By Michael Y. Kieval & Timothy P. Ofak
For a number of years, plaintiffs’ attorneys have brought suits against lenders and other industry participants based on allegations of “kickbacks” for the referral of real estate settlement services. Traditionally, these claims have been brought under Section 8 of the Real Estate Settlement Procedures Act (“RESPA”), which has a one-year statute of limitations. Plaintiffs’ attorneys have tried various ways to plead around that time limit, including asserting that the statute of limitations should be “equitably tolled” based on a consumer’s alleged inability to discover the violation in time or a defendant’s alleged concealment of the violation. Plaintiffs’ attorneys have also tried to circumvent the limitations period by restyling RESPA claims as claims under state consumer protection statutes or under federal statutes such as the Racketeer Influenced and Corrupt Organizations Act (“RICO”).
There is currently a split among the federal courts of appeals as to whether RESPA claims can be equitably tolled under any circumstances, and the U.S. Supreme Court has not decided the issue. The Supreme Court did, however, recently clarify that equitable tolling of any claim requires two elements: 1) that the plaintiff has been diligent in the pursuit of his or her rights; and 2) that extraordinary circumstances beyond plaintiff’s control prevented him or her from timely filing suit.1
Last year, in Community Bank,2 the United States Court of Appeals for the Third Circuit (“Third Circuit”) held that the one-year statute of limitations for private lawsuits under RESPA Section 8 can be tolled to permit consumers to bring claims past the one-year mark under certain circumstances. In that case, the Third Circuit also stated that although the diligence element of equitable tolling is usually a fact-specific inquiry (making it unsuitable for determination on a class action basis), “when a wrongful scheme is perpetrated through the use of common documentation, such as the documents employed to memorialize each putative class member’s mortgage loan, full participation in the loan process is alone sufficient to establish the due diligence element.”3
Now the Third Circuit has waded back into the RESPA equitable tolling waters to limit the application of this reasoning from Community Bank to motions for class certification. On February 19, 2016, the Third Circuit affirmed the district court’s decision in Cunningham v. M&T Bank Corp., which granted summary judgment to M&T Bank, its captive private mortgage reinsurer, and two private mortgage insurers, on the basis that the plaintiffs’ RESPA claims are time-barred.4 The plaintiffs/appellants asked the full Third Circuit to rehear the appeal, and that request was denied on April 1, 2016.
The Third Circuit determined that, on the undisputed facts, the plaintiffs failed to show due diligence and therefore could not use equitable tolling to rescue otherwise time-barred claims. The plaintiffs took no steps to investigate whether M&T Bank violated state or federal law. Rather, the plaintiffs did not become aware of a basis for a possible claim under RESPA until an attorney asked them to join the class action lawsuit approximately four years after the closing of their loans.
Cunningham is important for companies who find themselves defending claims under Section 8 of RESPA, both within the Third Circuit (Pennsylvania, New Jersey, Delaware, and the U.S. Virgin Islands) and elsewhere. In Cunningham, the Third Circuit has issued a precedential opinion that thoughtfully describes the legal doctrine of equitable tolling and how it applies to RESPA. The opinion also makes clear that a lack of due diligence during the one year limitations period precludes equitable tolling, even where plaintiffs allege that such diligence would have been futile, providing defendants with a powerful, clear-cut tool to challenge a plaintiff’s equitable tolling claim under RESPA.
The Underlying Facts Relevant to the Third Circuit’s Decision
In May 2007, October 2007, and June 2008, the three named plaintiffs in the putative class action closed on their residential mortgage loans from M&T Bank to finance the purchase of their homes. Each plaintiff sought a loan for more than 80% of the value of the property, loans which required private mortgage insurance. The Third Circuit explained that, as “is customary in the industry, M&T Bank selected the insurers with whom the plaintiffs would contract.”5
Companies providing private mortgage insurance may choose to obtain “reinsurance” on their risk through a reinsurance company that assumes a portion of the risk in exchange for a percentage of the mortgage insurance premium. Many mortgage lenders, including M&T Bank, formerly operated what are commonly referred to as “captive” companies that reinsure the mortgages originated by their parent lenders. In this case, the private mortgage insurers reinsured the plaintiffs’ insurance policies with M&T Mortgage Reinsurance Company, M&T Bank’s captive reinsurer.
