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Bell v. Brockett

United States Court of Appeals, Fourth Circuit

April 25, 2019

KENNETH D. BELL, in his capacity as court-appointed Receiver for Rex Venture Group, LLC d/b/a ZeekRewards.com, Plaintiff - Appellee,
v.
DURANT BROCKETT, Defendant-Appellant, and RONALD COX; FRANK SCHEUNEMAN; THERESA BRIDIE; MARC KANTOR; PAOLA KANTOR; TIM RICE; WAYLAND WOODS; T.H.; EDWARD ROURKE; EDDY LAYNE; CLYDE GARRETT; LARRY ALFORD; AARON PIHA, Movants - Appellants, and EDDY LAYNE; CLYDE GARRETT; LARRY ALFORD; AARON PIHA, Parties Below - Appellants, and TODD DISNER; TRUDY GILMOND; TRUDY GILMOND, LLC; JERRY NAPIER; DARREN MILLER; RHONDA GATES; DAVID SORRELLS; INNOVATION MARKETING LLC; AARON ANDREWS; SHARA ANDREWS; GLOBAL INTERNET FORMULA, INC.; T. LEMONT SILVER; KAREN SILVER; MICHAEL VAN LEEUWEN; DAVID KETTNER; MARY KETTNER; P.A.W.S. CAPITAL MANAGEMENT LLC; LORI JEAN WEBER; A DEFENDANT CLASS OF NET WINNERS IN ZEEKREWARDS.COM; DEFENDANT CLASS, Defendants.

          Argued: January 29, 2019

          Appeal from the United States District Court for the Western District of North Carolina, at Charlotte. Graham C. Mullen, Senior District Judge. (3:14-cv-00091-GCM)

         ARGUED:

          Paul Augustus Capua, CAPUA LAW FIRM, PA, Boone, North Carolina, for Appellants.

          Irving Michael Brenner, MCGUIREWOODS LLP, Charlotte, North Carolina, for Appellee.

         ON BRIEF:

          Tarya Arnshelic Tribble, TRIBBLE LAW CENTER, PA, Riverview, Florida, for Appellants.

          Kenneth D. Bell, Charlotte, North Carolina, Jacob D. Charles, MCGUIREWOODS LLP, Raleigh, North Carolina, for Appellee.

          Before NIEMEYER, KEENAN, and QUATTLEBAUM, Circuit Judges.

          QUATTLEBAUM, CIRCUIT JUDGE:

         This case involves one of the rarest types of complex litigation, the defendant class action. Defendant class actions are so rare they have been compared to "unicorns." CIGNA HealthCare of St. Louis, Inc. v. Kaiser, 294 F.3d 849, 853 (7th Cir. 2002).[1] In this case, members of the defendant class argue that the district court erred in certifying the class without simultaneously appointing counsel for the class and in failing to properly analyze the adequacy of class counsel. We agree that the district court failed to follow Federal Rule of Civil Procedure 23 on both of these issues. While these errors would prove fatal to the certification of a class in most instances, we nevertheless affirm the district court due to the unique circumstances of this case.

         I.

         We begin with a review of the factual and procedural background that brings us to this appeal. Because of its importance to our conclusion, we describe this history in detail.

         This case involves an alleged Ponzi scheme operated by Rex Venture Group, LLC ("RVG"). In 2011, RVG launched ZeekRewards ("Zeek"), the "private, invitation-only Affiliate advertising division" of Zeekler.com. Zeekler.com was an online auction website. In theory, Zeek offered participants ("Affiliates") an opportunity to share in RVG's revenues, including revenues from its online auction business. Affiliates purchased VIP bids, which entitled them to VIP points. The number of points an Affiliate purchased determined his or her share of the daily earnings or profits of RVG to which Affiliates were entitled. More points entitled Affiliates to a greater share of RVG's earnings or profits. Affiliates could earn benefits and money from RVG in other ways as well, either by recruiting new Affiliates to Zeek or signing up for a subscription.

         While Zeek theoretically allowed Affiliates to share in the earnings of RVG, its online auction business generated only minimal revenue. In reality, an Affiliate only made money when other Affiliates purchased VIP bids or subscriptions generating funds for distribution. In other words, the business model necessarily robbed Peter to pay Paul. The problem with this model was that, without material revenue from the auction portion of the business, Zeek depended on signing up new Affiliates who would purchase VIP bids or subscriptions. If sign ups of new Affiliates slowed down or ultimately stopped, there would be no source of money for Affiliates, especially those that joined Zeek later, to recoup their investment.

