Summary
denying certification where class counsel and the named plaintiff were business partners in a series of real estate transactions and joint defendants in a lawsuit
Summary of this case from Innovative Accounting Sols. v. Credit Process Advisors, Inc.Opinion
CV 01-9547 LGB (Mcx)
February 28, 2002
ORDER DENYING CLASS CERTIFICATION
I. INTRODUCTION
This action arises out of Defendant Capital One Bank's ("Capital One's") policy of failing to credit customers' credit card payments on the date of receipt, when those payments are received after the "cutoff" time of 3:00 p.m. each day or the payments are received on "non-business" days. Several plaintiffs brought this class action on behalf of similarly situated credit card holders, alleging that Defendant's policy resulted in the imposition of excess finance charges and late fees on payments received on the specified "due date" but after the specified cutoff time. Plaintiff Anne Stephens brings a motion for class certification ("Class Cert. Not."), while Capital One brings a motion to deny class certification ("Class Denial Mot.").
II. FACTUAL BACKGROUND
The allegations in this case are straight-forward. Plaintiffs allege that Capital One, a national issuer of credit cards, has a policy of not crediting payments on the day that Capital One receives them if the payments are received after a particular cut-off time during "business" days or the payments are received on a "non-business" day. Removal Not., Ex. A, ¶¶ 5-7. The cut-off time at one point was allegedly 9:00 a.m. in the morning, but now is generally 3:00 p.m. Id. ¶ 6. Plaintiffs allege that this practice leads to increased finance charges and late fees, even for payments that arrive on the day they are due. Id. ¶ 8. To better understand how this happens, a quick overview of Capital One's payment processing is necessary.
Capital One receives payments at all hours of the day and night, every day of the week. Carpenter Decl., Ex. C. According to one mail log submitted with these motions, on a particular Saturday, Capital One received payments at 11 different times during the day, ranging from midnight until 10 p.m. Id. at 7. Based on the numbers in this same log, Capital One receives around 300,000 payments per day or more. Id. Close to half of these payments are received after 3:00 p.m. Id. Capital One does not, however, log in payments when they are received. Removal Not., Ex. A, ¶ 3.
Instead, Capital One runs this volume of incoming payments in batches through "transport" machines. Carpenter Decl., Ex. E at 102. Capital One identifies each payment run through the machines in a given batch and maintains the time that each batch is processed by the transport through a P-Card database. Id., Ex. F at 144. In processing these batches, they are actually run through the transport machine twice and the times reflected in the system correspond to the timing of the second run-through. Id., Ex. E at 111-14. Further, plaintiffs have discovered that there is a lag time of at least six hours between the time payments are received and the time they are processed through the transports.Id., Ex. F. at 153.
After this initial processing, the payments are then credited to individual accounts. During this crediting, the crediting date is identified. Id., Ex. F at 131. Thus, there are two times ascertainable through Capital One's payment process: the time a payment is processed and the time the payment is credited.
III. PROCEDURAL BACKGROUND
This is the second time this case has come before the Court. Initially the Court granted summary judgment against name plaintiff Ed Sipper on his federal claims related to the Fair Credit Billing Act, 15 U.S.C. § 1666c ("FCBA"), based on the statute of limitations. Before granting that motion, the Court had rejected class counsel's attempt to add a new named plaintiff to the complaint for purposes of contesting the summary judgment motion because plaintiff's basis to amend was "clearly made to circumvent issues raised by Defendant's motion for summary judgment." Id., Ex. B at 24. The new plaintiff's name was Ellen Mandel. The Court then remanded the case to state court.
Throughout this litigation, plaintiffs have been represented by the Law Offices of Barry Kramer and the firm of Strange Carpenter.
After remanding the case to state court, class counsel brought another action, this time in Ms. Mandel's name. The Court granted summary judgment in this action after it was revealed that the account was actually in the name of Mandel's husband.
In the meantime two named plaintiffs were added to the state court action, Amar Niang and Anne Stephens. These two then reasserted the federal cause of action and Capital One removed the case. Following this development, Capital One filed a counter-claim against Niang alleging that Niang had defaulted on his debt to Capital One. Niang has since withdrawn his federal claim, thus leaving Anne Stephens as the only class representative encompassing both the state and federal claims.
On a parallel front, the original named plaintiff, Ed Sipper, has been the lead plaintiff in two other cases before the Court: Sipper v. Direct Merchants Credit Card Bank, No. 00-4214-LGB-JWJx ("Direct Merchants"), and Sipper v. Household Bank (NV), No. 00-4177-LGB-JWJx ("Household Bank"). In both actions, the same counsel has appeared on behalf of the plaintiff. The Court accepted a proposed settlement in Direct Merchants, but recommended the withdrawal of the proposed settlement in Household Bank because its terms were unacceptable.
