IN THE UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

No. 09-40997

CASA ORLANDO APARTMENTS, LTD., Relating to Pine Haven Apartments;

JASPER HOUSING DEVELOPMENT COMPANY, Relating to Pine View

Apartments; ALFRED PORKOLAB, JEAN J. PORKOLAB; ALAN B.

PORKOLAB, as Trustee for the Porkolab Family Trust No. 1, Relating to Lowell

Apartments, Lorain, Ohio,

Plaintiffs - Appellants

versus

FEDERAL NATIONAL MORTGAGE ASSOCIATION,

Defendant - Appellee

Appeal from the United States District Court

for the Eastern District of Texas

Before KING, HIGGINBOTHAM, and GARZA, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

This is an interlocutory appeal from the district court’s refusal to certify

a class. Plaintiff Appellants are mortgagors whose mortgages for low-income

multi-family housing were held or serviced by the Federal National Mortgage

Association (“Fannie Mae”) and insured by the Department of Housing and

Urban Development (“HUD”). Plaintiffs sued Fannie Mae on behalf of

themselves and those similarly situated for breach of fiduciary duty. The district

United States Court of Appeals

Fifth Circuit

F I L E D

October 14, 2010

Lyle W. Cayce

Clerk

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court denied class certification under all three prongs of the Federal Rules of

Civil Procedure Rule 23(b). For the reasons stated below, we AFFIRM.

I.

Since 1969, HUD has required mortgagors participating in its insurance

program to sign a Regulatory Agreement. This Agreement mandated that

mortgagors establish two funds with the mortgagee: 1) a Reserve Fund for

Replacements (“Reserve Fund”) and 2) a Residual Receipts Fund (“Residual

Fund”). The Reserve Fund ensured that the mortgagor had money available to

1

effectuate repairs on the HUD-insured property. The Residual Fund provided

additional liquidity to ensure payments on the loan and protect HUD’s interests.

According to the Agreement, the Reserve Fund was to be under the control of the

mortgagee (Fannie Mae) and the Residual Fund would be under the control of

the Federal Housing Commissioner. Disbursements from the Reserve Fund

were only to be made after receiving written consent from the Commissioner.

The Commissioner could also direct disbursements from the Residual Fund for

any purpose he saw fit. After repayment of the loan, mortgagees were to refund

any remaining amounts in the Funds to the mortgagors.

The Reserve Fund provision of the Agreement specifically contemplated

that those funds may take the form of cash deposit or guaranteed investment.

Fannie Mae gave mortgagors certain investment options for both their Reserve

Fund and Residual Fund moneys. Some mortgagors chose to partially or fully

 The Regulatory Agreement established a fixed amount for regular deposits into the 1

Reserve Fund. The Residual Fund was predicated upon surplus cash. In many instances,

there was no surplus cash available to be deposited into the Residual Fund. Therefore, at

least some of the class members only had Reserve Funds.

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invest these funds accordingly. Others elected to retain the liquidity and not

invest any such funds. These “uninvested funds” are the subject of this lawsuit.

Appellants contend that the Regulatory Agreement created a fiduciary

relationship between Fannie Mae and class members, with Fannie Mae holding

the Reserve and Residual Funds in trust for class member mortgagors.

Appellants further contend that Fannie Mae breached its fiduciary duties by

engaging in self-dealing with mortgagors’ uninvested funds, resulting in unjust

enrichment.

Between 1969 and 1995, Fannie Mae invested the so-called uninvested

funds in the overnight federal funds marketplace, retaining the interest proceeds

for itself. Appellants allege that Fannie Mae tried to discourage mortgagor

investments so Fannie Mae could maximize the earning potential of its federal

funds investments. In 1995, Fannie Mae transferred the servicing of its multifamily mortgages to GMAC Commercial Mortgage Corporation (“GMACCM”).

Under this arrangement, GMACCM created custodial bank accounts using

Fannie Mae mortgagors’ invested and uninvested funds. In return for the large

deposits, the banks offered GMACCM lines of credit well below the market

interest rates. GMACCM shared the financial proceeds of these favorable credit

lines with Fannie Mae, giving Fannie Mae seventy percent of GMACCM’s

benefit. Appellants argue these proceeds were wrongfully obtained and should

be disgorged.

Plaintiff Appellants define their class to include all mortgagors of property

located anywhere in the United States whose mortgages: 1) were insured under

§ 221(d)(3) or § 236 of the National Housing Act; 2) were held or serviced by

Fannie Mae; and 3) required the mortgagors to make deposits in Reserve and

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Residual Funds and where such funds were “uninvested” in part or whole for any

period of time. In 1978, Fannie Mae serviced nearly 4,000 potential class

mortgages. By 2004 (when this lawsuit was filed), approximately 1,500 such

mortgages existed. Mortgagors reside in all fifty states, signed the Regulatory

Agreements in various states, and conducted business with Fannie Mae regional

offices in Atlanta, Chicago, Dallas, Los Angeles, and Philadelphia. Fannie Mae

is headquartered in Washington, D.C.

The district court found that the class satisfied the requirements of Rule

23(a) but denied certification under Rule 23(b). We review a denial of class

2

certification for abuse of discretion, deferring to the district court’s ability to

manage pending litigation and conduct the factual inquiry necessary for

certification. However, we review de novo the question of whether the district

3

court applied the proper legal standard.

