gordon-mosher-v-dewaay-financial-network-llc-p-russell-hansen-deborah ( 2015 )

IN THE COURT OF APPEALS OF IOWA
No. 13-1007
Filed March 25, 2015
GORDON MOSHER, et al.,
Plaintiffs-Appellees,
vs.
DEWAAY FINANCIAL NETWORK, LLC, et al.
Defendants-Appellees,
P. RUSSELL HANSEN, DEBORAH HANSEN,
MARK VERMEER, and All Similarly Situated
Individuals,
Intervenors-Appellants.
____________________________________
WAYNE EDGERTON, et al.,
Plaintiffs-Appellees,
vs.
DEWAAY FINANCIAL NETWORK, LLC, et al.
Defendants-Appellees,
P. RUSSELL HANSEN, DEBORAH HANSEN,
MARK VERMEER, and All Similarly Situated
Individuals,
Intervenors-Appellants.
________________________________________________________________
Appeal from the Iowa District Court for Decatur County, John D. Lloyd,
Judge.
Intervenors appeal from orders certifying a non-opt-out, limited-fund class
and approving a settlement in these consolidated actions. AFFIRMED IN PART,
REVERSED IN PART, AND REMANDED.
2
Andrew B. Howie, Frederick B. Anderson, and J. Barton Goplerud of
Hudson, Mallaney, Shindler, & Anderson, P.C., West Des Moines, for plaintiffs-
appellees.
Steven P. Wandro and Kara M. Simons of Wandro & Associates, P.C.,
Des Moines; Angela R. Hill, Leon; and Samuel Y. Edgerton III and Elizabeth M.
Del Cid of Edgerton & Weaver, L.L.P., Hermosa Beach, California; for
defendants-appellees.
Gail E. Boliver of Boliver Law Firm, Marshalltown, and David Neuman of
Stoltmann Law Offices, P.C., Chicago, Illinois, for intervenors-appellants.
Heard by Danilson, C.J., and Potterfield and Bower, JJ.
3
DANILSON, C.J.
We must decide if a non-opt-out, limited-fund class action was
appropriately certified and settled.1 The intervenors in these actions contend the
district court abused its discretion in certifying a class and the settlement is unfair
and unreasonable. They also maintain the district court unreasonably restricted
their discovery, abused its discretion in consolidating the actions, and erred as a
matter of law in denying their motion to transfer venue.
We conclude the district court abused its discretion in approving this non-
opt-out, limited-fund class certification for purposes of settlement because there
has been no determination of the “maximum” amount of funds available for
settlement. We deny the relief requested by the intervenors in respect to
discovery, consolidation, and venue. We reverse in part and remand for further
proceedings.
1
“The principal role of the court of appeals is to dispose justly of a high volume of
cases.” Iowa Ct. R. 21.11. Here, our task has been greatly complicated. The nine
volumes of the appendix contain no “list of relevant docket entries.” See Iowa R. App. P.
6.905(2)(b)(2). In this several-thousand-page appendix, one table of contents exists for
eight of the nine volumes of appendices. See Iowa R. App. P. 6.905(2)(b)(1). (The
supplemental appendix does include its own table of contents.) Transcript pages are
dispersed among volume eight and the supplemental appendix and are not in
chronological order. See Iowa R. App. P. 6.905(7)(b) (“Any portion of a transcript of
proceedings shall appear in the chronological order of the proceedings.”). While some
appendices pages containing transcript do bear the name of the testifying witness, many
pages of volume eight do not. See Iowa R. App. P. 6.905(7)(c) (“The name of each
witness whose testimony is included in the appendix shall be inserted on the top of each
appendix page where the witness’s testimony appears.”). Omissions of transcript pages
are not indicated by three asterisks as required. See Iowa R. App. P. 6.905(7)(e) (“The
omission of any transcript page(s) or portion of a transcript page shall be indicated by a
set of three asterisks at the location on the appendix page where the matter has been
omitted.”).
4
I. Background Facts and Proceedings.
These proceedings involve the sale of private placement investments,2
many offered by DBSI Inc.3 and Provident Royalties LLC,4 both of which were
represented here by trustees appointed in bankruptcy courts. Donald G.
DeWaay Jr. and related entities,5 offered the 199 private placements at issue
here to their clients as investments.
