S.D.N.Y. Judge Denies Class Certification in Fair Housing Act Suit against Morgan Stanley

By: Andrew C. Glass, Roger L. Smerage, Eric W. Lee

The United States District Court for the Southern District of New York recently denied class certification in a Fair Housing Act disparate-impact case in which plaintiffs attempted to hold Morgan Stanley liable for investing in subprime mortgage loans that another entity originated. Adkins v. Morgan Stanley, No. 12-CV-7667, 2013 WL 3835198 (S.D.N.Y. May 14, 2013).

Plaintiffs sought to certify a class comprised of all African-American individuals in the Detroit area who received allegedly high-risk loans from the now-defunct New Century Mortgage Company (“New Century”) between 2004 and 2007. Plaintiffs alleged that Morgan Stanley should be held responsible for disparate-impact claims stemming from the subprime loans New Century originated because Morgan Stanley, as an underwriter of New Century securitizations, exerted significant influence on New Century’s loan origination practices.

In denying class certification, the court concluded that the named plaintiffs’ claims were not typical of those of the putative class and that common questions did not predominate over individual ones. Relying on the United States Supreme Court’s decision in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (U.S. 2011), the court ruled that typicality and predominance were lacking because of the discretion mid-level New Century employees and myriad independent brokers exercised in the loan-origination process. On those bases, the court found that plaintiffs failed to satisfy the requirements of Rules 23(a) and 23(b)(3) of the Federal Rules of Civil Procedure necessary to warrant certification of a class. The court noted that its denial of class certification likely constitutes a “death knell” for the plaintiffs’ lawsuit and that appellate review pursuant to Rule 23(f) may therefore be appropriate.