Federal judge rejects certification of LakinChapman case against H&R Block

By Steve Korris | Sep 24, 2010


EAST ST. LOUIS - U.S. District Judge Michael Reagan rejected a LakinChapman class action against H&R Block Tax Services on Sept. 17.

LakinChapman sought to represent about seven million taxpayers in 11 states, claiming Block deceived customers into buying "Peace of Mind" coverage they didn't need.

Peace of Mind protects customers from Block's errors and changes in tax law.

"The sheer number of purchasers, sales, offices and preparers weighs against uniformity," Reagan wrote.

"In the 11 class states, more than 5,000 Block branded tax offices with more than 48,000 tax preparers operated during tax season 2009," he wrote.

He wrote that plaintiffs claimed all tax preparers followed a uniform script year after year, even after Block proved otherwise.

"First, the scripts varied in detail from year to year," he wrote.

"Second, and more importantly, the script is clearly a kickoff point for a conversation between the preparer and the client," he wrote.

"It defies common sense to suggest that these scripts would be read verbatim," he wrote.

He also found that variations in consumer protection laws and fiduciary laws among the states defeated class certification.

The former Lakin Law Firm sued H&R Block Tax Services in Madison County circuit court in 2002, offering Lorie Marshall and Debra Ramirez as class representatives.

They claimed the returns of most customers were so simple that the likelihood of owing extra tax due to an error by Block was remote.

Six months later, an amended complaint alleged four kinds of statutory fraud and breach of fiduciary duty.

Associate Judge Ralph Mendelsohn certified Marshall and Ramirez to lead the class, and he certified H&R Block Tax Services to represent all Block entities.

Later, Mendelsohn reduced the action to 11 states and decertified the defendant class.

Block claimed Mendelsohn's changes created a new case for purposes of the Class Action Fairness Act, which steers most new class actions to federal courts.

Block removed it to federal court, and Reagan remanded it to Madison County.

Block appealed, and Seventh Circuit judges in Chicago reversed Reagan.

He took the case back, ruled that Mendelsohn's certification didn't count, and prepared to decide it himself.

The brief he received from the plaintiffs didn't match their complaint.

They dropped most of their fraud claims and alleged deception by omission.

They argued that Block didn't disclose the likelihood of a claim, the amount of an average claim, or the commissions for preparers who sell Peace of Mind.

Reagan held a hearing in April, asked for more briefs, and made up his mind.

He quoted a federal rule providing for certification if a defendant has acted on grounds that apply generally to the class so that injunctive or declaratory relief is appropriate.

"The insurmountable hurdle plaintiffs face is that the first amended complaint, under which this action proceeds, contains no mention of injunctive or declaratory relief," he wrote.

"Interestingly, although Block devoted several pages in its response to the class certification motion to this issue, plaintiffs did not mention it in their 15 page reply," he wrote.

"So, Block threw down the gauntlet, and plaintiffs did not pick it up," he wrote.

"This court cannot certify a class based on theories or claims that plaintiffs did not plead – and apparently have no intention of pleading," he wrote.

"They have had ample opportunity to amend their complaint and have not done so," he wrote.

He wrote that consumer protection laws of the 11 states differ with respect to deceptive intent, damages, and statutes of limitations.

He also found material differences in fiduciary duty laws.

He wrote that plaintiffs cited no prior certification of a class addressing a breach of fiduciary duty in comparable circumstances.

"Plaintiffs have pointed to nothing in the testimony of the named plaintiffs that established any fiduciary or special relationship between themselves and their tax professionals or Block," he wrote.

"Plaintiffs have also failed to refute Block's contention that there was a lack of uniformity in consumers' Peace of Mind purchase decisions," he wrote.

He wrote that the value of Peace of Mind can't be decided on a class basis because of unique individual circumstances.

He wrote that Block expert Russell Sobel testified that Peace of Mind had significant value even for those who never filed a claim.

Sobel testified that purchasers of warranties, guarantees and insurance gain the benefit of feeling more secure and worrying less, he wrote.

Sobel testified that issues on returns of both plaintiffs increased the likelihood of audit, he wrote.

"Lastly, it is impossible to know, given the thousands of transactions involved, what individual tax preparers told Block clients regarding any of the purportedly omitted information," he wrote.

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