BURROUGHS et al v. PHH MORTGAGE CORPORATION

Filing 34

OPINION. Signed by Judge Noel L. Hillman on 4/7/2016. (tf, )

UNITED STATES DISTRICT COURT
DISTRICT OF NEW JERSEY

JOSEPH BURROUGHS and LESLEE
BURROUGHS, individually and
on behalf of all others
similarly situated, et al.,

Civil No. 15-6122 (NLH/KMW)

OPINION
Plaintiffs,
v.
PHH MORTGAGE CORPORATION,
Defendant.

APPEARANCES:
PETER A. MUHIC
SAMANTHA E. JONES
TYLER STEPHEN GRADEN
DONNA SIEGEL MOFFA
KESSLER TOPAZ MELTZER & CHECK, LLP
280 KING OF PRUSSIA RD
RADNOR, PA 19087
On behalf of plaintiffs
PETER J. LEYH
BRAVERMAN KASKEY P.C.
ONE LIBERTY PLACE, 56TH FLOOR
1650 MARKET STREET
PHILADELPHIA, PA 19103-7334
MITCHEL H. KIDER
DAVID M. SOUDERS
BRUCE A. ALEXANDER
WEINER BRODSKY KIDER PC
1300 19TH STREET, N.W., FIFTH FLOOR
WASHINGTON, D.C. 20036
On behalf of defendant

HILLMAN, District Judge
This case involves plaintiffs’ putative class action claims
against their mortgage servicer, defendant PHH Mortgage
Corporation, for its “force-placed insurance” (“FPI”) or
“lender-placed insurance” (“LPI”) policies.

Plaintiffs’ claims

are familiar to this Court, because pending before the Court is
an action of two consolidated cases that also involves claims
against PHH for its FPI/LPI policies: Gallo v. PHH Mortgage
Corporation, Civ. A. No. 12-1117, consolidated with Finch v. PHH
Mortgage, Civ. A. No. 14-1694.

That matter, also a putative

class action, is asserted by plaintiffs who are citizens of
Pennsylvania (Gallo) and California and Illinois (Finch).
Plaintiffs in this case are citizens of Florida.
The claims here mirror those in Gallo/Finch, 1 and PHH had
previously moved to dismiss the complaints in both of those
cases prior to consolidation.

Arguments similar to the ones PHH

has asserted in this case were asserted by PHH in their prior
motions.

The Court denied in part PHH’s motions to dismiss, and

permitted the breach of contract/implied covenant claims, breach
of fiduciary duty claims, and RICO conspiracy claims to proceed

1

Gallo involves only state law breach of contract claims, while
Finch also includes RICO claims and related state law fraudbased claims.
2

in Gallo/Finch.
PHH’s primary basis for dismissal of the Burroughs’ claims
is that the filed rate doctrine bars all their claims.
advanced the same argument in the Gallo case.

PHH

As the Court will

fully discuss below, because the law in the Third Circuit has
not changed as to the application of filed rate doctrine in the
context of plaintiffs’ claims against PHH, the Court will deny
PHH’s motion on the same basis expressed in Gallo, which has
been reaffirmed in several other cases in this District and
Circuit.

The Court will also deny PHH’s motion to dismiss on

the other grounds it has presented in support of dismissal, such
as judicial estoppel and statute of limitations.
BACKGROUND
Plaintiffs, Joseph and Leslee Burroughs, filed their
putative class action complaint against defendant, PHH Mortgage
Corporation, arising out of PHH’s FPI or LPI policies.
Plaintiffs explain in their complaint that as a condition to
funding a borrower’s loan, mortgage lenders typically require
that borrowers purchase and agree to maintain hazard and, if
necessary, wind insurance on the secured property.

When

borrowers fail to maintain their hazard or required wind
insurance policies, mortgage servicers purchase FPI or LPI
policies, covering the secured property.
3

Plaintiffs contend that PHH has a practice of purchasing
force-placed hazard and wind insurance through the subsidiaries
of Assurant, Inc. pursuant to agreements that return a financial
benefit to PHH.

