Opinion
No. 05-04-00899-CV
Opinion filed August 24, 2005.
On Appeal from the 192nd Judicial District Court, Dallas County, Texas, Trial Court Cause No. 02-9640-K.
Reversed and Remanded.
Before Justices WRIGHT, MOSELEY, and LANG.
MEMORANDUM OPINION
In this interlocutory appeal, GMAC Commercial Mortgage Corporation, a California corporation, individually and/or in its capacity as a master servicer for multiple third parties, challenges the trial court's order certifying class. In five issues, GMAC contends the trial court abused its discretion in certifying this class because Texas Bay Oaks Limited Partnership failed to meet its burden pursuant to Texas Rule of Civil Procedure 42(a), (b)(2), and (b)(3). For the reasons below, we reverse the trial court's order and remand this case for further proceedings.
I. FACTUAL AND PROCEDURAL BACKGROUND
GMAC originates and services real estate loan transactions. Texas Bay Oaks, on behalf of itself and a purported nationwide class of borrowers respecting approximately 16,000 loans, sued GMAC, alleging that it received notice from GMAC that its real estate loan required it to obtain "terrorism insurance" after September 11, 2001, for the property securing the loan. Texas Bay Oaks alleged that it and other borrowers either purchased "terrorism insurance" in reliance on GMAC's notice or had such insurance "force placed" by GMAC on their behalf. Further, it alleged that neither its loan documents nor those of any other borrowers imposed a requirement for "terrorism insurance." Causes of action were asserted by Texas Bay Oaks for breach of contract, specifically, breach of the loan documents between GMAC and each borrower; declaratory judgment; and negligent misrepresentation. The only specific damages asserted was the cost of "terrorism insurance." Additionally, it sought class action certification; actual, exemplary, or punitive damages; attorney's fees; costs of court; and post-judgment interest.
A motion to certify a nationwide class of borrowers was filed, and GMAC filed a response. After a hearing, the trial court granted Texas Bay Oaks's motion to certify, finding the class satisfied the requirements of Texas Rule of Civil Procedure 42(a), (b)(2), and (b)(3) and certifying a class on behalf of the following class members:
All persons or entities who (i) borrowed funds in connection with real estate related loan transactions prior to September 11, 2001, (ii) received written communication from the Defendant, acting for itself and/or as servicer for a third party, stating that such borrower is required to procure "terrorism insurance" coverage for its property under threat of defaulting their loans, and (iii) purchased" terrorism insurance" coverage or had "terrorism insurance" "force purchased" on their behalf by Defendant and (iv) whose loans are within a collateralized mortgage-back securities ("CMBS") pool serviced by Defendant.
GMAC timely filed this interlocutory appeal, claiming that the trial court abused its discretion by certifying this class. See Tex. Civ. Prac. Rem. Code Ann. § 51.014(a)(3) (Vernon Supp. 2004-05); Tex.R.App.P. 26.1(b).
II. ISSUES ON APPEAL
In the first of its five issues, GMAC argues that the trial court erred in finding that common questions predominated over individual questions when liability for misrepresentation and breach of contract can be determined only by examining each class member's individual loan documents' provisions, which vary considerably because they were individually negotiated with different lenders, and which also require inquiry into the facts and circumstances specific to the particular property, borrower, and loan.
In its second issue, GMAC argues that common questions predominated over individual questions when the claims asserted against it require individual proof of reliance, waiver, and contributory negligence because some borrowers may have relied on GMAC's notices that they had to buy terrorism insurance, while others may have bought it, not because of GMAC's notices, but because they concluded that such insurance was a wise precaution after September 11, 2001.
In its third issue, GMAC argues the trial court erred in determining that Pennsylvania law applies here, when most class members' contracts contain valid choice of law provisions requiring the application of other state laws. Further, GMAC contends that the trial court erred in failing to conduct an extensive choice of law analysis as required by Compaq Computer Corp. v. Lapray, 135 S.W.3d 657, 671-81 (Tex. 2004).
In its fourth issue, GMAC argues that the trial court erred in certifying a nationwide class action when the differences in state law prevented common questions from predominating.
In its fifth issue, GMAC argues that the trial court erred in certifying a class under Rule 42(b)(2) without providing class members with notice and opt-out rights, and without explaining why the case was cohesive enough to be certified under that rule.
