8th Cir. Upholds Class Settlement in ‘Excessive Property Inspection’ Case, Rejects Attempt to Add Trespass Claims

The U.S. Court of Appeals for the Eighth Circuit recently affirmed a district court’s approval of a proposed class settlement in an action arising from a mortgage loan servicer’s practice of automatically ordering and charging for drive-by property inspections on delinquent borrowers, holding that the district court did not abuse its discretion.

In so ruling, the Court also affirmed the trial court’s denial of a borrower’s motion to join a trespass claim to the putative class action.

A copy of the opinion in Kenneth Njema v. Wells Fargo Bank, N.A. is available at:  Link to Opinion.

In 2008, four borrowers filed a putative class action in the United States District Court for the Southern District of Iowa against the servicer of their mortgage loans and its affiliate, alleging that by automatically charging borrowers who had fallen behind on their mortgage payments for drive-by property inspections, the defendants violated the federal Racketeer Influenced and Corrupt Organizations Act (RICO).

The parties reached a settlement at mediation that provided for the servicer to pay $25,750,000 in return for dismissal and a release of all related claims, defined to include any claims “‘based upon, arising out of, or relating to, in any way, property inspection fees assessed on a mortgage serviced by [the servicer], or [its] practices in ordering or charging borrowers for property inspections.’”

The district court approved the settlement on a preliminary basis in September 2015, scheduled a fairness hearing in January 2016, and entered an injunction prohibiting class members from suing for any of the released claims in any other court.  Notices were then sent to more than 2.7 million class members.

In the interim, in 2013, another borrower (the “trespass plaintiff”) sued in the United States District Court for the District of Minnesota, raising a claim for trespass based on the servicer’s having changed the locks even though he still lived in the home.

In October 2016, the trespass plaintiff received notice that he was included in the settlement class. He then filed a motion to transfer his individual action to the deferral trial court in Iowa for consolidation with the class action, and also filed a motion to stay his individual action in the Minnesota federal court.

The Minnesota trial court denied his motion, reasoning that there was no basis to transfer his case for consolidation. The borrower moved for reconsideration, at which time the Minnesota trial judge asked the servicer whether the class action injunction barred the trespass plaintiff’s trespass claim.

The servicer’s counsel responded that the trespass claim was not within the scope of the released claims, but even if it were, the servicer would waive this term as to the trespass plaintiff borrower in order that he could pursue his trespass claim.  Accordingly, the Minnesota federal court denied the motion for reconsideration along with the transfer motion, then dismissed the case for failure to prosecute.

The trespass plaintiff then filed an objection to the proposed class action settlement in the Iowa federal court arguing the terms were unfair. On the morning of the fairness hearing, he also filed a motion under Federal Rule of Civil Procedure 23 to certify his trespass claim as a “related claim” and to add himself as a class representative of this new subclass under Rule 19.

The Iowa federal court denied both motions because the questions of fact and law in the trespass case were not the same as those in the property inspection fee case. Thereafter, the Iowa federal court found that the settlement agreement was fair, overruled all objections and gave final approval to the settlement plus $10,000 incentive awards to each lead plaintiff. The trespass plaintiff appealed.

Reviewing the Iowa federal court’s denial of trespass plaintiff’s motion to certify the trespass claim as a related claim and create a new subclass under Rule 23 for abuse of discretion, the Eighth Circuit found that his trespass claim did not satisfy the “commonality” requirement of Rule 23(a) because “[c]ommonality requires the plaintiff to demonstrate that the class members have suffered the same injury.”

The Eighth Circuit reasoned that, because the trespass claim was based on unlawfully entering the property but the class action was based on improperly charging inspection fees for drive-by inspections involving no entry onto the property, “no common question existed between the two actions.”

Turning to whether the class action settlement was “fair, reasonable, and adequate” under Rule 23(e)(2), the Eighth Circuit rejected the appellant’s five arguments that the trial court had abused its discretion.