Plaintiffs claim that “PHH acted together with

Assurant Specialty Property to exploit PHH’s ability to forceplace hazard and wind insurance in order to reap additional,
unjustified profits in the form of payments disguised as
‘expense reimbursements,’ below-market-rate portfolio tracking,
subsidized mortgage servicing, and other forms of consideration
at the expense of borrowers whose hazard or wind insurance was
force-placed.

These charges were not legitimately related to

the cost of the force-placed insurance or to the legitimate
purpose for which force-placed insurance may be purchased –
which is to protect the lender’s interest in the property.”
(Compl. ¶ 3.)
Based on these, and other, allegations, plaintiffs assert
four counts against PHH:

Violation of the Racketeer Influenced

and Corrupt Organizations Act, 18 U.S.C. §§ 1961-1968 (Counts I
and II), breach of contract, including breach of the implied
covenant of good faith and fair dealing (Count III), and breach
of fiduciary duty/misappropriation of funds held in trust (Count
IV).

4

DISCUSSION
A.

Subject Matter Jurisdiction

This Court has jurisdiction over this matter pursuant to
the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2) (“CAFA”).
Plaintiffs, who are citizens of Florida, and many members of the
Class are citizens of different states than PHH, which is New
Jersey corporation with its principal place of business in New
Jersey.

The amount in controversy in this action exceeds

$5,000,000, and there are more than 100 members in the proposed
Class.
B.

Standard for Motion to Dismiss

When considering a motion to dismiss a complaint for
failure to state a claim upon which relief can be granted
pursuant to Federal Rule of Civil Procedure 12(b)(6), a court
must accept all well-pleaded allegations in the complaint as
true and view them in the light most favorable to the plaintiff.
Evancho v. Fisher, 423 F.3d 347, 351 (3d Cir. 2005).

It is well

settled that a pleading is sufficient if it contains “a short
and plain statement of the claim showing that the pleader is
entitled to relief.”

Fed. R. Civ. P. 8(a)(2).

Under the

liberal federal pleading rules, it is not necessary to plead
evidence, and it is not necessary to plead all the facts that
serve as a basis for the claim.

Bogosian v. Gulf Oil Corp., 562
5

F.2d 434, 446 (3d Cir. 1977).

However, “[a]lthough the Federal

Rules of Civil Procedure do not require a claimant to set forth
an intricately detailed description of the asserted basis for
relief, they do require that the pleadings give defendant fair
notice of what the plaintiff’s claim is and the grounds upon
which it rests.”

Baldwin Cnty. Welcome Ctr. v. Brown, 466 U.S.

147, 149-50 n.3 (1984) (quotation and citation omitted).
A district court, in weighing a motion to dismiss, asks
“‘not whether a plaintiff will ultimately prevail but whether
the claimant is entitled to offer evidence to support the
claim.’”

Bell Atlantic v. Twombly, 550 U.S. 544, 563 n.8 (2007)

(quoting Scheuer v. Rhoades, 416 U.S. 232, 236 (1974)); see also
Ashcroft v. Iqbal, 556 U.S. 662, 684 (2009) (“Our decision in
Twombly expounded the pleading standard for ‘all civil actions’
. . . .”); Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir.
2009) (“Iqbal . . . provides the final nail-in-the-coffin for
the ‘no set of facts’ standard that applied to federal
complaints before Twombly.”).
Following the Twombly/Iqbal standard, the Third Circuit has
instructed a two-part analysis in reviewing a complaint under
Rule 12(b)(6).

First, the factual and legal elements of a claim

should be separated; a district court must accept all of the
complaint's well-pleaded facts as true, but may disregard any
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legal conclusions.
S. Ct. at 1950).

