In a unanimous decision, the Supreme Court of California today chided a trial court for ruling on a motion for judgment on the pleadings before deciding whether to certify the case as a class action.  Fireside Bank v. Superior Court of Santa Clara County, No. S139171 (Cal. Apr. 16, 2007).

Fireside Bank sued Sandra Gonzalez to collect a deficiency on a car loan.  Ms. Gonzalez denied that the bank complied with state law requirements for a deficiency judgment and cross-claimed on behalf of a class of California borrowers who, like her, received defective notices from Fireside Bank.  She also moved for a judgment on the pleadings against the bank and, a little later, for class certification.  The trial court granted both motions on the same day.

The Court criticized the trial court’s sequencing, pointing to the danger that ruling on a merits issue before class members decide whether or not to opt out presents a danger of "one-way intervention".  Class members may join a case (or choose not to opt out) because they already know that they will win.  The Court held that the potential unfairness to defendants warrants postponing merits issues until after class certification.  The Court directed the trial court to vacate its ruling on the motion for judgment on the pleadings but also affirmed the certification order.

The decision, to Blawgletter’s eye, bucks a trend towards searching pre-certification scrutiny of merits issues.  Just last month, for example, the Fifth Circuit decertified a securities fraud case against Enron investment bankers because the court concluded that the plaintiffs didn’t state a cause of action.  (See post with opinion link here.)  And the Supreme Court of Texas often delves into the merits of defenses to determine whether or not they "apply" to class members.  See BMG Direct Mktg. v. Peake, 178 S.W.3d 763 (Tex. 2004) (reversing certification on ground that "voluntary payment" defense applies to class members’ claims).

The trend may simply reflect the fact that interlocutory review of class decisions has become common since rule changes in the 1990s.  But an appeals court can convert the criteria for class treatment into an opportunity to drill down until it hits the merits.  Blawgletter doubts that the extra layer of procedure and delay will often favor the plaintiff class.

Courts once recognized that delving into the merits before certification and notice poses risks for defendants as well as for plaintiffs.  The California decision today highlights that very point.  Appellate courts would do well to revive their former caution.

Barry Barnett

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