APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW JERSEY D.C. Civil Action No. 1763-73.
Van Dusen, Hunter and Weis, Circuit Judges.
Plaintiff mortgagors appeal from the dismissal of their civil antitrust suit against their mortgagee, First Federal Savings and Loan Association ("First Federal"), the mortgagee's law firm, Johnstone & O'Dwyer, and the directors of First Federal. Plaintiffs brought a class action alleging a conspiracy resulting in: 1) illegal tie-in of legal services in violation of the Sherman Act § 1, 15 U.S.C. § 1,*fn1 and 2) violations of Federal Home Loan Bank Board ("FHLBB") Regulations, 12 C.F.R. §§ 563.35(a)(3), 571.7(b). District Court dismissed the Sherman Act claim for lack of federal jurisdiction, finding no showing that the alleged tie-in either was in or substantially affected interstate commerce. The claim under the FHLBB regulations was held to be within the primary jurisdiction of the federal agency and was dismissed without prejudice. Because we find sufficient allegations of interstate impact to withstand a pretrial motion to dismiss the Sherman Act claim for lack of subject matter jurisdiction, we vacate the dismissal of appellant's Sherman Act claim and remand for further proceedings consistent with this opinion.
In October 1972, the Mortensens contracted to buy a house in Westfield, New Jersey, and applied to First Federal for the mortgage. When a home buyer applies to First Federal for a first mortgage, a condition of the loan is that the applicant pay First Federal's attorney for the related legal services of examining and certifying title, drafting and recording the mortgage, and closing title in the buyer. Mechanically, the fee for these services is deducted from the amount of the loan. The applicant is not precluded from hiring his or her additional attorney, but will remain responsible in any event for First Federal's attorney's fees.
First Federal refers these legal services to defendant Johnstone & O'Dwyer, a New Jersey law firm.*fn2 In fact, such services could be performed only by New Jersey attorneys. If, however, home buyers consider title insurance a comparable substitute for a certificate of title, there is no intra-New Jersey restriction: any title company would theoretically be in a position to offer this service.*fn3
Appellants allege the fees charged by Johnstone & O'Dwyer for these services to be unreasonably high,*fn4 and, further, that procurement of a mortgage from First Federal is conditioned upon applicant's acceptance of those fees. Appellants do not allege that First Federal's mortgage offer is more attractive than other mortgages.*fn5 There may be some 494 lending institutions with offices in New Jersey competing for the home mortgages given by First Federal; out-of-state lenders can also compete for the mortgages given on New Jersey homes.
Some of those lending institutions follow what is called an "open attorneys" plan, under which the mortgage applicant is permitted by the lender to choose his or her own counsel for the title examination and closing. In that case, the applicant pays the selected counsel directly, and the lender plays no role in the provision or payment of those particular legal services. The lender charges a fee to review the title. Other lending institutions, among them First Federal, prefer to rely on their own general counsel for these matters, and follow what is referred to as a "closed attorneys" plan.*fn6
First Federal has always relied on Johnstone & O'Dwyer to perform these legal services, expressing confidence in their work. Johnstone & O'Dwyer is paid on a case-by-case basis and receives no annual retainer from First Federal. On its part, First Federal receives no "kickback" from its referrals to Johnstone & O'Dwyer. In every case, the mortgage applicant is the one who pays for Johnstone & O'Dwyer's legal services. Plaintiffs claim that in the four-year period preceding this suit, Johnstone & O'Dwyer (and Guardian, the controlled title company) may have received some $1,000,000 in legal fees from First Federal's mortgage-related legal services.
According to First Federal, the legal services are rendered to and for First Federal, not the home buyer. Appellants contend just the reverse: the legal services are rendered to and for the mortgage applicants (as they would be in an "open attorneys" plan) and they are consequently being forced to buy the legal services selected by First Federal. The trial court adopted the latter contention for the purpose of deciding the jurisdictional issue.
