Opinion
19-13676
04-01-2022
In Re MONICA M. MORNINGSTAR Debtor(s)
Chapter 13
ORDER APPLYING RULE 7023 PROCEDURES TO DEBTOR'S MOTION TO DETERMINE MORTGAGE PAYMENT PURSUANT TO FRBP 3002.1(b), FOR ESCROW ACCOUNT RECONCILIATION, FOR WAIVER OF UNNOTICED ESCROW CHARGES OR REFUND OF ESCROW SURPLUS, AND FOR DISGORGEMENT OF UNNOTICED FEES, COSTS, OR CHARGES PURSUANT TO FRBP 3002.1(c) WITH CLASS ACTION ALLEGATIONS [Docket Number 33]
Beth A. Buchanan United States Bankruptcy Judge
This matter is before this Court on Debtor Monica Morningstar ("Debtor")'s request to apply Federal Rule of Bankruptcy Procedure ("Rule") 7023 to the issues raised in Debtor's Motion to Determine Mortgage Payment Pursuant to FRBP 3002.1(b), for Escrow Account Reconciliation, for Waiver of Unnoticed Escrow Charges or Refund of Escrow Surplus, and for Disgorgement of Unnoticed Fees, Costs, or Charges Pursuant to FRBP 3002.1(c) with Class Action Allegations [Docket Number 33] (the "Motion"). This Court has further considered the briefs filed by Debtor and Creditor NewRez LLC d/b/a Shellpoint Mortgage Servicing ("Shellpoint") in support of their positions on the application of Rule 7023 to this matter [Docket Numbers 82, 89 and 93]. Upon review of the Motion and briefs, this Court concludes that the factual background and legal analysis necessary for determination is adequately set forth by the parties and the matter is ripe for determination
I. FACTUAL AND PROCEDURAL BACKGROUND
In the Motion, the Debtor asserts that Shellpoint, her mortgage servicer, failed to file and serve notices in her bankruptcy case required by Rule 3002.1(b) and (c) for disclosure of mortgage-related fees or expenses and mortgage-related payment changes. Specifically, Shellpoint's alleged violations include: 1) failing to file and serve notices when the Debtor's mortgage payment changed due to changes in escrow expenses [Docket Number 33, pp. 2-3]; and 2) failing to file and serve notices for the collection of a late payment fee and property inspection fees during the Debtor's bankruptcy case [Id., p. 5]. The Debtor requests damages or sanctions for these violations but also asserts that Shellpoint's lack of compliance with Rule 3002.1 may be widespread. Accordingly, and in addition to other relief, the Debtor requests that this Court exercise its discretion to apply Rule 7023's class action provisions to this contested matter.
On September 30, 2021, the Debtor's Motion was partially granted on a default basis by this Court's order determining that Shellpoint failed to file notices in the Debtor's case required by Rule 3002.1(b) and/or (c) [Docket Number 52]. In the order, this Court noted the need to set a damages hearing to determine the appropriate relief to be awarded the Debtor pursuant to Rule 3002.1(i) but also the need to address the Debtor's request to apply Rule 7023's class action provisions [Id.].
Following a preliminary hearing and status conference held on October 21, 2021, this Court set a briefing schedule for the parties to address the following issue:
. . . whether this Court should exercise its discretion to apply Rule 7023 in this contested matter. In particular, the parties should address in their briefs whether class procedures are superior to non-class procedures with respect to the contested matter at issue, whether class certification would be legally impossible such that it would be futile to apply Rule 7023, and any other relevant considerations. See e.g., In re Biery, 2014 Bankr. LEXIS 1603, 2014 WL 1431947 (Bankr. E.D. Ky. April 14, 2014).[Docket Number 74]. The Debtor and Shellpoint subsequently filed briefs [Docket Numbers 82, 89 and 93].
In her brief, Debtor asserted that systemic violations of Rule 3002.1 have occurred among national mortgage servicers such that, in December of 2020, the United States Department of Justice's Trustee Program ("USTP") announced agreements reached with three large national mortgage servicers for servicing deficiencies impacting homeowners in bankruptcy [Docket number 82, Ex. 8]. According to the press release, the deficiencies, impacting more than 60,000 debtor accounts, included the failure to file timely and accurate notices of changes in debtors' mortgage payments, the failure to file timely and accurate notices of mortgage-related fees assessed during bankruptcy cases, and the failure to provide accurate final accountings. The agreements with the USTP resulted in more than $74 million in refunds, waivers, and credits recovered and the three mortgage servicers were required to implement improvements to their internal bankruptcy operations to prevent recurrence.
