SUMMARY OF ARTICLE 9 CLASS ACTIONS IN 1995

[ Published In The New York Law Journal January 30, 1996 ]

by Judge Thomas A. Dickerson & Kenneth A. Manning(*)

In 1995, Article 9 class actions were brought against automobile salesmen, baby makers, soft drink manufacturers and distributors, State and New York City welfare agencies, class action attorneys, rental car companies, the Chief Administrator of the Courts of New York State, brokerage firms, hospitals, medical insurance companies and State and local taxing authorities. This article will review the impact of these class actions.
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(*) Thomas A. Dickerson, a Westchester County Court, is Chairman of the Class Action Committee of the State Bar Association and author of Class Actions: The Law of 50 States ( Law Journal
Press, New York, 1981-2000 ). Kenneth A. Manning is a partner in the Buffalo lawfirm of Phillips, Lytle, Hitchcock, Blaine & Huber and a member of the Class Action Committee.


HYUNDAI SETTLEMENT

In Branch v. Crabtree,1 J. Silverman preliminarily approved a proposed settlement on behalf of a certified2 class of 4,000 purchasers of Hyundai motor vehicles. The Branch class had asserted that an automobile dealer had engaged in deceptive business practices and false advertising by misrepresenting low prices, low finance charges, guaranteed minimum trade-allowances, special gift incentives, factory rebates and prices only $49 over factory prices. The settlement provided for the issuance of certificates3 to each class member in the amount of $1,000.00 useable for " the purchase of a new or used car...specified dealer installed accessories....toward the cost of an extended warranty contract ". The certificates are transferable and can be sold to others. The class member does not have to present the certificate until after the lowest price has been negotiated and the sales agreement signed by the parties. This insures that class members should obtain the maximum value for their certificates. In addition, the defendants agreed to pay $435,000.00 for legal fees and costs, the costs of administering the settlement, incentive awards of $2,500.00 to each plaintiff and one half the cost of notice of the proposed settlement.
A companion bankruptcy action was settled by creditors agreeing to a class proof of claim of $740,000.00 the fruits of which, if any, would be given to two non-profit consumer rights organizations, Public Citizen and National Consumer Law Center.

THE BABY MAKERS

In Karlin v. IVF America, Inc.4, a class of couples
" desperately seeking to have children " charged the defendants with " dissemination of...misrepresentations as to...success rates in treating infertility problems and....concealment...of significant health risks, high miscarriage rates, failure rates approaching 90%, excessive neonatal deaths and physical disability problems of infants born as a result of treatment...".
The Karlin5 plaintiffs moved for class certification and defendants moved to dismiss the complaint. J. Rosato dismissed the causes of action alleging breach of fiduciary medical obligations, breach of covenant of fair dealing and good faith, fraudulent misrepresentations and unjust enrichment. However, claims based upon violations of New York's consumer protection statute6 [ General Business Law Sections 349 ( deceptive and unfair business practices ) and 350 ( false advertising ) and negligent informed consents were sustained by the Court. Defendants' motion to dismiss claims for non-pecuniary damages, statutory and punitive damages were denied as well. Plaintiffs' motion seeking class certification is pending.

HOW SWEET IS IT?

In Heller v. Coca-Cola Co.7 a nationwide class of consumers sued nine diet soft drink manufacturers and distributors alleging fraud, unjust enrichment and violation of General Business Law Sections 349 ( deceptive business practices ) and 350 ( false advertising ). The diet soft drink defendants used aspartame as a sweetener which broke down over time rendering the soft drinks tasteless. The defendants were charged with fraudulently misrepresenting their soft drinks' taste [ i.e., " Just for the taste of it ", " Taste that beats the other cold " ] and failing to disclose the probability of sweetness loss when they knew of their soft drinks' limited shelf life. The defendants moved to dismiss on the grounds of the primary jurisdiction of the federal Food and Drug Administration. J. Shaw granted this motion
[ " FDA has...expertise to consider the issue of whether (the)
labeling of diet soft drinks is deficient " ]. In addition, the Court dismissed (a) the fraud claim because the " taste " misrepresentations were not material [ " defendants ( did not represent ) that the aspartame in their products retained its sweetness quality indefinitely " ] and defendants' willingness to replace any " tasteless " soft drink without charge belied any scienter, (b) the GBL 349 claim because a failure to disclose shelf life was not a deceptive act and (c) the unjust enrichment claim because the proper defendants were local retailers that sold the soft drinks.

