Ruiz v. Countrywide Home Ln

In the United States Court of Appeals for the Fifth Circuit

_______________

m 01-21028 _______________

THERESA O’SULLIVAN, FOR HERSELF AND ALL OTHERS SIMILARLY SITUATED; ET AL.

Plaintiffs,

JON MAYNARD, FOR HIMSELF AND ALL OTHERS SIMILARLY SITUATED;

HEATHER MAYNARD,

Plaintiffs-Appellees,

VERSUS

COUNTRYWIDE HOME LOANS, INC.,

Defendant-Appellant ****************************************************

m 01-51190 _______________

SERGIO RUIZ,

Respondent-Appellee,

VERSUS

COUNTRYWIDE HOME LOANS, INC.; PEIRSON & PATTERSON, L.L.P.,

Petitioners-Appellants.

_________________________

Appeals from the United States District Court for the Southern District of Texas and the Western District of Texas

February 7, 2003

Before JONES, SMITH, and SILER,* the Real Estate Settlement Procedures Act Circuit Judges. (“RESPA”), 12 U.S.C. § 2607(a)-(b), and violated the Texas Unauthorized Practice of JERRY E. SMITH, Circuit Judge: Law (“UPL”) Statute, TEX. GOV’T CODE §§ 83.001-83.006. Because we conclude that In these consolidated appeals, each district both district courts improperly certified the court certified a class of plaintiffs who paid classes, we reverse and remand. mortgage preparation fees to law firms select- ed by defendant Countrywide Home Loans, I. Inc. (“Countrywide”), a mortgage broker. Countrywide originates and services mort- Plaintiffs allege that Countrywide accepted gage loans, offering approximately 250 loan kickbacks from the law firms in violation of programs to potential homeowners. Consum- ers can obtain a loan either through one of Countrywide’s thousands of retail storefront * locations or through a mortgage broker. Judge of the United States Court of Appeals for the Sixth Circuit, sitting by designation.

Countrywide prepares a set of closing doc- a computer software system, known as EDGE, uments for each loan. Consistent with state containing various legal and non-legal docu- law, Countrywide uses attorneys to prepare ments necessary for the completion of resi- these documents for its wholesale and retail dential mortgage transactions. Once a poten- loan operations.1 Federal law requires Coun- tial homeowner is approved for a loan, a trywide to provide a HUD-1 Settlement State- Countrywide employee enters data concerning ment (“HUD-1") to borrowers and sellers to the transaction into EDGE, including infor- disclose the various settlement costs, including mation on the borrower and the property, the attorney’s fees, that are listed as a “Document loan amount, and applicable interest rates. Preparation Fee” on the HUD-1. This process takes between two and five hours. Plaintiffs Jon Maynard (No. 01-21028) and Sergio Ruiz (No. 01-51190) obtained home The EDGE system generates an initial set mortgage loans from Countrywide. Maynard of mortgage closing documents, the quantity obtained his loan from one of Countrywide’s of which varies depending on the type of loan. Texas retail locations; Ruiz transacted with In the retail division, the documents are print- Countrywide’s wholesale division through a ed by Countrywide employees and faxed to mortgage broker. At closing, both paid docu- Gregg & Valby’s offices, where they are re- ment preparation fees that appeared as a direct viewed by attorney and non-attorney loan spe- payment to the law firms on their HUD-1 cialists. Gregg & Valby prepares a response statements. Maynard’s HUD-1 reflected a sheet for Countrywide indicating any needed payment of $225 to Gregg & Valby,2 a law corrections. Approximately half of the loan firm serving as the exclusive residential mort- documents are sent back to Gregg & Valby for gage document preparer for Countrywide’s a second review, and some are sent back ad- Texas retail division. Ruiz’s HUD-1 showed ditional times before final approval. a payment of $200 to Peirson & Patterson, a preparer for Countrywide’s wholesale division. Peirson & Patterson’s employees, on the other hand, are located on-site at Countrywide’s wholesale division. Although Gregg & Valby and Peirson & Patterson Countrywide employees still initially enter data provide legal services to Countrywide through into the EDGE system, Peirson & Patterson a time-saving process that permits the process- employees select and print the mortgage ing of documents in bulk. Countrywide owns forms. Like the retail division, representatives of the law firm review the forms for content 1 and accuracy. Nevertheless, Peirson & Texas law prohibits non-lawyers from directly Patterson employees make any necessary or indirectly charging compensation for “all or any corrections, so there is no shuffling of papers part of” the preparation of loan documents between separate offices. affecting the transfer of title to real estate. TEX. GOV’T CODE § 83.001(a). A portion of the document preparation fee 2 In actuality, Maynard paid $175 of the total paid to Gregg & Valby and Peirson & Patter- $225 fee, while the seller paid the remaining $50. son is reimbursed to Countrywide, which con- Ruiz paid the entire $200 document preparation tends this portion of the fee represents its fee.

