The U.S. Court of Appeals for the Eighth Circuit recently affirmed the dismissal of a class action by Missouri borrowers alleging that various assignees and purchasers of second mortgages charged or collected illegal fees in violation of the Missouri Second Mortgage Loan Act (MSMLA), holding that plaintiff borrowers lacked standing to sue the defendants who did not service their loans.

In so ruling, the Eighth Circuit refused to apply a state appellate court ruling made during the long history of this action, instead ruling that the MSMLA has a three-year statute of limitations, and that this three-year statute of limitations began to run when the subject origination fees were charged.

A copy of the opinion is available at:  Link to Opinion.

The borrowers, whose loans were secured by second mortgages on their homes, sued in state court. The case was twice removed to federal court and twice remanded to the state court, with the state court eventually granting summary judgment for the defendants on the basis that the three-year statute of limitations had expired.

The borrowers appealed to the Missouri Court of Appeals, which reversed and remanded the case, holding that a six-year statute of limitations applied. The borrowers then filed their sixth amended complaint, naming a national bank as a defendant for the first time. The bank removed the case to federal court pursuant to the federal Class Action Fairness Act and the district court denied the borrowers’ motion to remand to state court.

The district court then granted the bank’s motion to dismiss as to loans that it held directly or as trustee because the named class representatives lacked standing to sue. The borrowers appealed to the U.S. Court of Appeals for the Eighth Circuit.

On appeal, the Eighth Circuit first addressed the issue of standing, which federal courts must do before turning to the merits when the issue of standing is raised.  As you may recall, Article III of the U.S. Constitution limits the jurisdiction of federal courts to “cases and controversies.”

“A case or controversy requires a plaintiff to have standing. Standing requires a plaintiff: (1) to have suffered a concrete injury in fact, (2) to prove a causal connection between the injury and the defendant’s allegedly unlawful conduct, and (3) to show the injury is capable of redressability through a favorable ruling from the courts.”

Borrowers Lacked Standing to Sue

The Eighth Circuit agreed with the district court that the plaintiff borrowers lacked standing to sue the bank because there was no causal connection between the alleged charging and collecting of improper fees and the bank, which never collected any such fees from the plaintiffs.

The Court rejected the borrowers’ argument that the trial court’s order certifying the class conferred standing because it is settled law that “[a] class certification order does not confer standing on a plaintiff who otherwise lacks it.”

The Court also rejected the borrowers’ argument that they had standing under the “juridical link” doctrine, which “allows a named plaintiff to bring a class action against parties that did not cause the named plaintiff’s injury if the plaintiffs suffered identical injuries by parties related through a conspiracy or concerted scheme and suing all parties in one action would be expeditious.” Under this doctrine, once a court certifies a class, standing is analyzed with reference to the class as a whole, not with reference to the individual named class representatives.

Although the issue was one of first impression in the Eighth Circuit, the Court agreed with other circuits that found, under similar circumstances, that the doctrine does not confer standing on the borrowers.

Finally, the Eighth Circuit rejected the borrowers argument that the federal Home Ownership Equity Protection Act (HOEPA), conferred standing on them because “the courts that have considered the issue have held that nothing in HOEPA purports to confer standing that is otherwise lacking.”

Because the plaintiff borrowers lacked standing to sue the bank, which did not purchase and did not service their loans, the district court’s dismissal of the complaint against the bank was affirmed.

Borrowers’ Claims Were Time-Barred

In addition, the Eighth Circuit held the plaintiff borrowers’ claims were time-barred.

Earlier in this prolonged litigation, the Missouri appellate court held that MSMLA claims are subject to a six-year statute of limitations.  Schwartz v. Bann-Cor Mortgage, 197 S.W.3d 168 (Mo. Ct. App. 2006).  The borrowers argued that the ruling by the Missouri appellate court earlier in the litigation should apply, because it “is the best pronouncement of Missouri law and its holding should be applied to this case,” and under the law of the case doctrine.

However, the Eighth Circuit rejected the Missouri appellate court’s ruling, referencing its prior rulings in Rashaw v. United Consumers Credit Union, 685 F.3d 739 (8th Cir. 2012), cert. denied, 133 S. Ct. 1250 (2013), Washington v. Countrywide Home Loans, Inc., 747 F.3d 955, 958 (8th Cir.), cert. denied, 135 S. Ct. 307 (2014), and Huffman v. Credit Union of Tex., 758 F.3d 963, 966 (8th Cir. 2014), in which the Eighth Circuit repeatedly held that the three-year statute of limitations applied, after conducting a thorough analysis of both Missouri case law and legislative history.

The Eighth Circuit also rejected the borrowers’ argument that the law of the case doctrine required application of the Missouri appellate court’s ruling.  Under the law-of-the-case doctrine, “‘a court should not reopen issues decided in earlier stages of the same litigation.'” In re Raynor, 617 F.3d 1065, 1068 (8th Cir. 2010).  However, “the doctrine does not apply if the court is convinced that [its prior decision] is clearly erroneous and would work a manifest injustice.” Pepper v. United States, 131 S. Ct. 1229, 1250-51 (2011).  The Court held that the exception to the law of the case doctrine applied here.

The borrowers then argued that their causes of action did not accrue at the time of loan origination, but rather accrued when the assignees acquired or began collecting on the loans. Under Missouri law, a cause of action accrues “[w]hen the fact of damage becomes capable of ascertainment . . . even if the actual amount of damage is unascertainable.” Bonney v. Envtl. Eng’g, Inc., 224 S.W.3d 109, 116 (Mo. Ct. App. 2007). “Damage is capable of ascertainment when it can be discovered or is made known, even if its extent remains unknown.” D’Arcy & Assocs., Inc. v. K.P.M.G. Peat Marwick, L.L.P., 129 S.W.3d 25, 29 (Mo. Ct. App. 2004).

However, the Eighth Circuit held that the borrowers’ causes of action accrued with the origination of their loans. Explaining its ruling, the Eighth Circuit noted that “the ‘fact of damage’ would have been ‘capable of ascertainment’ when the loans closed because the borrowers allege that the impermissible fees were wrapped into the principal amount of the loan,” and “[t]he three-year statute of limitations thus began to run when the loans closed.”

The Eighth Circuit also rejected the plaintiff borrowers’ arguments that their claims “related back” to the original filing of this action within the limitations period.  The Court held that “[a]n evolving strategy, rather than a mistake in identity, caused the borrowers to add additional defendants.”  This, the Court held, prevented application of the relation back doctrine.

Lastly, the Eighth Circuit rejected the borrowers’ argument that HOEPA’s allowance for derivative liability for assignees somehow extended the statute of limitations period on their state-law claims.