court cited a Beaumont district court that had reached a similar
conclusion.34 We upheld the Beaumont decision in an unpublished opinion and
noted that the party opposing the class chose not to avail itself of the safeguards
of Rule 23(b)(1)(A). However, our affirmation and the district opinion both cited
additional reasons for why certification was not appropriate under 23(b)(1)(A).
While we recognize that several district courts outside of this Circuit have at
least partially relied on the defendant’s opposition in denying (b)(1)(A)
certification,35 we choose not to do so here.
We find nothing in the plain text of Rule 23 that permits a defendant’s
veto over (b)(1)(A) certification.36 Instead, we hold that a court may certify a
class under (b)(1)(A) if the court finds that separate lawsuits could create
inconsistent results that would establish incompatible standards of conduct for
the party opposing the class.37 The Fifth Circuit has previously upheld a class
34
Corley v. Entergy Corp., 222 F.R.D. 316 (E.D. Tex. 2004), aff’d Corley v. Orangefield
Ind. Sch. Dis., 152 Fed. Appx. 350 (5th Cir. 2005) (unpublished).
35
See, e.g., In re Ford Motor Co. Ignition Switch Prods. Liab. Litig., 174 F.R.D. 332, 354
(D.N.J. 1997); Pettco Enters. v. White, 162 F.R.D. 151, 155 (M.D. Ala. 1995); Alsup v.
Montgomery Ward & Co., 57 F.R.D. 89 (N.D. Cal. 1972).
36
See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997) (“The text of [Rule 23]
limits judicial inventiveness. Courts are not free to amend a rule outside the process Congress
ordered . . . .”).
37
Fed. R. Civ. Pro. 23(b)(1)(A); Newberg on Class Actions § 4:7 (2010) (stating that the
Advisory Committee Notes “contain no support for the view that the party opposing the class
is the exclusive beneficiary” of (b)(1)(A)).
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certification under (b)(1)(A) despite the defendant’s opposition when the district
court found that individual actions would create incompatible standards of
conduct.38
Following the text of Rule 23(b)(1)(A), we do not find that separate actions
would result in incompatible standards of conduct for Fannie Mae. First,
certification under (b)(1)(A) is seldom appropriate when dealing with monetary
compensation because no inconsistency is created when courts award varying
levels of money damages to different plaintiffs.39 Here, four of the ten remedies
Plaintiffs seek relate to monetary compensation—providing (or reconstructing)
an accounting for Fannie Mae’s earnings,40 disgorging profits earned through
breaches of fiduciary duty, and providing restitution of the profits. It would not
be incompatible for Fannie Mae to disgorge profits earned from one fund while
not disgorging profits earned from a different fund.41
Plaintiffs also seek non-monetary injunctive remedies. Plaintiffs request
that the court order Fannie Mae to cease its self-dealing, terminate its
38
Hernandez v. Motor Vessel Skyward, 61 F.R.D. 558 (S.D. Fla. 1973), aff’d 507 F.2d
1278 (5th Cir. 1975), aff’d 507 F.2d 1279 (5th Cir. 1975).
39
See Zinser v. Accufix Research Inst., 253 F.3d 1180, 1193 (9th Cir. 2001); Allison v.
Citgo Petroleum Corp., 151 F.3d 402, 421 n.16 (5th Cir. 1998).
40
See Garcia v. Koch Oil Co., 351 F.3d 636, 641 (5th Cir. 2003) (noting that a request
for an accounting is “simply a tool” for the plaintiff “to determine how much—or, in fact,
whether—any money properly his is being held by another”).
41
Plaintiffs argue that such an outcome would be inconsistent because it would create
contradicting interpretations of the defendant’s obligations. Because of the various state laws
involved, we disagree. See Part II, supra. Moreover, given the differences between the
language establishing the Residual and Reserve Funds in the Regulatory Agreement, there
may be additional arguments that even under the same state’s law, one of those funds may
be fiduciary while the other is not.
