Munoz v. PHH Mortg. Corp., No. 1:08-cv-00759-DAD-BAM

Decision Date11 August 2020
Docket NumberNo. 1:08-cv-00759-DAD-BAM
Citation478 F.Supp.3d 945
Parties Efrain MUNOZ, individually and on behalf of all others similarly situated, et al., Plaintiffs, v. PHH MORTGAGE CORPORATION, et al., Defendants.
CourtU.S. District Court — Eastern District of California

Alan R. Plutzik, Jennifer S. Rosenberg, Bramson, Plutzik, Mahler & Birkhaeuser, Walnut Creek, CA, Donna Siegel Moffa, PHV, Pro Hac Vice, James Maro, PHV, Pro Hac Vice, Johnston Whitman, PHV, Lisa M. Port, PHV, Pro Hac Vice, Natalie Lesser, PHV, Pro Hac Vice, Amanda R. Trask, PHV, Pro Hac Vice, Joseph H. Meltzer, PHV, Joshua A. Materese, PHV, Pro Hac Vice, Terence S. Ziegler, PHV, Pro Hac Vice, Kessler Topaz Meltzer and Check LLP, Radnor, PA, Eric G. Calhoun, PHV, Calhoun & Associates, Richardson, TX, Paul Anthony Rigali, Stephen Gerard Larson, Larson O'Brien LLP, Los Angeles, CA, for Plaintiff Efrain Munoz.

Alan R. Plutzik, Jennifer S. Rosenberg, Bramson, Plutzik, Mahler & Birkhaeuser, Walnut Creek, CA, Donna Siegel Moffa, PHV, Pro Hac Vice, James Maro, PHV, Pro Hac Vice, Johnston Whitman, PHV, Lisa M. Port, PHV, Pro Hac Vice, Natalie Lesser, PHV, Pro Hac Vice, Joseph H. Meltzer, PHV, Joshua A. Materese, PHV, Pro Hac Vice, Terence S. Ziegler, PHV, Pro Hac Vice, Kessler Topaz Meltzer and Check LLP, Radnor, PA, Eric G. Calhoun, PHV, Calhoun & Associates, Richardson, TX, Paul Anthony Rigali, Stephen Gerard Larson, Larson O'Brien LLP, Los Angeles, CA, for Plaintiffs Leona Lovette, Stephanie Melani.

Johnston Whitman, PHV, Lisa M. Port, PHV, Pro Hac Vice, Natalie Lesser, PHV, Pro Hac Vice, Joshua A. Materese, PHV, Pro Hac Vice, Kessler Topaz Meltzer & Check, LLP, Radnor, PA, Paul Anthony Rigali, Stephen Gerard Larson, Larson O'Brien LLP, Los Angeles, CA, for Plaintiff Iris Grant.

Donna Siegel Moffa, PHV, Johnston Whitman, PHV, Lisa M. Port, PHV, Pro Hac Vice, Natalie Lesser, PHV, Pro Hac Vice, Terence S. Ziegler, PHV, Joshua A. Materese, PHV, Pro Hac Vice, Kessler Topaz Meltzer and Check LLP, Radnor, PA, Paul Anthony Rigali, Stephen Gerard Larson, Larson O'Brien LLP, Los Angeles, CA, for Plaintiffs John C. Hoffman, Daniel M. Maga, II.

ORDER ON PARTIESMOTIONS TO STRIKE, CROSS-MOTIONS FOR SUMMARY JUDGMENT AND ON DEFENDANTS’ MOTION FOR CLASS DECERTIFICATION

Dale A. Drozd, UNITED STATES DISTRICT JUDGE

INTRODUCTION

Plaintiffs allege in this certified class action that defendants PHH Corporation ("PHH Corp."), PHH Mortgage Corporation ("PHH Mortgage"), PHH Home Loans, LLC ("PHH Home Loans") (collectively, "PHH"), and Atrium Insurance Corporation ("Atrium") (collectively, the "defendants") violated the anti-kickback provisions of the Real Estate Settlement Procedures Act ("RESPA") by requiring mortgage insurers ("MIs") to which PHH had referred private mortgage insurance ("PMI") business to enter into captive reinsurance agreements with Atrium, a reinsurer owned by PHH. According to plaintiffs, this requirement allowed defendants to extract kickbacks from those MIs for the PMI business that PHH had referred them.

