TEXAS COURT OF APPEALS, THIRD DISTRICT, AT AUSTIN
NO. 03-02-00524-CV
Citizens Insurance Company of America; Citizens, Inc.; Harold E. Riley and Mark A. Oliver, Appellants
v.
Dr. Fernando Hakim Daccach, Appellee
FROM THE DISTRICT COURT OF TRAVIS COUNTY, 250TH JUDICIAL DISTRICT NO. 99-09099, HONORABLE SUZANNE COVINGTON, JUDGE PRESIDING
OPINION
Appellants Citizens Insurance Company of America (CICA), Citizens, Inc., Harold E. Riley
and Mark A. Oliver (collectively ACitizens@)1 bring this interlocutory appeal challenging the district court=s
order certifying a class action. See Tex. Civ. Prac. & Rem. Code Ann. ' 51.014(a)(3) (West Supp.
2003). The underlying suit was brought by appellee Dr. Fernando Hakim Daccach (ADr. Hakim@) against
appellants for selling securities from Texas without complying with the registration requirements of the Texas
Securities Act (the ASecurities Act@). See Tex. Rev. Civ. Stat. Ann. art. 581-33A(1) (West Supp. 2003);
1 CICA is a wholly-owned subsidiary of Citizens, Inc. Both are Colorado corporations with their principal place of business in Austin, Texas. Harold E. Riley and Mark Oliver are officers and directors of Citizens, Inc. and, as such, are Acontrol persons@ as defined by the Texas Securities Act. See Tex. Rev. Civ. Stat. Ann. art. 581-33F(1) (West Supp. 2003). see also 7 Tex. Admin. Code ' 139.7 (2002). In three issues, Citizens contends that the district court
abused its discretion in certifying the class because: (1) the class definition accepted by the district court fails
to presently and precisely ascertain the proposed class; (2) the district court conducted an inadequate
choice-of-law analysis; and (3) none of the class certification requirements of rule 42 were established. We
will modify the class definition, and as modified, affirm the district court=s certification order.
BACKGROUND
This case concerns certain life insurance policies (ACICA policies@) which Citizens sells only
to non-residents and non-citizens of the United States. The CICA policies all allow for the assignment of
policy dividends and other benefits to offshore trusts. The trusts use the assigned dividends and other
benefits to purchase common stock in Citizens, Inc. Although the CICA policies contain varying options
and features, they are all substantially identical with regard to the crediting, earning and payment of
dividends and benefits, and the policyholder=s right to elect assignment to the offshore trusts for the purpose
of purchasing stock in Citizens, Inc. Evidence in the record shows that in each year since 1996 there have
been approximately 30,000 policyholders and at least seventy-five percent of them have assigned their
policy dividends and other benefits to the offshore trusts. The average annual premium paid by each
policyholder has been approximately $2,000.
On August 6, 1999, the original two named plaintiffs brought a class action suit against
Citizens. Alleging numerous causes of action, their original petition principally complained that Citizens sold
life insurance policies Awhich could not be sold or approved for sale in the United States by any state
insurance or other regulatory agency and did not give the policyholders the rights, benefits and protections
2 of insurance policies approved for sale in the United States.@2 The plaintiffs requested on their behalf and on
behalf of similarly situated class members compensatory damages, punitive damages, interests, court costs,
and attorneys= fees.
2 Specifically, the plaintiffs alleged: (1) violations of the Texas Deceptive Trade Practices Act; (2) breach of contract; (3) fraud and fraud in the inducement; (4) negligent misrepresentation; (5) breach of duty of good faith and fair dealing; (6) violations of the Texas Insurance Code; (7) equitable reformation of the CICA policies; (8) conspiracy; and (9) unjust enrichment and the imposition of a constructive trust.
3 By the time that a sixth amended petition had been filed in December 2001, seven new
plaintiffs had been added to the lawsuit, including Dr. Hakim, a neurosurgeon at a teaching hospital in
Bogota, Colombia.3 However, the plaintiffs no longer seek class certification for any of the original causes
of action. Except for Dr. Hakim, the plaintiffs are bringing those claims against Citizens only in regards to
their individual CICA policies and are referred to as the Aindividual plaintiffs.@ Dr. Hakim, on the other
hand, has been designated the Aclass plaintiff@ and asserts only the class claims, which consist solely of
Citizens= liability for being an unregistered dealer of securities and selling securities from Texas in the form of
the CICA policies.4 See Tex. Rev. Civ. Stat. Ann. art. 581-33A(1).5 This theory was not part of the
original petition, but was added in plaintiffs= second amended petition. On behalf of the class, Dr. Hakim
complains that A[Citizens] has unlawfully avoided any regulation of the investment feature of the CICA
Policies@ and seek the remedy of statutory rescission or, in the alternative, statutory damages if they have
cancelled their CICA policies. See Tex. Rev. Civ. Stat. Ann. art. 581-33D(1), D(3) (West Supp. 2003).
3 Dr. Hakim purchased two of the CICA policies in 1993 and 1994. His dividends were transferred from Citizens= office in Austin to a trust in Panama to purchase stock in Citizens, Inc. 4 Four of the individual plaintiffs have also been designated as members of the class. 5 Article 581-33A(1) of the Texas Securities Act provides:
A person who offers or sells a security in violation of Section 7, 9 (or a requirement of the Commissioner thereunder), 12, 23C, or an order under 23A or 23-2 of this Act is liable to the person buying the security from him, who may sue either at law or in equity for rescission or for damages if the buyer no longer owns the security.