4

II.

Under Rule 23, a class may be certified if it satisfies the requirements of

Rule 23(a) and fits into one of the three categories outlined in Rule 23(b).

Because we find that choice of law issues are relevant to all three categories, we

begin our discussion here.

Neither party appealed the Rule 23(a) findings. Therefore, we consider any issues 2

under 23(a) waived and begin our discussion with 23(b). See In re Tex. Mortgage Servs. Corp.,

761 F.2d 1068, 1073 (5th Cir. 1985).

See Allison v. Citgo Petroleum Corp., 151 F.3d 402, 408 (5th Cir. 1998); Jenkins v.

3

Raymark Indus., 782 F.2d 468, 471-72 (5th Cir. 1986).

See Forbush v. J.C. Penney Co., 994 F.2d 1101, 1104 (5th Cir. 1993).

4

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In diversity cases, federal courts must apply the choice of law rules of the

forum state. We review a district court’s choice of law determination de novo.

5

Texas courts follow the “most significant relationship” test outlined in the

Restatement (Second) of Conflict of Laws (“Restatement”). The choice of law is

6

evaluated issue by issue. In this case, the lynchpin issue is whether Fannie

7

Mae was in a fiduciary relationship with the plaintiff mortgagors (and

subsequently breached its fiduciary duty). Additionally, Plaintiffs seek relief

under an unjust enrichment theory.

Section 6 of the Restatement lists the general factors that should inform

a choice of law question: (a) the needs of the interstate and international

systems, (b) the relevant policies of the forum, (c) the relevant policies of other

interested states and the relative interests of those states in the determination

of the particular issue, (d) the protection of justified expectations, (e) the basic

policies underlying the particular field of law, (f) certainty, predictability and

uniformity of result, and (g) ease in the determination and application of the law

to be applied.

Since this is a breach of fiduciary duty case, we also consider Restatement

§ 145, which lists the primary factors for choice of law questions in tort cases.

These factors are: (a) the place where the injury occurred, (b) the place where the

conduct causing the injury occurred, (c) the domicile, residence, nationality,

See Spence v. Glock, 227 F.3d 308, 311 (5th Cir. 2000).

5

See, e.g., Torrington Co. v. Stuzman, 46 S.W.3d 829, 848 (Tex. 2000); Duncan v. 6

Cessna Aircraft Co., 665 S.W.2d 414, 420-21 (Tex. 1984).

See Duncan, 665 S.W.2d at 421. 7

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place of incorporation and place of business of the parties, and (d) the place

where the relationship, if any, between the parties is centered.

Plaintiffs highlight the Restatement’s comments, which instruct that when

a case involves unfair profit rather than a plaintiff’s pecuniary loss, the location

of the injury is less important than the location of defendant’s conduct.

8

Plaintiffs further advocate that there is no place central to the relationship

between Fannie Mae and its borrowers, claiming that each dealt with one

another from their respective principal places of business. Therefore, Plaintiffs

conclude that the place of the conduct causing the injury and the residence of the

parties are the most important factors in this case. Since Plaintiffs reside in all

fifty states, Appellants believe we should give greater weight to Fannie Mae’s

principal place of business, Washington D.C. In addition, Fannie Mae’s

headquarters is where the conduct causing the breach of fiduciary duty

arose—the District of Columbia is where the idea to invest the Funds developed

and where policies were created to implement this idea. Thus, Plaintiffs urge

us to apply D.C. law to all class members.

In analyzing the Restatement factors de novo, we agree with Plaintiffs that

the primary purpose of the tort rule involved here leads us to place less

importance on where the injury occurred, as disgorgement is not meant to

compensate for a loss. But the Restatement’s comments also instruct us not to

over-emphasize this restriction. A breach of fiduciary duty still causes an

9

Restatement (Second) of Conflict of Laws § 145 cmt. f (1971) [hereinafter Restatement]. 8

See Restatement § 145 cmt. c (“Undoubtedly, the relative weight of these two objectives 9

[deterrence or compensation] varies somewhat from rule to rule, and in the case of a given rule

it will frequently be difficult to tell which of these objectives is more important.”).

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injury, and in this case, those financial injuries occurred in the states where

plaintiffs maintain their principal places of business.

For the second factor, we generally agree with Plaintiffs’ assertion that the

District of Columbia is where the conduct causing the injury occurred. The

10

third factor, domicile of the parties, is also not in dispute.

We disagree, however, with Plaintiffs’ assessment of the fourth

Restatement factor—where the parties’ relationships were centered. The

relationship in dispute in this case is a fiduciary obligation that Plaintiffs

contend arose from the signing of the Regulatory Agreement and other mortgage

documents. Plaintiffs advocate that a trust relationship is created when the

parties manifest an intent to create such a relationship. According to Plaintiffs,

the trust intent exists in the Regulatory Agreement, Mortgage Deed/Deeds of

Trust, and Mortgagee’s Certificate. Therefore, the manifestation of that intent

must have taken place where and when the parties signed these documents.

