Linda Bradbury v. State Industries, Inc., et al.--Appeal from 18th District Court of Johnson County

IN THE

TENTH COURT OF APPEALS

No. 10-00-274-CV

LINDA BRADBURY,

Appellant

v.

STATE INDUSTRIES, INC., ET AL.,

Appellees

From the 18th District Court

Johnson County, Texas

Trial Court # 241-98

OPINION DENYING REHEARING

On November 29, 2000, in an appeal from an order certifying three classes of plaintiffs (the certified classes ) and authorizing the suit as a class-action, we reversed the order (the certification appeal ). State Industries, Inc. v. Fain, No. 10-99-145-CV, 2000 WL 1800578 (Tex. App. Waco Nov. 29, 2000, no pet. h.). While that appeal was pending, however, the class representatives, acting on behalf of three classes (the settlement classes ), settled with the defendant, States Industries, Inc. ( State ), and the parties asked the trial court to approve their settlement. Linda Bradbury ( Bradbury ), an unnamed member of a settlement class, intervened in the trial court and objected to the settlement. After a hearing, the court overruled her objections and approved the settlement. Bradbury brought this appeal (the settlement appeal ). At the time we decided the certification appeal, we believed that the three certified classes and the three settlement classes were identical. Thus, on the same day that we reversed the trial court s order certifying the classes, we vacated the trial court s order approving the settlement agreement. Counsel for the classes has filed a motion for rehearing (the class motion ), which we address today.

CLASS ACTIONS

Before we address the motion, we state some of the duties of the participants in a class-action suit, particularly as they relate to settlement. Tex. R. Civ. P. 42.

As an appellate court, we review whether the trial court met that obligation as part of our review for abuse of discretion. Rainbow Group, Ltd. v. Johnson, 990 S.W.2d 351, 359 (Tex. App. Austin 1999, pet. dism d w.o.j.).

One of the components required for class representatives to maintain a class action is adequacy of representation. Tex. R. Civ. P. 42(a)(4); Rainbow Group, Ltd., 990 S.W.2d at 356. Factors affecting that determination include whether or not there is a potential conflict of interest between the class representatives and the unnamed members of the class. State Farm Mutual Auto Ins. Co. v. Lopez, No. 13-99-814-CV, 2001 WL 91717, at *9 (Tex. App. Corpus Christi Feb. 1, 2001, no pet. h.); Dresser Indus., Inc. v. Snell, 847 S.W.2d 367, 373 (Tex. App. El Paso 1993, no writ).

Both class action jurisprudence generally . . . and Texas law specifically impose fiduciary duties on attorneys in their relationship with their clients. Bloyed, 916 S.W.2d at 959. Thus, once a class is certified, class counsel have a fiduciary duty to all members of that class. Smith v. McCleskey, Harriger, Brazill, & Graf, L.L.P., 15 S.W.3d 644, 647 (Tex. App. Eastland 2000, no pet.).

HISTORY OF THIS LITIGATION

We now set forth the sequence of events which, from our vantage point, are material to our decision on the motion for rehearing:

" This litigation began in October of 1998; Thomas W. Fain and five other plaintiffs (the class representatives ) sued State Industries, Inc. in Johnson County, alleging damages on behalf of three nationwide classes arising out of State s manufacture of residential electric water heaters;

" On May 18, 1999, the trial court entered findings of fact and conclusions of law, noting (among other findings) that the classes being certified included thousands or perhaps millions of property owners; the court certified the suit as a class action under Rule 42 of the Texas Rules of Civil Procedure;

" State appealed that order to this court as allowed by Section 51.014(a)(3) of the Texas Civil Practice and Remedies Code;

" On February 1, 2000, the class representatives notified us that they had tentatively settled the litigation and asked us to stay a decision in the certification appeal to allow time to finalize a settlement; we issued a stay and, on motion of the parties, three extensions;

" With the certification appeal still pending, on March 8, the class representatives, represented by class counsel, entered into a settlement agreement with State;

" On March 10, the trial court gave preliminary approval to the proposed settlement, approved the form of notice, directed that notice be given, and set a date for consideration of final approval of the settlement;

" On June 5, Bradbury intervened in the suit and filed an objection to the settlement;

" On July 24, after a hearing, the trial court approved the settlement over Bradbury s objections;

" On August 18, Bradbury filed her notice of appeal from the order approving the settlement;

" On August 30, the class representatives, acting through class counsel, asked us to expedite our decision in the settlement appeal, referring to the trial court s May 18 order certifying three nationwide classes and stating that State had agreed to compensate all members of the three plaintiff classes whose claims were not barred by the Uniform Commercial Code s four-year statute of limitations ;

" On September 16, our third extended stay of the certification appeal expired by its own terms;

" On October 20, Bradbury filed her brief in the settlement appeal;

" On October 30, the class representatives filed their reply brief, and the settlement appeal was at issue.

OUR DECISIONS

Because our opinion in the certification appeal had been written and was scheduled to be issued within a few days of February 1, 2000, the date on which a stay of that proceeding was first requested, because the extended stay had expired by its own terms, and because we had determined that the certified classes were improper, we decided to issue our opinion in the certification appeal. Because we determined in the certification appeal that the certification order should be reversed and we believed that the certified classes and the settlement classes were the same, we determined that our decision reversing the certification order dictated that the order approving the settlement agreement be vacated. Thus, on November 29, 2000, we issued simultaneous opinions reversing the order certifying the class action (Cause No. 10-99-00145-CV) and vacating the order approving the settlement (this appeal).

