MENICHINO et al v. CITIBANK, N.A. et al

Filing 149

OPINION. Signed by Judge Mark R. Hornak on 2/5/14. (bdb)

IN THE UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF PENNSYLVANIA

LINDA MENICHINO, et aI., individually
and on behalf of all others similarly situated,
Plaintiffs,
v.

CITIBANK, N.A., et ai.,
Defendants.

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Civil Action No. 2: 12-cv-00058
Judge Mark R. Hornak

MEMORANDUM OPINION
Mark R. Hornak, United States District Judge

This is a putative class action for mortgage services fraud pursuant to the Real Estate
Settlement and Procedures Act ("RESPA"), 12 U.S.C. § 2601 et seq. Plaintiff Linda Menichino,
on behalf of herself and others similarly situated, alleges that Defendants Citibank, N.A.
("Citibank"), CitiMortgage, Inc. ("CitiMortage"), ABN AMRO Mortgage Group ("ABN") (the
mortgagees), Citibank Mortgage RE, AAMBG RE (the captive reinsurers), and Radian Guaranty
Inc. ("Radian"), Genworth Mortgage Insurance Corporation ("Genworth"), and Mortgage
Guaranty Insurance Corporation ("MGIC") (the primary mortgage insurers, or PMIs) engaged in
an unlawful fee-splitting and kickback arrangement in connection with the Plaintiffs' residential
mortgages. The Plaintiffs also bring a state-law unjust enrichment claim pursuant to 28 U.S.C.

§ 1367. They request treble damages, attorneys' fees, and costs. The Defendants have filed
Motions to Dismiss in accordance with Federal Rule of Civil Procedure 12(b)(6), arguing that
the Plaintiffs' claims are untimely because they were brought outside of RESPA's one-year
statute of limitations. See 12 U.S.c. § 2614.

Because the Plaintiffs have pled facts sufficient to support tolling of the statute of
limitations, the Defendants' Motions to Dismiss (ECF Nos. 133, 135) will be denied. I
I.

BACKGROUND
The facts set forth below are derived from the Plaintiffs' Second Amended Complaint

("Complaint"), ECF No. 126.

Each of the twelve named Plaintiffs obtained residential

mortgages from either Citibank or ABN AMRO between 2005 and 2008. They live in six states:
Pennsylvania, North Carolina, Georgia, Maryland, New York, and Illinois.

Because the

Plaintiffs made do\\'ll payments of less than 20 percent of the market value of their homes, the
mortgagees required them to purchase primary mortgage insurance from Radian, Genworth, or
MGle.

Primary mortgage insurance protects the mortgagee in the event that the borrower

defaults on the loan. In turn, to hedge their own exposure in the event of a borrower default, the
PMIs purchased reinsurance from each mortgagee's "captive" reinsurance subsidiary, Citibank
Mortgage RE or AAMBG RE.

Disclosures contained in the Plaintiffs' closing documents

advised the Plaintiffs that their PMI was likely to purchase reinsurance from their mortgagee's
respective captive reinsurer. The premiums for primary mortgage insurance and reinsurance
were paid for with a portion of the total monthly mortgage premium remitted by the Plaintiffs.
In this lawsuit, the Plaintiffs allege that the portions of their monthly mortgage premiums
that supposedly went to pay for reinsurance services were actually disguised kickbacks remitted

The parties have provided Notices of Supplemental Authority, ECF Nos. 140 and 145, identifying Cunningham v.
M&T Bank Corp., 2013 WL 5876337 (M.D. Pa. Oct. 30, 2013), and Riddle v. Bank of Am. Corp., 2013 WL
6061363 (E.D. Pa. Nov. 18,2013), as noteworthy decisions for the Court to consider as to the Motions to Dismiss.
Cunningham reinforces the Court's conclusion that Plaintiffs have adequately pled lack of inquiry notice and the
reasonableness of their lack of due diligence. 2013 WL 5876337, at *6. The Court finds Riddle unhelpful to its
current inquiry, as that opinion involved a summary judgment analysis under Fed. R. Civ. P. 56, whereas the
Motions presently before the Court are brought pursuant to Fed. R. Civ. P. 12(b)(6), which requires a substantially
different and less searching legal analysis.
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by the PMI to the mortgagee in exchange for the mortgagee's continued flow of primary
mortgage insurance business.

