The U.S. Court of Appeals for the Seventh Circuit recently upheld the denial of class certification in a RESPA action for alleged kickbacks and fee splitting, confirming that resolution of the Section 8 allegations would require an individual determination of liability with respect to each putative class member's purported claim.
A copy of the opinion is available at:
Several Illinois consumers who purchased title insurance as part of their real estate transactions ("Plaintiff Borrowers"), filed suit against an Illinois title insurance company ("Defendant Title Company") alleging in part that the Defendant Title Company's payments to real estate attorneys acting as agents ("Title Agents") for the Defendant Title Company constituted illegal kickbacks and fee splitting in violation of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2601 et seq. ("RESPA").
The Plaintiff Borrowers claimed that, pursuant to the contracts between the Title Agents and the Defendant Title Company to sell title insurance, the Title Agents' title examination work associated with Plaintiff Borrowers' real estate transactions amounted to mere nominal services or duplicative work actually done by the Defendant Title Company. Specifically, the Plaintiff Borrowers alleged that the information provided by the Defendant Title Company to the Title Agents, including the legal description of a property, a list of any open liens, and the last known grantee, constituted a preliminary title examination that left little, if any, title examination work for the Title Agents to perform in order for the Defendant Title Company to prepare a title insurance commitment. The Plaintiff Borrowers thus alleged that the contract fees paid to the Title Agents for title examination work were excessive and unreasonable and constituted improper kickbacks for referrals rather than payment for services actually performed.
Plaintiff Borrowers sought class certification on behalf of consumers who purchased title insurance through the Title Agents, claiming that part of the premiums consumers paid went to the Title Agents who did not perform "core" title examination work in exchange for payment under their contracts.
The district court twice denied class certification, concluding that, because an individual determination of liability would be required for each class member's claim, the requisite element of commonality of issues did not exist for class certification. The Plaintiff Borrowers appealed. The Seventh Circuit affirmed.
The district court twice denied class certification, concluding that, because an individual determination of liability would be required for each class member's claim, the requisite element of commonality of issues did not exist for class certification. The Plaintiff Borrowers appealed. The Seventh Circuit affirmed.
As you may recall, class certification under Federal Rule 23 requires in part that plaintiffs establish commonality among claims, that common issues predominate over individual issues, and that a class action would be a superior method of adjudicating those claims. See F.R.C.P. 23(b); Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2548-49 & n.2 (2011). In addition, RESPA prohibits the payment of "kickbacks" in exchange for referrals for business, and prohibits payments "other than for services actually performed." See 12 U.S.C. § 2607(a), 2607(b). RESPA's implementing regulations clarify that prohibited charges include those where only "nominal services are performed," and that if a title agent is an attorney for the buyer or seller, the agent may not receive compensation as a title agent unless the agent performs "core title agent services (for which liability arises) separate from attorney services." See 24 C.F.R. § 3500.14(c), 14(g).
RESPA, however, provides a safe harbor for payments by title companies to their agents "for services actually performed in the issuance of a policy of title insurance," and a safe harbor for the payment of "a bona fide salary or compensation . . . for services actually performed." 12 U.S.C. § 2607(c)(1)(B), (c)(2).
The Seventh Circuit noted that RESPA's regulations explain that the services required to invoke the "core services safe harbor" must include: (1) evaluation of the title search to determine the insurability of the title; (2) the clearance of underwriting objections; (3) the actual issuance of the title insurance policy; (4) conducting the title search and real estate closing; and, (4) where appropriate, issuance of the title commitment.
Citing examples in the regulations and a federal agency's statement of policy, the Seventh Circuit noted that a Title Agent could violate RESPA's Section 8 by providing nominal or duplicative services, or if there is no reasonable relationship between the payment to the Title Agent and the value of the services provided, or where a title insurance company performs any of the core title services itself. The Court also pointed out, however, that if a title agent fails to qualify for the "core title services safe harbor" under Section 8, RESPA regulations allow payment to the title agent, as long as the payment is reasonably related to the value of the services performed. Accordingly, the Court determined that in order to proceed as a class, the Plaintiff Borrowers would have to show, first, that the fees paid to the Title Agents were not reasonably related to the services provided, and, that, moreover, the issue of the reasonability of fees paid could be resolved on a class-wide basis.
The Seventh Circuit rejected the Plaintiff Borrowers' position that payments under the Title Agents' contracts were essentially a class-wide per se violation of RESPA, and noted that the Plaintiff Borrowers' arguments failed to distinguish between the factors considered under the core services safe harbor test and the contractual compensation actually paid to the Title Agents. In so doing, the Court pointed out that the payment of the full contract fee for a title examination may be proper even where the core services safe harbor is not available and that a determination of the impropriety of such payments would hinge on evidence showing that payment to an individual Title Agent was not reasonably related to the services the Title Agent performed.
The Seventh Circuit concluded that the Plaintiff Borrowers presented no evidence that the compensation paid to the Title Agents or the services they performed were the same across the entire class. Accordingly, the Court ruled that, because each claim would require an individual analysis as to reasonableness of the compensation, individual issues predominated over common ones and thereby precluded class certification. See FRCP 23(b)(3).
The Seventh Circuit also concluded that the Plaintiff Borrowers were unable to show that the Title Company split fees with the Title Agents.
Ralph T. Wutscher
McGinnis Tessitore Wutscher LLP
The Loop Center Building
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Chicago, Illinois 60602
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Email: RWutscher@mtwllp.com
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