A recurring theme here has been the importance in class certification motions of the underlying substantive law. Yet another recent example comes from a securities fraud action in a Nevada federal court.
In Goodman v. Platinum Condominium Development, the court denied class certification based on a Rule 23(b)(3) predominance/superiority analysis. The plaintiffs were purchasers of condominium-hotel units in a Las Vegas resort. After their units experienced a steep drop in value, the purchasers sued the developers, alleging that the sale of the units violated state securities laws. The court found that the proposed class satisfied the class certification requirements of Rule 23(a), but nonetheless held that class certification was inappropriate under Rule 23(b). Specifically, the court rejected the plaintiffs' Rule 23(b)(3) arguments that the common questions of law or fact predominated over individual questions, and that the class action was a superior mechanism for resolving the dispute. In doing so, the court identified three factors that weighed against certification.
First, each purchaser's claim would hinge on whether the offering of the unit was, for purposes of Nevada law, a security. This, in turn, would depend on whether a purchased unit was an "investment contract." Since the plaintiffs maintained legal control over the units, they would have to show "an inability to exercise meaningful powers of control or find others to manage [the] investment." This approach would require the court to examine the economic reality of the investor/manager relationship and to determine that "each class member was so inexperienced or unknowledgeable as to be incapable of exercising his or her venture powers or that he or she was dependent on some unique entrepreneurial or managerial ability of Defendants." As a result, the court would have to examine the relationship between each individual class member and the property manager in order to establish each plaintiff's right to recovery. The court weighed this need to litigate individual issues as a factor against class certification.
Second, the court found that there would need to be individualized showings to determine which members of the putative class were barred from recovery by the statute of limitations. The statute of limitations barred claims not filed within two years after discovery of the violation should have been made through the exercise of reasonable care, and the units were purchased during a period between two and four years prior to the filing of the lawsuit. The court noted that "[t]here are undoubtedly differences between class members: some have previously been litigants in lawsuits about Las Vegas condominiums, some are experienced property owners, and others are lawyers." As a result of these differences, as well as differences in the date of purchase, some class members would be within the statute of limitations while others would not be. The court observed that a statute of limitations issue alone would not be enough to deny class certification, but was a factor weighing against certification here.
Finally, the court found that each proposed class member had an incentive to litigate individually, and some had actually chosen to do so. All of the named plaintiffs were seeking damages in excess of $200,000, indicating that the proposed class was not a group that lacked motivation to litigate individually. Out of 195 possible class members, 50 were already involved in separate litigation. Consequently, more than 25 percent of the potential class members showed an interest in controlling their own action.
While it cannot be determined from the opinion how much weight the court placed on each of its three bases for denying class certification, it is hard to imagine that the plaintiffs' motion could have survived the first issue—the individual threshold question of whether the purchase involved a security at all—even if the last two considerations did not come into play. If this is indeed the case, then the legal definition of an "investment contract" may have been the dispositive issue on class certification.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.