Pemberton v. Nationstar Mortgage, LLC

          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 ...