United States District Court, S.D. California
MICHAEL PEMBERTON and SANDRA COLLINS PEMBERTON, individually and on behalf of others similarly situated, Plaintiffs,
v.
NATIONSTAR MORTGAGE, LLC, a Federal Savings Bank, Defendant.
ORDER GRANTING FINAL APPROVAL OF CLASS ACTION
SETTLEMENT ECF NO. 132
Cynthia Bashant United District Judge
Plaintiffs
obtained an adjustable rate mortgage (“ARM”) loan
that permitted them to defer payment of accrued interest. The
loan provided that unpaid accrued interest would be added
back to their unpaid principal balance. How that unpaid
accrued interest added back to the principal balance
(“negative amortization”) should be treated for
purposes of IRS deductions is the subject of this lawsuit.
Plaintiffs
argue that, even though the accrued interest is added back to
principal, the negative amortization is still interest that
should have been reported on IRS Form 1098. Nationstar claims
it failed to report negative amortization only when it took
over certain loans from other companies that did not include
this negative amortization in the data it transferred to
Nationstar.
The
Court previously rejected Plaintiffs' theory, in part, by
finding that the statute at issue, 26 U.S.C. § 6050H, is
ambiguous as to “how, whether and when” such
interest must be reported on Forms 1098. (See Order
Denying Pls.' Mot. to Supp. the Second Am. Compl. at 16,
ECF No. 114.) Furthermore, as a direct result of this
lawsuit, Nationstar began investigating and ultimately
reporting in 2016 the negative amortization on the loans it
received via transfer. However, Nationstar has conceded that
its process for identifying loans that might have paid
deferred interest is not foolproof. This settlement ensued.
I.
PROPOSED SETTLEMENT
The
proposed settlement agreement (Ex. 1
(“Settlement” or “Settlement
Agreement”) to Joint Mot. to Certify Class and
Preliminary Approval of Settlement (“Preliminary
Motion”), ECF No. 130-2) applies to class members
(“Class” or “Class Members”) defined
as “all persons who, according to Nationstar's
reasonably available computerized computer records, had or
have Option ARM loans serviced by Nationstar and made
payments to Nationstar in any tax year from 2010-2018.”
(Preliminary Mot. at 14, ECF No. 130.)
The
Court provisionally certified the above class and appointed
the law offices of David J. Vendler and Michael R. Brown,
APC, as Class Counsel. (Order Preliminarily Approving Class
Action Settlement and Conditionally Approving Proposed
Settlement Class (“Preliminary Order”), ECF No.
131.) The Court further appointed Michael Pemberton and
Sandra Collins Pemberton as Class Representatives.
(Id.)
“Class
Members may submit Claim Forms with documentation sufficient
to establish that the Class Member paid more in taxes than
was owed, for one or more tax years between 2010 and
2018.” (Settlement Agreement § 2.01(a).)
“Nationstar will conduct an investigation of each claim
submitted to verify from its records whether or not Class
Members' Form 1098 included deferred interest.”
(Id. § 2.01(b).) For tax years 2016, 2017 and
2018, if Nationstar determines the amount reported on Form
1098 does not include deferred interest “and
documentation provided by the Class Member establishes that
the Class Member paid more in taxes than was owed based on
the failure to include deferred interest in the Form 1098,
Nationstar will issue an amended IRS Form 1098”
including the negative amortization not previously reported
to the IRS. (Id. § 2.02.) For tax years 2010
through 2015, where Nationstar determines that the amount
reported on Form 1098 did not include deferred interest
“and the documentation provided by the Class Member
establishes that the Class Member paid more in taxes than was
owed based on the failure to include deferred interest in the
Form 1098, Nationstar will issue the Class Member a payment
of $50.” (Id. § 2.04.)
Independent
of the Class compensation, Class Counsel will seek
attorneys' fees not to exceed $700, 000, which Nationstar
will not Oppose. (Id. § 4.02.) Additionally,
the Class Representatives will seek an incentive award of
$10, 000 each, which Nationstar agrees not to oppose.
(Id. § 4.03.) Nationstar shall pay the costs of
notice to the Class, as well as any attorneys' fees and
incentive award ordered by the Court. (Id. §
3.09.) The Settlement Agreement is not contingent on the
Court's granting attorneys' fees or a Class incentive
award. (Id. § 4.04.)
II.
ANALYSIS
A.
Class Certification (for Settlement Purposes
Only)
Here,
the Parties seek to certify a class for settlement purposes
only. Federal Rule of Civil Procedure 23(a) provides that a
class may be certified
only if (1) the class is so numerous that joinder of members
is impracticable; (2) there are questions of law or fact
common to the class; (3) the claims or defenses of the
representative parties are typical of the claims or defenses
of the class; and (4) the representative parties will fairly
and adequately protect the interests of the class.
Fed. R. Civ. P. 23(a). In addition to meeting the 23(a)
requirements, a class action must fall into one of the
categories laid out in Rule 23(b). Fed.R.Civ.P. 23(b). The
parties seek to certify the class under Rule 23(b)(3).
(Prelim. Mot.) The Court previously found that both 23(a) and
23(b) are satisfied in this case. (Prelim. Order.) The
reasoning in the Preliminary Order is adopted and made a part
of this Final Order.
B.
Fairness, Reasonableness, and Adequacy of the Proposed
Settlement
The
Ninth Circuit maintains a “strong judicial
policy” that favors the settlement of class actions.
Class Plaintiffs v. City of Seattle, 955 F.3d 1268,
1276 (9th Cir. 1992). However, according to Federal Rule of
Civil Procedure 23(e)(2), “the court may approve [a
settlement that would bind class members] only after a
hearing and on finding that [the settlement] is ...