NCBLC Blog

NYTimes.comLender Tells Judge It ‘Recreated’ Letters Tuesday January 8, 11:38 am ET By GRETCHEN MORGENSON

Markets fear banks have $1 trillion in toxic debtBy Sean O’Grady, Economics Editor

New York Times________________________________________                               November 6, 2007 

Borrowers Face Dubious Charges in Foreclosures

By GRETCHEN MORGENSON 

As record numbers of homeowners default on their mortgages, questionable practices among lenders are coming to light in bankruptcy courts, leading some legal specialists to contend that companies instigating foreclosures may be taking advantage of imperiled borrowers.  

Because there is little oversight of foreclosure practices and the fees that are charged, bankruptcy specialists fear that some consumers may be losing their homes unnecessarily or that mortgage servicers, who collect loan payments, are profiting from foreclosures. 

Bankruptcy specialists say lenders and loan servicers often do not comply with even the most basic legal requirements, like correctly computing the amount a borrower owes on a foreclosed loan or providing proof of holding the mortgage note in question.  

“Regulators need to look beyond their current, myopic focus on loan origination and consider how servicers’ calculation and collection practices leave families vulnerable to foreclosure,” said Katherine M. Porter, associate professor of law at the University of
Iowa. 

In an analysis of foreclosures in Chapter 13 bankruptcy, the program intended to help troubled borrowers save their homes, Ms. Porter found that questionable fees had been added to almost half of the loans she examined, and many of the charges were identified only vaguely. Most of the fees were less than $200 each, but collectively they could raise millions of dollars for loan servicers at a time when the other side of the business, mortgage origination, has faltered. 

In one example, Ms. Porter found that a lender had filed a claim stating that the borrower owed more than $1 million. But after the loan history was scrutinized, the balance turned out to be $60,000. And a judge in Louisiana is considering an award for sanctions against Wells Fargo in a case in which the bank assessed improper fees and charges that added more than $24,000 to a borrower’s loan.  

Ms. Porter’s analysis comes as more homeowners face foreclosure. Testifying before Congress on Tuesday, Mark Zandi, the chief economist at Moody’s Economy.com, estimated that two million families would lose their homes by the end of the current mortgage crisis.  Questionable practices by loan servicers appear to be enough of a problem that the Office of the United States Trustee, a division of the Justice Department that monitors the bankruptcy system, is getting involved. Last month, It announced plans to move against mortgage servicing companies that file false or inaccurate claims, assess unreasonable fees or fail to account properly for loan payments after a bankruptcy has been discharged.  

On Oct. 9, the Chapter 13 trustee in Pittsburgh asked the court to sanction Countrywide, the nation’s largest loan servicer, saying that the company had lost or destroyed more than $500,000 in checks paid by homeowners in foreclosure from December 2005 to April 2007.   The trustee, Ronda J. Winnecour, said in court filings that she was concerned that even as Countrywide misplaced or destroyed the checks, it levied charges on the borrowers, including late fees and legal costs.  

“The integrity of the bankruptcy process is threatened when a single creditor dishonors its obligation to provide a truthful and accurate account of the funds it has received,” Ms. Winnecour said in requesting sanctions.  A Countrywide spokesman disputed the accusations about the lost checks, saying the company had no record of having received the payments the trustee said had been sent. It is Countrywide’s practice not to charge late fees to borrowers in bankruptcy, he said, adding that the company also does not charge fees or costs relating to its own mistakes. 

Loan servicing is extremely lucrative. Servicers, which collect payments from borrowers and pass them on to investors who own the loans, generally receive a percentage of income from a loan, often 0.25 percent on a prime mortgage and 0.50 percent on a subprime loan. Servicers typically generate profit margins of about 20 percent. 

Now that big lenders are originating fewer mortgages, servicing revenues make up a greater percentage of earnings. Because servicers typically keep late fees and certain other charges assessed on delinquent or defaulted loans, “a borrower’s default can present a servicer with an opportunity for additional profit,” Ms. Porter said. 

The amounts can be significant. Late fees accounted for 11.5 percent of servicing revenues in 2006 at Ocwen Financial, a big servicing company. At Countrywide, $285 million came from late fees last year, up 20 percent from 2005. Late fees accounted for 7.5 percent of Countrywide’s servicing revenue last year. 

