Class Action Defense Blog

Federal Court Refuses to “Participate in Scheme” by Class Action Plaintiff Law Firm to Formulate Theory for Class Action Lawsuit and then Solicit “Stand-In Plaintiffs” to Serve as Class Representatives

Plaintiff filed a class action against Oreck Direct alleging unfair business practices in the advertisement and sale of its air purifiers. Bodner v. Oreck Direct, LLC, ___ F.Supp.2d ___, (N.D. Cal. April 25, 2007) [Slip Opn., at 1]. Plaintiff’s lawyer moved the court to certify the lawsuit as a class action and for appointment of lead plaintiff and lead counsel; defense attorneys opposed the motion. Id. The district court denied the motion, criticizing plaintiff’s law firm for formulating a class action lawsuit and then going in search of a class action plaintiff regardless of “the lack of a fitting plaintiff or the lack of ethical scruples.” Id., at 4.

Plaintiff alleges that he suffers from allergies and purchased an Oreck air purifier in reliance on defendant’s infomercial claiming that the product “would remove allergens, bacteria, dirt and dust from the air”; the thrust of his class action complaint is that the air purifier did nothing to alleviate his allergies. Bodner, at 1-2. The district court noted, however, that plaintiff did not even know what he was allergic to, had never been diagnosed or treated for allergies, frequently left open the window to his apartment, and was “exposed to allergens in other locations throughout the day,” id., at 2. Moreover, plaintiff’s air purifier was never tested to determine whether it performed as represented, id. The federal court also detailed that the class action had been formulated by plaintiff’s law firm before the firm “found” plaintiff, summarizing at page 2:

Continue reading "Class Action Defense Cases-Bodner v. Oreck: California Federal Court Refuses To Certify Class Action And Criticizes Ethics Of Plaintiff’s Counsel Westrup, Klick" »

Posted In: Certification of Class Actions, Class Action Court Decisions

Commission Exemption to Overtime Pay Under Federal Fair Labor Standards Act (FLSA) need only be Established by Preponderance of the Evidence Seventh Circuit Holds

Plaintiffs filed a labor law class action against their employer for violations of the federal Fair Labor Standards Act (FLSA) alleging that they were wrongly denied overtime pay. Defense attorneys moved for summary judgment on the ground that members of the putative class action were exempt from overtime pay under FLSA; the district court agreed and entered judgment in favor of the employer and against the class action plaintiffs. Yi v. Sterling Collision Centers, Inc., 480 F.3d 505, 506 (7th Cir. 2007). The Seventh Circuit affirmed.

This case involves “whether a system of compensation common in the auto repair industry is a commission system within the meaning of the [FLSA].” Yi, at 506. While the FLSA requires overtime pay for hours worked in excess of 40 hours per week, see 29 U.S.C. § 207(a)(1), the Circuit Court noted that “there is an exemption for workers in retail stores or other service establishments (including the automobile repair service that is the defendant in this case) who (1) are paid a wage that exceeds one and a half times the minimum wage and (2) receive more than half their compensation in the form of “commissions on goods or services,” Yi, at 506 (citing § 207(i)).

Preliminarily, the Circuit Court flatly rejected the argument that the defense must establish the exemption by “clear and affirmative evidence.” Yi, at 506. While it recognized that some sister circuits have used this or similar language, id., at 506-07, the Seventh Circuit’s analysis of the statute and the case law led it to a different conclusion: the burden of proof is no greater than in other federal civil cases – preponderance of the evidence. Id., at 507. In the Court’s opinion, the narrow interpretation of exemptions referenced in decisional law is properly viewed as “a tie breaker,” id., at 508.

Continue reading "FLSA Class Action Defense Cases-Yi v. Sterling Collision: Seventh Circuit Affirms Summary Judgment In Favor Of Defense In FLSA (Fair Labor Standards Act) Class Action Case Based On Commission Exemption To Overtime Pay" »

Posted In: Employment Law Class Actions, Class Action Court Decisions

Intervention in Class Action Rests in the Sound Discretion of the Trial Court and Lower Court did not Abuse that Discretion in Denying Leave to Intervene to Object to Class Action Settlement Illinois Court Holds

After more than 20 class action and individual lawsuits were filed against Ingersoll-Rand and Kryptonite based on the ease with which the Kryptonite U-Lock bicycle locks could be picked, defendants reached a settlement with plaintiffs in two of the nationwide class action lawsuits. Rosen v. Ingersoll-Rand Co., ___ N.E.2d ___ (Ill.App. March 30, 2007) [Slip Opn., at 1-3]. The class action settlement allowed purchasers of the U-Lock to exchange it for a more secure lock, or alternatively to receive vouchers redeemable for other Kryptonite products. Id., at 3. The proposed settlement addressed other terms as well, such as redress of class members whose bicycles were stolen because the U-Lock was picked, id. The trial court preliminarily approved the class action settlement, and held that it had jurisdiction over all class members residing in the United States and Canada, id. Certain named plaintiffs in other class action lawsuits objected to the proposed settlement on the ground that it did not adequately protect their interests and sought leave to intervene in the Illinois class action, id., at 4-5. The trial court denied intervention and approved the settlement, id., at 5-6. The appellate court affirmed.

With respect to the intervention motion, the appellate court held that, even though “courts should be indulgent [in class action cases] where objections concern notice of settlement,” Rosen, at 10, appellant had not satisfied the statutory test for intervention in a class action. In Illinois, a person seeking to intervene in a class action “may do so with leave of court and such leave shall be liberally granted except when the court finds that such intervention will disrupt the conduct of the action or otherwise prejudice the rights of the parties or the class.” Id. (citing Ill. Code Civ. Proc., §2-804(a)). The motion is left to the “sound judicial discretion” of the court and “will not be reversed absent an abuse of that discretion.” Id., at 11 (citation omitted). Appellant admitted that he was not entitled to intervene as of right, id., and the court held that the lower court did not abuse its discretion in denying permissive leave to amend, id., at 11-12.

NOTE: As a preliminary matter, the appellate court held that proposed intervenors had standing to appeal – or as the appellate court considered the issue, that appellants “should be considered a ‘party’ for the purposes of appealing the approval of the settlement.” Rosen, at 8-9

Download PDF file of Rosen v. Ingersoll-Rand

Posted In: Class Action Court Decisions

The American Conference Institute is sponsoring a two-day seminar entitled, "Defending Consumer Protection Class Actions." The conference will be held at the Fairmont Hotel in San Francisco on May 21 and 22, 2007. The conference promises to be well worthwhile.

More information about the American Conference Institute may be found at its website: www.americanconference.com.

Posted In: Class Actions In The News

As Matter of First Impression, if Class Action Complaint Alleges Less than $5 Million in Damages then Defense Bears Burden of Proving “Legal Certainty” that Jurisdictional Amount Required by CAFA (Class Action Fairness Act of 2005) is Satisfied Ninth Circuit Holds

Plaintiff filed a class action against her former employer in Oregon state court alleging violations of state labor laws and stating that the damages sought would not exceed $5 million. Lowdermilk v. U. S. Bank Nat'l Ass'n, 479 F.3d 994, 995 (9th Cir. 2007). Defense attorneys removed the class action to federal court under the Class Action Fairness Act of 2005 (CAFA); plaintiff filed a motion to remand the class action to state court, arguing that the amount in controversy did not exceed $5 million based on the allegations in the class action complaint. The district court held that unless plaintiff’s $5 million limitation on the amount in controversy was made in bad faith, then it was bound by the limitation stated therein; accordingly, it remanded the class action on the ground that the defense had not demonstrated that the damages limitation had been made in bad faith so the amount in controversy did not meet the $5 million threshold required by CAFA, id., at 996. The Ninth Circuit granted the employer’s request for leave to appeal. Id. As a matter of first impression, the Ninth Circuit held that when a class action complaint specifically alleges less than $5 million in damages, then CAFA requires that “the party seeking removal must prove with ‘legal certainty’ that the amount in controversy is satisfied, notwithstanding the prayer for relief in the complaint.” Id.

The Ninth Circuit concisely summarized the issue as follows: “In this case we are called upon to resolve a question of first impression: Under the Class Action Fairness Act of 2005 . . ., when the plaintiff has pled damages less than the jurisdictional amount, what must the defendant prove in order to remove the case to federal court?” Lowdermilk, at 995-96. The Circuit Court began its analysis by noting that the defense bears the burden of establishing removal jurisdiction, id., at 997 (citing Abrego Abrego v. Dow Chemical Co., 443 F.3d 676, 685 (9th Cir. 2006) (per curiam)), and that it was not disputed that CAFA's minimal diversity and numerosity requirements had been met, id.

The class action complaint sought damages “in total, less than five million dollars” plus attorney fees. Lowdermilk, at 997-98. The defense submitted evidence that the damages will exceed $5 million, and argued additionally that attorney fees should be included in determining the amount in controversy. Id., at 998. The Ninth Circuit began its analysis by rejecting defense claims that plaintiff failed to specify an amount in controversy; rather, it held that this case presented the precise situation reserved in Abrego Abrego – “What proof must the defendant adduce to contradict the plaintiff's claim that her damages are less than the jurisdictional amount?” Id. It answered this question of first impression by requiring “that where the plaintiff has pled an amount in controversy less than $5,000,000, the party seeking removal must prove with legal certainty that CAFA's jurisdictional amount is met.” Id., at 1000.

