On April 17, 2018, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York denied class certification in an action asserting claims for breach of contract and breach of trust against Wells Fargo Bank, N.A. Royal Park Investments SA/NV v. Wells Fargo Bank NA, 1:14-cv-09764 (S.D.N.Y. Apr. 17, 2018). Plaintiff alleged that defendant disregarded contractual duties arising out of its role as trustee of two RMBS trusts by failing to protect RMBS Certificate holders 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. Adopting in its entirety Magistrate Judge Sarah Netburn’s Report and Recommendation (“R&R”), see Southern District Of New York Magistrate Judge Recommends Denial Of Class Certification In Action Against RMBS Trustee at https://www.lit-sl.shearman.com/southern-district-of-new-york-magistrate-judge-re, the Court denied class certification on the basis that individual questions affecting proposed class members predominated over common issues.
The R&R had recommended a finding that, although plaintiff had satisfied the numerosity, commonality, typicality and adequacy requirements of Rule 23(a), plaintiff had failed to meet the Rule 23(b)(3) requirements that (i) questions of law or fact common to members of the proposed class predominated over any questions affecting only individual members, and (ii) a class action would be superior to other available methods for fair and effective adjudication. The Court agreed with the R&R that three issues relating to the underlying breach claims raised individual issues that predominated over common issues and noted that no decision in the Second Circuit had found class certification to be appropriate in a case alleging breach claims against an RMBS trustee.
First, the Court agreed that whether each putative class member had Article III standing to bring claims for breaches of the trusts’ governing agreements required difficult individualized determinations in light of the fact that many holders were not the actual beneficiaries, the trust certificates did not have unique identifiers, and the certificates traded on the secondary market without a clearinghouse to record trades. Slip op. at 14. The Court rejected plaintiff’s analogy to class certification in securities law cases, and further found that Depository Trust Company (“DTC”) records indicating current legal ownership were insufficient to identify all of the beneficial owners or to “reveal the chain of ownership necessary to determine whether a given certificateholder owns the litigation rights associated with their certificates.” Id. at 17.
Second, the Court agreed that, applying New York’s borrowing statute (CPLR § 202), the timeliness of each class member’s claim could depend on individualized determinations of “where the claim accrued, when it accrued, and the applicable statute of limitations in the relevant jurisdiction.” Id. at 18. The Court rejected plaintiff’s arguments that this concern was speculative and that affirmative defenses should not be a bar to class certification. The Court held that merely determining whether a statute of limitations defense applied to a particular claim would require an individualized determination and that whether such proof was necessary to establish affirmative defenses must be considered in conjunction with other factors in the predominance inquiry. Id. at 19.
Third, the Court agreed that the calculation of damages would require individualized inquiries, and even if those damages were calculable on a class-wide basis, dividing those damages among investors would require individual analysis that the Court had discretion to take into account. Id. at 20. The Court rejected plaintiff’s argument that the damages analysis should never be a bar to class certification, holding instead that this factor was within a court’s discretion to consider in combination with other factors. Id.
The Court also considered whether alleged breaches of contract or a common-law duty of trust might be decided on a common basis. However, the Court held that, regardless of any breach finding, liability to individual investors would still depend on the various individualized determinations discussed above. The Court found that, while a particular individual issue alone might not predominate over issues common to the putative class, id. at 13, taken together, they “dwarf the only common question identified in this case,” id. at 21.
In addition, the Court agreed with the R&R that the superiority requirement had not been met, for the same reasons analyzed with respect to the predominance requirement and also because the proposed class members were sophisticated institutional investors with a strong interest in individually controlling their own actions. Id. at 21–24. And the Court declined to certify a class for liability purposes pursuant to Rule 23(c)(4), which permits certification “with respect to particular issues.” Id. at 24. The Court agreed with the R&R that “individualized issues would continue to permeate the issue of liability.” Id. at 25.
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.