September 2015

Is the certification of a class by an NC state court set in stone or can it be modified during the course of the litigation?

The federal rule vs. the state rule

There is a difference between the federal rule governing class actions (FRCP 23) and the North Carolina equivalent (NCRCP 23).  The length and precision of the federal rule is overwhelming when measured against the short and simple state rule.

The Federal rule contains a specific provision allowing the presiding judge to alter or amend a class certification order: It says that "[a]n order that grants or denies class certification may be altered or amended before final judgment."  FRCP 23(c)(1)(C).

The NC Rule, by contrast, is silent on this subject.

The Original Class Certification

The ability of a Business Court to alter or amend a previously entered class certification order was at issue last week in an unpublished Order in  Elliott v. KB Home North Carolina, Inc.  Judge Jolly had certified a class in the case three years ago, in 2012.  I wrote about that case at the time the class was certified.The class members had in common the issue whether Defendant KB Home should have installed a weather resistant barrier (a "WRB") behind the HardiePlank® siding on homes which they had purchased from KB Homes in two developments in Cary, North Carolina.  

Judge Jolly certified a class of "all persons who own a home that was constructed by Defendant KB Home without a weather restrictive barrier" behind the HardiePlank.  Class notice went out in March 2012.

Three and a half years later, the case is now before Judge McGuire after a couple of trips to the Court of Appeals and Judge Jolly’s retirement.

Change In Ownership Of The Homes Owned By The Class Memberrs

Here was the issue for Judge McGuire: Even before the class notice was sent, 38 of the members of the potential class sold their homes ("Pre-Notice Sellers") to others.  And following the mailing of the class notice, 79 of the class members sold their homes ("Post-Notice Sellers") to others. Who are proper class members? Are all of the homeowners who owned the homes without a WRB on the date of class notice members of the class, even if they had sold their homes?  Or should membership in the class be confined to homeowners who originally bought their homes from KB Homes and continued to own them through the date of final judgment in the case (who knows how long it will be before that happens?).  

A request for modification to the class definition was made by the Plaintiff.

There are multiple issues regarding those potential class members who sold their homes after receiving the class notice.  They either did or did not disclose the existence of this litigation or the absence of a WRB to their buyer.  If they did not, there might have been no impact on the sales price and they therefore might have no damages.  And they certainly did not have a continuing interest in the installation of a WRB, no longer being owner of the house.

Did Judge McGuire have the power to modify Judge Jolly’s order certifying the class?  If Judge McGuire were a federal judge, yes.  But as a state court judge, maybe not.  The NC Court of Appeals held ten years ago that:

Clearly, the federal rule contemplates continuing review of the class certification status of an action. See 3B Moore’s Federal Practice ¶ 23.50 at 23-410. Rule 23 of the North Carolina Rules of Civil Procedure contains no such provision, Nobles v. First Carolina Communications, 108 N.C.App. 127, 423 S.E.2d 312 (1992), rev. denied 333 N.C. 463, 427 S.E.2d 623 (1993), and we will not judicially legislate one.

Dublin v. UCR, Inc., 115 N.C. App. 209, 444 S.E.2d 455, 461 (1994).

But given that a class certification order is an interlocutory order, Judge McGuire held that Judge Jolly’s order was:

‘subject to change at any time to meet the justice and equity of the case’ and [was] ‘modifiable for changed circumstances.’

Order ¶9 (quoting Dublin, supra, 115 N.C. App. at 220). 

He said, however,  that there would have to be "a change in circumstances since [the date of the certification order] that has altered the legal foundation upon which Judge Jolly based his decision to certify the class." Op. ¶10.

As to the homeowners who had purchased from the Pre-Notice Sellers, Judge McGuire ruled that Judge Jolly had "at least impliedly" considered the existence of persons buying the homes before the class was certified, and that he had not intended to limit the class to those who had purchased their homes directly from KB Homes.  The existence of the homeowners buying their homes from the Pre-Notice Sellers was therefore not a "changed circumstance warranting modification of the class definition. Op. ¶16.