Continue reading "CAFA Class Action Defense Cases-Lowdermilk v. U.S. Bank: Ninth Circuit Holds Class Action Fairness Act (CAFA) Requires Defense Prove Certainty of Jurisdictional Amount For Removal When Class Action Claims Less Than $5 Million" »

Posted In: Certification of Class Actions, Class Action Court Decisions

Class Action Alleging Failure to Disclose Profit in Currency Exchange Transactions Fails Illinois Court Holds

Plaintiffs filed a class action in Illinois state court against various American Express Travel Related Services Company alleging violations of the state’s Consumer Fraud and Deceptive Business Practices Act in connection with foreign currency conversions services; specifically, the class action challenged Amex’s failure to disclose the exchange rate at which it would convert currency purchased from its customers. Sanchez v. American Express Travel Related Servs. Co., Inc., ___ N.E.2d ___ (Ill.App. March 29, 2007) [Slip Opn., at 1-3]. A defense motion to dismiss the class action was denied, id., at 3-4. Defense attorneys then moved for summary judgment arguing that each travel office sets the per transaction fee it charges, that the per transaction fee is not intended to be a representation that Amex will not receive any additional profit out of the transaction, and that Amex could not disclose the “float” because it buys and sells currency in bulk and does not know at the time it exchanges currency for a customer the rate that it will receive for that currency. Id., at 5-8. The deposition testimony elicited during discovery in the class action revealed further that the mark-up on the sale of currency to customers varies from travel office to travel office, and that the exchange rate for the purchase of currency is set by each travel office based on the local market and competition. Id., at 10-13. Further, Amex admitted that it hoped to profit by more than $3 per transaction, id., at 13-14. The trial court granted the defense summary judgment motion because plaintiff had no evidence that Amex represented the $3 transaction fee to be its net profit, id., at 14-15, and because plaintiff failed to prove that he suffered any damage, id., at 17. The appellate court affirmed.

The class action complaint alleged that, in addition to the posted $3 service fee for each currency exchange, Amex profited from the “float” between the rate it paid for the foreign currency and the rate at which it sold the currency. Sanchez, at 2-3. The appellate opinion quotes from the class action complaint at page 3 as follows: “In addition to profiting by charging each of its customers a ‘fee’ for the [foreign currency exchange service], American Express also profits by skimming the difference between the exchange rate it receives and the exchange rate it uses to convert a customer’s currency. The difference between the two exchange rates is a hidden, undisclosed charge it assesses to each of its customers that use the Service (hereafter ‘the Money Skimming Scheme’).”

Continue reading "Amex Class Action Defense Cases-Sanchez v. American Express: Illinois Court Affirms Summary Judgment In Favor Of Defense In Unfair Business Practice Class Action" »

Posted In: Class Action Court Decisions

As a resource for class action defense attorneys who defend against RESPA (Real Estate Settlement Procedures Act) class actions, we provide the text of Regulation X. Congress gave authority to the Secretary of the Department of Housing and Urban Development (HUD) to promulgate regulations for RESPA, and the regulations are set forth in 24 CFR § 3500.1 et seq. The regulations concerning the validity of contracts and liens under RESPA are set forth in § 3500.18, while the regulations providing for the enforcement of RESPA are contained in § 3500.19. Those regulations provide in full:

§ 3500.18. Validity of contracts and liens

Section 17 of RESPA (12 U.S.C. § 2615) governs the validity of contracts and liens under RESPA.

§ 3500.19. Enforcement

(a) Enforcement Policy. It is the policy of the Secretary regarding RESPA enforcement matters to cooperate with Federal, State or local agencies having supervisory powers over lenders or other persons with responsibilities under RESPA. Federal agencies with supervisory powers over lenders may use their powers to require compliance with RESPA. In addition, failure to comply with RESPA may be grounds for administrative action by the Secretary under part 24 of this title concerning debarment, suspension, ineligibility of contractors and grantees, or under part 25 of this title concerning the HUD Mortgagee Review Board. Nothing in this paragraph is a limitation on any other form of enforcement which may be legally available.

(b) Violations of section 8 of RESPA (12 U.S.C. § 2607), § 3500.14, or § 3500.15. Any person who violates §§ 3500.14 or 3500.15 shall be deemed to violate Section 8 of RESPA and shall be sanctioned accordingly.

(c) Violations of section 9 of RESPA (12 U.S.C. § 2608) or § 3500.16. Any person who violates Section 3500.16 of this part shall be deemed to violate Section 9 of RESPA and shall be sanctioned accordingly.

(d) Investigations. The procedures for investigations and investigational proceedings are set forth in 24 CFR part 3800.

Posted In: Statutes & Rules

To assist California class action defense attorneys in anticipating the claims against which they may have to defend, we provide weekly, unofficial summaries of the legal categories for new class actions filed in California state and federal courts in the Los Angeles, San Francisco, San Jose, Sacramento, San Diego, San Mateo, Oakland/Alameda and Orange County areas. We include only those categories that include 10% or more of the class action filings during the relevant timeframe. Labor law class action cases generally top the list, and this past week was no exception. This report covers the time period from April 13 – April 19, 2007, during which time there were approximately 35 new class action lawsuits – a relatively low number of new class action filings by California standards. Of these new class actions, labor law class action cases accounted for 40%, with 14 new filings. Unfair competition law (UCL) class action claims, which include false advertising class action cases, were the only other category to meet the 10% threshold involved with 9 new cases (26%).

Posted In: Class Actions In The News

Class Action on Behalf of Purchasers of Stock on NASDAQ Europe More Properly Brought in Belgium, Warranting Dismissal of Class Action on Grounds of Forum Non Conveniens Massachusetts Federal Court Holds

Plaintiffs, three individuals from Belgium, filed a putative securities class action against Lernout & Hauspie N.V., a Belgian company that developed speech recognition software, and other defendants on behalf of those who purchased L&H securities on the European EASDAQ stock exchange for alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and of Rule 10b-5. Warlop v. Lernout, 473 F.Supp.2d 260, 261 (D. Mass. 2007). This class action was but one of several class actions filed against L&H, and this court opinion is but one of “several extensive opinions concerning the alleged fraudulent scheme causing the collapse of L&H,” id., at 261-62 (citations omitted). Defense attorneys for Belgian defendants KPMG-Belgium, the Outside Directors, Vanderhoydonck and Willaert moved to dismiss the class action under Rule 12(b)(6) on the grounds of forum non conveniens. The district court granted the motion.

Briefly, L&H was at one time very successful, and traded simultaneously on both Europe's EASDAQ market (known as “NASDAQ Europe”) and NASDAQ. Warlop, at 262. The class action complaint alleged that the company’s success was founded on misrepresentions by its directors concerning L&H’s finances, and on “the fraudulent creation of sham firms in Belgium and elsewhere which licensed software,” id. The fraud was discovered in August 2000 and EASDAQ suspending trading of the company’s securities; ultimately L&H collapsed. Id. A criminal investigation followed, leading to the arrest by the Belgian government of three L&H directors – Lernout, Hauspie and Willaert; by operation of Belgian law, all civil cases were stayed during the pendency of the still on-going criminal investigation, including a civil action by the class action plaintiffs in this case that essentially tracks the allegations in the class action complaint. Id. As noted above, several securities class actions were filed in various federal courts; the actions were eventually consolidated before the District of Massachusetts, and the consolidated amended class action complaint limited the scope of the class action to individuals who purchased L&H stock on NASDAQ. Id.

Continue reading "Class Action Defense Cases-Warlop v. Lernout: Massachusetts Federal Court Grants Defense Motion To Dismiss Securities Class Action On Grounds Of Forum Non Conveniens" »

Posted In: Class Action Court Decisions, PSLRA/SLUSA Class Actions

In Case that will have Direct and Substantial Impact on Labor California Law Class Action Cases, California Supreme Court Rejects Defense Argument that Additional Pay Awards under Labor Code § 226.7 Constitute “Penalties” Subject to One-Year Statute of Limitations and Holds that such Awards Constitute “Wages” Subject to Three-Year Statute of Limitations

Plaintiff, a store manager at a Kenneth Cole Productions clothing store, filed an individual (not class action) lawsuit against his former employer seeking unpaid overtime and waiting penalties, and for meal and rest period and itemized pay statement violations, because he regularly worked 9-10 hours days and rarely took meal or rest breaks. Murphy v. Kenneth Cole Productions, Inc., ___ Cal.4th ___ (Cal. April 16, 2007) [Slip Opn., at 2-3]. The trial court ruled against the employer and, in part, awarded “an additional hour of pay” under California Labor Code section 226.7, and applied to three-year statute of limitations to this award. Id., at 4. Defense attorneys appealed, and the appellate court reversed in part, holding that awards under § 226.7 constituted “penalties” rather than “wages,” and were therefore subject to a one-year limitations period. Id. at 4-5.

Plaintiff initially filed a wage claim with the state’s Labor Commissioner seeking overtime and waiting time penalties; the Commissioner ruled in plaintiff’s favor, and KCP filed for a trial de novo, thereby vesting jurisdiction in the Superior Court. Murphy, at 3. Plaintiff sought additional relief in this civil action, adding claims for failure to provide meal and rest periods and for itemized pay statement violations. Id., at 3-4. The trial court allowed plaintiff to add the additional claims to his action, and ultimately entered judgment in favor of plaintiff. Id., at 4. Of critical importance, the trial court concluded that the “additional hour of pay” awardable under § 226.7 for failing to provide meal or rest periods constituted “wages” rather than “penalties” and so awarded damages for meal and rest period violations dating back to October 2000, id. This issue had been unsettled in California, with the majority of appellate court holding that these damages constituted penalties. The Supreme Court, however agreed with the trial court.

