Kentucky District Court's Denial of Class Certification in Mortgage Lending Case Provides Numerous Lessons for Class Action Defendants

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Full text of the Countrywide decision

The recent decision in In re Countrywide Financial Mortgage Lending Practices Litigation, 2011 WL 4862174 (W.D. Ky. Oct. 13, 2011) is another example of a district court within the Sixth Circuit applying the lessons of Wal-Mart to deny class certification. In In re Countrywide, the district court denied certification of a class of African American and Hispanic consumers because "the idea that thousands of loan officers in hundreds of separate locations around the country would exercise their discretion in a similar discriminatory manner . . . defies belief."

As discussed below, In re Countrywide provides a number of important lessons for those defending class actions.

The Countrywide Class

In In re Countrywide Financial Mortgage Lending Practices Litigation, 2011 WL 4862174 (W.D. Ky. Oct. 13, 2011), Judge Heyburn was asked to certify a class of African-American and Hispanic consumers who claimed that Countrywide had discriminated against them by charging higher rates and costs on their home mortgages than the company charged to other similarly-situated, non-minority customers. Id. at *1.

They alleged that Countrywide permitted its mortgage brokers and loan officers to exercise discretion to increase these costs which, in turn, imposed a disparate impact on minority borrowers. Id. The court noted that Countrywide - one of the nation’s largest home mortgage lenders - originated loans through branch offices and call centers, "did not control how brokers charged [broker] fees," and used pricing models that included both objective and subjective criteria. Id.

In their motion for class certification, the plaintiffs provided expert testimony showing that “minorities paid more for Countrywide mortgage loans than whites with similar risk characteristics.” Id. at *2. The plaintiffs also challenged the subjective component of Countrywide’s loan pricing, alleging that this resulted in minority borrowers paying a higher APR that similarly-situated non-minorities. Id.

Before ruling on the motion for class certification, the court asked for supplemental briefing on the impact of the Wal-Mart decision, which evidently issued after the briefs in this case had been submitted. Id. at *1.

The court denied the motion for class certification, stating that the "crux of this case," as in Wal-Mart, is commonality.” Id. at *3. The court said that "[i]t is not enough merely to claim that all class members suffered a disparate-impact injury . . . 'their claims must depend upon a common contention', the determination of which 'will resolve an issue that is central to the validity of each one of the claims in one stroke.'” Id. (quoting Wal-Mart Stores, Inc. v. Dukes, 131 S. Ct. 2541, 2551 (2011)).

The court first noted that “[c]lass certification will not obtain where the only commonality among its members is their race and their relation to the defendant.” Id. The court did not find the plaintiffs’ expert’s analysis to be persuasive even though it purported to support the contention that minorities were paying more for their loans. The analysis did not show that every minority borrower would have paid more for their loans but for their minority status, nor did it account for the possibility that the differences may have resulted from the exercise of non-discriminatory practices “among thousands of loan officers and brokers working from hundreds of separate offices.” Id.

The court noted that “[t]he Wal-Mart decision makes clear that, absent a showing of common direction or common method of exercising discretion, statistical evidence of average disparities will not suffice to meet Rule 23’s commonality requirement.” Id. at *4. Instead, Wal-Mart requires that “there must be ‘some glue holding the alleged reasons for all those decisions together’ so that the claims of the representative party and the class are capable of resolution by a ‘common answer.’” Id. at *4.

The court found that there were too many variables to support the conclusions that “even an unconscious discriminatory motive or thought” was behind the rate decisions. Id. The court opined that:

[T]he idea that thousands of loan officers in hundreds of separate locations around the country would exercise their discretion in a similar discriminatory fashion as to each purported class member defies belief. Whether an individual loan officer or a single office did so, might be another question.

Id. It is significant that the court believed that certification of this class “was more debatable pre-Wal-Mart.” But now the Supreme Court - and district courts- require more. Id.

Classes Must Have Common Questions

Several lessons emerge from Countrywide. First, the commonality inquiry mandated by Wal-Mart requires more than a showing of mere common characteristics of the class. Here, a close analysis of proximate causation revealed that the class lacked the “glue” that Wal-Mart requires. The commonality analysis requires evidentiary support for each element of the proposed class claim, especially causation.

Classes Must be Smaller

Second, Countrywide suggests a trend toward smaller classes. Wal-Mart requires proof of common causation in order to satisfy the requirement that the class members suffered a common injury. While the court thought that “whether an individual loan officer or a single office” engaged in discriminatory behavior might yield a plausible theory of common causation, a larger class based on conduct occurring across a broader geographic location was unlikely to yield true common questions. Common causation is far more likely to exist at the hands of an individual than at the hands of many across a large organization. This is good news for those defending class certification, since smaller classes may effectively limit a defendant’s exposure.

Classes Must Be Plausible

Finally, although the court did not expressly say so, its decision appeared to apply the pleading rules announced in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937 (2009). While Twombly and Iqbal reaffirm some of the familiar pleading concepts developed in the years following Conley v. Gibson, 355 U.S. 41 (1957), the language of the cases suggests that the pleading bar has been raised. Consider the following precepts:

• When considering a motion to dismiss under Rule 12(b)(6), a court must determine whether a complaint “contain[s] sufficient factual matter, accepted as true, to ‘state a claim for relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 129 S. Ct. 1937, 1949 (2009) (quoting Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007)).
• The “tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions. Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice.” Iqbal, 129 S. Ct. at 1949.
• “Labels and conclusions” or a “formulaic recitation of the elements of a cause of action will not do,” nor will “naked assertion[s]” devoid of “further factual enhancements” support a claim for relief. Twombly, 550 U.S. at 555, 557.
• A “court considering a motion to dismiss can choose to begin by identifying pleadings that, because they are no more than conclusions, are not entitled to the assumption of truth.” Iqbal, 129 S. Ct. at 1950.
• Even when a complaint does contain well-pleaded factual allegations, “a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief. Iqbal, 129 S. Ct. at 1950.

• “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal at 1949.

This inquiry as to plausibility is “a context-specific task that requires the reviewing court to draw on its judicial experience and common sense . . . . [W]here the well-pleaded facts do not permit the court to infer more than the mere possibility of misconduct, the complaint has alleged — but has not show[n] — that the pleader is entitled to relief.” Iqbal, 129 S. Ct. at 1950.

When Judge Heyburn opined that “the idea that thousands of loan officers” would “exercise their discretion in a similar discriminatory fashion . . .defies belief,” In re Countrywide Financial Mortgage Lending Practices Litigation, 2011 WL 4862174 at *4, he effectively invoked the heightened pleading standard introduced in Iqbal.

The lesson for those defending class actions is that invocation of Twombly and Iqbal can be just as important as invoking the principles in Wal-Mart. Taken together, these cases provide an effective multi-layered defense to class certification.

Wal-Mart has changed the rules of the game. Similar post-Wal-Mart cases have been decided differently than their pre-Wal-Mart counterparts. See id. at *4 (collecting cases). Those defending classes must be diligent to require plaintiffs to provide an evidentiary basis for each element of their claims - especially causation - in the class certification process.