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In re State ex rel. Coffman

Supreme Court of Colorado, En Banc

July 5, 2016

In Re The State of Colorado ex rel. Cynthia H. Coffman, Attorney General for the State of Colorado and Julie Ann Meade, Administrator, Uniform Consumer Credit Code, Plaintiffs
v.
The Castle Law Group, LLC; Absolute Posting & Process Services, LLC; RE Records Research, LLC, d/b/a Real Estate Records Research; Colorado American Title, LLC; Lawrence E. Castle; Caren A. Castle; Ryan J. O'Connell; and Kathleen A. Benton, Defendants

         Original Proceeding Pursuant to C.A.R. 21 District Court, City and County of Denver, Case No. 14CV32763 Honorable Morris B. Hoffman, Judge

          Attorneys for Plaintiffs: Cynthia H. Coffman, Attorney General Frederick R. Yarger, Solicitor General Alissa Gardenswartz, Deputy Attorney General Erik R. Neusch, Senior Assistant Attorney General Megan Paris Rundlet, Senior Assistant Attorney General Lauren M. Dickey, Assistant Attorney General Rebecca M. Taylor, Assistant Attorney General Mark L. Boehmer, Assistant Attorney General Denver, Colorado

          Attorneys for Defendants The Castle Law Group, LLC; Lawrence E. Castle; and Caren A. Castle: Reilly Pozner LLP Larry S. Pozner Ellie Lockwood Denver, Colorado

          Attorneys for Defendants RE Records Research, LLC, d/b/a Real Estate Records Research; and Colorado American Title, LLC: Vedra Wali LLC Daniel J. Vedra Denver, Colorado

          Attorneys for Defendants Absolute Posting & Process Services, LLC; Ryan O'Connell; and Kathleen Benton: Senter Goldfarb & Rice, L.L.C. Billy-George Hertzke Margaret L. Boehmer Ashley J. DeVerna Denver, Colorado

          MÁRQUEZ JUSTICE

          ¶1 Following a two-year investigation into the Colorado foreclosure industry, the State brought a civil law enforcement action against the foreclosure law firm The Castle Law Group, LLC and its principals, Lawrence Castle and Caren Castle (collectively, "Castle"), as well as Castle's affiliated vendors, Absolute Posting & Processing Services, LLC, Ryan O'Connell, Kathleen Benton (collectively, "Absolute"), RE Records Research, LLC ("RERR"), and Colorado American Title, LLC ("CAT"). Among other things, the State alleges that between 2009 and 2014, the Castle defendants conspired with their affiliated vendors to generate and submit deceptive invoices reflecting systematically inflated costs incurred for foreclosure-related services, while falsely representing to mortgage servicers that these inflated costs were "actual, necessary, and reasonable." According to the State, Castle submitted the vendors' inflated invoices to the mortgage servicers, and in turn, the mortgage servicers, relying on Castle's false representation that the vendors' charges were "actual, necessary, and reasonable, " reimbursed Castle for these costs as part of the foreclosures and ultimately passed the inflated costs on to the public. The State contends that all the defendants benefitted from this scheme by collectively reaping millions in inflated profits from homeowners, purchasers of foreclosed homes at auction, and taxpayer-funded investors like Fannie Mae and Freddie Mac. Specifically, it alleges that Castle pocketed some of these overages as kickbacks from the vendors to circumvent the maximum allowable fees Castle could collect, but also contends that Castle's affiliated vendors were unjustly enriched by this scheme. The State alleges that the defendants' conduct violated the Colorado Consumer Protection Act ("CCPA"), §§ 6-1-101 to -115, C.R.S. (2015), as well as the Colorado Antitrust Act of 1992, §§ 6-4-101 to -122, C.R.S. (2015), and the Colorado Fair Debt Collection Practices Act, §§ 12-14-101 to -136, C.R.S. (2015). Only the CCPA claim is at issue in this original proceeding pursuant to C.A.R. 21.

