CGC Holding Co. v. Broad & Cassel , 773 F.3d 1076 ( 2014 )

FILED
United States Court of Appeals
Tenth Circuit
December 8, 2014
PUBLISH Elisabeth A. Shumaker
Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
CGC HOLDING COMPANY, LLC, a
Colorado limited liability company;
CRESCENT SOUND YACHT CLUB,
LLC, a Florida limited liability
company; HARLEM ALGONQUIN
LLC, an Illinois limited liability
company; and JAMES T. MEDICK, on
behalf of themselves and all others
similarly situated,
Plaintiffs-Appellees,
v. No. 13-1255
BROAD AND CASSEL, a Florida
general partnership; RONALD
GACHÉ; and CARL ROMANO,
Defendants-Appellants.
___________________
CGC HOLDING COMPANY, LLC, a
Colorado limited liability company;
CRESCENT SOUND YACHT CLUB,
LLC, a Florida limited liability
company; HARLEM ALGONQUIN
LLC, an Illinois limited liability
company; and JAMES T. MEDICK, on
behalf of themselves and all others
similarly situated,
Plaintiffs-Appellees,
v. No. 13-1257
SANDY HUTCHENS, also known as
Fred Hayes, also known as Moishe
Alexander, also known as Moshe Ben
Avraham; TANYA HUTCHENS;
JENNIFER HUTCHENS, also known
as Jennifer Araujo; H. JAN
LUISTERMANS, also known as
Herman Luisterman; 1681071
ONTARIO INC., an Ontario
corporation which has changed its
name to Canadian Funding Limited;
NORTHERN CAPITAL
INVESTMENTS LTD, an Ontario
corporation; 2800 NORTH FLAGLER
DRIVE UNITS 106-107 LLC, a
Florida limited liability company;
ESTATE OF JUDITH HUTCHENS;
129 LAREN STREET INC., an
Ontario corporation, also known as
2141250 Ontario Inc.; 3415
ERRINGTON AVENUE INC., an
Ontario corporation, also known as
2129974 Ontario Inc.; 367-369
HOWEY DRIVE INC., an Ontario
corporation, also known as 1714530
Ontario Inc.; 3419 ERRINGTON
AVENUE INC., an Ontario
corporation, also known as 2129982
Ontario Inc.; 17 SERPENTINE
STREET INC., an Ontario corporation,
also known as 1714529 Ontario Inc.;
720 CAMBRIAN HEIGHTS INC., an
Ontario corporation, also known as
2154461 Ontario Inc.; 331 REGENT
STREET INC., an Ontario corporation,
also known as 2126929 Ontario Inc.;
789 LAWSON STREET INC., an
Ontario corporation, also known as
2128417 Ontario Inc.; 110-114 PINE
STREET INC., an Ontario corporation,
also known as 2173061 Ontario Inc.;
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15-16 KEZIAH COURT INC., an
Ontario corporation, also known as
2128412 Ontario Inc.; 193
MOUNTAIN STREET INC., an
Ontario corporation, also known as
2141249 Ontario Inc.; 625 ASH
STREET INC., an Ontario corporation,
also known as 2128413 Ontario Inc.;
364 MORRIS STREET INC., an
Ontario corporation, also known as
2119821 Ontario Inc.; SANTAN
PROPERTY MANAGEMENT INC.;
101 SERVICES ROAD INC.; 146
WHITAKER STREET INC., an
Ontario corporation; JBD HUTCHENS
FAMILY HOLDINGS INC., an
Ontario corporation, also known as
2129981 Ontario Inc.; JBD
HOLDINGS; 1697030 ONTARIO
INC.,
Defendants-Appellants,
and
308 ELGIN STREET INC.; 1539006
ONTARIO INC.; FIRST CENTRAL
HOLDINGS INC.; FIRST CENTRAL
MORTGAGE FUNDING INC.;
CANADIAN FUNDING
CORPORATION; REALTY 1 REAL
ESTATE SERVICES LTD.,
Defendants.
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_________________
CGC HOLDING COMPANY, LLC, a
Colorado limited liability company;
CRESCENT SOUND YACHT CLUB,
LLC, a Florida limited liability
company; HARLEM ALGONQUIN
LLC, an Illinois limited liability
company; and JAMES T. MEDICK, on
behalf of the themselves and all others
similarly situated,
Plaintiffs-Appellees,
v. No. 13-1258
ALVIN MEISELS,
Defendant-Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
(D.C. No. 11-cv-01012-RBJ-KLM)
James D. Kilroy (Jessica E. Yates with him on the briefs), Snell & Wilmer L.L.P.,
Denver, Colorado, for Case No. 13-1255 Appellants.
Steven A. Klenda, Adroit Advocates, LLC, Denver, Colorado, for Case No. 13-
1257 Appellants.
John M. Palmeri (Heather K. Kelly and Greg S. Hearing with him on the briefs),
Gordon & Rees LLP, Denver, Colorado, for Case No. 13-1258 Appellants.
John F. Head, Head & Associates, P.C., Denver, Colorado, for Appellees.
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Before, KELLY *, TYMKOVICH and PHILLIPS, Circuit Judges.
TYMKOVICH, Circuit Judge.
This case requires us to consider the certification of a proposed class action
to pursue claims under the Racketeer Influenced and Corrupt Organizations Act
(RICO). A class primarily composed of real estate borrowers sued a group of
lenders, claiming the lenders conspired to create a fraudulent scheme to obtain
non-refundable up-front fees in return for loan commitments the lenders never
intended to fulfill.
On behalf of the proposed class, the class representatives—Colorado Golf
Club Holding Company LLC (CGC Holding), Harlem Algonquin LLC and James
T. Medick 1—allege that the lenders misrepresented their ability and their
objective to make good on the promises to meet certain financing obligations as
part of a scheme to entice borrowers to pay the up-front fees. In addition, the
class intends to offer generalized proof that the lenders concealed the financial
*
The late Honorable William J. Holloway, United States Senior Circuit
Judge, heard oral argument in this appeal. However, he passed away before the
opinion in this case was finalized, and he cast no vote with respect to this
finalized opinion. The Honorable Paul J. Kelly, Jr. substitutes to vote on this
final opinion.
1
Throughout the opinion, we also refer to the class representatives simply
as “plaintiffs” or “borrowers.”
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history of Sandy Hutchens, the principal defendant, and his use of pseudonyms, to
preserve the superficial integrity of the operation. Had they known about this
pretense, say the borrowers, no putative class member would have taken part in
the financial transactions that caused each to lose its up-front fees, amounting to
millions of dollars of cumulative losses.
The lenders oppose class certification under Rule 23 of the Federal Rules of
Civil Procedure. They contend class action is an inappropriate litigation vehicle
because the borrowers are unable to demonstrate that common issues susceptible
to generalized proof will predominate over any issues affecting class members
individually. In particular, the lenders contend that each class member will have
to demonstrate that it relied on the lenders’ misrepresentations or omissions to
satisfy RICO’s causation element, making a single trial unwieldy and unworkable.
The lenders are wrong, but not because plaintiffs benefit from a legal
“presumption” of reliance as identified by the district court. As we explain,
RICO class-action plaintiffs are not entitled to an evidentiary presumption of a
factual element of a claim. But still we agree with the district court that a class
can be certified in this context. The plaintiffs’ theory of the case rests on a
straightforward premise—that no rational economic actor would enter into a loan
commitment agreement with a party they knew could not or would not fund the
loans. Accordingly, plaintiffs’ payment of up-front fees allows for a reasonable
inference that the class members relied on lenders’ promises, which later turned
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out to be misrepresentations or omissions of financial wherewithal. This theory
sufficiently allays concerns about Rule 23(b)(3)’s requirement that common
issues predominate over those idiosyncratic to individual class members.
And with the predominance requirement met, the borrowers have
sufficiently proved each of the elements required to certify a class under Rule 23.
For this reason, the district court thus did not err in certifying the class. The
defendants associated with the lenders’ law firm, however, are an exception. For
that subset of the defendants, we reverse because plaintiffs concede that they lack
standing to pursue claims involving the law firm.
Exercising jurisdiction under Rule 23(f), we AFFIRM the class certification
decision on modified grounds. We also REVERSE the district court’s class
certification decision as to the lenders’ law firm and lawyers, Broad and Cassel,
Ronald Gaché and Carl Romano, and REMAND with instructions to DISMISS the
claims against those defendants.
