Opinion
No. 97-25258-B-7, Adversary No. 00-2604
March 19, 2001
ORDER DENYING MOTION
For the reasons set forth in the accompanying Memorandum Decision, the motion by plaintiffs Roy Kibler and Kathleen Kibler for class certification is hereby denied.
MEMORANDUM DECISION I. INTRODUCTION
Plaintiffs Roy and Kathleen Kibler ("Plaintiffs"), who are also the debtors in the underlying bankruptcy case, seek class certification pursuant to Federal Rule of Civil Procedure 23 in their class action against WFS Financial, Inc. ("Defendant"). The lawsuit challenges Defendant's debt collection practices.
II. SUMMARY OF PLAINTIFFS' CLAIMS
The first three causes of action of Plaintiffs' complaint are based on Defendants' alleged violations of different provisions of the Bankruptcy Code. In Count One, Plaintiffs allege that Defendant violated 11 U.S.C. § 524(c), which permits debtors to enter into enforceable agreements with creditors to reaffirm discharged debts, provided such agreements comply with the requirements of that section. Count Two alleges willful violations of the automatic stay provisions of section 362 (a). In Count Three, Plaintiffs assert that Defendant violated the permanent discharge injunction imposed pursuant to section 524 (a). Plaintiffs initially contended that they could enforce their rights under the Bankruptcy Code through a private right of action as well as contempt proceedings.
Unless otherwise stated, all future statutory references are to Title 11, United States Code.
Count Four alleges violations of the Fair Debt Collection Practices Act ("FDCPA"). In Counts Five through Eight, Plaintiffs seek declaratory relief, injunctive relief, an accounting, and attorneys' fees.
III. PROCEDURAL BACKGROUND
On May 15, 2000, Plaintiffs filed this class action against Defendant in the United States District Court for the Central District of California. Defendant filed a motion to dismiss this action, while Plaintiffs filed a competing motion for class certification.
In ruling on these motions, the District Court dismissed Plaintiffs' section 524 claims in Counts One and Three to the extent Plaintiffs sought to proceed by a private cause of action. The District Court found that violations of the discharge injunction could be remedied only through the bankruptcy court's contempt powers. The District Court also dismissed Plaintiffs' FDCPA claim in Count Four. Finally, the District Court dismissed Counts Five through Eight to the extent they were based on the dismissed section 524 and FDCPA claims. After granting the motion to dismiss, the only remaining substantive claims are a claim under section 362 (h) for Defendant's alleged violation of the automatic stay and a contempt proceeding based on its alleged violation of the discharge injunction.
As part of the same order, the District Court sua sponte referred the remaining claims to the Bankruptcy Court for the Central District of California pursuant to 28 U.S.C. § 157 (a). The Bankruptcy Court then granted Defendant's motion for change of venue and transferred the proceeding to this court. This court reopened Plaintiffs' underlying bankruptcy case on December 20, 2000. The still pending motion for class certification was submitted to this court for decision following further briefing and oral argument.
IV. FACTUAL BACKGROUND
The Complaint alleges the following facts. On September 21, 1995, Plaintiffs entered into a six-year loan agreement with Defendant in order to purchase a 1992 GMC van. The loan was secured by the van.
Plaintiffs filed a voluntary chapter 7 bankruptcy case on April 8, 1997, in the Eastern District of California. In their schedules, Plaintiffs indicated that they intended to reaffirm their obligation to Defendant. Defendant allegedly received notice of the bankruptcy filing before Plaintiffs' first meeting of creditors, which was held on May 27, 1997. Defendant did not attend the 341 (a) meeting.
Despite the bankruptcy filing, Defendant continued to send its normal billing statements to Plaintiffs and accept their loan payments for the van. On August 14, 1997, Plaintiffs received their discharge. After the discharge, Defendant continued its prior practice of sending billing statements and accepting Plaintiffs' loan payments.
According to Plaintiffs, Defendant did not attempt to obtain a reaffirmation agreement from them and did not advise them that they were no longer personally liable for this discharged obligation. Allegedly due to the failure of Defendant to inform them of their rights, Plaintiffs paid the entire outstanding balance of the loan for the van. They contend that such payment violated their discharge.
