Opinion
IP 02-C-0422 M/S
January 27, 2003
ORDER ON PLAINTIFFS' MOTION FOR CLASS CERTIFICATION
This matter is now before the Court on plaintiffs', Dennis M. McDaniel and Vicki McDaniel, Individually and as Natural Guardians of Jeremiah A. McDaniel, James K. Bush and Karen Clark Bush, Individually and as Natural Guardians of Jacob L. Bush, Linda Ann Perry and Pedcor Investments, LLC ("Plaintiffs"), motion for class certification. Plaintiffs have moved for class certification pursuant to Rules 23(b)(1), 23(b)(2), and 23(b)(3) of the Federal Rules of Civil Procedure. The issues have been fully briefed by the parties. For the reasons discussed herein, the Court GRANTS Plaintiffs' motion.
I. BACKGROUND
Although generally a court will determine the suitability of class certification on the facts alleged in the complaint and avoid an inquiry into the merits, the Seventh Circuit has stated: "[A] judge should make whatever factual and legal inquiries are necessary under Rule 23." Szabo v. Bridgeport Mach., Inc., 249 F.3d 672, 676 (7th Cir.) cert. denied 122 S.Ct. 348 (2001). With that principle in mind, the Court will draw upon the facts alleged in Plaintiffs' complaint ("Complaint"), Plaintiffs' Memorandum in Support of Motion for Class Certification ("Plaintiffs' Brief"), American Heartland Health Administrators, Inc.'s ("AHHA") Response in Opposition ("Response Brief"), Plaintiffs' Reply in Support of Motion for Class Certification ("Reply") and, potentially, other relevant materials submitted by the parties.
Plaintiffs have brought this action against North American Indemnity, N.V. ("NAI"), John Fowler Anderson, and Euan D. McNicoll, (collectively the "NAI Defendants"); Marsh Investment Corp.; AHHA; Managed Healthcare, Inc. ("MHI") and Edwin E. Horn (collectively, the "MHI Defendants"); and Jack H.M. Ferguson ("Ferguson") (collectively, "Defendants") alleging breaches of fiduciary duties and other violations of the Employee Retirement Income Security Act of 1974 ("ERISA"), sections 409 and 502.
Plaintiffs' Brief at 1-2. Plaintiffs and the class members are participants and/or beneficiaries of welfare benefit plans (the "Plans") governed by ERISA. Complaint ¶ 10. The Plans are or have been administered by Defendants. Id. Defendants are an insurer and third party administrators of the Plans, and their principles. Plaintiff's Brief at 1.
Plaintiffs allege that AHHA has entered into administrative contracts that are materially identical among Plaintiffs and the class members. Complaint ¶ 11. According to that form contract, AHHA was to adjudicate the liability of the Plans for any claim for benefits. Id. Plaintiffs allege that on the recommendation of AHHA, Plaintiffs' and the class members' employers entered into reinsurance agreements, which Plaintiffs claim are more accurately first-dollar insurance agreements, with NAI for coverage of welfare benefits claims under the Plans. Id. ¶ 12. The reinsurance agreements allegedly were form documents, each plan sponsor entering into identical or substantially similar agreements. Plaintiffs' Brief at 9. Plaintiffs also allege that NAI was seriously undercapitalized, and that AHHA was aware of this when it recommended NAI to the plan sponsors. Reply at 5-6. Plaintiffs allege that since August, 2001, NAI has refused to pay welfare benefit claims that have already been adjudicated as valid by AHHA and/or MHI for reasons that violate ERISA. Plaintiffs' Brief at 10.
Plaintiffs allege that once NAI realized it would lose money by paying valid benefit claims to Plaintiffs and the class members, NAI attempted to coerce AHHA into stepping down as third party administrator so that NAI could substitute a third party administrator of its own choosing. Id. at 11.
Plaintiffs also claim that NAI attempted to enlist AHHA in its illegitimate plan to administer claims so that they would not exceed premiums. Id. NAI allegedly used the help of certain AHHA employees to terminate AHHA as third party administrator of the Plans, and retain MHI as the new third party administrator. Id. at 11-12. Plaintiffs allege that since MHI was put in place as third party administrator, it has improperly managed Plaintiffs' and the class members' claims for benefits. Id. at 12. In addition, Plaintiffs allege that NAI has taken steps to impede collection of any judgment against it, including moving its assets to "offshore" bank accounts. Id.
