Just Film, Inc. v. Buono
| Decision Date | 07 February 2017 |
| Docket Number | No. 14-16132, No. 14-16133,14-16132 |
| Parties | JUST FILM, INC.; Rainbow Business Services, DBA Precision Tune Auto Care; Volker von Glasenapp; Jerry Su; Dietz Towing Inc. ; The Rose Dress Inc.; Verena Baumgartner; Terry Jordan; Lewis Bae; Erin Campbell, Plaintiffs–Appellees, v. Sam BUONO; Jay Cohen ; Sara Krieger; MBF Leasing LLC ; Leonard Mezei; Northern Funding, LLC; Northern Leasing Systems, Inc.; SKS Associates LLC, Defendants–Appellants. Rainbow Business Services, DBA Precision Tune Auto Care; Volker von Glasenapp; Jerry Su; Dietz Towing Inc. ; The Rose Dress Inc.; Verena Baumgartner; Terry Jordan; Lewis Bae; Erin Campbell, Plaintiffs–Appellees, v. Sam Buono; Jay Cohen ; Sara Krieger; MBF Leasing LLC ; Leonard Mezei; Northern Funding, LLC; Northern Leasing Systems, Inc.; SKS Associates LLC, Defendants–Appellants. |
| Court | U.S. Court of Appeals — Ninth Circuit |
Thomas J. Kavaler (argued), Cahill Gordon & Reindel LLP, New York, New
York; Robert D. Lillienstein and Scott E. Silberfein, Moses & Singer LLP, New York, New York; Rod Divelbiss, JRA Law Partners LLP, San Francisco, California; for Defendants–Appellants.
Adam J. Gutride (argued) and Seth A. Safier, Gutride Safier LLP, San Francisco, California, for Plaintiffs–Appellees.
Before: Ronald M. Gould and Marsha S. Berzon, Circuit Judges, and John R. Tunheim,* Chief District Judge.
Plaintiffs–Appellees are small businesses and small business owners who leased "point of sale" credit and debit card processing equipment. They allege that Defendants–Appellants (the "Leasing Defendants") defrauded them in a scheme that involved equipment leases and credit card processing services. Plaintiffs moved to certify five national classes with California-based subclasses under Federal Rule of Civil Procedure 23(b)(3). Of the five proposed national classes, the district court certified two: the "SKS Post–Lease Expiration Class" and the "Property Tax Equipment Cost Basis Class." Leasing Defendants appeal the district court's orders certifying these two classes.
Because we conclude that the district court did not abuse its discretion in certifying the SKS Post–Lease Expiration Class and the Property Tax Equipment Cost Basis Class, we affirm.
Plaintiffs are small businesses and small business owners who leased "point of sale" credit and debit card processing equipment, such as swipe terminals and pinpads. Plaintiffs allege that Leasing Defendants, a group of entities who financed their acquisition of the equipment, defrauded them in a scheme involving equipment leases and credit card processing services.
Plaintiffs describe the alleged fraud that swindled them as follows: Credit and debit card transactions are processed through financial networks called interchanges that are run by entities such as Visa and Mastercard. Financial institutions may become members of the interchange and can then sell card processing services directly to merchants or indirectly through entities known as Independent Sales Organizations and Merchant Service Providers ("ISOs/MSPs"). ISOs/MSPs must be licensed and registered with the financial institutions and both Visa and Mastercard. Merchants must acquire specific equipment necessary to process credit and debit card transactions and must also pay a fee for each transaction.
Plaintiffs allege that Leasing Defendants conspired with the ISO/MSP Defendants (the "Merchant Service Defendants") to market fraudulent, long-term equipment leases and credit card processing services to merchants. Merchant Service Defendants sought merchants and induced them to enroll in such leases through "a series of deceitful misrepresentations and forged documents," whereby merchants paid fees in excess of standard industry rates. The high lease costs did not pay for the equipment, but instead, primarily went toward Merchant Service Defendants' commissions for securing the leases and toward Leasing Defendants' profits.
