Thursday, October 28, 2010

FYI: 5th Cir Says Differing State Laws Precluded Class Certification Against FNMA

The U.S. Court of Appeals for the Fifth Circuit recently affirmed a district court's denial of class certification in an alleged breach of fiduciary case against Fannie Mae, holding that differences in state law precluded class certification.
A copy of the opinion is available at:
The key issue in the case was whether Fannie Mae was in a fiduciary relationship with the plaintiff mortgagors.  The plaintiffs were mortgagors whose mortgages for low-income multi-family housing were held or serviced by Fannie Mae and insured by HUD.  HUD required mortgagors participating in its insurance program to sign a Regulatory Agreement.  The Agreement mandated that mortgagors establish two funds with the mortgagee: 1) a Reserve Fund and 2) a Residual Fund.  The Reserve Fund provision of the Agreement specifically contemplated that those funds may take the form of cash deposit or guaranteed investment.  Fannie Mae gave mortgagors certain investment options for both their Reserve Fund and Residual Fund moneys.  Some mortgagors chose to retain the liquidity and not invest any such funds.  The "uninvested funds" were the subject of this lawsuit.  Between 1969 and 1995, Fannie Mae invested "uninvested funds" in the overnight federal funds marketplace, retaining the interest proceeds for itself.
Plaintiffs allege that Fannie Mae tried to discourage mortgagor investments in order that Fannie Mae could maximize the earning potential of its federal funds investments.  Plaintiffs sued Fannie Mae on behalf of themselves and those similarly situated for breach of fiduciary duty and also sought relief under an unjust enrichment theory.  
The district court found that the class satisfied the requirements of Rule 23(a) but denied certification under Rule 23(b).   The Fifth Circuit Court of Appeals reviewed the denial of class certification for abuse of discretion, and reviewed de novo the question of whether the district court applied the proper local law.
The Fifth Circuit applied the analysis in the Restatement (Second) of Conflict of Laws and found that the intention to create a trust (such as giving property to the trustee) manifested outside of Washington D.C. for many of the plaintiffs.  As a result, there was no single jurisdictional law that could be applied to the class as a whole.
The Fifth Circuit also turned to the Restatement for guidance to examine the unjust enrichment claims.  The Court concluded there were not sufficient contacts to apply D.C. law to each plaintiff's unjust enrichment claim, and found that D.C. law should not be applied to all putative plaintiff class members in either the fiduciary law or the unjust enrichment claims.
The Court found that determining whether a trust or fiduciary relationship has been created (and breached) was not as uniform as the plaintiffs' proposed.  Although the basic principles of fiduciary law may be the same throughout the country, the nuances vary and those nuances affect the outcome of claims.  The Court noted that the plaintiffs failed to demonstrate that state law variations do not preclude the certification of a nationwide class. 
The Fifth Circuit held that a court may certify a class under (b)(1)(A) if the court finds that separate lawsuits could create inconsistent results that would establish incompatible standards of conduct for the party opposing the class.  The court did not find that separate actions would result in incompatible standards of conduct for Fannie Mae. 
Most importantly, the Fifth Circuit found that various state laws apply to different class members.  Therefore, varying judgments with respect to plaintiffs' injunctive requests would not be "incompatible" but rather would reflect diverse state fiduciary law.  The Court noted that the Supreme Court has held that Rule 23(b)(1)(A) encompasses cases in which the defendant is obliged by law to treat members of the class alike.    
Thus, the Fifth Circuit Court of Appeals determined that the district court did not abuse its discretion in failing to certify under either Rule 23(b)(3), Rule 23(b)(1)(a), or Rule 23(b)(2) and the denial of class certification was affirmed.
Let me know if you have any questions.  Thanks.


Ralph T. Wutscher

Kahrl Wutscher LLP

The Loop Center Building

105 W. Madison Street, Suite 2100
Chicago, Illinois  60602
Direct:  (312) 551-9320 

Fax:  (866) 581-9302
Mobile:  (312) 493-0874


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