Finally, because several claims are not properly before us in this
interlocutory appeal, we decline to address (1) whether plaintiffs’ claims
constitute an impermissible extraterritorial application of RICO, (2) whether the
plaintiffs can prove proximate cause, or (3) whether the district court properly
exercised personal jurisdiction over certain defendants.
I. Background
A. Hutchens and the Alleged Fraud
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We take the facts as alleged in the complaint. The complaint alleges that
Sandy Hutchens was the mastermind behind the loan commitment fraud at the
heart of this case. Plaintiffs contend Hutchens is a career criminal with a history
of schemes similar to the one at issue here. In 2004, Hutchens pleaded guilty to
financial fraud charges in Canada and was sentenced to two years of house arrest
followed by two years of probation. 2 For reasons that become relevant later, after
his Canadian conviction, Hutchens converted to orthodox Judaism and changed
his name to Moishe Alexander Ben Avraham. In addition to the moniker Moishe
Alexander, Hutchens maintained several other aliases to conceal his identity,
including Moishe Alexander ben Avrohom, Moshe Ben Avraham, Fred Hayes,
Alexander MacDonald, Matthew Kovce, and Frederick Merchant. 3 Not
surprisingly, Hutchens disagrees with the plaintiffs’ characterization of his
operation and contends that he was a legitimate financial investor and lender with
success closing mortgage transactions, asset purchases, and other investments.
2
The amended complaint contains numerous allegations regarding
Hutchens’s past. For example, plaintiffs allege that Hutchens misrepresented
joint venture relationships with prominent North American lenders and invented
certain offshore funding sources. Furthermore, the record reflects that Hutchens’s
history of malfeasance was chronicled in several newspaper articles and on
various internet websites.
3
For consistency, we refer to Sandy Hutchens as “Hutchens” throughout
the opinion, even though he went by different names during his interactions with
the putative class members.
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Plaintiffs’ central claim is that Hutchens and his associates engaged in a
common scheme to defraud distressed, do-or-die borrowers out of up-front
payments. The formula for Hutchens’s alleged cookie-cutter scheme is not
complicated. First, a potential borrower would submit a loan application to one
of several issuing entities through a loan broker. Typically, the applicant would
identify in its application a piece of real estate that could serve as collateral to
secure the loan. After receiving the application, an issuing entity would extend
the applicant a loan commitment agreement. Under its terms, the applicant was
required to pay, among other advanced fees, an up-front, non-refundable payment
known as a “loan commitment fee.” In addition to this up-front fee, as a strict
condition of the terms of the agreement, the applicant was also required to meet
certain eligibility requirements prior to receiving the loan. One of these
conditions set a minimum valuation for the collateral property. If an appraisal
valued the property below the amount necessary to secure the loan, then the
commitment agreement would be annulled. Another condition required that the
applicant timely submit necessary paperwork to facilitate the loan’s approval. At
some point in the process, the issuing entities terminated each of the borrowers’
loan commitment agreements for failing, in one form or another, to comply with
the conditions of the agreement.
Plaintiffs claim this scheme was subterfuge for a scam to appropriate the
up-front fees without any intent or ability to ultimately fund the committed loan.
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To this end, Hutchens and his cohorts would fabricate a reason to deny the loan or
otherwise blame the borrower for the deal’s dissolution. According to Hutchens’s
former accountant, Martin Lapedus, by the end of 2009 the issuing entities
controlled by Hutchens had received over $8 million in up-front fees from
applicants, but had lent less than $500,000 in total funding. Furthermore,
Lapedus alleges that the issuing entities, and by extension Hutchens, never had
the liquidity to close the substantial loans committed to in the loan agreements.
Plaintiffs also allege that Hutchens and his syndicate concealed several
material aspects of Hutchens’s criminal or otherwise problematic past, including
his use of aliases to perpetuate false perceptions and obscure his identity. In the
same vein, plaintiffs allege that the physical addresses associated with the issuing
entities were façades used to shield the illusory nature of Hutchens’s business. At
bottom, plaintiffs contend that this deceit amounted to an effort to beguile class
members, ignorant of Hutchens’s unsavory methods, to enter the loan
commitment agreements. But for these active omissions and misrepresentations,
say plaintiffs, no putative class member would have participated in the deals.
B. Other Defendants
Plaintiffs also claim a number of other individuals and entities conspired
with Hutchens.
1. The Hutchens Family and Related Entities
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First, plaintiffs allege Hutchens’s wife, Tanya, and his daughter, Jennifer,
are co-conspirators. They claim Tanya Hutchens as the person responsible for
operating and maintaining the books of the fraudulent enterprise. She also
controlled the majority of the entities to which the enterprise funneled the
ill-gotten gains of their alleged scheme. Jennifer Hutchens (or Jennifer Araujo)
was the “Manager of Underwriting” for several of the corporate entities.
Plaintiffs next contend H. Jan Luistermans is a Canadian real estate agent
who worked with the Hutchens’s enterprise. His primary responsibility was
inspecting potential borrowers’ properties to determine whether the property
could serve as acceptable collateral for the loans. During the relevant time
period, Luistermans was employed by Realty 1 Real Estate Services Ltd.
Additionally, the complaint named five issuing entities as defendants. The
issuing entities—308 Elgin Street Inc. (308 Elgin), Canadian Funding Corporation
(CFC), First Central Mortgage Funding Inc. (FCMF), Northern Capital Investment
Ltd. (NCI), and Great Eastern Investment Fund, LLC (GEIF)—are all Canadian
corporations that allegedly served as vehicles to issue the conditional loan
commitments and accept the up-front fees required to secure those commitments.
A sixth entity, First Central Holdings Inc. (FCH), served a similar function,
allegedly receiving payments via wire transfers from class members. Finally,
Hutchens and his associates used another cadre of entities, collectively referred to
here as the transferees, to funnel or transfer class members’ advance payments.
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The transferees would allegedly purchase real estate with these illicit fees soon
after receipt.
2. Meisels
Alvin Meisels’s relationship with Sandy Hutchens dates back to at least
2004 when Meisels represented Hutchens in connection with criminal charges for
fraud. Meisels is an Ontario, Canada lawyer alleged to have advised Hutchens
throughout the period relevant to this action. Plaintiffs contend that Meisels
frequently certified the legitimacy of Hutchens’s ability to fund loan
commitments. According to the complaint, Meisels was on notice about
Hutchens’s criminal history from the outset of their relationship.
Meisels also represented Hutchens in a 2006 lawsuit alleging that Hutchens
committed a similar advance-fee loan fraud. Meisels subsequently served as
counsel to Hutchens in an action to secure an injunction against Brent Hillyer,
who was allegedly the source of several defamatory internet postings about
Hutchens. All told, from 2004 until March 2010, Meisels provided legal
representation to Hutchens and various other defendants.
Plaintiffs specifically allege that Meisels vouched for the bona fides of
several defendant entities on $420 million worth of loan commitments to
borrowers based out of Florida. Meisels also served as a reference for Hutchens
and frequently disseminated positive information while withholding facts that
tended to show Hutchens’s criminal past or other sordid factors.
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3. The Broad Defendants
Broad and Cassel is a law firm doing business in Florida. Ronald Gaché
and Carl Romano were partners at the firm during the relevant time period. 4 As
alleged in the amended complaint, Broad represented several defendants at certain
points during 2008. While Broad was counsel to the Hutchens-related entities, it
was involved with loan commitments to seventeen prospective borrowers, only
five of which paid advanced fees.
C. The Putative Class
Plaintiffs allege that the lenders issued at least 134 loan commitments
through the issuing entities over the course of nearly nine years. The putative
class, according to plaintiffs, thus includes at least 100 borrowers—consisting of
both individuals and corporate entities spanning across fifteen different
states—who paid advance fees to defendants. The contracted value of each class
member’s loan commitment ranged from $500,000 to $80 million. Based on
plaintiffs’ estimates, the lenders committed to fund at least $760 million in loans,
but only closed on one loan for a Florida condominium worth $265,000. The
circumstances of the three entities currently serving as the class representatives
for the putative class are typical of those of other potential class members.
1. CGC Holding
4
We refer to Broad and Cassel, Gaché, and Romano collectively as
“Broad.”
