Justice Jimmy Blacklock
The Texas Supreme Court has reversed an Austin Court of Appeals decision upholding a trial court’s order certifying a class action against a major provider of student housing on Texas college campuses.
In American Campus Communities, Inc., et al. v. Beth Berry, Brooke Berry, Yael Spirer, and Hailey Hoppensteing, Individually and on behalf of all others similarly situated (No. 21-0874), plaintiffs sought to certify a class on behalf of 65,000 tenants of more than 30 dorms and residential properties owned and operated by American Campus Communities and its subsidiaries (ACC). The plaintiffs alleged that ACC violated §92.056(g), Property Code, which requires a residential lease to contain language in underlined or bold print that informs the tenant of remedies available under the Property Code if the landlord does not discharge its duty to repair or remedy conditions that materially affect the physical health and safety of the tenant. The suit sought statutory penalties of one month’s rent plus $500, court costs, attorney’s fees, and injunctive and declaratory relief. A Travis County trial court granted the plaintiffs’ motion to certify a class action under Rule 42 for leases executed, renewed, or extended between October 1, 2014, and March 21, 2018. The Austin Court of Appeals affirmed (but narrowed the scope of the action somewhat).
In an opinion by Justice Blacklock, SCOTX reversed. ACC admitted that leases executed from 2008 to 2018 did not contain the statutory notice but argued that even so, §92.056 or the waiver provision in §92.006 do not create a private right of action for strict liability. Certifying a class based on a baseless legal theory, consequently, constituted an abuse of discretion. It further contended that the judicial remedies sought by plaintiffs under §92.0563 “apply only when a landlord has violated subsection (b) of Section 92.056(b)” (tenant notification of condition, tenant being current on rent, landlord’s failure to make diligent efforts to repair). Consequently, establishing a violation is fact specific to each tenant and defeats the predominance prong of the Rule 42 test. Plaintiffs responded that ACC is trying to argue the merits of the case in an interlocutory appeal of an order under Rule 42, which is limited to the question of whether the trial court abused its discretion in certifying the class.
“The initial question,” Justice Blacklock began, “is whether, in ruling on a class-certification order, a court may consider the defendant’s argument that certification should be denied because the plaintiff has not put forward a legally viable theory of the defendant’s liability to the class.” Noting that the court of appeals sidestepped the issue by drawing a bright line between the procedural requirements of Rule 42 and the “merits issues” proper to a nonappealable summary judgment motion or motion to dismiss, the Court opted for an approach to class action certification that emphasizes up-front scrutiny of whether the plaintiffs’ claims can even form the basis of the action in the first place. “It is true,” Justice Blacklock wrote, “as the court of appeals observed, that disputed questions of law about the nature of the claim would normally be addressed in dispositive motions that cannot immediately be appealed if they are denied. But this does not prohibit a court hearing a class-certification appeal from considering disputes of law that are necessary to discharge its duty under Rule 42 to properly understand the law governing the claim.” If properly raised at the class certification stage, the substantive law must be considered at the outset of the Rule 42 analysis. This substantive law analysis, furthermore, is necessary to fulfill the mandate that the trial court conduct a “meaningful” and “rigorous” of whether the claim satisfies Rule 42. Neither the trial court nor the court of appeals conducted such a review in this case.
Instead of conducting that review, Justice Blacklock noted, the trial court took “certify now and worry later” approach which “the [Court] has rejected on multiple occasions.” The court of appeals compounded the trial court’s error when it “essentially defaulted to the plaintiffs’ understanding of the claims. It proceeded to analyze the amenability to class resolution of the claims as understood by the plaintiffs—without ever asking whether that understanding accurately interprets Chapter 92 of the Property Code, the substantive law governing the claims…. The question is not whether the plaintiff has pleaded and argued a claim that, if it exists, would be suitable for class resolution. The question, instead, is whether, under the ‘applicable substantive law,’ the claim—as the law, not the plaintiff, defines it—is truly suitable for class resolution.” Indeed, little of the Rule 42 analysis makes much sense if the trial court does not first establish the nature of the plaintiffs’ claims, particularly the requirements of typicality and commonality. As Justice Blacklock put it, “to know whether common questions will ultimately predominate—not in a defective proceeding based on the incorrect law, but in a valid proceeding whose result will survive appeal—we must know what the law is.”
The Court emphasized that its holding does not require trial courts to “decide the merits of the lawsuit” at the class-certification stage, merely to understand the applicable law and “to determine whether the claim inexorably must fail under that law.” Class actions should be the certified at the drop of the hat, and “[c]ourts cannot be blind to the reality that certifying a class may, practically speaking, dictate the outcome of litigation by fundamentally changing the parties’ incentives to settle. Certifying a class based on a non-existent or mistakenly conceived claim—a claim on which a class could never validly recover regardless of the facts—raises the stakes of a lawsuit that should have no stakes at all.” The Court proceeded to provide the analysis that the trial court and court of appeals did not, that is, whether the Property Code sections at issue in the case really do impose strict liability on a landlord solely for omitting the required notice from the lease. The Court concluded that they did not. Although the Property Code gives tenants a judicial remedy when a landlord violates its duty to repair a dangerous condition, nothing in the Code extends the remedy any further than that. The Court further rejected plaintiffs’ claim that the omission of the required notice in the lease was tantamount to an unlawful attempt to compel tenants to waive the duty of repair, since that duty is “creature of statute” and “[a] lease’s failure to mention a statutory duty is in no sense a waiver of the statutory duty.” Because the Property Code provided no statutory basis for plaintiffs’ claim, the trial court could not but fail in its duty under Rule 42 to identify the elements of the claims.
This is an important decision that raises the rigor of the substantive law analysis that must precede a judicial determination of Rule 42’s requirements for class certification. The Court is sending a clear message, it seems to us, that class certification is not to be gamed or leveraged as part of settlement negotiations. If the initial analysis reveals, as Justice Blacklock observed, that “one party will lose,” then so be it.
