Mortensen v. First Federal Sav. and Loan Ass'n

Citation549 F.2d 884
Decision Date20 January 1977
Docket NumberNo. 75-2441,75-2441
Parties1977-1 Trade Cases 61,259 Bent E. MORTENSEN and Lise Lotte Mortensen, his wife, Individually and on behalf of all other persons similarly situated, Appellants, v. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION, an association organized under the laws of the United States and the State of New Jersey, et al., Appellees.
CourtUnited States Courts of Appeals. United States Court of Appeals (3rd Circuit)

Robert H. Jaffe, Springfield, N. J., for appellants.

Franz J. Skok, Johnstone & O'Dwyer, Westfield, N. J., for appellees.

Before VAN DUSEN, HUNTER and WEIS, Circuit Judges.

JAMES HUNTER, III, Circuit Judge:

Plaintiff mortgagors appeal from the dismissal of their civil antitrust suit against their mortgagee, First Federal Savings and Loan Association ("First Federal"), the mortgagee's law firm, Johnstone & O'Dwyer, and the directors of First Federal. Plaintiffs brought a class action alleging a conspiracy resulting in: 1) illegal tie-in of legal services in violation of the Sherman Act § 1, 15 U.S.C. § 1, 1 and 2) violations of Federal Home Loan Bank Board ("FHLBB") Regulations, 12 C.F.R. §§ 563.35(a)(3), 571.7(b). District Court dismissed the Sherman Act claim for lack of federal jurisdiction, finding no showing that the alleged tie-in either was in or substantially affected interstate commerce. The claim under the FHLBB regulations was held to be within the primary jurisdiction of the federal agency and was dismissed without prejudice. Because we find sufficient allegations of interstate impact to withstand a pretrial motion to dismiss the Sherman Act claim for lack of subject matter jurisdiction, we vacate the dismissal of appellant's Sherman Act claim and remand for further proceedings consistent with this opinion.


In October 1972, the Mortensens contracted to buy a house in Westfield, New Jersey, and applied to First Federal for the mortgage. When a home buyer applies to First Federal for a first mortgage, a condition of the loan is that the applicant pay First Federal's attorney for the related legal services of examining and certifying title, drafting and recording the mortgage, and closing title in the buyer. Mechanically, the fee for these services is deducted from the amount of the loan. The applicant is not precluded from hiring his or her additional attorney, but will remain responsible in any event for First Federal's attorney's fees.

First Federal refers these legal services to defendant Johnstone & O'Dwyer, a New Jersey law firm. 2 In fact, such services could be performed only by New Jersey attorneys. If, however, home buyers consider title insurance a comparable substitute for a certificate of title, there is no intra-New Jersey restriction: any title company would theoretically be in a position to offer this service. 3

Appellants allege the fees charged by Johnstone & O'Dwyer for these services to be unreasonably high, 4 and, further, that procurement of a mortgage from First Federal is conditioned upon applicant's acceptance of those fees. Appellants do not allege that First Federal's mortgage offer is more attractive than other mortgages. 5 There may be some 494 lending institutions with offices in New Jersey competing for the home mortgages given by First Federal; out-of-state lenders can also compete for the mortgages given on New Jersey homes.

Some of those lending institutions follow what is called an "open attorneys" plan, under which the mortgage applicant is permitted by the lender to choose his or her own counsel for the title examination and closing. In that case, the applicant pays the selected counsel directly, and the lender plays no role in the provision or payment of those particular legal services. The lender charges a fee to review the title. Other lending institutions, among them First Federal, prefer to rely on their own general counsel for these matters, and follow what is referred to as a "closed attorneys" plan. 6

First Federal has always relied on Johnstone & O'Dwyer to perform these legal services, expressing confidence in their work. Johnstone & O'Dwyer is paid on a case-by-case basis and receives no annual retainer from First Federal. On its part, First Federal receives no "kickback" from its referrals to Johnstone & O'Dwyer. In every case, the mortgage applicant is the one who pays for Johnstone & O'Dwyer's legal services. Plaintiffs claim that in the four-year period preceding this suit, Johnstone & O'Dwyer (and Guardian, the controlled title company) may have received some $1,000,000 in legal fees from First Federal's mortgage-related legal services.

