Bankruptcy Litigation - Class Actions

by Glen D. Rubin, McCurdy & Candler, L.L.C.

1. What is a Class Action?

• A lawsuit involving many different plaintiffs, each of whom has a similar cause of action
• A class action allows a single judge to hear all the concerns at the same time and come to one determination for all parties involved (judicial efficiency)
• The suit can be brought in state or federal court (bankruptcy court is a type of federal court).
• At the outset of the case, the Court must agree to certify the class action and to do so the Court will look to see if certain requirements are met. They are as follows:
  • Numerousity - are there an adequate number of plaintiffs?
  • Commonality - will there be common legal issues and damage awards involved?
  • Typicality - does each class member’s claim come from the same event and require the same legal argument be made?
  • Adequacy of Representation - will the representative plaintiff adequately protect and represent the interests of all the parties?
  • Viability of Defendant - although not technically a requirement of the Court, this is often a consideration. Simply put, the Defendant must have the means to compensate for the alleged damages. Lawyers look for defendants with “deep pockets”.
• In bankruptcy, certain Courts will permit certification of a nationwide class while the majority of the courts will limit class members to a particular jurisdiction.
• Lawyers who represent a class are generally paid out of the recovery at an amount that is approved by the Court. Oftentimes lawyers can take 25% or more or the entire recovery.

2. Bankruptcy Debtors Make Excellent Candidates for Class Actions

• The Home Court Advantage. Bankruptcy court is an ideal forum for class action lawsuits, bankruptcy judges are often more sympathetic toward borrowers than a non-bankruptcy judge would be. Also, keep in mind that bankruptcy laws are designed primarily to assist your borrowers, not the mortgage company.
• Bankruptcy Debtors Are Easy to Find. Cases are a matter of public record and one can easily match up a particular creditor with various debtors in a given geographic area.
• Bankruptcy Debtors Have a Lot in Common. For the most part, they are all consumers who are in dire financial straits. Typically they would be very willing to cooperate (share information) with opportunistic attorneys if it could benefit them financially and allow them to recover against one of their creditors who may have caused them great anguish.

3. Types of Bankrutpcy Class Actions

Violation of the Bankrutpcy Discharge – Typically, these cases are brought in the name of Plaintiffs who have received a discharge in bankruptcy (Chapter 7) against a lender who has taken certain “collection actions” which are alleged to have violated the law.

• The effect of a discharge is that a creditor is enjoined from collecting on all debts that were in existence at the time the Chapter 7 case was filed (with some notable exceptions).
• To understand the discharge class actions you must first understand what happens to a mortgage debt after a Chapter 7 debtor is discharged. Essentially, the debt becomes non-recourse. This means that although the obligation still exists and is not wiped away (i.e. payments must be made) the lender is prohibited from making any attempt to collect against the Debtor’s personal liability (i.e. a deficiency action). Simply put, if the loan defaults post-discharge, the lender may take steps to recover its collateral (i.e. foreclose on the house) but it may not seek to recover against any other assets of the Debtor.
• Examples of “collection actions” that were alleged to violate the discharge as part of class action lawsuits are as follows: contacting borrowers to discuss late payments or loss mitigation, sending monthly statements to borrowers, sending improper demand letters and/or foreclosure notices to borrowers and improperly seeking reaffirmation agreements.
• Collection of Improper Fees – Typically, these cases have centered around improper charges that are placed in proofs of claim or attempts to assess and/or collect bankruptcy attorneys fees after the bankruptcy case has concluded.
• Proofs of Claim are an area of great concern as they are being scrutinized more and more by Debtor’s counsel in search of the perfect class action. Have you noticed an increase in the amount of claims that are being objected to or the amount of Qualified Written Requests under RESPA that are being sent to your office regarding certain charges in Proofs of Claim?
• By objecting to claims or seeking information through QWR’s, oftentimes Debtor’s attorneys’ are on a fishing expedition for other useful information to bring a class action suit.
• Charges in Proofs of Claim that have typically been challenged are collection of inspection fees, late charges, fax fees, reinstatement fees as well as foreclosure fees and costs.
• The bankruptcy attorneys’ fee cases have received a great deal of publicity in recent months. The fees we are dealing with here are generally post-petition bankruptcy fees for things such as filing proofs of claim, objections to confirmation and motions for relief from stay.
• In the bankruptcy fee cases, the allegation is that lenders have assessed and/or collected the fees without Bankruptcy Court approval, or at a minimum, some form of disclosure to the borrower and the Court.

4. Preventing Class Actions

• Give Good Customer Service: Although there are some attorneys out there actively seeking out aggrieved class action plaintiffs (see numerous web sites and chat rooms on the internet) for the most part it still is the really upset borrower that has to seek out an attorney to take their case. Simply put, try never to give your borrower a reason to go out and seek a lawyer in the first place. Be responsive, objective and honest as opposed to not responding timely or being defensive. Do the best you can to explain and educate the borrower. Make the borrower feel like their problem is important and that they are not being singled out (a common belief of many borrowers). Realize that most borrowers will focus on how the problem was handled as opposed to the problem itself. Also realize that borrowers tend to be more forgiving if they feel they are being treated fairly.
• Work as a Group: If the issue is one that is particularly sensitive or one that you are not familiar with, find someone with experience (manager or counsel) to assist you in resolving it with the borrower. Establish a procedure at your office whereby all potentially sensitive issues are immediately reviewed by middle or even senior management.
• Establish Procedures and Audit Them Frequently: Should a lawsuit ensue, it can be very helpful in defending it if the lender can show that there were procedures to address the issue and whether or not they were followed. The law changes frequently and loan documents are updated very often. Therefore, it is imperative that procedures be reviewed regularly. In-house or outside counsel are by far the best equipped to review and audit procedures and assure that important attorney-client privileged information is protected.
• Keep a Watchful Eye and Keep Learning: Your lawyers are your “eyes and ears”. Often, it is your counsel who can see the issue before it emerges. Rely on them heavily. Read their newsletters and encourage them to share new and important information with you. Stay active in local and national trade organizations and mortgage banking associations where issues such as these will predominate. Share important information with others in the industry.
• Avoid Litigation: Encourage the use of mediation or grievance procedures as opposed to litigation where appropriate. Often, it may make sense both financially and practically to settle at “nuisance value” in order to avoid the expenses of litigation or the establishment of bad precedent in the courts.
• Improve the Reputation of the Servicing Industry: An industry that is well perceived is less of a target for class actions. The servicing industry as a whole has come under fire. Work in any way possible to get the “good word” out about our industry. Play up good deeds like loss mitigation and borrower counseling initiatives as well as advances in technology that have helped your borrowers. Also, participate more with other members of the bankruptcy community. Are you aware of organizations like the National Association of Chapter 13 Trustees (www.nacct.org), the National Association of Consumer Bankruptcy Attorneys (www.nacba.org) and the American Bankruptcy Institute (www.abiworld.org) ? Is your company a member and do you interact with these groups or look at their websites? My experience is that there is not much interaction between servicers and these groups. As a result these outsiders have formulated their own (often negative) impressions of our industry. They could certainly use some education about the business practices of our industry and would welcome our involvement.