First American Case at Top Court May Limit Home-Buyer Suits

The U.S. Supreme Court considered putting new limits on consumer lawsuits against title-insurance companies, hearing arguments on a suit that seeks hundreds of millions of dollars from First American Financial Corp. (FAF)

The suit accuses First American of operating an illegal title-insurance kickback scheme. The question for the high court is whether consumers suffered any injury that would entitle them to go to court.

The one-hour session today suggested that at least some, and perhaps a majority, of the nine justices are skeptical that the Constitution permits the lawsuit in the absence of indications that consumers paid higher fees.

“How does it harm her to get a title-insurance policy for the price of $453 from what you call a kickback-free seller as opposed to getting the same title insurance for $453 from a non- kickback-free seller?” Justice Antonin Scalia asked the lawyer for Denise P. Edwards, a Cleveland woman suing First American. “It seems to me purely, I don’t know, philosophical.”

Edwards’s lawyer, Jeffrey Lamken, argued that home buyers have the right to “conflict-free service” under the 1974 U.S. Real Estate Settlement Procedures Act, which bars kickbacks.

The suit, filed in federal court in California, centers on First American’s ownership stake in thousands of title agencies across the country. The company is accused of acquiring those interests in exchange for promises that the agencies would refer customers to a First American unit that sells title insurance.

The suit seeks class-action status.

Potential Harm

Edwards drew some support from Justice Ruth Bader Ginsburg, who said the 1974 law was aimed at “the potential that these kind of kickbacks can cause harm.”

“The problem that Congress was concerned about was that you can’t tell until the house is going to be sold in the end how adequate the title insurance is,” Ginsburg said.

First American’s lawyer, Aaron Panner, pointed to the constraints placed on federal courts by the Constitution, which says judges can consider only “cases” and “controversies.”

“That fundamental limitation on the role of the courts is critical to the liberty of the people who come before the courts and who are subject to the power of the courts,” Panner argued.

First American, based in Santa Ana, California, is the second-largest U.S. title insurer after Fidelity National Financial Inc.

The justices will rule by June in the case, First American Financial v. Edwards, 10-708.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

To contact the editor responsible for this story: Mark Silva at msilva34@bloomberg.net.

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