Adams v. Reagan, 2-89-270-CV

• Court: Texas Court of Appeals
• Writing for the Court: JOE SPURLOCK, II
• Citation: Adams v. Reagan, 791 S.W.2d 284 (Tex. App. 1990)
• Decision Date: 30 May 1990
• Docket Number: No. 2-89-270-CV,2-89-270-CV
• Parties: George G. ADAMS, George R. Adams, George J. Adams, et al., Appellants, v. Gaye REAGAN, et al., Appellees.

Page 284

791 S.W.2d 284

George G. ADAMS, George R. Adams, George J. Adams, et al., Appellants, v. Gaye REAGAN, et al., Appellees.

No. 2-89-270-CV.

Court of Appeals of Texas Fort Worth.

May 30, 1990.

Jenkens & Gilchrist, William D. Sims, Jr., Brian J. Hurst and David B. Dyer, Dallas, for appellants.

Banner, Dobbs & Briley and Jack Banner, Wichita Falls, for appellees.

Before JOE SPURLOCK, II, HILL and MEYERS, JJ.

OPINION

JOE SPURLOCK, II, Justice.

This is an appeal from an order granting appellee Gaye Reagan's Motion to Certify this suit as a class action on behalf of herself and many others.

We affirm.

Neither party disputes the following recitation of the facts. First Mercantile Corporation ("FMC") was a financial investment company located in Wichita Falls, Texas. By advertising and soliciting, FMC encouraged residents of Texas to make deposits or purchase securities issued by the corporation. Appellants state that FMC's business was to reinvest funds placed by individual investors. Appellees contend that the shareholders of FMC caused the corporation to loan money on a wide variety of speculative loans, many of which were to ventures or entities in which the shareholders held an interest. FMC issued Investor Notes, which provided investors fixed or floating rates of return. The Investor Notes were duly licensed and approved by the Texas Securities Commission. By March 1988, approximately 1,100 individuals and entities had investments at FMC.

On March 8, 1988, FMC filed bankruptcy in the United States Bankruptcy Court for the Northern District of Texas. As a result, the Texas Securities Commission began an investigation of FMC and sent questionnaires to approximately 800 investors. On May 20, 1988, 83 former investors at FMC (appellees) filed this action against appellants, who are former officers and directors of FMC. Appellees alleged five theories of liability: (1) violations of the Texas Securities Act; (2) fraud; (3) breach of fiduciary duties; (4) breach of duty of good faith and fair dealing; and (5) negligence and gross negligence.

The trial court held an evidentiary hearing on appellees' Motion to Certify the suit as a class action on June 7, 1989. By order dated October 11, 1989, the trial court certified all 1,100 FMC investors as potential class members. This is the order on appeal. Appellants' two points of error urge that the district court abused its discretion in certifying this action as a class action under TEX.R.CIV.P. 42(a) and 42(b)(1)(A).

This court's review of the trial court's class certification order is limited to determining if the court below abused its discretion. Life Ins. Co. of Southwest v. Brister, 722 S.W.2d 764, 770 (Tex.App.--Fort Worth 1986, no writ). An abuse of discretion may be found only in cases where, after searching the record, it is clear that the trial court's decision was arbitrary and unreasonable. See Simon v. York Crane & Rigging Co., Inc., 739 S.W.2d 793, 795 (Tex.1987); Landry v. Travelers Ins. Co., 458 S.W.2d 649, 651 (Tex.1970). We are required to view the evidence in the light most favorable to the trial court's action, and indulge in every presumption which would favor the trial court's action. Parks v. U.S. Home Corp., 652 S.W.2d 479, 485 (Tex.App.--Houston [1st Dist.] 1983, writ dism'd w.o.j.).

Rule 42(a) and (b) provide as follows:

(a) Prerequisites to a Class Action. One or more members of a class may sue or be sued as representative parties on behalf of all only if (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.

. . . . .

