April 23, 2019

Tenth Circuit: Class Certification Appropriate Where Common Issues Predominate Over Individualized Claims

The Tenth Circuit Court of Appeals issued its opinion in CGC Holding Co. LLC v. Broad & Cassel on Monday, December 8, 2014.

In this RICO class action interlocutory appeal, defendants contest the district court’s class certification. Plaintiff class representatives CGC Holding Co., LLC, Harlem Algonquin, LLC, and James Medick, on behalf of the proposed class, assert that a group of lenders led by Sandy Hutchens conspired to create a scheme to defraud borrowers by requiring up-front fees for loan commitments the lenders never intended to fulfill. Plaintiffs also allege the lenders fraudulently concealed Hutchens’ criminal past through the use of pseudonyms, and had they known about his financial history they would not have taken part in the financial transactions that caused them to lose their up-front fees.

In 2004, Hutchens pleaded guilty in Canada to financial fraud charges similar to those at issue here. Following his conviction, he changed his name and assumed various aliases. Plaintiffs claim Hutchens operated a scheme in which a potential borrower, typically a distressed “do-or-die” borrower, would submit a loan application to one of several issuing entities through a loan broker. The lending entity would issue a loan commitment requiring non-refundable up-front fees, also requiring the borrower to meet certain eligibility requirements. If the borrower failed to meet an eligibility requirement, the lending entity would terminate the loan application. Plaintiffs contend this was a subterfuge intended to scam the borrowers out of the non-refundable up-front fees, without any intention or ability to fund the loan. Hutchens contends the loans were legitimately terminated for failure to meet the eligibility requirements. However, his accountant testified that by the end of 2009 Hutchens and his entities had received over $8 million in up-front fees and had lent less than $500,000.

Plaintiffs also contend that Hutchens and his cohorts concealed Hutchens’ criminal past through the use of aliases and false addresses, and but for these omissions and misrepresentations, no borrower would have participated in the loan scheme. Plaintiffs named several persons and entities as co-conspirators with Hutchens, including his wife and daughter, five issuing entities, Hutchens’ attorney Alvin Meisels, and Broad and Cassel, a Florida law firm that represented several of the defendants during the relevant time period.

Plaintiffs conceded they lacked standing to pursue their claims against Broad and Cassel, and the Tenth Circuit reversed and remanded on this issue. However, the Tenth Circuit affirmed the district court’s grant of F.R.C.P. 23 class certification. Defendants contend the district court erred in finding that common issues predominated over individual ones in the class certification. The Tenth Circuit reviewed for abuse of discretion and found none. The Tenth Circuit found no reasonable dispute that plaintiffs met the threshold requirements of Rule 23(a), and evaluated solely for whether common issues predominated under the class type listed in Rule 23(b)(3).

After evaluating the prerequisites of a civil RICO claim, the Tenth Circuit discussed plaintiffs’ requirement to prove that a link existed between defendants’ actions and the class injury. Plaintiffs must prove a causal connection between defendants’ misrepresentation and and plaintiffs’ reliance on that misrepresentation. In the context of a class action, the plaintiffs must show that the reliance is susceptible to generalized proof. In the instant case, the evidence of class members’ payments for loan commitments is sufficient to show reliance on defendants’ promise to provide loan funds. The fact of payment of the up-front fee is common to the entire class. The Tenth Circuit also found that superiority was proven as to the class action’s preference over individualized actions.

Defendant Meisel also raised the question of whether the district court had subject matter jurisdiction over the Canadian defendant entities. The Tenth Circuit declined to consider the question, finding it exceeded the scope of Rule 23(f) review and instead was a merits issue. The Tenth Circuit similarly declined to consider several other issues raised by defendants, finding their review limited to the scope of Rule 23(f) and disfavoring interlocutory review of other issues.

The district court’s class certification was reversed and remanded as to Broad and Cassel, and was affirmed as to all other defendants.

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