The U.S. Court of Appeals for the Third Circuit recently affirmed certification of a nationwide class of mortgage loan borrowers that could include tens, if not hundreds, of thousands of class members.

More specifically, the Court held that the putative class plaintiff borrowers’ claims for violations of: (1) the federal Real Estate Settlement Procedures Act (RESPA); (2) the federal Truth in Lending Act (TILA); (3) the federal Home Ownership and Equity Protection Act (HOEPA); and (4) the federal Racketeer Influenced and Corrupt Organizations Act (RICO), satisfied the certification requirements of Federal Rules of Civil Procedure 23.

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

The case is a consolidation of multiple putative class actions filed in the early 2000s.

Since the initial filing and consolidation, the putative borrower plaintiffs previously sought certification of settlement classes twice, but both settlement class certifications were reversed on appeal due to concerns over intra-class conflicts, among other things. Both of the settlement attempts also included substantial numbers of “objector plaintiffs” who did not participate in the settlement class.

However, following the last reversal, the objector plaintiffs and the settlement plaintiffs (collectively, the “Borrowers”) joined together to seek certification of a litigation class only to resolve the intra-class conflict issues.

The Borrowers alleged that they were victims of a predatory lending scheme supposedly involving a community bank, title companies and other entities (collectively the “Bank”) to offer high-interest mortgage loans to “financially strapped” homeowners.  The purpose of the scheme, the Borrowers allege, was to circumvent various mortgage lending laws and provide illegal kickbacks to the organization and funnel other fees back to the organization for services it did not really perform.

The Borrowers also alleged that the scheme violated, among other things, RESPA, TILA, and HOEPA.  The statute of limitations for these claims is one year.  However, the first of the consolidated class action complaints were filed in the early 2000, more than a year after many of the class members loans were originated from the “period May 1998-December 2002.”

To try to get around the statute of limitations problem, the Borrowers claimed that equitable tolling applied to the RESPA, TILA, and HOEPA claims that would otherwise be time barred.  The Borrowers alleged equitable tolling applied because of alleged “fraudulent concealment” of the facts that form the basis of those claims.

The Borrowers sought certification of a general class and five sub-classes.

The general class included “[a]ll persons nationwide who obtained a second or subordinate, residential…mortgage loan from…” the Bank secured by a property used as that person’s primary residence, “for the period May 1998-December 2002.”

To eliminate potential intra-class conflicts over various claims, the litigation class also includes five sub-classes.  They are as follows:

Sub-Class 1: (RESPA [Affiliated Business Association] Disclosure Sub-Class)… – All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from…[the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1998-October 1998;

Sub-Class 2: (RESPA Kickback Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from…[the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period October 1998-November 1999;

Sub-Class 3: (TILA/HOEPA Non-Equitable Tolling Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from (the Bank) that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1, 2001-May 1, 2002;

Sub-Class 4: (TILA/HOEPA Equitable Tolling Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from…[the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1998-December 2002;

Sub-Class 5: (RICO Sub-Class)…– All persons nationwide who obtained a second or subordinate, residential, federally related, non-purchase money, mortgage loan from… [the Bank] that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1998-November 1999.

The U.S. District Court for the Western District of Pennsylvania granted class certification of the Borrower’s general litigation and all five sub-classes in 2013.

On appeal, the Bank argued certification was improper because:

  1. there is a fundamental conflict that undermines the adequacy of representation provided by class counsel;
  2. the District Court conditionally certified the class and thus erred; and
  3. the putative class does not meet the ascertainability, commonality, predominance, superiority, or manageability requirements under Fed. R. Civ. P. 23.

The Third Circuit rejected all of the Bank’s arguments, and held that certification was proper.

As you may recall, to “be certified, a class must satisfy the four requirements of Rule 23(a), namely: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation.”

Numerosity essentially means there are a sufficient number of class members to justify use of the class action.

Commonality generally means that common questions of law or fact predominate over individual ones (i.e. whether highly individualized inquires, or mini-trials would be required for the class to prove its claims).

Typicality means that the claims of the putative plaintiffs are the same (and thus represent) the claims of all the members in the class.

Adequacy of representation means both that “the putative plaintiffs adequately represent the class,” and that “class counsel is sufficiently experienced and skilled in class action litigation” to represent the putative plaintiffs and the class.  The analysis of the “adequacy element also examines the interests and incentives of the class representatives” (i.e. there cannot be a “fundament” intra-class conflict between different class members).

