In re Community Bank of Northern Virginia

Decision Date11 August 2005
Docket NumberNo. 03-4220.,No. 03-4221.,No. 03-4294.,No. 03-4504.,No. 04-1039.,No. 03-4275.,No. 03-4732.,No. 03-4316.,No. 03-4319.,03-4220.,03-4221.,03-4275.,03-4294.,03-4316.,03-4319.,03-4504.,03-4732.,04-1039.
Citation418 F.3d 277
PartiesIn re: COMMUNITY BANK OF NORTHERN VIRGINIA and Guaranty National Bank of Tallahassee Second Mortgage Loan Litigation. Stephanie Spann; Leonila T. Nini; Eufronio Nini; John Hardt; Robbin Verbeck; Stephanie Hafford; Charles B. Poindexter; Maureen F. Poindexter; David B. Walker; Shundra R. Walker; Jessie Dodd; James Beckius; Linda Whitehead; Lynell B. Wingfield; Jario Ivan Sarrie; Beatriz Sarrie; Michelle K. Morgan; Sharon Finnerty; Donald Appleton; Jeanette Appleton; Edelman, Combs & Latturner, LLC; Appellants Walters, Bender, Strohbehn & Vaughan, P.C., Appellant Scott C. Borison, Appellant Badeaux Class Member Opt-Outs, Appellants Alabama Class Member Opt-Outs, Appellants Dickey, McCamey & Chilcote, P.C., David J. Armstrong, Esq., Douglas C. LaSota, Esq., Franklin R. Nix, Esq., Georgia Class Member Opt-Outs, Appellants Ronald D. Gray; Ozy T. McDaniel; Jerline McDaniel; Tammy and David Wasem; Richard and Margaret Harlin; Sylvester and Patricia Watkins; Stephen D. Jensen; Joseph E. and Cynthia A. Brownfield; Missouri Class Member Opt-Outs; Illinois Class Member Opt-Outs, Appellants Michael Lane; Marcos Escalante; Cheryl White-Berry; William P. Gorny; Rinaldo Swayne, Appellants Franklin R. Nix, Esq.; Georgia Class Member Opt-Outs and Objectors, Appellants Marion Deloy Smith, Appellant John W. Sharbrough, III, Esq.; The Sharbrough Law Firm; Alabama Class Member Opt-Outs Appellants.
CourtU.S. Court of Appeals — Third Circuit

Daniel A. Edelman, Cathleen M. Combs (Argued), James O. Latturner, Edelman, Combs & Latturner, Chicago, IL, for Appellants Stephanie Spann, et al., in No. 03-4220.

J. Michael Vaughan (Argued), David M. Skeens (Argued), R. Frederick Walters, Walters, Bender, Strohbehn & Vaughan, Kansas City, MO, for Appellants Ronald D. Gray, et al., in Nos. 03-4732, et al.

Franklin R. Nix (Argued), Law Offices of Franklin R. Nix, Atlanta, GA, for Appellants Georgia Member Opt-Outs & Objectors, et al., in Nos. 03-4862, et al.

John W. Sharbrough, III, The Sharbrough Law Firm, Mobile, AL, for Appellants Alabama Class Member Opt-Outs, et al., in Nos. 03-4319, et al.

Brian S. Wolfman (Argued), Charlotte Garden, Public Citizen Litigation Group, Washington, D.C., Scott C. Borison, Legg Law Firm, Frederick, MD, for Appellants Badeaux Class Member Opt-Outs, et al., in Nos. 03-4316, et al.

David G. Oberdick, Meyer, Unkovic & Scott, Pittsburgh, PA, F. Douglas Ross, Odin Felman & Pittleman, Fairfax, VA, for Appellee Community Bank of Northern Virginia, in Nos. 03-4220, et al.

Gary P. Hunt, Richard B. Tucker, III, Tucker Arensberg, Pittsburgh, PA, for Appellee Guaranty National Bank of Tallahassee, in Nos. 03-4220, et al.

R. Bruce Carlson (Argued), Carlson Lynch, Sewickley, PA, Eric G. Calhoun, Lawson, Fields & Calhoun, Addison, TX, A. Hoyt Rowell, III, Daniel Myers, Richardson, Patrick, Westbrook & Brickman, Mt. Pleasant, SC, for Appellees Class Members in Nos. 03-4220, et al.

Thomas L. Allen (Argued), Roy W. Arnold, James C. Martin, Donna M. Doblick, Reed Smith, Pittsburgh, PA, for Appellee

GMAC Residential Funding Corporation in Nos. 03-4220, et al.

Lawrence H. Richmond, Federal Deposit Insurance Corp., Washington, D.C., for Intervenor Federal Deposit Insurance Corporation in Nos. 03-4220, et al.

Before SLOVITER, AMBRO, and ALDISERT, Circuit Judges.


SLOVITER, Circuit Judge.

