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In re Community Bank of Northern Virgina Mortgage Lending Practices Litigation

United States Court of Appeals, Third Circuit

July 29, 2015

IN RE: COMMUNITY BANK OF NORTHERN VIRGINA MORTGAGE LENDING PRACTICES LITIGATION, PNC Bank NA, successor to CBNV, Appellant

Argued: January 20, 2015.

On Appeal from the United States District Court for the Western District of Pennsylvania. (D.C. No. 2-03-cv-00425). District Judge: Hon. Arthur J. Schwab.

Martin C. Bryce, Jr., Esq. [ARGUED], Joel E. Tasca, Esq., Ballard Spahr, Philadelphia, PA, Counsel for Appellant.

Scott C. Borison, Esq., Legg Law Firm, Frederick, MD; R. Bruce Carlson, Esq. [ARGUED], Gary F. Lynch, Esq., Carlson Lynch Sweet & Kipela, Pittsburgh, PA; Daniel O. Myers, Esq., Traverse City, MI; David M. Skeens, Esq., Roy F. Walters, Esq. [ARGUED], Walters, Bender, Strohbehn & Vaughan, Kansas City, MO; Robert S. Wood, Esq., Richardson, Patrick, Westbrook & Brickman, Mount Pleasant, SC, Counsel for Appellees.

Before: FISHER, JORDAN, and GREENAWAY, JR., Circuit Judges.

OPINION

JORDAN, Circuit Judge.

TABLE OF CONTENTS

I. Background

A. The Alleged Illegal Lending Scheme

B. Community Bank I

C. Community Bank II

D. Post- Community Bank II Proceedings

II. Discussion

A. Adequacy of Representation

B. Conditional Certification

C. Other Rule 23 Requirements

1. Ascertainability

2. Commonality

3. Predominance

a. Standing

b. Equitable Tolling

i. Active Misleading

ii. Reasonable Due

Diligence

c. RESPA Claims

d. TILA/HOEPA Claims

e. RICO Claims

4. Superiority

5. Manageability

III. Conclusion

PNC Bank, N.A. (" PNC" ) challenges an order of the United States District Court for the Western District of Pennsylvania certifying a nationwide litigation class of individuals who received residential mortgage loans from Community Bank of Northern Virginia (" CBNV" ), a financial institution whose interests were later acquired by PNC. The appeal presents several arguments against certification. First, PNC contends that there is a fundamental class conflict that undermines the adequacy of representation provided by class counsel. Second, PNC claims that the District Court conditionally certified the class and thus erred. Third, PNC says that the putative class does not meet the ascertainability, commonality, predominance, superiority, or manageability requirements of Rule 23 of the Federal Rules of Civil Procedure. We have considered each of those arguments and a number of subsidiary ones and find them unpersuasive. We will therefore affirm.

I. Background

This is the third appeal from the certification of a class based on allegations of an illegal home equity lending scheme involving two banks, specifically CBNV and Guaranty National Bank of Tallahassee (" Guaranty" ), and also involving GMAC-Residential Funding Corporation n/k/a Residential Funding Corporation, LLC (" Residential Funding" ), a company that purchased mortgage loans from those banks. See In re Cmty. Bank of N. Va. ( Community Bank I ), 418 F.3d 277 (3d Cir. 2005); In re Cmty. Bank of N. Va. ( Community Bank II ), 622 F.3d 275 (3d Cir. 2010). The two previous appeals involved certification of settlement classes, but this appeal involves certification of a litigation class. Much of the factual and procedural history of this case is set out in detail in our two prior opinions, but we reiterate the relevant portions here.

A. The Alleged Illegal Lending Scheme

The Plaintiffs describe a predatory lending scheme affecting numerous borrowers nationwide and allegedly masterminded by the Shumway Organization (" Shumway" ), a residential mortgage loan business operating in Chantilly, Virginia. Through a variety of entities, including EquityPlus Financial, Inc. (" Equity Plus" ), Equity Guaranty, LLC (" Equity Guaranty" ), and various title companies, Shumway offered high-interest mortgage-backed loans to financially strapped homeowners.

