Friedman v. Market Street Mortgage Corp.

Citations: 520 F.3d 1289; 2008 U.S. App. LEXIS 5848; 2008 WL 739704Docket: 05-13820

Court: Court of Appeals for the Eleventh Circuit; March 20, 2008; Federal Appellate Court

Original Court Document: View Document

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Market Street Mortgage Corporation appeals the district court's certification of a class action led by Edward and Lori Friedman, claiming a violation of subsection 8(b) of the Real Estate Settlement Procedures Act (RESPA) due to an escrow waiver fee charged without corresponding services rendered. The Eleventh Circuit finds that the class certification order contravenes established legal principles and rules that subsection 8(b) does not apply to allegations of excessive settlement fees. Consequently, the court reverses the certification order and instructs the district court to dismiss the Friedmans' complaint with prejudice. 

The case background includes the Friedmans refinancing their mortgage for $222,500 on September 5, 2002, opting for a non-escrowed loan by paying an escrow waiver fee of $556.25, as disclosed in the HUD-1 Settlement Statement. Following refinancing, Market Street sold the loan to Washington Mutual Bank. The Friedmans filed suit on April 16, 2003, asserting that Market Street provided no services for the waiver fee, in violation of RESPA, which prohibits accepting charges for services not performed.

Market Street moved to dismiss the Friedmans' action under Federal Rule of Civil Procedure 12(b)(6), contending that their claim under subsection 8(b) was insufficient because it lacked allegations of sharing the escrow waiver fee with a third party. On June 9, 2003, the Friedmans sought class certification for those charged an Escrow Waiver Fee after April 16, 2002, without receiving escrow services. The district court, aligning with the Fourth, Seventh, and Eighth Circuits, determined that a valid subsection 8(b) claim necessitates allegations of fee sharing and granted Market Street's dismissal motion on July 1, 2003. 

Subsequently, in Sosa v. Chase Manhattan Mortgage Corporation, it was noted that a single party could violate subsection 8(b) by marking up another service provider's charge, which the Friedmans cited in their appeal on August 20, 2003, arguing that Sosa warranted reversal. However, a panel of this court, in a May 26, 2004 unpublished decision, affirmed the district court's dismissal, stating that the Friedmans only alleged that Market Street provided no services in exchange for the fee, despite some services being anticipated. The panel did not address a new argument regarding excessive fees, suggesting the Friedmans be allowed to amend their complaint to include this claim.

On June 17, 2004, the Friedmans amended their complaint to assert both that no services were provided and that the escrow waiver fee was excessive. They filed a second class certification motion on March 31, 2005, claiming that no individual analysis of service value was needed since they alleged no services were rendered. The district court certified a class on June 8, 2005, encompassing those charged an escrow waiver fee after April 16, 2002, whose loans were sold by Market Street within a year of closing, identifying the central legal question as whether Market Street violated RESPA by charging the fee without providing services. Market Street's petition for review under Federal Rule of Civil Procedure 23(f) is currently under consideration.

The Friedmans contend on appeal that they were not precluded by the Friedman I opinion from re-pleading their claim regarding the absence of services performed by Market Street in exchange for the escrow waiver fee. They assert that the court allowed them to replead and conduct discovery to verify if Market Street provided post-closing services, such as monitoring tax and insurance payments. However, the court expresses concern over this argument, emphasizing that the mandate clearly established that some services were rendered. The Friedmans’ only claim was that no services were provided for the fee, but the pleadings indicated that certain services were anticipated, including monitoring payments. 

The court notes that the issue of service provision was settled, and the Friedmans could have sought clarification or a rehearing if they believed otherwise, but they did not. Instead, they sought to amend their complaint to argue that the escrow waiver fee was excessive relative to the services provided. The limited remand was intended solely for this purpose, not to reconsider whether services were rendered, which would contravene the mandate rule—a principle ensuring that lower courts adhere to the findings of appellate courts. 