Continue reading "Class Action Defense Issues-Murphy v. Kenneth Cole: California Supreme Court Holds Three-Year Limitations Period Applies To Labor Code § 226.7 Additional Pay Awards" »

Posted In: Employment Law Class Actions, Class Action Court Decisions

FDCPA Class Action Claim Belonged to Bankruptcy Estate and Settlement of Individual Claim Appropriate because Trustee could not Prosecute Class Action Ohio Federal Court Holds

After a law firm filed an action to collect a debt from her, plaintiff filed a putative class action against the law firm alleging violations of the federal Fair Debt Collection Practices Act (FDCPA). Griffith v. Javitch, Block & Rathbone, LLP, 358 B.R. 338, 340 (S.D. Ohio 2007). Shortly thereafter, plaintiff and her husband filed a Chapter 7 bankruptcy petition in the federal court for the Southern District of Ohio, staying the underlying action, and plaintiff listed the class action as a contingent claim her creditor, Great Seneca Financial Corporation, but did not separately list her class action against the law firm. Id. The bankruptcy trustee determined that it was a no-asset case, and plaintiff and her husband received a bankruptcy discharge in October 2004; less than a month later, the underlying lawsuit was reopened. Id. The parties jointly requested a stay pending a decision by the federal Court of Appeals for the Sixth Circuit in a case concerning “several defenses to an FDCPA suit that are raised by [the law firm] here on essentially identical factual allegations,” id. (citing Todd v. Weltman, Weinberg & Reis, 434 F.3d 432 (6th Cir. 2006). The underlying class action again became active in June 2006.

Defense attorneys moved for dismissal or summary judgment, arguing that the class action claim belonged to the bankruptcy trustee because it was not properly listed on the bankruptcy petition schedules; accordingly, the defense argued, plaintiff lacked standing to prosecute the class action. Griffith, at 340. Plaintiff countered that a “class action claim” had been listed on the petition, and advised the court that the bankruptcy trustee would be filing a formal abandonment of the claim so that her class action could proceed; instead, the trustee advised plaintiff’s lawyer that it would not be in the best interests of the bankruptcy estate to abandon the claim. Id. The court issued an order to show cause why the complaint should not be dismissed for lack of standing, but the defense motions were held in abeyance pending further bankruptcy court proceedings. Id. The trustee moved to reopen the bankruptcy case, and to hire plaintiff’s lawyer to prosecute the class action on behalf of the estate. Id.

Continue reading "Class Action Defense Cases-Griffith v. Javitch: Ohio Court Holds Debtor’s Federal Fair Debt Collection Practices Act (FDCPA) Class Action Claim Belongs To Bankruptcy Trustee And Approves Settlement Of Individual Claim" »

Posted In: Certification of Class Actions, FDCPA Class Actions, Class Action Court Decisions

Second Circuit Holds in Putative Class Action that Federal Worker Adjustment Retraining and Notification (WARN) Act Applies if Sale of Assets to New Company is Delayed until One Week After Termination of Employees even if Employees cannot Demonstrate any Economic Harm

Plaintiffs filed a putative class action against their former employer, Meridian Rail, alleging violations of the federal Worker Adjustment Retraining and Notification Act of 1988 (WARN) arising out of the closure (through sale) of one of its operations sites. Phason v. Meridian Rail Corp., 479 F.3d 527, 528 (7th Cir. 2007). The district court entered judgment for defendant, holding that the WARN Act did not apply. Based on that holding, the district court found it unnecessary to determine whether the putative class action should in fact proceed as a class action. The Seventh Circuit reversed.

On December 31, 2003, Meridian Rail disclosed to its employees that it was immediately ceasing operations in Chicago Heights, Illinois, and “invited them to apply for jobs with NAE Nortrak, Inc., which had agreed to buy the assets.” Phason, at 578. Nortrak previously had issued an identical invitation in mid-December after “Nortrak and Meridian shook hands on the deal.” Id. However, the sale did not close until January 8, 2004, 8 days after Meridian had “severed all ties to the former workers.” Id. Because the WARN Act requires that an employer give 60 days' notice before subjecting at least 50 of them to “employment loss,” this class action lawsuit was filed. The district court described the theory behind the class action as “simple,” explaining at page 579: “One statutory trigger is a ‘plant closing,’ which 29 U.S.C. § 2101(a)(2) defines as any ‘permanent or temporary’ shutdown that ‘results in an employment loss at the single site of employment during any 30-day period for 50 or more employees’.”

Defense attorneys argued, and the district court held, that the WARN Act does not apply because Nortrak hired all but about 45 Meridian Rail employees. Phason, at 528-29. Meridian Rail relied upon the last sentence of Section 2101 (b)(1), which provides: “Notwithstanding any other provision of this Act, any person who is an employee of the seller (other than a part-time employee) as of the effective date of the sale shall be considered an employee of the purchaser immediately after the effective date of the sale.” The Circuit Court explained at page 529 that “[t]his sentence is the linchpin of Meridian's position.” According to Meridian Rail, “It sold the plant to Nortrak, and as Nortrak soon hired many of the workers (leaving fewer than 50 disappointed applicants), no ‘employment loss’ occurred.” Id. Plaintiffs countered that the relevant inquiry was “how many people lost their jobs on December 31, 2003, rather than the difference between that number and how many found work later,” and it was undisputed that if December 31 is the relevant date than over 50 lost employment. Id., at 529.

Continue reading "Class Action Defense Cases-Phason v. Meridian Rail: Federal WARN Act Applies If Employer Terminates Employees Before Sale Of Assets Closes Warranting Reversal Of Judgment In Favor Of Defense In Class Action Seventh Circuit Holds" »

Posted In:

"On Additional Hour of Pay" under California Labor Code Section 226.7 Constitutes Wage or Premium Pay Subject to Three-Year Statute of Limitations Period, not a Penalty Subject to One-Year Limitations Period, California Supreme Court Holds

In a case that will have a substantial and immediate impact on labor law class action cases, the California Supreme Court today issued its long-awaited decision in Murphy v. Kenneth Cole Productions, Inc., which addressed two issues: "first, whether the 'one additional hour of pay' provided for in Labor Code section 226.7 constitutes a wage or premium pay subject to a three-year statute of limitations . . . or a penalty subject to a one-year statute of limitations . . .; second, whether a trial court, conducting a de novo trial, can consider additional wage claims not presented in the administrative proceeding before the state Labor Commissioner." Slip Opn., at 1 (citations omitted). The Court of Appeal had held that the payment was a penalty subject to the shorter limitations period; the Supreme Court disagreed. As the Supreme Court summarized its opinion, "We conclude that the remedy provided in Labor Code section 226.7 constitutes a wage or premium pay and is governed by a three-year statute of limitations and that the trial court properly considered the additional, but related, wage claims during the de novo trial." Id.

A complete summary of the opinion will be posted later this week.

Posted In: Employment Law Class Actions, Class Action Court Decisions

Extensive News Reports of the Risks of Vioxx Placed Investors on Inquiry Notice More than Two Years before Filing of Securities Fraud Class Actions, Thus Warranting Dismissal of Class Action Complaint as Time-Barred as Requested by Defense Federal Court Holds

This securities fraud class action is but one of thousands of class action and individual complaints filed against Merck arising out of its prescription drug Vioxx. This class action alleged that Merck withheld information that Vioxx increased a patient’s risk of heart attack and misrepresented the drug’s safety. In re Merck & Co., Inc., Securities, Derivative & "ERISA" Litig., ___ F.Supp.2d ___ (D. N.J. April 12, 2007) [Slip Opn., at 2]. Defense attorneys moved to dismiss the class action complaint on several grounds, mostly notably that the claims were time-barred, id., at 1-2; the district court agreed with the statute of limitations defense and dismissed the class action complaint with prejudice as untimely.

By way of background, Merck brought Vioxx - a nonsterodial anti-inflammatory drug (NSAID) - to the market in May 1999,and two years later the Food & Drug Administration approved Vioxx for various uses. Slip Opn, at 2-3. “Merck continued to research, study and test Vioxx after its approval by the FDA and introduction to the market.” Id., at 3. In March 2000, Merck disclosed that one of those studies revealed that an increased incidence of heart attack and other thrombotic events. Id. Merck’s press release attributed this finding to the properties of the control drug but, according to the class action complaint allegations, Merck knew that the real cause of this difference was that Vioxx increased the risk of heart attacks. Id., at 4. The FDA advisory committee found inclusive evidence of the cause of the increased risk of cardiac events but believed it prudent to “include on the Vioxx label data about the higher incidence of cardiovascular events,” id. The study received extensive news coverage as early as April 2000, and several news articles warned patients that Vioxx “might increase their risk of suffering a heart attack.” Id., at 5. Other news reports agreed with Merck’s conclusion that the control drug used in the study worked to prevent heart attacks, thus accounting for the difference in incidence of cardiac events with the Vioxx control group, id., at 6-7. For its part, Merck issued numerous press releases touting the safety of Vioxx, id., at 7-8. The FDA criticized Merck’s promotional efforts, and in a warning letter dated September 17, 2001 and published on the FDA website, the FDA “admonished Merck for misrepresenting the safety profile of Vioxx, downplaying the cardiovascular findings of the . . . study,” id., at 8.

