TYMKOVICH, Circuit Judge.
This case requires us to consider the certification of a proposed class action to pursue claims under the Racketeer Influenced and Corrupt Organizations Act (RICO). A class primarily composed of real estate borrowers sued a group of lenders, claiming the lenders conspired to create a fraudulent scheme to obtain non-refundable up-front fees in return for loan commitments the lenders never intended to fulfill.
On behalf of the proposed class, the class representatives — Colorado Golf Club
The lenders oppose class certification under Rule 23 of the Federal Rules of Civil Procedure. They contend class action is an inappropriate litigation vehicle because the borrowers are unable to demonstrate that common issues susceptible to generalized proof will predominate over any issues affecting class members individually. In particular, the lenders contend that each class member will have to demonstrate that it relied on the lenders' misrepresentations or omissions to satisfy RICO's causation element, making a single trial unwieldy and unworkable.
The lenders are wrong, but not because plaintiffs benefit from a legal "presumption" of reliance as identified by the district court. As we explain, RICO class-action plaintiffs are not entitled to an evidentiary presumption of a factual element of a claim. But still we agree with the district court that a class can be certified in this context. The plaintiffs' theory of the case rests on a straightforward premise — that no rational economic actor would enter into a loan commitment agreement with a party they knew could not or would not fund the loans. Accordingly, plaintiffs' payment of up-front fees allows for a reasonable inference that the class members relied on lenders' promises, which later turned out to be misrepresentations or omissions of financial wherewithal. This theory sufficiently allays concerns about Rule 23(b)(3)'s requirement that common issues predominate over those idiosyncratic to individual class members.
And with the predominance requirement met, the borrowers have sufficiently proved each of the elements required to certify a class under Rule 23. For this reason, the district court thus did not err in certifying the class. The defendants associated with the lenders' law firm, however, are an exception. For that subset of the defendants, we reverse because plaintiffs concede that they lack standing to pursue claims involving the law firm.
Exercising jurisdiction under Rule 23(f), we AFFIRM the class certification decision on modified grounds. We also REVERSE the district court's class certification decision as to the lenders' law firm and lawyers, Broad and Cassel, Ronald Gaché and Carl Romano, and REMAND with instructions to DISMISS the claims against those defendants.
Finally, because several claims are not properly before us in this interlocutory appeal, we decline to address (1) whether plaintiffs' claims constitute an impermissible extraterritorial application of RICO, (2) whether the plaintiffs can prove proximate cause, or (3) whether the district court properly exercised personal jurisdiction over certain defendants.
A. Hutchens and the Alleged Fraud
We take the facts as alleged in the complaint. The complaint alleges that Sandy Hutchens was the mastermind behind the loan commitment fraud at the heart of this case. Plaintiffs contend Hutchens is a career criminal with a history of schemes similar to the one at issue here. In 2004, Hutchens pleaded guilty to financial fraud charges in Canada and was sentenced to two years of house arrest followed by two years of probation.
Plaintiffs' central claim is that Hutchens and his associates engaged in a common scheme to defraud distressed, do-or-die borrowers out of up-front payments. The formula for Hutchens's alleged cookie-cutter scheme is not complicated. First, a potential borrower would submit a loan application to one of several issuing entities through a loan broker. Typically, the applicant would identify in its application a piece of real estate that could serve as collateral to secure the loan. After receiving the application, an issuing entity would extend the applicant a loan commitment agreement. Under its terms, the applicant was required to pay, among other advanced fees, an up-front, non-refundable payment known as a "loan commitment fee." In addition to this up-front fee, as a strict condition of the terms of the agreement, the applicant was also required to meet certain eligibility requirements prior to receiving the loan. One of these conditions set a minimum valuation for the collateral property. If an appraisal valued the property below the amount necessary to secure the loan, then the commitment agreement would be annulled. Another condition required that the applicant timely submit necessary paperwork to facilitate the loan's approval. At some point in the process, the issuing entities terminated each of the borrowers' loan commitment agreements for failing, in one form or another, to comply with the conditions of the agreement.
Plaintiffs claim this scheme was subterfuge for a scam to appropriate the up-front fees without any intent or ability to ultimately fund the committed loan. To this end, Hutchens and his cohorts would fabricate a reason to deny the loan or otherwise blame the borrower for the deal's dissolution. According to Hutchens's former accountant, Martin Lapedus, by the end of 2009 the issuing entities controlled by Hutchens had received over $8 million in up-front fees from applicants, but had lent
Plaintiffs also allege that Hutchens and his syndicate concealed several material aspects of Hutchens's criminal or otherwise problematic past, including his use of aliases to perpetuate false perceptions and obscure his identity. In the same vein, plaintiffs allege that the physical addresses associated with the issuing entities were façades used to shield the illusory nature of Hutchens's business. At bottom, plaintiffs contend that this deceit amounted to an effort to beguile class members, ignorant of Hutchens's unsavory methods, to enter the loan commitment agreements. But for these active omissions and misrepresentations, say plaintiffs, no putative class member would have participated in the deals.
B. Other Defendants
Plaintiffs also claim a number of other individuals and entities conspired with Hutchens.
