Thomas v. UBS Ag

• Decision Date: 07 February 2013
• Docket Number: No. 12–2724.,12–2724.
• Citation: 706 F.3d 846
• Parties: Matthew THOMAS et al., on their own behalf and that of all others similarly situated, Plaintiffs–Appellants, v. UBS AG, Defendant–Appellee.
• Court: U.S. Court of Appeals — Seventh Circuit

706 F.3d 846

Matthew THOMAS et al., on their own behalf and that of all others similarly situated, Plaintiffs–Appellants,

v.UBS AG, Defendant–Appellee.

No. 12–2724.

United States Court of Appeals, Seventh Circuit.

Argued Dec. 7, 2012.

Decided Feb. 7, 2013.

David R. Deary, Attorney, Jeven R. Sloan (argued), Loewinsohn Flegle Deary, Dallas, TX, for Plaintiffs–Appellants.

Nathan P. Eimer, Attorney, Eimer Stahl LLP, Chicago, IL, Dean J. Kitchens (argued), Gibson, Dunn & Crutcher, Los Angeles, CA, for Defendant–Appellee.

Before POSNER, WOOD, and WILLIAMS, Circuit Judges.

POSNER, Circuit Judge.

The three appellants are the named plaintiffs in a class action suit that seeks damages from UBS, Switzerland's largest bank, which specializes in managing the assets of wealthy persons from all over the world. Federal jurisdiction is based on the alienage branch of the diversity jurisdiction.

The parties have not made clear the source or sources of the law applicable to the case. The plaintiffs advance a variety of common law claims without indicating the state or nation whose law gives rise to them. They mainly cite law from states in which the three plaintiffs reside (Arizona, California, and New York), but they also cite Illinois cases (without explaining why). When the parties to a diversity case do not mention what state's law applies, the court applies the law of the state in which the court is located. Santa's Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 345 (7th Cir.2010). But these parties, by citing cases both from Illinois (which is that state) and from the three states in which a plaintiff resides, imply that the law of all four states applies. This is quadruply strange: The parties don't suggest that all the class members reside in those three or four states or that all the allegedly wrongful acts occurred in those states. They don't indicate whether there are relevant differences among the laws of the four states. They don't explain why the law of the state of a plaintiff's or unnamed class member's residence should control under applicable conflict of laws principles rather than, for example, the law of Switzerland, which is UBS's domicile and also the place in which UBS committed the complained of acts or omissions. And they don't discuss the possibility that federal common law may apply instead of state law because, as we'll see, the plaintiffs rely in part on a contract with the federal government.

The problem of choice of law created by a nationwide class action governed by laws of different states or other jurisdictions is usually solved by the district court's certifying a different subclass for class members in each jurisdiction whose law differs in some relevant respect from that of the other jurisdictions in which members of the class reside or the allegedly unlawful acts were committed. The parties have not proposed that solution and anyway the case was dismissed on the merits before any class or subclasses were certified.

We're not at liberty to decide a diversity case on the basis of the “general common law.” In re Rhone–Poulenc Rorer Inc., 51 F.3d 1293, 1300–01 (7th Cir.1995); Central Soya Co. v. Epstein Fisheries, Inc., 676 F.2d 939, 941 (7th Cir.1982). The term denoted the common law principles created by federal judges for use in diversity cases—principles that might differ from the law that the various state courts would have applied to the same cases if litigated in state rather than federal courts. In the Erie case the Supreme Court held that to decide diversity cases on the basis of common law created by federal judges was an unconstitutional usurpation of state authority. “There is no federal general common law. Congress has no power to declare substantive rules of common law applicable in a state.” Erie R.R. v. Tompkins, 304 U.S. 64, 78, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). But parties still are allowed to specify (within reason, see Lloyd v. Loeffler, 694 F.2d 489, 495 (7th Cir.1982)) what law shall govern a lawsuit between them, and the specification can be implicit.

Many common law principles are the same, or materially the same, in many or even all U.S. states, and when a case turns on such a principle the parties will often cite decisions articulating and applying it without worrying about which state the decisions come from, as in our recent case of Adams v. Raintree Vacation Exchange, LLC, 702 F.3d 436, 438 (7th Cir.2012); to the same effect see Phillips v. Audio Active Ltd., 494 F.3d 378, 386 (2d Cir.2007). In Adams the parties had implicitly agreed that “American law” would govern the interpretation of a forum selection clause in a contract that had been made in Mexico, but they did not specify a state's law to govern the issue—just American rather than Mexican law. This case is similar. And since there is no indication that the common law principles invoked by the parties vary across the states that might have jurisdiction of claims in the complaint or that federal law might govern instead of state law or Swiss law instead of American law, we'll not worry further about choice of law.