Although Shellpoint was not one of the mortgage servicers subject to these agreements, Debtor's counsel cites four other local cases in which he was debtor counsel involving allegations that Shellpoint violated Rule 3002.1 [Id., p. 4]. Debtor counsel asserts that Shellpoint was prompted to fix its errors only after actions taken by the debtors in each case. Because Rule 3002.1 errors are difficult to catch without a review and understanding of a mortgage servicer's escrow accounting and because the amount of damages in each case is low, the Debtor asserts that a class action is the superior method to address these errors and ensure that corrective measures are taken to prevent them in the future. Accordingly, the Debtor requests that this Court apply Rule 7023 to allow "similarly situated debtors from across the Southern District of Ohio to vindicate their rights in a uniform way while recovering damages they may otherwise have foregone" [Id., p. 10].
The four cases in this district cited by the Debtor include In re James, Case Number 18-11778, Docket Number 74; In re Christmon, Case No. 14-15073, Docket Numbers 132 and 138; In re Dunn, Case Number 15-11789, Docket Number 83; and In re Fleetwood, Case No. 18-13959, Docket Numbers 70 and 85. This Court makes no findings or determinations with respect to the allegations of violations in these cases.
II. LEGAL ANALYSIS
The Debtor requests application of Rule 7023's class action provisions to the issues raised in the Motion and, more specifically, to allegations that Shellpoint has violated Rule 3002.1 by failing to file and serve required notices of mortgage payment changes and mortgaged-related fees and expenses. Both Shellpoint and Debtor agree that the language of Rule 9014 gives this Court broad discretion to apply adversary proceeding rules, including Rule 7023, to contested matters at any point in the proceedings. Fed.R.Bankr.P. 9014(c); see also In re Biery, 2014 Bankr. LEXIS 1603, at *11-13, 2014 WL 1431947, at *4-5 (Bankr. E.D. Ky. April 14, 2014). Thus, the only issue is whether this Court should exercise that discretion in this particular case.
In determining whether to apply Rule 7023's class action procedures to a contested matter, the proper inquiry focuses on "whether class procedures are superior to non-class procedures with respect to the contested matter at issue." Biery, 2014 Bankr. LEXIS 1603, at *17, 2014 WL 1431947, at *6. Upon review of the parties' filings, this Court determines that the Debtor has set forth a sufficient basis to apply Rule 7023 to this contested matter and allow pre-certification discovery to proceed.
First, the Debtor has demonstrated that allowing discovery to proceed has the potential to uncover widespread violations of Rule 3002.1. This rule was adopted in 2011 to address the problem caused by mortgage creditors failing to provide notice to debtors of mortgage-related payment changes and other fees and expenses during their chapter 13 cases and then seeking to foreclose after the cases end. Trevino v. HSBC Mortg. Servs., Inc. (In re Trevino), 615 B.R. 108, 128 (Bankr.S.D.Tex. 2020); In re Tollstrup, 2018 Bankr. LEXIS 767, at *9, 2018 WL 1384378, at *3 (Bankr. D. Or. March 16, 2018). Rule 3002.1 was adopted in an attempt to solve this problem "by providing a procedure for notice to be provided by a creditor for mortgage payment changes during a chapter 13 case, and an opportunity for the debtor to contest them[.]" Trevino, 615 B.R. at 128.
While Rule 3002.1's notice requirements were intended to ensure an end to surprise fees and changes in mortgage payments during a debtor's chapter 13 case, compliance with these requirements has been an ongoing issue for some mortgage servicers. As noted in the Debtor's brief, systemic violations of Rule 3002.1 by three large mortgage servicers resulted in a settlement with the USTP involving millions in recovered refunds, waivers, and credits. Although Shellpoint was not one of the nationwide mortgage servicers subject to the settlement, Debtor counsel cites four cases in this district, in addition to the Debtor's own case, with allegations of Rule 3002.1 violations by Shellpoint. Shellpoint argues that no determinations were made in the four other cases cited by the Debtor and, moreover, five cases is not evidence of routine or systemic violations by this mortgage servicer. But Shellpoint's argument begs the question: how would widespread violations be uncovered without allowing pre-class certification discovery to proceed? Based on the five cases cited by the Debtor, it is reasonable to believe that pre-certification discovery could uncover additional cases in this district involving the types of accounting irregularities and missed notices that may make a class action appropriate. This factor supports applying Rule 7023 procedures to this contested matter.
