Class Action Defense Cases-Berenson v. National Financial: First Circuit Dismisses Interlocutory Appeal In Class Action For Lack Of Jurisdiction

Jun 11, 2007 | By: Michael J. Hassen

Federal Arbitration Act (FAA) Provision Allowing Appeals from Orders Denying Petitions to Compel Arbitration Inapplicable Where District Court Granted Defense Motions Dismissing Class Action Allegations in Putative Class Action Complaint and then Granted Defense Motion Compelling Arbitration

Plaintiffs filed a putative class action in the District of Columbia federal court against their broker, National Financial Services and Fidelity Brokerage Services (both subsidiaries of Fidelity Investments), alleging violations of the federal Electronic Funds Transfer Act (EFTA) and various state laws arising out of Fidelity’s failure to pay customers interest on the “float” of their funds from date they requested electronic transfer of funds to the date the funds were in fact transferred. Berenson v. National Fin. Servs. LLC, 485 F.3d 35, 36 (1st Cir. 2007). The class action complaint alleged that plaintiffs opened an account with Fidelity in the 1980s, id. The Fidelity account agreement contained an arbitration clause requiring arbitration of “all controversies” but forbidding either party in a putative class action from seeking to compel arbitration unless (1) class action treatment is denied, (2) the class action is decertified, or (3) the court excludes the customer from participating in the class action, id., at 37-38. After the class action complaint was transferred to the Massachusetts federal court, id., at 37 n.3, defense attorneys filed a series of motions attacking the pleadings and the class action allegations but “reserved the right to compel arbitration if class certification is denied,” id., at 38. Ultimately defense attorneys succeeded in defeating the class action allegations and moved to compel arbitration of the plaintiffs’ non-class claims. After the district court compelled arbitration, Fidelity sought appellate review of the court’s order granting summary judgment; the First Circuit dismissed the interlocutory appeal for lack of jurisdiction.

Plaintiffs began using the company’s electronic bill payment service in the mid-1980s, but after a period of time Fidelity contracted out this service and in 2000 entered into an agreement with CheckFree to handle the bill payment service using the “good funds” method, which the First Circuit summarized at page 37 as follows:

In that system, the customer’s request for payment triggers a debit against the payor’s account at 10 p.m. on the day the request is made; the money is then held in a Fidelity account until 1 p.m. the next day, when it is wired to CheckFree. If CheckFree has an agreement with the designated payee, it then wires the money directly to the payee; if there is no such agreement, CheckFree issues and mails a CheckFree corporate check to the payee. This method is known as the “good funds” model because debiting the payor’s account immediately assures that a payment is not made unless the customer has sufficient funds, eliminating the possibility that the payment will “bounce.” This benefit comes at a cost: the payor loses the opportunity to earn interest on the funds it has scheduled for payment during the period between 10 p.m. on the day payment is initiated and when it is received by the payee, i.e. the “float.”

Beginning in August 2000, plaintiffs began using the bill pay service to electronically transfer funds from their personal Fidelity account to their corporate Fidelity account, but “[b]ecause there was no agreement between Fidelity and CheckFree to directly transfer money, CheckFree issued corporate checks to effect those transfers, resulting in a delay between when the primary account was debited and the corporate account was credited.” Berenson, at 37. In 2002, plaintiffs contacted Fidelity and demanded the interest earned during the delay in transferring these funds from one of his accounts to the other; Fidelity refused to credit the account and a class action complaint followed. Id.

The class action allegations were that Fidelity violated the federal Electronic Funds Transfer Act (EFTA), 15 U.S.C. § 1693 et seq., because the interest retained on the “float” constituted a “fee” under the EFTA that Fidelity was required to disclose and because Fidelity failed to respond to plaintiffs’ demand for interest on the float within the 10-day error resolution period provided by the EFTA. Berenson, at 38. The complaint also alleged violations of Massachusetts’ Truth in Savings law and Consumer Protection Act, breach of fiduciary duty, and intentional or negligence misrepresentation. Id. While a defense summary judgment motion was pending, plaintiffs’ moved the court to certify the litigation as a class action; defense attorneys objected on the ground that plaintiffs could not adequately represent the class. Id., at 38-39. The district court proposed to try plaintiffs’ claims on the merits before deciding whether to certify a class action; defense attorneys did not object to this proposal. Id., at 39.

Ultimately, the district court ruled in favor of the defense on all aspects of the class action complaint save one – the failure to respond within 10 days to plaintiffs’ demand; the court found, however, that plaintiffs were not adequate class representatives because they failed to timely file their EFTA disclosure claim, which the court found to be barred by the applicable statute of limitations, and so it dismissed the class allegations. Berenson, at 39-40. With the class certification motion denied, defense attorneys moved to compel arbitration of plaintiffs’ sole remaining claim, id., at 40. The district court granted the motion, but thereafter issued its written order on Fidelity’s summary judgment motions, id. Defense attorneys asked the court to reconsider a portion of its written order, and following the district court’s denial of the motion Fidelity filed an interlocutory appeal under the Federal Arbitration Act (FAA), which provides that “[a]n appeal may be taken from an order denying a petition … to order arbitration to proceed.” Id. (citing 9 U.S.C. § 16(a)(1)(B)). Fidelity’s concern was that the arbitrator would rely on certain “substantive determinations” contained in the court order that Fidelity deemed erroneous, id., at 41.

The essence of the defense argument on appeal was that “once the district court entered its order to compel arbitration, it no longer had the authority to address the merits of any remaining claims.” Berenson, at 41. The First Circuit disagreed. The chronology clearly revealed that the district court granted summary judgment before compelling arbitration; the district court simply delayed issuing its order until after granting the motion to compel arbitration, id., at 42. Because the court order did not implicate the FAA’s concerns, the Circuit Court lacked jurisdiction over the appeal and ordered the appeal dismissed. Id., at 45.

NOTE: The Circuit Court also concluded that defense attorneys essentially invited any error by permitting the district court to try plaintiffs’ case on the merits before ruling on class certification and by seeking summary judgment on grounds that ”urged the court to make a broad array of merits judgments extending beyond the particular facts of the [plaintiffs’] claims.” Berenson, at 42. After a detailed analysis, the First Circuit held that “Fidelity has only itself to blame for this self-inflicted wound.” Id., at 45.

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