The district judge dismissed the suit on the merits without, as we said, first considering whether to certify a class. Normally the issue of certification should be resolved first, Thomas v. City of Peoria, 580 F.3d 633, 635 (7th Cir.2009); Bertrand ex rel. Bertrand v. Maram, 495 F.3d 452, 454–56 (7th Cir.2007), because if a class is certified this sets the stage for a settlement and if certification is denied the suit is likely to be abandoned, as the stakes of the named plaintiffs usually are too small to justify the expense of suit, though that may not be true in this case. But deciding whether to certify a class can take a long time. Rule 23(c)(1)(A) requires that the decision be made at “an early practicable time,” but early is often not practicable. So when as in this case the suit can quickly be shown to be groundless, it may make sense for the district court to skip certification and proceed directly to the merits. Cowen v. Bank United of Texas, FSB, 70 F.3d 937, 941–42 (7th Cir.1995).

UBS opposed certification even though a defendant with a winning case has much to gain from it—the judgment for the defendant will be res judicata in any suit by a class member who had not opted out of the class, provided “that the named plaintiff at all times adequately represent the interests of the absent class members.” Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 812, 105 S.Ct. 2965, 86 L.Ed.2d 628 (1985); see also Hansberry v. Lee, 311 U.S. 32, 45, 61 S.Ct. 115, 85 L.Ed. 22 (1940). But even a defendant with a winning case may not have much to gain, if an opt out can be expected to file another class action against the defendant. That possibility to one side, a very risk-averse defendant will oppose certification even in a weak case lest it lose the case (against the odds) and, because the case was litigated as a class action, be ordered to pay very heavy damages.

The plaintiffs, and the other members of the class—who number in the thousands—are American citizens who had bank accounts in UBS in 2008 when the UBS tax-evasion scandal (of which more shortly) broke. The accounts of the three plaintiffs were large—$500,000 to $2 million each. The plaintiffs had not disclosed the existence of the accounts on their federal income tax returns, as they were required to do by Form 1040, Schedule B, which on line 7a asked (the current version is materially the same): “At any time during [2002–2008] did you have an interest in or signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” They also did not disclose the income they earned in those accounts. Neither did they pay federal income tax on that income, though it was taxable. Eventually they 'fessed up and paid the taxes they owed plus interest on those taxes and a 20 percent penalty. They did this pursuant to an IRS amnesty program, adopted in the wake of the scandal, called the “Offshore Voluntary Disclosure Program.” Internal Revenue Service, 2009 Offshore Voluntary Disclosure Program, www. irs. gov/ uac/ 2009– Offshore– Voluntary– Disclosure– Program, and Disclosure: Questions and Answers, www. irs. gov/ uac/ Voluntary- Disclosure:- Questions- and- Answers (both visited Jan. 31, 2013). The suit seeks to recover from UBS the penalties, interest, and other costs that the plaintiffs and the other members of the class incurred from their scrape with the IRS, plus the profits (in the hundreds of millions of dollars) they claim UBS made from the class as a result of the fraud and other wrongful acts that they allege UBS committed by inducing them to maintain their accounts with it.

The plaintiffs are tax cheats, and it is very odd, to say the least, for tax cheats to seek to recover their penalties (let alone interest, which might simply compensate the IRS for the time value of money rightfully belonging to it rather than to the taxpayers) from the source, in this case UBS, of the income concealed from the IRS. One might have expected the plaintiffs to try to show that they had forgotten they had accounts with UBS (though that would be preposterous, for these were significant investments for each of the plaintiffs). Or that UBS had told them that income earned in those accounts was somehow tax exempt and moreover that the accounts themselves were somehow not foreign bank accounts within the meaning of the tax code and so the plaintiffs didn't have to acknowledge having accounts with UBS. They don't make any of these feeble arguments. They do argue, as we'll see, that UBS was obligated to give them accurate tax advice and failed to do so, but not that it gave them inaccurate, as distinct from no, advice.

There are grounds for avoiding penalties for admitted violations of federal tax law, see, e.g., 26 U.S.C. § 6664(c), (d); 31...