Rodriguez v. Countrywide: Fifth Circuit Affirms Bankruptcy Court’s Certification of Class of Borrowers

In a ruling that substantially intersects with bankruptcy jurisprudence, the Fifth Circuit has denied Countrywide’s motion to decertify a class of borrowers who claim they were charged illegal fees. See Rodriguez v. Countrywide Home Loans, Inc., No. 11-40056, 2012 U.S. App. LEXIS 19372 (5th Cir. Sept. 14, 2012) (available here). Formally, the Fifth Circuit affirmed both the bankruptcy court’s certification of a class seeking injunctive relief and its denial of Countrywide’s motion to reconsider the certification ruling. A bankruptcy court’s granting of class certification, a relatively unusual occurrence, is authorized by Federal Bankruptcy Rule 7023, which provides for the use of Federal Rule of Civil Procedure Rule 23 in bankruptcy proceedings.

This litigation arose when plaintiffs, after emerging from Chapter 13 bankruptcies, were assessed fees by Countrywide, their mortgage lender, which had accrued while their bankruptcy cases were pending. The plaintiffs had all cured their pre-petition mortgage arrearages, completed their Chapter 13 plans, and received discharges. Despite these factors, Countrywide still threatened to foreclose on the plaintiffs’ homes if they refused to pay the fees. See Rodriguez at *1-2. Accordingly, the plaintiffs alleged that Countrywide’s insistence that they pay the fees violated Federal Rule of Bankruptcy Procedure 2016(a). The plaintiffs also alleged that Countrywide misapplied mortgage payments to satisfy some of the unauthorized fees, rather than properly applying the payments towards the amount due each month. Id.

As assets of their bankruptcy estates, the plaintiffs’ litigation against Countrywide proceeded in the bankruptcy court, which certified a class seeking an injunction mandating that “Countrywide shall not collect or attempt to collect any fees that (1) were incurred during the pendency of a class member’s bankruptcy case, (2) are governed by Rule 2016(a), and (3) have not yet been authorized pursuant to Rule 2016(a).” Id. at *5.

Countrywide moved to overturn the bankruptcy court’s 2010 class certification ruling, arguing that its conduct in imposing the fees was not generally applicable to the class because the company had no policy regarding the assessment of fees during bankruptcy proceedings. Notwithstanding the lack of a formal, written compliance policy, the court found that Countrywide did have a generally applicable practice. Id. at *17-18. Despite the rarity of class certification proceedings in federal bankruptcy courts, the court’s analysis in this case was notably detailed and rigorous. See id. at 16-17.

With the plaintiffs’ Chapter 13 bankruptcies now discharged and the certification ruling secure, it appears likely that the action will be transferred to an Article III federal district court for post-certification proceedings. Countrywide, acquired by Bank of America in 2008, has already settled numerous class actions for billions of dollars in connection with its conduct concerning home mortgages.