Continue reading "Merck Class Action Defense Cases-In re Merck: New Jersey Federal Court Grants Defense Motion To Dismiss Securities Fraud Class Action Finding Class Action Claims Barred By Statute Of Limitations" »

Posted In: PSLRA/SLUSA Class Actions

On April 12, 2007, United States District Court Judge Stanley R. Chesler of the District of New Jersey dismissed a securities fraud clas action against Merck, agreeing with defense attorneys that the class action claims are time-barred. The ruling represents yet another victory in Merck’s defense against thousands of class action and individual complaints arising, directly or indirectly, out of its prescription drug Vioxx.

A summary of the district court’s ruling will be posted later in the week.

Posted In: Class Actions In The News

As a resource for class action defense attorneys who defend against RESPA (Real Estate Settlement Procedures Act) class actions, we provide the text of Regulation X.Congress gave authority to the Secretary of the Department of Housing and Urban Development (HUD) to promulgate regulations for RESPA, and the regulations are set forth in 24 CFR § 3500.1 et seq.The regulations concerning escrow accounts are set forth in § 3500.17, which provides:

§ 3500.17. Escrow accounts

(a) General.This section sets out the requirements for an escrow account that a lender establishes in connection with a federally related mortgage loan. It sets limits for escrow accounts using calculations based on monthly payments and disbursements within a calendar year.If an escrow account involves biweekly or any other payment period, the requirements in this section shall be modified accordingly.A HUD Public Guidance Document entitled "Biweekly Payments--Example" provides examples of biweekly accounting and a HUD Public Guidance Document entitled "Annual Escrow Account Disclosure Statement-- Example" provides examples of a 3-year accounting cycle that may be used in accordance with paragraph (c)(9) of this section.A HUD Public Guidance Document entitled "Consumer Disclosure for Voluntary Escrow Account Payments" provides a model disclosure format that originators and servicers are encouraged, but not required, to provide to consumers when the originator or servicer anticipates a substantial increase in disbursements from the escrow account after the first year of the loan. The disclosures in that model format may be combined with or included in the Initial Escrow Account Statement required in §3500.17(g).

(b) Definitions.As used in this section:

Acceptable accounting method means an accounting method that a servicer uses to conduct an escrow account analysis for an escrow account subject to the provisions of § 3500.17(c).

Aggregate (or) composite analysis, hereafter called aggregate analysis, means an accounting method a servicer uses in conducting an escrow account analysis by computing the sufficiency of escrow account funds by analyzing the account as a whole. Appendix E to this part sets forth examples of aggregate escrow account analyses.

Annual Escrow Account Statement means a statement containing all of the information set forth in § 3500.17(i).As noted in § 3500.17(i), a servicer shall submit an annual escrow account statement to the borrower within 30 calendar days of the end of the escrow account computation year, after conducting an escrow account analysis.

Conversion date means the date three years after the publication date of the rule adding this section (i.e., October 27, 1997) by which date all servicers shall use aggregate analysis.

Cushion or reserve (hereafter cushion) means funds that a servicer may require a borrower to pay into an escrow account to cover unanticipated disbursements or disbursements made before the borrower's payments are available in the account, as limited by § 3500.17(c).

Deficiency is the amount of a negative balance in an escrow account.As noted in § 3500.17(f), if a servicer advances funds for a borrower, then the servicer must perform an escrow account analysis before seeking repayment of the deficiency.

Delivery means the placing of a document in the United States mail, first-class postage paid, addressed to the last known address of the recipient.Hand delivery also constitutes delivery.

Disbursement date means the date on which the servicer actually pays an escrow item from the escrow account.

Escrow account means any account that a servicer establishes or controls on behalf of a borrower to pay taxes, insurance premiums (including flood insurance), or other charges with respect to a federally related mortgage loan, including charges that the borrower and servicer have voluntarily agreed that the servicer should collect and pay. The definition encompasses any account established for this purpose, including a "trust account", "reserve account", "impound account", or other term in different localities. An "escrow account" includes any arrangement where the servicer adds a portion of the borrower's payments to principal and subsequently deducts from principal the disbursements for escrow account items.For purposes of this section, the term "escrow account" excludes any account that is under the borrower's total control.

Escrow account analysis means the accounting that a servicer conducts in the form of a trial running balance for an escrow account to:

(1) Determine the appropriate target balances;

(2) Compute the borrower's monthly payments for the next escrow account computation year and any deposits needed to establish or maintain the account; and

(3) Determine whether shortages, surpluses or deficiencies exist.

Escrow account computation year is a 12-month period that a servicer establishes for the escrow account beginning with the borrower's initial payment date.The term includes each 12-month period thereafter, unless a servicer chooses to issue a short year statement under the conditions stated in § 3500.17(i)(4).

Escrow account item or separate item means any separate expenditure category, such as "taxes" or "insurance", for which funds are collected in the escrow account for disbursement. An escrow account item with installment payments, such as local property taxes, remains one escrow account item regardless of multiple disbursement dates to the tax authority.

Initial escrow account statement means the first disclosure statement that the servicer delivers to the borrower concerning the borrower's escrow account. The initial escrow account statement shall meet the requirements of §3500.17(g) and be in substantially the format set forth in § 3500.17(h).

Installment payment means one of two or more payments payable on an escrow account item during an escrow account computation year.An example of an installment payment is where a jurisdiction bills quarterly for taxes.

Payment due date means the date each month when the borrower's monthly payment to an escrow account is due to the servicer. The initial payment date is the borrower's first payment due date to an escrow account.

Penalty means a late charge imposed by the payee for paying after the disbursement is due.It does not include any additional charge or fee imposed by the payee associated with choosing installment payments as opposed to annual payments or for choosing one installment plan over another.

Phase-in period means the period beginning on May 24, 1995, and ending on the conversion date, i.e., October 27, 1997, by which date all servicers shall use the aggregate accounting method in conducting escrow account analyses.

Post-rule account means an escrow account established in connection with a federally related mortgage loan whose settlement date is on or after May 24, 1995.

Pre-accrual is a practice some servicers use to require borrowers to deposit funds, needed for disbursement and maintenance of a cushion, in the escrow account some period before the disbursement date. Pre-accrual is subject to the limitations of §3500.17(c).

Pre-rule account is an escrow account established in connection with a federally related mortgage loan whose settlement date is before May 24, 1995.

Shortage means an amount by which a current escrow account balance falls short of the target balance at the time of escrow analysis.

Single-item analysis means an accounting method servicers use in conducting an escrow account analysis by computing the sufficiency of escrow account funds by considering each escrow item separately. Appendix E to this part sets forth examples of single-item analysis.

Submission (of an escrow account statement) means the delivery of the statement.

Surplus means an amount by which the current escrow account balance exceeds the target balance for the account.

System of recordkeeping means the servicer's method of keeping information that reflects the facts relating to that servicer's handling of the borrower's escrow account, including, but not limited to, the payment of amounts from the escrow account and the submission of initial and annual escrow account statements to borrowers.

Target balance means the estimated month end balance in an escrow account that is just sufficient to cover the remaining disbursements from the escrow account in the escrow account computation year, taking into account the remaining scheduled periodic payments, and a cushion, if any.

Trial running balance means the accounting process that derives the target balances over the course of an escrow account computation year.Section 3500.17(d) provides a description of the steps involved in performing a trial running balance.

(c) Limits on payments to escrow accounts; acceptable accounting methods to determine limits.

(1) A lender or servicer (hereafter servicer) shall not require a borrower to deposit into any escrow account, created in connection with a federally related mortgage loan, more than the following amounts:

(i) Charges at settlement or upon creation of an escrow account.At the time a servicer creates an escrow account for a borrower, the servicer may charge the borrower an amount sufficient to pay the charges respecting the mortgaged property, such as taxes and insurance, which are attributable to the period from the date such payment(s) were last paid until the initial payment date. The "amount sufficient to pay" is computed so that the lowest month end target balance projected for the escrow account computation year is zero (-0-) (see Step 2 in Appendix E to this part).In addition, the servicer may charge the borrower a cushion that shall be no greater than one-sixth ( 1/6 ) of the estimated total annual payments from the escrow account.

(ii) Charges during the life of the escrow account. Throughout the life of an escrow account, the servicer may charge the borrower a monthly sum equal to one-twelfth ( 1/12 ) of the total annual escrow payments which the servicer reasonably anticipates paying from the account.In addition, the servicer may add an amount to maintain a cushion no greater than one-sixth ( 1/6 ) of the estimated total annual payments from the account. However, if a servicer determines through an escrow account analysis that there is a shortage or deficiency, the servicer may require the borrower to pay additional deposits to make up the shortage or eliminate the deficiency, subject to the limitations set forth in § 3500.17(f).

(2) Escrow analysis at creation of escrow account. Before establishing an escrow account, the servicer must conduct an escrow account analysis to determine the amount the borrower must deposit into the escrow account (subject to the limitations of paragraph (c)(1)(i) of this section), and the amount of the borrower's periodic payments into the escrow account (subject to the limitations of paragraph (c)(1)(ii) of this section).In conducting the escrow account analysis, the servicer must estimate the disbursement amounts according to paragraph (c)(7) of this section. Pursuant to paragraph (k) of this section, the servicer must use a date on or before the deadline to avoid a penalty as the disbursement date for the escrow item and comply with any other requirements of paragraph (k) of this section.Upon completing the initial escrow account analysis, the servicer must prepare and deliver an initial escrow account statement to the borrower, as set forth in paragraph (g) of this section.The servicer must use the escrow account analysis to determine whether a surplus, shortage, or deficiency exists and must make any adjustments to the account pursuant to paragraph (f) of this section.

