Class Action Complaint Alleging Violations of Federal Truth in Lending Act (TILA) did not Warrant Class Action Treatment because Plaintiff Lacked Standing to Prosecute TILA Claim, Plaintiff was an Inadequate Representative because he could not Establish Traceability, and Plaintiff’s Claims were not Typical of the Putative Class Claims California Federal Court Holds
Plaintiff filed a putative class action against Paul Financial concerning option adjustable rate mortgages (Option ARMs); specifically, the class action complaint alleged that Option ARMs are “deceptively devised” in that they “promise that the loan [will] have a low, fixed interest rate” when in fact the loan carries a much higher interest rate. The class action alleged further that defendant “disguised” the fact that the Option ARM “was designed to cause negative amortization.” Jordan v. Paul Financial, LLC, ___ F.Supp.2d ___ (N.D. Cal. January 27, 2009) [Slip Opn., at 1-2]. The class action alleged, inter alia, violations of the federal Truth in Lending Act (TILA) and California’s Unfair Competition Law (UCL), id., at 2, and amendments to the class action complaint added HSBC and Luminent Capital Mortgage as defendants, id., at 1. Plaintiff sought to represent two classes of borrowers who received Option ARM loans secured by their primary residences: (1) a nationwide class, and (2) a California statewide class, id., at 1-2. Plaintiff’s attorney moved the district court to certify the litigation as a class action; defense attorneys argued against class action treatment. Id., at 1. The district court determined that class action treatment was not warranted and therefore denied plaintiff’s class action certification motion.
Paul Financial originated residential loans, and while it also serviced loans, Paul Financial sold 75% of its loans to third party investors and sold the servicing rights to other investors. Jordan, at 2. Defendant “sold the loans to about ten investors,” but does not have records of subsequent sales by those investors, id., at 2-3. Plaintiff’s loan, for example, was sold to defendant Luminent, and then pooled with other Option ARM loans into a mortgage-backed security pool; defendant HSBC was the trustee of the pool. Id., at 3. Defendant sold the servicing rights for plaintiff’s loan to yet another investor, Greenwich Capital, id. By December 2008, Paul Financial had less than $1000 and planned to cease operations on December 31, 2008. Id., at 2. After discussing the general rules regarding class action certification under Rule 23, see id., at 3-4, the district court turned to whether plaintiff had standing to represent the TILA class or the California class.
With respect to the TILA class action claim, defense attorneys argued that plaintiff’s individual claim was time-barred and, accordingly, plaintiff lacked standing to represent the class because in order “to sue as a class representative a plaintiff ‘must be a part of that class, that is, he must possess the same interest and suffer the same injury shared by all members of the class he represents.’” Jordan, at 4 (quoting Epstein v. MCA, Inc., 179 F.3d 641, 652 (9th Cir. 1999)). TILA claims must be filed “within one year from the date of the occurrence of the violation,” 15 U.S.C. § 1640(e), and the limitations period begins to run “from the date of consummation of the transaction” though it may be tolled “in the appropriate circumstances.” Id., at 4-5 (quoting King v. California, 784 F.2d 910, 915 (9th Cir. 1986)). Because plaintiff’s obtained his loan in January 2006, but did not file his class action complaint until August 2007, his TILA claim is time-barred and he thus lacked standing to represent the putative nationwide class for alleged violations of TILA. Id., at 5.
With respect to the statewide class action claims, defense attorneys argued that plaintiff was an inadequate class representative. Jordan, at 5-6. The district court summarized the argument at page 6 as follows: “The first California class consists of individuals who, since August 29, 2003, have obtained an ARM loan that was sold or owned by defendants and secured by property in California; the second California class consists of those individuals who, since August 29, 2003, have obtained an ARM loan that was sold or owned by defendants and secured by property outside California, and approved by defendants inside California. According to defendants, plaintiff does not have standing to represent the members of these classes because he cannot satisfy the traceability requirement for standing.” The federal court explained that at a minimum a plaintiff must establish three elements to have standing, one of which is “traceability”: “Traceability requires that there be ‘a causal connection between the injury and the conduct complained of – the injury has to be fairly traceable to the challenged action of the defendant’.” Id., at 6 (citation omitted). If a lender never held the borrower’s loan, then the traceability element is absent and standing does not exist. Id. (citations omitted). In concluding that plaintiff lacked standing, the court explained that plaintiff sought to represent borrowers whose loans were “held and serviced by entities other than the companies that hold and service plaintiff’s loan,” and that he sought to use discovery as a means of “identify[ing] all possible defendants” and then “join[ing] named plaintiffs who would have standing against those defendants.” Id. The federal court held that “[t]his unorthodox procedure reverses the traditional approach of seeking class certification on behalf of a class that is represented by named plaintiffs who have standing to represent the putative class.” Id.
The district court also held that plaintiff failed to satisfy Rule 23(a)(3)’s typicality requirement for class certification. The theory underlying the class action was that “defendants failed to disclose material information about the nature of plaintiff’s loan, including the true interest rate, the fact that the interest rate was variable, and the risk of negative amortization.” Jordan, at 7. But plaintiff “was equivocal as to whether he read the loan documents,” and his mortgage broker declared that he “explained to plaintiff that the minimum payments might not cover the interest due and that as a result, the principal balance on plaintiff’s loan could increase.” Id. Moreover, his broker characterized plaintiff a “‘savvy consumer’ who had purchased several properties previously and asked ‘a lot of questions about various mortgage products and terms.’” Id. (citation omitted). A unique defense existed, therefore, as to whether plaintiff relied on defendants’ representations or omissions. Id. Plaintiff countered that he need not establish reliance because defendants engaged in fraud, and that in any event reliance may be inferred. Id., at 8. The district court held that plaintiff would be required “to prove that he relied on defendants’ representations,” id., and that plaintiff’s fraud claims are not typical of the putative class, id., at 8-9.
Finally, given that Paul Financial offered more than 40 types of Option ARMs, plaintiff’s contract claims were not typical of the putative class, either. Jordan, at 9-10. The class action complaint stressed that defendants contractually agreed to apply monthly mortgage payments to both principal and interest, but breached this promise. Id., at 9. But the contract language varied among the 40+ Option ARM loan products, contradicting plaintiff’s characterization of the loan documents as “uniform.” Id. Accordingly, the federal court denied plaintiff’s motion for class action certification, id., at 11.