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relationship with GMACCM, segregate the Funds accounts, appoint a special
master, and refrain from retaliating against any class member. Varying results
with respect to these measures are not necessarily incompatible. For example,
if one court failed to require Fannie Mae to cease its relationship with
GMACCM, Fannie Mae could still end this relationship in order to comply with
a different court order. Such action would not be “incompatible” with the first
court’s order, but rather might exceed what that court demanded.42 An
incompatible judgment would arise if one court required Fannie Mae to continue
its relationship with GMACCM while another court prevented Fannie Mae from
working with GMACCM. Such a scenario is implausible given the facts of this
case.
Most importantly, for reasons stated above, we find that various state laws
apply to different class members. Therefore, varying judgments with respect to
Plaintiffs’ injunctive requests would not be “incompatible” but rather would
reflect diverse state fiduciary law. As the Supreme Court has advised, Rule
23(b)(1)(A) encompasses cases in which the defendant is obliged by law to treat
members of the class alike.43 Here, various state laws may result in some class
members having a fiduciary relationship with Fannie Mae while others do not.
Under Rule 23(b)(1)(A), dissimilar outcomes that result from differing state laws
42
Plaintiffs also argue that the Advisory Committee finds that breach of fiduciary duty
is one of six types of cases “especially appropriate” for (b)(1) treatment. However, Appellants
fail to mention that this Advisory Committee Note is discussing 23(b)(1)(B), not 23(b)(1)(A).
In their briefing, Appellants do not dispute the district court’s failure to certify under (b)(1)(B),
so we find this Note inapposite. Even if Plaintiffs were to appeal the (b)(1)(B) ruling, we would
affirm the lower court’s decision because we do not find that individual adjudications in this
case would be dispositive of other class members’ interests.
43
See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614 (1997); Allison, 151 F.3d at
412 (citing Amchem).
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are insufficient to justify class certification.44 Therefore, the district court did
not abuse its discretion in denying certification under Rule 23(b)(1)(A).
V.
A court may certify a class under Rule 23(b)(2) if “the party opposing the
class has acted or refused to act on grounds that apply generally to the class, so
that final injunctive relief is appropriate respecting the class as a whole.” 45 We
have previously stated that “this rule seeks to redress what are really group as
opposed to individual injuries. The uniformity of the injury across the class is
what renders the notice and opt-out provisions of (b)(3) unnecessary.” 46
Moreover, injunctive relief is not appropriate to the whole class when final relief
relates predominantly to money damages.47 Thus, a Rule 23(b)(2) inquiry
requires considering two factors: 1) whether the defendant’s behavior is
generally applicable to the class as a whole, and 2) whether injunctive relief
predominates over monetary relief.48
44
See, e.g., Utility Consumers’ Action Network v. Sprint Solutions, Inc., 259 F.R.D. 484,
488 (S.D. Cal. 2009).
45
Fed. R. Civ. P. 23(b)(2).
46
Bolin v. Sears, Roebuck & Co., 231 F.3d 970, 975 n.22 (5th Cir. 2000).
47
See Allison, 151 F.3d at 411; Fed. R. Civ. P. 23(b)(2) advisory committee’s note, 1966
Amendment.
48
Bolin, 231 F.3d at 975.
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A.
“To qualify for class-wide injunctive relief, class members must have been
harmed in essentially the same way . . . .”49 This qualification differs from a
predominance of common issues that Rule 23(b)(3) requires.50 Instead of
requiring common issues, 23(b)(2) requires common behavior by the defendant
towards the class. In Bolin v. Sears, we found that Sears’s central policies
regarding bankrupt credit card consumers were sufficient to allege behavior
generally applicable to the class.51 Similarly, here, Fannie Mae had
standardized policies with regard to how it treated its multi-family mortgagors.
The Regulatory Agreements that each mortgagor signed were very similar, if not
identical, and Fannie Mae had uniform policies with regards to the investment
of mortgagor funds. Differences do exist among the mortgagors: some had
Residual Funds and others did not; some invested part of their funds while
others invested nothing; some communicated with Fannie Mae regarding their
investments; and many no longer have mortgages serviced by Fannie Mae. But
regardless of these differences, Fannie Mae’s behavior and policy of investing the
various funds is generally applicable to the class.
B.
