United States District Court, N.D. Illinois, Eastern Division
PATRICIA FOX, on behalf of herself and all others similarly situated, Plaintiff,
RIVERVIEW REALTY PARTNERS, f/k/a Prime Group Realty Trust, et al., Defendants.
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge.
Patricia Fox, on behalf of a putative class of former preferred shareholders, filed suit against Prime Group Realty Trust (PGRT), its directors, and Five Mile Capital Partners LLC and its affiliates (Five Mile), alleging breach of fiduciary duty and unjust enrichment claims. Fox has now moved pursuant to Federal Rule of Civil Procedure 23(b)(3) for certification of a class of similarly situated plaintiffs. For the reasons stated below, the Court grants Fox's motion but narrows the class definition in one respect.
In her amended complaint, Fox alleged that PGRT (now called Riverview Realty Partners), its directors, and its management breached fiduciary duties owed to Fox and other preferred shareholders and that Five Mile aided and abetted these breaches. Fox also alleged self-dealing on the part of PGRT's officers. She further claimed that Five Mile breached its fiduciary duties as a majority shareholder and was unjustly enriched as a result.
PGRT was a real estate investment trust organized under the laws of Maryland. The company owned, managed, and leased office buildings, including one at 330 N. Wabash Avenue in Chicago. Fox, along with several others, owned shares of Series B Cumulative Redeemable Preferred Stock in PGRT. In February 2011, a company called the Lightstone Group, which held all of PGRT's outstanding common shares, returned those shares to PGRT for no financial consideration. This action left the preferred shareholders such as Fox as PGRT's sole shareholders. That same month, PGRT entered into a joint venture agreement and proposed merger agreement with Five Mile, an investment and asset management company. In connection with the proposed merger, Five Mile made a tender offer of $5.00 per share for PGRT's preferred shares and offered retention and incentive plan payments to PGRT's officers. The trustee defendants stated in the proposed merger proxy statement that if the merger was not approved, the board would authorize a dividend in the form of common stock to be issued to the preferred shareholders on a basis of one common share for each preferred share outstanding.
The preferred shareholders rejected the proposed merger with Five Mile in June 2011 and elected two trustees to PGRT's board. The newly constituted board then amended PGRT's declaration of trust to grant the preferred shareholders voting rights, and it scheduled an annual meeting to vote on the amendment. PGRT's board later postponed the annual meeting. Fox alleges that, prior to the meeting, PGRT negotiated a common share issuance and tender offer transaction with representatives of Five Mile. PGRT's board then held a board meeting on October 10, 2011 and voted to approve the common share issuance to Five Mile. Five Mile then agreed to increase its tender offer price for preferred shares to $5.25 per share, pursuant to a settlement agreement. After several preferred stockholders tendered their shares, Five Mile was left with 100 percent of PGRT's common stock and sixty-five percent of PGRT's preferred shares. In June 2012, Five Mile made an offer to the board to acquire the balance of the preferred shares that Five Mile did not yet own, at the same $5.25 price. After Five Mile rejected a counteroffer of $5.35 from John Sabin, a member of a special committee appointed by PGRT's board, the special committee unanimously voted to recommend the merger with Five Mile to the board. The board subsequently approved the merger, and in October 2012, PGRT issued a proxy statement to the preferred shareholders, after which Fox commenced this suit. On December 5, 2012, approximately seventy-four percent of the preferred shareholders voted in favor of the merger.
Fox thereafter moved for a preliminary injunction to bar the merger from proceeding. This Court denied the motion on December 21, 2012. See Fox v. Prime Group Realty Trust, No. 12 C 9350, 2012 WL 6680349 (N.D. Ill.Dec. 21, 2012). In February 2013, defendants moved to dismiss Fox's complaint for failure to state a claim. The Court dismissed the first two of Fox's breach of fiduciary duty claims as to PGRT, concerning the common stock issuance and the 2012 merger, but otherwise declined to dismiss the claims. The Court also dismissed the aiding and abetting claim against Five Mile and dismissed in its entirety Fox's claim that PGRT's officers engaged in self-dealing. The Court otherwise denied the motion to dismiss.
In August 2013, defendants moved to disqualify Fox's attorneys from the case, as well as Fox herself as a proposed class representative. Defendants argued that Fox's counsel and Fox herself had received documents protected by defendant Five Mile Capital Partners' attorney-client and work product privileges. The Court denied the motion. See Dec. 10, 2013 Order on Defs.' Motion for Disqualification [docket no. 137]. The Court concluded that none of the documents was protected by the attorney-client privilege and that six were protected by the work product doctrine but that none of the six had any substantial relationship to the present lawsuit. The Court also ordered Fox's counsel to locate and turn over to Five Mile all copies of the six documents that the Court had concluded were protected by the work product doctrine.
