Federal appeals court kicks back H&R Block class action

By Steve Korris | Nov 20, 2009

CHICAGO – Madison County Associate Judge Ralph Mendelsohn accidentally turned a state class action against tax preparer H&R Block into a federal case.

Changes he approved in the suit require removal to federal court, judges of the Seventh Circuit appeals court recently ruled.

The Seventh Circuit reversed District Judge Michael Reagan of East St. Louis, who rejected jurisdiction when H&R Block removed the case from Mendelsohn's court.

Reagan reopened the case on Nov. 3, announcing he would not honor Mendelsohn's ruling on class certification.

He gave plaintiff lawyers at LakinChapman a month to file a brief on class certification, not to exceed 20 pages.

He set a class certification hearing on Jan. 29.

Plaintiff Lorie Marshall sued affiliates of H&R Block in 2002, claiming they charged improper fees for guarantees that they would cover the cost of any error.

In 2003, Mendelsohn certified three national plaintiff classes and a national defendant class.

In 2005, the Illinois Supreme Court in Avery v. State Farm prohibited multi-state class actions where differences in laws and claims made class action impractical.

Lakin lawyers responded by proposing to drop 37 states, decertify the defendant class, and dismiss all defendants but TSI, a franchisor of retail tax offices.

Mendelsohn adopted the proposal on Aug. 5 of last year.

TSI removed the case to federal court 13 days later, arguing it would bear liability for acts of all associates and affiliates.

TSI claimed its liability expanded so greatly that Mendelsohn started a new cause of action for purposes of the Class Action Fairness Act of 2005.

The act steers most new class actions to federal courts and triggers removal of an old case if changes turn it into a new cause of action.

TSI pleaded that Mendelsohn triggered removal.

Reagan didn't agree, but in August the Seventh Circuit corrected him.

Judge Richard Posner wrote, "The district court judge thought that only a formal amendment of the complaint could commence a new action for CAFA purposes, but that would place too much weight on form."

"Defendant classes are certified in order to facilitate the economical resolution of common issues rather than to alter the substantive rights of parties or class members," Posner wrote.

He wrote that "having lost the other defendants, the plaintiffs want to pin the entire liability of all the former members of the defendant class on TSI.

"They may, for all we know, be able to do so, but that will, so far as appears, enlarge TSI's liability," he wrote.

TSI estimated its additional potential liability at $60 million, he wrote.

"We can imagine a situation in which a defendant deliberately increases its potential liability in an attempt to be allowed to remove the case under the class action fairness act; but that is not argued," he wrote.

Chief Judge Frank Easterbrook and Judge John Tinder agreed.

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