- Former Freddie Mac executives, who were accused of lying about Freddie’s exposure to subprime mortgages before the financial crisis, settled with the SEC.
- Citibank shareholders slam the Bank’s motion to dismiss a case over mortgage-backed securities worth more than $17 billion as NY federal courts have rejected similar arguments to dismiss similar cases.
- The Second Circuit dismisses a class action against Royal Bank of Scotland PLC finding that the bank did not lie about its exposure to residential mortgage-backed securities.
- DC federal judge certified a class action of evicted homeowners, with a lead representative who lost his home over a $134 unpaid tax bill. The court will decide whether district law creates a property interest in equity, if its tax-sale statutes effect a taking of the property and if class members were properly compensated.
Tag Archives: class action
Monday’s Adjudication Roundup
- Bankrupt Washington Mutual settles in class action suit for $10 million after duping plaintiffs into taking out mortgages with low “teaser rates.”
- Goldman Sachs asks NY Federal Judge not to certify class action suit over its Abacus collateralized debt obligation, which caused $1 billion in investor losses.
- The Third Circuit Court of Appeals has ruled that the Fair Debt Collection Practices Act (FDCPA) covers foreclosure complaints in suit brought by Bank of America and a NJ law firm.
- First Horizon National Corp.’s subsidiary First Tennessee Bank settles with FDIC over violation of due-diligence regulations for Federal Housing Administration-insured home loans for $212.5 million.
- HSBC and Assurant settle for $1.8 billion over allegations that the bank got kickbacks for getting consumers to purchase inflated flood insurance.
Monday’s Adjudication Roundup
- BofA has asked a PA federal judge to dismiss a class action RICO suit alleging kickbacks from overpriced mortgage insurance claiming it is the same suit that was dismissed as time-barred by Third Circuit in October.
- Deloitte is potentially facing $1.3 billion plus punitive damages to Freddie Mac for negligently auditing work for Taylor Bean, a mortgage lender with a massive employee fraud.
- Circuit split continues on whether and when lenders are responsible for development project failures when the Seventh Circuit ruled that the lender’s insurers would not cover the emergence of contractor liens in a failed $118 million real estate development.
Reiss on GSE Transfer Taxes
Law360 quoted me in Fannie, Freddie Look Unstoppable In Transfer Tax Fight (behind a paywall). It reads in part,
Class actions against Fannie Mae and Freddie Mac over hundreds of millions of dollars in unpaid transfer taxes in states and cities around the country continue to pile up, but experts say any attempt to challenge the housing giants’ exempt status is likely futile as court after court rules in their favor.
The Eighth Circuit on Friday joined the Third, Fourth, Sixth and Seventh circuits in ruling that Fannie Mae and Freddie Mac are exempt from local transfer taxes when it ruled in favor of the government-sponsored enterprises, or GSEs, after reviewing a suit brought by Swift County, Minnesota.
Swift County, as with a multitude of counties, municipalities and states before it, sought to dispute Fannie and Freddie’s claim that while they must pay property taxes, they are exempt from additional taxes on transfers of assets. But in what some experts say has come to seem like an inevitable answer, the Eighth Circuit found in favor of Fannie and Freddie.
“The federal statutes that set forth the charters of Fannie and Freddie are pretty clear that the two companies have a variety of regulatory privileges that other companies don’t,” David Reiss, a professor at Brooklyn Law School, said. “One of the privileges is an exemption from nearly all state and local taxation.”
The legal onslaught against the GSEs began in 2012 after U.S. District Judge Victoria A. Roberts ruled in March that they should not be considered federal agencies. In a suit filed by Oakland County, Michigan, over millions in unpaid transfer taxes, Judge Roberts rejected the charter exemption argument and, citing a 1988 U.S. Supreme Court ruling in U.S. v. Wells Fargo, found that “all taxation” refers only to direct taxes and not excise taxes like those imposed on asset transfers.
Counties, municipalities and states across the country were emboldened by the decision. Putative class actions soon followed in West Virginia, Illinois, Minnesota, Florida, Rhode Island, Georgia and elsewhere as plaintiffs rushed to see if they could elicit a similar ruling and recoup millions of dollars allegedly lost thanks to the inability to tax Fannie and Freddie’s mortgage foreclosure operations.
But Judge Roberts’ decision was later overturned by the Sixth Circuit, as were other similar orders, though many district judges found in favor of Fannie and Freddie from the start.
* * *
Many cases remain in the lower courts as well, but experts say the outcomes will likely echo those that played out in the Third, Fourth Sixth, Seventh and Eighth circuits, because the defendants’ chartered exemption defense appears waterproof.
“I find the circuit court decisions unsurprising and consistent with the letter and spirit of the law,” Reiss said. “I am guessing that other federal courts will follow this trend.”