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CGC Holding is a Colorado limited liability company, which developed an
eighteen-hole golf course and related community facilities during 2009. After
losing one of its primary investors, CGC Holding sought funding from FCMF and
FCH. CGC Holding signed a commitment letter with FCMF pursuant to which
FCMF agreed to lend $34 million to CGC Holding subject to certain terms. To
comply with the terms, CGC Holding paid FCH at least $182,500 in inspection
fees, administrative fees, and legal fees. CGC Holding did not receive the loan.
The lenders maintain that CGC Holding’s loan commitment was contingent upon
its collateral property commanding a valuation of $43 million, of which it fell
short.
2. Harlem Algonquin
Harlem Algonquin was a special-purpose entity operating out of Illinois
that was created to purchase and develop a commercial property. A mortgage
broker introduced Harlem Algonquin to CFC, and CFC ultimately issued a loan
commitment for $3.57 million to facilitate the purchase in June 2010. The parties
continued to negotiate, and Harlem Algonquin eventually paid $42,688 in fees to
CFC. According to the defendants, Harlem Algonquin failed to supply or
untimely delivered the necessary paperwork to complete its application. For this
reason, Harlem Algonquin never received a loan from the lenders. Harlem
Algonquin has since been involuntarily dissolved by the state of Illinois.
3. Medick
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James T. Medick wanted to purchase his former home in San Clemente,
California from his ex-wife. For this purpose, Medick was put in touch with
FCMF, which eventually committed to loan Medick $4 million. To secure the
necessary funding, he paid $95,950 to FCH in three payments during the first
three months of 2010. The terms of his commitment contract required that the
existing mortgages and encumbrances on the former home be up to date. Since
two mortgages and property taxes on the home were in arrears, CFC terminated
his application.
D. Procedural History
The defendants filed numerous procedural and substantive motions, which
the district court mostly denied in 2011. The court subsequently certified a class
including persons and entities fitting the following definition:
All U.S. residents or domiciled entities (1) who were
issued loan commitments between January 1, 2005, and
April 7, 2013, (2) by Canadian Funding Corporation,
First Central Mortgage Funding, Inc., 308 Elgin Street
Inc., Northern Capital Investment Ltd., Great Eastern
Investments, LLC, or any other entity controlled by
Sandy Hutchens, (3) whose loan commitments were not
funded (4) but who paid money to any defendant (5)
without having been informed that Moishe Alexander,
Moshe Ben Avraham, Fred Haynes, Alexander
MacDonald, Mathew Kovce, Fred Merchant, or other
aliases, as the case might be, were names used by Sandy
Hutchens, and that that individual had a criminal history
including a conviction for fraud.
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CGC Holding Co., LLC v. Hutchens, No. 11-CV-01012-RBJ-KLM, 2013 WL
798242, at *13 (D. Colo. Mar. 4, 2013).
Pursuant to the interlocutory appeal right of Rule 23(f), the defendants
argue the district court erred in finding that questions common to the entire class
will predominate over questions unique to individual class members.
II. Analysis
The scope of our review under Rule 23(f) is limited to whether the district
court abused its discretion in its certification of the putative class. As we explain,
the district court did not err in certifying the class. While the parties have raised
a number of other issues unrelated to class certification, we do not reach those as
part of this interlocutory appeal.
A. Class Certification
Hutchens and Meisels contend that the district court abused its discretion
by certifying the putative class because individual issues will overwhelm the
common issues of fact and law, making class treatment unmanageable and
inappropriate. They argue that, among other things, the motives, levels of
knowledge, diligence, and financial status of each class member are so different
that the district court will be inundated with independent inquiries specific to
each class member. And they contend that unpacking these unique concerns will
dominate the litigation.
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“When the district court has applied the proper standard in deciding
whether to certify a class, we may reverse that decision only for abuse of
discretion.” Adamson v. Bowen, 855 F.2d 668, 675 (10th Cir. 1988). The district
court abuses its discretion when it misapplies the Rule 23 factors—either through
a clearly erroneous finding of fact or an erroneous conclusion of law—in deciding
whether class certification is appropriate. Vallario v. Vandehey, 554 F.3d 1259,
1264 (10th Cir. 2009); Shook v. El Paso Cnty., 386 F.3d 963, 967–68 (10th Cir.
2004) (Shook I). Our review is only de novo to the extent we must determine
whether the district court applied the correct standard. Trevizo v. Adams, 455
F.3d 1155, 1160 (10th Cir. 2006). In the end, “[a]s long as the district court
applies the proper Rule 23 standard, we will defer to its class certification ruling
provided that decision falls within the bounds of rationally available choices
given the facts and law involved in the matter at hand.” Vallario, 554 F.3d at
1264.
1. Class Certification Standards
When addressing class certification, the district court must undertake a
“rigorous analysis” to satisfy itself that the prerequisites of Rule 23 of the Federal
Rules of Civil Procedure are met. See Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct.
2541, 2551 (2011) (Rule 23(a)); Comcast Corp. v. Behrend, 133 S. Ct. 1426, 1432
(2013) (Rule 23(b)). Because class action litigation remains “an exception to the
usual rule that litigation is conducted by and on behalf of the individual named
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parties only,” Califano v. Yamasaki, 442 U.S. 682, 700–01 (1979), the
requirements of Rule 23 are heavily scrutinized and strictly enforced. “[A]ctual,
not presumed, conformance with [Rule 23] remains . . . indispensable.” Gen. Tel.
Co. of Sw. v. Falcon, 457 U.S. 147, 160 (1982).
Under Rule 23(a), plaintiffs seeking class treatment must establish four
threshold requirements:
(1) the class is so numerous that joinder of all members
is impracticable;
(2) there are questions of law or fact common to the
class;
(3) the claims or defenses of the representative parties
are typical of the claims or defenses of the class; and
(4) the representative parties will fairly and adequately
protect the interests of the class.
Fed. R. Civ. P. 23(a) (emphasis added). In other words, the class must
demonstrate the requisite numerosity, commonality, typicality, and adequacy to
proceed with a class action.
If the class meets the four criteria under Rule 23(a), then the court must
consider whether the class satisfies at least one of the three alternative class-types
under Rule 23(b):
First, Rule 23(b)(1) addresses situations where “incompatible standards of
conduct for the party opposing the class” would arise without class treatment. Id.
at (b)(1).
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Second, Rule 23(b)(2) covers class actions for declaratory or injunctive
relief where the party defending against the class “has acted or refused to act on
grounds that apply generally to the class.” Id. at (b)(2).
Third, as is the case here, Rule 23(b)(3) is available where “questions of
law or fact common to class members predominate over any questions affecting
only individual members, and . . . a class action is superior to other available
methods for fairly and efficiently adjudicating the controversy.” Id. at (b)(3). In
other words, class status is appropriate as long as plaintiffs can establish an
aggregation of legal and factual issues, the uniform treatment of which is superior
to ordinary one-on-one litigation.
None of the elements of Rule 23(a) is realistically in dispute in this case.5
The real question is whether plaintiffs have sufficiently met their burden under
Rule 23(b)—specifically whether the plaintiffs can show that common questions
subject to generalized, classwide proof predominate over individual questions.
“The Rule 23(b)(3) predominance inquiry tests whether proposed classes are
sufficiently cohesive to warrant adjudication by representation.” Amchem Prods.,
Inc. v. Windsor, 521 U.S. 591, 622–23 (1997). It is not necessary that all of the
elements of the claim entail questions of fact and law that are common to the
class, nor that the answers to those common questions be dispositive. Amgen Inc.
5
Broad disputes whether the putative class is sufficiently numerous as
against the law firm defendants. Because we handle Broad separately, see Part
II.C.3 infra, we need not address numerosity at this juncture.
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v. Conn. Ret. Plans & Trust Funds, 133 S. Ct. 1184, 1196 (2013). Put differently,
the predominance prong “asks whether the common, aggregation-enabling, issues
in the case are more prevalent or important than the non-common, aggregation-
defeating, individual issues.” 2 William B. Rubenstein et al., Newberg on Class
Actions § 4:49, at 195–96 (5th ed. 2012) (“Newberg”).
Predominance regularly presents the greatest obstacle to class certification,
especially in fraud cases. Accordingly, the issues disputed in this case are not
unusual. And given our obligation to ensure that the district court did not err in
conducting its rigorous analysis, we must characterize the issues in the case as
common or not, and then weigh which issues predominate. Id. § 4:50, at 196.
Here, that task requires us to survey the elements of the class’s RICO claims to
consider (1) which of those elements are susceptible to generalized proof, and (2)
whether those that are so susceptible predominate over those that are not.
Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213,
1220 (10th Cir. 2013) (finding that the district court must consider the particular
facts of a case, including the underlying claims, when deciding a motion for class
certification); see also Rutstein v. Avis Rent-A-Car Sys., Inc., 211 F.3d 1228,
1234 (11th Cir. 2000) (“Whether an issue predominates can only be determined
after considering what value the resolution of the class-wide issue will have in
each class member’s underlying cause of action.”). Stated another way,
consideration of how the class intends to answer factual and legal questions to
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prove its claim—and the extent to which the evidence needed to do so is common
or individual—will frequently entail some discussion of the claim itself. See
Falcon, 457 U.S. at 160.
In this context, it is worth reiterating that our review on appeal is limited.
For the purposes of class certification, our primary function is to ensure that the
requirements of Rule 23 are satisfied, not to make a determination on the merits
of the putative class’s claims. See Anderson v. City of Albuquerque, 690 F.2d
796, 799 (10th Cir. 1982); see also Amgen Inc., 133 S. Ct. at 1195 (“Merits
questions may be considered to the extent—but only to the extent—that they are
relevant to determining whether the Rule 23 prerequisites for class certification
are satisfied.”). But it is impractical to construct “an impermeable wall” that will
prevent the merits from bleeding into the class certification decision to some
degree. See Shook v. Bd. of Cnty Comm’rs of El Paso, 543 F.3d 597, 612 (10th
Cir. 2008) (Shook II); Vallario, 554 F.3d at 1266. So, although class certification
does not depend on the merits of the suit, “[e]valuation of many of the questions
entering into determination of class action questions is intimately involved with
the merits of the claims.” Coopers & Lybrand v. Livesay, 437 U.S. 463, 469 n.12
(1978); see also Shook II, 543 F.3d at 612 (“[W]hile a district court may not
evaluate the strength of a cause of action at the class certification stage, it must
consider, without passing judgment on whether plaintiffs will prevail on the
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merits, whether remedying the harm alleged can be done on a class-wide basis in
conformity with Rule [23].”).
With these legal principles in mind, “[c]onsidering whether ‘questions of
law or fact common to class members predominate’ begins, of course, with the
elements of the underlying cause of action.” Erica P. John Fund, Inc. v.
Halliburton Co., 131 S. Ct. 2179, 2184 (2011) (quoting Rule 23). For this limited
purpose, we consider the proposed class’s claim for a RICO conspiracy.
2. Civil RICO
The Racketeer Influenced and Corrupt Organizations Act (RICO)
establishes a civil cause of action for persons injured as a result of a prohibited
racketeering activity. 18 U.S.C. § 1962(c); see also Bixler v. Foster, 596 F.3d
751, 756 (10th Cir. 2010). To prove a RICO violation, a plaintiff must show that
the defendant violated the RICO statute, and the plaintiff was injured “by reason
of” that violation. 18 U.S.C. §§ 1962, 1964(c). A defendant violates the act
when he (1) participates in the conduct (2) of an enterprise (3) through a pattern
of (4) racketeering activity. See Tal v. Hogan, 453 F.3d 1244, 1261 (10th Cir.
2006). Section 1961(1)(B) describes the qualifying “racketeering activities,” or
“predicate acts,” which include wire fraud. Id. at § 1961(1)(B). Pursuant to
§ 1962(d), conspiracy to commit a RICO violation also constitutes a violation of
the Act when a conspirator adopts the goal of furthering the enterprise, even if the
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conspirator does not commit a predicate act. United States v. Randall, 661 F.3d
1291, 1297 (10th Cir. 2011).
Under RICO’s “by reason of” requirement, “to state a claim . . . the
plaintiff is required to show that a RICO predicate offense ‘not only was a ‘but
for’ cause of his injury, but was the proximate cause as well.’” Hemi Grp., LLC
v. City of New York, 559 U.S. 1, 9 (2010) (quoting Holmes v. Sec. Inv. Prot.
Corp., 503 U.S. 258, 268 (1992)). Sufficiently establishing the element of
causation—both actual and proximate—is crucial to proving any violation of
RICO. Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 656–60 (2008).
“When a court evaluates a RICO claim for proximate causation, the central
question it must ask is whether the alleged violation led directly to the plaintiff’s
injuries.” Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461 (2006). Tailored
to the predominance inquiry, the question is whether the link between defendants’
actions and the class’s injuries can be adduced through common evidence.
Although reliance is not an explicit element of a civil RICO claim, it
frequently serves as a proxy for both legal and factual causation. McLaughlin v.
Am. Tobacco Co., 522 F.3d 215, 223 (2d Cir. 2008), abrogated on other grounds
by Bridge, 553 U.S. 639. But despite its usefulness as a stand-in for causation,
strict first-party reliance is not a prerequisite to establishing a RICO violation.
Bridge, 553 U.S. 639; Wallace v. Midwest Fin. & Mortg. Servs., Inc., 714 F.3d
414, 420 (6th Cir. 2013) (“For RICO purposes, reliance and proximate cause
-23-
remain distinct—if frequently overlapping—concepts. While reliance is often
used to prove . . . the element of causation, that does not mean it is the only way
to do so.” (internal quotations omitted)). Nevertheless, in cases arising from
fraud, a plaintiff’s ability to show a causal connection between defendants’
misrepresentation and his or her injury will be predicated on plaintiff’s alleged
reliance on that misrepresentation. Put simply, causation is often lacking where
plaintiffs cannot prove that they relied on defendants’ alleged misconduct.
Ultimately, in cases such as this one, “proving reliance is necessary [because] it is
integral to Plaintiffs’ theory of causation.” Hoffman v. Zenith Ins. Co., 487 F.
App’x 365, 365 (9th Cir. 2012).
3. The Predominance Element in RICO Class Actions
Next, we must determine whether reliance in this case is susceptible to
general and classwide proof.
Reliance, as a means of establishing RICO causation and beyond, takes on
uncommon gravity when it arises in the context of establishing predominance
under Rule 23. In practice, efforts to certify classes based on causes of action
that require an element of causation, including RICO, often turn on whether the
class can demonstrate that reliance is susceptible to generalized proof. Compare
In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d 108, 119 (2d Cir. 2013), cert.
denied 134 S. Ct. 1938 (2014) (certifying RICO class based on a classwide
inference of reliance); Klay v. Humana, 382 F.3d 1241 (11th Cir. 2004) (same),
-24-
abrogated on other grounds by Bridge, 553 U.S. 639; with Poulos v. Caesars
World, Inc., 379 F.3d 654 (9th Cir. 2004) (declining to certify class because
individualized issues of reliance would dominate); Sandwich Chef of Tex., Inc. v.
Reliance Nat. Indem. Ins. Co., 319 F.3d 205, 219 (5th Cir. 2003) (“The pervasive
issues of individual reliance that generally exist in RICO fraud actions create a
working presumption against class certification.”); Gunnells v. Healthplan Servs.,
Inc., 348 F.3d 417, 434 (4th Cir. 2003) (finding reliance not easily proven by
common evidence).
The status of reliance as a focal point at the class certification stage is
primarily a forward-looking evidentiary concern. Since reliance is often a highly
idiosyncratic issue that might require unique evidence from individual plaintiffs,
it may present an impediment to the economies of time and scale that encourage
class actions as an alternative to traditional litigation. In terms of Rule 23
doctrine, individualized issues of reliance often preclude a finding of
predominance.
But that is not always the case. Sometimes issues of reliance can be
disposed of on a classwide basis without individualized attention at trial. For
example, where circumstantial evidence of reliance can be found through
generalized, classwide proof, then common questions will predominate and class
treatment is valuable in order to take advantage of the efficiencies essential to
class actions. In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d at 119; Klay,
-25-
382 F.3d at 1258–59. Under certain circumstances, therefore, it is beneficial to
permit a commonsense inference of reliance applicable to the entire class to
answer a predominating question as required by Rule 23. In the RICO context,
class certification is proper when “causation can be established through an
inference of reliance where the behavior of plaintiffs and the members of the class
cannot be explained in any way other than reliance upon the defendant’s
conduct.” In re Countrywide Fin. Corp. Mortg. Mktg. & Sales Practices Litig.,
277 F.R.D. 586, 603 (S.D. Cal. 2011).
Cases involving financial transactions, such as this one, are the
paradigmatic examples of how the inference operates as an evidentiary matter.
