by Tanta on 3/07/2008 02:21:00 PM
Friday, March 07, 2008
I noted yesterday the Memorandum Opinion of U.S. Bankruptcy Judge Jeff Bohm in regards to a series of bankruptcy filings and testimony by Countrywide, its national law firm, and the local firm hired by the national firm, each of which involved a series of "negligent bungling" that rose right up to about an inch from "full-blown bad faith," if it didn't quite get there.
The Opinion is available online in two segments here and here. I very much recommend them as reading material for anyone with any connection to the mortgage business, and that would include you regulatory people. And reporters. Judge Bohm is asking the right questions, in my view, and he's done us all a public service.
The short summary of what went on:
A Countrywide-serviced borrower (the loan is actually owned by Fannie Mae) filed a Chapter 13 bankruptcy in October of 2006. A BK filing will place an automatic stay on foreclosure, which can only be lifted by the court if the lender files a motion to lift the stay. As a part of this process, the servicer is required to bring proof to the court of "pre-petition" and "post-petition" delinquency of the borrower. It is Fannie Mae's policy, to which CFC would have been expected to comply, that motions to lift stay are not filed unless the borrower is at least 60 days delinquent on the mortgage loan.
CFC submitted a "payment history" (this is a printout from a servicing system that shows all transactions on a loan, including payments, charges, fees, suspense and escrow account items, rate and payment adjustments, etc.) As CFC payment histories in general, not just in this case, are so complex and awkward as to be essentially meaningless not only to lay people but to courts and lawyers, CFC's national law firm had actually established, back in the spring of 2006, a separate corporate entity ("MR Default Services") which employs a bunch of "legal assistants" (not lawyers) to cut & paste information from the payment histories received from CFC into a more readable, simplified format; the new document is attached to the court filings. The new document is never, apparently, reviewed either by CFC or by the actual attorneys for quality-control or basic plausibility-check purposes. CFC is apparently just fine with the risk of going to court with a document that is a third-party prepared "version" of the actual official payment history. CFC's lawyers are also apparently cool with that.
In the specific case at hand, there was a series of errors: first, CFC for some reason got confused about when the borrower filed his original petition, and so included the payment made in November as a "pre-petition" payment, making it appear that the borrower had not made his first "post-petition" payment. (That's important; you are much less likely to get the stay lifted if the borrower continues to make mortgage payments after the petition.) Then, when "MR Default Services" went to "simplify" the payment history, the copy & paste process missed the first item on the top of one of the pages, and it turns out that item was a mortgage payment made way back in May. Also, this payment history was sent to the simplification factory on or around December 11, but the motion to lift stay wasn't filed with the court until December 29. The problem with that is that the borrower made a payment on December 13. Nobody requested an updated payment history from CFC, which is hard to believe: it is a simple fact of life in the business that a three-week-old payment history is "stale," especially if it was generated during the "grace period" in the beginning of a month, and in fact it appears (I'm not quite sure) that the actual payment history they used in the first place was prepared in early to mid-November.
The long and short of it was that the debtor's counsel pointed out that the payment history was simply wrong, and that (at worst) the debtor was only 30 days delinquent, not more than 60 days (and had made two payments post-petition that the motion ignored). CFC filed a motion to withdraw the motion to lift stay. The judge asked CFC's attorney (a local firm hired by the national firm, in this great game of legal "telephone") about it, and he basically lied about the reason for the motion to withdraw.
The whole thing snowballed from there into multiple lawyers from two different firms plus at least one person from CFC giving false testimony to the court about the whole thing to cover up the mistakes. If you read the entire Opinion, you have to conclude that Judge Bohm wouldn't have turned this into a high-powered series of hearings if someone originally had simply fessed up to a clerical error. Not only was the cover-up worse than the crime, but the cover-up exposed the whole wretched set of business arrangements and CFC operational practices that clearly do not function to prevent errors, and in fact seem prone to creating them.
One of the good Judge's intentions in investigating the reasons for the withdrawal of the motion to lift stay was, bless his heart, to assure that the debtor didn't get stuck with legal fees for the costs of the original motion and withdrawal motion, if this legal work was caused by CFC's or its attorney's errors. That opened up a whole can of worms about how CFC accounts for "non-recoverable" legal charges. It turns out that CFC's process is not to permanently remove non-recoverable costs (things you can't charge the debtor/borrower) from the loan records until the BK is discharged, which of course can take years and years for a Chapter 13 and which may never happen, if the Chapter 13 is dismissed rather than discharged. Whether or not the point of this idiotic practice is to let fees "lurk" in the system that can later "accidentally on purpose" be charged to the borrower some day in the future when the Court isn't looking, or whether the point is just another one of those famous "efficiencies" isn't clear. (You can easily imagine some moronic consultant telling CFC that "once through the process!" is a great slogan for the accounting department, and that it can save a lot of money by letting such things as non-recoverable fee entries pile up until the case is "done" and all work can be done once at the same time. Of course that's insane from a risk-management perspective, but I've heard consultants say even dumber stuff, myself.)
