Apartments v. Fed. Nat'l Mortgage Ass'n

• Decision Date: 14 October 2010
• Docket Number: No. 09-40997.,09-40997.
• Citation: 624 F.3d 185
• Parties: CASA ORLANDO APARTMENTS, LTD., Relating to Pine Haven Apartments; Jasper Housing Development Company, Relating to Pine View Apartments; Alfred Porkolab, Jean J. Porkolab; Alan B. Porkolab, as Trustee for the Porkolab Family Trust No. 1, Relating to Lowell Apartments, Lorain, Ohio, Plaintiffs-Appellants, v. FEDERAL NATIONAL MORTGAGE ASSOCIATION, Defendant-Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

624 F.3d 185

CASA ORLANDO APARTMENTS, LTD., Relating to Pine Haven Apartments; Jasper Housing Development Company, Relating to Pine View Apartments; Alfred Porkolab, Jean J. Porkolab; Alan B. Porkolab, as Trustee for the Porkolab Family Trust No. 1, Relating to Lowell Apartments, Lorain, Ohio, Plaintiffs-Appellants,

v.FEDERAL NATIONAL MORTGAGE ASSOCIATION, Defendant-Appellee.

No. 09-40997.

United States Court of Appeals,Fifth Circuit.

Oct. 14, 2010.

COPYRIGHT MATERIAL OMITTED.

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W. Mark Lanier, Kevin Philip Parker, Lanier Law Firm, P.C., Houston, TX, Nicholas H. Patton, Patton, Tidwell & Schroeder, L.L.P., Texarkana, TX, David Charles Frederick (argued), Kellogg, Huber, Hansen, Todd, Evans & Figel, P.L.L.C., Washington, DC, Brendan M. Hare, Andrews, Hare & Associates, Boston, MA, Roderick M. Hills, Washington, DC, Joseph S. Hoover, Jr., Oakton, VA, Evan Matthew Janush, Lanier Firm, P.L.L.C., New York, NY, for Plaintiffs-Appellants.

Lance Lee, Damon Michael Young, Sr., Young, Pickett & Lee, Texarkana, TX, Joseph H. Beisner, Skadden, Arps, Slate, Meagher & Flom, L.L.P., Brian P. Brooks (argued), Sarah Alexander Goldfrank, Kyra Anne Grundeman, O'Melveny & Myers, L.L.P., Washington, DC, for Defendant-Appellee.

Appeal from the United States District Court for the Eastern District of Texas.

Before KING, HIGGINBOTHAM and GARZA, Circuit Judges.

PATRICK E. HIGGINBOTHAM, Circuit Judge:

This is an interlocutory appeal from the district court's refusal to certify a class. Plaintiff Appellants are mortgagors whose mortgages for low-income multi-family housing were held or serviced by the Federal National Mortgage Association (“Fannie Mae”) and insured by the Department of Housing and Urban Development (“HUD”). Plaintiffs sued Fannie Mae on behalf of themselves and those similarly situated for breach of fiduciary duty. The district court denied class certification under all three prongs of the Federal Rules of Civil Procedure Rule 23(b). For the reasons stated below, we AFFIRM.

I.

Since 1969, HUD has required mortgagors participating in its insurance program to sign a Regulatory Agreement. This Agreement mandated that mortgagors establish two funds with the mortgagee: 1) a Reserve Fund for Replacements (“Reserve Fund”) and 2) a Residual Receipts Fund (“Residual Fund”). ¹ The Reserve Fund ensured that the mortgagor had money available to effectuate repairs on the HUD-insured property. The Residual Fund provided additional liquidity to ensure payments on the loan and protect HUD's interests. According to the Agreement, the Reserve Fund was to be under the control of the mortgagee (Fannie Mae) and the Residual Fund would be under the control of the Federal Housing Commissioner. Disbursements from the Reserve Fund were only to be made after receiving written consent from the Commissioner. The Commissioner could also direct disbursements from the Residual Fund for any purpose he saw fit. After repayment of the loan, mortgagees were to refund any remaining amounts in the Funds to the mortgagors.

The Reserve Fund provision of the Agreement specifically contemplated that those funds may take the form of cash deposit or guaranteed investment. Fannie Mae gave mortgagors certain investment options for both their Reserve Fund and Residual Fund moneys. Some mortgagors chose to partially or fully invest these funds accordingly. Others elected to retain the liquidity and not invest any such funds. These “uninvested funds” are the subject of this lawsuit.

Appellants contend that the Regulatory Agreement created a fiduciary relationship between Fannie Mae and class members, with Fannie Mae holding the Reserve and Residual Funds in trust for class member mortgagors. Appellants further contend that Fannie Mae breached its fiduciary duties by engaging in self-dealing with mortgagors' uninvested funds, resulting in unjust enrichment.