On this point, the Second Circuit’s recent decision in In re U.S. Foodservice Inc.
Pricing Litigation is instructive. 729 F.3d 108. In that case, defendants
challenged the certification of a nationwide RICO class action against a food
distributor for fraudulent overbilling under a “cost-plus” payment plan.
Defendants appealed the district court’s class certification decision on several
grounds, including that the district court ignored particularized issues of reliance
that were bound to predominate. See id. at 119. The Second Circuit disagreed,
finding circumstantial proof of classwide reliance in the fact that class members
made payments pursuant to the agreements:
In cases involving fraudulent overbilling, payment may
constitute circumstantial proof of reliance based on the
reasonable inference that customers who pay the amount
-26-
specified in an inflated invoice would not have done so
absent reliance on the invoice’s implicit representation
that the invoiced amount was honestly owed. Fraud
claims of this type may thus be appropriate candidates
for class certification because “while each plaintiff must
prove reliance, he or she may do so through common
evidence (that is, through legitimate inferences based on
the nature of the alleged misrepresentations at issue).”
Id. at 120 (quoting Klay, 382 F.3d at 1258).
Likewise, the Eleventh Circuit in Klay v. Humana found that an inference
of reliance was appropriate where “circumstantial evidence that can be used to
show reliance is common to the whole class. That is, the same considerations
could lead a reasonable factfinder to conclude beyond a preponderance of the
evidence that each individual plaintiff relied on the defendants’ representations.”
Klay, 382 F.3d at 1259. Klay involved class claims brought by doctors against
health maintenance organizations (HMOs), alleging a conspiracy to systematically
underpay physicians on reimbursements for their services. Id. at 1246. To rebut
the HMOs’ claims that this inference was inappropriate, the court commented that
“[i]t does not strain credulity to conclude that each plaintiff, in entering into
contracts with the defendants, relied upon the defendants’ representations and
assumed they would be paid the amounts they were due.” Id. at 1259.
In re U.S. Foodservice Inc. Pricing Litigation and Klay are persuasive and
they are hardly alone in reasoning that circumstantial evidence of reliance is
sufficient to allege RICO causation for purposes of Rule 23. Indeed, numerous
-27-
district court decisions, in the process of certifying classes, have accentuated facts
similar to those in this case—primarily, the alleged legitimacy of the counterparty
to an agreement, 6 or the fact that all plaintiffs paid fees in exchange for a
promise 7—as proper grounds to infer reliance on a classwide basis. 8 Moreover,
6
See Minter v. Wells Fargo Bank, N.A., 274 F.R.D. 525, 546 (D. Md.
2011) (“[T]he common inference involved in most such cases, as well as in the
case at bar, is that members of the plaintiff class relied upon the purported
legitimacy of the defendant with which they transacted.”); Robinson v.
Fountainhead Title Grp. Corp., 257 F.R.D. 92, 95 (D. Md. 2009) (“[I]t would be
a reasonable inference to assume that a class member who purchased services
from Assurance Title relied on the legitimacy of that organization in paying the
rate charged.”).
7
See Huyer v. Wells Fargo & Co., 295 F.R.D. 332, 348 (S.D. Iowa 2013)
(“[T]he civil RICO claim’s reliance element may be established by circumstantial
evidence applicable to the class as a whole—the payment of the amounts shown
in class members’ mortgage statements, which amounts included property
inspection fees.”); Kennedy v. Jackson Nat’l Life Ins. Co., No. C 07-0371CW,
2010 WL 2524360, at *8 (N.D. Cal. June 23, 2010) (finding that an inference of
reliance can arise where class members would not have purchased the product had
they been fully informed of the facts); Cullen v. Whitman Med. Corp., 188 F.R.D.
226, 235 (E.D. Pa. 1999) (“It need not involve time consuming proof of
individual causation or reliance. If the plaintiffs can prove that UDS was a
complete sham, then a fact finder can infer from the evidence that anyone who
paid tuition and attended the school suffered damage.”); Peterson v. H & R Block
Tax Servs., Inc., 174 F.R.D. 78, 84–85 (N.D. Ill. 1997) (“It is inconceivable that
the class members would rationally choose to pay a fee for a service they knew
was unavailable.”).
8
Still other cases have generally supported the application of this
inference under the right circumstances. See McLaughlin, 522 F.3d at 225
(stating that “proof of reliance by circumstantial evidence may be sufficient under
certain conditions”); Jenson v. Fiserv Trust Co., 256 F. App’x 924, 926 (9th Cir.
2007) (finding that it was “not unreasonable . . . to infer reliance by all
[class]members” when a trust company made similar fraudulent promises about
the nature of financial returns in an alleged Ponzi scheme); Torres v. SGE Mgmt.
(continued...)
-28-
outside the context of class certification, the inference of reliance has also been
deemed appropriate in RICO and similar fraud cases. See In re Neurontin Mktg.
& Sales Practices Litig., 712 F.3d 51, 58 (1st Cir. 2013), cert. denied, 134 S. Ct.
786 (2013) (granting an inference of reliance in a non-class-action RICO case); In
re Park W. Galleries, Inc., Mktg. & Sales Practices Litig., No. 09-2076RSL, 2010
WL 2640256, at *4 (W.D. Wash. June 25, 2010) (same); Smith v. MCI
Telecommunications Corp., 124 F.R.D. 665, 679 (D. Kan. 1989) (finding that with
respect to a common law fraud claim, “[i]t is implausible that, in initiating or
continuing their employment with MCI, the salespersons did not rely on the
commissions plans which they were required to sign. Further, whether their
reliance was reasonable is an objective inquiry common to the entire proposed
class.”).
The logic of these cases applies here. Under the facts of this case, evidence
of payment for the loan commitment—more specifically, the inference that arises
from it—is sufficient to present a predominating question related to class member
reliance that can resolve a central issue of this litigation in one swoop. Resorting
8
(...continued)
LLC, No. 4:09-CV-2056, 2014 WL 129793, at *10 (S.D. Tex. Jan. 13, 2014)
(“Because both logical inference and circumstantial evidence allow the class
members to establish proximate cause on a classwide basis, the Court finds that
common, rather than individual issues, predominate.”); Negrete v. Allianz Life
Ins. Co. of N. Am., 287 F.R.D. 590, 612 (C.D. Cal. 2012) (“The Court
agrees—resort to the ‘common sense’ inference for proving class-wide reliance
remains appropriate in this case.”).
-29-
to this generalized inference of reliance addresses a critical classwide piece of
evidence and will not require individualized consideration that would belie class
treatment. 9 More specifically the fact that a class member paid the nonrefundable
up-front fee in exchange for the loan commitment constitutes circumstantial proof
of reliance on the misrepresentations and omissions regarding Hutchens’s past
and the defendant entities’ ability or intent to actually fund the promised loan.
Were we deciding the merits of an individual plaintiff’s RICO fraud claim,
we would surely accept the introduction of such an inference—the factfinder’s
ultimate acceptance or rejection notwithstanding—with little analysis. For the
purposes of class certification, we see no reason why a putative class containing
plaintiffs, who all paid substantial up-front fees in return for financial promises,
should not be entitled to posit the same inference to a factfinder on a classwide
basis. When plaintiffs are given the opportunity to present that inference as their
theory of causation, reliance, an issue often wrought with individualized
inquiries, becomes solvable with a uniform piece of circumstantial evidence.
Furthermore, the circumstantial fact of payment of the up-front fee is common to
9
We note that the inference of reliance here is limited to transactional
situations—almost always financial transactions—where it is sensible to assume
that rational economic actors would not make a payment unless they assumed that
they were receiving some form of the promised benefit in return. This inference
would not be appropriate in most RICO class actions. And even in financial
transaction cases, there may be individual questions, including components of
class member reliance, that supplant this inference as the predominating concern
for purposes of Rule 23.
-30-
the entire class: all class members paid up-front fees without receiving the
promised loan. This element is subsumed in the definition of the class itself.
And as a result, the putative class is not stymied, for the purposes of class
certification, under Rule 23(b)’s predominance element.
The defendants point to cases from other circuits that have resisted class
certification in financial transaction cases where reliance cannot be shown
through generalized evidence. But those cases, rather than categorically rejecting
the inference, simply do not permit its application on a classwide basis due to
unique facts surrounding the class claims. In particular, those cases involve
significant individualized or idiosyncratic elements that reasonably preclude the
predomination of common questions.