1. The Hutchens Family and Related Entities
First, plaintiffs allege Hutchens's wife, Tanya, and his daughter, Jennifer, are co-conspirators. They claim Tanya Hutchens as the person responsible for operating and maintaining the books of the fraudulent enterprise. She also controlled the majority of the entities to which the enterprise funneled the ill-gotten gains of their alleged scheme. Jennifer Hutchens (or Jennifer Araujo) was the "Manager of Underwriting" for several of the corporate entities.
Plaintiffs next contend H. Jan Luistermans is a Canadian real estate agent who worked with the Hutchens's enterprise. His primary responsibility was inspecting potential borrowers' properties to determine whether the property could serve as acceptable collateral for the loans. During the relevant time period, Luistermans was employed by Realty 1 Real Estate Services Ltd.
Additionally, the complaint named five issuing entities as defendants. The issuing entities — 308 Elgin Street Inc. (308 Elgin), Canadian Funding Corporation (CFC), First Central Mortgage Funding Inc. (FCMF), Northern Capital Investment Ltd. (NCI), and Great Eastern Investment Fund, LLC (GEIF) — are all Canadian corporations that allegedly served as vehicles to issue the conditional loan commitments and accept the up-front fees required to secure those commitments. A sixth entity, First Central Holdings Inc. (FCH), served a similar function, allegedly receiving payments via wire transfers from class members. Finally, Hutchens and his associates used another cadre of entities, collectively referred to here as the transferees, to funnel or transfer class members' advance payments. The transferees would allegedly purchase real estate with these illicit fees soon after receipt.
Alvin Meisels's relationship with Sandy Hutchens dates back to at least 2004 when Meisels represented Hutchens in connection with criminal charges for fraud. Meisels is an Ontario, Canada lawyer alleged to have advised Hutchens throughout the period relevant to this action. Plaintiffs contend that Meisels frequently certified the legitimacy of Hutchens's ability to fund loan commitments. According to the complaint, Meisels was on notice about Hutchens's criminal history from the outset of their relationship.
Plaintiffs specifically allege that Meisels vouched for the bona fides of several defendant entities on $420 million worth of loan commitments to borrowers based out of Florida. Meisels also served as a reference for Hutchens and frequently disseminated positive information while withholding facts that tended to show Hutchens's criminal past or other sordid factors.
3. The Broad Defendants
Broad and Cassel is a law firm doing business in Florida. Ronald Gaché and Carl Romano were partners at the firm during the relevant time period.
C. The Putative Class
Plaintiffs allege that the lenders issued at least 134 loan commitments through the issuing entities over the course of nearly nine years. The putative class, according to plaintiffs, thus includes at least 100 borrowers — consisting of both individuals and corporate entities spanning across fifteen different states — who paid advance fees to defendants. The contracted value of each class member's loan commitment ranged from $500,000 to $80 million. Based on plaintiffs' estimates, the lenders committed to fund at least $760 million in loans, but only closed on one loan for a Florida condominium worth $265,000. The circumstances of the three entities currently serving as the class representatives for the putative class are typical of those of other potential class members.
1. CGC Holding
CGC Holding is a Colorado limited liability company, which developed an eighteen-hole golf course and related community facilities during 2009. After losing one of its primary investors, CGC Holding sought funding from FCMF and FCH. CGC Holding signed a commitment letter with FCMF pursuant to which FCMF agreed to lend $34 million to CGC Holding subject to certain terms. To comply with the terms, CGC Holding paid FCH at least $182,500 in inspection fees, administrative fees, and legal fees. CGC Holding did not receive the loan. The lenders maintain that CGC Holding's loan commitment was contingent upon its collateral property commanding a valuation of $43 million, of which it fell short.
2. Harlem Algonquin
Harlem Algonquin was a special-purpose entity operating out of Illinois that was created to purchase and develop a commercial property. A mortgage broker introduced Harlem Algonquin to CFC, and CFC ultimately issued a loan commitment for $3.57 million to facilitate the purchase in June 2010. The parties continued to negotiate, and Harlem Algonquin eventually paid $42,688 in fees to CFC. According to the defendants, Harlem Algonquin failed to supply or untimely delivered the necessary paperwork to complete its application.
James T. Medick wanted to purchase his former home in San Clemente, California from his ex-wife. For this purpose, Medick was put in touch with FCMF, which eventually committed to loan Medick $4 million. To secure the necessary funding, he paid $95,950 to FCH in three payments during the first three months of 2010. The terms of his commitment contract required that the existing mortgages and encumbrances on the former home be up to date. Since two mortgages and property taxes on the home were in arrears, CFC terminated his application.
D. Procedural History
The defendants filed numerous procedural and substantive motions, which the district court mostly denied in 2011. The court subsequently certified a class including persons and entities fitting the following definition:
CGC Holding Co., LLC v. Hutchens, No. 11-CV-01012-RBJ-KLM, 2013 WL 798242, at *13 (D.Colo. Mar. 4, 2013).
Pursuant to the interlocutory appeal right of Rule 23(f), the defendants argue the district court erred in finding that questions common to the entire class will predominate over questions unique to individual class members.
