Title: State v. Homeside Lending, Inc.

State: vermont

Issuer: Vermont Supreme Court

Document:

State v. Homeside Lending, Inc. (1999-265); 175 Vt. 239; 826 A.2d 997

2003 VT 17

[Filed 21-Feb-2003]

[Motion for Reargument Denied 15-Apr-2003]

       NOTICE:  This opinion is subject to motions for reargument under
  V.R.A.P. 40 as well as formal revision before publication in the Vermont
  Reports.  Readers are requested to notify the Reporter of Decisions,
  Vermont Supreme Court, 109 State Street, Montpelier, Vermont 05609-0801 of
  any errors in order that corrections may be made before this opinion goes
  to press.

                                 2003 VT 17

                                No. 1999-265

  State of Vermont	                         Supreme Court

                                                 On Appeal from
       v.	                                 Chittenden Superior Court

  Homeside Lending, Inc. and	                 June Term, 2000 
  BankBoston Corporation

  Matthew I. Katz, J. 

  William H. Sorrell, Attorney General, and Elliot Burg, Assistant Attorney
    General, Montpelier, for Plaintiff-Appellant.
    
  Robert S. DiPalma of Paul, Frank & Collins, Inc., Burlington, and 
    Jeffrey B. Maletta, Daniel J. Tobin and Lancelot A. King of 
    Kirkpatrick & Lockhart LLP, Washington D.C., for Defendants-Appellees.
           
  David L. Shapiro and Susan P. Koniak, Cambridge, Massachusetts, and
    Jonathan S. Massey, Washington, D.C., for Amici Curiae Law Professors 
    Supporting the State of Vermont.

  Philip T. McLaughlin, Attorney General, and Walter L. Maroney, Senior
    Assistant Attorney General, Concord, New Hampshire, for Amici Curiae 
    States In Support of State of Vermont.

  PRESENT:  Dooley, Morse, (FN1)  Johnson and Skoglund, JJ., and 
            Allen, C.J. (Ret.), Specially Assigned        

        
       ¶  1.  DOOLEY, J.   The State of Vermont appeals from a decision of
  the Chittenden Superior Court granting summary judgment to defendants,
  Homeside Lending, Inc. and BankBoston Corporation, on the grounds that this
  litigation is precluded by a national class action judgment by the Mobile,
  Alabama circuit court in Hoffman v. BancBoston Mortgage Corp., No.
  CV-91-1880 (Ala. Cir. Ct. Jan. 24, 1994).  In this action, the State
  alleges that defendants violated the Vermont Consumer Fraud Act, Vermont's
  mortgage escrow account statute, and its fiduciary duties and contractual
  obligations in implementing the Alabama judgment with respect to Vermont
  mortgagors who were class members because of their mortgages with
  defendants.  The State argues on appeal that the superior court's
  preclusion decision was erroneous because (1) the Alabama circuit court's
  assertion of personal jurisdiction over Vermont class members was defective
  because it violated their due process rights, and (2) even if Vermont
  mortgagors are precluded by the Alabama judgment from raising the claims
  asserted in this case, the State is not precluded.  We agree with the first
  argument, do not reach the second, and reverse.

       ¶  2.  The events underlying Hoffman and this lawsuit are notorious,
  having been the subject of extensive news and academic commentary.  See M.
  Shadur, The Unclassy Class Action, 23 No. 2 Litig. 3 (Winter 1997); S.
  Koniak & G. Cohen, Under Cloak of Settlement, 82 Va. L. Rev. 1051, 1068
  (1996); B. Meier, Math of a Class-Action Suit: 'Winning' $2.19 Costs
  $91.33, N.Y. Times, Nov. 21, 1995, at A1; J. Quinn, Fighting the System,
  Everywhere, Newsweek, Oct. 2, 1995, at 71.  The controversy arises out of
  real estate loans that Bank of Boston Corporation made to Vermont
  homeowners, as well as to those from other states, that were serviced by
  BancBoston Mortgage Corporation.  The names of these corporations have
  changed respectively to BankBoston Corporation and Homeside Lending, Inc.,
  the defendants in this case.
   
       ¶  3.  In 1991, Carl and Deborah Hoffman, mortgagors on a mortgage
  held by Bank of Boston Corporation and serviced by BancBoston Mortgage
  Corporation, brought a national class action against these corporations in
  the Alabama circuit court alleging that the mortgagees required the
  mortgagors to maintain excessive amounts - that is, amounts in excess of
  those authorized by the mortgage contract - in an escrow account to cover
  realty taxes, insurance, and other assessments.  The class contained more
  than 300,000 mortgagors from a number of states, including Vermont.  Since
  the defendants in that case, and those in this case, are identical, except
  for the change of names, we will hereafter refer to them as defendants.