The Plaintiffs contend that arrangement violates RESPA's

prohibition on kickbacks and unearned fees. See 12 U.S.C. § 2607. Although the Plaintiffs
concede that their claims fall outside of RESPA's one-year statute of limitations, they allege that
they were prevented from learning about the existence of their claims because the Defendants
fraudulently concealed the true purpose of the arrangement and gave them no reason to suspect
that anything was amiss.
This action was filed on January 13, 2012; the Plaintiffs subsequently filed a First
Amended Complaint (ECF No. 64) on December 4, 2012. Pursuant to Fed. R. Civ. P. 12(b)(6),
the Defendants moved to dismiss the First Amended Complaint on February 4, 2013, which the
Court granted without prejudice on July 19, 2013 on the grounds that the Plaintiffs had not set
forth facts sufficient to plead an entitlement to equitable tolling. See Opinion, ECF No. 124;
Menichino v. CWbank, NA., 2013 WL 3802451 (W.D. Pa. Jul. 19,2013). Consistent with the

Court's Order (ECF No. 125), the Plaintiffs timely filed their Second Amended Complaint on
August 16,2013, which the Defendants moved to dismiss on September 17, 2013.

II.

ST ANDARD OF REVIEW
Federal Rule of Civil Procedure 12(b)(6) empowers a district court to dismiss a complaint

if it fails to state a claim upon which relief can be granted. To survive a motion to dismiss, "a
complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is
plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007)). A complaint is facially plausible if it alleges sufficient

"factual content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged" and that "discovery will reveal evidence of the necessary

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element[s]" of the claim. Id; W Penn Allegheny Health Sys., Inc. v. UPMC, 627 F.3d 85, 98 (3d
Cir. 2010). Legal conclusions couched as factual allegations, conclusory factual allegations, and
threadbare recitations of a cause of action are insufficient to state a facially plausible claim.

Iqbal, 556 U.S. at 678-79. Moreover, a complaint fails to state a claim upon which relief can be
granted if it seeks to bring an action beyond the applicable statute of limitations period and the
plaintiff cannot demonstrate that the limitations period should otherwise be tolled.

Yang v.

Odom, 392 F.3d 97, 101 (3d Cir. 2004); Robinson v. Johnson, 313 F.3d 128,135 (3d Cir. 2002).
III. DISCUSSION

Because the Plaintiffs have cured the factual defects in their First Amended Complaint by
explaining how and when they learned about the possibility of their claims, what they did in
response, and why they could not have pursued their claims within RESPA's one-year statute of
limitations, they have pled an entitlement to equitable tolling that is plausible on its face.
Accordingly, the Defendants' Motions to Dismiss will be denied.
A. RESP A Claim
1. Equitable Tolling

RESPA prohibits the remittance of kickbacks and unearned fees in connection with the
provision of real estate settlement services. 12 U.S.C. § 2607(a)-(b). The statute oflimitations
for bringing a claim under section 2607 is one year from the date of the real estate closing.
Section 2614; Snow v. First American Title Ins. Co., 332 F.3d 356, 358-60 (5th Cir. 2003);

Morilus v. Countrywide Home Loans, Inc., 651 F. Supp. 2d 292, 305-06 (E.D. Pa. 2008); see
also Sarsfieldv. Citimortgage, Inc., 707 F. Supp. 2d 546, 560 (M.D. Pa. 2010) (holding that the
one-year statute limitations period in the Truth in Lending Act ("TILA"), 15 U.S.C. § 1601 et

seq., the sister statute to RESP A, accrues on the date of the real estate closing).
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However, RESPA's statute of limitations may be equitably tolled if the plaintiff can set
forth facts sufficient to show that (I) the defendant engaged in fraudulent concealment by
actively misleading the plaintiff, (2) which prevented the plaintiff from recognizing the validity
of his or her claim within the limitations period, and (3) that the plaintiffs ignorance is not
attributable to his or her lack of reasonable due diligence in attempting to uncover the relevant
facts.

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Cetel v. Kirwan Fin. Group, Inc., 460 F.3d 494, 508-09 (3d Cir. 2006); Forbes v.

