Stender et al v. Archstone-Smith Operating Trust
Filing
434
ORDER GRANTING IN PART and DENYING IN PART 396 Motion for class certification; OVERRULING as moot 399 Plaintiff's Objection to MAGISTRATE JUDGE DECISION; DENYING 430 Defendant's Request for Oral Argument, by Judge William J. Martinez on 09/28/2015.(cthom, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF COLORADO
Judge William J. Martínez
Civil Action No. 07-cv-02503-WJM-MJW
STEVEN A. STENDER,
HAROLD SILVER, and
INFINITY CLARK STREET OPERATING, L.L.C.,
on behalf of themselves and all others similarly situated,
Plaintiffs,
v.
ARCHSTONE-SMITH OPERATING TRUST et al.,
Defendants.
ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFFS’ MOTION FOR
CLASS CERTIFICATION, OVERRULING AS MOOT PLAINTIFFS’ OBJECTION TO
MAGISTRATE JUDGE’S JULY 23, 2015 ORDER, AND DENYING AS MOOT
DEFENDANTS’ REQUEST FOR ORAL ARGUMENT
Before the Court is Plaintiffs’ Motion for Class Certification (“Certification
Motion”). (ECF No. 396.) For the reasons explained below, the Court grants the
Motion with respect to liability and denies it with respect to damages.1 This disposition
moots Defendants’ request for oral argument. (ECF No. 430.)
Also before the court is Plaintiffs’ Objection (ECF No. 399) to United States
Magistrate Judge Michael J. Watanabe’s July 23, 2015 Order (ECF No. 393) denying
Plaintiffs’ motion to add an additional class representative (ECF No. 391). As described
below, Plaintiffs’ Objection is moot in light of the Court’s partial grant of the Certification
1
Both parties filed their class certification papers, including all exhibits, entirely under
seal (specifically, Restricted Access, Level 1). See D.C.COLO.LCivR 7.2. To the extent a brief
or exhibit is quoted or summarized below, the Court has determined that the portion quoted or
summarized does not meet the standards for Restricted Access set forth in D.C.COLO.LCivR
7.2(c)(2)–(4).
Motion. Plaintiffs’ Objection is therefore overruled as moot.
I. FACTUAL & PROCEDURAL BACKGROUND
A.
Early Proceedings & Arbitration
Plaintiffs initiated this action on November 30, 2007 by filing a class action
Complaint alleging breach of contract and breach of fiduciary duty. (ECF No. 1.) The
case was originally assigned to former United States District Judge Edward Nottingham.
(ECF No. 2.) In lieu of an answer, Defendants moved to dismiss all claims, arguing that
some claims were subject to an arbitration clause and others failed to state a claim
upon which relief could be granted. (ECF No. 29.) On September 30, 2008, Judge
Nottingham granted Defendants’ motion, finding that Plaintiffs’ claim relating to a tax
protection agreement (“TPA,” discussed further below) was subject to arbitration. (ECF
No. 76.) Judge Nottingham also found that Plaintiffs failed to state a claim for breach of
fiduciary duty and dismissed those claims with prejudice. (Id.)
Plaintiffs moved for reconsideration of the dismissal order, arguing that, because
Judge Nottingham found that Plaintiffs had failed to allege sufficient facts to state a
claim, they should be afforded the opportunity to file an amended complaint. (ECF No.
78.) While this motion was pending, the case was reassigned to United States District
Judge Robert E. Blackburn. (ECF No. 81.) Judge Blackburn granted Plaintiffs’ motion
to reconsider, ruling that Plaintiffs should be allowed to file an amended complaint.
(ECF No. 101.) However, Judge Blackburn did not accept Plaintiffs’ tendered amended
complaint at that time, instead administratively closing the case pending conclusion of
the arbitration of the claim related to TPA. (Id.)
2
Upon the undersigned’s appointment, the case was again reassigned. (ECF No.
131.) The Court permitted Plaintiffs to file an amended complaint, but continued the
stay of litigation until the arbitration was resolved and administratively closed the case.
(ECF Nos. 150, 159.)
B.
The Second Amended Complaint
Upon conclusion of the arbitration, the Court reopened this matter. (ECF No.
188.) On Defendants’ motion, the Court confirmed the arbitrator’s award in favor of
Defendants. (ECF Nos. 184, 243.) Plaintiffs then filed their Second Amended
Complaint, which is the operative pleading in this case. (ECF No. 266.)
1.
Plaintiffs’ Investment
The pertinent facts pled in the Second Amended Complaint are as follows. Up
until early 2007, Defendant Archstone REIT was one of the largest publicly held real
estate investment trusts in the United States. 2 (Id. ¶ 44.) The Archstone REIT held
nearly all of its assets in the Archstone UPREIT (formally known as the Archstone
Smith Operating Trust).3 (Id.) The Archstone REIT was the sole trustee of the
Archstone UPREIT, and was responsible for its strategic direction, as well as
2
A real estate investment trust is an entity that owns and manages income-producing
real estate such as apartments, offices, and industrial space. (Id. ¶ 69.) A REIT generally does
not pay corporate income taxes, which allows investors to enjoy the advantages of the
corporate form (including limited liability and transferability of shares) without incurring the costs
of double taxation. (Id. ¶¶ 70–71.)
3
UPREIT stands for “umbrella partnership real estate investment trust.” (Id. ¶ 72.) An
UPREIT is a REIT formed by combining properties from existing limited partnerships. (Id.) The
original partners exchange properties held by the partnerships for an interest in a new
transitional operating partnership. (Id.) Simultaneously, a corporation—usually a REIT—
contributes cash that it raised in a public offering in exchange for a general partnership interest
in the UPREIT. (Id.)
3
management and administration of all the properties the Archstone UPREIT owned.