First Federal is prohibited, by 12 C.F.R. §§ 545.6-6 from giving mortgages on homes outside New Jersey unless the out-of-state properties are within 100 miles of First Federal's home office. The home office is in Westfield, New Jersey. Although some parts of New York state are within 100 miles of Westfield, of its 3,462 mortgage loans still open as of December 7, 1973, not one was secured by out-of-state real property.
Although its home mortgage activity is thus virtually confined to New Jersey, there are apparently several interstate contacts: 1) First Federal is a federally chartered institution, and, as such, governed by federal regulations; 2) substantial funds used by First Federal for its loans come from the FHLBB as loans to First Federal;*fn7 3) the amounts of mortgage funds provided by First Federal's own savings deposits are insured by Federal Savings and Loan Insurance Corporation ("FSLIC"); 4) a number of the loans made by First Federal are guaranteed by federal or other out-of-state agencies or corporations;*fn8 and 5) at the time of mortgage application many buyers are from outside New Jersey.*fn9
In addition to First Federal's interstate contacts, the Mortensens point to out-of-state competitors for both the mortgage transaction and the title certificate, and to potential deterrent of out-of-state customers considering homes in New Jersey. Appellants contend in particular that New York banks compete for mortgage loans in First Federal's territory. Assuming that buyers consider title insurance an adequate substitute for title examinations by attorneys, there would of course be out-of-state competition for a significant part of the allegedly tied service.*fn10 The final point, the impact on the flow of out-of-state New Jersey home seekers, is more difficult to assess, since it is not clear from the record what proportion of New Jersey lenders operate under the "closed attorneys" plan. Moreover, not all New Jersey lenders are implicated, only First Federal.
Mortensens instituted this action in December, 1973. Discovery proceedings commenced; in December, 1974, plaintiffs moved for class action certification, and in January, 1975 moved to amend their complaint in order to add Johnstone & O'Dwyer's title company, Guardian Abstract Company. In February, 1975, defendants responded with motions to dismiss plaintiffs' complaint pursuant to Fed. R. Civ. P. 12(b)(1) for lack of subject matter jurisdiction; to dismiss under Fed. R. Civ. P. 12(b)(6) for failure to state a claim upon which relief can be granted; to stay the proceedings pending exhaustion of administrative remedies; and, in the alternative, to grant summary judgment under Fed. R. Civ. P. 56 in favor of defendants.
A single hearing was held, in April, 1975, on the above motions. Plaintiffs' attorney opened with his arguments favoring class action certification according to Fed. R. Civ. P. 23. When the judge asked how many lending institutions accept customer-chosen attorneys for closing, plaintiffs' counsel responded "I felt we didn't have to make all our proof here . . .," and proceeded with his proof of class action status.*fn11
The defendants' attorney, a member of the Johnstone & O'Dwyer firm, asserted that all the relevant facts were then before the court and that, consequently, the matter was ripe for summary judgment. The "central" issue, according to defendants' attorney, was whether Johnstone & O'Dwyer performed any legal services for First Federal's borrowers; the answer strenuously urged was "no," that the services were rendered to First Federal and not to the customers. In addition, defendants' attorney argued that the fees charged by Johnstone & O'Dwyer were not unreasonable. On the merits of the tying claim, defendants' attorney discussed a recent case dealing with a nearly identical practice in Louisiana, in which the district court held that there was no illegal tie-in because there were not two products, simply the one product of the loan with its related services.*fn12 In contradiction to plaintiffs' attorney, the defendants' attorney contended that First Federal's practice was thoroughly approved by the FHLBB regulations. Defendants' attorney responded to the class action certification request. He closed his argument without mentioning the jurisdictional issue. Plaintiffs' attorney had not earlier mentioned the jurisdictional issue and did not mention it on rebuttal.
It was not until the close of the hearing, after the judge said he would take the case under advisement and would write an opinion, that jurisdiction may have been considered.*fn13 The judge asked "Can anyone tell me what part of the market the defendant has?" No one could, promises were made to send the information in later, but the record does not show that this was done.
