United States: Covering All The Bases: An Example Of How Reed Smith’s Financial Services Litigators Combined Legal Analysis And Opposition Research To Secure Victory

Covering All The Bases: An Example Of How Reed Smith’s Financial Services Litigators Combined Legal Analysis And Opposition Research To Secure Victory

In the growing fray of class action suits supported by consumer lending advocacy groups, Reed Smith litigators recently secured dismissal of a putative class action brought against six of the firm’s financial services clients in an Ohio state court. Wilborn v. Bank One Corp., No. 03 CV 02674 (Court of Common Pleas, Mahoning County, Ohio, July 21, 2004). In seeking dismissal of the plaintiffs’ claims, Reed Smith employed multiple strategies, including preparation of preemption arguments on behalf of two national bank clients and research regarding the advocacy group supporting the plaintiffs’ claims, the National Consumer Law Center.

The plaintiffs were Ohio residents who allegedly defaulted on their home mortgage loans, and, after the filing of foreclosure proceedings, contracted to have their loans reinstated. Under each such contract, a plaintiff agreed to pay the attorneys’ fees that his mortgagee incurred in foreclosure proceedings. After the mortgages were reinstated, the plaintiff mortgagors alleged that their lenders had impermissibly collected attorneys’ fees as a condition of reinstatement and that Ohio common law and public policy prohibited such a practice. The plaintiffs asserted a violation of state common law, unjust enrichment, and civil conspiracy. In addition to injunctive relief, the plaintiffs sought compensatory and punitive damages on behalf of all Ohio residents who paid attorneys’ fees as a condition of reinstatement during the past 15 years. The plaintiffs also sought disgorgement of the disputed fees.

On behalf of six of the nine defendants in the case, Reed Smith argued that recent federal and state decisions had upheld the recovery of attorneys’ fees as a condition of the reinstatement of a residential mortgage loan. The Reed Smith litigators argued that the case on which the plaintiffs built their claim, Miller v. Kyle, 85 Ohio St. 186 (1911), had since been distinguished as inapplicable to the reinstatement of residential mortgage loans. Although no single case overturned Miller in its entirety, several subsequent decisions criticized Miller and expressly limited the reach of its holding. See, e.g., Nottingdale Homeowners Assoc., Inc. v. Darby, 33 Ohio St. 3d 32, 37 (1987).

In formulating arguments regarding Ohio case law, the Reed Smith team pursued a number of additional strategies to strengthen the defendants’ motions. In addition to tracking related ongoing cases, the team analyzed a previous complaint filed by two of the plaintiffs, which was voluntarily withdrawn; prepared a response to the plaintiffs’ public policy arguments and persistent representations that "real world" circumstances necessitated denial of the defendants’ motions to dismiss; researched relevant HUD and Veterans Affairs regulations; and, in anticipation of a motion for class certification, presented arguments regarding the weaknesses of the plaintiffs’ case as a class action suit.

Granting the defendants’ motions to dismiss, the court adopted Reed Smith’s arguments regarding the current state of Ohio law. The court noted that the rationales used in Washington Mut. Bank v. Mahaffey, 154 Ohio App. 3d 44 (Montgomery 2003), and Davidson v. Weltman, Weinberg and Reis, 285 F. Supp. 2d 1093 (S.D. Ohio 2003) reflected current Ohio law and properly distinguished the recovery of attorneys’ fees in the context of reinstatement from recovery in the context of default on a note or mortgage.

As to the two national bank defendants, Reed Smith presented a preemption analysis to the court, arguing that the National Bank Act would preempt application of any such Ohio law allegedly prohibiting the recovery of attorneys’ fees. Specifically, the Reed Smith team argued that the National Bank Act preempts state laws restricting a national bank’s ability to charge "non-interest" fees, including attorneys’ fees.

In preparing this argument, the team sought the advice of other Reed Smith Financial Services group members and carefully analyzed recent regulations issued by the Office of the Comptroller of Currency ("OCC"). These regulations clarify the preemptive power of the National Bank Act by specifying that "state laws that obstruct, impair or condition a national bank’s ability to fully exercise its federally authorized real estate lending powers do not apply to national banks." 69 Fed. Reg. 1,904 (2004).

On the basis of this research, the Reed Smith team was able to argue that national banks and their operating subsidiaries are empowered to make a mortgage loan and offer services in connection with the loan, such as allowing a defaulting borrower to reinstate his mortgage. The team concluded that because national banks are permitted to charge fees for these services, an Ohio law prohibiting the collection of such fees would unduly obstruct, impair, or condition the national bank’s ability to exercise its lending powers and should therefore be preempted. In support of this position, the team also noted that such preemption would be consistent with the OCC’s new preemption rules, which exclude collection-related attorneys’ fees from the list of state laws avoiding preemption, and the OCC’s prior determination that the National Bank Act preempts restrictions on non-interest fees, like attorneys’ fees, paid in curing a loan default.

Finally, Reed Smith researched the background and activities of plaintiffs’ counsel, the National Consumer Law Center. In doing so, the team learned that the Center had assisted in preparing model legislation directly contrary to the plaintiffs’ public policy claims. That is, although the plaintiffs contended that Ohio law prohibits the recovery of attorneys’ fees associated with residential mortgages and reinstatements, and attacked such recovery as somehow unfair, Reed Smith learned that the National Consumer Law Center participated in drafting a self-proclaimed "model state statute" that specifically provides for the recovery of such attorneys’ fees. This model statute, which the National Consumer Law Center entitled the "Home Loan Protection Act" and heralded as a "consumer protection statute" that was "designed to protect borrowers from abusive practices," codifies exactly the type of attorney fee recovery challenged in the plaintiffs’ suit.

This "opposition research" became particularly important when, during oral argument regarding defendants’ motions to dismiss, the plaintiffs attempted to use the National Consumer Law Center’s involvement in the action as a means for lending additional validity to their claims. By emphasizing the National Consumer Law Center’s role in the case, the plaintiffs sought to persuade the court to adopt their assumptions regarding the impropriety of the defendants’ actions and the allegedly "adhesive" nature of the reinstatement provisions at issue.

However, Reed Smith litigators were able to counter this argument—and plaintiffs’ supplemental memorandum— with an effective written response, arguing that plaintiffs’ counsel misconstrued the defendants’ arguments, misstated Ohio law, and advanced legislation providing for precisely the fees the plaintiffs deemed to be adhesive.

This article is presented for informational purposes only and is not intended to constitute legal advice.