The scope of our review under Rule 23(f) is limited to whether the district court abused its discretion in its certification of the putative class. As we explain, the district court did not err in certifying the class. While the parties have raised a number of other issues unrelated to class certification, we do not reach those as part of this interlocutory appeal.
A. Class Certification
Hutchens and Meisels contend that the district court abused its discretion by certifying the putative class because individual issues will overwhelm the common issues of fact and law, making class treatment unmanageable and inappropriate. They argue that, among other things, the motives, levels of knowledge, diligence, and financial status of each class member are so different that the district court will be inundated with independent inquiries specific to each class member. And they contend that unpacking these unique concerns will dominate the litigation.
"When the district court has applied the proper standard in deciding whether to certify a class, we may reverse that decision only for abuse of discretion." Adamson v. Bowen, 855 F.2d 668, 675 (10th Cir.1988). The district court abuses
1. Class Certification Standards
When addressing class certification, the district court must undertake a "rigorous analysis" to satisfy itself that the prerequisites of Rule 23 of the Federal Rules of Civil Procedure are met. See Wal-Mart Stores, Inc. v. Dukes, ___ U.S. ___, 131 S.Ct. 2541, 2551, 180 L.Ed.2d 374 (2011) (Rule 23(a)); Comcast Corp. v. Behrend, ___ U.S. ___, 133 S.Ct. 1426, 1432, 185 L.Ed.2d 515 (2013) (Rule 23(b)). Because class action litigation remains "an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only," Califano v. Yamasaki, 442 U.S. 682, 700-01, 99 S.Ct. 2545, 61 L.Ed.2d 176 (1979), the requirements of Rule 23 are heavily scrutinized and strictly enforced. "[A]ctual, not presumed, conformance with [Rule 23] remains ... indispensable." Gen. Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 160, 102 S.Ct. 2364, 72 L.Ed.2d 740 (1982).
Under Rule 23(a), plaintiffs seeking class treatment must establish four threshold requirements:
Fed.R.Civ.P. 23(a) (emphasis added). In other words, the class must demonstrate the requisite numerosity, commonality, typicality, and adequacy to proceed with a class action.
If the class meets the four criteria under Rule 23(a), then the court must consider whether the class satisfies at least one of the three alternative class-types under Rule 23(b):
First, Rule 23(b)(1) addresses situations where "incompatible standards of conduct for the party opposing the class" would arise without class treatment. Id. at (b)(1).
Second, Rule 23(b)(2) covers class actions for declaratory or injunctive relief where the party defending against the class "has acted or refused to act on grounds that apply generally to the class." Id. at (b)(2).
Third, as is the case here, Rule 23(b)(3) is available where "questions of law or fact common to class members predominate over any questions affecting only individual members, and ... a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Id. at (b)(3). In other words, class status is appropriate as long as plaintiffs can establish an aggregation of legal and factual issues, the uniform treatment of which is superior to ordinary one-on-one litigation.
Predominance regularly presents the greatest obstacle to class certification, especially in fraud cases. Accordingly, the issues disputed in this case are not unusual. And given our obligation to ensure that the district court did not err in conducting its rigorous analysis, we must characterize the issues in the case as common or not, and then weigh which issues predominate. Id. § 4:50, at 196. Here, that task requires us to survey the elements of the class's RICO claims to consider (1) which of those elements are susceptible to generalized proof, and (2) whether those that are so susceptible predominate over those that are not. Wallace B. Roderick Revocable Living Trust v. XTO Energy, Inc., 725 F.3d 1213, 1220 (10th Cir.2013) (finding that the district court must consider the particular facts of a case, including the underlying claims, when deciding a motion for class certification); see also Rutstein v. Avis Rent-A-Car Sys., Inc., 211 F.3d 1228, 1234 (11th Cir.2000) ("Whether an issue predominates can only be determined after considering what value the resolution of the class-wide issue will have in each class member's underlying cause of action."). Stated another way, consideration of how the class intends to answer factual and legal questions to prove its claim — and the extent to which the evidence needed to do so is common or individual — will frequently entail some discussion of the claim itself. See Falcon, 457 U.S. at 160, 102 S.Ct. 2364.
In this context, it is worth reiterating that our review on appeal is limited. For the purposes of class certification, our primary function is to ensure that the requirements of Rule 23 are satisfied, not to make a determination on the merits of the putative class's claims. See Anderson v. City of Albuquerque, 690 F.2d 796, 799 (10th Cir.1982); see also Amgen Inc., 133 S.Ct. at 1195 ("Merits questions may be considered to the extent — but only to the extent — that they are relevant to determining whether the Rule 23 prerequisites for class certification are satisfied."). But it is impractical to construct "an impermeable wall" that will prevent the merits from bleeding into the class certification decision to some degree. See Shook v. Bd. of Cnty. Comm'rs of El Paso, 543 F.3d 597, 612 (10th Cir.2008) (Shook II); Vallario,
With these legal principles in mind, "[c]onsidering whether `questions of law or fact common to class members predominate' begins, of course, with the elements of the underlying cause of action." Erica P. John Fund, Inc. v. Halliburton Co., ___ U.S. ___, 131 S.Ct. 2179, 2184, 180 L.Ed.2d 24 (2011) (quoting Rule 23). For this limited purpose, we consider the proposed class's claim for a RICO conspiracy.