According to First Federal, the legal services are rendered to and for First Federal, not the home buyer. Appellants contend just the reverse: the legal services are rendered to and for the mortgage applicants (as they would be in an "open attorneys" plan) and they are consequently being forced to buy the legal services selected by First Federal. The trial court adopted the latter contention for the purpose of deciding the jurisdictional issue.

First Federal is prohibited, by 12 C.F.R. §§ 545.6-6 from giving mortgages on homes outside New Jersey unless the out-of-state properties are within 100 miles of First Federal's home office. The home office is in Westfield, New Jersey. Although some parts of New York state are within 100 miles of Westfield, of its 3,462 mortgage loans still open as of December 7, 1973, not one was secured by out-of-state real property.

Although its home mortgage activity is thus virtually confined to New Jersey, there are apparently several interstate contacts: 1) First Federal is a federally character institution, and, as such, governed by federal regulations; 2) substantial funds used by First Federal for its loans come from the FHLBB as loans to First Federal; 7 3) the amounts of mortgage funds provided by First Federal's own savings deposits are insured by Federal Savings and Loan Insurance Corporation ("FSLIC"); 4) a number of the loans made by First Federal are guaranteed by federal or other out-of-state agencies or corporations; 8 and 5) at the time of mortgage application many buyers are from outside New Jersey. 9

In addition to First Federal's interstate contacts, the Mortensens point to out-of-state competitors for both the mortgage transaction and the title certificate, and to potential deterrent of out-of-state customers considering homes in New Jersey. Appellants contend in particular that New York banks compete for mortgage loans in First Federal's territory. Assuming that buyers consider title insurance an adequate substitute for title examinations by attorneys, there would of course be out-of-state competition for a significant part of the allegedly tied service. 10 The final point, the impact on the flow of out-of-state New Jersey home seekers, is more difficult to assess, since it is not clear from the record what proportion of New Jersey lenders operate under the "closed attorneys" plan. Moreover, not all New Jersey lenders are implicated, only First Federal.

Mortensens instituted this action in December, 1973. Discovery proceedings commenced; in December, 1974, plaintiffs moved for class action certification, and in January, 1975 moved to amend their complaint in order to add Johnstone & O'Dwyer's title company, Guardian Abstract Company. In February, 1975, defendants responded with motions to dismiss plaintiffs' complaint pursuant to Fed.R.Civ.P. 12(b)(1) for lack of subject matter jurisdiction; to dismiss under Fed.R.Civ.P. 12(b)(6) for failure to state a claim upon which relief can be granted; to stay the proceedings pending exhaustion of administrative remedies; and, in the alternative, to grant summary judgment under Fed.R.Civ.P. 56 in favor of defendants.

A single hearing was held, in April, 1975, on the above motions. Plaintiffs' attorney opened with his arguments favoring class action certification according to Fed.R.Civ.P. 23. When the judge asked how many lending institutions accept customer-chosen attorneys for closing, plaintiffs' counsel responded "I felt we didn't have to make all our proof here . . . ," and proceeded with his proof of class action status. 11

The defendants' attorney, a member of the Johnstone & O'Dwyer firm, asserted that all the relevant facts were then before the court and that, consequently, the matter was ripe for summary judgment. The "central" issue, according to defendants' attorney, was whether Johnstone & O'Dwyer performed any legal services for First Federal's borrowers; the answer strenuously urged was "no," that the services were rendered to First Federal and not to the customers. In addition, defendants' attorney argued that the fees charged by Johnstone & O'Dwyer were not unreasonable. On the merits of the tying claim, defendants' attorney discussed a recent case dealing with a nearly identical practice in Louisiana, in which the district court held that there was no illegal tie-in because there were not two products, simply the one product of the loan with its related services. 12 In contradiction to plaintiffs' attorney, the defendants' attorney contended that First Federal's practice was thoroughly approved by the FHLBB regulations. Defendants' attorney responded to the class action certification request. He closed his argument without mentioning the jurisdictional issue. Plaintiffs' attorney had not earlier mentioned the jurisdictional issue and did not mention it on rebuttal.

It was not until the close of the hearing, after the judge said he would take the case under advisement and would write an opinion, that jurisdiction may have been considered. 13 The judge asked "Can anyone tell me what part of the market the defendant has?" No one could; promises were made to send the information in later, but the record does not show that this was done.

In August, 1975, the district court filed an opinion dismissing the Sherman Act claim for lack of subject matter...

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