2
“[A] private placement is an offering of a company’s securities that is not registered with
the Securities and Exchange Commission (SEC) and is not offered to the public at
large.” http://www.finra.org/newsroom/2013/finra-issues-new-investor-alert-private-
placements%E2%80%94evaluate-risks-placing-them-your (last visited on March 23,
2015). The Financial Industry Regulatory Authority website cautions, “Investors should
understand that many private placement securities are issued by companies that are not
required to file financial reports, and investors may have problems finding out how the
company is doing.” Id.
3
In November 2008, DBSI Inc. and several of its affiliates “filed for bankruptcy protection
under chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq. [The d]ebtors’ plan of
liquidation was confirmed in October 2010, naming James R. Zazzali (‘Trustee’) as
litigation trustee of the DBSI Estate Litigation Trust.” In re DBSI, Inc., 467 B.R. 767, 769
(Bankr. D. Del. 2012) (summarizing bankruptcy adversary actions). “DBSI and its
related entities were involved in three main spheres of business activity: the syndication
and sale to investors of tenant-in-common interests in real estate, the purchase of real
estate, and investments in technology companies.” In re DBSI, Inc., 445 B.R. 344, 346
(Bankr. D. Del. 2011).
4
See In re Provident Royalties, LLC, 517 B.R. 687, 689 (Bankr. N.D. Tex. 2014) (noting
Milo H. Segner Jr. is the Liquidating Trustee of the PR Liquidating Trust, an entity
formed in bankruptcy cases, whose task it was to collect and liquidate the assets of
Provident Royalties, LLC and other jointly-administrated debtors as part of each of the
debtors’ confirmed Chapter 11 plans). Provident’s purported business was the
development of oil and gas properties, and the Provident securities were sold as
preferred stock and partnership interests in a series of shale gas ventures. See Billitteri
v. Sec. Am., Inc., No. 3:09-CV-01568-F, 2011 WL 3585983, at *1 (N.D. Tex. Aug. 4,
2011). One court has found Provident Royalties “operated as a Ponzi scheme.”
Provident Royalties, 517 B.R. at 695.
5
For simplicity, we will identify all the defendants simply as DeWaay. Cyril Mandelbaum
describes the DeWaay entities:
The various DeWaay operating entities include a complex web of
single member limited liability companies, limited liability partnerships,
and other partnerships. A significant component of the DeWaay entities’
business is dedicated to private investment vehicles. The two main
5
A. Lawsuits filed. On January 9, 2012, in Decatur County, Iowa, several
plaintiffs filed two proposed class action lawsuits on behalf of themselves and
other DeWaay investors, seeking a non-opt-out class certification under lowa
Rule of Civil Procedure 1.267(1)(b). One class action involved only DBSI private
placement offerings by DeWaay. The other involved numerous other private
placement offerings. The class action petitions6 asserted hundreds, perhaps
thousands, of putative class members invested over $40,000,000 with DeWaay
in the different private placement offerings, including those of DBSI and
Provident Royalties, and alleged, among other things, that DeWaay breached the
duty of due diligence.
B. Intervention allowed. P. Russell Hansen and Mark Vermeer were
involved in arbitration proceedings before the Financial Industry Regulatory
Authority (FINRA) asserting individual claims against DeWaay, which were
stayed by the Iowa district court.7
operating organizations are DFN Partners, LLC and DeWaay Capital
Management, Inc.
6
On February 25, 2012, the putative class plaintiffs filed a motion to consolidate the two
suits, which remained pending for more than one year.
7
On March 5, 2012, the court granted the proposed class action plaintiffs a temporary
restraining order, which provided in part:
5. Named Plaintiffs have obtained information that any potential
awards in the pending arbitration proceedings, when combined with other
potential claims by DeWaay’s DBSI investors, would exhaust the limited
funds available to resolve equitably the claims of all investors who
purchased DBSI securities from DeWaay.
6. The Court finds that it has authority pursuant to the Iowa Rules
of Civil Procedure to temporarily restrain all pending FINRA arbitrations
from proceeding. The Court’s exercise of this authority will protect the
identified, limited funds from being depleted by the costs to defend the
arbitrations until the Court determines whether to certify as a class all
investors who purchased DBSI securities from DeWaay.
6
On May 3, 2012, Hansen and Vermeer were allowed to intervene in these
proceedings on behalf of themselves and other arbitration intervenors. The
intervenors sought extensive discovery, which the district court limited to “copies
of attorney fee agreements, lists of the private placements and REITs [real estate
investment trusts] and copies of any assignments to claims.” The court also
denied the intervenors’ motion to change venue from Decatur County to Polk
County.
