On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. Nos. 03-cv-00425, 02-cv-01201, 02-cv-01563, 02-cv-01616, 02-cv-01999, 02-cv-02000) District Judge: Honorable Gary L. Lancaster.
The opinion of the court was delivered by: Sloviter, Circuit Judge.
Before: SLOVITER, AMBRO, and ALDISERT, Circuit Judges
I. Facts and Procedural History
A. The Alleged Illegal Lending Scheme
B. The Separate Class Actions
C. Consolidation of the Class Actions
D. The Opt-Out Solicitations
E. The Joint Motion to Invalidate Opt-Outs
F. The October 31, 2003 Conference Call
G. Appellants' Motion to Intervene
H. Appellants' Request for Discovery
J. The FDIC as Receiver for GNBT
III. Analysis A. Class Certification
1. Certification Process Followed by the District Court
2. The Appropriateness of Class Certification
i. The Rule 23(a) Criteria
ii. The Rule 23(b)(3) Criteria
iii. Summary of Rule 23 Analysis
B. The District Court's October 14th and 17th Order Invalidating Opt-Outs
C. The Motions to Intervene
D. Appellants' Request for Discovery
E. The Fairness of the Settlement
F. The Petition for Mandamus
This consolidated appeal arises from a "settlement only" class action in the District Court for the Western District of Pennsylvania that had consolidated six separate actions alleging an illegal home equity lending scheme against two banks and a company that acquired second mortgage loans from those banks in the secondary market. Plaintiffs are persons who borrowed from the two banks and signed second mortgages. On December 4, 2003, the District Court issued a Final Order approving a proposed settlement, which awarded $33 million to a class of 44,000 borrowers and $8.1 million in attorney fees. Appellees in this case are the settling parties. Appellants are a number of law firms and plaintiff class members who challenge the District Court's jurisdiction, nearly every aspect of the settlement process, and the fairness of the settlement itself.
FACTS AND PROCEDURAL HISTORY
A. The Alleged Illegal Lending Scheme
This action alleges a pervasive predatory and illegal lending scheme affecting borrowers nationwide. The alleged mastermind of the scheme was the Shumway Organization ("Shumway"), a residential mortgage loan business operating out of Chantilly, Virginia. Through its several business forms, including EquityPlus Financial, Inc. ("Equity Plus"), Equity Guaranty, LLC ("Equity Guaranty"), and various title companies, Shumway offered high-interest mortgage-backed loans to debt-laden homeowners.
Shumway was subject to fee caps and interest ceilings imposed by various state mortgage lending laws because it was a non-depository lender. State and nationally chartered banks, by contrast, are arguably not subject to the same restrictions. Plaintiffs allege that in an effort to circumvent the relevant state fee and interest ceilings, Shumway formed associations with several financially distressed banks, including two banks named as defendants, the Community Bank of Northern Virginia ("CBNV") (a state chartered bank) and the Guaranty National Bank of Tallahassee ("GNBT") (a nationally chartered bank).
CBNV and GNBT were allegedly paid for nothing more than permitting Shumway to disguise the origin of their loans, thus creating the appearance that fees and interest were paid solely to a depository institution. In reality, the overwhelming majority of fees and other charges associated with the loans were funneled through the two banks to Shumway via Equity Plus (in the case of loans purportedly made by CBNV) and Equity Guaranty (in the case of loans purportedly made by GNBT). Plaintiffs further allege that both CBNV and GNBT uniformly misrepresented the apportionment and distribution of settlement and title fees in their HUD-1 Settlement Statement forms, issued by the United States Department of Housing and Urban Development,*fn1 and that the stated fees in the HUD-1 Settlement Statements included illegal kickbacks to Shumway that did not reflect the value of any services actually performed.
