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/raid1/www/Hosts/bankrupt/CAR_Public/000705.MBX C L A S S A C T I O N R E P O R T E R Wednesday, July 5, 2000, Vol. 2, No. 129 Headlines ACCEPTANCE INSURANCE: AK Ct OKs Settlement with Rice Producers AUTO FINANCING: City Chevrolet Labels Don't Define Finance Charge CHANDLER INSURANCE: Reports on Securities Lawsuits Filed in Oklahoma CITRIX SYSTEMS: Founder Chairman Resigned in Shake-Up COLUMBIA LABS: May Be Sold Amidst Issue on Anti-HIV Products Failure COLUMBIA LABORATORIES: Stull, Stull Files Securities Suit in Florida COLUMBIA: Wolf Haldenstein Announces on Securities Suit in Florida DEPT OF VETERANS: FLRA Rejects NAGE Claims against Arbitrator EPA: Citizens Group Claims Superfund Cleanup Is Racially Discriminatory FEN-PHEN: AHP Settlement Timetable Slips; Judge Not to Rule until Sept. GENERAL DYNAMICS: Broken Promise of Cont'd Employment Subject of Fraud HITSGALORE.COM: CA Securities Suit Dismissed But Appeal at Early Stage McCALLA, RAYMER: Character of a Debt Is Determined at Loan's Inception MERCURY FINANCE: Ct OKs Arbitrator's Award in Securities & Ch 11 Case RELIANCE GROUP: Cauley & Geller Files Securities Suit in New York RESIDENTIAL FUNDING: Settlement Discount for Volume Not Referral Fees RETAILERS: ADA Cases Did Not Stop at Macy's San Francisco Store STEVEN MADDEN: Cauley & Geller Files Securities Suit in New York STEVEN MADDEN: Reveals Indictments and Resignation of Former Chairman TOBACCO LITIGATION: Nationwide Cert Ruling to Follow Prelim Proceeding TWA: Accused of Bilking Trainees; Dallas Resident Files Lawsuit ********* ACCEPTANCE INSURANCE: AK Ct OKs Settlement with Rice Producers -------------------------------------------------------------- The United States District Court in Little Rock, Arkansas on July 3 approved settlement of a class action by rice producers against Acceptance Insurance Companies Inc. (NYSE: AIF) and several affiliated companies. Based on a June 30, 2000 hearing, the Court's Order determined the previously announced settlement terms, preliminarily approved May 1, are fair, reasonable and adequate, and in the best interest of the Settlement Class. A Court-appointed Settlement Master, retired Arkansas Circuit Court Judge Lawrence Dawson, will now allocate the $3.7 million settlement fund, which Acceptance previously placed in escrow, among the rice producers who submitted claims. Lawsuits involving Acceptance Insurance Companies Inc. have previously been reported in the CAR. As described in the announcement, the Company is an insurance holding company providing specialized crop, property and casualty insurance products throughout the United States. AUTO FINANCING: City Chevrolet Labels Don't Define Finance Charge ----------------------------------------------------------------- Labels assigned to charges on an automobile retail sales contract don't determine what constitutes a finance charge, the Truth in Lending Act does. A finance charge is any charge that is avoidable by paying cash, said the 7th U.S. Circuit Court of Appeals in holding that a consumer should have an opportunity to prove an automobile dealer folded the cost of financing into the cash price of a car. (Balderos v. City Chevrolet, et al., No. 98-1944 (7th Cir. 5/26/00). Gregory Balderos filed a class action against an automobile dealer, City Chevrolet, and a finance company accusing them of violating the TILA, the Racketeer Influenced and Corrupt Organization Act, and state consumer-protection laws. The U.S. District Court for the Northern District of Illinois dismissed Balderos' suit for failure to state a claim, and he appealed. Cash Vs. Credit Customers On appeal, Balderos made three arguments. First he alleged the dealer treated cash customers differently from credit customers by raising the price of the car to cover charges levied by the finance company. According to Balderos, the dealer failed to list this additional charge as a finance charge on the TILA disclosure form. The dealership's argument that the complaint did not allege that it increased the price of only the cars that were financed failed to persuade the court to affirm the District Court's ruling. The 7th Circuit equally found the dealer's claim that a customer does not have to prove the dealership added the finance charge to the price of only the financed cars to be without merit. The court explained, "a finance charge is a charge that is avoidable by paying cash." The fact that the additional charge was not listed as a finance charge on the disclosure statement and did not increase the interest rate disclosed on the form is of no consequence. The court added, the charge was a finance charge and must be disclosed. The plaintiff's TILA claims against the dealership should not have been dismissed, the court concluded. Acceptance Fee Balderos next claimed the dealer violated the TILA by not including a car club membership fee as a finance charge on the TILA disclosure statement. Balderos alleged the finance company charged the dealer a 50 "acceptance fee" for every retail sales contract. The finance company purportedly waived this fee if the dealer sold the consumer a "Continental Car Club" membership. Membership in the club, owned by the finance company, entitled buyers to a bond card that could be surrendered in place of a driver's license when ticketed for a traffic offense. Balderos argued not only was the value of the bond card less than the membership fee, but that the membership fee was a disguised finance charge. The defendants rebutted that Balderos' complaint failed to allege that buyers were forced to buy the car club membership or that the 50 acceptance fee was imposed if a buyer refused the membership. The court found that Balderos offered to prove that the finance charge was imposed on buyers who did not buy the membership. Besides, said the court, "the fact that membership in the club is not mandatory is not a defense." As to the TILA claims against the finance company, the court held that the violations were not apparent on the face of the document. The court said, "the finance company could not tell by looking at the retail sales contract that its 20 percent additional finance charge had been passed on to the buyer." Accordingly, the 7th Circuit dismissed the TILA claims against the finance company. Fiduciary Duty Lastly, the consumer claimed the dealership violated federal mail and wire fraud statutes by breaching its fiduciary obligation to him. Balderos contended that while the finance company agreed to finance the dealer's retail sales contract at a particular interest rate, when the dealer negotiated a higher interest rate with the buyer, the dealer and finance company split the additional interest. Balderos claims that this undisclosed "kickback" formed the basis of his RICO claims. However, after reviewing the record, the 7th Circuit found no evidence to suggest that the dealer represented it would act as Balderos' agent in dealing with the finance company. The court said, "If the buyer wants to buy on credit, he recognizes that his decision does not change the arms' length nature of his relation to the dealer. He knows, or at least has no reason to doubt, that the dealer seeks a profit on the financing as well as on the underlying sale." Thus, the court ruled no agency relationship was created between the dealer and the buyer. Although the court determined Balderos failed to allege a breach of fiduciary duty, it went on to examine the plaintiff's RICO theory further. Violations of the TILA are not predicate acts under RICO, but Balderos argued they become predicate acts when mail and wire communications are used to further them. The dealership and finance company used mail and wire communications in extending Balderos credit, and a violation of the TILA occurred in connection with his loan. By violating the TILA with the use of the mail and wires, argued Balderos, the dealership and finance company committed a predicate act. The 7th Circuit disagreed. The court explained, "the practical effect of the plaintiff's argument would be to criminalize the Truth in Lending Act - for remember that it is through the mail and wire fraud statutes, which are criminal, that the plaintiffs seek to convert TILA into the basis for RICO liability." Chief Judge Posner opined that Balderos' theory was "unsound." The plaintiff must allege separately that a violation of the TILA constituted a scheme to defraud within the mail and wire fraud statutes. The court dismissed the RICO claim and the TILA claims against the finance company but remanded the other TILA claims. The 7th Circuit also directed the District Court to reinstate the state law claims. (Consumer Financial Services Law Report, June 26, 2000) CHANDLER INSURANCE: Reports on Securities Lawsuits Filed in Oklahoma -------------------------------------------------------------------- Chandler Insurance Company, Ltd.,(Nasdaq: CHANF), said that three civil lawsuits were filed against Chandler Insurance Company, Ltd. (Chandler or the