Munoz, et al. vs. PHH Mortgage Corp., et al.

Filing 507

ORDER Respecting Defendants' Motion in Limine #3 re 471 , signed by Judge M Miller Baker on 1/7/2022. (Gonzalez, R)

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UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF CALIFORNIA
EFRAIN MUNOZ, individually and on
behalf of all others similarly situated,
et al.,
Plaintiffs,
v.

No. 1:08-cv-00759-MMB-BAM
ORDER RESPECTING
DEFENDANTS’ MOTION
IN LIMINE #3

PHH MORTGAGE CORPORATION,
et al.,
Defendants.

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Defendants’ third motion in limine (ECF 471) seeks “to preclude any ar-

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gument, evidence, or testimony regarding separate government enforcement

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proceedings involving unproven allegations of Real Estate Settlement Proce-

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dures Act non-compliance.” ECF 471, at 1 (“defined term” omitted). Defendants

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express concern that Plaintiffs wish to admit evidence regarding (1) eight sep-

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arate actions, brought by either the Consumer Financial Protection Bureau or

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the Minnesota Department of Commerce against certain non-party mortgage

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insurance companies, that were settled without any finding of or admission of

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liability; and (2) an action the CFPB brought against Defendants that was ul-

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timately dismissed. Defendants assert that the evidence in question is irrele-

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vant and inadmissible hearsay, that evidence of settlements is inadmissible

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under Federal Rule of Evidence 408, and that even if any of the evidence had

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probative value, it is outweighed by its prejudicial effect.

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Defendants argue that none of the evidence is relevant under Rule 401

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because (1) the consent orders entered in some of the proceedings state that

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they do not adjudicate any fact or legal conclusion and that no admission of

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liability was made, ECF 471, at 2–3; (2) a number of the orders do not involve

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any of the defendants in this case and Atrium did not enter into captive rein-

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surance agreements with a number of the parties involved in those cases, id.

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at 3–4; and (3) the D.C. Circuit rejected the CFPB director’s interpretation of

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RESPA and vacated his decision and order, such that it is inappropriate for

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Plaintiffs to ascribe any significance to that decision and order, id. at 6–7.

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Plaintiffs respond that the evidence is plainly relevant because the other

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proceedings “involved nearly the same kickback scheme, same defendants,

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same mortgage insurers, and same captive arrangements at issue here” and

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argue that there is, at most, a “minimal risk of unfair prejudice.” ECF 482, at 1.

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They contend that the CFPB proceeding, in particular, is relevant because an

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administrative law judge determined that there was a RESPA violation and

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the D.C. Circuit’s later holding vacating the CFPB’s decision was based on “a

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narrow issue regarding the interpretation of REPSA” and “did not vacate the

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CFPB’s findings on the basis that no violation of RESPA occurred.” Id. at 3.

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Defendants reply that Plaintiffs seek to place far too much emphasis on

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the ALJ’s decision because it was merely a “recommended decision” that, inter

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alia, placed the burden of proof on the defendants, which is the reverse of the
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proper burden as found by the D.C. Circuit and as applied by the court in this

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case. ECF 492, at 1–2. They also emphasize that the ALJ’s decision was subject

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to de novo review by the CFPB’s director, who rejected some of the ALJ’s con-

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clusions but then proceeded to misapply the law in a different way in a decision

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subsequently vacated by the D.C. Circuit. Id. at 6. In a footnote, Defendants

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further mention that the CFPB’s rules require the director to rule upon any

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ALJ recommendation even if no party appeals, such that “it follows that a rec-

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ommended decision has no binding legal effect unless and until the CFPB Di-

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rector issues a final decision and order adopting that recommendation or oth-

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erwise ruling on it.” Id. at 6 n.6 (emphasis in original).

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The court concludes that Defendants have the better of the argument

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here for several reasons. First, a “recommended decision” is inherently non-

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binding unless the reviewing authority adopts it.