But these are not the only charges borrowers face. Others include $145 in something called “demand fees,” $137 in overnight delivery fees, fax fees of $50 and payoff statement charges of $60. Property inspection fees can be levied every month or so, and fees can be imposed every two months to cover assessments of a home’s worth.  

“We’re talking about millions and millions of dollars that mortgage servicers are extracting from debtors that I think are totally unlawful and illegal,” said O. Max Gardner III, a lawyer in Shelby, N.C., specializing in consumer bankruptcies. “Somebody files a Chapter 13 bankruptcy, they make all their payments, get their discharge and then three months later, they get a statement from their servicer for $7,000 in fees and charges incurred in bankruptcy but that were never applied for in court and never approved.”  

Some fees levied by loan servicers in foreclosure run afoul of state laws.  In 2003, for example, a New York appeals court disallowed a $100 payoff statement fee sought by North Fork Bank.  

Fees for legal services in foreclosure are also under scrutiny.  

A class-action lawsuit filed in September in Federal District Court in Delaware accused the Mortgage Electronic Registration System, a home loan registration system owned by Fannie Mae, Countrywide Financial and other large lenders, of overcharging borrowers for legal services in foreclosures. 

The system, known as MERS, oversees more than 20 million mortgage loans.   The complaint was filed on behalf of Jose Trevino and Lorry S. Trevino of University City, Mo., whose Washington Mutual loan went into foreclosure in 2006 after the couple became ill and fell behind on payments.  

Jeffrey M. Norton, a lawyer who represents the Trevinos, said that although MERS pays a flat rate of $400 or $500 to its lawyers during a foreclosure, the legal fees that it demands from borrowers are three or four times that.  

A spokeswoman for MERS declined to comment. 

Typically, consumers who are behind on their mortgages but hoping to stay in their homes invoke Chapter 13 bankruptcy because it puts creditors on hold, giving borrowers time to put together a repayment plan.  

Given that a Chapter 13 bankruptcy involves the oversight of a court, the findings in Ms. Porter’s study are especially troubling. In July, she presented her paper to the United States trustee, and on Oct. 12 she outlined her data for the National Conference of Bankruptcy Judges in Orlando, Fla. 

With Tara Twomey, who is a lecturer at Stanford Law School and a consultant for the National Association of Consumer Bankruptcy Attorneys, Ms. Porter analyzed 1,733 Chapter 13 filings made in April 2006. The data were drawn from public court records and include schedules filed under penalty of perjury by borrowers listing debts, assets and income.  Though bankruptcy laws require documentation that a creditor has a claim on the property, 4 out of 10 claims in Ms. Porter’s study did not attach such a promissory note. And one in six claims was not supported by the itemization of charges required by law.  

Without proper documentation, families must choose between the costs of filing an objection or the risk of overpayment, Ms. Porter concluded.   She also found that some creditors ask for fees, like fax charges and payoff statement fees, that would probably be considered “unreasonable” by the courts.  

Not surprisingly, these fees may contribute to the other problem identified by her study: a discrepancy between what debtors think they owe and what creditors say they are owed.  In 96 percent of the claims Ms. Porter studied, the borrower and the lender disagreed on the amount of the mortgage debt. In about a quarter of the cases, borrowers thought they owed more than the creditors claimed, but in about 70 percent, the creditors asserted that the debt owed was greater than the amounts specified by borrowers.  

The median difference between the amounts the creditor and the borrower submitted was $1,366; the average was $3,533, Ms. Porter said. In 30 percent of the cases in which creditors’ claims were higher, the discrepancy was greater than 5 percent of the homeowners’ figure.  

Based on the study, mortgage creditors in the 1,733 cases put in claims for almost $6 million more than the loan debts listed by borrowers in the bankruptcy filings. The discrepancies are too big, Ms. Porter said, to be simple record-keeping errors. 

Michael L. Jones, a homeowner going through a Chapter 13 bankruptcy in
Louisiana, experienced such a discrepancy with Wells Fargo Home Mortgage.  After being told that he owed $231,463.97 on his mortgage, he disputed the amount and ultimately sued Wells Fargo. 