Fox filed her motion for class certification in August 2013. In response, defendants argue that Fox cannot show that common issues predominate, because she has not shown that damages can be determined on a class-wide basis. Further, defendants contend that Fox cannot show via common proof that all absent class members have standing, noting three groups that do not have standing. Third, defendants argue that Fox's unjust enrichment claim in particular is unfit for class-wide determination, because of a conflict within the class and because individualized fact determinations are necessary to determine validity of the claim. Finally, defendants maintain that both Fox and her counsel cannot adequately represent the class.
The Court must grant Fox's motion if she demonstrates that the proposed class satisfies all of the requirements of Rule 23(a) and one of the requirements of Rule 23(b). Under Rule 23(a), the plaintiffs must demonstrate numerosity, commonality, typicality and adequate representation of the putative class. See Fed.R.Civ.P. 23(a). In this case, Fox seeks certification under Rule 23(b)(3), which requires her to show that "questions of law or fact common to class members predominate over any questions affecting only individual members" and "that a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3). Furthermore, "Rule 23 does not set forth a mere pleading standard." Wal-Mart Stores, Inc. v. Dukes, 131 S.Ct. 2541, 2551 (2011). "A party seeking class certification must affirmatively demonstrate his compliance with the Rule-that is, he must be prepared to prove that there are in fact sufficiently numerous parties, common questions of law or fact, etc." Id.
A. Standing and numerosity
Rule 23(a)(1) requires that "the class is so numerous that joinder of all members is impracticable." There is no bright-line test for numerosity, but courts have found that a class of forty is, or at least can be, sufficiently large to satisfy Rule 23(a)(1). See Pruitt v. City of Chicago, 472 F.3d 925, 926-27 (7th Cir. 2006) ("Sometimes even 40 plaintiffs would be unmanageable."); Shields v. Local 705, Int'l Bhd. of Teamsters Pension Plan, 188 F.3d 895, 897 (7th Cir. 1999) (noting that class consisted of class representative "and 35 other[s]"); Swanson v. Am. Consumer Indus., Inc., 415 F.2d 1326, 1333 n. 9 (7th Cir. 1969) (even forty members could be sufficiently large to satisfy numerosity); Costello v. BeavEx Inc., No. 12 C 7843, 2014 WL 1289612, at *8 (N.D. Ill. Mar. 31, 2014) ("A class consisting of more than 40 members generally satisfies the numerosity requirement of certifying a class action.").
Fox argues that the proposed class satisfies the numerosity requirement because it has at least 100 members. Defendants do not challenge this number directly. They contend, however, that there are three subgroups of absent class members who lack standing. First, there are those shareholders who sued PGRT and other defendants in Maryland state court; defendants say that settlement of that case required the plaintiffs to release all claims related to this litigation. (They call this group the "Rameson plaintiffs, " so named for the plaintiff in that case.) Second, there are the shareholders who tendered their shares to Five Mile, which included an agreement by which the shareholders would not retain rights to dividends on the sold shares. Finally, defendants point to shareholders who did not own shares during either the common share issuance or the 2012 merger and thus cannot challenge those transactions.
Defendants frame their standing argument as a roadblock to class certification, arguing that the Court should deny the motion to certify because certain unnamed plaintiffs do not have standing. As Fox correctly points out, it is necessary in the Seventh Circuit only for one named class plaintiff to have standing for the class to be certified. See Kohen v. P. Inv. Mgmt. Co. LLC, 571 F.3d 672, 676-77 (7th Cir. 2009) (dismissing challenge to class certification where defendants claimed some named plaintiffs lacked standing because "one is all that is necessary"); see also Abbott v. Lockheed Martin Corp., 725 F.3d 803, 808-09 (7th Cir. 2013) (rejecting "unworkable view of Article III standing" encompassing standing challenges at class certification stage). In Kohen, the court said it "is almost inevitable" that "a class will often include persons who have not been injured by the defendant's conduct... because at the outset of the case many of the members of the class may be unknown, or if they are known still the facts bearing on their claims may be unknown." Kohen, 571 F.3d at 677. And in Parko v. Shell Oil Co., 739 F.3d 1083 (7th Cir. 2014), the Seventh Circuit rejected an argument that the class should be decertified because 140 of 150 members of the proposed class lacked standing. To decide otherwise "would require... 150 trials before the class could be certified"; the decision of "[h]ow many (if any) of the class members have a valid claim is the issue to be determined after the class is certified." Id. at 1084-85.
