Class Certification
City of Philadelphia v Bank of America, et al.
Date: Aug. 1, 2025
Issue: Whether the Southern District of New York applied the wrong legal standard in granting class certification in the variable rate demand obligation (VRDO) lawsuit against several banks.
Case Summary: In a unanimous decision, a Second Circuit panel upheld a Southern District of New York order granting class certification to American cities and others accusing eight banks of inflating interest rates on VRDOs.
Rule 23 requires a proposed class to prove predominance. For damages classes under Rule 23(b)(3), the court must decide whether common legal or factual questions outweigh individual ones. The rule ensures the class is cohesive enough for one trial. Plaintiffs must show they can prove their core claims with common evidence and measure damages on a class-wide basis without extensive individual determinations.
In August 2021, the city of Philadelphia, the San Diego Association of Governments, the mayor and city council of Baltimore, and other investors (Plaintiffs) sued several banks, including Bank of America, Citigroup, and Merrill Lynch, claiming they conspired to avoid competition and agreed to keep VRDO interest rates artificially high to prevent investors from exercising a “put” option on the bonds and tendering them back to the banks. Plaintiffs paid interest on VRDOs, which the banks reset each week or day under remarketing agreements. Those agreements required the banks to set the lowest possible rates to keep the bonds trading at face value.
In 2020, Judge Jesse Furman of the Southern District of New York refused to dismiss most claims. In 2013, Judge Furman determined the Plaintiffs satisfied the predominance requirement of Rule 23(b)(3) and granted a motion to certify a nationwide class composed of all persons and entities that paid interest on VRDOs reset by the banks between Feb. 1, 2008, and Nov. 30, 2015.
On appeal, the banks challenged the district court’s finding that the proposed class met their burden of showing commonality and predominance. Specifically, the banks contended the district court failed to conduct the requisite “rigorous analysis” when determining whether the Rule 23(b)(3) predominance requirement had been met. The banks also argued the district court improperly discounted their individualized defenses to injury and causation in assessing predominance.
However, the panel held that the district court applied the correct Rule 23(b)(3) standard. The panel explained the district court acted in two stages: it first admitted Plaintiffs’ expert testimony under Daubert and then weighed both sides’ expert reports before concluding that common questions of law and fact predominated. Moreover, the district court underscored that Daubert does not end the analysis and subsequently explained why the banks’ arguments against class certification fell short.
The panel also concluded the district court properly considered the banks’ defenses and did not shift the burden of proving predominance. The panel noted that the district court reviewed the banks’ argument that bond-specific factors explained VRDO rates, but the panel held that, once admitted, Plaintiffs’ expert testimony made causation a merits question for later stages rather than class certification. The panel also emphasized that Plaintiffs met their burden by showing that nearly all VRDOs were inflated during the conspiracy period, creating a common issue across the class.
Bottom Line: The Second Circuit reasoned that Plaintiffs had overcome their burden of proof by providing evidence demonstrating that nearly all VRDOs rates were inflated at least once during the conspiracy period.
Document: Opinion