(Id. ¶ 83.) Archstone REIT owned about 89 percent of Archstone UPREIT’s beneficial
interests in the form of A-2 Common Units. (Id. ¶¶ 44–45.) The Archstone UPREIT
was governed by a Declaration of Trust (“DOT”).
In the late 1990s, Plaintiffs invested in various Archstone-predecessor UPREITS,
receiving what are referred to as A-1 units. (Id. ¶¶ 5, 76.) As of May 2007, Plaintiffs
and the proposed class held approximately 11 percent of the Archstone UPREIT in the
form of A-1 units. (Id. ¶ 45.) The A-1 units were not investments in the Archstone
REIT, but were common units in the Archstone UPREIT. (Id. ¶ 5.) Plaintiffs chose to
invest in the A-1 units of the Archstone UPREIT in exchange for the contractual
promise that, for some period of time after the transfer of their real estate holdings to
Archstone, the UPREIT could not dispose of any interest in the properties in a manner
that resulted in Plaintiffs realizing any taxable gain. (Id. ¶ 76.) If any such gain was
realized, the UPREITs were obligated to reimburse Plaintiffs in that amount. (Id.)
These contractual provisions were referred to as “tax protection agreements” or “TPAs.”
(Id.) The TPAs allowed Plaintiffs to obtain the benefits of a broader portfolio of
investments, without compromising their ability to plan for the tax consequences
resulting from the disposition of any property. (Id. ¶ 77.)
Plaintiffs were also drawn to contribute their capital to Archstone UPREIT
because they would be able to redeem their units at will for cash or tradable common
stock. (Id. ¶¶ 78, 90.) Plaintiffs found favorable the DOT’s requirement that Archstone
UPREIT distribute 100 percent of its taxable income to shareholders, because this
4
afforded the investor a regular cash flow. (Id. ¶¶ 78–79.)
2.
The Merger
On May 2, 2007, Defendant Tishman-Lehman Partnership (“TLP”) submitted a
written indication of interest seeking to acquire the Archstone REIT and UPREIT for a
cash purchase price of $64 per share. (Id. ¶ 92.) Two weeks later, Archstone REIT’s
board of trustees became aware of TLP’s concerns regarding the “magnitude of the
built-in gain associated with certain of Archstone’s properties that are subject to tax
protection agreements with operating trust unitholders and the magnitude of the
increase in property taxes as a result of the transaction.” (Id. ¶ 93.) On May 23, 2007,
TLP rescinded its original offer of $64 per unit, and instead offered a price of $60 per
unit. (Id. ¶ 96.) Allegedly, this price reduction was primarily driven by the magnitude
and scope of the TPAs. (Id.) Archstone REIT negotiated with TLP over the purchase
price, and those entities ultimately agreed on $60.75 per unit, conditioned on T LP’s
refusal to pay out a third-quarter dividend that was owed to A-1 unitholders. (Id. ¶ 99.)
On May 29, 2007, Archstone REIT publicly announced that it had signed a
contract to merge with TLP (“Merger Agreement”) in a transaction valued at
approximately $22.2 billion dollars (the “Merger”). (Id. ¶ 100.) The Merger Agreement
terminated the A-1 units and required holders thereof to choose between two options: a
cash payout of $60.75 per unit or a one-for-one exchange for a newly created Series O
unit. (Id. ¶ 105.) The Merger Agreement stated that River Acquisition (MD), LP
assumed “all properties, rights, privileges, purposes and powers and debts, duties and
liabilities” of the Archstone REIT. (Id. ¶ 104.) Because the Merger Agreement
5
eliminated the A-1 shares, River Acquisition assumed nothing with regard to the A-1
unitholders. (Id.)
Plaintiffs contend that the Series O units had inf erior economic characteristics to
the A-1 units, including the possibility of the Series O units lacking tax deferred status.
(Id. ¶ 122.) Plaintiffs allege that the Merger failed to “acknowledge and account for the
superior nature of the A-1 units over the A-2 units.” (Id. ¶ 126.)
After the Merger, Archstone REIT caused billions of dollars in assets held by
Archstone UPREIT to be transferred to itself. (Id. ¶ 124.) The Archstone REIT then
merged with the Tishman-Speyer Partnership, which became the sole trustee of the
Archstone UPREIT. (Id. ¶ 125.) Plaintiffs allege that the “sole purpose of leveraging
the assets was to permit an impermissible distribution to the A-2 Unitholders to fund the
acquisition of the Archstone REIT.” (Id.)
3.
Plaintiffs’ Claims
On these facts, Plaintiffs’ Second Amended Complaint brought claims for breach
of fiduciary duty, breach of contract, tortious interference with contract, civil conspiracy,
unjust enrichment, and similar claims. Defendants then filed a motion to dismiss the
Second Amended Complaint. (ECF No. 288.) This Court granted that motion as to
Plaintiffs’ claims based on Archstone REIT’s alleged breach of its fiduciary duty in its
capacity as trustee. (ECF No. 312 at 7–10.) Plaintiffs also voluntarily dismissed certain
causes of action. (Id. at 19.) The Court otherwise sustained the Second Amended
Complaint, leaving causes of action for breach of fiduciary duty based on majority
oppression of the minority A-1 unitholders (Claim 3), aiding and abetting the same
6
(Claim 4), breach of the DOT (Claim 5), tortious interference with the DOT (Claim 6),
civil conspiracy (Claim 7), and unjust enrichment (Claim 8).
II. CLASS CERTIFICATION ANALYSIS
A.
Legal Standard
As the parties seeking class certification, Plaintiffs must first demonstrate that all
four prerequisites of Federal Rule of Civil Procedure 23(a) are clearly met. Shook v. El
Paso Cnty., 386 F.3d 963, 971 (10th Cir. 2004); see also Tabor v. Hilti, Inc., 703 F.3d
1206 (10th Cir. 2013). These threshold elements consist of the following: (1) the class
is so numerous that joinder of all members is impracticable; (2) there are questions of
law or fact common to the class; (3) the claims or defenses of the representative party
are typical of the claims or defenses of the class; and (4) the representative parties will
fairly and adequately protect the interests of the class. Fed. R. Civ. P. 23(a).