(3) Subsequent escrow account analyses. For each escrow account, the servicer must conduct an escrow account analysis at the completion of the escrow account computation year to determine the borrower's monthly escrow account payments for the next computation year, subject to the limitations of paragraph (c)(1)(ii) of this section.In conducting the escrow account analysis, the servicer must estimate the disbursement amounts according to paragraph (c)(7) of this section. Pursuant to paragraph (k) of this section, the servicer must use a date on or before the deadline to avoid a penalty as the disbursement date for the escrow item and comply with any other requirements of paragraph (k) of this section. The servicer must use the escrow account analysis to determine whether a surplus, shortage, or deficiency exists, and must make any adjustments to the account pursuant to paragraph (f) of this section. Upon completing an escrow account analysis, the servicer must prepare and submit an annual escrow account statement to the borrower, as set forth in paragraph (i) of this section.

(4) Acceptable accounting methods to determine escrow limits.The following are acceptable accounting methods that servicers may use in conducting an escrow account analysis.

(i) Pre-rule accounts. For pre-rule accounts, servicers may use either single-item analysis or aggregate-analysis during the phase-in period. In conducting the escrow account analysis, servicers shall use "month-end" accounting.Under month-end accounting, the timing of the disbursements and payments within the month is irrelevant.As of the conversion date, all pre-rule accounts shall comply with the requirements for post-rule accounts in paragraph (c)(4)(ii) of this section. During the phase-in period, the transfer of servicing of a pre-rule account to another servicer does not convert the account to a post-rule account.After May 24, 1995, refinancing transactions (as defined in § 3500.2) shall comply with the requirements for post-rule accounts.

(ii) Post-rule accounts. For post-rule accounts, servicers shall use aggregate accounting to conduct an escrow account analysis.In conducting the escrow account analysis, servicers shall use "month-end" accounting.Under month-end accounting, the timing of the disbursements and payments within the month is irrelevant.

(5) Cushion.For post-rule accounts, the cushion shall be no greater than one-sixth ( 1/6 ) of the estimated total annual disbursements from the escrow account using aggregate analysis accounting.For pre-rule accounts, the cushion may not exceed the total of one-sixth of the estimated annual disbursements for each escrow account item using single-item analysis accounting.In determining the cushion using single-item analysis, a servicer shall not divide an escrow account item into sub-accounts, even if the payee requires installment payments.

(6) Restrictions on pre-accrual. For pre-rule accounts, a servicer shall not require any pre-accrual that results in the escrow account balance exceeding the limits of paragraph (c)(1) of this section.In addition, if the mortgage documents in a pre-rule account are silent about the amount of pre-accrual, the servicer shall not require in excess of one month of pre-accrual, subject to the additional limitations provided in paragraph (c)(8) of this section.For post-rule accounts, a servicer shall not practice pre-accrual.

(7) Servicer estimates of disbursement amounts. To conduct an escrow account analysis, the servicer shall estimate the amount of escrow account items to be disbursed.If the servicer knows the charge for an escrow item in the next computation year, then the servicer shall use that amount in estimating disbursement amounts. If the charge is unknown to the servicer, the servicer may base the estimate on the preceding year's charge, or the preceding year's charge as modified by an amount not exceeding the most recent year's change in the national Consumer Price Index for all urban consumers (CPI, all items). In cases of unassessed new construction, the servicer may base an estimate on the assessment of comparable residential property in the market area.

(8) Provisions in mortgage documents. The servicer shall examine the mortgage loan documents to determine the applicable cushion and limitations on pre-accrual for each escrow account.If the mortgage loan documents provide for lower cushion limits or less pre-accrual than this section, then the terms of the loan documents apply. Where the terms of any mortgage loan document allow greater payments to an escrow account than allowed by this section, then this section controls the applicable limits. Where the mortgage loan documents do not specifically establish an escrow account, whether a servicer may establish an escrow account for the loan is a matter for determination by State law. If the mortgage loan document is silent on the escrow account limits (for cushion or pre-accrual) and a servicer establishes an escrow account under State law, then the limitations of this section apply unless State law provides for a lower amount. If the loan documents provide for escrow accounts up to the RESPA limits, then the servicer may require the maximum amounts consistent with this section, unless an applicable State law sets a lesser amount.

(9) Assessments for periods longer than one year. Some escrow account items may be billed for periods longer than one year. For example, servicers may need to collect flood insurance or water purification escrow funds for payment every three years. In such cases, the servicer shall estimate the borrower's payments for a full cycle of disbursements.For a flood insurance premium payable every 3 years, the servicer shall collect the payments reflecting 36 equal monthly amounts. For two out of the three years, however, the account balance may not reach its low monthly balance because the low point will be on a three-year cycle, as compared to an annual one. The annual escrow account statement shall explain this situation (see example in the HUD Public Guidance Document entitled "Annual Escrow Account Disclosure Statement--Example", available in accordance with §3500.3).

(d) Methods of escrow account analysis. Paragraph (c) of this section prescribes acceptable accounting methods.The following sets forth the steps servicers shall use to determine whether their use of an acceptable accounting method conforms with the limitations in § 3500.17(c)(1). The steps set forth in this section derive maximum limits. Servicers may use accounting procedures that result in lower target balances.In particular, servicers may use a cushion less than the permissible cushion or no cushion at all.This section does not require the use of a cushion.

(1) Aggregate analysis. (i) When a servicer uses aggregate analysis in conducting the escrow account analysis, the target balances may not exceed the balances computed according to the following arithmetic operations:

(A) The servicer first projects a trial balance for the account as a whole over the next computation year (a trial running balance).In doing so the servicer assumes that it will make estimated disbursements on or before the earlier of the deadline to take advantage of discounts, if available, or the deadline to avoid a penalty.The servicer does not use pre-accrual on these disbursement dates. The servicer also assumes that the borrower will make monthly payments equal to one-twelfth of the estimated total annual escrow account disbursements.

(B) The servicer then examines the monthly trial balances and adds to the first monthly balance an amount just sufficient to bring the lowest monthly trial balance to zero, and adjusts all other monthly balances accordingly.

(C) The servicer then adds to the monthly balances the permissible cushion.The cushion is two months of the borrower's escrow payments to the servicer or a lesser amount specified by State law or the mortgage document (net of any increases or decreases because of prior year shortages or surpluses, respectively).

(ii) Lowest monthly balance. Under aggregate analysis, the lowest monthly target balance for the account shall be less than or equal to one-sixth of the estimated total annual escrow account disbursements or a lesser amount specified by State law or the mortgage document.The target balances that the servicer derives using these steps yield the maximum limit for the escrow account.Appendix E to this part illustrates these steps.

(2) Single-item or other non-aggregate analysis method. (i) When a servicer uses single-item analysis or any hybrid accounting method in conducting an escrow account analysis during the phase-in period, the target balances may not exceed the balances computed according to the following arithmetic operations:

(A) The servicer first projects a trial balance for each item over the next computation year (a trial running balance). In doing so the servicer assumes that it will make estimated disbursements on or before the earlier of the deadline to take advantage of discounts, if available, or the deadline to avoid a penalty.The servicer does not use pre-accrual on these disbursement dates. The servicer also assumes that the borrower will make periodic payments equal to one-twelfth of the estimated total annual escrow account disbursements.

(B) The servicer then examines the monthly trial balance for each escrow account item and adds to the first monthly balance for each separate item an amount just sufficient to bring the lowest monthly trial balance for that item to zero, and then adjusts all other monthly balances accordingly.

(C) The servicer then adds the permissible cushion, if any, to the monthly balance for the separate escrow account item. The permissible cushion is two months of escrow payments for the escrow account item (net of any increases or decreases because of prior year shortages or surpluses, respectively) or a lesser amount specified by State law or the mortgage document.

(D) The servicer then examines the balances for each item to make certain that the lowest monthly balance for that item is less than or equal to one-sixth of the estimated total annual escrow account disbursements for that item or a lesser amount specified by State law or the mortgage document.

(ii) In performing an escrow account analysis using single-item analysis, servicers may account for each escrow account item separately, but servicers shall not further divide accounts into sub-accounts, even if the payee of a disbursement requires installment payments. The target balances that the servicer derives using these steps yield the maximum limit for the escrow account. Appendix F to this part illustrates these steps.

(e) Transfer of servicing. (1) If the new servicer changes either the monthly payment amount or the accounting method used by the transferor (old) servicer, then the new servicer shall provide the borrower with an initial escrow account statement within 60 days of the date of servicing transfer.

(i) Where a new servicer provides an initial escrow account statement upon the transfer of servicing, the new servicer shall use the effective date of the transfer of servicing to establish the new escrow account computation year.

(ii) Where the new servicer retains the monthly payments and accounting method used by the transferor servicer, then the new servicer may continue to use the escrow account computation year established by the transferor servicer or may choose to establish a different computation year using a short-year statement. At the completion of the escrow account computation year or any short year, the new servicer shall perform an escrow analysis and provide the borrower with an annual escrow account statement.

(2) The new servicer shall treat shortages, surpluses and deficiencies in the transferred escrow account according to the procedures set forth in §3500.17(f).

(3) A pre-rule account remains a pre-rule account upon the transfer of servicing to a new servicer so long as the transfer occurs before the conversion date.