As a non-depository lender, Shumway was subject to fee caps and interest ceilings imposed by various state mortgage lending laws. The Plaintiffs aver that, in an effort to circumvent those limitations, Shumway formed associations with several banks, including CBNV and Guaranty. Shumway allegedly arranged payments to CBNV and Guaranty to disguise the source of its loan origination services so that fees for those services would appear to be paid solely to the banks, which were depository institutions. The Plaintiffs allege that, in reality, the overwhelming majority of fees and other charges associated with the loans were funneled through the two banks to Shumway via Equity Plus (in the case of loans made by CBNV) and Equity Guaranty (in the case of loans made by Guaranty). After Virginia banking regulators expressed concern to CBNV regarding the legality of the arrangement, the deal between CBNV and Equity Plus was allegedly restructured in October 1998 so that Equity Plus became a " consultant" to CBNV that provided no settlement services yet still received the lion's share of fees paid in exchange for those services.

The Plaintiffs allege that CBNV and Guaranty uniformly misrepresented the apportionment and distribution of settlement and title fees on their HUD--1 Settlement Statement forms.[1] The Plaintiffs further allege that the fees listed on the HUD--1s included illegal kickbacks to Shumway and did not reflect the value of any services actually performed.

According to the Plaintiffs, Residential Funding derived a significant portion of its business from the securitization of " jumbo" mortgages[2] and especially High-Loan-to-Value loans.[3] The Plaintiffs allege that Residential Funding purchased a majority and perhaps all of the loans originated by CBNV and Guaranty, despite knowing that those entities passed most of the origination and title service fees to Shumway. Because Residential Funding derived substantial income from the settlement fees, the Plaintiffs allege that it ignored unlawful settlement practices and actively worked with CBNV and Guaranty to expand the loan volume generated by the scheme.

In the early 2000s, a number of putative class actions arising out of the alleged Shumway scheme were filed by various plaintiffs (the " Original Plaintiffs" ) and were eventually consolidated in the United States District Court for the Western District of Pennsylvania.[4] The Original Plaintiffs asserted claims arising under the Real Estate Settlement Procedures Act (" RESPA" ),[5] the Racketeer Influenced and Corrupt Organizations Act (" RICO" ),[6] and Pennsylvania law. The putative class consisted of approximately 44,000 borrowers.

B. Community Bank I

On July 14, 2003, the Original Plaintiffs and certain defendants, including CBNV, Guaranty, and Residential Funding, proposed a nationwide class action settlement, which was approved by the District Court. Under the terms of the settlement, the maximum total payout to the approximately 44,000 member class was $33 million. The settlement payouts ranged from $250 to $925 per borrower depending on the borrower's residence and the date on which the loan was entered. In exchange, the borrowers were to release any and all state or federal claims that they might have relating to the mortgage loans at issue, including the right to use a violation of federal or state law as a defense to any foreclosure action. Because CBNV supported the settlement, it did not contest the requirements for class certification.[7] The order approving the settlement was appealed by a group of plaintiffs (the " Objector Plaintiffs" ) who argued that claims under the Truth in Lending Act (" TILA" )[8] and the Home Ownership and Equity Protection Act (" HOEPA" )[9] should also have been asserted on behalf of the putative class.

We vacated the order approving the settlement and remanded the case because, among other things, the District Court had not adequately analyzed the propriety of class certification under Federal Rule of Civil Procedure 23. Community Bank I, 418 F.3d at 300-02. We stated that various class certification requirements, which had not been disputed, were likely met, id. at 303 (suggesting " that the numerosity, typicality, and commonality prongs are met" ), but we specifically directed the District Court to perform its own independent analysis, id. at 306 (" All of the above, of course, are issues to be considered by the District Court in its independent analysis." ). In particular, we questioned whether the putative class representatives -- whose claims were untimely under TILA/HOEPA without the benefit of equitable tolling -- could adequately represent putative class members who had timely TILA/HOEPA claims. Id. at 306-07. To resolve that problem with the adequacy of representation, we suggested that the District Court " divid[e] the class into sub-classes." Id. at 307.

