Case Law

Sham affiliated business arrangement case against Wells Fargo continues

Case Law

Monday, May 6, 2013

A group of defendants in the class action Minter v. Wells Fargo Bank NA, et al. (No. 07-cv-03442) filed motions to certify a question of law to the 4th U.S. Circuit Court of Appeals, dismiss the claims and decertify the classes. The plaintiffs claim that the defendants, Wells Fargo, Long & Foster Real Estate and Prosperity Mortgage Co., formed a sham affiliated business arrangement in violation of RESPA.

The court denied the motion to certify a question of law and the motion to dismiss, while it granted, in part, the motion to decertify the classes.

The case was originally filed in 2007, and the classes were certified in May 2011. There are presently 150,000 class members divided between two classes — the timely class and the tolling class.

Conditional motion to certify a question of law

The defendants filed a motion to certify a question of law to the 4th Circuit Court of Appeals regarding the plaintiffs’ claims under RESPA Section 8(c). The defendants believe that under Freeman v. Quicken Loans, Inc., Section 8(c) is not independently actionable. Rather, they argue the only actionable provisions of RESPA Section 8 are found in Sections 8(a) and (b). The court disagreed and in a Feb. 14 holding, decided that Section 8(c) was not mentioned in Freeman and that the Supreme Court made no decision as to whether it was independently actionable.

The defendants requested the court bring the question to the 4th Circuit; however, Senior District Judge William Nickerson denied the motion.

“While it is true that the question the defendants seek to have certified meets many of the requirements of 28 U.S.C. Section 1292(b), other aspects of their motion give the court pause,” Nickerson wrote in the court’s April 26 opinion, “First, any delay in seeking certification must be reasonable. Here, the plaintiffs’ legal theory was determined to be viable years ago, they made clear their intention to abandon any claim for economic damages eight months ago and the court ruled on the defendants’ summary judgment motions two months ago. Thus, the court determines that the defendants have unreasonably delayed in seeking certification.”

Motion to dismiss

The defendants filed a motion to dismiss for lack of subject matter jurisdiction. Nickerson denied this motion as well.

“In the defendants’ motion to dismiss they argue that the plaintiffs have not been injured within the meaning of Article III and that the plaintiffs cannot satisfy statutory standing requirements under RESPA,” Nickerson wrote. “The court sees no need to review, in any detail, its understanding of Congress’ intent when it passed RESPA, which the defendants acknowledge is the key in this inquiry. It should suffice to say, once again, that the right to be free from transaction-specific economic harm is not the only right that RESPA created and that RESPA was intended to prevent practices that have market-distorting effects, such as those alleged by plaintiffs here (i.e., Prosperity is a sham or an undisclosed affiliated business arrangement). Thus, the harm resulting from a violation of RESPA “is not limited to inflating transaction-specific costs,” but also includes a distortion of competition in the market.”

The court determined that the plaintiffs have standing to pursue their RESPA claims without proving they were economically damaged.

Motion to decertify the tolling and timely classes

Nickerson decided to grant the motion to decertify as to the tolling class but deny it as to the timely class. He also limited the timely class to ensure that it was not overbroad.

The tolling classes’ members’ claims fall outside of RESPA’s one-year statute of limitation. The statute of limitations would need to be tolled in order for the members’ claims to be viable. In order for that to happen, the class would have to establish all of the elements of equitable tolling. In previous decisions, the court noted that it was concerned that proving equitable tolling could become unmanageable and would warrant a decision to decertify the class.

“In light of the court’s holding that violations of RESPA are not self-concealing, individual class members’ transactions are now more relevant to the concealment and due diligence inquiries of tolling,” Nickerson wrote. “The plaintiffs respond by suggesting that evidence from the class members’ individual transactions ‘creates, at worst, a jury question whether class members were on notice to inquire about the true roles of Prosperity and Wells Fargo in their transactions’ and that ‘alone does not warrant decertification.’ But, therein lies the manageability (or unmanageability) issue. The problem is not that the circumstances of class members’ transactions may create a jury question; it is that it only creates that jury question as to some class members and not others.”

Nickerson determined that the defendant’s arguments against the timely class were insufficient to warrant decertification, but did find that the class was overbroad. He limited the timely class to individuals who were referred to Prosperity by Long & Foster and who then had their loans passed from Prosperity to Wells Fargo.

“[T]his resulting class best mirrors the central core of the plaintiffs’ theories and arguments, namely, that Long & Foster and Wells Fargo created Prosperity simply as a scheme to direct mortgage loans from Long & Foster clients to Wells Fargo. Such schemes are the obvious targets of RESPA, and thus the claims of this more narrowly-tailored class are consistent with both plaintiffs’ central theory and RESPA’s purpose.”

The background

Denise Minter obtained a mortgage through Prosperity Mortgage Co. in 2006 with the assistance of a Long & Foster realtor. Jason and Rachel Alborough similarly obtained their mortgage in 2007. They later determined that Prosperity had been operating in violation of several laws and filed a lawsuit in 2007. They alleged violations of RESPA, Sections 8(a), 8(c) and 8(c)(4).

The plaintiffs alleged that Prosperity was formed as a joint venture between Wells Fargo Bank NA and Long & Foster Real Estate Inc. and that it was a front organization, or sham affiliated business arrangement, formed to circumvent RESPA, rather than an independent mortgage lender. They alleged that Prosperity was created as a way for Long & Foster to send mortgage referrals to Wells Fargo and for Wells Fargo to pay kickbacks to Long & Foster in exchange for the referrals.

Prosperity was formed in 1993 by Wells Fargo and Walker Jackson, a wholly owned subsidiary of Long & Foster. It operated as a mortgage lender, funding its loans through a wholesale line of credit with Wells Fargo. The defendants argued that Prosperity is a legitimate lender.