Hernandez v. Wells Fargo Bank, N.A.

Background

Plaintiff Alicia Hernandez and other borrowers brought a putative nationwide class action against Wells Fargo. The plaintiffs alleged that a software error overstated attorney’s fees when Wells Fargo decided whether borrowers qualified for trial loan modifications under the Home Affordable Modification Program. According to the allegations, this error caused Wells Fargo to deny loan modifications to borrowers who qualified and to foreclose on their homes.

The court certified a class only for the breach-of-contract claim. The certified class included people in the United States who, between 2010 and 2018, qualified for a government-sponsored home loan modification or repayment plan, were denied one by Wells Fargo because excessive attorney’s fees were included in the decision process, and whose homes Wells Fargo sold in foreclosure.

The court previously approved an original class settlement that resolved the claims of 505 class members. Wells Fargo later identified 741 additional affected borrowers who fit the class definition but had not been included in the original settlement. The parties negotiated a supplemental settlement for those borrowers.

Supplemental Settlement

The supplemental settlement covered 740 class members; one person opted out. Wells Fargo agreed to pay a total of $21,864,673. The settlement provided a net, non-reverting fund of $18,169,325 for economic damages and severe emotional distress.

Of that fund, $16,719,325 was allocated to economic damages. Payments were calculated so that a class member’s prior remediation payment plus the new economic-damages payment generally equaled 38% of the unpaid principal balance at the time of the decision error. The payment was reduced by 5% for every six months of delinquency, but could not be less than $14,000. Individual economic-damages payments ranged from $14,000 to $116,502.

Another $1,450,000 was allocated to severe emotional-distress claims. Class members who applied received final awards ranging from $11,400 to $34,420. The agreement released the supplemental class members’ economic-damages claims and most emotional-distress claims, but it did not release the emotional-distress claims of 52 class members whose notices were returned as undeliverable and who could not be located.

Notice and Class Response

The court found that notice sent by first-class mail to all 741 supplemental class members satisfied the applicable requirements. After an envelope-stuffing error caused some notices to be sent to the wrong people, the court ordered corrected notices, a new deadline for opting out, and an explanation that the corrected notice replaced the earlier one.

After efforts to redeliver notices, 52 remained undeliverable. The court stated that at least 21 of those people appeared to be deceased and that no known next of kin had been located. One class member opted out, and no class member objected.

Court’s Analysis

Under Federal Rule of Civil Procedure 23, a court may approve a class settlement only after a hearing and a finding that the settlement is fair, reasonable, and adequate. The court considered factors including the strength of the plaintiffs’ claims, the risks and costs of continued litigation, the amount offered, the stage of the case, counsel’s experience and views, and the class members’ responses.

The court found that the settlement was supported by the risks of continued litigation. Wells Fargo had argued that some class members’ contract claims would fail under existing decisions and that the law of each state where a property was located might apply. The court also noted the difficulty of proving damages for a nationwide class and the likelihood of an appeal if the case proceeded.

The court found the settlement amount favorable. The $18,169,325 net fund provided the same level of relief as the original settlement and represented a substantial percentage of the damages estimates discussed in the opinion. The court also found that the case had reached an advanced stage because the parties had completed extensive discovery, litigated class-certification and discovery issues, and fully briefed a motion for partial summary judgment.

The court examined the release of claims, the claims process for emotional-distress payments, the absence of incentive payments for the class representatives, and the lack of any side agreement. It concluded that the release was reasonably tied to the loan-modification denials and resulting foreclosure-related harm.

Attorney’s Fees and Expenses

The court considered whether the fee arrangement showed improper collusion. Wells Fargo had agreed to pay $3,623,865 in attorney’s fees separately from the class fund, and any amount not awarded would revert to Wells Fargo rather than to the class. The court nevertheless found the arrangement acceptable because it allowed original and supplemental class members to receive the same compensation for the same harm.

The requested fee equaled about 16.6% of the supplemental settlement’s $21,864,673 gross value, below the Ninth Circuit’s 25% benchmark for fees in common-fund settlements. Considering the original and supplemental settlements together, the aggregate fees equaled 20.2% of the aggregate gross settlement amount. The court found the fee request reasonable.

Disposition

The court granted final approval of the supplemental class action settlement. It granted the motion for attorney’s fees and awarded Gibbs Law Group LLP and Paul LLP $3,623,865. Half was to be paid after the settlement’s effective date, and the remainder after class counsel certified that the supplemental settlement funds had been properly distributed and the file could be closed. The court approved $70,000 in settlement-administration expenses and approved $1,483 in litigation expenses.