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

****************************************************
2

 

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,

*

Circuit Judges.

JERRY E. SMITH, Circuit Judge:

In these consolidated appeals, each district

court certified a class of plaintiffs who paid

mortgage preparation fees to law firms selected by defendant Countrywide Home Loans,

Inc. (“Countrywide”), a mortgage broker.

Plaintiffs allege that Countrywide accepted

kickbacks from the law firms in violation of

the Real Estate Settlement Procedures Act

(“RESPA”), 12 U.S.C. § 2607(a)-(b), and

violated the Texas Unauthorized Practice of

Law (“UPL”) Statute, TEX. GOV’T CODE

§§ 83.001-83.006. Because we conclude that

both district courts improperly certified the

classes, we reverse and remand.

I.

Countrywide originates and services mortgage loans, offering approximately 250 loan

programsto potential homeowners. Consumers 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.
3

Countrywide prepares a set of closing documents for each loan. Consistent with state

law, Countrywide uses attorneys to prepare

these documents for its wholesale and retail

loan operations.1 Federal law requires Countrywide to provide a HUD-1 Settlement Statement (“HUD-1") to borrowers and sellers to

disclose the varioussettlement costs, including

attorney’s fees, that are listed as a “Document

Preparation Fee” on the HUD-1.

PlaintiffsJon Maynard (No. 01-21028) and

Sergio Ruiz (No. 01-51190) obtained home

mortgage loans from Countrywide. Maynard

obtained his loan from one of Countrywide’s

Texas retail locations; Ruiz transacted with

Countrywide’s wholesale division through a

mortgage broker. At closing, both paid document preparation feesthat appeared as a direct

payment to the law firms on their HUD-1

statements. Maynard’s HUD-1 reflected a

payment of $225 to Gregg & Valby,

2

a law

firm serving as the exclusive residential mortgage document preparer for Countrywide’s

Texas retail division. Ruiz’s HUD-1 showed

a payment of $200 to Peirson & Patterson, a

preparerforCountrywide’s wholesale division.

Gregg & Valby and Peirson & Patterson

provide legalservicesto Countrywide through

a time-saving processthat permitsthe processing of documents in bulk. Countrywide owns

a computersoftware system, known asEDGE,

containing various legal and non-legal documents necessary for the completion of residential mortgage transactions. Once a potential homeowner is approved for a loan, a

Countrywide employee enters data concerning

the transaction into EDGE, including information on the borrower and the property, the

loan amount, and applicable interest rates.

This process takes between two and five

hours.

The EDGE system generates an initial set

of mortgage closing documents, the quantity

of which varies depending on the type of loan.

In the retail division, the documents are printed by Countrywide employees and faxed to

Gregg & Valby’s offices, where they are reviewed by attorney and non-attorney loan specialists. Gregg & Valby prepares a response

sheet for Countrywide indicating any needed

corrections. Approximately half of the loan

documents are sent back to Gregg & Valby for

a second review, and some are sent back additional times before final approval. 

Peirson & Patterson’s employees, on the

other hand, are located on-site at

Countrywide’s wholesale division. Although

Countrywide employeesstillinitiallyenter data

into the EDGE system, Peirson & Patterson

employees select and print the mortgage

forms. Like the retail division, representatives

of the law firm review the forms for content

and accuracy. Nevertheless, Peirson &

Patterson employees make any necessary

corrections, so there is no shuffling of papers

between separate offices. 

A portion of the document preparation fee

paid to Gregg & Valby and Peirson & Patterson isreimbursed to Countrywide, which contends this portion of the fee represents its

1Texaslaw prohibits non-lawyersfromdirectly

or indirectly charging compensation for “all or any

part of” the preparation of loan documents

affecting the transfer of title to real estate. TEX.

GOV’T CODE § 83.001(a).

2

In actuality, Maynard paid $175 of the total

$225 fee, while the seller paid the remaining $50.