11

Additional evidence of manifested intent would occur when and where Plaintiffs

Although the idea for the investments may have been generated in the District of 10

Columbia, we acknowledge that some uncertainty exists regarding the location of the conduct

causing the injury. Prior to 1995, the actual investing took place in overnight markets in New

York. Under the current GMACCM arrangement, the Funds are held in Philadelphia. Thus,

at least some of the conduct causing the injury may have occurred outside of Washington. 

However, since we need not resolve that issue to conclude that D.C. law does not apply to each

plaintiff, we assume that the conduct did occur in the District of Columbia.

While we recognize this is not a breach of mortgage agreement case, we note the

11

importance of the mortgage documents to the claims of this case. Those documents allegedly

established the fiduciary relationship. In choice of law analysis for breach of mortgage

agreement and unjust enrichment, “the location of the mortgaged properties is the single most

significant consideration.” Schmidt v. Interstate Federal Savings & Loan Ass’n, 74 F.R.D. 423,

428 (D.D.C. 1977). Thus, in a case where the mortgage agreement is pivotal, as it is here, the

location of the mortgaged property may play a greater role than it would otherwise in a breach

of fiduciary claim.

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delivered deposits (the trust corpus) for the Reserve and Residual Funds.

According to the record, one of the named Plaintiffs (the Porkolabs) made

deposits to the Atlanta Fannie Mae office, while another (Jasper) conducted

business with the Los Angeles office. There is no indication that these Plaintiffs

had direct contact with the Washington, D.C. office or manifested an intent to

create a trust there.

Plaintiffs assert that this case should follow the choice of law analysis in

a Texas appellate case involving securities fraud. There, the defendant resided

12

in New York, which is also where the misconduct occurred. Similarly, Fannie

Mae’s principal place of business is in Washington D.C., where the misconduct

occurred. However, Plaintiffs misapply Greenberg. There, the court noted that

none of the defendant’s conduct “occurred in, or was directed to” the forum state,

Texas. In contrast, Fannie Mae conducted business in several regional offices

13

outside of Washington. Moreover, the defendant in Greenberg had no knowledge

that it was dealing with Texans and no expectation that Texas laws might apply.

The court applied New York law based predominantly on reasonable

expectations. Here, Fannie Mae knew it was conducting business with

14

plaintiffs in a variety of states. Plaintiffs also knew Fannie Mae operated out

of regional offices. Additionally, the Regulatory Agreement, which Plaintiffs rely

on for the creation of fiduciary duty, specifically notes that Fannie Mae could

Greenberg Traurig v. Moody, 161 S.W.3d 56 (Tex. App.—Houston [14th Dist.] 2004, 12

no pet.).

Id. at 74. 13

Id.; see also Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 822 (1985) (noting that 14

parties’ expectations constitute “an important element” of considering whether a choice of law

conclusion is fair and constitutional). 

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bring suit in “any court, State or Federal.” Thus, in contrast with Greenberg,

reasonable expectations in this case do not so clearly point to the application of

a single jurisdiction’s laws.

Likewise, we are not persuaded that the analysis in Grant Thornton v.

SunTrust Bank compels us to apply D.C. law to all plaintiffs. In that case, the

15

court found that analysis under the Restatement §§ 148 or 145 did not

definitively point to a single jurisdiction. Thus, the court relied on

16

consideration of the § 6 general conflict of law factors rather than the tortspecific factors. The SunTrust court found that the policies of the forum state,

Texas, protected investors better than the policies of other states. Here, we do

not find that the § 6 factors, in conjunction with § 145, lead us to a single

jurisdiction applicable for all plaintiffs.

Instead, applying the Restatement’s factors highlights the need for

multiple state laws to apply to this class. The relevant policies of the interested

states and the forum state similarly discourage self-dealing by fiduciaries, but

they establish different standards for showing fiduciary duty and sometimes

different remedies. Neither party had a justified expectation that one state’s

17

law would apply over another. Moreover, the needs of the interstate system

 133 S.W.3d 342 (Tex. App.—Dallas 2004, pet. denied).

15

The court conducted its primary analysis using § 148 for fraud or misrepresentation

16

cases. But it also concluded that it would reach the same result following § 145 for torts,

which is what we use here.

See Part III, infra.

17

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direct us not to ignore relevant states’ interests in fiduciary law by applying D.C.

law to all matters of this case.

18

While the conduct causing a breach of fiduciary duty may have occurred

in the District of Columbia, there would be no fiduciary duty without activity

that occurred in other locations. Since the existence of a fiduciary relationship

is critical to this lawsuit, we find that the District of Columbia cannot have the

most significant relationship to the issues unless the fiduciary relationship was

created and maintained there. Given the Plaintiffs’ interactions with the

regional offices (including making payments to regional offices), we find that the

intention to create a trust (such as giving property to the trustee) manifested

outside of Washington D.C. for many of the Plaintiffs. As a result, there is no

single jurisdictional law that can be applied to the class as a whole.

We make a similar finding with respect to the unjust enrichment claim.

Following Texas law, we again turn to the Restatement for guidance on how to

examine unjust enrichment claims. The Restatement offers five factors to be

19

considered in choice of law decisions for unjust enrichment: 1) the place where

the parties’ relationship was centered; 2) the place where defendants received

the benefit or enrichment; 3) the location where the act conferring the

enrichment or benefit was done; 4) the parties’ domicile or place of business; and

5) the jurisdiction where a physical thing substantially related to the enrichment

See, e.g., Caton v. Leach Corp., 896 F.2d 939, 943 (5th Cir. 1990) (“Texas has a

18

significant interest in remedying civil injury to Texas citizens through tort liability and also

in defining the outer limits of tort liability.”).

