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Bankruptcy Class Action Defense Cases–In re Wilborn: Fifth Circuit Court Reverses Class Action Certification Order By Bankruptcy Court Because Requirements Of Rule 23(b) Not Met

Bankruptcy Court had Jurisdiction to Certify Debtor-Class Action Against Wells Fargo but Prerequisites for Class Action Certification under Rule 23(b) were not Satisfied, Particularly with Respect to Damages Fifth Circuit Holds

The three named plaintiffs in this action (Judy Wilborn, Karlton and Monica Flournoy, and Judy Martin) filed Chapter 13 bankruptcy petitions in Texas. In re Wilborn, ___ F.3d ___ (5th Cir. June 18, 2010) [Slip Opn., at 1-2]. According to the allegations underlying the class action complaint, plaintiffs have home loans that are held or serviced by Wells Fargo Bank, and they allege that the Bank “charged, or charged and collected, unreasonable and unapproved post-petition professional fees and costs during the pendency of their bankruptcies.” Id., at 2. The fees and costs challenged by the class action – which “include such things as bankruptcy attorneys’ fees, recording fees, notification fees, title search fees, document fees, and property inspection fees” – are permitted under each plaintiff’s loan documents. Id. Nonetheless, plaintiffs’ class action complaint accused the Bank of engaging in a pattern and practice of charging such fees in violation of bankruptcy laws on the theory that “Wells Fargo’s failure to disclose these fees to the bankruptcy court interferes with their ability to complete their Chapter 13 reorganization plans and emerge from bankruptcy having cured all arrearages.” Id. Plaintiffs also object to the fact that these fees and costs continued to accumulate during the pendency of the bankruptcy even though Wells Fargo received distributions from the Chapter 13 Trustee in accord with the individual bankruptcy plans. Id. The class action complaint acknowledged that the Bank charged plaintiffs fees that it had incurred both prior to and after confirmation of the bankruptcy plans, that the fees ranged from $1200 to $4000, and that in some instances at least a portion of the fees were approved by the bankruptcy court. Id., at 3. Plaintiffs moved the bankruptcy court to certify their complaint as a class action; the bankruptcy court granted the motion, certifying a class that consisted of more than 1200 members. Id., at 3-4. The bankruptcy court certified its class action certification order for direct appeal to the Fifth Circuit, and Wells Fargo also petitioned the Circuit Court for permission to appeal the certification order. Id., at 4. The Fifth Circuit granted the Bank’s petition for an interlocutory appeal and reversed the class action certification order. The Court concluded that “a bankruptcy judge may certify a class of debtors under appropriate circumstances but that the proposed class in this case does not satisfy the requirements of Federal Rule of Civil Procedure 23 and Federal Bankruptcy Rule of Procedure 7023.” Id., at 2.

The Fifth Circuit explained that the appeal presented two issues: “The questions at issue are whether a bankruptcy judge may certify a class action comprised of debtor-plaintiffs, and if so, whether the class certification in this case was proper.” In re Wilborn, at 1-2. Wells Fargo first challenged whether the bankruptcy court had jurisdiction to enter the class certification order, id., at 4. While the Circuit Court recognized that “there has been disagreement among courts as to whether a bankruptcy judge may certify a class action of debtors,” id., at 8, it had no difficulty in holding that the bankruptcy court had jurisdiction over the putative class action, see id., at 4-9. The central issue on appeal, then, was whether the prerequisites for class certification under Rule 23 had been met. Id., at 9.

Turning to the requirements of Rule 23(a) and (b), the Fifth Circuit concluded that it need not reach the merits of the Bank’s challenges under Rule 23(a) because it “agree[d] that the class certification was improper under Rule 23(b),” id. Specifically, Rule 23(b)(3) requires that common questions of law or fact “predominate” over individual issues, and that a class action be “superior to other available methods for fairly and efficiently adjudicating the controversy.” Id., at 10 (citation omitted). The Circuit Court explained at page 10: “The Rule 23(b)(3) predominance inquiry tests whether proposed classes are sufficiently cohesive to warrant adjudication by representation.” [Citation.] “Additionally, the superiority analysis ‘requires an understanding of the relevant claims, defenses, facts, and substantive law presented in the case.’” The Fifth Circuit held that neither test was met in this case “because individual issues for each class member, particularly with respect to damages, override class concerns when we consider how the case must be tried.” Id. More specifically, the fact pattern for each named plaintiff differed as to how and why certain fees and costs were charged. See id., at 11. The bankruptcy court recognized that each case presented a different fact pattern, bur erroneously concluded that common issues of law or fact nonetheless would predominate simply “because all plaintiffs had fees and costs charged to their accounts by Wells Fargo during the pendency of the bankruptcies,” id., at 11-12. This simplistic analysis “ignores how and why certain fees were charged or paid.” Id., at 12. In the Circuit Court’s view, “The circumstances surrounding the charging of fees require an individual assessment of the claims.” Id. Moreover, the Bank “may have viable defenses to some plaintiffs’ claims, such as waiver or estoppel.” Id. (citation omitted). “In short, the myriad issues that may arise in each case as to whether and how fees and costs were imposed preclude a class-wide disposition of the case under Rule 23(b)(3).” Id., at 12-13.

Similarly, class action certification under Rule 23(b)(2) was improper because whether Wells Fargo “has acted or refused to act on grounds that apply generally to the class” will again turn on “the circumstances and court orders [which] differ between the judges and cases.” In re Wilborn, at 13. Further, the Fifth Circuit found that the amounts Wells Fargo may be required to disgorge could not “be determined with mathematical certainty absent individual hearings.” Id. Accordingly, the bankruptcy court also erred in certifying the litigation as a class action under Rule 23(b)(2). Id. The Circuit Court therefore vacated the class action certification orders, id.

NOTE: The Bankruptcy Court defined the class as “All individuals who filed for bankruptcy under Chapter 13 in the Southern District of Texas between November 16, 2002 through November 16, 2007 who owed Wells Fargo, as servicer or holder, on a mortgage debt secured by real property, and upon whom Wells Fargo either charged, or both charged and collected, professional fees and costs during the pendency of each of their respective bankruptcy cases which were never disclosed to this Court, the debtors, or other parties-in-interest nor approved by this Court by written order entered on the docket in their respective bankruptcy cases.” In re Wilborn, at 3.

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