Company), Chandler (U.S.A.), Inc. (an indirect subsidiary of Chandler), and all of Chandler's directors on June 5 and 6, 2000. The lawsuits were filed on behalf of three different plaintiffs in state district court in Oklahoma City, Oklahoma by the same law firm. The suits allege that plans announced on June 1, by Brent LaGere, Chandler's Chairman of the Board and Chief Executive Officer, to take Chandler private are detrimental to the public shareholders. The suits also request that they be certified as class actions and that the court enter a temporary restraining order to prevent completion of the announced plan. The suits also allege that all defendants have breached and are breaching fiduciary duties owed to the plaintiffs and other shareholders. On June 12, 2000 CenTra, Inc. and certain of its affiliates (CenTra) made similar allegations in an already pending lawsuit involving a court-ordered divestiture of Chandler shares owned by CenTra. CenTra requested that the court enjoin and restrain LaGere and others from completing the announced plans. The U.S. District Judge for the District of Nebraska hearing the case took the CenTra request under advisement following oral argument in which National American Insurance Company (NAICO), an indirect subsidiary of Chandler, participated on June 27, 2000. Neither Chandler nor Chandler's directors are parties to that case. On that same day, CenTra filed a similar request in an already pending case in the U.S. District Court for the Western District of Oklahoma. No hearing has been scheduled in that case. Chandler has not responded to the allegations of the suits or the motions filed by CenTra. "Chandler and its subsidiary, Chandler (U.S.A.), Inc., will respond to the allegations in a timely manner," said Pat Gilmore, General Counsel to Chandler's U.S. based subsidiaries. According to Gilmore, Chandler's board of directors appointed a three member special committee of independent directors on June 5, 2000 to review any proposal submitted in connection with the announced plan. "The Committee has not received a formal proposal for going private, but they have met and are in the process of identifying and retaining an investment banking firm at this time. The Committee, Mr. LaGere and Chandler's other directors are aware of the lawsuits and other filings and I am sure they are carefully considering the impact, if any, upon the announced plans," Gilmore said. NAICO, an Oklahoma based insurer, principally writes property-casualty insurance and surety bonds for political subdivisions and businesses, including contractors, manufacturers, retailers, wholesalers and various service industries. Chandler (U.S.A.), Inc. is NAICO's direct parent and is headquartered in Chandler, Oklahoma. CITRIX SYSTEMS: Founder Chairman Resigned in Shake-Up ----------------------------------------------------- Ed Iacobucci, the founder, chairman and chief technical officer of Citrix Systems, stepped down amid a management shake-up at the Fort Lauderdale-based software company. Also, Mark Templeton, while staying on as president, resigned as chief executive officer Citrix is one of the most prominent technology companies in the region. The move came after Citrix announced it would miss its quarterly earnings estimates by about one-half. The stock has lost nearly two-thirds of its value since the announcement. (Palm Beach Daily Business Review, June 30, 2000) COLUMBIA LABS: May Be Sold Amidst Issue on Anti-HIV Products Failure -------------------------------------------------------------------- Two weeks after news broke that one of its anti-HIV products was not working, Columbia Laboratories announced that it is considering a sale of the company. In early June, tests revealed that a spermicide which was supposed to prevent women from contracting AIDS failed its task. The stock of the Aventura-based pharmaceutical company dropped more than 60 percent after the announcement. (Palm Beach Daily Business Review, June 30, 2000) COLUMBIA LABORATORIES: Stull, Stull Files Securities Suit in Florida -------------------------------------------------------------------- A class action lawsuit was filed on June 30, 2000, in the United States District Court for the Southern District of Florida, West Palm Beach Division on behalf all persons who purchased the common stock of Columbia Laboratories, Inc., (NASDAQ:COB) between November 8, 1999, and June 9, 2000 (the "Class Period"). The action is against defendants Columbia, William J. Bologna (Chief Executive Officer since January, 2000, and Director), David L. Weinberg (Chief Financial Officer), and Norman M. Meier (President and Chief Executive Officer until January, 2000). The Honorable James Lawrence King is the Judge presiding over the case. The complaint charges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between November 8, 1999, and June 9, 2000. For example, as alleged in the complaint, on November 8, 1999, defendants reported that the Company's operating results for its third fiscal quarter improved over the comparable 1998 period, and stated that a Swiss company, Ares-Sereno, had paid $68 million to the Company for the marketing rights to the fertility drug Crinone which was manufactured by Columbia. Defendants knew, or recklessly disregarded, that the statement was false because Ares-Sereno did not have a finalized license to market the drug, and because additional profitability from Crinone could not be recognized until the second half of fiscal 2000. Defendants further represented, in the Company's March 16, 2000 Annual Report to Shareholders, that the Company was optimistic that a double blind testing of the Company's anti-AIDS spreading drug, "Advantage-S," would prove the drug's effectiveness in the fight against the spread of AIDS. In fact, the Company knew, or recklessly disregarded, that it had no basis for its optimistic statements regarding the Advantage-S study. When the Company reported, on June 12, 2000, that the Advantage-S study revealed the drug to be no more effective at stemming the spread of the AIDS virus than the placebo, the Company's stock price dropped by 55%. As an explanation, defendants stated that because the study was "double blind," they could not, and did not, know of its results until its completion. Contact: Stull, Stull & Brody Tzivia Brody, Esq. tel: 800-337-4983 fax: 212/490-2022 SSBNY@aol.com COLUMBIA: Wolf Haldenstein Announces on Securities Suit in Florida ------------------------------------------------------------------ Wolf Haldenstein Adler Freeman & Herz LLP announces that a class action lawsuit has been commenced in the United States District Court for the Southern District of Florida on behalf of purchasers of the securities of "Columbia" (NASDAQ:COB - news) between November 8, 1999 and June 9, 2000 inclusive, (the "Class Period"). A copy of the complaint filed in this action is available from the Court, or can be viewed on the Wolf Haldenstein website at www.whafh.com. The action, numbered 00-2112, is pending in the United States District Court for the Southern District of Florida, West Palm Beach Division, located at 701 Clematis St., West Palm Beach, FL 33401, against defendants Columbia, William J. Bologna (Chief Executive Officer since January, 2000, and Director), David L. Weinberg (Chief Financial Officer), and Norman M. Meier (President and Chief Executive Officer until January, 2000). The Honorable James Lawrence King is the Judge presiding over the case. The complaint charges that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder, by issuing a series of material misrepresentations to the market between November 8, 1999, and June 9, 2000. For example, as alleged in the complaint, on November 8, 1999, defendants reported that the Company's operating results for its third fiscal quarter improved over the comparable 1998 period, and stated that a Swiss company, Ares-Sereno, had paid $ 68 million to the Company for the marketing rights to the fertility drug Crinone which was manufactured by Columbia. Defendants knew, or recklessly disregarded, that the statement was false because Ares-Sereno did not have a finalized license to market the drug, and because additional profitability from Crinone could not be recognized until the second half of fiscal 2000. Defendants further represented, in the Company's March 16, Annual Report to Shareholders, that the Company was optimistic that a double blind testing of the Company's anti-AIDS spreading drug, "Advantage-S", would prove the drug's effectiveness in the fight against the spread of AIDS. In fact, the Company knew, or recklessly disregarded, that it had no basis for its optimistic statements regarding the Advantage-S study. When the Company reported, on June 12, 2000, that the Advantage-S study revealed the drug to be no more effective at stemming the spread of the AIDS virus than the placebo, the Company's stock price dropped by 55%. As an explanation, defendants stated that because the study was "double blind," they could not, and did not, know