Mullinax v. Radian Guar. Inc.

• Decision Date: 25 January 2002
• Docket Number: No. 1:00CV01247.,1:00CV01247.
• Citation: 199 F.Supp.2d 311
• Court: U.S. District Court — Middle District of North Carolina
• Parties: Richard C. MULLINAX, Jr. and Perry Pike, on behalf of themselves and all other persons similarly situated, Plaintiffs, v. RADIAN GUARANTY INC. and Amerin Guaranty Corporation, Defendants.

199 F.Supp.2d 311

Richard C. MULLINAX, Jr. and Perry Pike, on behalf of themselves and all other persons similarly situated, Plaintiffs, v. RADIAN GUARANTY INC. and Amerin Guaranty Corporation, Defendants.

No. 1:00CV01247.

United States District Court, M.D. North Carolina.

January 25, 2002.

COPYRIGHT MATERIAL OMITTED

Martha Melinda Lawrence, Patterson Harkavy & Lawrence, Raleigh, NC, Michael D. Calhoun, Gulley Eakes and Volland, Durham, NC, Melvyn I. Weiss, Michael C. Spencer, Anita B. Kartalopoulos, Milberg Weiss Bershad Hynes & Lerach, LLP, New York City, Larry I. Smith, Thompson & Smith, P.C., Thomas W. Tucker, John B. Long, Tucker Everitt Long Brewton & Lanier, Augusta, GA, for Plaintiffs.

Mack Sperling, Brooks Pierce McLendon Humphrey & Leonard, Greensboro, NC, David Smith, Wendy Beetlestone, Schnader Harrison Segal & Lewis, LLP, Philadelphia, PA, for Defendants.

MEMORANDUM OPINION

BEATY, District Judge.

This matter comes before the Court on a Motion to Dismiss [Document # 9] by Defendants Radian Guaranty Inc. and Amerin Guaranty Corporation (together "Radian" or "Defendants"). Against these Defendants, Plaintiffs Richard C. Mullinax Jr. ("Mullinax") and Perry Pike ("Pike") (together "Plaintiffs")¹ allege violations of Section 8 of the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2607. For the reasons that follow, Defendants' Motion to Dismiss is GRANTED in Part and DENIED in part. Furthermore, Plaintiffs are granted LEAVE TO AMEND within thirty days.

I. BACKGROUND

On or about June 2, 1999, Plaintiffs Mullinax and Pike obtained a home mortgage through Crestar Mortgage Corporation ("Crestar"). Under the terms of this mortgage, Crestar required that Plaintiffs purchase primary mortgage insurance and referred them to Defendants, providers of primary mortgage insurance. Plaintiffs contracted with Defendants to purchase the needed primary mortgage insurance.

Mortgage insurance is often a necessary purchase for mortgagors who wish to borrow more than eighty percent of the property's purchase price. Although the borrower pays for the insurance, mortgage insurance primarily protects the lender by insuring the lender, up to a specified amount, in the event of the borrower's default. However, even though the borrower is not the beneficiary of primary mortgage insurance, he still benefits because the availability of primary mortgage insurance results in lenders who are willing to advance funds based on smaller down payments.

The actual selection of the primary mortgage insurance provider is done, according to Plaintiffs, by the lender, even though the borrower pays for the premiums. (Pls.' Compl. at 3.) Because the lender selects the provider but does not pay for the insurance, Plaintiffs contend that the competitive forces usually working in a free market to lower prices are stifled. Id. Instead of competing for borrowers' business by offering lower prices, Radian allegedly overcharged the borrowers and then used these excess profits to reward the lenders who refer their borrowers to Radian for the purchase of primary mortgage insurance. Radian allegedly provided these incentives through several structured transactions, including four types of independent business transactions that, for the purposes of this opinion, the Court will refer to collectively as "kickbacks." These kickbacks include pool insurance sales, contracts with captive insurance companies, underwriting contracts, and performance notes. In light of their importance in this case, each of these methods warrant further discussion.

