On Nov. 28, the U.S. Supreme Court heard oral arguments in First American v. Denise P. Edwards (Case No. 10-708), in which the court must decide whether a private purchaser of real estate has standing to sue for RESPA violations under Article III if she has suffered no damages.
The plaintiff, Denise Edwards had used Tower City Title Agency LLC as the settlement agent when she purchased her home in the Cleveland, Ohio, area. Tower City referred her to First American Title Insurance Co., where she purchased title insurance.
She later filed a lawsuit against First American Corp., alleging that First American She alleged that First American violated RESPA Section 8 by paying kickbacks for referrals and that the referrals unnecessarily increased the cost of title insurance. She also claimed that First American failed to disclose its alleged agreement with Tower City to her. Edwards did not claim that she paid an inflated amount for her title insurance or that it was of poor quality.
The U.S. District Court for the Central District of California determined that Edwards had Article III standing and that she did not have to suffer an overcharge to have a viable RESPA claim. However, the court denied Edwards’s motion for class certification.
The case was appealed to the U.S. 9th Circuit Court of Appeals, which held that RESPA Section 8(d)(2) provided standing to any person who purchased settlement services based on a referral that is allegedly in violation of RESPA — whether or not the person suffered actual harm. The court also determined that because there is a remedy provided under RESPA, irrespective of harm, the individual has standing to sue under Article III.
The U.S. Supreme Court granted review of the case on June 17, deciding to determine whether, in the absence of any claim that the alleged violation of RESPA affected the price, quality or other characteristics of the settlement services provided, does a private purchaser of real estate settlement services have standing to sue under Article III, Section 2 of the U.S. Constitution, which provides that the federal judicial power is limited to “cases” and “controversies” and which this Court has interpreted to require the plaintiff to “have suffered an injury in fact.”
Amidst a barrage of questions from the justices, both sides attempted to convey their arguments. First American’s attorney argued that Denise Edwards is required to show injury in fact, while Edwards’ attorney and the U.S. solicitor general argued that Congress provided Edwards with a statutory injury in fact.
Proof of damages required
First American’s attorney, Aaron Panner, a partner with Kellogg, Huber, Hansen, Todd, Evans and Figel PLLC, was the first to present his arguments. Put simply, he argued that Article III requires the plaintiff to show an injury in fact and that Denise Edwards had failed to do so.
“Article III requires a private plaintiff to show injury in fact, which means at a minimum that the alleged illegal conduct made her worse off,” Panner told the Court. “Factual injury does not automatically follow from violation of a statutory duty owed to the plaintiff, and Ms. Edwards has not alleged the type of harm alleged by plaintiffs in the common law cases that she invokes — [there has been] no misappropriation of her property, no loss of desired opportunity or benefit and no injury to reputation.”
Panner told the court that Edwards had paid the only title insurance rate that was available in Ohio and that she did not complain about the quality of the insurance or the service she received.
His argument led Justice Sonia Sotomayor to suggest that he was taking a broad position because Ohio is only one of three or four states that mandates that title insurance be at a fixed rate.
“But in those states in which there is no such mandate, you seem to be arguing that Congress can’t ever presume damages or injury, that even in those cases the plaintiff has to come in and prove that they would have paid less,” Sotomayor said.
“I don’t think so, your honor, because again the question for purposes of standing, the question for purposes of the ability of a plaintiff to come into court, is to show that they have some injury in fact, that there is some harm, some way in which they were made worse off,” Panner responded.
Sotomayor again questioned Panner’s argument that Congress has no power to give a cause of action based on a statutory violation that presumes injury.
“What Congress cannot do is to confer on a particular plaintiff an injury that is constitutionally sufficient under Article III,” Panner explained. “I think this Court has made clear that Congress cannot do that and that the existence of a statutory right by itself, even the invasion, the violation of the statutory right does not create injury for constitutional purposes.”
Justice Samuel Alito then asked Panner to clarify what a plaintiff who purchases title insurance in Ohio would need to allege in order to have sufficient standing. Panner said Edwards could have had standing if she had indicated that the manner in which the title insurance had been provided delayed her closing.
Panner contended with some difficult questions by the Court, but managed to return to his primary argument.