In April, Elizabeth W. Magner, a federal bankruptcy judge in Louisiana, ruled that Wells Fargo overcharged Mr. Jones by $24,450.65, or 12 percent more than what the court said he actually owed. The court attributed some of that to arithmetic errors but found that Wells Fargo had improperly added charges, including $6,741.67 in commissions to the sheriff’s office that were not owed, almost $13,000 in additional interest and fees for 16 unnecessary inspections of the borrowers’ property in the 29 months the case was pending. 

“Incredibly, Wells Fargo also argues that it was debtor’s burden to verify that its accounting was correct,” the judge wrote, “even though Wells Fargo failed to disclose the details of that accounting until it was sued.”  

A Wells Fargo spokesman, Kevin Waetke, said the bank would not comment on the details of the case as the bank is appealing a motion by Mr. Jones for sanctions. “All of our practices and procedures in the handling of bankruptcy cases follow applicable laws, and we stand behind our actions in this case,” he said. 

In Texas, a United States trustee has asked for sanctions against Barrett Burke Wilson Castle Daffin & Frappier, a Houston law firm that sues borrowers on behalf of the lenders, for providing inaccurate information to the court about mortgage payments made by homeowners who sought refuge in Chapter 13.  

Michael C. Barrett, a partner at the firm, said he did not expect the firm to be sanctioned.  

“We certainly believe we have not misbehaved in any way,” he said, saying the trustee’s office became involved because it is trying to persuade Congress to increase its budget. “It is trying to portray itself as an organ to pursue mortgage bankers.” 

Closing arguments in the case are scheduled for Dec. 12.

What’s the damage?

Why banks are only starting touncover their subprime losses       

By Gillian Tett and Paul J DaviesPublished: November 4 2007 18:08 | Last updated: November 4 2007 18:08The Financial Times 

When Merrill Lynch, the US bank, announced 10 days ago that it was taking $8bn-worth oflosses on mortgage-related securities, bankers and regulators around the world reeled in shock.For the writedown was twice the size of the losses that Merrill had forecast just a two and a halfweeks earlier – a “staggering” multi-billion dollar gap, as Standard and Poor’s, the US creditrating agency, observed. 

But last week, investors received an even more staggering set of numbers. As financialanalysts perused Merrill’s results, some came to the conclusion that the
US bank could beforced to make $4bn more write-offs in the coming months. 

These calculations were not limited to Merrill: after UBS unveiled $3.4bn (􀀁2.3bn, £1.6bn) ofthird-quarter mortgage-related losses last week, Merrill Lynch analysts warned that the Swissbank would need to take up to $8bn more losses in the fourth quarter of this year. Meanwhile,Citigroup’s share price slumped on rumours that it may need to acknowledge another $10bn oflosses. 

Such a tsunami of red ink would undoubtedly be shocking at any time. But right now, this newsis proving particularly unsettling for investors for two particular reasons. First, the numbers offeran unpleasant reminder that the pain from this summer’s credit turmoil is still far from over –contrary to what some bullish American bankers and policymakers were trying to claim a fewweeks ago. “To judge from secondary market prices, losses on mortgage inventory are likely tobe larger in the fourth quarter than the third quarter,” warns Tim Bond, analyst at BarclaysCapital, the UK bank. 

Second, the write-downs have reminded investors just how little is known about where thebodies from this summer’s credit turmoil might lie. Perhaps the most shocking thing about recentannouncements is that while big banks might have now written down their mortgage holdings bymore than $20bn, this does not appear to capture all the potential losses. 

Last week, for example, a US congressional committee warned that over the next year mortgagelenders could foreclose on 2m American homes, destroying $100bn of housing value. And someprivate sector economists think the total loss from mortgage problems could reach $200bn ormore. “What everyone keeps asking is where are those losses sitting – where is the rest of that$100bn?” admitted one senior international policymaker late last month. “The worrying thing isthat there still is just so much uncertainty around.” 

