Donald J. Roberts IRA v. Phillip H. McNeill, Sr.

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
April 23, 2014 Session
DONALD J. ROBERTS IRA ET AL. V. PHILLIP H. MCNEILL, SR. ET AL.
Appeal from the Circuit Court for Shelby County
No. CT00495507 Jerry Stokes, Judge
No. W2013-01072-COA-R3-CV - Filed May 30, 2014
This is the second interlocutory appeal from a class certification. In Roberts v.
McNeill, No. W2010-01000-COA-R9-CV, 2011 WL 662648 (Tenn. Ct. App. Feb. 23, 2011)
(“Roberts I”), we vacated the trial court’s class certification and remanded for
reconsideration. Plaintiffs/Appellees are former owners of preferred stock in Equity Inns,
Inc., who filed suit against Defendants/Appellants, the board of directors, for breaches of the
fiduciary duties allegedly owed to the preferred shareholders during the negotiation and
approval of a merger. Upon remand from this Court, the trial court granted the plaintiffs’
motion for class certification with respect to “the proposed preferred class stockholders.”
Having previously enumerated three preferred classes of stockholders, the purported
certification creates an ambiguity as to the global class. The trial court’s certification of three
subclasses does not cure the ambiguity in the global class, and we cannot proceed to review
under Tennessee Rule of Civil Procedure 23 in the absence of a clearly defined class.
Accordingly, we vacate and remand for further consideration.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Circuit Court Vacated and
Remanded
J. S TEVEN S TAFFORD, J., delivered the opinion of the Court, in which A LAN E. H IGHERS, P.J.,
W.S., and D AVID R. F ARMER, J., joined.
John S. Golwen, Annie T. Christoff, Johathan E. Nelson, Memphis, Tennessee, and Edward
J. Fuhr (pro hac vice), Matthew P. Bosher (pro hac vice), Trevor S. Cox (pro hac vice),
Richmond, Virginia, for the appellants, Phillip H. McNeill, Sr., Howard A. Silver, Raymond
E. Schultz, Robert P. Bowen, and Joseph W. McLeary.
Alan G. Crone, Memphis, Tennessee, and Lee A. Weiss (pro hac vice), Garden City, New
York, for the appellees, Donald J. Roberts IRA, Dr. James M. Byers IRA Rollover, Patrick
Svoboda IRA and Svoboda Realty Inc. Defined Benefit Plan, Jack Fulton, and Eric Clarke,
as Trustee of Clarke Revocable Trust, On Behalf of Themselves and All Others Similarly
Situated.
MEMORANDUM OPINION 1
As set out in Roberts I, this case arose following a merger of Equity Inns, Inc.
(“Equity Inns”) into the Whitehall Street Global Real Estate Limited Partnership 2007
(“Whitehall”). Prior to the merger, Equity Inns functioned as a publicly held real estate
investment trust based in Memphis, Tennessee; through its operating partnership, Equity Inns
owned 133 hotel properties in 35 states. Equity Inns issued a total of 5,850,000 shares of two
classes of preferred stock, which were designated (1) 8.75% Series B Cumulative Preferred
Stock (the “Series B Stock”), and (2) 8.00% Series C Cumulative Preferred Stock (the
“Series C Stock”). The remaining stock was common stock. The two series of preferred
shares were issued three years apart, and conferred different rights on their holders, were
subject to different conditions, and were governed by their own contractual terms.
In 2007, Equity Inns’ Board of Directors, Phillip H. McNeill, Sr., Howard A. Silver,
Raymond E. Schultz, Robert P. Bowen, and Joseph W. McLeary (together “Directors,”
“Defendants,” or “Appellants”), who were all holders of common stock in Equity Inns,
unanimously approved a definitive merger agreement under which the privately held
Whitehall would acquire Equity Inns in a transaction valued at approximately $2.2 billion.
The merger agreement provided owners of Equity Inns common stock $23 per share in cash,
a premium of approximately 28% over the stock’s 90 day average closing share price or
approximately 19% over its closing share price on June 20, 2007. At this time, the Directors
owned over 1.2 million shares of Equity Inns’ common stock, which would net them
approximately $28,000,000.00 when the merger closed. Only Director McNeill owned any
of the preferred series stock; he owned 8,000 shares of Series C Stock, which was less than
1
Rule 10 of the Rules of the Court of Appeals of Tennessee provides:
This Court, with the concurrence of all judges participating in the case, may affirm, reverse
or modify the actions of the trial court by memorandum opinion when a formal opinion
would have no precedential value. When a case is decided by memorandum opinion it shall
be designated “MEMORANDUM OPINION,” shall not be published, and shall not be cited
or relied on for any reason in any unrelated case.