                Table of Contents
                I. Facts and Procedural History
                  A. The Alleged Illegal Lending
                  B. The Separate Class Actions
                  C. Consolidation of the Class Actions
                  D. The Opt-Out Solicitations
                  E. The Joint Motion to Invalidate Opt-Outs
                  F. The October 31, 2003 Conference
                  G. Appellants' Motion to Intervene
                  H. Appellants' Request for Discovery
                  I. The Fairness Hearing
                  J. The FDIC as Receiver for GNBT
                II. Jurisdiction
                III. Analysis
                  A. Class Certification
                    1. Certification Process Followed by
                    the District Court
                    2. The Appropriateness of Class
                      i. The Rule 23(a) Criteria
                      ii. The Rule 23(b)(3) Criteria
                      iii. Summary of Rule 23 Analysis
                  B. The District Court's October 14th
                  and 17th Order Invalidating Opt-Outs
                  C. The Motions to Intervene
                  D. Appellants' Request for Discovery
                  E. The Fairness of the Settlement
                  F. The Petition for Mandamus
                IV. Conclusion

This consolidated appeal arises from a "settlement only" class action in the District Court for the Western District of Pennsylvania that had consolidated six separate actions alleging an illegal home equity lending scheme against two banks and a company that acquired second mortgage loans from those banks in the secondary market. Plaintiffs are persons who borrowed from the two banks and signed second mortgages. On December 4, 2003, the District Court issued a Final Order approving a proposed settlement, which awarded $33 million to a class of 44,000 borrowers and $8.1 million in attorney fees. Appellees in this case are the settling parties. Appellants are a number of law firms and plaintiff class members who challenge the District Court's jurisdiction, nearly every aspect of the settlement process, and the fairness of the settlement itself.

A. The Alleged Illegal Lending Scheme

This action alleges a pervasive predatory and illegal lending scheme affecting borrowers nationwide. The alleged mastermind of the scheme was the Shumway Organization ("Shumway"), a residential mortgage loan business operating out of Chantilly, Virginia. Through its several business forms, including EquityPlus Financial, Inc. ("Equity Plus"), Equity Guaranty, LLC ("Equity Guaranty"), and various title companies, Shumway offered high-interest mortgage-backed loans to debt-laden homeowners.

Shumway was subject to fee caps and interest ceilings imposed by various state mortgage lending laws because it was a non-depository lender. State and nationally chartered banks, by contrast, are arguably not subject to the same restrictions. Plaintiffs allege that in an effort to circumvent the relevant state fee and interest ceilings, Shumway formed associations with several financially distressed banks, including two banks named as defendants, the Community Bank of Northern Virginia ("CBNV") (a state chartered bank) and the Guaranty National Bank of Tallahassee ("GNBT") (a nationally chartered bank).

CBNV and GNBT were allegedly paid for nothing more than permitting Shumway to disguise the origin of their loans, thus creating the appearance that fees and interest were paid solely to a depository institution. In reality, the overwhelming majority of fees and other charges associated with the loans were funneled through the two banks to Shumway via Equity Plus (in the case of loans purportedly made by CBNV) and Equity Guaranty (in the case of loans purportedly made by GNBT). Plaintiffs further allege that both CBNV and GNBT uniformly misrepresented the apportionment and distribution of settlement and title fees in their HUD-1 Settlement Statement forms, issued by the United States Department of Housing and Urban Development,1 and that the stated fees in the HUD-1 Settlement Statements included illegal kickbacks to Shumway that did not reflect the value of any services actually performed.

GMAC Residential Funding Corporation ("RFC"), a division of GMAC Financial Services (part of the General Motors Corporation family), was alleged to be an essential co-conspirator in the Shumway scheme. In the late 1990s, RFC derived a substantial portion of its business by purchasing "jumbo" mortgages (mortgages with loan balances above the purchasing authority of Freddie Mac and Fannie Mae) and especially High-LTV (loan-to-value) loans (loans where the amount financed represented up to 125% of the value of the securitized collateral) in the secondary market. By 1999, Shumway, acting through CBNV and GNBT, had become the largest producer of High-LTV loans in the country. Plaintiffs allege that RFC purchased a majority and perhaps all of the CBNV and GNBT originated loans, despite knowing that CBNV and GNBT were mere "straw-parties" used to funnel origination and title services fees to Shumway. The high origination fees on the purchased loans generated profit not only for Shumway but also for RFC; in most cases, fees were rolled into the principal balance of the loans, thereby generating substantial interest income.

In 2001, the United States Office of the Comptroller of the Currency conducted an investigation and audit of GNBT, resulting in the Comptroller's imposition of tight restrictions on the bank. Shortly thereafter, Shumway's relationship with RFC began to deteriorate. In a press release dated March 28, 2002, RFC announced that it was no longer willing to purchase high interest mortgage loans like the ones sold by Shumway. Without a purchaser for its loan product and without adequate reserves to maintain the loans in its own portfolio, the Shumway scheme essentially shut down by early 2003.

B. Separate Class Actions

The Community Bank class action began as the following six separate actions:

Kessler v. GMAC-RFC, No. 03-0425 (W.D.Pa.) was originally filed in the Court of Common Pleas of Allegheny County, Pennsylvania on February 26, 2003. Plaintiffs, a class of Pennsylvania borrowers, charged that RFC had assignee liability under Pennsylvania state law for the "bogus" loan origination and title service fees charged ostensibly by CBNV and GNBT. On March 26, 2003, RFC removed the case to the United States District Court for the Western District of Pennsylvania, asserting that Sections 85 and 86 of the National Banking Act ("NBA"), 12 U.S.C. §§ 85-86, and Section 521 of the Depository Institutions Deregulation and Monetary Control Act ("DIDA"), 12...

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