Alert June 27, 2012

Recent Consumer Financial Services Decisions

Court Rejects Certification of Class of Borrowers Whose Properties Were Subject to Foreclosure

by Keith E. Levenberg

In Manson v. GMAC Mortgage, LLC, 2012 U.S. Dist. LEXIS 59492 (D. Mass. Apr. 30, 2012), Goodwin Procter assisted its clients GMAC Mortgage LLC and Wells Fargo Bank, as servicer of two U.S. Bank mortgage trusts, in defeating a motion to certify a class of home-mortgage borrowers who alleged that foreclosures performed on their properties were void due to defects in the chain of title to the foreclosing institution.  The plaintiffs relied on a decision of the Supreme Judicial Court of Massachusetts, U.S. Bank N.A. v. Ibanez, 941 N.E.2d 40 (Mass. 2011), which invalidated two foreclosure sales on the ground that the institutions on whose behalf the foreclosure proceedings were brought could not demonstrate that they held the mortgage at the time of the sale.

Before Ibanez, lenders and servicers could rely on a Massachusetts Real Estate Bar Association Title Standard providing that so long as a mortgage is properly assigned to the foreclosing entity, it will be given effect regardless whether it is executed before or after the foreclosure sale.  Ibanez upheld a Massachusetts Land Court decision finding that standard contrary to Massachusetts law.  The original Land Court opinion and the S.J.C.’s decision prompted numerous lawsuits in Massachusetts – most on an individual basis, but some purporting to represent a class ­– based on so-called “Ibanez violations,” challenging foreclosure sales and seeking to return title to the properties to the borrowers who had defaulted on their loans.  An action seeking to address alleged Ibanez violations was also brought by the Massachusetts Attorney General.

In denying the Manson plaintiffs’ motion for class certification, the district court accepted the defendants’ argument that there was no common question capable of driving the resolution of the litigation on a class-wide basis. The defendants relied on language in Ibanez clarifying that a post-foreclosure assignment will not be deemed defective when it merely confirms unrecorded agreements properly assigning the mortgage to the foreclosing entity prior to the sale, and maintained that the question whether such a valid chain of title exists is one that would have to be assessed on an individual basis for each alleged class member. The court agreed, holding that “the determination of whether the statute was in fact violated would require 8,000 highly individualized and case-specific inquiries,” and thus “[t]he glue that purports to bind the proposed class . . . would adhere only after the merits of each case had been fully investigated and only in those instances in which an Ibanez violation in fact was uncovered.”

The decision represents another example of Rule 23(a)’s commonality requirement defeating class certification as a result of Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2451 (2011), where the Court held that a common question capable of satisfying Rule 23(a)(2) “must be of such a nature that it is capable of class-wide resolution – which means that determination of its truth or falsity will resolve an issue that is central to the validity of each one of the claims in one stroke.” 

Superiority Requirement Not Met in Electronic Fund Transfer Act Suit When Individual Inquiries Required to Determine Whether ATM Users Were “Consumers”

by Adam M. Chud

The U.S. District Court for the District of Columbia recently denied class certification in an action under the Electronic Fund Transfer Act (“EFTA”), 15 U.S.C. §§ 1693 et seq. Ballard v. Branch Banking & Trust Co., 2012 U.S. Dist. LEXIS 80109 (June 11, 2012). In Ballard, the plaintiff claimed that the exterior of one of the defendant’s automatic teller machines (ATMs) did not have a required notice stating that a fee would be charged for withdrawals, even though an on-screen message provided that information. The plaintiff sought certification of a class of individuals who were charged a withdrawal fee while the exterior notice was allegedly missing.

The court denied class certification for failure to satisfy the superiority requirement of Rule 23(b)(3). Superiority was not met for two primary reasons. First, because the EFTA regulates fees charged to “consumers,” individualized inquiries were needed to determine whether each account was a personal (non-corporate) account and whether, even if the account was a personal account, the account was used for personal (non-business) purposes. The court concluded that it was “absolutely essential to communicate with the individuals who used the ATM” to learn this information.

Second, the court concluded that the class members could not be identified because the defendant did not maintain, and was not allowed to maintain, records identifying those who withdrew money from its ATMs or whether any given ATM user was a “consumer.”  Instead, the class members could only be identified by requesting that their banks conduct record searches, which would not be manageable on a class basis. Further, because contact information for the ATM users was not available, class notice could only be made by publication. But given the location of the ATM – in a high-tourist area in downtown Washington, D.C. – potential class members would be highly unlikely to see the notice. This was a real problem because each class member would need to be questioned about whether his or her transaction was a “consumer transaction.”  Because few people were likely to respond to the publication notice and provide this information, the class would “at best, consist of a handful of consumers, or at worst, be a class of one – plaintiff.”