In a January 10, 2018 ruling unsealed on January 19, Magistrate Judge Sarah Netburn of the United States District Court for the Southern District of New York recommended denial of Royal Park Investments’ request for class certification in an action against Wells Fargo Bank, N.A. (“Wells Fargo”). Royal Park Investments SA/NV v. Wells Fargo Bank, N.A., 14-CV-09764-KPF-SN (S.D.N.Y. Jan. 10, 2018). Plaintiff asserts claims for breach of contract and breach of trust in connection with Wells Fargo’s role as trustee of two RMBS trusts, alleging that Wells Fargo disregarded contractual duties by failing to protect RMBS Certificateholders and breached its common law duty of trust to avoid conflicts of interest by putting its own interests ahead of the beneficiaries’ and failing to take necessary action to the detriment of beneficiaries. Concluding that individual questions affecting proposed class members predominated over common issues, Magistrate Judge Netburn recommended that plaintiff’s motion be denied.
While recommending that plaintiff had demonstrated ascertainability and satisfied the numerosity, commonality, typicality and adequacy requirements of Rule 23(a), Magistrate Judge Netburn nevertheless recommended that class certification be denied under Rule 23(b)(3). Rule 23(b)(3) requires that questions of law or fact common to members of the proposed class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for fair and effective adjudication. With respect to predominance, Magistrate Judge Netburn noted that individualized questions related to ensuring that each class member had Article III standing “overwhelm[ed]” any questions common to the proposed class. Slip op. at 24. In particular, Magistrate Judge Netburn emphasized the “opaque” way in which RMBS certificates trade, due to their (i) lack of a unique identifier and (ii) trading on secondary markets without a central clearinghouse to record trades. As a result, identifying beneficial holders would be exceedingly difficult and tracing transactions in the Certificates would require “evidence that varies from member to member” and was “not obviously susceptible to class-wide proof.” Id. at 27. Compounding this problem, Magistrate Judge Netburn noted other individualized determinations that would be required to assess a class member’s standing, such as choice-of-law and factual determinations regarding whether Certificate holders had assigned their litigation rights along with the sale of their Certificates. Specifically, Magistrate Judge Netburn explained that, under New York law, litigation rights transfer automatically with the sale of a Certificate; under most other states’ laws, however, assignors must manifest an intention to transfer litigation rights. In a similar vein, Magistrate Judge Netburn found that different statutes of limitation might apply depending on each class member’s residence. Id. at 28-30. Magistrate Judge Netburn also recommended finding that the superiority requirement had not been met, for the same reasons just discussed and also because the proposed class members were sophisticated institutional investors and thus had a strong interest in individually controlling the prosecution of their own actions. Id. at 34.
Separately, Magistrate Judge Netburn recommended denying plaintiff’s alternative request that the Court should exercise its discretion to certify a class for liability purposes pursuant to Rule 23(c)(4), which permits certification “with respect to particular issues.” Id. at 35. Magistrate Judge Netburn reasoned that a “liability class” would suffer from the same problems that undermined plaintiff’s ability to satisfy the predominance and superiority requirements.
This decision is a reminder that, in actions based on state law, choice-of-law issues and material differences in state substantive laws can prevent class certification.