Wolfert ex rel. v. Transamerica Home First

• Decision Date: 24 February 2006
• Docket Number: Docket No. 04-5519-CV.
• Citation: 439 F.3d 165
• Parties: Marc S. WOLFERT, as Executor of the Estate of Elinor M. Wolfert, Plaintiff-Appellant, v. TRANSAMERICA HOME FIRST, INC. and Financial Freedom Senior Funding Corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

Page 165

439 F.3d 165

Marc S. WOLFERT, as Executor of the Estate of Elinor M. Wolfert, Plaintiff-Appellant, v. TRANSAMERICA HOME FIRST, INC. and Financial Freedom Senior Funding Corporation, Defendants-Appellees.

Docket No. 04-5519-CV.

United States Court of Appeals, Second Circuit.

Argued: December 9, 2005.

Decided: February 24, 2006.

Bob Green, Goshen, N.Y. (Neal D. Frishberg, Goshen, N.Y., on the brief), for Plaintiff-Appellant.

David C. Frederick, Washington, D.C. (Priya R. Aiyar, Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, D.C.; James H. Fleming, Reed Smith LLP, Oakland, Cal., on the brief), for Defendants-Appellees.

Before: NEWMAN, CABRANES, and HALL, Circuit Judges.

JON O. NEWMAN, Senior Circuit Judge.

This appeal presents due process challenges to the preclusive effect of a state court judgment approving a class action settlement. The challenges concern lack of adequate representation and deficiencies in notice of the settlement. Plaintiff-Appellant Marc S. Wolfert as Executor of the Estate of Elinor M. Wolfert ("Mrs. Wolfert") appeals from the September 16, 2004, judgment of the United States District Court for the Southern District of New York (Charles L. Brieant, Judge) dismissing her complaint as barred by res judicata. The complaint sought a declaratory judgment that the reverse mortgage entered into between Mrs. Wolfert and Defendant-Appellee Transamerica Home First, Inc. ("Transamerica") was unenforceable and return of all payments made to the lender. Mrs. Wolfert claimed that two provisions of the reverse mortgage, the "contingent interest" and the "maturity fee" were unlawful under New York law. Transamerica argued, successfully, that her claims were barred by a settlement in a class action in a California state court.

We conclude that Mrs. Wolfert was adequately represented in the California class action, that her challenges to the settlement notice lack merit, and that the California class action judgment therefore bars her current lawsuit. Accordingly, we affirm.

Background

The reverse mortgage. In February 1996, at the age of 82, Mrs. Wolfert entered into a reverse mortgage with Transamerica. As explained by the District Court,

A reverse mortgage loan is a means by which an individual, usually an elderly person, may borrow on the equity of his or her home, and the lender pays out so much of the loan proceeds as necessary, in agreed periodic installments over the individual's lifetime. The mortgage debt becomes due when the borrower either sells the property or dies, whichever occurs first.

Transamerica lent Mrs. Wolfert an initial amount of $94,987.14. It also agreed to loan her $100 per month for the next 96 months, or until March 1, 2004, as long as she remained alive and did not default on any of the other terms. The maximum total principal amount, as stated in the loan agreement, was $104,587.14. The loan provided for a fixed interest rate of 9.5 percent, compounded monthly. The reverse mortgage contract required Mrs. Wolfert to use part of the initial loan amount, $2,192.46, to purchase a life annuity with Metropolitan Life Insurance Company, which would begin monthly payments after the monthly advances under the loan agreement ended.

Two provisions of the reverse mortgage are especially pertinent to the pending litigation. The most controversial provision obligates the borrower to pay Transamerica a "Contingent Interest" upon various "Maturity Events," including the sale of the property.¹ The amount of the "Contingent Interest" is 50 percent of the difference between the appraised value of the property as of the date of the loan agreement and the time of the triggering event. Mrs. Wolfert's home was valued at $240,000 at the time of the loan and $686,000 at the time she tried to sell it in 2004. Thus, the amount of the "Contingent Interest" she would have to pay if she sold the home would be half the difference, or $223,000.

The second controversial provision obligates the borrower to pay Transamerica a "Maturity Fee" of two percent of the value of the home at the time of sale.