of its results until its completion. Contact: Wolf Haldenstein Adler Freeman & Herz LLP, New York Fred Taylor Isquith, Esq., Gregory M. Nespole, Esq., Brian S. Cohen, Esq., or Michael Miske, 800/575-0735 e-mail: classmember@whafh.com, whafh@aol.com, nespole@whafh.com, Gnespole@aol.com website: www.whafh.com DEPT OF VETERANS: FLRA Rejects NAGE Claims against Arbitrator ------------------------------------------------------------- The Federal Labor Relations Authority found the award of arbitrator Stanley H. Sergent denying a claim by the National Association of Government Employees for environmental differential pay for certain unit employees was not deficient. NAGE, Local R4-78 and DVA, Medical Center, Martinsburg, WV, 100 FLRR 1-1100 (FLRA 05/17/00). Sergent denied the grievants' claim against the Department of Veterans Affairs for environmental differential pay. The NAGE filed a class action grievance that claimed the grievants had been exposed to hazardous levels of asbestos. Sergent found that the NAGE failed to provide credible evidence showing airborne concentrations of asbestos exceeded the Occupational Safety and Health Administration permissible exposure level. Also, Sergent determined that there was no evidence that any employee became ill or demonstrated symptoms of asbestos diseases. On appeal, the FLRA concluded that the NAGE failed to establish that the award was deficient. First, the FLRA found the award was not based on a nonfact. The NAGE challenged Sergent's finding that the employees were not subjected to hazardous levels of asbestos. Because this was disputed before Sergent, it provided no basis for finding the award deficient. Next, the FLRA determined that the award was not contrary to law. The NAGE argued Sergent was incorrect in declining to draw an adverse inference from the DVA's inability to produce certain records. The FLRA noted the NAGE cited no authority for the proposition that arbitrators were required to draw adverse inferences from missing evidence. Finally, the FLRA found that the award draws its essence from the agreement. The NAGE argued that Sergent incorrectly interpreted the agreement as requiring application of a DVA regulation adopting the OSHA permissible exposure level. However, the NAGE conceded that the agreement required the DVA to act in accordance with its own regulations, and the NAGE did not dispute that a DVA regulation expressly adopted the OSHA permissible exposure level. The NAGE merely argued the agreement did not prohibit Sergent from imposing a higher standard upon the DVA. The FLRA noted that even if Sergent had such discretion, the NAGE failed to demonstrate that the failure to exercise such discretion was irrational, implausible or in manifest disregard of the agreement. (Federal Human Resources Week, June 26, 2000) EPA: Citizens Group Claims Superfund Cleanup Is Racially Discriminatory ----------------------------------------------------------------------- A federal district court allowed a citizens group to pursue environmental justice allegations that a company, city, housing authority, and EPA acted discriminatorily in selecting a remedial plan to clean up a site containing environmentally hazardous material. In separate orders issued a year apart, the court held that the citizens group could continue to litigate its claim that the company, city, housing authority, and EPA purposely refused to relocate housing project tenants on account of their race, even though the cleanup plan was under way but incomplete. Background Facts The Washington Park Housing Project's population has been 95 percent African-American since 1960. At that time, the city of Portsmouth, Virginia, and the Portsmouth Redevelopment and Housing Authority (PRHA) sited the project in an area of industrial land use, next to an operating foundry. From 1966-1978, Abex Corporation operated a brass and bronze foundry to recycle reused railroad car bearings. In 1978, Pneumo Abex Corp. bought the foundry. In the early 1980s, residents of Washington Park, particularly children, were ill from lead poisoning. Some children had blood lead levels four to five times higher than the level considered safe. In 1986, EPA sampled the Washington Park area. Test results indicated that lead levels in the soil were much higher than those recommended for residential areas. As a result of the high lead levels, EPA and Abex entered into a consent order to perform an emergency cleanup. In 1990, Washington Park was listed as a Superfund site under the Comprehensive Environmental Response, Compensation, and Liability Act. In 1993, Abex, the city, and PRHA endorsed a plan to remove all privately owned residential properties next to the site and relocate residents. The city then rezoned that residential land for commercial or industrial use. Under the plan, however, Washington Park residents were to remain in the cleanup area. In 1996, Abex, the city, PRHA, and EPA submitted the plan as a proposed consent decree. The court approved it. Environmental Justice Allegations In 1998, the Washington Park Lead Committee, Inc., and four named residents filed a class action lawsuit against all parties to the 1996 consent decree. They alleged that the Superfund remedial plan isolated the residents and left them exposed to further lead contamination. They had made that same argument during the public comment period on the proposed consent decree in 1996. Responses to Allegations EPA contended that residents could not trace their purported injuries to any action by EPA. The agency described the claimed injuries as "living in an allegedly segregated housing project." EPA argued that its only contact with Washington Park was for testing and formulation of a cleanup plan. It also argued that it cannot be sued because it is a state agency with sovereign immunity. The city and PRHA contended that the court did not need to resolve the allegations. That contention was based on their offer to individual residents to relocate them to another Portsmouth public housing project. Abex argued that it could not be sued because its conduct did not constitute state action. The residents alleged that Abex acted unlawfully by advocating and implementing the remedial plan. Court Holds All Potentially Liable for Damages The federal district court, in two separate opinions, held that the residents had the legal right to file their claims of race discrimination against Abex, the city, PRHA, and EPA under amendments to the U.S. Constitution that are enforceable through 42 U.S.C. sec. 1983. The court concluded that the complaint alleged unlawful conditions of segregation and discriminatory land use that the residents could be able to prove. Specifically, they would have to establish that Abex, the city, PRHA, and EPA acted discriminatorily in the selection of a remedy that isolated and injured African-Americans. Abex's Potential "State Action" The court acknowledged that private companies like Abex generally cannot be sued under 42 U.S.C. sec. 1983 because they are not government entities. The U.S. Supreme Court, however, has recognized the following exceptions to Section 1983's requirement of "state action": (1) the existence of a symbiotic relationship to the extent that the actions of a private party are fairly treated as those of the state; (2) the exercise of coercive power by the state over the private entity; and (3) the exercise of powers traditionally the exclusive prerogative of the state by a private party. Since Abex may have endorsed and implemented a discriminatory remedial plan, as the residents alleged, the court concluded that they might be able to prove that it acted together with the state. CERCLA Bar Abex, the city, PRHA, and EPA all argued that the court had to dismiss the complaint because the CERCLA remedial action and cleanup was not completed. Generally, CERCLA, 42 U.S.C. sec. 9613(h), prohibits judicial intervention while cleanup is ongoing. There is an exception, 42 U.S.C. sec. 9613(h)(4), however, when citizen suits allege that the remedial action violates CERCLA. The residents persuaded the court that that exception applied because they alleged that their constitutional rights were violated by CERCLA actions. This was the first time the court had considered this issue. Washington Park Lead Committee, Inc. v. EPA et al., 50 ERC 1331-1351 (U.S. D.C. Va. 1998-1999). (Florida Environmental Compliance Update, May, 2000) FEN-PHEN: AHP Settlement Timetable Slips; Judge Not to Rule until Sept. ----------------------------------------------------------------------- American Home Products has suffered a further setback in its efforts to resolve problems surrounding fen-phen diet drug litigation. The US pharmaceuticals company was expecting to announce this month that a district judge had finally given approval for AHP's proposed settlement of a class-action suit over the drugs, which are linked to heart valve abnormalities. However, the company has admitted that the timetable has slipped. The judge is not now expected to rule