See Mayo v. Hartford Life Ins. Co., 354 F.3d 400, 403 (5th Cir. 2004) (“Texas courts

19

use the ‘most significant relationship’ test set forth in the Restatement . . . for all choice of law

cases except contract cases in which the parties have agreed to a valid choice of law clause.”);

id. at 405 (applying Restatement § 221).

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was situated at the time of the enrichment. The primary factor in this analysis

20

is also where the parties’ fiduciary relationship was centered, which we conclude

will be different for each plaintiff. The second and third factors point to

Washington, D.C. but also to Pennsylvania and New York, where the Funds

were invested and Fannie Mae held accounts. The fourth factor leads to

jurisdiction in all fifty states and the District of Columbia. For the fifth factor,

there is likely not a physical “thing” related to the enrichment in this case, but

if one exists, it is the investment account located in the District, New York, or

Philadelphia. In evaluating these factors, we conclude there are not sufficient

contacts to apply D.C. law to each plaintiff’s unjust enrichment claim.

To summarize, we find that D.C. law should not be applied to all Plaintiff

class members in either the fiduciary law or unjust enrichment claims.

III.

The choice of law finding most closely interacts with the Rule 23(b)(3)

analysis. To obtain certification under (b)(3), the court must find “that the

questions of law or fact common to class members predominate over any

questions affecting only individual members, and that a class action is superior

to other available methods for fairly and efficiently adjudicating the

controversy.” Here, Plaintiffs seek to certify a nationwide class for a state

common law claim. “In a multi-state class action, variations in state law may

swamp any common issues and defeat predominance.” In order for common

21

issues to predominate and justify a (b)(3) certification, each state must have the

Restatement § 221(2). 20

Castano v. Amer. Tobacco Co., 84 F.3d 734, 741 (5th Cir. 1996). 21

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same standards for establishing a fiduciary relationship and breaching the

resulting duty.

The district court found that the policies of the interested states varied

considerably with regard to the fiduciary duties of an escrow administrator. On

appeal, Plaintiffs argue that such a finding is irrelevant because they do not rely

on traditional fiduciary relationships previously affirmed by state law. Instead,

Plaintiffs contend that the Regulatory Agreement and specific circumstances of

this case created a fiduciary duty between Fannie Mae and the mortgagors, even

if such a duty might not exist in an ordinary escrow account. Plaintiffs allege

that this duty would exist in any jurisdiction.

To support their claim, Plaintiffs provided a fifty-one jurisdiction survey

and noted that in every jurisdiction a fiduciary relationship is established

through the manifestation of an intent to create such a duty. Moreover,

Plaintiffs assert that self-dealing is a violation of fiduciary duty in every state.

In examining the state laws further, we find that determining when a trust or

fiduciary relationship has been created (and breached) is not as uniform as

Plaintiffs propose.

While the basic principles of fiduciary law may be the same throughout the

country, the nuances vary, and those nuances affect the outcome of claims. In

22

Illinois, for example, a valid express trust requires: 1) intent of the parties to

create a trust as shown by a writing or by circumstances; 2) a definite subject

matter of trust property; 3) ascertainable beneficiaries; 4) a trustee; 5)

specifications of a trust purpose and how the trust is to be performed; and 6)

See, e.g., Rohlfing v. Manor Care, 172 F.R.D. 330, 341 (N.D. Ill. 1997) (disussing the 22

importance of nuances in fiduciary law).

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delivery of the trust property to the trustee. In a case relying on these

23

standards, the court found there was no trust because checks were payable

directly to the defendant rather than to the escrow account. Thus, under

24

Illinois law, the way the mortgagors’ checks were submitted to Fannie Mae

would be relevant in determining whether a trust relationship existed.

Under Texas law, a “fiduciary relationship is an extraordinary one and will

not be lightly created.” Thus, ordinarily “an express trust does not arise unless

25

the owner of property has shown an unequivocal intention to create a trust.”

26

If “the person to whom the settlor’s wish is addressed has a clear discretion to

act as he thinks fit,” no trust is created. Under the Regulatory Agrement, the

27

Commissioner may direct the Residual Funds for any purpose he determines.

Thus, under Texas law, a trust would not be created with those funds.

The District of Columbia has a simpler standard, requiring that “the

settlor need only manifest an intention to impose upon herself or upon a

transferee of the property equitable duties to deal with the property for the

See In re Estate of Wilkening, 441 N.E.2d 158, 163 (Ill. App. 1982). 23

Hamilton Bancshares, Inc. v. Leroy, 476 N.E.2d 788, 790-91 (Ill. App. 1985).

24

Hoggett v. Brown, 971 S.W.2d 472, 488 (Tex. App.—Houston [14th Div.] 1997, pet.

25

denied).

Chapman Children’s Trust v. Porter & Hedges, L.L.P., 32 S.W.3d 429, 438 (Tex.

26

App.—Houston [14th Div.] 2000, pet. denied).