“The Constitution, Article III, as this Court has interpreted it, requires that a plaintiff that comes into court must have suffered an injury in fact, and Congress cannot create that injury legislatively,” Panner said. “Otherwise, the Congress can enlist the courts for regulatory purposes that are unrelated to the core function of the Court as this Court has articulated it … What Congress cannot do is to dictate in advance that a particular practice has caused injury to a particular plaintiff.”
Statutory violation enough
Jeffrey Lamken, a partner with Molo Lamken LLP, stepped up next to make arguments on behalf of Edwards.
“For at least 280 years the law has been clear that when someone breaches a duty of loyalty owed to you by taking a kickback or otherwise introducing a conflict into a transaction, you can sue on the basis of that alone, without showing a further harm in terms of economic loss,” Lamken told the Court. “The invasion of your right to conflict-free service was itself a sufficiently concrete and particularized injury in fact.
“The common law was absolutely clear that when someone invaded your right to a conflict-free transaction, invaded your right not to have kickbacks in your transactions, you didn’t have to prove that there was an economic consequence,” Lamken continued. “The invasion of your right not to have conflicts invade that transaction was sufficient.”
Lamken ran into trouble while trying to convince the Court that agents and fiduciaries have a duty not to accept kickbacks.
“Congress imposed one component of the duty that applies to agents and fiduciaries across the board and that is: Don’t take kickbacks that undermine the incentive to obtain the best deal offered a consumer,” Lamken said.
“It wasn’t agents and fiduciaries across the board,” Justice Antonin Scalia replied. “What’s the closest case you have to a situation where there is neither an agency relationship nor a trust relationship, and yet this kind of a right to sue without showing damage exists? What’s your best shot?”
Lamken replied that, in the law, there are a number of instances where a person may sue without showing financial losses. He used defamation cases as an example. He also likened Edwards’s situation to that of a trust beneficiary.
“Like a trust beneficiary, a homebuyer spending her money to insure title on her home has a concrete and particularized interest in insuring that those who direct the purchase are not doing it based on kickbacks, which is so undermining the incentive to seek her best interest,” Lamken said.
He explained to the court that it would be hard for Edwards to prove that another company could have handled her claims better or was more financially sound, but said that is the reason Congress does not require her to sue for her exact damages.
“It was precisely for that reason that Congress got out of the business and courts got out of the business of trying to regulate the underlying economics,” Lamken said. “They are not going to regulate price. They are not going to regulate quality. And instead, we are going to give you a right to get the referral from somebody who has expertise and who doesn’t have a conflict created by a conflict — by a kickback that so undermines their incentive.”
Scalia, however, was not entirely convinced that Congress can simply bestow this right and then step away.
“Congress wanted to get out of the business,” Scalia said. “But the issue here is whether Congress can get out of the business, whether it is the function of courts to provide relief to people who haven’t been injured. That’s the whole issue.”
“The Constitution, statutes and the common law regularly create bright lines across the board rights to protect underlying financial or other economic interests,” Lamken explained. “Where the right may sweep more broadly or may apply in cases where those underlying inputs are defected. But we don’t go look backwards at the purpose of the right.”
“The invasion of a statutory right itself can be injury in fact so long as it is sufficiently concrete and particularized,” Lamken said.
U.S. Attorney Anthony Yang, assistant to the Solicitor General, arguing on behalf of the United States, agreed with Lamken.
“When an individual has a statutory right to a kickback-free referral in a financial transaction, she participates in a particular financial transaction in which her right is violated and she pays money for the service unlawfully referred, she has sustained an Article III injury in fact based on, as this Court [has said] in its repeatedly explained test, an invasion of a legally protected interest,” Yang said in his opening statement to the Court.
The justices went through a number of examples with Yang, distinguishing why, in this case, Edwards’s injury in fact is provided to her by Congress. Yang used trespass for an example. At common law, when an individual stepped on to your property, it was considered trespass and was actionable even if you have no damages. In the case of trespass, your legal right has been invaded. Yang said this is a similar situation.
Read the entire argument transcript here.
What’s next
Now that the oral arguments are complete, it is up to the justices to review the information and come to a decision. This will likely happen before the end of June.
What that decision will be is still unknown, but industry experts shared some thoughts on the arguments and the potential outcome with The Legal Description.
Michael Holden, of North American Title Insurance Co., said he was impressed with the questions and knowledge the justices brought to the discussion of title insurance.