U.S. Dismissive of Frannie Suits
The Federal Housing Finance Agency filed its motion to dismiss all the claims in Perry Capital v. Lew, D.D.C., No. 13-cv-01025, 1/17/14. I blogged about this case (and similar cases) when they were filed last summer. It is quite interesting to read the government’s side of the story now. Today’s post focuses on the federal government’s alternative narrative. Where the private investors describe an opportunistic and abusive government in their complaints, the FHFA’s brief describes the government as a white knight who rode in to save the day at the depth of the financial crisis:
The national crisis having eased, Plaintiffs now ask the Court to re-write the agreements that FHFA, on behalf of the Enterprises, and Treasury executed to stabilize the Enterprises and the national economy, pursuant to express congressional authority. Plaintiffs want to cherry-pick those aspects of the agreements that they like—namely, the unprecedented financial support from Treasury at a time when the Enterprises required billions of dollars in capital—and discard the parts they do not like—namely, the Third Amended PSPAs—now that over one hundred billion dollars of federal taxpayer capital infusions and commitments have allowed the Enterprises to remain in business and produce positive earnings, rather than being placed into mandatory receivership and then liquidation. Plaintiffs’ attempt to reward themselves, at the expense of federal taxpayers who risked and continue to risk billions of dollars to save the Enterprises from receivership and liquidation, directly contravenes the relevant statutory authorities as implemented by the unambiguous language of the PSPAs.
Plaintiffs’ charges of common law and APA violations have it exactly backwards: FHFA, on behalf of the Enterprises, has acted at all times consistent with the Enterprises’ contractual obligations and FHFA’s powers as Conservator and statutory successor to all rights of the Enterprises and their stockholders. The shareholder-Plaintiffs, on the other hand, are attempting through these cases to convince this Court, during the conservatorships, to give shareholders financial value that they are not owed under the terms of their stock certificates or statutes, and to ignore the rights of the Enterprises’ senior preferred stockholder, the U.S. Treasury. By doing so, Plaintiffs seek not only to undermine the purposes of conservatorship, but also the very statutory mission of the Enterprises in which they chose to invest. (4-5)
While I think that the investors raise some serious legal issues for the court to decide, the federal government’s narrative of the financial crisis jibes a whole lot more with my own than does the investors’. I argued last summer that the side that wins control of the narrative will have an advantage in the battle over the legal issues. I would say that the federal government has won this first round.
The Taking of Fannie and Freddie 2
Today, I look at one more complaint filed in response to the federal government’s amendment to its Preferred Stock Purchase Agreements with Fannie and Freddie (the PSPAs). Cacciapelle et al. v. United States, filed July 10, 2013, is another takings clause case like the one filed by Fairholme the day before. The facts alleged in the complaint should be familiar to readers of REfinblog.com (here, here and here), although this is a class action complaint.
The plaintiffs state that the members of the class “paid valuable consideration to acquire these rights, and in doing so helped provide financial support for Fannie and Freddie, both before and after the conservatorship, by contributing to a viable market for Fannie’s and Freddie’s issued securities. Plaintiffs certainly had a reasonable, investment-backed expectation that the property they acquired could not be appropriated by the Government without payment of just compensation.” (4-5)
Now having read four complaints dealing with the same issue arising from the financial crisis, I am struck by the importance of narrative in litigation. Given that the federal government saved the Fannie and Freddie from certain financial ruin, we may label the Cacciapelle narrative the “Have Your Cake and Eat It Too” storyline.
One can well imagine the government’s version of events in its inevitable motion to dismiss.
Fannie and Freddie were at the brink of ruin. We swept in, provided unlimited capital and rescued the companies, the housing market, the country and the world from the Second Great Depression. To have the private preferred shareholders engage in Monday Morning Quarterbacking and focus on the details from the crisis response that harmed them, to have them ignore the competing concerns that were at stake for each of these critical decisions, adds insult to this injurious lawsuit. Judge, do not succumb to this hindsight bias!
Let’s label this the Corialanus storyline.
These lawsuits have caught reporters’ eyes and will be well-covered in the press. I would look to see which narratives resonate and I wouldn’t be surprised if the dominant narrative finds its way into the judicial opinions that decide these cases.
Servicing Fraud Claim Survives Motion To Dismiss
Judge Gonzalez Rogers issued an opinion in Ellis v. J.P. Morgan Chase, No. 4:12-cv-03897-YGR (N.D. Cal. June 13, 2013) in which she denied a motion to dismiss a fraud claim in this class action lawsuit arising from Chase’s servicing business. The plaintiffs allege that “Chase engaged in fraudulent practices by charging marked-up or unnecessary fees in connection with Defendants’ home mortgage loan servicing businesses.” (1)
The opinion states that
Plaintiffs have alleged numerous instances where deficient information was provided and could have been revealed—namely, in the mortgage agreements themselves, in the mortgage statements reflecting the marked-up fees, or during communications with Chase where it told Plaintiffs that the fees were in accordance with their mortgage agreements. Plaintiffs provide specific dates for statements in which they believe they were charged the marked-up fees, and allege they paid the fees without knowing their true nature. Plaintiffs describe the content of the omission as the failure to inform them that the fees were marked-up and that the majority of the fees ultimately went to Chase, and not third-party vendors performing the services. As discussed above, Plaintiffs have also sufficiently alleged that they did pay the marked-up fees. (36)
It continues,
Defendants allegedly demanded payment for fees that, in some cases, were never actually incurred. Moreover, Plaintiffs allege that false representations were made to borrowers when Chase told them that the fees were in accordance with their mortgage contracts—this is distinguishable from an omission. As alleged, the fraud is equally about the failure to disclose material information as it is that the amounts demanded on mortgage statements were false because they did not correspond to the actual amounts owed pursuant to the mortgage agreements relied upon by Defendants. Based on the alleged nature of the fraudulent scheme, the lack of an explicit “duty to disclose” is not dispositive in light of affirmative fraud that is also alleged. (37, citations omitted)
Denying the motion to dismiss this claim exposes servicers to great potential liability for their acts and omissions.