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2% of his total Equity Inns holdings. The merger agreement, which was allegedly approved
without separate inquiry into the effect on the preferred stockholders’ shares, provided that
the preferred stockholders would receive stock in Whitehall, which stock would have
identical dividend and other relative rights, preferences, limitations, and restrictions as their
existing shares. The merger closed on October 25, 2007. During the four-month period
between the merger and the announcement of the closing of the merger, the value of the
Series B Stock allegedly declined 32%; during the same time period, the Series C Stock
allegedly declined 33%.
On September 28, 2007, the named plaintiffs, Donald J. Roberts IRA, Dr. James M.
Byers IRA Rollover, Patrick Svoboda IRA, Svoboda Realty Inc. Defined Benefit Plan, Jack
Fulton, and Eric Clarke, as Trustee of Clarke Revocable Trust (together, “Plaintiffs,” or
“Appellees”), who were all preferred stock holders, filed this class action as amended against
the Directors.2 Appellees’ amended complaint asserted that the Directors owed the holders
of Equity Inns preferred stock the “utmost fiduciary duties of due care, loyalty, and good
faith.” The Directors allegedly violated these fiduciary duties when they approved a merger
that greatly benefitted the common stockholders, including the Directors, without properly
evaluating the impact of the merger on the preferred shareholders. According to Plaintiffs,
the announcement of the merger caused a foreseeable diminution in the value of their
preferred stock because Whitehall was not subject to the reporting requirements of the
Securities Exchange Act of 1934 and investors were unable to accurately value Whitehall’s
preferred stock. Plaintiffs specifically alleged that the Directors’ breaches caused 32% and
33% decreases in the value of Equity Inns’ Series B and Series C preferred stock,
respectively, prior to the closing of the merger. Plaintiffs concluded that, by approving the
merger and electing not to redeem the preferred stock for cash, the Directors impermissibly
increased the payout for common stock to the detriment of the preferred shareholders.
The Directors responded, on December 4, 2007, with a motion to dismiss the amended
complaint under Rule 12.02(6) of the Tennessee Rules of Civil Procedure for failure to state
a claim upon which relief could be granted. The Directors argued, in part, that Plaintiffs had
based their complaint on general fiduciary duty principles that do not apply when
determining the rights of preferred shareholders in Tennessee. The Directors maintained
that the rights of preferred shareholders are governed by contract and, thus, Plaintiffs failed
to state a claim because they did not allege a breach of contract. In the alternative, the
2
The original complaint did not name Jack Fulton as a plaintiff. After a failed attempt to certify
the class, the trial court granted a motion to amend the complaint to add Mr. Fulton over the objection of
Directors. Following the addition of Mr. Fulton as a plaintiff, the class was certified, which certification led
to the appeal in Roberts I. As discussed, infra, Eric Clarke was not added as a Plaintiff until after the case
was remanded in Roberts I. Mr. Clarke was added by amended pleading filed on April 30, 2012.
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Directors asserted that both the business judgment rule and an exculpatory provision in the
Company’s corporate charter precluded recovery. The trial court denied the Directors’
motion to dismiss, but granted permission to seek interlocutory appeal pursuant to Rule 9 of
the Tennessee Rules of Appellate Procedure, which appeal both this Court and the Tennessee
Supreme Court denied. Thereafter, the Directors filed an answer asserting various affirmative
and other defenses.
Plaintiffs moved to certify a class of “[a]ll holders of Equity Inns preferred stock as
of June 21, 2007” and to appoint Donald J. Roberts IRA, Dr. James M. Byers IRA Rollover,
and Jack Fulton as representatives of the class.3 Plaintiffs’ motion and initial supporting
memorandum argued that the class representatives satisfied all requirements of Rule 23.01
and 23.02(3) of the Tennessee Rules of Civil Procedure. The Directors disagreed and
submitted a detailed response arguing, inter alia, that the proposed representatives satisfied
neither the typicality, nor the adequacy of representation requirements of Rule 23. Plaintiffs
submitted a memorandum in reply, seeking to counter the arguments of the Directors and to
further support their motion. On March 2, 2010, the trial court conducted a fairly lengthy
hearing during which the parties asserted their positions. Rather than announce a decision at
the conclusion of the hearing, the court took the matter under advisement.