HIV & HOMELESS

In Darns v. Sobol8 a class of HIV infected individuals in need of " rent security deposits, broker's fees and moving expenses " sought injunctive relief requiring the New York City Department of Social Services to make eligibility determinations within 48 hours of the request for assistance. While J. Ramos granted injunctive relief to a narrow class of HIV infected and homeless individuals he denied class action treatment.
First, the class was too broadly defined to include persons who had no immediate need for housing [ " thus missing the mark by not zeroing in on helping those who are in dire straits " ]. To award relief to such a broad class would " effectively dilut(e) already scarce social service resources which everyone acknowledges are about to become even scarcer ". Second, a class action was unnecessary because in New York State it is assumed that a " judgment favoring the plaintiffs does bind the governmental body with respect to all persons similarly situated ". Unless it can be shown that the governmental body is unwilling to comply with a Court order class certification is unavailable in actions challenging governmental operations.

THE FEE FIGHTERS

In Bragar & Wexler v. Wechsler & Skirnick9, a fee fight erupted between two plaintiffs' class action law firms.10 In the underlying Ohio class action the Bragar defendants were plaintiffs' co-lead counsel while the Bragar plaintiffs were one of several law firms providing support at the direction of co- lead counsel. The Ohio class action was settled with co-lead counsel " request(ing) that it be granted authority to distribute the fee award among the various claimants' attorneys at its discretion ". The Ohio court awarded plaintiffs' attorneys 69% of their lodestar request and ordered co-lead counsel to distribute the fees without specifying the method of distribution. The Bragar plaintiffs expected to receive 69% of their fee request or $20,590.19. Instead co-lead counsel awarded Bragar plaintiffs 17% of their fee request or $5,205.00 while awarding itself 90% of its fee request. In this action the Bragar plaintiffs alleged a breach of fiduciary duty to which defendants justified the 17% payment because " (they) did no work in the Ohio class action "
In an earlier application to resolve the fee dispute the Ohio Court declined and citing Ohio's disciplinary rule, DR 2- 107(B) of the Code of Professional Responsibility referred the parties to arbitration before a local Bar Association. In dismissing the Bragar complaint, J. Stallman held that Ohio law governed the rights of the fee fighters, that arbitration would be an appropriate means of resolving the fee dispute and that the arbitration should take place in New York State.

REVEALING RENTAL CAR RATES

The marketing practices of rental car companies have frequently been challenged by consumers.11 In Gershon v. Hertz Corporation,12 a class of rental car users claimed that Hertz's failure to disclose " alternative rental arrangements at lower rates than (those) the customer had inquired about " constituted fraudulent misrepresentation, false advertising [ GBL Section 350 ] and deceptive business practices [ GBL Section 349 ]. In affirming the dismissal of the Gershon complaint, the Appellate Division, First Department found that a failure to disclose available alternative rental car rates is not a deceptive practice13 and does not violate the National Association of Attorneys General Guidelines of 1989 [ " (NAAG guidelines) to car rental companies on complying with State unfair and deceptive practice laws, do not require the disclosure of alternative basis rates but do require disclosure of ` surcharges `...fees for additional drivers, refueling and late return of a car " ]. The charges of fraud and false advertising were also dismissed because the named plaintiff failed to identify the alleged misrepresentation and failed to allege scienter.
In Lewis v. Hertz Corporation,14 The Appellate Division, First Department appears to have brought to an end a decade old nationwide class action on behalf of 2.8 million car renters which charged Hertz with fraud and deceptive business practices in overcharging for collision damage waivers, personal accident insurance and replacement gasoline. The certification of this action15 in 1986 as a nationwide class action seemed to signal a positive acceptance of CPLR Article 9 as a new weapon for consumers. Unfortunately, over the years several causes of action have been dismissed until finally the Appellate Division decertified the Lewis action [ " We now conclude that the representative plaintiff has failed to adduce any proof of having suffered the injuries she alleges...simply not eligible to represent a class of persons who did allegedly suffer injury..." ].


PAY THEM LESS NOT MORE

In Bertoldi v. State of New York,16 a class of 1,800 clerks challenged the decision of the Chief Administrator of the Courts to classify trial court clerks in a pay grade lower than appellate court clerks. On appeal the Review Board found that the trial clerks and appellate clerks " did basically the same work with an equivalent level of difficulty and responsibility " and, hence, their pay grades should be the same. Once having reached this conclusion, however, the Review Board did not find that the trial clerks were underpaid, a decision which would have cost the State a great deal of money. Instead, the Board found that the appellate clerks had been overpaid and ordered the Administrator to lower their pay grades.
This rather disheartening decision came before J. Weisberg of the Court of Claims who preceded to hold (1) that class certification would be appropriate [ " In the absence of anything in the Court of Claims Act which prohibits class actions in this court, I hold that they are permissible " ] and (2) that the Court of Claims lacked jurisdiction to review the Chief Administrator's decision denying retroactive pay to trial court clerks [ " any entitlement to such relief resides wholly within his discretion which I do lack the jurisdiction to review " ].