III. RULE 42'S GENERAL PRINCIPLES AND STANDARD OF REVIEW
Rule of civil procedure 42 governs class certification. Tex. R. Civ. P. 42. The rule is patterned after Federal Rule of Civil Procedure 23. Consequently, federal decisions and authorities interpreting current federal class action requirements are persuasive authority. S.W. Ref. Co. v. Bernal, 22 S.W.3d 425, 433 (Tex. 2000). All class actions must satisfy four threshold requirements: (1) numerosity ("the class is so numerous that joinder of all members is impracticable"); (2) commonality ("there are questions of law or fact common to the class"); (3) typicality ("the claims or defenses of the representative parties are typical of the claims or defenses of the class"); and (4) adequacy of representation ("the representative parties will fairly and adequately protect the interests of the class"). Id. (quoting Tex. R. Civ. P. 42(a)).
In addition to these prerequisites, class actions must satisfy at least one of the subdivisions of Rule 42(b). See id. Texas Bay Oaks asserts this class action satisfies Rule 42(b)(2), which requires that "the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole," and Rule 42(b)(3), which requires common questions of law or fact to predominate over questions affecting only individual members and class treatment to be "superior to other available methods for the fair and efficient adjudication of the controversy." Tex. R. Civ. P. 42(b)(2), (b)(3).
Effective January 1, 2004, former subsection (b)(4) was renumbered as subsection (b)(3). See Compaq Computer Corp., 135 S.W.3d at 661 n. 1. The amended rule applies here.
A plaintiff bears the burden of satisfying the requirements of Rule 42. Bernal, 22 S.W.3d at 439. Although we review a trial court's class certification order for abuse of discretion, we do not indulge every presumption in its favor, as compliance with class action requirements must be demonstrated rather than presumed. Compaq Computer Corp., 135 S.W.3d at 671 (citing Henry Schein, Inc. v. Stromboe, 102 S.W.3d 675, 691 (Tex. 2002)); see Bernal, 22 S.W.3d at 439. We also must evaluate "the claims, defenses, relevant facts, and applicable substantive law." Compaq Computer Corp., 135 S.W.3d at 671 (quoting Bernal, 22 S.W.3d at 435).
IV. ORDER CERTIFYING CLASS
In its certification order, the trial court declares, inter alia, that the issues are susceptible to common proof "from Defendant's employees and the documents maintained by Defendant at its offices." Additionally, the trial court concludes that "the Class will rely upon this same core of facts to support its breach of contract, declaratory judgment[,] and negligent misrepresentation causes of action." (Emphasis added.) In its conclusion that the requirement of "typicality" is met, the trial court states, "The class members all have substantially similar loan documents, received standard written communication(s) from Defendant . . ., were treated in a standard and uniform manner by Defendant, paid for terrorism insurance (or had it force-purchased by GMAC at the class member's expense), and have incurred costs thereby." (Emphasis added.) Respecting the trial court's finding that the case satisfies the requirements of Rule 42(b)(2), the court concludes, "The Defendant has acted or refused to act on grounds generally applicable to the class. . . . Those loan documents contain substantially similar insurance clauses[,] and the class seeks a declaration as to its rights and remedies under those contracts." (Emphasis added.) When addressing "justifiable reliance," which the court acknowledges is an element of class-wide proof on the negligent misrepresentation claims, the court concludes, variously, that: (1) the elements of that claim (as well as breach of contract and declaratory judgment) "are basically identical in Texas and Pennsylvania, [footnote omitted] and throughout most of the United States"; and (2) the Texas Supreme Court has declared "reliance will typically require individual proof," citing Henry Schein, Inc., 102 S.W.3d at 694, but the trial court states that this element is susceptible to trial by class action since "Plaintiff has introduced evidence showing that that [sic] GMAC intended for the class members to rely on the class-wide representations that it made, that such reliance would be reasonable and expected, and that at least 50% of the class members actually relied on the representations." (Emphasis added.) Finally, the trial court concludes, without elaboration or analysis, in addition to the above statements as to the applicable law, that the law of Pennsylvania applies. The trial court says, "Lastly, even though this is a multi-state class action, the predominance requirement is met because this Court will not have to balance the laws of various jurisdictions. Instead, the Court finds that Pennsylvania law applies to this case under Texas conflicts of laws rules."
