Toothman v. Freeborn & Peters

• Decision Date: 21 November 2002
• Docket Number: No. 01CA1142.,01CA1142.
• Citation: 80 P.3d 804
• Parties: Penelope TOOTHMAN, Robert Mosbarger, and Marvin Nevonen, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. FREEBORN & PETERS and Lawson M. Kerster, Defendants-Appellees.
• Court: Colorado Court of Appeals

80 P.3d 804

Penelope TOOTHMAN, Robert Mosbarger, and Marvin Nevonen, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. FREEBORN & PETERS and Lawson M. Kerster, Defendants-Appellees.

No. 01CA1142.

Colorado Court of Appeals, Div. II.

November 21, 2002.

Certiorari Denied October 15, 2003.

Dyer & Shuman, LLP, Robert J. Dyer, III, Jeffrey A. Berens, Denver, Colorado; Mower & Carreon, Jon R. Mower, Irvine, California, for Plaintiffs-Appellants.

Gersh & Helfrich, LLP, Miles M. Gersh, James S. Helfrich, Denver, Colorado; Hall & Evans, LLC, Daniel R. Satriana, Jr., John E. Bolmer, II, Denver, Colorado, for Defendant-Appellee Freeborn & Peters.

Lawson M. Kerster, Pro Se.

Ken Salazar, Attorney General, Gerald R. Rome, Assistant Attorney General, Denver, Colorado, for Amicus Curiae Securities Commissioner for the State of Colorado.

Brega & Winters, P.C., Lee Katherine Goldstein, Denver, Colorado, for Amicus Curiae Business Law Section of the Colorado Bar Association.

Opinion by Judge PIERCE¹

Plaintiffs, Penelope Toothman, Robert Mosbarger, and Marvin Nevonen, appeal a trial court order denying their request for class certification pursuant to C.R.C.P. 23. We reverse and remand with directions.

Plaintiffs sued numerous defendants, including Lawson M. Kerster and Freeborn & Peters (the law firm), asserting violations of the Colorado Securities Act, § 11-51-101, et seq., C.R.S.2002; the Colorado Consumer Protection Act, § 6-1-101, et seq., C.R.S. 2002; and the Colorado Organized Crime Control Act, § 18-17-101, et seq., C.R.S. 2002, as well as common law claims for damages.

In the underlying suit, plaintiffs alleged that numerous defendants, with the intent to defraud investors, organized, promoted, and sold interests in fifty-three limited liability partnerships (LLPs) established to sell prepaid cellular phone services. The interests were sold, via phone solicitation, to approximately 5,000 investors.

After several partial class action settlements were reached, in which the trial court certified settlement classes of investors as to the claims against certain defendants, plaintiffs sought class certification of their claims against the remaining defendants—Kerster and the law firm.

In their motion for class certification, plaintiffs defined the putative class as:

All persons who purchased or otherwise acquired limited liability "partnership interests" in Colorado limited liability partnerships in which [the two corporate general partners] served as corporate partner.

....

Excluded from the Class are plaintiffs' counsel, all past and present defendants in this action, any subsidiaries or affiliates of the past and present defendant companies, and members of the immediate families of past and present defendants.

Excluded from the Class shall also be those persons and entities who file a valid request for exclusion.

In support of their request for class certification, plaintiffs first argued that the common questions of law and fact included, but were not limited to: whether defendants engaged in the conduct complained of; whether the interests at issues here are "securities" under the Colorado Securities Act; whether the law firm drafted the relevant offering documents and whether those documents contained material misrepresentations or omissions; whether defendants participated in or aided and abetted Colorado Securities Act violations; whether and how much the class members were damaged; and whether the class is entitled to punitive damages.

Plaintiffs further asserted that because they alleged "a common course of conduct involving, for example, misleading form offering documents and breach of fiduciary duties affecting each and every putative class member," and the ultimate issue of liability is common to the putative class, the common issues predominate over any individual issues.

The trial court denied plaintiffs' motion after extensive briefing and oral arguments, ruling that they had failed to establish that the matter was appropriate for class certification under C.R.C.P. 23(b).

This appeal of the trial court's class certification denial is properly before us for review. See Levine v. Empire Sav. & Loan Ass'n, 192 Colo. 188, 557 P.2d 386 (1976)

(dismissal of class action allegation is final order because its legal effect is dismissal of all members of the class other than petitioners).

I. Class Certification Law

Initially, we note that when available and applicable, we will rely upon Colorado case law. When citing cases from other jurisdictions, however, we have selected the authorities that, in our view, represent the better rule of law even where case law to the contrary exists.

