FYI: 5th Cir Says BK Courts May Certify Classes of Debtor-Pls

The U.S. Court of Appeals for the Fifth Circuit recently held that a bankruptcy judge may certify a class of debtor-plaintiffs under certain circumstances, but that the proposed class must satisfy the requirements of Federal Rule of Civil Procedure 23 and Federal Rule of Bankruptcy Procedure 7023.  A copy of the opinion is attached. 

The individual named plaintiffs in this matter each had filed separate Chapter 13 bankruptcy petitions in the Southern District of Texas, and also had a home mortgage either owned or serviced by Wells Fargo.  Plaintiffs brought an adversary proceeding in the bankruptcy court against Wells Fargo, alleging that Wells Fargo charged and/or collected unreasonable and unapproved post-petition professional fees during the pendency of their bankruptcies in violation of 11 U.S.C § 506 and Federal Bankruptcy Rule of Procedure 2016.  Plaintiffs then moved for class certification, which the bankruptcy court granted.  Wells Fargo appealed the class certification on both jurisdictional and procedural grounds, and this opinion followed.

The Fifth Circuit vacated the class certification, but not because the bankruptcy court did not have jurisdiction to certify a class of debtors in this case.  In fact, as to the bankruptcy court's jurisdiction, the Court found that there was federal bankruptcy jurisdiction under 28 U.S.C. § 1334(b), on the grounds that the claims of the named plaintiffs arose during each plaintiff's individual bankruptcy case, and therefore arose under Title 11 for purposes of jurisdiction. The Court further noted that § 1334(b) and 28 U.S.C. §157(a) (which permits district courts to provide that any or all proceedings arising under Title 11 be referred to the district bankruptcy judges) restrict the placement of jurisdiction in the bankruptcy courts, rather than restricting the scope of bankruptcy court jurisdiction. 

Although there is a disagreement among the courts as to whether a bankruptcy judge may certify a class action of debtor plaintiffs, the Fifth Circuit reasoned that, if it ruled that the bankruptcy court had no jurisdiction to certify a class, Fed. R. Bankr. P. 7023, which provides that the requirements for class actions under Fed. R. Civ. P. 23 apply in adversary proceedings, would be "virtually read out of the rules." 

Ultimately, the Court found that, although a bankruptcy judge may certify a class of debtor-plaintiffs,  the adversary action in this case did not satisfy the predominance and superiority prerequisites for a class under Fed. R. Civ. P 23.

Let me know if you have any questions.  Thanks.

 

 

Ralph T. Wutscher

Kahrl Wutscher LLP

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