Weatherly v. Deloitte & Touche

• Decision Date: 20 July 1995
• Docket Number: No. 14-94-00462-CV,14-94-00462-CV
• Citation: 905 S.W.2d 642
• Parties: J.D. WEATHERLY and Elliott S. Horwitch, Appellants, v. DELOITTE & TOUCHE, Elias Zinn, Julius Zinn, Dennis Lam, and Ronald Begnaud, Appellees. (14th Dist.)
• Court: Texas Court of Appeals

Page 642

905 S.W.2d 642

J.D. WEATHERLY and Elliott S. Horwitch, Appellants, v. DELOITTE & TOUCHE, Elias Zinn, Julius Zinn, Dennis Lam, and Ronald Begnaud, Appellees.

No. 14-94-00462-CV.

Court of Appeals of Texas, Houston (14th Dist.).

July 20, 1995.

Rehearing Overruled Sept. 28, 1995.

Robin Harrison, Robert Brown, Justin Campbell, III, Robert Remy, Houston, for appellants.

O. Clayton Lilienstern, Julius Glickman, Gail Slaughter, Kenneth Hughes, Gregg Laswell, Laura Eastman, Houston, for appellees.

Before YATES, FOWLER and DRAUGHN, ^* JJ.

OPINION

DRAUGHN, Justice.

This is an interlocutory appeal from an order denying class certification. See TEX.CIV.PRAC. & REM.CODE ANN. § 51.014(3) (Vernon 1986). Appellants, J.D. Weatherly and Elliott Horwitch, bring two points of error complaining the trial court abused its discretion in denying class certification. Because we find the trial court abused its discretion, we reverse and remand.

Entertainment Marketing, Inc. (EMI) is a wholesale distributor of consumer electronics and computer products. On April 16, 1987, EMI sold convertible subordinated debentures and common stock to the public. Appellants purchased debentures as part of EMI's public offering. On April 15, 1992, appellants filed suit alleging that EMI's management and accountants conspired to misrepresent EMI's net income in separate, but identical, prospectuses circulated to investors in connection with the public offering. Specifically, appellants alleged that EMI's top management (the EMI defendants) overstated EMI's sales and net income by reporting fictitious sales of EMI inventory in prior fiscal years. ¹ Appellants also alleged that EMI's accountants (the accountant defendants): (1) knew at the time they audited EMI's financial statements that EMI was planning the April 1987 public offering of debentures and common stock; (2) participated in reporting EMI's overstated financial performance; and (3) were reckless or negligent in audits of EMI. ² Appellants alleged that EMI could not have made the securities offering if its true financial performance had been disclosed to the public.

In each year following the April 1987 offering, EMI reported a loss. In 1992, EMI declared bankruptcy. The undisputed evidence shows that neither the debentures nor the stocks were ever traded at a price as high as the price at which they were offered in April 1987. Thus, all investors who purchased EMI debentures and/or stock in April 1987, suffered losses on their investment.

In their petition, appellants alleged multiple causes of action and sought certification of the class of plaintiffs who: (1) purchased EMI debentures and stocks between April 16, 1987, and April 30, 1987; and (2) lost all or part of their investments. Appellants subsequently filed a separate Motion for Class Certification. On November 5, 1993, the trial court held a hearing at which appellants offered only certain exhibits. On November 24, 1993, the trial court, without entering an order, denied appellants' motion. Appellants filed a motion seeking a rehearing on their earlier Motion for Class Certification and alternatively, seeking certification of the class of plaintiffs who purchased only debentures. On April 14, 1994, the trial court denied appellants' motions and appellants perfected this appeal. The trial court's order does not state the reason for denial of class certification and the record does not contain findings of fact or conclusions of law, despite appellants' timely request. On appeal, appellants request only that their claim under the Texas Securities Act, TEX.REV.CIV.STAT.ANN. art. 581-33 (Vernon Supp.1995) (the Act), be certified as a class action.

In two points of error, appellants contend the trial court abused its discretion in denying their motions for class certification under TEX.R.CIV.P. 42.

In order to gain certification of a class action, a party must meet all the requirements of TEX.R.CIV.P. 42(a) and satisfy one of the subsections of TEX.R.CIV.P. 42(b)(4). Under Rule 42(a), appellants must show:

(1) numerosity--the number of plaintiffs is so numerous that joinder of all class members is impracticable;

(2) commonality--there are questions of law or fact common to the class;

(3) typicality--the claims of the proposed representatives are typical of those of the class; and

(4) adequacy--the proposed representatives will fairly and adequately protect the interest of the class.

TEX.R.CIV.P. 42(a)(1)-(4).

Appellants claim they satisfied Rule 42(b)(4), because they showed that:

(1) questions of law or fact common to the members of the class predominate over questions affecting individual members; and

(2) a class action is superior to other available methods for the fair and efficient adjudication of their claim.

TEX.R.CIV.P. 42(b)(4).