(b) Class Actions Maintainable. An action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition:

(1) the prosecution of separate actions by or against individual members of the class would create a risk of

(A) inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the party opposing the class, or

(B) adjudications with respect to individual members of the class which would as a practical matter be dispositive of the interests of the other members not parties to the adjudications or substantially impair or impede their ability to protect their interests; or (2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole; or

(3) where the object of the action is the adjudication of claims which do or may affect specific property involved in the action; or

(4) the court finds 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.

TEX.R.CIV.P. 42(a) and (b).

Texas Rule 42 is patterned after the federal class action rule and, therefore, reference to federal case law in the absence of Texas case law is appropriate. RSR Corp. v. Hayes, 673 S.W.2d 928, 931-32 (Tex.App.--Dallas 1984, writ dism'd w.o.j.). In the court below, appellees were required to satisfy all four requirements of Rule 42(a) and further show that the proposed class falls within one of the subsections of 42(b). Brister, 722 S.W.2d at 770. To determine whether a class action is appropriate in this case, we will analyze the evidence under each subsection of Rule 42(a) and (b).

RULE 42(a)(1)

: NUMEROSITY

There is no argument that subsection (1) of Rule 42(a) has been met, since it is undisputed that the potential class numbers between 800 and 1,100 potential participants.

RULE 42(a)(2) & (b)(4)

: COMMON QUESTIONS OF LAW OR FACT

Appellants argue under point of error number one that appellees failed to show that they met the commonality requirements of Rule 42(a)(2) and (b)(4). Rule 42(a)(2) presents one of the elements that must be met for certification, that is, that there are questions of law or fact common to the class. TEX.R.CIV.P. 42(a)(2). Subsection (b)(4) of the Rule requires that the court find that these questions of law or fact common to 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. TEX.R.CIV.P. 42(b)(4).

We stated in Brister that it is only where this predominance of the common issues exists that the economies of a class action can be achieved and the splintering into numerous individual trials can be avoided. Brister, 722 S.W.2d at 772. Questions common to the class are those questions which, when answered as to one class member, are answered as to all class members. RSR Corp., 673 S.W.2d at 930; Amoco Production Co. v. Hardy, 628 S.W.2d 813, 816 (Tex.App.--Corpus Christi 1981, writ dism'd). The test for the court to use in evaluating the predominance issue is not whether the common issues out-number the individual issues, but instead whether common or individual issues will be the object of most of the efforts of the litigants and the court. Republic Nat'l. Bank of Dallas v. Denton & Anderson Co., 68 F.R.D. 208, 215 (N.D.Tex.1975). Appellants urge that in this case the key facts are different for each investor, and as a result, the individual issues of the individual investors predominate over any common issues.

In support of their commonality argument, appellees list three separate and individually homogeneous "issues of fact or law," each of which they assert is legally sufficient to sustain the class certification. The first issue is that appellants, by scheme and design, sold and issued securities without resort to, or use of, the prospectus. Appellees urge that the sale and issuance of a registered security to more than 750 different people without any use of, or disclosure by, a prospectus is a homogeneous class action based on the same facts and the same law.

Appellees' second common issue urged is that appellants, individually and collectively, caused false and misleading financial information to be disseminated to investors by way of printed Statements of Condition concerning FMC's financial circumstances. The Statement of Condition dated June 30, 1987, represents FMC to have stock, retained earnings, and surplus of $4,356,067. No adverse financial information or circumstances is disclosed in this Statement of Condition. However, eight months later, appellants placed FMC in bankruptcy. There was testimony by one of the appellants admitting that the Statements of Condition were not a full disclosure of the financial condition of FMC.

Appellees claim that the alleged false and misleading Statements of Condition were written documents received by all the class members making a uniform fact issue applicable to the entire class. The Securities Act of Texas prohibits the use of false or misleading information by a regulated issuer of securities. This is an issue of law common to the class.

The third issue supporting class certification is that appellants, by design, scheme and plan, have kept secret and...