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Financial Services Law Insights and Observations

Texas Federal Court Declines to Exercise Jurisdiction over Real Estate Settlement Service Case

State Issues

On May 10, the U.S. District Court for the Southern District of Texas granted a motion to remand a lawsuit alleging the payment of kickbacks in connection with real estate settlement services despite the warranty service provider’s allegations that the lawsuit brought claims under the federal Real Estate Settlement Procedures Act (RESPA). American Home Shield of Texas v. Texas, No. H-10-0808, 2010 WL 1903594 (S.D. Tex. May 10, 2010). In this long-running case, the State of Texas brought a lawsuit in 2007 in state court against American Home Shield of Texas (AHS) alleging that the company, a provider of home warranties, had been paying kickbacks to real estate brokers for promoting and selling its service. The state also alleged that AHS engaged in misleading and deceptive practices. The claims were brought under the Texas Deceptive Trade Practices-Consumer Protection Act, but no claims were brought by the state under RESPA, which also prohibits the payment of kickbacks. Two related class action lawsuits making similar allegations were subsequently filed against AHS in federal court in Alabama. The state filed an objection to the settlement of one of those cases, arguing, in part, that its lawsuit should prevent the settlement of claims against Texas residents. As part of its objection, the state made “scant and ambiguous references to RESPA,” but the state did not amend its complaint in the Texas state-court action to include RESPA allegations. AHS argued that the state’s references to RESPA, along with the allegation that RESPA is a substantial and embedded issue in the state-court action, were sufficient to give rise to federal question jurisdiction. The federal court disagreed and remanded the case to state court. The federal court noted that the state was not bringing claims directly under RESPA, even though it could have, nor was resolving an issue under RESPA necessary to resolve the state-law claims. Therefore, AHS had failed to establish federal subject-matter jurisdiction.

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