Class Action Litigation Information

Although leave to amend a complaint is ordinarily a matter which is given liberal opportunity by the court, in this matter, plaintiff seeks leave to "Amend the Complaint and to Proceed as a Class." As will be discussed in this memorandum, there is neither a basis for permitting an amended complaint to be filed nor any factual or legal basis in this case for class certification. Therefore, the motion should be denied.

Certification of a class in South Carolina requires a rigorous analysis by the court to determine that the plaintiff has met his burden of demonstrating the presence of all essential elements mandated by S.C.R.C.P. 23. In the present matter, there is neither a showing by plaintiff that all requisite elements are met, nor even a perfunctory effort to demonstrate the matter is appropriate for certification. There is a total absence of any legal or factual basis justifying certification in the pleadings filed by plaintiff. Further, the manner in which plaintiff has proceeded with this litigation to date raises substantial and serious questions regarding his adequacy to represent a class in this matter.

This matter was commenced on September 8, 1997 by plaintiff's filing of a complaint against American Federal Bank, FSB. [Exhibit 1.] The complaint was not filed as a class action, but rather as a case solely by Carl C. Crawford against defendant, American Federal Bank, alleged to be the successor to Fidelity Federal Savings and Loan Association. Mr. Crawford obtained an IRA investment from Fidelity. The underlying crux of his complaint is that by virtue of his obtaining a certificate of deposit ("CD") with interest compounded quarterly at the time he opened an IRA, the bank was forever obligated to compound interest quarterly regardless of the dates CDs matured or the interest rate that was offered on any rollover of a CD. Defendant has filed a motion for summary judgment addressing the lack of merit in the legal claims asserted in the complaint. It was more than a year after this action was commenced that plaintiff filed his "Motion to Amend the Complaint and to Proceed as a Class," attached hereto as Exhibit 2.

Ordinarily, when one seeks to amend a complaint in any ostensible class action, a memorandum in support of such a motion to amend as well as a proposed amended complaint is tendered to the court. In this case, no amended complaint has been tendered and no basis for leave to amend is asserted other than the plaintiff "wants to." S.C.R.C.P. 15 expressly states that "leave shall be freely given when justice so requires and does not prejudice any other party." (Emphasis added.) In this case, no explanation is given as to why a motion to amend should be granted, what the plaintiff intends to claim in any amended complaint or any reason why justice so requires. When a pleading seeking leave to amend is insufficient on its face, this Court may deny such amendment. Cf. Birnbaum v. Hall, 101 F. Supp. 605, 606 (D.S.C. 1951).

The motion is legally deficient in that it requests that the "present action" be allowed to proceed as a class. The motion cannot be granted and deemed to relate back to the date the original complaint was filed. To do so would add parties and operate to the prejudice of defendant by destroying affirmative defenses to claims of such purported class members based on the statute of limitations, ratification, novation or estoppel. At the time this case was filed, defendant was not placed on notice of any purported claims by a "class," nor a description of who or how many people may hold one or more unspecified claims against the defendant.

If there is a "class" of people, any amendment to the complaint is essentially a new and separate proceedings with new parties, and each and every affirmative defense associated with such class members would have to be separately determined. Due to account transfers, removal of funds from accounts, account closures, deaths of customers and other such factors, it is an impossibility to determine the presence or absence of affirmative defenses on a class-wide basis. It is also certainly inappropriate to relate a claim for such new parties back more than two years from the date a complaint was filed. The delay by plaintiff in seeking certification, even if certification is appropriate, demonstrates a failure to protect the purported class claims, if such claims exist.

The allegations in the motion to amend state that "plaintiff and defendant executed an Individual Retirement Trust Account." The supposed class definition is composed of all persons who: "executed the Individual Trust Account which is the trust agreement between the defendant and the plaintiff." The fact is that there are no other persons who "executed the Individual Trust Account which is the trust agreement between the defendant and the plaintiff" other than those two parties. A copy of the trust agreement is attached hereto as Exhibit 3. A single plaintiff does not a class make.

A fundamental prerequisite to the maintenance of any class action is that there is an identifiable class and the named plaintiff is a member of that class. Bailey v. Patterson, 369 U.S. 31, 33, 7 L. Ed. 2d 512, 82 S. Ct. 549 (1962); Roman v. ESB, Inc., 550 F.2d 1343, 1348 (4th Cir. 1976); McGlothin v. Connors, 142 F.R.D. 626, 632 (WD Va 1992). As an initial matter, the court should also consider whether the proposed definition of the class is proper. See Alliance to End Repression v. Rochford, 565 F.2d 975, 977 (7th Cir. 1977). The proposed class definition is improper. No ascertainable class can be mustered from the proposed definition.

