Second Circuit Rules That Judges Can Decertify a Class After a Jury Verdict

The Second Circuit recently held that under Federal Rule of Civil Procedure 23, a district court judge can decertify a class after a jury verdict in favor of the class but before entering judgment, upholding a Southern District Court of New York decision granting defendants’ post-verdict motion to decertify the class.  Joseph Mazzei v. The Money Store, TMS Mortgage Inc., HomEq Servicing Corp., No. 15-2054 (2d Cir. July 15, 2016).  The Second Circuit’s decision confirms that after a court certifies a class, defendants should continue to develop evidence to seek to decertify the class even after a jury verdict in favor of the class.

Joseph Mazzei, the named plaintiff and putative class representative, sued a group of loan servicers and mortgage lenders alleging that their imposition of post-acceleration late fees on mortgage loans constituted a breach of contract.  Mazzei initially achieved certification for a class of borrowers who signed mortgages that were owned or serviced by the defendant.  The class consisted of borrowers who had been charged late fees after their loans were accelerated and paid off their accelerated loans.  The class included individuals who had borrowed funds from the defendant and also individuals whose loans from others had been serviced by the defendant.  The jury awarded Mazzei $133.80 and the class approximately $32 million plus prejudgment interest.

After the jury rendered its verdict, defendants moved to decertify the class pursuant to Rule 23(c)(1)(C)—which allows the court to alter or amend a class certification order any time before final judgment—or in the alternative, the entry of judgment as a matter of law on the late fee claims pursuant to Rule 50.  Although the jury found that privity of contract with each class member was proven, defendant argued that Mazzei had failed to establish class-wide privity of contract between defendant and those borrowers whose loans it serviced, but did not own, and that recovery would require individualized proof that each class member’s loan had been accelerated.  The district court agreed with defendant.  Judge John G. Koeltl found that the lack of privity meant that Rule 23(a)’s typicality requirement and Rule 23(b)(3) predominance requirement were not satisfied.  The court decertified the class and entered judgment for the named plaintiff on his individual late fee claim.  Mazzei v. Money Store, 308 F.R.D. 92 (S.D.N.Y. 2015).

The Second Circuit affirmed the district court’s decertification order.  In doing so, it cited the Commentary to Rule 23(c)(1):  “A determination of liability after certification, however, may show a need to amend the class definition.  Decertification may be warranted after further proceedings.”  The panel emphasized that the binding nature of class proceedings on absent class members means that judges have an affirmative duty to monitor their class decisions as evidence develops.

Mazzei argued that decertification violated the Seventh Amendment, which protects a litigant’s right to a jury trial in some civil cases and protects a jury’s findings of fact from reexamination by the courts.  The Second Circuit disagreed, noting that the named plaintiff would receive the damages the jury awarded on his individual claim, absent class members’ claims would survive for potential future adjudication, and the decertification decision was consistent with judicial oversight of findings of the jury.  Similarly, the Second Circuit rejected the argument that decertification should be constrained by the Rule 50’s standard of “legally insufficient evidence” for judgment as a matter of law, because decertification, unlike the grant of a motion under Rule 50, does not resolve the claims of the class.  Instead, the Second Circuit adopted Rule 59’s standard for a new trial on weight-of-the-evidence grounds, holding that “when a district court considers decertification (or modification) of a class after a jury verdict, the district court must defer to any factual findings the jury necessarily made unless those findings were “seriously erroneous,” a “miscarriage of justice,” or “egregious.”

The Second Circuit’s decision highlights the fact that challenges to class certification can be brought throughout district court proceedings, even after an initial certification ruling and a trial. A prudent defense strategy should take this into account and involve developing evidence supporting a defense position on certification, even as parties litigate the merits of their cases at trial.