Ridgeway v. Burlington Northern Santa Fe

• Decision Date: 24 August 2006
• Docket Number: No. 2-05-253-CV.,2-05-253-CV.
• Citation: 205 S.W.3d 577
• Parties: Ray RIDGEWAY, Richard Foley and Richard Starkey, Appellants and Appellees, v. BURLINGTON NORTHERN SANTA FE CORP. and the Burlington Northern and Santa Fe Railway Company, Appellees and Appellants.
• Court: Texas Court of Appeals

205 S.W.3d 577

Ray RIDGEWAY, Richard Foley and Richard Starkey, Appellants and Appellees, v. BURLINGTON NORTHERN SANTA FE CORP. and the Burlington Northern and Santa Fe Railway Company, Appellees and Appellants.

No. 2-05-253-CV.

Court of Appeals of Texas, Fort Worth.

August 24, 2006.

Rehearing Overruled October 19, 2006.

COPYRIGHT MATERIAL OMITTED

Law Offices of Windle Turley, P.C., Windle Turley and Thomas B. Cowart, Dallas, for Appellants.

Thompson & Knight, L.L.P., Debora B. Alsup, Austin, E. Michael Sheehan, Fort Worth, and William M. Katz, Jr., Dallas, for Appellees.

PANEL A: CAYCE, C.J.; DAUPHINOT and GARDNER, JJ.

OPINION

JOHN CAYCE, Chief Justice.

I. Introduction

Ray Ridgeway, Richard Foley, and Richard Starkey (collectively, appellants) appeal from the trial court's order denying class action status to their case against Burlington Northern Santa Fe Corp. and The Burlington Northern and Santa Fe Railway Company (collectively, BNSF). In five issues, appellants contend that the trial court abused its discretion by denying their request for class treatment. BNSF has also filed a conditional cross-appeal, in the event we sustain appellants' issues. Because we conclude that the trial court did not abuse its discretion by denying appellants' request for class certification, we affirm the trial court's order without reaching BNSF's cross-appeal.

II. Background Facts and Procedural History

In 1988, to fight off a hostile takeover, BNSF distributed $4.7 billion to its shareholders as a special distribution on more than 250 million shares of stock. Before making the special distribution, BNSF conducted a study to determine the "mix" of the distribution for tax purposes. To the extent the distribution was paid out of BNSF's earnings and profits (E & P), it was required to be characterized as a dividend and was taxable as ordinary income to the shareholders. Any part of the distribution that exceeded the E & P was considered a return of capital and was not taxable, to the degree that it did not exceed the shareholders' purchase price for their respective shares. Instead, the return of capital portion of the distribution was to be credited against the shares' basis, which would then reduce the investment deducted from the sales price of the shares for tax purposes in the event the shares were sold.

In October 2000, appellants filed the underlying suit against BNSF on their own behalf, and on the behalf of a world-wide class of more than 200,000 shareholders, asserting causes of action for negligence per se, common law negligence, breach of contract, and breach of fiduciary duty, and seeking to recover damages allegedly resulting from an error in BNSF's special distribution mix study. Appellants allege that the study grossly overstated the amount of the special distribution characterized as a taxable dividend and grossly understated the amount of the distribution characterized as a nontaxable return of capital. Appellants allege that this error had a direct impact on their 1988 income tax payments, causing the class as a whole to pay federal income taxes on approximately $2.7 billion of the distribution amount that was mischaracterized as a dividend. Appellants further allege that the mischaracterization "adversely impacted the ability of the class members to make rational financial decisions," including decisions regarding tax planning, estate planning, and evaluations of the corporate actions BNSF has taken in the years following the 1988 special distribution.

