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3rd Circuit Revives Class Action Against Countrywide Over Alleged Kickback Scheme
The Legal Intelligencer
October 29, 2009
In a huge setback for Countrywide Financial Corp., a federal appeals court has revived a national class action brought by homebuyers who accused the lender of concocting a kickback scheme in which buyers were required to purchase mortgage insurance from one of a handful of companies that in turn took out reinsurance policies from one of Countrywide's wholly owned subsidiaries.
A lower court had dismissed the case on standing grounds after finding that the buyers could never show they had been "overcharged" and therefore had no right to sue under the Real Estate Settlement Procedures Act.
But the U.S. Department of Justice intervened in the appeal of that ruling and urged the court to revive the case and to declare that consumers have standing to sue whenever they allege a violation of RESPA's anti-kickback provisions.
Now, in Alston v. Countrywide Financial Corp., a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals has agreed and ruled that such an alleged kickback scheme, if proven, is a clear violation of RESPA, and that consumers have no duty under the law to show an overcharge to qualify for statutory damages.
The ruling is a victory for attorneys Edward W. Ciolko, Joseph H. Meltzer, Donna S. Moffa and Terence S. Ziegler of Barroway Topaz Kessler Meltzer & Check in Radnor, Pa.
In an interview, Ciolko said that Countrywide, which was acquired by Bank of America in 2008, could now be facing a class numbering in the tens of thousands and potential liabilities in the hundreds of millions of dollars.
The precise scope of the case is impossible to gauge now, Ciolko said, because it will depend on how the lower court rules on key issues like the statute of limitations that will determine which consumers are eligible to join the class.
In court papers, the plaintiffs lawyers said the suit was brought to "challenge the payment of illegal kickbacks and unearned fees" that stemmed from a scheme concocted by Countrywide Financial and its subsidiaries -- Countrywide Home Loans Inc. and Balboa Reinsurance Co. -- to "circumvent RESPA's strict prohibitions on abusive practices in the provision of home purchase settlement procedures."
The suit alleged that Countrywide set up a "captive reinsurance" scheme in which Countrywide referred buyers to one of seven primary mortgage insurers that in turn "reinsured" their policies with Balboa -- thereby effectively "kicking back" a portion of the premium to Countrywide.
Balboa, the suit alleged, "assumes no or little risk" under the purported reinsurance agreements, revealing that the arrangement "is simply a scheme under which illegal kickbacks and unearned fees are paid to Countrywide."
The suit was dismissed in April 2008 when U.S. District Judge James T. Giles (who has since left the bench and joined Pepper Hamilton) held that the plaintiffs lacked standing because RESPA was designed to protect individuals from "unnecessarily high settlement charges," and therefore did not allow for standing where the consumer cannot show any overcharge.
On appeal, the plaintiffs were joined by the U.S. Department of Justice, which intervened in the case with a brief that said Congress intended to create a private right of action for any consumer who alleges a violation of the kickbacks and unearned fees provisions in the law. Giles' decision to require proof of an overcharge, the DOJ lawyers argued, "cannot be squared with the text, purpose, or legislative history of the statute."
Instead, the DOJ urged the 3rd Circuit to adopt the reasoning of the 6th Circuit's decision in Carter v. Welles-Bowen Realty Inc. that said an allegation that a settlement service provider violated RESPA's Section 8 is enough to satisfy the injury-in-fact requirements of Article III.
The 3rd Circuit agreed, holding that "the plain language of RESPA Section 8 does not require plaintiffs to allege an overcharge."
Writing for the court, U.S. Circuit Judge Maryanne Trump Barry found that "the best indication of Congress's intent" was the method that the statute provided for calculating statutory damages.
Barry noted that RESPA proscribes "specific types of abusive kickback and referral activities," and goes on to provide a private right of action for a consumer that says defendants will be liable for "an amount equal to three times the amount of any charge paid for such settlement service."
She also found that "none of these provisions contains the word 'overcharge' or otherwise implies that the plaintiff must allege that he or she paid more than he or she otherwise would have paid."
Barry, who was joined by Judges D. Michael Fisher and Kent A. Jordan, concluded that "the provision of statutory damages based on the entire payment, not on an overcharge, is a certain indication that Congress did not intend to require an overcharge to recover under Section 8 of RESPA."
Neither of Countrywide's lawyers -- David L. Permut and Thomas Hefferon of Goodwin Procter in Washington, D.C. -- could be reached for comment on Wednesday.
Efforts to reach a spokesperson for Bank of America were unsuccessful.