2. Civil RICO
The Racketeer Influenced and Corrupt Organizations Act (RICO) establishes a civil cause of action for persons injured as a result of a prohibited racketeering activity. 18 U.S.C. § 1962(c); see also Bixler v. Foster, 596 F.3d 751, 756 (10th Cir.2010). To prove a RICO violation, a plaintiff must show that the defendant violated the RICO statute, and the plaintiff was injured "by reason of" that violation. 18 U.S.C. §§ 1962, 1964(c). A defendant violates the act when he (1) participates in the conduct (2) of an enterprise (3) through a pattern of (4) racketeering activity. See Tal v. Hogan, 453 F.3d 1244, 1261 (10th Cir.2006). Section 1961(1)(B) describes the qualifying "racketeering activities," or "predicate acts," which include wire fraud. Id. at § 1961(1)(B). Pursuant to § 1962(d), conspiracy to commit a RICO violation also constitutes a violation of the Act when a conspirator adopts the goal of furthering the enterprise, even if the conspirator does not commit a predicate act. United States v. Randall, 661 F.3d 1291, 1297 (10th Cir. 2011).
Under RICO's "by reason of" requirement, "to state a claim ... the plaintiff is required to show that a RICO predicate offense `not only was a `but for' cause of his injury, but was the proximate cause as well.'" Hemi Grp., LLC v. City of New York, 559 U.S. 1, 9, 130 S.Ct. 983, 175 L.Ed.2d 943 (2010) (quoting Holmes v. Sec. Inv. Prot. Corp., 503 U.S. 258, 268, 112 S.Ct. 1311, 117 L.Ed.2d 532 (1992)). Sufficiently establishing the element of causation — both actual and proximate — is crucial to proving any violation of RICO. Bridge v. Phoenix Bond & Indem. Co., 553 U.S. 639, 656-60, 128 S.Ct. 2131, 170 L.Ed.2d 1012 (2008). "When a court evaluates a RICO claim for proximate causation, the central question it must ask is whether the alleged violation led directly to the plaintiff's injuries." Anza v. Ideal Steel Supply Corp., 547 U.S. 451, 461, 126 S.Ct. 1991, 164 L.Ed.2d 720 (2006). Tailored to the predominance inquiry, the question is whether the link between defendants' actions and the class's injuries can be adduced through common evidence.
Although reliance is not an explicit element of a civil RICO claim, it frequently serves as a proxy for both legal and factual causation. McLaughlin v. Am. Tobacco Co., 522 F.3d 215, 223 (2d Cir.2008), abrogated on other grounds by Bridge, 553 U.S. 639, 128 S.Ct. 2131, 170 L.Ed.2d 1012. But despite its usefulness as a stand-in for causation, strict first-party reliance is not a prerequisite to establishing
3. The Predominance Element in RICO Class Actions
Next, we must determine whether reliance in this case is susceptible to general and classwide proof.
Reliance, as a means of establishing RICO causation and beyond, takes on uncommon gravity when it arises in the context of establishing predominance under Rule 23. In practice, efforts to certify classes based on causes of action that require an element of causation, including RICO, often turn on whether the class can demonstrate that reliance is susceptible to generalized proof. Compare In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d 108, 119 (2d Cir.2013), cert. denied ___ U.S. ___, 134 S.Ct. 1938, 188 L.Ed.2d 960 (2014) (certifying RICO class based on a classwide inference of reliance); Klay v. Humana, 382 F.3d 1241 (11th Cir.2004) (same), abrogated on other grounds by Bridge, 553 U.S. 639, 128 S.Ct. 2131; with Poulos v. Caesars World, Inc., 379 F.3d 654 (9th Cir.2004) (declining to certify class because individualized issues of reliance would dominate); Sandwich Chef of Tex., Inc. v. Reliance Nat. Indem. Ins. Co., 319 F.3d 205, 219 (5th Cir.2003) ("The pervasive issues of individual reliance that generally exist in RICO fraud actions create a working presumption against class certification."); Gunnells v. Healthplan Servs., Inc., 348 F.3d 417, 434 (4th Cir. 2003) (finding reliance not easily proven by common evidence).
The status of reliance as a focal point at the class certification stage is primarily a forward-looking evidentiary concern. Since reliance is often a highly idiosyncratic issue that might require unique evidence from individual plaintiffs, it may present an impediment to the economies of time and scale that encourage class actions as an alternative to traditional litigation. In terms of Rule 23 doctrine, individualized issues of reliance often preclude a finding of predominance.