Fowler, 578 F.3d at 210 (citing Iqbal, 129
Second, a district court must then determine

whether the facts alleged in the complaint are sufficient to
show that the plaintiff has a “‘plausible claim for relief.’”
Id. (quoting Iqbal, 129 S. Ct. at 1950).

A complaint must do

more than allege the plaintiff's entitlement to relief.

Id.;

see also Phillips v. Cnty. of Allegheny, 515 F.3d 224, 234 (3d
Cir. 2008) (stating that the “Supreme Court's Twombly
formulation of the pleading standard can be summed up thus:
‘stating . . . a claim requires a complaint with enough factual
matter (taken as true) to suggest’ the required element.

This

‘does not impose a probability requirement at the pleading
stage,’ but instead ‘simply calls for enough facts to raise a
reasonable expectation that discovery will reveal evidence of’
the necessary element”).

A court need not credit either “bald

assertions” or “legal conclusions” in a complaint when deciding
a motion to dismiss.

In re Burlington Coat Factory Sec. Litig.,

114 F.3d 1410, 1429-30 (3d Cir. 1997).

The defendant bears the

burden of showing that no claim has been presented.

Hedges v.

U.S., 404 F.3d 744, 750 (3d Cir. 2005) (citing Kehr Packages,
Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1409 (3d Cir. 1991)).
A court in reviewing a Rule 12(b)(6) motion must only
consider the facts alleged in the pleadings, the documents
7

attached thereto as exhibits, and matters of judicial notice.
S. Cross Overseas Agencies, Inc. v. Kwong Shipping Grp. Ltd.,
181 F.3d 410, 426 (3d Cir. 1999).

A court may consider,

however, “an undisputedly authentic document that a defendant
attaches as an exhibit to a motion to dismiss if the plaintiff’s
claims are based on the document.”

Pension Benefit Guar. Corp.

v. White Consol. Indus., Inc., 998 F.2d 1192, 1196 (3d Cir.
1993).

If any other matters outside the pleadings are presented

to the court, and the court does not exclude those matters, a
Rule 12(b)(6) motion will be treated as a summary judgment
motion pursuant to Rule 56.
C.

Fed. R. Civ. P. 12(b).

Analysis

As noted above, PHH’s primary argument for the dismissal of
plaintiffs’ claims is that the filed rate doctrine bars their
claims.

“The filed rate doctrine provides that a rate filed

with and approved by a governing regulatory agency is
unassailable in judicial proceedings brought by ratepayers.”
Alston v. Countrywide Fin. Corp., 585 F.3d 753, 763 (3d Cir.
2009).

PHH argues that because plaintiffs’ claims are based on

the premise that they were assessed too much for LPI, such
claims are barred because the rates PHH charged were approved by
a governmental regulatory agency.
PHH acknowledges that this Court, following Third Circuit
8

precedent, rejected that same argument in Gallo.

In Gallo, this

Court followed Alston, which made the distinction between claims
that challenged the rate the mortgage servicer charged for LPI
and claims that challenged the mortgage servicer’s allegedly
unlawful conduct rather than the rate itself.

Gallo v. PHH

Mortgage Corp., 916 F. Supp. 2d 537, 548 (D.N.J. 2012) (“Under
Alston, which is controlling precedent in this Circuit, the
Amended Complaint clearly complains of Defendant PHH Mortgage's
conduct in allegedly improperly receiving various financial
benefits through the force-placed insurance process, and cannot
fairly be read as a direct challenge to the reasonableness of
the rates charged by the force-place insurance providers, none
of whom are even parties to this suit.”).
PHH argues, however, that this Court should now follow more
recent caselaw from other circuits.

Specifically, PHH argues

that the Court should follow the reasoning of the Second Circuit
in Rothstein v. Balboa Ins. Co., 794 F.3d 256 (2d Cir. 2015).
In Rothstein, the Second Circuit explained that the filed rate
doctrine “reaches both federal and state causes of action and
protects rates approved by federal or state regulators.”
Rothstein, 794 F.3d at 261 (citation omitted).