Although the plaintiff may have intended to request certification of a class of individuals who executed agreements similar to plaintiff or with identical terms, the proposed definition can only provide a "class" by speculation. Further, the definition as proposed could never put any reader of the definition on notice as to whether he or she was a class member. How would any reader of this purported definition know whether they "executed the Individual Trust Account which is the trust agreement between the defendant and plaintiff?" See McGann v. Mungo, 340 S.E.2d 154, 159 (S.C. App. 1986)(Class must be cognizable and manageable).

South Carolina»s class action rule, S.C.R.C.P. 23, is modeled on, but different from Fed. R. Civ. P. 23. As under Fed. R. Civ. P. 23(a), certification under South Carolina law requires a showing of numerosity, commonality, typiClass Action Litigationty and adequacy of representation. [S.C.R.C.P. 23(a).] South Carolina also has a unique requirement that for certification, "the amount in controversy exceeds one hundred dollars for each member of the class." S.C.R.C.P. 23(a)(5). Although not expressly written into the rule, in order for a court to certify a class in South Carolina, the court should logically determine the action is superior to other available means and that the action is manageable. See Dickerson, Class Actions: The Law of 50 States § 6.06 (1998)(Generally, a showing is required that the use of the class action device is superior to other procedural devices). Otherwise, an action certified as a class is at risk of degenerating into an unmanageable quagmire of individual issues and affirmative defenses.

Plaintiff bears the burden of establishing that each of the elements of S.C.R.C.P. 23(a)(1) through (5) has been met in this case. See Waller v. Seabrook Island Property Owners Assoc., 388 S.E.2d 799, 801 (SC 1990), citing Windham v. American Brands, Inc., 565 F.2d 59 (4th Cir. 1977), cert. denied, 435 U.S. 968 (1978). Plaintiff's failure to satisfy any one of the prerequisites is fatal to class certification. Id. The trial court is charged with undertaking a rigorous analysis to ensure that the certification requirements are satisfied. Waller v. Seabrook, 388 S.E.2d 801, citing General Telephone Co. of Southwest v. Falcon, 457 U.S. 147 (1982). In undertaking this analysis, the court may not engage in speculation or conjecture, nor may guess whether at some future date evidence may be forthcoming on any essential element. Cf. Id.

In conducting its analysis, the court may look beyond the bald allegations in the complaint, but need not decide the merits of the underlying claim. Falcon, 457 U.S. 160 ("[I]t may be necessary for the court to probe behind the pleading before coming to rest on the certification question"); Castano v. American Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996)("Going beyond the pleadings is necessary, as a court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of certification issues.")(Citation omitted.) The court conducts its analysis by "tak[ing] into account the substantive elements of plaintiff»s claims and looks to the proof necessary to those elements so as to envision the form trial on those issues would take." Elliott v. ITT Corp., 150 F.R.D. 569, 572 (N.D. Ill 1992)(citation omitted). In making its analysis, if the court foresees a trial where the basic elements of the alleged claims and American Federal&rquo;s corresponding defenses cannot be proven on a class-wide basis by the evidence that Crawford himself will offer on his claims, and instead resolution of the class members&rquo; claims would require evidence from or individual determinations about each class member, then certification is clearly inappropriate. Under the rigorous analysis required by S.C.R.C.P. 23, plaintiff cannot meet that burden.

The first Requirement of S.C.R.C.P 23(a) mandates that the class be so numerous that joinder is impracticable. Plaintiff has made only a bald assertion that the class is numerous, and stated no factual basis for this Court to make such a determination.

Plaintiff has shown no diversity in geographic location among the bank's customers that would make joinder impracticable. Nor has plaintiff alleged any specific nor general number of claimants who "executed the Individual Retirement Trust Account, which is the trust agreement executed between the defendant and plaintiff." Plaintiff has not even alleged that the specific trust agreement was in use by the bank for any extended period of time. There simply has been no demonstration of numerosity whatsoever.