       ¶  4.  Defendants offered to settle the Hoffman suit, even before it
  was certified as a class action, by releasing some of the money in each of
  the escrow accounts and paying $500,000 in attorneys' fees to plaintiffs'
  counsel.  That offer was rejected, and on July 2, 1992, the suit was
  certified as a class action.  On October 12, 1993, the Alabama court ruled
  on summary judgment that defendants had required that mortgagors hold in
  the escrow accounts amounts in excess of those authorized by the mortgage
  contracts.  Thereafter, on November 9, 1993, the parties entered into a
  "global" settlement which received preliminary approval from the court on
  December 6, 1993.  The approval order provided for notice to class members,
  which included a description of the proposed settlement, a form for
  requesting exclusion from the class, a form to give notice of objection to
  the settlement, and a form indicating participation in a subclass.  The
  notice was sent by first-class mail and published in USA Today.
   
       ¶  5.  Some members of the class opted out, but most did not. 
  Approximately 200 class members indicated an intent to appear and object to
  the settlement, but only the Florida Attorney General appeared at the
  January 10, 1994 fairness hearing to object to the settlement terms.  The
  Alabama court approved the settlement, finding that it benefitted the class
  members by lowering escrow amounts in the future, requiring a refund of
  part of the existing escrow amounts, and paying them interest on the escrow
  amounts improperly held by defendants in the past.  The interest payments
  under the settlement were $8.76 for existing mortgagors and $1.78 for past
  mortgagors.

       ¶  6.  The impetus for this action is the attorney's fee awarded to
  class counsel.  The settlement provided that the attorney's fee would be a
  percentage "of the economic benefit conferred on the class" as determined
  by the court.  The notice to the class members contained the following
  paragraph entitled "ATTORNEYS' FEES AND COSTS":

    Counsel for plaintiffs and the class will request the Court to
    award them a reasonable attorney's fee to be paid out of each
    escrow account based on the benefit conferred on the class after
    BancBoston has performed the analysis set forth in paragraphs
    3(b), (c), and (d) of this Notice.  Counsel for the plaintiffs and
    the class will request a percentage not to exceed one-third of the
    economic benefit conferred that is more fully described in this
    Notice and the Consent Decree.  The Court will decide whether or
    not to award attorneys' fees out of the benefit conferred at the
    fairness hearing set for January 10, 1994.  BancBoston has agreed
    not to challenge or object to plaintiffs' counsel request. . . .
    BancBoston will distribute the above fees, costs and expenses to
    counsel for plaintiffs and the class on a monthly basis after the
    analysis set forth in paragraphs 3(b), (c) and (d) has been
    performed.
     
  Paragraphs 3(b), (c), and (d), referenced in the attorney's fees paragraph,
  specified how BancBoston was to calculate escrow amounts under the
  settlement and what it was to do with excess escrow amounts. (FN2)  The
  attorney's fees paragraph references an "economic benefit conferred that is
  more fullydescribed in this Notice."  Apparently, this reference is also to
  paragraphs 3(b), (c) and (d), although these paragraphs do not attempt to
  describe the extent of the economic benefit conferred on class members.

       ¶  7.  Class counsel presented evidence at the fairness hearing in
  support of their request for an attorney's fee.  Because defendants in the
  settlement had agreed not to oppose any fee amount class counsel requested,
  they were silent on the issue.  The circuit court summarized class
  counsels' position as follows:

         Class counsel submitted the affidavit of Mr. Michael Koster,
    Senior Vice-President of BancBoston who testified that under the
    last analysis performed by BancBoston, the difference in the
    escrow account portfolio between the new and old methodology was
    19%.  Class counsel proposed that attorneys' fees be awarded as
    one-third of 19% of the balance reflected in the escrow accounts
    at the time that the annual escrow analysis is calculated.

  Order of Settlement Approval and Final Judgment, Hoffman v. BancBoston
  Mortgage Corp., No. CV-91-1880, slip op. at 9 (Ala. Cir. Ct. Jan. 24,
  1994).  Based on its evaluation of the amount of work undertaken by class
  counsel and the "unprecedented results achieved," the court found that
  counsel was entitled to an attorney's fee "based on a percentage of the
  economic benefit conferred" by the settlement.  It awarded 28% of 19% of
  the escrow account amounts of class members to be deducted monthly and sent
  to class counsel.  Although there is some disagreement about the final
  amount of the attorney's fee awarded, it is between 8 and 11.7 million
  dollars. (FN3) 

       ¶  8.  After defendants began implementing the settlement, its
  economic implications became more apparent.  In understanding the impact of
  the settlement on the mortgagor class members, we are aided by the
  extensive literature about the settlement terms.  We recognize some of the
  claims of the economic value of the settlement are disputed, but since this
  action was dismissed with no factual development beyond the various papers
  and orders in Hoffman, the analyses in the literature are particularly
  relevant to understand the allegations contained in plaintiffs' complaint. 
  (FN4) 
                    