Lender-captive reinsurance of private mortgage insurance has been the subject of numerous lawsuits as well as several Consumer Financial Protection Bureau (“CFPB”) enforcement actions, including actions against private mortgage insurers that were settled in part based upon those companies’ agreement not to obtain reinsurance on new loans from lender-captive reinsurers.
The Complaint and District Court Proceedings
In late 2011, plaintiffs’ counsel began contacting consumers, including the named plaintiffs, and informing them that the attorneys were “investigating” M&T Bank’s captive mortgage reinsurance. The plaintiffs filed their complaint in June 2012, alleging that M&T Bank and its reinsurer colluded with private mortgage insurers by “referring customers to the private mortgage insurers and receiving in return reinsurance agreements that require M&T Mortgage Reinsurance to take on little or no actual risk,” which allegedly violated RESPA’s anti-kickback and anti-fee-splitting provisions.6 Plaintiffs sought to represent a nationwide class of similarly situated individuals.
In response to the complaint, M&T Bank filed a motion to dismiss, arguing that the plaintiffs’ claims were barred by RESPA’s one-year statute of limitations. The district court denied the motion without prejudice and allowed the parties to engage in limited discovery concerning the issue of equitable tolling. After conducting limited discovery on this specific issue, M&T Bank filed a motion for summary judgment. The district court granted summary judgment, finding that the plaintiffs were not entitled to equitable tolling because they failed to exercise reasonable diligence by investigating potential claims under RESPA.
RESPA Section 8 and the Statute of Limitations
Plaintiffs allege in their complaint that the defendants’ scheme violated RESPA’s anti-kickback and anti-fee-splitting provisions. Section 8(a) of RESPA prohibits anyone from giving or accepting a fee, kickback, or thing of value in exchange for referrals of settlement service business involving a federally-related mortgage loan. Section 8(b) of RESPA prohibits fee-splitting except where services were actually performed.7
These claims are subject to a one-year statute of limitations.8 The limitations period begins to run from the occurrence of the violations, which starts at the closing of the loan.
The Court’s Equitable Tolling Analysis
Despite filing their lawsuit several years after the statute of limitations period had run, the plaintiffs argued that they were entitled to equitable tolling on the basis of alleged fraudulent concealment. To establish fraudulent concealment, the plaintiffs were required show the following three elements: (1) the defendant actively misled the plaintiffs; (2) this prevented the plaintiffs from recognizing the validity of their claims within the limitations period; and (3) the plaintiffs’ ignorance is not attributable to a lack of reasonable due diligence to investigate possible claims. If a plaintiff with an otherwise time-barred claim has not presented sufficient evidence of even one of these three elements, then judgment should be entered for the defendant.
The Third Circuit began its equitable tolling analysis by explaining that, while it had previously held that the statute of limitations under RESPA is eligible for equitable tolling, equitable tolling is an extraordinary remedy that should be extended sparingly.9 Next, the Court considered the information available to the plaintiffs at the time of their closings and whether they took any steps to investigate the validity of the reinsurance arrangement between M&T Bank and the private mortgage insurers. After conducting a thorough and well-reasoned analysis, the Court found that the plaintiffs failed to exercise reasonable diligence to justify tolling the statute of limitations.
In support of its finding, the Court explained that, before closing on their respective loans, each plaintiff received a disclosure form that (1) explained reinsurance in plain language, (2) advised that reinsurance could be with a company affiliated with M&T Bank, and (3) provided an opportunity to opt out of having their loans reinsured. Each plaintiff signed the disclosure form, and they admitted during their depositions that they were aware of the possibility of captive reinsurance at the time of their closings.
The plaintiffs also “took no steps to investigate whether M&T Bank’s captive reinsurance program might violate state or federal law. They did not, for example, ask their mortgage insurer if their particular insurance policy had been reinsured and, if so, with whom. They did not seek the advice of an attorney, research captive reinsurance, request documents related to their mortgage insurance, or take any steps to discover if they had a claim under RESPA.” Rather, the plaintiffs “claim simply that it was not until late 2011 or early 2012, when counsel asked them to join a lawsuit, that they became aware of the basis for a possible claim under RESPA.”10
Based upon these undisputed facts, the Third Circuit held that the plaintiffs “failed to show due diligence and cannot use equitable tolling to rescue otherwise time-barred claims.”11 The Court explained that the plaintiffs were aware at the time of their closings that the mortgage insurance on their homes might be reinsured with an affiliate of M&T Bank. The plaintiffs had facts to develop their claims under RESPA but failed to take any steps to investigate. This obvious “inaction” during an approximately four-year period was not reasonable diligence.