until as late as September. The delay is a disappointment for AHP, which has been beset by problems with the drugs for more than three years. It offered Dollars 3.75bn last year to settle a class-action suit and has been waiting for judicial approval since then. Uncertainty over the status of the settlement has been a drag on the company's share price and contributed to the failure of three attempts to merge with other pharmaceutical companies. The latest delay is a surprise since it was understood that final approval was a formality. AHP announced two months ago that just 45,000 users of the diet drugs, out of 5.8m, had opted out of the settlement, so defusing one possible problem that the company would have to scrap the Dollars 3.75bn proposal since too many people were pursuing separate litigation. Then Louis Bechtle, the district judge who has already given the settlement preliminary approval, held a fairness hearing over the case at the beginning of May. That seemed to pass swiftly and smoothly. The company said over the weekend that it did not know why the judge's final approval was not going to be given on time. It added that its lawyers did not anticipate any problems with the settlement. Redux and Pondimin, the diet drugs together known as fen-phen, worked by inhibiting the desire for food through chemicals in the brain. The combination was withdrawn in 1997 after it was discovered that it could cause a serious heart condition. The company's shares were hit last week after an Oregon jury awarded two diet drug users Dollars 3.8m in actual damages and Dollars 25.3m in punitive damages in a separate case. (Financial Times (London), July 3, 2000) GENERAL DYNAMICS: Broken Promise of Cont'd Employment Subject of Fraud ---------------------------------------------------------------------- You would think that employees who lose their jobs because of a layoff might consider wrongful discharge lawsuits. The Ninth Circuit, however, has allowed a group of employees to sue for fraud because the employer allegedly promised them continued employment. Facts Philip Williamson and three former General Dynamics employees were improperly classified as "salaried exempt" (i.e., ineligible to receive overtime pay) under the federal Fair Labor Standards Act (FLSA). They were entitled to join in the settlement of a class-action lawsuit based on the company's failure to pay overtime wages. Williamson said that he didn't join in the settlement because General Dynamics threatened to harm his job if he joined. Employees were allegedly told that by joining the lawsuit, they would be committing "career suicide." They were also told that they had careers with the company and that no decision had been made to shut down the plant where they worked. Several months later, the plant was closed, and the employees were apparently laid off. They tried to get back into the class-action settlement but were unable to do so. Several other lawsuits were filed, but Williamson and the other employees did not join. Instead, they waited two years and filed their own lawsuit, alleging fraud and misrepresentation. The fraud claims were based on General Dynamics' promise to be "honest, trustworthy, and law-abiding" in paying overtime and the employer's alleged misrepresentation that the employees had career jobs and would not be laid off. The district court dismissed the lawsuit without a trial, and Williamson and the other employees appealed. No Conflict with FLSA General Dynamics argued that the remedy for the employees' claims was found in the FLSA. That federal law not only requires payment of the minimum wage and overtime, but also prohibits employers from retaliating against employees who make claims for unpaid wages. The employer said that the employees should have filed a complaint under the FLSA and not a fraud claim. The Ninth Circuit disagreed. There was no unlawful retaliation because the employees had never made a claim. The court said the employees were not trying to recover overtime pay, but were accusing the employer of fraud and misrepresentation because of its statements about the employees' "career jobs" and about not closing the plant. It reversed the district court's decision and said that the employees should have a chance to prove their claims. Williamson v. General Dynamics Corporation, F.3d (9th Cir., April 12, 2000). Practical Application This odd case was decided under California law. Under Montana law, the Wrongful Discharge from Employment Act is an employee's exclusive remedy for discharge. The case does point out, however, the trouble that you can get into when you make promises to employees and you're not sure you can keep them. Because of those kinds of comments, General Dynamics exposed itself to both compensatory and punitive damage claims. (Montana Employment Law Letter, June, 2000) HITSGALORE.COM: CA Securities Suit Dismissed But Appeal at Early Stage ---------------------------------------------------------------------- On May 13, 1999, May 16, 1999 and June 11, 1999, separate putative class action suits were filed against the Company, Mr. Steve Bradford and Mr. Dorian Reed in the United States District Court, Central District of California (Case Nos. 99-5060, 99-5151R and 99-6925R, respectively), involving the purchase of the Company's securities during periods specified in the complaints. On September 20, 1999, the Court entered an order consolidating the three lawsuits into one and appointing the lead plaintiff and lead counsel for the consolidated lawsuit (the "Consolidation Order"). Pursuant to the Consolidation Order, on or about October 8, 1999, a single consolidated amended class action complaint (the "Amended Complaint") was filed by the plaintiffs in the consolidated putative class action under Case No. 99-5060R. The Amended Complaint attempted to assert claims for violations of the federal securities laws against the Company and Messrs. Bradford and Reed based on alleged misrepresentations and omissions of fact purportedly made in the Company's press releases and certain SEC filings during the period from February 17, 1999 through August 24, 1999 (the "Class Period"). The Defendants believe the claims to be without merit, have vigorously contested the lawsuit, and successfully moved to dismiss the Amended Complaint, which Complaint was dismissed by the Court on December 20, 1999. On January 11, 2000, Plaintiffs filed their second consolidated amended class action complaint (the "2nd Amended Complaint"), to which the Defendants again responded with a motion to dismiss. On February 23, 2000, the Court entered its Order Granting Defendant's Motion to Dismiss With Prejudice, effectively terminating the action before the District Court. The Plaintiff's filed a Notice of Appeal, appealing the Order dismissing the case to the U.S. Court of Appeals for the Ninth Circuit. The appeal is at the early stage, and a decision is not expected until the end of this year or in 2001. It is not possible to predict the likely outcome of the appeal, the outcome of the case if the appeal is granted, or the likelihood or amount of any losses, if any, in the event of an adverse outcome. On April 20, 1999 the U.S. Bankruptcy Court dismissed an Involuntary Petition under Chapter 7 of the U.S. Bankruptcy Code filed against Systems Communications, Inc. (the former name of Hitsgalore), on June 1, 1998 in the United States Bankruptcy Court for the Middle District of Florida (Case No. 98-09299-8P7). The proceeding did not involve Old Hitsgalore. McCALLA, RAYMER: Character of a Debt Is Determined at Loan's Inception ---------------------------------------------------------------------- The 7th Circuit Court of Appeals recently became the first appellate court to hold that the Fair Debt Collection Practices Act sets the relevant time for determining what constitutes a consumer debt as the time the loan is made, not the time it is collected. (Miller v. McCalla, Raymer, Padrick, Cobb, Nichols, and Clark LLC, et al., No. 99-3263 (7th Cir. June 5, 2000).) Kevin Miller refinanced his Atlanta home. When he moved to Chicago two years later, he rented his Atlanta residence. Subsequently, the law firm of McCalla, Raymer, Padrick, Cobb, Nichols & Clark LLC mailed Miller a collection notice concerning the unpaid balance of the mortgage on his Atlanta residence. Miller responded by filing a class action under Section 1692 of the FDCPA. Miller claimed the debt collector violated the act by failing to state the amount of the debt. The law firm countered that Miller's loan on which it sought repayment was not a "debt" as defined by the act because Miller was using the Atlanta residence for commercial purposes. Miller argued, however, that the "relevant time for determining the nature of the debt is when the debt first arises, not when collection efforts begin." His loan, Miller contended, was a consumer loan when it was made. In a motion for summary judgment, the law firm argued that the time for determining the nature of a debt under the FDCPA is when