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In re Community Bank of Northern Virginia and Guaranty National Bank of Tallahassee Second Mortgage Loan Litigation

September 22, 2010

IN RE: COMMUNITY BANK OF NORTHERN VIRGINIA AND GUARANTY NATIONAL BANK OF TALLAHASSEE SECOND MORTGAGE LOAN LITIGATON (MDL 1674) OBJECTING CLASS MEMBERS, APPELLANTS (08-3621) (PURSUANT TO FED. R. APP. P. 12(A))
ALABAMA AND GEORGIA OBJECTING CLASS MEMBERS, APPELLANTS (08-3790) (PURSUANT TO FED. R. APP. P. 12(A))
RICHARD H. HEADY, JR., ROBERT ROWLEY, ARLINE ROWLEY, GALEN HURT, DARRELL TURNER, MICHAEL RICH, EDNA RICH, PATRICK FRANKLIN, MICHAEL GRAHAM, TRACY GRAHAM, ERIC LEWIS, BARBARA LEWIS, DAVID DAVIDSON, MICHAEL MOORE, KARLA MOORE, ANTHONY DIXON AND KATHY DIXON. APPELLANTS (08-3791) (PURSUANT TO FED. R. APP. P. 12(A))
TROY ELLIOTT, LORRAIN OSWALD AND RUTH D. MATHIS-WISSEH, APPELLANTS (08-3857) (PURSUANT TO FED. R. APP. P. 12(A))
JOHN DRENNEN; ROWENA DRENNEN; DAVID GARNER; DIANE GARNER; SHAWN STARKEY; LORENE STARKEY, APPELLANTS
v.
PNC BANK NATIONAL ASSOCIATION; GMAC-RESIDENTIAL FUNDING CORPORATION, A MINNESOTA CORPORATION; HOMECOMINGS FINANCIAL NETWORK INC., A DELAWARE CORPORATION



Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Civil Action Nos. 2-02-cv-01201, 2-03-cv-00425, 2-05-cv-00688 and 2-05-cv-01386) District Judge: Honorable Gary L. Lancaster.

The opinion of the court was delivered by: Ambro, Circuit Judge

PRECEDENTIAL

Argued April 20, 2010

Before: SCIRICA*fn1, Chief Judge, AMBRO, Circuit Judge and JONES*fn2, District Judge.

OPINION OF THE COURT

Table of Contents

I. Factual and Procedural Background.. . . . . . . . . . . . . .10

A. The Alleged Predatory Lending Scheme........10

B. The Separate Class Actions and the Initial Settlement... . . . . . . . . . . . . . . . . . . . . . .11

C. The Objectors.. . . . . . . . . . . . . . . . . . . . . .17

D. The Prior Appeal.. . . . . . . . . . . . . . . . . . . . . . . . .21

E. The Proceedings on Remand.................23

1. The Hobson Action.. . . . . . . . . . . . . . . . . .23

2. The Objectors Withdraw Their Motion to Intervene.. . . . . . . . . . . . . . . . . . . . . . .24

3. The District Court's Viability Briefing....25

4. The Modified Settlement. .............27

5. The District Court Determines the TILA/HOEPA Claims Are Not Viable. . . . . . . . . . . . . . . . . . .30

6. The District Court Appoints a "Friend of the Court.. . . . . . . . . . . . . . . . . . . . . . .32

7. The District Court Denies the Objectors' Renewed Motion to Intervene, Conditionally Re-Certifies the Class, and Preliminarily Approves the Modified Settlement...............34

8. The District Court Certifies the Class and Approves the Modified Settlement....36

II. Jurisdiction and Standards of Review.. . . . . . . . . . . .37

III Discussion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38

A. Class Certification.. . . . . . . . . . . . . . . . . . . . . . . .39

1. Legal Standards. . . . . . . . . . . . . . . . . . . . .39

2. Statute-of-Limitations Issues at the Class Certification Stage. ...............42

3. The District Court's Analysis...........49

a. The District Court's Relation-Back Analysis.. . . . . . . . . . . . . . . . . .50

b. The District Court's Equitable Tolling Analysis.............64

4. Adequacy of Representation............70

a. The Class Representatives........70

b. Class Counsel. . . . . . . . . . . . . . . . .73

5. The North Carolina Objectors. .........83

B. The Fairness of the Settlement. ..............89

C. The Objectors' Renewed Motion to Intervene. ..93

D. The Objectors' Renewed Petition for Mandamus to Recuse the District Judge. .............95

IV. Conclusion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100

This is the second appeal from the certification of a consolidated "settlement only" nationwide class action that alleged an illegal home equity lending scheme involving two banks and a company that purchased second mortgage loans from them. Certain members of the class (the "Objectors") contest the District Court's decisions certifying that class and approving the class settlement. As it was in the prior appeal, the principal dispute remains the named plaintiffs' and class counsel's decision not to make claims against the defendants under the Truth in Lending Act, 15 U.S.C. § 1601 et seq. ("TILA"), and the Home Ownership and Equity Protection Act ("HOEPA"), id. § 1639. The Objectors contend that the failure to do so renders the named plaintiffs and class counsel inadequate class representatives.