The other can of worms that got opened was the whole business of the two law firms and their relationship to CFC. It turns out that CFC--for "efficiency" reasons--wanted one and only one "official" law firm, who would parcel out filings to all the different local law firms all over the country. The contract with the national law firm explicitly stated that the local firms were not allowed to communicate directly with CFC. They could only talk to the national firm, who could only talk to CFC. Among other problems this creates, if the local firm, say, happens to notice at 4:45 p.m. that there seems to be something wrong with a payment history, that firm can't pick up the phone and call Eunice in CFC's bankruptcy servicing department to get it straightened out. The whole thing has to go through the national law firm, and as far as I can tell the best anyone ever expected was 48-hour turnaround.
And the loan in question being a Fannie Mae-owned loan, the legal work is required strictly to be on a flat-fee basis. Fannie Mae's position is that without that rule, debtors/borrowers would be facing a "running meter" of legal fees that would eat up all their equity and then some if you let it go on. However, it appears that the law firms' response to the flat-fee thing is to just not bother with following up on things like stale or incorrect payment histories, because apparently they don't think they get paid enough to do things right.
Here's Judge Bohm on the conclusions he drew in this whole ugly miserable tale of idiocy, which I think are worth quoting at length:
Over the past several years, attorney's fees and costs have risen steadily--some clients would doubtless say astronomically. Corporations in particular have reacted by demanding concessions such as flat fee pricing for each file. In the consumer bankruptcy field, many financial institutions--for example, Fannie Mae in the case at bar--have negotiated flat fee engagements with certain law firms to avoid large fees that can accrue under an hourly rate system. In theory, this arrangement seems appropriate: fixed fees minimize costs that are primarily passed on to consumer debtors. In practice, this arrangement has fostered a corrosive "assembly line" culture of practicing law.
As the case at bar shows, attorneys and legal assistants at Barrett Burke and McCalla Raymer are filing motions to lift stay without questioning the accuracy of the debt figures and other allegations in these pleadings and appearing in court without properly preparing for the hearings. These lawyers appear in court with little or no knowledge because they have been poorly trained. Indeed, the case at bar shows that the attorneys from Barrett Burke and McCalla Raymer often appear in court ill-prepared to think or effectively communicate.
This fixed-rate fee business model appears to have been an overwhelming financial success. In Allen, Bankruptcy Judge Steen noted that Barrett Burke's revenues totalled between approximately $9.7 million and $11.6 million per annum. . . . Based upon the testimony at the show cause hearings, this Court estimates that McCalla Raymer has generated revenues of approximately $28 million over the past decade from representing solely Fannie Mae. Meanwhile, the profession has suffered from the ever decreasing standards that firms like Barrett Burke and McCalla Raymer have heretofore promoted.
This demise must stop. The problems at Barrett Burke and McCalla Raymer are not limited to training lawyers; there are other aspects of these firms' culture that is disconcerting. What kind of culture condones a firm signing an engagement letter which prevents its attorneys from communicating with its client? What kind of culture condones its lawyers preparing, signing, and filing motions to lift stay without having the client review the final version for accuracy? What kind of culture condones its attorneys signing proofs of claims without even contacting the client to review and confirm the debt figures? What kind of culture condones attorneys testifying to basic facts and then, at the next hearing, recanting the testimony on the grounds that the attorney had not sufficiently prepared to testify? And above all else, what kind of culture condones its lawyers lying to the court and then retreating to the office hoping that the Court will forget about the whole matter?
Countrywide's corporate culture is no better. What kind of culture condones blockading personnel from communicating with outside counsel? What kind of culture discourages the checking of outside counsel's work? What kind of culture promotes payment histories that are so confusing to the vast majority of persons, including attorneys and judges--not to mention borrowers--that it becomes necessary for legal assistants to "simplify" them--leading to more error and confusion? . . .
With respect to Countrywide, this Court would hope that this entity would reevaluate its policies and procedures in order to improve upon the accuracy of payment histories and to ensure that its actions do not undermine the integrity of the bankruptcy system. Countrywide's business is directly tied to a quintessentially American aspiration--homeownership. If Countrywide does not properly maintain payment histories and effectively communicate with its counsel, the consequences can be very harmful. . . .
This Court trusts that Barrett Burke, McCalla Raymer and Countrywide will mend their broken practices. This Court will continue to verify that its trust is well-placed.