Tex. Rev. Civ. Stat. Ann. art. 581-33A(1) (West Supp. 2003). Section 12 prohibits an unregistered seller of securities from making Aa sale of any securities in this state.@ Id. art. 581-12A.
4 In response to Dr. Hakim=s class securities claims, Citizens filed a motion for summary
judgment arguing that the CICA policies do not qualify as securities under the Securities Act. The district
court denied Citizens= motion, concluding that the summary judgment evidence of the parties established the
existence of a genuine fact issue as to whether the CICA policies are securities under Texas law. The
district court then conducted a four-day hearing to consider Dr. Hakim=s amended motion for class
certification of the claims against Citizens for violations of the Securities Act. The court considered
documentary evidence as well as testimony from Dr. Hakim, officers and directors of the defendants, expert
witnesses concerning the securities allegations, and expert witnesses concerning the requirements to certify a
class. The court granted Dr. Hakim=s certification motion and issued a twenty-page certification order in
which it analyzed class definition, notice to the class, class certification requirements, predominance of
common issues of fact and law, and the superiority of adjudicating the securities claims in a class action.
Furthermore, the order contained a detailed ten-page trial plan in which the court stated that
it had developed Aan understanding of the issues and questions which will be decided by the jury and/or the
Court in the trial of the Class claims.@ The order presented four class-wide issues to be resolved at trial: (1)
whether a CICA Policy is a Asecurity@ pursuant to the Securities Act (including the question of whether the
CICA policies fall within an insurance exception to the Securities Act); (2) whether Citizens sold or offered
for sale the CICA policies from Texas; (3) calculation of the statutory remedy pursuant to the Securities
Act; and (4) attorneys= fees. The trial plan also discussed the nature of the class claims and defenses, the
type of evidence and expert testimony necessary to aid in the jury=s determination, and the proposed jury
questions and instructions for the first two issues listed above. Citizens disapproved of the certification
5 order in all respects and brought this appeal, arguing that the district court abused its discretion in granting
Dr. Hakim=s motion to certify his claims for class action.
REQUIREMENTS OF CLASS CERTIFICATION
The class action serves as a mechanism to eliminate or reduce the threat of repetitive
litigation, prevent inconsistent resolution of similar cases, and provide a means of redress for individual
claims that are too small to make independent actions economically viable. Ford Motor Co. v. Sheldon,
22 S.W.3d 444, 452 (Tex. 2000). The principal purpose of the class action device is efficiency and
economy of litigation. Id. (discussing origins and general design of class action device). Thus, when
properly used, a class action saves the court=s and the parties= resources by allowing class-wide issues to be
tried in an economical fashion. Id. (citing General Tel. Co. v. Falcon, 457 U.S. 147, 155 (1981)).
All class actions must satisfy the following four requirements: (1) numerosityCthe class is so
numerous that joinder of all members is impracticable; (2) commonalityCthere are questions of law or fact
common to the class; (3) typicalityCthe claims or defenses of the representative parties are typical of the
claims or defenses of the class; and (4) adequacy of representationCthe representative parties will fairly and
adequately represent the interests of the entire class. Tex. R. Civ. P. 42(a); Southwestern Ref. Co. v.
Bernal, 22 S.W.3d 425, 435 (Tex. 2000). In addition to these prerequisites, class actions must satisfy at
least one of four subdivisions of rule 42(b). Here, the district court found that Dr. Hakim established that
this class action satisfies rule 42(b)(4), which requires questions of law or fact common to the class to
predominate over questions affecting only individual members and that class treatment be superior to other
6 available methods for the fair and efficient adjudication of the controversy. See Tex. R. Civ. P. 42(b)(4);
see also Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 615 (1997); Bernal, 22 S.W.3d at 433.
STANDARD OF REVIEW
A trial court is afforded considerable authority and discretion in defining the class,
determining whether to grant or deny class certification, and in decertifying or modifying the class if
necessary as the case develops. Intratex Gas Co. v. Beeson, 22 S.W.3d 398, 408 (Tex. 2000). On
interlocutory appeal, a trial court=s decision to certify a class is to be reviewed for an abuse of discretion.
Henry Schein, Inc. v. Stromboe, 46 Tex. Sup. Ct. J. 103, 112, 2002 Tex. LEXIS 178, at *40-41 (Oct.
31, 2002) (citing Bernal, 22 S.W.3d at 439). An appellate court must not substitute its judgment for that of
the trial court. Tana Oil & Gas Corp. v. Bates, 978 S.W.2d 735, 740 (Tex. App.CAustin 1998, no
pet.). We will not find an abuse of discretion simply because a trial court determines an issue differently
than we would. Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 242 (Tex. 1985). In
determining whether a matter should be litigated as a class action, a trial court abuses its discretion if its
decision is arbitrary, unreasonable, or without reference to any guiding principles. Tana Oil, 978 S.W.2d at
741. Further, a trial court abuses its discretion if it does not properly apply the law to the undisputed facts,
but does not abuse its discretion if it bases its decision on conflicting evidence. Id. at 740-41.