Alexander v. Botsford, 439 S.W.2d 414, 417 (Tex. Civ. App.—Dallas 1969, writ ref’d 27

n.r.e.).

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benefit of another person.” The law of the District of Columbia further requires

28

the trustee to take title of the trust assets.

29

Even assuming that general fiduciary principles are similar across

jurisdictions, Plaintiffs have the responsibility to demonstrate that state law

variations do not preclude the certification of a nationwide class. They have

30

failed to do so with respect to the establishment of fiduciary duty. As an Illinois

district court noted, “Illinois law provides that a plaintiff making a fiduciary

duty claim . . . must establish the existence of a fiduciary relationship by ‘clear

and convincing’ evidence. Do any of the other 12 states involved in this case

impose a similar burden on plaintiffs? [Plaintiff] gives us no indication.”

31

Likewise, Plaintiffs’ survey here fails to show that burden of proof standards do

not vary or that differences in state unjust enrichment laws are insignificant.

For example, to state a claim for unjust enrichment some jurisdictions require

the complainant to prove an actual loss or impoverishment. Such a

32

United States v. Taylor, 867 F.2d 700, 703 (D.C. Cir. 1989) (internal citations 28

omitted); see Fielding v. BT Alex Brown Corp., 116 F. Supp. 2d 59, 63 (D.D.C. 2000); Cabaniss

v. Cabaniss, 464 A.2d 87, 91 (D.C. 1983).

Fielding, 116 F. Supp. 2d at 63. 29

See Castano v. Amer. Tobacco Co., 84 F.3d 734 (5th Cir. 1996) (“Appellees see the

30

‘which law’ matter academic. They say no variations in state . . . laws relevant to this case

exist. A court cannot accept such assertion ‘on faith.’ Appellees, as class action proponents,

must show that it is accurate.”) (quoting Walsh v. Ford Motor Co., 807 F.2d 1000, 1016 (D.C.

Cir. 1986)).

Rohlfing v. Manor Care, 172 F.R.D. 330, 341 n.14 (N.D. Ill. 1997). 31

Compare Cmty. Guardian Bank v. Hamlin, 898 P.2d 1005, 1008 (Ariz. 1995) (listing 32

“impoverishment” as an element of unjust enrichment) and State v. Barclays Bank of New

York, N.A., 563 N.E.2d 11, 15 (N.Y. 1990) (noting that plaintiffs must have “suffered a loss”

to have a claim for unjust enrichment) with County of San Bernardino v. Walsh, 69 Cal. Rptr.

3d 848, 855-56 (Cal. App. 2007) (“The public policy of this state does not permit one to take

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requirement may be detrimental to Plaintiffs’ claims, and Plaintiffs give no

indication of why such variances in state law are irrelevant in this matter.

In the class certification hearing below, Plaintiffs’ counsel, to his credit,

confronted this issue candidly, stating, “if you’re not going to apply D.C. law you

probably cannot certify the class as we have asked it.” Even when so ably put,

we are not persuaded by the contention that D.C. law is applicable to all

plaintiffs in this case. We cannot find the district court abused its discretion in

failing to certify under Rule 23(b)(3).

IV.

Rule 23(b)(1) provides that a class action may be maintained if

“prosecuting separate actions by or against individual class members would

create a risk of: (A) inconsistent or varying adjudications with respect to

individual class members that would establish incompatible standards of

conduct for the party opposing the class.” Plaintiffs urge that multiple lawsuits

33

in this case would impose incompatible standards of conduct upon Fannie Mae;

that the Regulatory Agreements require a single standard of conduct from

Fannie Mae that makes this class suited to (b)(1)(A) certification.

advantage of his own wrong regardless of whether the other party suffers actual damage.”

(internal quotations omitted)). Another relevant state law difference is that some states,

including Texas, preclude unjust enrichment claims when a valid, express contract governing

the subject matter exists. See Coghlan v. Wellcraft Marine Corp., 240 F.3d 449, 454 (5th Cir.

2001). Upon review of the merits of this case, a court could find the Regulatory Agreement is

a valid contract, which would foreclose the unjust enrichment claim in some states.

Fed. R. Civ. Pro. 23(b)(1)(A). Appellants do not argue that the district court erred in 33

denying class certification under Rule 23(b)(1)(B). Therefore, any such claim is waived.

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Rule 23(b)(1)(A) focuses on class action suitability from the defendant’s

perspective. Interpreting this defense-minded rule, the district court held that

certification of a 23(b)(1)(A) class is improper without the defendant’s consent.

The court cited a Beaumont district court that had reached a similar

conclusion. We upheld the Beaumont decision in an unpublished opinion and

34

noted that the party opposing the class chose not to avail itself of the safeguards

of Rule 23(b)(1)(A). However, our affirmation and the district opinion both cited

additional reasons for why certification was not appropriate under 23(b)(1)(A).

While we recognize that several district courts outside of this Circuit have at

least partially relied on the defendant’s opposition in denying (b)(1)(A)

certification, we choose not to do so here.