(f) Shortages, surpluses, and deficiencies requirements.(1) Escrow account analysis.For each escrow account, the servicer shall conduct an escrow account analysis to determine whether a surplus, shortage or deficiency exists.

(i) As noted in § 3500.17(c)(2) and (3), the servicer shall conduct an escrow account analysis upon establishing an escrow account and at completion of the escrow account computation year.

(ii) The servicer may conduct an escrow account analysis at other times during the escrow computation year. If a servicer advances funds in paying a disbursement, which is not the result of a borrower's payment default under the underlying mortgage document, then the servicer shall conduct an escrow account analysis to determine the extent of the deficiency before seeking repayment of the funds from the borrower under this paragraph (f).

(2) Surpluses.(i) If an escrow account analysis discloses a surplus, the servicer shall, within 30 days from the date of the analysis, refund the surplus to the borrower if the surplus is greater than or equal to 50 dollars ($50). If the surplus is less than 50 dollars ($50), the servicer may refund such amount to the borrower, or credit such amount against the next year's escrow payments.

(ii) These provisions regarding surpluses apply if the borrower is current at the time of the escrow account analysis. A borrower is current if the servicer receives the borrower's payments within 30 days of the payment due date. If the servicer does not receive the borrower's payment within 30 days of the payment due date, then the servicer may retain the surplus in the escrow account pursuant to the terms of the mortgage loan documents.

(iii) After an initial or annual escrow analysis has been performed, the servicer and the borrower may enter into a voluntary agreement for the forthcoming escrow accounting year for the borrower to deposit funds into the escrow account for that year greater than the limits established under paragraph (c) of this section.Such an agreement shall cover only one escrow accounting year, but a new voluntary agreement may be entered into after the next escrow analysis is performed. The voluntary agreement may not alter how surpluses are to be treated when the next escrow analysis is performed at the end of the escrow accounting year covered by the voluntary agreement.

(3) Shortages.(i) If an escrow account analysis discloses a shortage of less than one month's escrow account payment, then the servicer has three possible courses of action:

(A) The servicer may allow a shortage to exist and do nothing to change it;

(B) The servicer may require the borrower to repay the shortage amount within 30 days;or

(C) The servicer may require the borrower to repay the shortage amount in equal monthly payments over at least a 12-month period.

(ii) If an escrow account analysis discloses a shortage that is greater than or equal to one month's escrow account payment, then the servicer has two possible courses of action:

(A) The servicer may allow a shortage to exist and do nothing to change it;or

(B) The servicer may require the borrower to repay the shortage in equal monthly payments over at least a 12-month period.

(4) Deficiency.If the escrow account analysis confirms a deficiency, then the servicer may require the borrower to pay additional monthly deposits to the account to eliminate the deficiency.

(i) If the deficiency is less than one month's escrow account payment, then the servicer:

(A) May allow the deficiency to exist and do nothing to change it;

(B) May require the borrower to repay the deficiency within 30 days;or

(C) May require the borrower to repay the deficiency in 2 or more equal monthly payments.

(ii) If the deficiency is greater than or equal to 1 month's escrow payment, the servicer may allow the deficiency to exist and do nothing to change it or may require the borrower to repay the deficiency in two or more equal monthly payments.

(iii) These provisions regarding deficiencies apply if the borrower is current at the time of the escrow account analysis. A borrower is current if the servicer receives the borrower's payments within 30 days of the payment due date. If the servicer does not receive the borrower's payment within 30 days of the payment due date, then the servicer may recover the deficiency pursuant to the terms of the mortgage loan documents.

(5) Notice of Shortage or Deficiency in Escrow Account. The servicer shall notify the borrower at least once during the escrow account computation year if there is a shortage or deficiency in the escrow account.The notice may be part of the annual escrow account statement or it may be a separate document.

(g) Initial Escrow Account Statement. (1) Submission at settlement, or within 45 calendar days of settlement. As noted in § 3500.17(c)(2), the servicer shall conduct an escrow account analysis before establishing an escrow account to determine the amount the borrower shall deposit into the escrow account, subject to the limitations of §3500.17(c)(1)(i). After conducting the escrow account analysis for each escrow account, the servicer shall submit an initial escrow account statement to the borrower at settlement or within 45 calendar days of settlement for escrow accounts that are established as a condition of the loan.

(i) The initial escrow account statement shall include the amount of the borrower's monthly mortgage payment and the portion of the monthly payment going into the escrow account and shall itemize the estimated taxes, insurance premiums, and other charges that the servicer reasonably anticipates to be paid from the escrow account during the escrow account computation year and the anticipated disbursement dates of those charges. The initial escrow account statement shall indicate the amount that the servicer selects as a cushion. The statement shall include a trial running balance for the account.

(ii) Pursuant to § 3500.17(h)(2), the servicer may incorporate the initial escrow account statement into the HUD-1 or HUD-1A settlement statement. If the servicer does not incorporate the initial escrow account statement into the HUD-1 or HUD-1A settlement statement, then the servicer shall submit the initial escrow account statement to the borrower as a separate document.

(2) Time of submission of initial escrow account statement for an escrow account established after settlement. For escrow accounts established after settlement (and which are not a condition of the loan), a servicer shall submit an initial escrow account statement to a borrower within 45 calendar days of the date of establishment of the escrow account.

(h) Format for initial escrow account statement. (1) The format and a completed example for an initial escrow account statement are set out in HUD Public Guidance Documents entitled "Initial Escrow Account Disclosure Statement--Format" and "Initial Escrow Account Disclosure Statement--Example", available in accordance with § 3500.3.

(2) Incorporation of Initial Escrow Account Statement Into HUD-1 or HUD-1A Settlement Statement. Pursuant to §3500.9(a)(11), a servicer may add the initial escrow account statement to the HUD-1 or HUD-1A settlement statement. The servicer may include the initial escrow account statement in the basic text or may attach the initial escrow account statement as an additional page to the HUD-1 or HUD-1A settlement statement.

(3) Identification of Payees. The initial escrow account statement need not identify a specific payee by name if it provides sufficient information to identify the use of the funds.For example, appropriate entries include: county taxes, hazard insurance, condominium dues, etc. If a particular payee, such as a taxing body, receives more than one payment during the escrow account computation year, the statement shall indicate each payment and disbursement date. If there are several taxing authorities or insurers, the statement shall identify each taxing body or insurer (e.g., "City Taxes", "School Taxes", "Hazard Insurance", or "Flood Insurance," etc.).

(i) Annual Escrow Account Statements. For each escrow account, a servicer shall submit an annual escrow account statement to the borrower within 30 days of the completion of the escrow account computation year. The servicer shall also submit to the borrower the previous year's projection or initial escrow account statement. The servicer shall conduct an escrow account analysis before submitting an annual escrow account statement to the borrower.

(1) Contents of Annual Escrow Account Statement. The annual escrow account statement shall provide an account history, reflecting the activity in the escrow account during the escrow account computation year, and a projection of the activity in the account for the next year. In preparing the statement, the servicer may assume scheduled payments and disbursements will be made for the final 2 months of the escrow account computation year. The annual escrow account statement must include, at a minimum, the following (the items in paragraphs (i)(1)(i) through (i)(1)(iv) must be clearly itemized):

(i) The amount of the borrower's current monthly mortgage payment and the portion of the monthly payment going into the escrow account;

(ii) The amount of the past year's monthly mortgage payment and the portion of the monthly payment that went into the escrow account;

(iii) The total amount paid into the escrow account during the past computation year;

(iv) The total amount paid out of the escrow account during the same period for taxes, insurance premiums, and other charges (as separately identified);

(v) The balance in the escrow account at the end of the period;

(vi) An explanation of how any surplus is being handled by the servicer;

(vii) An explanation of how any shortage or deficiency is to be paid by the borrower;and

(viii) If applicable, the reason(s) why the estimated low monthly balance was not reached, as indicated by noting differences between the most recent account history and last year's projection. HUD Public Guidance Documents entitled "Annual Escrow Account Disclosure Statement--Format" and "Annual Escrow Account Disclosure Statement--Example" set forth an acceptable format and methodology for conveying this information.

(2) No annual statements in the case of default, foreclosure, or bankruptcy.This paragraph (i)(2) contains an exemption from the provisions of § 3500.17(i)(1). If at the time the servicer conducts the escrow account analysis the borrower is more than 30 days overdue, then the servicer is exempt from the requirements of submitting an annual escrow account statement to the borrower under §3500.17(i). This exemption also applies in situations where the servicer has brought an action for foreclosure under the underlying mortgage loan, or where the borrower is in bankruptcy proceedings. If the servicer does not issue an annual statement pursuant to this exemption and the loan subsequently is reinstated or otherwise becomes current, the servicer shall provide a history of the account since the last annual statement (which may be longer than 1 year) within 90 days of the date the account became current.

(3) Delivery with other material. The servicer may deliver the annual escrow account statement to the borrower with other statements or materials, including the Substitute 1098, which is provided for federal income tax purposes.

(4) Short year statements. A servicer may issue a short year annual escrow account statement ("short year statement") to change one escrow account computation year to another.By using a short year statement a servicer may adjust its production schedule or alter the escrow account computation year for the escrow account.

(i) Effect of short year statement. The short year statement shall end the "escrow account computation year" for the escrow account and establish the beginning date of the new escrow account computation year. The servicer shall deliver the short year statement to the borrower within 60 days from the end of the short year.