In making its class certification decision, the trial court can consider the pleadings and other
material in the record, along with the evidence presented at the hearing. Employers Cas. Co. v. Texas
Ass=n of Sch. Bds. Workers= Comp. Self-Ins. Fund, 886 S.W.2d 470, 474 (Tex. App.CAustin 1994, writ
dism=d w.o.j.). In conducting the initial evidentiary review, the trial court must conduct a rigorous analysis to
7 determine whether all prerequisites have been met before ruling on class certification. Bernal, 22 S.W.3d at
435. Thus, a Atrial court has discretion to rule on class certification issues, and some of its
determinationsClike those based on its assessment of the credibility of witnesses, for exampleCmust be
given the benefit of the doubt.@ Schein, 46 Tex. Sup. Ct. J. at 112, 2002 Tex. LEXIS 178, at *41. But in
reviewing a class certification order, we are prohibited from indulging Aevery presumption in favor of the trial
court=s ruling.@ Id. The certification order must demonstrate actual compliance with the certification
requirements because Athe trial court=s exercise of discretion cannot be supported by every presumption that
can be made in its favor.@ Id.
ANALYSIS
Citizens appeals the certification order in three issues. First, Citizens challenges the
adequacy of the class definition approved by the district court. Second, Citizens contends that the district
court failed to conduct Aa proper choice-of-law analysis necessary to determine whether any common
issues predominate over individual matters.@ Third, Citizens contends that the district court failed to
adequately establish the class certification requirements, including numerosity, commonality, typicality,
adequacy of representation, predominance, and superiority. Citizens presents the issues of class definition
and choice-of-law as Athreshold issues.@ Indeed, Abefore a reviewing court can consider a putative class=s
compliance with the rule 42(a) and (b) class-certification requirements, it must first consider the
appropriateness of the certified class definition.@ Beeson, 22 S.W.3d at 403. Thus, we will first address
Citizens= challenge to the certified class definition and a related challenge to numerosity. However, for
8 reasons we explain below, we need not address Citizens= choice-of-law challenge as a separate Athreshold
issue.@ We will then address the remaining class certification requirements.
Class Definition and Numerosity
In Beeson, the supreme court ruled that rule 42 implicitly requires that the class members be
presently ascertainable by reference to objective criteria. Id. at 403-04. The class definition Ashould not be
defined by criteria that are subjective or that require an analysis of the merits of the case.@ Id. at 403. If the
proposed class definition Arests on the paramount liability question,@ then it cannot be objective because
when the class definition is framed as a legal conclusion, Athe trial court has no way of ascertaining whether a
given person is a member of the class until a determination of ultimate liability as to that person is made.@ Id.
at 404. Such a definition creates a Afail-safe class@ that would only be bound by a judgment favorable to the
plaintiffs, not a class also bound by a judgment favorable to defendants. Id. Members of a class who did
not prevail on the merits would not be a class and thus would not be precluded from bringing individual
claims. A fail-safe class is impermissible because of its failure to bind class members regardless of the
outcome.
The certification order in this case defined the class as follows:
The Class consists of all persons, who, during the Class Period (August 6, 1996 through the date the Class is certified): (1) purchased a CICA Policy and executed an assignment to a trust for the purchase of Citizens, Inc. stock, or (2) paid any money that, pursuant to a CICA Policy and assignment to a trust, was for the purchase of Citizens, Inc. stock, or (3) were entitled to any cash benefits from a CICA Policy that, pursuant to a CICA Policy and assignment to a trust, were for the purchase of Citizens, Inc. stock. Specifically excluded from the Class are all persons who, within the time period established by the judgment, do
9 not surrender their CICA Policies and take the other actions required to obtain the relief awarded by the Court.
Citizens specifically complains that the last sentence of the class definition causes it to run afoul of Beeson,
arguing that Athe exclusionary language creates a future contingency, dependent on the future state of mind
of each class member.@ According to Citizens, this future contingency creates a fail-safe class by being
dependent upon a judgment in favor of the plaintiffs. We disagree.
The trial court in Beeson defined the class as gas producers Awhose natural gas was taken
by the defendant in quantities less than their ratable proportions.@ Id. The supreme court held the trial court
abused its discretion because the certified definition was the legal issue of whether Intratex had taken
nonratably from the producers. Id. Similarly, in Ford Motor Co. v. Sheldon, the supreme court rejected a
class defined as those Awho suffered past and/or future damage as a result of peeling or flaking paint on
these vehicles caused by a defective paint process@ or Awho paid Ford or a Ford dealership for a paint
repair to their vehicle to repair peeling or flaking paint caused by a defective paint process.@ 22 S.W.3d at
448. In Sheldon, if the paint process was not defective, then no class would exist. Id. at 454. Thus,
Aincluding the defective paint process theory as an element of the class definition impermissibly required a
determination of the merits before the court could ensure the existence of a class.@ Charlie Thomas
Courtesy Leasing v. Taylor, 44 S.W.3d 684, 688 (Tex. App.CHouston [14th Dist.] 2001, no pet.)
(discussing Beeson, 22 S.W.3d at 404).
Unlike the class definitions in Beeson and Sheldon, the class definition at issue here is not
prohibited because the class members are Apresently ascertainable by reference to objective criteria.@
10 Beeson, 22 S.W.3d at 403. This class includes any purchaser of CICA policies who assigned dividends
and other benefits to the offshore trusts, and as the district court explained in the certification order, this fact
can be Aobjectively ascertained from the records of the Defendants.@ The class definition does not rest on
whether the CICA policies qualify as securities or whether the policies were in fact sold or offered for sale
from Texas; therefore, no resolution of the merits is required before class membership can be determined,
and the definition does not rest upon the paramount liability question. Id. at 404.