C. Community Bank II

On remand, the District Court approached its analysis in two steps. First, it addressed the viability of potential TILA/HOEPA claims. Second, it addressed adequacy of representation and other Rule 23 requirements. While the parties were briefing the viability issue, the Original Plaintiffs entered into new settlement negotiations with the defendants, which resulted in a new settlement agreement (the " Modified Settlement Agreement" ). The Modified Settlement Agreement took the availability of TILA/HOEPA claims into account and increased the settlement amount for class members who were able to assert such claims.

The District Court then heard oral argument on the viability of potential TILA/HOEPA claims. In discussing the case, the Original Plaintiffs and the Objector Plaintiffs agreed with the District Court that a Rule 12(b)(6) standard should be used to determine the viability of potential TILA/HOEPA claims. The District Court's reasoning appeared to be that, if those claims could not survive a Rule 12(b)(6) motion to dismiss (and thus were not viable), neither the named plaintiffs nor their counsel could be faulted -- on adequacy of representation grounds or otherwise -- for failing to bring them. In October 2006, the District Court issued an order in which, purportedly applying a Rule 12(b)(6) standard,[10] it determined that the potential TILA/HOEPA claims were not viable. It concluded that " no class member could bring a timely claim under TILA or HOEPA for damages or rescission" because those claims would not relate back to any earlier complaint, and it also concluded that " no class member could rely on equitable tolling to save their otherwise time-barred claims." Community Bank II, 622 F.3d at 288.

On December 1, 2006, the District Court informed the parties that it intended to appoint an " independent body" to evaluate the fairness of the Modified Settlement Agreement. Id. The Court later appointed Donald Ziegler, a retired Chief Judge of the United States District Court for the Western District of Pennsylvania, to provide a non-binding opinion as to whether the Modified Settlement Agreement was " fair and reasonable" under Rule 23. Id. Judge Ziegler heard arguments from the parties and issued an advisory opinion in which he concluded that the Modified Settlement Agreement was fair and reasonable. On August 14, 2008, the District Court issued an order adopting Judge Ziegler's recommendation. The Court certified the settlement class and approved the Modified Settlement Agreement.

The Objector Plaintiffs once more appealed, challenging both the District Court's certification order and its earlier ruling regarding the adequacy of representation. We again vacated the District Court's order, finding that the Court had erred in a number of ways. Without actually deciding the issue, we expressed doubts about the District Court's Rule 12(b)(6) analysis because, in our opinion, the Objector Plaintiffs had a " strong argument that their TILA/HOEPA claims" qualified for class action tolling. Id. at 300. We also stated that, " because the question [of] whether a particular party is eligible for equitable tolling generally requires consideration of evidence beyond the pleadings, such tolling is generally not amenable to resolution on a Rule 12(b)(6) motion." Id. at 301-02. We went on to note that, in any event, the District Court's merits inquiries -- i.e., whether a new plaintiff could file an amended pleading asserting TILA/HOEPA claims or adequately plead a basis for equitable tolling under Rule 12(b)(6) -- " were unnecessary to evaluate the adequacy requirement." Id. at 303 .

Looking at the adequacy requirement, we concluded, that the District Court had " incorrectly evaluated the adequacy of the named plaintiffs and class counsel." Id. We repeated that the adequacy requirement is designed " 'to uncover conflicts of interest between named parties and the class they seek to represent.'" Id. (quoting Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 625, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997)). And we stated that there was an " obvious and fundamental intra-class conflict of interest," which was the same conflict of interest we had identified in Community Bank I. Community Bank II, 622 F.3d at 303. We were concerned that the class representatives' RESPA and TILA/HOEPA claims were untimely and required equitable tolling to be saved, but that they nevertheless sought to represent a " sizeable subgroup" of approximately 14,000 persons who had timely claims under each statute. Id. We directed the District Court to consider that intra-class conflict on remand and stated that " [t]he most obvious remedy would be to create subclasses." Id. at 304.