If Plaintiffs prove they have met these threshold requirements, they must then
demonstrate that the action falls within one of the three categories set forth in Rule
23(b). Shook, 386 F.3d at 971. Here, Plaintiffs seek certification pursuant to Rule
23(b)(3), which requires that “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.”
The party seeking to certify a class bears the strict burden of proving the
requirements of Rule 23. Trevizo v. Adams, 455 F.3d 1155, 1162 (10th Cir. 2006). In
determining the propriety of a class action, the question is not whether the plaintiffs
7
have stated a cause of action or will prevail on the merits, but rather whether the
requirements of Rule 23 are met. Anderson v. City of Albuquerque, 690 F.2d 796, 799
(10th Cir. 1982). When deciding whether the proposed class meets the requirements of
Rule 23, the Court accepts the plaintiffs’ substantive allegations as true, though it need
not blindly rely on conclusory allegations and may consider the legal and factual issues
which the complaint presents. Shook, 386 F.3d at 968; see also Vallario v. Vandehey,
554 F.3d 1259, 1265 (10th Cir. 2009). T he Court should not pass judgment on the
merits of the case, but must conduct a “rigorous analysis” to ensure that the
requirements of Rule 23 are met. D.G. ex rel. Stricklin v. Devaughn, 594 F.3d 1188,
1194 (10th Cir. 2010).
The decision whether to grant or deny class certification “involves intensely
practical considerations and therefore belongs within the discretion of the trial court.”
Tabor, 703 F.3d. at 1227.
B.
Proposed Class
Plaintiffs propose the following Class definition: “[A]ll persons or entities who
owned Class A-1 common units (‘A-1 Units,’ and their holders, ‘A-1 Unitholders’) of the
Archstone-Smith Operating Trust (‘ASOT’), an umbrella partnership real estate
investment trust, at the time of the Merger.” (ECF No. 397 at 10.) 4
C.
Rule 23(a)
The Court’s first task is to ensure that the Federal Rule of Civil Procedure 23(a)
requirements are satisfied as to the proposed Class: (1) the class is so numerous that
4
All ECF page citations are to the page number in the ECF header, which does not
always match the document’s internal pagination.
8
joinder of all members is impracticable (“numerosity”); (2) there are questions of law or
fact common to the class (“commonality”); (3) the claims or defenses of the
representative parties are typical of the claims or defenses of the class (“typicality”); and
(4) the representative parties will fairly and adequately protect the interests of the class
(“adequacy”). The Court will address each of these considerations in turn.
1.
Numerosity
Plaintiffs contend there are as many as 1,071 Class members. (ECF No. 397 at
34.) Defendants claim there are 813 Class members (ECF No. 413 at 15), but
Defendants do not argue that 813 is insufficiently numerous. Given that even 813
Class members would make joinder impracticable, and given Defendants’ nonopposition on this point, the Court finds that the numerosity requirement is satisfied.
2.
Commonality
Defendants similarly do not contest Plaintiffs’ assertion that there are questions
of law or fact common to the Class. Because such questions appear on the face of the
Second Amended Complaint (e.g., whether majority shareholders oppressed minority
shareholders, whether the DOT was breached, etc.), and in light of Defendants’ nonopposition on this point, the Court finds that the commonality requirement is satisfied.
3.
Typicality & Adequacy
The typicality and adequacy requirements of Rule 23(a) “tend to merge.” Gen.
Tel. Co. of Sw. v. Falcon, 457 U.S. 147, 162 n.13 (1982). Accordingly, with respect to
the named Plaintiffs, the Court will analyze these two requirements together.
a.
Stender
Plaintiff Stender was an A-1 unitholder who, at the time of the Merger, elected to
9
take cash for his A-1 units rather than the new Series O shares. (ECF No. 266 ¶ 26.)
Defendants attack Stender’s typicality and adequacy through the “unique defense”
doctrine: “class certification is inappropriate where a putative class representative is
subject to unique defenses which threaten to become the focus of the litigation.” Gary
Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 903 F.2d 176,
180 (2d Cir. 1990); see also In re Crocs, Inc. Sec. Litig., 306 F.R.D. 672, 687 (D. Colo.
2014) (“The reason why a lead plaintiff’s unique defense is detrimental to the class is
that the lead plaintiff might devote time and effort to the defense at the expense of
issues that are common and controlling for the class.” (internal quotation marks
omitted)). Given that Stender was a party to the arbitration proceeding described in
Part I.A, supra, Defendants claim that Stender will be “barred by collateral estoppel
from relitigating legal and factual issues decided” in that arbitration. (ECF No. 413 at
25.)
Arbitration can indeed have a collateral estoppel effect. See Coffey v. Dean
Witter Reynolds Inc., 961 F.2d 922, 925 n.4 (10th Cir. 1992). Evaluating the extent to
which Stender may be collaterally estopped requires a brief summary of the question
resolved in arbitration.
At issue in the arbitration was a specific TPA section requiring Archstone to
indemnify A-1 unitholders if Archstone agreed to any merger “that results in [the A-1
unitholder] being required to recognize part or all of the [taxable] gain” on a property
contributed by the unitholder to the REIT. (ECF No. 397-32 at 87.) The arbitration
claimants (including Stender) argued that their choice at the Merger between cash and
10
Series O units was no real choice. (ECF No. 184-1 at 4.) Although Series O units, in
theory, preserved the tax-deferred characteristics of the A-1 units, the claimants
asserted that “the Series O Unit was so economically inferior that it provided no
reasonable alternative to the cash option,” and so the claimants were effectively
“required to take the cash, thereby recognizing taxable gain.” (Id.) The claimants
accordingly sought damages equal to the taxes paid. (Id. at 3; see also ECF No. 39732 at 91.)
