Do Bankruptcy Judges Have Class (Certification Ability)?

While bankruptcy has been described as the epitomy of a class action (that is, an action by the debtor against all of his creditors), there has been some controversy over whether a bankruptcy court could certify a class consisting of debtors against a single lender. In a new opinion, the Fifth Circuit has held that Bankruptcy Judges may certify a class consisting of debtors, but not in the specific case. Matter of Wilborn, No. 09-20415 (5th Cir. 6/18/10).

In Wellborn, several debtors claimed that Wells Fargo was charging post-petition fees and expenses in chapter 13 cases without obtaining court approval. They sought to obtain certification of a class of debtors who had filed chapter 13 bankruptcy in the Southern District of Texas over a five year period where Wells Fargo was the lender or servicer. The Bankruptcy Court granted class certification as to a class consisting of 1,236 members.

The Fifth Circuit found that the Bankruptcy Court could certify a class of debtors within the same district even if they did not have the same judge. The court found this based upon the application of Fed.R.Bankr.P. 7023, which makes class actions applicable in bankruptcy court.

However, the Fifth Circuit found that the particular class action failed the requirements of Rule 23(b). Where the circumstances of the individual debtors varied, it was not proper to certify a class. The Court ruled:

Plaintiffs’ claims here fail under the predominance and superiority inquiries because individual issues for each class member, particularly with respect to damages, override class concerns when we consider how the case must be tried. As noted above, the claim that Wells Fargo charged, or charged and collected, undisclosed fees is based on § 506(b) of the Bankruptcy Code and Rule 2016. There is disagreement among the bankruptcy courts as to the scope of the requirement under § 506(b) and Rule 2016 for lenders to obtain court approval before assessing contractually-allowed fees.19 For purposes of reviewing the certification order, we will assume, without deciding, that prior disclosure and approval are necessary. See Langbecker v. Elec. Data Sys. Corp.20 However, when we “evaluate with rigor,” as we must, the claims and the Rule 23 requirements, we conclude that class adjudication of the case is not warranted. The cases of the individual named plaintiffs show how the circumstances of the fees charged by or paid to Wells Fargo may vary from debtor to debtor and illustrate the many underlying circumstances of the charges that would need to be considered. In the case of Wilborn, the parties entered into an agreed order to modify the stay after Wilborn defaulted on her loan post-petition. The agreed order required Wilborn to resume payments to Wells Fargo, but when Wilborn could not comply with the order, the automatic stay terminated under the terms of the order. In order to avoid the resulting foreclosure, Wilborn agreed to a loan modification, pursuant to which she agreed to pay certain fees and costs in addition to the delinquency. The Flournoys also defaulted on their loan postpetition, but the bankruptcy court entered an agreed order modifying the stay to allow the Flournoys to cure post-petition delinquencies and to pay fees and costs, which were then approved by the court. Finally, the bankruptcy court allowed Martin to sell her home outside of bankruptcy and all fees and costs accrued to the loan were paid at the closing.

The bankruptcy court certifying this class action recognized that differing events had occurred within each individual debtor’s bankruptcy case, but the court held that because all plaintiffs had fees and costs charged to their accounts by Wells Fargo during the pendency of the bankruptcies, common issues of law or fact predominate over individual issues. But this ignores how and why certain fees were charged or paid. The circumstances surrounding the charging of fees require an individual assessment of the claims. It appears that some debtors, like Wilborn, may have agreed to certain fees as an inducement to Wells Fargo for a loan modification and provided additional consideration for the modification. In other cases at least partial fees were approved for some debtors.

Such varying circumstances will require the court to examine each individual bankruptcy case. The bankruptcy court cannot require Wells Fargo to simply disgorge all fees that were not previously approved because it is evident that there has been a wide “array of charges tailored” to each individual debtor. See Maldonado, 493 F.3d at 525–26.

In some cases it may be appropriate to require Wells Fargo to disgorge fees, but we think that is for the bankruptcy court to decide. The differing circumstances of the debtors render the reasonableness of the individual charges a fact-specific inquiry rather than a class-oriented decision. See Maldonado, 493 F.3d at 526. In some instances, it may also be necessary to determine whether fees were actually imposed on the debtors or merely recorded on internal records. See In re Padilla, 379 B.R. 643, 662 (Bankr. S.D. Tex. 2007) (“The Bankruptcy Code does not prohibit [creditors] from maintaining internal records of costs incurred.”). Furthermore, where fees have been imposed Wells Fargo may have viable defenses to some plaintiffs’ claims, such as waiver or estoppel. See In re Monumental Life Ins. Co. Finally, the rulings of different 22 bankruptcy judges during their cases may affect the computation of allowable charges by Wells Fargo. In short, the myriad issues that may arise in each case as towhether and how fees and costs were imposed preclude a class-wide disposition of the case under Rule 23(b)(3).

For similar reasons, class certification is improper under Rule 23(b)(2). The Rule 23(b)(2) inquiry focuses on whether the putative class defendant “has acted or refused to act on grounds that apply generally to the class” so that injunctive or declaratory relief is appropriate for the class as a whole. See FED. R. CIV. P. 23(b)(2). Again, the circumstances and court orders differ between the judges and cases. And the injunctive or declaratory relief sought by the plaintiffs must predominate over claims for monetary relief. Maldonado, 493 F.3d at 524. This requires that requests for monetary relief be incidental to the class-wide injunctive or declaratory relief so that plaintiffs will be automatically entitled to the monetary remuneration once liability is established for the class. See Allison, 151 F.3d at 416. The monetary relief must be “capable of computation by means of objective standards and not dependent in any significant way on the intangible, subjective differences of each class member’s circumstances.” Id. at 415. The Plaintiffs’ request for disgorgement of fees is not merely incidental to the sought-after injunction and declaration. The amount that each plaintiff was charged, perhaps the amount that is “reasonable,” and any amount to be disgorged will depend on the specific circumstances of each class member and whether and how fees were imposed. See Maldonado, 493 F.3d at 524. We therefore disagree with the bankruptcy court’s determination that disgorgement amounts may be determined with mathematical certainty absent individual hearings. The class certification under Rule 23(b)(2) was therefore improper.

Opinion, at 11-13.

The conclusion from this opinion seems to be that class actions in bankruptcy are permissible, but that the requirements of Rule 23 still control. Merely because a practice affects multiple parties does not justify a class action.