Second, the Debtor has demonstrated that applying class procedures may enhance the chance that violations of Rule 3002.1 that are discovered will be adjudicated. See Biery, 2014 Bankr. LEXIS 1603, at *17-19, 2014 WL 1431947, at *6. In Biery, the bankruptcy court noted that class action procedures are superior in matters where damages in each individual case are limited or nominal reducing the incentive for individual debtors to expend the costs and time to litigate. Id. (determining class action procedures to be superior in an action for contempt for violation of the discharge injunction when the relatively small amount of compensatory damages in each case would not justify individual suits). Although this matter involves Rule 3002.1 violations rather than violations of the discharge injunction, the Debtor has noted that relief may be similarly limited. As an example of these limits, the Debtor notes that Shellpoint has calculated the damages in the Debtor's case to be $408.32 [See Docket Number 82, p. 8 citing Docket Number 41, Ex. A]. See also Blanco v. Bayview Loan Servicing, LLC (In re Blanco), 633 B.R. 714, 755 (Bankr.S.D.Tex. 2021) (suggesting that the Rule 3002.1 noticing violations for small fees and charges may either go unnoticed by debtors or debtors may find it easier to pay the small fees rather than litigate them). Based on the limited incentive to pursue such small amounts individually, this factor weighs in favor of applying Rule 7023 in this matter.
Even with these factors weighing in its favor, application of the rule should be denied if class certification is legally impossible so that application of Rule 7023 would be futile. Biery, 2014 Bankr. LEXIS 1603, at *21, 2014 WL 1431947, at *7. Shellpoint argues that class certification is impossible with respect to its alleged Rule 3002.1 violations for several reasons: 1) that Rule 3002.1 is procedural in nature and does not provide a substantive cause of action; 2) that this Court lacks jurisdiction over a class of debtors whose proceedings would not affect this Debtor or her bankruptcy estate; and 3) that the Debtor's proposed class will be uncertifiable because it will amount to a "fail-safe class" or will otherwise fail to meet a Rule 7023 requirement for certification. This Court will address each argument in turn.
First, Shellpoint argues that Rule 3002.1 is procedural in nature and does not provide substantive relief to a debtor in the form of compensatory and/or punitive damages. Shellpoint argues that violations of a procedural rule cannot form the basis of a class action.
Rule 3002.1(i) describes the relief afforded for a creditor's failure to file and serve proper Rule 3002.1 notices. Specifically, this provision provides that the bankruptcy court, after notice and hearing, may preclude the creditor from presenting the omitted information as evidence or may "award other appropriate relief, including reasonable expenses and attorney's fees caused by the failure." Fed.R.Bankr.P. 3002.1(i). Whether the "appropriate relief" available under Rule 3002.1(i) includes compensatory damages or punitive sanctions is the subject of considerable recent dispute. See PHH Mortg. Corp. v. Sensenich (In re Gravel), 6 F.4th 503 (2nd Cir. 2021) (the majority opinion and dissent set forth the conflicting views regarding whether Rule 3002.1(i)'s language "other appropriate relief" authorizes punitive sanctions); Blanco, 633 B.R. at 754-55 (agreeing with the dissent in Gravel that the plain language of Rule 3002.1(i) provides courts with significant latitude in awarding compensatory relief or punitive sanctions); Beiter v. Chase Home Fin., LLC (In re Beiter), 590 B.R. 446, 456 (Bankr. S.D. Ohio 2018) (reserving for a later determination whether punitive sanctions may be imposed for violations of Rule 3002.1); Tollstrup, 2018 Bankr. LEXIS 767, at *11-13, 2018 WL 1384378, at *5-6 (concluding that Rule 3002.1(i) is a procedural rule that does not permit a monetary award as either compensatory damages or punitive sanctions).
At this preliminary stage, however, it is unnecessary to determine the outer limits of the relief that may be afforded under Rule 3002.1(i). It suffices to note that class actions have been utilized to address creditor violations of similar bankruptcy rules and have been permitted for purposes other than monetary damages. See generally, Rodriguez v. Countrywide Home Loans, Inc. (In re Rodriguez), 695 F.3d 360 (5th Cir. 2012) (affirming bankruptcy court's certification of class action for injunctive relief against mortgage servicer for alleged violations of Federal Rule of Bankruptcy Procedure 2016(a) by charging fees without court approval and misapplying chapter 13 plan payments to satisfy some of the unauthorized fees); In re Sheffield v. HomeSide Lending, Inc. (In re Sheffield), 281 B.R. 24 (Bankr. S.D. Ala. 2000) (certifying class action for creditor's alleged failure to satisfactorily disclose post-petition, pre-confirmation attorney fees included in its proofs of claim). Accordingly, certification is not impossible in this respect.