To an extent, this uncertainty reflects the fact that the tangible scale of defaults in the
USmortgage arena is still unclear, particularly in that sector of the mortgage market known as“subprime” – loans extended to borrowers with poor credit histories. In the past year, the paceof defaults on subprime loans has risen sharply in America, particularly on mortgages made in2006 and 2007. However, it is unclear what scale of losses this will eventually produce forbanks, since it typically takes several months for lenders to foreclose on loans and then sell aproperty. 

Moreover, it is also very unclear how the pattern of mortgage defaults will develop. While someeconomists fear that the default ratios could rise sharply in the coming year, others suspectthat the US government will force lenders to be lenient towards borrowers. Thus estimates ofpotential mortgage losses in the subprime sector range from $100bn (according to governmentfigures) to several times that. 

However, when it comes to working out the impact on banks, the task becomes even harder. Forin recent years, banks have not simply been acquiring subprime loans, they have beenrepackaging them into complex “asset-backed securities” (ABS) that can be difficult to value.The Bank of England, for example, suggests that on the basis of industry data some$700bn-worth of bonds backed by subprime loans are now in circulation in the world’s financialsystem, with another $600bn of bonds backed by so-called “Alt A” loans, or those with slightlybetter credit quality. 

Moreover, these bonds have then been used to create even more complex securities backed bydiversified pools of debt, known as collateralised debt obligations (CDOs). According to theBank’s calculations, for example, some $390bn of CDOs containing a proportion of mortgagedebt were issued last year – though the precise level of the subprime component varies.The multi-layered nature of these complex financial flows means it is hard to assess howdefaults by homeowners will affect the value of related securities. 

In recent weeks, some credit rating agencies have indeed started to downgrade their ratings ofdebt: Moody’s and S&P, for example, downgraded about $100bn of mortgage-related securitieslast month. But most analysts think that this “downgrade” process is still at a very early stage –and in tangible terms, that means that subprime defaults have not yet delivered tangible lossesfor many security investors. “Most CDOs have yet to see many downgrades and there havebeen almost no actual defaults of the ABS bonds within the CDO portfolios,” points out MattKing, analyst at Citigroup. “[But] all that is about to change.” 

The other big problem that makes it hard to calculate the “real” scale of mortgage-linked lossesat banks is that it is often fiendishly hard to get an accurate value for mortgage-linked assets –and thus determine how much prices have fallen so far. In other arenas of finance, such asequities, banks typically value their assets by looking at external markets: the share price of aBritish company, say, can be calculated within seconds, by glancing at the stock exchange.Mortgage-related securities have not been widely traded in recent years, and in the past coupleof months activity has dried up almost completely – meaning there is no market, and thus nomarket value. 

Some banks have tried to get around this problem in the past by developing computer models towork out what the securities “should” be worth. However, these can be very unreliable and varywildly between different banks. Recent calculations by the Bank of England, for example, showthat if tiny changes are made to the type of model typically used by banks to valuemortgage-linked debt, the implied price of supposedly “safe” assets can suddenly change by asmuch as 35 per cent. 

As a result, some analysts are now using another technique to work out their mortgage-linkedlosses, namely, extrapolating from prices based on derivatives indices such as the so-calledABX. For although mortgage bonds have not traded much in recent weeks, derivatives havebeen bought and sold – meaning that the ABX can offer a trading price.  In recent weeks, this trading price has fallen sharply (see chart), which has increased the pressure on banks to mark their books down. However, the banks have not yet made write-offs as large as the ABX might imply. Merrill Lynch analysts, for example, calculate that mid-quality ABX debt is on average now trading at 40 cents in the dollar. But these analysts say that Merrill Lynch itself has only written this type of debt down to 63 cents in the dollar – and UBS is still assuming this debt is worth 90 cents. “Simple math would imply that UBS needs an additional $8bn write-down [on its $15.4bn holdings] if the ABX pricing is correct,” Merrill says. 