But that is not always the case. Sometimes issues of reliance can be disposed of on a classwide basis without individualized attention at trial. For example, where circumstantial evidence of reliance can be found through generalized, classwide proof, then common questions will predominate and class treatment is valuable in order to take advantage of the efficiencies essential to class actions. In re U.S. Foodservice Inc. Pricing Litig., 729 F.3d at 119; Klay, 382 F.3d at 1258-59. Under certain circumstances, therefore, it is beneficial to permit a commonsense inference of reliance applicable to the entire class to answer a predominating question as required by Rule 23. In the RICO context, class certification is proper when "causation can be established through an inference of reliance where the
Cases involving financial transactions, such as this one, are the paradigmatic examples of how the inference operates as an evidentiary matter. On this point, the Second Circuit's recent decision in In re U.S. Foodservice Inc. Pricing Litigation is instructive. 729 F.3d 108. In that case, defendants challenged the certification of a nationwide RICO class action against a food distributor for fraudulent overbilling under a "cost-plus" payment plan. Defendants appealed the district court's class certification decision on several grounds, including that the district court ignored particularized issues of reliance that were bound to predominate. See id. at 119. The Second Circuit disagreed, finding circumstantial proof of classwide reliance in the fact that class members made payments pursuant to the agreements:
Id. at 120 (quoting Klay, 382 F.3d at 1258).
Likewise, the Eleventh Circuit in Klay v. Humana found that an inference of reliance was appropriate where "circumstantial evidence that can be used to show reliance is common to the whole class. That is, the same considerations could lead a reasonable factfinder to conclude beyond a preponderance of the evidence that each individual plaintiff relied on the defendants' representations." Klay, 382 F.3d at 1259. Klay involved class claims brought by doctors against health maintenance organizations (HMOs), alleging a conspiracy to systematically underpay physicians on reimbursements for their services. Id. at 1246. To rebut the HMOs' claims that this inference was inappropriate, the court commented that "[i]t does not strain credulity to conclude that each plaintiff, in entering into contracts with the defendants, relied upon the defendants' representations and assumed they would be paid the amounts they were due." Id. at 1259.
In re U.S. Foodservice Inc. Pricing Litigation and Klay are persuasive and they are hardly alone in reasoning that circumstantial evidence of reliance is sufficient to allege RICO causation for purposes of Rule 23. Indeed, numerous district court decisions, in the process of certifying classes, have accentuated facts similar to those in this case — primarily, the alleged legitimacy of the counterparty to an agreement,
The logic of these cases applies here. Under the facts of this case, evidence of payment for the loan commitment — more specifically, the inference that arises from it — is sufficient to present a predominating question related to class member reliance that can resolve a central issue of this litigation in one swoop. Resorting to this generalized inference of reliance addresses a critical classwide piece of evidence and will not require individualized consideration that would belie class treatment.
Were we deciding the merits of an individual plaintiff's RICO fraud claim, we would surely accept the introduction of such an inference — the factfinder's ultimate acceptance or rejection notwithstanding — with little analysis. For the purposes of class certification, we see no reason why a putative class containing plaintiffs, who all paid substantial up-front fees in return for financial promises, should not be entitled to posit the same inference to a factfinder on a classwide basis. When plaintiffs are given the opportunity to present that inference as their theory of causation, reliance, an issue often wrought with individualized inquiries, becomes solvable with a uniform piece of circumstantial evidence. Furthermore, the circumstantial fact of payment of the up-front fee is common to the entire class: all class members paid up-front fees without receiving the promised loan. This element is subsumed in the definition of the class itself. And as a result, the putative class is not stymied, for the purposes of class certification, under Rule 23(b)'s predominance element.
The defendants point to cases from other circuits that have resisted class certification in financial transaction cases where reliance cannot be shown through generalized evidence. But those cases, rather than categorically rejecting the inference, simply do not permit its application on a classwide basis due to unique facts surrounding the class claims. In particular, those cases involve significant individualized or idiosyncratic elements that reasonably preclude the predomination of common questions.
For example, Poulos v. Caesars World, Inc., 379 F.3d 654 (9th Cir.2004), is unpersuasive because the court found that a given putative class member's decision to partake in slot-machine and video-poker gambling was not necessarily done in reliance on the game machine's maker's representations about the odds of winning. Unlike entering into a serious financial transaction, many people gamble without any consideration, let alone reliance, on the representations about the likelihood of striking it rich. Nor does every slot player spend any serious money expecting something (other than a good time, perhaps) in return.
A similar, albeit less direct, conclusion derives from Sandwich Chef of Texas, Inc. v. Reliance National Indemnity Insurance Co., 319 F.3d 205, 219 (5th Cir.2003). In Sandwich Chef, the class alleged that several insurance companies defrauded policyholders in violation of RICO by charging excessive premiums on workers' compensation plans.
At bottom, the sort of quid pro quo that is present in this case did not exist in Sandwich Chef. The putative class members in Sandwich Chef received the insurance they coveted — even if it was a slightly watered-down or less appealing version. Moreover, the insurance coverage itself was legitimate, and the companies offering it were in the business of providing insurance. In this case, the victims of Hutchens's fraud were completely deprived of any benefit from their transaction because Hutchens allegedly did not intend to or have the ability to fund any of the loans. This fact, if proved at trial, will resolve a central, predominating issue that is common to all class members. Not so in Sandwich Chef where common proof simply would not suffice to dispose of any principal issue in that case.
