APPEAL FROM: District Court of the Eleventh Judicial District, In and For the County of Flathead, Cause No. DV-99-548(A) Honorable Katherine R. Curtis, Presiding Judge
The opinion of the court was delivered by: Justice James C. Nelson
Argued and Submitted: May 9, 2012
Decided: December 27, 2012
Justice James C. Nelson delivered the Opinion of the Court.
¶1 Plaintiffs are a group of landowners or former landowners with properties on the shores of Flathead Lake and a portion of the upper Flathead River (Landowners). They commenced the instant action in 1999 in the Eleventh Judicial District Court, Flathead County, against Montana Power Company (MPC) and MPC's successor, PPL Montana, LLC (PPLM).
¶2 The present appeal is the third in the course of this litigation. In Mattson v. Mont. Power Co., 2002 MT 113, 309 Mont. 506, 48 P.3d 34 (Mattson I), this Court upheld the District Court's denial of PPLM's motion to substitute the District Court judge. In Mattson v. Mont. Power Co., 2009 MT 286, 352 Mont. 212, 215 P.3d 675 (Mattson II), this Court reversed a portion of the District Court's order granting summary judgment in favor of the defendants, vacated the District Court's orders concerning class certification, and remanded for further proceedings.
¶3 On remand, the District Court denied Landowners' renewed motion for class certification. The sole issue in this appeal is whether the District Court erred in its application of Mattson II to the class-certification question under Rule 23 of the Montana Rules of Civil Procedure. We conclude that the District Court did so err. We therefore reverse and remand with instructions to certify the class, as specified below, and for further proceedings consistent with this Opinion.
¶4 Flathead Lake is located in northwest Montana. Covering 191 square miles, it is the largest natural freshwater lake west of the Mississippi. Its two primary tributaries are the upper Flathead River and the Swan River, which enter from the north and east. The lake drains to the south into the lower Flathead River.
¶5 In 1930, the Federal Power Commission issued Rocky Mountain Power Company (RMPC, a subsidiary of MPC) a 50-year license to construct and operate a dam on the lower Flathead River. RMPC transferred the license to MPC in 1938. Construction of the dam (Kerr Dam) began in 1930 but then was delayed due to the Great Depression. It was finally completed in 1938, and commercial operations began in 1939. The dam is located on the lower Flathead River 4.5 miles downstream of the lake's natural outlet. It regulates the lake's water level and generates electrical power for customers in Montana.
¶6 In 1976 (four years before the original 50-year license expired), MPC and the Confederated Salish and Kootenai Tribes of the Flathead Reservation filed competing applications for a new license to operate the Kerr Project (the dam, the reservoir, and appurtenant facilities). They eventually reached a settlement under which a new 50-year license would issue to MPC and the Tribes jointly, and MPC would hold and operate the project for the first 30 years (i.e., until 2015), at which point the Tribes would have the option of taking over the project. The Federal Energy Regulatory Commission issued the joint license in July 1985. MPC continued to manage and operate the project until 1999, when it conveyed its interest to PPLM. PPLM has operated the dam since.
¶7 Flathead Lake is fed by snowmelt and by releases from Hungry Horse Dam.*fn1
Prior to the construction of Kerr Dam, the lake's water level rose an average of eight feet each year from mid-April to early June due to spring runoff. The average peak elevation was 2,890 feet above mean sea level. The water level then dropped steadily during the summer to a base level where it would remain until the following spring. Under Kerr Dam operations, however, the lake is raised to 2,893 feet (three feet higher than the average pre-dam peak) by June 15 each year, and is maintained at or close to this level through the summer and into the fall. The lake is then lowered gradually over the fall and winter months to 2,883 feet by April 15, at which point spring runoff begins the cycle anew. The dam was operated in substantially the same manner from 1938 to 2007. As described below, PPLM made a relevant change in procedure in 2007.
