Antitrust Law Daily Wrap Up, RICO—2d Cir.: Filed-rate doctrine blocks lender-placed hazard insurance challenge, (Jul 23, 2015)

By Greg Hammond, J.D.

Borrowers who failed to purchase hazard insurance on their mortgaged properties were barred under the filed-rate doctrine from bringing Racketeer Influenced and Corrupt Organizations Act (RICO) claims against insurance companies for purchasing lender-placed hazard insurance for the properties and billing borrowers for the regulator approved rates. The U.S. Court of Appeals in New York reversed and remanded the lower court’s order denying dismissal of the RICO claims, finding that a claim challenging a regulator-approved rate is subject to the filed-rate doctrine whether or not the rate is passed through an intermediary (Rothstein v. Balboa Insurance Co., July 22, 2015, Jacobs, D.).

Loan servicer GMAC Mortgage LLC bought lender-placed insurance from Balboa Insurance Company and MeritPlan Insurance Company (Balboa) at regulator-approved rates. The borrowers claimed that they were fraudulently overbilled because the rates did not reflect secret “rebates” and “kickbacks” that GMAC received from Balboa through affiliate Newport Management Corp. Consequently, the borrowers filed RICO and Real Estate Settlement Procedures Act (RESPA) claims against GMAC, which subsequently settled, and Balboa and Newport. The district court denied the insurance companies’ motion to dismiss, finding that the regulatory approval for the lender-placed insurance rates did not necessarily extend to the borrowers’ reimbursement to GMAC. The court certified its decision for interlocutory appeal after noting a conflict of authority on this issue.

Under the filed-rate doctrine, a rate that is approved by the governing regulatory agency, or “filed rate,” is per se reasonable and unassailable in judicial proceedings brought by ratepayers. The court identified two rationales for the doctrine: (1) courts should not undermine agency rate-making authority by upsetting approved rates (principle of nonjusticiability); and (2) litigation should not become a means for certain ratepayers to obtain preferential rates (principle of nondiscrimination).

The court concluded that both rationales are applicable in the instant case, barring the borrowers’ RICO and RESPA claims. Specifically, the court found that the borrowers’ claims would undermine the rate-making authority of the state insurance regulators who approved Balboa’s lender-placed insurance rates and that, under the nonjusticiability principle, it is squarely for the regulators to say what should or should not be included in a filed rate. Second, because the claims would result in borrowers paying preferential rates for lender-placed insurance, the claims also offend the nondiscrimination principle, because it would undermine the scheme of uniform rate regulation.

Lastly, the court noted that the filed-rate doctrine is not limited to transactions in which the ratepayer deals directly with the rate filer. Rather, the doctrine operates notwithstanding an intermediary that passes along the rate. The court noted that it would make little sense for the doctrine to apply as between the rate filer and the intermediaries, but not when it comes to the ultimate ratepayers, particularly where the “A-to-B-to-C” character of transactions, such as in this case, are known to the regulators who approved the rates.

The case is number 14-2250-cv.

Attorneys: Ross E. Morrison (BuckleySandler LLP) for Balboa Insurance Co., Newport Management Corp., and MeritPlan Insurance Co. Mark A. Strauss (Kirby McInerney LLP) for Plaintiffs-Appellees.

Companies: Balboa Insurance Co.; Newport Management Corp.; MeritPlan Insurance Co.

Cases: RICO ConnecticutNews NewYorkNews VermontNews