In the present motions, Anne Stephens now requests class certification while Capital One opposes it.
IV. CERTIFICATION OF THE PROPOSED CLASS
Before certifying a class, a district court's threshold task is to ascertain whether the proposed class satisfies the requirements of Rule 23(a) of the Federal Rules of Civil Procedure applicable to all class actions, namely: (1) numerosity, (2) commonality, (3) typicality, and (4) adequacy of representation. Amchem Products, Inc. v. Windsor, 521 U.S. 591, 625 (1997). The Court must then decide whether one of three grounds for a class action exist under Rule 23(b). In this action, the parties are seeking certification under Rule 23(b)(3), which permits a class action if "questions of law and 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."
V. ANALYSIS — NOTION TO DENY CLASS CERTIFICATION
The plaintiffs propose the following class:
[A]ll consumers who have had Visa or Mastercard credit card accounts issued by Defendant Capital One Bank.
Capital One primarily challenges the adequacy of representation by class counsel. See, e.g., Class Denial Mot. at 14-21. Its objection centers on the relationship between one of the attorneys in this action, Barry Kramer, and one of the named plaintiffs in this action and two other actions which have come before the Court, Ed Sipper. Id. at 1-2. Sipper and Kramer are business partners in a series of real estate deals. See McGuire Decl., Exs. K-M. Kramer is the "money-man" and Sipper is the public front for these deals. McGuire Decl., Ex. X at 445-46. According to Sipper, he depends on Kramer for his involvement in these deals because Kramer supplies the money. Id. Not only are Kramer and Sipper business partners, they have been joint defendants in a California lawsuit. McGuire Decl., Ex. J.
Capital One also challenges the ascertainability of the proposed class, see Opp'n to Class Cert. at 15-16, but based on the Court's conclusions over the adequacy of representation there is no need to address this argument.
Neither Kramer nor Sipper felt the need to disclose this relationship to the Court, his other clients in these matters, or Kramer's co-counsel, the firm of Strange Carpenter, during the course of these class actions. In previous deposition testimony and interrogatories Sipper danced around questions that would have required revealing his relationship with Kramer. Nor has Kramer come forward with this information on his own. Why?
See Strange Opp'n Decl. ¶ 2; Sipper Opp'n Decl. ¶¶ 3, 4; Kramer Opp'n Decl. ¶¶ 3, 4; Carpenter Opp'n Decl. ¶¶ 2-4.
The primary source of information for these allegations is Sipper's deposition in a Los Angeles Superior Court case, Aguilar v. Edward Sipper Barry Kramer, et al., No. SC 063-814, taken on May 24, 2001. McGuire Decl., Ex. K. This flow of information contrasts with the following exchange, which took place during a deposition for the Sipper v. Direct Merchants litigation.
When asked about his partners in XLNT properties, Sipper's joint venture with class counsel Kramer:
Q: Do you have any partners, or people that you work closely with, with XLNT?
WITNESS: Actually, can I talk to you for a second on that?
MS. CARPENTER [class counsel for Sipper]: Sure.
WITNESS: Is that all right?
By Mr. NARITA:
Q: We can — why don't we do this. I'll come back to that question.
A: Yeah, I'll think about it.
Q: At this point in the deposition, it's not material enough to force you to be concerned about it.
A: Yeah. It's — kind of the deal that I have with the man that puts up the money — so
Q: Right. You —
A: He — I'm the front man. I'm supposed to get all the notoriety. He's nothing. He doesn't exist.
McGuire Decl., Ex. X at 445-46.
Then in interrogatory answers prepared by Ms. Carpenter in this case:
Interrogatory No. 4:
IDENTIFY . . . every lawsuit to which YOU have been a party.
Response to Interrogatory No. 4:
[After listing the three credit card class actions:] In addition to these cases, plaintiff believes he has also been a party in a few other lawsuits, unrelated to this case. Those lawsuits have involved plaintiff's attempts to collect debts from his creditors and possibly an automobile accident.
McGuire Decl., Ex. G at 88-89.
Because, in the face of clear legal authority recognizing the relevance and potential conflict of interest in a situation such as this, Kramer and co-counsel maintain the relationship is not "relevant." See Kramer, Opp'n Decl. ¶ 3; Strange Decl. ¶ 2; Opp'n to Class Denial Mot. at 17-22. At argument, counsel contended that their review of the cases did not alert them to the fact that a close business relationship could create even the potential for a conflict of interest. The Court first observes that this research does not appear in their briefs on the matter, as the cases cited therein support a very different proposition: the existence of a business relationship does not automatically preclude class representation. See, e.g., Macarz v. Transworld Systems, Inc., 193 F.R.D. 46, 52 (D. Conn. 2000) (refusing to deny class certification based solely on relationship without indication of collaboration to generate fees). The Court has simply been provided with nothing that supports the conclusion such relationships are irrelevant.