On April 26, 2010, the trial court granted Plaintiffs’ motion for class certification with
respect to “the named class representatives” in an order that set forth relevant facts, offered
the court’s legal conclusions, and incorporated by reference the transcript of the parties’
hearing. The court expressly acknowledged that the burden to demonstrate compliance with
Rule 23.01’s requirements—numerosity, commonality, typicality, and adequacy of
representation—rested with Plaintiffs. Upon examination of the issues, the court concluded
that Plaintiffs carried their burden. The court also concluded that Plaintiffs demonstrated a
basis for certification under Rule 23.02(3). The Directors filed an application for
interlocutory appeal pursuant to Rule 9 of the Tennessee Rules of Appellate Procedure and
Tennessee Code Annotated section 27-1-125, which this Court granted.
On February 23, 2011, in Roberts I, this Court vacated the class certification and
remanded the case back to the trial court for further consideration. Our decision was based,
3
As noted in Roberts I, the trial court’s order cited Donald J. Roberts IRA, Patrick Svoboda
IRA, and Svoboda Realty Inc. Defined Benefit Plan as the proposed class representatives for the Series B
preferred shareholders and Jack Fulton as the proposed class representative for Series B and C preferred
shareholders. However, Plaintiffs’ motion for class certification and accompanying memoranda sought
appointment of Dr. James M. Byers IRA Rollover as a class representative, not Patrick Svoboda IRA or
Svoboda Realty Inc. Defined Benefit Plan.
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inter alia, upon the following:
We vacate and remand for several reasons. First, the record does
not demonstrate that the claims or defenses of the representative
parties are typical of the claims or defenses of the class. This is
enough in our view to vacate the decision of the trial court.
Second, remand prevents this Court from authoring a potentially
advisory opinion on whether at least one named plaintiff must
possess standing for each claim in a class action, which is a
matter of first impression before Tennessee courts. While Mr.
Fulton’s status as a class representative stands in jeopardy, it is
possible that the trial court will determine upon review of the
relevant evidence that he satisfies both the typicality and
adequacy of representation requirements. Third, it is not entirely
clear that the trial court would have reached the same decision
on certification if it had concluded upon examination of the
necessary evidence that Mr. Fulton was an inadequate
representative. The court’s order suggests it considered only Mr.
Fulton a proposed class representative for Series C preferred
shareholders. Finally, remand gives the trial court an opportunity
to correct an apparent error in its decision regarding which
named plaintiffs sought to serve as class representatives and to
clarify which class representatives met Rule 23’ s requirements.
We accordingly vacate the trial court’s decision and remand for
further consideration.
Roberts I, 2011 WL 662648, at *9 (footnote omitted). In reaching our decision, we noted,
in dicta, that the existence of a potential unique defense against a class representative would
defeat typicality in Tennessee. Id. at *8 (“[T]he court may have premised its rejection of
Directors’ position on an erroneous conclusion that a unique defense likely to become a
major focus of the litigation does not defeat typicality in Tennessee.”). Specifically, we
noted that the affirmative defenses of acquiescence, ratification, and waiver, which were
raised against Mr. Fulton based upon his vote in favor of the merger, “are likely to become
a major focus of the litigation regardless of whether they are ultimately meritorious.” Id.
Finally, we counseled the lower court that it “must actively guard against the development
of conflicts” and reject class certification if a conflict exists. Id. at *10.