The second element of S.C.R.C..P. 23(a) requires a showing of commonality. Two of the three claims asserted by plaintiff in his complaint, as it exists at the present time, are for fraud. Plaintiff makes no real attempt to identify any common questions presented by the fraud claims. This is not surprising. Common law fraud claims rarely present predominant common questions and therefore are rarely certified. Broussard v. Meineke Discount Muffler Shops, Inc., 155 F.3d 331, 341-342 (4th Cir. 1998)("the rights of these parties arising as they do out of fraudulent representations which may vary widely between purchasers, are hardly suitable for class treatment."); In re American Med. Sys. Inc., 75 F.3d 1069, 1981 (6th Cir. 1996)(accord); Simon v. Merrill, Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880, 882-83 (5th Cir. 1973)(suggesting per se prohibition against class actions based on varying representations). This case is no different and, far from presenting a central series of common questions, would require the resolution of numerous claims -- not including trying to decipher what the complaint supposedly alleges -- as well as resolving numerous questions of fact as to each class member. Moreover, the individual questions raised by the case would quickly overwhelm any nominally "common" questions, if any such questions exist at all. The presence of the many individual factual determinations that must be made in any trial of this case precludes certification.

Under South Carolina law, plaintiff must prove eight elements to make out a claim for misrepresentation or fraud. These elements are: (1) a representation; (2) its falsity; (3) materiality; (4) either knowledge of its falsity or a reckless disregard of the truth or falsity; (5) intent that the representation be acted upon; (6) the hearer's ignorance of its falsity; (7) the hearer's reliance on its truth; (8) the hearer's right to rely thereon; and (9) the hearer's consequent and proximate injury. Cheney Bros. v. Batesville Casket Co., Inc., 47 F.3d 111, 114 (4th Cir. 1995)(Collecting cases.) The evidence of each component must be clear and convincing and the failure to prove any one element is fatal to plaintiff's cause of action. Id.

In a similar fashion, plaintiff's claim for breach of fiduciary duty due to changing interest compounding periods, logically requires at a minimum that: (1) the alleged duty not to change compounding periods, in fact, exists; and (2) the account holder did not agree to permit a change in interest compounding periods. There are a variety of financial products on the market which historically have changed with market conditions, as in any other business. However, one need go no further than Crawford's deposition to ascertain that individual issues will predominate in proving both a purported fraud claim as well as a breach of fiduciary duty. The circumstances regarding the CDs purchased by bank customers, as well as their preference as to the account type they desired, all varied. Decisions by bank customers depended in large part on oral communications and in some instances face-to-face meetings, which differed as to each individual who opened an IRA account.

The CDs sold by the bank to Mr. Crawford, as well as to the public generally, were issued for a determinate period of time for either fixed or variable interests rates, and with varying methods of compounding over the subject period. When a CD was due to mature, a "rollover"or repurchase of a new certificate of deposit to replace the expired CD was common practice. [Exhibit 4.]

It was the bank&rquo;s practice prior to the expiration of a CD in an IRA account to call the customer, inform them of the fact that their certificate was due to mature, and to discuss with them the manner in which they desired to have their funds reinvested.

Q. Let’s see if I can do this a little quicker. The rest of your CD’s when they matured as shown in defendant’s exhibit number 1, except for the last three, all would have rolled over automatically into a floating rate. It is my understanding that when you found out that your CD was going to roll over into a floating rate you would have called in and asked them to put it into a different account; is that correct?
A. I wouldn’t call in, they would, - they would call me at the store.
Q. Who would call you?
A. Well, different people would call me. She has called me. Some girl Teri had called me. Charlotte Strange has called me.
Q. When would they, not dates, but they would, would they call you when your CD matured?
A. They would, I would get a notice from American Federal that this certificate was going to mature seven to eight to nine to ten days from then. Then they would make, I would make contact with them or they would make contact with me before it matured and I would tell them what to do with it.
Q. If they said, "Mr. Crawford, your CD is going to roll over into a 12 month IRA floating rate CD unless you do something different," what would you have done at that point?
A. I would say what is your regular CD. I did not want any floating rates, they knew that.

It is clear that the bank was not making decisions about investments in customer’s accounts. Rather, the bank was calling each customer, discussing the alternatives, and after the information desired by the customer was provided, the customer was allowed to decide which financial product he desired. There is no uniform document or representation underling these transactions. In fact, the financial products offered by American Federal over the period of time that Mr. Crawford held an account, varied in their terms. The transactions were individual-based. Proof regarding the content of the conversations, what each customer knew, did not know and what they relied upon, will vary as to each individual. Clearly, such claims are not subject to unitary proofs of any kind in a class action.