The certification of a class action is governed by C.R.C.P. 23, and the plaintiffs have the burden of proving compliance with the rule. Ammons v. Am. Family Mut. Ins. Co., 897 P.2d 860 (Colo.App.1995).

To maintain a class action, a party must first meet the requirements of C.R.C.P. 23(a), that:

(1) The class is so numerous that joinder of all members is impracticable; (2) there are questions of law or fact common to the class; (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and (4) the representative parties will fairly and adequately protect the interests of the class.

The law firm and Kerster do not dispute that plaintiffs have satisfied the threshold requirements of C.R.C.P. 23(a).

"If the requirements of C.R.C.P. 23(a) are satisfied, an action then may be maintained as a class action only if it meets the additional requirements of one of the three subsections of [C.R.C.P.] 23(b)." State v. Buckley Powder Co., 945 P.2d 841, 844 (Colo. 1997).

As applicable here, the relevant subsection requires:

that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.

The matters pertinent to the findings include:

(A) The interest of members of the class in individually controlling the prosecution or defense of separate actions;

(B) The extent and nature of any litigation concerning the controversy already commenced by or against members of the class;

(C) The desirability or undesirability of concentrating the litigation of the claims in the particular forum;

(D) The difficulties likely to be encountered in the management of [a] class action.

C.R.C.P. 23(b)(3).

"[W]hen one or more of the central issues in the action are common to the class and can be said to predominate, the action is proper under [C.R.C.P.] 23(b)(3), even though other matters will have to be tried separately." Villa Sierra Condo. Ass'n v. Field Corp., 787 P.2d 661, 665 (Colo.App.1990)(quoting In re Sch. Asbestos Litig., 789 F.2d 996 (3d Cir.1986)).

"The decision of whether to certify a class action lies within the discretion of the trial court and will not be disturbed unless the decision is clearly erroneous and an abuse of discretion." Friends of Chamber Music v. City & County of Denver, 696 P.2d 309, 317 (Colo.1985); Livingston v. United States Bank, 58 P.3d 1088, 2002 WL 927068 (Colo.App. No. 01CA0605, May 9, 2002). An abuse of discretion includes an erroneous application of the law. See, e.g., Kuhn v. State, 817 P.2d 101 (Colo.1991)

.

Because C.R.C.P. 23 is virtually identical to Fed.R.Civ.P. 23, we look to case law regarding the federal rule for guidance. See State v. Buckley Powder Co., supra. Furthermore, class treatment is particularly appropriate for proceedings involving alleged violations of securities laws, and Fed.R.Civ.P. 23 should be construed liberally to achieve that end. Eisenberg v. Gagnon, 766 F.2d 770 (3d Cir.1985); Schwartz v. Celestial Seasonings, Inc., 178 F.R.D. 545 (D.Colo.1998). That proposition applies equally to C.R.C.P. 23.

II. Trial Court Ruling

The trial court here ruled that plaintiffs established common questions of law or fact among the 5,000 potential class members. Specifically, the court found that "every member of the class invested in almost identical LLPs, and entered into the transaction using substantially similar partnership agreements."

However, it further found that the common questions do not "predominate over individual questions" under C.R.C.P. 23(b)(3). The court first determined that whether the LLP interests here are "securities" for the purpose of proving securities fraud "requires an analysis of each [individual] investor in relation to each partnership" pursuant to the holding in Feigin v. Digital Interactive Associates, Inc., 987 P.2d 876 (Colo.App.1999) (adopting the rationale of Williamson v. Tucker, 645 F.2d 404 (5th Cir.1981)). The court further found that in this case "there is a wide range of investment knowledge and education among the individual investors" and that "each investor completed detailed signature pages informing [him or her] that the LLPs were not securities and required a certain degree of acumen, involvement and sophisticated investor knowledge."

The court also determined that § 13-21-111.5, C.R.S.2002, and Slack v. Farmers Insurance Exchange, 5 P.3d 280 (Colo.2000), would require a special verdict apportioning fault among the parties, including the class members and certain nonparties, who may be "found to have contributed to the unsuccessfulness [sic] of the LLPs."

As a result, the court ruled that "given the number of potential class members and the individualized issues relating to whether the partnerships are securities and apportionment of fault, this case would be unwieldy if tried as a class action."

III. Previous Settlement Class Certifications

As a threshold matter, we first reject plaintiffs' contention that the trial court's prior class certifications, related to the settlements with other defendants, require that the class here must be certified. Because neither...