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Second, the D.C. Circuit opinion vacating the CFPB’s decision makes

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clear that the agency erred in just about every way. As relevant here, the ALJ

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had ruled that the Section 8(c) “safe harbor” is an affirmative defense on which

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the defendants bear the burden of proof and that “once the elements of Section

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8(a) or 8(b) have been established, there is a presumption that RESPA has been

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violated,” ECF 471-11, at 70, and the CFPB director then decided the case on

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other grounds that effectively nullified Section 8(c) but also stated that he

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would have agreed with the ALJ that Section 8(c) is an affirmative defense on
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which the defendant would bear the burden of proof, ECF 471-10, at 20. The

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D.C. Circuit noted that the CFPB director wrongly “discarded HUD’s long-

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standing interpretation of Section 8 and, for the first time, pronounced its new

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interpretation” and then applied it retroactively. PHH Corp. v. Consumer Fin.

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Prot. Bureau, 839 F.3d 1, 12 (D.C. Cir. 2016), reinstated in relevant part and

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rev’d in part on other grounds, 881 F.3d 75 (D.C. Cir. 2018) (en banc). The court

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stated that “Section 8(c) specifically bars the aggressive interpretation of Sec-

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tion 8(a) advanced by the CFPB in this case.” Id. at 42. The court further re-

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jected the CFPB’s “affirmative defense” theory: “Proving that the mortgage in-

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surer paid more than reasonable market value—and thus made a disguised

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payment for the referral—is an element of the Section 8 offense that the CFPB

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has the burden of proving by a preponderance of the evidence.” Id. at 49 n.27.

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Thus, both CFPB decisions were predicated on an incorrect interpretation of

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the relevant statute. The court cannot reasonably allow Plaintiffs to refer to

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decisions that relied on an incorrect interpretation of the very statutory provi-

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sion that governs the issue to be tried in this case.

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Third, it is true that the Ninth Circuit has recognized that prior adjudi-

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cations are “relevant evidence and therefore admissible in a later federal suit

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so long as the judgment has some tendency to prove a fact in issue.” Enquist v.

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Or. Dep’t of Agric., 478 F.3d 985, 1009 (9th Cir. 2007). In the ensuing para-

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graphs, however, the court also recognized that evidence of prior judgments or
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verdicts is often excluded because of the risk of prejudice—“[a] jury is likely to

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give a prior verdict against the same defendant more weight than it warrants”

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and “admission of a prior verdict creates the possibility that the jury will defer

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to the earlier result.” Id. at 1009–10 (brackets in original) (quoting Coleman

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Motor Co. v. Chrysler Corp., 525 F.2d 1338, 1351 (3d Cir. 1975)). The Ninth

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Circuit expressed concern about the “substantial risk that the jury would im-

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port the whole verdict of liability from the prior proceeding.” Id. at 1010.

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Similarly, the Ninth Circuit affirmed a district court’s exclusion of evi-

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dence about an SEC injunction against a defendant in a prior administrative

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proceeding that terminated in a consent decree. The court found that “there is

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a clear risk of unfair prejudice. The consent decree was not evidence of culpa-

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bility, but admitting the settlement into evidence would run the risk of ‘per-

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mitt[ing] the jurors to succumb to the simplistic reasoning that if the defendant

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was accused of the conduct, it probably or actually occurred.’ ” U.S. SEC v.

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Jensen, 835 F.3d 1100, 1116 (9th Cir. 2016) (alteration in original) (quoting

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United States v. Bailey, 696 F.3d 794, 801 (9th Cir. 2012)). The same risk is

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present here, and Plaintiffs’ own briefing essentially confirms that they want

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to invite the jurors to employ exactly the sort of reasoning about which the

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Jensen court expressed concern. See ECF 482, at 7 (“[T]he enforcement action

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and this suit involve Defendants engaging in the exact same illegal conduct via

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agreements with the same mortgage insurers involved here.”).
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The obvious risk of prejudice to Defendants if Plaintiffs are allowed to

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introduce the evidence of past proceedings is sufficient reason to exclude that

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evidence under Rule 403. The court therefore need not address the parties’ ar-

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guments about whether the evidence is inadmissible hearsay, whether the

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public records exception applies, and whether Rule 408 applies.

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Defendants’ motion in limine #3 is therefore GRANTED, and it is hereby

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ORDERED that Plaintiffs shall not attempt to admit evidence of, or otherwise

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refer to, (1) the eight separate actions brought by the CFPB or the Minnesota

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Department of Commerce against mortgage insurance companies that resulted

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in settlements and (2) the action brought by the CFPB against Defendants.

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Dated: January 7, 2022

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/s/ M. Miller Baker
M. Miller Baker, Judge 1

Judge of the United States Court of International Trade, sitting by designation.

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