Eagleson, 228 F.3d 471,486-87 (3d Cir. 2000). Regardless of the defendant's actions, equitable
tolling will be inapplicable if the plaintiff was on inquiry notice of the possible existence of the
claim during the limitations period yet failed to investigate the possible existence of the claim.
Cetel, 460 F.3d at 507. A plaintiff is on inquiry notice whenever circumstances exist that would
lead a reasonable person, through the exercise of due diligence, to discover his or her injury. Id.;
Whirlpool Fin. Corp. v. GN Holdings, Inc., 67 F.3d 605, 610 n.3 (7th Cir. 1995); Au
Rustproojing Clr., Inc. v. Gulf Oil Corp., 755 F.2d 1231, 1237 (6th Cir. 1985). At the pleading
stage, the plaintiff bears the burden of establishing an entitlement to tolling that is plausible on
its face. See Iqbal, 556 U.S. at 678; In re Comm. Bank of N. Va., 622 F.3d 275, 301 (3d Cir.
2010) ("Comm. Bank II") (citing Oshiver v. Levin, Fishbein, Sedran & Berman, 38 F.3d 1380,
1391-92 (3d Cir. 1994)).
In its previous Opinion in this matter, this Court held that Plaintiffs had adequately pled
active misleading but failed to plausibly show that they were not on inquiry notice or that their
alleged due diligence was reasonable. Opinion, ECF No. 124 at 17-18; 2013 WL 3802451, at *9
(Plaintiffs' mortgage agreements stating that the reinsurers would transfer real risk in exchange
Fraudulent concealment is an equitable doctrine that is read into every federal statute of limitations. Mathews v.
Kidder, Peabody & Co., [nc., 260 FJd 239, 256 (3d Cir. 2001) (quoting Davis v. Grusemeyer, 996 F.2d 617, 624
(3d. Cir. 1993)).
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for premium and that the reinsurance arrangement would result in no extra cost to the borrowers,
in combination with the allegations regarding the "pay to play" scheme, was sufficient to plead
active misleading and fraudulent concealment). Consequently, the Court granted the Plaintiffs
leave to re-plead these two elements in a Second Amended Complaint. The Plaintiffs made no
changes to the facts pled with respect to active misleading.

Thus, that ruling need not be

revisited. See Hamilton v. Leavy, 322 F.3d 776, 786 (3d Cif. 2003) ("The law of the case
doctrine 'limits relitigation of an issue once it has been decided' in an earlier stage of the
litigation." (quoting In re Continental Airlines, Inc., 279 F.3d 226,232 (3d Cir. 2002)).
Unlike the First Amended Complaint, the Second Amended Complaint sets forth, for
each named Plaintiff, the following: the date that each Plaintiff received a notice of investigation
from counsel; the date that each Plaintiff consented to counsel's representation; the dates each
Plaintiff contacted their mortgagee and PMI to learn whether their mortgage had been reinsured;
and what the Plaintiffs were told (or, more to the point, what they were not told) by their
mortgagee and PMI's representatives in response to the notice. ECF No. 126 at

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138-84. The

Second Amended Complaint also alleges that none of the disclosures, correspondence, or
monthly billing statements that Plaintiffs received from either their mortgagee or PMI after
closing advised them that a portion of their monthly mortgage payments were financing
reinsurance premiums or indicated that the mortgages were ever actually reinsured, which the
mortgagee's own customer service representatives could not confirm when the Plaintiffs
contacted them in response to receiving the notice from counsel. Id.
Even though the closing documents made Plaintiffs aware of the likelihood that their
mortgages were going to be reinsured by their mortgagee's captive reinsurer, Plaintiffs have
nevertheless alleged that the Defendants' post-closing disclosures and correspondence never
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referenced the captive reinsurance arrangement or indicated that their monthly payments were
financing the reinsurance premiums. These allegations are entitled to a presumption of truth for
purposes of this Motion, as is the allegation that Plaintiffs participated actively in the loan
process by reading their closing documents and subsequent monthly statements and disclosures.
ECF No. 126 at ~ 134. Viewed in the light most favorable to the Plaintiffs, these allegations are
sufficient to plead that the Plaintiffs were not on inquiry notice of the possible existence of their
claims and that their lack of due diligence during the limitations period was reasonable under the
circumstances.

Comm. Bank II, 622 F.3d at 305-307 (holding that similar allegations were

sufficient to plead an entitlement to equitable tolling); In re Comm. Bank ofN Va. Mort. Lending

Prac. Litig., 2013 WL 3279551, at *19 (W.D. Pa. June 27, 2013). However, the Court's ruling
on this issue shall not prejudice Defendants from re-raising the affirmative defense of the statute
of limitations on a more fully developed record at summary judgment. See Riddle v. Bank ofAm.

Corp., 2013 WL 1482668, at *10 (E.D. Pa. Apr. 11,2013) (citing Wise v. Mortg. Lenders
Network, USA, Inc., 420 F. sup. 2d 389, 394-95 (E.D. Pa. 2006); Brock v. Thomas, 782 F. Supp.
2d 133, 140 (E.D. Pa. 2011)).
2. Violation of § 2607
Proceeding to the substantive allegations, the Court finds that Plaintiffs have pled a
violation of RESP A that is plausible on its face. RESPA provides that "[n]o person shall give
and no person shall receive any fee, kickback, or thing of value pursuant to any agreement or
understanding, oral or otherwise, that business incident to or part of a real estate settlement
service ... shall be referred to by any person," and that "[n]o person shall give and no person
shall accept any portion, split, or percentage of any charge made or received for the rendering of
a real estate settlement service... other than for services actually performed."
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12 U.S.c.

§ 2607(a)-(c); see also § 2607(d) (providing for a private cause of action).

