NCBLC Blog

The New York Times

November 17, 2007 

Judge Demands Documentation in Foreclosures  

By GRETCHEN MORGENSON

After the recent dismissal of 14 foreclosure cases by a federal judge in Cleveland, another federal judge in Ohio has given lenders 30 days to prove that they own he properties they intend to seize from troubled homeowners in 27 other cases. 

The second judge, Thomas M. Rose of Federal District Court , in Dayton, ruled Thursday that while the lawyer filing 26 of the cases had claimed his clients owned the properties at the time the foreclosures began, he had not submitted the necessary proof to the court.  

“Failure in the future by this attorney to comply with the filing requirements,” Judge Rose said, “may only be considered to be willful.”  

Taken with Judge Christopher A. Boyko’s dismissal of 14 cases in Cleveland last month, the latest ruling indicates that some courts are growing tougher on lenders foreclosing on delinquent borrowers without providing proof of ownership.  

It has long been a common practice for lenders to bring foreclosure proceedings without attaching proof of ownership of the underlying note. Tracking down such documentation may be more challenging because of securitization, the pooling of mortgages into trusts that are subsequently sold to investors.  

Citibank is trustee in one case overseen by Judge Rose; it represents a securitization trust sold in 2005 by First Franklin a loan originator now owned by Merrill Lynch.   At issue in the case is a mortgage on a property in Miamisburg, Ohio, for $191,000. The borrower defaulted in August 006. 

Another case involves HSBC, which is foreclosing on a $144,000 mortgage on a property in Dayton. The mortgage was underwritten in 2004 and has been in default since October 2006. 

A Citigroup spokeswoman said the company did not comment on pending litigation. An HSBC spokeswoman said the bank had not studied the ruling and could not comment.  

An estimated two million families may lose their homes to foreclosure in the coming years, specialists say. A recent study of 1,733 foreclosures by Katherine M. Porter, an associate professor of law at the University of Iowa, found that 40 percent of the creditors foreclosing on borrowers did not show proof of ownership. 

Such proof gives a creditor standing to foreclose against a borrower and is required by law. 

Judge Rose cited Ms. Porter’s study in his ruling.  

http://www.nytimes.com/2007/11/17/business/17lend.html?_r=1&ref=business&oref=slogin 

Since I worked with Mark Redmiles on a Panel at the annual Hudson Valley New York Bankruptcy Seminar, I have requested him to provide me with a written statement confirming that his office has been and will be taking actions to enforce the Bankruptcy Code against Abusive Creditor Practices.  The abuses of mortgage servicers in consumer bankruptcy cases is currently running at epidemic levels.  Well, Mark, who is the Deputy Director of the U.S. Trustee Program, finally came through with an email this week.  I have posted the email on all of the major consumer listservs.  The substance of the statement is reprinted below: 

The U.S. Trustee will protect consumer debtors from abusive creditor practices, according to a statement issued by Mark A. Redmiles, Deputy Director of the Executive Office of the United States Trustee.

“The United States Trustee Program (Program) is responsible for protecting the integrity of the bankruptcy system,” he said. This responsibility includes a duty to protect consumer debtors from and to redress violations by, creditors; particularly when the abuse is systemic or multi-jurisdictional. In many cases, misconduct by creditors is best addressed by the private case trustees who review and object to claims, or by debtors’ lawyers who engage in two party disputes. However, where the integrity of the system is at stake, and where the U.S. Trustee is in the best position to protect debtors against abusive practices, we will investigate and we will take appropriate enforcement action.”

Redmiles said, “the Program has recently focused enforcement efforts, and has engaged in litigation, to redress identified practices among mortgage servicing creditors and their attorneys in chapter 13 cases. This includes enforcement activity to redress the filing of false or inaccurate claims, the assessment of unreasonable post-petition charges, and the failure to properly account for post-petition mortgage payments.”

A front-page article in the San Jose Mercury News earlier this week and a recent AP story both reported on a practice I’ve previously blogged about here: private debt collectors that rent out a prosecutor’s name and authority, which they use to threaten consumers who have written bad checks with criminal prosecution and jail unless they pay exorbitant collection fees.  The threats are made without regard to the facts of the case (in the vast majority of cases, there’s no criminal intent), and the revenues are split with the prosecutors.  Assuming they’re subject to suit, these companies’ practices violate virtually every section of the Fair Debt Collection Practices Act. 

The threshold question, however, is whether these companies are above the law.  They have argued that they’re entitled to blanket immunity from suit–that they get derivative sovereign immunity by virtue of their contractual relationship with the government.  In one case, a Florida federal district court bought that argument, extending the doctrine of state sovereign immunity far beyond previously existing law.  In a second case, a California federal district court disagreed.  In separate appeals, Public Citizen’s Consumer Justice Project has been defending the California decision and urging reversal of the Florida decision.

Yesterday, the U.S. Court of Appeals for the Eleventh Circuit (a notably conservative court on immunity issues, and the only federal appeals court ever to have sustained a state sovereign immunity defense by any private corporation) reversed the Florida district court and rejected the immunity defense raised by a company called American Corrective Counseling Services (ACCS).  In its decision, the appeals court found that attorneys in the prosecutors’ offices do not review cases before ACCS threatens consumers with prosecution, and that the prosecutors exercise virtually no control over ACCS.  Sovereign immunity, the court said, “has never been held to apply simply because an independent contractor performs some government function.”

The decision has potentially far-reaching implications for holding all sorts of government contractors–from private prisons to Blackwater–accountable in the federal courts.  And both in its analysis of the Eleventh Amendment issue and its characterization of the program itself, the decision in many ways provides a roadmap for arguing that these types of debt collectors should be held liable under both state and federal consumer protection law.   [press release]  [case info and briefs]