The arbitrator ruled against claimants, concluding that the Series O unit “was a
bona fide investment alternative, and, therefore, the merger did not result in Claimants
being required to recognize taxable gain by choosing the cash option.” (ECF No. 184-1
at 5–6 (underscoring in original); see also id. at 9.) The arbitrator also rejected an
alternative argument, i.e., that the TPA did not permit Archstone to offer anything other
than cash combined with tax indemnification. (Id. at 9–10.) Finally, the arbitrator
appeared to rule against the claimants on the question of whether the DOT permitted
the Merger without an approving vote from the A-1 unitholders. (Id. at 10–11.) But the
arbitrator also stated, “Even if Claimants could establish that their voting rights . . . were
violated, . . . Claimants might choose to assert a claim for breach . . . in an appropriate
forum. However, such a claim is not within the scope of this arbitration.” (Id. at 11 n.4.)
Defendants moved in this Court to confirm that arbitration award. (ECF No.
184.) Although the Court granted the motion, it agreed with Plaintiffs that the
arbitrator’s concluding analysis regarding A-1 unitholders’ right to vote on the merger
was dicta and therefore would not bind Plaintiffs in this lawsuit. (ECF No. 243 at 9–10.)
11
Defendants now argue that the arbitration result will infect every portion of this
case as it relates to Stender. “No matter how Plaintiffs attempt to disguise them,”
Defendants say, “their allegations and claimed damages derived from the alleged taxrelated consequences of the [Merger]. But Mr. Stender . . . has already litigated and
lost in arbitration in which he sought exactly those tax-related damages.” (ECF No. 413
at 25.) In support, Defendants offer two items of evidence.
The first item is Stender’s deposition testimony, where Stender made statements
such as “the Tax Protection Agreement is a critical component of our claims.” (ECF No.
413-6 at 3; see also ECF No. 413 at 27 & n.22.) Defendants appear to be attempting to
portray Stender as doggedly holding on to tax indemnification despite the arbitration.
Having thoroughly reviewed the Stender deposition excerpts submitted by Defendants,
the Court finds that Defendants quotations are highly selective and do not fairly portray
Stender’s position. For instance, with respect to the TPA being “a critical component of
our claims,” Stender’s actual testimony was as follows: “I think the fact that they
[Archstone] ignored the Tax Protection Agreement is a critical component of our claims.
I think it constitutes, to my way of thinking, and oppression of the minority.” (ECF No.
413-6 at 3.) Thus, the “critical component” is not the TPA itself, but Archstone’s choice
to “ignore” it when negotiating the Merger, i.e., to disregard the interests of the A-1
unitholders, who were in the minority. This is not an attempt to resurrect the matters
decided in arbitration. It is simply one Plaintiff’s understanding of Plaintiffs’ Claim 3 for
breach of fiduciary duty based on majority oppression. Moreover, Stender was asked
at least four times whether tax indemnification damages were still at issue, and he
answered “no” each time. (ECF No. 413-6 at 4, 5, 6, 7.)
12
The second item comes from the report of Plaintiffs’ damages expert, Evan
Cohen. The Court will discuss Cohen’s report in greater detail when it addresses
whether individual damages questions overwhelm common questions. (See Part II.D.1,
infra.) For present purposes, it suffices to note that one of the ways Cohen measured
Plaintiffs’ alleged damages was through calculating the difference between the Series
O units or cash, on the one hand, and “the af ter-tax value of the A-1 Units assuming
there was no [Merger],” on the other. (ECF No. 397-30 ¶ 12.) In calculating the A-1
units’ value, Cohen considered, among other things, the value to an investor of the A-1
units’ tax-protected status. (Id. ¶¶ 34–44.) Defendants claim that this is some sort of
backdoor attempt to resurrect the tax indemnification damages rejected in the
arbitration, and therefore Stender may not rely on the Cohen report. (ECF No. 413 at
27–28.)
Without prejudging the overall relevance or validity of Cohen’s choice to
calculate the value to an investor of the A-1 units’ tax-protected status, the Court sees a
meaningful distinction between damages based in part on that value and damages
based on breach of a tax indemnification requirement. Tax indemnification damages
(now foreclosed by the arbitration) presumably would have been a question of how
much in taxes each affected unitholder actually paid. By contrast, Cohen attempted to
calculate the per-unit value an investor would ascribe to the tax protections, which
seems little different than calculating the per-unit value of a unit’s other features, such
as guaranteed distributions. Thus, the Court is not convinced that collateral estoppel
arising from the arbitration will be a “unique defense” to Stender that threatens to
become the focus of this lawsuit. The Court accordingly rejects Defendants’ challenge
13
to Stender’s typicality and adequacy.
b.
Infinity
Plaintiff Infinity Clark Street Operating (“Infinity”) is an Illinois business entity that
accepted Series O units rather than cash. (ECF No. 266 ¶ 28.) Def endants argue that
Infinity “is an atypical and inadequate representative” because it “elected to take Series
O Units to have standing here,” and continues to hold those units (rather than
redeeming them) to maintain standing. (ECF No. 413 at 30.) This supposedly “puts
Infinity on far different footing from the other putative class members that chose Series
O Units, and continue[] to hold them, ostensibly for bona fide investment purposes
(including tax deferral), not for strategic litigation reasons.” (Id.)
The Court disagrees. The premise underlying Defendants’ argument is that
some A-1 unitholders who took the Series O units did so without reservation. That may
be true, but all it really tells us is that some Class members may have no interest in
bringing a lawsuit like this one. That is probably always the case with class actions. It
does not show that Infinity is an atypical or inadequate representative.
