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Debtors Win Victories Against Mortgage Servicers

posted by Katie Porter

In the last few weeks, several courts have issued opinions ruling that mortgage servicers' actions have harmed consumers. Some of you follow this issue closely, but if you need an introduction, I've previously posted a bit on the basics of mortgage servicing and why it's an important component of the foreclosure problem. After the jump, I summarize three recent and newsworthy decisions. Debtors won big in these cases, variously recovering sizeable damages, having the foreclosure action against their home dismissed, or getting a preliminary injunction issued against a servicer's misconduct. Taken collectively, they all signal an increased willingness by courts at all levels (state, federal, bankruptcy) to take challenges to mortgage servicers' actions seriously. While I'm convinced that legislation, regulatory enforcement, and different market incentives are necessary to stop the misbehavior of mortgage servicers, this trio of decisions shows how litigation can help real families and point the way for further policymaking.

The Jones v. Wells Fargo decision from the bankruptcy court in the Eastern District of Louisiana was a landmark opinion in describing the problems with Wells Fargo's servicing of bankruptcy debtors' mortgages. On July 1, 2008, the district court ruled on Wells Fargo's voluminous appeal. The court affirmed the bankruptcy court's factual findings and legal conclusions that actions like misapplying plan payments violates the Bankruptcy Code. The district court remanded to the bankruptcy court on the remedy, ruling that while the bankruptcy court had injunctive powers to order new accounting standards, the court should first make a finding that there was "no adequate legal remedy as an alternative to monetary punitive damages." If I were Wells Fargo (and I'm grateful that I'm not), I'd be worried that the remand is an invitation to a large sanction. Wells' decision to appeal the new accounting standards is itself noteworthy. Why not embrace correct accounting? Do servicers prefer to pay monetary damages on those rare (albeit increasingly frequent) occassions when they get caught and continue to overcharge debtors in all other instances? It appears the answer may be "yes." I'll post an update when the bankruptcy court rules on the remanded issue.

The bankruptcy court in the Eastern District of Arkansas granted a preliminary injunction against a mortgage servicer, ASC, to halt its "continuing its efforts to collect payments from [the debtors] that they did not owe." While the matter will proceed to trial for final disposition, the opinion in support of the injunction finds that ASC misapplied 14 payments, sent the debtors "inaccurate, incomprehensible mortgage statements," and refused to stop collecting. The court concluded that an injunction was required, in part, because the servicer had admitted that it "could not guarantee that it would not violate" an agreement to stop collecting, even though it had put a "stop call" on the account. This latter bit caused the judge to note that "[i]n other words, ASC's counsel explained that ASC could not be responsible for its own actions." The injunctive relief here is an important new remedy that we haven't seen used frequently in the bankruptcy context.    

On June 5, 2008, a New York state court dismissed with prejudice a foreclosure proceeding because Wells Fargo, and its servicing agent, Litton, could not prove that Wells Fargo owned the mortgage. The note had purportedly been assigned from Argent to Ameriquest to Wells Fargo but the court found the assignments defective. It also ruled that the servicing agreement between Wells Fargo and Litton was insufficient to give Litton authority to make the required "affidavit of facts" to support the foreclosure petition. While the original mortgage between the debtor and Argent seems to remain valid, the court ordered the other mortgages removed from the real property records. This "lack of standing" decision is very similar to the relief that two federal courts in Ohio granted to plaintiffs earlier this fall. While my research study found that 40% of bankruptcy claims were not accompanied by a note, these cases reveal the existence of an even bigger problem--the companies who are foreclosing may not have any legal right to do so. That is, it's not just that some servicers are sloppy and don't bother with the note, it's that some do not have the authority to foreclose at all!   


Thanks for the update. Sweet! More leverage. I have a few things going with some of those servicers in BK. More tinder for the fire. I think that ED case might be a 5th cir. case in which I can use.

Trying to keep dry down here in the STX..


Katie, the New York case you referred to is not an isolated incident. Several judges here in Kings and Nassau Counties have been routinely denying foreclosure where the mortgage assignments or other documents don't pass muster. Some lenders' attorneys have even been threatened with sanctions for bringing "frivolous" cases, due to their clients' lack of legal standing to foreclose. Justice Schack in Brooklyn refers to the assignment shenanigans as "The Kansas City Shuffle." http://www.nycourts.gov/reporter/3dseries/2008/2008_50176.htm

Other judges(the majority)merely rubber stamp the foreclosures, especially when the debtors fail to appear.

I notice these cases in the New York Law Journal, and it's pretty easy to find decisions on our E-courts system, but nobody outside of a few fringe bloggers is writing about the big picture- that many, if not most, New York foreclosure actions before the courts right now are defective and defendable!

Those “Ohio” cases were Deutsche right? The federal court there came out and said, (something like…) Deutsche could not produce (with additional time already given) the proper “recorded” instrument. And they said (something like) you don’t know what you are talking about judge; we have been doing it the same way for the longest time. From the looks of it, they bought a few “packages” of those “MBO”s. I see them as “assigns” in quite a few BK cases. I’ve seen a few 5th cir. Ops, where the “Cir” affirmed the lower courts granting of a 12(b)(6) Motion though. I should go back and take another peak and see why.