Following remand, the parties attempted to mediate. However, when that was
unsuccessful, the Plaintiffs were granted leave to amend their complaint “to address the
potential issues raised by the Court of Appeals.” The second amended complaint, filed on
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April 30, 2012, made one change. It added Eric Clarke, as Trustee of Clarke Revocable
Trust, as a plaintiff. Clarke Revocable Trust held Series C Stock at the time of the merger
announcement. However, discovery revealed that the Clarke Trust had purchased thousands
of shares of both Series B Stock and Series C Stock following the announcement of the
merger. After adding Clarke, Plaintiffs filed a renewed motion for class certification on June
6, 2012. Because the Clarke Trust held no common stock, Plaintiffs argued that the addition
of the Clarke Trust addressed this Court’s concern, as set out in Roberts I, because the Clarke
Trust could allegedly serve as a representative of Series C shareholders, without being
subject to the potential acquiescence defense. Because the potential acquiescence defense
was allegedly factually unsupported due to the lack of any meaningful disclosure concerning
the preferred shares in the proxy statement for the merger, and the defense allegedly did not
raise a conflict between preferred shareholders who did not own common stock and those
who did, Plaintiffs once again sought certification of a class of all preferred stockholders on
the date of the merger announcement. Although the Plaintiffs opined that the acquiescence
defense was completely without merit, out of an abundance of caution, they proposed, in
their renewed motion for class certification, two subclasses. First, Plaintiffs proposed the
“Preferred/Common Stock SubClass.” The Preferred/Common Stock SubClass would
allegedly address concerns regarding the acquiescence defense because any legal issues
concerning that defense would be common to any class member who voted in favor of the
merger, and the litigation of those common questions would not raise any conflicts with the
other preferred shareholders. Roberts I, 2011 WL 662648, at *8 (“[I]t is possible that the
defenses raised with respect to Mr. Fulton are not unique because a substantial part of the
class is similarly situated.”). Plaintiffs proposed Mr. Fulton as the representative of the Class
and the Preferred/Common Stock SubClass. In addition, Plaintiffs proposed a second
subclass, the “Preferred Stock SubClass,” which would include only those who owned
preferred stock, and did not own common stock, on or after June 21, 2007. Plaintiffs
proposed the appointment of the Roberts IRA, the Byers IRA, and the Clarke Revocable
Trust as representatives of the Preferred Stock SubClass.
The Directors opposed the renewed motion for class certification, arguing, inter alia,
that the motion still sought certification of the same single class of all holders of Equity Inns
preferred stock—both Series B and Series C shareholders, including those who also held
common shares. The trial court held a hearing on the motion for class certification.
Despite some confusion at the hearing concerning the parameters of the Plaintiffs’
proposed class and subclasses, in its April 26, 2013 order, the trial court attempted to clarify
Plaintiffs’ position on class certification. Specifically, the court stated that Plaintiffs were
seeking class certification of
all preferred stockholders (global class); and/or subclass
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certification of all Series B Preferred shareholders who owned
neither Series C Preferred stock nor common stock as of June
21, 2007; and/or subclass certification of all Series C
shareholders who owned neither Series B preferred nor common
stock as of June 21, 2007; and/or subclass certification of all
Series B & C preferred shareholders who also owned common
stock as of June 21, 2007.
Plaintiffs also seek class certification of all preferred
stockholders, as of June 21, 2007, who did not own common
stock on or after June 21, 2007. Also, Plaintiffs seek class
certification of all preferred stockholders who owned common
stock on or after June 21, 2007.
Plaintiffs also request this Court certify this lawsuit as a
class action on behalf of a class consisting of all holders of the
Company’s preferred stock as of June 21, 2007, and certify the
preferred stock subclass and the preferred/common stock
subclass. Plaintiffs request that Roberts IRA, Byers IRA, and
Eric Clarke be appointed as representatives of the global class
of preferred shareholders; and that Jack Fulton be appointed as
representative of the global class of the preferred/common stock
subclass. Excluded from the class and subclasses are the named
Defendants and any person, firm, trust, corporation or other
entity related to, or affiliated with, any Defendant.
In the foregoing statements, the trial court outlines three different classes: (1) “all preferred
stockholders (global class)”; (2) “all preferred stockholders, as of June 21, 2007, who did not
own common stock on or after June 21, 2007”; (3) “all preferred stockholders who owned
common stock on or after June 21, 2007.” The trial court also identifies three subclasses: (a)
“all Series B preferred stockholders who owned neither Series C preferred stock nor common
stock as of June 21, 2007”; (b) “all Series C shareholders who owned neither Series B
preferred nor common stock as of June 21, 2007”; and (c) “all Series B & C preferred
shareholders who owned common stock as of June 21, 2007.”
After outlining and discussing the requirements of Tennessee Rule of Civil Procedure
23, see discussion infra, the trial court ruled as follows:
[T]he Court hereby certifies the proposed preferred class
stockholders under Rule 23. As part of that certification, the
Court creates and certifies subclasses under rule 23.03(4) and
appoints Byers and Roberts as class representatives of all Series
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B stockholders who owned such stock on June 21, 2007. The
Court appoints Clarke as class representative of all Series C
stockholders who owned such stock on June 21, 2007. In
addition, this Court appoints Fulton as class representative of all
stockholders who owned Series B and C stock as well as
common stock on June 21, 2007. All other requests for class
certification is [sic] denied.