Defendants also argue—and Plaintiffs do not contest—that Infinity is in privity
with Stender because Stender controls (or previously controlled) Infinity, and therefore
the arbitration result binds Infinity as well. (ECF No. 413 at 30–31.) But for the reasons
explained above, Defendants have not shown that collateral estoppel arising from the
arbitration will have any serious effect on this lawsuit. Thus, the Court rejects
Defendants’ challenge to Infinity’s typicality and adequacy.
c.
Silver
Plaintiff Silver took Series O units rather than cash. (ECF No. 266 ¶ 27.) Silver,
14
however, would not be a typical or adequate Class representative.
“Plaintiffs may be found to be inadequate representatives where they are not
familiar with the basic elements of their claims, [or] have an almost total lack of
personal knowledge of their claims . . . .” City P’ship Co. v. Jones Intercable, Inc., 213
F.R.D. 576, 583–84 (D. Colo. 2002) (citations omitted). Such is the case here, as
shown by the following excerpts from Silver’s deposition:
Q.
Do you understand that you potentially may be a
class representative in this action?
A.
I don’t understand what that means.
***
Q.
Okay. I’m going to—have you ever reviewed any of
the Complaints that have been filed in this action?
A.
No.
Q.
Okay. Do you have an understanding of what the
allegations are in this action?
A.
No.
Q.
Do you have an understanding of what the claims are
in this action?
A.
No.
Q.
Do you have an understanding of who the class is,
the proposed class is, in this action?
A.
Just by this [referring to the Second Amended
Complaint]. No.
***
Q.
. . . And it says [referring to Silver’s verification of
interrogatory responses], “I, Harold Silver, have read
the foregoing responses to Defendants’ first set of
15
Interrogatories to Plaintiffs and do swear under
penalty of perjury that they are true and correct to the
best of my knowledge and recollection.” Okay.
Now, what did you do, Mr. Silver, to make sure that
these responses were true?
A.
Nothing.
Q.
And what did you do to make sure that they were
correct, to the best of your knowledge and
recollection?
A.
Nothing.
(ECF No. 413-2 at 3, 11, 14.) Even Silver’s own counsel, at the end of the deposition,
could not elicit a helpful response:
Q.
I have a question for you, Mr. Silver.
A.
Sure.
Q.
Do you have an understanding as to whose behalf this
lawsuit is for?
[Objection.]
A.
For me.
Q.
Anyone else?
A.
No.
(Id. at 15.)
Not surprisingly, Plaintiffs’ Certification Motion contains a declaration from Silver,
attempting to explain his deposition testimony. (ECF No. 397-73.) Silver begins by
noting that he is 89 years old. (Id. ¶ 1.) He then goes on to explain that he “found the
process” of his deposition “to be long and confusing”:
The lawyers questioning me handed to me legal documents
16
several times and then asked me what I thought were
confusing questions about them. They asked me what
appeared to [be] the same question in different forms; they
confronted me with my prior answers and asked questions
about those; sometimes when they spoke there was more
than one question in the same sentence; the questions were
long and had lots of different phrases, including some with
legal terms which I thought I understood but maybe did not.
At the same time, my lawyer was saying “objection” quite
often. Sometimes he would say[,] “Objection, you can
answer the question[,]” as questions were posed to me, and
at the same time as I was being shown documents. At the
time, I was not sure whether I had seen those documents or
not or whether I had spoken to [class counsel] about them .
Because of my confusion, some of my answers were just
plain wrong.
I have reviewed my deposition transcript since my June 2
deposition. I think it has a lot of errors, where I thought I
understood the question, but now see that I did not.
Although I have not had a chance to review the entire
transcript of the approximately 6 hour deposition in detail,
one thing I saw that struck me. I was asked multiple times
whether I was or wanted to be a “class representative” and
in the heat of the deposition, I just did not understand what
that meant. The answer I gave was incorrect. As I have told
[class counsel] when we first met and many times since, I
want to help with the case in any way that I can. As far as I
know, I have done everything I have been asked to do in
that regard [and] will continue to do so.
(Id. ¶¶ 8–9.)
In the context of summary judgment, the Tenth Circuit is clear that declarations
contradicting one’s deposition testimony are highly suspect and may be disregarded
after considering the following factors: “[1] whether the [declarant] was cross-examined
during his earlier testimony, [2] whether the [declarant] had access to the pertinent
evidence at the time of his earlier testimony or whether the [declaration] was based on
newly discovered evidence, and [3] whether the earlier testimony reflects confusion
17
which the [declaration] attempts to explain.” Burns v. Bd. of Cnty. Comm’rs of Jackson
Cnty., 330 F.3d 1275, 1282 (10th Cir. 2003). T he Court sees no reason why these
same considerations should not apply to a class certification motion, and none of these
considerations favors Silver. His cross-examination elicited the same lack of
knowledge as the direct examination, there is no newly discovered evidence, and the
testimony does not reflect confusion. To be sure, Silver now claims he was confused,
but “his answers to the direct questions posed by counsel do not reflect any obvious
confusion.” Id.
“A lead plaintiff must . . . possess a minimum threshold of knowledge about the
case which, considering the nature of the claim, is sufficient to make reasonable
decisions at critical stages of the litigation.” Lapin v. Goldman Sachs & Co., 254 F.R.D.
168, 176 (S.D.N.Y. 2008). Plaintiffs have not demonstrated that Silver meets that
standard. The Court agrees with Defendants that Silver would not be an adequate
class representative. He will be dismissed as a named plaintiff.
4.
Adequacy of Class Counsel
When considering adequacy of class counsel, the Court “must consider”:
(i) the work counsel has done in identifying or investigating
potential claims in the action;
(ii) counsel’s experience in handling class actions, other
complex litigation, and the types of claims asserted in the
action;
(iii) counsel’s knowledge of the applicable law; and
(iv) the resources that counsel will commit to representing
the class[.]