share of the costs associated with the practice of law. preparat ion of each set of loan closing documents. For example, Countrywide lists In Maynard, the district court certified a the use and maintenance of its EDGE system, class consisting of: the time spent by its employees inputting and gathering data, and the costs of telephone All persons in Texas who, as part of a calls, faxes, paper, and photocopying. residential real estate loan transaction with Countrywide, from January 10, The reimbursement amounts are set by 1996 to the present, were charged a schedule and vary according to loan type.3 For “Document Preparation Fee” (or portion the Maynard’s “Conventional Purchase with of a document preparation fee) on their Deed,” Countrywide was reimbursed $130 out HUD-1 Settlement Statement, where of the $225 paid to Gregg & Valby. Similarly, Countrywide received a portion of the $100 of Ruiz’s $200 document preparation fee document preparation fee, and Gregg & was reimbursed to Countrywide. The HUD-1 Valby is listed as the provider of does not reflect the fee splitting, but rather document preparation services. shows only a direct payment of the entire amount to the respective law firm. Similarly, in Ruiz, the district court certified the following class: Maynard and Ruiz allege that the fee splitting constitutes a “kickback” or “referral All persons [since April 1993]: (1) who fee” in violation of RESPA § 8(a)-(b). 4 In obtained loans from Countrywide addition, plaintiffs sued Countrywide under the secured by residential real property in Texas UPL Statute,5 arguing that its Texas; and (2) who paid for document participation in the preparation of loan preparation fees and/or attorney’s fees documents constituted the unauthorized charged by Peirson & Patterson as reflected by the HUD-1 Settlement Statement. 3 The Countrywide-Gregg & Valby fee schedule is set forth in the appendix hereto. Over objections that significant loan-to-loan variations in the amount and type of work 4 RESPA Section 2607(d)(2) requires performed require an individual analysis of defendants to pay treble damages to plaintiffs each transaction to determine the charged unearned fees. In total, Maynard seeks reasonableness of the reimbursed fee, the approximately $90 million in damages for an district courts found “the practice itself” of estimated class of 75,000 borrowers. Ruiz seeks reimbursing Countrywide for its services more than $58 million for a class of approximately satisfied predominance. This court permitted 80,000 borrowers. Countrywide to appeal the class certification 5 Ruiz also named Peirson & Patterson as a de- orders pursuant to FED. R. CIV. P. 23(f). fendant. Because Peirson & Patterson raises es- sentially the same arguments against certification II. as does Countrywide, our reference to Countrywide We review the certification of a class for includes Peirson & Patterson unless otherwise abuse of discretion. Stirman v. Exxon Corp, indicated.