V. COMMONALITY
GMAC's first four issues principally focus on the "commonality" requirement as dictated by Rule 42(b)(3). As to commonality, GMAC claims that there are three defects which preclude certification: (1) individual issues predominate as to proof of the element of reasonable "reliance" on the negligent misrepresentation claims since in order for Texas Bay Oaks and the proposed class to meet their burden of proof, "individual" proof must be presented for each borrower's reliance on GMAC's representation; (2) individual issues predominate over common issues since liability for negligent misrepresentation and breach of contract can be determined only by examining each class member's individual loan documents, the provisions of which vary among the approximately 16,000 loans in the proposed class, and determining whether GMAC's requirement that the borrowers obtain "terrorism insurance" was required by those contract provisions; and (3) the trial court erred in determining that Pennsylvania law applies, since most of the loan agreements contain valid choice of law provisions requiring application of laws other than that of Pennsylvania, and the laws of the various states are sufficiently different to prevent common questions from predominating. In issues three and four, GMAC argues that the trial court abused its discretion by certifying a section (b)(2) and a section (b)(3) class without conducting the choice of law analysis required by Compaq Computer Corp., 135 S.W.3d at 671-81. These issues include some points similar to those in issues one and two.
A. Applicable Law
Rule 42(b)(3)'s predominance requirement is one of the most stringent prerequisites to class certification. Bernal, 22 S.W.3d at 433. To aid a court in determining if section (b)(3) certification is appropriate, the rule establishes a list of nonexhaustive factors to consider: (A) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating the litigation in the particular forum; and (D) the difficulties likely to be encountered in the management of a class action. Tex. R. Civ. P. 42(b)(3).
Courts determine if common issues predominate by identifying the substantive issues of the case that will control the outcome of the litigation, assessing which issues will predominate, and determining if the predominating issues are, in fact, those common to the class. Bernal, 22 S.W.3d at 434. The test for predominance is not whether common issues outnumber uncommon issues, but whether common or individual issues will be the object of most of the efforts of the litigants and the court. Id. If, after common issues are resolved, presenting and resolving individual issues are likely to be overwhelming or unmanageable tasks for a single jury, then common issues do not predominate. "Ideally, `a judgment in favor of the class members should decisively settle the entire controversy, and all that should remain is for other members of the class to file proof of their claim.'" Id. (citation omitted). Before we determine whether individual issues predominate over common ones in this class, we consider how to properly apply the predominance requirement. Id.
The predominance requirement is intended to prevent class action litigation when the sheer complexity and diversity of the individual issues would overwhelm or confuse a jury or severely compromise a party's ability to present viable claims or defenses. Id. The supreme court has rejected the approach of "certify now and worry later." Id. at 435. Courts must perform a "rigorous analysis" before ruling on class certification to determine whether all prerequisites to certification have been met, and a "cautious approach to class certification is essential." Id. Actual, not presumed, conformance with Rule 42 is indispensable. Id.
Thus, it is improper to certify a class without knowing how the claims can and will likely be tried. Id. A trial court's certification order must indicate how the claims will likely be tried so that conformance with Rule 42 may be meaningfully evaluated. Id. "`Given the plaintiffs' burden, a court cannot rely on [mere] assurances of counsel that any problems with predominance or superiority can be overcome.'" Id. (quoting Castano v. Am. Tobacco Co., 84 F.3d 734, 742 (5th Cir. 1996)). To make a proper analysis, a court must go beyond the pleadings to "`understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues.'" Id. (quoting Castano, 84 F.3d at 744). Any proposal to expedite resolving individual issues must not unduly restrict a party from presenting viable claims or defenses without that party's consent. Id. "If it is not determinable from the outset that the individual issues can be considered in a manageable, time-efficient, yet fair manner, then certification is not appropriate." Id. at 436.
The class action is a procedural device intended to advance judicial economy by trying claims together that lend themselves to collective treatment. Id. at 437. It is not meant to alter the parties' burdens of proof, rights to a jury trial, or the substantive prerequisites to recovery under a given tort. Id. Procedural devices may "`not be construed to enlarge or diminish any substantive rights or obligations of any parties to any civil action.'" Id. (quoting Tex. R. Civ. P. 815). Although a goal of our system is to resolve lawsuits with "great expedition and dispatch and at the least expense," the supreme objective of the courts is "`to obtain a just, fair, equitable and impartial adjudication of the rights of litigants under established principles of substantive law.'" Id. (quoting Tex. R. Civ. P. 1). This means that convenience and economy must yield to a paramount concern for a fair and impartial trial. Id. Basic to the right of a fair trial is that each party has the opportunity to present adequately and vigorously any material claims and defenses. Id.