Fed. R. Civ. P. 23(g)(1)(A). Furthermore, this Court “may consider any other matter
18
pertinent to counsel’s ability to fairly and adequately represent the interests of the
class.” Id. 23(g)(1)(B).
Defendants do not challenge Plaintiffs’ counsel’s experience with class actions,
knowledge of the applicable law, or resources, and the record demonstrates that these
considerations run in counsel’s favor. (See ECF Nos. 397-51, 397-52.) Defendants
instead focus their challenge on counsel’s investigation and subsequent handling of the
case. Specifically: (1) “for more than four years, Plaintiffs’ counsel propped up
Mr. Silver as a putative class representative, although they must have known (or should
have known with minimal diligence)” of his unsuitability; (2) Plaintiffs’ counsel
unsuccessfully opposed a motion to compel discovery responses, leading to a Rule
37(a)(5)(A) award of fees against Plaintiffs (see ECF Nos. 360, 377); and (3) Plaintiffs’
counsel allegedly failed to instruct Silver to preserve his tax returns, and Silver has
since shredded them. (ECF No. 413 at 34–37.)
The Court does not condone inadequate investigation or treating discovery
obligations lightly. Under the circumstances, however, the Court does not find that
these accusations, taken individually or collectively, disqualify Plaintiffs’ counsel.
Accordingly, the Court finds Plaintiffs’ counsel to be adequate and qualified to represent
the Class, and counsel is therefore appointed to do so.
D.
Rule 23(b)(3)
Plaintiffs have satisfied the Rule 23(a) factors. Plaintiffs must now establish that
their proposed class action matches one of the scenarios described in Rule 23(b).
Plaintiffs argue for the scenario described in Rule 23(b)(3): “questions of law or fact
19
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.” The Court will address these considerations in
turn.
1.
Predominance of Common Questions
Defendants argue that individual questions regarding damages predominate over
common issues. (ECF No. 413 at 38–54.) Evaluating this argument requires some
extended discussion of class action damages generally and Plaintiffs’ theory of
damages in this case.
Broadly speaking, class action damages generally fall into two categories:
aggregate damages (sometimes called classwide damages) and individual damages.
See William B. Rubenstein, Newberg on Class Actions § 12:2 (5th ed., Sept. 2015
update) (“Newberg”). Aggregate damages are, in essence, a lump sum awarded in
favor of the class, supposedly representing all of the harm done to the class, without
inquiring into any particular class member’s injury. Id. Individual damages, as the label
suggests, represent damages calculated according to individual class members’
respective circumstances. Id. Individual damages obviously increase the risk that
individual issues will predominate over common classwide issues, and so plaintiffs
seeking individual damages “must [demonstrate] a single or common method that can
be used to measure and quantify the damages of each class member.” Id. § 12:4
(emphasis in original).
Here, Plaintiffs have selected the aggregate approach, as detailed in their
20
expert’s (Cohen’s) report. (ECF No. 397-30.) Plaintiffs asked Cohen to calculate (1)
the “damages, if any, . . . incurred by the A-1 Unitholders from being forced to relinquish
their A-1 Units and receive either cash or O Units”; and (2) “the per unit damages
incurred by A-1 Unitholders from the difference in value between the initial $64.00 per
share acquisition offer price . . . and the final purchase price of $60.75 per share[,]
based on different assumptions about the share of that difference which is attributable
to the A-1 Units.” (Id. ¶ 10.)
Cohen’s analysis of the first question proceeded on the assumption that the
proper measure of damages is essentially as follows: On the date the A-1 Unitholders
were required to elect between Series O units or $60.75 in cash, what was the
difference between the value of an A-1 unit and the value of a Series O unit (for those
unitholders who took them) or $60.75 (for those who took cash)? (Id. ¶¶ 11–12.)
Cohen made his calculations based on the after-tax value of the A-1 units, Series O
units, and cash, “because a damages award will be made in cash and I need to
determine the cash-equivalent value of what was held before and after the [Merger].”
(Id. ¶ 12.)
Calculating after-tax value required three explicit assumptions about each A-1
unit holder’s tax status:
1.
all unitholders were subject to the highest federal marginal tax rate for
individuals in 2007 (35%);
2.
all unitholders were subject to the federal long-term capital gains rate in
2007 (15%); and
3.
all unitholders paid a “weighted average state tax rate” on ordinary income
21
and capital gains, respectively.
(Id. ¶¶ 18–19.) Implicit in Cohen’s analysis (because it receives no discussion) is the
additional assumption that no unitholder ever took deductions or offsets.
Calculating after-tax value also required a significant assumption about each
unitholders’ investment. Because calculating capital gains requires knowing the tax
basis of an A-1 unit, and because tax basis turns on the value of each unitholder’s
property at the time he or she contributed it to the REIT, Cohen assumed an average
basis for all A-1 units. (Id. ¶¶ 32–33.)
Cohen, furthermore, was required to split his valuation into two categories: one
for A-1 units that would eventually generate taxable gains (itself requiring a further
assumption about “when and how the taxpayer will eventually pay the capital gains
tax”), and another for A-1 units on which no capital gains tax would be assessed
(because, e.g., the unitholder could die, triggering a tax basis step-up for his or her
heirs). (Id. ¶¶ 42–43.) Working from these and other assumptions, Cohen determined
that each A-1 unit was worth $29.79 if taxes were eventually assessed, and $46.65 if
taxes could be permanently deferred. (Id. ¶ 45.)
Cohen then went on to apply some of these assumptions, and yet more
assumptions, to estimate the value of a Series O unit. Of particular importance was an
assumption that, beginning in 2012, no Series O unitholder would hold such a unit for
more than three additional years, and so “one-third of shareholders would redeem their
shares in each of [2012, 2013, and 2014].” (Id. ¶ 55.) This, among other things, led
Cohen to value the Series O unit at less than zero, specifically, –$1.60. (Id. ¶¶ 55–56.)
