Opinion
Civil No. 97-2142 (DSD/JMM)
August 3, 2002
Eric W. Valen, Esq., Valen Law Office, 445 Minnesota Street, 2218 North Central Tower, St. Paul, MN 55101; William H. Crowder, Esq., Susan C. Bedor, Esq., Vildan A. Teske, Esq. and Crowder Bedor, 555 Wet Seventh Street, Suite 201, St. Paul, MN 55101; Daniel A. Edelman, Esq., Edelman Combs, 135 5. LaSalle Street, Suite 2040, Chicago, IL 60603, counsel for plaintiff.
James A. O'Neal, Esq. and Faegre Benson, 2200 Norwest Center, 90 South Seventh Street, Minneapolis, MN 55402; R. Bruce Allensworth, Esq., Irene C. Freidel, Esq. and Kirkpatrick Lockhart, One International Plaza, Suite 1300, Boston, MA 02110, counsel for defendant EMC Financial.
Jeffrey R. Ansel, Esq. and Winthrop Weinstine, 3200 Minnesota World Trade Center, 30 East Seventh Street, St. Paul, MN 55101, counsel for defendant Home Town Mortgage.
ORDER
This matter is before the court on the motion of plaintiff for class certification. Based on a review of the file, record, and proceedings herein, the court denies plaintiff's motion.
BACKGROUND
Plaintiff Thomas A. Schmitz ("Schmitz") hired defendant Home Town Mortgage, Inc. ("Home Town") to obtain financing for a residential home loan. Home Town is a Minnesota corporation and mortgage broker in the business of making or arranging for mortgage loans between consumer borrowers and wholesale lenders or investors. On September 27, 1996, the plaintiff's loan was closed and plaintiff entered into a mortgage loan transaction with defendant Aegis Mortgage Corporation ("Aegis"), an Oklahoma corporation engaged in wholesale residential mortgage lending with national operations. Home Town arranged the loan.
At the loan closing, Schmitz received and signed a HUD-1 Settlement Statement that disclosed actual settlement costs and payments. See Affidavit of Susan Ford Bedor in Support of Motion, Ex. A. In connection with the closing, Schmitz paid the following amounts to Home Mortgage: a loan origination fee of $1,681.00; a processing fee of $350; a document preparation fee of $35; an appraisal fee of $300; and a credit report fee of $50. Id. The statement also shows that Aegis paid a "yield differential" to Home Town in the amount of $1,050.94, which was paid outside the closing. The loan transaction was "table funded" by Aegis, meaning that Aegis, rather than Home Town, provided the money to fund the loan.
On July 11, 1996, Aegis and Home Town entered into an Aegis Mortgage Corporation Broker Agreement ("Agreement"), which defines the parties' relationship. Aegis also provides each of its brokers with a manual or broker guide that describes the various loan programs offered by Aegis and sets forth certain program requirements that a broker must meet for Aegis to purchase a loan.
Aegis sends Home Town daily rate sheets that show the types of loans Aegis will make to qualified borrowers. Aegis offers mortgage loans priced at "par," "above par," or "below par." Par is a benchmark rate. Par is the lowest interest rate at which Aegis will make a loan without charging the borrower or broker "discount points." When the mortgage broker brings Aegis a loan at an "above par" rate, meaning that the interest rate of the loan is higher than par, Aegis pays the broker a "yield differential." Plaintiff asserts that the yield differentials paid by Aegis to Home Town for table-funded loans were computed by Aegis using its applicable interest rate and discount requirements and were calculated based on the size of the loan, the interest rate that the loan carried, the timing of closing of the loan, and the type of loan selected by the borrower.
Plaintiff Schmitz asserts that the yield differential payment from Aegis to Home Town was made in violation of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601, et seq. ("RESPA"), and implementing HUD Regulation X, 24 C.F.R. § 3500.14. In Count I, Schmitz asserts that Aegis made payments to brokers and originators of federally related residential mortgage loans in return for the referral of business. Schmitz alleges that the "yield differential" payment was not for actual services performed by Home Town Mortgage, but was merely for the referral of plaintiff's business, in violation of 12 U.S.C. § 2607, and HUD Regulation X, 24 C.F.R. § 3500.14. In Count II, Schmitz asserts that Aegis made payments to brokers and originators that were duplicative of payments made by borrowers for settlement services and were unreasonable and unearned, not representing bona fide compensation for actual settlement services performed, in violation of 12 U.S.C. § 2607, and HUD Regulation X, 24 C.F.R. § 3500.14. In Count III, plaintiff asserts that Aegis, through agreements or understandings with a number of mortgage brokers, including Home Town, paid the brokers "yield differentials" for bringing borrowers to Aegis at above-market, or "above-par," interest rates. Plaintiff alleges that this practice wrongfully interfered with mortgage brokerage contracts, in violation of state common law. In Count IV, plaintiff alleges that this same practice induced mortgage brokers to breach their fiduciary duties owed to borrowers, also in violation of state law.