The mandate rule, as stated, applies to all issues decided explicitly or implicitly in prior appeals, requiring trial courts to comply strictly with appellate mandates. The Friedman I panel did not direct a re-examination of the service issue nor delay its resolution pending further discovery. The Friedmans did not seek clarification or rehearing, thus the district court could not disregard the mandate. They incorrectly cite Odaleinde v. Birmingham to support their argument; however, that case involved a different context and did not establish the law of the case. The court emphasizes that defendants maintain the right to assert defenses as more facts emerge throughout the proceedings.

The court addressed whether the district court was justified in deviating from the established law of the case set in Friedman I concerning the defendants' qualified immunity defense. It outlined that only three exceptional circumstances allow such deviation: (1) substantial changes in evidence at a subsequent trial, (2) intervening controlling authority making a contrary decision, or (3) a previous decision being clearly erroneous and causing manifest injustice. 

The court found no intervening changes in controlling authority and noted that the Friedmans did not claim such. They argued that new evidence warranted deviation under the first and third exceptions but were not convincing. The new evidence presented by the Friedmans—pertaining to Market Street's fees for tax monitoring services and the lack of post-closing services—was deemed not substantially different from prior allegations, which had already been considered by the Friedman I panel. The panel had previously acknowledged the existence of services in exchange for the fees charged.

Regarding the third exception, the court determined that the Friedmans' claims of clear error and manifest injustice simply restated their argument for new evidence, which had already been rejected. Further discovery did not indicate any clear error, and testimony from Market Street’s representative clarified that the tax service fee charged did not negate the possibility that the escrow waiver fee included charges for related monitoring services. Thus, the court reinforced its stance that the prior decision was not erroneous nor unjust.

Chase's retention of fees is justified due to the services performed, which include setting up servicing systems, managing tax and insurance information, coordinating with contractors for tax monitoring, and addressing issues with new servicers. Non-escrowed loans are considered higher risk, leading to an escrow waiver fee that Market Street does not profit from, as these fees correspond to discounts on such loans in the secondary market. The Friedmans do not dispute the performance of these services but argue against their valuation. The court reaffirms that no exceptions to the law of the case doctrine apply, and the previous decision did not address whether a settlement service provider can be liable under subsection 8(b) of RESPA for excessive fees. The court aligns with other circuits in concluding that subsection 8(b) does not regulate excessive fees as it is not a price control provision. The Friedmans reference a HUD Statement of Policy from 2001, claiming it merits Chevron deference, which asserts that a provider may be liable for fees exceeding the reasonable value of services rendered. However, Market Street contends subsection 8(b) does not prohibit excessive fees and that the SOP is not entitled to deference. The court emphasizes that clear congressional intent in the statute negates the need for deference to agency interpretations that contradict the statute's plain meaning. Ultimately, subsection 8(b) strictly prohibits charging fees unless services have been performed.

The Second Circuit clarified that courts cannot divide a fee into 'reasonable' and 'unreasonable' components, as all fees charged are for services rendered by the institution. The court emphasized that the language of the statute is clear, preventing HUD from imposing its own interpretations under Chevron. The interpretation of subsection 8(b) aligns with the statutory scheme, as it does not define 'reasonable' or 'unreasonable' charges. Subsection 8(d)(2) allows for treble damages but lacks guidance on differentiating between reasonable and unreasonable charges, indicating that RESPA targets abusive practices rather than setting price controls.

Legislative history supports this interpretation, as a proposed bill to empower HUD to set maximum charges was rejected, leading to the current approach that regulates business practices rather than imposing direct cost controls. The court’s decision in Heimmerman does not obligate deference to all HUD interpretations of RESPA, particularly regarding excessive fees under subsection 8(b).

Because the law of the case established that plaintiffs must allege the absence of services rendered for a settlement fee, the Friedmans could not amend their complaint to state a valid claim under subsection 8(b). Consequently, the district court’s class certification is vacated, and the case is remanded with instructions to dismiss the complaint with prejudice. The court does not address other issues, including the appropriateness of class treatment or the Rule 23(a) requirements for class certification.