35

We find nothing in the plain text of Rule 23 that permits a defendant’s

veto over (b)(1)(A) certification. Instead, we hold that a court may certify a

36

class under (b)(1)(A) if the court finds that separate lawsuits could create

inconsistent results that would establish incompatible standards of conduct for

the party opposing the class. The Fifth Circuit has previously upheld a class

37

Corley v. Entergy Corp., 222 F.R.D. 316 (E.D. Tex. 2004), aff’d Corley v. Orangefield 34

Ind. Sch. Dis., 152 Fed. Appx. 350 (5th Cir. 2005) (unpublished).

See, e.g., In re Ford Motor Co. Ignition Switch Prods. Liab. Litig., 174 F.R.D. 332, 354 35

(D.N.J. 1997); Pettco Enters. v. White, 162 F.R.D. 151, 155 (M.D. Ala. 1995); Alsup v.

Montgomery Ward & Co., 57 F.R.D. 89 (N.D. Cal. 1972).

See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 620 (1997) (“The text of [Rule 23] 36

limits judicial inventiveness. Courts are not free to amend a rule outside the process Congress

ordered . . . .”).

Fed. R. Civ. Pro. 23(b)(1)(A); Newberg on Class Actions § 4:7 (2010) (stating that the 37

Advisory Committee Notes “contain no support for the view that the party opposing the class

is the exclusive beneficiary” of (b)(1)(A)).

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certification under (b)(1)(A) despite the defendant’s opposition when the district

court found that individual actions would create incompatible standards of

conduct.

38

Following the text of Rule 23(b)(1)(A), we do not find that separate actions

would result in incompatible standards of conduct for Fannie Mae. First,

certification under (b)(1)(A) is seldom appropriate when dealing with monetary

compensation because no inconsistency is created when courts award varying

levels of money damages to different plaintiffs. Here, four of the ten remedies

39

Plaintiffs seek relate to monetary compensation—providing (or reconstructing)

an accounting for Fannie Mae’s earnings, disgorging profits earned through

40

breaches of fiduciary duty, and providing restitution of the profits. It would not

be incompatible for Fannie Mae to disgorge profits earned from one fund while

not disgorging profits earned from a different fund.

41

Plaintiffs also seek non-monetary injunctive remedies. Plaintiffs request

that the court order Fannie Mae to cease its self-dealing, terminate its

Hernandez v. Motor Vessel Skyward, 61 F.R.D. 558 (S.D. Fla. 1973), aff’d 507 F.2d 38

1278 (5th Cir. 1975), aff’d 507 F.2d 1279 (5th Cir. 1975).

See Zinser v. Accufix Research Inst., 253 F.3d 1180, 1193 (9th Cir. 2001); Allison v. 39

Citgo Petroleum Corp., 151 F.3d 402, 421 n.16 (5th Cir. 1998).

See Garcia v. Koch Oil Co., 351 F.3d 636, 641 (5th Cir. 2003) (noting that a request 40

for an accounting is “simply a tool” for the plaintiff “to determine how much—or, in fact,

whether—any money properly his is being held by another”).

Plaintiffs argue that such an outcome would be inconsistent because it would create 41

contradicting interpretations of the defendant’s obligations. Because of the various state laws

involved, we disagree. See Part II, supra. Moreover, given the differences between the

language establishing the Residual and Reserve Funds in the Regulatory Agreement, there

may be additional arguments that even under the same state’s law, one of those funds may

be fiduciary while the other is not.

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relationship with GMACCM, segregate the Funds accounts, appoint a special

master, and refrain from retaliating against any class member. Varying results

with respect to these measures are not necessarily incompatible. For example,

if one court failed to require Fannie Mae to cease its relationship with

GMACCM, Fannie Mae could still end this relationship in order to comply with

a different court order. Such action would not be “incompatible” with the first

court’s order, but rather might exceed what that court demanded. An

42

incompatible judgment would arise if one court required Fannie Mae to continue

its relationship with GMACCM while another court prevented Fannie Mae from

working with GMACCM. Such a scenario is implausible given the facts of this

case.

Most importantly, for reasons stated above, we find that various state laws

apply to different class members. Therefore, varying judgments with respect to

Plaintiffs’ injunctive requests would not be “incompatible” but rather would

reflect diverse state fiduciary law. As the Supreme Court has advised, Rule

23(b)(1)(A) encompasses cases in which the defendant is obliged by law to treat

members of the class alike. Here, various state laws may result in some class

43

members having a fiduciary relationship with Fannie Mae while others do not.

Under Rule 23(b)(1)(A), dissimilar outcomes that result from differing state laws

Plaintiffs also argue that the Advisory Committee finds that breach of fiduciary duty

42

is one of six types of cases “especially appropriate” for (b)(1) treatment. However, Appellants

fail to mention that this Advisory Committee Note is discussing 23(b)(1)(B), not 23(b)(1)(A).

In their briefing, Appellants do not dispute the district court’s failure to certify under (b)(1)(B),

so we find this Note inapposite. Even if Plaintiffs were to appeal the (b)(1)(B) ruling, we would

affirm the lower court’s decision because we do not find that individual adjudications in this

case would be dispositive of other class members’ interests.

See Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 614 (1997); Allison, 151 F.3d at 43

412 (citing Amchem).

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are insufficient to justify class certification. Therefore, the district court did

44

not abuse its discretion in denying certification under Rule 23(b)(1)(A).

V.