We conclude that the District Court-by approaching the adequacy-of-representation questions on remand as though it were ruling on a motion to amend pursuant to Federal Rule of Civil Procedure 15(c) or a motion to dismiss pursuant to Rule 12(b)(6)-applied the wrong legal standard in ruling on class certification under Rule 23. We thus reluctantly vacate again the Court's certification decision and its approval of the class settlement, and remand for further proceedings. In doing so, we continue to reject (i) the claim that the District Court abused its discretion in denying the Objectors' renewed motion to intervene, and (ii) their renewed petition for mandamus to recuse the District Judge in this case.

I. Factual and Procedural Background

A. The Alleged Predatory Lending Scheme

The complex factual and procedural history of these matters is set out at length in our prior opinion, and we only summarize it here. See In re Community Bank of N. Va., 418 F.3d 277 (3d Cir. 2005)("Community Bank I"). These class actions involve the alleged predatory lending scheme of the Shumway/Bapst Organization ("Shumway"), a residential mortgage loan business involved in facilitating the making of high-interest, mortgage-backed loans to debt-laden homeowners. Because Shumway is not a depository lender-and thus subject to fee caps and interest ceilings under various state laws-it allegedly formed relationships with defendants Community Bank of Northern Virginia ("CBNV") and Guarantee National Bank of Tallahassee ("GNBT"), both financially distressed banks,*fn3 to circumvent those restrictions. This allegedly permitted Shumway to conceal the origin of the loans, thus creating the appearance that fees were paid solely to a depository institution when "[i]n reality . . . the overwhelming majority of fees and other charges associated with the loans were funneled to Shumway." Id. at 284.

The class action complaint claimed defendant GMAC Residential Funding Corporation ("RFC") was a co-conspirator in this scheme, deriving a substantial portion of its business by purchasing "jumbo" and high "loan-to-value" loans from CBNV and GNBT in the secondary market. The named plaintiffs asserted that RFC acted with knowledge that CBNV and GNBT were mere "straw parties" used to funnel origination and title services fees to Shumway. Because these fees were incorporated into the principal on the loan, RFC purportedly benefitted from the practice through increased interest income.

In 2001, the federal Comptroller of the Currency investigated and audited GNBT, and imposed tighter restrictions on the bank. Shortly thereafter, RFC announced that it would no longer purchase high interest mortgage loans like those originated by CBNV and GNBT. RFC's withdrawal, in turn, caused the Shumway organization to shut down in early 2003.*fn4

B. The Separate Class Actions and the Initial Settlement

The consolidated class actions before us began as six separate class actions. The first-Davis v. CBNV, which named CBNV and RFC as defendants-was filed in Pennsylvania state court in May 2001 as a putative state-wide class action and was later removed to federal court (on federal preemption grounds). The first action to name GNBT and RFC as defendants was Ulrich v. GNBT, filed in the District Court for the Western District of Pennsylvania in September 2002 as a putative nationwide class action. The remaining four actions are: Sabo v. CBNV, filed in federal court in September 2002 as a putative nationwide class action; and Picard v. CBNV (October 2002), Mathis v. GBNT (November 2002), and Kessler v. RFC (February 2003), all filed in Pennsylvania state court as putative state-wide class actions and later removed to federal court in the Western District. R. Bruce Carlson of Carlson Lynch Ltd., located in Sewickley, Pennsylvania, was the lead plaintiffs' attorney in all six actions, and was subsequently appointed as class counsel by the District Court.*fn5

These actions asserted claims against CBNV, GNBT, and RFC under the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq.; the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq.; and the usury, unfair trade practices, and consumer protection laws of Pennsylvania. Section 8(a) of RESPA prohibits the giving or accepting of any "fee, kickback, or thing of value" in exchange for referrals of federally related mortgage loans. 12 U.S.C. § 2607(a). Section 8(b) prohibits the giving or accepting of "any portion, split, or percentage" of unearned fees. Id. § 2607(b). Plaintiffs alleged that defendants violated RESPA in both ways: (1) by charging excessive origination fees (often as high as 10% of the loan principal) and paying them as "kickbacks" to Shumway in exchange for its mortgage-solicitation services; and (2) by charging title services fees for services that were never performed. Plaintiffs alleged that RFC, as the assignee of the closed loans, was derivatively liable for the banks' conduct. See 15 U.S.C. § 1641(d)(1).