¶8 Landowners contend that MPC's and PPLM's practice of maintaining the lake at full pool (2,893 feet) has caused, and will continue to cause, substantial damage to their properties. They assert that the shoreline of Flathead Lake and the upper Flathead River is continuously being eroded and undercut by such operation of Kerr Dam, resulting in an "ever-widening footprint" of the lake. They explain that erosion is more severe during storms, that storms are stronger in the fall, and that the presence of higher-than-normal waves during fall storms produces substantial shoreline erosion and property damage. Thus, Landowners claim that most of the damage to their properties takes place in the fall when the lake is artificially held at or near 2,893 feet. They contend that this practice of keeping the lake at high levels into the fall storm season when shoreline erosion is most significant causes unreasonable and unnecessary damage to their properties.
¶9 There is no question that artificially maintaining the lake at full pool impacts shoreline properties. In fact, RMPC anticipated this. In a September 1937 letter to the Federal Power Commission, RMPC stated that holding the lake at 2,893 feet for longer time intervals than those which typically prevailed under pre-dam conditions would "affect" lake borderlands and could, for instance, cause "waterlogging of lands beyond the conventional project boundary." A report issued by the Federal Energy Regulatory Commission in 1984 confirms this prediction. It states that because the lake, from about May through January, is held at high levels which formerly occurred naturally for only short periods (May through July), the delta and nearby islands at the head of the lake have suffered "high level erosion" and have been "progressively reduced in size." This is due to the fact that the shorelines in these areas "are now subjected to extended periods of wave erosion during times when they were formerly well above the lake level." MPC conducted its own study of shoreline erosion in the early 1990s, which revealed that the shoreline is retreating at several locations at the north end of the lake "in response to wind-generated waves at the higher water surface elevation." MPC's report states that this shoreline retreat is expected to continue as far as 2,100 feet inland on the east side and 1,640 feet inland on the west side before an equilibrium beach profile is reached. "Without intervention, wildlife habitat and developed lands such as the Eagle Bend golf course could be inundated within a few decades." A 1994 report prepared for MPC by Dr. Mark Lorang (who is now one of Landowners' consultants in the present litigation) likewise states that "[w]ave energy is the main physical forc[e] responsible for shoreline erosion in Flathead Lake." Dr. Lorang explains that the higher the lake level and the longer high lake levels are maintained, the more shoreline erosion. "Ultimately, future shoreline erosion on Flathead Lake will depend on how the lake level is regulated."
¶10 Dr. Lorang has been studying Flathead Lake since 1982, and has been studying shoreline erosion in particular since the mid-1990s. In his August 8, 2005 affidavit, he explains that the construction of Kerr Dam greatly altered the annual vertical distribution of wave energy, resulting in erosion and land loss across all shore lands except those composed of bedrock. He notes, in this regard, that property owners have invested in miles of seawall, revetment, and rip-rap construction along the shoreline of the lake, and that much of the undeveloped shoreline erodes away every year. Dr. Lorang has established study sites at various locations around the lake and found that shoreline retreat is most severe along the delta area of the river mouth located on the north shore of the lake. Annual land losses in that area are "on the order 40 to 50 feet." He found that land losses at other locations around the lake, due to elevated lake levels and wave erosion, varied between 1.5 feet and 12 feet annually. Notably, Dr. Lorang found nearly zero erosion in some of these areas in 2001, a particularly dry year when the lake did not reach and hold full-pool levels. In Dr. Lorang's opinion, a one-foot reduction of the lake level before the end of October each year "would dramatically reduce erosion lakewide that occurs during the fall storm season."
¶11 Prior to 2007, the average lake level as of November 1 each year was 2,892 feet. Starting in the fall of 2007, PPLM voluntarily implemented a procedure of lowering that level by one foot-i.e., down to 2,891 feet as of November 1. PPLM's stated purpose for doing this was to greatly reduce lakewide shoreline erosion in the fall.