For the proposition that every single member of a class must have standing in order for the class to be certified, defendants cite a Ninth Circuit case that seems to be at odds with Kohen and Parko. See Mazza v. Am. Honda Motor Co., 666 F.3d 581, 594 (9th Cir. 2012) ("[N]o class may be certified that contains members lacking Article III standing." (internal quotation marks omitted)). They also cite a Seventh Circuit case in which the proposed class was found indefinite because it included everyone in Illinois who bought a fountain Diet Coke after a certain date. See Oshana v. Coca-Cola Co., 472 F.3d 506, 514 (7th Cir. 2006). That class included "[c]ountless" people who by definition could not ever show damages caused by the defendant's deception; the class definition did not account for such deception. Id. For this and other reasons, the district court's decision not to certify the class was not an abuse of discretion. The factual circumstances of Oshana were vastly different from this case, where far fewer class members reside on a defined list of known individuals who may lack standing.
Even if taken at face value, defendants' arguments are insufficient to preclude class certification. In a recent case, the Seventh Circuit declined to decertify a class where the defendant argued that the class included "a number of individuals" who had not been harmed by defendants. Messner v. Northshore Univ. HealthSystem, 669 F.3d 802, 824-25 (7th Cir. 2012). The court noted its statement in Kohen that a class definition is too broad if "it contains a great many persons who have suffered no injury at the hands of the defendant." Id. at 825 (quoting Kohen, 571 F.3d at 677). Observing that the "great many" term was imprecise, the court in Messner nonetheless held that the defendant had "given no indication how many such individuals [who had not suffered harm] actually exist." Id. at 825. If it appeared to the district court during later discovery that the class was too broad, the court said the district court could "revisit this issue." Id. at 826. The same, of course, is true here.
The Court will not deny class certification based on the arguable lack of standing of certain unnamed class members. That said, one of the subclasses of plaintiffs without standing that defendants describe suggests a potential numerosity issue-with emphasis on "potential." As noted above, defendants argue that the Rameson plaintiffs previously agreed to a settlement in Maryland state court with PGRT, Five Mile, and other individuals. Via the settlement, the Rameson plaintiffs released all claims against PGRT and Five Mile relating to the common share issuance, 2011 merger, and the joint venture. The terms of the release are quite clear, and the Court agrees that the individuals who agreed to the release cannot be part of the class. Yet defendants have not informed the Court how many such people there are or who they are, even though they no doubt have this information. The settlement agreement they have provided names certain individuals and entities but also includes terms indicating that the list of parties to the agreement is or could be larger than the number of listed names. The Court therefore concludes that the class is appropriately defined as excluding the Rameson plaintiffs. If this determination ultimately affects numerosity, defendants may file a motion to decertify at a later date.
B. Commonality and predominance
Fox contends that her proposed class satisfies the commonality requirement of Rule 23(a) because "each Class member's claims arise from... the capture and transfer of value from the B Shareholders." Pl.'s Mem. at 10. Defendants' conduct "identically impacted each Series B share by wrongfully stripping each share of its PGRT voting rights" and then, in the buyout of stock, "identically impacted each Series B share by cashing-out the shares using an unfair process and at an inadequate price." Id. at 10-11. As for predominance under Rule 23(b)(3), Fox says that proof of the elements of her claims "will rely predominantly, if not exclusively, on common evidence that applies equally" to all class members-not "on any individual relationship or communications." Id. at 16.
Defendants argue that certification should be denied because Fox has not proved "that damages are ascertainable on a class-wide basis" and thus that there is no commonality among class members or predominance of common questions. Defs.' Resp. at 7. Specifically, defendants say Fox has not provided a "damages methodology, which precludes class certification" under Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013), and Parko. Defs.' Resp. at 8. Their criticism is based on this sentence in Fox's initial memo: "[A]ny questions relating to individual Class members, such as calculation of damages, can be mechanically answered on a per share basis from Class members' records of holdings of the B shares." Pl.'s Mem. at 16. This type of statement, defendants contend, "is wholly insufficient" because it "is precisely the approach that was rejected by the Supreme Court in Comcast. " Defs.' Resp. at 9. (They do not explain how Comcast rejected this approach.) Defendants argue that damages are especially uncertain with regard to Fox's claims about the November 2011 common share issuance. They say that if the damages are based on what common shares would have been worth if gifted to the preferred ...