Eleventh Circuit Vacates Denial Of Class Certification Motion, Finding District Court’s Determinations On Timeliness And Administrative Feasibility To Be Abuses Of Discretion
Securities Litigation
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  • Eleventh Circuit Vacates Denial Of Class Certification Motion, Finding District Court’s Determinations On Timeliness And Administrative Feasibility To Be Abuses Of Discretion

    On June 29, 2021, the United States Court of Appeals for the Eleventh Circuit vacated a decision by the Southern District of Florida denying a class certification motion. Jacob Rensel, et al. v. Centra Tech, Inc., No. 20-10894 (11th Cir. 2021).  Plaintiffs, investors in a cryptocurrency digital products company (the “Company”), alleged in their amended complaint violations of Sections 12(a)(1) and 15(a) of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, its co-founders, former executives, and celebrity promoters.  The district court denied plaintiffs’ motion for class certification as untimely, and alternatively for failure to establish an administratively feasible method for class identification.  The Eleventh Circuit held that, on both issues, the district court abused its discretion.

    The Company engaged in an initial coin offering to finance the development of its financial products.  Investors later discovered defendants made misleading statements with respect to the Company’s contracts and products, which led plaintiffs to file their initial complaint on December 13, 2017.  Defendants moved to dismiss on February 2, 2018, triggering the automatic stay of discovery under the Private Securities Litigation Reform Act (“PSLRA”).  The district court granted plaintiffs leave to file an amended complaint on September 25, 2018, and denied the pending motion to dismiss as moot, lifting the PSLRA’s stay on discovery.  On October 9, 2018, plaintiffs filed their amended complaint.  The parties then filed a Joint Discovery Plan and Status Report which included a proposed deadline for plaintiffs’ motion for class certification.  However, the district court “did not follow up with a scheduling order,” and thus “never imposed a deadline for the [p]laintiffs’ class certification motion.”  On December 31, 2018, certain defendants filed their motions to dismiss, and the remaining defendants—except the Company—filed their motions to dismiss in January and April 2019.  On January 31, 2019, plaintiffs requested the Clerk enter a default against the Company for failure to appear.  In May 2019, the district court granted certain defendants’ motions to dismiss, and on June 7, 2019, by which time plaintiffs had voluntarily dismissed their claims against the remaining defendants, the district court lifted the automatic stay.

    On June 13, 2019, as directed by the district court, plaintiffs moved for default judgment against the Company.  Simultaneously, plaintiffs moved to certify three subclasses of investors.  The district court denied the motion to certify on two grounds.

    First, the district court held that plaintiffs failed to move for class certification “at an early practicable time” pursuant to Federal Rule of Civil Procedure 23(c)(1)(A) because they waited eighteen months after the initial complaint and six months after the amended complaint.  The district court further concluded that plaintiffs intentionally delayed the motion until it “would be unopposed by a defaulting defendant.”

    In assessing this ground for dismissal, the Eleventh Circuit held that the district court “abused its considerable discretion” in denying the motion as untimely.  The Court observed that for “just under fifteen of the eighteen months” between the filing of the initial complaint and the motion to certify, the PSLRA’s “automatic stay rule prevented the [p]laintiffs from conducting any discovery to support their motion for class certification” and the automatic stay was not permanently lifted until “just six days before [p]laintiffs filed their certification motion.”  The Court further noted that the PSLRA’s discovery stay had applied except during two windows between the filing of the initial complaint and the motion to dismiss, and between the granting of leave to amend the complaint and the motion to dismiss the amended complaint.  The Court observed that “these short windows did not provide sufficient time to take certification-related discovery,” nor “could [plaintiffs have] feasibly … moved for class certification during these periods” as it “may well have been dismissed as premature.”  Moreover, the Court emphasized that the district court’s characterization of the eighteen-month period as a “delay” was inaccurate; “considering the posture of [the] case [it] was not a ‘delay.’”

    The Court noted that the “current version” of Federal Rule of Civil Procedure 23(c)(1)(A), which incorporates a 2003 amendment that in part allowed “more time for discovery,” further signaled the “expectation that plaintiffs will have some opportunity for discovery before moving for class certification [and that the] onus of ensuring a timely certification decision” is placed on the district court.  The Court noted, however, that the district court “failed to set a deadline for filing the class certification motion” because it never entered a scheduling order, violating both the Federal Rules of Civil Procedure and the Local Rules of the district.  This impermissibly “deprived the [p]laintiffs of any notice that their June 13, 2019 certification motion might be denied as untimely.”  The Court observed that while prior Eleventh Circuit precedent held that “discovery is ‘often’ necessary before a class certification decision,” the district court’s order that plaintiffs move for default judgment against the Company “forced” plaintiffs’ “class certification hand” without the benefit of full discovery or otherwise risk losing the opportunity once a final judgment was entered.  The Court added that “[m]ore troubling” was the district court’s characterization of plaintiffs’ timing as a strategic play so that the motion would be “unopposed by a defaulting defendant,” noting that the “record belies this conclusion” as the Clerk had already entered a default against the Company months prior and plaintiffs had “no reason to wait until June” to move for certification.  Acknowledging that plaintiffs could have “done more” to advocate for themselves, the Court held that in consideration of all these factors, plaintiffs “could not practically have moved for class certification any earlier than they did” and in fact they “had no choice but to move prematurely.”  Noting that plaintiffs did not miss any deadlines or “prejudice any party,” the Court held that the district court’s denial of the motion as untimely was an abuse of discretion.

    The district court had also held that plaintiffs’ proposed subclasses were not sufficiently ascertainable under Federal Rule of Civil Procedure 23 because the method by which plaintiffs proposed to identify absent class members would not be “administratively feasible,” citing an unpublished Eleventh Circuit decision.  The Eleventh Circuit noted that although the district court “was right to inquire into whether the proposed subclasses were ‘adequately defined and clearly ascertainable,’” recent Eleventh Circuit precedent clarified that “administrative feasibility is not a requirement for certification under Rule 23” and “clarified that ‘a proposed class is ascertainable if it is adequately defined such that its membership is capable of determination.’”  The Court explained that class membership need not be capable of “convenient determination” to be capable of determination.  Although “administrative feasibility” may be relevant to the manageability criterion of Rule 23(b)(3)(D), “that provision requires a ‘comparative’ analysis that is incompatible with a threshold, standalone administrative feasibility requirement.”  The Court added that with respect to a proposed subclass that may have “presented some difficulty,” the district court should have “asked whether membership [in that subclass] was ‘capable of determination’” rather than reject plaintiffs’ arguments for lack of a precise explanation of their proposed methodology.  Because the district court applied an “incorrect legal standard” regarding ascertainability, its denial of plaintiffs’ class certification motion on this ground also constituted an abuse of discretion.

    The Court thus vacated the district court’s order denying plaintiffs’ motion for class certification and remanded for further proceedings.