Before moving on, a few observations about the limited effect of this inference on the litigation of the class claims. As we have explained, the sole result of this inference is that the class members are exempted from demonstrating causation on a class-member-by-class-member basis. The inference thus manifests primarily as an evidentiary matter: class members will not be required to testify as to their reliance on the lenders' misrepresentations and omissions. Instead, the putative class members are permitted to use the common fact that they all forfeited advanced fees as evidence that the class's damages were caused "by reason of" defendants' alleged RICO violations.
But this inference does not shift the burden of proof at trial on the element of RICO causation (or any other elements of the claim) — plaintiffs will still have to prove RICO causation by a preponderance of the evidence to win on the merits. See, e.g., Sikes v. Teleline, Inc., 281 F.3d 1350, 1362 n. 3 (11th Cir.2002) (distinguishing between presumed reliance and an inference of reliance), abrogated on other grounds by Bridge, 553 U.S. 639, 128 S.Ct. 2131. Similarly, the trier of fact is not required to accept the inference; it is merely permitted to utilize it as common evidence to establish the class's prima facie claims under RICO. Given the significance that RICO's causation element will play at trial, combined with lenders' common misrepresentations and omissions regarding Hutchens's ability or intent to fund the promised loans (which are not challenged here), it is clear that the class's claims will "prevail or fail in unison." Amgen Inc., 133 S.Ct. at 1191. That is enough to satisfy the predominance prong of Rule 23.
4. Presumption of Reliance
The foregoing analysis confirms that plaintiffs have satisfied the predominance prong of Rule 23(b)(3). The district court, however, rather than crediting an inference of causation, instead borrowed the presumption of reliance from securities law to give plaintiffs an extra — and ultimately unneeded — boost in their efforts to establish reliance. As we explain, the presumption of reliance does not apply to RICO fraud.
The fraud-on-the-market theory arises from the Supreme Court's interpretation of federal securities law. In securities cases, plaintiffs can take advantage of a legal presumption that the defendant's misrepresentations affected their investment decision in situations where proving causation is unfeasible. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, 552 U.S. 148, 159, 128 S.Ct. 761, 169 L.Ed.2d 627 (2008). For proceedings under § 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5, "[r]equiring a plaintiff to show a speculative state of facts ... places an unrealistic evidentiary burden on the 10(b) plaintiff." Joseph v. Wiles, 223 F.3d 1155, 1162 (10th Cir.2000).
This understanding is based on two seminal Supreme Court cases, Basic Inc. v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194 (1988) and Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), which are the cornerstones of this presumption of reliance. In Basic Inc., the Supreme Court declined to require the 10(b) plaintiff to provide direct proof of reliance on defendant's misrepresentation, recognizing that doing so "effectively would ... prevent [plaintiffs] from proceeding with a class action" in typical securities fraud cases. Basic Inc., 485 U.S. at 242, 108 S.Ct. 978. And in Affiliated Ute, the Court endorsed a similar presumption of reliance when the theory of securities fraud centers on defendant's failure to disclose material information. Affiliated Ute, 406 U.S. at 153-54, 92 S.Ct. 1456.
The rules from each of these cases largely rest on the unique nature of publicly traded securities markets. This is because the private causes of action under the antifraud provisions of the federal securities laws rely on the condition of the public market at the time of the alleged fraudulent transaction as much as the subjective
Indeed, the fraud-on-the-market theory allows plaintiffs to benefit from a relaxed pleading standard that grants them a rebuttable presumption of reliance on the value of an allegedly fraudulent security price. See Basic Inc., 485 U.S. at 229-30, 108 S.Ct. 978. For class certification, this legal presumption of classwide reliance is particularly accommodating because it helps avoid questions of individualized reliance and their attendant difficulties under the predominance prong of Rule 23(b)(3). The sui generis nature of securities fraud supports the reasoning behind entitling plaintiffs to a presumption of reliance because only where an arguably efficient market provides the backdrop for fraud allegations does the fraud-on-the-market theory hold any water. See Amgen Inc., 133 S.Ct. at 1192. This is so because an efficient market incorporates all publicly available information into a security's price. Id. Thus, a particular public, material misrepresentation will artificially inflate the security's price, and individual investors, conscious of the nature of the efficient market, will rely on the price of the security in their decision to invest. Id. By relying on the efficiency of the market, an investor has essentially relied on the misrepresentation or omission (even if he never actually heard it). Id.
Similarly, as we referenced above, the Affiliated Ute presumption posits that when a theory of securities fraud is based on a fraudulent failure to disclose material facts, courts do not require the plaintiff to counterfactually demonstrate that it would have relied on the omitted material information; instead, the court permits the factfinder to presume that they would have done so. See Affiliated Ute, 406 U.S. at 153-54, 92 S.Ct. 1456. This presumption typically does not apply to affirmative misrepresentations made by the defendant. Joseph v. Wiles, 223 F.3d 1155, 1163 (10th Cir.2000).
In sum, the presumption is uniquely applicable in the securities context and it has not gained traction in other fields of law. See generally 2 McLaughlin on Class Actions § 8:11 (10th ed.2013). And this presumption is unsuited for RICO fraud cases because they involve a more self-contained universe of plaintiffs and conduct by defendants that does not necessitate a legal presumption. Given that, we decline to apply a species of the presumption to RICO allegations and cannot endorse the district court's decision holding otherwise.
