Class action waiver held unenforceable

Where a waiver limiting the ability of borrowers to bring a class action suit did not allow them to vindicate their federal rights, it was unenforceable.

Background

This class-action proceeding relates to a lending scheme allegedly designed to circumvent state usury laws. Matt Martorello appeals from three district court rulings that (1) reconsidered prior factual findings based on a new finding that Martorello made misrepresentations that substantially impacted the litigation, (2) found that the borrowers did not waive their right to participate in a class-action suit against him and (3) granted class certification.

This court granted Martorello’s petition for permission to appeal. It has jurisdiction over the grant of class certification pursuant to 28 U.S.C. § 1292(e) and Federal Rule of Civil Procedure 23(f). It has pendent jurisdiction over the misrepresentation opinion because it is “so interconnected” with the class-certification opinion that it “warrant[s] concurrent review.”

Mandate

Martorello first contends that the district court violated this court’s mandate by making new factual findings in the misrepresentation opinion that contradict the record from the prior appeal.

Following this court’s mandate, the district court considered the borrowers’ evidence that Martorello made material misrepresentations to the district court and this court in the prior proceedings about facts relating to the entities’ sovereign immunity. The district court found that Martorello made misrepresentations in a declaration he filed in support of the entities’ motion to dismiss for lack of subject matter jurisdiction.

When new evidence indicates that a district court previously made erroneous factual findings based on fraud or misrepresentation, the district court may reconsider those findings as needed. Here, the district court found such fraud or misrepresentations and thus did not violate the mandate rule in reconsidering its prior factual findings.

Waiver language

Martorello contends that the borrowers waived their right to bring class-action claims against him. He asserts that the district court erred in concluding that the class-action waiver did not apply to disputes between him and the borrowers and in finding that the waiver was unenforceable due to the prospective waiver doctrine.

Under the waiver, the borrowers forfeit the right to participate in class actions filed against the lender or “related third parties.” The loan agreement defines “related third parties” as “any of Our employees, agents, directors, officers, shareholders, governors, managers, members, parent company or affiliated entities[.]”

Martorello contends he is an affiliated entity of the lenders and thus falls within this definition of a party immune to class-action proceedings. This court concludes that the term “affiliated entities” in the loan agreement does not refer to individuals.

Prospective waiver

The prospective waiver doctrine invalidates agreements that prospectively waive a party’s right to pursue statutory remedies in certain circumstances. Martorello asserts that the prospective waiver doctrine only applies to arbitration agreements and cannot be extended to any other agreement. But the rationale underlying the prospective waiver doctrine supports its application to non-arbitration contracts: a prospective waiver of federal statutory rights is unenforceable because it violates public policy. Martorello nevertheless claims that the borrowers could later sue in federal court, so  the prospective waiver doctrine does not apply. This court disagrees with Martorello’s contentions.

Turning to the application of the prospective waiver doctrine on the merits, this court concludes that the doctrine renders the class-action waiver unenforceable because the waiver itself, the loan agreement and the code provisions incorporated into the loan agreement make clear that the waiver does not permit the borrowers to effectively vindicate their federal rights.

Class certification

Martorello concludes his appeal by arguing that even if the borrowers did not waive their right to pursue their claims as a class action, the district court nevertheless abused its discretion in granting certification. He contends that individual, not common, questions of fact predominate and thus bar class certification. This court disagrees.

Affirmed.

Williams v. Martorello, Case No. 21-2116, Jan. 24, 2023. 4th Cir. (Agee), from EDVA at Richmond (Payne). Bernard R. Given II for Appellant. Matthew W.H. Wessler for Appellees. VLW 023-2-023. 43 pp.