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Galas v. The Lending Company, Inc.

United States District Court, D. Arizona

August 14, 2014

Margaret Galas, a single woman, individually and on behalf of those similarly situated, Plaintiff,
The Lending Company, Inc., et al., Defendants.


STEPHEN M. McNAMEE, Senior District Judge.

Pending before the Court is Plaintiff Margaret Galas's ("Plaintiff") Motion for Class Certification and Appointment of Class Counsel. (Doc. 102.) Defendants The Lending Company, Inc. ("TLC"), Mark A. Nickel, Jennifer Nickel, Dave J. Johnson, Lauri Serota-Johnson, RJ Reynolds and Family Housing Resources ("FHR") (collectively "Defendants") filed their Response to Plaintiff's Motion for Class Certification and Appointment of Class Counsel. (Doc. 115.) Thereafter, Plaintiff replied in support of her Motion. (Doc. 119.) After careful consideration of the arguments set forth by the parties, and after hearing oral argument in this matter (Doc. 123), the Court will deny class certification.



TLC is in the business of providing mortgage lending services to consumers. To properly understand and place in context TLC's mortgage loan program at issue, the

following background information is set forth. In a typical mortgage loan, the mortgagee pays the lender the mortgage amount for the real estate, plus interest and closing or settlement costs. Generally, a mortgage loan involves not only the lender bank, but also a mortgage broker, hired by the mortgagee to assemble the entire mortgage loan package and have the mortgage transaction ready to close by a date certain. The mortgage loan package consists of a number of settlement services. See Schuetz v. Banc One Mortgage Corp. , 292 F.3d 1004, 1007 (9th Cir. 2002) (summarizing settlement services provided by mortgage brokers such as processing loan application, fees for recording, title examinations, credit reports, surveys, appraisals, home inspection, etc.). At closing, the mortgagee directly pays its mortgage broker a traditional 1% mortgage loan origination fee for its services. See Bjustrom v. Trust One Mortgage Corp. , 322 F.3d 1201, 1203-04 (9th Cir. 2003). As part of other closing costs, the lender, indirectly through the mortgagee, agrees to pay the mortgage broker for settlement services generally denominated as yield spread premium payments, [1] and for larger loans, service release premium payments.[2] Id.

Congress enacted the Real Estate Settlement Procedures Act ("RESPA") in 1974 to protect home buyers from inflated prices in the home purchasing process.[3] Schuetz , 292 F.3d at 1008. Congress sought to increase the supply of information available to mortgage consumers about the cost of home loans in advance of settlement, and to eliminate abusive practices such as kickbacks, referral fees, and unearned fees. Id . RESPA requires lenders to provide borrowers with a statement identifying all settlement charges on a standardized form, commonly known as a HUD-1, [4] 12 U.S.C. § 2603. Id . Thus, the HUD-1 provides an accounting of the settlement charges already stated, the amount due from the consumer to the mortgage broker for loan origination fee, for YSP charges, and for any SRP charge. In addition, mortgage consumers are provided with an information booklet prepared by HUD that counsels borrowers on how mortgage transactions work and how to recognize inflated charges. Id. at 1008-09.

In this case, TLC operated as both the lender and its own mortgage broker in relation to the mortgage consumer. (Doc. 115 at 3.) In order for a mortgage loan to qualify for Federal Housing Administration ("FHA") insurance, the mortgage consumer in addition to responsibility for settlement charges, must make a down payment to the lender of at least 3.5%. See 12 U.S.C. § 1709(b)(9). In this case, TLC sought to enable borrowers to satisfy the down payment requirement without providing the full 3.5% by offering consumers a "1% down" program. (Doc. 45 at 3.) The program required borrowers to provide a 1% down payment, after which they would receive down payment assistance, a "gift" of the additional 2.5% from a non-profit charitable organization. (Id.) TLC advised borrowers that the borrowers were not obligated to make any future payments to the non-profit charitable organization; they were only responsible for their mortgage payments.

