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11th Cir. Rejects Borrower Challenges Alleging Lender-Placed Insurance Overcharges, Kickbacks

The U.S. Court of Appeals for the Eleventh Circuit recently affirmed the dismissal of consolidated putative class action cases against mortgage loan servicers and an insurance company, holding that the filed-rate doctrine barred the plaintiffs’ claims.

A copy of the opinion in Pankaj Patel, et al v. Specialized Loan Servicing, LLC, et al is available at:  Link to Opinion.

The plaintiffs in the two trial court cases, consolidated on appeal, alleged that their mortgage loan servicers breached the loan documents and the implied covenant of good faith and fair dealing by supposedly overcharging for “force-placed” insurance (FPI) when the borrowers failed to maintain the coverage required by the mortgage to protect the lender’s security interest.  The claims also included allegations that the insurance company gave the servicers “rebates” or “kickbacks” that were not passed on as savings to the borrowers.

In addition, the plaintiffs alleged that the servicers “colluded” with the insurance company “to disguise the alleged overcharges as legitimate expenses” in violation of the federal Truth in Lending Act, 15 U.S.C. § 1601, tortiously interfered with an existing business relationship, were unjustly enriched and violated the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1962(c), (d), and the Florida Deceptive and Unfair Trade Practices Act, § 501.201, Fla. Stat.

In one case, the lead plaintiff’s insurance coverage lapsed in June 2014. The servicer sent him a letter informing him that he needed to obtain coverage from an insurer or agent of his choosing and warned that if he failed to do so, the servicer would purchase coverage on his behalf, which would likely be much more expensive.

One month later, the servicer sent a second letter, which “included an insurance binder that disclosed the annual premium of the policy that [the servicer] would purchase if it did not receive proof of coverage.”

The plaintiff borrower again failed to provide proof of coverage, so in August 2014 the servicer purchased coverage from the defendant insurance company, which issued a one-year FPI policy. The borrower eventually purchased voluntary coverage in June 2015.

The plaintiffs in the other consolidated case had similar experiences, except three were also told in writing that if FPI was purchased, “an affiliate could earn commissions or income from the transaction.”

The defendants in both cases moved to dismiss the complaint, arguing that the plaintiffs’ claims were barred by the filed-rate doctrine, which “precludes any judicial action which undermines agency rate-making authority.” The trial court agreed and dismissed the cases for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). The plaintiffs appealed.

On appeal, the insurer and one of the servicers moved to consolidate the appeals, which motion was granted.

The Eleventh Circuit explained that the filed-rate doctrine prohibits a “regulated entity” from charging more than the rate approved by the administrative agency authorized by law to determine the rate.

“Two rationales underlie the doctrine. The first, which is known as the ‘nondiscrimination principle,’ is that all rate-payers should be charged the same rate for the regulated entity’s service. … The second, which is termed the ‘nonjusticiability principle,’ is that duly-empowered administrative agencies should have exclusive say over the rates charged by regulated entities because agencies are more competent than the courts at the rate-making process. … These two principles are ‘applied strictly, meaning that the filed-rate doctrine bars ‘a plaintiff from bringing a cause of action even in the face of apparent inequities ….”

The doctrine applies if either policy rationale “is implicated by the cause of action the plaintiff seeks to pursue.”

The Court further explained the filed-rate doctrine bars two types of lawsuits: direct challenges to the filed rate and “facially-neutral challenges—i.e., any cause of action that is not worded as a challenge to the rate itself….” The latter “are barred when an award of damages ‘would, effectively, change the rate paid by the customer-[plaintiff] to one below the filed rate paid by other customers’ or ‘would, in effect, result in a judicial determination of a reasonableness of that rate[.]’” The Court took pains to point out that it doesn’t matter “whether the plaintiff is a rate-payer.”

The Eleventh Circuit then established a “simple framework … for determining whether the filed-rate doctrine bars a cause of action. First, we examine whether the complaint facially attacks a filed rate. … Second, if the complaint does not facially attack a filed rate, we must ask whether it implicates the nonjusticiability principle by challenging the components of a filed rate.”

The Court then addressed “the dissent’s claim that we should not apply the filed-rate doctrine.”

First, the majority explained that it had already made clear in its opinion in Taffett that the filed-rate doctrine applies equally to federal and state regulatory agencies.

Second, in response to the dissent’s argument that the majority opinion did not analyze state law to determine whether the Florida and Pennsylvania legislatures had given their regulatory agencies the power to determine the reasonableness of the rate, the majority gave a “quick overview” of its “discussion in Taffett of Alabama’s and Georgia’s utility rate-making regimes—to help frame the ensuing Erie guess….”

Having concluded that the filed-rate doctrine existed in Alabama and Georgia, the majority turned to Florida, concluding that it “has enacted a similar regime with respect to insurance rates.” For similar reasons, it made the same “educated guess regarding the determination of the appellate courts of Pennsylvania.”

The Eleventh Circuit majority then reasoned that although the plaintiffs argued on appeal that they were not challenging the reasonableness of the defendant insurer’s rates, “the complaints belie this claim” because, most obviously, “the plaintiffs repeatedly state that they are challenging [the insurer’s] premiums.” “[A]nd since these premiums are based upon rates filed with state regulators, plaintiffs are directly attacking those rates as being unreasonable as well.”

The Court concluded that the plaintiffs’ “complaints therefore contain textbook examples of the sort of claims that we have previously held are barred by the nonjusticiability principle.”

Accordingly, the Eleventh Circuit affirmed the trial court’s dismissal for failure to state a claim and, incidentally, also denied a motion for judicial notice filed by the loan servicer and insurer as moot.

One of the three appellate judges wrote a dissent longer than the opinion, arguing that first, the case should be certified “to the supreme courts of Pennsylvania and Florida and ask whether they have adopted the filed rate doctrine in some form. Second, assuming that the filed rate doctrine applies in its unadulterated federal form, it does not bar a breach-of-contract claim that does not challenge a filed rate. Third, the filed rate doctrine does not—and should not—extend to lenders who are not regulated by rate-setting agencies, are not required to file rates, and are not sellers of filed rates.”

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