280 F.3d 554, 561 (5th Cir. 2002). Because, requires that the court inquire how the case however, a court abuses its discretion when it will be tried. Castano, 84 F.3d at 744. This makes an error of law, we apply a de novo entails identifying the substantive issues that standard of review to such errors. Id. The will control the outcome, assessing which is- party seeking certification bears the burden of sues will predominate, and then determining demonstrating that the requirements of rule 23 whether the issues are common to the class. have been met. Allison v. Citgo Petroleum Although this inquiry does not resolve the case Corp., 151 F.3d 402, 408 (5th Cir. 1998). on its merits, it requires that the court look beyond the pleadings to “understand the The district court must conduct a “rigorous claims, defenses, relevant facts, and applicable analysis of the Rule 23 prerequisites” before substantive law.” Id. at 744. Such an certifying a class. Castano v. Am. Tobacco understanding prevents the class from Co., 84 F.3d 734, 740 (5th Cir. 1996). degenerating into a series of individual trials. Among the four prerequisites of Rule 23(a) is the requirement that “there are questions of A. law or fact common to the class.” FED. R. RESPA seeks to ensure that real estate CIV. P. 23(a)(2).6 Before a class may be consumers “are provided with greater and maintained under rule 23(b)(3), a court must more timely information on the nature and also determine that “questions of law or fact costs of the settlement process and are common to the members of the class protected from unnecessarily high settlement predominate over any questions affecting only charges caused by certain abusive practices.” individual members” and that “a class action is 12 U.S.C. § 2601(a). Both classes were superior to other available methods for the fair certified under § 2607(a)-(b), which states: and efficient adjudication of the controversy.” FED. R. CIV. P. 23(b)(3). The predominance (a) No person shall give and no person and superiority requirements are “far more de- shall accept any fee, kickback, or thing manding” than is rule 23(a)(2)’s commonality of value pursuant to any agreement or requirement. Amchem Prods. v. Windsor, 521 understanding . . . that business incident U.S. 591, 624 (1997). to or part of a real estate settlement ser- vice . . . shall be referred to any person. Determining whether legal issues common to the class predominate over individual issues (b) No person shall give and no person shall accept any portion, split, or percentage of any charge made or 6 received for the rendering of a real The four rule 23(a) requirements are: estate settlement service . . . other than “(1) numerosity (a class so large that joinder of all for services actually performed. members is impracticable); (2) commonality (ques- tions of law or fact common to the class); (3) typicality (named parties’ claims or defenses 12 U.S.C. § 2607(a)-(b). Despite a are typical of the class); and (4) adequacy of rep- prohibition against kickbacks and referral fees, resentation (representatives will fairly and RESPA § 8(c) permits “the payment to any adequately protect the interests of the class).” person of a bona fide salary or compensation Mullen v. Treasure Chest Casino, L.L.C., 186 or other payment for goods or facilities F.3d 620, 623 (5th Cir. 1999).

actually furnished or for services actually the excess is not for goods or services actually performed.” 12 U.S.C. § 2607(c)(2). performed or provided.” 24 C.F.R. § 3500.14(g)(2).8 This test was promulgated for Both classes were certified after a the purpose of assisting courts in ferreting out determination that rule 23(a)(2)’s commonality kickbacks disguised as legitimate payments for requirement is met by the issue of whether goods and services in complex real estate Countrywide’s receipt of compensation from settlement transactions. Gregg & Valby and Peirson & Patterson constitutes an illegal kickback or referral fee In separate policy statements issued in 1999 arrangement. In assessing rule 23(b)(3) and 2001, HUD clarified the reasonable predominance, both courts rejected relationship test in the context of lender-broker Countrywide’s contention that liability should payments known as yield spread premiums. In hinge on determinations of whether, in its 1999 Policy Statement, HUD expressed the individual cases, a reasonable relationship reasonable relationship test from 24 C.F.R. § exists between the value of the alleged services 3500.14(g)(2) as a two-part inquiry: (1) provided and payments received by “whether goods or facilities were actually Countrywide.7 Rather, both courts found that furnished or services were actually performed plaintiffs could show “the practice itself” bears for the compensation paid”; and (2) “whether no reasonable relationship to the value of the payments are reasonably related to the Countrywide’s services en toto, while relying value of the goods or facilities that were on the fee splitting schedule for any post- actually furnished or services that were liability calculation of damages. actually performed.”9 HUD expressly limited the 1999 Policy Statement to payments 1. between lenders and mortgage brokers.¹⁰ Congress authorized the Secretary of HUD to “prescribe such rules and regulations, to make such interpretations, and to grant such 8 Title 24 C.F.R. § 3500.14(g)(2) states that reasonable exemptions for classes of where a payment does not bear a reasonable rela- transactions, as may be necessary to achieve tionship to goods or services provided, this fact the purposes” of RESPA. 12 U.S.C. § “may be used as evidence of a violation of sec- 2617(a). HUD defines the § 8(c) exception in tion 8.” terms of a reasonable relationship test, holding 9 that where “the payment of a thing of value Real Estate Settlement Procedures Act bears no reasonable relationship to the market Statement of Policy 1999-1 Regarding Lender value of the goods or services provided, then Payments to Mortgage Brokers, 64 Fed. Reg. 10,080, 10,084 (March 1, 1999). 10 So far as we can tell, courts have applied 7 Countrywide does not question numerosity or both the 1999 and 2001 Policy Statements typicality. Although Countrywide argues that Ser- exclusively in yield spread premium cases. E.g., gio Ruiz cannot adequately protect the interests of Heimmermann v. First Union Mortgage Corp., his class pursuant to rule 23(a)(4), we need not 305 F.3d 1257 (11th Cir. 2002); Glover v. address this argument in light of our conclusion Standard Fed. Bank, 283 F.3d 953 (8th Cir. that questions of law or fact do not predominate 2002); Schuetz v. Banc One Mortgage Corp., 292 over questions affecting individual class members. (continued...)