22
In the end, Cohen’s damages calculation ranges from approximately $661 million to
almost $1.4 billion. (Id. ¶ 64.)
Cohen’s analysis goes on to additional issues, but the foregoing is enough to
frame the parties’ arguments. Plaintiffs’ characterize Cohen’s analysis as “an empirical,
formulaic analysis by which damages can be calculated on a class-wide basis.” (ECF
No. 397 at 43.) Plaintiffs further state that “the use of aggregate damages is an
efficient class action mechanism that avoids manageability problems at trial.” (Id. at
42–43.) Defendants, by contrast, argue that any after-tax valuation “is an inherently
individual exercise that depends on each taxpayer’s unique circumstances.” (ECF No.
413 at 39.) Defendants insist that, in contrast to Cohen’s analysis, “[d]etermining the
actual total damages requires a bottom-up approach—incorporating the individual
considerations and adding up each individual’s damages, to reach a true total of
damages.” (Id. at 43.) At bottom, Plaintiffs and Defendants disagree over whether
aggregate damages can be the appropriate method for calculating damages in this
case.
Generally speaking, aggregate damages are “well-established” in the class
action case law and “[t]he fact that damage calculations would require individualized
inquiries does not defeat certification. Rather, as long as there is a common formula to
the class, predominance is satisfied.” Newberg § 12:5 (footnotes omitted). Indeed, the
Tenth Circuit recently affirmed a class-action verdict where the plaintiffs’ expert used
statistical extrapolation “to approximate damages.” In re Urethane Antitrust Litig., 768
F.3d 1245, 1257 (10th Cir. 2014), petition for cert. filed (No. 14-1091, Mar. 10, 2015).
23
The question, then, is whether Plaintiffs have presented “a common formula to
the class” that “approximate[s] damages.” The answer is no. “Approximate” is
obviously a flexible word. Courts have said, for example, that “the damages awards
[must] roughly reflect the aggregate amount owed to class members.” Seijas v.
Republic of Argentina, 606 F.3d 53, 58–59 (2d Cir. 2010). But “roughly” is no more
helpful than “approximate.” That said, when aggregate damages calculations are
admittedly “inflated” and “likely to result in an astronomical damages figure that does
not accurately reflect the number of plaintiffs actually injured by defendants and that
bears little or no relationship to the amount of economic harm actually caused by
defendants,” such damages are not an appropriate basis on which to certify a class
action. Id. (internal quotation marks omitted).
Considering all of the circumstances, the Court concludes that Cohen’s analysis
does not “approximate” any damages Defendants may owe. Cohen’s estimates turn on
several momentous assumptions, to the point where there can be no confidence that
his final figures are anywhere close to the harm the Class allegedly suffered. For
example, it is beyond belief that not one of the 800+ Class members had tax
deductions or offsets during the relevant time period. Closely related to the foregoing is
the fact that applying (assumed) marginal tax rates is almost never likely to be accurate
given the many ways that an individual’s effective tax rate can vary from year to year. A
“weighted average tax rate” is also particularly troubling, as is Cohen’s assumption that
all A-1 unitholders had the same tax basis in the properties they contributed to the
REIT. Potentially hundreds of millions of dollars are at stake in every one of these
assumptions.
24
In sum, Plaintiffs have failed to demonstrate that aggregate damages are
appropriate under the circumstances, and the very assumptions Cohen was required to
make show that individual damages issues would surely overwhelm common issues
(i.e., of liability) if this class action were certified as to both liability and damages. The
Court therefore will not certify this proposed class action on the question of damages.
Cf. Jacob v. Duane Reade, Inc., 293 F.R.D. 578, 588 (S.D.N.Y. 2013) (“there are due
process implications for defendants, which render the so-called ‘trial by formula’
approach, whereby representative testimony is utilized to determine damages for an
entire class, inappropriate where individualized issues of proof overwhelm damages
calculations”), aff’d, 602 F. App’x 3 (2d Cir. 2015); see also Kase v. Salomon Smith
Barney, Inc., 218 F.R.D. 149, 157 (S.D. Tex. 2003) (finding “the issue of damages . . .
not well suited for class treatment” where it would “necessitate examining [individual
plaintiffs’] tax returns for every year within the class period”).
Nonetheless, this Court may still certify as to the question of liability only. See
Fed. R. Civ. P. 23(c)(4) (“When appropriate, an action may be brought or maintained as
a class action with respect to particular issues.”); Wallace B. Roderick Revocable Living
Trust v. XTO Energy, Inc., 725 F.3d 1213, 1220 (10th Cir. 2013) (“at the outset, a class
may be certified for liability purposes only, leaving individual damages calculations to
subsequent proceedings” (internal quotation marks omitted)); Newberg § 4:54 (“a class
may also be certified solely on the basis of common liability, with individualized
damages determinations left to subsequent proceedings”). The Court will therefore
continue with its analysis to determine if a class action would be the superior method
25
for judging liability.5
2.
Superiority of a Class Action
Defendants argue that “[t]he putative class members are already organized into
partnerships” which “provide a natural organizational structure for the putative class
members that completely eliminates the need for the class action mechanism.” (ECF
No. 413 at 54–55.) Defendants further argue that, under Plaintiffs’ own damages
theories, the available recovery to the various partnerships is quite high, and therefore
supposedly a sufficient incentive for individual lawsuits. (Id. at 55–56.)
All of this may be true, but Plaintiffs claim, with colorable support, that the
theories of liability they propose are the same as to all partnerships (ECF No. 397 at
40–42), and Defendants do not attempt to refute this. It would thus be more efficient to
resolve liability questions as to all partnerships at once rather than in separate
proceedings. Accordingly, the Court finds that a class action would be superior to
individual lawsuits on the question of liability.