Ruiz paid the entire $200 document preparation

fee. 
4

share of the costs associated with the

preparation of each set of loan closing

documents. For example, Countrywide lists

the use and maintenance of its EDGE system,

the time spent by its employees inputting and

gathering data, and the costs of telephone

calls, faxes, paper, and photocopying.

The reimbursement amounts are set by

schedule and varyaccording to loan type.3 For

the Maynard’s “Conventional Purchase with

Deed,”Countrywidewasreimbursed $130 out

of the $225 paid to Gregg & Valby. Similarly,

$100 ofRuiz’s $200 document preparation fee

was reimbursed to Countrywide. The HUD-1

does not reflect the fee splitting, but rather

shows only a direct payment of the entire

amount to the respective law firm.

Maynard and Ruiz allege that the fee

splitting constitutes a “kickback” or “referral

fee” in violation of RESPA § 8(a)-(b).

4

 In

addition, plaintiffs sued Countrywide under the

Texas UPL Statute,5arguing that its

participation in the preparation of loan

documents constituted the unauthorized

practice of law.

In Maynard, the district court certified a

class consisting of:

All persons in Texas who, as part of a

residential real estate loan transaction

with Countrywide, from January 10,

1996 to the present, were charged a

“Document Preparation Fee” (or portion

of a document preparation fee) on their

HUD-1 Settlement Statement, where

Countrywide received a portion of the

document preparation fee, and Gregg &

Valby is listed as the provider of

document preparation services.

Similarly, in Ruiz, the district court certified

the following class:

All persons [since April 1993]: (1) who

obtained loans from Countrywide

secured by residential real property in

Texas; and (2) who paid for document

preparation fees and/or attorney’s fees

charged by Peirson & Patterson as

reflected by the HUD-1 Settlement

Statement.

Over objections that significant loan-to-loan

variations in the amount and type of work

performed require an individual analysis of

each transaction to determine the

reasonableness of the reimbursed fee, the

district courts found “the practice itself” of

reimbursing Countrywide for its services

satisfied predominance. This court permitted

Countrywide to appeal the class certification

orders pursuant to FED. R. CIV. P. 23(f).

II.

We review the certification of a class for

abuse of discretion. Stirman v. Exxon Corp,

3TheCountrywide-Gregg& Valby fee schedule

is set forth in the appendix hereto.

4 RESPA Section 2607(d)(2) requires

defendants to pay treble damages to plaintiffs

charged unearned fees. In total, Maynard seeks

approximately $90 million in damages for an

estimated class of 75,000 borrowers. Ruiz seeks

more than $58 million for a class of approximately

80,000 borrowers.

5 Ruiz also named Peirson & Patterson as a defendant. Because Peirson & Patterson raises essentially the same arguments against certification

as doesCountrywide, our reference to Countrywide

includes Peirson & Patterson unless otherwise

indicated.
5

280 F.3d 554, 561 (5th Cir. 2002). Because,

however, a court abuses its discretion when it

makes an error of law, we apply a de novo

standard of review to such errors. Id. The

party seeking certification bears the burden of

demonstrating that the requirements of rule 23

have been met. Allison v. Citgo Petroleum

Corp., 151 F.3d 402, 408 (5th Cir. 1998). 

The district court must conduct a “rigorous

analysis of the Rule 23 prerequisites” before

certifying a class. Castano v. Am. Tobacco

Co., 84 F.3d 734, 740 (5th Cir. 1996).

Among the four prerequisites of Rule 23(a) is

the requirement that “there are questions of

law or fact common to the class.” FED. R.

CIV. P. 23(a)(2).6 Before a class may be

maintained under rule 23(b)(3), a court must

also determine that “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 methodsfor the fair

and efficient adjudication of the controversy.”

FED. R. CIV. P. 23(b)(3). The predominance

and superiority requirements are “far more demanding” than is rule 23(a)(2)’s commonality

requirement. Amchem Prods. v. Windsor, 521

U.S. 591, 624 (1997).

Determining whether legal issues common

to the class predominate over individual issues

requires that the court inquire how the case

will be tried. Castano, 84 F.3d at 744. This

entails identifying the substantive issues that

will control the outcome, assessing which issues will predominate, and then determining

whether the issues are common to the class.