collection attempts are made because the act, by its very name, governs collection. The District Court for the Northern District of Illinois granted the defendants' motion. The court concluded that Miller failed to demonstrate he used the Atlanta home for consumer purposes. On appeal, the 7th Circuit reviewed the act and found that its language suggests that the relevant time for determining the nature of a debt is when the loan is made. Chief Judge Richard Posner explained, "The original creditor is more likely to know whether the debt was personal or commercial at its incipience than either the creditor or the debt collector is to know what current use the debtor is making of the loan." Further, the court relied on Section 1692a(5)'s definition of a debt: "any obligation ... of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes." Under this Section, said the court, Miller's obligation to repay arose from the purchase of a family residence for his personal use. Upon finding Miller's debt to be a consumer debt, the 7th Circuit addressed whether the law firm violated its statutory duty to state the amount of the debt. The collection letter at issue stated the "unpaid principal balance" of Miller's loan was 178,844 and that "this amount does not include accrued but unpaid interest, unpaid late charges, escrow advance or other interest ... ." The collection letter instructed Miller to telephone for a complete statement and payoff figure. On appeal, the law firm argued that they could not provide Miller with the exact amount of the debt because "the debt changes daily." The 7th Circuit found this argument to be meritless. It held the letter violated the FDCPA's requirement that a collection notice specify the total amount due, interest, other charges and principal. The letter, said the court, could have stated all these things based on the date it was sent. (Consumer Bankruptcy News, June 27, 2000) MERCURY FINANCE: Ct OKs Arbitrator's Award in Securities & Ch 11 Case --------------------------------------------------------------------- The arbitrator, retired United States District Judge Nicholas J. Bua, who was appointed to resolve a dispute in the Chapter 11 case of Mercury Finance Company, did not abuse his discretion in allowing and allocating the claims of the securities fraud claimants. The full text of In re Mercury Finance Co., No. 98 B 20763, (Bankr. N.D. Ill. June 13, 2000), will appear in full text in BCD 3606. The debtor was a consumer finance company. Its stock was regarded as a hot growth stock. However, when the debtor announced that it had significantly overstated its earnings, the stock price plummeted. The debtor defaulted on 1.1 billion in debt and its shareholders lost more than 2.5 billion. Numerous securities fraud lawsuits followed. The debtor filed for Chapter 11 relief. The heart of the confirmed plan was the settlement of the securities fraud cases. The plan placed the securities fraud claimants, both classes and individuals, into one class, Class 7B. Class 7B had six member entities, four of which were class actions. The plan provided that the debtor would transfer in excess of 5 million to the Class 7B liquidating trust to pay the securities fraud claimants. The trust's assets totaled 30 million, with the additional monies coming from settlements with the debtor's officers and directors. This was not enough to pay the more than 2 billion in claims against the trust made by the Class 7B members. The plan and trust agreement, with the consent of the parties, created a mechanism for dividing the assets among the six competing claims. There was to be a period of negotiation, and if the parties could not agree, there would be arbitration. The parties required arbitration. The six claimants and the percentage allocation they were awarded by the arbitrator were as follows: federal class claimants, 42 percent; state class claimants, 10 percent; ERISA class claimants, 0 percent; holder class claimants, 42 percent; the Shriners Hospital, 1.5 percent; and a certain individual, 4.5 percent. The federal class appealed, arguing that any allowance of and allocation to the holder class was an abuse of discretion. The individual appealed, also challenging the allowance and allocation to the holder class and claiming that any allowance of the state class claim was an abuse of discretion. He further objected to the percentages. Judge Erwin I. Katz (Bankr. N.D. Ill.) affirmed the award, noting that under the terms of the agreement, the standard of review was abuse of discretion, the standard normally used by an appellate court to review the decision of a lower court. The appellants argued that the arbitrator abused his discretion in two ways. First, they argued that the arbitrator failed to perform his duties because he did not fully adjudicate the merits of the parties' claims and thus did not properly allow those claims. The arbitrator's duties were allowance and allocation, but none of the controlling documents set forth the standards or methods he was to apply in allowing claims. The AAA Rules set the only standard by which the arbitrator was required to measure. Thus the ultimate question was whether, applying the abuse of discretion standard of review, a reasonable person could agree that the arbitrator made an award that he deemed just and equitable and within the scope of the parties' agreement. The court answered in the affirmative. The appellants argued that the arbitrator impermissibly assumed the validity of the six claimants' claims, the holder class claim in particular. But the language of the award contradicted that argument. Second, the appellants argued that any award to the holder class was an abuse of discretion because it was contrary to well-established law. The "just and equitable" standards governed the allocation. To vacate or modify the allocation, the court would have to find that no reasonable person could agree with it. The federal class argued that no court has ever awarded damages for fraud under federal securities law to a holder of securities, as opposed to a seller or buyer. But the arbitrator made the allocation based, not on federal securities law, but on his evaluation of state and common law claims for breach of fiduciary duty. Judge Katz ruled that a reasonable person could agree with the award. (BCD News and Comment, June 28, 2000) RELIANCE GROUP: Cauley & Geller Files Securities Suit in New York ----------------------------------------------------------------- The Law Firm of Cauley & Geller LLP has filed a class action in the United States District Court for the Southern District of New York on behalf of all individuals and institutional investors that purchased the common stock of Reliance Group Holdings Inc. ("Reliance" or the "Company") (NYSE:REL) between Feb. 8, 1999, and May 10, 2000, inclusive (the "Class Period"). The complaint charges that the Company and certain of its officers and directors violated the federal securities laws by providing materially false and misleading statements regarding the Company. Specifically, as alleged in the Complaint, on March 31, 1999, defendants, in their financial statement filed with the SEC for its fiscal 1998 operations, stated that the Company's reinsurance contracts were valid, and that it expects to recover the full amount of such coverage. This statement was false and misleading, and defendants knew, or recklessly disregarded its falsity, because the Company was notified, prior to making the statement, that several reinsurance companies terminated their obligations to the Company. Because the Company's obligations to its insureds remained intact, the Company's expected losses exceeded $150 million. Furthermore, this$150 million loss should have been reflected as a charge to income, under Generally Accepted Accounting Principles, and was not, thereby masking the Company's true, and impaired, financial condition and prospects. On May 10, 2000, the Company reported that its first fiscal 2000 quarter would see an operating loss of $.31 per diluted share, which represented a greater loss than the comparable 1999 quarter. On that day, the price of Reliance stock closed at $2.625, a decline of more than 76 percent from the class period high of $11 per share. Contact: Cauley & Geller, LLP Sue Null, Jackie Addison or Sharon Jackson, 888/551-9944 Cauleypa@aol.com RESIDENTIAL FUNDING: Settlement Discount for Volume Not Referral Fees --------------------------------------------------------------------- A discount price schedule for settlement services negotiated between a large-volume institutional seller of real estate owned properties and a settlement service provider are not illegal kickbacks under the Real Estate Settlement Procedures Act when based on 'economies of scale, held the U.S. District Court for the Northern District of California. (Lane v. Residential Funding Corp., No. C96-3331 MMC (N.D. Calif. 