In Re Ydalia Rodriguez

• Decision Date: 21 July 2010
• Docket Number: Adversary No. 08-01004.,Bankruptcy No. 02-10605.
• Citation: 432 B.R. 671
• Parties: In re Ydalia RODRIGUEZ, Debtor(s).Ydalia Rodriguez, et al, Plaintiff(s)v.Countrywide Home Loans, Inc., Defendant(s).
• Court: U.S. Bankruptcy Court — Southern District of Texas

432 B.R. 671

In re Ydalia RODRIGUEZ, Debtor(s).Ydalia Rodriguez, et al, Plaintiff(s)v.Countrywide Home Loans, Inc., Defendant(s).

Bankruptcy No. 02-10605.

Adversary No. 08-01004.

United States Bankruptcy Court,

S.D. Texas,

Brownsville Division.

July 21, 2010.

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Ellen C. Stone, The Stone Law Firm PC, McAllen, TX, Ellen C. Stone, The Stone Law Firm, P.C., Brownsville, TX Gary Klein, Shennan Alexandra Kavanagh, Roddy Klein & Ryan, Boston, MA, Karen L. Kellett, Armstrong Kellett Bartholow P.C., Dallas, TX, for Plaintiff(s).

Barbara E. Rutkowski, Goodwin Procter, David L. Permut, Washington, DC, Thomas A. Connop, Locke Lord et al., Dallas, TX, Elizabeth Carol Freeman, Porter & Hedges, L.L.P., Thomas H. Grace, Spencer Crain Cubbage Healy & McNamara, Houston, TX, for Defendant(s).

MEMORANDUM OPINION GRANTING, IN PART, AND DENYING, IN PART, PLAINTIFFS' MOTION FOR CLASS CERTIFICATION

MARVIN ISGUR, Bankruptcy Judge.

For the reasons set forth below, the Court grants, in part, and denies, in part, Plaintiffs' motion for class certification.

Jurisdiction

The Court has jurisdiction over this matter under 28 U.S.C. § 1334. See also Wilborn v. Wells Fargo Bank, N.A. (In re Wilborn), 609 F.3d 748, 754 (5th Cir.2010) (“[B]ankruptcy court has authority to certify a class action of debtors whose petitions are filed within its judicial district provided the prerequisites for a class under Rule 23 are satisfied.”). Venue is proper in this District pursuant to 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. § 157(b)(2).

Background

i. Summary of Dispute

This class action lawsuit was initiated on February 26, 2008 by named Plaintiffs Ydalia Rodriguez, Maria Antoineta Herrera and David Herrera, and Lucy Moreno and Alfonso Moreno (“Plaintiffs”). Plaintiffs are all former chapter 13 debtors with mortgage contracts serviced by Countrywide Home Loans, Inc. (now BAC Home Loans Servicing, LP). Plaintiffs allegedly cured their pre-petition mortgage arrearages, completed their chapter 13 plans, and received a discharge. Plaintiffs claim that Countrywide nevertheless sought to foreclose on Plaintiffs' homes after Plaintiffs emerged from bankruptcy. According to Plaintiffs, Countrywide improperly charged unauthorized fees ¹ to Plaintiffs' accounts during the pendency of their bankruptcy cases. Countrywide then allegedly threatened to foreclose if the fees were not paid after the Plaintiffs were discharged from bankruptcy. In essence, Plaintiffs claim that instead of receiving chapter 13's promise of a fresh start upon discharge, they were illegally forced into post-discharge default.

At the outset of the case, Plaintiffs alleged that Countrywide employed numerous, systemic practices that violated various provisions of the United States Bankruptcy Code.² These practices allegedly culminated in Countrywide's impermissible attempts to foreclose on the Plaintiffs' homes. After this Court's rulings on Countrywide's Motion to Dismiss (Doc. No. 63) and Motion for Summary Judgment (Doc. No. 287), and the United States District Court's decision on Countrywide's Motion to Withdraw the Reference, the dispute has been considerably narrowed. See In re Rodriguez, 396 B.R. 436 (Bankr.S.D.Tex.2008) (denying in part, and reserving judgment on, in part, Countrywide's Motion to Dismiss); Rodriguez v. Countrywide Home Loans, Inc., 421 B.R. 341 (S.D.Tex.2009) (denying Countrywide's Motion to Withdraw the Reference); In re Rodriguez, 421 B.R. 356 (Bankr.S.D.Tex.2009) (granting, in part, and denying in part, Countrywide's Motion for Summary Judgment). See also Manual for Complex Litigation § 21.133 (4th ed. 2004) (“The court may rule on motions pursuant to Rule 12, Rule 56, or other threshold issues before deciding on certification....”). As set forth below, the key remaining issue is whether Countrywide's fee collection practices violate Federal Rule of Bankruptcy Procedure 2016(a) on a scale that merits certification of this class action.

ii. Summary Judgment & Rule 2016(a)