In addition to commonality and predominance, Meisels contends the district court erred in finding that a class action was superior to any other method of adjudication. He claims that the existence of numerous individual actions against the lenders shows that a class action is unnecessary.
Although it is unclear as to the number of individual actions that have been filed around the country concerning this controversy, the mere existence of individual actions brought by putative class members does not necessarily defeat a claim for superiority. Cf. Vassalle v. Midland Funding LLC, 708 F.3d 747, 758 (6th Cir.2013). It is enough that class treatment is superior because it will "achieve economies of time, effort, and expense, and promote uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results." Amchem, 521 U.S. at 615, 117 S.Ct. 2231.
Superiority has been demonstrated here.
B. Extraterritoriality of RICO
Entirely separate from the issue of class certification, Meisels raises an additional claim that challenges whether the district court had subject matter jurisdiction over the claims in this case. He contends that the extent to which RICO applies to conduct outside the United States — or "extraterritorially" — influences the power of the federal courts to hear this matter. By framing this issue as one of jurisdiction, Meisels in effect broadens the limited scope of Rule 23(f) review and asks us to consider prematurely the merits of plaintiffs' RICO claims.
But this argument contravenes the Supreme Court's explicit guidance in Morrison v. National Australia Bank Ltd., 561 U.S. 247, 130 S.Ct. 2869, 177 L.Ed.2d 535 (2010). In Morrison, the Court found that the extent to which a statute applies extraterritorially proceeds exclusively as a merits issue, not a question of jurisdiction: "[T]o ask what conduct [a statute] reaches is to ask what conduct [a statute] prohibits, which is a merits question." Id. at 2877 (emphasis added). And so, while we can dismiss a case for want of subject matter jurisdiction at any time during the pendency of an action, Mires v. United States, 466 F.3d 1208, 1211 (10th Cir.2006), a Rule 23 interlocutory appeal permits us to consider the merits of the class's claims only to the extent that they overlap with the Rule 23 factors. Thus, an independent review of the merits, untethered to Rule 23, is outside the scope of that review. Shook I, 386 F.3d at 971.
Courts addressing the issue since the Supreme Court's decision in Morrison have evenly determined that the extraterritoriality of RICO is a question of whether the plaintiffs have stated a claim, not whether the court properly has subject matter jurisdiction. See, e.g., United States v. Chao Fan Xu, 706 F.3d 965, 977 (9th Cir.2013), as amended on denial of reh'g (Mar. 14, 2013); Norex Petroleum Ltd. v. Access Indus., Inc., 631 F.3d 29, 31 (2d Cir.2010). That is the identifiable lesson from Morrison, and Meisels offers no compelling reason why a straight-forward application of it does not apply here.
Despite Morrison's clear guidance, the parties treat the issue of RICO's extraterritoriality as a dispositive jurisdictional issue, even at the class certification stage of the proceedings. This is in error, but we pause briefly to address the parties' contentions.
Courts have gone in two directions in identifying the "focus" of RICO. On one side, a collection of courts have found that the focus of RICO is its nerve center, the nefarious enterprise. Mitsui O.S.K. Lines, Ltd. v. Seamaster Logistics, Inc., 871 F.Supp.2d 933, 938-40 (N.D.Cal.2012); Cedeno v. Intech Group, Inc., 733 F.Supp.2d 471, 473 (S.D.N.Y.2010) aff'd sub nom., Cedeno v. Castillo, 457 Fed. Appx. 35 (2d Cir.2012); Farm Credit Leasing Servs. Corp. v. Krones, Inc. (In re Le-Nature's, Inc.), No. 9-MC-162, 2011 WL 2112533, at *3 n. 7 (W.D.Pa. May 26, 2011); In re Toyota Motor Corp., 785 F.Supp.2d 883, 914 (C.D.Cal.2011); European Cmty. v. RJR Nabisco, Inc., No. 02-CV-5771, 2011 WL 843957, at *5 (E.D.N.Y. Mar. 8, 2011). The appeal of focusing on the nerve center of the enterprise is its administrative ease and consistency. See Mitsui O.S.K. Lines, 871 F.Supp.2d at 940-41. Moreover, attention on the nerve center comports with the purpose of RICO, which punishes racketeering activity in connection with an enterprise, not simply the predicate acts, which are separate offenses. European Cmty., 2011 WL 843957, at *5.
On the other side, a collection of courts have found that RICO's focus is the pattern of racketeering activity. United States v. Chao Fan Xu, 706 F.3d 965, 975-76 (9th Cir.2013); Chevron Corp. v. Donziger, 871 F.Supp.2d 229, 243-46 (S.D.N.Y. 2012); United States v. Philip Morris USA, Inc., 783 F.Supp.2d 23, 29 (D.D.C. 2011). The genesis of this position is pre-Morrison Supreme Court jurisprudence that insisted that "the heart of any RICO complaint is the allegation of a pattern of racketeering." Agency Holding v. Malley-Duff Assoc., 483 U.S. 143, 154, 107 S.Ct. 2759, 97 L.Ed.2d 121 (1987) (emphasis omitted). In addition, "[t]his approach... would afford a remedy to a U.S. plaintiff who claims injury caused by domestic acts of racketeering activity without regard to the nationality or foreign character of the defendants or the enterprise whose affairs the defendants wrongfully conducted." Donziger, 871 F.Supp.2d at 244. The landscape surrounding RICO's enactment also suggests that it was intended to reach at least some enterprises operating out of foreign countries.
