Friday, August 16, 2013

FYI: 3rd Cir Upholds Rejection of Class Settlement of Discriminatory Lending "Discretionary Pricing" Claims Under Dukes

The U.S. Court of Appeals for the Third Circuit recently held that the putative class in an action involving alleged racially discriminatory lending practices lacked commonality, in that the alleged discrimination was based on the exercise of discretion by numerous decision makers, and therefore lacked a common discriminatory mode. 


A copy of the opinion is available at


A group of minority borrowers ("borrowers") filed a class action complaint against a bank, alleging that the bank had an established practice or pattern of racial discrimination in its financing of home loan purchases.   Specifically, the borrowers argued that the bank allowed brokers and loan officers to add subjective surcharges to their loans, such that minority applicants were charged more than similarly-situated Caucasian borrowers. 


The bank supplied the borrowers' counsel with data as to more than two million of its loans.  The borrowers analyzed this data, and asserted that it supported their contentions.  The two sides entered into settlement negotiations, and the bank agreed to settle the matter for $7,000,000.  Before the lower court approved the settlement, the Supreme Court issued its opinion in Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541 (2011) ("Dukes"). 


The lower court determined that under the standards articulated in Dukes, the instant class lacked commonality and typicality, and therefore could not be certified.  Accordingly, the lower court declined the parties' motion to approve the settlement agreement.  The borrowers appealed. 


As you may recall, Federal Rule of Civil Procedure 23(a) ("Rule 23") requires that the members of a proposed class share a common question of law or fact.  The commonality requirement is satisfied where "the named plaintiffs share at least one question of fact or law with the grievances of the prospective class."  Baby Neal v. Casey, 43 F.3d 48, 56 (3d Cir. 1994). 


In Dukes, the Supreme Court held among other things that where a putative class asserts discrimination on the basis of giving discretion to lower-level employees, such claims must do more than "merely prov[e] that the discretionary system has produced a racial or sexual disparity."  In addition, plaintiffs must also identify "the specific practice that is challenged" - and to bring a case as a class action, each member of the class must have been subjected to the specific challenged practice in roughly the same manner.  Dukes, 131 S. Ct. at 2555-56. 


On appeal, the borrowers contended that the lower court overstepped its bounds in invalidating the parties' settlement agreement.  They further contended that the lower court misapplied Dukes.  The Third Circuit considered each argument in turn.       


The borrowers pointed to the Third Circuit's policy in favor of voluntary settlement to suggest that the lower court had improperly denied their motion to approve the class settlement agreement.  The Third Circuit agreed that it subscribed to the policy, but noted that "while that policy is indeed strong, it cannot alter the strictures of Rule 23." 


The borrowers further argued that both parties agreed in their settlement agreement that a more fully developed record would demonstrate that questions of law and fact existed that were common to all class members.  The Third Circuit found this argument unpersuasive, finding that "[t]he mere possibility that evidence of commonality could have been produced does not satisfy [Rule 23]." 


In sum, the Third Circuit rejected the borrowers' contentions on the basis that "as much as they might like to, parties cannot choose to avoid the judicial scrutiny demanded by Rule 23." 


Next, the Third Circuit turned to borrowers' contention that the lower court misapplied the Supreme Court's holding in Dukes.  Specifically, the borrowers contended that in their analysis of the data they received from the bank, they eliminated all objective credit and risk factors, leaving only a "common mode of exercising discrimination" to explain the loan officers' decisions.   


The Third Circuit found this contention unconvincing, noting that as the borrowers had not introduced their data or findings into evidence, their contentions were unsupported by anything in the record.  In addition, the Third Circuit placed emphasis on the fact that in the borrowers' analysis of the relevant data, they "do not even purport to control for individual, subjective considerations."  And even if they had done so, the Third Circuit noted that the borrowers "still have not shown that [the discretionary policy] affected all members in all regions and bank branches in a common way."  


Because "the exercise of broad discretion by an untold number of unique decision-makers...undermines the attempt to claim...that the decisions are bound together by a common discriminatory mode," the Third Circuit determined that the putative class lacked commonality, and accordingly affirmed the decision of the lower court.   




Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
The Loop Center Building
105 W. Madison Street, 18th Floor
Chicago, Illinois 60602
Direct: (312) 551-9320
Fax: (312) 284-4751
Mobile: (312) 493-0874


Admitted to practice law in Illinois


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