On Appeal from the United States District Court for the District of New Jersey (D.C. No. 96-cv-00032) Argued: October 28, 1997
Before: Sloviter, Nygaard and Kravitch,* Circuit Judges
The opinion of the court was delivered by: Sloviter, Circuit Judge,
Appellant William H. Michelson filed a class action complaint in the district court of New Jersey against Citicorp National Services, Inc. , a corporation headquartered in the State of Missouri, alleging that CNS imposed unreasonable early termination fees in connection with its consumer automobile leases and that it failed adequately to disclose the nature of those fees, in violation of the Consumer Leasing Act , 15 U.S.C. § 1667b,*fn1 and its implementing regulation.*fn2 Before the court ruled on class certification, Michelson sought leave to amend the complaint to add 39 additional plaintiffs as additional class representatives and filed a new motion for class certification based on the proposed amended complaint. The district court, relying on the authority of Colorado River Water Conservation Distr. v. United States, 424 U.S. 800 (1976), denied Michelson's motion, denied certification of a plaintiff class, and sua sponte stayed Michelson's individual claim pending the resolution of a related state court action in Missouri. Michelson appeals from that order. The thrust of Michelson's argument on appeal is that the district court misapplied the Colorado River doctrine because the federal and state actions involve different parties and are not truly "parallel." Appellee CNS concedes that the Colorado River doctrine would not be applicable to certain elements of Michelson's case but argues that the district court's order was entered only in part pursuant to Colorado River and is not a final order. Accordingly, CNS contends that this court lacks jurisdiction over Michelson's appeal, which is the threshold question before us.)
The convoluted procedural history of this case began on May 6, 1991 when Merrilou Kedziora*fn3 filed a class action against CNS in Illinois state court. The complaint alleged, inter alia, that the manner in which CNS calculated early automobile lease termination fees and charges, known as the Rule of 78s or the Sum-of-the-Digits method, invariably favored the lessor and was unreasonable. In addition, the complaint alleged that CNS inadequately disclosed the effect of its use of the Rule of 78s in its lease agreements. That suit, premised on the CLA, the Missouri Merchandising Practices Act, Mo. Rev. Stat. SS 407.010, et seq., and Illinois state law, was removed to the United States District Court for the Northern District of Illinois on June 4, 1991.
On November 21, 1991, before a plaintiff class was certified, the district court in Illinois granted CNS's motion to dismiss the disclosure claims under the CLA for failure to state a claim upon which relief could be granted. See Kedziora v. Citicorp Nat'l. Servs., Inc., 780 F. Supp. 516, 529-31 (N.D. Ill. 1991), aff 'd in relevant part, Channell v. Citicorp Nat'l. Servs. Inc., 89 F.3d 379, 383 (7th Cir. 1996). This left pending the plaintiffs' claims under state law and their claim that CNS's use of the Rule of 78s was unreasonable under the CLA. Several months later, in March of 1992, the Illinois plaintiffs voluntarily dismissed their state law claims, and refiled their MMPA claim in Missouri state court. The latter claim alleged that the use of the Rule of 78s to determine early termination deficiencies was unreasonable under Missouri law. The corresponding federal claim under the CLA was not asserted in the Missouri action, however, because that claim was still pending in federal court in Illinois. The Missouri state court complaint pleaded only an opt-in class action. Michelson, the plaintiff here, did not opt in.
On October 15, 1992, a plaintiff class was certified in the action pending in federal court in Illinois consisting of all those with private automobile leases assigned to CNS as defined in the complaint and who were assessed early termination or default deficiencies. See Kedziora, No. 91 C 3428, 1992 WL 300982 (N.D. Ill., Oct. 15, 1992). Michelson was a member of that class. Supp. App. at 101. Several years later, the district court in Illinois narrowed the scope of the plaintiff class. See Kedziora, 883 F. Supp. 1155 (N.D. Ill. 1995). It found that Kedziora's lease was terminated involuntarily and that CNS did not employ the Rule of 78s in cases of involuntary termination. Thus, the court concluded that Kedziora, the named plaintiff in that case, did not have standing to pursue the claims of the members who had terminated their leases voluntarily and were challenging the reasonableness of the Rule of 78s. Id. at 1159-60. This had the effect of excluding many former class members, including Michelson. Consequently, as of the date of that ruling, Michelson was not a party to any relevant litigation pending in any court.