I like the idea of attacking a Motion for Relief from Stay by just using “standing”. Make them first prove that they are the owners of the “Note” before getting to whether the debtors defaulted or not. The same goes for that POC. Getting them to produce that info would take a hearing maybe two. Even though it should be attached to that POC. Most likely they would ask for a one-month pass to “track down those documents”. By then the 13 Trustee is breathing down your neck about confirmation… “you need to file a "Y" plan”. Nice thought though. Maybe we could make it a “SOP” in our answers and really piss them off. That would make every other 13 case a “5th cir. Case”….. so not worth $3k. But if everyone did it, they would have to change “their evil ways” and other consumer bankruptcy firms wouldn’t have to work so hard either. If only we could use our numbers the way “they” do…........Ok...... Back to reality.

So if the “Note holder” didn’t have standing but the same bank gave it to a particular “servicer” to service the loan; the debtors made payments to the servicer; whose money is it now? The servicer already took its fee, maybe some late fees, a BPO thrown in for “good measure”… What happens to all of that money? And what happens to the “amortization” of that loan “Permanent Injunction”, like ole’ “Mike”?

Patches, you're thinking of the Boyko, Rose, O'Malley, Holschuk decisions that got the ball rolling. I have some of those decisions handy in .pdf if anyone would like them instead of fishing for them. Drop me a line...

Some interesting cases at least temporarily in favor of the borrower:

Case 3:07-cv-00286-TMR-MRM Doc 24 Filed 11/15/07
Judge Thomas Rose
Prof. Porter's study is specifically cited here.
27 foreclosures given 30 days to prove standing or dismissed w/o prejudice

Case 1:07-cv-02282-CAB Document 11 Filed 10/31/2007
Judge Christopher Boyko
14 FCs dismissed w/o prejudice

Judge Kathleen M. O'Malley
32 FCs dismissed w/o prejudice

Case 2:07-cv-00166-JDH-TPK Document 26 Filed 12/27/2007
Judge John D. Holschuh
15 FCs dismissed w/o prejudice

And, thanks to the hard work of William A. Roper, an Excel spreadsheet of 141 Ohio 2007 cases updated as of Feb 2008 also exists.

Wells Fargo Bank NA v HAMPTON Judge KURTZ 03Jan2008

Wells Fargo C/O Litton v Farmer Judge Schack

Wells Fargo v Reyes Judge Schack
(my favorite Schack decision as, despite Mr. Reyes failing to appear before Judge Schack, not only is the FC action denied with prejudice, but the Rosicki FC mill is threatened with sanctions)

Deutsche Bank v HARRIS 05Feb2008 Judge Schack
**Interesting note here is that pg 2, Judge Schack asks why the assignment was executed in MN and not CA. The answer to that lies in the ACTUAL employment of Ms. Laura Hescott, also mentioned bottom p2.

Ms. Hescott is not a VP of MERS, but an employee of Fidelity National Information Solutions ( www.fnis.com ) or Fidelity National Foreclosure & Bankruptcy Solutions, Inc. - I honestly forget which one but they are the same corp. ANYway, the reason for the MN assignment execution is that Ms. Hescott works at the 1270 Northland Dr, Suite 200, Mendota Heights, MN address of Fidelity. She also appears in various VP or Secretarial capacities for at least six or eight other servicers as noted in various MA and NH registry filings.

Deutsche Bank v CASTELLANOS 11 May 2007

American Brokers Conduit v ZAMALLA 28Jan2008

I recently had an interesting experience here in Florida while doing a forensic loan audit. The client was in foreclosure and the lender had filed a lis pendens. The client contacted a loan modification company who referred them to me. We sent the lender a Qualified Written Request for a copy of the file including the transfer affidivits for the servicing. I had them request a hearing. Four weeks later, they went in front of a judge. They tell the judge they hired me to do their due diligence by performing an audit and I get called to the stand. After explaining what I do and that I requested the file, the lender's attorney claims they never received the request and implies I may be lying. So out of the folder I pull the certified receipt from te mailing and show that it was signed for. The judge looked at the lender's attorney and says, "Well, Mr X, it looks like the defendants are trying to do their due diligence. They requested this file three weeks ago and you have not compiled. Therefore I'm granting the defendant a 90 day continuance. Mr. X give them a copy of what they asked for."

That happened about 5 weeks ago and I'm still waiting on the lender. I'm writing up the Audit Report today with aa recommendation to hire an attorney to bring possible litigation against the lender for violating Section 6 of RESPA.

Hi, I would really like to get the information on Laura Hescott noted above. I pulled the Schack case, but if you have the others, please get them to me. I have a case where Laura Hescott is the Attorney In fact for HSBC and the Notary is the same as the guy named above. Please send me any information you have on her. Thanks.

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