O'Sullivan v. Countrywide Home Loans, Inc.

• Decision Date: 07 February 2003
• Docket Number: No. 01-51190.,No. 01-21028.,01-21028.,01-51190.
• Citation: 319 F.3d 732
• Parties: Theresa O'SULLIVAN, for Herself and All Others Similarly Situated; et al., Plaintiffs, Jon Maynard, for Himself and All Others Similarly Situated; Heather Maynard, Plaintiffs-Appellees, v. COUNTRYWIDE HOME LOANS, INC., Defendant-Appellant. Sergio Ruiz, Respondent-Appellee, v. Countrywide Home Loans, Inc.; Peirson & Patterson, L.L.P., Petitioners-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 732

319 F.3d 732

Theresa O'SULLIVAN, for Herself and All Others Similarly Situated; et al., Plaintiffs, Jon Maynard, for Himself and All Others Similarly Situated; Heather Maynard, Plaintiffs-Appellees, v. COUNTRYWIDE HOME LOANS, INC., Defendant-Appellant.

Sergio Ruiz, Respondent-Appellee, v. Countrywide Home Loans, Inc.; Peirson & Patterson, L.L.P., Petitioners-Appellants.

No. 01-21028.

No. 01-51190.

United States Court of Appeals, Fifth Circuit.

February 7, 2003.

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John Craig Roberson (argued), Hill & Parker, Mark A. Carrigan, Law Office of Mark A. Carrigan, Houston, TX, for Jon and Heather Maynard.

Robert T. Mowrey (argued), Cynthia Keely Timms, Thomas George Yoxall, Locke, Liddell & Sapp, Dallas, TX, John C. Englander (argued), Goodwin Procter, Boston, MA, for Countrywide Home Loans, Inc.

Olan John Boudreaux (argued), Wayne Fisher, James A. Huguenard, Fisher, Boyd, Brown, Boudreaux & Huguenard, Houston, TX, Dennis K. Drake, Law Offices of Dennis K. Drake, San Antonio, TX, for Ruiz.

Appeals from the United States District Court for the Southern District of Texas and the Western District of Texas.

Before JONES, SMITH and SILER,^* Circuit Judges.

JERRY E. SMITH, Circuit Judge:

In these consolidated appeals, each district court certified a class of plaintiffs who paid mortgage preparation fees to law firms selected by defendant Countrywide Home Loans, Inc. ("Countrywide"), a mortgage broker. Plaintiffs allege that Countrywide accepted kickbacks from the law firms in violation of the Real Estate Settlement Procedures Act ("RESPA"), 12 U.S.C. § 2607(a)-(b), and violated the Texas Unauthorized Practice of Law ("UPL") Statute, TEX. GOV'T CODE §§ 83.001-83.006. Because we conclude that both district courts improperly certified the classes, we reverse and remand.

I.

Countrywide originates and services mortgage loans, offering approximately 250 loan programs to potential homeowners. Consumers can obtain a loan either through one of Countrywide's thousands of retail storefront locations or through a mortgage broker.

Countrywide prepares a set of closing documents for each loan. Consistent with state law, Countrywide uses attorneys to prepare these documents for its wholesale and retail loan operations.¹ Federal law requires Countrywide to provide a HUD-1 Settlement Statement ("HUD-1") to borrowers and sellers to disclose the various settlement costs, including attorney's fees, that are listed as a "Document Preparation Fee" on the HUD-1.

Plaintiffs Jon Maynard (No. 01-21028) and Sergio Ruiz (No. 01-51190) obtained home mortgage loans from Countrywide. Maynard obtained his loan from one of Countrywide's Texas retail locations; Ruiz transacted with Countrywide's wholesale division through a mortgage broker. At closing, both paid document preparation fees that appeared as a direct payment to the law firms on their HUD-1 statements. Maynard's HUD-1 reflected a payment of $225 to Gregg & Valby,² a law firm serving as the exclusive residential mortgage document preparer for Countrywide's Texas retail division. Ruiz's HUD-1 showed a payment of $200 to Peirson & Patterson, a preparer for Countrywide's wholesale division.

Gregg & Valby and Peirson & Patterson provide legal services to Countrywide through a time-saving process that permits the processing of documents in bulk. Countrywide owns a computer software system, known as EDGE, containing various legal and non-legal documents necessary for the completion of residential mortgage transactions. Once a potential homeowner is approved for a loan, a Countrywide employee enters data concerning the transaction into EDGE, including information on the borrower and the property, the loan amount, and applicable interest rates. This process takes between two and five hours.

The EDGE system generates an initial set of mortgage closing documents, the quantity of which varies depending on the type of loan. In the retail division, the documents are printed by Countrywide employees and faxed to Gregg & Valby's offices, where they are reviewed by attorney and non-attorney loan specialists. Gregg & Valby prepares a response sheet for Countrywide indicating any needed corrections. Approximately half of the loan documents are sent back to Gregg & Valby for a second review, and some are sent back additional times before final approval.