C. Proposed settlement. On August 3, 2012, the putative class plaintiffs
and defendants filed a notice of filing a settlement agreement. The proposed
settlement agreement defines several terms, including the following: The
defendants are defined as “DeWaay Financial Network LLC, DeWaay Capital
Management, Inc., DFN Partners, LLC and Donald G. DeWaay, Jr. and their
current and prior officers, directors, employees, agents, and Registered
Representatives (defined below).”
The “Limited Fund” is defined as “the contribution from Donald G.
DeWaay, Jr., in an amount that exceeds the amount that would be paid to
unsecured creditors had the estate of Donald G. DeWaay, Jr., been liquidated
under Chapter 7 of the United States Bankruptcy Code.”
“‘Policy Proceeds’ means the amount of $2,000,000 from the Defendants’
insurance carrier, the Scottsdale Insurance Company; and the amount of
$75,000 from the Defendants’ other insurance carrier, the Torus Specialty
Insurance Company.”8
8
Under a section entitled “benefits of settlement to the settlement class,” it states, “the
Settlement Fund . . . totals $3,000,000.”
7
“Settlement” is defined as “the resolution of the Class Actions and FlNRA
Arbitrations as described in this Settlement Agreement.” And the “settlement
class” is defined as “all investors, their representatives, successors, heirs,
assigns, and any others authorized to act on their behalf, who purchased any of
the Covered Products or received services in collection with these purchases
from any of the Defendants, Defendants’ officers, directors, employees or agents,
or Registered Representatives.” The definition excludes defendants and
enumerated persons and entities whose claims DeWaay had already “resolved.”
D. Preliminary approval. On August 29, 2012, the plaintiffs’ attorneys
moved for an order (1) preliminarily approving settlement in both actions,
(2) certifying a non-opt-out class for purposes of settlement, (3) appointing class
counsel, (4) setting a final fairness hearing, and (5) approving the issuance of
notice to the class.
On November 19, 2012, the district court entered an amended order in
which (1) the settlement agreement was preliminarily approved, (2) a non-opt-out
class was certified for purposes of settlement, (3) class counsel were appointed,
(4) notice was to issue to class members, and (5) timelines for objections and a
date for a final fairness hearing were set.
E. Motion for final approval of settlement and non-opt out class for
purposes of settlement. On December 17, 2012, the plaintiffs filed a motion for
(1) an order approving final settlement, (2) certifying an Iowa Rule of Civil
Procedure 1.267 (non-opt-out) class for purposes of settlement, (3) appointing
class counsel, and (4) approving “the notice to the class as fulfilling due process.”
The defendants joined in the motion. Objections were filed by the intervenors
8
and some individuals who received notice pursuant to the court’s November 19
order.
F. Consolidation and final approval of non-opt-out, limited-fund class
for purposes of settlement. An evidentiary hearing was held on January 30,
31, and February 1, 2013. Following that hearing, the district court consolidated
the two class actions; certified a non-opt-out, limited-fund class; and approved
the proposed settlement. The intervenors now appeal.
II. Scope and Standards of Review.
A district court’s decision on class certification is reviewed for abuse of
discretion. Vos v. Farm Bureau Life Ins. Co., 667 N.W.2d 36, 44 (Iowa 2003).
“Our class-action rules are remedial in nature and should be liberally construed
to favor the maintenance of class actions.” Comes v. Microsoft Corp., 696
N.W.2d 318, 320 (Iowa 2005).
With respect to a class action, a district court’s approval of a settlement
agreement will not be set aside absent an abuse of discretion. City of Dubuque
v. Iowa Trust, 587 N.W.2d 216, 220 (Iowa 1998) (citing predecessor to Iowa Rule
of Civil Procedure 1.271, which provides a class action may not be
“compromised” without court approval).
The district court abuses its discretion only where its grounds for deciding
the class certification issue are clearly unreasonable. See Varner v. Schwan’s
Sales Enters., Inc., 433 N.W.2d 304, 305 (Iowa 1988).