The Second

Circuit found that the application of the filed rate doctrine
“does not depend on the nature of the cause of action the
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plaintiff seeks to bring or the culpability of the defendant's
conduct or the possibility of inequitable results,” and that
“[w]henever a ratepayer's claim against a rate filer would
implicate either the nonjusticiability principle or the
nondiscrimination principle, it is barred.”

Id. at 261-62

(citations omitted).
PHH argues that this Court should apply the Second
Circuit’s broad application of the filed rate doctrine to this
case.

It is understandable why PHH prefers the Second Circuit’s

application of the filed rate doctrine over the Third Circuit’s.
But, as pointed out by a district court in the Second Circuit,
“‘Rothstein ... is in direct tension with the prevailing
precedent in the Third Circuit, Alston.’”

Lyons v. Litton Loan

Servicing LP, --- F. Supp. 3d ---, 2016 WL 415165, at *13
(S.D.N.Y. Feb. 2, 2016) (quoting Weiss v. Bank of Am. Corp., –––
F. Supp. 3d –––, 2015 WL 9304506, at *10 (W.D. Pa. Dec. 22,
2015)).

Alston succinctly held, “It is absolutely clear that

the filed rate doctrine simply does not apply [where the
plaintiffs] challenge [the mortgage servicer’s] allegedly
wrongful conduct, not the reasonableness or propriety of the
rate that triggered that conduct.”

Alston, 585 F.3d at 765.

This Court will decline PHH’s invitation to depart from the
binding authority of the Third Circuit, which permits
10

plaintiffs’ claims to proceed, as they have in numerous similar
cases since the Alston decision.

See, e.g., Weiss v. Bank of

Am. Corp., --- F. Supp. 3d ---, No. 15-62, 2015 WL 9304506, at
*10 (W.D. Pa. Dec. 22, 2015); Santos v. Carrington Mortgage
Servs., LLC, 2015 WL 4162443, at *2 (D.N.J. July 8, 2015);
DiGiacomo v. Statebridge Co., LLC, 2015 WL 3904594, at *7
(D.N.J. June 25, 2015); Laffan v. Santander Bank, N.A., 2014 WL
2693158, at *4 (E.D. Pa. June 12, 2014); Xi Chen Lauren v. PNC
Bank, N.A., 2013 WL 5565511, at *5 (W.D. Pa. Oct. 8, 2013).
Beyond precedent, however, the Court finds that the Third
Circuit’s view of the filed rate doctrine in this type of case
is the more sound application.

The Second Circuit’s fear that

judicial action would undermine agency rate-making authority
without the filed rate doctrine bar, see Rothstein, 794 F.2d at
262, is not a concern when a mortgagee challenges his mortgage
servicer’s relationship with the insurer and their scheme of
hiding the nature of fees under the guise of regulatory-approved
rates.

Regardless of the rate charged for LPI, what is being

challenged here and in similar cases is not the rate itself, but
rather the mortgage servicer’s alleged exploitation of its
ability to force-place hazard insurance in order to reap
additional, unjustified profits in the form of payments
disguised as purportedly legitimate fees.
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The protection of the

filed rate doctrine should not be extended to shelter mortgage
servicers and their co-conspirator insurers from liability for
their fraud, if such fraud can be proven.

Therefore, PHH’s

motion to dismiss plaintiffs’ claims based on the filed rate
doctrine must be denied.
PHH’s other bases for the dismissal of plaintiffs’ claims
can be quickly resolved.

First, PHH’s argument that Mr.

Burroughs’ claims are barred by judicial estoppel principles
because plaintiff did not reveal his current claims in his 2010
bankruptcy filing is without merit.

When taken as true, PHH

assessed LPI fees over the course of several years against
plaintiffs at the time they were unaware that PHH and the
insurer had allegedly conspired to charge fees unrelated to the
cost or purpose of LPI.