Although thisinquiry does not resolve the case

on its merits, it requires that the court look

beyond the pleadings to “understand the

claims, defenses, relevant facts, and applicable

substantive law.” Id. at 744. Such an

understanding prevents the class from

degenerating into a series of individual trials. 

A.

RESPA seeks to ensure that real estate

consumers “are provided with greater and

more timely information on the nature and

costs of the settlement process and are

protected from unnecessarily high settlement

charges caused by certain abusive practices.”

12 U.S.C. § 2601(a). Both classes were

certified under § 2607(a)-(b), which states:

(a) No person shall give and no person

shall accept any fee, kickback, or thing

of value pursuant to any agreement or

understanding . . . that business incident

to or part of a real estate settlement service . . . shall be referred to any person.

(b) No person shall give and no person

shall accept any portion, split, or

percentage of any charge made or

received for the rendering of a real

estate settlement service . . . other than

for services actually performed.

12 U.S.C. § 2607(a)-(b). Despite a

prohibition against kickbacks and referralfees,

RESPA § 8(c) permits “the payment to any

person of a bona fide salary or compensation

or other payment for goods or facilities

6 The four rule 23(a) requirements are:

“(1) numerosity (a class so large that joinder of all

members is impracticable); (2) commonality (questions of law or fact common to the class);

(3) typicality (named parties’ claims or defenses

are typical of the class); and (4) adequacy of representation (representatives will fairly and

adequately protect the interests of the class).”

Mullen v. Treasure Chest Casino, L.L.C., 186

F.3d 620, 623 (5th Cir. 1999).
6

actually furnished or for services actually

performed.” 12 U.S.C. § 2607(c)(2).

Both classes were certified after a

determination that rule 23(a)(2)’s commonality

requirement is met by the issue of whether

Countrywide’s receipt of compensation from

Gregg & Valby and Peirson & Patterson

constitutes an illegal kickback or referral fee

arrangement. In assessing rule 23(b)(3)

predominance, both courts rejected

Countrywide’s contention that liability should

hinge on determinations of whether, in

individual cases, a reasonable relationship

exists between the value ofthe alleged services

provided and payments received by

Countrywide.7 Rather, both courts found that

plaintiffs could show “the practice itself” bears

no reasonable relationship to the value of

Countrywide’s services en toto, while relying

on the fee splitting schedule for any postliability calculation of damages.

1.

Congress authorized the Secretary of HUD

to “prescribe such rules and regulations, to

make such interpretations, and to grant such

reasonable exemptions for classes of

transactions, as may be necessary to achieve

the purposes” of RESPA. 12 U.S.C. §

2617(a). HUD defines the § 8(c) exception in

terms of a reasonable relationship test, holding

that where “the payment of a thing of value

bears no reasonable relationship to the market

value of the goods or services provided, then

the excessis not for goods or services actually

performed or provided.” 24 C.F.R. §

3500.14(g)(2).8 This test was promulgated for

the purpose of assisting courts in ferreting out

kickbacks disguised aslegitimate paymentsfor

goods and services in complex real estate

settlement transactions. 

In separate policystatementsissued in 1999

and 2001, HUD clarified the reasonable

relationship test inthe context oflender-broker

payments known as yield spread premiums. In

its 1999 Policy Statement, HUD expressed the

reasonable relationship test from 24 C.F.R. §

3500.14(g)(2) as a two-part inquiry: (1)

“whether goods or facilities were actually

furnished or services were actually performed

for the compensation paid”; and (2) “whether

the payments are reasonably related to the

value of the goods or facilities that were

actually furnished or services that were

actually performed.”9 HUD expressly limited

the 1999 Policy Statement to payments

between lenders and mortgage brokers.10

7 Countrywide does not question numerosity or

typicality. Although Countrywide argues that Sergio Ruiz cannot adequately protect the interests of

his class pursuant to rule 23(a)(4), we need not

address this argument in light of our conclusion

that questions of law or fact do not predominate

over questions affecting individual class members.