We also noted that, as to class counsel, the adequacy requirement assures that counsel possesses adequate experience, will vigorously prosecute the action, and will act at arm's length from the defendant. Id. at 304-05. " [M]ere disagreement," we said, " over litigation strategy ... does not in and of itself, establish inadequacy of representation." Id. at 305 (internal quotation marks omitted) (alteration in original). " Were it otherwise, disagreements over strategy would require decertification any time an objection is raised to a class, certainly not the standard envisioned by Rule 23." Id. (internal quotation marks omitted). Looking to the particulars presented in Community Bank II, we stated that, while " class counsel is not inadequate simply because they have not asserted every claim that could theoretically be pled against a defendant," class counsel's explanation for not asserting TILA/HOEPA claims on behalf of the class " deserve[d] more scrutiny" than the Court had given it. Id. at 305. Accordingly, we directed the District Court to examine the adequacy of class counsel more closely on remand. Id. at 314.

D. Post-Community Bank II Proceedings[11]

Following remand, the Original Plaintiffs abandoned settlement negotiations and joined forces with the Objector Plaintiffs, and on October 4, 2011, the Plaintiffs filed a Joint Consolidated Amended Complaint (the " Complaint" ) that now includes TILA/HOEPA claims, along with RESPA and RICO claims. The Complaint originally named as Defendants CBNV, the Federal Deposit Insurance Corporation (" FDIC" ) as the Receiver for Guaranty,[12] PNC Bank as Successor to CBNV,[13] and Residential Funding. Residential Funding subsequently filed a Notice of Bankruptcy and Effect of Automatic Stay, and all claims against it were stayed. The District Court also granted the FDIC's Motion to Dismiss for lack of subject matter jurisdiction.[14] As a result, the only active claims remaining before the District Court at the certification stage were those asserted against CBNV and its successor in interest, PNC.

On June 21, 2013, the Plaintiffs moved for certification of a general class and of five subclasses. The general class was defined as: " All persons nationwide who obtained a second or subordinate, residential, federally related, non purchase money, mortgage loan from CBNV that was secured by residential real property used by the Class Members as their principal dwelling, for the period May 1998-December 2002." (App. at 1271.) The five subclasses were defined as:

Sub-Class 1: (RESPA [Affiliated Business Association] Disclosure Sub-Class) (Plaintiffs: Philip and Jeannie Kossler) -- All persons nationwide who obtained a second or subordinate, residential, federally related, non purchase money, mortgage loan from CBNV 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) (Plaintiffs: Brian and Carla Kessler; John and Rebecca Picard) -- All persons nationwide who obtained a second or subordinate, residential, federally related, non purchase money, mortgage loan from CBNV 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) (Plaintiffs: Kathy and John Nixon; Flora Gaskin; and, Tammy and David Wasem) -- All persons nationwide who obtained a second or subordinate, residential, federally related, non purchase money, mortgage loan from CBNV 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) (Plaintiffs: All [named] plaintiffs other than the Nixons, Gaskins and Wasems) -- All persons nationwide who obtained a second or subordinate, residential, federally related, non purchase money, mortgage loan from CBNV 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) (Plaintiffs: John and Rebecca Picard; Brian and Carla Kessler) -- All persons nationwide who obtained a second or subordinate, residential, federally related, non purchase money, mortgage loan from CBNV that was secured by residential real property used by the Class Members as their principal dwelling for the period May 1998-November 1999.

(App. at 1271-1272.) The Plaintiffs requested that all named class representatives be appointed as representatives of the general class and that the designated class representatives be appointed as representatives of the requested subclasses. The Plaintiffs also requested that two law firms be appointed as co-lead counsel and that a handful of other lawyers and law firms be appointed as class counsel.

On July 31, 2013, the District Court granted class certification.[15] The Court's certification ruling relied heavily on our dicta in Community Bank I discussing the requirements of Rule 23, and it approved the general class and subclasses proposed by the Plaintiffs. The order did not make provision for separate counsel for the subclasses. In analyzing the adequacy requirement, the District Court relied primarily on Dewey v. Volkswagen Aktiengesellschaft, 681 F.3d 170 (3d Cir. 2012), in which we stated that only " fundamental" intra-class conflicts will defeat the adequacy requirement. Id. at 183-84. Because the Original Plaintiffs and the Objector Plaintiffs each asserted TILA/HOEPA ...


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