The U.S. Court of Appeals for the Seventh Circuit held that merely requiring extrinsic evidence to interpret a provision of a form contract does not render class certification improper, and that absent a more thorough explanation of its reasoning from the trial court, it could not uphold the trial court’s ruling decertifying the class.

As a result, the Seventh Circuit vacated the decision of the trial court and remanded for further proceedings.

A copy of the opinion in Red Barn Motors, Inc. v. NextGear Capital, Inc. is available at: Link to Opinion.

The plaintiff auto dealerships entered into demand promissory note and security agreements with the defendant company whereby the company would issue a line of credit for the dealerships to access in purchasing used vehicles at automobile auctions.

The agreements provided the dealerships with a revolving line of credit, called a floorplan agreement, to purchase vehicles at an auction which they subsequently sell at their dealerships.

In a typical auction and financing transaction, a used car dealer bids on automobiles at an auction, and if their bid is accepted the dealer takes possession of the vehicle. The dealer then either pays the auction company directly or utilizes a financing company, which pays the auction house and provides financing by means of the floorplan agreement to the dealer for repayment. The auction house then forwards title to the entity that paid for the vehicle.

However, the dealerships allege the company deviated from that sequence because it did not pay the auction house at the time possession was delivered, but instead paid only after it received title to the vehicle purchased, which could take up to eight weeks.

Despite this delay, the company nevertheless charged interest and curtailment fees to the dealerships from the date of the initial purchase, even though the company pays no money on that date.

The dealerships filed a putative class action lawsuit challenging that imposition of interest fees during the period prior to the receipt of title, when the company was not yet paying any funds to the auction house.

The dealerships sought class certification to pursue that challenge on behalf of all other dealers who were subject to the same agreement.

The dealerships’ amended complaint asserted numerous claims including breach of contract, constructive fraud, tortious interference, unjust enrichment, RICO violations, and RICO conspiracy.

The trial court originally issued an extensive 30-page opinion granting class certification as to the breach of contract and substantive RICO claims; however, after the company filed a motion to reconsider, the trial court issued a one-page ruling reversing course and determining that class certification was not appropriate.

The matter was then appealed.

Initially, the Seventh Circuit noted that while it reviewed “a trial court’s decision to grant or deny certification for abuse of discretion,” the “review, while deferential, ‘can and must be exacting.’”

In vacating the decision of the trial court, the Seventh Circuit ruled that the trial court’s “denial of class certification lacks sufficient reasoning for our court, on review, to ascertain the basis of its decision.”

As you may recall, Federal Rule of Civil Procedure 23(a) sets forth explicit requirements for a case to proceed as a class action: (1) the class is so numerous that joinder of all members is impracticable (numerosity); (2) there are questions of law or fact common to the class (commonality); (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class (typicality); and (4) the representative parties will fairly and adequately protect the interests of the class (adequacy of representation).

In addition, one of the four categories set forth in Federal Rule of Civil Procedure 23(b) must be met in order for a case to proceed as a class action.

The dealerships asserted that the case fell within Rule 23(b)(3) which considers whether “questions of law or fact common to class members predominate over any questions affecting only individual members, and … a class action is superior to other available methods for fairly and efficiently adjudicating the controversy.”

The Seventh Circuit noted that the trial court’s “decision withdrawing class status provides only the conclusion that an ambiguous contract ‘requires consideration of extrinsic evidence, necessitates individualized proof, and undermines the elements of commonality and predominance for class certification.’”

However, the Seventh Circuit ruled that “[n]either the categorization of the contract as ambiguous, nor the prospect of extrinsic evidence, necessarily imperils class status.”

The Court noted that the parties in the case conceded that the floorplan contract at issue was a standard form contract, and “with a form contract such as this one, uniform application and interpretation of the clauses would be expected absent evidence that the form contracts in fact had meaning that varied from one signatory to another.”

Moreover, “[e]ven if the determination that the language is ambiguous as to when interest could accrue opens the door to extrinsic evidence to ascertain the intended meaning of that provision, the determination of its meaning would apply to all signatories and therefore would be capable of class-wide resolution.”

Finally, the Seventh Circuit observed: “[W]hen presented with the same issue in its initial class certification – the ambiguity as to when interest would accrue – the court concluded that the ambiguity did not prevent class certification because it was capable of a common answer. The court has not explained why a different conclusion to that question was reached in the Motion for Reconsideration, instead mentioning only the need for extrinsic evidence.”

However, “the mere need for extrinsic evidence does not itself render a case an improper vehicle for class litigation,” and the trial court provided the Seventh Circuit with “no indication as to what evidence the court believed would render class certification improper.”

The Seventh Circuit therefore held that “[a]bsent a more thorough explanation of its reasoning, we cannot uphold the decision decertifying the class.”

As a result, the Seventh Circuit vacated the trial court’s ruling, and remanded for further proceedings.