9
III. Discussion.
Iowa Rules of Civil Procedure 1.261 through 1.263 set forth the standards
governing the class certification process. These rules “closely resemble Federal
Rule of Civil Procedure 23,” and the court “may rely on federal authorities
construing similar provisions of Federal Rule of Civil Procedure 23.” Vos, 667
N.W.2d at 44. It is the plaintiffs’ obligation to define the class for which class
certification is sought. See Brownell v. State Farm Mut. Ins. Co., 757 F. Supp.
526, 544 (E.D. Pa. 1991) (stating the plaintiffs’ burden is “adequately and
accurately to define an appropriate class”); see also Vaszlavik v. Storage Tech.
Corp., 175 F.R.D. 672, 685 (D. Colo. 1997) (rejecting overbroad definition,
stating “it is not for me to revise the proposed class definition for plaintiffs”). It is
also the plaintiffs’ burden to prove certification of the putative class is both
permissible and proper. Stone v. Pirelli Armstrong Tire Corp., 497 N.W.2d 843,
846 (Iowa 1993).
Class certification is permissible only where: (1) “The class is so
numerous or so constituted that joinder of all members, whether or not otherwise
required or permitted, is impracticable” and (2) “There is a question of law or fact
common to the class.” Iowa R. Civ. P. 1.261. Class certification is proper only if:
(1) the requirements of rule 1.261 have been satisfied, (2) a class action should
be permitted for the fair and efficient adjudication of the controversy, and (3) the
representative parties will fairly and adequately protect the interests of the class.
See Iowa R. Civ. P. 1.262(2).
Rule 1.263(1) lists thirteen non-exclusive factors for the court to consider
“[i]n determining whether the class action should be permitted for the fair and
10
efficient adjudication of the controversy.” Iowa R. Civ. P. 1.263(1)(a)–(m).9 The
court “need not assign weight to any of the factors listed” and “need not make
written findings as to each factor.” Luttenegger v. Conseco Fin. Servicing Corp.,
671 N.W.2d 425, 437 (Iowa 2003). “Rather, the district court need only weigh
9
Iowa Rule of Civil Procedure 1.263(1) provides:
In determining whether the class action should be permitted for
the fair and efficient adjudication of the controversy, as appropriately
limited under rule 1.262(3), the court shall consider and give appropriate
weight to the following and other relevant factors:
a. Whether a joint or common interest exists among members of
the class.
b. Whether the prosecution of separate actions by or against
individual members of the class would create a risk of inconsistent or
varying adjudications with respect to individual members of the class that
would establish incompatible standards of conduct for a party opposing
the class.
c. Whether adjudications with respect to individual members of the
class as a practical matter would be dispositive of the interests of other
members not parties to the adjudication or substantially impair or impede
their ability to protect their interests.
d. Whether a party opposing the class has acted or refused to act
on grounds generally applicable to the class, thereby making final
injunctive relief or corresponding declaratory relief appropriate with
respect to the class as a whole.
e. Whether common questions of law or fact predominate over
any questions affecting only individual members.
f. Whether other means of adjudicating the claims and defenses
are impracticable or inefficient.
g. Whether a class action offers the most appropriate means of
adjudicating the claims and defenses.
h. Whether members who are not representative parties have a
substantial interest in individually controlling the prosecution or defense of
separate actions.
i. Whether the class action involves a claim that is or has been the
subject of a class action, a government action, or other proceeding.
j. Whether it is desirable to bring the class action in another forum.
k. Whether management of the class action poses unusual
difficulties.
l. Whether any conflict of laws issues involved pose unusual
difficulties.
m. Whether the claims of individual class members are insufficient
in the amounts or interests involved, in view of the complexities of the
issues and the expenses of the litigation, to afford significant relief to the
members of the class.
11
and consider the factors and come to a reasoned conclusion as to whether a
class action should be permitted for a fair adjudication of the controversy.” Id.
Rule 1.263(2) identifies three required findings the court must make “[i]n
determining . . . that the representative parties fairly and adequately will protect
the interests of the class.” Iowa R. Civ. P. 1.263(2)(a)–(c).10
In Iowa, while the courts have addressed settlement in a class action, see,
e.g., Iowa Trust, 587 N.W.2d at 221–24, and have approved a non-opt-out class
certification, see Kragnes v. City of Des Moines, 810 N.W.2d 492, 505 (Iowa
2012), no case law has addressed or approved the use of “limited fund,” non-opt-
out class action settlement. The proponents of the settlement agreement here
contend it was properly employed under the civil procedure rules governing class
actions and principles enunciated in Ortiz v. Fibreboard Corp., 527 U.S. 815
(1999). The intervenors/objectors argue the district court abused its discretion in
numerous respects in approving the class certification and settlement here. We
presume our supreme court would adhere to the principles enunciated in Ortiz
before allowing a non-opt-out, limited-fund class action settlement. See
Luttenegger, 671 N.W.2d at 436.