6/6/00).) Jesse Lane purchased a home from Resolution Funding Corp. RFC is a large-volume institutional seller of real estate owned properties which typically have been the subject of foreclosure. As the title-owner of these REO properties, RFC routinely attempts to sell the homes quickly to cut its losses. The sales require the services of third-party service providers, such as real estate brokers, title insurers and escrow companies, to sell and close the transactions. As a large-volume seller, RFC has substantial bargaining power to negotiate a lower price for the same services than an individual seller would require. Thus, prior to the Lane transaction in which Lane agreed to use the escrow company of the seller's choice, RFC negotiated with Chicago Title Co. to provide all of the company's settlement services. RFC and Chicago Title agreed that Chicago Title would charge a uniform fee of 300 for basic escrow services and 60 percent of the basic rate for an owner's title insurance policy. Alleged Kickback Lane's transaction, which was closed by Chicago Title, involved a federally related mortgage loan as defined by the RESPA. Section 8 of the RESPA provides, "No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding ... that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person." The Department of Housing and Urban Development defines a referral as "any oral or written action directed to a person which has the effect of affirmatively influencing the selection by any person of a provider of a settlement service ... when such person will pay for such settlement service." Additionally the regulations state, "When a thing of value is received repeatedly and is connected in any way with the volume of value of the business referred, the receipt of the thing of value is evidence that it is made pursuant to an agreement or understanding for the referral business." Alleging the defendants engaged in an illegal kickback scheme, Lane filed a class action under Sections 8 and 9 of the RESPA. Lane questioned whether the lower price due to a "volume discount" RFC paid Chicago Trust was a "thing of value" given in return for the referral of business and constituted an illegal kickback under the act. Certified Class The District Court certified a class of 134 persons under Section 8 but not Section 9. The class was defined as 134 persons who purchased residential real property from RFC and used Chicago Title as the settlement service provider. Settlement Services RFC and First National Bank of Chicago, joined by Chicago Title, then moved for summary judgment on the Section 8 claim. In their motion, the defendants argued that the discount was not given in exchange for referrals and was not dependent on any volume or value of referrals. Instead, the defendants explained the discount on the basis of lower transaction costs associated with providing settlement services to a sophisticated institutional seller. The defendants supported their discount agreement with evidence that the cost to Chicago Title for providing escrow services to RFC is lower because of RFC's familiarity with escrow transactions and its use of standardized forms and procedures. Additionally, the defendants argued that Chicago Title is able to offer RFC a lower price because its sales involve REO properties that are accompanied by title reports or trustee sale guarantees. According to Lane, the only direct evidence to rebut the defendants' declarations was a note written by a Chicago Title sales manager. The note read "Residential Funding 15 deal or above per month." This note, argued Lane, showed Chicago Title offered RFC a discount conditioned upon receiving at least 15 transactions a month from RFC. But whether the lender and Chicago Title had an understanding as to a specified volume of transactions was "not dispositive," ruled the court in this case of first impression. Judge Maxine M. Chesney explained, "there is sufficient undisputed evidence from which a trier of fact could infer that both RFC and Chicago Title anticipated a volume of business in the event they reached an agreement as to Chicago Title's rates, otherwise there was little point to their negotiating a pricing schedule in the first place." Referral of Buyer The real issue, said the District Court, was not whether Chicago Title offered RFC a lower rate based on volume and repeat business but whether a seller, who purchases settlement services covered by the RESPA for a favorable rate based on the volume of services it purchases for itself, violates the act when it refers its buyers to that service provider. To prevent summary judgment, Lane argued that Chicago Title and RFC did accept a "thing of value" with the understanding of future referrals and volume of transactions. However, the court could find no authority that makes it illegal under Section 8 for a volume seller of real estate to choose to give its business to the lowest cost settlement provider. Furthermore, said the court, "HUD gives no indication that every arrangement involving a discount and referral constitutes, ipso facto, a violation of RESPA." In fact HUD, which is often a seller of properties, follows a similar pricing schedule with Chicago Title. The defendants argued, and the court agreed, that if RFC's discount was an illegal kickback, HUD was guilty of violating the act it is charged with enforcing. The court granted the defendants' motion, concluding that where settlement service fees charged the seller are based on "economies of sale" the discount should not be considered an illegal referral fee under the RESPA. James C. Sturdevant of the Sturdevant Law Firm in San Francisco and E. Gerard Mannion of Mannion & Lowe in San Francisco represented Lane. William L. Stern of Severson & Werson in San Francisco represented Residential Funding. John M. Grenfell of Pillsbury, Madison & Sutro LLP, also in San Francisco, represented Chicago Title. (Consumer Financial Services Law Report, June 26, 2000) RETAILERS: ADA Cases Did Not Stop at Macy's San Francisco Store --------------------------------------------------------------- DRA did not stop with its success in the San Francisco Macy's case. Instead, it relied on the strength of that ruling to support similar actions against other retailers. Two other California cases, both filed by DRA and both now pending before Judge Patel, make similar accusations against other Macy's locations. One of those cases involves a single Macy's location at a mall in Sacramento, while the other currently encompasses all remaining Macy's stores in California. The plaintiffs will soon be seeking to expand the latter suit, said DRA attorney Melissa Kasnitz, to include Macy's locations in a number of other states as well. There are other clear indications that suits alleging inaccessibility of store merchandise are expanding beyond California's borders. DRA is acting as co-counsel in a Florida suit that was filed in November against retailer Burdines Inc., which, like Macy's, is owned by Federated Department Stores. That suit may soon be expanded as well, as a motion for class certification is pending along with a defense motion to dismiss claims raised under state law. Rosemarie Richard of Richard & Richard in Stuart, Fla., is co-counsel for the plaintiffs in that case. In yet another similar case, DRA sued California-based Robinsons-May Inc., a division of the May Department Store Company, in April. In that suit, Kasnitz said, the defendants have agreed to enter into settlement negotiations, which are currently underway. Earlier this month, DRA continued its campaign by suing Mervyn's California Inc., a retailer headquartered in Hayward, Calif. Mervyn's has department store locations in California, Arizona, Colorado, Idaho, Louisiana, Michigan, Minnesota, Nevada, New Mexico, Oklahoma, Oregon, Texas, Utah and Washington. Joining DRA to represent the plaintiffs are Daniel S. Mason, Joseph W. Bell and Sara M. Scott of San Francisco's Zelle, Hoffman, Voelbel & Gette. The suit against Mervyn's was filed on behalf of four individuals with mobility impairments: Renee Pollard, Theresa Camalo, Lillian Dismuke and Maryjane Naughten. All of the plaintiffs use a wheelchair or motorized scooter for mobility. The Mervyn's suit bears many similarities to the case pending against Robinsons-May. It claims that Mervyn's "routinely arranges its merchandise racks so that people with mobility disabilities, such as wheelchair users, are unable to obtain access to much of the merchandise." Mervyn's also maintains illegal access barriers with respect to restrooms, fitting rooms and customer service, the suit claims. Like the Robinsons-May suit, the one against Mervyn's is styled as a class action and includes claims under Title III of the ADA and California law. It also includes a subclass of plaintiffs, who allegedly have encountered access barriers at the defendant's California locations. The complaint seeks injunctive and declaratory relief as well as damages on the state-law claims. In addition, the suit asks for reasonable attorney's fees and costs. "Inaccessible merchandise aisles are like signs which say: 'disabled not