This Court further rejects Shellpoint's argument that certification is rendered impossible because this Court lacks jurisdiction over multi-debtor class actions. Various courts, including a bankruptcy court within this district, have concluded that they have jurisdiction over multi-debtor class actions, at least with respect to debtors whose cases are filed in the same district. Wilborn v. Wells Fargo Bank (In re Wilborn), 609 F.3d 748, 754 (5th Cir. 2010); Rodriguez v. Countrywide Home Loans, Inc., 421 B.R. 341, 354-55 (S.D. Tex. 2009); Kilbourne v. CitiMortgage, Inc. (In re Kilbourne), 555 B.R. 628, 633 (Bankr. S.D. Ohio 2015) (concluding that the bankruptcy court had jurisdiction over a class of debtors filing for chapter 13 bankruptcy in the Southern District of Ohio); In re Biery, 543 B.R. 267, 302 (Bankr. E.D. Ky. 2015) (certifying a class of district-wide debtors with respect to a contempt proceeding). Indeed, "class action proceedings are expressly allowed in the Federal Bankruptcy Rules" and "if bankruptcy court jurisdiction is not permitted over a class action of debtors, Rule 7023 is virtually read out of the rules." Wilborn, 609 F.3d at 754 (noting that the creditor's argument would restrict a bankruptcy court's class certification authority to a proposed class of creditors rather than debtors and that neither the Bankruptcy Code or Rules provided such an express limitation). Because the Debtor has expressly stated that the potential class will be limited to debtors who filed their cases in the Southern District of Ohio [Docket Number 82, p. 10], certification is of a multi-debtor class is possible.
Lastly, Shellpoint argues that class certification will be impossible because the putative class is a "fail-safe class" meaning that the class is defined in terms of the ultimate question of liability or entitlement to relief so that "[e]ither the class members win or, by virtue of losing, they are not in the class and, therefore, not bound by the judgment." See Randleman v. Fidelity Nat'l Title Ins. Co., 646 F.3d 347, 352 (6th Cir. 2011) (noting that an improper fail-safe class is an independent ground for denying class certification). Alternatively, Shellpoint argues that certification of a class will be impossible because the Debtor will be unable to meet the commonality requirement under Rule 7023(a) or, if certifying under Rule 7023(b)(3), the predominance requirement. See, e.g., Wilborn, 609 F.3d at 755-57; Gawry v. Countrywide Home Loans, Inc. 640 F.Supp.2d 942, 951-52 (N.D. Ohio 2009), aff'd, 395 Fed.Appx. 152 (6th Cir. 2010) (concluding that where extensive factual inquiries are required to determine whether an individual is a member of a class, certification under Rule 23(b)(3) is improper). Certainly, Shellpoint's arguments highlight hurdles that the Debtor may face when attempting to certify a class. However, difficulty is not the same as impossibility which is the limited issue to be addressed at this preliminary stage when the precise scope of the Debtor's putative class remains to be determined. It is neither appropriate to define the class at this time nor determine whether the Debtor will ultimately meet the requirements to certify a class both of which will largely depend on what is uncovered once the parties have an opportunity for pre-certification discovery. Because Shellpoint's arguments do not support that certification is impossible, and recognizing that pre-class discovery is liberally granted, see Biery v. Beneficial Kentucky, Inc. (In re Biery), 2013 Bankr. LEXIS 3622, at *4, 2013 WL 4602698, at *1 (Bankr. E.D. Ky. Aug. 29, 2013), this Court concludes that the Debtor has set forth a sufficient basis to apply Rule 7023 to this contested matter and allow pre-certification discovery to proceed.
Shellpoint further argues that permitting a class action to proceed will only complicate and delay what are otherwise simple procedures under Rule 3002.1 for dealing with post-petition mortgage payment changes, fees and expenses. The Debtor counters that providing a uniform remedy for similarly situated debtors will not delay these cases and missed notifications of payment changes, fees and expenses may never be uncovered without permitting pre-certification discovery to proceed. At this preliminary stage, Shellpoint's arguments remain speculative and are best raised if and when the Debtor seeks to certify a class.
For these reasons, this Court will grant the Debtor's request to apply Rule 7023 to the issues raised in Debtor's Motion to Determine Mortgage Payment Pursuant to FRBP 3002.1(b), for Escrow Account Reconciliation, for Waiver of Unnoticed Escrow Charges or Refund of Escrow Surplus, and for Disgorgement of Unnoticed Fees, Costs, or Charges Pursuant to FRBP 3002.1(c) with Class Action Allegations [Docket Number 33].
SO ORDERED.