¶12 Key to the parties' claims and defenses in this case is the fact that Landowners' properties are subject to flood easements, which RMPC and MPC obtained from shoreline property owners in the 1930s, '40s, and '50s. These easements allow the operator of Kerr Dam to flood, subirrigate, drain, or otherwise affect shoreline properties with the waters of Flathead Lake. Landowners contend that MPC and PPLM have acted outside the scope of these easements by operating the dam "in a manner not reasonably necessary to the enjoyment of their rights, resulting in continuous erosion, property damage, and loss of shoreline on the plaintiffs' properties." Landowners assert claims of trespass, nuisance, a taking of property, and breach of the easements. MPC and PPLM, conversely, maintain that their operation of the dam has been within the scope of the easements and that they are not liable, therefore, for Landowners' claimed damages. This Court addressed the parties' differing views of the easement language in Mattson II. Our various interpretations of that language bear directly on the class-certification issue in the instant appeal and are explained in the Discussion section below.
¶13 Turning now to the class-certification proceedings, Landowners commenced this action on behalf of themselves and similarly situated landowners and filed motions to certify the lawsuit as a class action under Rule 23(a) and (b)(3) of the Montana Rules of Civil Procedure. The District Court granted the motions as to MPC in March 2001 and as to PPLM in July 2003. The court certified the following class:
All persons and entities (other than Defendants and the Confederated Salish and Kootenai Tribes of the Flathead Reservation, Montana) that own real property either with frontage on the shoreline of Flathead Lake in Flathead County or Lake County, Montana, or which contains a bank of the Flathead River located in Flathead County, Montana, or both.
¶14 In analyzing Landowners' motions for class certification, the District Court stated that it was "required to take the Plaintiffs' allegations in support of the class action as true," citing Eisen v. Carlisle and Jacquelin, 417 U.S. 156, 177-78, 94 S. Ct. 2140 (1974). In its cross-appeal in Mattson II, PPLM argued that the District Court had erred in this respect. This Court agreed, concluding that the District Court had overread the Eisen decision. Mattson II, ¶ 64. Notably, the Supreme Court has recently confirmed this conclusion. See Wal-Mart Stores, Inc. v. Dukes, ___ U.S. ___, 131 S. Ct. 2541, 2552 n. 6 (2011). Citing federal precedent as persuasive authority,*fn2 we observed that nothing in Rule 23 requires a district court to accept all of the complaint's allegations when deciding whether to certify a class. Mattson II, ¶ 65 (citing Szabo v. Bridgeport Machs., Inc., 249 F.3d 672, 675 (7th Cir. 2001)). In fact, it may be necessary to look past the pleadings because " 'a court must understand the claims, defenses, relevant facts, and applicable substantive law in order to make a meaningful determination of the certification issues.' " Mattson II, ¶ 65 (quoting Castano v. Am. Tobacco Co., 84 F.3d 734, 744 (5th Cir. 1996), and also citing Gen. Tel. Co. of the Southwest v. Falcon, 457 U.S. 147, 160, 102 S. Ct. 2364, 2372 (1982)). Thus, for purposes of analyzing a motion for class certification, we adopted the following guidelines:
"(1) a district judge may certify a class only after making determinations that each of the Rule 23 requirements has been met; (2) such determinations can be made only if the judge resolves factual disputes relevant to each Rule 23 requirement and finds that whatever underlying facts are relevant to a particular Rule 23 requirement have been established and is persuaded to rule, based on the relevant facts and the applicable legal standard, that the requirement is met; (3) the obligation to make such determinations is not lessened by overlap between a Rule 23 requirement and a merits issue, even a merits issue that is identical with a Rule 23 requirement; (4) in making such determinations, a district judge should not assess any aspect of the merits unrelated to a Rule 23 requirement; and (5) a district judge has ample discretion to circumscribe both the extent of discovery concerning Rule 23 requirements and the extent of a hearing to determine whether such requirements are met in order to assure that a class certification motion does not become a pretext for a partial trial of the merits.