wanted,'" said DRA attorney Joshua Konecky. "The 10th anniversary of the ADA is in a few weeks and corporate giants are still segregating people with disabilities in violation of the law." (Disability Compliance Bulletin, June 30, 2000) STEVEN MADDEN: Cauley & Geller Files Securities Suit in New York ---------------------------------------------------------------- The Law Firm of Cauley & Geller, LLP has filed a class action in the United States District Court for the Eastern District of New York on behalf of all individuals and institutional investors that purchased the common stock of Steven Madden, Ltd. (Nasdaq: SHOO) between June 21, 1997 and June 20, 2000, inclusive (the "Class Period"). The complaint charges that the Company and certain of its officers and directors violated the federal securities laws by failing to disclose material adverse information about the Company and defendant Steven Madden. Specifically, the Complaint charges that the defendants failed to disclose: a) an illegal scheme between defendant Madden and third party Stratton Oakmont ("Stratton") to act as "flippers" to gain control of interest that accrued from the Company's stock through a manipulation of the Company's Initial Public Offering ("IPO"); b) defendant Madden's unlawful profiting at the Company's expense through his illegal scheme to act as a flipper; and c) the true relationship between the Company and Jordan Belfort ("Belfort"), president of Stratton, regarding Belfort's true beneficial ownership interest in the Company. On June 20, 2000, when the truth was revealed, the public was shocked to learn that defendant Madden had been charged with securities fraud and money laundering by the Securities Exchange Commission, causing the Company's stock price to plummet by 15% before trading was halted on the Nasdaq. Contact: Cauley & Geller, LLP Sue Null, Jackie Addison or Sharon Jackson, 888/551-9944 Cauleypa@aol.com STEVEN MADDEN: Reveals Indictments and Resignation of Former Chairman --------------------------------------------------------------------- In its report to the SEC, the company reveals that on June 20, 2000, Steven Madden, the Company's former Chairman and current Chief Executive Officer, was indicted in the Southern District and Eastern District of New York. The indictments allege that Mr. Madden engaged in securities fraud and money laundering activities. In addition, the Securities and Exchange Commission filed a complaint in the United States District Court for the Eastern District of New York alleging that Mr. Madden violated Section 17(a) of the Securities Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of 1934, as amended. Neither the indictments nor the SEC complaint alleges any wrongdoing by the the company or its other officers and directors. Mr. Madden has denied any improper conduct and has advised the company that he will vigorously defend himself against any and all charges. On June 21, 2000, a class action lawsuit was filed in United States District Court for the Eastern District of New York against the company, Steven Madden, Rhonda Brown, a director and the President and Chief Operating Officer of the company, and Arvind Dharia, a director and the Chief Financial Officer of the Registrant, seeking remedies under the Exchange Act. Several other similar actions have been filed against the Registrant. (These have been reported in the CAR.) On June 21, 2000, Steven Madden temporarily resigned as Chairman of the Board of Directors and the Registrant appointed Charles Koppelman as acting Chairman of the Board. Mr. Koppelman has been a director of the company since June 1998. Mr. Madden continues to serve as the company's Chief Executive Officer. TOBACCO LITIGATION: Nationwide Cert Ruling to Follow Prelim Proceeding ---------------------------------------------------------------------- Plaintiffs moved for class certification of a nationwide smoker class action. They asserted that there was a valid cause of action for hundreds of thousands of people injured because of violations of their substantive rights by the tobacco industry. In their view, the most effective way to obtain a remedy for those who had allegedly suffered lung cancer caused by smoking was through a national class action. Defendants argued that a class action was not authorized by the Federal Rules of Civil Procedure, and that class resolution of the tobacco disputes would deny Due Process rights to individual adjudications. Looking to the Supreme Court case, Amchem Products, Inc. v. Windsor, the court held that the parties should conduct further preliminary proceedings with respect to the matters raised, before a final decision on certification could be made. Judge Weinstein SIMON v. PHILIP MORRIS INCORPORATED QDS:03762577 - Plaintiffs have moved for class certification of a nationwide smoker class action. See Fed.R.Civ.P. 23(b)(3). The putative class is described as: All persons residing in the United States, or who were residents of the United States at the time of their deaths, who have a 20 pack-year history of smoking Defendants' cigarettes and who, individually or through an estate or other legal representative, had a timely claim as of April 9, 1999 for personal injury damages or wrongful death arising from cancer of the lung. A pack-year is one package of cigarettes consumed per day per year. They assert that there is a valid cause of action for hundreds of thousands of people injured (and estates of those who have died) because of violations of their substantive rights by the tobacco industry ("Tobacco"). In their view, the most effective way to obtain a remedy for those who have allegedly suffered lung cancer caused by smoking is through a national class action. As a threshold matter, Tobacco denies the substantive and factual viability of these claims. It also contends that, even if theoretically supportable, the claims are nevertheless barred by various defenses, including statutes of limitations. With respect to the specific question of class certification, Tobacco points to the fact that there are only some 750 cases pending nationally against it and that a class action with all its attendant complexities is not needed to avoid undue burdens on the judicial system. More forcefully, Tobacco argues that a class action is not authorized by the Federal Rules of Civil Procedure as interpreted by the courts, and that class resolution of the tobacco disputes would deny both prospective plaintiffs and defendants their due process rights to individual adjudications. In addressing plaintiffs' motion to certify at this preliminary stage plaintiffs' contention that there is a valid cause of action must be assumed to be accurate. While the court need not now, and does not, make any finding that plaintiff's contentions can be proven, their proffer (incorporated in this memorandum as Appendix A (on file with the Clerk of the Court) is so weighty as to be entitled to respectful consideration on the certification issue. As a practical matter, the issue of class certification cannot be resolved without further attention to the litigation's factual and procedural underpinnings. Plaintiffs have requested a preliminary evidentiary hearing to assist the court in deciding whether certification is proper. That request is granted. Putting aside for the moment the question of whether the technical requirements of Rule 23 for class certification can be met, defendants contend that the substantive tort law and associated substantive-procedural rules of fifty states and the District of Columbia (as well as the various other U.S. jurisdictions) must be applied under the Erie doctrine and New York's conflict rules; these laws, the argument goes, are so diverse that a national class action cannot realistically be decided by a single jury. As appendices C through K (on file with the Clerk of the Court) suggest, there is considerable weight to this argument. A variety of statutory reforms and evolutions in the caselaw have in recent years created substantial deviations in the states from what had earlier been a rather uniform national common law of torts. The contention about diverse substantive law warrants some reflective consideration. Workable alternatives may exist if plaintiffs' views prevail. First, it may be that the states can be divided for purposes of controlling substantive law into a relatively few categories. Second, it may be that New York's substantive law will be held to govern as representing the place where the gravamen of the alleged delicts occurred, providing a uniform law. See, e.g., Bergeron v. Phillip Morris, Inc., No. 99 CV 6142, 2000 WL, at F.Supp.2d (E.D.N.Y. June 8, 2000); Friedrick K. Juenger, A Third Conflicts Restatement?, 75 Ind. L.J. 403, 412-415 (2000) ("interstate and international transactions are, by their very nature, sufficiently different from purely domestic ones to pose the legitimate question whether they ought not to be governed by some form of international or supranational law.... The substantive law approach