According to Plaintiffs, at least three other lawsuits are pending that arise out of the same transactions that are at issue in this case. Id. at 2. The plaintiffs in each of the cases apparently have requested differing forms of relief, and none of them seek injunctive relief or removal of Defendants as fiduciaries. Id. at 23. The District Court for the Southern District of Texas has certified a plaintiff class of ERISA plans who have purchased reinsurance from NAI, in a case against NAI only (the "Texas Litigation"). Response Brief at 2-3 and Ex. A.
Plaintiffs, on behalf of the putative class, bring their action pursuant to ERISA section 502(a)(1) to recover benefits due; ERISA sections 502(a)(2) and 409 for Defendants' breaches of their fiduciary duties, requesting damages, disgorgement of profits, injunctive relief from future breaches and/or removal of Defendants as plan fiduciaries, and other equitable relief; and ERISA section 502(a)(3) for violations of ERISA's substantive provisions, requesting a constructive trust, accounting of Defendants' assets, and an order freezing those assets.
Plaintiffs seek certification of two subclasses. First, "[a]ll participants and beneficiaries in ERISA welfare benefit plans, at any time administered by AHHA and insured, reinsured or administered by NAI, having outstanding welfare benefit claims adjudicated (at present or in the future) as valid by AHHA, which claims remain unpaid in whole or in part", and second, "[a]ll participants and beneficiaries in ERISA welfare benefit plans, at any time administered by MHI and insured, reinsured or administered by NAI, having outstanding welfare benefit claims adjudicated (at present or in the future) as valid by MHI, or unadjudicated to date by MHI, which claims remain unpaid in whole or in part." Only AHHA has responded to Plaintiffs' motion.
The NAI Defendants have filed a motion to dismiss based on insufficiency of service and lack of personal jurisdiction. That motion is pending. Marsh Investment Corp. has not appeared since its first attorney was granted leave to withdraw on May 13, 2002. The MHI Defendants were defaulted on May 9, 2002. Plaintiffs subsequently amended the Complaint to add a claim for damages against the MHI Defendants. The MHI Defendants have not appeared, but MHI has filed a motion to reconsider the addition of the damages claim. AHHA and Ferguson were defaulted on May 9, 2002, but the Court vacated those defaults upon a motion by AHHA and Ferguson. Ferguson has not appeared.
II. STANDARDS
Class certification is governed by Rule 23. The burden of demonstrating class certification is proper lies on the party moving for class certification. See Retired Chi. Police Ass'n v. City of Chi., 7 F.3d 584, 596 (7th Cir. 1993). To show that class certification is justified in this case, Plaintiffs first must satisfy the four requirements of Rule 23(a). See Williams v. Chartwell Fin. Servs., Ltd., 204 F.3d 748, 760 (7th Cir. 2000); Mira v. Nuclear Measurements Corp., 107 F.3d 466, 475 (7th Cir. 1997). The prerequisites of Rule 23(a) are:
(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). Once the Court determines that Plaintiffs have satisfied these prerequisites, then the Court must determine whether they meet one or more of the requirements of Rule 23(b). See Williams, 204 F.3d at 760; Retired Chi. Police Ass'n, 7 F.3d at 596.
Rule 23(b)(1) authorizes a class when individual actions would create a risk of inconsistent adjudications that would create incompatible standards of conduct for the party opposing the class, or adjudications with respect to individual plaintiffs would "substantially impair or impede" the ability of other class member to protect their interests. Fed.R.Civ.P. 23(b)(1). Rule 23(b)(2) authorizes a class when 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. Fed.R.Civ.P. 23(b)(2). See also Jefferson v. Ingersoll Int'l Inc., 195 F.3d 894, 897 (7th Cir. 1999).
Classes certified pursuant to Rules 23(b)(1) or 23(b)(2) are not opt-out classes and notification to class members is not required. Fed.R.Civ.P. 23(c)(3). In contrast, Rule 23(b)(3) authorizes a class that is personally notified and has an opportunity to opt out of the class litigation when "the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy." Fed. Rs. Civ. P. 23(b)(3) 23(c)(2).
III. DISCUSSION A. RULE 23(a)
Taking each element in turn, the Court finds that Plaintiffs meet all four requirements of Rule 23(a) for class certification.
1. Numerosity AHHA does not dispute that Plaintiffs' proposed class meets the numerosity requirement of Rule 23(a)(1); that is, that "the class is so numerous that joinder of all members is impracticable." Fed.R.Civ.P. 23(a)(1). Plaintiffs estimate the class exceeds 4000. The numerosity requirement clearly is met.