As a representative selection of the relevant case law, see Hanlon v. Chrysler Corp., 150 F.3d 1011, 1020 (9th Cir. 1998) ("do the named plaintiffs and their class counsel have any conflicts of interest with other class members?"); Kayes v. Pacific Lumber Co., 51 F.3d 1449, 1465 (9th Cir. 1995) ("The responsibility of class counsel to absent class members whose control over their attorneys is limited does not permit even the appearance of divided loyalties of counsel. . . . The `appearance' of divided loyalties refers to differing and potentially conflicting interests and is not limited to instances manifesting such conflict."); see also In re Quintus Sec. Litig., 148 F. Supp.2d 967, 969 (N.D. Cal. 2001) (lead plaintiff and class counsel are fiduciaries);Swift v. First USA Bank, 1999 WL 1212561 *1, *5-5 (N.D. Ill. 1999) (refusing certification even after. arrangement for finder's fee with plaintiff's husband was withdrawn because there was still the "appearance of an expectation of a return favor linger[ing] on"); Lyon v. Arizona, 80 F.R.D. 665, 667-68 (D. Az. 1978) (no certification, similar facts).
If anything, Macarz undercuts counsel's argument as the court not only discussed the potential conflict of interest, but specifically concluded there was no indication the plaintiff and attorney had "collaborated on this case simply to generate fees." 193 F.R.D. at 52. The Court fails to see how this discussion could support a conclusion that such relationships are irrelevant or justify the failure to allowthe Court to engage in this same determination in the other cases brought by Sipper. See Jaroslawicz, 151 F.R.D. at 329 n. 2 (denying certification based in part on failure to disclose); Lyon, 80 F.R.D. at 669 (same).
Additionally, the Court directs counsel to Jaroslawicz v. Safety Kleen Corp., 151 F.R.D. 324, 328-330 (N.D. Ill. 1993). In Jaroslawicz the district court thoroughly discusses the rationale of Susman v. Lincoln American Corp., 561 F.2d 86, 95-96 (7th Cir. 1977), where the Seventh Circuit affirmed a district court's conclusion that a proposed lead plaintiff who rented space from class counsel was an inadequate representative. The rationale of Susman and Jaroslawicz are entirely consistent with the principles operative within the Ninth Circuit, as explicated by cases like Kayes v. Pacific Lumber Co., 51 F.3d at 1465, and Lyon v. Arizona, 80 F.R.D. at 667-668. Although counsel made the argument that the law has changed since Susman, the Court has not been directed to any cases nor found any indication that these principles have somehow been weakened by the passage of time or contrary case authority.
In sum, the Court emphatically disagrees with counsel's relevance argument and is surprised by class counsel's attitude toward a matter of such importance. A central concern of the Rules of Civil Procedure governing class actions is ensuring that the class action format is not hijacked by parties or attorneys to their own ends at the expense of the other class members. of particular concern, "courts fear that a class representative who is closely associated with the class attorney would allow settlement on terms less favorable to the interests of absent class members." See Susman, 561 F.2d at 91 (citations omitted).
That concern is of great import here. The failure to disclose this relationship has not just infected this case, but it reaches two others before the Court. In one, the Court approved a settlement with Sipper as lead plaintiff against Direct Merchants Bank. In the other, Sipper v. Household Bank (NV), the Court suggested counsel withdraw a proposed settlement agreement based on its concerns over the settlement terms. Given this rejection and the fears of collusive settlements that motivates the courts' scrutiny of class representative and class counsel relationships, see. e.g., Susman, 561 F.2d at 61, it is unfathomable that counsel could assert that the Sipper/Kramer relationship is simply "irrelevant." See Opp'n to Class Denial at 17. The entire course of conduct in this matter makes it appear as if the potential conflict of interest has become an actual conflict, suggesting collusion between Sipper and Kramer. Cf. Swift, 1999 WL 1212561 at *6 (where lead plaintiff's husband arranged for a "finder's fee" with class counsel, fears of an under-the-table deal between plaintiff and counsel branded the relationship with the appearance of impropriety).