V. DISCUSSION
Plaintiffs seek class certification under either Federal Rule of Civil Procedure 23 (b) (2) or 23 (b) (3), as incorporated by Federal Rule of Bankruptcy Procedure 7023. They propose the following class definition:
All individuals in the United States:
a. Who filed a Chapter 7 petition for relief under Bankruptcy Code;
b. About whom Defendant received notice of the bankruptcy filing;
c. Who, subsequent to the filing of the bankruptcy petition, did not execute an agreement with Defendant purporting to reaffirm such debt or alleged debt in conformity with 11 U.S.C. § 524 (c); and
d. From whom payments on such pre-petition debt or alleged debt were solicited by Defendant.
To obtain class certification, the Plaintiffs must satisfy a two-part statutory test. First, they must establish all four elements of Rule 23 (a), and, second, at least one prong of Rule (b).
In pertinent part, Rule 23 (a) provides that:
[o]ne or more members of a class may sue . . . on behalf of [the class] only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the [class representative] are typical of the claims or defenses of the class, and (4) the [class representative] will fairly and adequately protect the interests of the class.
These four prerequisites of Rule 23 (a) are generally referred to as "numerosity," "commonality," "typicality," and "adequacy of representation," respectively.
In addition to satisfying the elements of subdivision (a), the action must comply with one of the subdivisions contained in Rule 23 (b). Plaintiffs contend that both subsections (b) (2) and (b) (3) apply. They state that:
(2) the party opposing the class has acted or refused to act on grounds generally applicable to the class, thereby making appropriate final injunctive relief or corresponding declaratory relief with respect to the class as a whole;
(3) . . . the 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.
A. The Four Prerequisites of Rule 23 (a)
1. Numerosity (Rule 23 (a)(1))
Although numerosity does not require a precise number of class members, at least forty people is considered an appropriate benchmark for class actions. Lockwood Motors, Inc. v. General Motors Corp., 162 F.R.D. 569, 574 (D. Minn. 1995) [citation omitted]. The term "impracticable" as used in this provision does not mean impossible, but only that joining all members of the class would be difficult. Ibid. In addition to class size, courts also consider the geographical distribution of the class members for the numerosity determination. Boyd v. Ozark Air Lines, Inc., 568 F.2d 50, 54-55 (8th Cir. 1977). Mere conclusory allegations of class size or practical difficulties in joinder do not satisfy Rule 23 (a)(1).Marcial v. Coronet Ins., 880 F.2d 954 957 (7th Cir. 1989).
Plaintiffs have not specified the number of members in their class. Based on Plaintiff's estimate of 15,000 annual credit losses by Defendant, however, Plaintiffs contend that "[o]ne can safely conclude that there are more than 40 individuals who" would qualify as class members. Plaintiffs' conclusion requires this court to engage in pure speculation. Plaintiffs have not submitted any evidence that would permit the court to reasonably cull the number of potential class members from among Defendant's 15,000 annual credit losses.
The 15,000 figure is derived from the percentage of credit loss reserve compared to total auto finance contracts held for sale, as set forth in Defendant's 10-Q report.
Plaintiffs also contend that because Defendant is a nationwide lender, joinder is impracticable. The mere fact that Defendant makes loans throughout the United States is not sufficient evidence for the court to infer that the class members are scattered throughout the country. See Gray-Mapp v. Sherman, 100 F. Supp.2d 810, 814 (N.D. Ill. 1999)
Plaintiffs have failed to satisfy numerosity.
Plaintiffs have requested an opportunity for additional discovery on the numerosity requirement. However, even if such 28 discovery produced evidence to satisfy the numerosity requirement, it would not change the outcome of other Rule 23 (a) prerequisites.
2. Commonality (Rule 23 (a) (2))
While Rule 23 (a) (2) requires the existence of "questions of law or fact common to the class," not all issues of law or fact need to be the same in order for commonality to exist. For instance, the commonality requirement is satisfied if common questions of liability are present, regardless of individual variations in damages. Hanlon v. Chrysler Corp., 150 F.3d 1011, 1019-20 (9th Cir. 1998).