Monetary relief predominates unless it is “incidental” to the requested
injunctive or declaratory relief.52 We have defined incidental to mean “damages
49
Maldonado v. Ochsner, 493 F.3d 521, 524 (5th Cir. 2007).
50
See Forbush v. J.C. Penney Co., Inc., 994 F.2d 1101, 1105 (5th Cir. 1993).
51
Bolin, 231 F.3d at 975.
52
Allison, 151 F.3d at 415.
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that flow directly from liability to the class as a whole on the claims forming the
basis of the injunctive or declaratory relief.”53 Such incidental damages should
only be those to which class members would be automatically entitled once
liability to the class is established.54
Here, monetary relief does not directly flow to the class members as a
whole. Plaintiffs accurately state that there are no subjective, mortgage-specific
factors affecting the amount of profit realized by Fannie Mae. However, Fannie
Mae’s earning of profits does not automatically entitle Plaintiffs to receive those
profits in the form of disgorgement. Plaintiffs must first prove liability by
demonstrating a breach of fiduciary duty. However, as we have discussed, each
state has varying applicable law surrounding the creation of fiduciary duty.
Thus, liability could not be proven for this nationwide class as a whole. Without
the ability to prove class-wide liability, class-wide disgorgement is also not
feasible. The equitable relief is dependent on “subjective differences of each
class member’s circumstances,” namely which state law applies to his or her
claim.55
Classes certified under (b)(2) do not provide an absolute right to notice or
opt-out. These procedural safeguards are not required because a (b)(2) class is
presumed to be homogeneous in nature, with few conflicting interests among its
members.56 However, once subjective differences between class members arise,
53
Id.
54
Id.
55
Id.
56
Id. at 413.
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these procedural safeguards become necessary. Such is the case here. For
example, some states have specific statutes that provide remedies for breach of
trust. Damages include profits made by the trustee (sometimes with interest)
as well as attorneys’ fees.57 Case law in several states also permits punitive
damages for breach of fiduciary duty when there has been malice.58 Plaintiffs
eligible for disgorgement may also be interested in these additional monetary
remedies. If all eligible plaintiffs are included in the proposed class, individuals
who could possibly obtain a larger judgment outside of the class have no opt-out
opportunity.
C.
In assessing whether monetary relief predominates, a court must examine
claims asserted in the context of the class composition.59 In Bolin v. Sears, we
vacated a (b)(2) certification because “most of the plaintiffs [were] seeking only
damages” and had nothing to gain from an injunction since their relationship
with Sears had ended.60 Similarly, we have vacated a (b)(2) certification
involving ERISA investments because “many potential class members” would
not benefit from the requested injunction.61 Finally, in Maldonado v. Ochsner
we affirmed a denial of certification when the named plaintiffs would not benefit
57
See, e.g., Cal. Prob. Code § 16440; Ga. Code 53-12-193; Tex. Prop. Code § 114.001.
58
Rainsville Bank v. Willingham, 485 So. 2d 319 (Ala. 1986); Wagman v. Lee, 457 A.2d
401 (D.C. 1983); Citizens & So. Nat. Bank v. Haskins, 327 S.E.2d 192 (Ga. 1985). But see
Packard v. Provident Nat. Bank., 994 F.2d 1039, 1048 (3d Cir. 1993) (holding that punitive
damages cannot be recovered against trustee under Pennsylvania law).
59
Bolin v. Sears, Roebuck & Co., 231 F.3d at 976.
60
Id. at 978.
61
Langbecker v. Electronic Data Sys. Corp., 476 F.3d 299 (5th Cir. 2007).
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from injunctive relief. We noted that (b)(2) certification is “inappropriate when
the majority of the class does not face future harm.”62
Plaintiffs rely on our ruling in Monumental Life 63 to assert that (b)(2)
certification would be appropriate in the present case, claiming Monumental
held that eighteen percent of class members benefitting from an injunction is
sufficient to warrant (b)(2) certification. In Monumental Life, plaintiffs
challenged defendants’ practice of charging higher life insurance premiums to
African-Americans. Many class members no longer had insurance policies with
the defendants, and the exact number of class members who would benefit from
an injunction was unknown. Defense and plaintiff experts’ estimates ranged
from eighteen to eighty percent. Given these estimates, we found that “the
proportion is sufficient, absent contrary evidence from defendants, that the class
as a whole is deemed properly to be seeking injunctive relief.” 64 In other words,
absent additional evidence, the plaintiffs had sufficiently demonstrated that
“most” of the class would likely benefit from injunctive relief.