“It made me very positive in thinking that the justices had a lot of research provided to them about the subject,” he said. “I imagine that this is not just going to be a pat decision. I think a pretty in-depth thought process will go into it.”
He said Panner may have missed an argument during the oral arguments in that he did not point out that there is a difference between a Realtor who tells a buyer to use its in-house title company or mortgage company.
“That was the only thing that I thought wasn’t really being discussed,” Holden said. “The allegation is that because First American owns 17 percent that they had an exclusive agency relationship with Tower City Title and that is not even true.”
“When underwriters buy minority interests in agencies, they are buying a revenue stream,” he said. “That is what First American did when it bought an interest in Tower City Title. They said, ‘This company is profitable; it meets our core business function and we expect it to make us a return,” and it did for a long time, in addition to the revenues they were already receiving having them as an agent.”
Marx Sterbcow, managing attorney at The Sterbcow Law Group, focused on outcome, saying he believes the decision will hinge on Justice Anthony Kennedy’s opinion. However, he was uncertain about which way Kennedy would lean. He noted that Kennedy asked some pointed questions of both Edwards and First American.
“In my opinion Kennedy seemed concerned about the economic marketplace impact from his questioning of First American’s attorney,” he said. “The ruling could go either way or the Supreme Court could remand it back to district court with specific instructions on how to determine injury in fact under law. Kennedy is an economic theorist by nature so it is highly possible they could remand back to district court and allow the Plaintiffs the opportunity to hire an economist to establish the economic injury in fact. It definitely seems as if Kennedy is torn in this case but he seems worried about the impact of fixed market conditions on consumers and on other businesses.
“As far as all the other justices they don’t particularly matter since its clear from the transcripts that their minds are already made up,” Sterbcow continued. “Scalia, Alito, Chief Justice John Roberts and Justice Clarence Thomas on First American’s side versus Justices Stephen Breyer, Sotomayor, Ruth Bader Ginsburg, and Elena Kagan on Edwards’ side. However, since Thomas didn’t ask one single question at the hearing we have no idea which way he is leaning. Based on past rulings I’ll put him in the Roberts’ camp.”
Holden agreed. “You’ve got about four pro-consumer justices and about four pro-business justices and maybe one swing vote and I would not be surprised if this was a five/four decision,” he said.
Francis C. Riley, partner at the Princeton, N.J.-based firm of Saul Ewing LLC, was a bit more certain about the specific outcome.
“I think that each and every Justice viewed as infirmed Edwards’ argument that RESPA creates a fiduciary or agency between the consumer and the title agent relative to the procurement of a title policy, which in turn provides for actual damages when there is a breach of the fiduciary duty (acceptance of a kick back from the underwriter, i.e., investment in the agency by the underwriter) in the form of disgorgement of fees,” Riley said. “It also appears that the discussion by several Justices about an economist’s opinion that AfBA’s in general and the one at issue in this case specifically place consumers in a economic disadvantage that equals to actual damages was nothing other than a sideline, academic frolic. There is simply no evidence in the record, nor argument, that supports a finding that Edwards or others suffered an economic loss or suffered some ethereal loss that at common law might give rise to right to ‘damages’ which RESPA effectively makes clear are incorporated within and thus give rise to Article III standing.
“The court will likely find that Edwards has no Article III standing since Article III does not confirm standing to sue in Federal Court under a Federal Statutes for ‘damages’ that only find their genesis in academic or philosophical debate,” he continued.
Holden had ideas about what a potential outcome could mean for the industry, noting that if the court finds that Congress dictated that buyers have the right to the opportunity to have a conflict-free transaction, it must also note that Congress has provided a remedy for that potential conflict, disclosure.
“If they remand this case back to the trial court and it becomes a class action lawsuit, First American is going to have to deal with [the outcome], but the real outcome is going to be that when an underwriter owns part of an agency, they are going to have to disclose it, just like if a Realtor owns part of a title agency. Its going to be another category of conflict. The whole argument is that they said that Congress said you have a right to a conflict-free title insurance transaction and because that was not given to Ms. Edwards, she has standing to bring her lawsuit. You could argue the merits of whether or not Congress created that right, but then you can’t ignore the fact that in the same law Congress created the cure for when there is a conflict, which is disclosure.”