This action questions whether Defendant's collection practices violated the automatic stay and discharge provisions of the Bankruptcy Code. Any recovery by a class member will be based on the Defendant's unlawful conduct. Thus, the issue of the propriety of Defendant's conduct is common to all class members, thereby satisfying the commonality requirement. Although each class member may not be entitled to the same relief, variation in damage awards, without more, is not a reason to deny certification.
Defendant contends that the split in authority among the circuits over the existence of the so-called "ride-through" option, also known as the "fourth option," will destroy commonality. Section 521 (2) (A) of the Bankruptcy Code requires a chapter 7 debtor, with respect to each secured consumer obligation, to indicate his or her intention to either redeem, surrender or reaffirm the debt. Various circuits differ in their interpretation of this section.
In the Ninth Circuit, as well as in the Second, Fourth and Tenth Circuits, debtors may keep their property without reaffirming the underlying debt. See, e.g., In re Parker, 139 F.3d 668, 672-73 (9th Cir. 1998). In these circuits, a creditor's lien, and the obligation it secures, pass through bankruptcy unaffected except for the debtor's release from personal liability. Because the creditor still has the ability to enforce its lien rights, a debtor must continue to make regular contract payments in order to retain the property.
By contrast, in the First, Fifth, Seventh or Eleventh Circuits, which do not recognize the "fourth option," a debtor must reaffirm the secured debt or redeem the property in order to keep it. The remaining circuits have not yet ruled on the availability of the "ride-through" option.
Despite the differences among the circuits with respect to the availability of the "ride-through" option, no circuit, including the Ninth Circuit in Parker, has abrogated the automatic stay and discharge injunction. Thus, the underlying issue remains the same, namely, whether Defendant violated the Bankruptcy Code. Any divergence over the availability of the "ride-through" option may, at most, affect the extent to which a class member will recover, which, again, is not grounds for denying certification.
3. Typicality (Rule 23 (a) (3))
The typicality requirement in Rule 23 (a) (3) requires that the interests of the named representative coincide with the interests of other class members. The claims of the class representative must "emanate from the same event or [be] based on the same legal theory as the claims of the class members." In re Potash Antitrust Litig., 159 F.R.D. 682, 690 (D. Minn. 1995) [citation omitted]. The representative's claim must be coextensive with the claims of the class members. Hanlon, 150 F.3d at 1020. Class certification is inappropriate where the class representative is subject to a unique defense that may become the focus of the litigation. Hanon v. Dataproducts Corp., 976 F.2d 497, 508 (9th Cir. 1992).
Plaintiffs limit the proposed class to all chapter 7 debtors from whom Defendant solicited payments on pre-petition debts without an executed reaffirmation agreement. As written, the proposed definition of the class would include at least three groups of debtors: those who retained their property without reaffirming the debt, those who surrendered it, and those who redeemed it. With respect to each group, Defendant must have solicited payment of its pre-petition loans.
Plaintiffs complain that receipt of Defendant's continued monthly billings without a valid reaffirmation agreement violated their rights under the Bankruptcy Code. The propriety of Defendant's collection practices will depend, however, on which group of debtor class members is affected. For instance, solicitation of payment from those debtors who elected to surrender Defendant's collateral would seem an obvious violation of the Automatic stay and discharge injunction. On the other hand, Debtors who exercised their right to redeem the collateral for its fair market value have not been injured by not executing a reaffirmation agreement. Plaintiffs do not belong to and have little in common with either group. Rather, Plaintiffs are among those individuals who did not formalize their election under section 521 (2) (A), opting to retain Defendant's collateral without actually reaffirming the debt.
Plaintiffs' claims even conflict with the interests of other potential class members who are similarly situated. In jurisdictions that recognize the "ride-though" option, debtors may want to preserve their property, yet not incur the potential personal liability imposed by a reaffirmation agreement. These debtors, unlike Plaintiffs, need to receive normal monthly billings to avoid a contract default and potential foreclosure. What constitutes acceptable communication between a secured creditor and a debtor taking advantage of the "ride-through" option varies on a case-by-case basis and even from court to court. For example, the conduct complained of by Plaintiffs, Defendant's continuation of its customary pre-petition billing practices, is ordered by some bankruptcy judges. Plaintiffs seek to disallow the same conduct that many similarly situated debtors welcome and some courts order.
