The U.S. Court of Appeals for the Ninth Circuit recently held that the district court abused its discretion in denying a plaintiff’s motion to certify a class of home buyers alleging that a scheme involving a title insurer buying minority interests in title agencies in exchange for referral of future title insurance business violated the federal Real Estate Settlement Procedures Act (RESPA), affirming in part, vacating in part and remanding for further proceedings.

In so ruling, the Court held that the Consumer Financial Protection Bureau’s position in its amicus brief was not entitled to Chevron deference, because the CFPB was interpreting RESPA’s statutory language, rather than the language of its own rule, and was not doing so as part of its formal rule-making authority, and, in addition, because the statute was not ambiguous.

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

A title insurer allegedly conducted business by buying minority ownership interests in title insurance agencies in return for the exclusive referral of future title insurance business to the insurer.  The lead plaintiff sued, alleging that the arrangement between the title insurer and its “captive title agencies” violated RESPA’s “anti-kickback provision, 12 U.S.C. § 2607.

The plaintiff moved to certify a class of home buyers referred by the 180 title agencies that the insurer partially owned to the insurer.  The district court denied the motion for class certification, instead ordering discovery in order to determine whether a smaller class should be certified.

After limited discovery, the plaintiff moved to certify the smaller class, which the district court also denied.

The Ninth Circuit reversed, holding that there existed a single, common fact question:  whether the alleged arrangement violated RESPA.  It also remanded with directions that nationwide discovery be conducted in order to allow the plaintiff another opportunity at certification of a nationwide class.

The plaintiff moved to certify a nationwide class of all home buyers who closed a federally insured mortgage with 38 title agencies that sold a minority ownership interest to the title insurer, and agreed to refer future title business to the insurer.

The district court again denied the motion, this time because “common issues did not predominate over individual issues for the nationwide class.”  Specifically, the district court held that:  (a) an individual inquiry was required to determine whether the insurer “overpaid for its ownership interest in each title agency;” (b) commonality did not exist on the issues of “reliance and causation for referrals;” and (c) “transaction-specific inquiries as a result of the different types of title agencies will not require common proof related to [the title insurer’s] liability. The plaintiff again appealed.

On appeal, the Ninth Circuit began its analysis applying the abuse of discretion standard of review to whether the district court correctly applied Federal Rule of Civil Procedure 23, and the de novo standard to the “underlying legal questions … [with] any error of law on which a certification order rests [being] deemed a per se abuse of discretion.”

The Ninth Circuit recited that the party seeking class certification bears the burden of establishing that the proposed class satisfies “all requirements in Rule 23(a) [numerosity, commonality, typicality and adequacy of representation] and at least one of the requirements in Rule 23(b)” [here, subsection (b)(3), which requires that a class action is superior to other methods of litigation and] “that questions of law or fact common to class members predominate over any question affecting only individual members.”

The Court then discussed the legislative history of RESPA, noting that one of its main purposes is to protect consumers from unnecessary closing costs caused by abusive practices such as kickbacks and referral fees. It then looked to the text of § 2607, which prohibits the giving of anything of value as part of an agreement “that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.”

The Court explained that subsection 2607(c)(2) provides a “statutory safe harbor” that exempts payments made in return for a referral if the payment was “for goods or facilities actually furnished or for services actually performed.”

The Court then addressed whether an individual inquiry was required for each transaction in light of the safe harbor in subsection 2607(c)(2) and the version of Regulation X in place at the relevant time, 24 C.F.R. 3500.14(g)(2).

Court Declines Deference to CFPB Amicus

The Consumer Financial Protection Bureau, which now enforces RESPA, filed an amicus brief interpreting RESPA and Regulation X, arguing that the safe harbor does not apply to the transactions at issue because the title insurer did not pay for goods, facilities, or services, but for equity interests in the title agencies.

The Court first had to determine how much deference to give the CFPB’s argument.  It reasoned that, because the CFPB was interpreting RESPA’s statutory language, rather than the language of its own rule, and was not doing so as part of its formal rule-making authority, and, in addition, because the statute was not ambiguous, the CFPB was not entitled to any deference under the U.S. Supreme Court’s decision in Chevron, U.S.A., Inc. v. Nat’l Res. Def. Council, Inc.

Nonetheless, the Court agreed with the CFPB’s interpretation, which it found was consistent with RESPA’s language.

The Ninth Circuit reasoned that, although neither RESPA nor Regulation X define “goods,” “facilities,” or “services,” their meanings are plain, citing Webster’s and the American Heritage dictionaries in support.  The Court then concluded that “[t]he ownership interests purchased by [the title insurer] are equity shares, not goods, services, or facilities,” because the purchase of ownership interests are not goods, services, or facilities.

Accordingly, the Ninth Circuit held that the safe harbor under 12 U.S.C. 2607(c)(2) did not apply at all, and the district court erred by relying on the safe harbor provision to determine whether to certify the class.

The Court then turned to “whether individual inquiries are required because of § 2607(a).” It disagreed with the district court because the cases relied upon interpreted the safe harbor provision of subsection 2607(c)(2), which the Court held did not apply to the purchase transactions at issue because “no services were provided by the title agencies to [the title insurer].”