More specifically, Plaintiffs allege that in 2011, Leasing Defendants conspired among themselves to defraud former lessee merchants by collecting or attempting to collect taxes that were not actually due or paid to any taxing authority. Leasing Defendants calculated property taxes using inaccurate tax information, such as the wrong property tax base and incorrect years that lessees were enrolled in the leases, and compiled the results in a spreadsheet called Schedule 1. Schedule 1 listed more than 107,000 merchants owing over $10 million in back property taxes and administrative fees. Leasing Defendants next instructed a third party to send a form letter to the former lessees telling them that Defendant SKS Associates LLC had acquired collection rights, and deductions would occur based on the purported back taxes merchants owed. Leasing Defendants collected the taxes and fees from merchants with expired leases by making misrepresentations to third party processors and causing processors to authorize Automated Clearing House ("ACH") withdrawals from the merchants' bank accounts. Many accounts were actually debited, but Leasing Defendants could only attempt to debit closed bank accounts associated with expired leases. Leasing Defendants also created a network of shell companies to "ensure[ ] that their unlawful acts remain hidden and that victims and the courts are unable to identify the responsible party."
Plaintiff Erin Campbell does business as the Silicon Valley Pet Clinic. Campbell seeks to represent a class of lessees targeted under this post-lease expiration tax collection scheme. She entered into a lease for a credit card terminal with CIT Corporation and provided her bank account information to make monthly payments of about $86.55. GCN Holdings, LLC later acquired Campbell's lease, and Defendant Northern Leasing Systems serviced the lease on behalf of GCN. Campbell began taking steps to terminate her lease in January 2007 and completed termination in June 2007. Yet, in March 2011, Campbell received a letter (the "Notice of Debt") from Defendant SKS Associates, which Plaintiffs allege was written by Defendant Northern Leasing Systems. The letter stated that SKS Associates had acquired the rights and title to her old lease, that she owed $85.50 for taxes and filing costs associated with her equipment, and that the amount would be deducted on March 15, 2011. Campbell called SKS Associates about the charge, and the customer service representative stated that Leasing Defendants had paid taxes on Campbell's behalf and that she now owed them for that payment. The representative warned Campbell that if she did not pay, Leasing Defendants would report the amount owed to credit bureaus and pursue other methods of collection. Campbell alleges she spent several hours of her normal work time investigating the claims in the letter and paid an employee $7.50 to investigate the claims and compute what Campbell paid during the lease.
Plaintiffs also allege that Leasing Defendants collected property taxes using an inaccurate methodology: rather than collecting property taxes based on the actual cost of equipment (the "Equipment Cost"), Leasing Defendants calculated taxes using a higher base—the stream of income a lease generated (the "Acquisition Cost"). Plaintiffs contend that the difference between the two costs is large. For example, Plaintiff Just Film's Acquisition Cost was $5,429.19, and Plaintiff Dietz Towing's Acquisition Cost was $3,686. By contrast, the Equipment Cost was only $358.
Leasing Defendants collected property taxes using the higher Acquisition Cost as the tax base for several years but later switched to calculating property tax using the Equipment Cost as the tax base. Plaintiffs allege that after the switch, Defendant Northern Leasing Systems never told merchants that it had wrongly overcharged them for property taxes and did not take any steps to refund merchants for its mistakes.
Plaintiffs filed a putative class action in state court, which Defendants removed to federal court. In their Third Amended Class Action Complaint, Plaintiffs allege violations of Sections 17200 and 17500 of the California Business and Professions Code ; violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962 ; violations of the Fair Credit Reporting Act ("FCRA"), 15 U.S.C. § 1681 ; breach of contract; deceit and/or misrepresentation; negligent misrepresentation; and conversion.
In April 2011, Plaintiffs filed an application for a temporary restraining order, asking the district court to enjoin Leasing Defendants' collection of post-lease expiration taxes and administrative fees. The district court granted the application, and in June 2011, issued a preliminary injunction. We affirmed the preliminary injunction order in Just Film, Inc. v. Merchant Servs., Inc. , 474 Fed.Appx. 493 (9th Cir. 2012).
In December 2013, the district court granted a motion for final approval of the class action settlement with respect to the Merchant Service Defendants.
In May 2013, Plaintiffs filed a motion for class certification, seeking to certify an overarching class and five separate subclasses under Rule 23(b)(3). Two of the subclasses were certified and are relevant to this appeal: (1) the "SKS Post–Lease Expiration Class," and (2) the "Property Tax Equipment Cost Basis Class."1 The SKS Post–Lease Expiration Class is defined as "[a]ll persons and businesses whose lease numbers appeared on Schedule 1" with a national class pursuing RICO and RICO conspiracy claims and a California subclass pursuing an Unfair Competition Law ("UCL") claim under Section 17200 of the California Business and Professions Code. The Property Tax Equipment Cost Basis Class is defined as "[a]ll persons and businesses who [from March 26, 2006 to the present] paid any Leasing Defendants...
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