GMAC Residential Funding Corporation ("RFC"), a division of GMAC Financial Services (part of the General Motors Corporation family), was alleged to be an essential co-conspirator in the Shumway scheme. In the late 1990s, RFC derived a substantial portion of its business by purchasing "jumbo" mortgages (mortgages with loan balances above the purchasing authority of Freddie Mac and Fannie Mae) and especially High-LTV (loan-to-value) loans (loans where the amount financed represented up to 125% of the value of the securitized collateral) in the secondary market. By 1999, Shumway, acting through CBNV and GNBT, had become the largest producer of High-LTV loans in the country. Plaintiffs allege that RFC purchased a majority and perhaps all of the CBNV and GNBT originated loans, despite knowing that CBNV and GNBT were mere "straw-parties" used to funnel origination and title services fees to Shumway. The high origination fees on the purchased loans generated profit not only for Shumway but also for RFC; in most cases, fees were rolled into the principal balance of the loans, thereby generating substantial interest income.
In 2001, the United States Office of the Comptroller of the Currency conducted an investigation and audit of GNBT, resulting in the Comptroller's imposition of tight restrictions on the bank. Shortly thereafter, Shumway's relationship with RFC began to deteriorate. In a press release dated March 28, 2002, RFC announced that it was no longer willing to purchase high interest mortgage loans like the ones sold by Shumway. Without a purchaser for its loan product and without adequate reserves to maintain the loans in its own portfolio, the Shumway scheme essentially shut down by early 2003.
B. Separate Class Actions
The Community Bank class action began as the following six separate actions:
Kessler v. GMAC-RFC, No. 03-0425 (W.D. Pa.) was originally filed in the Court of Common Pleas of Allegheny County, Pennsylvania on February 26, 2003. Plaintiffs, a class of Pennsylvania borrowers, charged that RFC had assignee liability under Pennsylvania state law for the "bogus" loan origination and title service fees charged ostensibly by CBNV and GNBT. On March 26, 2003, RFC removed the case to the United States District Court for the Western District of Pennsylvania, asserting that Sections 85 and 86 of the National Banking Act ("NBA"), 12 U.S.C. §§ 85-86, and Section 521 of the Depository Institutions Deregulation and Monetary Control Act ("DIDA"), 12 U.S.C. § 1831d, completely preempt any state law attempting to limit the amount of interest and fees a national or federally insured state-chartered bank could charge. Plaintiffs did not challenge removal.
Before the Kessler action was filed there were five other related actions pending in the same District Court premised on the same Shumway lending scheme. In Davis v. CBNV, No. 02-1201, initially filed on May 1, 2001, different plaintiffs sought to represent both a class of Pennsylvania borrowers and a class of nationwide borrowers. They asserted claims against CBNV, RFC, and Sovereign Bank (a purchaser of CBNV loans on the secondary market). On behalf of the Pennsylvania class, plaintiffs asserted that defendants violated Pennsylvania's mortgage lending usury statute, 41 Pa. Cons. Stat. §§ 101 et seq., and the Pennsylvania Unfair Trade Practices and Consumer Protection Law, 73 Pa. Cons. Stat. §§ 201-1, et seq. On behalf of the nationwide class, the Davis plaintiffs asserted a violation of the fee split and disclosure provisions of the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2607(b). The case, originally filed in a Pennsylvania state court, was later removed by defendants to the federal court based on the existence of federal question jurisdiction.
In Sabo v. CBNV, No. 02-1563, filed on September 11, 2002, in the United States District Court for the Western District of Pennsylvania, plaintiffs commenced a putative nationwide class action suit against CBNV and RFC asserting claims under RESPA. In Ulrich v. GNBT, No. 02-1616, filed on September 19, 2002, in the same federal court, plaintiffs filed a similar putative nationwide class action suit asserting claims under RESPA, but this one named as defendants GNBT and RFC.
One month later, on November 16, 2002, plaintiffs filed Mathis v. GNBT, No. 02-1999, in the Court of Common Pleas of Allegheny County asserting various state law mortgage lending claims against GNBT and RFC, including violations of Pennsylvania's mortgage lending usury statute, 41 Pa. Cons. Stat. §§ 101 et seq., and the Unfair Trade Practices and Consumer Protection Law, 73 Pa. Cons. Stat. §§ 201-1, et seq. On November 19, 2002, Defendants removed the Mathis case to the federal court based on the doctrine of complete preemption. As in Kessler, these plaintiffs did not challenge removal.
Finally, on October 23, 2002, plaintiffs filed Picard v. CBNV, 02-2000, in the Court of Common Pleas of Allegheny County against CBNV, GNBT, and RFC. On November 19, 2002, Defendants removed the case to the federal court based on the doctrine of complete preemption. Plaintiffs initially filed a motion to remand, but on February 27, 2003, they filed an amended class action complaint asserting claims under RESPA and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962, in addition to the various state law mortgage claims asserted in the original state complaint.
R. Bruce Carlson of the Pittsburgh, Pennsylvania law firm Specter, Specter, Evans, & Manogue, P.C. (now with Carlson Lynch), was the principal plaintiffs' class attorney in each of the above actions, including Kessler.
C. Consolidation of the Class Actions
On July 11, 2003, and prior to any discovery, the named plaintiffs in all six actions, together with defendants CBNV, GNBT and RFC, filed a joint motion for preliminary approval of a proposed nationwide class action settlement. Under the terms of the settlement, the maximum total payout to the approximately 44,000 member plaintiff class was $33 million, and the agreed-upon attorney fees were $8.1 million. The settlement payouts ranged from $250 to $925 per borrower depending on the borrower's residence and the date on which the loan was entered. In exchange, the borrowers were to release any and all state or federal claims that they might have relating to their second mortgage loan, including the right to use a violation of federal or state law as a defense to foreclosure or any other action. See, e.g.,15 U.S.C. § 1641(d)(1); 815 Ill. Comp. Stat. § 205/6; Kan. Stat. Ann. § 16a-5-202. The proposed settlement states that if more that .5% of the class members opt out of the settlement class, the settling defendants may terminate the settlement.*fn2
On July 17, 2003, less than a week after the motion was filed seeking approval of the settlement, the District Court, in an Order that in all material respects was a verbatim copy of the proposed Order offered by the settling parties in their July 11, 2003 joint motion, preliminarily approved the proposed settlement and consolidated all six actions listed above into the Kessler action. The case was thus consolidated at No. 03-cv-00425.
The plaintiff class was "conditionally certified" for settlement purposes only. The Order defined the class as:
all persons . . . who (a) entered into a loan agreement with Community Bank of Northern Virginia . . . and/or Guaranty National Bank of Tallahassee . . .; (b) whose loan was secured by a second mortgage or deed of trust on property located in the United States; (c) whose loan was purchased by Residential Funding Corporation . . . and, (d) who [were] not . . . member[s] of the class certified in the action captioned Baxter v. Guaranty National Bank, et al., Case No 01-CVS-009168, in the General Court of Justice, Superior Court Division of Wake County, North Carolina.
Significantly, before issuing the July 17, 2003 Order, the District Court did not analyze whether the proposed class satisfied the prerequisites for a class action set forth in Fed. R. Civ. P. 23 (a), (b)(3), or (c)(2), as the Court explicitly reserved such analysis for a settlement hearing to be held on November 14, 2003.
The July 17, 2003 Order also provided for the mailing and publication of the class notice. The class notice directed by the District Court was verbatim the proposed class notice offered by the settling parties; it described the action as:
A group of CBNV and GNB[T] borrowers, who are referred to as the "Named Plaintiffs" in this Notice, claim in the Litigation that CBNV and GNB[T] violated certain federal and state laws in connection with the fees and interest charged on second mortgage loans. These claims are asserted against the Defendants CBNV, GNB[T] and RFC.
JA 137. The notice also provided that all opt-outs must be received by the Settlement Administrator by October 1, 2003. Finally, class members were specifically instructed that they may discuss the settlement with their own attorneys.
D. The Opt-Out Solicitations
In September 2003, after the class notice was mailed, several law firms mailed letters to members of the plaintiff class urging them to contact the law firms regarding the above settlement, and in some cases urging them to opt out of the class. These law firms and the members of the class whom they solicited and who opted-out are the Appellants before us ("Appellants"). The Appellant law firms are as follows:
Walters Bender, Strohbehn & Vaughan ("Walters") , Nos. 03-4221, 03-4504, 03-4732, 04-1002 -
Walters has represented two plaintiff classes in class action suits related to the Shumway scheme. In June 2001, it filed a class action suit in Jackson County, Missouri against CBNV and assignees, alleging violation of the Missouri Second Mortgage Loans Act ("MSMLA"), Mo. Rev. Stat. §§ 408.231, et seq. The Circuit Court of Jackson County granted defendants' motion to dismiss for failure to state a claim on the ground that their MSMLA claim failed as a matter of law. The Missouri Court of Appeals affirmed. Avila v. Community Bank of N. Va., 143 S.N.3d 1 (Mo. Ct. App. 2003).
On April 3, 2003, Walters filed a putative class action in Clay County, Missouri against GNBT for violations of the MSMLA, asserting the same claim that it had asserted against CBNV. After GNBT removed that case to the United States District Court for the Western District of Missouri, that court held that plaintiffs' MSMLA claims are preempted under Sections 85 and 86 of the National Banking Act. See Phipps v. GNBT, No. 03-420-CV-W-GAF, 2003 WL 22149646 (W.D. Mo. Sept. 17, 2003). The Eighth Circuit affirmed. Phipps v. FDIC, __ F.3d __, 2005 WL 17736118 (8th Cir. 2005).
On September 18 and 19, 2003, the Walters firm mailed solicitation letters to borrowers in Missouri and Illinois urging them to object to the fairness of the settlement in the present action but did not urge them to opt out. In an affidavit to the District Court, Attorney J. Michael Vaughan of the Walters firm declared that prior to the September 18, 2003 letter, Walters was asked to advise and represent several Missouri borrowers (aside from those in either of the two Missouri class actions) who had obtained loans from GNBT. According to Walters, a total of nineteen Missouri borrowers filed opt-outs. Following the September 18 letter, thirty-five Missouri borrowers and eighty-nine Illinois borrowers filed objections to the settlement with the District Court.
Attorney Franklin Nix and The Sharbrough Law Firm ("Nix"), Nos. 03-4725, 03-4319, 03-4862, 04-1039 -
On September 17, 2003, Attorney Nix mailed a solicitation letter to hundreds of Georgia class members setting forth defendants' potential liability under the Home Ownership and Equity Protection Act ("HOEPA"), 15 U.S.C. §§ 1601, et seq., and urging class members to opt-out or contact him regarding their settlement claims. Included in the solicitation was a Notice of Opt-Out form letter and a Representation & Fee Agreement contract. The Sharbrough Law Firm sent solicitations to Alabama class members.*fn3
Legg Law Firm ("Legg"), Nos.03-4294, 03-4316, 03-4837, 04-4838 -
Maryland and Florida borrowers received solicitation letters from Legg urging class members to contact the firm to discuss the settlement. The original letter misstated the opt-out date as October 15, 2003. A subsequent letter corrected the mistake. In a Declaration to the District Court, Attorney Scott C. Borison of the Legg firm declared that prior to sending out the solicitation letters he had existing clients who had claims against CBNV. Borison also declared that after he sent the solicitation letters approximately 100 people asked him to assess their cases. After he reviewed their documents, he recommended that only forty-four class members (collectively known as the Badeaux opt-outs) opt out of the settlement and retain Borison as their counsel against CBNV.
Edelman, Combs & Latturner, LLC ("Edelman"), Nos. 03-4220 -
Edelman sent solicitation letters to borrowers in Illinois urging class members to contact them to assess their claims, and to opt-out of the settlement. Edelman claims to have received fifteen responses to its solicitations; thirteen of which it believed had merit. On October 3, 2003, Edelman filed a suit on behalf of these opt-outs in the Northern District of Illinois in a case captioned Spann v. CBNV, No. 03 C 7022.
By the October 1, 2003 deadline, 435 people had opted out of the class action settlement. Stephen Tilghman, the settlement administrator, declared that 419 of those opt-outs were a result of the solicitation letters by the above law firms. Of those 419 opt-outs, 326 were submitted by Georgia class members on opt-out forms provided by Nix. The 435 total opt-outs amounted to nearly 1% of the total class; nearly double the .5% trigger that would allow defendants to terminate the settlement.
E. The Joint Motion to Invalidate Opt Outs
Fearing that their settlement was in jeopardy, on October 6, 2003, class counsel and defendants' counsel (the "settling parties") filed a Joint Motion to Invalidate Solicited Opt-Outs and for Court Approved Notice to Address False, Misleading and Deceptive Solicitations of Opt-Outs. The Joint Motion asserted that the above law firms had improperly solicited and misled class members, thus inducing them to opt out of the class settlement. The settling parties asked the Court to invalidate all prior opt-out decisions, send a curative notice to those class members who had opted out, and prevent any communication between Appellants and class members, except for written communications pre-approved by the Court. The settling parties' brief in support of the Joint Motion, as expected, targeted the Nix's solicitations.
The District Court granted the settling parties' joint motion on October 14, 2003. It did so without conducting a hearing, setting a briefing schedule or otherwise allowing Appellants any practical opportunity to be heard. The Order the District Court entered on October 14, 2003 followed verbatim the Order proposed by the settling parties, except that the District Court extended the second opt-out deadline from the October 24, 2003 date proposed by the settling parties, to November 3, 2003.*fn4
On October 15, 2003, one day after entry of the Order invalidating the opt-outs, Appellants Walters, Nix, and Edelman filed emergency motions asking the District Court to stay its October 14 Order and to reconsider its decision. On October 16, Legg submitted a proposed communication to its opt-out clients to the District Court for approval.
On October 17, 2003, two days after the motion to reconsider was filed, the District Court denied the motions. The brief Order stated in full:
Before the court are several motions to reconsider our Order of October 14, 2003 [doc. Nos. 30, 31, 32, and 33]. The motions are DENIED. The letters mailed by each of the firms named in the October 14, 2003 Order of Court to plaintiff class members in this case were direct solicitations for prospective clients whom they knew to be represented by another lawyer. If there is not a rule of professional conduct that prohibits such activity in the jurisdictions where these lawyers practice, there should be. See generally, Georgine v. Amchem Products, 160 F.R.D. 478[, 495 n.26] (E.D. Pa. 1995). . . .
The District Court apparently treated the Legg proposed communication as a motion to reconsider, and denied it in the same October 17, 2003 Order. The Court thereafter did not specifically address why it would not permit Legg to send out its proposed communications.
Pursuant to the October 14, 2003 Order, "curative notices" were sent to all class members who had opted out during the first opt-out period. These notices, which were tailored to the communications sent by each Appellant law firm, were verbatim copies of the proposed curative notices submitted by the settling parties. Each notice stated that the Court has concluded that the "[Appellant law firms' solicitations] contained a number of misleading and inaccurate statements" and therefore that the "exclusion requests received after the date of the letter are all void." See, e.g., App. at 2062. The curative notices also contained a number of detailed bases for the finding that the Appellant law firms' solicitations were misleading. Finally, the curative notices urged the recipients to reconsider their decisions to opt out. The notice made clear that failure to submit a second opt-out by November 3, 2003 would waive the class member's rights to opt out of the settlement.
The provision of the October 14, 2003 Order that precluded the Appellant law firms from communicating with any members of the class, except for written communications pre- approved by the District Court, included a bar on communication with class members who had retained the Appellant law firms either before or during the first opt-out period. Several Appellants declared in affidavits provided thereafter that when their retained clients attempted to contact them for advice or for explanation of the curative notice, they were compelled to reject their clients' attempts at communication. See, e.g. JA 2056-57 (declaration of Borison). In the particular cases of Walters and Edelman, the October 14, 2003 Order prevented ...