       ¶  9.  As Professors Koniak and Cohen explained in their law review
  article analyzing the Hoffman settlement:

    Class counsel asked for attorney's fees equaling 33 1/3% of all
    the money the bank was wrongfully holding in escrow; that is,
    one-third of all the excessive cushion money.  The trick was in
    characterizing all that money as money recovered by this lawsuit. 
    Had there been no lawsuit, 100% of the excess cushion would have
    been returned to class members at the time their mortgages were
    repaid.  Therefore, what the lawsuit recovered for each class
    member was (in addition to the back interest) only the difference
    between the value of the excess cushion money in the class
    member's hands today and the value of the money had the bank held
    it until the mortgage was paid off.  The lawsuit and class counsel
    did not "recover" the excessive cushion money being held in escrow
    because that money was never lost.  All that the class members had
    lost by the bank's allegedly wrongful acts was the use of that
    money today and the use of that money in years past.

  S. Koniak & G. Cohen, Under Cloak of Settlement, 82 Va. L. Rev. 1051, 1063
  (1996).  Consistent with this explanation, the authors calculated the value
  of the settlement under a number of scenarios. (FN5)  In one, the attorney's
  fees were about four times the recovery; in another about forty times the
  recovery; and in another, there was no recovery, so the attorney's fees
  were infinity times the recovery.  See id. at 1064-68.  They noted that any
  class member who paid more in attorney's fees than he or she recovered
  "would have been better off if class counsel had lost the case."  Id. at
  1068.

       ¶  10.  The complaint in this case does not allege the exact loss to
  Vermont consumers as a result of the settlement.  It does allege that
  approximately 900 of the 300,000 persons in the class were Vermont
  residents and that they paid at least $30,000 in attorney's fees.  Further,
  it alleges that the settlement was of no value to them because Vermont law,
  8 V.S.A. § 1260(b) (Cum. Supp. 2000) (recodified at 8 V.S.A. § 10404),
  requires that interest be paid on home loan escrow funds at the prevailing
  savings account rate.

       ¶  11.  The litigation did not end with the approval of the settlement
  by the Alabama court.  Two class members from Maine and one from Wisconsin
  sued class counsel and the defendants in Hoffman, alleging violations of
  the RICO and Civil Rights Acts as well as fraud, negligent
  misrepresentation, attorney malpractice, breach of fiduciary duty, and
  conversion.  See Kamilewicz v. Bank of Boston Corp., 1995 WL 758422 (N.D.
  Ill. 1995) (Kamilewicz I).  The federal court dismissed the case for lack
  of subject matter jurisdiction under the Rooker-Feldman doctrine, a rule
  that prevents lower federal courts from hearing appeals of state actions,
  (FN6)  based on its conclusion that the federal court would have to
  improperly review the Alabama court actions in order to grant relief.  The
  district court opinion was affirmed by the United States Court of Appeals
  for the Seventh Circuit, Kamilewicz v. Bank of Boston Corp., 92 F.3d 506
  (7th Cir. 1996) (Kamilewicz II), and a request for rehearing en banc failed
  on a 6-to-5 vote, over a lengthy dissent by Judge Easterbrook, Kamilewicz
  v. Bank of Boston Corp., 100 F.3d 1348 (7th Cir. 1996) (Kamilewicz III).
  (FN7)

       ¶  12.  While the federal action was pending, class counsel sought an
  injunction against the Kamilewicz plaintiffs in the Alabama circuit court
  arguing that they were bound by the Alabama orders.  The Kamilewicz
  plaintiffs refused to appear, alleging that the court had no jurisdiction
  over them.  The court found that it did have jurisdiction over the class
  members for the same reason that it asserted jurisdiction initially, found
  again that the settlement was fair and reasonable, and found that class
  counsel's representation was adequate.  It further found that defendants
  did not violate their fiduciary obligations as escrow agents with respect
  to the attorney's fees taken from the escrow accounts.  It held that the
  Kamilewicz plaintiffs "are bound by the Order of Settlement and are
  precluded from reasserting the claims dismissed in the Federal Class Action
  in any forum."  Order Denying Motion to Set Aside Order of Settlement, In
  re Kamilewicz, No. CV-91-1880, slip op. at 10 (Ala. Cir. Ct. Jan. 30,
  1996).
   
       ¶  13.  When the law firm that represented the Hoffman plaintiffs
  brought a suit against the Kamilewicz plaintiffs and their counsel for
  malicious prosecution, the Alabama Supreme Court granted a writ ordering
  the circuit court to dismiss the action for lack of personal jurisdiction. 
  Ex parte Kamilewicz,