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Ninth Circuit Disapproves $45 Million FCRA Class Settlement Based on Conditional Incentive Award
On April 22, the U.S. Court of Appeals for the Ninth Circuit reversed a district court’s order approving a $45M class action settlement under FCRA on the grounds that the conditional nature of the incentive award rendered the class representatives and class counsel inadequate representatives of the absent class members. Radcliffe v. Experian Info. Solutions Inc., 11-56376, 2013 WL 1715422 (9th Cir. Apr. 22, 2013). The plaintiffs alleged that the three major credit reporting agencies issued consumer credit reports containing negative entries for debts that were already discharged through bankruptcy. The parties reached a settlement in February 2009, whereby a $45M common fund would provide an award not to exceed $5,000 to each named plaintiff, while plaintiffs suffering actual damages would receive awards ranging from $150.00 to $750.00 and the remaining class members would each recover roughly $26.00. The Ninth Circuit held that the “incentive awards” provided to the named plaintiffs “corrupt the settlement by undermining the adequacy of the class representatives and class counsel,” while the conditional nature of the awards “removed a critical check on the fairness of the class-action settlement, which rests on the unbiased judgment of class representatives similarly situated to absent class members.” The court further held that class counsel would have been disqualified under this agreement because they have a fiduciary responsibility to represent the interests of the class as a whole, and conditional incentive rewards would require class counsel to represent class members with conflicting interests. The court explained that the disparity between the awards given to the named plaintiffs and the rest of the class “further exacerbated the conflict of interest caused by the conditional incentive awards.” The court concluded that the representative plaintiffs ultimately were unable to fairly and adequately protect the interests of the class, reversed the district court’s approval of the settlement, and remanded the case for further proceedings.
Supreme Court Holds Class Plaintiff Cannot Avoid Removal by Stipulating Damages Under CAFA's Jurisdictional Threshold
On March 19, the Supreme Court held that a class action plaintiff’s pre-class certification stipulation that the class would not seek damages exceeding the Class Action Fairness Act’s (CAFA) $5 million amount-in-controversy requirement could not be binding on the class, and therefore, the stipulation would not affect federal jurisdiction under CAFA. Standard Fire Ins. Co. v. Knowles, No. 11-1450, 2013 WL 1104735 (2013). The district court determined that the value of the putative class members’ claims would have exceeded $5 million, but for the named plaintiff’s stipulation limiting damages to less than that amount, and based on that stipulation, remanded the case to state court. On appeal, the Supreme Court explained that while a plaintiff may disclaim his or her own damages, such damages stipulations or any pre-certification stipulation “cannot legally bind members of the proposed class before the class is certified.” The Court thus held that because the class representative “lacked the authority to concede the amount-in-controversy issue for the absent class members,” the district court wrongly concluded that the “precertification stipulation could overcome its finding that the CAFA jurisdictional threshold had been met.” The Court vacated the District Court’s order remanding the case to state court, and remanded the class action for further proceedings in the federal district court.
Supreme Court Declines Review of Second Circuit Decision Reinstating MBS Class Action
On March 18, the U.S. Supreme Court denied a petition seeking review of a Second Circuit decision that reinstated a class action against an underwriter and an issuer of mortgage-backed securities. Goldman Sachs & Co. v. NECA-IBEW, No. 12-528, 2013 WL 1091772 (2013). An institutional purchaser of certain MBS filed suit on behalf of a putative class alleging that the offering documents contained material misstatements regarding the mortgage loan originators’ underwriting guidelines, the property appraisals of the loans, and the risks associated with the certificates. After the district court dismissed the case, the Second Circuit reinstated and held that the plaintiff had standing to assert the claims of the class, even when the securities were purchased from different trusts, because the named plaintiff raised a “sufficiently similar set of concerns” to allow it to seek to represent proposed class members who purchased securities backed by loans made by common originators. With regard to the plaintiff’s ability to plead a cognizable injury, the court reasoned that while it may be difficult to value illiquid assets, “the value of a security is not unascertainable simply because it trades in an illiquid market.”
Sixth Circuit Affirms Fair Lending Class Certification Denial
On January 15, the U.S. Court of Appeals for the Sixth Circuit affirmed a district court’s denial of class certification sought by a proposed class of borrowers alleging that a lender’s mortgage loan pricing policy, which granted discretion to local loan originators, disparately impacted racial minorities. Miller v. Countrywide Bank, N.A., No. 12-5250, 2013 WL 149853 (6th Cir. Jan. 15, 2013). The outcome was expected following the U.S. Supreme Court’s opinion in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011), which held that a policy that allows local units discretion to act can only present a common question if the local units share a common mode of exercising that discretion. In this case, the borrowers sued their lender on behalf of a proposed class claiming that the lender’s policy granting local agents discretion to deviate from par rates, within a specified range, when originating loans was racially biased. The appeals court held, as in Dukes, that the borrowers did not assert that the policy guided how local agents exercised their discretion and as such the policy could not have caused or contributed to the alleged disparate impacts. The court rejected the borrowers’ attempts to distinguish Dukes based on the Seventh Circuit’s holding in McReynolds v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 672 F.3d 482, 490 (7th Cir.), because that case involved companywide policies that contributed to the alleged disparate impact that arose from the delegation of discretion to individual actors. The Sixth Circuit held that no similar policy existed in this case and affirmed denial of class certification.