2. Commonality AHHA also concedes that most of the Plaintiffs and class members share common questions of law or fact as required by Rule 23(a)(2). A "common nucleus of operative fact" generally will satisfy the commonality requirement. Rosario v. Livaditis, 963 F.2d 1013, 1018 (7th Cir. 1992). Plaintiffs challenge Defendants' practices and policies as applied to the entire class. Specifically, Plaintiffs allege that Defendants are ERISA fiduciaries; that NAI breached its fiduciary duties by systematically denying valid claims for welfare benefits and attempting to coerce the removal of AHHA as plan administrator and by approving MHI as plan administrator; that AHHA breached its fiduciary duties by its selection of NAI as the insurer; and, that MHI facilitated NAI's breaches. Plaintiffs allege that Defendants' conduct was "global." Motion at 16. These allegations of standardized conduct show that the class members' claims present common issues of law and fact, satisfying the commonality requirement. AHHA disputes that Pedcor shares those common questions because it is a plan sponsor. It appears, however, that AHHA is mistaken. Pedcor is not a plan sponsor, but rather an assignee of plan participants' claims for benefits.
Reply at 3-4. Thus, Pedcor is a plaintiff who stands in the same position as the rest of the class. See Morlan v. Universal Gty. Life Ins. Co., 298 F.3d 609, 615-16 (7th Cir. 2002) (holding that claims for welfare benefits are assignable) cert. denied — S.Ct., No. 02-764, 2003 WL 138446 (Jan. 21, 2003); Plumb v. Fluid Pump Serv., Inc., 124 F.3d 849, 864 (7th Cir. 1997) (explaining, where assignment of ERISA claims were at issue, that an assignee stands in the shoes of the assignor). Plaintiffs, including Pedcor, and the class members present common issues of law and fact to satisfy Rule 23(a)(2).
3. Typicality AHHA also misunderstands Pedcor's interests in the litigation as not typical of the individual class members. The typicality requirement of Rule 23(a)(3) is closely related to the issue of commonality.
Rosario, 963 F.2d at 1018. As an assignee of claims for benefits, Pedcor, like the other named Plaintiffs and the class, brings claims pursuant to ERISA sections 502(a)(1), 502(a)(2), 502(a)(3), and 409. Each of Plaintiffs' claims arises from Defendants' alleged course of conduct toward the class, and each of Plaintiffs' claims is based upon the same legal theory as the class members. Plaintiffs' claims are typical of the class, and the typicality requirement of Rule 23(a) is satisfied. See id; De La Fuente v. Stokley-Van Camp, 713 F.2d 225, 232 (7th Cir. 1983).
4. Adequacy Of Representation The adequacy of representation requirement of Rule 23(a)(4) turns on both the class representatives' ability to protect the interests of all the class members, as well as the named plaintiffs' counsel to adequately represent the class. See Secretary of Labor v. Fitzsimmons, 805 F.2d 682, 697 (7th Cir. 1986); Susman v. Lincoln Am. Corp., 561 F.2d 86, 90 (7th Cir. 1977). AHHA attacks Plaintiffs' counsel's ability to impartially represent the class, based on a familial relationship between one of Plaintiffs' attorneys and a third party who allegedly advised some Plan sponsors, who also are uninvolved in the litigation. AHHA alleges that this third-party advice increased the class members' damages. AHHA does not cite any evidence in support of its allegations, nor does it inform the Court in what way this third party served as advisor to the plans or what advice he gave.
Further, Susman v. Lincoln Am. Corp. does not uphold AHHA's argument. In Susman, the issue was whether the named plaintiff could adequately represent the class when the named plaintiff's attorney was his own brother or his law partner. In those situations, a conflict of interest may arise because the named plaintiff's attorney might compromise the interests of absent class members to protect his own right to attorney's fees. See Susman, 561 F.2d at 91. Courts also have feared champerty because of the close relationship between counsel and the class representative, or a variety of other potential conflicts of interest.
See id. These concerns, while valid in Susman, are not present here, where the relationship at issue is between Plaintiffs' attorney and an uninterested third party, and where that third party's testimony is not likely to be necessary to the litigation. The conflict between Plaintiffs' counsel's interest in attorney fees on one hand and the class members' interests in an appropriate settlement amount or fair distribution of recovered damages on the other hand is not affected by counsel's relationship with a third party. The Court is confident Plaintiffs' counsel will adequately and fairly represent the class.
AHHA does not make an issue of the named Plaintiffs' ability to protect the interests of absent class members. Plaintiffs appear to have relatively large claims as compared to some class members, enforcing Plaintiffs' incentives to pursue the litigation vigorously. Because Plaintiffs satisfy each requirement of Rule 23(a), the Court will examine whether class certification is proper under Rule 23(b).