In May 2010, Plaintiff applied for and in June 2010 obtained an FHA insured mortgage loan from TLC in the amount of $132, 554 through its 1% down program. (Doc. 35 at 22; Doc. 35-9 at 2.) Plaintiff provided 1% of the down payment and received a "gift" of the additional 2.5%, or a total of $3, 375, from the charitable organization FHR. (Doc. 45 at 3.) Plaintiff alleges that TLC charged her a higher interest rate than she would have obtained had she not participated in the 1% down program. That interest rate, she claims, was elevated so that her mortgage could be sold as a "premium" mortgage on the secondary market; TLC then used the additional proceeds from the sale of her loan to repay the charity for the 2.5% gift and TLC retained the rest of the proceeds as an "administrative fee." (Doc. 35 at 15-19.) Additionally, FMR gave TLC a tax donation receipt for the monies TLC paid to FMR after TLC sold Plaintiff's loan on the secondary loan market. Plaintiff alleges that while she was promised a "gift, " she and other 1% down borrowers were actually paying for the "gift" through an inflated mortgage interest rate, and that Defendants misrepresented to her the terms of her mortgage loan. (Doc. 35 at 22-23.)

Procedural History

Plaintiff filed a class action complaint asking this Court to certify the following nationwide class action, defined as: "all persons in the United States who applied for and received an [FHA] loan through TLC's "1% down" FHA loan program from the start of the program to the present." (Doc 35 at 25.) Plaintiff seeks nationwide class action certification based upon the following causes of action: Claims one and two assert violations of portions of RESPA. 12 U.S.C. § 2607(a) & (b). Claims three and four allege conspiracy and enterprise liability violations of the Racketeer Influence and Corrupt Organization Act ("RICO"). 18 U.S.C. § 1962(c) & (d). Claim five alleges a violation of the Arizona Consumer Fraud Act ("ACFA"), A.R.S. § 44-1522. Claim six alleges common law claims of fraudulent misrepresentation and omission. ( Id. at 28-43.)

Previously, Judge David Campbell dismissed Claim 7, Breach of Contract. (Doc. 91.) Plaintiff no longer seeks class certification for Claim 8, Declaratory and Injunctive Relief. (Doc. 102 at 4.)

Prior to oral argument, Plaintiff submitted an investigative report regarding TLC's 1% down program, which was conducted by HUD on behalf of their FHA program. The August 20, 2013 report found that TLC's gift programs did not comply with HUD requirements because they contained unallowable gifts. (Doc. 121.) As a result of home mortgage loans under the 1% Down Program, HUD reported that the FHA insurance program sustained losses and seeks indemnity from TLC for those losses. (Id.)


Class Certification

Class actions are governed by Fed.R.Civ.P. 23. Rule 23 "give[s] the district court broad discretion over certification of class actions[.]" Stearns v. Ticketmaster Corp. , 655 F.3d 1013, 1019 (9th Cir. 2011). Class certification is "an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only.'" Comcast Corp. v. Behrend , 133 S.Ct. 1426, 1432 (2013) (quoting Califano v. Yamasaki , 442 U.S. 682, 700-701 (1979)). "In order to justify a departure from that rule, a class representative must be part of the class and possess the same interest and suffer the same injury as the class members." See Wal-Mart Stores, Inc. v. Dukes , 131 S.Ct. 2541, 2550 (2011).

Rule 23 does not set forth a mere pleading standard. Id. at 2551. According to Rule 23(a), the party seeking class certification must affirmatively set forth facts sufficient to satisfy the following four prerequisites: (1) numerosity; (2) commonality; (3) typicality; and (4) adequacy of representation. Fed.R.Civ.P. 23(a); see also Amchem Prods., Inc. v. Windsor. , 521 U.S. 591, 613 (1997). Numerosity requires a class "so numerous that joinder of all members is impracticable." Fed.R.Civ.P. 23(a)(1). Commonality requires "questions of law or fact common to the class." Fed.R.Civ.P. 23(a)(2). The purpose of the rigorous commonality standard is to require that class members' claims depend upon a common contention whose truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke. See Dukes , 131 S.Ct. at 2551 (stating further that what matters is not the raising of common questions but rather the capacity of a classwide proceeding to generate common answers apt to drive the resolution of the litigation); see also id. at 2552 (stating that "without some glue holding [the rationale for the alleged violation] together, it will be impossible to say that examination of all the class members' claims for relief will produce a common answer to the crucial question" of whether there was a violation); Cal. Rural Legal Assistance, Inc. v. Legal Servs. Corp. , 917 F.2d 1171, 1175 (9th Cir. 1990) (stating that commonality ensures that claims of individual class members share a common core of facts "sufficiently parallel to insure a vigorous and full presentation of all claims for relief"). Typicality ensures that the "claims or defenses of the representative parties are typical of the claims or defenses of the class" as a whole. Fed.R.Civ.P. 23(a)(3). Finally, adequacy of representation is necessary to "fairly and adequately protect the interests of the class." Fed.R.Civ.P. 23(a)(4).