California Federal District Court Holds Force-Placed Insurance Claims Not Preempted by National Bank Act
On December 11, the U.S. District Court for the Northern District of California refused to preempt under the National Bank Act claims that a mortgage lender breached its contract by force-placing a backdated flood insurance policy on the borrower’s property. Ellsworth v. U.S. Bank, No. C 12-02506, 2012 WL 6176905 (N.D. Cal. Dec. 11, 2012). The borrower brought a putative class action against his lender and flood insurer on behalf of himself and similarly situated borrowers, alleging that the lender and insurance company overcharged him for a temporary force-placed flood insurance policy that was backdated, and for which the lender received a kickback from the insurer. The lender and insurer moved to dismiss on the grounds that the borrower’s claims are preempted by the National Bank Act and barred by California’s filed rate doctrine and the voluntary payment doctrine, and that the borrower failed to state a claim. The court held that the borrower’s claims are not preempted by the National Bank Act because they are at their core about practices—the alleged kickbacks and backdating—rather than fees. Further, the court held that claims based on overcharging due to the alleged kickback scheme are not a challenge to the rates of the premiums, but rather the allegedly unlawful conduct, and therefore are not barred by the filed rate doctrine. The court also declined to dismiss based on the defendants’ attempts to apply the voluntary payment doctrine and arguments the borrower failed to state a claim, and denied defendants’ motions to dismiss.
Ohio Supreme Court Upholds Dismissal of Class Action Challenging Bank's Interest Calculation Method
On November 21, the Ohio Supreme Court reinstated a lower court’s grant of summary judgment to a bank defending a putative class action challenging its interest calculation method as described in its promissory note for a commercial loan. JNT Properties, LLC v. KeyBank N.A., No. 2012-Ohio-5369, 2012 WL 5911063 (Ohio Nov. 21, 2012). The borrower alleged that the bank was in breach of contract by calculating interest using the 365/360 method, resulting in a higher effective rate than the rate stated in the promissory note. The bank maintained that the note clearly fixed the interest rate according to the 365/360 method. The trial court found in favor of the bank on summary judgment, but the appellate court reversed, concluding that the note was ambiguous and created a genuine issue of material fact as to which interest rate the note meant to impose. The Ohio Supreme Court reversed the appellate court and reinstated the trial court’s grant of summary judgment in favor of the bank. It held that the note’s “inartful use of the term ‘annual interest rate,’ which is clearly at variance with the next phrase setting the 365/360 method as the applicable method for computing interest,” does not render the clause defining the interest calculation method ambiguous. The court reasoned that the note was not so confusing that a reasonable person would think that the rate would be calculated using something other than the 365/360 method, and held that the note made clear that the term being defined was not the annual interest rate, but rather the interest computation method.
Supreme Court Passes on Appeals of Overdraft Litigation Decisions
On October 9, the U.S. Supreme Court denied the petitions for writ of certiorari filed by plaintiffs in two cases challenging the overdraft billing practices of certain banks. Hough v. Regions Financial Corp., No. 12-1139, 2012 WL 3097294 (Oct. 9, 2012); Buffington v. SunTrust Banks, Inc., No. 12-146, 2012 WL 3134482 (Oct. 9, 2012). In March, the U.S. Court of Appeals for the Eleventh Circuit issued two separate, but substantively similar, opinions regarding arbitration agreements at issue in the overdraft litigation. Hough v. Regions Financial Corp., No. 11-14317, 2012 WL 686311 (11th Cir. Mar. 5, 2012); Buffington v. SunTrust Banks, Inc., No. 11-14316, 2012 WL 660974 (11th Cir. Mar. 1, 2012). In both cases, based on the Supreme Court’s holding in AT&T Mobility v. Concepcion, 131 S. Ct. 1740 (2011), the Eleventh Circuit vacated district court rulings that the banks’ arbitration clauses were substantively unconscionable under Georgia law because they contained a class action waiver. After further proceedings on remand yielded a second appeal, the Eleventh Circuit held that, under Georgia law, an agreement is not unconscionable because it lacks mutuality of remedy. It also rejected the district court’s holding that the clauses were procedurally unconscionable because the contract did not meet the Georgia standard that an agreement must be so one-sided that “’no sane man not acting under a delusion would make [it] and … no honest man would’ participate in the transaction.” The U.S. Supreme Court’s decision not to review the Eleventh Circuit decisions will now require the plaintiffs to arbitrate their claims against the banks.