8 Title 24 C.F.R. § 3500.14(g)(2) states that

where a payment does not bear a reasonable relationship to goods or services provided, this fact

“may be used as evidence of a violation of section 8.”

9 Real Estate Settlement Procedures Act

Statement of Policy 1999-1 Regarding Lender

Payments to Mortgage Brokers, 64 Fed. Reg.

10,080, 10,084 (March 1, 1999).

10 So far as we can tell, courts have applied

both the 1999 and 2001 Policy Statements

exclusively in yield spread premium cases. E.g.,

Heimmermann v. First Union Mortgage Corp.,

305 F.3d 1257 (11th Cir. 2002); Glover v.

Standard Fed. Bank, 283 F.3d 953 (8th Cir.

2002); Schuetz v. Banc One Mortgage Corp., 292

(continued...)
7

Yield spread premiums, analogous in some

waystoCountrywide’sreimbursement fee, enable borrowers to finance up-front closing

costs by paying a higher interest rate on their

home loan. HUD Policy Statement 1999, at

10,081. The yield spread premium is a

payment from the lender to the broker, the

amount of which reflects the loan’s interest

rate and consequently the lender’s profits. Id.

Although yield spread premiums are desirable

from a policy standpoint, because they permit

borrowers to finance up-front closing costs,

they are criticized by some as blatant referral

fees, varying only according to a higher

interest rate pushed on the borrower and not

by the broker’s actual services.11

Following HUD’s 1999 Policy Statement,

a few courts certified class actions contesting

yield spread premiums. In Culpepper v. Irwin

Mortgage Corp., 253 F.3d 1324 (11th Cir.

2001), cert. denied, 534 U.S. 1118 (2002), for

example, the court found that the broker’s

failure to tie the yield spread premium to specific goods or services was sufficient to create

a factual issue as to the overall intent of the

payment.12 From the 1999 Policy Statement’s

two-part test, Culpepper interpreted the term

“for the compensation paid” as requiring the

defendants to tie the disputed fee to specific

goods or services provided by the broker. Id.

at 1329. In doing so, the Culpepper court determined that RESPA § 8 class actions could

be certified by looking only to the first prong

of the HUD testSSwhether goods or services

were provided for the disputed fee paid.

HUD disclaimed the Culpepper holding in

its 2001 Policy Statement,13 finding class certification in yield spread premium cases like

Culpepper inappropriate because “neither Section 8(a) of RESPA nor the 1999 [Policy

Statement]supportsthe conclusion that a yield

spread premium can be presumed to be a referral fee” simply because the lender does not

have specific knowledge of what services the

broker has performed. HUD Policy Statement

2001, at 53,055. Instead, as the 2001 Policy

Statement clarifies, there is no requirement

that the lender and broker tie the disputed fee

to specific services provided. So long as the

total compensation paid to the broker is

reasonably related to the total value of the

goods orservices actuallyprovided, there is no

10(...continued)

F.3d 1004 (9th Cir. 2002). 

11 See Schuetz, 292 F.3d at 1015 (“I see the

phrase ‘yield spread premium’ as an obfuscatory

way of avoiding calling a kickback a kickback.”)

(Kleinfeld, J., dissenting); Glover, 238 F.3d at 958

(“Some consumers . . . allege that this

compensation system is illegal under RESPA

because it fosters the payment of prohibited

referral fees. Others view this practice as an

option that fosters home ownership because it

reduces the amount of money required from

borrowers up-front and out-of-pocket.”).

12 Culpepper, 253 F.3d at 1332 (noting an absence of evidence showing “that [the lender] negotiates yield spread premiums loan-by-loan, rather

than paying themaccording to terms and conditions

common to all loans. Nor does [the lender] contend

that it intends some yield spread premiums to pay

for services and others to pay for referrals.”). 

13 Real Estate Settlement Procedures Act

Statement of Policy 2001-1: Clarification of Statement of Policy 1999-1RegardingLender Payments

to Mortgage Brokers, and Guidance Concerning

Unearned Fees Under Section 8(b), 66 Fed. Reg.

