Colbert v. Dymacol

Federal and State Rules of Procedure provide cost and sometimes attorney's fee shifting mechanisms for defendants to attempt to force plaintiffs/consumers to accept proposed settlements. This forum provides a source of information for how these rules may impact the litigation.

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David A. Szwak
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Colbert v. Dymacol

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PRECEDENTIAL

Filed August 28, 2002

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 01-4397

BRENT COLBERT, ON BEHALF OFHIMSELF AND ALL OTHERS SIMILARLYSITUATED

v.

DYMACOL, INC.;INTELLIRISK MANAGEMENT CORP.,Appellants

Appeal from the United States District CourtFor the Eastern District of Pennsylvania

D.C. No.: 01-cv-03577

District Judge: Honorable Clarence C. Newcomer

Argued: June 14, 2002

Before: ROTH, RENDELL, and ROSENN, Circuit Jud ges.(Filed: August 28, 2002)

OPINION OF THE COURTROSENN, Circuit Judge.This appeal presents an important question of firstimpression in this circuit concerning the continuedpresence of federal jurisdiction in class action litigationwhen a putative class’s named representative’s claimbecomes moot before he or she files a Motion for ClassCertification. Defendant Dymacol, Inc. (Dymacol) made anOffer of Judgment to the named plaintiff, Brent Colbert,pursuant to Federal Rule of Civil Procedure (FRCP) 68

The pertinent portion of Rule 68 provides:At any time more than 10 days before the trial begins, a partydefending against a claim may serve upon the adverse party an offerto allow judgment to be taken against the defending party for themoney or property or to the effect specified in the offer, with coststhen accrued. . . . An offer not accepted shall be deemed withdrawnand evidence thereof is not admissible except in a proceeding todetermine costs. If the judgment finally obtained by the offeree isnot more favorable than the offer, the offeree must pay the costsincurred after the making of the offer.2that provided Colbert with the maximum relief he couldobtain by winning on the merits. The District Court heldthat Rule 68 is fundamentally incompatible with classaction litigation and granted Colbert’s Motion to Strike theOffer of Judgment and his Motion for Class Certification,the latter having been filed after Dymacol’s offer had beenmade. Because Dymacol’s offer of full relief mootedColbert’s claim before Colbert had filed his Motion for ClassCertification, we hold that there is no longer federaljurisdiction over this litigation and the District Court’sOrder will be vacated.I.On July 19, 2000, Colbert received a dunning letter fromDymacol, a collection agency and wholly-owned subsidiaryof defendant Intellirisk Management Corp., requesting thatpayment be made on merchandise purchased from anentity known as Sound and Spirit.Colbert filed a Class Action Complaint with the UnitedStates District Court for the Eastern District ofPennsylvania on July 17, 2001, alleging violations of theFair Debt Collection Practices Act (FDCPA), 15 U.S.C.SS 1692-1693r, and the Pennsylvania Fair Credit ExtensionUniformity Act, PA. STAT. ANN. tit. 73, SS 2270.1-2270.6, asapplied pursuant to the Pennsylvania Unfair TradePractices and Consumer Protection Law, PA. STAT. ANN. tit. 73, S 201-1 to S 209-6. In the Complaint, Colbert sought torepresent a class of persons in the Commonwealth ofPennsylvania who, in the preceding two years, had receiveddunning letters from the defendants.On September 7, 2001, before filing an Answer to theComplaint, Dymacol served Colbert with an Offer ofJudgment, pursuant to FRCP 68, for the maximum amountof statutory damages recoverable under the FDCPA,including reasonable costs and attorneys’ fees.On September 10, 2001, Colbert moved to certify theClass. Two days later, Colbert moved to strike Dymacol’sOffer of Judgment. The defendants opposed both motions.On October 2, 2001, the District Court held that"becauseRule 68 would bypass court approval of settlement, plaintiff3has filed this suit as a class action, and this Court has notdetermined that plaintiff ’s class action is improper, Rule 68is not applicable here, and the Court will strike defendants’Offer of Judgment." The Court likewise granted Colbert’sMotion for Class Certification.On October 12, 2001, the defendants, pursuant to FRCP23(f),2 filed an Application for Permission to Appeal from theDistrict Court’s Order. On December 10, 2001, we granteddefendants’ Application and now turn to the merits of thisinterlocutory appeal.3II.Under the United States Constitution, federal judicialpower extends only to "cases" or "controversies." U.S.CONST. art. III, S 2; Flast v. Cohen, 392 U.S. 83, 94 (1968);Lusardi v. Xerox Corp., 975 F.2d 964, 974 (3d Cir. 1992).Thus, it is axiomatic that a litigation becomes moot andfederal jurisdiction is lost when a dispute between theparties no longer exists or when a party loses a personalinterest in the outcome of the litigation. Holstein v. City ofChicago, 29 F.3d 1145, 1147 (7th Cir. 1994)."Article IIIrequires that a plaintiff ’s claim be live not just when hefirst brings the suit but throughout the entire litigation,and once the controversy ceases to exist the court mustdismiss the case for lack of jurisdiction." Lusardi, 975 F.2dat 974.On September 7, 2001, before Colbert filed a Motion forClass Certification, Dymacol made him an Offer ofJudgment, pursuant to FRCP 68, in the amount of $1100and reasonable costs and attorneys’ fees, which is themaximum statutory amount Colbert could recover underthe FDCPA.4 As Colbert conceded at oral argument, an offer. The Rule provides, in pertinent part: "A court of appeals may in itsdiscretion permit an appeal from an order of a district court granting ordenying class action certification . . ."