Nor does the definition create a fail-safe class whereby the class members would be bound
only by a judgment favorable to the plaintiffs. The exclusionary language of which Citizens complains was
specifically added to the definition to address the district court=s concern about providing Anotice to the
Class about the issue of non-insurability that might result from a Class member surrendering his or her CICA
Policy to implement the statutory rescission remedy provided by the [Securities Act].@ The certification
order further explains that Athe exclusionary language . . . allows individual Class members, in the event the
Class= claims are successful, to decide they would rather keep their CICA Policies and not take the steps
required to obtain Court-ordered relief.@ (Emphasis added.) This is not a fail-safe class because, in the
event of a judgment for Citizens, the last sentence of the class definition will not operate to exclude anyone
from the class, but only from receiving the statutory remedy of rescission; all class members will be bound
by a favorable or unfavorable judgment. See id. Although the class members who retain life insurance
coverage will not be granted rescission, they will be precluded from later asserting an individual action
against Citizens based on article 581-33A of the Securities Act if Citizens prevails.
11 Citizens argues that the exclusionary language of the class definition provides the putative
class members a second, post-judgment opportunity to eliminate themselves as members of the class.
According to Citizens, Athis future decision by putative class members is dependent upon their future state of
mind,@ and therefore Aeven in the event that [Dr. Hakim] should prevail on the merits, there may be no class
whatsoever.@ We believe that Citizens misinterprets the effect of the class definition=s last sentence, which
likely results from their reading of the phrase Aexcluded from the Class.@ (Emphasis added.) But this
language does only what it says: should Dr. Hakim prevail on the merits, the class members will forgo the
statutory remedy and retain life insurance coverage unless they affirmatively take the steps prescribed by the
district court. Having already received notice and chosen to remain in the class, the class members will not
be allowed a second opportunity to opt out of the class or the judgment.6 To remove any doubt, and for
the sake of clarity, we will modify the last sentence of the class definition by substituting the word Aremedy@
in place of the word AClass.@7 Cf. Beeson, 22 S.W.3d at 406-08 (noting that appellate courts can redefine
6 According to the certification order, the notice to the class shall include:
$ a description of the nature of the class action; $ a description of the claims of the Class Plaintiff, the measure of damages if the Class claims succeed, and the defenses of the Defendants; $ a full explanation of the non-insurability issue; $ description of the rights of the Class members to opt out of the Class and the procedure for opting out of the Class; and $ a statement regarding the attorneys= fees that will be sought by Class counsel.
This notice satisfies the class notice requirements, see Tex. R. Civ. P. 42(c)(2), and makes clear that if the class member has not opted out by a specified date, then he or she is bound by whatever judgment the district court renders. 7 The last sentence of the class definition will therefore read as follows: ASpecifically excluded from
12 class in some circumstances, but refusing to do so after determining that Athe present class definition must be
abandoned because it is fundamentally flawed@). Because the class definition is not fundamentally flawed,
we see no reason to remand to the district court to completely redefine the class.
Although Citizens challenges numerosity separately as part of its third issue, Citizens does
not specifically challenge the numerosity findings of the district court. Rather, Citizens merely urges an
argument based on the one it made against class definition. According to Citizens, if Dr. Hakim prevails at
trial on the merits, Aand no CICA policyholder surrenders their life insurance policies, the class size would
undoubtedly fail the numerosity requirement of Rule 42.@ This argument is without merit because, as we
previously explained, the class members who do not opt out by the notice deadline will be bound by the
judgment. Whether the class members take the action necessary to receive the statutory rescission remedy
or damages has no bearing on the numerosity analysis. We therefore hold that the district court did not
abuse its discretion in defining the class and accordingly overrule Citizens= first issue and its third issue to the
extent that Citizens challenges the district court=s numerosity finding.
Choice of Law, Commonality, Predominance of Common Issues
Citizens dedicates its entire second issue to complaining that the district court abused
its discretion by failing to engage in an adequate choice-of-law analysis. As part of its third issue, Citizens
challenges commonality, but restricts this challenge to arguing that the district court=s finding of commonality
the remedy are all persons who, within the time period established by the judgment, do not surrender their CICA Policies and take the other actions required to obtain the relief awarded by the Court.@
13 rests upon the erroneous conclusion that Texas law applies to the sale of foreign life insurance policies
occurring in fifty jurisdictions across the globe. Furthermore, in its challenge to the district court=s rule
42(b)(4) analysis, also part of its third issue, Citizens contends that the absence of any meaningful choice-of-
law analysis renders impossible any reliable determination of whether common issues predominate. Thus,
we will address choice-of-law in the context of the commonality and predominance requirements. We will
also dispose of Citizens= challenges to commonality and predominance in a single discussion because the
Acommonality requirement is subsumed under the more stringent Rule 42(b)(4) requirement that common
questions of law or fact predominate over questions involving individual members.@ E & V Slack, Inc. v.
Shell Oil Co., 969 S.W.2d 565, 569 (Tex. App.CAustin 1998, no pet.) (citing Amchem, 521 U.S. at
626). The predominance test is used to determine whether common issues predominate over
individual issues, and inquires whether common or individual issues will be the object of most of the efforts
of the litigants and the court. Bernal, 22 S.W.3d at 433-34. A non-exhaustive list of factors relevant to the
predominance inquiry is the interest of members of the class in individually controlling the prosecution or
defense of their particular actions; the extent and nature of any litigation concerning the controversy already
commenced by or against members of the class; the desirability of concentrating the litigation of the claims in
the particular forum; and the difficulties likely to be encountered in the management of a class action. Tex.