53052 (October 18, 2001).
8

§ 8 liability.14

We defer to 24 C.F.R. § 3500.14(g)(2), as

a broad agency rule, insofar as it provides a

mechanism for detecting kickbacks where the

§ 8(c) exception is invoked. Where, as here,

agency regulations are promulgated under express congressional authority, they are given

controlling weight unless they are arbitrary,

capricious, or manifestly contrary to the

statute. Chevron U.S.A., Inc. v. Natural Res.

Defense Council, Inc., 467 U.S. 837, 844

(1984).15 Given the failure of § 2607(a)-(b) to

provide a workable liability standard, we cannot say that the reasonable relationship test is

manifestlycontrary to the plain meaning ofthe

statute. If anything, RESPA’s stated goal of

eliminating “kickbacks or referral fees that

tend to increase unnecessarily the costs of certain settlement services,” 12 U.S.C. § 2601-

(b)(2), is furthered by the reasonable

relationship test, so we are bound to apply it in

assessing certification.

In addition, we look to the 1999 and 2001

Policy Statements insofar as they express the

reasonable relationship test as a two-part inquiry, asking first whether Countrywide

provided goods or servicesin connection with

the particulartransaction, and second, whether

Countrywide’s compensation isreasonably related to the value of those goods or services.

We do not decide whether the policy

statements are entitled to Chevron deference,16

nor whether, for purposes of the reasonable

relationship test, the proper reference is the

total mortgage transaction or only the

reimbursement and services associated with

Countrywide’s preparation of legal

documents.17 Either way, both courts abused

their discretion in certifying the RESPA

claims.

2.

Plaintiffs concede Countrywide performed

some servicesin furtherance of document preparation, but argue that its reimbursements do

not represent the reasonable value of those

services. We apply HUD’s reasonable

relationship test, which holds that any excess

may be used as evidence of a kickback or

referral fee. 

Using a rationale similar to that ofthe Eleventh Circuit in certifying a yield spread

premiumclassinCulpepper, bothcourtsfound

certification proper, because they believe

predominance exists regarding whether “the

14 Id. at 53,055. Following HUD’s 2001 Policy

Statement, the Eleventh Circuit overruled Culpepper in Heimmermann, 305 F.3d at 1263.

15 See also United States v. Mead Corp., 533

U.S. 218, 226-27 (2001) (“[A]dministrative implementation of a particular statutory provision qualifies for Chevron deference when it appears that

Congress delegated authority to the agency generally to make rules carrying the force of law, and

that the agency interpretation claiming deference

was promulgated in the exercise of that authority.”).

16 See Krzalic v. Republic Title Co., 2002 U.S.

App. LEXIS 26744, at *20 (7th Cir. Dec. 26,

2002) (Easterbrook, J., concurring) (“I am

confident that Heimmermann and Schuetz erred in

thinking that the Real Estate Settlement

Procedures Act Statement of Policy 2001-1 is

itself conclusive under Chevron, as opposed to

informative (and potentially persuasive).”). 

17 In its discussion of the issue, however, Countrywide appears to argue that liability depends on

finding a reasonable relationship between its

reimbursement and the value of its document

preparation services, not its total compensation,

goods, and services.
9

overall practice” violates RESPA. Plaintiffs

indeed argue that they have evidence showing

the reimbursement payments were not tied to

the services provided by Countrywide, and

thus violate § 8. Countrywide argues the

HUD reasonable relationship test requires a

transaction-by-transaction inquiry to assess

whether Countrywide’s reimbursement is

reasonably related to the undisputed servicesit

provides in connection with document

preparation.

Bothcourts erred byfailing to acknowledge

Countrywide’s use of the § 8(c) exception as

a defense. Castano, 84 F.3d at 744.

Consistently with the HUD reasonable

relationship test, individualized factfindingwill

be required for each transaction on the issues

of what goods or services Gregg & Valby and

Peirson&Patterson provided toCountrywide,

and whether the flat fee charged was

reasonably related to their value. Plaintiffs do

not attempt to argue that Countrywide

provided identicalgoods and servicesSSintype

or quantitySSin each transaction. 

