Commercial Litigation and Arbitration

Class Actions — Adequacy of Representation Must Be Judge Independently of Fairness of Settlement — Utility of Subclasses — Civil RICO Liability Is Based on Predicate Criminal Conduct, Requires Conscious Wrongdoing

Charron v. Wiener, 2013 U.S. App. LEXIS 19977 (2d Cir. Sept. 30, 2012):

B. Adequacy of Representation

Federal Rule of Civil Procedure 23(a)(4) requires that in a class action, "the interests of the class" must be "fairly and adequately protect[ed]." Fed. R. Civ. P. 23(a)(4). To ensure that all members of the class are adequately represented, district courts must make sure that the members of the class possess the same interests, and that no fundamental conflicts exist among the members. In re Literary Works, 654 F.3d at 249; see also Denney v. Deutsche Bank AG, 443 F.3d 253, 268 (2d Cir. 2006). Adequacy of representation must be determined independently of the fairness of the settlement: "Rule 23 requires protections under subdivisions (a) and (b) against inequity and potential inequity at the precertification stage, quite independently of the required determination at postcertification fairness review under subdivision (e) that any settlement is fair in an overriding sense." Ortiz v. Fibreboard Corp., 527 U.S. 815, 858 (1999); see also Amchem, 521 U.S. at 622 ("Federal courts . . . lack authority to substitute for Rule 23's certification criteria a standard never adopted -- that if a settlement is 'fair,' then certification is proper.").

Where a fundamental conflict exists that goes "to the very heart of the litigation,"   Cent. States Se. & Sw. Areas Health & Welfare Fund v. Merck-Medco Managed Care, L.L.C., 504 F.3d 229, 246 (2d Cir. 2007), it can be cured by dividing the class "into homogeneous subclasses . . . with separate representation to eliminate conflicting interests of counsel." Ortiz, 527 U.S. at 856. Such subclassing may provide a key "structural assurance of fair and adequate representation for the diverse groups and individuals affected," Amchem, 521 U.S. at 627, and "serve[s] to inhibit appraisals of the chancellor's foot kind -- class certifications dependent upon the court's gestalt judgment or overarching impression of the settlement's fairness," id. at 621. >Appellants argue that the settlement in effect created two subclasses with a fundamental conflict: (1) those who may bring their rent overcharge claims before the Claims Administrator, and (2) those with Excluded Overcharge Claims, whose rents (a) were set unlawfully high before Pinnacle took over their buildings, or (b) were set on or before July 11, 2004. Appellants argue that because the settlement discriminates against members with Excluded Overcharge Claims, it creates a fundamental conflict of interest among these two subclasses. They argue that because the two subclasses were not separately represented, as required by Rule 23(a)(4) and Ortiz, the settlement must be vacated.

As a preliminary matter, we note that unlike the situation in Amchem, Ortiz, and In Re Literary Works, the settlement here was not being approved at the same time that the class was being certified. Where settlement and certification proceed simultaneously, courts must give heightened attention to the requirements of Rule 23(a). See Ortiz, 527 U.S. at 848-49; Amchem, 521 U.S. at 620; In Re Literary Works, 654 F.3d at 249. That is so because the certification of a mandatory settlement class "effectively concludes the proceeding save for the final fairness hearing," and there is thus a heightened risk of conflating the fairness requirements of Rule 23(e) with the independent requirement of "rigorous adherence to those provisions of the Rule designed to protect absentees," such as Rules 23(a) and (b). Ortiz, 527 U.S. at 849 (internal quotation marks omitted).

Here, by contrast, appellants seek to challenge a subsequent settlement on Rule 23(a) grounds, asserting conflicts never raised at the certification stage. In its April 27, 2010 order certifying the class in anticipation of litigation, the district court carefully considered each 23(a) factor, including adequacy of representation, and deemed them to be satisfied. At that stage, no party argued that there were intra-class conflicts based on the nature of the different claims held by different class members. Nor did any appellant ask for separate representation. Rather, plaintiffs argued that Class Counsel could adequately protect the interests of the class. To be sure, appellants argue that class conflicts arose   after certification, during the course of settlement negotiations that concluded in August 2011. To the extent these conflicts were not apparent at certification, and assuming they were, indeed, "fundamental," Rule 23 and due process would require renewed scrutiny of the suitability of the class. See, e.g., Fed. R. Civ. P. 23(c)(1)(c) ("An order that grants or denies class certification may be altered or amended before final judgment."); Fed. R. Civ. P. 23(c)(5) ("When appropriate, a class may be divided into subclasses that are each treated as a class under this rule."); Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812 (1985) ("[T]he due process clause of course requires that the named plaintiff [in a class action] at all times adequately represent the interests of the absent class members."). Cf. Joel A., 218 F. 3d at 140 (holding objection to settlement on adequacy of representation grounds waived where the "perceived differences [among] subclass members were apparent when the subclasses were certified" and no objection was made at time of certification decision). However, in this specific and factually complex situation, we do not find a fundamental conflict between class members necessitating separate representation.

First, it is important to distinguish, as appellants for the most part do not, the RICO claims that were brought as part of this case from any potential rent overcharge claims under New York City rent stabilization law, which were not included in plaintiffs' complaint. Under New York City law, landlords of rent-regulated apartments must charge the correct rent under the complicated rent stabilization rules. See, e.g., N.Y. Rent Stabilization Code §§ 2521-2522. Class members who were overcharged are entitled, like other regulated tenants, to reimbursement for such overcharges, regardless of whether the overcharge was intentional, negligent, or the product of reasonable mistake.

The complaint in this case does not allege individualized claims of erroneously charged rents in violation of the stabilization rules. Indeed, it is difficult to see how such claims could possibly be brought on a class basis, since the sole issue in each individual's claim would be the correctness of that tenant's rent, based on the specific rent history of that apartment and its conformance to the correct calculation under the rules. Instead, the complaint alleges that the entire class was victimized by defendants' conduct of a single RICO enterprise based on fraud and extortion. While the damages suffered by class members will vary, and will in many cases be based on the extent to which the relevant criminal conduct affected the rent paid by individual tenants, defendants' liability is based on fraudulent or other predicate criminal conduct.

Thus, in assessing the argument that various overcharged rent claims were excluded from the settlement, it is important to recognize that claims of rent overcharges as such were never part of the case in the first place. The claims that were addressed by the settlement are based on conscious wrongdoing by defendants themselves, including among other things fraudulent rent overcharges. To the extent that the settlement excludes overcharges resulting from rents erroneously set (whether fraudulently or otherwise) by prior landlords not affiliated with Pinnacle or the RICO enterprise alleged in the complaint, it excludes claims that are far more tenuous against defendants, and that (except to the extent defendants could be shown to have acted with fraudulent intent) were not part of the case at all.***

Fourth, unlike in In Re Literary Works, the exclusion of certain claims here does not "provide[] strong evidence . . . of inadequate representation." 654 F.3d at 256. As discussed above, claims based on rents set by prior landlords do not easily fall within plaintiffs' core allegations of a RICO enterprise.   Pinnacle's potential liability under New York law for prior landowners' overcharges on a "carryover liability" theory that sounds in negligence does not satisfy RICO's requirement of conscious wrongdoing.   Similarly, while appellants argue that their pre-2004 claims would not be barred by RICO's or the NYCPA's statutes of limitations due to equitable tolling, the very need to litigate the applicability of equitable tolling make these claims weaker than post-2004 claims.


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