As one court has aptly described Ortiz:
10
Rule 1.263(2) provides:
(2) In determining under rule 1.262(2) that the representative
parties fairly and adequately will protect the interests of the class, the
court must find all of the following:
a. The attorney for the representative parties will adequately
represent the interests of the class.
b. The representative parties do not have a conflict of interest in
the maintenance of the class action.
c. The representative parties have or can acquire adequate
financial resources, considering rule 1.276, to ensure that the interests of
the class will not be harmed.
12
Ortiz involved a large class of asbestos claimants suing a
manufacturer, Fibreboard, which had in turn sued its two insurance
carriers for funds to pay the claimants. See [Ortiz, 527 U.S.] at
821–23. Eleventh hour negotiations between class counsel,
Fibreboard and the two insurance companies produced a
settlement fund of $1.525 billion, funded nearly entirely by the
insurance companies and contingent on certification under Rule
23(b)(1)(B) as a mandatory limited fund class. See id. at 823–25.
The district court certified the class under [Federal] Rule [of Civil
Procedure] 23(b)(1)(B), reasoning that, without certification and
settlement, the class ran the risk that the insurance companies
would prevail against Fibreboard in their pending coverage cases,
leaving a much smaller fund available to the class. See id. at 827–
28. . . .
. . . The Court expressed “serious constitutional concerns
that come with any attempt to aggregate individual tort claims on a
limited fund rationale,” Ortiz, 527 U.S. at 845:
First, the certification of a mandatory class
followed by settlement of its action for money
damages obviously implicates the Seventh
Amendment jury trial rights of absent class members.
....
Second, and no less important, mandatory
class actions aggregating damages claims implicate
the due process “principle of general application in
Anglo–American jurisprudence that one is not bound
by a judgment in personam in a litigation in which he
is not designated as a party or to which he has not
been made a party by service of process,” it being
“our ‘deep-rooted historic tradition that everyone
should have his own day in court.’”
Id. at 845–46 (quoting Hansberry v. Lee, 311 U.S. 32, 40 (1940);
Martin v. Wilks, 490 U.S. 755, 762 (1989)) (citations omitted).
In light of these concerns, the Court counseled against
“adventurous application of Rule 23(b)(1)(B),” id. at 845, stressing
that a limited construction of the Rule, “stay[ing] close to the
historical model . . . avoids serious constitutional concerns raised
by the mandatory class resolution of individual legal claims . . . .”
Id. at 842; see also 5 Newberg § 17:15 at 339. The Court
described this “historical model” of a limited fund as “a ‘fund’ with a
definitely ascertained limit, all of which would be distributed to
satisfy all those with liquidated claims based on a common theory
of liability, by an equitable, pro rata distribution.” Ortiz, 527 U.S. at
841. From its discussion of the historical model, the Court
identified three “presumptively necessary” characteristics of a
traditional limited fund. Id. at 842. Those characteristics are:
13
(1) “the totals of the aggregated liquidated claims and the
fund available for satisfying them, set definitely at their maximums,
demonstrate the inadequacy of the fund to pay all the claims,” id. at
838;
(2) “the whole of the inadequate fund [is] to be devoted to
the overwhelming claims,” id. at 839; and
(3) “the claimants identified by a common theory of recovery
[are] treated equitably among themselves,” id.
In re Katrina Canal Breaches Litig., 628 F.3d 185, 192-93 (5th Cir. 2010).
The Supreme Court has stated that in an action to certify a mandatory
class under a Federal Rule 23(b)(1)(B) limited-fund theory, “the settling parties
must present not only their agreement, but evidence on which the district court
may ascertain the limit and the insufficiency of the fund.” Ortiz, 527 U.S. at 849
(emphasis added).
The district court found:
The fund in this case consists of three contributions, two
from insurance carriers and one from the defendants themselves.
Scottsdale Insurance Company is contributing $2,000,000 and
Torus Specialty Insurance Company is contributing $75,000.00.
