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Gresser v. Wells Fargo Bank, N.A.

United States District Court, D. Maryland

March 31, 2014



CATHERINE C. BLAKE, District Judge.

Plaintiffs Anne Gresser, Gregory Lizzi, Karen Spicknall, and Michael Zuck bring this action on behalf of a putative class of bondholders alleging that, under an Indenture with failed sub-prime mortgage lender KH Funding ("KH"), defendant Wells Fargo breached its duties as Indenture Trustee. Plaintiffs have filed a motion for class certification and to appoint class counsel.[1] A hearing was held on the motion on January 10, 2014. For the reasons set forth below, plaintiffs' motion will be denied.


A full summary of the facts of this case is included in the court's October 22, 2012, Memorandum, and need not be repeated in its entirety here. ( See Memorandum, ECF No. 72.) KH issued Series 3 Senior Secured Investment Debt Securities ("Series 3 Notes") pursuant to an indenture agreement with Wells Fargo, under which Wells Fargo acted as Indenture Trustee. (Pl.'s Mem., ECF No. 95-1, at 4.) Plaintiffs are a group of investors ("Noteholders") who purchased Series 3 Notes. ( Id. )

On May 18, 2005, Wells Fargo, as Indenture Trustee, filed an original financing statement with the Maryland Department of Assessment and Taxation to perfect a lien on collateral held by KH for the benefit of Series 3 Noteholders. ( Id. at 6.) Under Maryland law, a financing statement is only effective for five years. Md. Code Ann., Comm. Law, § 9-515(a). Wells Fargo did not file a continuation statement before the expiration of five years causing Series 3 Noteholders' interest in KH's collateral to lapse. (Pl.'s Mem. at 6.) Wells Fargo filed a second financing statement on September 7, 2010. ( Id. )

By the end of 2008, KH was falling behind on meeting redemption requests submitted by Series 3 Noteholders, and, in its April 2009 filings with the Securities and Exchange Commission, reported that it was facing continuing Events of Default as of the end of 2008 and had notified Wells Fargo. (2008 Annual Report, Form 10-K, ECF No. 61-11, at 10.) Under the Indenture, an "Event of Default" occurred when KH was unable to pay the principal or interest due on a Series 3 Note for thirty days or more. (Indenture, ECF No. 61-2, § 6.1.) On January 7, 2010, Wells Fargo notified Noteholders that an Event of Default was occurring. (Def.'s Opp'n, ECF No 116, at 8.). It had taken no action before that date. On February 5, 2010, Wells Fargo gave notice that it was accelerating Series 3 Notes. ( Id. )

KH filed for bankruptcy on December 3, 2010. ( Id. ) Because Wells Fargo failed to properly secure Series 3 Noteholders' lien on KH assets with a properly filed continuation statement, KH sought to avoid application of the lien against its assets. (Pl.'s Mem. at 7.) Wells Fargo and KH eventually entered a stipulation agreement under which Series 3 Noteholders lost secured creditor status with respect to all of KH's assets except for two deposit accounts with a value of $55, 000. ( Id. )

Anne Gresser, claiming to be a Series 3 Noteholder, filed this action, (Compl., ECF No. 1), and later added Gregory Lizzi, Karen Spicknall, and Michael Zuck as plaintiffs. ( See Am. Compl., ECF No. 94.) They bring two causes of action against Wells Fargo for breach of contract and/or breach of fiduciary duty. The first claim is based on Wells Fargo's alleged failure to declare an Event of Default and notify Noteholders of the default when KH began to fall behind on payments to Noteholders in December 2008. (Pl.'s Mem. at 2; Hearing Tr. 7:4-7.) The second claim is based on Wells Fargo's alleged failure to file a continuation of registration statement so that Series 3 Noteholders would be properly protected in KH's bankruptcy proceedings.[2] ( Id. )

Plaintiffs now seek to certify a class of all individuals who held Series 3 Notes as of January 7, 2010, the date Wells Fargo declared a continuing Event of Default and notified Noteholders of it. (Reply, ECF No. 131, at 20; Hearing Tr. 25:15-27:19.) They exclude from the class any Noteholders who were employed by, served as a director of, or had a controlling interest in KH Funding or Wells Fargo. (Pl.'s Mem. at 4.) Although it is not clear from the class definition they offered in their motion, ( see id. ), the plaintiffs clarified at the hearing that Noteholders who held Series 3 Notes jointly with any of the above listed individuals are also excluded from the class.[3] (Hearing Tr. 75:20-76:19; see also Reply at 2.)


A district court has "wide discretion" in deciding whether class certification is appropriate. Ward v. Dixie Nat'l Life Ins. Co., 595 F.3d 164, 179 (4th Cir. 2010) (quoting Central Wesleyan College v. W.R. Grace & Co., 6 F.3d 177, 185 (4th Cir. 1993)) (internal quotation marks omitted). Because "[t]he class action is an exception to the usual rule that litigation is conducted by and on behalf of the individual named parties only, '" the court must engage in a rigorous analysis to determine whether the party seeking certification has "affirmatively demonstrate[d] his compliance' with [Federal Rule of Civil Procedure] 23." Comcast Corp. v. Behrend, 133 S.Ct. 1426, 1432 (2013) (citation omitted). The inquiry may require the court to "probe behind the pleadings, " and "such an analysis will frequently entail overlap with the merits of the plaintiff's underlying claim." Id. (internal quotation marks and citation omitted).

Rule 23 sets out a two-step process for determining whether a class should be certified. First, the class must satisfy the four prerequisites of Rule 23(a): numerosity, commonality, typicality, and adequacy of representation. If those requirements are met, the class must then satisfy at least one of the three sub-parts of Rule 23(b). See Comcast, 133 S.Ct. at 1432. Here, plaintiffs move for certification by relying on Rule 23(b)(3), which "encompasses those cases in which a class action would achieve economies of time, effort, and expense, and promote uniformity of decision as to persons similarly situated, without sacrificing procedural fairness or bringing about other undesirable results." Advisory Committee Notes to 1966 Amendments to Rule 23, 39 F.R.D. 69, 102-03 (1966).

The plaintiffs have not met their burden to demonstrate that the class meets every requirement of Rule 23 because the named plaintiffs are not typical of the rest of the class and they are not adequate representatives. In addition, common issues do not predominate and a class action is not ...

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