HR Block 2009 Annual Report Download - page 18

this litigation vigorously. We currently do not believe that we will incur a material loss with respect to this
litigation.
RSM MCGLADREY LITIGATION –RSM McGladrey Business Services, Inc. and certain of its subsidiaries are
parties to a class action filed on July 11, 2006 and entitled Do Right’s Plant Growers, et al. v. RSM EquiCo, Inc., et
al. Case No. 06 CC00137, in the California Superior Court, Orange County. The complaint contains allegations
regarding business valuation services provided by RSM EquiCo, Inc., including fraud, negligent misrepresentation,
breach of contract, breach of implied covenant of good faith and fair dealing, breach of fiduciary duty and unfair
competition and seeks unspecified damages, restitution and equitable relief. On March 17, 2009, the court granted
plaintiffs’ motion for class certification on all claims. The class consists of all RSM EquiCo U.S. clients who signed
platform agreements and for whom RSM EquiCo did not ultimately market their business for sale. RSM EquiCo has
filed an appeal of this certification ruling and intends to defend this case vigorously. The amount claimed in this
action is substantial and could have a material adverse impact on our consolidated results of operations. There can
be no assurance regarding the outcome of this matter.
RSM has a relationship with the Attest Firms pursuant to which (1) some RSM employees are also partners or
employees of the Attest Firms, (2) many clients of the Attest Firms are also RSM clients, and (3) our RSM
McGladrey brand is closely linked to the Attest Firms. The Attest Firms are parties to claims and lawsuits
(collectively, “Attest Firm Claims”) arising in the normal course of business. Judgments or settlements arising
from Attest Firm Claims exceeding the Attest Firms’ insurance coverage could have a direct adverse effect on
Attest Firm operations and could impair RSM’s ability to attract and retain clients and quality professionals. For
example, accounting and auditing firms (including one of the Attest Firms) have become subject to claims based
on losses their clients suffered from investments in investment funds managed by third-parties. Although RSM may
not have a direct liability for significant Attest Firm Claims, such Attest Firm Claims could have a material adverse
effect on RSM’s operations and impair the value of our investment in RSM. There is no assurance regarding the
outcome of the Attest Firm Claims.
LITIGATION AND CLAIMS PERTAINING TO DISCONTINUED MORTGAGE OPERATIONS –Although mortgage
loan origination activities were terminated and the loan servicing business was sold during fiscal year 2008, SCC
remains subject to investigations, claims and lawsuits pertaining to its loan origination and servicing activities that
occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state
attorneys general, other state regulators, municipalities, individual plaintiffs, and cases in which plaintiffs seek to
represent a class of others alleged to be similarly situated. Among other things, these investigations, claims and
lawsuits allege discriminatory or unfair and deceptive loan origination and servicing practices, public nuisance,
fraud, and violations of the Truth in Lending Act, Equal Credit Opportunity Act and the Fair Housing Act. In the
current non-prime mortgage environment, the number of these investigations, claims and lawsuits has increased
over historical experience and is likely to continue at increased levels. The amounts claimed in these
investigations, claims and lawsuits are substantial in some instances, and the ultimate resulting liability is
difficult to predict. In the event of unfavorable outcomes, the amounts SCC may be required to pay in the discharge
of liabilities or settlements could be substantial and, because SCC’s operating results are included in our
consolidated financial statements, could have a material adverse impact on our consolidated results of operations.
On June 3, 2008, the Massachusetts Attorney General filed a lawsuit in the Superior Court of Suffolk County,
Massachusetts (Case No. 08-2474-BLS) entitled Commonwealth of Massachusetts v. H&R Block, Inc., et al.,
alleging unfair, deceptive and discriminatory origination and servicing of mortgage loans and seeking equitable
relief, disgorgement of profits, restitution and statutory penalties. In November 2008, the court granted a
preliminary injunction limiting the ability of the owner of SCC’s former loan servicing business to initiate or
advance foreclosure actions against certain loans originated by SCC or its subsidiaries without (1) advance notice
to the Massachusetts Attorney General and (2) if the Attorney General objects to foreclosure, approval by the
court. The preliminary injunction generally applies to loans meeting all of the following four characteristics:
(1) adjustable rate mortgages with an introductory period of three years or less; (2) the borrower has a
debt-to-income ratio generally exceeding 50 percent; (3) an introductory interest rate at least 2 percent lower
than the fully indexed rate (unless the debt-to-income ratio is 55% or greater); and (4) loan-to-value ratio of
97 percent or certain prepayment penalties. We have appealed this preliminary injunction. We believe the claims in
this case are without merit, and we intend to defend this case vigorously, but there are no assurances as to its
outcome.
SCC also remains subject to potential claims for indemnification and loan repurchases pertaining to loans
previously sold. In the current non-prime mortgage environment, it is likely that the frequency of repurchase and
indemnification claims may increase over historical experience and give rise to additional litigation. In some
instances, H&R Block, Inc. was required to guarantee SCC’s obligations. The amounts involved in these potential
claims may be substantial, and the ultimate resulting liability is difficult to predict. Because SCC’s operating
14 H&R BLOCK 2009 Form 10K