Favorable Ruling For Debtors In Jones v. Wells Fargo Bank Upheld

On July 1, 2008 the much anticipated District Court decision in the Jones v. Wells Fargo case was released.

In her decision, District Judge Helen G. Berrigan affirmed the judgment of Eastern District of Louisiana Bankruptcy Court Judge Elizabeth Magner on all but one issue, and remanded that issue for further consideration.

In what can only be called a victory for consumers, this decision requires Wells Fargo to institute fair and reasonable accounting procedures that permit the Debtor, the Trustee and the Bankruptcy Court to know that post petition payments are being properly credited in Chapter 13 bankruptcy proceedings.

It is this writer’s hope that Jones v. Wells Fargo becomes the accepted accounting model throughout the Bankruptcy Court system.

A more in-depth summary of the decision can be read below.

Wells Fargo appealed Judge Magner’s decision on numerous grounds.  These arguments and the findings of the Court are summarized herein. 

This is not meant to be an exhaustive analysis of the District Court opinion.

MOTION TO VACATE NOT WARRANTED FOR FAILURE TO DISCLOSE LAWSUIT

In one of its weaker arguments, Wells Fargo maintained on appeal that the judgment in this matter should have been vacated due to the failure of Mr. Jones to disclose a Vioxx lawsuit.

Judge Berrigan rejected this argument noting that Wells Fargo had failed to show how the alleged misconduct of Jones prevented Wells Fargo from a full and fair presentation of its case in the adversary proceeding.

ATTORNEY’S FEES AND COSTS CORRECTLY ACCESSED AGAINST WELLS FARGO

Wells Fargo argued that the award of $67,202.45 in attorney’s fees and costs had no factual basis, but if a fee was warranted and supported by the facts, then the fee was excessive.

In rejecting this argument Judge Berrigan, citing case law interpreting 11 U.S.C. Sec. 362(k), first noted that the Bankruptcy Code permits a debtor to seek actual damages, including costs and attorneys’ fees, and, when appropriate, the award of punitive damages.

Judge Berrigan further noted that both the attorneys for Jones and Wells Fargo submitted time sheets and bookkeeping records to Judge Magner so that Judge Magner could make a determination as to a reasonable award of attorneys’ fees.

With regard to the reasonableness of the attorneys’ fee, Judge Berrigan noted that Judge Magner made a finding that the hourly rate charged by Mr. Jones’ attorney was a customary rate for bankruptcy litigation, that the issues involved were “…novel, difficult, complex, and ones of first impression in [the] district…”, and that the significance of the case was far reaching and would have ramifications in many other cases.

THE BANKRUPTCY COURT DID NOT VIOLATE THE “ANTI-MODIFICATION RULE”

Wells Fargo argued that Judge Magner’s award to Jones of $16,852.01 was reversible error because the award modified the rights of Wells Fargo to recover interest and inspection fees under its mortgage agreement with Jones.

Judge Berrigan, describing Wells Fargo’s anti-modification argument as a “false argument”, found that Judge Magner did not modify the Wells Fargo agreement between Wells Fargo and Jones, but instead found that Wells Fargo violated the automatic stay provisions of the Bankruptcy Code by:

1. Applying funds that it received for post petition debt to prepetition debt in violation of the terms of the Chapter 13 plan;
2. Overstating the costs that were actually owed by Jones; and,
3. Adding to its prepetition arrearage without amending its proof of claim.

In a later part of her opinion, Judge Berrigan noted that Wells Fargo “…either does not understand the Bankruptcy Court’s rationale for finding a stay violation, or is mischaracterizing the Bankruptcy Court’s findings on appeal.”

JUDGE MAGNER DID NOT IMPROPERLY APPLY THE BURDEN OF PROOF TO WELLS FARGO

Wells Fargo argued that Judge Magner improperly placed the burden of proof on it when the burden of proof belonged to Jones.

Judge Berrigan, citing Supreme Court and Fifth Circuit cases, rejected Well Fargo’s argument, noting that Jones met his initial burden of production at which point it became the burden of Wells Fargo to adequately explain its accounting procedures.  Drawing a comparison to a game of tennis, Judge Berrigan noted that Wells Fargo could not hit the “tennis Ball” back over the net.

VOLUNTARY PAYMENT DOCTRINE DID NOT APPLY

Wells Fargo asserted that the payments that Jones made were for fees that were included in a payoff statement, and that therefore the payments should be considered as voluntary payments that were not recoverable.

Judge Berrigan, in addressing this argument by Wells Fargo, noted that as a general rule of Louisiana law, when a person with full knowledge of the facts, (emphasis added) voluntarily pays a demand unjustly made, he cannot recover back the money.  However, Judge Berrigan further noted that the finding by Judge Magner that the fees were not knowingly paid by Jones was not “clearly erroneous” and therefore was not reversible error.

JUDGE MAGNER DID NOT EXCEED HER AUTHORITY IN ORDERING WELLS FARGO TO PROVIDE ANNUAL NOTICES OF POST-PETITION CHARGES

Wells Fargo asserted on appeal that Judge Magner exceeded her authority in ordering Wells Fargo to provide annual notices of post-petition charges reasoning that by doing so Judge Magner was regulating Wells Fargo actions as they pertained to non-parties.

While Judge Berrigan did ultimately remand the case to address this argument by Wells Fargo, Judge Berrigan did make the following observations:

1. That it appeared that the new accountING procedures were actually proposed by Wells Fargo as an alternative to the imposition of punitive monetary damages.  Judge Berrigan noted that it was uncertain whether Wells Fargo had a right to appeal the imposition of the new accounting procedures under the theory of invited error, which provides that a party may not complain on appeal of errors that it caused.
2. That Judge Magner has the authority to order the new accounting procedures under the Bankruptcy Court’s equitable powers to provide injunctive relief. 
3. That the record did not show whether Judge Magner applied the necessary test to determine if the plaintiff was “…threatened by some injury for which he has no adequate legal remedy…” thus permitting the injunctive relief of the new accounting procedures.
4. That it was necessary to remand the case for additional consideration of this issue.

WELLS FARGO CONSENTED TO A DEFERRED RULING ON SANCTIONS AND PUNITIVE DAMAGES

Wells Fargo finally asserted that it did not consent to a deferred ruling on sanctions and punitive damages.

Judge Berrigan found the lack of consent argument by Wells Fargo to be “disingenuous.”

Judge Berrigan noted that Judge Magner asked the following specific question on the record:  “Are you willing to enter into a consent order (emphasis in opinion) on those terms?” and further noted that both the attorney for Wells Fargo and Wells Fargo’s Vice President of the Wells Fargo Bankruptcy Department answered this question with the affirmative statement:  “yes.”

Judge Berrigan found no further indication that Wells Fargo ever revoked its intent to be bound by the consent order and noted that Wells Fargo seemed to have shifted its position on the consent order solely for the purposes of seeking reversible error on appeal.

In the end, Judge Berrigan ordered:

1. That the money judgment against Wells Fargo be stayed pending an appeal provided that Wells Fargo submit a bond in the amount of $100,891.24; and
2. That the non-monetary portion of Judge Magner’s judgment with respect to the new accounting procedures not be stayed, but that they be revisited on remand to the Bankruptcy Court.