Defendants bring up a raft of ethical issues stemming from this conduct. Without expressing a view (for the moment) on the merits of Capital One's accusations, the Court does note that Sipper's conduct appears to violate his fiduciary duty to disclose and Kramer's appears to violate his fiduciary duty and duty of candor owed to this Court. And the irony of all this is that a simple disclosure might have avoided all this taint. See Susman, 561 F.2d at 93-94 (rejecting a per se analysis); Macarz v. Transworld Sys. Inc., 193 F.R.D. 46, 52 (D. Conn. 1990) (allowing representation where professional dealings in past and no evidence suggesting improper purpose). Instead the adequacy of plaintiff's representation has been destroyed, and class certification will be denied. See Lyon, 80 F.R.D. at 669 (denying certification on similar facts).
The Court is aware that objections to the adequacy of class counsel should be taken with a "grain of salt," Williams v. Balcor Pension Investors, 150 F.R.D. 109, 119 n. 10 (N.D. Ill. 1993), and puts aside a consideration of the merits of Capital One's various alleged ethical violations, as well as class counsel's own invocation of Capital One's alleged transgressions other proceedings. Even with that "grain of salt" the documented evidence surrounding this particular potential conflict demands serious attention.
Another sampling of relevant cases: Pacific Harbor Capital, Inc. v. Carnival Air Lines, 210 F.3d 1112, 1119 (9th Cir. 2000) (upholding sanctions for violation of duty of good faith and candor to court); Wharf v. Burlington N. R.R. Co., 60 F.3d 631, 637-38 (9th Cir. 1995) (litigant violated duty of candor to court); United States v. Shaffer Equip. Co., 11 F.3d 450, 458-459 (4th Cir. 1993) (discussing general duty of candor in federal courts); In re Quintus Sec. Litig., 148 F. Supp.2d at 969 (recognizing fiduciary duties); Great American Ins. Co., v. Wexler Ins. Agency, 2000 WL 290380 *1, *13 (C.D. Cal. 2000) (discussing general duty to disclose); Continental Air Lines, Inc. v. Group Sys. Int'l Far East, Ltd., 109 F.R.D. 594, 598 (C.D. Cal. 1986) (recognizing duty of candor as a rule of professional conduct); Williams v. Superior Court, 46 Cal.App.4th 320, 330 ("Honesty in dealing with the courts is of paramount importance, and misleading a judge is, regardless of motives, a serious offense"); In the matter of Harney, 3 Cal State Bar Ct. Rptr. 266, 284 (Cal. Bar. Ct. 1995) ("Respondent also had a duty of candor . . . [whereby] he could not simply conceal from the court a material fact and profit sizably thereby at the expense of his client").
Class counsel also makes two primary arguments in an attempt to evade the significance of the Sipper/Kramer relationship, both to no avail. First, they point to the lack of a similar relationship between Kramer and the new proposed lead plaintiff, Anne Stephens. Class. Cert. Mot. Reply at 3. The Court finds this is insufficient to save this action from the cloud that currently hangs over these proceedings. Linney v. Cellular Alaska Partnership, 151 F.3d 1234, 1239 (9th Cir. 1998) ("Of course, the district court must . . . inquire into whether impermissible conflict continues to taint the [proceedings]"). Ms. Stephens, while perhaps minimally qualified, has failed to evince the kind of independent control that might reassure the Court in the face of counsel's egregious conduct. Cf. In re Quintus, 201 F.R.D. at 481-82, 491 (concluding no proposed lead plaintiff is adequate where no lead plaintiff could be expected to (1) monitor the conduct of class counsel and (2) decide whether and when the case should be settled or taken to trial). In light of counsel's adventures with other proposed lead plaintiffs in this case, the Court is firmly convinced that this particular piece of litigation has spun out of the class representative's control and maintenance of the legal fiction could irreparably harm the interests of non-present class members.
Ms. Stephens's declaration and the motion for class certification provide little, if any, support for the conclusion that she is an adequately informed and independent lead plaintiff. See Stephens, Decl. at 1-2; Class Cert. Mot. at 17. Her deposition testimony, despite claiming a discussion over litigation strategy, undermines the Court's confidence. See Roth, Decl., Ex. A at 19-20 (testimony about meeting Kramer on Venice Beach, where he then asked if Stephens had a Capital One credit card). Plaintiffs' counsel expressed concern at argument over Capital One's accusations of incompetency. The Court has disregarded that argument, but is focused instead on the concerns raised by this case's "wild ride" through the Court system.
