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From Banking and Finance Law Daily, August 25, 2015

Kickback claims can be suitable for class action status

By Richard A. Roth, J.D.

A consumer’s claims that First American Corporation and its wholly-owned title insurance subsidiary accepted kickbacks in violation of the Real Estate Settlement Procedures Act could be suitable for class action treatment, the U.S. Court of Appeals for the Ninth Circuit has decided. The appellate court rejected a number of arguments as to why a class should not be certified to pursue the claims, affirming the district court judge on only one point that will narrow any resulting class action (Edwards v. First American Corp., Aug. 24, 2015, Gould, R.)

Investment transactions. The consumer is challenging First American’s alleged practice of buying interests in title agencies in exchange for the agencies’ agreement to refer title insurance business exclusively to First American Title Insurance Company. According to the consumer, First American has invested in 38 title agencies across the nation, paying money in exchange for ownership interests and exclusive referral agreements. This violates 12 U.S.C. §2607(a), which prohibits paying any “thing of value” in exchange for an agreement to refer settlement service business, she claims.

The consumer who brought the suit bought her home in Cleveland, Ohio, using the services of Tower City Title Agency. She claimed that Tower City had entered into one of the investment arrangements with First American, with Tower City receiving $2 million in exchange for a 17.5-percent ownership interest and a referral agreement.

Prior proceedings. Initially, the consumer asked the district court judge to certify a class to pursue claims arising from all of the 180 title agencies in which First American had an interest. The judge refused to do so, but did allow her to engage in discovery related to whether a class should be certified to pursue claims arising only from referrals by Tower City.

At the end of that discovery, the judge refused to certify a class. The appellate court reversed the order, saying that whether the arrangement between Tower City and First American violated RESPA constituted “a single, overwhelming common question of fact.” The appellate court also gave the consumer an opportunity to engage in discovery over whether a nationwide class should be certified.

When that discovery was completed, the consumer asked the district court judge to certify a nationwide class to pursue claims arising from transactions with any of 38 title agencies that had sold minority interests to First American in deals that included exclusive referral agreements. The judge again refused, this time on the basis that common issues did not predominate over individual issues—a requirement for class certification under Federal Rule of Civil Procedure 23. The appellate court said the judge gave three reasons for this conclusion:

  1. Individual inquiries would be needed to decide whether First American paid more for the ownership interests than they were worth.

  2. Common issues did not predominate over individual issues of what caused the referrals.

  3. Transaction-specific considerations that resulted from differences among the title agencies would not require common proof.

The appellate court reversed the district court judge’s decisions on the first two reasons and most of his ruling on the third.

RESPA safe harbor. The district court judge believed that a safe harbor in RESPA (12 U.S.C. §2607(c)) and a comparable provision in Reg. X—Real Estate Settlement Procedures (12 CFR Part 3500) (now 12 CFR Part 1024) would require the consumer to prove that First American overpaid for each of the 38 title agency investments. The appellate court disagreed, saying that the safe harbor does not apply.

According to 12 U.S.C. §2607(c), paying for “goods or facilities actually furnished or for services actually performed” would not violate RESPA. The regulation offers a comparable exemption. However, First American had not paid for goods, facilities, or services; it had paid for equity ownership in the title agencies. That meant the safe harbor did not apply at all, so no individual inquiry was needed, the court said.

“Thing of value.” The appellate court also rejected the district court judge’s decision that individual inquiries were needed to determine whether First American had provided a “thing of value” in exchange for referrals, as proscribed by 12 U.S.C. §2607(a). RESPA would require a consideration of whether there was an overpayment for services that actually were provided, which could amount to a kickback, but the title agencies had provided no services to First American.

Other predominating individual issues. RESPA did not require the consumer to do any more than show that First American gave a thing of value in exchange for a referral agreement, the appellate court said. There were no individual issues that would predominate over that common issue and make class certification inappropriate.

In each investment, First American paid nothing but money, so there was no issue about individual payments. Moreover, common contract principles dictated that a payment was for everything that was received in exchange; the consumer was not obligated to distinguish between how much of First American’s payment in any investment was for the equity ownership and how much was for the referral agreement.

The common class issue of whether First American’s pattern of investments violated RESPA predominated over individual issues, according to the court. Several so-called “Smoking Gun memos” generated during some of these investment transactions, in which First American’s board was advised by the company’s staff that the investments would lock up income streams from future referrals, were evidence of that.

Referral causation. It was irrelevant that persons other than the title agencies could have been responsible for some of the referrals, the court continued. The question was whether the title agencies were obligated to make referrals only to First American.

A referral did not need to be the only reason, or even the most important reason, that a homebuyer chose to use First American Title, the appellate court said. What mattered was whether the title agencies’ referral agreements influenced homebuyer choices.

Types of title agencies. First American also argued that there were three different types of title agencies involved and that this meant individual inquiries into liability would be needed. Some of the agencies constituted affiliated business arrangements that were exempt from the kickback ban, the company claimed, some were majority-owned by First American, and some were formed initially by First American rather than being the subjects of later investments.

No individual inquiry was needed to decide if any of the title agencies was an affiliated business arrangement because the defense was invalid as a matter of law, the appellate court said. The defense would protect First American from liability had it referred business to the title agencies in which it had invested in exchange for a return on its investment. However, First American had not made referrals, the title agencies had done so, the court pointed out. Also, First American had not received payments from the title agencies as a return on its ownership.

It was irrelevant that some of the title agencies were majority-owned by First American, the court continued. First American argued that there could be no RESPA liability when it essentially was referring business to itself, but the court replied that First American and the title agencies were separate legal entities. That meant the company’s majority ownership did not call for individual inquiry into liability.

First American gained its only relief from its argument about the title agencies it helped form from the beginning. According to the company, it participated in the creation of 12 of the 38 title agencies relevant to the suit, rather than investing in pre-existing agencies. Transactions relating to these 12 companies would involve facts different from transactions involving the 26 in which the company made later investments, the appellate court agreed. The absence of common questions of fact meant that common proof would not establish First American’s liability, so the district court judge properly declined to certify a class to pursue these claims.

The case is No. 13-55542.

Attorneys: James W. Spertus (Spertus, Landes & Umhofer, LLP) and Cyril V. Smith (Zuckerman Spaeder LLP for Denise P. Edwards. Brian J. Murray (Jones Day) for First American Corporation and First American Title Insurance Company. Nandan M. Joshi for amicus curiae Consumer Financial Protection Bureau.

Companies: First American Corporation; First American Title Insurance Company; Tower City Title Agency, LLC

MainStory: TopStory AlaskaNews ArizonaNews CaliforniaNews GuamNews HawaiiNews IdahoNews MontanaNews Mortgages NevadaNews OregonNews RESPA WashingtonNews

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