Yield spread premiums, analogous in some payment.12 From the 1999 Policy Statement’s ways to Countrywide’s reimbursement fee, en- two-part test, Culpepper interpreted the term able borrowers to finance up-front closing “for the compensation paid” as requiring the costs by paying a higher interest rate on their defendants to tie the disputed fee to specific home loan. HUD Policy Statement 1999, at goods or services provided by the broker. Id. 10,081. The yield spread premium is a at 1329. In doing so, the Culpepper court de- payment from the lender to the broker, the termined that RESPA § 8 class actions could amount of which reflects the loan’s interest be certified by looking only to the first prong rate and consequently the lender’s profits. Id. of the HUD testSSwhether goods or services Although yield spread premiums are desirable were provided for the disputed fee paid. from a policy standpoint, because they permit borrowers to finance up-front closing costs, HUD disclaimed the Culpepper holding in they are criticized by some as blatant referral its 2001 Policy Statement,13 finding class cer- fees, varying only according to a higher tification in yield spread premium cases like interest rate pushed on the borrower and not Culpepper inappropriate because “neither Sec- by the broker’s actual services.11 tion 8(a) of RESPA nor the 1999 [Policy Statement] supports the conclusion that a yield Following HUD’s 1999 Policy Statement, spread premium can be presumed to be a re- a few courts certified class actions contesting ferral fee” simply because the lender does not yield spread premiums. In Culpepper v. Irwin have specific knowledge of what services the Mortgage Corp., 253 F.3d 1324 (11th Cir. broker has performed. HUD Policy Statement 2001), cert. denied, 534 U.S. 1118 (2002), for 2001, at 53,055. Instead, as the 2001 Policy example, the court found that the broker’s Statement clarifies, there is no requirement failure to tie the yield spread premium to spe- that the lender and broker tie the disputed fee cific goods or services was sufficient to create to specific services provided. So long as the a factual issue as to the overall intent of the total compensation paid to the broker is reasonably related to the total value of the goods or services actually provided, there is no