In August, 1975, the district court filed an opinion dismissing the Sherman Act claim for lack of subject matter jurisdiction, and granting leave to renew the FHLBB claim after exhaustion of the appropriate administrative remedies. In its consideration of subject matter jurisdiction, the court went through a two-step analysis: first, did defendants' conduct occur in interstate commerce, and, second, if it did not, did it nevertheless substantially affect interstate commerce.
In examining the conduct under the first prong, the court asserted that
plaintiffs' claim to having satisfied the first standard rests upon the facts that (1) the Association [First Federal] obtains both investment funds and depositors' insurance from interstate sources and some of its customers' loans are guaranteed by federal agencies and enterprises based without the State, (2) perhaps 25% of its customers originate their loans while residing outside New Jersey, and (3) it competes in the local real estate financing market with New York lending institutions.
Finding real estate financing to be "essentially a local enterprise,"*fn14 the trial judge commented that "an entity engaged in such activities is not brought within the flow of interstate commerce merely because it incidentally purchases supplies in interstate commerce, or because its customers travel in interstate commerce, or because it is situated in an area of interstate activity," and concluded "without great difficulty" that the transactions involved here are not in interstate commerce.
As for whether or not these transactions substantially affect interstate commerce, the trial court understood the relevant inquiry to be "whether, considering the nature of the restraint alleged to exist and the circumstances surrounding it, the conduct of which plaintiffs complain will probably affect the flow of interstate goods or service," relying inter alia on our opinions in Doctors, Inc. v. Blue Cross of Greater Philadelphia, 490 F.2d 48 (3d Cir. 1973), and United States v. Mazzei, 521 F.2d 639 (3d Cir.), cert. denied, 423 U.S. 1014, 46 L. Ed. 2d 385, 96 S. Ct. 446 (1975).
The trial court considered unpersuasive an argument that because Johnstone & O'Dwyer's fees were excessive, the flow of buyers from outside New Jersey would be impeded, as would be the flow of related goods and services. To support its finding that those effects are not likely to result here, the trial court relied on the following factors: 1) First Federal is a single lender with little or no market power in the area of credit; 2) plaintiffs do not allege that First Federal has the ability or intent to raise prices or eliminate competitors in any relevant credit market; 3) plaintiffs do not allege any conspiracy between First Federal and any other lender, distinguishing this from Stavrides v. Mellon Nat'l Bank & Trust Co., 353 F. Supp. 1072 (W.D. Pa. 1973); Kinee v. Abraham Lincoln Federal Savings & Loan Ass'n, 365 F. Supp. 975 (E.D. Pa. 1973); and Beck v. Athens Building Loan & Savings Ass'n, 65 F.R.D. 691 (M.D. Pa. 1974); 4) plaintiffs do not allege uniquely attractive credit offered by First Federal, see Fortner v. U. S. Steel Corp., 394 U.S. 495, 22 L. Ed. 2d 495, 89 S. Ct. 1252 (1969); 5) any decreased competition in the tied products market would have a de minimis effect at most on the demand for credit and building supplies, and a purely local effect on competition in the legal services market; 6) no plaintiff is involved in an interstate mortgage transaction, distinguishing this from Goldfarb v. Virginia State Bar, 421 U.S. 773, 44 L. Ed. 2d 572, 95 S. Ct. 2004 (1975); and 7) no competitor of Johnstone & O'Dwyer is alleged to be making interstate purchases whose flow will be disrupted by First Federal's activities, distinguishing this from our opinion in Doctors, Inc., supra. Because the trial court found defendant's activities to be neither in nor substantially affecting interstate commerce, it dismissed plaintiffs' Sherman Act claim for lack of federal subject matter jurisdiction.
As for the second federal claim, alleging violations of FHLBB regulations, the district court found this to be an area within the primary jurisdiction of the FHLBB. Accordingly, this claim was dismissed without prejudice to a right to renew the claim after consideration by the appropriate federal agency. The remaining pendent state claim was also dismissed by the trial court, relying on its ...