SECURITIES

In Guice v. Charles Schwab & Co.,17 a class of customers sued a discount brokerage firm seeking injunctive relief and alleging a " common law tort...to determine the reasonableness of the industry-wide practice of payment for order flow ". In reversing a dismissal the Appellate Division, First Department held that the action was not preempted by either federal statute or by SEC rules or regulations. In addition, the court determined that the doctrine of primary jurisdiction would not apply " inasmuch as there is no mechanism for referral of plaintiff's claims to the SEC and its particular expertise is not required....".
In Rosenfeld v. Bear Stearns & Co.,18 a class of brokerage customers charged sixteen firms with purchasing securities for customers which " are not or were not fully paid for or are not or were not excess margin securities ". Plaintiffs claimed that defendants " disclosure and manner of lending customer margin securities is violative of New York common law ". A proposed settlement, preliminarily approved by J. Gammerman, was reached whereby defendants would mail notice of their method of lending margin securities to all customers. In addition, plaintiffs' attorneys would be permitted to apply for a fee award of no greater than $35,000 for each defendant [ or $560,000.00 ].

HOSPITAL OVERCHARGES

In Meraner v. Albany Medical Center19 a class of patients charged their hospital with over billing in that bills were
" false and fraudulent because they contain hidden charges for hospital expenses...bills were deliberately deceptive...( For failing to disclose ) that the physician group ` would then pay a kickback to the hospital ` "20. In an earlier decision the Meraner plaintiffs were allowed discovery and an extension of time in which to move for class certification. Unfortunately, plaintiffs inexplicably waited four months after the completion of discovery to move for class certification. The Appellate Division, Third Department denied class certification [ " Clearly, (the) motion pursuant to CPLR 902 was untimely " ].

MEDICAID COVERAGE

In Seittelman v. Sabol,21 medicaid recipients challenged State and New York City regulations " limiting reimbursement to expenses paid only to Medicaid-enrolled providers " The Appellate Division, First Department affirmed the lower Court's finding that this limitation was irrational and inconsistent with federal law. The Court also granted class certification notwithstanding the general rule that actions challenging governmental operations are not certifiable except " where...defendants have failed to propose any other form of relief that even purports to protect the right of indigent Medicaid recipients to retroactive reimbursement of which they have been wrongfully deprived..." ].



MEDICAL POLICY RATES SKY HIGH

In Empire Blue Cross Customer Litigation,22 unhappy policyholders charged that Empire Blue Cross submitted false and inaccurate financial reports with the Department of Insurance to justify excessive and unwarranted rate increases. Earlier23 J. Cahn had dismissed the breach of contract, fraud and GBL 349 claims because they were barred by the " filed rate " doctrine leaving a claim under Insurance Law 4226 [ misleading representations of financial conditions ].
Thereafter J. Cahn denied class certification to which plaintiffs responded by seeking discovery of " documents identifying persons who might have been class members had certification been granted ". Plaintiffs reasoned that notwithstanding a denial of class treatment they had a fiduciary duty to notify class members and encourage them to join as plaintiffs [ " Plaintiffs candidly state that they (wish) to conduct a direct mailing...and essentially...solicit them to join " ]. J. Cahn denied this unique discovery request finding the data irrelevant to the prosecution of individual claims. In addition, there was no fiduciary obligation under CPLR 908 to notify class members of a denial of certification. However, there is such a duty when plaintiffs seek to settle or discontinue a purported class action before the issue of certification has been resolved by the Court24.

