Plaintiffs estimate that approximately 250 lending institutions use this accounting method and that they write total mortgage loans of approximately $750,000,000.00 per year in the Pittsburgh SMSA.
The class of plaintiffs is defined as all property owners who have borrowed money from the representative and class defendants against the security of mortgages of real property to the representative and class defendants.
Plaintiffs allege that the lending practices are violations of the Sherman Anti-Trust Act, 15 U.S.C. §§ 1-7; the Consumer Credit Protection Act ("Truth-in-Lending Act"), 15 U.S.C. § 1601 et seq.; and Pennsylvania State Law relating to usury, unjust enrichment and breach of fiduciary duty.
This suit is now before the court on defendants' motion to dismiss which asserts that the court has no jurisdiction over the subject matter of the Sherman Act claim; that the Truth-in-Lending and Sherman Acts claims fail to state a claim upon which relief can be granted; and that the state law claims are not a proper subject for the exercise of pendent jurisdiction.
We shall deal first with counts 1, 2, and 3 of the complaint
which allege violations of the Sherman Act. The Sherman Act counts can be summarized as follows:
The first count alleges that the defendants entered into an unlawful combination and conspiracy on or about January 1, 1960, to stop their former practice of deducting the monthly tax and insurance payments from the principal debt balance of the loan, i.e., "capitalizing," and to begin to account for such payments in so called "escrow" accounts bearing no interest and that this conspiracy restrained trade.
The second count alleges that the extension of credit is conditioned on the deposit by the borrower of escrow funds and that conditioning the extension of credit to an escrow payment requirement is an illegal tying arrangement.
The third count alleges that the banks would not extend credit unless the borrowers would offer to make escrow deposits and that maintaining an escrow payment requirement as a condition of securing credit is an illegal reciprocal dealing arrangement.
A. The defendants argue in their motion to dismiss that counts 1, 2 and 3 of the plaintiffs' complaint do not fall within the subject matter jurisdiction of the court because the mortgage practices in question are local, not in or affecting interstate commerce and, therefore, beyond the pale of the Sherman Act.
Residential mortgage loans, the defendants argue, are primarily local in nature. "The absence of the significant interstate commerce is a function of the nature of the banking transaction involved and of the local character of real estate. Where banks are engaged with non-commercial borrowers and individual depositors such as the plaintiffs here, any interstate impact of that portion of their business is both de minimis and incidental." (Defendant's Brief, p. 8).
We hold, however, that the requisite connection with interstate commerce has been well-pleaded. Strictly speaking, the defendant banks' involvement in residential loans, by itself, may be wholly intrastate. However, we will not assume at this stage of the suit that the defendants do not receive some increase in assets or profits as a result of their residential mortgage business and that these increased assets and/or profits do not make their way through the normal course of the banking business into interstate commerce. See Bank of Utah v. Commercial Security Bank, 369 F.2d 19, 22 (10th Cir. 1966).
Where, as here, jurisdictional issues rest on factual disputes the plaintiffs should have an opportunity to prove that the practices in question do, in fact, have a substantial effect on interstate commerce. McBeath v. Inter-American Citizens for Decency Com., 374 F.2d 359 (5th Cir. 1967), cert. denied, 389 U.S. 896, 19 L. Ed. 2d 214, 88 S. Ct. 216 (1967). Fireman's Fund Ins. Co. v. Railway Express Agency, 253 F.2d 780 (6th Cir. 1958). For purposes of this motion we assume the truth of the allegations, of course.
Defendants' motion for dismissal on counts 1 and 2 and 3 because of lack of jurisdiction over the subject matter is denied.
B. Defendants also move to dismiss count 1 because it fails to state a claim on which relief can be granted.
Count 1 alleges that the change from the "capitalization" method of accounting to the "escrow" method by the representative and class defendants on or about January 1, 1960, was the result of an unlawful combination or conspiracy in violation of the Sherman Act. Count 1 further alleges that the representative and class plaintiffs "have been damaged to the extent of the increase of the effective applicable annual interest rate on their principal debt balances occasioned by the aforesaid change from the 'capitalization' to the 'escrow' method of accounting. . . ." P 18.
An alleged conspiracy or combination, if proved, constitutes a per se violation of the Sherman Act. Albrecht v. Herald Co., 390 U.S. 145, 19 L. Ed. 2d 998, 88 S. Ct. 869 (1968). For an aggrieved party to state a claim for relief under the Sherman Act it is necessary to allege only a per se violation of the act and, in a treble damage action, resultant damage. Radiant Burners, Inc. v. Peoples Gas Lgt. and Coke Co., 364 U.S. 656, 5 L. Ed. 2d 358, 81 S. Ct. 365 (1961); McBeath v. Inter-American Citizens for Decency Com., supra. The plaintiffs' complaint satisfies both requirements. Consequently, defendants' motion to dismiss count 1 for failure to state a claim upon which relief can be granted is denied.