We have appellate jurisdiction pursuant to 28 U.S.C. S 1292(e).4. On appeal, Colbert argues that he suffered actual damages and thatDymacol’s Offer of Judgment was therefore not the maximum amount hecould recover in this litigation. The District Court noted, however, thatColbert did "not dispute that th[e Offer of Judgment] represents themaximum he could hope to recover." (JA 10, n.1) Thus, Colbert haswaived any argument that Dymacol’s Offer of Judgment did notrepresent his maximum potential recovery.4of complete relief in an individual action moots thelitigation. Rand v. Monsanto Co., 926 F.2d 596, 598 (7thCir. 1991) ("Once the defendant offers to satisfy theplaintiff ’s entire demand, there is no dispute over which tolitigate and a plaintiff who refuses to acknowledge this losesoutright, under Fed.R.Civ.P. 12(b)(1), because he has noremaining stake.") (citation omitted); Zimmerman v. Bell,800 F.2d 386, 390 (4th Cir. 1986) (holding no case orcontroversy when defendant offers plaintiff full damages);Abrams v. Interco Inc., 719 F.2d 23, 32 (2d Cir. 1983) (nojustification for expending court resources after defendantoffered plaintiff more than plaintiff could recover on merits);Wright, Miller & Cooper, Federal Practice and Procedure:Jurisdiction 2d S 3533.2 ("Even when one party wishes topersist to judgment, an offer to accord all of the reliefdemanded may moot the case."). Colbert, however, arguesthat because this litigation was filed as a class action,typical mootness rules do not apply and he should bepermitted to continue as named representative of theputative class.The District Court accepted Colbert’s argument, andgranted his motions to strike Dymacol’s Offer of Judgmentand to certify the class. Although decisions to grant or denyclass certification are usually reviewed for abuse ofdiscretion, Newton v. Merrill Lynch, Pierce, Fenner & Smith,Inc., 259 F.3d 154, 165 (3d Cir. 2001), the District Courtapplied legal precepts in deciding the mootness issue, andthus our review is plenary. Davis v. Thornburgh, 903 F.2d212, 213 n.2 (3d Cir. 1990).The District Court held that Rule 68 is inapplicable in theclass action context. In the case at bar, however, the Rule68 issue is a red herring. Rule 68 operates merely as a fee-shifting device, requiring plaintiffs who reject Offers ofJudgment to accept the risk of being taxed costs if theultimate judgment obtained by the plaintiff is less than thedefendant had offered. Assuming arguendo that the DistrictCourt is correct and Rule 68 is inapplicable in class actionlitigation, this assumption does not affect this case.Dymacol’s Offer of Judgment was for the maximum reliefColbert could have obtained on the merits. Dymacol’s useof Rule 68 as the means of transmitting its Offer of5Judgment is therefore irrelevant; the significant factor is that Dymacol offered Colbert maximum relief under thegoverning statute. The focus on Rule 68 was thereforemisplaced.Colbert asserts that permitting a defendant to moot aclass action through an offer of maximum relief to thesingle named plaintiff is inconsistent with FRCP 23(e),which provides that "[a] class action shall not be dismissedor compromised without the approval of the court . .." Thisargument elevates form over substance and we thereforereject it. The purpose of Rule 23(e) is "to protect thenonparty members of the class from unjust or unfairsettlements affecting their rights." Wilson v. SouthwestAirlines, Inc., 880 F.2d 807, 818 (5th Cir. 1989)(internalquotations omitted). Thus, a court with jurisdiction over aclass action will give careful scrutiny to any settlementagreements between named representatives anddefendants. However, in this case, there were no non-partymembers of the putative class when Dymacol tenderedjudgment. A court cannot use Rule 23(e) to circumvent the"case or controversy" requirement of Article III, as it is self-evident that the Federal Rules of Civil Procedure