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Rothstein v. Balboa Ins. Co.

United States Court of Appeals, Second Circuit

July 22, 2015

LANDON ROTHSTEIN, individually and on behalf of all others similarly situated, ROBERT DAVIDSON, IHOR KOBRYN, individually and on behalf of all others similarly situated, JENNIFER DAVIDSON, Plaintiffs-Appellees,
v.
BALBOA INSURANCE COMPANY, NEWPORT MANAGEMENT CORPORATION, MERITPLAN INSURANCE COMPANY, Defendants-Appellants, GMAC MORTGAGE, LLC, f/k/a GMAC MORTGAGE CORPORATION, GMAC INSURANCE MARKETING, INC., d/b/a GMAC AGENCY MARKETING, JOHN DOES 1-20, ALLY FINANCIAL, INC., f/k/a GMAC, INC., ALLY BANK, f/k/a GMAC BANK, JOHN DOE CORPORATION, PRAETORIAN INSURANCE COMPANY, QBE FIRST INSURANCE AGENCY, INC., QBE INSURANCE CORPORATION, QBE SPECIALTY INSURANCE COMPANY, Defendants

Argued May 1, 2015

Page 257

[Copyrighted Material Omitted]

Page 258

Defendants Balboa Insurance Company, Newport Management Corporation, and MeritPlan Insurance Company appeal from the order of the United States District Court for the Southern District of New York (Nathan, J.), denying in part their motion to dismiss. The plaintiffs, borrowers who failed to maintain hazard insurance on their mortgaged properties, claim that they were overcharged by their loan servicer for lender-placed insurance sold by the defendants. We conclude that the claims are barred by the filed rate doctrine.

Reversed and remanded.

ROSS E. MORRISON (Robyn C. Quattrone and Katherine L. Halliday, BuckleySandler LLP, Washington, D.C., John C. Englander, Goodwin Procter LLP, Boston, Massachusetts, Brian T. Burgess, Goodwin Procter LLP, Washington, D.C., on the brief), BuckleySandler LLP, New York, New York, for Defendants-Appellants.

MARK A. STRAUSS (Thomas W. Elrod, on the brief), Kirby McInerney LLP, New York, New York, for Plaintiffs-Appellees.

Frank G. Burt, Denise A. Fee, W. Glenn Merten, and Brian P. Perryman, Carlton Fields Jorden Burt, P.A., Washington, D.C., for Amicus Curiae American Security Insurance Company.

Before: JACOBS, HALL, and LYNCH, Circuit Judges.

OPINION

Page 259

DENNIS JACOBS, Circuit Judge.

Plaintiffs are borrowers who failed to purchase hazard insurance on their mortgaged properties, as required by the terms of their loan agreements. Their loan servicer, GMAC Mortgage LLC (" GMAC" ), bought lender-placed insurance (" LPI" ) from Balboa Insurance Company and MeritPlan Insurance Company (together, " Balboa" ) at rates that were approved by regulators. GMAC then sought reimbursement from Plaintiffs at those same rates.

Plaintiffs allege that they were fraudulently overbilled because the rates they were charged did not reflect secret " rebates" and " kickbacks" that GMAC received from Balboa through Balboa's affiliate, Newport Management Corporation (" Newport" ). They sued GMAC and various affiliates, Balboa, and Newport in the United States District Court for the Southern District of New York (Nathan, J.), alleging, inter alia, claims under the Racketeer Influenced and Corrupt Organizations Act (" RICO" ) and the Real Estate Settlement Procedures Act (" RESPA" ). The claims against all defendants except Balboa and Newport were settled.

Balboa and Newport moved to dismiss under the filed rate doctrine, arguing that Plaintiffs could not sue to challenge LPI rates approved by regulators. The district court denied the motion in relevant part, reasoning that although Balboa received regulatory approval for the LPI rates it charged to GMAC, that approval did not necessarily extend to the borrowers' reimbursement to GMAC. Noting a conflict of authority on this issue, the court certified its decision for interlocutory appeal.

We hold that a claim challenging a regulator-approved rate is subject to the filed rate doctrine whether or not the rate is passed through an intermediary. The claim is therefore barred if it would undermine the regulator's rate-setting authority or operate to give the suing ratepayer a preferential rate. Applying this analysis, we conclude that Plaintiffs' claims are barred and, accordingly, reverse and remand for dismissal of the case.

BACKGROUND

The purchase of residential property is often financed through a mortgage loan secured by the subject property. Until repayment of the loan, the lender holds a security interest in the property (i.e., the mortgage) in the unpaid amount. To mitigate the risk that the mortgaged property will be damaged or destroyed before the loan is repaid, the lender can require the borrower to maintain hazard insurance sufficient to cover the lender's interest.

In a typical mortgage loan arrangement, if the borrower fails to maintain adequate hazard insurance, the lender can purchase insurance on the borrower's behalf and then seek reimbursement from the borrower. Such lender-placed insurance, or LPI, can be more expensive than ordinary

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hazard insurance and does not necessarily cover the borrower's interest in the property.

Lenders seldom hold or manage individual mortgage loans. Such loans are typically securitized through the transfer of title to a trust that pools the loans together and issues securities backed by the mortgages in the pool (" residential mortgage-backed securities" ). The trust also contracts with a loan servicer, such as GMAC, to service the loans on a day-to-day basis. Among other responsibilities, the servicer must ensure that borrowers maintain contractually required hazard insurance and, if necessary, the servicer must purchase LPI from an insurer, such as Balboa.

Plaintiffs' residential properties in Texas, New Hampshire, and New York were financed with mortgage loans serviced by GMAC. Plaintiffs each signed a loan agreement requiring hazard insurance on the mortgaged property and warning that the lender would be entitled to purchase LPI if hazard insurance was not maintained. Plaintiff Landon Rothstein's agreement was typical:

Borrower shall keep . . . the Property insured against loss by fire, hazards included within the term " extended coverage," and any other hazards . . . for which ...

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