Next, Strange Carpenter claims that it had no idea of the Kramer/Sipper relationship and that its record in this matter supports certification. Class Denial Opp'n at 7; Class Cert. Reply at 2. The Court accepts Strange Carpenter's representations concerning Sipper and Kramer, but finds that its record in this case supports denying certification. The failure to probe Sipper about his relationships strongly suggests inadequate investigation and/or inadequate preparation for various depositions and interrogatory responses. See Greenfield v. U.S. Healthcare, Inc., 146 F.R.D. 118, 124-26 (E.D. Pa. 1993), aff'd by 22 F.3d 1274 (3d. Cir. 1994) (finding Rule 11 violation where attorney failed to adequately inquire into potential conflicts of interest). Leaving this aside, the maintenance that the Kramer/Sipper relationship is legally irrelevant strongly shakes the Court's confidence in counsel.Cf. Linney, 151 F.3d at 1239 (requiring further inquiry even if additional non-conflicted counsel). "The responsibility of class counsel to absent class members whose control over their attorneys is limited does not permit even the appearance of divided loyalties of counsel."Kayes, 51 F.3d at 1465. The failure to recognize this in the first place is seriously troubling and the unwillingness in its papers to acknowledge the impact of such authority is far more serious.
As a result, the Court DENIES the request for class certification in this action. Because the Court has concluded that neither the mere addition of different plaintiffs nor of different class counsel can save this particular action from the appearance of impropriety, the only option available to counsel or the current named plaintiffs is continuance of the action on the named plaintiffs' behalf. See Jaroslawicz, 151 F.R.D. at 330 (allowing action to proceed without class allegations).
The Court's decision is currently limited to this particular case. It expresses no opinion on the appropriateness of class certification in any other pending cases, including Juan Godinez, et al. v. Capital One Bank, et al., CV 01-9515 LGB (FMOx).
Defendants ask the Court to also dismiss the cause of action as an exercise of its inherent authority. Class Denial Mot. at 24-25. This the Court declines to do. Instead, the Court orders Kramer to show cause why he should not be ordered to pay Defendants' attorney fees from the inception of this suit to the present, some other point of the litigation, or some lesser sanction. See 28 U.S.C. § 1927; Pacific Harbor, 210 F.3d at 1117-19; Chambers v. NASCO, Inc., 501 U.S. 32 (1991). Additionally, he must show cause why the Court should not take action on any of the alleged violations of ethical rules of conduct raised by Capital One's accusations, including, but not limited to reporting this conduct to the State Bar and revisiting the propriety of attorney's fees realized in other cases where Sipper was lead plaintiff. Finally, Mr. Sipper is ordered to show cause why he should not be sanctioned for his conduct in this case, Direct Merchants, and Household Bank.
In approaching these issues, the Court has kept in mind the previous history of class counsel before this Court, including the Court's explicit findings in other cases that counsel were adequate representatives. Here the record fully supports the Court's decision to deny certification as well as its strong disapproval of the failure to voluntarily disclose the Sipper/Kramer business relationship, but it reserves judgment on the culpability of the various parties pending further briefing.
Further, at argument class counsel expressed displeasure at the perceived "character assassination" approach taken by Capital One in its motion to deny class certification. The present motions display a vituperative tone that may have overshadowed the legal issues presented and which concerns the Court. The Court reminds all counsel that accusations in their briefs and representations of fact are all governed, at a minimum, by Federal Rule of Civil Procedure 11.
VI. MOTION TO GRANT CLASS CERTIFICATION
For the reasons above, the Court DENIES plaintiff Anne Stephens's Motion for Class Certification.
VII. CONCLUSION
Based on the foregoing, the Court:
1) GRANTS Capital One's motion to deny class certification;
2) DENIES Anne Stephens's motion for class certification with prejudice;
3) ORDERS Capital One to file detailed declarations and statements of all costs incurred in this matter, broken down by topic no later than March 25, 2002;
4) ORDERS Barry Kramer to SHOW CAUSE why he should not be held personally responsible for Capital One's fees incurred from the instigation of this litigation forward. Mr. Kramer is also ORDERED to SHOW CAUSE why this Court should not take further action on the allegations of ethical violations raised in conjunction with the present motions. Mr. Kramer's response is due no later than March 25, 2002;
5) ORDERS Ed Sipper to SHOW CAUSE why he should not be sanctioned for his conduct in this case, Sipper v. Direct Merchants, and Sipper v. Household Bank. Mr. Sipper's response is due no later than March 25, 2002;
6) SETS an optional supplemental briefing schedule as follows:
Any supplemental briefs contesting the OSC responses shall be filed no later than April 15, 2002; Any reply briefs shall be filed no later than April 22, 2002; and
Again, the denial of the motion with prejudice only applies to this particular proceeding and this particular named plaintiff.
The OSC Hearing is SET for April 29, 2002 at 10:00 a.m.