While the record is minimal, the court is of the opinion that it
establishes that the contributions from the insurance carriers are at
a maximum that can be achieved within a reasonable amount of
time in light of the risks associated with litigation of the insurance
coverage issues. Torus has far less exposure to any of the claims
asserted in this litigation by virtue of its later arrival on the scene as
defendants’ insurer. The policy period for Torus commenced
January 23, 2012, some nine days after these suits were filed. It is
providing coverage for claims “first made against such Insured
during the Policy Period.” It excludes any coverage for DBSI
products. Without purporting to decide the issue, Torus appears to
have a substantial argument that it has no coverage on these suits
at all.
Scottsdale probably has coverage for at least some of the
claims but the amount of that coverage is subject to significant
litigation risk. Like Torus, Scottsdale’s policy specifically excludes
DBSI products. Scottsdale has aggressively reserved its right to
litigate every exclusion contained in its policy. In addition, its policy
contains the following language defining “wrongful act”: “Any such
‘wrongful act,’ together with any related ‘wrongful acts’ or series of
14
continuous, repeated or ‘interrelated wrongful acts,’ shall be
considered one ‘wrongful act’ for purposes of the application of our
Limits of Liability and the applicable ‘retention’.” Should a court
determine that the failures of due diligence amounted to a series of
interrelated acts, the single limit of $1,000,000 might well be all that
is available. Similar language was one of the reasons that the
Stott[11] court relied on in approving a limited fund settlement.
Settlement in this amount without the costs and delays of coverage
litigation appear to be in the best interests of the class. This
amount was arrived at following extensive mediation efforts which
involved the plaintiffs as well as the defendants and therefore
included people at the table with a definite interest in maximizing
the amount to be contributed by the carrier. The court is satisfied
that the insurance carrier contributions are effectively at their
maximum.
The settlement is also funded by a $925,000 contribution
from the defendants. In addition, the defendants are paying
$130,000 towards the costs of this litigation. Whether or not this is
the most that can be obtained from these defendants was probably
the most serious dispute between the parties during the hearing.
The court received testimony from Cyril Mandelbaum, a certified
forensic accountant in private practice, and Marc A. Lefebvre, a
certified financial analyst and instructor in finance at Creighton
University. Both are highly qualified. Ms. Mandelbaum engaged in
a detailed analysis of the defendants’ financial condition and history
over the past five plus years. She attempted to place a value on
the various entities and assets, assuming an orderly liquidation
within three to six months. Mr. Lefebvre was critical of Ms.
Mandelbaum’s approach, however, preferring that the operating
companies be valued on a going concern basis. Since he did not
attempt to analyze or value the businesses or assets, however,
there is no way to tell what, if any, difference such an approach
would make on valuations. In addition, these defendants have
been the subject of substantial negative publicity both before and
after these suits were filed. Clients and employees have left in
droves. Whether or to what extent there is any going concern value
appears questionable. In addition, the broker dealer, DFN
Partners, LLC, has closed its doors and has no going concern
value. In addition, any settlement at this point depends on what is
available now, not what might be available from operations over the
indefinite future. The court concludes that Ms. Mandelbaum’s
approach is reasonable under the circumstances.
Ms. Mandelbaum values the assets and entities at
$1,923,252.77. However, this number is probably optimistic, as
she notes. One sentence in her report probably sums it up best:
11
Stott v. Capital Fin. Servs., Inc., 277 F.R.D. 316, 329–30 (N.D. Tex. 2011)
15
“Mr. DeWaay is presently in survival mode.” The real estate which
he owns may or may not sell and may or may not be worth what it
is valued at. In particular, Mr. DeWaay disputes the value placed
on the vacation home at Lake Okoboji. Significant real estate
assets have already been surrendered to secured lenders because
sales efforts were unsuccessful. The court notes the likelihood that
the jewelry and collectibles will be claimed as owned by Mrs.
DeWaay if a bankruptcy is filed or liquidation is forced, rendering
them unavailable or at best available only after costs and delays of
litigation. The likelihood of recovery for the members of this class is
enhanced by the settlement, eliminating as it does the risks of
insurance coverage litigation and the uncertainties and costs
inherent in bankruptcy or forced liquidation. The court concludes
that this is indeed a limited fund case under the factors set out in
Ortiz.
(Footnotes omitted.)
Relying on the “presumptively necessary” characteristics delineated in
Ortiz, we conclude the district court here abused its discretion in determining the
settlement proposed involves a limited fund “set definitely at [its] maximum[].”