But the problem is that no one really knows whether these numbers represent the “true” guide to tangible mortgage losses either; some analysts claim, for example, that the ABX is an unreliable guide to price.Moreover, most banks have not actually sold their troubled securities yet in an open market. And while there are reports that some banks have tried to arrange quasi-sales between institutions, on “sweetheart” terms in recent months, the
US regulators now appear to be scrutinising these practices too – not least because this could potentially manipulate prices as well. But if these problems make it hard to calculate the scale of banks’ subprime losses, the guesswork becomes even wilder when it comes to other financial groups. As the subprime credit chain has grown in recent years, it has left banks exposed not simply to these assets but to a host of other investment institutions as well, including insurance companies, pension funds and hedge funds. These institutions sometimes use different approaches to reporting their subprime exposures from those adopted by bulge-bracket banks – and these differences are further magnified by the fact that they are operating under different national accounting regimes. 

In some corners of the global financial system, institutions are already trying to come clean about the pain. It is relatively easy, for example, to calculate the losses at so-called structured investment vehicles (SIVs) – a breed of specialist fund – because they are required to publish regular “net asset value” numbers. According to the rating agencies, for example, the average value of assets in SIV vehicles has fallen by a third since the start of the summer. Some investors with holdings of SIVs have recently come clean about their losses. TPG-Axon, the US hedge fund, is understood to have written off the value of all the junior notes issued by its SIV. 

A number of Taiwanese banks – which have been among the biggest buyers of such paper – have also been surprisingly frank. For example, Bank SinoPac said it would take a third-quarter hit of $43m on its $350m of SIV holdings.  However, for every example of transparency there is a case – or several – of an institution reluctant to reveal losses. In jurisdictions such as Japan, for example, it is widely accepted that institutions need not mark all their assets to market, since they often hold these to maturity.  Similarly, uncertainty dogs large parts of the asset management world in continental Europe. Meanwhile, the insurance industry is generating particular anxiety among some investors. In recent days, for example, the share price of the largest US monoline insurance groups, such as MBIA and Ambac, have collapsed in spectacular fashion due to concerns about potential exposure to mortgage-linked CDOs. The two companies say that they do not have any serious problems – and point out that the proportion of mortgage-related assets in their business is tiny. But the challenge that dogs these “monoline” groups is that their balance sheet accounting is poorly understood by most investors. 

Optimists within the financial world point out that such uncertainty is not unique to the 2007credit squeeze: 15 years ago, for example, the financial world was presented with a similar fog,when it tried to untangle the losses that hit the Lloyd’s insurance syndicate. “There are a lot ofparallels today,” says Adam Ridley, a senior
London financier who was heavily involved in theLloyd’s affair. 

However, the challenge for policymakers today is that the 2007 credit storm – unlike the Lloyd’sdebacle – is not a contained affair: on the contrary, the opaque subprime chain has createdunexpected linkages between an extraordinarily wide range of investors and institutions aroundthe world. The longer investors continue to fear that this chain could produce unexpectedly largefuture losses, the greater the danger of a downward spiral in investor confidence – and thus thehigher the risk of a knock-on impact on the “real” economy. 

Robert Rubin to Serve as Chairman of the Board of Citi, Sir Win Bischoff to Serve as Acting Chief Executive Officer, Charles Prince Elects to Retire from Citi

NEW YORK–(BUSINESS WIRE)–The Board of Directors of Citigroup Inc. (NYSE: C) today announced that Robert E. Rubin, Chairman of the Executive Committee of Citi and a member of the Board of Directors, will serve as Chairman of the Board.

In addition, Sir Win Bischoff, Chairman of Citi Europe and a member of Citi’s Business Heads, Operating and Management Committees, will serve as acting Chief Executive Officer. The Board also announced that Charles Prince, Chairman and Chief Executive Officer, has elected to retire from Citi. The Board has designated a special committee consisting of Mr. Rubin, Alain J.P. Belda, Richard D. Parsons, and Franklin A. Thomas to conduct the search for a new CEO.

Mr. Prince commented, “We have made strong progress in our strategy for building for the future, evidenced in the momentum we have achieved in most of our businesses. Nevertheless, it is my judgment that given the size of the recent losses in our mortgage- backed securities business, the only honorable course for me to take as Chief Executive Officer is to step down. This is what I advised the Board.

Every time I file a civil action against a mortgage servicer the very first document I want is a copy of the “Pooling and Servicing Agreement.”  This is the legal document that creates the securitized trust of mortgage loans and also strictly provides for the duties of all entities who are assigned the responsiblity of servicing loans for the Trust.