The Court held that “the district court abused its discretion in denying class certification based on an erroneous interpretation of § 2607(a) … and that cases alleging illegal kickbacks in violation of § 2607(a) are not necessarily unfit for class adjudication.”

However, the Ninth Circuit’s work was not finished, because it still had to decide whether there existed “individual issues here that could predominate over common issues such that class action certification is inappropriate” under Rule 23(b)(3).  The Court held that the answer was “no.”

The Ninth Circuit held that RESPA does not require the plaintiff “to pinpoint how much money [the title insurer] paid for the referral agreement as opposed to the equity interest.” Instead, the plaintiff “can state a claim under RESPA [§ 2607(a)] by alleging that [the title insurer] paid a lump sum of money to each captive title agency (the thing of value), and — in exchange for that money — each title agency agreed to refer [the title insurer] future insurance (business agreement).”  The Court reasoned that both RESPA and its implementing regulation define “thing of value” broadly, and the transfer of money need not be only in return for a kickback, but can also be in return for future insurance business, as in case at bar.

The Court stressed that its conclusion is consistent with contract law, under which there exists a “presumption that when parties enter into a contract, each and every term and condition is in consideration of all the others, unless otherwise stated.”  The Ninth Circuit noted that, even though the contracts at issue were silent on how much the title insurer paid for referrals of future business, “the law does not require every term of the contract to have a separately stated consideration,” and the “undivided monetary consideration paid by [the title insurer] must be treated in law as consideration for both the equity interests and referrals.”

According to the Ninth Circuit, because the plaintiff only needed to prove “the existence of an exchange involving a referral agreement, … [s]uch proof does not require inquiry into individual facts across all thirty-eight captive title agencies.”

Court Concludes Commonality Was Present

The Court then considered whether “commonality” existed under Rule 23(a)(2), i.e., “whether the proposed class members share a common question of law or fact, the answer to which ‘will resolve an issue that is central to the validity of each one of the [class members’] claims.’”  The Ninth Circuit concluded that a common question of fact existed:  whether [the title insurer’s] pattern of conduct in entering into similar transaction with the title agencies violates RESPA.”

The Court then ruled that “the district court erred in concluding that the common issue does not predominate over individual issues for the proposed class members” vacating the district court’s denial of class certification in part as to the transactions that were presented for approval to the title insurer’s board of directors.

The Ninth Circuit also disagreed with the district court that because, on some occasions, a third party such as a lender, mortgage broker or realtor had a hand in deciding which title insurer to use, their involvement required individual inquiries rendering class adjudication improper, reasoning that “[o]ther sources of referral do not defeat the predominant common question of fact, i.e., whether the title agencies have contractual obligations to refer their customers to [the title insurer].”

Finally, the Court addressed the district court’s denial of class certification on the basis that “the different types of title agencies will require individual, case-by-case proof on [the title insurer’s] liability.”

The title insurer argued that “its transactions with twelve of the thirty-eight title agencies are affiliated business arrangements (‘ABA’) that are exempt from RESPA violations under § 2607(c)(4).”

However, the Ninth Circuit rejected this argument as invalid as a matter of law because subsection 2607(c)(4) applies “when a person who partially owns a settlement service provider refers business to the service provider, and the owner receives nothing other than a return of the service provider’s shares,” but in the case at bar, the title insurer “— the partial owner of the title agencies — did not refer business to the title agencies.”  Instead the title agencies referred business to the part-owner, the title insurer.  The Court concluded that no individual inquiries as to the “affiliated business arrangement” status of the 12 title agencies was needed because subsection 2607(c)(4) did not apply to these transactions as a matter of law.

The title insurer also argued that it was the majority owner of some of the title agencies and it “cannot refer business to itself,” citing Freeman v. Quicken Loans, Inc., 132 S. Ct. 2034 (2012), a U.S. Supreme Court decision holding that “to establish a violation of § 2607(b), a plaintiff must demonstrate that a charge for settlement services was divided between at least two persons.”

The Court disagreed, finding the cited decision inapplicable because:  (a) “[the title insurer] and its majority-owned title agencies are not the same person, but separate legal entities;” and, (b) “[n]o separate inquiries are necessary merely because [the title insurer] is the majority owner of certain captive title agencies.”

The Court agreed, however, with the district court’s conclusion that [the title insurer’s] “transactions with the newly-formed title agencies do not raise common issues sufficient for class action adjudication,” affirming the district court’s denial of certification as to this subclass because 12 of the 38 title agencies did not exist when the title insurer decided to purchase ownership interests, but were formed jointly with third-party investors.

These particular arrangements presented a different set of facts from the alleged nationwide scheme involving the purchasing of ownership interests in return for future referral of title business.

Because the district court did not address “the remaining prerequisites of class certification, including whether a class action is a superior method of adjudication, whether [the lead plaintiff] and her counsel are adequate, and whether the putative class is ascertainable,” the Court declined to do so in the first instance and remanded the case to the district court to do so.

The district court’s denial of class certification was affirmed “as to the newly-formed title agencies,” its denial of class certification was reversed and vacated in part as to the remaining title agencies, and the case remanded for further proceedings.