Consumer Finance Insights
September 4, 2018

Ninth Circuit Affirms Dismissal and Summary Judgment in Default Servicing Class Actions

On August 28, 2018, the Ninth Circuit affirmed Judge Yvonne Gonzalez Rogers’ decisions in two putative class actions challenging Citibank’s and J.P. Morgan Chase’s default servicing practices.  In Stitt v. Citibank, N.A. and Ellis v. J.P. Morgan Chase & Co., the Ninth Circuit concluded that Judge Rogers had correctly dismissed plaintiffs’ federal Racketeer Influenced and Corrupt Practices Act (RICO) claims and had correctly granted defendants summary judgment on plaintiffs’ state-law fraud and unjust enrichment claims.  Stitt and Ellis were two of a slew of similar putative class actions filed against mortgage servicers related to default-servicing practices (such as property inspections).  Mortgage servicers faced with similar claims should consider these decisions in plotting out their defensive strategies to such claims.

The Stitt and Ellis plaintiffs were all borrowers who had defaulted on their mortgage obligations.  They claimed that, upon default, Citibank and Chase began charging them for property inspections that were either unnecessary or never actually carried out.  Further, they alleged that they had been defrauded either because monthly statements that included charges for property inspections implicitly represented that the inspections were reasonable or appropriate (Stitt), or because monthly statements concealed such fees by referring to them as “miscellaneous” or “corporate advances” (Ellis).  On these allegations, plaintiffs brought RICO and state-law fraud and unjust enrichment claims.  Over the course of each case, Judge Rogers dismissed the RICO claims and granted summary judgment to defendants on the state law claims after denying motions for class certification in each respective case.

In affirming Judge Rogers’ decision to dismiss the RICO claims, the Ninth Circuit explained that plaintiffs had failed to plead an essential element of their claims—a common purpose among a purported enterprise.  To plead a RICO claim, plaintiffs had to allege, among other things, the existence of an enterprise consisting of (1) “a common purpose of engaging in a course of conduct”; (2) “an ongoing organization, formal or informal”; and (3) “evidence that the various associates function as a continuing unit.”  Plaintiffs tried to do so by arguing that defendants had conspired together with their property-inspection vendors to conduct the challenged inspections.  The Ninth Circuit rejected this argument, holding that servicing contracts between vendors and servicers could not establish a common purpose.

Although the Ninth Circuit also affirmed Judge Rogers’ summary judgment decisions, it did so for slightly different reasons in each case.  In Stitt, the Ninth Circuit affirmed summary judgment because plaintiffs in that case had not refuted Citi’s evidence that it only charged them for inspections that had actually taken place.  Furthermore, the court held that plaintiffs’ allegations that Citi had implicitly represented that the inspections were reasonable or appropriate could not support a fraud claim because such representations were opinions of law.  In Ellis, the court concluded that characterization of property inspection fees as “miscellaneous” or “corporate advance” was not inaccurate and therefore not fraud.  Moreover, it held that plaintiffs had failed to establish reliance because they had not demonstrated that the alleged mischaracterization of property inspection fees caused them to make payments.

Finally, the Ninth Circuit rejected plaintiffs’ unjust enrichment claims because it found that those claims were governed by the terms of plaintiffs’ mortgage contract and equitable relief was therefore unavailable.