For all “public placements” or “public offerings,”  the Pooling and Servicing Agreement is always filed on Form 8-K with the Securities and Exchange Commission.  All such documents can be found by conducting a search of the SEC’s website through an internal search engine known as “Edgar.”  But, what is a PSA?  Why do I want to see it? What can be found in the PSA?  Kevin Byers, a forensic accountant, who works with me on these cases, has assisted me in developing the following list of reasons why any consumer must have the PSA.  The reasons are as follows:

Pooling and Servicing Agreements (PSA)Top Twenty Reasons to Request ProductionKevin Byers and O. Max Gardner III 

In no particular order, these are some of reasons you need to request through formal discovery in any mortgage-related case the PSA Agreement and why it is relevant: 

 1.     It is a contractual document naming the parties to any given securitization, important for standing issues.  The document will list the Sponsor, the Trustee for the Securitized Trust, the Master Servicer, and all primary and secondary servicers. 

2.     It provides address for all necessary parties including “notice” addresses for the service of legal process. 3.     It outlines the specific duties of the Servicer and/or the Master Servicer as well as the Trustee on behalf of a respective trust. 4.     It contains the representations and warranties of all parties to the agreement, including the Servicer and/or Master Servicer. 

5.     It includes all representations provided by the Depositor of the loans into the trust as the same relate to important consumer protection issues related to the underwriting and origination of the loan, such as conformity with anti-predatory lending laws, full-file credit reporting, title insurance coverage, and validity and content of individual loan files. 

6.     It gives the conditions under which a prepayment penalty may be waived or modified by the Servicer and/or Master Servicer. 7.     It oftentimes will outline specific loss mitigation and foreclosure avoidance measures available to the Servicer, including, for example, forbearance and loan modification, principal reductions, interest reductions and interest changes. 

8.     It defines a “defective mortgage loan” and describes the circumstances and process by which the lender must repurchase a loan. 

9.     It establishes the rights of the Trustee under the Trust to force the Depositor/Originator of any loan to repurchase a loan under the recourse provisions. 10.    It describes the specific process by which a delinquent loan can be charged off and the subsequent servicing party and procedures that apply to such charged-off loan. 11.    It provides guidelines on loan-level advances that must be paid by the servicer. 12.    It provides details regarding the mechanics of how the Servicer must go about foreclosing on property, what documents need to be requested and/or recorded and what authorizations need to be granted to foreclose, and in whose name the foreclosure must be filed. 13.    It provides guidance on the fees a Servicer may retain as compensation in the administration of the loans, for example, NSF fees, late fees, loan modification or assumption fees.   

14.    It will contain the Mortgage Loan Schedule, important to verify the ownership of the loan on behalf of the Trust. 

15.    It details the requirements for mortgage assignments and when these will or will not be recorded and the implications of the failure to record such assignments. 16.    It details the specific loan documents contained in each loan file that will be delivered to the Trustee or Document Custodian on behalf of the trust, establishing who holds the original Note and where it may be found. 

17.    It describes the credit enhancements that have been deployed to enhance the rating of the most secure certificates of investment in the Trust. 

18.    It provides rules and procedures for the rights of the Master Servicer or the Primary Servicer to accept a deed-in-lieu of foreclosure or a short sale of the property so as to avoid a foreclosure. 

19.    It describes the rights the Originator/Depositor may retain the Residual Value of the Trust and the extent to which the residuals may be used as credit enhancements. 

20.    It will name a default servicer and describe when a loan is considered to be in default and outline the process for the transfer of servicing rights. 

O. Max Gardner IIIHistoric Webbley House

Shelby NC 28151-1000704.487.0616 (v)704.487.0619 (f)maxgardner@maxgarnder.comhttp://www.maxgardnerlaw.comhttp://www.maxbankruptcybootcamp.com 

The article printed below was written by Jay Macdonald for Bankrate.com.  It is a very good summary of the danagers of dealing with these so-called “home rescue” operatons. 

You see the signs everywhere these days: We buy houses! Cash for your home! Fast refi now!

