Citizens Ins. Co. of America v. Daccach

• Decision Date: 02 March 2007
• Docket Number: No. 03-0505.,03-0505.
• Citation: 217 S.W.3d 430
• Parties: CITIZENS INSURANCE COMPANY OF AMERICA, Citizens, Inc., Harold Riley, and Mark Oliver, Petitioners, v. Dr. Fernando Hakim DACCACH, On Behalf of Himself and all Others Similarly Situated, Respondent.
• Court: Texas Supreme Court

217 S.W.3d 430

CITIZENS INSURANCE COMPANY OF AMERICA, Citizens, Inc., Harold Riley, and Mark Oliver, Petitioners, v. Dr. Fernando Hakim DACCACH, On Behalf of Himself and all Others Similarly Situated, Respondent.

No. 03-0505.

Supreme Court of Texas.

Argued October 21, 2004.

Decided March 2, 2007.

Fred E. Davis, Mark A. Keene, Davis & Davis, P.C., Austin, for Petitioners.

Robert B. Dubose, Alexander Dubose Jones & Townsend LLP, Ronald E. Cook, Robert M. Roach Jr., Cook & Roach L.L.P., Houston, Carlos Velasquez, Montero Finizio & Velasquez, Fort Lauderdale, Tony M. Jobe, Law Offices of Tony Jobe, Madisonville, LA, and Robert J. Malone, Toas, NM, for Respondent.

Justice WAINWRIGHT delivered the opinion of a unanimous Court as to sections I-III and V-VIII; the opinion of the Court as to sections IV-A, IV-C, and IV-D, joined by Justice HECHT, Justice O'NEILL, Justice GREEN, Justice JOHNSON, and Justice WILLETT; and a concurring opinion as to section IV-B, joined by Justice JOHNSON.

In this interlocutory appeal petitioners challenge a trial court's order certifying a worldwide class. Dr. Fernando Hakim Daccach, the class's representative, alleges that petitioners Citizens Insurance Company of America (CICA), Citizens, Inc., Harold E. Riley, and Mark A. Oliver (collectively Citizens) sold securities from Texas to nonresidents without complying with the registration requirements of the Texas Securities Act. The court of appeals modified the class definition and affirmed the trial court's certification of the class. 105 S.W.3d 712. Because we conclude the trial court did not consider the effect of res judicata on the adequacy of the class representative, the superiority of litigating this case as a class action, the typicality of claims within the class, and the predominance of common issues over individual issues, we decertify the class and remand the case to the trial court for further proceedings consistent with this opinion.

I. Background

Citizens, Inc. and its wholly-owned subsidiary CICA are Colorado corporations with their principal places of business in Austin, Texas. Riley and Oliver are officers and directors of Citizens, Inc. Citizens sells life insurance policies (CICA policies) through foreign insurance agents exclusively to persons outside of the United States. The purchasers reside in over thirty-five countries including the United States. The CICA policies allow policyholders to assign policy dividends and other benefits to offshore trusts. The trusts use the assigned dividends and other benefits to purchase common stock in Citizens, Inc. Each year since 1996 there have been approximately 30,000 CICA policies in effect, with each policyholder paying an average annual premium of around $2,000. Id. at 717. At least seventy-five percent of these policyholders have assigned their policy dividends and other benefits to the offshore trusts. Id.

The CICA policies are not registered with the Texas State Securities Board, Texas Department of Insurance, nor any other regulatory body in the United States, although the common stock purchased with policy dividends is listed on the American Stock Exchange. Similarly, neither Citizens nor its salespersons have registered with any regulatory body in Texas or elsewhere in the United States. Citizens also asserts that the CICA policies are not subject to regulation in the countries in which the policyholders reside.

On August 6, 1999, Delia Bolanos Andrade and Luis Martin Tapia Alberti, both residents and citizens of Colombia, South America, filed a class action against Citizens in Texas state court. The original petition alleged several causes of action related to the CICA policies, including (1) violations of the Texas Deceptive Trade Practices Act, (2) breach of contract, (3) fraud, (4) fraud in the inducement, (5) negligent misrepresentation, (6) breach of the duty of good faith and fair dealing, (7) violations of the Texas Insurance Code, (8) equitable reformation of the policies, (9) conspiracy to plan and implement this scheme, and (10) unjust enrichment and the imposition of a constructive trust. On December 15, 2000, the class plaintiffs filed a second amended original petition to add a cause of action under the Texas Securities Act for selling securities in this state without first being registered. See TEX. REV.CIV.STAT. arts. 581-12A, 581-33A(1).¹ By this time seven new plaintiffs had been added to the lawsuit, including Daccach.

