On February 13, 2019, the Seventh Circuit in Red Barn Motors, Inc., et al. v. NextGear Capital, Inc., rejected the defendant’s argument that a class could not be certified in a case involving contract interpretation because the court would need to consult extrinsic evidence to interpret allegedly ambiguous form contracts between each class member and the defendant. What doomed the argument? Both sides advocated for uniform—albeit different—contractual interpretations, which left no place for class-member-specific extrinsic evidence that might suggest varied interpretations.
The Red Barn case arises from a series of financing agreements entered into between several used car dealerships and NextGear Capital Inc., a lender that provided the dealerships with lines of credit used at auctions to purchase vehicles that the dealership then resold. According to the dealerships, under normal circumstances, the lender will pay the auction company once the auction bid is accepted and the dealership takes possession of the vehicle. The dealership plaintiffs in Red Barn, however, allege that NextGear deviated from this standard practice, and paid the auction company only after it received title to the acquired vehicles, which could take as long as two months. Meanwhile NextGear—before paying the money—allegedly charged interest and fees to the dealerships from the date of the initial purchase. The dealership plaintiffs brought a proposed class action alleging breach of contract, fraud, and RICO violations (among other claims) against NextGear to recover the fees and interest they allege were improperly assessed.
On June 29, 2017, the district court granted class certification, finding that Federal Rules of Civil Procedure 23(a) and 23(b)(3) were satisfied. NextGear moved for reconsideration on grounds that the court declined to consider evidence submitted after the initial class certification briefing. Specifically, NextGear claimed the plaintiffs had argued in summary judgment briefing that the financing agreements were ambiguous and—according to NextGear—this meant that, to interpret the contracts, the court would need to look to extrinsic evidence regarding party intent on a plaintiff-by-plaintiff basis. The district court accepted NextGear’s argument and decertified the class, holding “the Court agrees with the Defendants that ambiguity in the contracts requires consideration of extrinsic evidence, necessitates individualized proof, and undermines the elements of commonality and predominance for class certification.”
The Seventh Circuit reversed, holding that because the contracts are form contracts, and each side argued for an interpretation that would apply to all signatories of the contracts, contract interpretation would be capable of resolution on a class-wide basis. In its reversal, the Seventh Circuit relied on the Supreme Court’s holding in Wal-Mart Stores, Inc. v. Dukes, finding that—extrinsic evidence aside—“[t]he proper focus for commonality is whether determination of the question will yield common answers that could resolve the litigation.”
Adam E. Polk is a partner with Girard Sharp LLP in San Francisco, California.
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