Peirson & Patterson's employees, on the other hand, are located on-site at Countrywide's wholesale division. Although Countrywide employees still initially enter data into the EDGE system, Peirson & Patterson employees select and print the mortgage forms. Like the retail division, representatives of the law firm review the forms for content and accuracy. Nevertheless, Peirson & Patterson employees make any necessary corrections, so there is no shuffling of papers between separate offices.

A portion of the document preparation fee paid to Gregg & Valby and Peirson & Patterson is reimbursed to Countrywide which contends this portion of the fee represents its share of the costs associated with the preparation of each set of loan closing documents. For example, Countrywide lists the use and maintenance of its EDGE system, the time spent by its employees inputting and gathering data, and the costs of telephone calls, faxes, paper, and photocopying.

The reimbursement amounts are set by schedule and vary according to loan type.³ For the Maynard's "Conventional Purchase with Deed," Countrywide was reimbursed $130 out of the $225 paid to Gregg & Valby. Similarly, $100 of Ruiz's $200 document preparation fee was reimbursed to Countrywide. The HUD-1 does not reflect the fee splitting, but rather shows only a direct payment of the entire amount to the respective law firm.

Maynard and Ruiz allege that the fee splitting constitutes a "kickback" or "referral fee" in violation of RESPA § 8(a)-(b).⁴ In addition, plaintiffs sued Countrywide under the Texas UPL Statute,⁵ arguing that its participation in the preparation of loan documents constituted the unauthorized practice of law.

In Maynard, the district court certified a class consisting of:

All persons in Texas who, as part of a residential real estate loan transaction with Countrywide, from January 10, 1996 to the present, were charged a "Document Preparation Fee" (or portion of a document preparation fee) on their HUD-1 Settlement Statement, where Countrywide received a portion of the document preparation fee, and Gregg & Valby is listed as the provider of document preparation services.

Similarly, in Ruiz, the district court certified the following class:

All persons [since April 1993]:(1) who obtained loans from Countrywide secured by residential real property in Texas; and (2) who paid for document preparation fees and/or attorney's fees charged by Peirson & Patterson as reflected by the HUD-1 Settlement Statement.

Over objections that significant loan-to-loan variations in the amount and type of work performed require an individual analysis of each transaction to determine the reasonableness of the reimbursed fee, the district courts found "the practice itself" of reimbursing Countrywide for its services satisfied predominance. This court permitted Countrywide to appeal the class certification orders pursuant to FED.R.CIV.P. 23(f).

II.

We review the certification of a class for abuse of discretion. Stirman v. Exxon Corp., 280 F.3d 554, 561 (5th Cir.2002). Because, however, a court abuses its discretion when it makes an error of law, we apply a de novo standard of review to such errors. Id. The party seeking certification bears the burden of demonstrating that the requirements of rule 23 have been met. Allison v. Citgo Petroleum Corp., 151 F.3d 402, 408 (5th Cir.1998).

The district court must conduct a "rigorous analysis of the Rule 23 prerequisites" before certifying a class. Castano v. Am. Tobacco Co., 84 F.3d 734, 740 (5th Cir.1996). Among the four prerequisites of Rule 23(a) is the requirement that "there are questions of law or fact common to the class." FED.R.CIV.P. 23(a)(2).⁶ Before a class may be maintained under rule 23(b)(3), a court must also determine that "questions of law or fact common to the members of the class predominate over any questions affecting only individual members" and that "a class action is superior to other available methods for the fair and efficient adjudication of the controversy." FED.R.CIV.P. 23(b)(3). The predominance and superiority requirements are "far more demanding" than is rule 23(a)(2)'s commonality requirement. Amchem Prods. v. Windsor, 521 U.S. 591, 624, 117 S.Ct. 2231, 138 L.Ed.2d 689 (1997).

Determining whether legal issues common to the class predominate over individual issues requires that the court inquire how the case will be tried. Castano, 84 F.3d at 744. This entails identifying the substantive issues that will control the outcome, assessing which issues will predominate, and then determining whether the issues are common to the class. Although this inquiry does not resolve the case on its merits, it requires that the court look beyond the pleadings to "understand the claims, defenses, relevant facts, and applicable substantive law." Id. at 744. Such an understanding prevents the class from degenerating into a series of individual trials.

A.

RESPA seeks to ensure that real estate consumers "are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices." 12 U.S.C. § 2601(a). Both classes were certified under § 2607(a)-(b), which states:

(a) No person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding ... that business incident to or part of a real estate settlement service ... shall be referred to any person.

(b) No person shall give and no person shall accept any portion,...