The Home Owners Who Had Sold Their Homes After The Class Was Certified Became Members Of A Subclass

Judge McGuire rejected the argument that the potential that the Post-Notice Sellers might have different damages from other class members (in that they would not need the benefit of an WRB being installed or that they might not have suffered damage upon the sale of their home) was a "changed circumstance warranting modification of the class.  He said that:

such individual differences in damages, by themselves, are not sufficient to defeat class certification where they do not predominate over common questions of law or fact affecting an entire class.

Op. ¶22.

But the Post-Notice Sellers nevertheless did represent a "changed circumstance."  That was due to the reason that the Post-Notice Sellers would need to individually establish that they had suffered any injury at all.

The overarching common question in the case remains whether KB Homes complied with the building code and the manufacturer’s recommendations regarding the need for a WRB.  (Judge McGuire recently denied KB Home’s motion for summary judgment on this issue in another unpublished Order).

borrowing from the U.S. Supreme Court”s recent Wal–Mart decision on class certification, Judge McGuire held that:

‘[w]hat matters to class certification . . . is not the raising of common "questions" — even in droves — but, rather the capacity of a class-wide proceeding to generate common answers apt to drive the resolution of the litigation.  Here, the answer to the question of whether the failure to install a WRB violated the then-existing building code will ”drive the resolution’ of Plaintiff’s claims.

Op. ¶26 (quoting Wal-Mart Stores v. Dukes, 131 S.Ct. 2541, 2550-511 (2011)).

The "changed circumstances" allowed a modification of the class definition to create a sub-class of the Post-Notice Sellers.  Counsel for the class were directed to add a named Plaintiff who was a Post-Notice Seller to represent the interests of the class. Op. ¶29.

Are you confused about which homeowners are in this class and which are not?  Here’s my take on that:

Time of Transaction In Or Out Of Class?
Sold before class notice Out (neither party sought their inclusion (Op. ¶14 & n.18)
Bought before class notice In
Sold after class notice In
Bought after class notice Out

II haven”t written about a class action issue for a while given the entry of the Robinson Bradshaw firm into the elite class of law firms with blogs.  Lawyers there write an excellent blog devoted entirely to the subject of class actions in North Carolina: the Carolinas Class Action blog.


Continue Reading Can An NC Superior Court Judge Modify Another Judge’s Class Certification Order?

It seems like forever ago that the then venerable North Carolina institution, Wachovia Bank, failed and was acquired by Wells Fargo.  (This was actually seven years ago).  But just last week came what might be the final closure in the battle by the lawyers representing the class which challenged that acquisition to be paid their "well-deserved fees."  If you don’t detect the sarcasm in that last sentence, you can read what I’ve previously written about that fee application here and here.  I’m not a fan.

But putting aside my venom, last week the NC Court of Appeals, in Ehrenhaus v. Baker, affirmed Judge Murphy’s March 2014 Order awarding class counsel slightly over $1 million in fees and expenses.  The COA didn’t assess the reasonableness of that fat fee, it said that Judge Murphy had properly assessed it in his 2014 Order.

The value in the decision from the Court of Appeals is for lawyers representing class plaintiffs in future class action settlements.  North Carolina, in this ruling, has embraced the concept that class action settlements can include an agreement for the defendant to pay attorneys’ fees.

Perhaps you are thinking that there is nothing unusual about a settling party agreeing to pay the opposing party’s legal fees.  Defendants often agree to pay the plaintiff’s attorneys’ fees as a part of a settlement.  But in the class action context, the creation of a common fund was the only exception previously recognized in North Carolina to the "American Rule."  The American Rule provides that "a successful litigant may not recover attorneys’ fees . . . unless such a recovery is expressly authorized by statute."  Op. at 17.

Some other jurisdictions recognize the "common benefit" doctrine as a second exception to the American Rule when a class action is involved.  North Carolina rejected that basis for fees — which allows an award when the class plaintiff "confers a common monetary benefit on the class" — in In re Wachovia Shareholders Litig., 168 N.C. App. 135, 139, 607 S.E.2d 48, 50-51, disc. rev. denied, 359 N.C. 411, 613 S.E.2d 25 (2005).

The COA approved the award of fees to the Ehrenhaus class’  lawyers by recognizing a third exception to the American Rule.  Judge Davis wrote:

we hold that the parties to a class action may agree to a fee-shifting provision in a negotiated settlement that is — like all other aspects of the settlement — subject to the trial court’s approval in a fairness hearing.  During the fairness hearing, the trial court must carefully assess the award of attorneys’ fees to ensure that it is fair and reasonable.