A court may certify a class under Rule 23(b)(2) if “the party opposing the

class has acted or refused to act on grounds that apply generally to the class, so

that final injunctive relief is appropriate respecting the class as a whole.” We

45

have previously stated that “this rule seeks to redress what are really group as

opposed to individual injuries. The uniformity of the injury across the class is

what renders the notice and opt-out provisions of (b)(3) unnecessary.”

46

Moreover, injunctive relief is not appropriate to the whole class when final relief

relates predominantly to money damages. Thus, a Rule 23(b)(2) inquiry

47

requires considering two factors: 1) whether the defendant’s behavior is

generally applicable to the class as a whole, and 2) whether injunctive relief

predominates over monetary relief.

48

See, e.g., Utility Consumers’ Action Network v. Sprint Solutions, Inc., 259 F.R.D. 484, 44

488 (S.D. Cal. 2009).

 Fed. R. Civ. P. 23(b)(2). 45

Bolin v. Sears, Roebuck & Co., 231 F.3d 970, 975 n.22 (5th Cir. 2000). 46

See Allison, 151 F.3d at 411; Fed. R. Civ. P. 23(b)(2) advisory committee’s note, 1966 47

Amendment.

Bolin, 231 F.3d at 975.

48

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A.

“To qualify for class-wide injunctive relief, class members must have been

harmed in essentially the same way . . . .” This qualification differs from a

49

predominance of common issues that Rule 23(b)(3) requires. Instead of

50

requiring common issues, 23(b)(2) requires common behavior by the defendant

towards the class. In Bolin v. Sears, we found that Sears’s central policies

regarding bankrupt credit card consumers were sufficient to allege behavior

generally applicable to the class. Similarly, here, Fannie Mae had

51

standardized policies with regard to how it treated its multi-family mortgagors.

The Regulatory Agreements that each mortgagor signed were very similar, if not

identical, and Fannie Mae had uniform policies with regards to the investment

of mortgagor funds. Differences do exist among the mortgagors: some had

Residual Funds and others did not; some invested part of their funds while

others invested nothing; some communicated with Fannie Mae regarding their

investments; and many no longer have mortgages serviced by Fannie Mae. But

regardless of these differences, Fannie Mae’s behavior and policy of investing the

various funds is generally applicable to the class.

B.

Monetary relief predominates unless it is “incidental” to the requested

injunctive or declaratory relief. We have defined incidental to mean “damages

52

Maldonado v. Ochsner, 493 F.3d 521, 524 (5th Cir. 2007).

49

See Forbush v. J.C. Penney Co., Inc., 994 F.2d 1101, 1105 (5th Cir. 1993). 50

Bolin, 231 F.3d at 975.

51

Allison, 151 F.3d at 415.

52

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that flow directly from liability to the class as a whole on the claims forming the

basis of the injunctive or declaratory relief.” Such incidental damages should

53

only be those to which class members would be automatically entitled once

liability to the class is established.

54

Here, monetary relief does not directly flow to the class members as a

whole. Plaintiffs accurately state that there are no subjective, mortgage-specific

factors affecting the amount of profit realized by Fannie Mae. However, Fannie

Mae’s earning of profits does not automatically entitle Plaintiffs to receive those

profits in the form of disgorgement. Plaintiffs must first prove liability by

demonstrating a breach of fiduciary duty. However, as we have discussed, each

state has varying applicable law surrounding the creation of fiduciary duty.

Thus, liability could not be proven for this nationwide class as a whole. Without

the ability to prove class-wide liability, class-wide disgorgement is also not

feasible. The equitable relief is dependent on “subjective differences of each

class member’s circumstances,” namely which state law applies to his or her

claim.

55

Classes certified under (b)(2) do not provide an absolute right to notice or

opt-out. These procedural safeguards are not required because a (b)(2) class is

presumed to be homogeneous in nature, with few conflicting interests among its

members. However, once subjective differences between class members arise,

56

Id. 53

Id. 54

Id. 55

Id. at 413. 56

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these procedural safeguards become necessary. Such is the case here. For

example, some states have specific statutes that provide remedies for breach of

trust. Damages include profits made by the trustee (sometimes with interest)

as well as attorneys’ fees. Case law in several states also permits punitive

57

damages for breach of fiduciary duty when there has been malice. Plaintiffs

58

eligible for disgorgement may also be interested in these additional monetary

remedies. If all eligible plaintiffs are included in the proposed class, individuals

who could possibly obtain a larger judgment outside of the class have no opt-out

opportunity.

C.

In assessing whether monetary relief predominates, a court must examine

claims asserted in the context of the class composition. In Bolin v. Sears, we

59

vacated a (b)(2) certification because “most of the plaintiffs [were] seeking only

damages” and had nothing to gain from an injunction since their relationship

with Sears had ended. Similarly, we have vacated a (b)(2) certification

60

involving ERISA investments because “many potential class members” would

not benefit from the requested injunction. Finally, in Maldonado v. Ochsner

61

we affirmed a denial of certification when the named plaintiffs would not benefit

See, e.g., Cal. Prob. Code § 16440; Ga. Code 53-12-193; Tex. Prop. Code § 114.001. 57

Rainsville Bank v. Willingham, 485 So. 2d 319 (Ala. 1986); Wagman v. Lee, 457 A.2d 58

401 (D.C. 1983); Citizens & So. Nat. Bank v. Haskins, 327 S.E.2d 192 (Ga. 1985). But see

Packard v. Provident Nat. Bank., 994 F.2d 1039, 1048 (3d Cir. 1993) (holding that punitive

damages cannot be recovered against trustee under Pennsylvania law).

