HR Block 2013 Annual Report Download - page 89

82 H&R Block 2013 Form 10-K
servicing practices, fraud and other common law torts, rights to indemnification and violations of securities laws, the
Truth in Lending Act (TILA), Equal Credit Opportunity Act and the Fair Housing Act. Given the impact of the financial
crisis on the non-prime mortgage environment, the aggregate number of these investigations, claims and lawsuits has
increased over time and is expected to continue to remain elevated. 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 in many
cases cannot be reasonably estimated. In the event of unfavorable outcomes, the amounts that may be required to be
paid in the discharge of liabilities or settlements could be substantial and could have a material impact on our consolidated
financial position, results of operations and cash flows. Certain of these matters are described in more detail below.
On February 1, 2008, a class action lawsuit was filed in the United States District Court for the District of
Massachusetts against SCC and other related entities styled Cecil Barrett, et al. v. Option One Mortgage Corp., et al.
(Civil Action No. 08-10157-RWZ). Plaintiffs allege discriminatory practices relating to the origination of mortgage
loans in violation of the Fair Housing Act and Equal Credit Opportunity Act, and seek declaratory and injunctive relief
in addition to actual and punitive damages. The court dismissed H&R Block, Inc. from the lawsuit for lack of personal
jurisdiction. In March 2011, the court issued an order certifying a class, which defendants sought to appeal. On August
24, 2011, the First Circuit Court of Appeals declined to hear the appeal, noting that the district court could reconsider
its certification decision in light of a recent ruling by the United States Supreme Court in an unrelated matter. SCC
subsequently filed a motion to decertify the class, which the court granted. Plaintiffs' petition for appeal was denied.
A portion of our loss contingency accrual is related to this lawsuit for the amount of loss that we consider probable and
reasonably estimable. We believe SCC has meritorious defenses to the claims in this case and it intends to defend the
case vigorously; however we do not currently believe this case is material.
On December 9, 2009, a putative class action lawsuit was filed in the United States District Court for the Central
District of California against SCC and H&R Block, Inc. styled Jeanne Drake, et al. v. Option One Mortgage Corp., et
al. (Case No. SACV09-1450 CJC). Plaintiffs allege breach of contract, promissory fraud, intentional interference with
contractual relations, wrongful withholding of wages and unfair business practices in connection with not paying
severance benefits to employees when their employment transitioned to American Home Mortgage Servicing, Inc.
(now known as Homeward Residential, Inc. (Homeward)) in connection with the sale of certain assets and operations
of SCC. Plaintiffs seek to recover severance benefits of approximately $8 million, interest and attorney’s fees, in addition
to penalties and punitive damages on certain claims. On September 2, 2011, the court granted summary judgment in
favor of the defendants on all claims. Plaintiffs filed an appeal, which remains pending. We have not concluded that a
loss related to this matter is probable nor have we established a loss contingency related to this matter. We believe we
have meritorious defenses to the claims in this case and intend to defend the case vigorously, but there can be no
assurances as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.
On October 15, 2010, the Federal Home Loan Bank of Chicago (FHLB-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, H&R Block, Inc. and
other entities, arising out of FHLB-Chicago’s purchase of RMBSs. The plaintiff seeks rescission and damages under
state securities law and for common law negligent misrepresentation in connection with its purchase of two securities
collateralized by loans originated and securitized by SCC. These two securities had a total initial principal amount of
approximately $50 million, of which approximately $40 million remains outstanding. The plaintiff agreed to voluntarily
dismiss H&R Block, Inc. from the suit. The remaining defendants, including SCC, filed motions to dismiss, which the
court denied. Defendants moved for leave to appeal and the circuit court denied the motion. We have not concluded
that a loss related to this matter is probable nor have we accrued a liability related to this matter. We believe SCC has
meritorious defenses to the claims in this case and intends to defend the case vigorously, but there can be no assurances
as to its outcome or its impact on our consolidated financial position, results of operations and cash flows.
On February 22, 2012, a lawsuit was filed by SCC against Homeward in the Supreme Court of the State of New
York, County of New York, styled Sand Canyon Corporation v. American Home Mortgage Servicing, Inc. (Index
No. 650504/2012), alleging breach of contract and breach of the implied covenant of good faith and fair dealing in
connection with the Cooperation Agreement entered into with SCC in connection with SCC’s sale of its mortgage loan
servicing business to the defendant in 2008. SCC is seeking relief to, among other things, require the defendant to
provide loan files only by the method prescribed in applicable agreements. The court denied the defendant's motion to
dismiss and an appellate court affirmed. Discovery is proceeding.