See 527 U.S. at 838.
As emphasized in Ortiz, the limited fund concept in
subsection (b)(1)(B) contemplates a fixed fund in the traditional
sense: a fixed resource, such as a mineral deposit, or a fixed
amount of money, such as a trust.[12] The traditional and most
common use of subsection (b)(1)(B) class actions is in “limited
fund” cases where claims are aggregated against a res or
preexisting fund insufficient to satisfy all claims.
Telectronics Pacing, 221 F.3d at 877 (emphasis added); see In re Simon II Litig.,
407 F.3d 125, 127-28 (2d Cir. 2005) (“We hold that the order certifying this
punitive damages class must be vacated because there is no evidence by which
12
This footnote In re Telectronics Pacing Sys., Inc., 221 F.3d 870, 877 n.5 (6th Cir.
2000), provides:
A limited fund exists when a fixed asset or piece of property exists
in which all class members have a preexisting interest. . . . Classic
illustrations include claimants to trust assets, a bank account, insurance
proceeds, company assets in a liquidation sale, . . . and others. 1
Newberg on Class Actions § 4.09, at 4–33 (cited in In re Asbestos Litig.,
134 F.3d [668,] 673 [5th Cir. (1998)] (Smith, J., dissenting)).
16
the district court could ascertain the limits of either the fund or the aggregate
value of punitive claims against it, such that the postulated fund could be deemed
inadequate to pay all legitimate claims, and thus plaintiffs have failed to satisfy
one of the presumptively necessary conditions for limited fund treatment under
Ortiz[.]”); see also In re Park Cent. Global Litig., No. 3:09-CV-765-M, 2014 WL
4261950, at *7 (N.D. Tex. Aug. 25, 2014) (“In Ortiz, the Supreme Court specified
that limited funds were only those that were pre-existing, such as trust assets or
a bank account, not the personal assets of defendants. Defendants’ assets are
not a limited fund within one of the historical models to which the Supreme Court
has specifically limited Rule 23(b)(1)(B)’s application. Were the Court to accept
plaintiff’s argument, conceivably any case where a defendant’s assets are not
sufficient to satisfy a judgment against the defendant would be a limited fund,
and on that basis, a case could be certified as a class action.” (citation omitted));
Macedonia Church v. Lancaster Hotel Ltd. P’ship, 270 F.R.D. 107, 119-20 (D.
Conn. 2010) (rejecting class certification because “Ortiz requires that evidence
be submitted so the court can determine the limit of the potential payout” and the
“evidence in the record at present is insufficient to support [such] a finding”);
Pettrey v. Enter. Title Agency, Inc., 241 F.R.D. 268, 282 (N.D. Ohio 2006) (“The
Supreme Court and Sixth Circuit have recently explained that Rule 23(b)(1)(B) is
limited to traditional ‘limited fund’ cases in which there is a ‘fixed fund in the
traditional sense: a fixed resource, such as a mineral deposit, or a fixed amount
of money, such as a trust.’” (citing Telectronics Pacing, 221 F.3d at 877, and
Ortiz, 527 U.S. at 841-42).
17
As recognized by the district court, the “real issue” is “the amount
available to pay claims.” The fund must be “set definitely at [its] maximum.”
Ortiz, 527 U.S. at 838.
In Ortiz, the Court wrote,
The “fund” in this case comprised both the general assets of
Fibreboard and the insurance assets provided by the two policies,
see 90 F.3d, at 982 (describing the fund as Fibreboard’s entire
equity and $2 billion in insurance assets under the Trilateral
Settlement Agreement). As to Fibreboard’s assets exclusive of the
contested insurance, the District Court and the Fifth Circuit
concluded that Fibreboard had a then-current sale value of $235
million that could be devoted to the limited fund. While that
estimate may have been conservative, at least the District Court
heard evidence and made an independent finding at some point in
the proceedings. The same, however, cannot be said for the value
of the disputed insurance.
Id. at 850-51. With respect to the insurance proceeds, the Court observed the
lower court had “simply accepted” the settlement figure. Id. at 851. “One may
take a settlement amount as good evidence of the maximum available if one can
assume that parties of equal knowledge and negotiating skill agreed upon the
figure through arms-length bargaining, unhindered by any considerations tugging
against the interests of the parties ostensibly represented in the negotiation.” Id.
at 852. The Supreme Court emphasized that it would be “essential that the fund
be shown to be limited independently of the agreement of the parties to the
action.” Id. at 864. The evidence presented by the settling parties establishes no
such ascertainable amount here.