Op. at 22 (emphasis added).

This decision isn’t big news to the Business Court.  The Court has been assessing the reasonableness of fees paid to class counsel via a negotiated settlement for a long time, at least since its decision in In re Harris-Teeter Merger Litig., 2014 NCBC 44, in which Chief Judge Gale thoroughly examined the Court’s power to award fees as the result of a class action settlement (in ¶¶51-57).

I’m not sure if this is the final chapter in the effort by the class’ attorneys to obtain the fees that they requested.  You might remember that Judge Murphy denied any award of fees to the North Carolina attorney co–lawyering with Mr. Ehrenhaus’ New York counsel.  The Business Court awarded nothing to him even though there was a valid fee sharing agreement between him and Ehrenhaus’ out of state counsel which specified that local counsel would receive five percent of the total fee.  Since local counsel offered no evidence of the time expended or his hourly rate the Court could not determine whether the five percent (which would have been more than $50,000) was reasonable.

Judge Davis dropped a footnote in the COA decision saying that "[w]hile we express no opinion on this issue, we note that Judge Murphy’s Order does not contain language foreclosing the possibility of [NC counsel] ultimately being deemed entitled to receive some portion of the attorneys’ fees at issue."  Op. at 26 & n.3.

Even so, it’s probably a little bit late in the day for Mr. Ehrenhaus’ local counsel to apply to the Business Court for fees.


Judge McGuire’s opinion last week in Western Sky in State v. Western Sky Financial, LLC, 2015 NCBC 84 has a little bit of everything in it: choice of law, the U.S. Constitution, claims for usury (excessive interest rates) and American Indians.  If that doesn’t impel you to read on, I don’t know what would.

The chances are good, if you live in North Carolina, that you’ve seen at least one commercial for Western Sky.  It offered to loan you $10,000 in a day, with no collateral.  All you had to do was call and fill out a few online forms, but those loans, which ranged from $850 to a maximum of $10,000, "carried interest rates between 89.68% and 342.86%."  Op. 11.

NC Attorney General Roy Cooper came down hard on Western Sky for violating North Carolina’s usury laws and otherwise taking advantage of North Carolina consumers.  The penalty for usury in North Carolina is forfeiture of all of the interest specified in the loan agreement, as well as recovery of twice the interest paid by the borrower.  N.C. Gen. Stat. §24-2.

American Indians

Wait.  You are undoubtedly wondering, what do American Indians have to do with all this?.  The Attorney General said that the Defendants were engaged in a "rent-a-tribe scheme, in which [an] unlicensed lender. . . makes usurious consumer loans . . . . by purporting to affiliate with an Indian tribe to claim federal tribal sovereign immunity."  Op. 18.

Western Sky is a South Dakota LLC, whose offices are located on the Cheyenne River Indian Reservation.  Its sole owner, Martin Webb, is a member of the Cheyenne River Sioux Tribe. Op. 7

Western Sky borrowers consented to loan agreements which said that the loan was "subject solely to the exclusive laws and jurisdiction of the Cheyenne River Sioux Tribe, Cheyenne River Indian Reservation." Op. 13.  The loan agreements also provided that they were "governed by the Indian Commerce Clause of the Constitution of the United States of America and the laws of the Cheyenne River Sioux Tribe."  Op. 14.

The Indian Commerce Clause

I’m assuming that none of you have ever heard of, or even thought about, the Constitution’s Indian Commerce Clause.  Article I, Section 8, Clause 3 of the Constitution says that the United States Congress shall have power "[t]o regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."

Choice Of Law 

The central issue of the case was whether North Carolina’s very strong restrictions on usurious loans could be applied to Western Sky’s business.  Judge McGuire had to get past the argument that applying North Carolina’s jurisdiction and laws to the Plaintiff’s claims would infringe on the Cheyenne River Sioux Tribe’s sovereign immunity.

The Defendants had argued that because Webb, Western Sky’s sole owner, was a member of the Cheyennne River Sioux tribe, that Western Sky was exempt from the Court’s authority.  And they also argued that Western Sky’s assignees of the loans — California corporations with no Indian connection — were entitled to the same immunity.