In July 2003, the named plaintiffs and the defendants (collectively, the "Settling Parties") moved for preliminary approval of a proposed nationwide class action settlement (the "Initial Settlement"). The settlement class was defined to include all persons (1) who entered into a loan agreement with CBNV or GNBT, (2) whose loan was secured by a second mortgage or deed of trust on property located in the United States, and (3) whose loan was purchased by RFC. There was no time restriction on the class, which encompassed approximately 44,000 loans (dating back to as early as 1998).

In reaching the Initial Settlement, the Settling Parties agreed that the "realistic best-case scenario for RESPA damages on a per-loan basis" was $4,765 ($3,675 for origination fees and $1,090 for title service fees). With a class of approximately 44,000 members, the Settling Parties concluded that the total "best-case" recovery for the class (after averaging the amount of individual fees charged) was approximately $200 million.*fn6

The Initial Settlement committed defendants to pay up to $33 million, with class members receiving between $250 and $925 each. The settlement fund would be allocated among class members based on two core factors: (1) when the class member's loan closed; and (2) the class member's state of residence when the loan closed.

First, $23.2 million would be distributed automatically based on the date the loans closed. The approximately 14,000 class members whose loans closed within one year of the "relevant complaints"-i.e., the earliest class action complaint filed against the bank that made the loan to the class member, the Davis Complaint (for CBNV borrowers) and the Ulrich Complaint (for GBNT borrowers)-would receive $600 automatically. This structure reflected the hurdle posed by RESPA's one-year statute of limitations, which begins to run "from the date of the occurrence of the violation," 12 U.S.C. § 2614, i.e., the date the loan closed, see, e.g., Snow v. First Am. Title Ins. Co., 332 F.3d 356, 359--61 (5th Cir. 2003). As the Settling Parties explain, "[t]his was a negotiated compromise of a vigorously disputed issue": whether the named plaintiffs in the other four actions, as well as the absent class members, could rely on the filing dates of the Davis and Ulrich complaints to make their RESPA claims timely. (Settling Parties' Br. at 71.)

Class members whose loans closed more than one year before the Davis or Ulrich complaints were filed would automatically receive $250 (less than half of the automatic payment to class members with timely claims). However, these class members were eligible to receive an additional $302 (for a total of $552) based on their answers to questions in a claims submission form designed to determine whether they could rely on equitable tolling as a defense to the expiration of the one-year limitations period.

Finally, class members could receive an additional $325 if they resided in one of 21 "Qualifying States" where class counsel determined that class members could have pursued state law claims against CBNV, GNBT, and/or RFC.*fn7

The Initial Settlement provided for "an extremely generous fee" of $8.1 million to class counsel, Community Bank I, 418 F.3d at 315, and incentive fee payments to the named plaintiffs of $1,500 each. It also included a broad release of all claims that were (or could have been) asserted in the litigation. The release specifically included claims that could have been brought under TILA and HOEPA, including claims for actual damages, statutory damages, and rescission.

Less than a week after the Settling Parties' filed their motion, the District Court entered an order (1) consolidating these six actions into the Kessler action*fn8 (2) "conditionally" certifying a class for settlement purposes; and (3) preliminarily approving the Initial Settlement. The Court also directed that notice be sent to members of the class advising them of the settlement and of their right to opt out. Later that year (in November 2003), the Court approved the filing of an amended consolidated class action complaint action for all six actions (the "Consolidated Amended Complaint") to cure what the Court viewed as a potential jurisdictional problem regarding the Kessler action (as noted, the action into which the six class actions had been consolidated).*fn9

C. The Objectors

As noted, none of the named plaintiffs brought claims against the defendants under TILA or HOEPA. This prompted several plaintiffs' firms-whom we shall refer to collectively as "counsel for the Objectors"-to mail letters to members of the putative class urging them to communicate with those law firms regarding the settlement, and, in some instances, urging them to opt out of the class. 418 F.3d at 287--88. A principal reason given was the allegedly inadequate consideration paid by the defendants for release of the class members' TILA and HOEPA claims.