In reaching its holding, the Third Circuit also rejected the plaintiffs’ assertion that M&T Bank’s misrepresentations did not give them any reason to investigate potential claims. The plaintiffs argued that in the absence of “storm warnings,” they were not put on notice of the need to investigate. The Court found this argument meritless. First, the Court explained that the plaintiffs were incorrectly invoking the “discovery rule,” which relates to when the limitations period begins to run. The discovery rule does not apply to RESPA since Congress specifically provided that the limitations period begins to run on the “date of the occurrence of the violation.”12 The Court also noted that M&T Bank’s disclosure provided proper notice and, even if the lender’s disclosure did not give the plaintiffs warning of the need to investigate, “the onus is still on Plaintiffs in these circumstances to exercise some degree of diligence in order to receive the benefit of equitable tolling.”13
The district court in Cunningham (in the opinion affirmed by the Third Circuit) went even further, stating:
That a typical purchaser may not learn of potential RESPA violations until advised of same by counsel is not unexpected. Unfortunately, RESPA simply does not contemplate an inquiry notice or discovery rule element which permits equitable tolling of the limitations period. Plaintiffs conducted no investigation into their claims for more than half a decade after the limitations period expired.14
The Third Circuit’s opinion, while not binding on other Circuits, is well-written and well-reasoned, and will likely have a significant and persuasive impact on RESPA cases going forward in federal court. The Third Circuit’s opinion clarifies its holding in last year’s Community Bank decision, which had suggested that mere participation in the loan process could constitute diligence, and offers straightforward guidance for determining whether a plaintiff is entitled to equitable tolling. It reaffirms the analysis of the Third Circuit’s unpublished (and therefore non-precedential) 2014 decision in a similar case brought by the same plaintiffs’ attorneys,15 and will control a number of similar cases that were stayed pending this decision.
Keep in mind that the plaintiffs/appellants can still ask the Supreme Court to review the Third Circuit’s decision by filing a petition for writ of certiorari.
This decision follows closely on the heels of the Supreme Court’s recent decision in Menominee Tribe, however, in which the Supreme Court reiterated that a plaintiff’s diligence during the period to be tolled is an independently required element in order to toll the statute of limitations. That decision suggests that plaintiffs/appellants might not find a warm reception for their diligence arguments in that Court.
Finally, note that these positive developments concerning class action lawsuits do not protect companies from lawsuits or administrative enforcement actions brought by regulators for the same types of alleged RESPA violations. State and federal regulators can bring suit in federal court for RESPA violations within three years of the date of the violation, and the CFPB has taken the position that it can enforce RESPA through administrative enforcement actions (brought in the CFPB’s in-house “court”) without regard to the statute of limitations. Additionally, plaintiffs’ attorneys continue to plead allegations of RESPA-type kickbacks under other statutes to avoid RESPA’s limitations period. But for members of our industry facing untimely private class actions brought by consumers under RESPA, Cunningham and Menominee Tribe are good news indeed.
1 Menominee Indian Tribe of Wisconsin v. United States, 136 S. Ct. 750 (2016).
2 In re Cmty. Bank of N. Virginia, 795 F.3d 380 (3d Cir. 2015).
3 Id. at 404.
4 Cunningham v. M&T Bank Corp., 814 F.3d 156 (3d Cir. 2016).
5 Cunningham, 814 F.3d at 159.
6 Cunningham, 814 F.3d at 159.
7 12 U.S.C. § 2607(a)-(b).
8 12 U.S.C. § 2614.
9 See Cmty. Bank, 795 F.3d at 400 n.20.
10 Cunningham, 814 F.3d at 162.
12 12 U.S.C. § 2614.
13 Cunningham, 814 F.3d at 163.
14 Cunningham v. M&T Bank Corp., No. 1:12-cv-1238, 2015 U.S. Dist. LEXIS 15767, at *23-24, 2015 WL 539761 (M.D. Pa. Feb. 10, 2015) (internal citations omitted).
15 See Riddle v. Bank of Am. Corp., 588 F. App’x 127 (3d Cir. 2014).