Mattson II, ¶ 67 (quoting Miles v. Merrill Lynch & Co., 471 F.3d 24, 41 (2d Cir. 2006)).
¶15 Having concluded that the District Court applied an incorrect "take the Plaintiffs' allegations as true" standard, we vacated the District Court's July 2003 order certifying the class as to PPLM and remanded for reconsideration under the Miles guidelines. Mattson II, ¶¶ 67, 70. The District Court's March 2001 order granting class certification as to MPC had not been challenged in Mattson II and, thus, remained in force (for the time being).
¶16 On remand, Landowners filed a renewed motion for class certification as to PPLM. The parties briefed the issue, and the District Court held an evidentiary hearing in August 2010, at which time various witnesses testified and a number of exhibits were admitted. The District Court issued its findings of fact, conclusions of law, and order on June 16, 2011. The court concluded that Landowners had failed to establish all of the elements of Rule 23(a) and (b)(3), and the court thus denied their renewed motion to certify the class as to PPLM. Moreover, the court decertified the class as to MPC as well. The District Court's reasoning will be discussed below, where relevant.
¶17 We review a district court's decision on a motion for class certification for an abuse of discretion. Chipman v. N.W. Healthcare Corp., 2012 MT 242, ¶ 17, 366 Mont. 450, 288 P.3d 193. The question under this standard is not whether this Court would have reached the same decision, but whether the district court acted arbitrarily without conscientious judgment or exceeded the bounds of reason. Chipman, ¶ 17. Of course, "[a] court abuses its discretion if its certification order is premised on legal error." Hawkins v. Comparet-Cassani, 251 F.3d 1230, 1237 (9th Cir. 2001); accord Marisol A. v. Giuliani, 126 F.3d 372, 375 (2d Cir. 1997) ("[T]he failure to follow the proper legal standards in certifying a class . . . is an abuse of discretion."). Likewise, "when a district court's decision is not supported by findings as to the applicability of Rule 23 criteria, it is not entitled to the traditional deference" given to determinations of class status. Local Joint Exec. Bd. of Culinary/Bartender Trust Fund v. Las Vegas Sands, Inc., 244 F.3d 1152, 1161 (9th Cir. 2001) (internal quotation marks omitted). "To the extent that the ruling on a Rule 23 requirement is supported by a finding of fact, that finding, like any other finding of fact, is reviewed under the 'clearly erroneous' standard. And to the extent that the ruling involves an issue of law, review is de novo." Miles, 471 F.3d at 40-41. Thus, for example, "a ruling on numerosity, based on a finding of fact that is not clearly erroneous and with application of a legal standard that is correct, could be affirmed as within allowable discretion, in some circumstances, whether the ruling determined that this Rule 23 requirement was met or not met." Miles, 471 F.3d at 41.
¶18 The class action is "an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only." Califano v. Yamasaki, 442 U.S. 682, 700-01, 99 S. Ct. 2545, 2557 (1979). Rule 23 of the Montana Rules of Civil Procedure governs the propriety of a class action in Montana. The threshold inquiry into whether a class action is appropriate requires analysis of the four prerequisites set out in Rule 23(a): numerosity, commonality, typicality, and adequacy of representation. Diaz v. Blue Cross & Blue Shield of Mont., 2011 MT 322, ¶ 27, 363 Mont. 151, 267 P.3d 756. These four requirements "ensure[ ] that the named plaintiffs are appropriate representatives of the class whose claims they wish to litigate" and "effectively limit the class claims to those fairly encompassed by the named plaintiff's claims." Wal-Mart, 131 S. Ct. at 2550 (internal quotation marks omitted). Once the Rule 23(a) prerequisites are satisfied, the analysis shifts to Rule 23(b), which sets forth additional requirements depending on the type of class action being sought. Diaz, ¶ 27.
¶19 Landowners seek class certification under Rule 23(b)(3). Accordingly, they must satisfy the four criteria of Rule 23(a) and ...