In alleging the

mortgage fraud scheme, Plaintiffs must state with particularity the circumstances constituting the
fraud, although scienter may be alleged generally. Fed. R. Civ. P. 9(b).
Here, Plaintiffs have alleged that, in exchange for a steady stream of primary mortgage
insurance business from Citibank and ABN, the PMIs remitted kickbacks, dressed up as
"reinsurance premiums," to Citibank and ABN through their reinsurance subsidiaries.

The

source of the purported kickback funds was a portion of the monthly mortgage premium that the
plaintiffs remitted to their mortgagees.

In support of their allegation that no real risk was

transferred between the PMIs and captive reinsurers, the Plaintiffs refer to the terms of the
reinsurance contracts, which they contend provided no recourse to the PMIs in the event that the
reinsurers did not maintain adequate funds in reserve to pay claims, as well as to the purportedly
low dollar value of claims paid by the reinsurers versus the amount of reinsurance premium
remitted by the PMIs between 2004 and 2011. (ECF No. 126 at" 9-10, 84-87, 110-11.) The
Complaint supports these allegations with details from the Defendants' public filings. At this
stage of the litigation, these factual allegations are sufficient to plead a violation of RESPA's
prohibition on kickbacks and unearned fees.

B. Unjust Enrichment Claim
Plaintiffs' supplemental unjust enrichment claim also survives Rule 12(b)(6) review.
While Defendants argue that Plaintiffs cannot as a matter of law pursue an unjust enrichment
claim because a contract

namely, the mortgage document and accompanying disclosures

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directly on point, the Plaintiffs contend that the kickback arrangement is not contemplated
anywhere within the four comers of that agreement. A cause of action for unjust enrichment lies
only when the transaction underlying the dispute is not subject to a contract. The laws of the six

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states in which the named Plaintiffs reside are in agreement on this point. See Northeast Fence
& Iron Works, Inc. v. Murphy Quigley Co., Inc., 933 A.2d 664, 669 (Pa. Super. Ct. 2007); see

also Georgia Dept. of Comm. Health v. Data Inquiry, LLC, 722 S.E.2d 403, 407 (Ga. Ct. App.
2012); Perez v. Citicorp Mortg. Inc., 703 N.E.2d 518, 526 (Ill. App. Ct. 1998); Cnty. Comm'rs of
Caroline Cnty. v. J Roland Dashiell & Sons, Inc., 747 A.2d 600, 610 (Md. 2000); Waters Edge
Builder, LLC v. Longa, 715 S.E.2d 193, 196 (N.C. Ct. App. 2011); Clarke-Fitzpatrick, Inc. v.
Long Is. R.R. Co., 516 N.E.2d 190, 193 (N.Y. 1987).
Plaintiffs are correct that the only Defendants with whom Plaintiffs were in privity of
contract were Citibank and ABM, the mortgagees. Even though the mortgage agreements stated
that the mortgagees would use a portion of Plaintiffs' monthly mortgage payments to purchase
primary mortgage insurance, Plaintiffs were not parties to the primary mortgage insurance
contracts, nor were they entitled to any rights under those contracts. Similarly, Plaintiffs had no
involvement with, were entitled to no rights in, and received no benefits under, the disputed
reinsurance arrangements between the PMIs and captive reinsurers. Unlike cases where unjust
enrichment claims were found not to lie because the terms of the contract between the parties
governed their dispute, see Northeast Fence, 933 A.3d at 669; Data Inquiry, 722 S.E.2d at 407;
Perez, 703 N.E.2d at 526; Dashiell & Sons, 747 A.2d at 610; Longa, 715 S.E.2d at 196; and
Clarke-Fitzpatrick, 516 N .E.2d at 193, the Plaintiffs here were contracting parties only to the
agreement that formed the first link in the chain. They had no involvement in or rights or
obligations under the subsequent contracts that give rise to the crux of the dispute.

Thus,

Plaintiffs have sufficiently pled that there was no contract between themselves and the parties to
the purported kickback scheme (the respective mortgagees, captive reinsurers, and PMIs

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connected to their residential mortgages) that is on point or otherwise governs the disputed
transaction.
Although a more detailed review of the variations in state law may be required at the
class certification stage, see Sullivan v. DB Investments, Inc., 667 F.3d 273, 301-03 (3d Cir.
2011), Plaintiffs have met their pleading burden as it exists at this point. Accordingly, the statelaw claim survives.
IV. CONCLUSION

For the reasons set forth above, the Defendants' Motions to Dismiss (ECF Nos. 133, 135)
will be denied. An appropriate Order will follow.

,..­

Mark R. Hornak
United States District Judge

Dated: FebruaryJ_, 2014
cc: All Counsel of Record

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