In addition to meeting the conditions imposed by Rule 23(a), the party seeking class certification must satisfy through evidentiary proof at least one of the provisions of Rule 23(b). See Comcast Corp. v. Behrend , 133 S.Ct. 1426, 1432 (2013). Here, Plaintiff moves for class certification pursuant to Rule 23(b)(3), which requires that the Court find (1) that "questions of law or fact common to class members predominate over any questions affecting only individual members, " and (2) that "a class action is superior to other available methods for fairly and efficiently adjudicating the controversy." Fed.R.Civ.P. 23(b)(3).

The predominance inquiry "tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation." Hanlon v. Chrysler Corp. , 150 F.3d 1011, 1022 (9th Cir. 1998) (citation and internal quotation omitted). "This analysis presumes that the existence of common issues of fact or law have been established pursuant to Rule 23(a)(2); thus, the presence of commonality alone is not sufficient to fulfill Rule 23(b)(3)." Id .; see also Comcast , 133 S.Ct. at 1432 (reiterating that "[i]f anything, Rule 23(b)(3)'s predominance criterion is even more demanding that Rule 23(a)"). "In contrast to Rule 23(a)(2), Rule 23(b)(3) focuses on the relationship between the common and individual issues." Hanlon, "When common questions present a significant aspect of the case and they can be resolved for all members of the class in a single adjudication, there is clear justification for handling the dispute on a representative rather than on an individual basis." Id . However, under Comcast, it is the court's duty to take a close look at whether common questions predominate over individual ones. 133 S.Ct. at 1432; see also In re Hydrogen Peroxide Antitrust Litig. , 552 F.3d 305, 311 (3d Cir. 2008) ("If proof of the essential elements of the cause of action requires individual treatment, then class certification is unsuitable"). The superiority inquiry "requires determination of whether the objectives of the particular class action procedure will be achieved in the particular case." Id. at 1023. "This determination necessarily involves a comparative evaluation of alternative mechanisms of dispute resolution." Id.

Although a district court has broad discretion to certify a class, the court must undertake a "rigorous analysis" to ensure that the prerequisites of Rule 23 have been satisfied and that class certification is appropriate. See Dukes , 131 S.Ct. at 2551; Hanon v. Dataproducts Corp. , 976 F.2d 497, 509 (9th Cir. 1992). The rigorous analysis that must be undertaken regarding class certification frequently involves overlap with the merits of the plaintiff's underlying claim. See Gen. Tel. Co. of SW. v. Falcon , 457 U.S. 147, 160 (1982) (stating that "the class determination generally involves considerations that are enmeshed in the factual and legal issues comprising the plaintiff's cause of action.").

Plaintiff asks this Court to certify the following nationwide class action, defined as: all persons in the United States who applied for and received an FHA loan through TLC's "1% down" FHA loan program from the start of the program to the present. (See Doc. 35 at 25.) Plaintiff alleges that Defendants orchestrated a fraudulent loan scheme targeting low-income, first-time home buyers. Defendants deny these allegations and contend that Plaintiff cannot meet the requirements for class certification.


The Court evaluates the prerequisites for class action certification pursuant to Federal Rule of Civil Procedure 23. As part and parcel of that Rule 23 discussion, the Court will first consider Rule 23(a), the prerequisites for maintaining a class action. Plaintiff must affirmatively demonstrate her compliance with Rule 23. If Rule 23(a)'s prerequisites are satisfied, then the Court will analyze Plaintiff's showing under Rule 23(b), as to whether the alleged violations are appropriate for class treatment.

Plaintiff alleges that Defendants orchestrated a fraudulent loan scheme that targeted low-income, first-time home buyers. Defendants deny these allegations, but only challenge whether Plaintiff met the requirements for Rule 23(a)(4) and Rule 23(b)(3). Regarding Plaintiff's various causes of action, the parties focus their arguments and analysis on the Rule 23(b)(3) predominance aspect under the assumption that Plaintiff's certification motion hinges on whether individual issues predominate this complaint.

The Court will summarily review Rule 23(a)(1) thru (a)(3) as Defendants have not challenged these prerequisites, and then analyze Defendants' contentions regarding Rule 23(a)(4) and Rule 23(b)(3).

I. RULE 23(a)

A. Numerosity

Plaintiff alleges that TLC's 1% Down Payment loan program resulted in approximately 800 borrowers receiving mortgages from TLC, which is a sufficiently large number to satisfy Rule 23(a)(1)'s numerosity requirement. (Doc. 102 ...

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