Moreover, the “parties seeking class certification bear the burden of establishing by a preponderance of the evidence that the requirements of Rule 23(a) have been met.”  To meet that burden, “they must affirmatively demonstrate that there are in fact sufficiently numerous parties, common questions of law or fact, etc.”

If those Rule 23(a) requirements are met, “then a court must consider whether the class fits within one of the three categories of class actions set forth in Rule 23(b).”  In this case, the putative plaintiffs chose to pursue Rule 23(b)(3) claims, which in turn “requires a court to consider whether common questions of law or fact predominate and whether the class action mechanism is the superior method for adjudicating the case.”

The manageability of class litigation is pertinent to those findings.  The Third Circuit also recognized that “an essential prerequisite of a class action, at least with respect to actions under Rule 23(b)(3), is that the class must be currently and readily ascertainable based on objective criteria.”

The Court held that the individualized issues raised by the Bank did not defeat the “Plaintiffs’ showing of predominance” and that common issues certainly predominated over individual ones.

On the TILA/HOEPA claims the Third Circuit held that “even if individualized inquiries predominate on one” asserted basis for TILA/HOEPA liability, it still “does not undermine the predominance of the primary claims for TILA/HOEPA liability, namely, the delivery of inaccurate information.”

Court Affirms General Class, Five Sub-Classes

The Court also held that the general class and five sub-classes satisfied the adequacy of representation requirement of Rule 23(a).  It held that the “principal purpose of the adequacy requirement is to determine whether the named plaintiffs have the ability and the incentive to vigorously represent the claims of the class.”

Further, it explained that not “every intra-class conflict is consequential.”  Here, it held that because it was “no longer dealing with a settlement class and a fixed sum to satisfy claims…[these] new circumstances are materially different from the scenarios present” in the prior appeals of this case where “subclasses were jockeying for pieces of a limited [fixed] settlement pie.”

By contrast here, the Third Circuit noted that “[a]ll class members can assert all of their available claims, and all class members can, at least in theory, recover all of their damages without impacting the recovery of any other class members.”  Accordingly, the Third Circuit held that there was no “fundamental” intra-class conflict.

The Court also held that it was not necessary to appoint separate counsel for the subclasses as a “prerequisite for certification of the subclasses.”  However, it cautioned that on remand, post-certification, if “the District Court determines that any subclass’s equitable tolling arguments fail, it may well be necessary to appoint separate counsel to represent newly divergent interests.”

The Court also held that the Bank’s “conditional certification” argument failed.  Following certification, the District Court had agreed to give the Borrowers “an opportunity to conduct further discovery touching on merits-related issues.”  The Bank argued that this means the “District Court [improperly] conditionally certified the class.”

Rejecting the Bank’s argument, the Third Circuit held that although the District Court had “articulated an expectation that discovery would vindicate its decision to grant class certification, we do not believe that the Court’s statements were meant to indicate that the earlier ruling was conditional…[and] [w]e conclude, therefore, that the class was not conditionally certified.”

Turning to the commonality element, the Third Circuit explained that a “putative class satisfies Rule 23(a)’s commonality requirement if the named plaintiffs share at least one [common] question of fact or law with the grievances of the prospective class,” and that the Borrowers’ burden to meet that element “is not high.”  Additionally, citing Walmart and other United States Supreme Court precedence, the Third Circuit held that the “common contention” or contention must be of such a nature that it “is capable of classwide resolution.”

Accordingly, as you may recall, under Walmart, “what matters to class certification is not the raising of common questions—even in droves—but, rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation.”

Plaintiffs Met Commonality Element

Here, The Third Circuit held that the commonality element was met.  Applying Walmart, the Third Circuit also distinguished this case from Walmart, holding that “[u]nlike the Walmart plaintiffs, the Plaintiffs in this case have alleged that the class was subjected to the same kind of illegal conduct by the same entities, and that the class members were harmed in the same way, albeit to potentially different extents.”