MOTION FOR REHEARING

On December 15, 2000, the class representatives, acting through class counsel, filed the motion for rehearing, explicitly telling us for the first time that [t]he settlement agreement modified the scope of the original classes certified in May of 1999. The class motion states that this court abdicated [our] proper judicial role as fiduciary for the absent class members by ignor[ing] a carefully negotiated class action settlement and vacating the order approving the settlement agreement on an issue that none of the parties raised.

On December 28, 2000, State filed a response opposing the class motion and asserting that the motion inaccurately suggests that State joins in the request that the Court vacate its November 29 Opinion. This is simply not true. State further contends that our reversal of the certification order rendered the parties settlement agreement null and void.

On January 4, 2001, in an effort to clarify the positions of the parties, we requested a response to the class motion from Bradbury, set the motion for oral argument on January 17, and directed all counsel to be present.

After our request for a response and before the date set for oral argument, Bradbury responded, saying that she had withdrawn her appeal and that the settlement appeal was now moot. She joined the class motion in asking for a rehearing. At oral argument, her counsel advised us for the first time that Bradbury had entered into an agreement with the class representatives, and we requested a copy of that agreement. A document entitled Stipulation and Agreement was furnished to us shortly thereafter. The document states: In recognition of the present posture of the Settlement and the litigation, it is advantageous for members of the previously certified settlement classes to have this matter resolved now and the appellate process terminated. (Emphasis added.) The agreement requires class counsel to pay Bradbury s counsel One Million Two Hundred Fifty Thousand and no/100 Dollars ($1,250,000) out of the Ten Million Six Hundred Thousand and no/100 Dollars ($10,600,000) awarded as attorney s fees in the settlement.

On January 31, Bradbury filed a Response to Supplemental Filings Following Oral Argument, in which she states: Regrettably, it appears that this Court was not kept fully apprised of all the details of the settlement reached by State Industries and Plaintiffs. She urges that both this appeal and the certification appeal should be dismissed as moot.

DENIAL OF MOTION

It is now clear that the settlement agreement was reached on behalf of different classes of persons than the classes initially certified by the trial court. By some estimates, the number of unnamed class members in the certified classes was twice the number of members of the putative settlement classes. It is also now clear that, at the time the class representatives and class counsel were negotiating a settlement on behalf of different (smaller) classes, they remained in the posture of urging this court to affirm the order certifying the larger classes, in that we had never been informed that the negotiations and settlement for which we stayed the certification appeal were on behalf of different classes nor had we been asked to vacate or modify the order certifying the larger classes.

We do not agree that the issues in this appeal were moot at the time our opinion was issued or that they are now moot. We had reached a decision in the appeal and issued our opinion before Bradbury entered into her stipulation and agreement with the class representatives and before she attempted to withdraw her appeal. In addition, State contends that our decision in the certification appeal rendered the settlement agreement null and void, essentially the result we reached in our opinion.

Furthermore, understanding as we now do that the settlement classes are different from the certified classes and assuming that the class representatives and class counsel were in a position to negotiate on behalf of different classes than those approved in the trial court s certification order, our duty was to examine the settlement to ascertain whether the trial court abused its discretion in approving it. Crouch v. Tenneco, Inc., 853 S.W.2d 643, 646 (Tex. App. Waco 1993, writ denied) (Approval of a class action settlement is within the sound discretion of the trial court and should not be reversed absent an abuse of that discretion.).

A class action may not be settled or compromised without court approval. Tex. R. Civ. P. 42(e). Given the heightened responsibility of the trial court in approving class action settlements mandated by Rule 42(e), a plenary hearing, with the opportunity for questioning by the court and vigorous cross-examination by counsel representing objecting class members, should be the general rule. Bloyed, 916 S.W.2d at 958. In conducting a plenary hearing on a proposed class action settlement, the trial court must resolve two primary issues: (1) whether to certify the class under the Rule 42 prerequisites of numerosity, commonality, typicality, and adequacy of representation; and, if so, (2) whether the settlement is fair, adequate, and reasonable, considering the six Ball factors and the amount of attorney's fees to be awarded class counsel. See id. (citing Ball v. Farm & Home Sav. Ass'n, 747 S.W.2d 420, 423-24 (Tex. App. Fort Worth 1988, writ denied)). These two issues are separate, and findings approving the settlement as fair cannot substitute for the certification findings required by Rule 42. See In re General Motors Corp. Pick-Up Truck Fuel Tank Products Liability Litigation, 55 F.3d 768, 795-96 (3d Cir. 1995) (holding that findings regarding the fairness of the settlement cannot serve as "a surrogate for" certification findings because "the settlement approval inquiry is far different from the certification inquiry").

We find nothing in the record to suggest that the trial court engaged in the same kind of review of the settlement classes as had been done with the certified classes. In fact, the record suggests that the trial judge thought that the settlement classes were the same as the certified classes.

The settlement agreement does not satisfy all the concerns about the classes which we expressed in our opinion in the certification appeal. State Industries, 2000 WL 1800578, at *5. For example, we found that the class representatives cannot be said to be representative of plaintiffs nationwide. The changes in the scope of the classes in the settlement agreement do not satisfy this concern. See id.

For these reasons, we deny the motion for rehearing.

BILL VANCE

Justice

Before Chief Justice Davis

Justice Vance, and

Justice Gray

Motion for rehearing denied

Opinion delivered and filed February 21, 2001

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