A federal judge has refused to dismiss a class action suit against Bank of America, its home loan and reinsurance subsidiaries and a number of private mortgage insurers, instead directing the parties to develop a record on the issue of whether the statute of limitations should be equitably tolled based on the plaintiffs’ claims that the defendants allegedly engaged in a scheme to use mortgage insurance premiums to fund illegal kickbacks to lenders.
In Riddle v. Bank of America Corp., U.S. District Judge Berle M. Schiller of the Eastern District of Pennsylvania said the plaintiffs alleged facts sufficient to defeat the defendants’ motions to dismiss at the current stage of the litigation.
According to Schiller, the plaintiffs claimed to have paid nearly $285 million for private mortgage insurance premiums, but alleged that a portion of that money was used to provide kickbacks to lenders.
"Whether these arguments ultimately bear fruit must be decided at a later date," Schiller said. "At this stage, however, plaintiffs’ allegations that defendants dressed up an illegal scheme to appear as a legitimate transaction is sufficient to deny defendants’ motion to dismiss on the issue of equitable tolling."
Schiller said that if the plaintiffs can prove their allegations they may be entitled to equitable tolling, but noted that the defendants have raised legitimate arguments about the plaintiffs’ lack of due diligence and the timeliness of their claims.
"Therefore, before the parties pour significant time and resources into the merits of plaintiffs’ claims and whether this litigation can be certified as a class action, the court will afford the parties an opportunity to conduct limited discovery on the statute of limitations issue," Schiller said.
In Riddle, according to Schiller, plaintiffs Thomas J. Riddle, Marilyn Fischer and Jeffrey Stanton filed a class action suit against Bank of America Corp. (BAC), Bank of America (BOA), Bank of America Reinsurance Corp. (BOARC), United Guaranty Residential Insurance Co., Triad Guaranty Insurance Corp., Republic Mortgage Insurance Co., Mortgage Guaranty Insurance Corp., Radian Guaranty Inc. and Genworth Mortgage Insurance Corp.
The plaintiffs have since, however, voluntarily dismissed their claims against Triad, Republic and MGIC, according to Schiller.
According to Schiller, the plaintiffs all purchased homes through mortgages with BOA and were required to buy private mortgage insurance selected by the lender.
Riddle’s mortgage insurance was with Genworth, Fischer’s insurance was with United and Stanton’s was Radian, Schiller said.
"According to plaintiffs, lenders such as BAC and BOA, along with their affiliated mortgage reinsurer, BOARC, colluded with various private mortgage insurers such as Radian, Genworth and United to evade federal laws that prohibit lenders from accepting kickbacks or referral fees from any person providing a real estate settlement service or accepting any portion of a settlement service fee, other than for services actually performed," Schiller said.
The plaintiffs alleged that lenders such as BOA set up reinsurance subsidiaries like BOARC to contract with private mortgage insurers, according to Schiller.
The plaintiffs alleged that the lenders then funneled kickbacks from the private mortgage insurers to their own reinsurance subsidiaries, Schiller said.
The plaintiffs alleged that, in exchange for the lender referring borrowers to a private mortgage insurer, the private mortgage insurer kicked a percentage of the borrower’s premiums back to the lender’s reinsurance subsidiary, according to Schiller.
Meanwhile, according to the plaintiffs, the contracts were structured to allow for the reinsurers to be paid hundreds of millions of dollars in premiums while assuming little or no actual risk because they could opt out of the scheme at any time.
"Ultimately, plaintiffs contend, borrowers paid more for mortgage insurance because the price included the kickbacks to lenders," Schiller said. "The scheme perpetrated by defendants failed to constitute a real, risk-transferring reinsurance agreement between BOARC and the private mortgage insurers."
The plaintiffs alleged that the scheme violated the Real Estate Settlement Procedures Act (RESPA) and argued that they were entitled to equitable tolling of the statute of limitations because the defendants intentionally concealed the scheme, which was too complicated for the plaintiffs to have uncovered on their own without the help of lawyers, according to Schiller.
Beginning his analysis, Schiller noted that, under the U.S. Court of Appeals for the Third Circuit’s 1994 ruling in Oshiver v. Levin, Fishbein, Sedran & Berman, plaintiffs are entitled to equitable tolling when "(1) the defendant has actively misled the plaintiff respecting the plaintiff’s cause of action; (2) the plaintiff in some extraordinary way has been prevented from asserting his or her rights; or (3) the plaintiff has timely asserted his or her rights mistakenly in the wrong forum."
Radian and Genworth argued in their motion to dismiss that the plaintiffs failed to allege any acts of concealment; United echoed this argument in its own motion to dismiss and further argued that the plaintiffs failed to exercise any due diligence, according to Schiller.
The Bank of America defendants, meanwhile, disputed the plaintiffs’ claim that the alleged scheme was self-concealing and argued in their motion to dismiss that the plaintiffs failed to show that the defendants affirmatively tried to deceive them, Schiller said.
But Schiller disagreed, noting that the plaintiffs "cite mortgage documents that ‘contain … language which does not disclose the nature of the agreements/understandings alleged, or that Bank of America’s captive reinsurance arrangements resulted in a financial benefit or kickback to Bank of America, but rather misleadingly give the arrangement an outward, though incorrect appearance of legitimacy.’"
"These alleged misrepresentations are deemed separate and apart from the actual RESPA violation, which is complete when the fees are improperly accepted or shared," Schiller said.
The plaintiffs relied on the Eastern District of Pennsylvania’s February ruling in Barlee v. First Horizon National, in which plaintiffs brought claims identical to those in Riddle and based on the same scheme, according to Schiller.
The Barlee court had found that the plaintiffs’ allegations that they were unable to uncover the alleged scheme on their own and that the defendants had purposely concealed the scheme were sufficient to defeat a motion to dismiss on the issue of equitable tolling, Schiller said.
"With respect to their diligence, plaintiffs correctly note that courts in this district have determined that due diligence is sufficiently alleged by a plaintiff’s full participation in his or her loan transaction coupled with a defendant’s acts of concealment," Schiller said. "The court sees no reason to deviate from these holdings here before a record is developed."
Counsel for the plaintiffs, Edward W. Ciolko of Kessler Topaz Meltzer & Check in Radnor, Pa., could not be reached for comment.
Counsel for the Bank of America defendants, David L. Permut of Goodwin Procter in Washington, D.C.; counsel for United, Brad E. Rosen of Quinn Emanuel Urquhart & Sullivan in New York; and counsel for Genworth, Nicholas M. Centrella of Conrad O’Brien in Philadelphia, also could not be reached.
Counsel for Radian, David Smith of Schnader Harrison Segal & Lewis, said Friday afternoon that he was not authorized to comment on the ruling.
(Copies of the 19-page opinion in Riddle v. Bank of America Corp., PICS No. 13-0866, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •