Articles from March 2011

Now, nearly two-and-a-half years after the September 2008 collapse of Lehman Brothers (the emotional, if not technical, start of the “Great Recession”), we are seeing the resolution of litigation related to the phenomenon that most agree was the tripwire to the economy’s sudden fall: sub-prime mortgages and their too-good-to-be true consumer inducements.

One notable settlement was recently reached in the case of In re: Wachovia Corp. “Pick-a-Payment” Mortgage Marketing and Sales Practices Litigation, No. 5:09-md-02015-JF (C.D. Cal. filed Feb. 13, 2009). A copy of the Settlement Agreement is available here. The Wachovia Corp. “Pick-a-Payment” class had alleged that Wachovia (itself a casualty of the economic crisis and now owned by Wells Fargo) deceived customers by failing to disclose that borrowers could face negative amortization of their payment option mortgages by choosing to make minimum payments in amounts less than the interest accrued during the payment period. The remaining interest would then be capitalized, or added to the loan principle, which would itself accrue interest. The tantalizingly low payments of these “Pick-a-Payment” loans were a common feature of home mortgage loans that, in the expectation of a perpetual refinancing market, eventually entailed enormous balloon payments once the early-phase, unnaturally low payments expired. Apart from deceiving consumers, this and other negative amortization schemes directly contributed to the mortgage defaults that triggered the collapse of mortgage-backed securities, a wholly separate source of litigation. In a related matter, Wells Fargo entered into individual settlement agreements with the Attorneys General of at least ten states, including California, to provide mortgage modification and restitution to customers who obtained Pick-a-Payment loans from Wachovia and World Savings Bank.

The immediate significance of the Pick-a-Payment settlements is three-fold. First, the settlements are notable in their magnitude: the In re: Wachovia Corp. settlement pool is over $50 million, exclusive of attorneys’ fees and administrative costs, and the Wells Fargo settlement with the State of California includes over $2 billion in loan modifications. In addition, the California settlement obligates Wells Fargo to make direct restitutionary cash payments totaling $32 million to over 12,000 California borrowers who lost their homes through foreclosure on Pick-a-Payment loans. Second, the Pick-a-Payment settlements underscore the continuing relevance of government entities’ prosecution of consumer-based civil claims. Then-Attorney General, now governor, Jerry Brown is understood to have been personally invested in the litigation, a pro-consumer zeal that will likely carry over into his newest gubernatorial administration. (Similarly, in the wage-and-hour realm, President Barack Obama has substantially expanded the federal Department of Labor’s enforcement of misclassification violations, in which employers attempt to elude overtime obligations by titling employees as “managers” or “administrative” but without satisfying the requisite criteria for an overtime exemption.) Finally, with the term “class action” having unfortunately acquired an unearned negative connotation among some due to ongoing corporate campaigns, the Pick-a-Payment settlements serve as a reminder that only class actions are capable of the sort of massive remedial action that was called for here, which directly benefited victims of deceptive loan practices who had been put out of their homes.

It cannot be disputed that the eventual Dukes decision will remake the rules for federal district courts’ consideration of motions for class certification. And in light of the state courts’ practice of regularly consulting Rule 23 jurisprudence, Dukes will likely be a landmark class certification ruling from the Roberts Court. The Dukes decision is also likely to remake the strict divide between class certification analysis and merits analysis. Specifically, those who litigate class actions in federal court invariably invoke and confront the maxim set forth in Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974), that, in ruling on a motion for class certification, trial courts must only determine whether the requisite class certification elements (numerosity, predominance, and so forth) have been satisfied, not whether the class is likely to prevail on the merits. Plaintiffs’ counsel frequently underscore the holding in Eisen with citation to Blackie v. Barack, 524 F.2d. 891 (9th Cir.) (1975), for the proposition that the allegations in the complaint must be presumed true throughout the class certification analysis. However, in Dukes, the Ninth Circuit noted a tension between Eisen and Blackie and the largely unarticulated mandate in General Telephone Co. of the Southwest v. Falcon, 457 U.S. 147 (1982), requiring that trial courts conduct a “rigorous analysis” of each Rule 23 element.

While the Ninth Circuit’s opinion in Dukes purported its emphasis on the “rigorous analysis” standard to be a legal non-event, without circuit split implications, its rejection of the Blackie rule requiring that the operative class complaint’s allegations be presumed true has caused many observers to speculate that the Supreme Court will build on that and fashion a new rule for class certification jurisprudence interpreting the Falcon “rigorous analysis” requirement to entail a substantially greater consideration of the merits than that to which class action practitioners have grown accustomed over the first forty-plus years of Rule 23 jurisprudence.

Accordingly, whether the future of trial courts’ consideration of class certification motions will involve a more probing assessment of the merits is undoubtedly one of, if not the, most watched issues in connection with the Dukes case.

The California Supreme Court’s contingent fee decision last year, County of Santa Clara v. Superior Court, 235 P.3d 21 (Cal. 2010), is a little remarked upon, but important, victory for government entities as well as a significant development for the plaintiffs’ bar. Though complex and somewhat technical in its particulars, the essential holding in County of Santa Clara is clear: private lawyers may represent the government on a contingent-fee basis in public nuisance actions. Id. at 36. And because the decision was not limited to its facts and set a flexible standard applicable beyond nuisance cases, it is likely that County of Santa Clara will be the basis for rulings in trial courts and the Court of Appeal approving contingent-fee arrangements between private lawyers and local government entities—a win for plaintiffs’ lawyers, of course, but also a benefit generally, because public enforcement resources are already stretched to their limit.

The County of Santa Clara outcome had been in some doubt because an earlier precedent, People ex. rel. Clancy v. Superior Court, 705 P.2d 347 (Cal. 1985), was thought to generally prohibit private lawyers from entering into contingent-fee arrangements with government entities. However, Chief Justice George’s unanimous opinion distinguished the “constitutional and institutional interests present in a criminal case” (County of Santa Clara at 31), as in Clancy, and set forth an objective and broadly applicable standard for assessing the permissibility of private-public contingent-fee arrangements. So long as “neutral, conflict-free government attorneys retain the power to control and supervise the litigation,” such an arrangement is permissible. County of Santa Clara at 36.

As one of the George Court’s capstone decisions, County of Santa Clara exemplifies a moderate-to-progressive legacy that few anticipated when the former Chief Justice was elevated to that position by Governor Pete Wilson in 1996.