For example, Poulos v. Caesers World, Inc., 379 F.3d 654 (9th Cir. 2004),
is unpersuasive because the court found that a given putative class member’s
decision to partake in slot-machine and video-poker gambling was not necessarily
done in reliance on the game machine’s maker’s representations about the odds of
winning. Unlike entering into a serious financial transaction, many people
gamble without any consideration, let alone reliance, on the representations about
the likelihood of striking it rich. Nor does every slot player spend any serious
money expecting something (other than a good time, perhaps) in return.
A similar, albeit less direct, conclusion derives from Sandwich Chef of
Texas, Inc. v. Reliance National Indemnity Insurance Co., 319 F.3d 205, 219 (5th
-31-
Cir. 2003). In Sandwich Chef, the class alleged that several insurance companies
defrauded policyholders in violation of RICO by charging excessive premiums on
workers’ compensation plans. 10 Plaintiffs asserted that their theory of reliance
was based on a simple financial transaction; namely, that each class member
relied on the accuracy of an inflated invoice when it made payments in
satisfaction of their debt. This act of payment, said the class, was sufficient to
establish circumstantial evidence of reliance on a classwide basis. The Fifth
Circuit disagreed, finding that individualized issues of reliance would take center
stage at trial. According to the court, the uniquely negotiated premiums, among
other bespoke elements of the insurance policies, would require personalized
evidence to establish whether a given plaintiff was aware of the method for
calculating premiums, whether individual policyholders were aware that their
rates deviated from rates filed with regulators, and, most importantly, whether “a
specific policyholder thought an invoice complied with the approved rate and paid
an inflated premium in reliance on that belief.” Id. at 221. Particularly in the
context of insurance negotiations, where myriad factors are considered during the
fact-specific bargaining process, no set of universal facts could predominate over
10
We also note that Sandwich Chef, like Poulos, was decided before the
Supreme Court’s decision in Bridge. Accordingly, it focused on the plaintiffs’
inability to demonstrate individual reliance by common evidence. The necessity
of individual reliance is no longer an aspect of a civil RICO claim predicated on
fraud. While we doubt that the slight shift in the law would have completely
changed the Fifth Circuit’s mind, it may have made it a closer case.
-32-
the comprehensive sui generis evidence that would arise at trial with respect to
each putative class member. Under those circumstances, Rule 23(b)’s
predominance requirement cannot be met.
At bottom, the sort of quid pro quo that is present in this case did not exist
in Sandwich Chef. The putative class members in Sandwich Chef received the
insurance they coveted—even if it was a slightly watered-down or less appealing
version. Moreover, the insurance coverage itself was legitimate, and the
companies offering it were in the business of providing insurance. In this case,
the victims of Hutchens’s fraud were completely deprived of any benefit from
their transaction because Hutchens allegedly did not intend to or have the ability
to fund any of the loans. This fact, if proved at trial, will resolve a central,
predominating issue that is common to all class members. Not so in Sandwich
Chef where common proof simply would not suffice to dispose of any principal
issue in that case.
Before moving on, a few observations about the limited effect of this
inference on the litigation of the class claims. As we have explained, the sole
result of this inference is that the class members are exempted from
demonstrating causation on a class-member-by-class-member basis. The
inference thus manifests primarily as an evidentiary matter: class members will
not be required to testify as to their reliance on the lenders’ misrepresentations
and omissions. Instead, the putative class members are permitted to use the
-33-
common fact that they all forfeited advanced fees as evidence that the class’s
damages were caused “by reason of” defendants’ alleged RICO violations.
But this inference does not shift the burden of proof at trial on the element
of RICO causation (or any other elements of the claim)—plaintiffs will still have
to prove RICO causation by a preponderance of the evidence to win on the merits.
See, e.g., Sikes v. Teleline, Inc., 281 F.3d 1350, 1362 n.3 (11th Cir. 2002)
(distinguishing between presumed reliance and an inference of reliance),
abrogated on other grounds by Bridge, 553 U.S. 639. Similarly, the trier of fact
is not required to accept the inference; it is merely permitted to utilize it as
common evidence to establish the class’s prima facie claims under RICO. Given
the significance that RICO’s causation element will play at trial, combined with
lenders’ common misrepresentations and omissions regarding Hutchens’s ability
or intent to fund the promised loans (which are not challenged here), it is clear
that the class’s claims will “prevail or fail in unison.” Amgen Inc., 133 S. Ct. at
1191. That is enough to satisfy the predominance prong of Rule 23. 11
11
Apart from the issues of RICO causation, it bears mentioning that
another central, generalized element is at the crux of plaintiffs’ theory of liability:
whether Hutchens and his alleged coconspirators actually misrepresented their
ability or intent to satisfy the loan commitments. See In re Linerboard Antitrust
Litig., 305 F.3d 145, 163 (3d Cir. 2002) (finding that common issues involving
the defendants’ conduct rather than the plaintiffs actions can satisfy the
predominance prong of Rule 23). The parties do not focus on this issue as it
relates to predominance, but we think it deserves attention. In effect, a
predominating question at trial will concern the legitimacy of Hutchens’s
operation, which can be shown with evidence common to the entire class.
(continued...)
-34-
4. Presumption of Reliance
The foregoing analysis confirms that plaintiffs have satisfied the
predominance prong of Rule 23(b)(3). The district court, however, rather than
crediting an inference of causation, instead borrowed the presumption of reliance
from securities law to give plaintiffs an extra—and ultimately unneeded—boost in
their efforts to establish reliance. As we explain, the presumption of reliance
does not apply to RICO fraud. 12
The fraud-on-the-market theory arises from the Supreme Court’s
interpretation of federal securities law. In securities cases, plaintiffs can take
advantage of a legal presumption that the defendant’s misrepresentations affected
their investment decision in situations where proving causation is unfeasible. See
11
(...continued)
Presumably, plaintiffs intend to prove Hutchens’s low batting average in funding
loans, his lack of capitalization, and other features that reflect the illicitness of
the scheme. By contrast, Hutchens and his associates will try to discredit this
theory, pointing to any available evidence that would probatively communicate
Hutchens’s authenticity as a lender. On both sides, this dispute is resolvable by
common evidence. And the answer to this predominant question may, in many
ways, definitively end the litigation. The existence of such a predominating
question places a thumb on the scale in favor of class certification. All told, we
are satisfied that common questions will predominate over any issue requiring
individualized attention.
12
The legal distinction between a presumption and an inference helps
clarify our divergence with the reasoning behind the district court’s class
certification decision. A presumption is a legal conclusion that will alter the
plaintiffs’ burden of proof on the merits of their RICO allegations at trial. By
contrast, an inference is simply a commonsense deduction based on the facts
presented that plaintiffs can use to satisfy Rule 23(b).
-35-
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159 (2008).
For proceedings under § 10(b) of the Securities Exchange Act of 1934 and Rule
10b-5, “[r]equiring a plaintiff to show a speculative state of facts . . . places an
unrealistic evidentiary burden on the 10(b) plaintiff.” Joseph v. Wiles, 223 F.3d
1155, 1162 (10th Cir. 2000).
This understanding is based on two seminal Supreme Court cases, Basic
Inc. v. Levinson, 485 U.S. 224 (1988) and Affiliated Ute Citizens of Utah v.
United States, 406 U.S. 128 (1972), which are the cornerstones of this
presumption of reliance. In Basic Inc., the Supreme Court declined to require the
10(b) plaintiff to provide direct proof of reliance on defendant’s
misrepresentation, recognizing that doing so “effectively would . . . prevent[]
[plaintiffs] from proceeding with a class action” in typical securities fraud cases.
Basic Inc., 485 U.S. at 242. And in Affiliated Ute, the Court endorsed a similar
presumption of reliance when the theory of securities fraud centers on defendant’s
failure to disclose material information. Affiliated Ute, 406 U.S. at 153–54.
The rules from each of these cases largely rest on the unique nature of
publicly traded securities markets. This is because the private causes of action
under the antifraud provisions of the federal securities laws rely on the condition
of the public market at the time of the alleged fraudulent transaction as much as
the subjective decisions by individual investors. See T.J. Raney & Sons, Inc. v.
Fort Cobb, Oklahoma Irr. Fuel Auth., 717 F.2d 1330, 1332 (10th Cir. 1983).
