Summary
finding action involving claims for the sale of unregistered securities "easily" meets the predominance requirement
Summary of this case from Katz v. MRT Holdings, LLCOpinion
Civil No. 02-1236 (RHK/AJB)
April 21, 2003
Karl L. Cambronne and Jeffrey D. Bores, Chestnut Cambronne, Minneapolis, Minnesota; Jan Downs Stuurmans, Stuurmans Law Office, Minneapolis, Minnesota, for Plaintiff and Counterclaim Defendant.
Ted S. Meikle and F. Chet Taylor, Meikle Taylor, Minneapolis, Minnesota, for Defendant and Counterclaimant.
MEMORANDUM OPINION
Introduction
This matter comes before the Court on Plaintiff's Motion for Preliminary Approval of Settlement. Plaintiff Daryl L. Cooper ("Cooper") has sued Miller Johnson Steichen Kinnard, Inc. ("MJSK"), alleging MJSK sold unregistered securities in violation of § 5 of the Securities Act of 1933, 15 U.S.C § 77e(a). Cooper seeks to represent a class consisting of all persons who purchased Stockwalk Group, Inc. ("Stockwalk") commercial paper from MJSK and were holding such paper on September 27, 2001, the date Stockwalk financially collapsed. The parties have entered into a Stipulation of Settlement (Doc. No. 46), contingent on the Court certifying a class under either Rule 23(b)(1)(B) or 23(b)(3). For the reasons set forth below, the Court will certify a class under Rule 23(b)(3).
Background
On April 18, 2001, Daryl L. Cooper purchased $207,000 of Stockwalk Group commercial paper from MJSK, a securities broker and dealer located in Minneapolis, Minnesota. MJSK was wholly owned by MJK Clearing, Inc. ("MJK Clearing"), which, in turn, was wholly owned by Stockwalk Group, Inc., a publicly owned company with its shares traded on the NASDAQ.
Short term, unsecured promissory notes, generally issued by large corporations and finance companies, are "commercial paper."
In early 2001, MJK Clearing had borrowed securities from Native Nations, a New York securities broker and dealer, which MJK Clearing subsequently loaned to various brokers in exchange for cash collateral. In these inter-dealer stock loans, the value of the cash collateral was "marked to the market," so that as the market rose and fell, cash was delivered to or returned from the lender. When the value of the securities MJK Clearing had borrowed and re-loaned dropped precipitously in September 2001, it returned the excess cash collateral to the brokers holding the stock. It expected, in turn, to receive excess cash collateral from Native Nations. Native Nations, however, was unable to return the cash collateral it had been holding, and without sufficient capital reserves to meet minimum net capital requirements, MJK Clearing ceased operations on September 25, 2001.
Two days later, under a directive from the Securities Investors Protection Corporation, MJK Clearing transferred its ownership of Defendant MJSK to the parent company, Stockwalk. MJK Clearing's meltdown, however, proved more than Stockwalk could financially bear. Stockwalk defaulted on its commercial paper, including that distributed by MJSK, and, in February 2002, filed for Chapter 11 bankruptcy. While Stockwalk's shares of MJSK became an asset in bankruptcy, MJSK was not — and is not — bankrupt. On May 21, 2002, the bankruptcy court approved Stockwalk's plan of reorganization. Under the plan, Stockwalk's unsecured creditors — a group that includes, but is not limited to, members of the putative class — are to receive the greater of 72% of any profits generated by MJSK or minimum payments that increase each year until the creditors are paid in full. The remaining 28% of profits are designated to pay bonuses to MJSK's representatives and to meet regulatory minimum net capital requirements.
Standard of Decision
The Court may certify a class action "only when it is satisfied after rigorous analysis that all of Rule 23's prerequisites are met." Lockwood Motors, Inc. v. General Motors Corp., 162 F.R.D. 569, 573 (D.Minn. 1995) (Kyle, J.). Rule 23(a) of the Federal Rules of Civil Procedure sets out four threshold prerequisites that must be satisfied before a party can obtain class certification:
One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
Fed.R.Civ.P. 23(a). In addition to the prerequisites of Rule 23(a), the movant must demonstrate that a class action can be maintained under one of the three categories described in Rule 23(b).
When certifying a class for settlement purposes, "the moment of certification requires `heightene[d] attention' to the justifications for binding the class members." Ortiz v. Fibreboard Corp., 527 U.S. 815, 849 (1999) (quoting Amchem Products, Inc. v. Windsor, 521 U.S. 591, 620 (1997)). However technically provisional, certification of a mandatory settlement class under 23(b)(1)(B) effectively concludes the proceeding, save for the final fairness hearing. Id. While a final fairness hearing under Rule 23(e) is important to ensure an equitable settlement, it is "no substitute for rigorous adherence to those provisions of [Rule 23] `designed to protect absentees,' among them subdivision b(1)(B)." Id. (quoting Amchem, 521 U.S. at 620).