The California class action. The Transamerica reverse mortgages were challenged in a class action in the Superior Court of San Mateo County, California. That action began as several separate actions in 1998 that challenged various aspects of Transamerica's reverse mortgages. These separate law-suits were consolidated as the Reverse Mortgage Cases. In February 2002, the (then-putative) class representatives filed a third consolidated amended complaint, which stated three causes of action: (1) unlawful, unfair, or fraudulent business practices in violation of California Business & Professions Code § 17200 et seq.; (2) concealment/fraud; and (3) negligent misrepresentation. In September 2002, the California Superior Court granted a motion to certify a nationwide class only as to the first cause of action. The class comprised those who, prior to January 1, 1999, had entered into a reverse mortgage loan with Transamerica that charged identified fees concerning a 50 percent contingent interest, a deferred annuity premium, and/or a 2 percent maturity fee.² The class included legal successors-in-interest and heirs of deceased borrowers. Transamerica sold 1,588 of these reverse mortgages, of which 760 had been sold in California. In December 2002, the class representatives and the Defendants reached a settlement and sought court approval of the settlement and the class notice. After a hearing, the trial court gave preliminary approval to the settlement.

The settlement agreement provided for the Defendants to pay a total of $8 million. After legal fees, incentive payments to named plaintiffs, and administrative costs, approximately $5.28 million was available for distribution to class members. The agreement allocated this amount among the 3,422 borrowers (or their successors-in-interest) according to whether the loan was open or closed, the number of payments made with respect to closed loans, and the date the loan started with respect to open loans. Mrs. Wolfert expected to receive $2,600 in the settlement.

Class counsel mailed notice of the settlement in February 2003.³ The notice comprises 13 pages of single-spaced text. On the first page, it identifies the borrower by name and loan number. On pages 5-7, it describes how each borrower's Settlement Share was calculated. On page 8, it describes the release each class member will provide to the Defendants:

In particular, each class member will be completely releasing all claims, of any kind, he or she has now or may have in the future relating to the facts and claims alleged in the Action, including without limitation (1) the fairness of any of the terms or features of the loan and/or its accompanying annuity, (2) the disclosure or concealment of the loan's features, including its charges and fees and the cost of the annuity, and (3) the marketing of the loan, including its annuity. . . . .

It should be noted that the claims which class members will be releasing as a condition of the settlement include, but are not limited to, the claims that the named plaintiffs have asserted in the Action and those that the Court has determined are suitable for class-wide treatment. The Released Claims also are not limited to claims arising under California law. The Released Claims include any claims of the described sort, even if the claim has not been asserted in the Action or is too individualized in its facts or relevant law to be suitable for class certification or uniquely arises under the laws of the borrower's home state.

[Proposed] Notice of Class Action and Settlement at 8-9 (emphasis in original). The notice stated that "the full Settlement Agreement" was available "for inspection. . . during regular business hours at the Office of the Clerk of the Superior Court, San Mateo, California." The notice also refers the reader to an Internet address, www.gilardi.com, at which "the Settlement Agreement" was to have appeared. In addition, the Claims Administrator published an advertisement once a week for four consecutive weeks in the business section of USA Today.

The Settlement Agreement is a 29-page, double-spaced document. The release clause uses similar, but not identical, language to that appearing in the Notice:

Effective as of the Final Effective Date, [the class members] hereby forever completely release and discharge each of the Defendants . . . from any and all causes of action . . . arising now or in the future out of or in connection with or related to the facts and claims alleged or asserted in any of the complaints filed in the Litigation . . . under federal law or the law of any state or locality, including consumer protection laws (the "Released Claims"). The Released Claims include without limitation any claim . . . that any of the terms of the Reverse Mortgage Loans or annuities were unfair or unlawful. . . .

Settlement Agreement and Release at 19-20 (emphasis added). The Settlement Agreement states that the Defendants will pay $8 million in total to settle the claims. The agreement also provides that the Defendants would not oppose class counsels' request for an attorney fee award of 29 percent of the settlement amount. The agreement also provides for incentive awards for each of the named plaintiffs in the amount of $10,000 for all but one, who received $2,500. The agreement refers to a Plan of Allocation for the award as Exhibit B to the agreement, but this plan does not appear in the record or on the Internet.

The trial court held a fairness hearing in May 2003. One class member filed an objection, and 18 opted out. Mrs. Wolfert neither objected nor opted out. The trial court rejected all the objections and gave final approval to the settlement in June 2003. In March 2004, the California Court of Appeal affirmed the judgment of the trial court, and the California Supreme Court denied review in July 2004.

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