Bolin v. Sears, Roebuck & Co., 231 F.3d at 976.

59

Id. at 978.

60

Langbecker v. Electronic Data Sys. Corp., 476 F.3d 299 (5th Cir. 2007). 61

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from injunctive relief. We noted that (b)(2) certification is “inappropriate when

the majority of the class does not face future harm.”

62

Plaintiffs rely on our ruling in Monumental Life to assert that (b)(2)

63

certification would be appropriate in the present case, claiming Monumental

held that eighteen percent of class members benefitting from an injunction is

sufficient to warrant (b)(2) certification. In Monumental Life, plaintiffs

challenged defendants’ practice of charging higher life insurance premiums to

African-Americans. Many class members no longer had insurance policies with

the defendants, and the exact number of class members who would benefit from

an injunction was unknown. Defense and plaintiff experts’ estimates ranged

from eighteen to eighty percent. Given these estimates, we found that “the

proportion is sufficient, absent contrary evidence from defendants, that the class

as a whole is deemed properly to be seeking injunctive relief.” In other words,

64

absent additional evidence, the plaintiffs had sufficiently demonstrated that

“most” of the class would likely benefit from injunctive relief.

Here there is no dispute regarding the number of proposed class members

who would benefit from injunctive relief. The class is composed of mortgagors

who have had multi-family loans serviced by Fannie Mae beginning in 1969.

Both parties agree that over sixty percent of class-qualifying mortgages are no

longer operative. Thus, less than forty percent of the class would benefit from

Maldonado v. Ochsner, 493 F.3d 521, 525 (5th Cir. 2007); see also In re Monumental 62

Life, 365 F.3d 408, 416 (5th Cir. 2004) (“Of course, certification under rule 23(b)(2) is

appropriate only if members of the proposed class would benefit from the injunctive relief they

request.”).

 365 F.3d 408 (5th Cir. 2004).

63

Id. at 416.

64

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the proposed injunctive relief. We find that given the other variables in this

case, forty percent of the class benefitting from an injunction is not sufficient to

certify under (b)(2).

65

In contrast to Monumental Life and an earlier case, Pettway, the case

66

before us now is not a civil rights case. While (b)(2) classes are not exclusively

reserved for civil rights disputes, this class type is especially suited for those

plaintiffs. In Pettway, for example, this Circuit allowed a class-wide back pay

67

award under a (b)(2) certification for African-American employees who were

victims of discriminatory employment practices. Appellants in this case compare

their disgorgement to the Pettway back pay award. However, unlike Appellants,

all of the Pettway plaintiffs would have benefitted from the injunctive relief

requested. All were current employees of the defendant employer. Moreover,

the injunctive relief awarded was substantial: restructuring the promotion

procedures, overhauling the training programs, and creating a bi-racial

committee of employees to act as an agent of the Board of Operatives. Based on

the significant monetary relief sought and less central injunctive relief, the

circumstances here do not warrant (b)(2) certification.

Finally, we are reminded that the district courts “are in the best position

to assess whether a monetary remedy is sufficiently incidental to a claim for

injunctive or declaratory relief.” We find that the district court applied the

68

We also note that potentially less than forty percent of the class members still have 65

uninvested funds.

Pettway v. Amer. Cast Iron Pipe Co., 494 F.2d 211 (5th Cir. 1974). 66

See Fed. R. Civ. Pro. 23(b)(2) advisory committee’s note, 1966 Amendment. 67

Allison, 151 F.3d at 416.

68

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correct legal standard for predomination under (b)(2) and do not find that the

district court abused its discretion in failing to certify the class.

VI.

For the foregoing reasons, we find the district court did not abuse its

discretion in denying certification under either Rule 23(b)(1)(A), Rule 23(b)(2),

or Rule 23(b)(3). The denial of class certification is AFFIRMED.

VII.

Much of the record in this case is under seal pursuant to a Protective

Order issued in November 2005. Prior to this appeal, Plaintiffs moved to unseal

the record, but the district court did not rule on the matter. Plaintiffs carried

the motion with their appeal of the class certification denial.

We have jurisdiction over the sealed documents because the district court’s

record transferred to us upon appeal. However, the district court has greater

69

familiarity with the record and is thus in a better position to balance the privacy

interests with the public’s potential common-law right to access the judicial

records. Therefore, we REMAND and refer the Plaintiff’s motion to unseal the

70

record to the district court for consideration.

 See Fed. R. App. P. 11. 69

See United States v. Comprehensive Drug Testing, Inc., 513 F.3d 1085, 1116 (9th Cir. 70

2008); see also Nixon v. Warner Communications, Inc., 435 U.S. 589, 599 (1978) (“The few

cases that have recognized [a common-law right to access] do agree that the decision as to

access is one best left to the sound discretion of the trial court . . . .”); S.E.C. v. Van

Waeyenberghe, 990 F.2d 845, 848 (5th Cir. 1993) (“[T]he common law merely establishes a

presumption of public access to judicial records.”).

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