Analysis
I. The Rule 23(a) Requirements A. Numerosity
In order to maintain a class action, Plaintiffs must show that the class of plaintiffs is "so numerous that joinder of all members is impracticable." Fed.R.Civ.P. 23(a).
Although the Plaintiffs need not show that joinder of all class members would be impossible, they must show that it would be difficult. See Lockwood Motors, 162 F.R.D. at 574 (citing Jenson v. Continental Fin. Corp., 404 F. Supp. 806, 809 (D.Minn. 1975) (Lord, J.)).
The parties agree that approximately 329 persons or entities bought Stockwalk commercial paper from MJSK. "No arbitrary or rigid rules regarding the required size of a class have been established by the courts, and what constitutes impracticability depends on the facts of each case." Parkhill v. Minn. Mut. Life Ins. Co., 188 F.R.D. 332, 337 (D. Minn. 1999) (Doty, J.) (citing Boyd v. Ozark Air Lines, Inc., 568 F.2d 50, 54 (8th Cir. 1977). Assessing the specific facts of this case, the Court concludes that joining these 329 persons and entities in lawsuit would be impracticable. Accordingly, the proposed class meets the numerosity requirement.
B. Commonality
The second provision of Rule 23(a) requires that the Plaintiffs show that "there are questions of law or fact common to the class." Fed.R.Civ.P. 23(a)(2). While not every question of law and fact must be common to the entire class, the Plaintiffs must show that the course of action giving rise to their cause of action affects all putative class members, or that at least one of the elements of that cause of action is shared by all of the putative class members. See Lockwood Motors, 162 F.R.D. at 575 (citing Forbush v. J.C. Penney Co., Inc., 994 F.2d 1101, 1106 (5th Cir. 1993)). Because commonality requires only one common question of law or fact, courts often find the requirement to be satisfied. See 5 Moore's Federal Practice, § 23.23[2].
This case links a common legal theory — securities law violations — to a common group — Stockwalk commercial paper purchasers. The Court therefore concludes that a common class exists.
C. Typicality
The third requirement of Rule 23(a) calls for the party seeking certification to show that "the claims or defenses of the representative parties are typical of the claims or defenses of the class." Fed.R.Civ.P. 23(a)(3). "Typicality" under Rule 23(a)(3) suggests "`there are other members of the class who have the same or similar grievances as the [representative] plaintiff.'" Chaffin v. Rheem Mfg. Co., 904 F.2d 1269, 1275 (8th Cir. 1990) (quoting Donaldson v. Pillsbury Co., 554 F.2d 825, 830 (8th Cir. 1977)). "Typicality is satisfied when the claims of the named plaintiffs emanate from the same event or are based on the same legal theory as the claims of the class members." Lockwood Motors, 162 F.R.D. at 575.
Here, both the named plaintiff and the members of the putative class purchased Stockwalk Commercial Paper and were holding it on September 27, 2001. Because the claims of the named plaintiff and the members of the putative class arise from the same conduct, the Court concludes that the class meets the typicality requirement.
D. Adequacy of Representation
The fourth requirement of Rule 23(a) — adequacy of representation — is related to the typicality requirement. If the representative parties have interests or claims (or defenses to counterclaims) that are significantly different to that of the majority of class members, then neither typicality nor adequacy is present. See In re Potash Antitrust Litig., 159 F.R.D. 682, 692 (D.Minn. 1995) (Kyle, J.). To satisfy the adequacy requirement, the Plaintiffs must show "that (1) the representatives and their attorneys are able and willing to prosecute the action competently and vigorously and (2) each representative's interests are sufficiently similar to those of the class that it is unlikely that their goals and viewpoints will diverge." Id. (citing Wirebound Boxes, 128 F.R.D. at 270). The Court finds that plaintiff's counsel will fairly and adequately represent the interests of the class and that the named plaintiff's interests and those of the proposed class do not conflict.
II. The Rule 23(b) Requirements
In addition to the Rule 23(a) prerequisites, the parties must demonstrate that a class action can be maintained under one of the three categories described in Rule 23(b). Fed.R.Civ.P. 23(b).
A. Rule 23(b)(1)(B)
The parties have requested that the Court certify a mandatory, non opt-out settlement class under Rule 23(b)(1)(B). Under Rule 23(b)(1)(B), a class action may be maintained if the requirements of Rule 23(a) are met and
the prosecution of separate actions by or against individual members of the class would create a risk of . . . adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests . . .
Fed.R.Civ.P. 23(b)(1)(B). The parties seek to proceed as a "limited fund" class action. This requires that (1) the totals of the aggregated liquidated claims and the fund available for satisfying them, set definitely at their maximums, demonstrate the inadequacy of the fund to pay all the claims, (2) the whole of the inadequate fund must be devoted to the overwhelming claims, and (3) the claimants must be equitably treated amongst themselves. Ortiz, 527 U.S. at 838. Here, the Court finds that the parties have failed to meet two of these requirements. 1. Limited Fund
The parties likely satisfy the third of the Ortiz factors, that the claimants be "equitably treated among themselves." 527 U.S. at 383.