         ¶2 Relevant here, the State seeks to demonstrate at trial that the costs for foreclosure-related services charged by Castle's affiliated vendors and claimed by Castle were not, in fact, the "actual, necessary, and reasonable" costs for such services. Specifically, the State seeks to demonstrate that these costs were artificially inflated by comparing the invoiced rates submitted by Castle with the market rates charged by unaffiliated vendors for such services. The State retained an expert witness, Matthew Lausten, to testify, among other things, regarding the "overage" amounts Defendants obtained from their alleged deceptive trade practices as reflected by the difference in the invoiced costs and the "market rate" prices charged by unaffiliated vendors for the same services.

         ¶3 On January 7, 2016, approximately a week before the scheduled trial, the district court issued an order granting Castle's motion to limit Lausten's testimony and granting in part Absolute's motion to exclude Lausten's testimony, albeit not based on the CRE 702 reliability and relevance grounds raised in the motions. Instead, the court concluded that the market rates for foreclosure-related services are "irrelevant to Plaintiffs' cognizable claims." The court construed the State's CCPA deceptive trade practice claim to be grounded on the allegation that the Castle defendants exceeded their allowable fees by charging additional fees in the guise of costs for foreclosure-related services. The court reasoned that "[i]t doesn't matter whether those charges were over or under 'market' rates; what matters is if any portion of them found their way to the Castle Defendants as disguised attorney fees . . . ."

         ¶4 In response to the State's motion for clarification of this order, the court issued another order on January 11, 2016, ruling that "[c]harging high prices is not deceptive or unjust, as long as those prices are accurately disclosed. Charging high prices is not unlawful, as long [sic] those prices have not been capped by state price controls and are not the product of an antitrust violation." The court further noted that it read the State's complaint to allege that Castle received some portion of the high prices as kickbacks from the vendors in a scheme to avoid contractual or regulatory caps on their attorney fees. The court ruled that this allegation is the "only strand keeping [the State's non-antitrust] claims alive, and it is the only strand on which I will permit evidence."

         ¶5 The State sought review of the district court's January 7 and January 11 Orders pursuant to C.A.R. 21. The State contends that by excluding market rate evidence, the trial court sua sponte dismissed one of the theories that formed the basis of the State's CCPA claim and its disgorgement calculations. We issued a rule to show cause.

         ¶6 Consistent with our decision in May Department Stores Co. v. State ex rel. Woodard, 863 P.2d 967 (Colo. 1993), we hold that, for purposes of a deceptive trade practices claim under the CCPA, disclosure of a price charged does not automatically insulate a party from claims that the price is deceptive. Here, the State's CCPA claim alleges that the Castle defendants engaged in a scheme with the vendors to generate invoices with greatly inflated charges for foreclosure-related services, while Castle falsely represented to mortgage servicers that these charges were the "actual, necessary, and reasonable" costs for such services. That the invoices disclosed the prices charged for foreclosure-related services misperceives the alleged deception: namely, that these prices were not, in fact, the "actual, necessary, and reasonable" costs for such services. Evidence of the market rates charged by unaffiliated vendors for such services is directly relevant to establishing whether the costs invoiced by the vendors were the actual or reasonable costs of such services. Market rate evidence is further relevant to the State's allegation that the vendors themselves also benefitted from the common scheme and serves as a benchmark for the State's disgorgement calculations. We therefore conclude that the trial court abused its discretion in barring evidence of market rates for foreclosure-related services. Accordingly, we make our rule absolute and remand the matter to the trial court for further proceedings consistent with this opinion.

         I. Facts and Procedural History

         ¶7 The State alleges that Castle, in conjunction with its affiliated vendors, systematically misrepresented and inflated the costs for foreclosure-related services in more than 100, 000 foreclosures in Colorado. The State's expert witness report estimates that Castle passed on over $25 million in price inflation to mortgage servicers such as Fannie Mae. According to the State, these deceptively inflated costs were then passed on to, and ultimately borne by, investors and insurers of the loan, third-party purchasers acquiring the property at auction, and home owners trying to save their homes.

