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White v. PNC Financial Services Group, Inc.

United States District Court, E.D. Pennsylvania

January 10, 2017

NELSON WHITE, JR., et al., Plaintiffs,


          STENGEL, J.


         This is a putative class action brought by homeowners claiming violations of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2607 (RESPA). The plaintiffs claim the defendants carried on a “captive reinsurance scheme” in which the defendants enjoyed kickbacks, referrals, and fees that are prohibited by RESPA.

         After I denied defendants' motion to dismiss in 2014, this case was stayed pending the U.S. Court of Appeals for the Third Circuit's decision in Cunningham v. M & T Bank Corp., 814 F.3d 156 (3d Cir. 2016). Both parties sought a stay pending the Cunningham decision because the issue in that case was identical to an issue in this case: whether equitable tolling applies to RESPA's one-year statute of limitations. Now that Cunningham has been decided, plaintiffs move to lift the stay. Plaintiffs also move for leave to amend their complaint to modify their RESPA claim and add several entirely new claims under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961 et seq. (RICO).[1] For the reasons that follow, I will grant in part and deny in part plaintiffs' motion for leave to amend.


         For purposes of this motion, it is important to understand both the substantive nature of plaintiffs' claims as well as the procedural posture of this case.

         A. The Nature of Plaintiffs' RESPA Claims

         Understandably, when many people purchase a home, they cannot afford to make a 20% down payment. To protect lenders in the event of default, homeowners who are unable to make a 20% down payment are required to purchase private mortgage insurance. Once a homeowner enters into a mortgage insurance contract with an insurance company (an “insurer”), often times, the insurer then enters into a separate “reinsurance” arrangement with another company (a “reinsurer”). In theory, and under RESPA, the reinsurer is required to assume part of the risk that the insurer took on when it entered into a contract with the homeowner.

         In this case, plaintiffs allege that the defendant insurers, lenders, and reinsurers have colluded to create a scheme that violates RESPA. Plaintiffs maintain that the lenders, as a general practice, form subsidiary companies that become the reinsurers. These lenders then systematically refer homeowners to the insurers to buy mortgage insurance. In exchange for a constant stream of profit-producing homeowner-borrowers, the insurers then pay a kickback to the reinsurer who, as a subsidiary, is really just an extension of the lender.[2] Plaintiffs claim this “pay-to-play” scheme harms homeowners because, by colluding, the insurers, reinsurers, and lenders, were able to reduce competition in the mortgage insurance market, thereby increasing the premium payments the homeowner-plaintiffs are required to pay to maintain their mortgage insurance.

         To be sure, there is nothing inherently wrong with-or unlawful about- reinsurance contracts. However, RESPA prohibits certain captive reinsurance schemes that result in “sham” service. See Alston v. Countrywide Fin. Corp., 585 F.3d 753, 755- 57 (3d. Cir 2009) (explaining how certain captive reinsurance schemes, like the one alleged here, may violate RESPA). Specifically, Section 8(a) of RESPA prohibits fees and kickbacks paid in exchange for business referrals involving federally related mortgage loans. 12 U.S.C. § 1607(a). Section 8(b) prohibits unearned fees: “No person shall give and no person shall accept any portion, split, or percentage of any charge made or received for the rendering of a real estate settlement service . . . other than for services actually performed.” Id. § 1607(b). Plaintiffs allege defendants violated these provisions of RESPA because: (1) they systematically gave and received kickbacks; (2) the reinsurers did not assume any real risk; and (3) the reinsurers never “actually performed” any real services.

         B. Procedural Background

         The plaintiffs filed their initial complaint on December 31, 2011. In it, they brought two claims for: (1) a violation of § 2607 of RESPA; and (2) common law unjust enrichment. (Doc. No. 1). Several months later, the parties filed a joint motion to stay all proceedings pending the U.S. Supreme Court's review of Edwards v. First American Financial Corp., 610 F.3d 514 (9th Cir. 2010).[3] After the U.S. Supreme Court dismissed the writ of certiorari in Edwards, the parties filed a joint motion to lift the stay. (Doc. No. 75). The stay was lifted and plaintiffs then filed an amended class action complaint. (Doc. No. 83). In their amended complaint, plaintiffs reasserted the identical two claims they had asserted in their original complaint. (Id.)

         Defendants then moved to dismiss the plaintiffs' RESPA claims as untimely. Plaintiffs argued in response that their claims were timely based on principles of equitable tolling. On June 20, 2013, I dismissed plaintiffs' RESPA claims without prejudice, finding that equitable tolling did not apply. (Doc. No. 145). A few weeks later, plaintiffs filed a second amended complaint. (Doc. No. 148). In their second amended complaint, plaintiffs reasserted the identical two claims they had asserted in their original complaint and in their amended complaint: (1) a RESPA violation; and (2) unjust enrichment. (Id.) Defendants then filed a second motion to dismiss, again arguing the RESPA claims were time-barred. Plaintiffs renewed their equitable tolling argument, this time stressing that they were reasonably diligent in discovering the RESPA claims.[4] I denied defendants' second motion to dismiss finding that, based on then-current precedent, whether equitable tolling applied could only be decided at the summary judgment stage after fact discovery had concluded. (Doc. No. 185 at 19).