R. Civ. P. 42(b)(4); Bernal, 22 S.W.3d at 433-34.
Rather than specifically addressing the predominance of the common questions identified by
the district court in its order, Citizens contends that choice-of-law is a barrier to commonality and the
predominance of common issues because of potential differences in the applicable securities laws of foreign
14 jurisdictions. According to Citizens, the district court abused its discretion by failing to conduct a Amost
significant relationship@ analysis pursuant to section 6(2) of the Restatement (Second) of Conflict of Laws
and thereby applying the securities laws of the jurisdictions where the class members reside. See
Torrington Co. v. Stutzman, 46 S.W.3d 829, 848 (Tex. 2000); Restatement (Second) of Conflict of
Laws '' 6, 188 (1971). However, Citizens overlooks section 6(1) of the Restatement, which directs the
application of Texas law to this case and therefore renders the Amost significant relationship@ analysis
inapplicable.
Section 6 of the Restatement provides:
(1) A court, subject to constitutional restrictions, will follow a statutory directive of its own state on choice of law.
(2) When there is no such directive, the factors relevant to the choice of the applicable rule of law include . . . .
Restatement (Second) of Conflict of Laws ' 6 (emphasis added). If the Texas Legislature intends for a
statute to be applied to out-of-state facts, the courts will so apply it unless constitutional limitations forbid it.
Id. ' 6(1) cmt. b. Application to out-of-state facts is permissible even when the local law of another state
would be applicable under usual choice-of-law principles. Id. AIf construction of the Texas statute justifies
the application of Texas rather than [foreign] law, and that does not offend the constitution, it is not
necessary to engage in the choice of law analysis based on the significant relationships set out in [section
6(2) of the Restatement].@ Busse v. Pacific Cattle Feeding Fund, 896 S.W.2d 807, 814 (Tex.
15 App.CTexarkana 1995, writ denied) (citing Siskind v. Villa Found. for Educ., Inc., 642 S.W.2d 434
(Tex. 1982)).8
At the certification hearing, the district court heard extensive argument on whether the
Securities Act contains a statutory directive for its application to claims asserted by non-residents. For
example, Dr. Hakim argued to the court that section 33A is a legislative choice-of-law rule directing its
application to this case if Citizens hasAsold or offered for sale a security from this state without registering as
a securities dealer. We agree. A plain reading of the statute reveals that the legislature intended to prohibit
an unregistered seller of securities from selling in this state, even when the purchasers are non-residents. See
Tex. Rev. Civ. Stat. Ann. arts. 581-12, -33A(1) (West Supp. 2003). Also, the Securities Board has
promulgated a specific regulation entitled ASale of Securities to Nonresidents,@ which states in part that A[a]n
issuer or selling agent who makes an offer or sale from Texas, by any means . . . is a dealer and must
comply with the dealer registration requirements of the Securities Act.@ 7 Tex. Admin. Code ' 139.7
(2002) (emphasis added). Finally, case law makes clear that the Securities Act applies to sales from Texas
to non-residents by specifying that it applies when certain actions take place within Texas. See, e.g.,
Enntex Oil & Gas Co. v. State, 560 S.W.2d 494, 497 (Tex. Civ. App.CTexarkana 1977, writ ref=d
n.r.e.); Rio Grande Oil Co. v. State, 539 S.W.2d 917, 921-22 (Tex. Civ. App.CHouston [1st Dist.]
8 Citizens does not make the argument that constitutional limitations forbid the application of the Securities Act to the facts of this case.
16 1976, writ ref=d n.r.e.) (concluding that the Securities Act applies to sales made from Texas to residents of
other states).
Citizens argues that Athe [Securities Act] was never intended to apply, even by the state
agency charged with its enforcement, to the sale of alleged securities occurring in foreign jurisdictions.@
However, the class claims do not allege sales occurring in foreign jurisdictions, but rather sales occurring in
or from Texas. At trialCgiven that one of the common questions is Awhether the CICA Policies were sold
from Texas@CDr. Hakim will carry the burden of proving to the factfinder that Citizens= activities in Texas
relating to the CICA policies were critical links Ain the chain of the selling process@ and therefore constituted
an offer or sale of securities from Texas.9 Rio Grande Oil, 539 S.W.2d at 922. Citizens seeks to employ
the Amost significant relationship@ analysis to preemptively reach the merits and show that it did not offer or
sell securities from Texas. But as counsel for Dr. Hakim explained to the district court at the certification
hearing, there is no choice-of-law issue in this case Aexcept for the same substantive issue on which liability
depends.@ We conclude that the district court did not abuse its discretion by failing to engage in a Amost
significant relationship@ analysis.10
9 Citizens uses the same process in each country to obtain policyholders for the CICA policies. Citizens does not sell the CICA policies directly to the policyholders, but rather applications for the CICA policies are obtained by CICA=s agents in the countries where the policyholders reside. Dr. Hakim argues that there is nonetheless enough evidence in the record to show that Citizens sells the CICA policies from Texas. For example, Citizens partially develops a sales training manual in Austin, and the underwriting takes place in Austin. 10 In its reply brief, Citizens also contends that the Securities Act cannot apply to the class claims because it was never intended to apply to the sale of foreign life insurance policies. See Tex. Rev. Civ. Stat. Ann. art. 581-4A (West Supp. 2003); Tex. Ins. Code Ann. art. 3.42(a) (West Supp. 2003). Citizens attempts to conflate this argument with its choice-of-law issue. However, Citizens made this exact argument
17 As part of its third issue, Citizens challenges the district court=s predominance finding by also
arguing that, because all the claims except for the securities claims have been abandoned by the class, Dr.
Hakim improperly seeks to resolve a single issue by way of the class action rather than the entire
controversy. For support, Citizens cites to the statement in Bernal that Aa judgment in favor of the class
members should decisively settle the entire controversy, and all that should remain is for other members of
the class to file proof of their claim.@ 22 S.W.3d at 434 (quoting Life Ins. Co. of the Southwest v.