The overall intent of the reimbursement

practice, although perhaps satisfying the rule

23(a)(2) commonality requirement as a factual

issue common to all or at least most class

members,18 does not satisfy the more exacting

requirements of predominance. The only way

the overall practice may be proven to violate

RESPA, consistently with the HUD liability

standard, is to examine the reasonableness of

paymentsfor goods and services. This inquiry

must be performed on a transaction-bytransaction basis, because a single finding of

liability based on an unreasonable relationship

between goods and services does not

necessitate the conclusion that such

unreasonableness exists on a classwide basis.19

In both proposed class actions, there is a

question whether an overall practice or policy

violates a statute. But rule 23(b)(3)

predominance requires a court to ask, in light

of how liability is established under the

relevant statute, whether common questions

predominate over individual ones. Because

RESPA § 8 liability is established by making

individual comparisons of compensation to

actual services, not by presuming fire where

there issmoke, we find certification improper.

B.

Both courts also certified classes under the

UPL claim. Texas law forbids nonlawyers

such as Countrywide from charging or

receiving, either directly or indirectly, “any

compensation for all or any part of the

preparation of a legal instrument affecting title

to real property.” TEX.GOV’TCODE§ 83.001.

Plaintiffs contend that Countrywide’s role in

18 See Jenkins v. Raymark Indus., 782 F.2d

468, 472 (5th Cir. 1986) (stating that the threshold

for commonality is not “high,” requiring only that

“resolution of common questions affect all or a

substantial number of the class members”) (citation

omitted).

19 See LaCasse v. Washington Mutual, Inc.,

198 F. Supp. 2d 1255, 1264 (W.D. Wash. 2002)

(“Given the possibility that some or all of the defendants’ 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,

F.S.B., 181 F.R.D. 509, 523 (M.D. Ala. 1998)

(“[N]o matter what Plaintiffs can easily prove

about the general contours of these transactions,

Plaintiffs still cannot prove (by a class method)

that none of the yield spread premiums at issue

were earned through the provision of services.”).
10

preparing the loan closing documents violates

the UPL statute. As with RESPA, however,

the question of class certification is

complicated by the fact that chapter 83 does

not prohibit “an attorney from paying

secretarial, paralegal, or other ordinary and

reasonable expenses necessarily and actually

incurred by the attorney for the preparation of

legal instruments.” TEX. GOV’T CODE §

83.002. These services are not proscribed by

chapter 83, because they do not require the

use of “legal skill or knowledge.”20

Countrywide initially argues that neither

Maynard nor Ruiz hasstanding under the Texas UPL statute. As an “inherent prerequisite

to the class certification inquiry,” Rivera v.

Wyeth-Ayerst Labs., 283 F.3d 315, 319 (5th

Cir. 2002) (citation omitted), we must

determine whether plaintiffs have a valid cause

of action under Texas law and whether they

have stated an injury-in-fact. Id. The statute

confers a cause of action on “any person who

pays a fee prohibited by [TEX. GOV’T CODE

§ 83.001].” TEX. GOV’T CODE § 83.005. 

Countrywide arguesthat Maynard andRuiz

cannot sue under § 83.005, because the law

firms, not plaintiffs, actually reimbursed the

fee. We disagree. Section 83.001 prohibits

those fees paid either “directly or indirectly”

for the preparation of real estate legal

documents. Realizing that Maynard and Ruiz,

as borrowers, ultimately paid all transaction

fees, the fact that plaintiffs indirectly paid the

disputed fee by first paying a document

preparation fee to the law firms does not

defeat their right to sue. Countrywide’s

narrow interpretation of chapter 83 standing

would eviscerate the term “indirectly” from §

83.001.