First, the parties have not shown the existence of a limited fund. "The settling parties must provide evidence on which the district court may ascertain the limit and the insufficiency of the fund. . . ." Id. at 849. Moreover, "[w]ithout a finding as to the net worth of the defendant, it is difficult to see how the fact of a limited fund could [be] established. . . ." In re Dennis Greenman Securities Litig., 829 F.2d 1539, 1546 (11th Cir. 1987) (as quoted in Ortiz, 527 U.S. at 850). Here, the parties have not provided evidence of MJSK's net worth. Although they have demonstrated MJSK's net capital over the course of the prior year, net capital only measures "general financial liquidity and integrity." (Cobb Aff. 6 20.) Net capital does not equate to net worth. Whatever level of net capital might enable MJSK "to maintain stability, and to adapt to technological changes" (id.), the limited pool presupposes that " all of [the defendant's] assets are potentially available to suitors." In re Greenman, 829 F.2d at 1546 (emphasis added); see also Ortiz, 527 U.S. at 850. Having failed to demonstrate MJSK's net worth, the parties have not proven the existence of a limited fund.
2. The Whole of the Inadequate Fund
Second, the parties have not shown that the whole of the inadequate fund would be devoted to the outstanding claims. Rather, the reorganization plan ensures that MJSK maintains "sufficient net capital to operate and to survive periods of losses in the volatile securities industry" (Cobb Aff. ¶ 21) and "pay bonuses to its representatives" (Def.'s Mem. Supp. Class Cert. at 10). While MJSK asserts "it is already committed to pay all its disposable profits to the creditors," (id. at 15 (emphasis added)), "the whole of the inadequate fund . . . [must] be devoted to the overwhelming claims," Ortiz, 527 U.S. at 838 (emphasis added), not merely the disposable profits. Therefore, the parties fail to satisfy this requirement.
MJSK asserts this arrangement benefits the class because "every class member is also a creditor." (Def.'s Mem. Supp. Class Cert. at 15). It is worth pointing out, however, that every Stockwalk creditor is not a class member. According to the Cobb Affidavit, class member claims encompass only $25,212,000 out of MJSK's total indebtedness of $54,082,600. Even were the Court to conclude that the Stockwalk's plan or reorganization constituted a limited fund — a dubious proposition at best — the "whole" of money devoted to creditors claims would decidedly not be devoted to resolving the claims of the class members.
It is understandable, even laudable, for MJSK to try to ensure its future viability and its ability to pay its creditors. Those obligations, however, do not permit the court to compromise the due process rights of absent class members. Whatever the practical desirability of a non opt-out class, the Rules Enabling Act does not "abridge, enlarge or modify any substantive right." 28 U.S.C. § 2072(b); see also Amchem, 521 U.S. at 613. Because the Court concludes that the proposed non opt-out class would compromise substantive rights, certification of a class under Rule 23(b)(1)(B) would be inappropriate.
B. Rule 23(b)(3)
In the alternative, the parties have asked the Court to certify a class under Rule 23(b)(3). Under Rule 23(b)(3), a class action may be maintained where "the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." Fed.R.Civ.P. 23(b)(3) (emphasis added).
"The predominance requirement of subdivision (b)(3) is `far more demanding' than the `commonality' requirement of subdivision (a)." In re The Hartford Sales Practices Litig., 192 F.R.D. 592, 604 (D.Minn. 1999) (Kyle, J.) (quoting Amchem Prods., 521 U.S. at 623-24). The predominance inquiry tests whether the proposed class is "sufficiently cohesive to warrant adjudication by representation." Amchem Prods., 521 U.S. at 623, 117 S.Ct. at 2249 (1997), quoted in Levine v. North Am. Mortgage, 188 F.R.D. 320, 330 (D.Minn. 1999) (Tunheim, J.) and Schmitz v. Aegis Mortg. Corp., No. Civ. 97-3142, 1998 WL 1100084 at *4 (D.Minn. Aug. 3, 1998) (Doty, J.). There is "no bright-line boundary" for determining predominance, Hartford Sales, 192 F.R.D. at 604, and the predominance inquiry requires "a pragmatic assessment of the entire action and of all the issues involved." 5 Moore's Federal Practice § 23.46[1].
Here, the Court finds that the proposed class easily meets the predominance requirement. The common facts — all class members purchased Stockwalk commercial paper and were holding it on September 27, 2001 — and common legal questions — whether or not that paper was required to be registered — significantly outweigh the individual issues involved in this case. Because "generalized evidence may [be used to] prove or disprove elements of a claim," Hartford Sales, 192 F.R.D. at 604, the Court finds that the proposed class meets the predominance requirement.
Conclusion
Accordingly, the Court concludes that class certification under Rule 23(b)(3) is appropriate and will certify the class in its accompanying Order Granting Preliminary Approval of Stipulation Settlement, Certifying a Settlement Class Pursuant to Fed.R.Civ.P. 23(b)(3), and Approving Notice of Pendency of Settlement of Class Action to Class Members.