Steven v. Residential Funding Corp..

• Decision Date: 23 November 2010
• Docket Number: WD 70227,WD 70244,WD 70263.,Nos. WD 70210,s. WD 70210
• Parties: Steven and Ruth MITCHELL, et al., Appellant–Respondents,v.RESIDENTIAL FUNDING CORP., et al., Respondent–Appellants.
• Court: Missouri Court of Appeals

334 S.W.3d 477

Steven and Ruth MITCHELL, et al., Appellant–Respondents,

v.RESIDENTIAL FUNDING CORP., et al., Respondent–Appellants.

Nos. WD 70210

WD 70227

WD 70244

WD 70263.

Missouri Court of Appeals, Western District.

Nov. 23, 2010.As Modified Feb. 1, 2011.Motion for Rehearing and/or Transfer to

Supreme Court Denied Feb. 1, 2011.

Application for Transfer Denied

April 26, 2011.

Roy F. Walters, Counsel, Kip D. Richards, David M. Skeens, J. Michael Vaughan, Garrett M. Hodes, Co–Counsels, Kansas City, MO, for Appellant–Respondents.Gene C. Schaerr, Pro Hac Vice, Kenneth L. Marshall, Counsel, Jefferson City, MO, Randolph G. Willis, Robert T. Adams, Todd W. Ruskamp, Michael K. Underhill, Robert K. Sellers, Jennifer M. McAdam, Co–Counsels, Kansas City, MO, for Respondent–Appellants.Before THOMAS H. NEWTON, P.J., GARY D. WITT, J. and STEPHEN K. WILLCOX, Sp. J.THOMAS H. NEWTON, Presiding Judge.

Residential Funding Company, LLC (Residential), Homecomings Financial, LLC (Homecomings), Household Finance Corp. III (Household), and Wachovia Equity Servicing (Wachovia) (collectively, “Defendants”) appeal from a judgment awarding approximately $104,000,000 in compensatory and punitive damages to a class of consumers (Plaintiffs). Plaintiffs cross appeal, contesting issues of damages. We affirm the trial court's entry of judgment as to compensatory damages; reverse and remand its denial of prejudgment interest on Plaintiffs' past interest payments; reverse the punitive damages award for instructional error, and remand for a new trial as to punitive damages. Plaintiffs' motion for attorney fees on appeal is granted and remanded to the trial court to determine a reasonable amount.

Factual and Procedural Background¹

In November 1999, Steven and Ruth Mitchell acquired a second mortgage loan from Mortgage Capital Resource Corporation (MCR). Prior to closing on the loan, MCR mailed the Mitchells a number of documents, including: (1) a Truth–In–Lending–Act (TILA) disclosure statement, which stated the proposed loan amount and the interest rates; (2) a Good Faith Estimate of Settlement Charges, which listed an estimate of the closing fees; and (3) a Home Ownership and Equity Protection Act (HOEPA) disclosure statement, which stated that the loan would be subject to HOEPA. The Mitchells signed and returned the TILA and HOEPA disclosure statements. MCR sent the Mitchells a closing package, which included a United States Department of Housing and Urban Development Settlement Statement (“HUD–1A”). The HUD–1A statement provided that the Mitchells would be required to pay $3,433 in closing costs for thirteen different fees. The Mitchells signed the closing documents and returned them to MCR. The principal amount of the Mitchells' loan was $21,000 with an interest rate of 10.85%. The Mitchells financed the $3,433 in closing costs as part of the principal. MCR assessed similar types of fees for more than 300 other Missouri loans from 1998 to 2000, and in each case, the loan settlement fees were rolled into the principal.

Residential purchased the Mitchells' loan, acquiring all rights, title, and interest in the real estate deed of trust and promissory note executed by the Mitchells. Residential then conveyed the Mitchell's deed of trust and note to a trust.² Homecomings, a subsidiary of Residential, collected and processed the Mitchells' loan payments, as well as the other relevant payments for loans Residential purchased from MCR. Household and Wachovia entered into similar agreements with MCR on Plaintiffs' loans.

The contract between Residential and MCR for the Mitchells' loan consisted of a Seller Contract and a Master Commitment Letter. The Seller Contract and Master Commitment Letter each referenced Residential's Client Guide, which set forth the terms and conditions for Residential's loan purchase requirements. The Client Guide stated that the client must comply with all state and federal laws and regulations and that Residential would purchase loans in reliance on the client's representations and compliance with the Client Guide. Residential did not independently investigate if the loans it purchased complied with state law. In their loan purchases from MCR, Wachovia and Household also did not verify whether the loans complied with state law. MCR subsequently filed for bankruptcy.