Insofar as Countrywide argues that

plaintiffs have notsuffered a legally cognizable

injury-in-fact because they do not complain

they were charged too high a fee for the

mortgage documents or that the documents

were deficient, they ignore the fact that §§

83.001 and 83.003 create a right to recoup

fees paid to nonlawyers who exercise legal

skill or knowledge in preparing legal

documents. Because only those persons who

pay a fee can sue under § 83.005, the UPL

statute is distinguishable from those statutes

violating Article III that permit “any person”

to bring suit.21

Initially,ratherthanpointing to specific acts

requiring the use of legal skill or knowledge

common to each and every transaction,

Maynard and Ruiz allege that Countrywide’s

actions “across the board” violate the Texas

20 The parties dispute whether liability under §

83.001 requires the exercise of legal skill or

knowledge. Given that subchapter G is entitled

“Unauthorized Practice of Law,” and § 81.101 defines “practice of law” as “any service requiring

the use of legal skill or knowledge,” it appears that

theTexaslegislature sought to prohibit nonlawyers

from exercising legal skill or knowledge in the

preparation of legal documents. This view is

supported by an interpretative opinion issued by

the Texas Attorney General. See OP. TEX. ATTY.

GEN. JM-943, 1988 WL 406255, at *2 (1988)

(“What is meant in [chapter 83] by the ‘preparation of legal instruments’ must be decided with

reference to the practice of law.”).

21 See Lujan v. Defenders of Wildlife, 504 U.S.

555, 572-74 (1992) (holding that provision in

Endangered Species Act allowing any person to

bring a lawsuit to enforce compliance with

procedural requirements could not vest standing in

plaintiff who had not suffered an injury). 
11

UPL statute.22 As with the RESPA claims,

both courtsfound that individual issues did not

predominate, because it was Countrywide’s

overall practice that violates the UPL statute.

The district courts’ reasoning fails to account

for Countrywide’s intent to use § 83.002 as a

defense, specifically that its reimbursements

were ordinary and reasonable compensation

for secretarial or clerical assistance.

Ruiz takes issue with the overall

reimbursement scheme by arguing that it

conflicts with rule 5.04 of the Texas

Disciplinary Rules of Professional Conduct,

which prohibits lawyers from splitting fees

with nonlawyers.23 Assuming arguendo that

the reimbursementscheme violatesrule 5.04,24

Ruiz points to no authority suggesting that

chapter 83 should be construed in light of the

Texas Disciplinary Rules of Professional

Conduct. Whereas the disciplinary rules apply

only to lawyers, chapter 83 imposesliability on

non-lawyers.25 Given § 83.002's failure to

mention rule 5.04 or any authority suggesting

that its terms do not mean what they say, we

will construe the statute according only to its

plain language, which sets no limitation

regarding howa lawyer may pay forsecretarial

or clerical assistance.

Maynard, while similarly arguing that the

overall reimbursement scheme is inconsistent

with the Texas UPL statute, contends that

some ofCountrywide’sindividualpractices violate chapter 83. For instance, Countrywide

employees examine and construe previous

mortgage documents in order to select which

one of the more than 250 forms will be used

for a particular transaction. Without deciding

whether this practice constitutes the

unauthorized practice of law, we note that

Countrywide does not deny that its employees

are responsible forselecting the proper formin

each and every transaction. 

Similarly, it is undisputed that Countrywide

employees enter data into EDGE, generate an

initial set of closing documents, fax the

documents to Gregg & Valby, and enter

suggested changes in each transaction. A

finding that any of these practices, standing

alone, requires the use of legal skill or

22 Maynard, for example, states: “The

important point . . . is that the focus of the issue

truly is on the overall ‘program,’ as the district

court correctly noted in its opinion.” Ruiz states

that “the very nature of the arrangement between

Peirson& Patterson andCountrywide is prohibited

by Texas law governing the conduct of lawyers.”

23 Rule 5.04 states that “a lawyer or law firm

shall not share or promise to share legal fees with

a non-lawyer.” TEX. DISCIPLINARY R. PROF’L

CONDUCT 5.04(a), reprinted in Tex. Gov’t Code

Ann., tit. 2, subtit. G app. A (Vernon 1998) (TEX.

STATE BAR R. art. X, § 9).