B. RULE 23(b)
A district court has three options to consider for certifying a class when there are both equitable and legal claims involved. See Lemon v. International Union of Operating Eng'rs, 216 F.3d 577, 581 (7th Cir. 2000) (citing Jefferson v. Ingersoll Int'l Inc., 195 F.3d 894 (7th Cir. 1999)). The first option is to certify the class under Rule 23(b)(3) for all proceedings. Id. The second option, which Plaintiffs advocate here, is divided certification, by which a district court would certify a class under Rule 23(b)(2) for the portion of the case addressing equitable relief, and under Rule 23(b)(3) for the portion of the case addressing damages. Id. "This avoids the due process problems of certifying the entire case under Rule 23(b)(2) by introducing the Rule 23(b)(3) protections of personal notice and opportunity to opt out for the damages claims." Id. The third option is for the district court to certify the class under Rule 23(b)(2) for all claims, but mandate personal notice to all class members and the opportunity to opt out, pursuant to the court's authority under Rules 23(d)(2) and 23(d)(5).
Plaintiffs seek certification of their equitable claims pursuant to Rules 23(b)(1) and 23(b)(2), and of their damages claims pursuant to Rule 23(b)(3). AHHA does not argue against certification under any of the three subsections of Rule 23(b). As discussed below, the Court finds it appropriate to certify the class pursuant to each of the three subsections of Rule 23(b).
AHHA does argue, although it is not clear as to what purpose, that plan sponsors and certain insurance agents or brokers should be defendants in the litigation, because those entities are at least as liable as AHHA. First, this is not the time for the Court to inquire as to the merits of Plaintiffs' case, and it would be improper for the Court to refuse to certify the class simply because it doubted Plaintiffs' case on the merits. See Eisen v. Carlisle Jacquelin, 417 U.S. 156, 177 (1974); Loeb Indus. Inc. v. Sumitomo Corp., 306 F.3d 469, 480 (7th Cir. 2002) (citing Eisen). Second, as Plaintiffs point out, any litigation against the Plans and Plan sponsors would be impossible for the defined class to maintain because so many different plans and sponsors would be involved. It is unlikely that any particular plan would involve enough of the class members to satisfy the numerosity requirement of Rule 23. Finally, the Plans and sponsors are not necessary parties to this litigation, the gravamen of which is Plaintiffs' claims that certain entities breached their duties as fiduciaries.
1. Rule 23(b)(1)
A class action may be maintained pursuant to Rule 23(b)(1) if litigation by individual members of the class would create a risk of (A) inconsistent rulings that would establish incompatible standards of conduct for the defendant, or (B) judgment in favor of individual members of the class that would be dispositive of the interests of other class members; i.e., the individual adjudications would deplete a "limited fund." Fed.R.Civ.P. 23(b)(1); Oritz v. Fireboard Corp., 527 U.S. 815, 834 (1999). Other litigation is pending around the country that arises out of the circumstances of which Plaintiffs complain, each with different requests for relief. Especially with regard to the equitable relief Plaintiffs seek here, various adjudications would impose inconsistent standards of conduct on Defendants. This risk is material enough to satisfy Rule 23(b)(1)(A).
Contrary to Plaintiffs' argument, however, certification is not appropriate on a "limited fund" theory.
The Supreme Court has made clear that Rule 23(b)(1)(B) should not be used creatively to eliminate the notice and opt-out rights of class members. See Jefferson, 195 F.3d at 897 (citing Oritz, 527 U.S. 815).
A true "limited fund" class must satisfy three criteria: (1) The total maximum liquidated claims and the total maximum fund to satisfy those claims demonstrates the inadequacy of the fund; (2) the whole of the inadequate fund will be devoted to the claims; and (3) the claimants share a common theory of recovery and will be treated equitably among themselves. Oritz, 527 U.S. at 838-40. Plaintiffs have reason to believe that a judgment against the NAI Defendants will be difficult to collect, in light of their alleged undercapitalization and attempts to hide assets. Class treatment will ensure any collectible judgment will be equitably distributed among all class members. However, this is not the definition of a "limited fund" class. A "limited fund" is not one created by the litigation; that is, a large volume of claims that, in the aggregate, might exceed the assets that are available to satisfy them does not justify a Rule 23(b)(1)(B) class. See id. at 843 (citations omitted). It is unknown what the total maximum fund is in this case.
Plaintiffs' fear that Defendants' assets will be inadequate or difficult to recover does not prove that the assets, at their maximum, will be insufficient or that Defendants' entire assets will be devoted to any recovery by the class. The Court is not convinced that the proposed class meets the first two elements of the test set out in Oritz.
