HR Block 2011 Annual Report Download - page 81

conversion and unfair competition. Plaintiffs seek unspecified actual and punitive damages, in addition to pre-
judgment interest and attorneys’ fees. On March 17, 2009, the court granted plaintiffs’ motion for class certification
on all claims. To avoid the cost and inherent risk associated with litigation, the parties have reached an agreement
in principle to settle this case, subject to approval by the California Superior Court. The settlement would require a
maximum payment of $41.5 million, although the actual cost of the settlement depends on the number of valid
claims submitted by class members. The defendants believe they have meritorious defenses to the claims in this
case and, if for any reason the settlement is not approved, they will continue to defend the case vigorously.
Although we have recorded a liability for expected losses, there can be no assurance regarding the outcome of this
matter.
On December 7, 2009, a lawsuit was filed in the Circuit Court of Cook County, Illinois (2010-L-014920) against
M&P, RSM and H&R Block styled Ronald R. Peterson ex rel. Lancelot Investors Fund, L.P., et al. v. McGladrey &
Pullen LLP, et al. The case was removed to the United States District Court for the Northern District of Illinois on
December 28, 2009 (Case No. 1:10-CV-00274). The complaint, which was filed by the trustee for certain bankrupt
investment funds, seeks unspecified damages and asserts claims against RSM for vicarious liability and alter ego
liability and against H&R Block for equitable restitution relating to audit work performed by M&P. The amount
claimed in this case is substantial. On November 3, 2010, the court dismissed the case against all defendants in its
entirety with prejudice. The trustee has filed an appeal to the Seventh Circuit Court of Appeals with respect to the
claims against M&P and RSM. The appeal remains pending.
RSM and M&P operate in an alternative practice structure (“APS”). Accordingly, certain claims and lawsuits
against M&P could have an impact on RSM. More specifically, any judgments or settlements arising from claims
and lawsuits against M&P that exceed its insurance coverage could have a direct adverse effect on M&P’s
operations. Although RSM is not responsible for the liabilities of M&P, significant M&P litigation and claims could
impair the profitability of the APS and impair the ability to attract and retain clients and quality professionals. This
could, in turn, have a material effect on RSM’s operations and impair the value of our investment in RSM. There is
no assurance regarding the outcome of any claims or litigation involving M&P.
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
and HRB remain subject to investigations, claims and lawsuits pertaining to its mortgage business activities that
occurred prior to such termination and sale. These investigations, claims and lawsuits include actions by state
attorneys general, other state and federal 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, fraud, and violations of securities laws, the Truth in Lending Act, Equal Credit
Opportunity Act and the Fair Housing Act. Given the 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 and thus cannot be reasonably estimated. In the event of
unfavorable outcomes, the amounts that may be required to pay in the discharge of liabilities or settlements
could be substantial and could have a material 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) styled 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.
An appeal of the preliminary injunction was denied. A portion of our loss contingency accrual is related to this
matter for the amount of loss that we consider probable and estimable. We do not believe losses in excess of our
accrual would be material to our financial statements, although it is possible that our losses could exceed the
amount we have accrued. We and SCC believe we have meritorious defenses to the claims presented and intend to
defend them vigorously. There can be no assurances, however, as to the outcome of this matter or its impact on our
consolidated results of operations.
On October 15, 2010, the Federal Home Loan Bank of Chicago filed a lawsuit in the Circuit Court of Cook County,
Illinois (Case No. 10CH45033) styled Federal Home Loan Bank of Chicago v. Bank of America Funding
Corporation, et al. against multiple defendants, including various SCC related entities and H&R Block, Inc.
related entities, arising out of Federal Home Loan Bank’s (FHLB’s) purchase of mortgage-backed securities.
Plaintiff asserts claims for rescission and damages under state securities law and for common law negligent
H&R BLOCK 2011 Form 10K 69