State ex rel. Coffman v. Castle Law Grp., LLC

• Decision Date: 05 July 2016
• Docket Number: Supreme Court Case No. 16SA8
• Citation: 2016 CO 54,375 P.3d 128
• Court: Colorado Supreme Court
• Parties: In re The STATE of Colorado EX REL. Cynthia H. COFFMAN, Attorney General for the State of Colorado and Julie Ann Meade, Administrator, Uniform Consumer Credit Code, Plaintiffs, v. The CASTLE LAW GROUP, LLC; Absolute Posting & Process Services, LLC ; RE Records Research, LLC, d/b/a Real Estate Records Research; Colorado American Title, LLC; Lawrence E. Castle; Caren A. Castle; Ryan J. O'Connell; and Kathleen A. Benton, Defendants.

375 P.3d 128

2016 CO 54

In re The STATE of Colorado EX REL. Cynthia H. COFFMAN, Attorney General for the State of Colorado and Julie Ann Meade, Administrator, Uniform Consumer Credit Code, Plaintiffs

v.The CASTLE LAW GROUP, LLC; Absolute Posting & Process Services, LLC ; RE Records Research, LLC, d/b/a Real Estate Records Research; Colorado American Title, LLC; Lawrence E. Castle; Caren A. Castle; Ryan J. O'Connell; and Kathleen A. Benton, Defendants.

Supreme Court Case No. 16SA8

Supreme Court of Colorado.

July 5, 2016

Attorneys for Plaintiffs: Cynthia H. Coffman, Attorney General, Frederick R. Yarger, Solicitor General, Alissa Gardenswartz, Deputy Attorney General, Erik R. Neusch, Senior Assistant Attorney General, Megan Paris Rundlet, Senior Assistant Attorney General, Lauren M. Dickey, Assistant Attorney General, Rebecca M. Taylor, Assistant Attorney General, Mark L. Boehmer, Assistant Attorney General, Denver, Colorado

Attorneys for Defendants The Castle Law Group, LLC; Lawrence E. Castle ; and Caren A. Castle: Reilly Pozner LLP, Larry S. Pozner, Ellie Lockwood, Denver, Colorado

Attorneys for Defendants RE Records Research, LLC, d/b/a Real Estate Records Research; and Colorado American Title, LLC: Vedra Wali LLC, Daniel J. Vedra, Denver, Colorado

Attorneys for Defendants Absolute Posting & Process Services, LLC; Ryan O'Connell ; and Kathleen Benton : Senter Goldfarb & Rice, L.L.C., Billy-George Hertzke, Margaret L. Boehmer, Ashley J. DeVerna, Denver, Colorado

En Banc

JUSTICE MÁRQUEZ delivered the Opinion of the Court.

¶1 Following a two-year investigation into the Colorado foreclosure industry, the State brought a civil law enforcement action against the foreclosure law firm The Castle Law Group, LLC and its principals, Lawrence Castle and Caren Castle (collectively, “Castle”), as well as Castle's affiliated vendors, Absolute Posting & Processing Services, LLC, Ryan O'Connell, Kathleen Benton (collectively, “Absolute”), RE Records Research, LLC (“RERR”), and Colorado American Title, LLC (“CAT”). Among other things, the State alleges that between 2009 and 2014, the Castle defendants conspired with their affiliated vendors to generate and submit deceptive invoices reflecting systematically inflated costs incurred for foreclosure-related services, while falsely representing to mortgage servicers that these inflated costs were “actual, necessary, and reasonable.” According to the State, Castle submitted the vendors' inflated invoices to the mortgage servicers, and in turn, the mortgage servicers, relying on Castle's false representation that the vendors' charges were “actual, necessary, and reasonable,” reimbursed Castle for these costs as part of the foreclosures and ultimately passed the inflated costs on to the public. The State contends that all the defendants benefitted from this scheme by collectively reaping millions in inflated profits from homeowners, purchasers of foreclosed homes at auction, and taxpayer-funded investors like Fannie Mae and Freddie Mac. Specifically, it alleges that Castle pocketed some of these overages as kickbacks from the vendors to circumvent the maximum allowable fees Castle could collect, but also contends that Castle's affiliated vendors were unjustly enriched by this scheme. The State alleges that the defendants' conduct violated the Colorado Consumer Protection Act (“CCPA”), §§ 6-1-101

to -115, C.R.S. (2015), as well as the Colorado Antitrust Act of 1992, §§ 6-4-101 to -122, C.R.S. (2015), and the Colorado Fair Debt Collection Practices Act, §§ 12-14-101 to -136, C.R.S. (2015). Only the CCPA claim is at issue in this original proceeding pursuant to C.A.R. 21.