Between 1969 and 1995, Fannie Mae invested the so-called uninvested funds in the overnight federal funds marketplace, retaining the interest proceeds for itself. Appellants allege that Fannie Mae tried to discourage mortgagor investments so Fannie Mae could maximize the earning potential of its federal funds investments. In 1995, Fannie Mae transferred the servicing of its multi-family mortgages to GMAC Commercial Mortgage Corporation (“GMACCM”). Under this arrangement, GMACCM created custodial bank accounts using Fannie Mae mortgagors' invested and uninvested funds. In return for the large deposits, the banks offered GMACCM lines of credit well below the market interest rates. GMACCM shared the financial proceeds of these favorable credit lines with Fannie Mae, giving Fannie Mae seventy percent of GMACCM's benefit. Appellants argue these proceeds were wrongfully obtained and should be disgorged.

Plaintiff Appellants define their class to include all mortgagors of property located anywhere in the United States whose mortgages: 1) were insured under § 221(d)(3) or § 236 of the National Housing Act; 2) were held or serviced by Fannie Mae; and 3) required the mortgagors to make deposits in Reserve and Residual Funds and where such funds were “uninvested” in part or whole for any period of time. In 1978, Fannie Mae serviced nearly 4,000 potential class mortgages. By 2004 (when this lawsuit was filed), approximately 1,500 such mortgages existed. Mortgagors reside in all fifty states, signed the Regulatory Agreements in various states, and conducted business with Fannie Mae regional offices in Atlanta, Chicago, Dallas, Los Angeles, and Philadelphia. Fannie Mae is headquartered in Washington, D.C.

The district court found that the class satisfied the requirements of Rule 23(a) but denied certification under Rule 23(b). ² We review a denial of class certification for abuse of discretion, deferring to the district court's ability to manage pending litigation and conduct the factual inquiry necessary for certification. ³ However, we review de novo the question of whether the district court applied the proper legal standard. ⁴

II.

Under Rule 23, a class may be certified if it satisfies the requirements of Rule 23(a) and fits into one of the three categories outlined in Rule 23(b). Because we find that choice of law issues are relevant to all three categories, we begin our discussion here.

In diversity cases, federal courts must apply the choice of law rules of the forum state. We review a district court's choice of law determination de novo. ⁵ Texas courts follow the “most significant relationship” test outlined in the Restatement (Second) of Conflict of Laws (“Restatement”).

⁶ The choice of law is evaluated issue by issue. ⁷ In this case, the lynchpin issue is whether Fannie Mae was in a fiduciary relationship with the plaintiff mortgagors (and subsequently breached its fiduciary duty). Additionally, Plaintiffs seek relief under an unjust enrichment theory.

Section 6 of the Restatement lists the general factors that should inform a choice of law question: (a) the needs of the interstate and international systems, (b) the relevant policies of the forum, (c) the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue, (d) the protection of justified expectations, (e) the basic policies underlying the particular field of law, (f) certainty, predictability and uniformity of result, and (g) ease in the determination and application of the law to be applied.

Since this is a breach of fiduciary duty case, we also consider Restatement § 145, which lists the primary factors for choice of law questions in tort cases. These factors are: (a) the place where the injury occurred, (b) the place where the conduct causing the injury occurred, (c) the domicile, residence, nationality, place of incorporation and place of business of the parties, and (d) the place where the relationship, if any, between the parties is centered.

Plaintiffs highlight the Restatement's comments, which instruct that when a case involves unfair profit rather than a plaintiff's pecuniary loss, the location of the injury is less important than the location of defendant's conduct. ⁸ Plaintiffs further advocate that there is no place central to the relationship between Fannie Mae and its borrowers, claiming that each dealt with one another from their respective principal places of business. Therefore, Plaintiffs conclude that the place of the conduct causing the injury and the residence of the parties are the most important factors in this case. Since Plaintiffs reside in all fifty states, Appellants believe we should give greater weight to Fannie Mae's principal place of business, Washington D.C. In addition, Fannie Mae's headquarters is where the conduct causing the breach of fiduciary duty arose-the District of Columbia is where the idea to invest the Funds developed and where policies were created to implement this idea. Thus, Plaintiffs urge us to apply D.C. law to all class members.

In analyzing the Restatement factors de novo, we agree with Plaintiffs that the primary purpose of the tort rule involved here leads us to place less importance on where the injury occurred, as disgorgement is not meant to compensate for a loss. But the Restatement's comments also instruct us not to over-emphasize this restriction. ⁹ A breach of fiduciary duty still causes an injury, and in this case, those financial injuries occurred in the states where plaintiffs maintain their principal places of business.

For the second factor, we generally agree with Plaintiffs' assertion that the District of Columbia is where the conduct causing the injury occurred. ¹⁰ The third factor, domicile of the parties, is also not in dispute.

We disagree, however, with Plaintiffs' assessment of the fourth Restatement factor-where the parties' relationships were centered. The relationship in dispute in this case is a fiduciary obligation that Plaintiffs contend arose from the...