5
The parties spar over the meaning and application of the Supreme Court’s recent
decision in Comcast Corp. v. Behrend, 133 S. Ct. 1426 (2013). (Compare ECF No. 397 at
46–48 with ECF No. 413 at 43–47.) Comcast is an enigmatic opinion. See Newberg § 4:54
(discussing various views of and difficulties with the Comcast opinion). At its broadest,
Comcast could be read to state that class certification is impossible (even as to liability) without
a common damages formula applicable to all class members. See Jacob, 293 F.R.D. at 581,
583 (exploring this view). The Tenth Circuit, however, continues to endorse the possibility of
certifying a class as to liability only if individualized damages issues would otherwise
predominate. See Wallace B. Roderick, 725 F.3d at 1220. Moreover, the Tenth Circuit has
interpreted Comcast fairly narrowly. See Urethane, 768 F.3d at 1258 (stating that Comcast
“was premised on the majority’s conclusion that,” given certain circumstances unique to that
case, “without a way to measure damages on a class-wide basis, individualized questions
would inevitably overwhelm questions common to the class” (internal quotation marks omitted)).
The Court therefore finds that Comcast is no barrier to considering partial certification.
26
E.
Scope of Certification
The Court will certify the Class as proposed by Plaintiffs on the question of
liability. Plaintiffs propose, however, that the Court should also certify the class at least
as to unjust enrichment damages, which Cohen calculated simply by multiplying the
number of A-1 units by $3.25 (the difference between the original offer price of $64.00
per share and the ultimate price of $60.75 per share). (ECF No. 424 at 9, 30.) Given
the history of this case and the parties’ willingness to fight most every issue, the Court
is frankly concerned that a distinction between unjust enrichment damages and other
damages would become just another battleground. In addition, without prejudging the
issue, the Court is not convinced that Plaintiffs are entitled to unjust enrichment
damages without first resolving liability and damages on their other theories. And
finally, if it eventually appears that Plaintiffs may indeed recover on an unjust
enrichment theory, and if Cohen’s simple calculation turns out to be the appropriate
measure, then certifying the class as to that particular matter would be a fairly simple
process at a later date.
Nonetheless, the Court understands that Plaintif fs’ unjust enrichment theory
turns in part on how much of the $3.25 price drop was attributable to the A-1 units’ tax
protected status. (See ECF No. 397-31 ¶ 63.) Although that factors into Cohen’s
unjust enrichment damages calculation, the Court does not mean to foreclose discovery
on that question, because it is also relevant to the question of liability (i.e., if the price
drop was not at all attributable to the A-1 units’ tax protected status, then it would
appear that Plaintiffs’ unjust enrichment theory fails).
Finally, certifying as to liability only does not foreclose arguments from
27
Defendants that Plaintiffs could not have been damaged under any conceivable
circumstance. (See, e.g., ECF No. 413 at 29 (arguing that “Series O Unitholders likely
suffered no conceivable damages” because of Series O units’ current value).) Again,
such an argument goes to liability as well, and therefore remains a valid area to explore
in this phase of the case.
III. RULE 72(a) OBJECTION ANALYSIS
Following Silver’s deposition, Plaintiffs naturally began to worry about whether
this Court would confirm him as an appropriate class representative. Out of caution,
Plaintiffs then moved to amend the complaint to add a new named plaintiff. (ECF No.
391.) This Court referred to that motion to the Magistrate Judge. (ECF No. 392.) The
Magistrate Judge denied the motion, reasoning that if Silver is indeed vulnerable to
attack, Plaintiffs’ counsel should have known that long ago. (ECF No. 393 at 2.) The
Magistrate Judge further found that allowing amendment would unduly delay the case
given that Plaintiffs’ class certification motion was due the following week. (Id. at 2–3.)
Plaintiffs filed a Rule 72(a) Objection to the Magistrate Judge’s ruling. (ECF No.
399.) Plaintiffs nonetheless stated that the relief they request “may well be mooted by
the Court’s decision” on the Certification Motion. (Id. at 2.) Elaborating, Plaintiffs stated
that
it isn’t necessary for the Court to decide Plaintiffs’ objection
at this time. Mr. Silver is an adequate class representative.
Even if the Court determines otherwise, there are two other
named plaintiffs. One of them (Infinity Clark Street
Operating LLC) received Series O Units like Mr. Silver. The
other (Steven A. Stender) received cash. Either Plaintiff can
represent the Class as a whole in that both have the same
interest in proving Defendants’ liability. Thus, Plaintiffs
28
believe that the need for an additional Plaintiff will never
come to pass.
(Id. at 3–4 (footnotes omitted).)
Given that the Court has approved of Stender and Infinity as class
representatives, the Court accepts Plaintiffs’ invitation to overrule their objection as
moot.
IV. CONCLUSION
For the reasons set forth above, the Court ORDERS as follows:
1.
Plaintiffs’ Motion for Class Certification (ECF No. 396) is GRANTED as to liability
questions and otherwise DENIED;
2.
The Court CERTIFIES the following class: “All persons or entities who owned
Class A-1 common units of the Archstone-Smith Operating Trust, an umbrella
partnership real estate investment trust, at the time of the Merger”;
3.
Pursuant to Federal Rule of Civil Procedure 23(g), Wexler Wallace LLP and
Squitieri & Fearon, LLP, are APPOINTED as class counsel;
4.
Plaintiff Harold Silver is DISMISSED as a named plaintiff and the case caption
shall so reflect in future filings;
5.
Plaintiffs’ Objection to Magistrate Judge Watanabe’s July 23, 2015 Order (ECF
No. 399) is OVERRULED AS MOOT; and
6.
The Archstone Defendants' Request for Oral Argument (ECF No. 430) on
Plaintiffs’ Motion for Class Certification is DENIED AS MOOT.
29
Dated this 28th day of September, 2015.
BY THE COURT:
_________________________
William J. Martínez
United States District Judge
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