"[I]n all choice of law cases, except those contract cases in which the parties have agreed to a valid choice of law clause, the law of the state with the most significant relationship to the particular substantive issue will be applied to resolve that issue." Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 421 (Tex. 1984) (applying Restatement (Second) of Conflict of Laws); see Spence v. Glock, Ges.m.b.H., 227 F.3d 308, 311 (5th Cir. 2000). When ruling on motions for class certification, the trial court must conduct an extensive choice of law analysis before it can determine predominance, superiority, cohesiveness, and even manageability. Compaq Computer Corp., 135 S.W.3d at 672. Generally, the issue of which state's law applies is a question of law we resolve by reviewing the record de novo. Id. In the context of a nationwide class action, the determination of the applicable substantive law is of paramount importance. If the court does not know which states' laws must be applied, it cannot determine whether variations in the applicable laws would defeat predominance in a section (b)(3) class action or destroy the cohesiveness of a section (b)(2) class. Id. Moreover, "[i]f the laws of fifty-one jurisdictions apply in this class action, the variations in the laws of the states and District of Columbia `may swamp any common issues and defeat predominance.'" Id. (quoting Castano, 84 F.3d at 741). A proper choice of law analysis begins with a determination whether there is conflict between the law of the jurisdiction that the trial court has found applies and the laws of other interested states. There can be no harm in applying that state's law if there is no conflict. Id. The class representative bears the burden of presenting the trial court with an extensive analysis of state law evaluating any differences. Id.
B. Discussion 1. Choice of Law
In oral argument, Texas Bay Oaks conceded GMAC's third issue: that the certification order does not meet the requirements of Compaq Computer Corp. since the trial court did not conduct an extensive choice of law analysis. We agree that GMAC's third issue as it relates to the analysis required by Compaq Computer Corp. has merit, and we resolve that part of GMAC's third issue in its favor. We conclude this certification cannot stand on that point alone, and this case must be remanded for further proceedings consistent with the applicable case law.
In conceding that the order must be reversed because it does not meet the requirements of Compaq Computer Corp., Texas Bay Oaks suggested that, in the interest of judicial economy, we need not address GMAC's other issues on appeal.
The issues presented by the parties to this Court on appeal were fully addressed with the trial court and extensively briefed here. It was not until oral argument that Texas Bay Oaks conceded that there is need for an extensive choice of law analysis. Accordingly, even though we need not limit our considerations to that discrete issue, we do so and reverse and remand solely on that point.
We do so with grave reservations, particularly in view of comments during oral argument from counsel for Texas Bay Oaks about other changes which might be suggested by Texas Bay Oaks, as proponent of the class upon remand to the trial court. Texas Bay Oaks commented that, should we remand, not only would it ask the trial court to conduct the analysis required by Compaq Computer Corp., but that, in view of the existence of "some differences" respecting the negligent misrepresentation law in various states, subclasses may be necessary to address those differences. However, counsel maintains that the trial court's statement in the certification order, inter alia, that contract law is essentially the same throughout the United States as it relates to interpretation of unambiguous contracts, is accurate.
It is obvious that the reason the Compaq Computer Corp. analysis is required is to assure an exercise which results in a correct determination of what law should apply. That mechanical analysis must address the overarching requirement of commonality. While Texas Bay Oaks concedes that the mechanical analysis of the choice of law was not conducted by the trial court in accordance with established Texas Supreme Court authority, it does not concede that the trial court's conclusion that Pennsylvania law applies here is incorrect. We would be loathe to send the parties back to the trial court simply by saying that the trial court must conduct the mechanical exercise required by Compaq Computer Corp. and insert language to that effect in the certification order, yet retain its conclusion about Pennsylvania law. Texas Bay Oaks's claims in this record assert negligent misrepresentation and breach of contract as to 16,000 written loan agreements, which were executed in or pertain to many different states across our country and which include choice of law provisions naming many different states. On remand, Texas Bay Oaks may opt to change its claims or seek subclasses. However, the material facts underlying the contentions do not appear to be contested. We believe that GMAC's commonality arguments in issues one through four, especially as to "reliance" and "breach of contract" claims, are integral to the choice of law analysis. The commonality issues require careful scrutiny by the trial court in its rigorous analysis required by Compaq Computer Corp. and Bernal. See Bernal, 22 S.W3d at 435.