The district court cited the Stott case as an example of a valid non-opt-out,
limited-fund settlement. We, too, believe that case shows why the instant case is
inappropriately designated a limited fund. In Stott, the court considered whether
18
the proposed settlement fund of $1,520,000, was “set definitely at its maximum”
as required by Ortiz. 277 F.R.D. at 329. The limited-fund settlement “consist[ed]
of $1,400,000 remaining in insurance coverage and a $120,000 contribution
directly from Capital Financial, which is the absolute maximum amount that
FINRA has determined Capital Financial can contribute while maintaining the
amount of assets necessary to maintain operations.” Id. (emphasis added). The
Stott court held, “The parties have submitted clear evidence as to the two
sources of the fund: the remaining insurance benefits, which have been
preserved through the Court’s temporarily enjoining arbitration claims against
Capital Financial, or $1.4 million, and the $120,000 approved for inclusion in the
settlement fund by FINRA.” Id. (emphasis added).
In Ortiz, the court concluded a mandatory class action was not appropriate
because “[i]n this case, the limit of the fund was determined by treating the
settlement agreement as dispositive.” 527 U.S. at 864. With respect to the
insurance proceeds here the district court wrote, “While the record is minimal, the
court is of the opinion that it establishes that the contributions from the insurance
carriers are at a maximum that can be achieved within a reasonable amount of
time in light of the risks associated with litigation of the insurance coverage
issues.” But that determination is—in essence—treating the settlement
agreement as dispositive. Although the proposed monies contributed by the
insurance companies may well be a very good negotiated settlement, it is a
settlement based upon the insurance companies’ perceived risk rather than a
true limited fund.
19
Moreover, the amount to be contributed by the defendants is not set
definitely at its maximum. The expert who testified, and upon whose valuation
the court relied, was charged with determining “how much liquid assets were
available or assets that could be turned into liquidity in a three to six month
period.”13 Ms. Mandelbaum testified she valued the assets of the defendants at
$1.923 million—not the $925,000 the defendants agreed to contribute.14
Intervenors’ expert testified Ms. Mandelbaum’s $1.923 million valuation was
conservative. Ms. Mandelbaum acknowledged her method “probably” yielded a
valuation “on the lower end.” Yet the district court found the valuation optimistic
and accepted the amount proposed by the parties’ settlement agreement.
We understand the district court was faced with some very difficult and
novel issues, and we do not fault it for attempting to use this novel certification
method. Because of the circumstances presented, however, we conclude the
district court abused its discretion in finally approving certification of this class
action for settlement purposes because there is no definitely ascertained limited
fund.
Because the court’s rulings to consolidate, certify class, and approve
settlement were granted for purposes of the proposed non-opt-out, limited-fund
13
We note that the record does not establish that a liquidation of the defendants’ assets
was required.
14
Ms. Mandelbaum testified that with respect to Don DeWaay’s “many investments,”
which included ninety-four limited partnerships, “I took his valuation on those.” The
motivation of the defendant to estimate his own investments at a “maximum” value
seems unlikely.
We note too that the intervenors elicited testimony at the hearing that DeWaay
recently had engaged in another settlement, which contradicts the court’s conclusion
that the agreed to amount of contribution was the “maximum” available for the settlement
class.
20
settlement, we make no determination whether class certification might otherwise
be granted. We conclude only that the record does not support class certification
for purposes of the proposed non-opt-out, limited-fund settlement.
In light of our ruling that a limited-fund class certification is not proper, we
find the limitations on discovery were relative to the non-opt-out, limited-fund
certification and settlement and will be at the discretion and perhaps
reconsideration of the district court on remand. In regard to the consolidation of
the two cases, we find no abuse of discretion but again the district court may
reconsider this issue upon remand if subsequently found to be inappropriate. In
respect to venue, we agree there is no authority granted under Iowa Rule of Civil
Procedure 1.808 or Iowa Code chapter 616 for an intervenor to challenge venue.
Accordingly, we deny the relief requested by the intervenors with respect to
discovery, consolidation, and venue.
Costs on appeal shall be divided equally between the parties.
AFFIRMED IN PART, REVERSED IN PART, AND REMANDED.