§ 8 liability.14 Countrywide’s compensation is reasonably re- lated to the value of those goods or services. We defer to 24 C.F.R. § 3500.14(g)(2), as We do not decide whether the policy a broad agency rule, insofar as it provides a statements are entitled to Chevron deference,16 mechanism for detecting kickbacks where the nor whether, for purposes of the reasonable § 8(c) exception is invoked. Where, as here, relationship test, the proper reference is the agency regulations are promulgated under ex- total mortgage transaction or only the press congressional authority, they are given reimbursement and services associated with controlling weight unless they are arbitrary, Countrywide’s preparation of legal capricious, or manifestly contrary to the documents.17 Either way, both courts abused statute. Chevron U.S.A., Inc. v. Natural Res. their discretion in certifying the RESPA Defense Council, Inc., 467 U.S. 837, 844 claims. (1984).15 Given the failure of § 2607(a)-(b) to provide a workable liability standard, we can- 2. not say that the reasonable relationship test is Plaintiffs concede Countrywide performed manifestly contrary to the plain meaning of the some services in furtherance of document pre- statute. If anything, RESPA’s stated goal of paration, but argue that its reimbursements do eliminating “kickbacks or referral fees that not represent the reasonable value of those tend to increase unnecessarily the costs of cer- services. We apply HUD’s reasonable tain settlement services,” 12 U.S.C. § 2601- relationship test, which holds that any excess (b)(2), is furthered by the reasonable may be used as evidence of a kickback or relationship test, so we are bound to apply it in referral fee. assessing certification. Using a rationale similar to that of the Elev- In addition, we look to the 1999 and 2001 enth Circuit in certifying a yield spread Policy Statements insofar as they express the premium class in Culpepper, both courts found reasonable relationship test as a two-part in- certification proper, because they believe quiry, asking first whether Countrywide predominance exists regarding whether “the provided goods or services in connection with the particular transaction, and second, whether 16 See Krzalic v. Republic Title Co., 2002 U.S. App. LEXIS 26744, at *20 (7th Cir. Dec. 26, 14 Id. at 53,055. Following HUD’s 2001 Policy 2002) (Easterbrook, J., concurring) (“I am Statement, the Eleventh Circuit overruled Culpep- confident that Heimmermann and Schuetz erred in per in Heimmermann, 305 F.3d at 1263. thinking that the Real Estate Settlement Procedures Act Statement of Policy 2001-1 is 15 See also United States v. Mead Corp., 533 itself conclusive under Chevron, as opposed to U.S. 218, 226-27 (2001) (“[A]dministrative imple- informative (and potentially persuasive).”). mentation of a particular statutory provision qual- 17 ifies for Chevron deference when it appears that In its discussion of the issue, however, Coun- Congress delegated authority to the agency gen- trywide appears to argue that liability depends on erally to make rules carrying the force of law, and finding a reasonable relationship between its that the agency interpretation claiming deference reimbursement and the value of its document was promulgated in the exercise of that author- preparation services, not its total compensation, ity.”). goods, and services.

overall practice” violates RESPA. Plaintiffs must be performed on a transaction-by- indeed argue that they have evidence showing transaction basis, because a single finding of the reimbursement payments were not tied to liability based on an unreasonable relationship the services provided by Countrywide, and between goods and services does not thus violate § 8. Countrywide argues the necessitate the conclusion that such HUD reasonable relationship test requires a unreasonableness exists on a classwide basis.19 transaction-by-transaction inquiry to assess whether Countrywide’s reimbursement is reasonably related to the undisputed services it In both proposed class actions, there is a provides in connection with document question whether an overall practice or policy preparation. violates a statute. But rule 23(b)(3) predominance requires a court to ask, in light Both courts erred by failing to acknowledge of how liability is established under the Countrywide’s use of the § 8(c) exception as relevant statute, whether common questions a defense. Castano, 84 F.3d at 744. predominate over individual ones. Because Consistently with the HUD reasonable RESPA § 8 liability is established by making relationship test, individualized factfinding will individual comparisons of compensation to be required for each transaction on the issues actual services, not by presuming fire where of what goods or services Gregg & Valby and there is smoke, we find certification improper. Peirson & Patterson provided to Countrywide, and whether the flat fee charged was reasonably related to their value. Plaintiffs do B. not attempt to argue that Countrywide Both courts also certified classes under the provided identical goods and servicesSSin type UPL claim. Texas law forbids nonlawyers or quantitySSin each transaction. such as Countrywide from charging or receiving, either directly or indirectly, “any The overall intent of the reimbursement compensation for all or any part of the practice, although perhaps satisfying the rule preparation of a legal instrument affecting title 23(a)(2) commonality requirement as a factual to real property.” TEX. GOV’T CODE § 83.001. issue common to all or at least most class Plaintiffs contend that Countrywide’s role in members,18 does not satisfy the more exacting requirements of predominance. The only way 19 the overall practice may be proven to violate See LaCasse v. Washington Mutual, Inc., RESPA, consistently with the HUD liability 198 F. Supp. 2d 1255, 1264 (W.D. Wash. 2002) standard, is to examine the reasonableness of (“Given the possibility that some or all of the de- payments for goods and services. This inquiry fendants’ yield spread premiums may have constituted an exchange for goods or services, it would be impossible to determine liability from generalized proof.”); Taylor v. Flagstar Bank, 18 See Jenkins v. Raymark Indus., 782 F.2d F.S.B., 181 F.R.D. 509, 523 (M.D. Ala. 1998) 468, 472 (5th Cir. 1986) (stating that the threshold (“[N]o matter what Plaintiffs can easily prove for commonality is not “high,” requiring only that about the general contours of these transactions, “resolution of common questions affect all or a Plaintiffs still cannot prove (by a class method) substantial number of the class members”) (citation that none of the yield spread premiums at issue omitted). were earned through the provision of services.”).