2. Reliance
GMAC argues that the test for commonality as to the negligent misrepresentation cause of action is not met because individual proof is needed to prove "justifiable reliance." The Texas Supreme Court addressed this precise issue in Henry Schein, Inc. and supplied direction applicable in this case. Henry Schein, Inc. involved allegations of misrepresentations to purchasers of computer software products. The plaintiffs claimed that "class wide" reliance could be shown. The plaintiffs, in Henry Schein, Inc., argued that there was evidence that "Schein wanted purchasers to rely on its advertisements and other representations . . ., as most marketers of any product would. . . ." Henry Schein, Inc., 102 S.W.3d at 694. However, the supreme court noted that there was no evidence that the purchasers " actually did rely on Schein's statements so uniformly that common issues of reliance predominate over individual issues." Id. Further, the supreme court said, "The trial court did not explain in its certification order how the plaintiffs can avoid individual proof of reliance or why the necessity for such proof would not defeat the predominance requirement for certification." Id. Under those facts, the supreme court declined to decide whether a class asserting a cause of action requiring proof of reliance could ever be certified. However, applying the principle stated in Perrone v. General Motors Acceptance Corp., 232 F.3d 433, 440 (5th Cir. 2000), cert. denied, 532 U.S. 971 (2001), that if "individual reliance is necessary to prove actual damages, a class action may not be certified on this issue," the supreme court concluded that the plaintiffs failed to show that the individual issue did not predominate. Henry Schein, Inc., 102 S.W.3d at 694.
Upon remand, the trial court must articulate, in view of the supreme court's conclusion in Henry Schein, Inc., how this case is suited for class treatment as to the negligent misrepresentation claims. The only finding by the trial court in its order as to "class wide" proof is that GMAC intended the borrowers to rely on the GMAC representation that "terrorism insurance" must be purchased under the terms of the loan agreements. Such a conclusion by the trial court wholly ignores the requirement that the actual "justifiable reliance" of the borrower, the class member, is at issue, not what GMAC wanted or expected. Additionally, GMAC asked us to consider whether the trial court's finding was based upon speculation when it stated that fifty percent of the borrowers allegedly relied on the GMAC demand when they secured terrorism insurance. However, we need not determine whether that finding was supported by fact or speculation. Even assuming the validity of the support for the trial court's conclusions, it is clear that, in order to determine which of the borrowers should be included in that fifty percent who may have relied on GMAC's demand, individual proof is necessary as to each borrower and whether it "relied."
3. Breach of Contract
The only finding in the trial court's order as to the commonality of the contract claims is that the contract provisions for each loan were "similar." GMAC has presented evidence in the record that shows the contract language for the 16,000 loans varies greatly from contract to contract. The trial court did not address in the order how it could determine "class wide" breach when the contract provisions may be similar, but, according to the record before us, the language is varied, and, possibly, is subject to interpretation on different legal standards based upon choice of law. The case law is clear, at least in Texas, that a court, in determining the intent of the parties to a contract, is guided by the four corners of the contract, absent any allegations of ambiguity. See Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995) (per curiam); see also Bowers v. Jefferson Pilot Fin. Ins. Co., 219 F.R.D. 578, 581 (E.D. Mich. 2004) (discussing differences among states in considering extrinsic evidence in determining presence of ambiguity). Further, since many of the contracts have choice of law provisions, which select the law of different states, the interpretation of even identical contractual terms may vary based on the laws of the different states applicable to each contract. Accordingly, even under Texas law, a fact finder must analyze different contract provisions individually in order to determine whether breach has occurred.
Bernal and its progeny require these issues be addressed. See Bernal, 22 S.W.3d at 434-36.
VII. CONCLUSION
Because of our resolution of GMAC's issues as to commonality, specifically the choice of law analysis required by Compaq Computer Corp., we conclude the trial court abused its discretion in certifying the class. In view of this conclusion, we need not consider GMAC's other specific objections to the class action or trial plan. Nevertheless, on remand, there must be a rigorous analysis of all class action requirements necessary under our law, including choice of law. See Bernal, 22 S.W.3d at 435, 439. We reverse the order certifying class and remand this cause to the trial court for further proceedings consistent with this opinion.