On January 5, 1996, Michelson, a New Jersey resident, filed the class action complaint in the case at bar in the United States District Court for the District of New Jersey. He alleged that in April of 1988 he had leased a new Eagle Premier LX for 48-months. Under the lease, Michelson's payments totaled $14,472, including a finance charge or "lease charge" of $4,263.84. In September of 1991, he terminated the lease because, according to him, the car was a "lemon." CNS then determined that Michelson still owed $1,814.49 in remaining payments (calculated pursuant to the Rule of 78s) and $5,221.29 for the residual value of the car. Michelson claims he paid the $1,814.49 in remaining payments upon termination. CNS then sold the car at
auction for $4,040, applied the proceeds toward Michelson's ultimate liability and sought only $1,171.29 from him. Michelson contested that amount but forwarded to CNS "under protest" a check for $500 "to settle this account. . . for residual value on the resale."
Michelson's complaint, as amended, alleged in Count One that CNS violated the CLA's disclosure provisions for failing to explain the Rule of 78s and in Count Two that CNS's practice of calculating early termination charges using the Rule of 78s was unreasonable under the CLA. Michelson asserted no claim under the MMPA or any other state statute.
In May of 1996, Michelson moved to certify a plaintiff class of those lessees who were assessed charges for early termination, delinquency or default. Before ruling on that motion, the district court turned its attention to CNS's pending motion to dismiss, and granted the motion with respect to Count One of the second amended complaint (the disclosure count) but denied the motion with respect to Count Two (the "reasonableness" claim).
Thereafter, at a pretrial conference with the magistrate judge on October 23, 1996, CNS argued that Michelson's $500 payment operated as a settlement of his claim, which jeopardized his standing to lead the proposed class of approximately 3,000 plaintiffs. Although Michelson disputed the issue and the issue was not resolved, the magistrate Judge entered an order on October 29, 1996 giving Michelson leave to join an additional proposed class representative. Consequently, Michelson's third amended complaint proposed the addition of 39 new plaintiffs. CNS opposed the amendment, arguing that because all 39 proposed plaintiffs were class members in the Missouri state court litigation, denial of the amendment was appropriate under the doctrine enunciated by the Supreme Court in Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976). CNS did not challenge the maintenance of Michelson's individual claim.
The district court held a hearing on the proposed amendment on March 10, 1997. At that time, the court expressed concern that although the New Jersey action was
based on the federal statute and the pending Missouri state court action was based on Missouri state law, it appeared that the question of the reasonableness of the Rule of 78s was the primary issue in both actions and the damages sought in both actions were essentially the same. Michelson sought to distinguish the actions on the grounds that statutory damages were available in the federal action whereas only compensatory and punitive damages were available in the Missouri action. He also contended that the ruling in Missouri would not be dispositive of his action. Without deciding the res judicata issue raised by CNS as one of the bases for its contention that the 39 proposed plaintiffs were inappropriate class representatives, the court commented that Michelson's individual action would remain even if the 39 proposed plaintiffs were eventually barred after completion of the Missouri action. Likewise, the court recognized that other potential members of the New Jersey class who were not parties to the Missouri action would not be barred by a Missouri judgment.
The court denied the motion to amend the complaint to add the 39 proposed plaintiffs and the motion for class certification, and stayed proceedings on Michelson's individual claim pending resolution of the Missouri action. It delivered an oral opinion, stating at the outset: "I find that the basic thrust of the determination I am about to make is controlled by Colorado River Water Conservation Dis. v. United ...