REVOLTING TAXPAYERS

In Penfield Tax Protest Group v. Yancey25, homeowners challenged the assessment rolls of the Town of Penfield on the grounds that the method of selecting properties for reassessment
" violate the equal protection guarantees of the State and Federal Constitutions ". The Appellate Division, Fourth Department affirmed a denial of class certification and a dismissal of the complaint as legally insufficient. The Court also declared that the 1993-1994 assessment roll was valid and constitutional.
In Herzog v. Town of Thompson,26 the taxpayers of Kiamesha Sewer District of Town of Thompson sued an engineering firm for malpractice and negligence. In 1987 and 1988 local officials determined that the Kiamesha sewage treatment plant was " inadequate for the needs of the District ". Taxpayers approved a $7.75 million bond issue to finance the project. After the plant was built it was discovered that the data justifying the expansion was erroneous having been based upon a malfunctioning flow meter.
The Herzog action was brought pursuant to General Municipal Law Section 51, which allows taxpayers to sue derivatively
" ` only when the acts complained of are fraudulent, or a waste of public property in the sense that they represent a use of public property or funds for entirely illegal purposes ` ". The Appellate Division, Third Department dismissed the G.M.L. Section 51 claim because plaintiffs had failed to allege fraud or illegal conduct.
In Prodell v. State,27 taxpayers challenged the constitutionality of an amendment of the Suffolk County Tax Act
(SCTA) requiring a school district near a nuclear power plant to pay school tax refunds. As noted by J. Kahn " The Shoreham Nuclear Power Plant continues to be a costly white elephant whose footfall is heard in many quarters..(the) essence of the dispute...(is) who shall pay the multi-million dollar school tax refund " ]. The amendment under attack provided that school tax refunds must be paid by a school district where property has been improved by being located near a nuclear power plant. The 1983 amendment was based on the belief that " nuclear ( power plants )
have created ` tax havens ` resulting in lower school taxes for residents of school districts which contain them ". In finding the amendment unconstitutional the Court found the presumed benefit arising from proximity to a nuclear power plant to be flawed and without support.

CLASS MEMBER CLAIM EXCLUDED

In Beaumont v. American Can Co.28, two companies merged in a buy out agreement which provided $15.00 in cash for each share held by large institutional investors and $12.61 cash equivalents for small shareholders. The Beaumont class of small shareholders sought the $2.39 difference and alleged a breach of fiduciary duty and violations of Business Corporation Law Section 501 which " mandates that each share of stock shall be equal to every other share of the same class ". A settlement expressly excluding defendants was reached providing for a per share recovery of $3.22. Frank T. Crohn, a former director and executive committee member of one of the defendants owned 334,031 shares and made a claim against the settlement fund. The Appellate Division, First Department affirmed the denial of the Crohn claim on two grounds. First, Crohn voted for the merger and was, in part, responsible for the lawsuit and, hence, " a wrongdoer should not be allowed to profit from his own wrong ". Second, Crohn was not a typical member of the class since he had voted for the merger to the disadvantage of class members.