Brister, 722 S.W.2d 764, 772 (Tex. App.CFort Worth 1986, no writ)) (internal quotations omitted).
to the district court in its motion for summary judgment, which the court denied. Whether the CICA policies are securities as defined by the Securities Act (including the question of whether the CICA policies fall within an insurance exception to the Securities Act) is another element of the class claims and has been identified by the district court as a common question for the fact finder to decide with the aid of expert testimony. Thus, we need not address it here.
18 Citizens misapplies the language quoted by the supreme court in Bernal. In Bernal, the
causation and damages elements of the cause of action were unique to each class member and therefore a
single judgment could not settle the entire controversy. Id. at 436-37. Here, whether Citizens violated the
Securities Act=s registration requirements is not a single issue or element of a controversy, but rather a
complete cause of action that constitutes an Aentire controversy@ unto itself. This case is more analogous to
Compaq Computer Corp. v. LaPray, where the court of appeals concluded that, although the class
plaintiffs disclaimed consequential damages and abandoned various claims, the common interests of absent
class members had not been sacrificed. 79 S.W.3d 779, 793 (Tex. App.CBeaumont 2002, no pet.). AThe
fact that defendants engaged in a course of activity giving rise to a variety of claims, only some of which are
suitable for class treatment, does not mean certification is inappropriate.@ Id. (citing Microsoft Corp. v.
Manning, 914 S.W.2d 602, 610 (Tex. App.CTexarkana 1995, writ dism=d)). AClients who have claims
not raised in this class action because the claims are unsuitable for class treatment can bring those claims on
an individual basis, and res judicata will not bar those claims because absent class members had no
opportunity to litigate those issues in this lawsuit.@ Sullivan v. Chase Inv. Servs. of Boston, Inc., 79
F.R.D. 246, 265 (N.D. Cal. 1978).
Finally, Citizens challenges predominance by arguing that, should the class claims succeed,
individual issues will predominate over the question of whether the class is entitled to recover attorneys= fees
pursuant to the Securities Act. The Securities Act provides that A[o]n rescission or as a part of damages, a
buyer or a seller may also recover reasonable attorney=s fees if the court finds that the recovery would be
equitable in the circumstances.@ Tex. Rev. Civ. Stat. Ann. art. 581-33D(7) (West Supp. 2003). Citizens
19 directs us to the commentary of that provision, which recommends that a court consider circumstances such
as the conduct of the parties in making the transaction; the conduct of both parties in the lawsuit; whether
the defendant benefitted from the violation; and fiduciary relationships. Tex. Rev. Civ. Stat. Ann. art. 581-
33D(7) cmt. (West Supp. 2003). According to Citizens, the district court abused its discretion because its
certification order fails to explain howCas Citizens puts itCthe Aconduct of each party to each of the
underlying transactions@ can be efficiently determined in a single trial to a single jury. See Bernal, 22
S.W.3d at 434 (AIf, after common issues are resolved, presenting and resolving individual issues is likely to
be an overwhelming or unmanageable task for a single jury, then common issues do not predominate.@).
Citizens= argument focuses too literally on the commentary, which we regard as being only
persuasive. The trial court need not consider all the circumstances listed in the commentary; rather, we
read the commentary to suggest that the court consider all the circumstances that, in its sound discretion, it
deems relevant to violations of the registration requirements. Thus, we note that article 581-33D(7) of the
Securities Act applies to the whole of section 33, including 33A(2), which creates liability for selling or
offering securities by means of an untrue statement or the omission of a material fact. See Tex. Rev. Civ.
Stat. Ann. art. 581-33A(2) (West Supp. 2003). The Acircumstances@ that might make the recovery of
attorneys= fees Aequitable@ under this cause of action could involve individualized issues of misrepresentation,
reliance, or the subjective knowledge of the policyholders. But here, because the heart of the dispute turns
only on whether the jury decides that the CICA policies constitute securities and whether they were sold
from Texas, Athe conduct of each party to each of the underlying transactions@ appears altogether
20 irrelevant.11 Furthermore, the jury will not be presented with an Aoverwhelming task@ because the court
rather than the jury will consider the circumstances that would make recovery of attorneys= fees equitable.
See id. art. 581-33D(7); cf. Bernal, 22 S.W.3d at 434.
We hold that the district court did not abuse its discretion in determining that the class claims
asserted by Dr. Hakim demonstrate commonality and that common issues of law and fact predominate over
any individual issues. Accordingly, we overrule Citizens= second issue (concerning choice of law) as well as
Citizens= third issue to the extent that it challenges commonality and predominance.
Typicality
Typicality requires that class representatives possess the same interests and suffer the same
injury as the unnamed or absent class members. State Farm Mut. Auto Ins. Co v. Lopez, 45 S.W.3d
182, 191 (Tex. App.CCorpus Christi 2001, pet. dism=d w.o.j.). To be typical, class representatives=
claims need not be identical, but must arise from the same event or course of conduct giving rise to the
claims of other class members and must also be based on the same legal theories. Weatherly v. Deloitte &
Touche, 905 S.W.2d 642, 653 (Tex. App.CHouston [14th Dist.] 1995, writ dism=d w.o.j.). Here, the
district court concluded that typicality had been satisfied with regard to the securities claims, and
11 We note that Citizens would urge the district court to consider, for purposes of determining attorneys= fees, whether the terms of the CICA policies were carefully explained to the policyholders, whether the policyholders diligently attempted to understand the policies, and whether the policyholders purchased the policy primarily for insurance or as an investment.