TILA is a federal consumer protection statute, intended to promote the informed use of credit by requiring certain uniform disclosures from lenders. The statute is implemented by Regulation Z, 12 C.F.R. §§ 226.1 et seq., which requires creditors who make loans secured by a borrower's principal dwelling to provide those borrowers with certain material disclosures, id. § 226.18. HOEPA, enacted as an amendment to TILA, applies to a special class of regulated loans that are made at higher interest rates and are subject to special disclosure requirements. See 15 U.S.C. § 1639. In particular, HOEPA requires lenders to disclose to their borrowers the annual percentage rate ("APR") of sums due for the use of monies loaned and the amount of regular monthly payments. Id. § 1639(a)(2). According to the Objectors, the vast majority of class members' loans are subject to HOEPA. Like claims for damages under RESPA, TILA/HOEPA damages claims are subject to a one-year statute of limitations. Id. § 1640(e).

The Objectors allege that defendants violated TILA and HOEPA by understating materially the APR in the disclosure forms they were required to give borrowers when the loans closed. The calculation of the APR must incorporate "finance charges," as defined in Regulation Z, 12 C.F.R. § 226.4. See also 15 U.S.C. § 1605(a). Although fees for title abstracts and title examinations ordinarily are excluded from the definition of "finance charges," id. § 226.4(c)(7)(i), and therefore not incorporated into the calculation of the APR, the Objectors contended that the fees charged by CNBV and GNBT were neither "bona fide" nor "reasonable"-and thus should have been factored into the calculation of the APR, id. § 226.4(c)(7)-because (1) no title examinations were performed, and (2) no true abstracts of title were obtained. Instead, the Objectors alleged that borrowers were charged for "property reports" (which allegedly are neither "true" title examinations nor abstracts) by entities affiliated with Shumway, and that this charge was illegally marked up and passed on to the borrower.*fn10

The Objectors contend that each class member's claims under TILA/HOEPA are worth as much as $52,000 per loan, which figure includes actual, statutory, and rescission damages.*fn11

Together with the defendant's potential liability under RESPA (including trebled damages), the Objectors contend that the actual value of the claims being released is almost $3 billion (approximately $67,000 per class member).

By October 2003, 435 class members had opted out of the class settlement. Two weeks later, the District Court-"without conducting a hearing, setting a briefing schedule or otherwise allowing [the Objectors] any practical opportunity to be heard"-granted the Settling Parties' joint motion to invalidate those opt-outs. Community Bank I, 418 F.3d at 288. The Court entered an order that "followed verbatim the Order proposed by the [S]ettling [P]arties" extending the opt-out period to November 2003. Id. Finally, the Court entered an order barring the objecting law firms from communicating with any member of the class, and denied the Objectors' motion to intervene "without explanation." Id. at 289, 291.

D. The Prior Appeal

The District Court held a hearing on the fairness of the Initial Settlement on November 14, 2003, and heard argument from the Settling Parties and the Objectors. On December 4, 2003, the Court entered a final order approving the settlement. The Objectors timely appealed.

In Community Bank I, we vacated the District Court's certification of the class and approval of the settlement, concluding that the Court had erred in several ways, including by: (1) failing to make an independent inquiry as to whether the Rule 23 class action requirements were satisfied; (2) improperly enjoining counsel for the Objectors from communicating with absent class members; and (3) denying the Objectors' motion to intervene without "reasoning or discussion." Id. at 314. As a result, we declined "to address definitively the substantive nature of the settlement." Id. at 318.

With respect to the District Court's certification decision, we concluded that three of the four Rule 23(a) requirements-numerosity, typicality, and commonality-were met, as well as the Rule 23(b)(3) predominance and superiority requirements. Id. at 303--10. We expressed serious concerns, however, as to whether the adequacy requirement of Rule 23(a) could be met, specifically in the context of whether the named plaintiffs and class counsel were adequate representatives in light of their failure to assert colorable TILA/HOEPA claims.

We were particularly concerned in Community Bank I with the Settling Parties' invoking the statute-of-limitations defense to justify declining to bring TILA/HOEPA claims. We noted that the Settling Parties themselves had represented to our Court and the District Court that "approximately 14,000 members of the class have loans that . . . closed 'within one year of the date of filing of the relevant complaint.'" Id. at 305. Accordingly, it "appear[ed] that one-third of the class may have affirmative TILA and HOEPA claims that are not time barred." Id. We doubted whether the named plaintiffs' interests were "sufficiently aligned with those of the absent class members" if the District Court determined that the TILA/HOEPA claims were "viable," noting that, "[b]ecause the one-year statutory period for filing an affirmative TILA or HOEPA ...


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