Metz v. Unizan Bank, Nos. 09-3751, 09-3879, 09-4363, 2011 WL 3629714 (6th Cir. Aug. 19, 2011).
In this case, the Sixth Circuit held that Congress did not base CAFA jurisdiction on a civil action being “certified” as a class action, but instead on an action being “filed under” the rule governing class actions.
The plaintiffs’ suits arose out of a Ponzi scheme orchestrated by James Carpenter in which he sold investments in three sham companies — Rawhide Select, Inc., Serengeti Diamonds, U.S.A., Inc., and Lomas De La Barra. Carpenter sold these debentures through salespeople, who told the plaintiffs they would receive a guaranteed return of over 10 % annual interest. Although Carpenter made interest payments and partial redemptions to investors during the course of the scheme, Rawhide, Serengeti, and Lomas were mere instruments of fraud, and Carpenter stole nearly all of the plaintiffs’ investments.
The Metz, Loyd, and Blair plaintiffs sued two classes of banks Carpenter used to carry out his scheme: drawee banks and depositary banks. The plaintiffs alleged the drawee banks violated the Uniform Commercial Code’s (“UCC”) ‘properly payable rule’ by issuing payment from their checking accounts for checks they wrote to Carpenter’s sham corporations. The plaintiffs alleged the depositary banks violated the UCC and committed fraud by depositing their checks into accounts maintained for Rawhide, Serengeti, and Lomas.
The district court in Blair and Loyd dismissed all claims as time-barred. In Metz, the district court dismissed the claims against the drawee banks as time-barred and dismissed most of the claims against the depositary banks for failure to state a claim. However, it allowed the claims of conspiracy to commit fraud and aiding and abetting fraud against Unizan to proceed.
Jonas Yoder was then substituted for Carol Metz as the named plaintiff and proposed class representative. After denying class certification, the district court granted Unizan’s motion for summary judgment on Yoder’s conspiracy claim based on his release in the earlier litigation.
A jury trial was held on Yoder’s aiding and abetting fraud claim that resulted in a verdict in favor of Unizan.
Upon appeal, Yoder, the only remaining plaintiff from the Metz case, argued that once the district court declined to grant him class certification it no longer had subject matter jurisdiction to pass on his claims.
Relying on Cunningham Charter Corp. v. Learjet, Inc., 592 F.3d 805, 806 (7th Cir. 2010), the Sixth Circuit held that denial of class certification does not divest federal courts of jurisdiction. (Editors’ Note: See the CAFA Law Blog analysis of Cunningham posted on February 3, 2010.
The Sixth Circuit noted that CAFA, 28 U.S.C. § 1332(d) grants jurisdiction over class actions in which the parties are minimally diverse and the amount in controversy exceeds $5 million. A ‘class action’ is defined as ‘any civil action filed under Fed. R. Civ. P. 23 or similar State statute or rule of judicial procedure authorizing an action to be brought by 1 or more representative persons as a class action. The “filed under” language shows that it is the time of filing that matters for determining jurisdiction under CAFA. Congress did not base CAFA jurisdiction on a civil action being “certified” as a class action, but instead on an action being “filed under” the rule governing class actions.
The Sixth Circuit observed that although district courts have relied upon other language in CAFA to determine that they do not retain jurisdiction following denial of class certification, it agreed with the Cunningham court’s contrary interpretation of these sections. For example, CAFA, § 1332(d)(8), states, “this subsection shall apply to any class action before or after the entry of a class certification order by the court with respect to that action.”
As explained in Cunningham, the likely explanation for this section is that “the defendant can wait until a class is certified before deciding whether to remove the case to federal court,” not that certification is a requirement for continued jurisdiction. Also, § 1332(d)(1)(C) defines a “class certification order” as “an order issued by a court approving the treatment of some or all aspects of a civil action as a class action.” Cunningham explained that this section merely means “a suit filed as a class action cannot be maintained as one without an order certifying the class. That needn’t imply that unless the class is certified the court loses jurisdiction of the case.” If Congress meant to divest the district courts of jurisdiction following denial of class certification, it could have said so explicitly.
The Sixth Circuit pointed that in addition to the statutory text, general jurisdictional principles support the conclusion that federal jurisdiction continues following denial of class certification. The general rule is that if jurisdiction exists at the time an action is commenced; such jurisdiction may not be divested by subsequent events. Also, a contrary reading of CAFA would mean that a district court would be unable to revisit an order denying class certification because it would no longer have subject matter jurisdiction. Such an interpretation would nullify Fed. R. Civ. P. 23(c)(1)(C), which provides that “an order that grants or denies class certification may be altered or amended before final judgment.”
For these reasons, the Sixth Circuit concluded that the district court retained subject matter jurisdiction following its denial of Yoder’s motion for class certification.