Fall 2005 Class Action Update

By Dean Foster

Dr. Roberto Melo, et al. v. Gardere Wynn Sewell, L.L.P. et al., No. 3-04-CV-2238-BD, 2005 U.S. Dist. Lexis 7040 (N.D. Tex. April 21, 2005). 

             This lawsuit was one in a series of actions arising out of the collapse of Sharp Capital, Inc., an investment advisory company.   Plaintiff Roberto Melo purported to represent a class of more than 200 Mexican citizens who had invested with Sharp.  Gardere Wynn Sewell, L.L.P. ("Gardere") served as legal counsel for Sharp from 1994 to 1998.   Plaintiffs alleged that Gardere had conspired with Sharp to conceal its illegal activities from U.S. securities regulators by moving Plaintiffs' investments to an offshore company without Plaintiffs' knowledge or approval.

             Another group of Sharp investors filed a nearly identical class action lawsuit in state court more than two years earlier.   In the state court case a summary judgment in favor of the defendants, which included Gardere, was granted based on limitations.  The plaintiffs timely filed an appeal, which was pending before a Texas court of appeals.  Defendants therefore requested a stay of the federal litigation pending the outcome of the state court appeal.

             The court noted that while federal courts have an obligation to exercise the jurisdiction given them, a federal court may stay or dismiss a case in favor of a concurrent state court proceeding in extraordinary circumstances.   The court explained that abstention is only proper when the state and federal court proceedings are parallel and exceptional circumstances exist.  A lawsuit is parallel when substantially the same parties are litigating substantially the same issues in another forum.  The court determined the federal and state cases to be parallel in this instance because both cases arose out of the same set of facts and Gardere was a defendant in both cases. 

As to the determination of whether exceptional circumstances existed, the court determined that because the limitations issue on appeal in the state court action would likely determine the court's decision in the federal case, it would not make sense to proceed with the federal case until the limitations issue was resolved.  In addition, the court noted that if the state court judgment were to be reversed, the defendants would be forced to defend identical class action lawsuits in two different forums.  Therefore, the court held that the federal action should be stayed pending final resolution of the state court proceeding.

Supportkids, Inc. v. Cynthia Morris, No. 14-04-00390-CV (Tex. App. - Houston [14th Dist.] May 17, 2005),   2005 Tex. App. Lexis 3731.

             In this interlocutory appeal, Supportkids, Inc. appeals a judgment in favor of Cynthia Morris on the grounds that the trial court abused its discretion in granting class certification.   Supportkids is a company that collects past due child support for custodial parents.  Morris signed a contract with Supportkids whereby she agreed Supportkids would retain 33% of any child support collected.  Supportkids obtained a withholding order on the non-custodial parent's wages so the arrearage could be collected.  Six months later, Morris demanded her contract with Supportkids be canceled so she could collect 100% of the child support.  When Supportkids refused, Morris filed suit against Supportkids alleging that it was engaged in the unauthorized practice of law.  Morris then sought to certify a class of other individuals that had contracted with Supportkids to collect past due child support.  The trial court granted the motion and certified the class. 

             The named representative in a class action must fairly and adequately protect the interest of the class members.   This requirement has two components: (1) an absence of antagonism between the class representatives and the class members, and (2) an assurance the representative parties will vigorously prosecute the class claims and defenses.  While the court did not challenge willingness and competence of the named plaintiff's counsel to participate in and control the litigation, the court noted that the possibility of antagonism within the class remained.  There was a substantial likelihood that some of the customers of Supportkids did not want their contracts to be declared void.  Even though Supportkids did not present any evidence of disagreement among the potential class members, the burden of proof on certification issues is on the plaintiff.  The court determined that it would be improper to demand evidence from the defendant that a number of class members oppose the plaintiff when it is clear that a real possibility of antagonism exists.  As a result, the court found that the trial court had abused its discretion in finding the named representative was able to fairly and adequately protect the interests of the prospective class.  For this and other reasons the order of the trial court certifying the class was reversed.    

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