Plaintiff requests certification of one class against defendants Aegis and Home Town relating to counts I, III, and IV, and another class, or subclass, against Aegis and Home Town relating to count II. With respect to Counts I, III, and IV, plaintiff requests that the court certify a class action on behalf of the following class:
All persons who, for the period beginning one year prior to the filing of the original complaint, satisfy the following criteria:
a. They entered into a residential mortgage transaction that was documented as a transaction under RESPA, in that a HUD-1 Settlement Statement was provided;
b. The loan was originated in the name of or brokered by Home Town and was funded by Aegis and assigned to Aegis within two weeks of closing; or
c. The loan was originated in the name of Aegis and was funded by Aegis and assigned to Aegis within two weeks of closing; and
d. The HUD-1 Settlement Statement shows that a "yield differential," "par plus premium," "service release premium," "yield spread differential," "yield spread premium," or the like was paid by Aegis to Home Town.
With respect to Count II, plaintiff requests that the court certify a subclass with the additional provision that:
e. The loan file also shows that the borrower(s) paid Home Town a loan origination fee, a processing fee, document preparation fee, and/or the like.
Defendants oppose class certification. For the reasons discussed below, the court declines to certify plaintiff's proposed classes.
DISCUSSION
Schmitz seeks certification of the classes under Rule 23 of the Federal Rules of Civil Procedure. In requesting class certification, plaintiff bears the burden of showing that the class should be certified and that the requirements of Rule 23 are met. Coleman v. Watt, 40 F.3d 255, 258 (8th Cir. 1994); Smith v. Merchants Farmers sank of West Helena, 259 574 F.2d 982, 983 (8th Cir. 1978) Under Rule 23(a), plaintiff must establish four threshold requirements for class certification:
(1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
Fed.R.Civ.P. 23(a); General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 161, 102 S.Ct. 2364, 2372, 72 L.Ed.2d 740 (1982) (stating that the court may only certify the class if satisfied, after a rigorous analysis, that plaintiff has met the prerequisites of Rule 23(a)). If plaintiff satisfies the prerequisites of Rule 23(a), then plaintiff must establish that his action on behalf of the class falls within one of the three categories listed in Fed.R.Civ.P. 23(b). In this case, plaintiff asserts that his class satisfies Rule 23(b)(3):
that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy.
Fed.R.Civ.P. 23(b)(3). In determining predominance and superiority, the court considers several factors, including:
(A) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; [and] (D) the difficulties likely to be encountered in the management of a class action.
See Fed.R.Civ.P. 23(b)(3); see also Amchem Products, Inc. v. Windsor, ___ U.S. ___, ___, 117 S.Ct. 2231, 2246, 138 L.Ed.2d 689 (1997) (stating the nonexhaustive list of factors pertinent to the courts inquiry as to predominance and superiority under Rule 23(b)(3)). The court retains broad discretion in determining whether or not to certify a class under Rule 23. General Telephone, 457 U.S. at 161; In re Potash Antitrust Litigation, 159 F.R.D. 682, 688 (D. Minn. 1995); In re Workers' Compensation, 130 F.R.D. 99, 103 (D. Minn. 1990)
In enacting RESPA, Congress found that significant reforms in the real estate settlement process were needed to protect home buyers "from unnecessarily high settlement charges caused by certain abusive practices." See 12 U.S.C. § 2601 (a). Congress sought to eliminate "kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services." See id. § 2601(b)(2). Thus, RESPA prohibits kickbacks and unearned fees:
No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.
Id. § 2607(a). However, the statute exempts payments for goods or services from the prohibition, including "the payment to any person of a bona fide salary or compensation or other payment for goods or facilities actually furnished or for services actually performed." Id. § 2707(c)(2). In this case, Schmitz asserts that the "yield differential" payment was an illegal referral fee paid by Aegis to Home Town on a table-funded loan. Schmitz argues that class certification on behalf of those similarly situated is appropriate because defendants were parties to an ongoing contractual relationship evidenced by the Agreement; all loans were controlled by the same procedures and documents; all class members' loans were table-funded; and the services provided by Aegis and Home Town do not change depending on the interest rate that the loan contains or the yield differential paid on the loan.