California Federal District Court Affirms Lender's Sole Discretion to Change Rate Index for ARM Loan
On October 3, the U.S. District Court for the Northern District of California held that a lender had no duty to abandon the index to which certain adjustable rate mortgage rates were tied when the index experienced an unprecedented jump. Haggarty v. Wells Fargo Bank, N.A., No 10-02416, 2012 WL 4742815 (N.D. Cal. Oct. 3, 2012). The borrowers, who had entered into two adjustable rate mortgages, sued the lender when their rates increased substantially following a jump in the index to which the adjustable rates were tied. On behalf of themselves and a putative class, the borrowers claimed that the bank breached an implied covenant of good faith and fair dealing by failing to substitute a new index under a clause in the Notes that allowed the lender to choose a new index if the original index was “substantially recalculated.” The court held that the Note language granting the lender ”sole discretion” to determine whether the index had been substantially recalculated insulated the lender from claims that it was required to reach a certain conclusion about the index and the need to substitute a new index. Further, the court held that the borrowers’ attempt to use implied covenants to add contract terms or establish a breach was preempted by the Home Owners’ Loan Act, which in relevant part was intended to avoid inconsistent obligations for lenders regarding interest rate adjustments. The court granted summary judgment in favor of the lender.
Federal District Court Holds Federal Law Preempts Massachusetts' Statutory Limits On Hazard Insurance
On September 21, the U.S. District Court for the District of Massachusetts held that the Federal Homeowners Loan Act preempted a Massachusetts law that forbids lenders from requiring borrowers to purchase insurance greater than the replacement cost of the building on the mortgaged property. Silverstein v. ING Bank, fsb, No. 12-10015, 2012 WL 4340587 (D. Mass. Sep. 21, 2012). A borrower brought a putative class action in state court alleging that the bank’s requirement that borrowers purchase insurance equal to the outstanding principal balance on the mortgage violated the state’s limit on mortgage insurance. The bank removed the case to federal court and subsequently moved to dismiss while the borrower moved to remand the case. In denying the motion to remand and granting the bank’s motion to dismiss, the court held that the Massachusetts statute limiting hazard insurance to the replacement cost of the building falls plainly within the illustrative list of preempted state laws provided by the Homeowners Loan Act’s implementing regulations. The court conceded that the borrower could bring common law claims against the bank, but held that the borrower’s attempt to label his clear statutory claims as common law claims failed.
First Circuit Reinstates Two Force-Placed Insurance Class Actions
On September 21, the U.S. Court of Appeals for the First Circuit vacated a district court’s dismissal of two putative class actions brought by borrowers alleging that their mortgage lender improperly required borrowers to buy and maintain higher flood insurance coverage. Lass v. Bank of America, N.A., No. 11-2037, 2012 WL 4240504 (1st Cir. Sep. 21, 2012); Kolbe v. BAC Home Loans Servicing, LP, No. 11-2030, 2012 WL 4240298 (1st Cir. Sep. 21, 2012). Both named borrowers claim on their own behalf and that of similarly situated borrowers that the bank breached its contracts by requiring borrowers to purchase more flood insurance than contractually required. They also claim that the bank proceeded in bad faith by requiring that such insurance be purchased through backdated policies placed with the bank’s affiliates, which earned a kickback on the purchase. In Kolbe, while the court favored the borrower’s interpretation that the contract prohibits the lender from exercising discretion with regard to flood insurance, it held that the mortgage contract was ambiguous and susceptible to multiple interpretations. In Lass, the court held that while the borrower’s mortgage contract explicitly grants the lender discretion to set the amount of flood insurance required for the property, a “flood insurance notification” document provided to the borrower at closing may be read to state that the amount of insurance required at closing would not change during the term of the mortgage. The notification was part of the mortgage agreement and essentially completed that contract, the court held. Taken together, the court explained, the mortgage contract and flood insurance notification are ambiguous with regard to the lender’s authority to alter the flood insurance coverage requirement. Further, in both cases, the court held that the borrowers alleged sufficient facts to support their bad faith claims of the bank’s backdating and self-dealing. The court vacated the district court’s decisions on the lender’s motions to dismiss and remanded both cases for further proceedings. Notably, in Kolbe, the circuit court did not overturn the lower court’s dismissal of the plaintiff’s claims for breach of contract and breach of the implied covenant of god faith and fair dealing against the insurance carrier, noting that the complaint was devoid of allegations showing a contractual relationship between the plaintiff and the insurance carrier.