(ii) Short year statement upon servicing transfer. Upon the transfer of servicing, the transferor (old) servicer shall submit a short year statement to the borrower within 60 days of the effective date of transfer.

(iii) Short year statement upon loan payoff. If a borrower pays off a mortgage loan during the escrow account computation year, the servicer shall submit a short year statement to the borrower within 60 days after receiving the pay-off funds.

(j) Formats for annual escrow account statement. The formats and completed examples for annual escrow account statements using single-item analysis (pre-rule accounts) and aggregate analysis are set out in HUD Public Guidance Documents entitled "Annual Escrow Account Disclosure Statement--Format" and "Annual Escrow Account Disclosure Statement--Example".

(k) Timely payments. (1)If the terms of any federally related mortgage loan require the borrower to make payments to an escrow account, the servicer must pay the disbursements in a timely manner, that is, on or before the deadline to avoid a penalty, as long as the borrower's payment is not more than 30 days overdue.

(2) The servicer must advance funds to make disbursements in a timely manner as long as the borrower's payment is not more than 30 days overdue.Upon advancing funds to pay a disbursement, the servicer may seek repayment from the borrower for the deficiency pursuant to paragraph (f) of this section.

(3) For the payment of property taxes from the escrow account, if a taxing jurisdiction offers a servicer a choice between annual and installment disbursements, the servicer must also comply with this paragraph (k)(3).If the taxing jurisdiction neither offers a discount for disbursements on a lump sum annual basis nor imposes any additional charge or fee for installment disbursements, the servicer must make disbursements on an installment basis. If, however, the taxing jurisdiction offers a discount for disbursements on a lump sum annual basis or imposes any additional charge or fee for installment disbursements, the servicer may at the servicer's discretion (but is not required by RESPA to), make lump sum annual disbursements in order to take advantage of the discount for the borrower or avoid the additional charge or fee for installments, as long as such method of disbursement complies with paragraphs (k)(1) and (k)(2) of this section.HUD encourages, but does not require, the servicer to follow the preference of the borrower, if such preference is known to the servicer.

(4) Notwithstanding paragraph (k)(3) of this section, a servicer and borrower may mutually agree, on an individual case basis, to a different disbursement basis (installment or annual) or disbursement date for property taxes from that required under paragraph (k)(3) of this section, so long as the agreement meets the requirements of paragraphs (k)(1) and (k)(2) of this section.The borrower must voluntarily agree; neither loan approval nor any term of the loan may be conditioned on the borrower's agreeing to a different disbursement basis or disbursement date.

(l) System of recordkeeping. (1) Each servicer shall keep records, which may involve electronic storage, microfiche storage, or any method of computerized storage, so long as the information is easily retrievable, reflecting the servicer's handling of each borrower's escrow account. The servicer's records shall include, but not be limited to, the payment of amounts into and from the escrow account and the submission of initial and annual escrow account statements to the borrower.

(2) The servicer responsible for servicing the borrower's escrow account shall maintain the records for that account for a period of at least five years after the servicer last serviced the escrow account.

(3) A servicer shall provide the Secretary with information contained in the servicer's records for a specific escrow account, or for a number or class of escrow accounts, within 30 days of the Secretary's written request for the information.The servicer shall convert any information contained in electronic storage, microfiche or computerized storage to paper copies for review by the Secretary.

(i) To aid in investigations, the Secretary may also issue an administrative subpoena for the production of documents, and for the testimony of such witnesses as the Secretary deems advisable.

(ii) If the subpoenaed party refuses to obey the Secretary's administrative subpoena, the Secretary is authorized to seek a court order requiring compliance with the subpoena from any United States district court.Failure to obey such an order of the court may be punished as contempt of court.

(4) Borrowers may seek information contained in the servicer's records by complying with the provisions set forth in 12 U.S.C. 2605(e) and §3500.21(f).

(5) After receiving a request (by letter or subpoena) from the Department for information relating to whether a servicer submitted an escrow account statement to the borrower, the servicer shall respond within 30 days.If the servicer is unable to provide the Department with such information, the Secretary shall deem that lack of information to be evidence of the servicer's failure to submit the statement to the borrower.

(m) Penalties. (1) A servicer's failure to submit to a borrower an initial or annual escrow account statement meeting the requirements of this part shall constitute a violation of section 10(d) of RESPA (12 U.S.C. 2609(d)) and this section.For each such violation, the Secretary shall assess a civil penalty of 65 dollars ($65), except that the total of the assessed penalties shall not exceed $120,000 for any one servicer for violations that occur during any consecutive 12-month period.

(2) Violations described in paragraph (m)(1) of this section do not require any proof of intent. However, if a lender or servicer is shown to have intentionally disregarded the requirements that it submit the escrow account statement to the borrower, then the Secretary shall assess a civil penalty of $110 for each violation, with no limit on the total amount of the penalty.

(n) Civil penalties procedures. The following procedures shall apply whenever the Department seeks to impose a civil money penalty for violation of section 10(c) of RESPA (12 U.S.C. 2609(c)):

(1) Purpose and scope. This paragraph (n) explains the procedures by which the Secretary may impose penalties under 12 U.S.C. 2609(d). These procedures include administrative hearings, judicial review, and collection of penalties. This paragraph (n) governs penalties imposed under 12 U.S.C. 2609(d) and, when noted, adopts those portions of 24 CFR part 30 that apply to all other civil penalty proceedings initiated by the Secretary.

(2) Authority.The Secretary has the authority to impose civil penalties under section 10(d) of RESPA (12 U.S.C. 2609(d)).

(3) Notice of intent to impose civil money penalties. Whenever the Secretary intends to impose a civil money penalty for violations of section 10(c) of RESPA (12 U.S.C. 2609(c)), the responsible program official, or his or her designee, shall serve a written Notice of Intent to Impose Civil Money Penalties (Notice of Intent) upon any servicer on which the Secretary intends to impose the penalty. A copy of the Notice of Intent must be filed with the Chief Docket Clerk, Office of Administrative Law Judges, at the address provided in the Notice of Intent. The Notice of Intent will provide:

(i) A short, plain statement of the facts upon which the Secretary has determined that a civil money penalty should be imposed, including a brief description of the specific violations under 12 U.S.C. 2609(c) with which the servicer is charged and whether such violations are believed to be intentional or unintentional in nature, or a combination thereof;

(ii) The amount of the civil money penalty that the Secretary intends to impose and whether the limitations in 12 U.S.C. 2609(d)(1), apply;

(iii) The right of the servicer to a hearing on the record to appeal the Secretary's preliminary determination to impose a civil penalty;

(iv) The procedures to appeal the penalty;

(v) The consequences of failure to appeal the penalty; and

(vi) The name, address, and telephone number of the representative of the Department, and the address of the Chief Docket Clerk, Office of Administrative Law Judges, should the servicer decide to appeal the penalty.

(4) Appeal procedures. (i) Answer.To appeal the imposition of a penalty, a servicer shall, within 30 days after receiving service of the Notice of Intent, file a written Answer with the Chief Docket Clerk, Office of Administrative Law Judges, Department of Housing and Urban Development, at the address provided in the Notice of Intent. The Answer shall include a statement that the servicer admits, denies, or does not have (and is unable to obtain) sufficient information to admit or deny each allegation made in the Notice of Intent.A statement of lack of information shall have the effect of a denial. Any allegation that is not denied shall be deemed admitted. Failure to submit an Answer within the required period of time will result in a decision by the Administrative Law Judge based upon the Department's submission of evidence in the Notice of Intent.

(ii) Submission of evidence. A servicer that receives the Notice of Intent has a right to present evidence.Evidence must be submitted within 45 calendar days from the date of service of the Notice of Intent, or by such other time as may be established by the Administrative Law Judge (ALJ).The servicer's failure to submit evidence within the required period of time will result in a decision by the Administrative Law Judge based upon the Department's submission of evidence in the Notice of Intent.The servicer may present evidence of the following:

(A) The servicer did submit the required escrow account statement(s) to the borrower(s);or

(B) Even if the servicer did not submit the required statement(s), that the failure was not the result of an intentional disregard of the requirements of RESPA (for purposes of determining the penalty).

(iii) Review of the record. The Administrative Law Judge will review the evidence submitted by the servicer, if any, and that submitted by the Department. The Administrative Law Judge shall make a determination based upon a review of the written record, except that the Administrative Law Judge may order an oral hearing if he or she finds that the determination turns on the credibility or veracity of a witness, or that the matter cannot be resolved by review of the documentary evidence. If the Administrative Law Judge decides that an oral hearing is appropriate, then the procedural rules set forth at 24 CFR part 30 shall apply, to the extent that they are not inconsistent with this section.

(iv) Burden of Proof. The burden of proof or the burden of going forward with the evidence shall be upon the proponent of an action. The Department's submission of evidence that the servicer's system of records lacks information that the servicer submitted the escrow account statement(s) to the borrower(s) shall satisfy the Department's burden. Upon the Department's presentation of evidence of this lack of information in the servicer's system of records, the burden of proof shifts from the Secretary to the servicer to provide evidence that it submitted the statement(s) to the borrower.

(v) Standard of Proof. The standard of proof shall be the preponderance of the evidence.

(5) Determination of the Administrative Law Judge.

(i) Following the hearing or the review of the written record, the Administrative Law Judge shall issue a decision that shall contain findings of fact, conclusions of law, and the amount of any penalties imposed.The decision shall include a determination of whether the servicer has failed to submit any required statements and, if so, whether the servicer's failure was the result of an intentional disregard for the law's requirements.

(ii) The Administrative Law Judge shall issue the decision to all parties within 30 days of the submission of the evidence or the post-hearing briefs, whichever is the last to occur.

(iii) The decision of the Administrative Law Judge shall constitute the final decision of the Department and shall be final and binding on the parties.

(6) Judicial review. (i) A person against whom the Department has imposed a civil money penalty under this part may obtain a review of the Department's final decision by filing a written petition for a review of the record with the appropriate United States district court.

(ii) The petition must be filed within 30 days after the decision is filed with the Chief Docket Clerk, Office of Administrative Law Judges.

(7) Collection of penalties. (i) If any person fails to comply with the Department's final decision imposing a civil money penalty, the Secretary, if the time for judicial review of the decision has expired, may request the Attorney General to bring an action in an appropriate United States district court to obtain a judgment against the person that has failed to comply with the Department's final decision.

(ii) In any such collection action, the validity and appropriateness of the Department's final decision imposing the civil penalty shall not be subject to review in the district court.

(iii) The Secretary may obtain such other relief as may be available, including attorney fees and other expenses in connection with the collection action.

(iv) Interest on and other charges for any unpaid penalty may be assessed in accordance with 31 U.S.C. 3717.

(8) Offset.In addition to any other rights as a creditor, the Secretary may seek to collect a civil money penalty through administrative offset.

(9) At any time before the decision of the Administrative Law Judge, the Secretary and the servicer may enter into an administrative settlement.The settlement may include provisions for interest, attorney's fees, and costs related to the proceeding.Such settlement will terminate the appearance before the Administrative Law Judge.

(o) Discretionary payments. Any borrower's discretionary payment (such as credit life or disability insurance) made as part of a monthly mortgage payment is to be noted on the initial and annual statements.If a discretionary payment is established or terminated during the escrow account computation year, this change should be noted on the next annual statement.A discretionary payment is not part of the escrow account unless the payment is required by the lender, in accordance with the definition of "settlement service" in § 3500.2, or the servicer chooses to place the discretionary payment in the escrow account. If a servicer has not established an escrow account for a federally related mortgage loan and only receives payments for discretionary items, this section is not applicable.

Posted In: Statutes & Rules

In order to assist California class action defense attorneys in anticipating the claims against which they may have to defend, we provide weekly, unofficial summaries of the legal categories for new class actions filed in California state and federal courts in the Los Angeles, San Francisco, San Jose, Sacramento, San Diego, San Mateo, Oakland/Alameda and Orange County areas. We include only those categories that include 10% or more of the class action filings during the relevant timeframe. Labor law class action cases generally top the list, and this past week was no exception. This report covers the time period from April 5 – April 12, 2007, during which time approximately 42 class action lawsuits were filed in these California state and federal courts. New labor law class action filings accounted for 45% of these cases, with 19 new class action lawsuits. The only other category exceeding the 10% threshold involved unfair competition law (UCL) class action claims, which include false advertising class action cases, with 7 new cases (17%).

Posted In: Class Actions In The News

Cy Pres Distribution of Unclaimed Class Action Settlement Funds Appropriate Michigan District Court Holds

Following settlement of a class action, there remained approximately $45,000 in unclaimed funds. The federal court had ordered the settlement funds disbursed in March 2006, and further efforts had been made to contact the individual class members who had not claimed their share of the class action settlement proceeds. Lessard v. City of Allen Park, 470 F.Supp.2d 781, 782 (E.D. Mich. 2007). The terms of the class action settlement agreement failed to provide for distribution of unclaimed funds, as did the court order for distribution of the settlement proceeds; however, the settlement agreement expressly provided that the federal court would retain jurisdiction over “any dispute regarding the distribution.” Id. Based on the general rule that “if the unclaimed funds [from a class action settlement] are not directed to one party or another, they are distributed ‘cy pres’ – i.e., to whatever would be the next best use of the money to carry out the intent of the fund, which in class actions usually means for the indirect benefit of the class,” id., at 783 (citation omitted), and the fact that “[f]ederal courts have broad discretionary powers in shaping equitable decrees for distributing unclaimed class action funds,” id., at 782 (citations omitted), the district court decided that the funds should be disbursed to the Michigan Bar Association’s Access to Justice Fund, id., at 784.

In reaching its conclusion, the court concluded that “there would be little benefit to the Plaintiff class of attempting a second distribution of the unclaimed funds” to the members of the class action, and, further, that it would be inappropriate in this particular case to return the unclaimed settlement proceeds to the defendants because the funds represented remuneration for actual damages suffered by members of the class. Lessard, at 783. The district court selected the Access to Justice Fund because courts favor “distributions to charities that offer services that are related to the plaintiffs of a class action,” id. (citation omitted), and held that “[t]he Access to Justice fund is the ‘next best’ use of the remaining settlement monies in this case, because both class actions and Access to Justice programs facilitate the supply of legal services to those who cannot otherwise obtain or afford representation in legal matters,” id., at 783-84 (citation omitted). Accordingly, the district court issued an order to show cause why the unclaimed class action settlement funds should not be disbursed to the Michigan Bar's Access for Justice Fund. Id., at 784.

NOTE: The district court noted that the United States Supreme Court “has specifically declined to rule on the question of what happens to unclaimed funds in a class action.” Lessard, at 783 n.3 (citing Boeing Co. v. Van Gemert, 444 U.S. 472, 482 (1980)).

Download PDF file of Lessard v. City of Allen Park

Posted In: Class Action Court Decisions

Judicial Panel Grants Defense Request for Pretrial Coordination of Class Action Lawsuits Pursuant to 28 U.S.C. § 1407, Rejecting Opposition by Plaintiffs in One Class Action based on Pending Motion for Remand of Class Action to State Court

Fourteen securities class action lawsuits – 13 in New Jersey and one in New York – were filed against various defendants based on the initial public offering of Vonage common stock. In re Vonage Initial Public Offering (IPO) Securities Litig., ___ F.Supp.2d ___, 2007 WL 128791, *1 (Jud.Pan.Mult.Lit. 2007). Defense attorneys for six of the defendants moved the Judicial Panel for Multidistrict Litigation (MDL) for centralization of the class actions pursuant to 28 U.S.C. § 1407, but did not suggest an appropriate transferee court. Vonage and other parties later requested that the class actions be consolidated in the District of New Jersey; lead counsel for the New Jersey class action plaintiffs joined in that request. Id. The New York class action plaintiff opposed the motion, asserting that the federal court lacked jurisdiction over his class action complaint because he had filed a motion to remand the class action to state court. Id. The Judicial Panel granted the motion to centralize the class actions, finding that the lawsuits “involve common questions of fact” and that centralization “will serve the convenience of the parties and witnesses and promote the just and efficient conduct of the litigation.” Id. The Panel selected the District of New Jersey as the transferee court because “i) all but one of the actions in this docket were initially brought in that district; ii) Vonage is located in that district, and many of the relevant acts and transactions are alleged to have taken place there; and iii) no party supports centralization in any other district.” Id. The Panel rejected New York plaintiff’s federal jurisdiction argument, explaining that if his pending motion to remand the class action to state court is not resolved by the time of the transfer under section 1407, “[it] can be presented to and decided by the transferee judge.” Id. (citations omitted).

Download PDF file of In re Vonage IPO Transfer Order

Posted In: Multidistrict Litigation, Class Action Court Decisions

As Matter of First Impression, Massachusetts Federal Court Holds that Rider Creates Security Interest in Property Required to be Disclosed under Federal Truth in Lending Act (TILA)

Plaintiff filed a putative class action against his mortgage lender, Long Beach Mortgage Company, for alleged violations of the federal Truth in Lending Act (TILA), later amending the class action complaint to add two additional party plaintiffs and two additional claims – a class action claim under TILA’s state law counterpart, the Massachusetts Consumer Cost Disclosure Act (MCCDA), and an individual claim for under TILA and MCCDA for rescission. Carye v. Long Beach Mortgage Co., 470 F.Supp.2d 3, 5 (D. Mass. 2007). Defense attorneys moved to dismiss the class action claim and plaintiff Carye’s individual claims for rescission pursuant Rule 12(b)(6), and moved also to sever the claims of the newly added plaintiffs. Id. The defense argued that the class action claim failed because TILA does not require the disclosure of the security interest created by Id.

As the district court explained, TILA requires that a creditor disclose to the borrower any security interest taken in property purchased as part of the loan transaction and in any property not purchased as part of the transaction but separately identified. Carye, at 6-7. In this case, plaintiffs borrowed money from Long Beach Mortgage secured by their residences, and each of them signed a 1-4 Family Rider/Assignment of Rents (Rider) as part of their loan documentation. Carye, at 5-6. The Riders created a security interest in property separately identified in detail (see Note, below). Plaintiffs urged that this constituted a violation of TILA; Long Beach argued that the interest was merely “incidental” and, accordingly, was not required to be disclosed under TILA. Id., at 7. Plaintiffs countered that the Rider “created a security interest in virtually all of the plaintiffs' personal property” and had to be disclosed. Id., at 7-8.

Continue reading "TILA Class Action Defense Cases-Carye v. Long Beach: Massachusetts Federal Court Dismisses Individual Rescission Claims In TILA Class Action But Denies Defense Request To Dismiss Class Action Claim And Motion To Sever" »

Posted In: Class Action Court Decisions, RESPA/TILA Class Actions