The party who has defrauded another

cannot use the success of that fraud as a sword to defeat the
victim’s claims against it.
Second, PHH’s contention that plaintiffs’ claims regarding
forced-placed wind insurance are barred by the applicable
statutes of limitations is unavailing.

Even though the initial

charge for forced-placed wind insurance was before the four and
five year statute of limitations for their RICO, breach of
contract, and breach of fiduciary duty claims, PHH charged
plaintiffs forced-placed wind insurance fees several times
12

within the applicable limitations periods for their claims,
which is sufficient to defeat a time-bar defense to those
claims.

See Cetel v. Kirwan Fin. Grp., Inc., 460 F.3d 494, 506

(3d Cir. 2006) (civil RICO actions are subject to a four-year
statute of limitations) 2; City of Quincy v. Womack, 60 So. 3d
1076, 1077 (Fla. Dist. Ct. App. 2011) (“[T]he City contends that
the appellee's [breach of contract] lawsuit was not filed within
the limitations time allowed under section 95.11(2)(b), Florida
Statutes [Five year statute of limitations for breach of
contract]. . . .

In asserting that the limitations period had

expired, the City ignores the continuing nature of its
obligations under the contract, and that its ongoing
nonperformance constituted a continuing breach while the
contract remained in effect.

The appellee's cause of action was

not limited to the City's initial breach, and the statute of
limitations had not expired when the appellee filed his lawsuit
which encompassed the City's continuing breach.”); HalkeyRoberts Corp. v. Mackal, 641 So. 2d 445, 447 (Fla. Dist. Ct.
App. 1994) (explaining that breach of fiduciary duty is an
intentional tort and the four-year statute of limitations

2

A pattern of racketeering activity requires at least two
predicate acts of racketeering. 18 U.S.C. § 1961(5). At least
two alleged predicate acts by PHH occurred within the four year
period.
13

applies, and also explaining that for continuing torts, the
limitations period runs from the date the tortious conduct
ceases). 3
Third, despite PHH’s argument to the contrary, plaintiffs
have properly pleaded the causation element to support their
RICO claim. 4

PHH argues that because it did not cause plaintiffs

3

In addition to not being barred by the 4-year statute of
limitations, plaintiffs’ breach of fiduciary duty count is
properly pleaded and can proceed. See, e.g., Edwards v. Green
Tree Servicing, LLC, No. 5:15CV148-MW/GRJ, 2015 WL 6777463, at
*8 (N.D. Fla. Oct. 22, 2015) (citations omitted):
Generally, in Florida, lenders and borrowers enter
into an arms-length relationship, and the lender does not
owe a fiduciary duty to the borrower. However, a fiduciary
relationship may arise under “special circumstances” where
the bank knows or has reason to know that the customer is
placing trust and confidence in the bank and is relying on
the bank so to counsel and inform him. These special
circumstances include instances where the lender (1) takes
on extra services for a customer, (2) receives any greater
economic benefit than from a typical transaction, or (3)
exercises extensive control.
Here, the Edwards have adequately alleged all three
“special circumstances” giving rise to a fiduciary duty.
Green Tree took on the extra service of paying insurance
premiums on a monthly basis out of the escrow account; it
received an unusually great economic benefit through the
kickbacks; and it exercised extensive control over the
escrow proceeds, and had near-unfettered discretion to
choose the force-placed insurance provider. From these
facts, it is certainly plausible at this stage in the
litigation that a fiduciary relationship existed, and that
Green Tree breached it by selecting an overpriced insurance
policy in order to line its own pockets.
4

To prove a claim under the federal civil RICO statute, a
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to fail to maintain their own hazard and wind insurance, which
is the trigger for PHH to implement the forced-placed insurance
provision in their contract, plaintiffs cannot maintain their
RICO claim.

Plaintiffs do not argue that PHH caused them to

lapse on their own hazard and wind insurance, but instead that
PHH’s LPI scheme caused them to unwittingly pay for fees that
were not related to the legitimate purpose for which forceplaced insurance was purchased.