         A. The State's Complaint

         ¶8 The State's CCPA claim rests on the allegation that Castle, in concert with their affiliated vendors, systematically charged inflated and deceptive costs for posting foreclosure notices, obtaining title products, preparing documents, and providing other foreclosure-related services by using affiliated vendors to create invoices for foreclosure services at costs that are grossly inflated above the actual costs and above what unaffiliated vendors charge for such services (i.e., the "market rate" for such services). Am. Compl. at ¶ 2, State v. The Castle Law Grp., LLC, No. 14CV32763 (Denver Dist. Ct. Apr. 15, 2015). The State alleges that the allowable fees and costs charged by a law firm conducting foreclosures are governed by the mortgage loan documents, servicer agreements, investor guidelines, and state law. Id. at ¶ 58. With respect to the allowable costs, the State alleges that the servicer agreements require that costs passed along to the servicer/investor must be "actually incurred, necessary to complete the foreclosure, and reasonable, i.e., market rate, " id. at ¶ 60, and that accordingly, Castle agreed to seek reimbursement for only its "actual, necessary, and reasonable (i.e., market rate) costs, " id. at ¶ 59. The State alleges that the servicer has little incentive to scrutinize these costs because it ultimately passes these costs on to others, namely homeowners, investors, and insurers. Id. at ¶ 63. Consequently, the servicers rely on the law firm's representations that it will comply with the agreements and investor guidelines and pass through only its "actual, necessary, and reasonable" costs. Id. at ¶ 3; see also id. at ¶¶ 59, 60, 64, 69, 72, 167.

         ¶9 The gravamen of the State's CCPA claim in this case is that the invoiced costs submitted by Castle for reimbursement from the mortgage servicers were not, in fact, actual, necessary, or reasonable, as Castle (falsely) represented. See id. at ¶¶ 2, 3, 7, 12, 49, 59, 60, 73, 83, 120, 127, 151, 156, 162, 163, 166. The State's amended complaint repeatedly equates "reasonable" costs in this context with the market rate charged by unaffiliated vendors for such costs. Id. at ¶¶ 3, 7, 12, 59, 60, 64, 69. For example, the State alleges that $125 was not the actual or market rate cost for posting a foreclosure notice on a door, id. at ¶¶ 7, 20, 83, 122; that $275 was not the actual or market rate cost for a title search, id. at ¶¶ 20, 166, 179; and that $75 was not the actual or market rate cost for a title search update, id. at ¶¶ 20, 179, 181. The State alleges that Castle pocketed some of these overages as kickbacks from the vendors to skirt contractual and regulatory limits on the attorney fees Castle could charge. Id. at ¶¶ 63, 65, 66, 73, 171. However, it also alleges that its vendors were unjustly enriched by this scheme. Id. at ¶¶ 74, 217.

         B. Pre-Trial Motions and Discovery

         ¶10 In October 2014, defendants RERR and CAT filed a motion to dismiss under C.R.C.P. 12(b)(5), arguing that the State's complaint failed to state a CCPA claim against them. The motion asserted that the State's complaint alleged only that the defendants charged too high a price for their services, not that the invoices contained fraudulent prices. The State responded that its complaint alleged that the invoiced costs were deceptive because the mortgage servicer relied on Castle's false representation that the costs were "actual, reasonable, and necessary" and therefore the defendants' alleged scheme to charge the inflated prices generated millions of dollars in unlawful profits.

         ¶11 The trial court denied the motion to dismiss. In its order denying the motion, the court noted that it agreed with the defendants' contention that charging "an amount 'above the market price'" is not actionable under the CCPA as long as the amounts charged "were accurately disclosed and billed" and the title work was actually performed. Order at 3, State v. The Castle Law Grp., LLC, No. 14CV32763 (Denver Dist. Ct. Nov. 13, 2014) [hereinafter "November 2014 Order"]. The trial court went on, however, to state that the gravamen of the State's CCPA claim against these defendants was that they acted in concert with the Castle defendants to misrepresent and overstate the actual cost of their title work as part of an alleged scheme to hide the real price of the Castle defendants' attorney fees. Despite the court's comments regarding market price, the November 2014 Order did not expressly limit the scope of the State's CCPA claim or bar evidence of market rates.