cannotcreate federal jurisdiction outside the perimeters of ArticleIII. Accordingly, the essence of the question facing thisCourt is: Did Dymacol’s Offer of Judgment to Colbertdeprive Colbert of a stake in this case and, concomitantly,deprive the District Court of jurisdiction over the matter?Although Dymacol’s Offer of Judgment came beforeColbert filed a Motion for Class Certification, Colbert andhis amicus, National Consumer Law Center, cite Phillips v.Allegheny County, Pa., 869 F.2d 234 (3d Cir. 1989), for theproposition that "even though an action has not beencertified as a class action, an action filed as a class actionshould be treated as if certification has been granted for thepurposes of settlement until certification is denied." Id. at237. Colbert and his amicus look to Kahan v. Rosenstiel,424 F.2d 161 (3d Cir. 1970), for further support. There, theDistrict Court had dismissed a putative class action on theground that the underlying claim was meritless. Wereversed, and stated that "n the present case it is alsoappropriate to follow the view . . . that a suit brought as a6class action should be treated as such for purposes ofdismissal or compromise, until there is a full determinationthat the class action is not proper." Id. at 169 (emphasisadded).The general principle, appropriately followed in Phillipsand Kahan, is not applicable here. Cf. Bd. of SchoolComm’rs v. Jacobs, 420 U.S. 128, 129 (1975) (high schoolgraduation of representative students mooted case"unlessit was duly certified as a class action"). In Phillips, incontrast to the case at bar, a Motion for Class Certificationwas pending when the parties settled the case, and it wastherefore not inappropriate to treat the case as if classcertification had been granted. Kahan’s facts centered around the question whether the District Court erred in itsdetermination that the named plaintiff ’s claim was withoutmerit; it did not involve a question of federal jurisdiction.The facts here, on the other hand, are different and arecontrolled by Lusardi v. Xerox Corp., 975 F.2d 964 (3d Cir.1992).Although acknowledging that once a class has beencertified, "special mootness rules apply in the class actioncontext," we held in Lusardi that "[a] different general ruleoperates when a class has yet to be certified." Id. at 974."Normally, when claims of the named plaintiffs becomemoot before class certification, dismissal of the action isrequired." Id. "In such a situation, there is no plaintiff . . .who can assert a justiciable claim against any defendantand consequently there is no longer a ‘case or controversy’within the meaning of Article III of the Constitution." Id. at974-75 (internal quotations omitted).There are, however, two exceptions to this class actionmootness precept. First, a named representative who nolonger has a personal stake can continue "to argue acertification motion that was filed before his claims expiredand which the district court did not have a reasonableopportunity to decide." Id. at 975. Second, a namedrepresentative whose individual claim has expired canappeal a denial of a class certification motion filed when herclaims were alive. Id. Because Colbert’s individual claimexpired before he filed a motion for class certification,neither exception is applicable here.7The second exception finds its origins in United StatesParole Commission v. Geraghty, 445 U.S. 388 (1980). InGeraghty, the Supreme Court recognized that a plaintifflitigating a class action presents two separate issues to thecourt: (1) the merits of the litigation, and (2) the claim thathe is entitled to represent a class. Id. at 402. The denial ofclass certification is an adjudication of the second issue. Id.The Court took pains to note that its holding "is limited tothe appeal of the denial of the class certification motion."Id. at 404; Lusardi, 975 F.2d at 975 ("Recognizing thepotential breadth of this theory of third-party standing, theCourt took pains to limit its application."). The significanceof this limitation cannot be overstated.As Geraghty noted, "when a District Court erroneouslydenies a procedural motion . . . an appeal lies from thedenial and the corrected ruling ‘relates back’ to the date ofthe original denial." Id. at 406-07 n.11. 