Tennessee Code Annotated Section 27-1-125 provides:
The court of appeals shall hear appeals from orders of trial
courts granting or denying class certification under Rule 23 of
the Tennessee Rules of Civil Procedure, if a notice is filed
within ten (10) days after entry of the order. All proceedings in
the trial court shall be automatically stayed pending the appeal
of the class certification ruling.
Although not required, on May 6, 2013, the Directors filed a motion in this Court for
permission to appeal. A significant portion of that motion claimed that the trial court’s order
was incomplete and inconsistent. On May 9, 2013, this Court issued an order, noting that
Tennessee Code Section 27-1-125 did not require the Directors to file an application for
appeal, and ordering that the matter would proceed as an appeal as of right.
On June 12, 2013, while the appeal was pending, Plaintiffs filed a motion to remand
the case pursuant to Tennessee Code Annotated Section 27-3-128 on the basis of a “defect
in the record.”4 In their motion to remand, Plaintiffs alleged that the order appealed suffers
from a number of “defects,” including that: (1) “omissions and ambiguities” plague the order;
(2) the trial court failed to “state the definition of the Class that it certified”; (3) the “different
definitions” of the class in the order create ambiguity; (4) the trial court made potentially
“contradictory statements” and “contradictory findings” regarding Plaintiffs’ typicality and
adequacy; and (5) the lower court “could [have] ma[d]e clearer findings as to the Class’s
satisfaction of the requirements of Tennessee Rule of Civil Procedure 23.01(3) and (4).”
4
Tennessee Code Annotated Section 27-3-128 provides:
The court shall also, in all cases, where, in its opinion, complete justice
cannot be had by reason of some defect in the record, want of proper
parties, or oversight without culpable negligence, remand the cause to the
court below for further proceedings, with proper directions to effectuate the
objects of the order, and upon such terms as may be deemed right.
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This Court denied the remand motion. Accordingly, Plaintiffs contend that our
“consideration of this appeal should focus on Rule 23 elements, which the Class readily
satisfies, and the resolution of any perceived ambiguities in the Class Certification Order.”
In the first instance, the mere fact that we declined to remand the case under
Tennessee Code Annotated Section 27-3-128 at the time the motion was made does not, ipso
facto, require us to limit our review to Rule 23 elements, or prevent this Court from resolving
any ambiguities we may find in the trial court’s order. Rather, our review will extend as far,
and in whatever direction, as may be necessary to adjudicate the issues before us. Those
issues, as stated in the Directors’ brief, are as follows:
1. Did the lower court improperly certify a global class of
shareholders, given that the order failed to provide a coherent
basis for determining the membership of the certified class and
contained illogical conclusions, as even Plaintiffs concede,
regarding whether Rule 23’ s requirements had been met?
2. Did the lower court incorrectly conclude that the global class
of shareholders satisfied Rule 23’s commonality and
predominance requirements, given that the shareholder groups
comprising the class each had different, separately defined legal
rights that prevent the resolution of their claims in one stroke?
3. Did the lower court incorrectly certify three subclasses within
the global class, given that the court: excluded significant
shareholder groups within the global class from membership in
the subclasses, thereby preventing satisfaction of Rule 23’s
superiority and predominance requirements; created a subclass
with intra-class conflicts; failed to find that each subclass
satisfied the numerosity requirement; and neglected to appoint
separate counsel to represent the conflicting interests of each
subclass?
4. Did the lower court incorrectly certify the global class and
three subclasses, given that each of the plaintiffs the court
appointed to represent them are subject to unique defenses that
destroy their typicality and/or are incapable of adequately
representing absent class members?
Before turning to the issues, we restate the standard of review applicable to class
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certification questions. As stated in Roberts I:
A trial court’s decision on class certification is entitled to
deference. See Meighan v. U.S. Sprint Commc’ns Co., 924
S.W.2d 632, 637 (Tenn. 1996). The grant or denial of class
certification is discretionary, and the court’s decision will stand
absent abuse of that discretion. Id. (citing Sterling v. Velsicol
Chem. Corp., 855 F.2d 1188, 1197 (6th Cir.1988)). The abuse
of discretion standard typically applies when a choice exists in
the trial court among several acceptable alternatives. Lee Med.,
Inc. v. Beecher, 312 S.W.3d 515, 524 (Tenn. 2010) (citing
Overstreet v. Shoney’s, Inc., 4 S.W.3d 694, 708 (Tenn. Ct. App.