After numerous hearings spanning more than two years, the trial court entered an order denying appellants' request for class certification. In its order, the trial court made the following findings and conclusions, among others:

• The substantive issues, including the elements of the causes of action, the defenses asserted by the parties, and the burdens of proof on those elements, are governed by Delaware law;

• The procedural issues, including class certification requirements, are governed by Texas law;

• The essential elements of Texas Rule of Civil Procedure 42 have not been satisfied because the actual damages issues are not manageable and appellants cannot maintain a class action under rule 42(b)(3).

This interlocutory appeal followed.

III. Standard of Review

Trial courts enjoy a wide range of discretion in deciding whether to maintain a lawsuit as a class action.¹ Our review of the trial court's decision on appeal is strictly limited to determining whether there has been an abuse of discretion in denying certification.² A trial court abuses its discretion when it (1) acts arbitrarily or unreasonably, without reference to any guiding rules or principles;³ (2) does not properly apply the law to the undisputed facts;⁴ or (3) rules on factual assertions not supported by the record.⁵ A trial court does not abuse its discretion when it bases its decision on conflicting evidence.⁶

In determining whether the trial court abused its discretion in denying certification, we do not view the evidence in the light most favorable to the trial court's decision, nor do we entertain every presumption in favor of the court's decision.⁷ Instead, we determine whether the trial court, before ruling on a class certification, performed a "rigorous analysis" of whether all prerequisites to certification had been met.⁸

Texas law does not require a trial court to certify a class action upon a determination that the facts sufficiently satisfy Texas Rule of Civil Procedure 42.⁹ Thus, an appellant seeking to reverse an order denying class certification faces a formidable task. Appellants must demonstrate not only that they satisfied all the rule 42 requirements for certification, but also that the trial court's refusal to certify the class was legally unreasonable under the facts and circumstances of the case.¹⁰ So long as the trial court acted rationally in the exercise of its discretion, we will uphold its ruling denying certification.¹¹

IV. The Predominance Requirement of Rule 42(b)(3)

Class actions must satisfy at least one of the subdivisions of rule 42(b),¹² which are as follows:

An action may be maintained as a class action if the prerequisites of [rule 42(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) the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and a class action is superior to other available methods for the fair and efficient adjudication of the controversy.¹³

Appellants assert that "the application of settled legal principles to the facts of this case leads to the conclusion that the litigation is suitable for class treatment." Specifically, they assert that this class action satisfies subdivision 42(b)(3). The trial court found, however, that the predominance requirement of rule 42(b)(3) had not been satisfied because the actual damages issues are not manageable. The trial court stated,

[T]he determination of actual damages, if any, is an issue affecting individual class members on a class-member-by-class-member basis. The issue of whether and to what extent each class member has suffered actual damages will be the object of most of the efforts of the litigants and the Court. Due to the many individual issues concerning payment of income taxes by each class member, as applied to the number of class members in Plaintiffs' proposed class, this case cannot be tried in a manageable, time-efficient, yet fair manner.

Rule 42(b)(3)'s predominance requirement is one of the most stringent prerequisites to class certification.¹⁴ To aid courts in determining if rule 42(b)(3) certification is appropriate, the rule establishes a list of nonexhaustive factors to consider:

(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; and (D) the difficulties likely to be encountered in the management of a class action.¹⁵

The test for predominance is not whether common issues outnumber uncommon issues, but "whether common or individual issues will be the object of most of the efforts of the litigants and the court."¹⁶ If, after common issues are resolved, presenting and resolving individual issues is likely to be an overwhelming or unmanageable task for a single jury, then common issues do not predominate.¹⁷ Thus, if it is not determinable from the outset that individual issues can be considered in a manageable, time-efficient, yet fair manner, certification of the class is not appropriate.¹⁸

V. Nominal Damages Class

In their first issue, appellants contend that the predominance requirement could be satisfied by certifying a nominal damages class for purposes of appellants' breach of contract and breach of fiduciary duty claims.

Nominal damages are available under Delaware law for breach of contract and breach of fiduciary duty.¹⁹ Nominal damages generally are not recoverable under Delaware law for negligence,...