         ¶12 Indeed, it appears from the record before us that, following the trial court's November 2014 Order, all parties continued with discovery assuming that the State would present evidence of the market rates charged by unaffiliated vendors for foreclosure-related services. For example, in April 2015, Absolute served discovery requests asking the State to identify the vendors from which the State established its market rate data and to produce any documents with their listed prices. In May 2015, Castle served discovery asking the State to identify the vendors that provided foreclosure-related services at the State's alleged market rate. Castle also asked the State to detail its methodology and provide supporting documentation for determining the market rates for foreclosure-related services. In July 2015, both Castle and Absolute served C.R.C.P. 30(b)(6) deposition notices to the State, seeking testimony on the State's market rate allegations.

         ¶13 In November 2015, Absolute filed a motion for summary judgment. In an order dated December 28, 2015, the trial court denied the motion with respect to the State's CCPA claim, concluding that genuine issues of material fact existed as to whether Castle received kickbacks, either directly or indirectly, from Absolute. Relevant here, Absolute argued in its motion that the complaint presented no evidence that the $125 it charged for a foreclosure posting was inflated beyond the market price and that the State's evidence of market price was cherry-picked and not reliable. The court rejected these arguments "for the simple reason that market price is not an issue in this case." Order at 2, State v. The Castle Law Grp., LLC, No. 14CV32763 (Denver Dist. Ct. Dec. 28, 2015) [hereinafter "December 2015 Order"]. The December 2015 Order did not, however, expressly limit the scope of the State's CCPA claim or bar evidence of market rates. The court rejected Absolute's contention that the State could not establish that the alleged deceptive trade practice significantly impacted the public, noting that the State "will have to prove[] that the Absolute Defendants conspired with the Castle Defendants to inflate the Castle Defendants' permissible fees, " thus injuring Castle's clients-an injury that the court noted "may well reverberate downstream to buyers who would have to pay these inflated fees." Id. at 3.

         C. January 2016 Orders

         ¶14 The January 2016 Orders at issue in this case issued a little over a week after the court's ruling on Absolute's motion for summary judgment. These orders addressed Castle's and Absolute's separate motions to limit or exclude the expert testimony of the State's expert witness, Matthew Lausten. The State retained Lausten to testify regarding (1) the relationship between Castle, the affiliated vendors, and a series of entities that the State alleged were used to funnel proceeds of the deceptive costs back to Castle; (2) the monies flowing back to Castle; and (3) the "overage" amounts the defendants obtained through the alleged deceptive trade practice, as reflected by the difference between the invoiced charges and the "market rate" prices that unaffiliated vendors charged for the same services. Lausten did not independently research the market rate for these services but relied in his expert report on the market rate information provided to him by the State.

         ¶15 On December 14, 2015, Absolute and Castle separately moved to strike some or all of Lausten's testimony. The defendants challenged the reliability of Lausten's conclusions under CRE 702 and the relevance of certain aspects of his report; however, neither defendant contended that the market rates for foreclosure-related services were irrelevant to the State's CCPA claim.

         ¶16 In an order dated January 7, 2016, the court granted Castle's motion to limit Lausten's testimony and granted Absolute's motion to exclude Lausten's testimony as to the market rates for foreclosure-related services. Order at ¶¶ 1–2, State v. The Castle Law Grp., LLC, No. 14CV32763 (Denver Dist. Ct. Jan. 7, 2016) [hereinafter "January 7 Order"]. The court stated, "As I indicated in my Order dated December 28, 2015, the market rates for posting, serving or title work are themselves irrelevant to Plaintiffs' cognizable claims." Id. at ¶ 1. The court characterized the State's CCPA claim as grounded on the allegation that the Castle defendants "exceeded their contracted-for or regulated fee limits by charging excess fees in the guise of posting, serving or title charges." Id. The court reasoned that "[i]t doesn't matter whether those charges were over or under 'market' rates; what matters is if any portion of them found their way to the Castle Defendants as disguised attorney fees in sufficient amounts and under circumstances making the scheme ...


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