State of Louisiana v. Litton Mortgage Company, Class Representative, and All Other Similarly Situated Mortgage Servicing Companies, Bisys Loan Services, Inc., Class Representative, and All Other Similarly Situated Mortgage Servicing Companies Fka Litton Mortgage Servicing Center, Inc.

Citations: 50 F.3d 1298; 32 Fed. R. Serv. 3d 519; 1995 U.S. App. LEXIS 8854Docket: 94-30343

Court: Court of Appeals for the Fifth Circuit; March 29, 1995; Federal Appellate Court

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The State of Louisiana appealed two orders from the United States District Court for the Eastern District of Louisiana, which dismissed its complaint against Litton Mortgage Company (now BISYS Loan Services, Inc.) and Magnolia Federal Bank, citing failure to state a claim. The State challenged the dismissal based on the assertion that Section 10 of the Real Estate Settlement and Procedures Act (RESPA) does not imply a private right of action and argued that the district court erred in denying its motion to amend the complaint.

The Fifth Circuit affirmed the district court's ruling that Section 10 of RESPA does not allow for a private cause of action, thus supporting the dismissal of the State's complaint. However, the appellate court found that the district court erred in determining that the dismissal constituted a dismissal of the entire action regarding the motion to amend. Despite this error, the appellate court deemed it harmless, as the district court had addressed the merits of the amendment request and did not abuse its discretion in denying it.

The State's original complaint, filed in November 1993, involved claims under RESPA, the Racketeering Influenced and Corrupt Organizations Act (RICO), the Louisiana Unfair Trade Practices and Consumer Protection Act (UTP), and state antitrust laws. The claims arose from allegations that the mortgage companies required homeowners to maintain escrow account deposits exceeding permissible amounts. The State sought class certification against the defendants, initially amending its complaint to include federal antitrust claims and later narrowing it to focus on RESPA and UTP claims. Ultimately, the motions to dismiss were granted based on the lack of a private right of action under RESPA and the court's decision not to exercise supplemental jurisdiction over the UTP claim.

Following the court's dismissal of the State's action but prior to final judgment, the State filed two motions to amend its complaint for a third and fourth time, seeking to reassert the RICO claim, reinstate RESPA and state law claims, and add additional defendants. The court denied these motions, reasoning that the earlier dismissal left no action to amend and that the attempt to reassert the RICO claim indicated possible bad faith or inartful pleading, providing sufficient grounds for denial on the merits. 

The court reviewed the dismissal de novo for failure to state a claim, while the denial of the motion to amend was assessed for abuse of discretion, specifically regarding whether the dismissal was of the entire action or only certain claims. The State challenged the dismissal based on the court's finding that Section 10 of RESPA does not imply a private cause of action. Citing the Cort v. Ash standard, the State argued that Section 10 implies such a right, noting that plaintiffs are within the class intended to benefit from the statute, that the provision would be ineffective without a private cause of action, and that allowing such a claim aligns with legislative intent. However, the State's argument failed to address the Supreme Court's subsequent clarification that the primary consideration is Congress's intent regarding private rights of action, and the lack of legislative history on this matter typically argues against inferring such rights.

The legal analysis acknowledges a split among circuits regarding whether Section 10 of the Real Estate Settlement Procedures Act (RESPA) allows for a private right of action. The Seventh Circuit’s ruling in *Allison v. Liberty Savings* is deemed persuasive, as it determined that Section 10 does not create such a right. The *Allison* court applied the Cort test and highlighted that Congress provided federal private remedies in other sections of RESPA but omitted them in Section 10. This led to the conclusion that Congress did not intend to establish a private remedy since the statute's language and legislative history did not support such an implication. Additionally, the court noted that after *Allison*, Congress amended Section 10 to add penalties for violations of a different provision but did not include penalties related to escrow deposit accounts. Four district courts in three other circuits have also aligned with *Allison*, reinforcing the decision that no private right of action exists under Section 10.

Regarding the State's motion to amend, the court found that the district court erred in denying the motion on the grounds that the earlier dismissal terminated the entire action. The State argued that the dismissal order was ambiguous, indicating only the dismissal of the complaint rather than the whole action. Citing *Whitaker v. City of Houston*, the court ruled that unless explicitly stated, a dismissal typically refers to the complaint alone, allowing for the possibility of amendment. The dismissal order, which only referenced the complaint without any clear indication of terminating the entire action, supported this interpretation. The court noted additional factors, such as the absence of an invitation to amend and the delay in filing a final judgment, which reinforced the conclusion that the State should have been allowed to seek leave to amend its complaint.

The district court's denial of the State's motion to amend was upheld, as the court's substantive reasoning justified the decision despite a procedural error in its initial refusal. The State contested this substantive denial, arguing it was an abuse of discretion since it sought to reassert a previously abandoned RICO claim. However, the court found no abuse of discretion, noting that Rule 15(a) favors granting leave to amend unless there is a substantial reason for denial. The court considers factors like undue delay, bad faith, and futility of amendment when exercising this discretion.

In its denial, the district court observed that the State's new RICO allegations were conceptually identical to those in the original complaint and deemed the attempt to resurrect the abandoned claim as a sufficient basis for denial. The State argued against this "abandonment" rationale, referencing a precedent in Watkins v. Lujan, where a plaintiff could reassert an abandoned claim. However, the court distinguished Watkins, emphasizing that the circumstances differed significantly, particularly since Watkins involved a pro se plaintiff and focused on the relation back of claims under Rule 15(c). The court concluded that the reasoning in Watkins, which allowed the reassertion of claims based on the same operative facts, did not apply in this case.

The district court noted that the State had abandoned its RICO claim and had amended its complaint twice, with the proposed amendments constituting the fourth and fifth complaints. The court found that these amendments did not introduce new claims or factual allegations. It highlighted that the State sought to reassert the previously abandoned RICO claim and the RESPA and state law claims that had been unconditionally dismissed just two weeks earlier. The court determined that these actions suggested possible bad faith or a dilatory motive, leading to a substantial reason to deny the State's motion to amend. The appellate court affirmed the district court's denial of the motion, agreeing that no abuse of discretion occurred. 

Regarding the State's argument that Section 10 of RESPA implies a private right of action, the appellate court concluded that Congress did not intend to create such a right, thus affirming the dismissal of the RESPA claims. Although the district court mistakenly treated the dismissal of the complaint as a dismissal of the entire action, this error was deemed harmless due to the correct substantive analysis of the motion. Consequently, the appellate court upheld the district court's order.