The district court's decision lands within this latter group of courts, applying the so-called predicate acts approach. See CGC Holding Co., 824 F.Supp.2d at 1209. ("[T]he conduct of the enterprise within the United States was the key to its success." (emphasis added)). Indeed, the opinion below was cited as persuasive authority in several subsequent cases, including United States v. Chao Fan Xu, 706 F.3d 965, 979 (9th Cir.2013), and Chevron Corp. v. Donziger, 871 F.Supp.2d 229, 243-45 (S.D.N.Y.2012).
Looking to the plain language of the legislation does not provide a conspicuous answer to which approach Congress favored when it enacted RICO. And neither
In the end, notwithstanding the parties' attention to this issue, we need not resolve finally which approach is preferred in the circuit. On this interlocutory appeal, we do not decide the merits of plaintiffs' claims, including the extent to which those claims involve an extraterritorial application of RICO. Since the question of the extraterritoriality of a statute is a merits question, resolving it must await a final disposition from the court below.
C. Additional Considerations
Finally, we must briefly address several ancillary issues that the parties raised in the three separate appeals before us.
1. Personal Jurisdiction Over Transferees
First, Hutchens argues the district court erred in finding the court could exercise personal jurisdiction over the transferees.
A district court's decision denying a motion to dismiss for lack of personal jurisdiction "is not an immediately appealable collateral order." Van Cauwenberghe v. Biard, 486 U.S. 517, 527, 108 S.Ct. 1945, 100 L.Ed.2d 517 (1988). To be sure, we have the authority to exercise pendent appellate jurisdiction over decisions related to personal jurisdiction when we have an otherwise valid interlocutory appeal before us. But our use of pendent appellate jurisdiction "is generally disfavored." Vondrak v. City of Las Cruces, 535 F.3d 1198, 1205 (10th Cir.2008). Indeed, "[i]t is appropriate to exercise pendent appellate jurisdiction only where resolution of the appealable issue necessarily resolves the nonappealable issue, or where review of the nonappealable issue is necessary to ensure meaningful review of the appealable one." Buck v. City of Albuquerque, 549 F.3d 1269, 1293 (10th Cir. 2008) (internal quotation marks omitted). As the Supreme Court has cautioned, the narrow category of issues that deserve pendent review "includes only decisions that are conclusive, that resolve important questions separate from the merits, and that are effectively unreviewable on appeal from the final judgment in the underlying action." Swint v. Chambers Cnty. Comm'n, 514 U.S. 35, 42, 115 S.Ct. 1203, 131 L.Ed.2d 60 (1995).
Despite the parties' stipulation regarding our power to exercise jurisdiction over the district court's decision to take personal jurisdiction over the transferees, we decline to do so. Quite clearly, the question is beyond the scope of a traditional Rule 23(f) review, and the parties have completely failed to explain why pendent appellate jurisdiction is appropriate under the circumstances. At bottom, the personal jurisdiction issue and the class certification decision are not so "inextricably intertwined ... that review of the former decision [is] necessary to ensure meaningful review of the latter." Swint, 514 U.S. at 51, 115 S.Ct. 1203. And Rule 23 does not permit a party to shoehorn every decision that went against it into its petition for interlocutory review.
2. Standing and Proximate Causation
By the same token, we reject Hutchens's suggestion that plaintiffs lack standing to bring their RICO claims due to a failure to allege proximate causation.
As the natural, foreseeable, and, most importantly, intended victims of the alleged fraud, plaintiffs have sufficiently pleaded proximate causation to survive a threshold standing inquiry. In essence, Hutchens alleges that defendants will eventually win because the facts demonstrate the causal weaknesses in the class's RICO claims.
In sum, saying nothing of the strength of their RICO cause of action, plaintiffs have a viable theory of causation that is adequate to confer standing under RICO at this stage in the litigation.
3. Standing with Respect to Broad
Finally, we do accept the plaintiffs' concession that they lack standing to pursue their claims against Broad. Regardless of the merits of this about-face, plaintiffs have relinquished their intent to establish the justiciability of those claims and can no longer fairly and adequately protect the interests of any putative class members that could assert valid causes of action vis-a-vis Broad. Accordingly, we reverse the district court's decision to the extent it certified a class against only Broad and Cassel, Gaché, and Romano and remand those claims to the district court with instructions
Based on the analysis above, we REVERSE and REMAND the district court's class certification decision as it pertains to Broad and Cassel, Gaché, and Romano. In all other respects, we AFFIRM the district court's decision to certify a class. The remaining issues raised by defendants are not properly before us on this Rule 23(f) interlocutory review, and we decline to address them at this juncture.
CGC Holding Co., 2013 WL 798242 at *17. If we omit the reference to Affiliated Ute, the district court essentially established the "inference" of reliance that we find supportive of the predominance prong. Simply put, going further to draw a presumption of reliance was unnecessary.