5 The "relation back"theory is what prevents the evisceration of Article III’s "caseor controversy" requirement. Lusardi, 975 F.2d at 976 ("The‘relation back’ rationale rescues Article III’s‘case orcontroversy’ requirement from virtual extinction."); id. at983 ("Without a rule that plaintiff have a live claim at leastwhen the motion to certify is filed, the ‘case or controversy’requirement would be almost completely eviscerated in theclass action context, since almost anybody might be deemed to have standing to move to certify a class."). And,of course, there must be something to "relate back" to,which is the filing of the Motion for Class Certification.When a named representative’s claim expires before aMotion for Class Certification has been filed, there isnothing to "relate back" to, id. at 978, the litigation is moot,and there is no longer federal jurisdiction over the matter.See Holmes v. Pension Plan, 213 F.3d 124, 135-36 (3d Cir.). Dicta from an earlier United States Supreme Court decision noted thatthere could be times when a named representative’s personal claim ismooted before a District Court can reasonably rule on class certification.In such circumstances, the Court indicated that perhaps "thecertification can be said to ‘relate back’ to the filing of the complaint."Sosna v. Iowa, 419 U.S. 393, 402 n.11 (1975). As noted, however,Geraghty made clear that in such a contingency, the certification relatesback to when the motion was filed and not the filing of the Complaint.82000) ("If . . . the putative class representative’s individualclaim becomes moot before he moves for class certification,then any subsequent motion must be denied and the entireaction dismissed.").Colbert argues that as a matter of policy, we should notcountenance a system that allows defendants to moot classactions by "picking off " claim after claim of putativerepresentatives before they file a Motion for ClassCertification. Although this argument has superficialappeal, it lacks real substance. First, it should be notedthat Lusardi rejected this argument. "[E]ven so far as theseopinions [accept the "picking off " argument], they stillrequire the named plaintiff to have a personal stake whenthe class certification motion at issue was filed." Lusardi,975 F.2d at 982 (emphasis in original). Second, it is highlyunlikely that the defendants here are attempting to"pickoff " putative representatives in order to frustrate the classaction device. This is because the FDCPA limits defendants’potential liability to unnamed class members to"the lesserof $500,000 or 1 per centum of the [defendant’s] networth." 15 U.S.C. S 1692k(a)(2)(B). In their Answer toColbert’s Complaint, the defendants admitted that morethan 42,000 dunning letters had been sent to Pennsylvaniaconsumers. Thus, it would cost the defendants more tocontinue to "pick off " putative representatives than it wouldto go to trial. Therefore, at least in this case, Colbert’sargument is unconvincing. Even in other higher-stakescontexts, such as asbestos litigation, "picking off " putativerepresentatives would obviously be cost-prohibitive andotherwise impractical. We see no compelling policyargument that can overcome the jurisdictional structuredelineated in Article III.III.Accordingly, Colbert’s individual claim had become mootand the District Court lost federal jurisdiction when Dymacol offered Colbert maximum relief. The DistrictCourt’s Order granting Colbert’s Motion to Strike Dymacol’sOffer of Judgment and granting Colbert’s Motion for ClassCertification will be vacated.9A

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