preparing the loan closing documents violates firms, not plaintiffs, actually reimbursed the the UPL statute. As with RESPA, however, fee. We disagree. Section 83.001 prohibits the question of class certification is those fees paid either “directly or indirectly” complicated by the fact that chapter 83 does for the preparation of real estate legal not prohibit “an attorney from paying documents. Realizing that Maynard and Ruiz, secretarial, paralegal, or other ordinary and as borrowers, ultimately paid all transaction reasonable expenses necessarily and actually fees, the fact that plaintiffs indirectly paid the incurred by the attorney for the preparation of disputed fee by first paying a document legal instruments.” TEX. GOV’T CODE § preparation fee to the law firms does not 83.002. These services are not proscribed by defeat their right to sue. Countrywide’s chapter 83, because they do not require the narrow interpretation of chapter 83 standing use of “legal skill or knowledge.”20 would eviscerate the term “indirectly” from § 83.001. Countrywide initially argues that neither Maynard nor Ruiz has standing under the Tex- Insofar as Countrywide argues that as UPL statute. As an “inherent prerequisite plaintiffs have not suffered a legally cognizable to the class certification inquiry,” Rivera v. injury-in-fact because they do not complain Wyeth-Ayerst Labs., 283 F.3d 315, 319 (5th they were charged too high a fee for the Cir. 2002) (citation omitted), we must mortgage documents or that the documents determine whether plaintiffs have a valid cause were deficient, they ignore the fact that §§ of action under Texas law and whether they 83.001 and 83.003 create a right to recoup have stated an injury-in-fact. Id. The statute fees paid to nonlawyers who exercise legal confers a cause of action on “any person who skill or knowledge in preparing legal pays a fee prohibited by [TEX. GOV’T CODE documents. Because only those persons who § 83.001].” TEX. GOV’T CODE § 83.005. pay a fee can sue under § 83.005, the UPL statute is distinguishable from those statutes Countrywide argues that Maynard and Ruiz violating Article III that permit “any person” cannot sue under § 83.005, because the law to bring suit.21

Initially, rather than pointing to specific acts 20 The parties dispute whether liability under § requiring the use of legal skill or knowledge 83.001 requires the exercise of legal skill or common to each and every transaction, knowledge. Given that subchapter G is entitled Maynard and Ruiz allege that Countrywide’s “Unauthorized Practice of Law,” and § 81.101 de- actions “across the board” violate the Texas fines “practice of law” as “any service requiring the use of legal skill or knowledge,” it appears that the Texas legislature sought to prohibit nonlawyers from exercising legal skill or knowledge in the 21 preparation of legal documents. This view is See Lujan v. Defenders of Wildlife, 504 U.S. supported by an interpretative opinion issued by 555, 572-74 (1992) (holding that provision in the Texas Attorney General. See OP. TEX. ATTY. Endangered Species Act allowing any person to GEN. JM-943, 1988 WL 406255, at *2 (1988) bring a lawsuit to enforce compliance with (“What is meant in [chapter 83] by the ‘prepar- procedural requirements could not vest standing in ation of legal instruments’ must be decided with plaintiff who had not suffered an injury). reference to the practice of law.”).