There is no right to bring a lawsuit as a class action. Vinson v. Texas Commerce Bank, 880 S.W.2d 820, 824 (Tex.App.--Dallas 1994, no writ). Rather, rule 42 provides only that the trial court may certify a class action if the plaintiff satisfies the requirements of the rule. Id. (emphasis in original). However, when the trial court makes a decision of class status at an early stage of the proceeding before supporting facts are fully developed, it should err in favor of, and not against, maintenance of the class action. National Gypsum Co. v. Kirbyville Indep. School Dist., 770 S.W.2d 621, 627 (Tex.App.--Beaumont 1989, writ dism'd w.o.j.); Life Ins. Co. of Southwest v. Brister, 722 S.W.2d 764, 774-75 (Tex.App.--Fort Worth 1986, no writ). This is so because the class certification order is always subject to modification should later developments during the course of the trial so require. Id.; see TEX.R.CIV.P. 42(c)(1).

Trial courts enjoy broad discretion in determining whether a lawsuit should be maintained as a class action. Dresser Indus., Inc. v. Snell, 847 S.W.2d 367, 371 (Tex.App.--El Paso 1993, no writ). At the certification stage, the burden of proof is on the plaintiffs to establish their right to maintain an action as a class action. Life Ins. Co. of Southwest v. Brister, 722 S.W.2d 764, 773 (Tex.App.--Fort Worth 1986, no writ). Though they must do more than merely allege that the requirements have been met and must at least show some facts to support certification, class proponents generally are not required to prove a prima facie case or make an extensive evidentiary showing in support of a motion for class certification. Clements v. League of United Latin American Citizens, 800 S.W.2d 948, 952 (Tex.App.--Corpus Christi 1990, no writ); Brister, 722 S.W.2d at 773. The trial court may base its decision on pleadings or other material in the record. Clements, 800 S.W.2d at 952; National Gypsum Co., 770 S.W.2d at 626-27.

On appeal, review of trial court's decision granting or denying certification is limited to determining whether the court abused its discretion. Morgan v. Deere Credit, Inc., 889 S.W.2d 360, 365 (Tex.App.--Houston [14th Dist.] 1994, no writ); Amoco Prod. Co. v. Hardy, 628 S.W.2d 813, 816 (Tex.App.--Corpus Christi 1981, writ dism'd). In reviewing the trial court's ruling on certification, the appellate court is required to view the evidence in a light most favorable to the trial court's action, and indulge every presumption in favor of the trial court's action. Dresser, 847 S.W.2d at 372; Angeles/Quinoco Securities Corp. v. Collison, 841 S.W.2d 511, 513 (Tex.App.--Houston [14th Dist.] 1992, no writ). A trial court does not abuse its discretion when it bases its decision on conflicting evidence. Wiggins v. Enserch Exploration, Inc., 743 S.W.2d 332, 334 (Tex.App.--Dallas 1987, writ dism'd w.o.j.); RSR Corp. v. Hayes, 673 S.W.2d 928, 930 (Tex.App.--Dallas 1984, writ dism'd). That the trial court, in the opinion of the appellate court, made an error in judgment, does not alone demonstrate an abuse of discretion. Morgan, 889 S.W.2d at 365; Dresser, 847 S.W.2d at 371. Rather, a trial court abuses its discretion when it: (1) does not properly apply the law to the undisputed facts; (2) acts arbitrarily or unreasonably; or (3) rules upon factual assertions not supported by material in the record. See Angeles/Quinoco, 841 S.W.2d at 513; Wiggins, 743 S.W.2d at 334; RSR, 673 S.W.2d at 930; Mahoney v. Cupp, 638 S.W.2d 257, 261 (Tex.App.--Waco 1982, no writ).

In this case, the trial court abused its discretion on all three counts. There was simply no basis in law or fact for the trial court to have denied class certification in this case. Appellees cite numerous federal trial court opinions from the various circuits to support a myriad of secondary propositions under FED.R.CIV.P. 23 which might support the trial court's unstated basis for its ruling. In the area of class certification, cases can be found to support practically any point of view. Simon v. Westinghouse Elect. Corp., 73 F.R.D. 480, 483 (E.D.Pa.1977). Federal decisions regarding class actions are persuasive, but they are not binding authority. Reserve Life Ins. Co. v. Kirkland, No. 14-93-00161-CV, slip op. at 13, --- S.W.2d ----, ---- (Tex.App.--Houston [14th Dist.] October 27, 1994 n.w.h.). More importantly, reference to federal case authority construing FED.R.CIV.P. 23 is only appropriate in the absence of Texas case law or case law from this circuit. See Adams v. Reagan, 791 S.W.2d 284, 288 (Tex.App.--Fort Worth 1990, no writ). Based on the law of this state and this circuit, we conclude that appellants met all the requirements of subsection (a) and satisfied subsection (b)(4) of TEX.R.CIV.P. 42. Because appellees brief extensively the issues of commonality and adequacy of representation, we address those issues first.

Commonality of Issues and Predominance of Common Issues and Facts

The factual or legal basis for suit must be common to all members in a class action. Dresser, 847 S.W.2d at 372. Questions common to the class are those questions which, when answered as to one class member, are answered...