         Predictably, the addition of new Affiliates did in fact slow down. As a result, some Affiliates were net losers, receiving less money than they paid into Zeek ("Net Losers"), and some Affiliates were net winners, receiving more money than they paid into Zeek ("Net Winners"). According to one expert, nearly 90% of Affiliates were Net Losers, losing approximately $822.9 million. Nearly 8% of Affiliates were Net Winners, receiving approximately $282.1 million in profits. Of these Net Winners, the expert determined that 14, 700 individuals received at least $1, 000 more in payments from Zeek than they paid into Zeek. On the high end of the spectrum, some received over $1, 000, 000.

         After the SEC filed an enforcement action to shut Zeek down and freeze RVG's assets, the district court appointed Kenneth Bell as the Receiver for Rex Venture Group, LLC d/b/a www.ZeekRewards.com ("Bell"). On February 28, 2014, Bell filed a defendant class action against the Net Winners of the Zeek scheme under the theory that the net winnings of the class were improper gains from a Ponzi scheme and that the gains should be recovered and returned to the Net Losers. Bell sought to certify the defendant class under Rules 23(a), 23(b)(1)(A) and 23(b)(1)(B). Bell asserted that the named defendants in the action should be appointed class representatives of the Net Winner class.

         On July 30, 2014, Bell moved to certify the defendant class. Bell proposed a class definition "consisting of all persons or entities who were Net Winners in ZeekRewards . . . of more than one thousand dollars ($1000) (the 'Net Winner Class') . . . ." J.A. 493. In moving to certify the class, Bell argued that the proposed class representatives and their counsel would provide fair and adequate representation of the defendant class's interests under Rule 23(a)(4). Regarding the proposed class counsel specifically, Bell argued that "counsel retained by the proposed Class Representatives are experienced and qualified attorneys, fully capable of protecting the interests of their clients and consequently the class." J.A. 502. Bell also argued that "by virtue of defending themselves, the named Defendants will inevitably and fully litigate the merits of the claims against the other class members." J.A. 659.

         Some of the named defendants opposed class certification. On August 29, 2014, several filed an opposition to Bell's motion for certification arguing that the putative class could not satisfy several of the requirements of Rule 23. Their objections were primarily economic. These named defendants argued that the proposed class representatives could not afford to fairly represent the class. Arguing against adequacy on cost grounds, these defendants catalogued the extensive costs imposed upon the proposed class representatives and class counsel:

To represent the class, defense counsel would need to obtain, conduct, and review discovery pertinent not just to [these defendants], but to the class members . . . . If the Court certifies a class, the problem of class counsel providing free services to the class members and the Receiver will compound. After certification, Defendants will need to brief and litigate a number of issues related to discovery, summary judgment, experts, and other matters, as well as potentially try a case . . . . If [these defendants] received an adverse decision on these questions, particularly certification, [these defendants] would be obligated to immediately appeal on behalf of themselves or the members, solely to clarify the law at the earliest possible stage and fully protect all members' rights.

J.A. 626-29. Significantly, the named defendants did not address the due process concerns related to defendant class actions, including whether the court could properly assert personal jurisdiction over the absent class members or whether absent class members should have notice or opt out rights.

         On February 10, 2015, the district court certified the defendant class under Rules 23(a) and 23(b)(1). In certifying the class, the district court determined that the class representatives and their counsel would adequately represent the class. However, the district court did not appoint class counsel at that time. Instead, it held that counsel for the named defendants are "fully capable of protecting the interests of their clients and consequently the class." J.A. 742. It likewise did not address personal jurisdiction or opt out issues.

         Although not required under Rule 23(b)(1), the district court approved a notice of class certification. The notice described the certification decision and notified class members of their membership in the class. Describing the effect of the certification decision on class members, the notice provided that "[t]he Court has not yet ruled on the merits of the claims in this lawsuit; however, when it does so, its orders will be legally binding upon you and all other members of the Net Winner Class." J.A. 759. Regarding the role of class members in the liability determination, the notice stated that "[y]ou are not required to and there should be no need for you to participate in the legal proceedings related to answering the common questions for the Net Winner class." J.A. 759. Regarding the role of class members in the damages determination, the notice provided:

You will, however, have an opportunity to participate in the process if the Net Winner Class is found to be required to repay their net winnings. If liability is found, the Receiver intends to seek a court Judgment against each class member in the amount of their individualized net winnings plus interest . . . . While the specifics of the process for determining those amounts has not yet been decided, the Receiver intends to seek a process that will notify you of the amount of your net winnings according to RVG records, allow you a reasonable ...

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