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Footnotes

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1 .Branch v. Crabtree, Index No: 15822/89, N.Y. Sup., West. Cty.,
Decision of J. Silverman dated October 31, 1995.
2 .Branch v. Crabtree, 197 A.D. 2d 557, 603 N.Y.S. 2d 490 ( 1993 )
( class certification granted ).
3 .For a discussion of a coupon settlement see Feldman v. Quick Quality Restaurants, Inc., N.Y.L.J., July 22, 1983, p. 12, col. 4
( N.Y. Sup. )( 16 million fast food purchasers overcharged $.01; fluid recovery approved; settlement provided for $100,000.00 worth of $.50 coupons for the purchase of fast food products ).
4 .Karlin v. IVF America, Inc., Index No. 19993/94, N.Y. Sup., West. Cty., Decision of J. Rosato dated December 6, 1995.
5 .Compare: Stix v. Mount Sinai Hospital, Index No: 103856/93, N.Y. Sup., N.Y. Cty, J. Wilk ( approval of $4 million settlement of claims against infertility clinic arising from misrepresented success rates ).
6 .This element of the Karlin decision is important since it reflects an expansive approach to the application of New York's consumer protection statute. See N. 12, infra.
7 .Heller v. The Coca-Cola Co., N.Y.L.J., April 18, 1995, p. 28, col. 6 ( Kings Sup. ).
8 .Darns v. Sabol, 165 Misc. 2d 77, 627 N.Y.S. 2d 526 ( 1995 ).
9 .Bragar & Wexler, P.C. v. Wechsler Skirnick, N.Y.L.J., February 8, 1995, p. 22, col 3 ( N.Y. Sup. ).
10 .For another unpleasant fee fight between plaintiffs' class action law firms see Sternberg v. Citicorp Co., 110 Misc. 2d 804, 442 N.Y.S. 2d 1017 ( 1981 ).
11 .See e.g., Lazar v. The Hertz Corp., 143 Cal. App. 3d 128, 191 Cal. Rptr. 849 ( 1987 )( unconscionable gasoline replacement charges ); Super Glue Corp. v. Avis Rent-A-Car Systems, Inc., 132 A.D. 2d 604, 517 N.Y.S. 2d 764 ( 1987 )( excessive refueling charges ); Truta v. Avis Rent A Car Systems, 193 Cal. App. 3d 802, 238 Cal. Rptr. 806 ( 1989 )( excessive charges for collision damage waivers ); Korn v. Avis Rent A Car Systems, Inc., 8 Pa. D. & C. 3d 655 ( Pa. Com. Pleas 1997 ), aff'd 387 A. 2d 119 ( 1978 )
( unconscionable collision damage waiver charges ). See also Dickerson, Travel Law, Law Journal Press, New York, 1981-1995 at Section 305.
12 .Gershon v. The Hertz Corporation, 626 N.Y.S. 2d 80 ( N.Y. App. Div. 1st Dept. 1995 ).
13 .For cases discussing various deceptive business practices see Oswego Laborer's Local 214 Pension Fund v. Marine Midland Bank, NA, 85 N.Y. 2d 20, 623 N.Y.S. 2d 529, 647 N.E. 2d 741 ( 1995 )
( misrepresented savings accounts ); Teller v. Bill Hayes, 630 N.Y.S. 2d 769 ( N.Y. App. Div. 2d. Dept. 1995)( home improvement contracts ); Andre v. Pace University, 161 Misc. 613, 618 N.Y.S. 2d 975 ( 1994 )( educational malpractice ); Bartolomeo v. Runco, 162 Misc. 2d 485, 616 N.Y.S. 2d 695 ( 1994 )( leases and illegal apartments ); Rossi v. 21st Century Concepts, Inc., 162 Misc. 2d 932, 618 N.Y.S. 2d 182 ( 1994 )( door to door sale of pots and pans ); Giarratano v. Midas Muffler, 630 N.Y.S. 2d 656 ( Yks.
Cty. Ct. 1995 )( breach of warranty ); Pelligrini v. Landmark Travel Group, N.Y.L.J., June 2, 1995, p. 31, col. 5 ( Yks. Cty.
Ct. 1995 )( travel agent negligence ); Brown v. Hambric, N.Y.L.J., December 7, 1995, p. 36, col. 5 ( Yke. Cty. Ct. 1995 )
( pyramid schemes ). See also Moldovan, New York Creates A Private Right Of Action To Combat Consumer Fraud: Caveat Venditor, 48 Brooklyn L.R. 509.
14 .Lewis v. Hertz Corporation, 212 A.D. 2d 476, 624 N.Y.S. 2d 800 ( 1995 ).
15 .Weinberg v. Hertz Corporation, 69 N.Y. 2d 979, 516 N.Y.S. 2d 652 ( 1987 ).
16 .Bertoldi v. State of New York, 164 Misc. 2d 814, 625 N.Y.S. 2d 814 ( 1995 ).
17 .Guice v. Schwab & Co., 214 A.D. 2d 53, 630 N.Y.S. 2d 317
( 1995 ).
18 .Rosenfeld v. Bear Stearns, Notice of Pendency of Class Action, Proposed Settlement of Class Action and Settlement Hearing, dated March 28, 1995 ( J. Gammerman ).
19 .Meraner v. Albany Medical Center, 621 N.Y.S. 2d 208 ( N.Y. App. Div. 3rd Dept. 1995 ).
20 .Meraner v. Albany Medical Center, 199 A.D. 2d 740, 605 N.Y.S. 2d 442 ( 1993 ).
21 .Seittelmen v. Sabol, 630 N.Y.S. 2d 296 ( N.Y. App. Div. 1st Dept. 1995 ).
22 .Matter of Empire Blue Cross and Blue Shield Customer Litigation, N.Y.L.J., October 12, 1995, p. 28, col. 6 ( N.Y. Sup. ).
23 .See Minihane v. Weissman, N.Y.L.J., December 20, 1994, p. 27, col. 4 ( N.Y. Sup. ).
24 .See Avena v. Ford Motor Co., 85 A.D. 2d 149, 447 N.Y.S. 2d 278 ( 1982 ).
25 .Matter of Penfield Tax Protest Group, 210 A.D. 2d 901, 621 N.Y.S. 2d 256 ( 1994 ).
26 .Herzog v. Town of Thompson, 628 N.Y.S. 2d 869 ( N.Y. App. Div. 1995 ).
27 .Prodell v. State of New York, 630 N.Y.S. 2d 880 ( Albany Sup. 1995 ).
28 .Beaumont v. American Can Co., N.Y.L.J., May 22, 1995, p. 25, col. 5 ( N.Y. App. Div. 1st Dept. )