The failure of the proposed class to become certified under Rule 23(b)(1)(B), however, does not prevent the Court from certifying the class pursuant to Rule 23(b)(1)(A). Moreover, as discussed below, due process for absent class members will not be a concern if notice and the opportunity to opt out is given pursuant to Rule 23(b)(3).
2. Rule 23(b)(2)
A class action is properly certified under Rule 23(b)(2) if the defendant's conduct is generally applicable to the class, thus making injunctive or declaratory relief appropriate with respect to the entire class. Fed.R.Civ.P. 23(b)(2). It is clear from Plaintiffs' allegations that Defendants' conduct has been "globally" applied to Plaintiffs and class members. Plaintiffs' requests for injunctive and other equitable relief seek to remedy the effects of Defendants' uniform conduct.
3. Rule 23(b)(3)
A class should be certified under Rule 23(b)(3) if common questions of law or fact predominate over individual questions and class treatment is a superior method for adjudicating the controversy. Fed.R.Civ.P. 23(b)(3). As discussed, Plaintiffs present many common questions of law and fact. Moreover, the class's legal theories rest upon uniform federal law — ERISA sections 409 and 502. It appears the only individual question is one of damages. Differing levels of damages will not outweigh the predominate common issues. See De La Fuente, 713 F.2d at 233. "It is very common for Rule 23(b)(3) class actions to involve differing damage awards for different class members." Id.
As stated above, AHHA does not dispute Plaintiffs' argument that the class should be certified pursuant to any subsection of Rule 23(b). However, when deciding whether class treatment is superior to individual litigation, a Court may consider "the extent and nature of any litigation concerning the controversy already commenced by or against members of the class." Fed.R.Civ.P. 23(b)(3)(B). AHHA, in arguing against a finding of commonality pursuant to Rule 23(a)(2), argues that Plaintiffs' rights are adequately protected in the Texas Litigation. Response Brief at 11-12. First, AHHA reasons that because Pedcor's plan is a class member in the Texas Litigation then Pedcor, as a plan sponsor, is adequately protected in that action. Again, AHHA apparently has misunderstood the nature of the Pedcor entity that is a Plaintiff in the present case. Pedcor is not a plan sponsor.
Second, AHHA argues that Plaintiffs' claims are derivative of the claims of the plans and plan sponsors in the Texas Litigation, because if the Texas Litigation class is successful, those plaintiff plans will pay Plaintiffs' claims. Plaintiffs respond that the Texas Litigation class is unlikely to recover any damages, even if successful in the litigation. As Plaintiffs' point out, the Texas Litigation involves only NAI as a defendant. Plaintiffs argue that any judgment against NAI likely will be uncollectible, both because NAI does not have the assets to satisfy a judgment and because NAI is a foreign corporation, against which a judgment in an American court might not survive international law. Further, AHHA ignores that Plaintiffs' claims are not just for benefits, but for breaches of fiduciary duties under ERISA. Plaintiffs' claims for injunctive and other equitable relief brought against AHHA, MHI, and the individual defendants in this case would not be preserved. The Court is not persuaded that Plaintiffs' interests are adequately protected in the Texas Litigation, such that the current class should not be certified.
Class treatment also is superior because many class members' claims for damages are minimal. See Crawford v. Equifax Payment Servs., Inc., 201 F.3d 877, 880 (7th Cir. 2000); Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997). AHHA does not dispute the notion that class treatment is quite likely the only way for this litigation to survive.
IV. CONCLUSION
For all the foregoing reasons, Plaintiffs' motion is GRANTED. The Court has found that the named Plaintiffs satisfy the criteria of Federal Rules of Civil Procedure 23(a), 23(b)(1), 23(b)(2), and 23(b)(3) to proceed with a class action against Defendants on behalf of the following two subclasses:
1. All participants and beneficiaries in ERISA welfare benefit plans administered by AHHA and insured, reinsured or administered by NAI, having outstanding welfare benefit claims adjudicated as valid by AHHA between August 1, 2001, and September 28, 2001, which claims remain unpaid in whole or in part.
2. All participants and beneficiaries in ERISA welfare benefit plans administered by MHI since September 28, 2001, and insured, reinsured or administered by NAI, having outstanding welfare benefit claims adjudicated (at present or in the future) as valid by MHI, or unadjudicated to date by MHI, which claims remain unpaid in whole or in part.
Plaintiffs hereby are ordered to provide a plan and draft for notification of the class members, pursuant to Federal Rule of Civil Procedure 23(c)(2), on or before February 24, 2003.
IT IS SO ORDERED.