H&R Block removes Madison County class action based on CAFA

Steve Korris Aug. 27, 2008, 1:19am

After Madison County Associate Judge Ralph Mendelsohn expanded a Lakin Law Firm class action that H&R Block Tax Services asked him to decertify, Block removed it to federal court as a new action.

Mendelsohn himself commenced the new action in an Aug. 5 order that decertified a defendant class and redefined three plaintiff classes, according to Block.

In an Aug. 18 removal notice Jason Rankin of Edwardsville wrote that Mendelsohn's order added new claims against Block Tax Services and expanded its potential liability.

Rankin wrote that the order would include independent franchise holders who own and operate 1,594 tax offices.

A day after removing the suit to U.S. district court in East St. Louis, Rankin moved to vacate Mendelsohn's order.

The Lakin firm filed the suit in 2002 for Lorie Marshall, alleging that Block sold "peace of mind" warranties that customers did not need.

Marshall sued a number of H&R Block affiliates.

In 2003 Mendelsohn certified a class action in 30 states and the District of Columbia, for transactions since Jan. 1, 1997.

He certified a class of customers who paid a separate fee, a class Block charged for unsolicited warranties, and a class that bought warranties as unregulated insurance.

He certified a defendant class, with H&R Block Tax Services as class representative.

In 2006 Block moved for decertification.

Block argued that the case matched Avery v. State Farm, an Illinois Supreme Court decision rejecting a $1.2 billion verdict.

At a July 9 hearing, defense attorney Larry Hepler of Edwardsville told Mendelsohn that both sides agreed that he should decertify the defendant class.

Hepler said Block paid $192 million to customers with peace of mind warranties.

He said individual issues predominated over common questions.

"Did they file a claim? Was the claim paid? Did we provide an audit?" Hepler asked.

Dan Cohen of the Lakin firm said, "Block is selling a product to millions of people a year knowing that a few thousand of those millions will need it."

Cohen said experts could tell the value of the warranties.

"They can tell us whether this is overpriced," Cohen said.

"It was by no means worth what it was sold to for anyone.

"A hundred ninety two million dollars paid out on a six hundred million take is not an acceptable loss ratio."

Mendelsohn rounded $192 million to $200 million and said it was 33 percent of $600 million.

Cohen said $600 million was considerably underestimated.

He said he believed it was more than $800 million.

He told Mendelsohn he could reduce the classes from 30 states to 13.

He said that would still incorporate most of the warranties in the

Mendelsohn asked both sides to prepare orders.

Cohen prepared an order defining H&R Block Tax Services as the only defendant and holding it liable for actions of affiliates.

Cohen's order narrowed his reach from 30 states to 13.

Mendelsohn adopted Cohen's order, triggering removal.

Rankin wrote, "Plaintiffs previously had not sought to impose liability against Block Tax Services for the acts of any or all affiliated entities in separate Peace of Mind transactions in which Block Tax Services was not involved."

The Class Action Fairness Act requires removal if a new cause of action does not relate back to the original cause, he wrote.

"Under Illinois law, where an amendment alleges that a defendant is liable for the actions of another, and previously the defendant had been alleged liable for its own actions, there is no relation back," Rankin wrote.

The court assigned the case to District Judge William Stiehl, but he recused himself.

The court then assigned it to District Judge Michael Reagan.

On Aug. 20, Paul Weiss of Chicago entered the first appearance for Marshall.

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