District Court Applied Wrong Legal Standard in Finding Named Plaintiffs and Their Counsel to be Adequate Representatives of the Proposed Class under Rule 23(a)(4) and thus Abused its Discretion in Certifying Class and Approving Nationwide Class Action Settlement Third Circuit Holds
Several putative class actions were filed against various defendants, including Community Bank of Northern Virginia (CBNV), Guarantee National Bank of Tallahassee (GNBT) and Residential Funding Corporation (RFC), arising out of “the alleged predatory lending scheme of the Shumway/Bapst Organization (‘Shumway’), a residential mortgage loan business involved in facilitating the making of high-interest, mortgage-backed loans to debt-laden homeowners.” In re Community Bank of N. Va. & Guar. Nat’l Bank of Tallahassee Second Mortgage Loan Litig., 622 F.3d 275 (3d Cir. 2010) [Slip Opn., at 10]. According to the allegations underlying the class action complaints, Shumway entered into relationships with CBNV and GNBT in order to circumvent state-law restrictions on fees that it could charge; the alleged scheme permitted Shumway to make it appear as if the fees were paid to depository institutions (which are not subject to the fee restrictions) when in reality they were being funneled to Shumway. Id. RFC allegedly aided this conspiracy by purchasing CBNV and GNBT loans on the secondary market, even though it allegedly knew that these institutions were acting as mere “straw parties” for Shumway. Id., at 11. The class actions were consolidated, see id., at 11-12, and ultimately a proposed nationwide class action settlement was reached, id., at 13. Certain members of the class objected to the proposed class action settlement, and certain class members sought leave to intervene in the consolidated class action lawsuit; the district court denied the motion to intervene and overruled the objections to the class action settlement. Id., at 9. The Third Circuit affirmed the district court’s denial of intervention, but reversed and remanded the approval of the class action settlement. Id. The district court again approved the class action settlement, and again the objectors appealed: “The Objectors contend that the failure [to make claims against the defendants under the Truth in Lending Act (TILA) and the Home Ownership and Equity Protection Act (HOEPA)] renders the named plaintiffs and class counsel inadequate class representatives.” Id. The Circuit Court again reversed.
We do not discuss in detail the Circuit Court’s 100-page opinion. In sum, the Third Circuit concluded that “by approaching the adequacy-of-representation questions on remand as though it were ruling on a motion to amend pursuant to Federal Rule of Civil Procedure 15(c) or a motion to dismiss pursuant to Rule 12(b)6)[,] [the district court] applied the wrong legal standard in ruling on class certification under Rule 23.” In re Community Bank, at 9. Accordingly, the Court “reluctantly” vacated the district court order certifying the class action and approving the class action settlement, and again remanded the matter for further proceedings. Id. The Third Circuit also noted, “we continue to reject (i) the claim that the District Court abused its discretion in denying the Objectors’ renewed motion to intervene, and (ii) their renewed petition for mandamus to recuse the District Judge in this case.” Id.
Briefly, the problem with the district court’s analysis was that it analyzed the adequacy of the representation by evaluating the “viability of potential TILA/HOEPA class claims.” In re Community Bank, at 49. As the Third Circuit explained, “The District Court’s reasoning appears to be that, if these claims could not survive a Rule 12(b)(6) motion to dismiss (and thus were not viable), neither the named plaintiffs nor their counsel were inadequate for failing to bring them.” Id., at 49-50. The Circuit Court rejected this reasoning, explaining that “the Court’s analysis reduces to the conclusion that the existing named plaintiffs are made adequate because there is no remedy for their inadequate representation.” Id., at 53-54. This “is a path we find troubling.” Id., at 64. Accordingly, the district court’s order was reversed and the matter remanded with instructions. Id., at 100.