UPDATE (after argument): SCOTUS grants cert on CPLR § 901(b) issue

The Civil Procedure & Federal Courts Blog is on top of it.  The SCOTUS blog is all over it as well.

I posted about this case a little while ago here  and it was in the NYLJ Wrap-Up. I’m sure you’ve been wondering about it. I have.

You can read the transcript HERE.
Or, if you don’t want to get it from me, you can go over to The Civil
Procedure & Federal Courts Blog, and get it from them.

This post is a work in progress.  There will be additions and commentary as I continue to review the case and receive (or find) additional information.

CPLR 901(b) Unless a statute creating or imposing a penalty, or a minimum measure
of recovery specifically authorizes the recovery thereof in a class
action¹, an action to recover a penalty, or minimum measure of recovery
created or imposed by statute may not be maintained as a class action.

FRCP 23 Class Actions

The Supreme Court of the United States recently granted cert in Shady Grove Orthopedic Associates, P.A. v. Allstate Ins. Co., 129 S.Ct. 2160, 173 L.Ed.2d 1155, 77 USLW 3472, 77 USLW 3605, 77 USLW 3609 (U.S. May 04, 2009) (NO. 08-1008).  It made its way there through the Eastern District (466 F.Supp.2d 467) and the Second Circuit Court of Appeals (549 F.3d 137)

What's this all about? 

The short version:

Shady Grove (a Maryland corporation) brought a class action against Allstate (a Illinois corporation)  in Federal court suing for interest that is overdue from no-fault claims.  The underlying lawsuit involved a New York policy.  Those claims were paid, but for the interest.  Shady Grove argued that it could get into Federal Court through 28 U.S.C. § 1332(d)(2)(A), which gives the federal courts original jurisdiction in a class action where the amount in controversy is more that five-million dollars and diversity exists, and FRCP 23 allows class certification.

Allstate moved to dismiss, arguing that because interest is a "penalty", CPLR § 901(b) expressly prohibits such a class action² and that because CPLR § 901(b) is a substantive rule, the Federal Court must apply it. Shady Grove argued that (1) it is a procedural rule and it is in conflict with FRCP 23 (the federal equivalent of CPLR § 901), which contains no identical or similar restriction;  (2) because it is a procedural rule, an Erie³ analysis requires that the Federal Court apply its own rule; and (3) it argued that the "unless clause" (see FN 1) of CPLR § 901(b) permits the lawsuit, even if the court finds it to be a substantive rule.

The district court agreed with Allstate and dismissed the action. It found that CPLR § 901(b) is substantive and therefore does not invoke either the Supremacy Clause⁴ or Erie.  Without class certification, Shady Grove was unable to maintain diversity jurisdiction.

At the Second Circuit, Shady Grove added an argument⁵ (a request really) in its reply brief; that the Court should certify the following question to the New York Court of Appeals: whether the interest provision is a "penalty within the meaning of CPLR § 901(b)."  The Second Circuit, upon Allstate's motion, struck that portion of the brief, because it should have been brought up in the initial brief.

The Second Circuit discussed each of Shady Grove's arguments.

The Court first addressed the Erie situation.  It found that FRCP 23 does not conflict with CPLR § 901(b); that there is no "direct collision" with § 901.  It reasoned that, because FRCP 23 does not determine which actions can or cannot be brought, "it leaves room for the operation of § 901(b)," finding it to be a substantive rule. 

But would the application of CPLR § 901(b) "serve the twin aims⁶ of Erie?  The Court answered in the affirmative. Not applying the rule would, according to the Court, encourage plaintiff' to file in the Federal Courts, rather than in New York.  And it would allow them to recover in Federal Court, when they could not in New York.

The Court then discussed Shady Grove's argument that under N.Y. Ins. Law § 5106(a)⁷ the lawsuit can be maintained via class action because 11 NYCRR § 65-3.9(c)⁸ contemplated class actions in this context, and therefore satisfies the exception clause of CPLR § 901(b).  In rejecting this argument, the Court found that § 65-3.9(c) did not specifically authorize⁹ class actions.  "At most,[the] regulation contemplates the recovery of a penalty in a class action."

The "questions presented" in the petition for cert are:

1. Can a state legislature properly prohibit the federal courts from using the class action device for state
law claims?

2. Can state legislatures dictate procedure in the federal courts?

3. Could state-law class actions eventually disappear altogether, as more state legislatures declare them offlimits to the federal courts?

——————-

1.  This is the unless clause.

2.  "…an action to recover a penalty, or minimum measure of recovery
created or imposed by statute may not be maintained as a class action."  CPLR § 901(b)

3. 
Erie Railroad Co. v. Tompkins, 304 U.S. 64 (1938).  Under Erie, when a Federal Court sits in diversity jurisdiction, it must apply a states substantive law and the federal procedural law.  It's more complicated than it seems.  More information can be found on the case and the issue on wikipedia.

4. U.S. Const. art. VI, Cl. 2

5. Shady Grove cited to Sperry v. Crompton Corp., 8 N.Y.3d 204 (Ct. App., 2007) in support of its request for certification.

6. (1) to discourage forum shopping and (2) inequitable administration of the laws.

7. § 5106(a) provides:

8. § 65-3.9(c) provides:

9.  The Court is referring to this portion of CPLR § 901(b) (which is quoted in its entirety at the top of this post): "Unless a statute creating or imposing a penalty, or a minimum measure
of recovery specifically authorizes the recovery thereof in a class
action." (emphasis added).  See FN 1.