C. Count 2 alleges that the practice of the defendants of requiring plaintiffs to establish escrow accounts as a condition of securing home mortgage loans is an illegal tying arrangement in violation of the Sherman Act.
Defendants argue that count 2 of the complaint should be dismissed for failure to state a claim upon which relief can be granted because such an arrangement does not constitute "tying."
involve situations where the seller can use his power over the tying product to win customers that would otherwise have constituted a market available to competing sources of the tied product. Fortner Enterprises v. U.S. Steel, 394 U.S. 495, 22 L. Ed. 2d 495, 89 S. Ct. 1252 (1969). In effect, the seller says to the buyer, "I will sell product 'X' to you only if you also buy product 'Y' from me." Plaintiffs argue that defendants here use credit
(the tying product) to sell escrow or short-term deposit services (the tied product).
Defendants, in their motion to dismiss, argue that there can be no tying arrangement here because, among other reasons, only one product -- money -- is involved. Plaintiffs, of course, argue that there are two products involved -- credit and escrow services.
Whether or not there is a separate escrow services or short-term deposit market, whether the defendants are selling one product or two, whether there is any legitimate business justification for the escrow requirement, and whether the escrow service is an ancillary part of the loan itself are clearly questions of disputed fact. Disputed facts cannot be resolved on a motion to dismiss, but must await adjudication at trial, Scozzafava v. U.S., 199 F. Supp. 43 (S.D.N.Y. 1961).
While the allegations of the complaint in this regard are highly unusual, we are not convinced that plaintiffs are absolutely unable to prove any set of facts in support of their claim which would entitle them to relief. It will have to be determined whether there are two products or only one; whether the banks actually engage in the practice of selling escrow service; whether the banks condition the extension of credit on the obtaining of the escrow service business from those to whom they extend credit, or whether, as the banks argue, the purpose of requiring the payment of tax and insurance money is simply to make sure that taxes and insurance premiums are paid. Consequently defendants' motion to dismiss count 2 for failure to state a claim upon which relief can be granted is denied. Conley v. Gibson, 355 U.S. 41, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957).
D. Plaintiffs allege in count 3 that the arrangement by which they are required, as a condition to the extension of credit, to establish and maintain accounts with the representative and class defendants, into which they make monthly tax and fire insurance deposits, is a reciprocal dealing agreement in violation of the Sherman Act.
We do not think the practices which serve as the basis of count 3 can be properly classified as "reciprocal dealing agreements" as that term is usually defined.
In its broadest meaning "reciprocity" describes the practice whereby a company, overtly or tacitly, agrees to conduct one or more aspects of its business so as to confer a benefit on the other party to the agreement; the consideration being the return promise in kind by the other party.
United States v. General Dynamics, 258 F. Supp. 36 (S.D.N.Y. 1966). It is basically a policy of favoring one's customers in purchasing commodities sold by them. U.S. v. Penick and Ford Ltd., 242 F. Supp. 518, 521 (D. N.J. 1965). Reduced to its simplest equation it means "You scratch my back and I'll scratch yours" or "I'll buy from you only if you buy from me."
Plaintiffs' argument that the practices in question involve a reciprocal dealing arrangement is concisely stated in their brief (p. 39); "Only by establishing an interest-free account with defendant banks could plaintiffs secure credit to purchase a home. . . . The plaintiff-borrowers, hungry for mortgages, are happy to open an interest-free account quid in exchange for credit quo. The swap is known as reciprocity."
We disagree. These practices, even if proved at trial, would not establish a reciprocal dealing arrangement as defined above. We think the concept of "reciprocity" would be stretched too far if we were to hold that the plaintiffs' willingness to open interest free accounts was a "product" which they "sold" in the course of a mutually beneficial relationship with the banks.
Therefore, plaintiffs' motion to dismiss count 3 for failure to state a claim is granted.
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Finally, it is necessary to add a separate ruling as to Federal National Mortgage Association. It does not lend money to mortgagors but purchases mortgages in the secondary market from mortgage lenders (see Title III, National Housing Act, 12 U.S.C. §§ 1716, 1719). Both Sherman Act counts rest upon an allegation that defendants lend money. In our view, it is obvious that neither count states a cause of action against FNMA. Accordingly, all counts are dismissed as to FNMA. It is so ordered.