In July 2003, the Mitchells filed suit against Defendants, seeking to certify a class and claiming that MCR charged closing fees to Missouri consumers that were prohibited by Missouri's Second Mortgage Loan Act, §§ 408.231–242 (“MSMLA”).³ The Mitchells alleged that Defendants were liable under the MSMLA for “[c]harging and/or receiving, either directly or indirectly” unlawful fees prohibited by section 408.233, that Defendants were barred from collecting interest on the loans and were liable for all interest collected on the loans, and that Defendants were liable for MCR's actions as the loans' assignees. The trial court certified a class including all individuals who obtained a second mortgage loan on Missouri real property from MCR on or after July 29, 1997. Out of the relevant loans that MCR originated, Residential purchased 248, Household purchased 31,⁴ and Wachovia purchased 23.

Trial was held from December 3, 2007, through January 4, 2008. The trial was bifurcated—the first stage addressed liability for compensatory and punitive damages, and the second stage addressed the amount of punitive damages. At the close of Plaintiffs' case, the trial court directed a partial verdict for Plaintiffs, holding that: (1) MCR violated the MSMLA by charging illegal closing fees; and (2) Residential, Household, and Wachovia (“Assignee Defendants”) were liable for MCR's violations. At the close of the liability phase, the jury found in favor of Plaintiffs and against Defendants. It awarded Plaintiffs $5,421, 706 in compensatory damages, which included compensation for the challenged fees, past interest paid on the loans, and future interest on the loans.⁵ In the second phase of the trial, the jury awarded $99,000,000 in punitive damages—$92,000,000 against Residential, $4,500,000 against Household, and $2,500,000 against Wachovia.⁶ All parties raised post-trial motions. The trial court subsequently reduced compensatory damages against Household, awarded the Mitchells an incentive payment from the common fund, awarded statutory attorney fees against Residential, Household, and Wachovia, and granted Plaintiffs' application for prejudgment interest on the challenged fees but denied their request for prejudgment interest on the past interest. Defendants appeal, raising fifty-three points ⁷ and Plaintiffs cross-appeal, raising two points.

Legal Background

Absent an exception, the maximum annual interest rate that a lender may charge in Missouri is ten percent or the “market rate,” which is calculated according to long-term U.S. government bond yields. § 408.030. A loan that charges more than the maximum interest rate is usurious. “[U]sury is the taking or exacting of interest at a rate in excess of that allowed by law for the loan or use of money.” Redd v. Household Fin. Corp., 622 S.W.2d 255, 257 (Mo.App. E.D.1981).⁸

The MSMLA creates an exception to this normal rule. “Enacted in 1979, the [M]SMLA is a consumer-protection measure designed to regulate the business of making high interest second mortgage loans on residential real estate.” Avila v. Cmty. Bank of Va., 143 S.W.3d 1, 4 (Mo.App. W.D.2003) (internal quotation marks and citation omitted). Although Missouri law prohibits lenders from charging interest of more than ten percent or the market rate, under the MSMLA lenders can bypass this restriction for second mortgage loans, provided they otherwise comply with its restrictions. See Thomas v. U.S. Bank Nat'l Ass'n ND, 575 F.3d 794, 796 n. 1 (8th Cir.2009). Prior to 1998, the MSMLA permitted lenders to charge up to 20.04% on these second mortgage loans, provided the loans otherwise complied with its restrictions. Avila, 143 S.W.3d at 4.

In 1998, the MSMLA was amended to remove the limit on interest rates, but the fee restrictions remained in place.⁹ Adkison v. First Plus Bank, 143 S.W.3d 29, 30 (Mo.App. W.D.2004). The MSMLA permits lenders to charge “rates agreed to by the parties” on these second mortgage loans provided the loans otherwise comply with its restrictions. Id. at 32 (citing § 408.232). The Act thus allows lenders to charge interest rates on second mortgages that exceed Missouri's statutorily prescribed usury rate, but “[t]he limits on closing costs and fees ... act as a trade-off.” Thomas, 575 F.3d at 796 n. 1. If a second mortgage loan does not comply with the restrictions of the MSMLA, it does not benefit from the MSMLA's provisions permitting it to charge a 20.04% interest rate (prior to 1998) or any “rates agreed to by the parties” (after 1998). See id.; § 408.232. The lender is subject to civil and criminal penalty for charging fees not authorized by the Act. Avila, 143 S.W.3d at 4.

Plaintiffs' claims of direct liability against Defendants were brought under the MSMLA. Plaintiffs also alleged that Assignee Defendants were derivatively liable for MCR's violations of the MSMLA through HOEPA and common law. In HOEPA, Congress created a means, under federal law, for a plaintiff to “seek relief from an assignee of a HOEPA loan for all claims (including state law claims) which the plaintiff could have brought against the original creditor.” Bryant v. Mortg. Capital Res. Corp., 197 F.Supp.2d 1357, 1366 (N.D.Ga.2002). It provides that assignees of HOEPA (high interest) loans “are derivatively liable” for the conduct of the assignor by eliminating any “holder in due course” defense for assignees of mortgage loans falling within its definitions. Schwartz v. Bann–Cor Mortg., 197 S.W.3d 168, 179 (Mo.App. W.D.2006) (citing 15 U.S.C. § 1641(d)). In enacting this provision, “Congress intended to place the increased burden of inquiring into the...