On June 29, 2001, Daccach filed a motion for class certification in which he sought designation as the class representative and alleged against Citizens only one class claim: selling or offering securities from Texas in the form of the CICA policies without registering with the Texas Securities Board. See TEX.REV.CIV. STAT. arts. 581-12A, 581-33A(1), 581-33D(1), D(3). Daccach expressly disclaimed any intention to pursue the other causes of action in the class suit. In the sixth amended petition, filed the same day as the first amended motion for class certification, the other plaintiffs pled the original claims against Citizens as individuals, not as class representatives. The trial court has not ruled on Daccach's motion to sever the class claims.

Challenging Daccach's motion for class certification, Citizens argued that Texas law should not apply to this worldwide class action and that Daccach's abandonment of claims defeats certification prerequisites. In response, Daccach presented alternate choice of law analyses all of which directed the application of Texas law, but none of his theories analyzed the laws of other jurisdictions.

After conducting a four-day hearing, the trial court granted Daccach's motion in a twenty-page class certification order. The order's nine-page trial plan identified four class-wide issues to be resolved at trial: (1) whether a CICA Policy is a "security" pursuant to the Securities Act (including the question of whether the CICA policies fall within an insurance exception to the Securities Act); (2) whether Citizens sold or offered for sale the CICA policies from Texas; (3) the calculation of the statutory remedy pursuant to the Securities Act; and (4) attorney's fees. The order defined the class as follows:

The Class consists of all persons, who, during the Class Period (August 6, 1996 through the date the Class is certified): (1) purchased a CICA Policy and executed an assignment to a trust for the purchase of Citizens, Inc. stock, or (2) paid any money that, pursuant to a CICA Policy and assignment to a trust, was for the purchase of Citizens, Inc. stock, or (3) were entitled to any cash benefits from a CICA Policy that, pursuant to a CICA Policy and assignment to a trust, were for the purchase of Citizens, Inc. stock. Specifically excluded from the Class are all persons who, within the time period established by the judgment, do not surrender their CICA Policies and take the other actions required to obtain the relief awarded by the Court.

Citizens brought an interlocutory appeal challenging the trial court's certification order. See TEX. CIV. PRAC. & REM.CODE § 51.014(a)(3). Citizens argued that the trial court abused its discretion in granting Daccach's motion for class certification. First, Citizens challenged the adequacy of the trial court's class definition. Second, it argued that the trial court failed to conduct a proper choice of law analysis to determine whether common issues predominate over individual issues. Third, Citizens argued that the trial court failed to adequately establish the class certification prerequisites. The court of appeals rejected all three points, holding that: the class definition, after a one-word modification, precisely ascertains the class members;² the trial court was not required to engage in a "most significant relationship" choice of law analysis; and the trial court did not abuse its discretion by finding that the class certification requirements had been met. 105 S.W.3d at 729-30.

Citizens then petitioned this Court for review. Specifically, Citizens contends that the court of appeals erred in (1) affirming the certification of an improper fail-safe class, whose members are not presently ascertainable, and eviscerating material defenses; (2) not applying the "most significant relationship" test to resolve choice-of-law issues; (3) determining that common legal and factual issues predominate despite that calculating attorney's fees will be an overwhelming task requiring the discovery and resolution of circumstances surrounding life insurance sales in over fifty foreign jurisdictions; (4) affirming that a class action is superior to individual claims despite the fact that certification requires dismissal of ten of the eleven original claims and that this is not a negative value suit;³ (5) agreeing, without explanation, that the trial court will be able to implement the statutory remedy of rescission even though the beneficial interests of the policies are held in offshore trusts not parties to this case; (6) affirming that Texas Rule of Civil Procedure 42(a)'s typicality requirement was met despite the presence of a statute of limitations defense against the class plaintiff and the class plaintiff's dismissal of ten of the eleven originally alleged claims; and (7) holding that previously asserted, and now abandoned, individual claims of class members would not be barred by res judicata, thereby reading Rule 42 as an exception to the Court's transactional approach to claim preclusion. We granted Citizens' petition for review.

II. Jurisdiction

Section 51.014(a)(3) of the Texas Civil Practice and Remedies Code allows the interlocutory appeal of class certification orders. Although interlocutory appeals are generally final in the courts of appeals, this Court has jurisdiction over an interlocutory appeal if the court of appeals "holds differently from a prior decision of another court of appeals or of the supreme court." TEX. GOV'T CODE §§...