         A few weeks after I denied this motion to dismiss, the parties filed another joint motion to stay all proceedings pending the Third Circuit's decision in Riddle v. Bank of America Corp., 588 F. App'x 127 (3d Cir. 2014). Riddle addressed the issue of equitable tolling with respect to RESPA's statute of limitations. After the Third Circuit decided Riddle, the stay was lifted. (Doc. No. 195). The defendants then filed motions for reconsideration of my Order denying their motion to dismiss. Before those motions were decided, the parties filed yet another joint motion to stay all proceedings pending the Third Circuit's decision in Cunningham. (Doc. No. 219). In their third joint motion to stay, the parties agreed that “the ultimate resolution of the central issue in the Cunningham Action, i.e. the applicability and application of the doctrine of equitable tolling, has a very reasonable likelihood of informing this Court on the resolution of such matters in this case, and advancing the ultimate disposition of this action.” (Id. at 2). Months later, during this Cunningham stay, the Consumer Financial Protection Bureau (“CFPB”) issued a decision in a landmark RESPA case, holding that RESPA's statute of limitations did not bar claims for kickbacks that occurred after the closing of home loans.

         Several months after this CFPB decision, the Third Circuit decided Cunningham. The plaintiffs in Cunningham were homeowners who brought the same exact type of RESPA claim-based on reinsurance kickbacks-that is brought here. 814 F.3d at 158. They did not file their complaint until years after RESPA's one-year statute of limitations had expired. Id. The Cunningham plaintiffs relied on equitable tolling to argue that their claims were timely. Id. In fact, they made the same exact argument that has previously been made in this litigation: the first time they became aware of their RESPA claims was when they received letters informing them of the potential viability of the claims. Id. at 162. The Third Circuit expressly rejected this equitable tolling argument. Id. at 160-62. It found that the plaintiffs became aware of their RESPA claims much earlier: on the date of closing when they read certain disclosures that explained reinsurance. Id. at 161-64. Therefore, the Court held that the plaintiffs were not reasonably diligent in bringing their claims, which is required of them to enjoy the doctrine of equitable tolling based on fraudulent concealment.

         The plaintiffs now move for leave to amend their complaint to modify their RESPA claim and to add new claims under RICO.


         Federal Rule of Civil Procedure 15 governs amendment of pleadings generally. Fed.R.Civ.P. 15. The U.S. Court of Appeals for the Third Circuit has explained that a district court's inquiry is distinctly different under Rule 15(a) than it is under Rule 15(c). Arthur v. Maersk, Inc., 434 F.3d 196, 202-03 (3d Cir. 2006).

         Rule 15(a) applies to motions for leave to amend. “The Federal Rules of Civil Procedure express a preference for liberally granting leave to amend.” Oran v. Stafford, 226 F.3d 275, 291 (3d Cir. 2000). A motion for leave to amend a complaint should be granted “whenever justice so requires.” Fed.R.Civ.P. 15(a); Arthur, 434 F.3d at 202-03. In determining whether “justice so requires, ” courts consider a number of factors including undue delay, bad faith, prejudice to the opposing party, and futility. Foman v. Davis, 371 U.S. 178, 182 (1962). Delay alone is not sufficient to warrant denial of leave to amend. Adams v. Gould Inc., 739 F.2d 858, 868 (3d Cir. 1984). However, when delay becomes “undue, ” it forms an adequate basis, on its own, for denial of a motion to amend. Bjorgung v. Whitetail Resort, LP, 550 F.3d 263, 266 (3d Cir. 2008). “Delay becomes ‘undue, ' and thereby creates grounds for the district court to refuse leave, when it places an unwarranted burden on the court or when the plaintiff has had previous opportunities to amend.” Id. Thus, an undue delay analysis requires courts to focus on “the movant's reasons for not amending sooner.” Id. (quoting Cureton v. Nat'l Collegiate Athl. Ass'n, 252 F.3d 267, 273 (3d Cir. 2001)). A proposed amendment is futile “if the amendment will not cure the deficiency in the original complaint or if the amended complaint cannot withstand a renewed motion to dismiss.” Jablonski v. Pan Am. World Airways, Inc., 863 F.2d 289, 292 (3d Cir. 1988).