1999)). Because the trial court is vested with the responsibility
to make that choice, a reviewing court cannot second-guess the
lower court’s judgment or merely substitute an alternative it
finds preferable. Id. at 524 (citations omitted). A reviewing
court must instead affirm the discretionary decision so long as
reasonable legal minds can disagree about its correctness.
Eldridge v. Eldridge, 42 S.W.3d 82, 85 (Tenn. 2001) (citing
State v. Scott, 33 S.W.3d 746, 752 (Tenn. 2000); State v.
Gilliland, 22 S.W.3d 266, 273 (Tenn. 2000)). The same
principles apply here; a trial court’s certification decision must
stand if reasonable judicial minds can differ about the soundness
of its conclusion. Freeman v. Blue Ridge Paper Prod., Inc.,
229 S.W.3d 694, 703 (Tenn. Ct. App. 2007) (citing White v.
Vanderbilt Univ., 21 S.W.3d 215, 223 (Tenn. Ct. App. 1999)).
“The abuse of discretion standard of review does not, however,
immunize a lower court’s decision from any meaningful
appellate scrutiny.” Beecher, 312 S.W.3d at 524 (citing Boyd v.
Comdata Network, Inc., 88 S.W.3d 203, 211 (Tenn. Ct. App.
2002)).
A trial court’s discretion is not unbounded. Cf. Gulf Oil
Co. v. Bernard, 452 U.S. 89, 100, 101 S. Ct. 2193, 68 L. Ed. 2d
693 (1981). A trial court must consider controlling legal
principles and relevant facts when making a discretionary
decision. Beecher, 312 S.W.3d at 524 (citing Konvalinka v.
Chattanooga-Hamilton Cnty. Hosp. Auth., 249 S.W.3d 346,
358 (Tenn. 2008); Ballard v. Herzke, 924 S.W.2d 652, 661
(Tenn. 1996)). A trial court abuses its discretion if it (1) applies
an incorrect legal standard, (2) reaches an illogical or
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unreasonable decision, or (3) bases its decision on a clearly
erroneous evaluation of the evidence. Elliott v. Cobb, 320
S.W.3d 246, 249–50 (Tenn. 2010) (citation omitted); see also
Walker v. Sunrise Pontiac-GMC Truck, Inc., 249 S.W.3d 301,
308 (Tenn.2008) (citation omitted). Additionally, a trial court
abuses its discretion if it “strays beyond the applicable legal
standards or when it fails to properly consider the factors
customarily used to guide the particular discretionary decision.”
Beecher, 312 S.W.3d at 524 (citing State v. Lewis, 235 S.W.3d
136, 141 (Tenn. 2007)).
Appellate courts review a trial court’s discretionary
decision to determine “(1) whether the factual basis for the
decision is properly supported by evidence in the record, (2)
whether the lower court properly identified and applied the most
appropriate legal principles applicable to the decision, and (3)
whether the lower court’s decision was within the range of
acceptable alternative dispositions.” Id. at 524–25 (citing Flautt
& Mann v. Council of Memphis, 285 S.W.3d 856, 872–73
(Tenn. Ct. App. 2008)). We review the trial court’s legal
conclusions de novo with no presumption of correctness. Id. at
525 (citing Johnson v. Nissan N. Am., Inc., 146 S.W.3d 600,
604 (Tenn. Ct. App. 2004); Boyd v. Comdata Network, Inc., 88
S.W.3d 203, 212 (Tenn. Ct. App. 2002)). We review the trial
court’s factual conclusions under the preponderance of the
evidence standard. Id. (citations omitted).
Roberts I, 2011 WL 662648, at *3–4.
Furthermore, as set out in Roberts I:
Rule 23 of the Tennessee Rules of Civil Procedure
governs class action certification. Walker, 249 S.W.3d at 307
(citing Hamilton v. Gibson Cnty. Util. Dist., 845 S.W.2d 218,
225 (Tenn. Ct. App. 1992)). The burden is on the proponent of
class certification to demonstrate that a class action is
appropriate. Id. This burden is two-fold. The proponent must
first satisfy the numerosity, commonality, typicality, and
adequacy of representation requirements of Rule 23.01. Id. at
307–08 (citing Tenn. R. Civ. P. 23.01). Rule 23.01 permits class
certification if
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(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 interest of the class.