Another confounding issue of proof, and the variations in knowledge and investment goals of bank customers is reflected in the fact that the bank customers were informed of each transaction as it occurred. After the transaction occurred, the bank’s customers continued to be informed of the status of their account via periodic statements. [Exhibit 4.] Each customer received periodic statements, and each customer received those statements only after they had selected the investment they desired. Certainly, a claim that the bank customers did not know what financial products they purchased is a claim impossible to prove on a class-wide basis.

The third requirement of S.C.R.C.P 23(a) is that that of typiClass Action Litigationty. Presuming hypothetically there is a claim that belongs to one or more bank customers who purchased CDs, any damages among such individuals must be proven as a direct and proximate cause of a false representation. See Cheney Bros. v. Batesville Casket Co., Inc., 47 F.3d 111, 114 (4th Cir. 1995). South Carolina law further requires that each plaintiff must take steps to mitigate his damages. See McClary v. Massey Ferguson, Inc., 291 S.C. 506, 354 S.E.2d 405 (Ct. App. 1997); Rathborne, Hair & Ridgeway Co v. Williams, 59 F. Supp. 1, 2-4 (D.S.C. 1945).

At the time American Federal moved from quarterly compounding to annual compounding, notices were sent to each of the bank customers via a mass mailing. [Exhibit 4.] Further, the bank has been mailing IRA newsletters discussing the financial products it offers for many years. The following discussion during plaintiff’s deposition illustrates the lack of typiClass Action Litigationty between Mr. Crawford and other bank customers in that Mr. Crawford denied receiving any newsletters during the entire time he had an account with American Federal.

Q. They are IRA newsletters and they go out with your account statement. As a matter of fact, they're (sic) mail them together with your account statement. My question is, looking at that stack of documents, does it refresh your recollection in any way as to whether your (sic) received something other than your account statement with your account statement? A. I’ve never seen any of these. The only thing I ever got was the statements showing the account. Q. So your testimony is that there was nothing that came with the account statements other than the account statement? A. That’s correct. I've never seen any of this stuff.

The focus of the commonality requirement in a plaintiff class action must be on whether the fact to be proved is common to all members of the class. See Central Wesleyan College v. W.R. Grace & Co., 143 F.R.D. 628, 636 (DSC 1992), affd 6 F3d 177 (4th Cir. 1993). TypiClass Action Litigationty is somewhat different that commonality in that it requires that "the claims or defenses of the representative parties are typical of the claims or defenses of the class." Fed.R.Civ.P., 23(a)(3). In other words, there must be a nexus between the class representative’s claims or defenses and the common questions of fact or law that unite the class. See Kornberg v. Carnival Cruise Lines, Inc. 741 F.2d 1332 (11th Cir. 1984); Pickett v. IBP, Inc., 182 F.R.D. 647-49 (MD Ala. 1998).

In light of the numerous notices and newsletters sent out to bank account holders, the plaintiff in this matter would have neither commonality nor typiClass Action Litigationty with respect to notice of account terms, acceptance of terms or ratification of changes by those account holders who received the newsletters. Further, in light of the fact that numerous newsletters were sent over the subject period, which the plaintiff denies ever having received or read, he could not reasonably reflect "typical" claims of any other bank customer. Again, the level of knowledge of the bank customers would vary according to the conversations held over the telephone with bank personnel, the level of sophistication by the investor, the receipt of newsletters by the investor from the bank, and the results of face-to-face meetings with bank customer representatives, with no two people having received totally identical information, and with no two people having common goals regarding the financial products they desired to purchase as an investment. Such being the case, any attempt to try this matter as a class action would degenerate quickly into a plethora of individual actions, understandings and communications.

If this case were certified, each plaintiff would have to show what steps were taken to mitigate the damages which might have been suffered as a result of the change in interest compounding periods. For example, if the bank was offering a fixed rate CD with a term of two years at 5% and annual compounding, but a customer selected a variable rate CD for a period of three years starting at 6.25% and with annual compounding, what would his damages be if the rate fluctuated through ten different rates over the three year period? Presuming a customer had received and read the account statement and enclosed newsletters, and knew annual compounding applied, at what point in time would the customer have been obligated to take action with regard to the alleged compounding period being changed? In fact, if a customer had discussed the terms of the CD with a bank representative, and had preferred a higher interest rate on an annual compounding basis versus a lower interest rate on a quarterly compounding basis, how can it be said that any misrepresentation created damages?