         Rule 15(c) addresses the issue of whether a proposed amended complaint “relates back” to the filing of the original complaint. Under Rule 15(c)(1)(B), an amendment to a pleading relates back to the date of the original pleading where “the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out-or attempted to be set out-in the original pleading.” “Where an amendment relates back, Rule 15(c) allows a plaintiff to sidestep an otherwise-applicable statute of limitations, thereby permitting resolution of a claim on the merits, as opposed to a technicality.” Glover v. FDIC, 698 F.3d 139, 145 (3d Cir. 2012). The Third Circuit has made clear that “only where the opposing party is given fair notice of the general fact situation and the legal theory upon which the amending party proceeds will relation back be allowed.” Id. at 146. On the contrary, “amendments that significantly alter the nature of a proceeding by injecting new and unanticipated claims are treated far more cautiously.” Id. When a plaintiff's original complaint does not provide a defendant “‘fair notice of what the plaintiff's [amended] claim is and the grounds upon which it rests, ' the purpose of the statute of limitations has not been satisfied and it is ‘not an original pleading that [can] be rehabilitated by invoking Rule 15(c).'” Id. (quoting Baldwin Cty. Welcome Ctr. v. Brown, 466 U.S. 147, 149 n.3 (1984)).


         Plaintiffs move for leave to amend their complaint to modify their RESPA claim and to add two new RICO claims. Defendants oppose plaintiffs' motion. Defendants argue that the motion is unduly delayed, they would be prejudiced by amendment, and the proposed amendment is futile. I will deny plaintiffs' motion to amend the complaint to add RICO claims because I agree the plaintiffs' actions-and lack thereof-constitute undue delay with respect to these claims. I also find that the RICO claims do not relate back to the original complaint under Rule 15(c). Because I find the continuing violations doctrine applicable to the plaintiffs' RESPA claims, I will grant them leave to amend their RESPA claims.[5]

         A. Plaintiffs' Proposed Modified RESPA Claim

         Plaintiffs concede that they are no longer relying on principles of equitable tolling to support survival of their RESPA claims. Instead, plaintiffs argue that the continuing violations doctrine applies to their RESPA claims.[6]

         1. RESPA's Statute of Limitations

         An action under Section 2607 of RESPA must be brought within “1 year . . . from the date of the occurrence of the violation.” 12 U.S.C. § 2614. In Cunningham, the Third Circuit noted that this statute of limitations begins running “from the date of the occurrence of the violation . . . which begins at the closing of the loan.” 814 F.3d at 160 (citation omitted); In re Cmty. Bank of N. Va., 622 F.3d 275, 281 (3d Cir. 2010) (“RESPA's one-year statute of limitations . . . begins to run from the date of the occurrence of the violation, . . . i. e., the date the loan closed”) (citation omitted).The plaintiffs argue that the closing is not the only time that a RESPA violation can occur. They maintain defendants violated RESPA each time they paid an illegal kickback or fee, or made an illegal referral. According to plaintiffs, each violation triggered a new statute of limitations period.

         2. The Continuing Violations Doctrine

         “In most federal causes of action, when a defendant's conduct is part of a continuing practice, an action is timely so long as the last act evidencing the continuing practice falls within the limitations period.” Brenner v. Local 514 United Bros. of Carpenters of Am, 927 F.2d 1283, 1295 (3d Cir. 1991); 287 Corp. Ctr. Assocs. V. Township of Bridgewater, 101 F.3d 320, 324 (3d Cir. 1996) (noting the same). As the U.S. Court of Appeals for the Third Circuit has explained, “[t]he continuing violations doctrine has been most frequently applied in employment discrimination claims.” Cowell v. Palmer Twp., 263 F.3d 286, 292 (3d Cir. 2011). “However, this has not precluded the application of the doctrine to other contexts.” Id.

         The U.S. Supreme Court and Third Circuit have applied the continuing violations doctrine in a wide variety of contexts. See, e.g., Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S. 321, 338 (1971) (applying the doctrine to an antitrust claim under the Sherman Act); Hanover Shoe, Inc. v. United Shoe Mach. Corp., 392 U.S. 481, 502 n.15 (1968) (same); Toledo Mack Sales & Serv., Inc. v. Mack Trucks, Inc., 530 F.3d 204, 217-18 (3d Cir. 2008) (recognizing the continuing violations doctrine's applicability in antitrust cases); Brenner, 927 F.2d at 1283 (applying the doctrine to a claim brought under the National Labor Relations Act); Centifanti v. Nix, 865 F.2d 1422, 1432-33 (3d Cir. 1999) (applying the doctrine to a constitutional due process claim brought under 42 U.S.C. § 1983); Cowell, 263 F.3d at 292-93 (finding the doctrine generally applicable to § 1983 cases but not in the particular case at bar); Crawford v. Washington Cty. Children & Youth Servs., 353 F. App'x 726, 729 (3d Cir. 2009) (same); In re Niaspan Antitrust Litig., 42 F.Supp.3d 735, 745-47 (E.D. Pa. 2014) (finding the doctrine applicable to Sherman Act pay-for-delay and price-fixing claims based on a “continuing illegal contract” under which the defendants continued to sell drugs “at an above-market price”). The Third Circuit has also emphasized that “application of the continuing violations doctrine is not dependent on which statute gives rise to the plaintiff's claim.” Cardenas v. Massey, 269 F.3d 251, 258 (3d Cir. 2001).

         3. RESPA and the Continuing ...

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