Judge McGuire found that he didn’t need to address that argument since even if Western Sky was a tribal member the Court’s jurisdiction would not be precluded.  He put his focus on where the loan transactions had occurred and determined that "the last act necessary to formation of the loan agreements occurred in North Carolina,"  Op. 37, and that North Carolina law therefore applied.

The Court had many routes to get to the same conclusion that North Carolina law governed Western Sky’s loans notwithstanding the choice of law provisions in the loan agreements.  One lay in the stringent nature of NC’s usury laws.  Section 24-2.1(a) of the General Statutes provides that "[f]or purposes of this Chapter, any extension of credit shall be deemed to have been made in this state. . . if the lender offers or agrees in this State to lend to a borrower who is a resident of this State."  The NC Supreme Court has held that "a contract ‘made in a foreign State or country with the intent and purpose to evade the usury laws of this State’ is invalid and ‘the interest laws of North Carolina are applicable." Op. 37 (quoting Bundy v. Comm. Credit Co., 200 N.C. 511, 517-18 (1931).

Also, since the Attorney General was not a party to the loan agreements, he was acting as "an enforcement arm of the State of North Carolina" and was not bound by the choice of law provision.  Op. 38.

And last but not least, there is also the public policy consideration that "North Carolina will not enforce a choice of law provision in a contract where the chosen law would ‘violate a fundamental policy of [North Carolina] or otherwise applicable law."  Op. 39.  The usury statute itself says that "[i]t is the paramount public policy of North Carolina to protect North Carolina resident borrowers through the application of North Carolina interest laws."  N.C. Gen. Stat. §24-2.1(g).

More U.S. Constitution

Western Sky also argued that subjecting its loans to North Carolina law would violate the Dormant Commerce Clause of the Constitution.  The Dormant Commerce Clause?  If you don’t remember that Clause and you can’t find it in the Constitution, that is because it is not only "explicit.  it is implied in the grant of power to the federal government to "regulate commerce . . . among the several States."

Judge McGuire rejected the Dormant Commerce Clause argument, holding that:

[t]he statutes at issue do not attempt to regulate conduct beyond North Carolina’s borders and do not unduly burden interstate commerce.    The statutes do not purport to dictate the interest rates or other lending practices that Defendants apply in any state other than North Carolina.

Op. 45.  It also noted that "[C}ourts throughout the United States have consistently allowed states to regulate the content of loan contracts made by out-of-state lenders to resident borrowers." Op. 44 (quoting State of Minn. v. CashCall, Inc., 2013 Minn. Dist. LEXIS 31 (Minn. Dist. Ct. Sept. 6, 2013).

I think that this decision represents the first time that the Business Court has considered these provisions of the United States Constitution.  I think the only other mention of the U.S. Constitution by the Business Court was its discussion of the Full Faith and Credit Clause earlier this year.  Generally, you don’t need to know much about the Constitution to litigate in the Business Court.

The AG’s Request For A Preliminary Injunction Was Only Partly Successful 

The Attorney General requested an extraordinarily broad preliminary injunction against Western Sky.  Judge McGuire granted only part of what was requested: enjoining Western Sky from making further loans within the State and from collecting payments on the loans that had previously been made.  Given that Western Sky had already ceased making loans in North Carolina even before the Complaint was filed, the Court said that "a restriction on Defendants’ ability to initiate new loans would not be a significant hardship." Op. 82

The part of the requested injunction which was denied was that Western Sky establish an escrow fund sufficient to provide full restitution of the usurious interest to those consumers who had paid Western Sky interest higher than the 16% maximum allowed by North Carolina law (N.C. Gen. Stat.  §24-1.1(c) provides that for a loan of $25,000 or less, the maximum rate that may be charged is 16%).

That type of an injunction would amount to the seizure of the Defendants’ assets before the entry of a judgment and the Court refused to grant that relief.  The Attorney General argued that the escrow account sought was necessary because of the potential financial impact of the substantial litigation facing Western Sky in other jurisdictions but the Court found no evidence that the escrow of funds was "necessary or appropriate." Op. 78. 

 Western Sky has shut down business in September 2013 due to what it referred to as "unwarranted overreach by state regulators."  The company has faced lawsuits in multiple states, and is also was sued by the Federal Trade Commission and consented to a Permanent Injunction.