UPL statute.22 As with the RESPA claims, Ruiz points to no authority suggesting that both courts found that individual issues did not chapter 83 should be construed in light of the predominate, because it was Countrywide’s Texas Disciplinary Rules of Professional overall practice that violates the UPL statute. Conduct. Whereas the disciplinary rules apply The district courts’ reasoning fails to account only to lawyers, chapter 83 imposes liability on for Countrywide’s intent to use § 83.002 as a non-lawyers.25 Given § 83.002's failure to defense, specifically that its reimbursements mention rule 5.04 or any authority suggesting were ordinary and reasonable compensation that its terms do not mean what they say, we for secretarial or clerical assistance. will construe the statute according only to its plain language, which sets no limitation Ruiz takes issue with the overall regarding how a lawyer may pay for secretarial reimbursement scheme by arguing that it or clerical assistance. conflicts with rule 5.04 of the Texas Disciplinary Rules of Professional Conduct, Maynard, while similarly arguing that the which prohibits lawyers from splitting fees overall reimbursement scheme is inconsistent with nonlawyers.23 Assuming arguendo that with the Texas UPL statute, contends that the reimbursement scheme violates rule 5.04,24 some of Countrywide’s individual practices vi- olate chapter 83. For instance, Countrywide 22 employees examine and construe previous Maynard, for example, states: “The mortgage documents in order to select which important point . . . is that the focus of the issue one of the more than 250 forms will be used truly is on the overall ‘program,’ as the district for a particular transaction. Without deciding court correctly noted in its opinion.” Ruiz states whether this practice constitutes the that “the very nature of the arrangement between Peirson & Patterson and Countrywide is prohibited unauthorized practice of law, we note that by Texas law governing the conduct of lawyers.” Countrywide does not deny that its employees are responsible for selecting the proper form in 23 Rule 5.04 states that “a lawyer or law firm each and every transaction. shall not share or promise to share legal fees with a non-lawyer.” TEX. DISCIPLINARY R. PROF’L Similarly, it is undisputed that Countrywide CONDUCT 5.04(a), reprinted in Tex. Gov’t Code employees enter data into EDGE, generate an Ann., tit. 2, subtit. G app. A (Vernon 1998) (TEX. initial set of closing documents, fax the STATE BAR R. art. X, § 9). documents to Gregg & Valby, and enter suggested changes in each transaction. A 24 Nevertheless, we note our inability to discern finding that any of these practices, standing a meaningful distinction between the Countrywide- alone, requires the use of legal skill or Peirson & Patterson fee arrangement characterized by Ruiz as “systematic,” and the salary typically paid to a secretary at a law firm, which Plaintiffs 24 concede is permissible under § 83.002. Both fees (...continued) are pre-determined, scaled, and split from a 25 lawyer's profits. Given that § 83.002 presupposes It is also worth noting that the Texas payments for secretarial or paralegal work, Rule Disciplinary Rules of Professional Conduct are 5.04 cannot be as constraining as Ruiz would have promulgated by the Texas Supreme Court, while us believe. chapter 83 is a duly enacted statute by the state (continued...) legislature.

knowledge is sufficient to confer liability under damage claims “focus almost entirely on facts the Texas UPL.26 and issues specific to individuals rather than the class as a whole,” Allison, 151 F.3d at 419, Even though a class is theoretically the potential exists that the class action may certifiable on these issues, we find that an “degenerate in practice into multiple lawsuits apportioned calculation of damagesSSrequired separately tried,” Castano, 84 F.3d at 745 by the Texas UPL statuteSSmeans that n.19 (citation omitted). In such cases, class individual issues predominate. Section 83.001 certification is inappropriate.27 prohibits compensation for “all or any part” of the preparation of mortgage documents, while As we have noted, there are several Section 83.005 grants “recovery of the fee practices common to each transaction that may paid” to “[a] person who pays a fee prohibited or may not require t he use of legal skill or by [chapter 83].” In deciding whether the knowledge. Although the propriety of each term “fee” should be interpreted as (1) the practice can be determined on a classwide ba- amount charged to Plaintiffs on their HUD- sis, the calculation of damages cannot. For ex- 1’s, (2) the amount reimbursed to ample, at least one practiceSSdata entrySSis Countrywide, or (3) the portion of the almost surely a secretarial or clerical function reimbursement actually spent on unauthorized within the meaning of the § 83.002 services, we are guided by Section 83.005’s exception.28 Countrywide has demonstrated requirement that a recovered fee be “prohibited by [chapter 83].” Only the last of the three possibilities is a fee prohibited in its 27 Allison, 151 F.3d at 413 (“[A]s claims for entirety. Therefore, a plaintiff suing under the individually based money damages begin to pre- Texas UPL statute is entitled to recover only dominate, the presumption of cohesiveness that portion of his total fee used to actually decreases while the need for enhanced procedural finance the unauthorized practice of law. safeguards . . . increases.”) (citation omitted); Montelongo v. Meese, 803 F.2d 1341, 1351 (5th The extent (but not the nature) of Cir. 1986) (stating that claims are unsuitable for Countrywide’s participation in the transactions class treatment when individual questions, such as varies, making individualized calculations of reliance and damages, predominate over class damages predo minate. Where the plaintiffs’ questions”) (emphasis added). But see Bertulli v. Indep. Ass’n of Cont’l Pilots, 242 F.3d 290, 298 (5th Cir. 2001) (“Although calculating damages 26 Ruiz cannot make this argument, because will require some individualized determinations, it Peirson & Patterson employees (attorney and non- appears that virtually every issue prior to damages attorney), not Countrywide employees, select and is a common issue.”). Importantly, in Bertulli, the generate the mortgage forms in the wholesale di- court recognized the plaintiffs’ claims for vision. The only practice performed by injunctive relief on top of money damages, noting Countrywide employees in every wholesale that “not all of the relief requires individualized transaction is data entry, a practice that even Ruiz determination.” Id. does not argue is non-secretarial. As for Peirson & 28 Patterson’s potential liability for permitting its non- The 1988 Texas Attorney General Opinion attorney employees to select and generate forms, supports our view that data entry likely qualifies as the analysis is the same as for Countrywide’s retail secretarial-type work under the § 83.002 exception: division in Maynard. (continued...)

