Oct. 3, 2012 (Westlaw Journals) – Countrywide Home Loans must continue to defend itself in a “fail-safe” class action in Texas federal court that accuses the lender of threatening discharged bankruptcy debtors with foreclosure if they do not pay fees incurred while their bankruptcy cases were pending.
Rodriguez et al. v. Countrywide Home Loans Inc., No. 11-40056, 2012 WL 4041448 (5th Cir. Sept. 14, 2012).
The lender had argued that certification of a “fail-safe” class was improper because by definition its members can only be ascertained after the ultimate question of liability is resolved.
But the 5th U.S. Circuit Court of Appeals said “Countrywide does not cite any case where we have rejected a class definition because it created a so-called fail-safe class.”
The five named plaintiffs, led by Ydalia Rodriguez, are former debtors with mortgages serviced by Countrywide. They each had filed Chapter 13 petitions in U.S. Bankruptcy Court for the Southern District of Texas.
After receiving discharges from bankruptcy, they filed an adversary action in 2008 claiming that, despite curing their pre-petition mortgage arrearages and receiving discharges from bankruptcy, Countrywide threatened to foreclose on their homes if they did not pay fees that were charged while their bankruptcy cases were still pending, the 5th Circuit’s opinion said.
The plaintiffs also say Countrywide misapplied mortgage payments to satisfy some of the allegedly unauthorized fees instead of applying them to satisfy the amount due each month on their mortgages, according to the opinion.
The complaint seeks money damages and declaration that Countrywide’s conduct violated Federal Rule of Bankruptcy Procedure 2016(a).
The rule requires, among other things, that a mortgage lender receive court permission before collecting any reimbursable fees and costs while a Chapter 13 case remains pending.
After the plaintiffs moved for class certification, the Bankruptcy Court concluded in a July 2010 decision that the rule applies to fees assessed during Chapter 13 proceedings but not collected until after bankruptcy.
The court then granted the plaintiffs’ motion for class certification for the injunctive relief claim, but denied certification for a damages class.
It also narrowed the potential number of class members to about 125 people who had filed Chapter 13 cases in the Southern District of Texas before Oct. 15, 2005, who have confirmed plans that involved Countrywide mortgages and who have outstanding fees charged by Countrywide that are governed by Rule 2016(a).
Countrywide unsuccessfully challenged the decision with the District Court before turning to the 5th Circuit.
The appeals court upheld the class certification.
The panel found that the evidence before the District Court showed Countrywide charged every proposed class member fees that allegedly violate Rule 2016(a).
The appeals court also found no error in the certification of a “fail-safe” class.
“Because the class is similarly linked by a common complaint, the fact that the class is defined with reference to an ultimate issue of causation does not prevent certification,” the panel said, citing Mullen v. Treasure Chest Casino, 186 F.3d 620 (5th Cir. 1999).
Finally, the panel found no merit in Countrywide’s claim that the demand for injunctive relief has been mooted by a consent judgment it agreed to in litigation brought by the Federal Trade Commission in California federal court.
The consent judgment, which imposed a nationwide injunction against Countrywide’s challenged conduct, does not include all of the relief sought by the plaintiffs in Texas, the 5th Circuit said.
The panel noted that the consent judgment makes no mention of the need for bankruptcy court approval under Rule 2016(a) and does not provide relief to plaintiffs whose payments allegedly have been misapplied by Countrywide.
The 5th Circuit returned the case to the Bankruptcy Court for further proceedings.
(Reporting by Chip Giambrone, Westlaw Journal Bankruptcy.)