Here there is no dispute regarding the number of proposed class members
who would benefit from injunctive relief. The class is composed of mortgagors
who have had multi-family loans serviced by Fannie Mae beginning in 1969.
Both parties agree that over sixty percent of class-qualifying mortgages are no
longer operative. Thus, less than forty percent of the class would benefit from
62
Maldonado v. Ochsner, 493 F.3d 521, 525 (5th Cir. 2007); see also In re Monumental
Life, 365 F.3d 408, 416 (5th Cir. 2004) (“Of course, certification under rule 23(b)(2) is
appropriate only if members of the proposed class would benefit from the injunctive relief they
request.”).
63
365 F.3d 408 (5th Cir. 2004).
64
Id. at 416.
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the proposed injunctive relief. We find that given the other variables in this
case, forty percent of the class benefitting from an injunction is not sufficient to
certify under (b)(2).65
In contrast to Monumental Life and an earlier case, Pettway,66 the case
before us now is not a civil rights case. While (b)(2) classes are not exclusively
reserved for civil rights disputes, this class type is especially suited for those
plaintiffs.67 In Pettway, for example, this Circuit allowed a class-wide back pay
award under a (b)(2) certification for African-American employees who were
victims of discriminatory employment practices. Appellants in this case compare
their disgorgement to the Pettway back pay award. However, unlike Appellants,
all of the Pettway plaintiffs would have benefitted from the injunctive relief
requested. All were current employees of the defendant employer. Moreover,
the injunctive relief awarded was substantial: restructuring the promotion
procedures, overhauling the training programs, and creating a bi-racial
committee of employees to act as an agent of the Board of Operatives. Based on
the significant monetary relief sought and less central injunctive relief, the
circumstances here do not warrant (b)(2) certification.
Finally, we are reminded that the district courts “are in the best position
to assess whether a monetary remedy is sufficiently incidental to a claim for
injunctive or declaratory relief.”68 We find that the district court applied the
65
We also note that potentially less than forty percent of the class members still have
uninvested funds.
66
Pettway v. Amer. Cast Iron Pipe Co., 494 F.2d 211 (5th Cir. 1974).
67
See Fed. R. Civ. Pro. 23(b)(2) advisory committee’s note, 1966 Amendment.
68
Allison, 151 F.3d at 416.
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correct legal standard for predomination under (b)(2) and do not find that the
district court abused its discretion in failing to certify the class.
VI.
For the foregoing reasons, we find the district court did not abuse its
discretion in denying certification under either Rule 23(b)(1)(A), Rule 23(b)(2),
or Rule 23(b)(3). The denial of class certification is AFFIRMED.
VII.
Much of the record in this case is under seal pursuant to a Protective
Order issued in November 2005. Prior to this appeal, Plaintiffs moved to unseal
the record, but the district court did not rule on the matter. Plaintiffs carried
the motion with their appeal of the class certification denial.
We have jurisdiction over the sealed documents because the district court’s
record transferred to us upon appeal.69 However, the district court has greater
familiarity with the record and is thus in a better position to balance the privacy
interests with the public’s potential common-law right to access the judicial
records.70 Therefore, we REMAND and refer the Plaintiff’s motion to unseal the
record to the district court for consideration.
69
See Fed. R. App. P. 11.
70
See United States v. Comprehensive Drug Testing, Inc., 513 F.3d 1085, 1116 (9th Cir.
2008); see also Nixon v. Warner Communications, Inc., 435 U.S. 589, 599 (1978) (“The few
cases that have recognized [a common-law right to access] do agree that the decision as to
access is one best left to the sound discretion of the trial court . . . .”); S.E.C. v. Van
Waeyenberghe, 990 F.2d 845, 848 (5th Cir. 1993) (“[T]he common law merely establishes a
presumption of public access to judicial records.”).
25