A Unicorn Sighting? Fourth Circuit Affirms Certification of Defendant Class

Carlton Fields

Carlton Fields

Bell v. Brockett is an unusual case in several respects. Most notably, the Fourth Circuit affirmed certification of a defendant class, despite acknowledging that defendant class actions are “so rare they have been compared to unicorns.” The court not only acknowledged the rarity of defendant class actions but also commented on their “inherent risks.” Indeed, in a delightful footnote the court explained that although both unicorns and defendant class actions are rare, the analogy breaks down after that because unicorns are “majestic and even magical creatures with attributes superior to those of traditional animals” while defendant class actions are sometimes “not so noble.” The Fourth Circuit also agreed with appellants that the district court did not follow Rule 23 with respect to when and how it appointed class counsel. Nevertheless, the court affirmed “due to the unique circumstances of this case.”

The circumstances of Bell v. Brockett are — to simplify greatly — that an alleged Ponzi scheme had two groups of (presumably unwitting) investors: the vast majority of investors who ended up being net losers from the scheme, and a much smaller group who ended up being net winners. The SEC filed an enforcement action to shut down the company perpetrating the scheme and freeze its assets. The district court then appointed a receiver for the company, and the receiver moved to certify a defendant class comprised of the net winners under the theory that their gains were improper and should be returned to the net losers. Some of the named defendants opposed certification on adequacy of representation grounds, but the district court found that the class representatives and their counsel would adequately represent the class and thus granted the receiver’s certification motion. Afterward the district court approved a notice of class certification. It also appointed class counsel.

The receiver later filed a motion for summary judgment that the district court granted, finding the net winners liable to the net losers. The district court then turned to the damages phase of the litigation, creating a process for determining the amount of final judgments against net winners. This process had different stages and defined roles for the receiver, for a special master appointed by the court, and for the district court itself. Class members were sent multiple notices regarding the damages phase.

Before explaining how it resolved this case, the Fourth Circuit provided an overview of certain aspects of the law governing defendant class actions. They, like plaintiff class actions, must comply with Rule 23. A defendant class thus cannot be certified unless both class representatives and class counsel will adequately protect the interests of the class. In analyzing the adequacy of class counsel, courts must consider four enumerated factors under Rule 23(g). And adequacy is a particularly important requirement for defendant class actions, which pose “heightened due process concerns.” The Fourth Circuit agreed with appellants that the district court failed to ensure that the defendant class met the adequacy requirement, because the district court (1) did not appoint class counsel until seven months after it certified the class; and (2) did not consider the Rule 23(g) factors relating to the adequacy of class counsel when it did.

So how did this procedural history and background result in an affirmance? First, the Fourth Circuit emphasized that the first objection from an unnamed class member was raised over two years after the district court certified the defendant class, and almost two years after the appointment of class counsel. Second, neither that unnamed class member “nor the other unnamed class members raised the failure of the district court to name class counsel at the time it certified the class; the failure of the district court to apply the Rule 23(g) factors in appointing class counsel; commonality, typicality, or jurisdictional issues related to absent class members; or the absence of opt out rights.” The Fourth Circuit did not rule on whether any of those concerns, taken individually or in some combination, doomed this defendant class action because they were not raised before the district court or on appeal. Third, and finally, over 2,500 class members resolved the claims against them through the district court’s damages process, and appellants should not be allowed to undo all that progress with their belated objections.

The Fourth Circuit took pains to emphasize the narrowness of its holding, explaining that the “circumstances that compel us to affirm the district court here are exceedingly narrow if not unique.” So its decision should not be taken as an unequivocal endorsement of defendant class actions. But it is an interesting study of a jurisprudential unicorn.

Bell v. Brockett, No. 18-1149, 2019 WL 1848525 (4th Cir. Apr. 25, 2019).

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Carlton Fields

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