-36-
Indeed, the fraud-on-the-market theory allows plaintiffs to benefit from a
relaxed pleading standard that grants them a rebuttable presumption of reliance on
the value of an allegedly fraudulent security price. See Basic Inc., 485 U.S. at
229–30. For class certification, this legal presumption of classwide reliance is
particularly accommodating because it helps avoid questions of individualized
reliance and their attendant difficulties under the predominance prong of Rule
23(b)(3). The sui generis nature of securities fraud supports the reasoning behind
entitling plaintiffs to a presumption of reliance because only where an arguably
efficient market provides the backdrop for fraud allegations does the
fraud-on-the-market theory hold any water. See Amgen Inc., 133 S. Ct. at 1192.
This is so because an efficient market incorporates all publicly available
information into a security’s price. Id. Thus, a particular public, material
misrepresentation will artificially inflate the security’s price, and individual
investors, conscious of the nature of the efficient market, will rely on the price of
the security in their decision to invest. Id. By relying on the efficiency of the
market, an investor has essentially relied on the misrepresentation or omission
(even if he never actually heard it). Id.
Similarly, as we referenced above, the Affiliated Ute presumption posits
that when a theory of securities fraud is based on a fraudulent failure to disclose
material facts, courts do not require the plaintiff to counterfactually demonstrate
that it would have relied on the omitted material information; instead, the court
-37-
permits the factfinder to presume that they would have done so. See Affiliated
Ute, 406 U.S. at 153–54. This presumption typically does not apply to
affirmative misrepresentations made by the defendant. Joseph v. Wiles, 223 F.3d
1155, 1163 (10th Cir. 2000).
In sum, the presumption is uniquely applicable in the securities context and
it has not gained traction in other fields of law. See generally 2 McLaughlin on
Class Actions § 8:11 (10th ed. 2013). And this presumption is unsuited for RICO
fraud cases because they involve a more self-contained universe of plaintiffs and
conduct by defendants that does not necessitate a legal presumption. Given that,
we decline to apply a species of the presumption to RICO allegations and cannot
endorse the district court’s decision holding otherwise. 13
13
Although the district court ultimately did not need to employ the
Affiliated Ute presumption, its predominance analysis was sufficiently rigorous to
support the alternative conclusion that we reach today:
Plaintiffs have evidence and expect to prove that these
entities were essentially shell corporations that, like
Hutchens himself, had no ability to fund the large loans,
let alone the collection of loans to which they
committed. The point of the case is that all of this was a
giant ruse to scam applicants possibly desperate for loan
funds out of the advance fees that were demanded of
them. Those questions are common to all members of
the class.
If these facts are established, then I am inclined towards
the view that proof of actual reliance on an individual
basis is not necessary. Cf. Affiliated Ute Citizens of
Utah v. United States, 406 U.S. 128, 153–55 (1972). It
(continued...)
-38-
5. Superiority
In addition to commonality and predominance, Meisels contends the
district court erred in finding that a class action was superior to any other method
of adjudication. He claims that the existence of numerous individual actions
against the lenders shows that a class action is unnecessary.
Although it is unclear as to the number of individual actions that have been
filed around the country concerning this controversy, the mere existence of
individual actions brought by putative class members does not necessarily defeat
a claim for superiority. Cf. Vassalle v. Midland Funding LLC, 708 F.3d 747, 758
(6th Cir. 2013). It is enough that class treatment is superior because it will
“achieve economies of time, effort, and expense, and promote uniformity of
decision as to persons similarly situated, without sacrificing procedural fairness
or bringing about other undesirable results.” Amchem, 521 U.S. at 615.
Superiority has been demonstrated here.
13
(...continued)
is difficult to conceive that any individual or entity
contemplating a substantial payment of advance fees in
support of a loan application would not consider those
facts to be important in the making of their decision.
CGC Holding Co., 2013 WL 798242 at *17. If we omit the reference to Affiliated
Ute, the district court essentially established the “inference” of reliance that we
find supportive of the predominance prong. Simply put, going further to draw a
presumption of reliance was unnecessary.
-39-
B. Extraterritoriality of RICO
Entirely separate from the issue of class certification, Meisels raises an
additional claim that challenges whether the district court had subject matter
jurisdiction over the claims in this case. He contends that the extent to which
RICO applies to conduct outside the United States—or “extraterritorially”—
influences the power of the federal courts to hear this matter. By framing this
issue as one of jurisdiction, Meisels in effect broadens the limited scope of Rule
23(f) review and asks us to consider prematurely the merits of plaintiffs’ RICO
claims.
But this argument contravenes the Supreme Court’s explicit guidance in
Morrison v. National Australia Bank Ltd., 130 S. Ct. 2869 (2010). In Morrison,
the Court found that the extent to which a statute applies extraterritorially
proceeds exclusively as a merits issue, not a question of jurisdiction: “[T]o ask
what conduct [a statute] reaches is to ask what conduct [a statute] prohibits,
which is a merits question.” Id. at 2877 (emphasis added). And so, while we can
dismiss a case for want of subject matter jurisdiction at any time during the
pendency of an action, Mires v. United States, 466 F.3d 1208, 1211 (10th Cir.
2006), a Rule 23 interlocutory appeal permits us to consider the merits of the
class’s claims only to the extent that they overlap with the Rule 23 factors. Thus,
an independent review of the merits, untethered to Rule 23, is outside the scope of
that review. Shook I, 386 F.3d at 971.
-40-
Courts addressing the issue since the Supreme Court’s decision in Morrison
have evenly determined that the extraterritoriality of RICO is a question of
whether the plaintiffs have stated a claim, not whether the court properly has
subject matter jurisdiction. See, e.g., United States v. Chao Fan Xu, 706 F.3d
965, 977 (9th Cir. 2013), as amended on denial of reh’g (Mar. 14, 2013); Norex
Petroleum Ltd. v. Access Indus., Inc., 631 F.3d 29, 31 (2d Cir. 2010). That is the
identifiable lesson from Morrison, and Meisels offers no compelling reason why a
straight-forward application of it does not apply here.
Despite Morrison’s clear guidance, the parties treat the issue of RICO’s
extraterritoriality as a dispositive jurisdictional issue, even at the class
certification stage of the proceedings. This is in error, but we pause briefly to
address the parties’ contentions. The district court found, and the parties do not
dispute, that RICO does not apply extraterritorially. See CGC Holding Co. v.
Hutchens, 824 F. Supp. 2d 1193, 1210 (D. Colo. 2011). But this case poses a
slightly different issue; namely, whether the complaint alleges a domestic
application of RICO despite its extraterritorial tenor given the Canadian persons
and entities. To understand whether an extraterritorial obstacle exists, the
Supreme Court tells us to consider Congress’s “focus” in enacting the examined
legislation. Morrison, 130 S. Ct. at 2884. In other words, did Congress intend a
statute to encompass conduct outside the United States so as to overcome the
-41-
general “presumption against extraterritoriality,” or was the focus primarily on
domestic conduct? Id.
Courts have gone in two directions in identifying the “focus” of RICO. On
one side, a collection of courts have found that the focus of RICO is its nerve
center, the nefarious enterprise. Mitsui O.S.K. Lines, Ltd. v. Seamaster Logistics,
Inc., 871 F. Supp. 2d 933, 938–40 (N.D. Cal. 2012); Cedeno v. Intech Group,
Inc., 733 F. Supp. 2d 471, 473 (S.D.N.Y. 2010) aff’d sub nom. Cedeno v. Castillo,
457 F. App’x 35 (2d Cir. 2012); Farm Credit Leasing Servs. Corp. v. Krones, Inc.
(In re Le-Nature’s, Inc.), No. 9-MC-162, 2011 WL 2112533, at *3 n.7 (W.D. Pa.
May 26, 2011); In re Toyota Motor Corp., 785 F. Supp. 2d 883, 914 (C.D. Cal.
2011); European Cmty. v. RJR Nabisco, Inc., No. 02-CV-5771, 2011 WL 843957,
at *5 (E.D.N.Y. Mar. 8, 2011). The appeal of focusing on the nerve center of the
enterprise is its administrative ease and consistency. See Mitsui O.S.K. Lines, 871
F. Supp. 2d at 940–41. Moreover, attention on the nerve center comports with the
purpose of RICO, which punishes racketeering activity in connection with an
enterprise, not simply the predicate acts, which are separate offenses. European
Cmty., 2011 WL 843957, at *5.