Plaintiffs’ allegations

concerning causation are sufficient to survive PHH’s motion to
dismiss. 5

See Santos v. Carrington Mortgage Servs., LLC, 2015 WL

plaintiff must show: (1) conduct (2) of an enterprise (3)
through a pattern (4) of racketeering activity. See 18 U.S.C. §
1962(c); Sedima, S.P.R.L, v. Imrex Company, Inc., 473 U.S. 479,
496 (1985). A RICO enterprise exists only where (1) there is
“an ongoing organization, formal or informal”; (2) “the various
associates [of the enterprise] function as a continuing unit”;
and (3) the enterprise exists “separate and apart from the
pattern of activity in which it engages.” United States v.
Turkette, 452 U.S. 576, 583 (1981). A pattern of racketeering
activity will exist only where there are at least two predicate
acts of racketeering. See 18 U.S.C. § 1961(5); Sedima, 473 U.S.
at 496 n.14. ). The predicate acts of racketeering may include
federal mail fraud under 18 U.S.C. § 1341 or federal wire fraud
under 18 U.S.C. § 1343. Plaintiffs claim that PHH mailed them
letters regarding LPI that intentionally misrepresented the
nature of the charges, which went beyond the simple cost of
insuring their property.
5

Plaintiffs’ RICO conspiracy claim may also proceed because
plaintiffs have adequately pleaded a RICO violation claim. See
Rehkop v. Berwick Healthcare Corp., 95 F.3d 285, 290 (3d Cir.
1996) (citing Lightning Lube, Inc. v. Witco Corp., 4 F.3d 1153
(3d Cir. 1993)) (explaining that in order to state a violation
of section 1962(d) for conspiracy to violate subsection (a),
15

4162443, at *11 (D.N.J. July 8, 2015) (“Taking the complaint's
factual allegations as true, these statements [in the mortgage
servicer’s letters to its customers] fail to mention the
kickback scheme as the true reason for the higher cost, a
material omission that could constitute a scheme to defraud,
furthered by use of the mails.”).
Finally, PHH’s argument that the McCarran Ferguson Act bars
plaintiffs’ RICO claims is unsupportable.

The MFA requires that

no federal statute “be construed to invalidate, impair, or
supersede any law enacted by any State for the purpose of
regulating the business of insurance ... unless such Act
specifically relates to the business of insurance.”
1012(b).

15 U.S.C. §

To explain why the MFA does not apply to plaintiffs’

RICO claims here, this Court follows the comprehensive decision
in Montoya v. PNC Bank, N.A., 94 F. Supp. 3d 1293, 1315 (S.D.
Fla. 2015), which found that the same claims did not relate to
the business of insurance and that the application of RICO would
not conflict with Florida insurance regulations.
CONCLUSION
Putative class actions based on mortgage servicers’ forced-

(b), or (c), the plaintiff must establish that the defendant
violated one of those subsections).

16

placed insurance practices appear to be proliferating throughout
the nation’s courts, and these cases’ viability seems to depend,
in part, on the jurisdiction in which they are filed.

Indeed,

this is evidenced by the numerous “supplemental authority”
letters filed by the parties during the pendency of the motion
to dismiss.

This case, like several others before this Court

and in this district, have been permitted to proceed past the
motion to dismiss stage through the rejection of arguments that
have been successful in other circuits.

Without a superior

court’s issuance of a binding decision which differs from the
current Third Circuit law, the jurisdictional divide will
remain.

As stated above, however, the Court finds that the

Third Circuit’s approach to assessing these forced-placed
insurance scheme cases is both sound, and most importantly,
binding on this Court.
An appropriate Order will be entered.

Date:
April 7, 2016
At Camden, New Jersey

s/ Noel L. Hillman
NOEL L. HILLMAN, U.S.D.J.

17