Tenn. R. Civ. P. 23.01. The proponent of class certification must
demonstrate compliance with each of Rule 23.01’s
requirements. Walker, 249 S.W.3d at 307–08.
The proponent must next establish the class action is
maintainable under Rule 23.02. Id at 308. In contrast to Rule
23.01, the proponent of class certification must establish only
one Rule 23.02 basis for the maintenance of a class action. Id.
Rule 23.02 provides three bases for class action certification:
(1) the prosecution of separate actions by or
against individual members of the class would
create a risk of
(a) inconsistent or varying adjudications with
respect to individual members of the class which
would establish incompatible standards of
conduct for the party opposing the class, or
(b) adjudications with respect to individual
members of the class which would as a practical
matter be dispositive of the interests of the other
members not parties to the adjudications or would
substantially impair or impede their ability to
protect their interest; or
(2) the party opposing the class has acted or
refused to act on grounds generally applicable to
the class, thereby making appropriate final
injunctive relief or corresponding declaratory
relief with respect to the class as a whole; or
(3) the court finds that the question of law or fact
common to the members of the class predominate
over any questions affecting only individual
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members, and that a class action is superior to
other available methods for the fair and efficient
adjudication of the controversy. The matters
pertinent to the findings include: (a) the interest of
members of the class in individually controlling
the prosecution or defense of separate actions; (b)
the extent and nature of any litigation concerning
the controversy already commenced by or against
members of the class; (c) the desirability or
undesirability of concentrating the litigation of the
claims in the particular forum; (d) the difficulties
likely to be encountered in the management of a
class action.
Tenn. R. Civ. P. 23.02. Class certification is permissible only if
the proponent demonstrates compliance with both Rule 23.01
and Rule 23.02. Freeman, 229 S.W.3d at 702 (citing Hamilton,
845 S.W.2d at 225).
Roberts I, 2011 WL 662648, at *4–5.
Ambiguity in the Order
It is well settled that a trial court speaks through its orders. Palmer v. Palmer, 562
S.W.2d 833, 837 (Tenn. Ct. App. 1997). Whether an order is ambiguous presents a legal
issue. See Konvalinka v. Chattanooga-Hamilton County Hosp. Auth., 249 S.W.3d 346, 356
(Tenn. 2008). Our review of a legal issue is conducted “under a pure de novo standard of
review, according no deference to the conclusions of law made by the lower courts.” Moody
v. Hutchison, 159 S.W.3d 15, 26 (Tenn. Ct. App. May 25, 2004) (quoting Southern
Constructors, Inc. v. Loudon County Bd. Of Educ., 58 S.W.3d 706, 710 (Tenn. 2001)).
As noted above, in its order, the trial court first identified three separate classes of
preferred stockholders: (1) “all preferred stockholders (global class)”; (2) “all preferred
stockholders, as of June 21, 2007, who did not own common stock on or after June 21,
2007"; (3) “all preferred stockholders who owned common stock on or after June 21, 2007.”
The court then goes on to certify “the proposed preferred class stockholders under Rule 23.”
Unfortunately, we cannot determine to which (if any) of the three enumerated classes the
“proposed preferred class stockholders” language refers. This creates an ambiguity that is
fatal to meaningful review.
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We have reviewed the record, but have been unable to glean any information that
would illuminate the trial court’s order concerning which class it is certifying. Elsewhere in
its order, the court states that “[c]ertifying this proposed global class as constituted would
invite intra-class conflict,” and that “the typicality requirement has not been satisfied as to
the global class.” Yet, despite these statements, the court appears to certify some global
class, i.e., the “proposed preferred class stockholders.”
The failure to define the purported class constitutes error, which requires this Court
to vacate the trial court’s judgment and remand for further proceedings. Cf. Fed. R. Civ. P.
23(c)(1)(B) (“An order that certifies a class action must define the class.”).5 Indeed, “an
essential prerequisite to a class action is the existence of a class whose bounds are precisely
drawn.” Considine v. Park Nat. Bank, 64 F.R.D. 646, 647–48 (E.D. Tenn. 1974). “Clearly
delineating the contours of the class . . . serves several important purposes, such as providing
the parties with clarity and assisting class members in understanding their rights.” Marcus
v. BMW of N. Am., LLC, 687 F.3d 583, 591–92 (3d Cir. 2012). Accordingly, courts have
not hesitated to overturn orders that attempt to certify vaguely-defined classes. For example,
in Marcus, the United States Court of Appeals for the Third Circuit vacated a trial court’s
certification order that stated it was certifying plaintiff’s proposed class, but did not “set out
its own definition,” resulting in a class whose parameters were “far from clear.” Id. at 592.