that the amount of data entry required in each transaction varies depending on the type of loan and the number of corrections required by Gregg & Valby. Under the recovery provision of the Texas UPL, Countrywide is entitled to keep the reasonable value of its secretarial or clerical services even if the other practices violate Chapter 83. In light of the individual calculation of damages that is required, the district court abused its discretion in certifying the UPL claims.

The orders certifying the respective classes are REVERSED, and these matters are REMANDED for further proceedings.

28 (...continued) “[T ]he mere act of recording a borrower’s responses to the questions on a standard form prob- ably does not require legal skill or knowledge and would therefore not be practicing law . . . .” OP. TEX. ATTY. GEN. JM-943, 1988 WL 406255, at *2.

Appendix

LOAN TYPE INVOICE PAYMENT TO AMOUNT RETAINED AMOUNT COUNTRYWIDE BY GREGG & VALBY

Conventional Purchase $ 175 $ 100 $ 75 Conventional Purchase $ 225 $ 130 $ 95 with Deed Conventional Refinance $ 175 $ 100 $ 75 FHA Purchase $ 175 $ -0- $ 175 FHA Purchase with Deed $ 225 $ 50 $ 175 FHA Refinance $ 150 $ -0- $ 150 VA Purchase $ 175 $ 100 $ 75 VA Purchase with Deed $ 225 $ 130 $ 95 VA Refinance $ 100 $ -0- $ 100 Second Lien $ 75 $ 45 $ 30 One Time Close $ 295 $ 170 $ 125

The Countrywide-Peirson & Patterson rate schedule is less complex: The law firm receives a flat rate of $200 for most loans, of which $100 is reimbursed to Countrywide. For FHA and VA loans only, Peirson & Patterson receives $150, of which Countrywide is reimbursed $50.

Footnotes

[10] 12 (...continued) Culpepper, 253 F.3d at 1332 (noting an ab- F.3d 1004 (9th Cir. 2002). sence of evidence showing “that [the lender] ne- gotiates yield spread premiums loan-by-loan, rather 11 See Schuetz, 292 F.3d at 1015 (“I see the than paying them according to terms and conditions phrase ‘yield spread premium’ as an obfuscatory common to all loans. Nor does [the lender] contend way of avoiding calling a kickback a kickback.”) that it intends some yield spread premiums to pay (Kleinfeld, J., dissenting); Glover, 238 F.3d at 958 for services and others to pay for referrals.”). (“Some consumers . . . allege that this 13 compensation system is illegal under RESPA Real Estate Settlement Procedures Act because it fosters the payment of prohibited Statement of Policy 2001-1: Clarification of State- referral fees. Others view this practice as an ment of Policy 1999-1 Regarding Lender Payments option that fosters home ownership because it to Mortgage Brokers, and Guidance Concerning reduces the amount of money required from Unearned Fees Under Section 8(b), 66 Fed. Reg. borrowers up-front and out-of-pocket.”). 53052 (October 18, 2001).