The court recognizes that numerous other courts, in mostly unpublished decisions, have considered and denied class certification in "yield spread premium" cases. See Taylor v. Flagstar Bank, FSB, Civil Action No. 98-A-50-N (M.D. Ala. July 21, 1998) (recognizing that "the legal test of RESPA is one which, on its face does not encourage class action"); Conomos v. Chase Manhattan Corp., No. 97 Civ. 0909 (PKL), 1998 WL 118154 (S.D.N.Y. Mar. 17, 1998) (determining that predominance criterion prevented class certification); Hinton v. First American Mortgage, No. 96 C S668, 1998 WL 111668 (N.D. Ill. Mar. 3, 1998) (stating that "the facts of each individual loan transaction would quickly swallow the issues common to the class as a whole"); Barboza v. Ford Consumer Finance Co., Inc., No. 94-12352-GAO, 1998 WL 148832 (D. Mass. Jan. 30, 1998) (recognizing that individual issues are central to the viability of the claims and not "simply incidental"); DuBose v. First Security Savings Bank, No. 95-D-867-N (M.D. Ala. Oct. 23, 1997) (adopting recommendation of magistrate judge to deny class certification); Briggs v. Countrywide Funding Corp., No. 95-D-859-N (M.D. Ala. Sept. 29, 1997) (adopting recommendation of magistrate judge to deny class certification); Marinaccio v. Barnett Banks, Inc., 176 F.R.D. 104 (S.D.N.Y. 1997) (determining that class treatment is an inferior method of adjudication); Mentecki v. Saxon Mortgage, Inc., Civil Action No. 96-1629-A (E.D. Va. July 11, 1997) (stating that RESPA inquiry would require "judicial investigation into each loan transaction" making class certification inappropriate); Moniz v. Crossland Mortgage Corp., 175 F.R.D. 1 (D. Mass. 1997) (finding class certification inappropriate when individual questions regarding individual members predominate over questions common to the class); Badio v. Accubanc Mortgage Co., C.A. No. 96-12259-RCL (D. Mass. July 2, 1997) (denying motion for class certification based on court's decision in Moniz); Martinez v. Weyerhauser Mortgage Co., Case No. 94-1610-CIV-RYSKAMP (S.D. Fla. June 25, 1997) (finding that individual factors predominate over common issues); see also Brancheau v. Residential Mortgage Group, Inc., 177 F.R.D. 655 (D. Minn. 1997) (denying motion to amend complaint to include class allegations); but see McDermott v. Mercury Capital Serv., 1:94-cv-1524-MHS (N.D. Ga. July 12, 1995) (concluding summarily that class certification was appropriate method of adjudication). Plaintiff attempts to distinguish these cases, but the court is unpersuaded by plaintiff's position.
The court will assume without deciding that Schmitz satisfies the threshold requirements of Rule 23(a). See Amchem, 117 S.Ct. at 2243 ("The Third Circuit recognized that Rule 23(a)(2)'s `commonality' requirement is subsumed under, or superseded by, the more stringent Rule 23(b)(3) requirement that questions common to the class "predominate over' other questions."). However, plaintiff's motion for certification must fail under the Rule 23(b)(3) analysis. The first prong of Rule 23 (b)(3) requires Schmitz to show that common questions of law or fact predominate over any questions affecting only individual members. The predominance inquiry "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Amchem, 117 S.Ct. at 2249; Brancheau, 177 F.R.D. at 660. A claim will satisfy the predominance requirement "when there exists generalized evidence which proves or disproves an element on a simultaneous, class-wide basis, since such proof obviates the need to examine each class member's individual position." See In re Potash, 159 F.R.D. at 693; see also In re Workers' Compensation, 130 F.R.D. at 108 (recognizing that there are no bright lines for determining predominance).
Schmitz claims that because this case deals with standardized documents and procedures, it meets the predominance test. Schmitz argues that this case is especially appropriate for class action treatment because there are no individual questions relating to liability. Schmitz states that the only issue is whether the payment of the yield differential violates RESPA and common law. Plaintiff's argument misses the mark.
In determining whether the "yield differential" payment is an illegal payment under RESPA, an issue which would need to be determined is whether any goods or services were actually provided and, if so, whether the payment was reasonably charged. See Taylor, at 23 (stating central test); Conomos, 1998 WL 118154, at *4 (recognizing that trier of fact would have to decide which services were actually performed in each of the transactions encompassed by the proposed class). Notwithstanding that the defendants had an ongoing relationship and used standardized forms and procedures, whether a RESPA violation occurred cannot be decided without analyzing the specific facts of each loan transaction. See Taylor, at 11 (recognizing that the test of RESPA is transaction specific); Marinaccio, 176 F.R.D. at 106-07 (stating that yield spread premiums paid to brokers are not per se violations, but instead require the trier of fact to examine whether services were actually performed); Moniz, 175 F.R.D. at 4 (determining that to resolve the dispute the court would have to evaluate each of the transactions). The court concludes that a class action would be improper because the individual inquiries would predominate.