The Court rejected the trespass plaintiff’s first argument, that the trial court misapplied the four-part test set forth in the Eighth Circuit’s ruling in Van Horn v. Trickey, finding the trial court “properly analyzed the Van Horn factors and concluded that they weighed in favor of approving the settlement.”

The first factor, weighing the merits of the case against the settlement terms, weighed in favor of settlement because the Court found the plaintiff’s claims were weakened by the defense that some class members had waived their right to sue for inspection fees because the fees had been rolled into principal as part of a loan modification. On the other hand, the large settlement amount ensured that the class members would receive “an adequate percentage of their damages” because they would each receive at least $5 in compensation for an average inspection fee of $15.

The Eighth Circuit found the second factor, the defendant’s financial condition, was “neutral” as the servicer’s financial condition was stable.

According to the Court, the third factor — “the complexity and expense of further litigation” — also weighed in favor of approving the settlement because going to trial would be expensive, time consuming and complex.

The Eighth Circuit found no error with the trial court’s finding that the fourth factor, “the amount of opposition to the settlement,” was neutral, because while only 13 out of 2.7 million class members objected, the trial court reasoned that could be due to “lack of time, resources, or information necessary to lodge an objection.”

Because two factors weighed in favor of approving the settlement and were neutral, the Court concluded the trial court did not abuse its discretion in approving the settlement.

The Eighth Circuit also rejected as “faulty math” the appellant’s second argument, that the settlement was not fair and violated the federal Class Action Fairness Act (CAFA) because it “will ‘cost’ class members $10 to settle a $5 claim.”

The Court reasoned that the class members had already paid the $15 fee and the question was how much they would recover. The Eighth Circuit noted that the appellant’s argument was incorrect that “any class action settlement that does not result in class members receiving the full value of the damages alleged in the complaint would be considered a ‘net loss’ for the purpose of CAFA’s written finding requirement” because “CAFA requires a written finding only when the settlement obligates a class member to ‘pay sums to class counsel that would result in a net loss to the class member.’” The terms of the settlement at issue did not obligate class members to pay counsel or incur any expense to receive their awards and thus they would receive a net gain.

The Eighth Circuit also rejected the appellant’s third argument, that the settlement provision barring class members from bringing claims related to the property inspection fees was unfair, reasoning that the trial court correctly pointed out in denying the motion to certify the trespass claim that no class member was required to waive their trespass claim in order to participate in the settlement because the trespass and property inspection fee claims were not related.

Turning to the appellant’s fourth argument, that the $10,000 incentive awards to the lead plaintiffs were inadequate, the Court found that he lacked standing because he was not a named plaintiff and thus was not injured by the district court’s decision to give more to the lead plaintiffs.

The Eighth Circuit also rejected the appellant’s fifth and final argument, that the trial court erred in approving the settlement because the defendants did not give the required notice to appropriate state and federal officials where a class member resides within 10 days after filing the proposed settlement, reasoning that this issue was waived because no one raised it before the district court.

Accordingly, the trial court’s judgment was affirmed.

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Mickey Lee practices in Maurice Wutscher’s Commercial Litigation, Consumer Credit Litigation and Employment Litigation groups. He has substantial experience representing clients in class action litigation, Fair Credit Reporting Act litigation, labor and employment law, and various types of commercial litigation. He has co-chaired several bench and jury trials in state and federal court and has authored numerous appellate briefs and argued numerous cases before the Indiana Court of Appeals and the United States Court of Appeals for the Seventh Circuit. He is Vice President of the Indianapolis Chapter of the Federal Bar Association, and a Board member of the Johnson County Indiana University Alumni Association. Mickey and his wife, Melissa, are active members of the Riley Society with the Riley Children’s Foundation and the Mended Little Hearts of Indianapolis. Mickey received his Juris Doctor from the Indiana University Robert H. McKinney School of Law, and obtained his Bachelor of Science degree from Indiana University – Bloomington.