Both parties have moved for summary judgment (Doc. Nos. 340, 342) and to strike each other's expert witnesses. (Doc. Nos. 336, 350, 365.) Defendants also move for class decertification. (Doc. No. 339.) The motions came before the court for hearing back on December 20, 2016.1 (Doc. No. 384.) Attorneys Donna Siegel Moffa and Terence Ziegler appeared at that time for plaintiffs; Edward Ciolko, for intervenor Marcella Villalon; and Joseph Genshlea, David Souders, and Michael Trabon, for defendants. (Doc. No. 384.) For the following reasons, the court will grant in part plaintiffsmotion for summary judgment in the manner described below. All other motions will be denied.

BACKGROUND
A. RESPA and Mortgage Insurance

"Passed by Congress in 1974, RESPA broadly regulates various aspects of real estate transactions."

In re Zillow Grp., Inc. Sec. Litig. , No. 2:17-cv-01387-JCC, 2018 WL 4735711, at *5 (W.D. Wash. Oct. 2, 2018) (citing 12 U.S.C. §§ 2601 et seq. ). In passing RESPA, Congress sought to combat the "unnecessarily high settlement charges caused by certain abusive practices" by eliminating kickbacks and referral fees that inflate the cost of real estate settlement services. 12 U.S.C. § 2601(a), (b)(2). Specifically, § 8(a) of RESPA prohibits giving or accepting "any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, [in relation to the referral of] a real estate settlement service involving a federally related mortgage loan." Real Estate Settlement Procedures Act § 8, 12 U.S.C. § 2607 (2012).

PMI is a real estate settlement service that is regulated pursuant to RESPA. See Munoz v. PHH Corp. , 659 F. Supp. 2d 1094, 1098 (E.D. Cal. 2009) ; Kay v. Wells Fargo & Co. , 247 F.R.D. 572, 576 (N.D. Cal. 2007). When a borrower purchases a home with a mortgage but puts less than 20% down, the mortgage lender generally requires the borrower to purchase PMI from a MI to guard against the risk of default. (Doc. Nos. 362-1, Pls.’ Statement of Undisputed Facts ("PSUF") at ¶¶ 7–9; 342-2, Defs.’ Statement of Undisputed Facts ("DSUF") at ¶ 40.) In most cases, the lender directs the borrower to one of its preferred MIs, though some borrowers have the option to choose their own. (PSUF at ¶ 11; Doc. No. 352-1, Defs.’ Resp. to PSUF ("DRF") at ¶ 11.) Although the lender is the primary beneficiary of PMI, the borrower pays the PMI premiums. (PSUF at ¶ 10; DSUF at ¶ 10.) As mortgages proliferated in number, size, and riskiness throughout the 2000s, MIs began entering into reinsurance agreements to transfer some of their risk to a reinsurer. (See, e.g. , PSUF. at ¶ 13; DSUF at ¶¶ 26–27; DRF at ¶ 17.) In response, some mortgage lenders, including PHH, created reinsurance affiliates to provide reinsurance to MIs. (PSUF at ¶¶ 13, 31–33; DSUF at ¶¶ 26–27.) These affiliates often operated on the basis of captive reinsurance agreements wherein a MI agrees to purchase reinsurance from a specific reinsurer, often in exchange for referrals of PMI business. (PSUF at ¶¶ 13, 17.)