In support of his position, Schmitz relies on the decision of the Eleventh Circuit Court of Appeals in Culpepper v. Inland Mortgage Corp., 132 F.3d 692 (11th Cir. 1998), reh'g and suggestion for reh'g en banc denied, 144 F.3d 717 (11th Cir. 1998). In Culpepper, the district court had granted summary judgment, determining that the yield spread premium payment was not an improper referral fee. The Eleventh Circuit reversed the district court's decision, stating that the defendant had not established as a matter of law that the yield spread premium violated RESPA. Under the particular facts of the case, including that the transaction was table-funded, the Eleventh Circuit concluded that "the yield spread premium [the mortgage lender] paid to [the mortgage broker] was a prohibited referral fee under RESPA." 132 F.3d at 697. Plaintiff argues that under the particular facts in this case, a violation of RESPA has occurred which is common to the class. Although the Culpepper decision may lend support for the merits of plaintiff's claims, the posture of the Culpepper case involved the grant and subsequent reversal of summary judgment. The Eleventh Circuit clarified that on remand, the defendant would be permitted to introduce evidence of services provided by the mortgage broker to the mortgage lender. 144 F.3d at 718. In addition, the Culpepper decision did not address class certification. See Hinton, 1998 WL 111668, at 11 (recognizing that whereas the Culpepper decision may assist plaintiff in establishing a violation of RESPA, the decision does not speak to class certification). In short, the Culpepper decision did not establish a per se violation of RESPA. Indeed, the opinion recognizes that a determination of RESPA liability requires a fact-intensive inquiry into the loan transaction. See Culpepper, 132 F.3d at 697 n. 5; see also Taylor, at 28 (stating that a finder of fact "will be called upon to determine whether the yield spread premium was intended to be additional payment for the broker's services to the lender and borrower and then, if so, whether there is any excess payment over the reasonable relationship of the total payment to the market value of the services provided"). The court concludes that Schmitz has not satisfied the predominance requirement of Rule 23(b)(3).
In addition, Schmitz has not satisfied the second prong of Rule 23(b) (3), which requires a showing that the class action is superior to other available methods for the fair and efficient adjudication of the controversy. The determination of superiority "often turns on the manageability, and the efficiency, of the proposed class action, in contrast to other alternative methods of suit. Brancheau, 177 F.R.D. at 660. The court recognizes "that dismissal for management reasons is never favored. The vehicle of class action is meant to permit plaintiffs with small claims and little money to pursue a claim otherwise unavailable. A contrary rule would essentially preclude class treatment whenever separate issues had to be tried." In re Workers' Comp., 130 F.R.D. at 110 (quotations and citations omitted).
Schmitz argues that the class action is the superior method of proceeding because most persons would find it uneconomical to bring an individual action. Furthermore, Schmitz argues that separate actions would produce duplicative proceedings, impose a burden on the court, and create the risk of inconsistent results for similarly situated parties. Schmitz states that, in any event, if class treatment proves to be inappropriate or to otherwise not be in the best interest of the court or the parties, the court may alter or amend the class before a decision on the merits pursuant to Rule 23(c)(1). See Fed.R.Civ.P. 23(c)(1) (stating that an "order under this subdivision may be conditional, and may be altered or amended before the decision on the merits").
Whereas denial of class certification for managerial reasons is not favored, in this case the determination of liability would inevitably "devolve into [a] . . . thicket of individualized claims." See Brancheau, 177 F.R.D. at 663. The court concludes that the requirement for individualized determinations would not serve judicial economy or efficiency. In addition, treble damages, attorneys' fees, and costs are available for individuals to prosecute their own claims. See 12 U.S.C. § 2607 (d); see also Taylor, at 31. The court concludes that individual prosecution is the superior method for the adjudication of plaintiff's claims.
Plaintiff also seeks class certification of his state law claims. As with his RESPA claims, plaintiff's state law claims require the same fact-specific inquiries which are necessary for his RESPA claims. A class action is not the superior method of adjudication for any of plaintiff's claims. As other courts have recognized, the court's decision on class certification does not affect the viability of plaintiff's claims on the merits.
CONCLUSION
Based on a review of the file, record, and proceedings herein, the court finds that plaintiff has failed to satisfy the requirements of Fed.R.Civ.P. 23. Therefore, IT IS HEREBY ORDERED that plaintiff's motion for class certification is denied.