One thing regulators discovered during the S&L investigations was that rogue S&L operators were selling their bad loans to each other, magically making them good again because, well, there was a buyer on the other side of the transaction. These crooked thrift chiefs called the practice, “Trading dead horses for dead cows.” On Friday, we learned from published reports, that Merrill Lynch - the Wall Street poster child for this crisis - did something that may not have passed the smell test. According to The Wall Street Journal: “In one deal, a hedge fund bought $1 billion in commercial paper issued by a Merrill-related entity containing mortgages, a person close to the situation said. In exchange, the hedge fund had the right to sell back the commercial paper to Merrill itself after one year for a guaranteed minimum return.” This transaction allowed Merrill to book a profit on paper and temporarily off-load a major liability. Andy Fastow would be proud of these guys!

Next Open Boot Camp: Dec. 7 to 10 (Spaces Open) www.maxbankruptcybootcamp.com PO Box 1000 Shelby NC 28151-1000704.487.0616 (v)

Option One’s credit lines reducedBy GENE MEYERThe Kansas City Star

O. Max Gardner III

November 1, 2007

Mr. Gardner received his undergraduate degree from the University of North Carolina at
Chapel Hill in 1969 and graduated with high honors from the UNC School of Law in 1974. Among others, he was a member of the Law Review, President of the Student Bar Foundation and elected to the Order of the Coif. Following graduation, he served as the Senior Law Clerk to the Hon. William H. Bobbitt, the late Chief Justice of the North Carolina Supreme Court, and as Senior Law Clerk to the Hon. William Copeland, an Associate Justice of that Court.  

Gardner worked for three years with the Smith Moore law firm in Greensboro following his Clerkships.  His primary working partner at Smith Moore was the legendry McNeill Smith.  Gardner later served as Treasurer in Smith’s campaign for the United States Senate. 

Gardner served the Democratic Party of North Carolina as General Counsel from 1986 to 1992, during which time he worked closely with two different Governors.  During this time, he also managed his law practice in Shelby, which he opened in 1977 after leaving Smith Moore.  Gardner was also “Of Counsel” to the Washington, D.C., law firm of Sims Walker & Steinfeld from 1992 to 1996.  

He currently limits his practice to consumer bankruptcy cases and all consumer claims arising with respect to those cases.   Gardner has been widely recognized as the leading consumer attorney in America on “predatory mortgage servicing” in Chapter 13 bankruptcy cases. He has also taken the lead in pursuing the attempts of many creditors to collect debts notwithstanding the fact that the debts have been legally discharged in a bankruptcy case. 

Gardner has been the lead attorney of record in many landmark cases but some of his most significant were: 

Myrtle Marshall v Spindale Savings & Loan.  This was the first case under the Bankruptcy Act of 1978 where a debtor was able to avoid and cancel a completed pre-filing foreclosure sale of her home by arguing that the Savings & Loan did not pay “reasonable value” for the home at the public sale.  Gardner used Section 548 of the Bankruptcy Code to characterize this sale as a “fraudulent conveyance.”  Before this case, almost everyone thought that once a foreclosure was completed under state law a debtor could never use a bankruptcy case to avoid the completed sale.  The case sent shock waves throughout the mortgage and title insurance industries.  Congress later amended the law to preclude this specific remedy. 

Gerald Stark v Crestar Mortgage.  In this case of first impression, the Bankruptcy Court held that the imposition of a monthly property inspection fee by a mortgage servicer on a Chapter 13 homeowner was a violation of the automatic stay and was nothing more than a “bankruptcy monitoring fee.”  The Court also held that such a practice was unlawful under the mortgage note and deed of trust.  Stark has been widely followed and cited and sent shock-waves through the mortgage servicing industry.  

Shelby Yarn Company.  This was the first reported case where a group of former employees (5 to be exact) filed an “involuntary” bankruptcy petition against their former employer.  Gardner represented all of the former employees who filed the involuntary petition.  One of his clients was the former Vice President of Shelby Yarn, Paul Petroff.  After the filing, Gardner was appointed by the Court to represent the Committee of all 656 former employees.  Gardner was also appointed as Special Counsel to the Trustee in a bankruptcy in the prosecution of a civil action against the former officers, directors and owners of Shelby Yarn. This civil action was settled for approximately $2.2 million.  The case was widely reported by the media and was featured as the cover story on the September 2000 edition of Business North Carolina. 

