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3rd Cir. Rejects Borrowers’ Equitable Tolling Arguments in RESPA Captive Reinsurance Class Action

The U.S. Court of Appeals for the Third Circuit recently affirmed summary judgment against a putative class of borrowers who were allegedly victims of a captive reinsurance scheme by a lender and its affiliated reinsurance company.

In so ruling, the Court held that the plaintiff borrowers’ claims were barred by the applicable statute of limitations, and the doctrine of equitable tolling did not apply because the plaintiff borrowers had not exercised reasonable diligence in investigating their potential claims.

A copy of the opinion in Judith Cunningham v. M&T Bank Corp. is available at: Link to Opinion.

The plaintiff borrowers financed the purchase of their homes with mortgage loans.  The loans exceeded 80 percent of the homes’ value, and they were required to purchase private mortgage insurance from insurers selected by the lender.

The private mortgage insurers, in turn, contracted with the lender’s wholly owned “captive” reinsurance company. “Under a reinsurance agreement, the reinsurance company assumes a portion of the risk associated with default in exchange for a percentage of the mortgage insurance premiums paid by the borrower.”

The plaintiff borrowers filed a putative class action alleging violations of the federal Real Estate Settlement Procedures Act (RESPA) and unjust enrichment. The complaint alleged that the lender and its reinsurer “colluded with private mortgage insurers, referring customers to the private mortgage insurers and receiving in return reinsurance agreements that required [the captive reinsurer] to take on little or no actual risk” in alleged violation of RESPA’s anti-kickback and anti-fee-splitting provisions, 12 U.S.C. § 2607(a)-(b).

The lender moved to dismiss, arguing that RESPA’s one-year statute of limitations barred the plaintiffs’ claims and equitable tolling did not apply. The district court denied the motion, reasoning that limited discovery was necessary to resolve the fact-intensive issue of equitable tolling.

After discovery, the lender moved for summary judgment, which the district court granted, holding that the claims were time-barred and equitable tolling did not apply because the plaintiffs had not exercised reasonable diligence in investigating their potential RESPA claims. The plaintiffs appealed.

The Third Circuit began its analysis by explaining that RESPA has a one-year statute of limitations, which runs from the date of the closing of the loan. The plaintiffs closed on their loans in May 2007, October 2007 and June 2008, but filed their lawsuit in June 2012.

The plaintiffs argued that, despite filing suit more than one year after their closings, the doctrine of equitable tolling applied to “rescue a claim otherwise barred as untimely … when a plaintiff has been prevented from filing in a timely manner due to sufficiently inequitable circumstances.”

The Third Circuit pointed out that it had “previously held that the statute of limitations in RESPA is not jurisdictional and is thus eligible for equitable-tolling consideration … [b]ut ‘equitable tolling is an extraordinary remedy which should be extended only sparingly.’ ”

The Court explained that in order for equitable tolling to apply based on a theory of fraudulent concealment, plaintiffs must “show three elements: ‘(1) that the defendant actively misled the plaintiff; (2) which prevented the plaintiff from recognizing the validity of her claim within the limitations period; and (3) where the plaintiff’s ignorance is not attributable to her lack of reasonable due diligence in attempting to uncover the relevant facts.’ ” In order to show reasonable diligence, a plaintiff must “ ‘establish that he pursued the cause of his injury with those qualities of attention, knowledge, intelligence and judgment which society requires of its members for the protection of their own interests and the interests of others.’ ”

The Third Circuit noted that before the plaintiff borrowers closed on their loans, they received a disclosure form explaining reinsurance in plain language and providing the option to opt out of captive reinsurance with an affiliate of the lender, but none did so.

In addition, after the closing, the plaintiffs “took no steps to investigate whether [the lender’s] captive reinsurance program might violate state or federal law. They did not, for example, ask their mortgage insurer if their particular insurance policy had been reinsured and, if so, with whom. They did not seek the advice of an attorney, research captive reinsurance, request documents related to their mortgage insurance, or take any steps to discover if they had a claim under RESPA.”

The plaintiff borrowers also argued that they did not discover they had potential RESPA claims until late 2011, when their attorney asked them to join a lawsuit.

The Third Circuit rejected this argument as well.  The Court concluded that based on the undisputed facts, the plaintiff borrowers “failed to show due diligence and cannot use equitable tolling to rescue otherwise time-barred claims.”

It rejected the plaintiff borrowers’ argument because most of the cases they cited “address the discovery rule, which relates to claim accrual (when the limitations period begins to run) rather than equitable tolling (the events that can stop the clock on a limitations period once it has begun to run). Under the discovery rule, a cause of action does not accrue until the plaintiff discovers or in the exercise of reasonable diligence should have discovered the basis of her claim against the defendant. … In deciding when a diligent plaintiff would have discovered the basis of a claim, courts look for ‘storm warnings’ that would put the plaintiff on notice of her injury. However, the discovery rule is not apt for RESPA claims because Congress specifically provided that the limitations period begins to run on ‘the date of the occurrence of the violation.’ … It is thus irrelevant for purposes of the statute of limitations in RESPA when a reasonable plaintiff would have discovered her claim.”

Regardless of the inapplicability of the discovery rule to time-barred RESPA claims, the Third Circuit reasoned that the plaintiffs were asking it to “ignore the plain words of [the lender’s] disclosure. Based on the disclosure, they were on notice that reinsurance for their mortgage loans was reasonably likely through an affiliate of [the lender]. Armed with the facts necessary to allege their claim under RESPA, it is undisputed that they took no steps to investigate whether the reinsurance arrangement was fully valid.”

The Court held that “accepting Plaintiffs’ theory in this case — toll indefinitely the limitations period for claims under RESPA until a lawyer can find the right plaintiff to join a lawsuit and notify other putative plaintiffs — would effectively write the statute of limitations out of RESPA.”

Accordingly, the Third Circuit affirmed the district court’s grant of summary judgment for the defendants.

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The attorneys of Maurice Wutscher are seasoned business lawyers with substantial experience in business law, financial services litigation and regulatory compliance. They represent consumer and commercial financial services companies, including depository and non-depository mortgage lenders and servicers, as well as mortgage loan investors, financial asset buyers and sellers, loss mitigation companies, third-party debt collectors, and other financial services providers. They have defended scores of putative class actions, have substantial experience in federal appellate court litigation and bring substantial trial and complex bankruptcy experience. They are leaders and influencers in their highly specialized area of law. They serve in leadership positions in industry associations and regularly publish and speak before national audiences.

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