Teamsters Local 445 Freight Div. V. Bombardier

• Decision Date: 14 October 2008
• Docket Number: Docket No. 06-3794-cv.
• Citation: 546 F.3d 196
• Parties: TEAMSTERS LOCAL 445 FREIGHT DIVISION PENSION, FUND on its own Behalf and on behalf of all those Similarly Situated, Plaintiff-Appellant, v. BOMBARDIER INC., Bombardier Capital Inc., Bombardier Capital Mortgage Securitization Corp., Laurent Beaudoin, Brian Peters, Robert Gillespie, Lawrence F. Assell, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

546 F.3d 196

TEAMSTERS LOCAL 445 FREIGHT DIVISION PENSION, FUND on its own Behalf and on behalf of all those Similarly Situated, Plaintiff-Appellant, v. BOMBARDIER INC., Bombardier Capital Inc., Bombardier Capital Mortgage Securitization Corp., Laurent Beaudoin, Brian Peters, Robert Gillespie, Lawrence F. Assell, Defendants-Appellees.

Docket No. 06-3794-cv.

United States Court of Appeals, Second Circuit.

Argued: March 13, 2008.

Decided: October 14, 2008.

Joel P. Laitman (Samuel P. Sporn, Christopher Lometti, Kurt Hunciker, Jay

P. Saltzman, Frank R. Schirripa, on the brief), Schoengold Sporn Laitman & Lometti, P.C., New York, NY, for Plaintiff-Appellant.

Patrick M. McGuirk (A. Robert Pietrzak, Isaac S. Greaney, on the brief) Sidley Austin LLP, New York, NY, for Defendants-Appellees.

Before B.D. PARKER, and LIVINGSTON, Circuit Judges, and HALL, District Judge.¹

B.D. PARKER, Jr., Circuit Judge:

Teamsters Local 445 Freight Division Pension Fund ("Teamsters"), lead plaintiffs in a putative securities class action, appeal from an interlocutory order of the United States District Court for the Southern District of New York (Scheindlin, J.). The district court concluded that Teamsters failed to satisfy the predominance requirement of Rule 23(b)(3), Fed. R. Civ. P, and denied its motion for class certification. We agreed to hear this interlocutory appeal to consider whether the district court applied the correct standard of proof—the preponderance of the evidence standard—to this decision. This appeal also raises several ancillary issues: whether the district court made clearly erroneous factual findings in denying class certification; whether it was required to permit a full evidentiary hearing before employing a preponderance of the evidence standard; and whether it was obligated to allow additional class discovery before denying class certification. Finding no error in any of these areas, we affirm.

BACKGROUND

Bombardier, Inc. ("BI") is a Canadian corporation that manufactures and sells a variety of products, including aircraft, recreational vehicles, and locomotives. Bombardier Capital, Inc. ("BCI") is a wholly owned subsidiary of BI that was involved in financing and leasing mobile homes. Bombardier Capital Mortgage Securitization Corporation ("BCM"), a wholly owned subsidiary of BCI, packaged mobile home loans and sold them to the public as "the Certificates," the securities that are the subject of this litigation. $1.85 billion worth of Certificates were sold in seven separate offerings between 1998 and 2001, each secured by a distinct pool of mobile home loan contracts and mortgages. The Certificates were typically traded relatively infrequently and in large amounts by sophisticated institutional investors, such as Teamsters. In May 2002, Teamsters purchased $250,000 par value Series 2000-A Class A-2 Certificates for a total investment of $234,826.

In September 2001, BI, BCI, and BCM discontinued debt offerings secured by mobile home loans. In December 2002, the Series 2000A Certificates were downgraded to below investment grade. That same month, the Toronto Star and other papers reported that the price of BI shares had drastically fallen in 2002 in part due to "questions about [its] financing arm, [BCI]" and the National Post announced that BI "could take a goodwill writeoff of up to $2-billion," in order to "quickly clear up some of the most pressing challenges facing the company's lending unit."² In March 2003, the Canadian Press reported that BI and BCI were downgraded to "under review, with negative implications" and that BI "warned of the prospect of major writedowns," and the Hamilton Spectator stated that "[n]on-cash writedowns will likely include [BCI], already written down in 2001."³

In February 2005, Teamsters sued. The Complaint alleges that from 1998 to 2001, senior management at BCM, BCI, and BI disregarded underwriting standards, regularly underwrote loans to borrowers who were not creditworthy, and purchased large quantities of facially defective and deficient mobile home loans. The Complaint alleges that these reckless underwriting practices caused escalating delinquency rates, which were systematically underreported. It contends that Certificate prices collapsed following the downgrades and the December 2002 and March 2003 disclosures. The Complaint further alleges that this conduct violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78a et seq., and Rule 10b-5 thereunder, 17 C.F.R. § 240.10b-5.

In February 2006, Teamsters moved pursuant to Rule 23(b)(3) for certification of a class of all open market purchasers of the Certificates between February 7, 2000 and February 7, 2005. The appellees opposed principally on the ground that Certificate holders were not a proper Rule 23(b)(3) class because Teamsters could not adequately demonstrate that Certificate prices timely incorporated information material to the strength of the underlying collateral. The district court denied the motion. Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898(SAS), 2006 WL 2161887 (S.D.N.Y. Aug.1, 2006). It identified the "decisive" question as whether Teamsters could show that class issues predominated over individual issues so that common proof could be used to establish the reliance element of their claim under Section 10(b) and Rule 10b-5. Id. at *4. Teamsters invoked the fraud-on-the-market doctrine as one theory of reliance. Id. at *5; see Basic Inc. v. Levinson, 485 U.S. 224, 242-49, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988).⁴ The district court concluded that the fraud-on-the-market presumption was only available if the Certificates were found to have traded in an "efficient" market, one that was "open and developed enough so that it quickly incorporate[d] material information into the price of the security." Id. at *5. According to the district court, if Teamsters could "not avail itself of the presumption that investors relied on defendants' misrepresentations, the requirement that common issues predominate over individual issues [would] not be satisfied, and class certification [would] be denied." Id. at *1.

Believing that the standard of proof for analyzing Teamsters' evidence of market efficiency "ha[d] not been precisely defined," the district court determined that the preponderance of the evidence standard applied. Id. at *3, 9. It understood this Court's decision in Heerwagen v. Clear Channel Communications, 435 F.3d 219 (2d Cir.2006), to prescribe a binary standard of proof for Rule 23 issues. Teamsters, 2006 WL 2161887, at *4. The district court believed that a plaintiff was required to demonstrate by a "preponderance of the evidence" class certification issues that are "sufficiently independent of the merits to justify weighing the evidence," but to make only "some showing" of issues that are "effectively identical to the merits." Id. (internal quotation marks omitted). Finding that "the availability of a presumption [of reliance] is not a merits issue," the district court applied the preponderance of the evidence standard. Id. at *9.

The district court analyzed Teamsters' evidence of market efficiency according to five of the eight factors set forth in Cammer v. Bloom, 711 F.Supp. 1264 (D.N.J. 1989):(1) the average weekly trading volume of the Certificates, (2) the number of securities analysts following and reporting on them, (3) the extent to which market makers traded in the Certificates, (4) the issuer's eligibility to file an SEC registration Form S-3, and (5) the demonstration of a cause and effect relationship between unexpected, material disclosures and changes in the Certificates' prices. Teamsters, 2006 WL 2161887, at *6-7, 10-12. It found that two factors—the average weekly trading volume of the Certificates expressed as a percentage of the outstanding shares and the filing of an SEC Form S-3 for each class of the Certificates—supported a finding of market efficiency. Id. at *10-11. However, the district court determined that the other three factors— the existence of securities analysts following and reporting on the Certificates, the showing that market makers traded in them, and the demonstration of a causal relationship between the disclosure of material information about the Certificates and their prices—did not. Id. at *10-12. Based on this analysis and other information available, the district court concluded that Teamsters failed to demonstrate by a preponderance of the evidence that the Certificates traded in an efficient market and therefore could not rely on the fraud-on-the-market presumption. Id. at *12. Because class members would have to prove reliance individually, the court determined that Teamsters could not satisfy Rule 23(b)(3)'s predominance requirement and class certification was denied. Id.

In August 2006, shortly after the district court entered its ruling, and after an eleven-month period of discovery that included a three-month extension, the district court stayed additional discovery. Teamsters then sought, and we granted, leave to appeal the denial of class certification.⁵ See Rule 23(f), Fed.R.Civ.P. In December 2006, Teamsters asked the district court to lift the stay and to permit an additional six months of discovery to develop more proof that the Certificates traded in an efficient market.⁶ It argued that our decision in Miles v. Merrill Lynch & Co., (In re Initial Pub. Offerings Sec. Litig.), 471 F.3d 24 (2d Cir.2006) ("In re IPO"), which was issued after it had moved for class certification, established for the first time that the preponderance of the evidence standard applied to its Rule 23 evidence.

The district court denied the request. Teamsters Local 445 Freight Div. Pension Fund v. Bombardier, Inc., No. 05 Civ. 1898(SAS), at 8 (S.D.N.Y. Jan. 3, 2007) (order denying discovery request). It observed that the holding of In re IPO "was not wholly unanticipated" and that He...