The Court discussed Rule 2016(a)'s application in this case in its December 9, 2009 Memorandum Opinion resolving Countrywide's Motion for Summary Judgment. See Rodriguez, 421 B.R. at 372-80. Since the Court's Rule 2016(a) analysis is “the law of the case” and fundamental to Plaintiffs' claims, the Court reiterates the relevant Rule 2016(a) principles here. ³ See Countrywide, 421 B.R. at 355 (upholding this Court's conclusion that Rule 2016(a) requires mortgage lenders to “disclose and seek bankruptcy court approval of fees and expenses charged post-petition and pre-discharge”); Wilborn, 609 F.3d at 755-56 (assuming, without deciding, that “prior disclosure and approval are necessary” before contractually-allowed fees can be assessed against debtors in bankruptcy). See also Woods v. Kenan (In re Woods), 215 B.R. 623, 625 (10th Cir. BAP 1998) (“Issues decided on appeal become the law of the case and are [generally] to be followed in all subsequent proceedings in the same case in the trial court or on a later appeal in the appellate court ....”) (emphasis added).

Plaintiffs claim that Countrywide's collection practices violate Bankruptcy Rule 2016(a), which provides:

An entity seeking interim or final compensation for services, or reimbursement of necessary expenses, from the estate shall file an application setting forth a detailed statement of (1) the services rendered, time expended and expenses incurred, and (2) the amounts requested.... The requirements of this subdivision shall apply to an application for compensation for services rendered by an attorney or accountant even though the application is filed by a creditor or other entity.

Fed. R. Bankr.P. 2016(a). Thus, “[u]nder the plain language of Rule 2016, a mortgage lender must file a Rule 2016 application before collecting any reimbursable fees and costs while a chapter 13 case remains pending.” Rodriguez, 421 B.R. at 372 (citing Cano v. GMAC Mortgage Corp. (In re Cano), 410 B.R. 506, 532 (Bankr.S.D.Tex.2009)).

Plaintiffs claim that two of Countrywide's fee collection practices violate Rule 2016(a). Rodriguez, 421 B.R. at 372. First, Plaintiffs claim that Countrywide misapplied bankruptcy plan payments that should have been credited to their monthly mortgage payments by instead crediting portions of the payments to unauthorized fees. Id. Second, Plaintiffs claim that Countrywide charged undisclosed and unauthorized fees to their accounts while their bankruptcy cases were pending and then attempted to collect those fees by threatening foreclosure after Plaintiffs were discharged from bankruptcy. Id.

As set forth in the next section, which discusses the named Plaintiffs' cases, Countrywide admits that it misapplied plan payments and charged fees without Court approval, but Countrywide claims its actions were on a smaller and less systematic scale than Plaintiffs allege.⁴ However, at the summary judgment stage, Countrywide claimed that, irrespective of whether such collection activity occurred, its collection practices did not violate Rule 2016(a). Id.

Countrywide advanced two theories as to why its conduct did not violate Rule 2016(a). First, Countrywide argued that Rule 2016(a) is inapplicable to its post-confirmation collection activity because, under 11 U.S.C. § 1327(b),⁵ the estate ordinarily ceases to exist upon confirmation. Id. at 373. Countrywide correctly articulated that Rule 2016(a), by its express terms, only applies to property of the estate. However, the Court held that Countrywide's theory that the estate ceases to exist upon confirmation was incorrect under 11 U.S.C. § 1306(a)(2). ⁶ Id. at 373-74. The Court's conclusion was consistent with the majority view of the courts, including three circuit courts. Id. As explained by the Eleventh Circuit:

While the case is pending, the post-petition property ... [is] added to the estate until confirmation, the event that triggers [section] 1327(b) and “vests” the property of the estate in the debtor. That is, the property interests comprising the pre-confirmation estate property are transferred to the debtor at confirmation, and this “vesting” is free and clear of the claims or interests of creditors provided for by the plan, [section] 1327(b), (c). Finally, the property of the estate once again accumulates property by operation of [section] 1306(a) until the case is “closed, dismissed, or converted.”

In re Waldron, 536 F.3d 1239, 1243 (11th Cir.2008) quoted in Rodriguez, 421 B.R. at 374.

Countrywide's second defense was that Rule 2016(a) does not apply when fees are assessed during bankruptcy but not collected until post-bankruptcy. Rodriguez, 421 B.R. at 378. The Court rejected this argument for two reasons. First, as discussed in the next section, there is evidence that Countrywide collected unauthorized fees from the named Plaintiffs while their bankruptcy cases were pending. Id. To the extent Countrywide collected unapproved fees while cases were pending, Countrywide's second defense is a non sequitur.

The Court also rejected Countrywide's second argument under 11 U.S.C. § 105:

Countrywide attempts to take advantage of a loophole in Rule 2016. Countrywide argues that Rule 2016 is inapplicable once the case is terminated and the estate ceases to exist. This argument is made because Rule 2016 only requires Countrywide to seek approval of its fees if they are to be collected from the estate. Countrywide reasons that if it waits until the estate terminates, it can collect the very same fees from the debtor instead of from the estate.

If such a literal reading correctly allows Countrywide to escape the requirements of Rule 2016, then it would clearly raise concerns under 11 U.S.C. § 105. The District Court's December 4, 2009 Memorandum Opinion holds that this Court was correct in finding that § 105 provides relief for the precise

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