Thus, the Third Circuit held, whereas there was discretion by different managers and employees in Walmart, here there was no discretion where the Borrowers alleged that the bank and its co-conspirators “operated a residential mortgage assembly line that included unlawful loans characterized by illegal kickbacks,” among other things.  Accordingly, the Third Circuit held that as “the Plaintiffs rightly point out” numerous “questions are common to each class member and will generate common answers.”

Further, the Third Circuit held these “common issues” predominated over individualized ones.  Although, it also acknowledged that “some individualized determinations may be necessary to completely resolve the claims of each…class member in this case, those are not the focus of the commonality inquiry.”

Additionally, the Third Circuit held that the Borrowers’ equitable tolling arguments did not bar class certification.  The Borrowers alleged that equitable tolling based upon a “fraudulent concealment doctrine” which “operates to stop the statute of limitations from running in circumstances when the accrual date of a claim has passed but the ‘plaintiff’s cause of action has been obscured by the defendant’s conduct.’”

The Third Circuit held that any individualized issues with the respect to the Borrowers’ equitable tolling allegations were not so “highly individualized” as to preclude class certification.  However, it did not reach the merits of whether the Borrowers were “actually entitled to equitable tolling,” but rather “only conclude[d]…that the common issues of fact and law predominate over individual ones such that the issue [of equitable tolling] is suitable for class-wide treatment on the merits.”

The Third Circuit also held that the Borrowers’ RESPA and TILA/HOEPA claims did not preclude class certification.

On those claims, the Bank had argued that individualized issues predominated over common issues.  The Bank argued that the TILA/HOEPA claims presented substantial individualized issues because to prove equitable tolling based upon fraud on each of the Borrowers HUD-1s, each of the Borrowers would have to demonstrate the “organization” and its co-conspirators took affirmative steps to mislead them.

Also, the Bank argued that the RESPA claims would require individualized inquiry because there were different fees that different “plaintiffs complain about,” and thus the fact finder would have to “individually analyze each borrower’s loan transaction” to determine if the fees were properly represented on the HUD-1, thus resulting in thousands of mini-trials.

The Third Circuit disagreed.  It held that although the Borrowers’ allegations in support of the illegal kick-back scheme and violations of RESPA “places a potentially onerous evidentiary burden on” the Borrowers, the key elements of the RESPA claims that “are ‘essential’…can potentially be proven with common evidence.”

Additionally, the Third Circuit held that the Borrowers’ TILA/HOEPA claims did not present any “highly individualized inquiry” issues.

In support of those claims, the Borrowers alleged that the Bank “improperly excluded certain charges from its APR calculation—improper charges that were added to every loan—that resulted in a materially misstated APR.”  The Third Circuit held that proving these allegations would not require highly individualized inquiry, but rather to determine “whether the fees were in fact excluded from the APR calculation requires simple arithmetic.”

Claims Satisfied Predominance Requirements

Moreover the Third Circuit held that even if the Borrowers’ TILA/HOEPA claims “premised on deficient HOEPA disclosures…require loan-by-loan analysis…those possible issues do not affect the principal violations of TILA/HOEPA in the Complaint.”  Thus, the Third Circuit held that those issues “do not undermine the District Court’s decision on predominance.”

The Third Circuit also held that the Borrowers’ RICO claims satisfied the predominance requirements of Rule 23.

The Court explained that there was no danger of individualized issues predominating over common ones for the Borrowers to prove the reliance element of their RICO claims because “they can prove their RICO claims with the same classwide evidence that will be used to prove the RESPA and TILA/HOEPA claims.”  And, “where proof of the RICO violation is demonstrated through common evidence of a common scheme, reliance may be inferred on a classwide basis.”

The Bank also argued that the RICO claims would require “a loan-by-loan and fee-by-fee analysis, and therefore, that individualized facts inquiries at the damages stage” would overwhelm individualized ones, precluding certification.

However, the Court held that argument was “mistaken” because the Borrowers “do not allege that [one of the defendants] performed inadequate services in exchange for fees,” but rather that “class-wide evidence demonstrates” that no services at all were provided.

Finally, the Third Circuit held that the certified case was sufficiently manageable under Rule 23 and that the Borrowers had sufficiently met their burden under Rule 23(b)(3) of showing that “class treatment…[is] superior to other available methods for fairly and efficiently adjudicating the controversy.”

In sum, the Court affirmed the District Court’s decision and held that the District Court did not abuse its discretion “as to any certification issue or requirement.”