See, Defendant's Request for Judicial Notice, Exs. B, C, D.
Plaintiffs face the "Parker" defense, which is unique to four circuits. The rights of debtors in jurisdictions that do not accept the "ride-through" option are more circumscribed. In these jurisdictions, a debtor cannot escape personal liability and still retain the collateral. If a debtor fails to either redeem or surrender the property or reaffirm the debt, the creditor's remedy is to obtain relief from stay. The availability of the Parker defense against the Plaintiffs will become the focus of this litigation, yet that defense involves only some class members.
The inclusion of class members who either surrendered or redeemed their collateral is a problem of definition that could be remedied. Nonetheless, Plaintiff's claims are not typical of the remaining debtors who exercised the "ride-through" option or those who could not retain collateral without reaffirmation. Plaintiffs have not met the typicality requirement.
4. Adequacy off Representation (Rule 23 (a) (4))
"Adequacy" requires that "the [class representative] . . . fairly and adequately protect the interests of the class." Plaintiffs' lawsuit, if successful, would prevent Defendant from informing debtors exercising the "ride-through" option of the amount and due date of each of their payments, increasing the likelihood of default. Additionally, Plaintiffs would have Defendant reject payments from debtors without reaffirmation agreements.
If Plaintiffs' position were to be upheld, the "ride-through" option would no longer be viable. Yet many debtors consider the ability to retain property subject to a security interest, without exposure to personal liability, a benefit. The court finds that the position advanced by Plaintiffs is antagonistic to other members of the class.
2. Rule 23 (b) Certification
A. Rule 23 (b) (2)
Rule 23 (b) (2) permits class actions for injunctive or declaratory relief. Rule 23 (b) (2) does not apply, however, to class actions that seek predominantly monetary relief. Morgan v. Laborer's Pension Trust Fund, Etc., 81 F.R.D. 669, 672 (N.D. Cal. 1979). Nonetheless, as long as the relief the class seeks is primarily injunctive or declaratory in nature, requests for incidental monetary relief will not defeat a Rule 23 (b) (2) certification. See Elliott v. Weinberger, 564 F.2d 1219, 1228, n. 12b (9th Cir. 1977), rev'd on other qrounds, 442 U.S. 682 (1979).
Although the complaint contains causes of action for declaratory and injunctive relief, the relief sought in the complaint is primarily monetary in nature. Certification under Rule 23 (b) (2) is not appropriate in this proceeding.
B. Rule 23 (b)(3)
In the alternative, Plaintiffs seek certification under Rule (b) (3). In determining whether common questions of law or fact predominate and whether a class action is superior to other alternatives, as required by this subsection, the court should consider:
(A) the interest of members of the class in individually controlling the prosecution or defense of separate actions; (B) the extent and nature of any litigation concerning the controversy already commenced by members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; CD) the potential difficulties likely to be encountered in the management of the class action.
Fed.R.Civ.P. 23 (b) (3). These factors are not exhaustive. Kamm v. California City Dev. Co., 509 F.2d 205, 212 (9th Cir. 1975). This court may also consider the interests of all parties, including the public and the judicial system. Id.
Although the issue of whether Defendant's collection practices were unlawful is common to all class members, the commonality of issues among class members ends there. As discussed above, the proposed class includes debtors who redeemed and surrendered their property. Some class members kept their property by exercising the "ride-through" option, while others may not have had that right. Even if Defendant's collection activity was uniform and identical as to all debtors, the impact of that conduct varies tremendously depending on who was affected.
Because commonality of legal and factual issues does not predominate among all class members, the court does not need to reach the second prong of Rule 23 (b) (3), i.e., "superiority."
VI. CONCLUSION
In conclusion, Plaintiffs' request that this court certify its class action does not satisfy the requirements of Federal Rule of Civil Procedure 23. The Plaintiff cannot meet the numerosity, typicality, and adequacy of representation requirements of Rule 23 (a) (1), (a) (3), and (a) (4), respectively. Additionally, the class action is not maintainable under either Rule 23 (b) (2) or (b) (3). By separate order, the court will deny Plaintiffs' Motion for Certification in accordance with this decision.