In a class action, as in any civil lawsuit, damages must be proven. In this case, if there were any damages incurred by anyone, such damages are highly individual and specific and would turn on what the individual understood he was buying, what information he received, whether he understood what was provided to him, what he intended to purchase, and what he did when he learned the interest was being compounded on an annual basis. Certainly, there is nothing the plaintiff would have in common with other IRA account holders and there is nothing other bank customers would have in common with each other on these issues.

The essence of typiClass Action Litigationty is that the same event or conduct that gave rise to plaintiff’s claim also gave rise to the class as a whole. TypiClass Action Litigationty focuses on whether the action is based on conduct which is not unique to the named plaintiffs, and whether other members of the class have been injured by the same course of conduct. In this case, the bank’s conduct and representations, as well as the investors’ subjective desires are individual in character and not typical to plaintiff’s claims. In fact, since plaintiff claims that he never received a newsletter in the many years he had an account, the bank’s conduct as to Mr. Crawford may be unique as to any other person who had an IRA account.

The last element of S.C.R.C.P. 23 goes to the issue of adequacy. It is an essential prerequisite to the right to maintain a class action under Rule 23 that the court be certain the representatives will fairly and adequately protect the interests of the class. Hill v. Western Electric Co., 672 F.2d 381, 388 (4th Cir.), cert denied, 459 U.S. 981, 103 S.Ct 318, 74 L.Ed 2d 294 (1982). Adequacy of representation by a plaintiff is ultimately a question of fact with respect to which the plaintiff must bear the burden of proof. Predmore v. Allen, 407 F. Supp. 1053, 1064 (D Md 1975). The adequacy standard is met if: (1) the named plaintiff has interests common with, and not antagonistic to, those of absent class members; and (2) the plaintiff’s attorney is qualified, experienced and generally able to conduct the litigation. Sosna v. Iowa, 419 U.S. 393, 403, 95 S. Ct. 553, 42 L.Ed 2d 532 (1975). See also, Taylor v. Flagstaff Bank, 181 F.R.D. 509 (ND Ala 1998); Kuper v. Quantum Chemical Corp., 145 F.R.D. 80, 82 (SD OH 1992)(Both attorney and representative are considered on question of adequacy). Neither the named plaintiff nor his counsel have brought forth any basis for this Court to determine that the element of adequacy would be met if this case were certified.

Moreover, the actual pleading to amend requests "another party be designated as another plaintiff" without explanation for any reason to add a party, who the party is or what the party intends to claim. Adequacy of representation, which is the touchstone for Constitutional due process concerns, involve an inquiry into both the ability of the named representative as well as his chosen counsel to represent the class. Adequacy of the named representatives and their counsel is essential to absent class member protection. Hill v. Western Electric Co., 672 F.2d 381, 388 (4th Cir), cert denied, 459 U.S. 981, 103 S.Ct 318 (1982). "The adequacy requirement mandates an inquiry into the zeal and competence of the representative’s counsel and the ability of the representative to take an active role in and control the litigation and to protect the interests of the absentees . . ." Horton v. Goose Creek Independent School District, 677 F.2d 471, 488 (5th Cir. 1982). It is a legal impossibility for this Court to find that some unidentified plaintiff who might be brought into this case could adequately represent the interests of any absent class members. See Waller v. Seabrook, 388 S.E.2d 799, 801 (S.C. 1990)(Proposed representatives must demonstrate that they have no interest antagonistic to or in conflict with the class and that they are fairly and adequately able to protect the interests of the class).

The foregoing illustrates the many reasons why this matter is inappropriate for class action treatment. Plaintiff's claims are clearly not typical of the purported class claims in light of his denying that he received information provided by the bank to all of its IRA customers. The IRA account holders based their investment decisions on a variety of factors including information provided to them over the telephone, information provided in account statements, face-to-face meetings with bank employees and the IRA account holder's subjective investment goals. There is no commonality present either factually or legally in this matter. The failure to move for class certification until more than a year after the case was filed, in conjunction with a clearly ambiguous and improper proposed class definition, the legal inadequacy in providing any grounds substantiating a valid basis for certification, and the plethora of individual issues clearly call for the motion to amend and to proceed as a class to be denied.