Likewise, in Gov’t Em ployees Ins. Co. v. Bloodworth, No.
M2003-02986-COA-R10-CV, 2007 WL 1966022 (Tenn. Ct. App. June 29, 2007), this Court
held that a “trial court [is] required to make a rigorous and thorough analysis of [the Rule 23
requirements] and to provide a sufficient explanation of that analysis to provide an
opportunity for meaningful appellate review.” Id. at *51. Specifically, we noted:
Based on the trial court’s order and the record before us, we
cannot determine whether the trial court applied the correct legal
principles to the issues raised herein. . . . Based on the record
before us, we cannot conclude that the class proponent has met
her burden of establishing that the requirements of Tenn. R. Civ.
5
As noted in Roberts I, “[a]lthough there are few reported opinions from Tennessee state courts
addressing class certification under Rule 23 of the Tennessee Rules of Civil Procedure, federal cases
addressing class certification under the Federal Rules of Civil Procedure are persuasive authority. Meighan
v. U.S. Sprint Commc’ns Co., 924 S.W.2d 632, 637 n.2 (Tenn. 1996) (citing Bayberry Assocs. v. Jones, 783
S.W.2d 553, 557 (Tenn.1990)).” Roberts I, 2011 WL 662648, n.5. In fact, the Tennessee class action statute
is modeled after the federal rule. “Because Tennessee Rule of Civil Procedure 23 and Federal Rule of Civil
Procedure 23 use identical language, federal authority is persuasive.” Freeman v. Blue Ridge Paper Prods.,
Inc., 229 S.W.3d 694, 702 n.3 (Tenn. 2007).
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P. 23.02(3) have been met. Neither can we conclude that the
trial court has conducted the type of analysis necessary to insure
compliance with those requirements. Consequently, we must
vacate the trial court’s order certifying this action as a class
action.
Id. The same is true here. Because we cannot determine the parameters of the “proposed
preferred class,” we cannot conduct a meaningful review so as to reach the “conclu[sion] that
the trial court conducted the type of analysis necessary to insure compliance with these [Rule
23] requirements.” Id. For us to proceed with Rule 23 analysis in the absence of a clearly
defined class would border on an advisory opinion. “In an interlocutory appeal, as well as
in an appeal as of right, the appellate court considers only questions that were actually
adjudicated by the trial court.” Shaffer v. Memphis Airport Authority, Service Management
Systems, Inc., No. W2012-00237-COA-R9-CV, 2013 WL 209309, at *4 (Tenn. Ct. App.
Jan.18, 2013) (citing In re Estate of Boykin, 295 S.W.3d 632, 636 (Tenn. Ct. App. 2008)
(“At the appellate level, we are limited in authority to the adjudication of issues that are
presented and decided in the trial courts.”). “To do otherwise would render the interlocutory
appeal a request for an advisory opinion.” Shaffer, 2013 WL 209309, at *4. Accordingly,
we must vacate the order of the trial court and remand for further proceedings. However, we
note that after three attempts at class certification, and two interlocutory appeals, this case
has become convoluted to the point that the trial court may need to wipe the slate clean and
start from the beginning on remand. At any rate, after reviewing the record, and from
statements made during oral argument, it appears that the framework for class certification,
i.e. Tennessee Rule of Civil Procedure 23, may have been neglected in favor of attempts to
create subclasses to negate shortcomings in the global class. This is not proper procedure.
As discussed in Roberts I, the creation of subclasses will not cure Rule 23 deficiencies in the
larger class. Nonetheless, because we cannot determine what class the trial court is certifying,
we cannot proceed with further review.
For the foregoing reasons, we vacate the trial court’s order on class certification, and
remand for further proceedings as may be necessary and are consistent with this opinion.
Costs of the appeal are assessed against the Appellees, Donald J. Roberts IRA, Dr. James M.
Byers IRA Rollover, Patrick Svoboda IRA, Svoboda Realty Inc. Defined Benefit Plan, Jack
Fulton, and Eric Clarke, for which execution may issue if necessary.
_________________________________
J. STEVEN STAFFORD, JUDGE
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