The first alleged kickback, supplemental pool insurance ("pool insurance"), is a product that Radian provides to lenders who wish to take advantage of certain federal programs through which the Federal Home Loan Mortgage Corporation ("Freddie Mac") or the Federal National Mortgage Association ("Fannie Mae") purchase pools of insurance policies. In order to participate in the federal programs, however, the lenders must pay an annual guaranty fee to protect the government organizations from losses not covered by the loans' primary mortgage insurance policies. One way to reduce this guaranty fee is to obtain a pool insurance policy that protects the loan pool purchaser from this risk. As a provider of both pool and primary insurance, Radian allegedly rewarded the lenders who referred their primary insurance business to Radian by discounting the lenders' rates on these pool insurance policies. Plaintiffs believe that this discount was an illegal reward for the primary mortgage insurance referrals.²

Secondly, according to Plaintiffs, Radian provided unearned benefits to lenders through captive reinsurance agreements. Such an agreement involves lenders with wholly-owned subsidiaries that are engaged in the business of reinsuring primary mortgage insurance policies. Under a captive reinsurance agreement, the subsidiary and the insurers enter into a contract whereby the subsidiary assumes some of the risk of default that the insurer carries for its primary mortgage insurance policies. In exchange, the insurer pays the subsidiary a part of the borrowers' mortgage insurance premiums. Effectively, this arrangement allows the insurance company to subcontract out a portion of the risk of its primary insurance policies to the lenders. Although Plaintiffs do not allege that the practice itself violates any law, they do contend that Radian paid to the lenders' subsidiaries a price that is higher than the usual price for these services, and this higher price translated into a kickback for the lenders.

In the third type of kickback, Plaintiffs contend that unearned profits are transmitted to the lenders through Radian's underwriting. Although Plaintiffs do not describe this kickback in much detail, their Complaint suggests that, as in the other two kickbacks already discussed, Radian provided services, in this case underwriting services, to the lenders at greatly discounted prices.

Finally, Plaintiffs allege that Radian provided kickbacks to the lenders by funneling them rebates through performance notes. In this scheme, Radian allegedly borrowed from the lender an amount that directly correlated to the value of the lender's home loans that Radian insured. Under the terms of these loans, the variable interest rates were inversely proportional to the actual damages Radian incurred from the insurance policies. Accordingly, the lenders would earn more interest from Radian as its loans insured by Radian's primary mortgage insurance policies became less risky. This practice translated into an interest rate that, Plaintiffs contend, greatly exceeded the market rates, constituting the fourth kickback method.

Upon their belief that Radian engaged in at least these four kickback practices, Plaintiffs brought suit under the federal Real Estate Settlement Procedures Act ("RESPA"), contending that these practices, to the extent they were disguised methods to provide kickbacks and to split fees with the lenders, are activities prohibited by RESPA's anti-kickback provision, 12 U.S.C. § 2607. Plaintiffs request a variety of remedies, including damages and injunctive relief. In response, Radian filed this Motion to Dismiss for Failure to State a Claim [Document # 9], arguing that Plaintiffs' claims were both time-barred and barred by a second federal statute, the McCarran-Ferguson Act. As part of their response to Radian's motion, Plaintiffs filed a Request for Oral Argument [Document # 15]. Plaintiffs' request shall be denied by the Court, because the Court concludes that oral argument would not be helpful in its consideration of this motion. The Court now turns to Radian's Motion to Dismiss.

II. DISCUSSION

To support its Motion to Dismiss, Radian maintains that Plaintiffs' Complaint embodies a total of four deficiencies. The first of these four grounds for Radian's Motion to Dismiss is that the statute under which Plaintiffs bring suit, RESPA, cannot be enforced against Radian because of another federal statute, the McCarran-Ferguson Act. Alternatively, Radian requests dismissal based on its second basis, that Plaintiffs' suit is time-barred by RESPA's statute of limitations. If Radian's argument on either of these two theories is correct, then the Court must dismiss Plaintiffs' case in its entirety. If the Court does not grant Radian's motion in its entirety for these two reasons, Radian requests partial dismissal of Plaintiffs' Complaint for two additional deficiencies. As its first reason for partial dismissal, Radian maintains that Plaintiffs only properly allege a RESPA violation through one kickback method, discounted pool insurance. As a result, Radian requests dismissal of Plaintiffs' claims of violations by the other kickback methods. As its second reason for partial dismissal, Radian asserts that the injunctive relief Plaintiffs request is an unavailable remedy for RESPA plaintiffs. As a result, Radian requests dismissal of Plaintiffs' Complaint to the extent that Plaintiffs request injunctive relief. The Court will consider these arguments in turn after first determining the appropriate standard of review.

A. Standard of Review

This motion comes before the Court as a Rule 12(b)(6) motion to dismiss for failure to state a claim. When deciding a Rule 12(b)(6) motion, the Court reviews the complaint using a relaxed standard, "accepting all well-pleaded allegations in the plaintiff's complaint as true and drawing all reasonable factual inferences from those facts in the plaintiff's favor." Edwards v. City of Goldsboro, 178 F.3d 231, 244 (4th Cir.1999). Accordingly, dismissal is only appropriate when it is "beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80, 84 (1957). Because this motion is designed to test solely "the legal adequacy of the complaint," dismissal based on an...