Plaintiffs allege that defendants’ captive reinsurance agreements were merely a means for defendants to extract kickbacks from the MIs to which defendants had referred PMI business, and that such an arrangement violated § 8 of RESPA. (See Doc. No. 96, First Am. Compl. ("FAC") at 2–3.)

B. The Parties

Defendant PHH is a residential mortgage originator and servicer that operates in the United States. (PSUF at ¶¶ 1–2.) Atrium, a PHH subsidiary, provides reinsurance exclusively for PMI issued in connection with loans originated or purchased by PHH.2 (PSUF at ¶¶ 3–4; DSUF at ¶ 1.) During the period in question, Atrium had reinsurance agreements with the following four MIs: AIG United Guaranty Mortgage Insurance Company ("UGI"), Genworth Mortgage Insurance Company ("Genworth"), Radian Guaranty Inc. ("Radian"), and CMG Mortgage Insurance Company ("CMG") (collectively, the "captive MIs"). (PSUF at ¶ 16; DSUF at ¶ 8.)

The named plaintiffs represent a class of people who

obtained residential mortgage loans originated and/or acquired by PHH and/or its affiliates on or after June 2, 2007, and, in connection therewith, purchased private mortgage insurance and whose loans were included within PHH's captive mortgage reinsurance arrangements (the "Class").3

Munoz v. PHH Corp. , No. 1:08-cv-0759-AWI-BAM, 2013 WL 2146925, at *26 (E.D. Cal. May 15, 2013) (" Munoz I "), findings and recommendations adopted , No. 1:08-cv-0759-AWI, 2015 WL 3703972 (E.D. Cal. June 11, 2015).

C. The Captive Reinsurance Agreements between Atrium and the Four Captive MIs
1. How the Captive Reinsurance Agreements Worked

The captive reinsurance agreements at issue (the "CRAs") were structured as excess-of-loss arrangements, meaning that Atrium provided reinsurance coverage to pools of loans called "books," typically categorized by "book year," but only paid out claims after any losses exceeded a set percentage called the "attachment point," and only up to a set point called the "detachment point." (DSUF at ¶¶ 9–10.) The risk band contemplated by the CRAs ranged from an attachment point of 2.25–4% of a loan to a detachment point of 6.25–14%. (Id. at ¶ 12.) Loans were categorized by the year in which they closed, and the risk of each book year reflected various factors such as the "type of loans in the pool, as well as external market conditions, such as the employment rate, inflation, housing prices, and other economic factors." (Id. at ¶ 10.)

In exchange for reinsurance coverage by Atrium, the captive MIs ceded to Atrium between 25–45% of the gross premiums that the MIs had collected from the underlying PMI (i.e., the premiums paid by borrowers to the MIs). (Id. at ¶ 12.) Atrium then placed those proceeds into cross-collateralized4 trust accounts for each MI from which claims could be satisfied. (PSUF at ¶¶ 34–36; DSUF at ¶ 11.) Atrium invested the funds in those accounts and, assuming certain conditions such as minimum capital requirements were met, was allowed to collect dividends and withdraw funds from the accounts. (PSUF at ¶¶ 31, 45.)

The CRAs with Genworth, Radian, and CMG included additional liability-limiting provisions that protected the trust accounts from claims arising from other reinsurance agreements and limited Atrium's liability to the funds therein. (See Doc. Nos. 362-2 at 170; 362-3 at 20; 362-3 at 76.) For example, in an analysis of the Genworth CRA, Atrium wrote:

Atrium supports the reinsurance with capital and the ceded net written premium deposited into a trust. If trust funds are depleted such that Atrium's capital is below the required capital, Atrium can infuse additional funds in order to continue reinsuring business [Atrium must maintain total capital of at least 10% of reinsured risk (i.e. a risk to capital ratio of 10 to 1)]. However, Atrium has no liability beyond the funds available in the trust.

(Doc. No. 362-4 at 238 (brackets in original).) During the time the CRAs were in effect,...

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