21 furthermore that there Aare no defenses asserted by the Defendants which make Dr. Hakim atypical of the
Class.@
Citizens first contends that Dr. Hakim is not typical of the class because his securities claim
is barred by the statute of limitations, which prohibits a person from suing under section 33A(1) Amore than
three years after the sale.@ Tex. Rev. Civ. Stat. Ann. art. 581-33(H) (West Supp. 2003). We are not
persuaded because the Aargument that the presence of even an arguable defense peculiar to different class
members destroys the entire class, is incorrect.@ Adams v. Reagan, 791 S.W.2d 284, 290 (Tex.
App.CFort Worth 1990, no writ); see also Sun Coast Res., Inc. v. Cooper, 967 S.W.2d 525, 537 (Tex.
App.CHouston [1st Dist.] 1998, pet. dism=d w.o.j.) (rejecting contention that defenses of release and
accord and satisfaction applicable to class members other than class plaintiff necessarily destroys typicality);
Dresser Indus., Inc. v. Snell, 847 S.W.2d 367, 373 (Tex. App.CEl Paso 1993, no writ) (holding that,
although varying defenses existed as to different class members, including a limitations defense, typicality
was not destroyed). As in these cases, because the class alleges an Aoverall scheme@ on the part of Citizens
which must be defended by arguing that the CICA policies do not qualify as securities and were not sold or
offered for sale from Texas, we conclude that Dr. Hakim=s securities claims are typical of the class he seeks
to represent. See Dresser Indus., 847 S.W.2d at 373.
Second, Citizens argues that Dr. Hakim is not typical of the class because he purchased his
CICA policies without relying on the Citizens, Inc. website, which repeatedly characterized the CICA
package as an Ainvestment.@ However, because reliance is not an element of a cause of action based on
article 581-33A(1) of the Securities Act, Citizens= argument has no relevance to the typicality inquiry. See
22 Tex. Rev. Civ. Stat. Ann. art. 581-33A(1). Finally, Citizens challenges typicality by arguing that Dr.
Hakim=s CICA policies do not contain arbitration clauses, unlike other CICA policies purchased by some
of the putative class members. We reject this argument because the alleged distinction does not destroy the
Anexus@ that exists between Dr. Hakim=s injuries and those of the other class members. Dresser Indus.,
847 S.W.2d at 372. We therefore hold that the district court did not abuse its discretion in determining that
the typicality requirement had been met.
Adequacy of Representation
Two components make up the requirement of fair and adequate representation: (1) an
absence of antagonism between the class representative and the class members; and (2) an assurance that
the class representative will vigorously prosecute the class members= claims and defenses. See Forsyth v.
Lake LBJ Inv. Corp., 903 S.W.2d 146, 150 (Tex. App.CAustin 1995, writ dism=d w.o.j.). The adequacy
of representation is a fact question that the trial court determines based on the individual circumstances of
each case, and is addressed to the trial court=s discretion. Manning, 914 S.W.2d at 614. A number of
factors affect this determination, including adequacy of counsel; potential conflicts of interest; the personal
integrity of the plaintiffs; the representatives= familiarity with the litigation and their belief in the legitimacy of
the grievance; the manageability of the class considering geographical limitations; and the ability to finance
the class action. Forsyth, 903 S.W.2d at 150.
We first examine whether any antagonism exists between Dr. Hakim and the class
members. A conflict that goes to the very subject matter of the litigation will defeat a party=s claim of
representative status. Id. at 151. Class certification may be denied if there is a possibility of significant
23 disagreement within the proposed class. Id. (citing Horton v. Goose Creek Indep. Sch. Dist., 690 F.2d
470, 485-86 (5th Cir. 1982)). According to Citizens, an inter-class antagonism exists here because Dr.
Hakim seeks statutory rescission of the CICA policies, without regard to some class members= potential
desire to keep their CICA policies and maintain life insurance coverage. Citizens points to testimony by Dr.
Hakim, where he stated that he did not believe in insurance and purchased his CICA policy merely as an
investment. However, Citizens has presented no evidence that any class members oppose the remedy
sought by Dr. Hakim. Nor does Citizens offer evidence on how Dr. Hakim=s decision to have his CICA
Policy rescindedCwhich would require affirmative steps on his part and on the part of any class member
seeking rescissionCwould prevent other class members from remaining insured. Indeed, the district court=s
definition of the class, as modified, defeats Citizens= claim. Thus, because the possibility of an inter-class
antagonism in this case is merely speculative, the cases relied on by Citizens are easily distinguished. In
Forsyth, this Court treated the fact that at least twelve class members intervened and opposed the class-
proponents= objectives as evidence of actual inter-class antagonism. Id. at 151-52. In E & V Slack, one
putative class member testified that he opposed the remedy sought by the representatives because it would
mean dismantling a program that he and other class members still benefitted from. 969 S.W.2d at
568-69. In contrast, here the investment scheme of the CICA policies might be terminated, but those
primarily interested in maintaining life insurance coverage can choose to reject that remedy and therefore are
not antagonistic to Dr. Hakim=s objectives.12
12 As we discussed earlier in this opinion, the certification order explains that class members who would prefer to maintain life insurance coverage could simply opt out after receiving notice or permissibly choose to forgo the remedy while still being bound by the judgment. Nonetheless, Citizens attacks the
24 certification order for barely mentioning whether a conflict of interest exists between Dr. Hakim and the class. To the contrary, the district court=s order expressed concern over ensuring that certain class members retain their life insurance coverage if they so desire, and states that such concern is the reason for the last sentence of the class definition. Clearly, the district court directed serious attention to the issue of a potential conflict of interest.