On the other side, a collection of courts have found that RICO’s focus is
the pattern of racketeering activity. United States v. Chao Fan Xu, 706 F.3d 965,
975–76 (9th Cir. 2013); Chevron Corp. v. Donziger, 871 F. Supp. 2d 229, 243–46
(S.D.N.Y. 2012); United States v. Philip Morris USA, Inc., 783 F. Supp. 2d 23, 29
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(D.D.C. 2011). The genesis of this position is pre-Morrison Supreme Court
jurisprudence that insisted that “the heart of any RICO complaint is the allegation
of a pattern of racketeering.” Agency Holding v. Malley-Duff Assoc., 483 U.S.
143, 154 (1987) (emphasis omitted). In addition, “[t]his approach . . . would
afford a remedy to a U.S. plaintiff who claims injury caused by domestic acts of
racketeering activity without regard to the nationality or foreign character of the
defendants or the enterprise whose affairs the defendants wrongfully conducted.”
Donziger, 871 F. Supp. 2d at 244. The landscape surrounding RICO’s enactment
also suggests that it was intended to reach at least some enterprises operating out
of foreign countries.
The district court’s decision lands within this latter group of courts,
applying the so-called predicate acts approach. See CGC Holding Co., 824 F.
Supp. 2d at 1209. (“[T]he conduct of the enterprise within the United States was
the key to its success.” (emphasis added)). Indeed, the opinion below was cited
as persuasive authority in several subsequent cases, including United States v.
Chao Fan Xu, 706 F.3d 965, 979 (9th Cir. 2013), and Chevron Corp. v. Donziger,
871 F. Supp. 2d 229, 243–45 (S.D.N.Y. 2012).
Looking to the plain language of the legislation does not provide a
conspicuous answer to which approach Congress favored when it enacted RICO.
And neither approach is unimpeachable. For example, courts applying the
enterprise approach have recognized its limitations, noting “hard cases” may
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present particularized facts surrounding the enterprise’s home base that may not
be as predictable. European Cmty., 2011 WL 843957, at *6. And by a similar
token, the predicate acts approach is subject to criticism because it does not lend
itself to an obvious limiting principle. Under its logic, a RICO claim involving
domestic predicate acts—which is to say, every RICO claim—would be
potentially viable even when the enterprise, victims, and schemes are almost
completely foreign.
In the end, notwithstanding the parties’ attention to this issue, we need not
resolve finally which approach is preferred in the circuit. On this interlocutory
appeal, we do not decide the merits of plaintiffs’ claims, including the extent to
which those claims involve an extraterritorial application of RICO. Since the
question of the extraterritoriality of a statute is a merits question, resolving it
must await a final disposition from the court below.
C. Additional Considerations
Finally, we must briefly address several ancillary issues that the parties
raised in the three separate appeals before us.
1. Personal Jurisdiction Over Transferees
First, Hutchens argues the district court erred in finding the court could
exercise personal jurisdiction over the transferees.
A district court’s decision denying a motion to dismiss for lack of personal
jurisdiction “is not an immediately appealable collateral order.” Van
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Cauwenberghe v. Biard, 486 U.S. 517, 527 (1988). To be sure, we have the
authority to exercise pendent appellate jurisdiction over decisions related to
personal jurisdiction when we have an otherwise valid interlocutory appeal before
us. But our use of pendent appellate jurisdiction “is generally disfavored.”
Vondrak v. City of Las Cruces, 535 F.3d 1198, 1205 (10th Cir. 2008). Indeed,
“[i]t is appropriate to exercise pendent appellate jurisdiction only where
resolution of the appealable issue necessarily resolves the nonappealable issue, or
where review of the nonappealable issue is necessary to ensure meaningful review
of the appealable one.” Buck v. City of Albuquerque, 549 F.3d 1269, 1293 (10th
Cir. 2008) (internal quotation marks omitted). As the Supreme Court has
cautioned, the narrow category of issues that deserve pendent review “includes
only decisions that are conclusive, that resolve important questions separate from
the merits, and that are effectively unreviewable on appeal from the final
judgment in the underlying action.” Swint v. Chambers Cnty. Comm’n, 514 U.S.
35, 42 (1995).
Despite the parties’ stipulation regarding our power to exercise jurisdiction
over the district court’s decision to take personal jurisdiction over the transferees,
we decline to do so. Quite clearly, the question is beyond the scope of a
traditional Rule 23(f) review, and the parties have completely failed to explain
why pendent appellate jurisdiction is appropriate under the circumstances. At
bottom, the personal jurisdiction issue and the class certification decision are not
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so “inextricably intertwined . . . that review of the former decision [is] necessary
to ensure meaningful review of the latter.” Swint, 514 U.S. at 51. And Rule 23
does not permit a party to shoehorn every decision that went against it into its
petition for interlocutory review.
Under the circumstances, we refuse to permit an end-run around the general
rule disfavoring interlocutory appeals on this issue.
2. Standing and Proximate Causation
By the same token, we reject Hutchens’s suggestion that plaintiffs lack
standing to bring their RICO claims due to a failure to allege proximate
causation. 14 Rightly understood, this is a surreptitious effort to challenge the
merits of the class claims, which are not at issue at the class certification stage.
Yes, sufficiently alleging proximate cause is necessary to establish standing under
RICO, Bixler, 596 F.3d at 756, but accepting plaintiffs’ allegations as true, we are
satisfied that plaintiffs have properly pleaded proximate cause to earn standing to
vindicate the alleged wrongs. Gillmor v. Thomas, 490 F.3d 791, 797 & n.4 (10th
Cir. 2007). By alleging that the putative class members were the “direct targets”
of defendants’ fraudulent scheme (based on the alleged RICO predicate acts),
plaintiffs have adequately established the requisite causal connection between
defendants’ act and each class member’s financial loss. See Brokerage Concepts,
14
Meisels makes a version of this argument in his appeal, and we reject it
for the same reason.
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Inc. v. U.S. Healthcare, Inc., 140 F.3d 494, 521 (10th Cir. 1998); see also
Trollinger v. Tyson Foods, Inc., 370 F.3d 602, 612 (6th Cir. 2004); Baisch v.
Gallina, 346 F.3d 366, 373 (2d Cir. 2003); Mid Atl. Telecom, Inc. v. Long
Distance Servs., Inc., 18 F.3d 260, 263–64 (4th Cir. 1994).
As the natural, foreseeable, and, most importantly, intended victims of the
alleged fraud, plaintiffs have sufficiently pleaded proximate causation to survive
a threshold standing inquiry. In essence, Hutchens alleges that defendants will
eventually win because the facts demonstrate the causal weaknesses in the class’s
RICO claims. 15 That argument may be sound, but it invites an ultimate judgment
about the defendants’ liability, not plaintiffs’ entitlement to bring legal action.
In sum, saying nothing of the strength of their RICO cause of action,
plaintiffs have a viable theory of causation that is adequate to confer standing
under RICO at this stage in the litigation. 16
15
Many of the defendants, for example, point out plaintiffs’ concession
that there may have been legitimate reasons for lenders to deny each class
member’s loan application. According to defendants, this destroys proximate
cause. On the merits, this might be true, and the parties can certainly litigate this
issue at trial. As a threshold matter, however, these arguments of proximate
causation do not divest plaintiffs of standing to bring their well-pleaded RICO
claims.
16
We recognize that questions of proximate causation often converge at a
point existing between standing and the merits. Holmes, 503 U.S. at 268–69. But
however large the overlapping space in this metaphorical Venn diagram, the
questions raised by defendants are firmly in the merits circle.
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3. Standing with Respect to Broad
Finally, we do accept the plaintiffs’ concession that they lack standing to
pursue their claims against Broad. Regardless of the merits of this about-face,
plaintiffs have relinquished their intent to establish the justiciability of those
claims and can no longer fairly and adequately protect the interests of any
putative class members that could assert valid causes of action vis-a-vis Broad.
Accordingly, we reverse the district court’s decision to the extent it certified a
class against only Broad and Cassel, Gaché, and Romano and remand those claims
to the district court with instructions to dismiss without prejudice. Brereton v.
Bountiful City Corp., 434 F.3d 1213, 1219 (10th Cir. 2006).
III. Conclusion
Based on the analysis above, we REVERSE and REMAND the district
court’s class certification decision as it pertains to Broad and Cassel, Gaché, and
Romano. In all other respects, we AFFIRM the district court’s decision to certify
a class. The remaining issues raised by defendants are not properly before us on
this Rule 23(f) interlocutory review, and we decline to address them at this
juncture.
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