24 Nevertheless, we note our inability to discern

a meaningful distinction between theCountrywidePeirson& Patterson fee arrangement characterized

by Ruiz as “systematic,” and the salary typically

paid to a secretary at a law firm, which Plaintiffs

concede is permissible under § 83.002. Both fees

are pre-determined, scaled, and split from a

lawyer's profits. Given that § 83.002 presupposes

payments for secretarial or paralegal work, Rule

5.04 cannot be as constraining as Ruiz would have

us believe.

(continued...)

24(...continued)

25 It is also worth noting that the Texas

Disciplinary Rules of Professional Conduct are

promulgated by the Texas Supreme Court, while

chapter 83 is a duly enacted statute by the state

legislature.
12

knowledge issufficient to conferliabilityunder

the Texas UPL.26

Even though a class is theoretically

certifiable on these issues, we find that an

apportioned calculation of damagesSSrequired

by the Texas UPL statuteSSmeans that

individualissues predominate. Section 83.001

prohibits compensation for “all or any part” of

the preparation of mortgage documents, while

Section 83.005 grants “recovery of the fee

paid” to “[a] person who pays a fee prohibited

by [chapter 83].” In deciding whether the

term “fee” should be interpreted as (1) the

amount charged to Plaintiffs on their HUD1’s, (2) the amount reimbursed to

Countrywide, or (3) the portion of the

reimbursement actually spent on unauthorized

services, we are guided by Section 83.005’s

requirement that a recovered fee be

“prohibited by [chapter 83].” Only the last of

the three possibilities is a fee prohibited in its

entirety. Therefore, a plaintiff suing under the

Texas UPL statute is entitled to recover only

that portion of his total fee used to actually

finance the unauthorized practice of law.

The extent (but not the nature) of

Countrywide’s participationinthe transactions

varies, making individualized calculations of

damages predominate. Where the plaintiffs’

damage claims “focus almost entirely on facts

and issues specific to individuals rather than

the class as a whole,” Allison, 151 F.3d at 419,

the potential exists that the class action may

“degenerate in practice into multiple lawsuits

separately tried,” Castano, 84 F.3d at 745

n.19 (citation omitted). In such cases, class

certification is inappropriate.27

As we have noted, there are several

practices commonto eachtransaction that may

or may not require t he use of legal skill or

knowledge. Although the propriety of each

practice can be determined on a classwide basis, the calculation of damages cannot. For example, at least one practiceSSdata entrySSis

almost surely a secretarial or clerical function

within the meaning of the § 83.002

exception.28 Countrywide has demonstrated

26 Ruiz cannot make this argument, because

Peirson & Patterson employees (attorney and nonattorney), not Countrywide employees, select and

generate the mortgage forms in the wholesale division. The only practice performed by

Countrywide employees in every wholesale

transaction is data entry, a practice that even Ruiz

does not argue is non-secretarial. As for Peirson &

Patterson’s potentialliability for permitting its nonattorney employees to select and generate forms,

the analysis is the same as for Countrywide’s retail

division in Maynard.

27 Allison, 151 F.3d at 413 (“[A]s claims for

individually based money damages begin to predominate, the presumption of cohesiveness

decreases while the need for enhanced procedural

safeguards . . . increases.”) (citation omitted);

Montelongo v. Meese, 803 F.2d 1341, 1351 (5th

Cir. 1986) (stating that claims are unsuitable for

class treatment when individual questions, such as

reliance and damages, predominate over class

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

will require some individualized determinations, it

appears that virtually every issue prior to damages

is a common issue.”). Importantly, in Bertulli, the

court recognized the plaintiffs’ claims for

injunctive relief on top of money damages, noting

that “not all of the relief requires individualized

determination.” Id.

28 The 1988 Texas Attorney General Opinion

supports our view that data entry likely qualifies as

secretarial-type work under the § 83.002 exception:

(continued...)
13

that the amount of data entry required in each

transaction varies depending on the type of

loan and the number of correctionsrequired 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

responsesto the questions on a standard formprobably 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.
14

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 isless 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.