is designed to achieve fair results in multistate cases."). Third, the jury may be asked to make separate findings of fact that will permit its general findings to be applied to the law of the various jurisdictions affected. Fourth, a single jury could be empaneled to decide common questions of law and fact, with non-class (individual specific) issues later litigated separately before different juries in courts in the states of plaintiffs' residences (so long as diversity jurisdiction remained intact). See Mary J. Davis, Towards the Proper Role for Mass Tort Class Actions, 77 Or. L.Rev. 157, 219-21 (1998) ("Requiring an analysis of relevant and interested jurisdictions does not mandate the application of the law of each state."); cf., Fed.R.Civ.P. 42(b) (separate trials); see also 28 U.S.C. @ 1404(a) (transfer to another district "for the convenience of parties and witnesses... where it might have been brought"). The national tobacco settlement with the states resulted in a proportion of the total settlement for each state; that ratio may reflect the force of relative substantive laws of the states as a surrogate for their differences. Limiting the number of subclasses based upon typologies of state tort law may warrant analysis by experts on American tort or procedural law. Apart from the problem of possible subclasses based upon differences in state laws, other possible subclasses may need attention. For example, even though only one disease - primary lung cancer - is involved, and future "victims" are not covered by the proposed class, subclasses of the living, representatives of the deceased and those claiming punitive damages may be required. Before the issue of certification is decided, the complaint may need to be recast to reflect such subclassing. A number of the issues raised on the certification motion will require further briefing, evidentiary hearings, and, possibly, amendment of the complaint. The extent to which the case might be simplified by statistical analysis has not yet been adequately explored with the court. None of the matters to be addressed at the certification hearing deals will decide the ultimate merits of the claims. Compare Phillip Morris, Inc. v. National Asbestos Workers Medical Fund, 2000 WL 733374 (2nd Cir. June 9, 2000) (no ruling on the merits as part of certification), with Karin S. Schwartz, et al., Notes from the Cave: Some Problems of Judges in Dealing with Class Action Settlements, 163 F.R.D. 369 (1995) (need for some regard for merits in deciding preliminary class action certification issues). To facilitate the newly established interlocutory appeals for class certification decisions as provided by Rule 23(f), some fleshing out of the factual background of the underlying dispute so that the appellate court can fully and fairly evaluate certification in proper context is desirable. In this and other ways trial courts have an obligation to assist the appellate courts in applying Rule 23(f). See, e.g., Fed.R.Civ.P. 23(f) cmt. ("The distrct court often can assist the parties and court of appeals by offering advice on the desirability of appeal."... "The district court, having worked through the certification decision, often will be able to provide cogent advice on the factors that bear on the decision whether to permit appeal."). Rule 23 remains viable in mass tort cases, but requires "caution when individual stakes are high and disparities among class members are great." See Amchem Products, Inc. v. Windsor, 521 U.S. 591, 625 (1997). Nothing in any of the cases cited by the parties suggests that the Supreme Court has sought to indirectly repeal Rule 23 or to hobble the district courts in using available techniques to provide for "the just, speedy and inexpensive determination of every action," Fed.R.Civ.P. 1. In accordance with the Supreme Court's caution, decision on class certification is reserved so that the parties can arrange for further preliminary proceedings with respect to the matters raised in this memorandum, issues discussed orally during the June 12, 2000 hearing, and such other matters as may arise before a final decision on certification. Plaintiffs must establish that they can modify their complaint so that it can be presented as a series of discreet questions to the jury, permitting a verdict applicable to the entire class without the need for hundreds-of-thousands of separate trials on such individual matters as the amount of compensatory damages, application of defenses, and allocation of punitive damages. Since the case is structured for trial, plaintiffs must establish that trial is in fact feasible. The parties shall attempt to agree on the ambit and procedure for the certification hearing in accordance with the oral suggestions of the court. Counsel are urged to proceed expeditiously. See Fed.R.Civ.P. 23(c)(1) ("As soon as practicable after the commencement of an action brought as a class action, the court shall determine by order whether it is to be so maintained."). (New York Law Journal, June 22, 2000) TWA: Accused of Bilking Trainees; Dallas Resident Files Lawsuit --------------------------------------------------------------- A Dallas resident has sued Trans World Airlines, saying the airline deceived and defrauded him and others who took an employment training course. The lawsuit was filed by Perry Luna two months ago in Jackson County Circuit Court in Independence. Luna's suit is seeking class-action status for others who allegedly were misled and bilked by taking the course. TWA, based in St. Louis, said it still offers the course but no longer requires a fee for prospective employees to take it. However, the airline denied any wrongdoing. "The lawsuit involved a tuition-based training program that TWA used to offer," said Julia Bishop-Cross, a TWA spokeswoman. "All of the candidates who signed up to take the training and later were hired by TWA knew at the time what the terms agreement were and agreed to participate in the program. TWA has lived up to its obligations under the program, and we see no basis for any lawsuit." The case revolves around a TWA training course for reservation sales agents. TWA charges prospective employees about $2,800 to take the course, which is then paid off through payroll deductions if the person is hired. According to the suit, TWA guaranteed job placement after a person successfully took the course and interest-free financing for the tuition. In addition, the airline said those taking the course would be able to use the skills they learned for jobs at other airlines, the lawsuit says. Luna's suit charges that TWA falsely promised a job guarantee and that very little of what's taught in the course can be applied to jobs at other airlines. The suit says Luna took the course in St. Louis in 1997. After Luna became an employee, TWA began deducting the tuition fee from his paychecks regularly. However, after Luna left TWA, the airline began charging interest on the balance remaining at rates as high as 19 percent, according to the lawsuit. The suit contends that through such practices, TWA has illegally profited by millions of dollars through the course. TWA has offered the training course through its Trans World Travel Academy in various cities where it has reservations centers, including St. Louis, Los Angeles, Chicago and Norfolk, Va. TWA offered the course in Kansas City in the past but apparently doesn't any longer, said John F. Edgar, a lawyer with Humphrey Farrington & McClain of Independence. The law firm recently placed an ad in The Kansas City Star seeking past or present students who took the TWA course for reservation sales agents, known as Course No. 105. Edgar said it is impossible to know how many people would qualify to be part of the suit without getting access to TWA's records. Ads have not been placed in the other cities where TWA has reservation centers, he said. The suit says damages would not exceed $75,000 for any person allegedly defrauded by TWA's actions. The suit seeks damages for each individual, as opposed to a collective amount. (The Kansas City Star, July 4, 2000) ********* S U B S C R I P T I O N I N F O R M A T I O N Class Action Reporter is a daily newsletter, co-published by Bankruptcy Creditors' Service, Inc., Princeton, NJ, and Beard Group, Inc., Washington, DC. Theresa Cheuk, Managing Editor. Copyright 1999. All rights reserved. ISSN 1525-2272. This material is copyrighted and any commercial use, resale or publication in any form (including e-mail forwarding, electronic re-mailing and photocopying) is strictly prohibited without prior written permission of the publishers. Information contained herein is obtained from sources believed to be reliable, but is not guaranteed. The CAR subscription rate is $575 for six months delivered via e-mail. Additional e-mail subscriptions for members of the same firm for the term of the initial subscription or balance thereof are $25 each. For subscription information, contact Christopher Beard at 301/951-6400. * * * End of Transmission * * *