25 Citizens also argues that the district court abused its discretion by finding that Dr. Hakim
would vigorously prosecute the claims and defenses of the class members. According to Citizens, Dr.
Hakim lacks knowledge concerning the details of the class action and passively acquiesced to class
counsel=s decision to seek class certification only for the Securities Act claims. However, it is not necessary
that Dr. Hakim, as class representative, fully comprehend the legal terms and pleadings. See LaPray, 79
S.W.3d at 792-93. He must vigorously prosecute the claims through his attorneys, which he can do by
providing personal knowledge of the facts underlying the complaint. See id. (citing Forsyth, 903 S.W.2d at
152; Weatherly, 905 S.W.2d at 652). According to the certification order, Dr. Hakim had twice traveled
to Texas to attend certification hearings; he demonstrated the intelligence and personal integrity necessary to
grasp the nature of the proceedings and the issues; and he demonstrated familiarity with the class claims and
a willingness to vigorously prosecute those claims. The evidence supports the district court=s findings.
Furthermore, Dr. Hakim cannot be rendered an inadequate class representative for abandoning those claims
not appropriate for class action treatment because, as we previously discussed, there is nothing
impermissible about that strategy. See id. at 793. Because the district court did not abuse its discretion, we
overrule Citizens= third issue to the extent that it challenges adequacy.
Superiority
Finally, Citizens disputes the district court=s finding of superiority. A class action is the
superior method of adjudication when the benefits of class-wide resolution of common issues outweigh any
difficulties that may arise in the management of the class. Tana Oil, 978 S.W.2d at 743. The trial court
should consider alternative procedures for disposing of the dispute and compare these to the judicial
26 resources and potential prejudice to absent class members involved in pursuing the class action. Id. The
trial court may consider whether: (1) class members have an interest in resolving the common issues by class
action; (2) class members will benefit from discovery already commenced; and (3) the court has invested
time and effort in familiarizing itself with the issues in dispute. Id. Here, class members have an interest in
obtaining rescission of securities that are completely unregulated. To the extent that the rescission of
individual CICA policies is too small to justify the expense of traveling to the United States to engage in
expensive litigation, the class action mechanism provides for an efficient means to resolve the securities
claims. As the district court stated in the certification order: A[I]t is highly desirable to concentrate the
litigation of the identical claims of the members of the Class for violations of the [Securities Act] in this forum
. . . because the Court has already expended substantial time and effort on the Class= securities claims and,
as a result, is fully informed about the nature of the claims and defenses.@ We agree. Repeated litigation
over whether the CICA policies qualify as securities and whether they were sold from Texas would be a
waste of judicial resources.
Citizens argues that, notwithstanding these findings, the fact that individual suits are being
pursued by every named plaintiff other than Dr. Hakim proves that pursuing the claims under the Securities
Act as a class action is not the superior method of adjudication. However, five of the nine individual
plaintiffs are not asserting securities claims and are not class members because they sued only to recover
death benefits. The other four plaintiffs bring their individual claims only because they were combined with
the death claimants= and the class claims. Thus, four individuals out of a potential class of over twenty-five
thousand have filed claims other than the class=s securities claims. As Dr. Hakim points out, this is Ahardly
27 compelling evidence that Class members have a significant interest in controlling the prosecution of their
claims; in fact, it proves the opposite.@ Furthermore, because the securities claims are not predominated by
individual issues such as reliance and damages, Dr. Hakim has shown that a class action is both more fair
and efficient in these circumstances. Cf. Schein, 46 Tex. Sup. Ct. J. at 119, 2002 Tex. LEXIS 178, at *66
(holding that superiority requirement not satisfied where plaintiffs Afailed to show that a class action is either
more fair or more efficient@ under the circumstances). The district court did not abuse its discretion;
therefore, we overrule Citizens= challenge to superiority in its third issue.
CONCLUSION
In conducting the initial evidentiary review, the trial court must conduct a rigorous analysis to
determine whether all prerequisites have been met before ruling on class certification. Bernal, 22 S.W.3d at
435. Our review of the record supports our conclusion that the district court did not abuse its discretion in
certifying the class. The district court conducted a thorough certification hearing in which it went beyond the
parties= pleadings in order to examine the claims, defenses, relevant facts, and applicable substantive law in
order to make a reasoned determination of the certification issues. At the certification hearing, both sides
presented a large quantity of documentary evidence and expert witnesses. The district court=s decision to
certify the class is explained in an extensive, lengthy certification order that contains a detailed trial plan.
This demonstrates that the district court conducted a rigorous review of the information presented, after
which it determined that the case met the supreme court=s test of actual, rather than presumed, compliance
with the rule 42 certification requirements. Id.; Schein, 46 Tex. Sup. Ct. J. at 112, 2002 Tex. LEXIS 178,
at *41.
28 We conclude that the class definition presently and precisely ascertains the class members,
although we instruct the district court to modify the class definition in accordance with this opinion. We
conclude that the district court was not required to engage in a Amost significant relationship@ choice-of-law
analysis. Furthermore, we conclude that the district court did not abuse its discretion by finding that all class
certification requirements had been met. We therefore overrule Citizens= issues on appeal and accordingly
affirm the district court=s order as modified.
__________________________________________
W. Kenneth Law, Chief Justice
Before Chief Justice Law, Justices B. A. Smith and Puryear
Modified and, as Modified, Affirmed
Filed: April 24, 2003