Shearman & Sterling LLP | Securities Litigation Blog | Second Circuit Holds Judges Can Decertify Class Actions After Jury Verdicts<br >  
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  • Second Circuit Holds Judges Can Decertify Class Actions After Jury Verdicts
    On July 15, 2016, the U.S. Court of Appeals for the Second Circuit affirmed the post-verdict decertification of a previously certified class action against Wells Fargo subsidiaries. Mazzei v. Money Store, No. 15-2054 (2nd Cir. July 15, 2016).  The Court held that district courts have the power to decertify a class after a jury verdict and before the entry of final judgment.

    Plaintiffs—a group of borrowers whose mortgages had been owned or serviced by The Money Store (subsequently HomEq Servicing Corp) and its servicing operator, TMS Mortgage Inc.—alleged in the U.S. District Court for the Southern District of New York that they had been improperly charged late fees after their loans had gone into default.  The District Court certified the class in January 2013.  In December 2014, a jury returned a verdict in favor of Plaintiffs on the late fee claims; the jury awarded the lead plaintiff $133.80 and awarded the class $32 million plus prejudgment interest.  In May 2015, however, U.S. District Judge John Koeltl granted defendants’ motion to decertify the class, on the ground that there was no proof that defendants had a contractual relationship with class members whose loans they serviced but did not originate.  Plaintiffs appealed that decision to the Second Circuit, arguing that the class had been properly certified and that the District Court’s decertification decision infringed on plaintiffs’ Seventh Amendment rights.

    The Second Circuit upheld the decertification, holding that district courts have the power, consistent with the Seventh Amendment, to decertify a class after a jury verdict and before the entry of final judgment.  The Court further held that, in considering such decertification, district courts must defer to any factual findings made by a jury unless the findings were “seriously erroneous,” a “miscarriage of justice,” or “egregious.”  In setting forth its reasoning, the Court first pointed to Federal Rule of Civil Procedure 23(c)(1), which states that “[a]n order that grants or denies class certification may be altered or amended before final judgment,” and noted that “because the results of class proceedings are binding on absent class members . . . the district court has the affirmative duty of monitoring its class decisions in light of the evidentiary development of the case.”  The Court then held that this determination was not inconsistent with the Seventh Amendment, which provides the right to a jury trial and that no fact tried by a jury can be re-examined in a court of law.  The Court noted that lead plaintiff will still receive the amount awarded to him for his individual claim and that the class members’ “right to adjudication by jury is unimpaired” because their claims were tolled by the filing of the class action, and thus any putative class member of the decertified class may still file a new individual action seeking damages within the time remaining in the statute of limitations period.  The Court further found that “the Seventh Amendment is not violated by the district court’s evaluation of trial evidence in ruling on the procedural issue of decertification.”  The Court concluded that the District Court had not abused its discretion in decertifying the class.

    The decision serves as a reminder that the certification of a class can be challenged at multiple stages of a lawsuit, including after the verdict, and that evidence undermining the commonality of the class that emerges at trial may provide an additional avenue to challenge certification.  Such post-verdict challenges may become more common in the wake of this decision.