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District Courts With Diversity Jurisdiction To Use Federal Rules For Class Actions Even When Underlying Lawsuit is Based On State Law

On March 31, 2010, the Supreme Court ruled that a Federal Court hearing a case based on diversity jurisdiction may certify a class action under the Federal Rules of Civil Procedure, even though the underlying lawsuit is based upon a state law claim. Shady Grove Orthopedic v. Allstate Insurance (No. 08-1008), 2010 WL 1222272, ____ U.S. ____ (2010).

Shady Grove Orthopedic Associates provided medical care to a patient who was injured in an automobile accident. As part of her payment, the patient assigned her rights to insurance benefits under an Allstate Insurance Co. policy to Shady Grove. The policy was governed by New York law. As such, Allstate had 30 days to pay Shady Grove’s claim. Allstate paid, but not within the 30 days. Allstate then refused to pay the required statutory interest.

Shady Grove sued in the Eastern District of New York. The District Court had jurisdiction based on diversity of citizenship. Shady Grove’s claim was for about $500. Shady Grove, however, brought its claim as a class action seeking to recover on behalf of itself and a class of others to whom Allstate owes interest.

New York prohibits class action suits seeking penalties or statutory minimum damages. N.Y. Civ. Prac. Law Ann. § 901. The District Court, sitting in diversity, found that the statutory interest was a penalty and dismissed the case. The Second Circuit affirmed finding that Federal Rule of Civil Procedure 23 did not conflict with §901(b) and that §901(b) was substantive with in the meaning of Erie R. Co. v. Tompkins, 304 U.S. 64 (1938). Specifically, the Second Circuit found that the rules do not conflict because §901 dealt with the particular type of claim that is eligible for class treatment where Rule 23 dealt with the criteria for determining whether a class can and should be certified. Therefore, the Second Circuit decided §901 must be applied by a Federal Court sitting in New York with diversity jurisdiction despite the existence of Federal Rule of Civil Procedure 23.

The Supreme Court found that Fed. Rule Civ. Proc. 23(b) “creates a categorical rule entitling a plaintiff whose suit meets the specified criteria to pursue his claim as a class action.” As such “Rule 23 provides a one-size-fits-all formula for deciding the class-action question.” The Court also found that New York’s §901(b) addresses the same question, but “it states that Shady Grove’s suit ‘may not be maintained as a class action’ because of the relief it seeks.” (Emphasis added by the Court.) Since Rule 23 would permit the class and §901(b) prohibits the class, the Court found that the two rules conflict. Therefore, §901(b) “cannot apply in diversity suits unless Rule 23 is ultra vires.” Since it is well with in Congress’s power to determine what cases the Federal Courts hear, Rule 23 is not ultra vires.

The Court reinforced its decision with the text of the rules and called the Second Circuit’s line between eligibility and certifiability “entirely artificial”. Importantly, the Court found that Rule 23 explicitly authorizes a federal court to certify a class by stating “if the prescribed preconditions are satisfied ‘[a] class action may be maintained.’” (Emphasis added by the Court.) The term “may”, as used in Rule 23, gives discretion to the plaintiff, not a court, as it is the litigants who maintain actions. Since Rule 23 and §901 both addressed under what circumstances a class action could be maintained, the rules conflicted. Thus, when a plaintiff brings a class action, even if his claim is based on diversity jurisdiction, “like the rest of the Federal Rules of Civil Procedure, Rule 23 automatically applies ‘in all civil actions and proceedings in the United States district courts.”

Jason B. Desiderio, Esq.

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