Marjorie White v Duke Medical Center.  The debtor in this case had to file for Chapter 13 relief because Duke Medical Center had secured a judgment against her for less than $2,000 for unpaid medical bills.  Duke was threatening to foreclose her home to collect the judgment.  After the filing, the debtor filed an action against Duke and Dr. Bernard Bressler for medical negligence arising out of alleged sexual acts between Bressler and the debtor that were all instigated by Bressler, who was her psychiatrist.  The case was settled for more than $1,000,000 and was widely reported nationally at the time.  Myra McPherson, a Pulitzer Award Winning Reporter, wrote a lengthy series of articles in the Washington Post on the case entitled “O. Max Gardner III vs The City of Medicine (“the City of Medicine” being the moniker for Durham, NC, home of Duke). 

Smith vs The Money Store.  In this case of first impression, Gardner filed a Class Action against The Money Store for adding the sum of $125.00 to every proof of claim filed in a consumer bankruptcy case.  The fee allegedly related to “lawyer services” in preparing the claims. Gardner established by uncontradicted evidence that an attorney played little to no role in the claims preparation process.  Based on this evidence, the Court disallowed these fees as improper and held that a creditor violated the automatic stay by seeking to include attorney fees in a proof of claim. If a creditor wanted an award of any attorney fee, the court held the creditor would have to file a fee application and notice it for hearing, thereby giving the debtor the right to object and be heard.  The court also held that for purposes of the vast majority of mortgages in consumer cases a fee for preparation of the proof of claim would never be appropriate.  This case has been widely reported and certainly raised the level of awareness of this unlawful practice. 

Gardner was named the Outstanding Consumer Lawyer of 2004 by the National Association of Consumer Bankruptcy Lawyers at their Annual Meeting in
Philadelphia.  He has been elected three times as a member of the “Legal Elite” of
North Carolina lawyers by his fellow attorneys in a state-wide poll conducted by Business North Carolina.  He has twice been named as a North Carolina “Super Lawyer in Consumer Bankruptcy Law” by Law & Politics and the Charlotte Magazine.   His renowned “Bankruptcy Boot Camps” have been featured in the NY Times, The Wall Street Journal, The Washington Post, the Chicago Tribune, Business Week and on a one hour segment of “Your Money” on CNN.  Max has also been quoted many times by all of the major print and electronic media in America.  According to Robert Berner of Business Week, “Max is the go to guy on all consumer bankruptcy cases!” 

Gardner is the grandson of O. Max Gardner, who was a former North Carolina Governor and United States Ambassador to Great Britain. Governor Gardner also served as Lt. Governor of North Carolina and as the Undersecretary for the United States Treasury under President Harry Truman.  Gardner’s great uncle, Clyde R. Hoey, was also Governor of North Carolina and a distinguished member of the United States Senate.  Governor Hoey is the only North Carolinian to have served in the State House, the State Senate, the United States House of Representatives and the United States Senate.    

In January of 2007, Gardner was named as the Chief Executive Officer and Vice President of Litigation for Gardner & Botes, PLLC.  Gardner & Botes is a new national law firm that Gardner has formed to prosecute violations of the Discharge in Bankruptcy by creditors and debt-buyers.  Gardner has been quoted as saying these violations are “at historic levels with no end in sight.”  Gardner & Botes will do business as the National
Consumer Bankruptcy Litigation Center.  Its primary office will be in Shelby, North Carolina, and its technology and development center will be in Chicago, Illinois.  Brad Botes, the Vice President of the firm, is from Alabama and was the former Executive Director of the National Association of Consumer Bankruptcy Attorneys. Erik Clark of
Los Angeles is the President of NCBLC. 

Gardner is a long-time member of NACBA and NACA and a frequent national speaker on bankruptcy law and consumer representation.  
Gardner is the father of three children, Max IV, Webb and Sarah.  His son Max IV was killed in a tragic accident involving a drunk driver in April of 2005.  Max and his wife, Victoria, live at Lizemere Farm, located deep in the heart of the South Mountains of
North Carolina, where they breed and show their beloved Cavalier King Charles Spaniels.