¶2 Relevant here, the State seeks to demonstrate at trial that the costs for foreclosure-related services charged by Castle's affiliated vendors and claimed by Castle were not, in fact, the “actual, necessary, and reasonable” costs for such services. Specifically, the State seeks to demonstrate that these costs were artificially inflated by comparing the invoiced rates submitted by Castle with the market rates charged by unaffiliated vendors for such services. The State retained an expert witness, Matthew Lausten, to testify, among other things, regarding the “overage” amounts Defendants obtained from their alleged deceptive trade practices as reflected by the difference in the invoiced costs and the “market rate” prices charged by unaffiliated vendors for the same services.

¶3 On January 7, 2016, approximately a week before the scheduled trial, the district court issued an order granting Castle's motion to limit Lausten's testimony and granting in part Absolute's motion to exclude Lausten's testimony, albeit not based on the CRE 702

reliability and relevance grounds raised in the motions. Instead, the court concluded that the market rates for foreclosure-related services are “irrelevant to Plaintiffs' cognizable claims.” The court construed the State's CCPA deceptive trade practice claim to be grounded on the allegation that the Castle defendants exceeded their allowable fees by charging additional fees in the guise of costs for foreclosure-related services. The court reasoned that “[i]t doesn't matter whether those charges were over or under ‘market’ rates; what matters is if any portion of them found their way to the Castle Defendants as disguised attorney fees....”

¶4 In response to the State's motion for clarification of this order, the court issued another order on January 11, 2016, ruling that “[c]harging high prices is not deceptive or unjust, as long as those prices are accurately disclosed. Charging high prices is not unlawful, as long [sic] those prices have not been capped by state price controls and are not the product of an antitrust violation.” The court further noted that it read the State's complaint to allege that Castle received some portion of the high prices as kickbacks from the vendors in a scheme to avoid contractual or regulatory caps on their attorney fees. The court ruled that this allegation is the “only strand keeping [the State's non-antitrust] claims alive, and it is the only strand on which I will permit evidence.”

¶5 The State sought review of the district court's January 7 and January 11 Orders pursuant to C.A.R. 21

. The State contends that by excluding market rate evidence, the trial court sua sponte dismissed one of the theories that formed the basis of the State's CCPA claim and its disgorgement calculations. We issued a rule to show cause.

¶6 Consistent with our decision in May Department Stores Co. v. State ex rel. Woodard , 863 P.2d 967 (Colo.1993)

, we hold that, for purposes of a deceptive trade practices claim under the CCPA, disclosure of a price charged does not automatically insulate a party from claims that the price is deceptive. Here, the State's CCPA claim alleges that the Castle defendants engaged in a scheme with the vendors to generate invoices with greatly inflated charges for foreclosure-related services, while Castle falsely represented to mortgage servicers that these charges were the “actual, necessary, and reasonable” costs for such services. That the invoices disclosed the prices charged for foreclosure-related services misperceives the alleged deception: namely, that these prices were not, in fact, the “actual, necessary, and reasonable” costs for such services. Evidence of the market rates charged by unaffiliated vendors for such services is directly relevant to establishing whether the costs invoiced by the vendors were the actual or reasonable costs of such services. Market rate evidence is further relevant to the State's allegation that the vendors themselves also benefitted from the common scheme and serves as a benchmark for the State's disgorgement calculations. We therefore conclude that the trial court abused its discretion in barring evidence of market rates for foreclosure-related services. Accordingly, we make our rule absolute and remand the matter to the trial court for further proceedings consistent with this opinion.

I. Facts and Procedural History

¶7 The State alleges that Castle, in conjunction with its affiliated vendors, systematically misrepresented and inflated the costs for foreclosure-related services in more than 100,000 foreclosures in Colorado. The State's expert witness report estimates that Castle passed on over $25 million in price inflation to mortgage servicers such as Fannie Mae. According to the State, these deceptively inflated costs were then passed on to, and ultimately borne by, investors and insurers of the loan, third-party purchasers acquiring the property at auction, and home owners trying to save their homes.

A. The State's Complaint

¶8 The State's CCPA claim rests on the allegation that Castle, in concert with their affiliated vendors, systematically charged inflated and deceptive costs for posting foreclosure notices, obtaining title products, preparing documents, and providing other foreclosure-related services by using affiliated vendors to create invoices for foreclosure services at costs that are grossly inflated above the actual costs and above what unaffiliated vendors charge for such services (i.e., the “market rate” for such services). Am. Compl. at ¶ 2, State v. The Castle Law Grp., LLC , No. 14CV32763 (Denver Dist. Ct. Apr. 15, 2015). The State alleges that the allowable fees and costs charged by a law firm conducting foreclosures are governed by the mortgage loan documents, servicer agreements, investor guidelines, and state law. Id. at ¶ 58. With respect to the allowable costs, the State alleges that the servicer agreements require that costs passed along to the servicer/investor must be “actually incurred, necessary to complete the foreclosure, and reasonable, i.e., market rate,” id. at ¶ 60, and that accordingly, Castle agreed to seek reimbursement for only its “actual, necessary, and reasonable (i.e., market rate) costs,” id. at ¶ 59. The State alleges that the servicer has little incentive to scrutinize these...