Law Suits & Courts

Foreclosure Freeze Started With Small Firms

Posted on Thursday, October 21, 2010

The paperwork mess muddying home foreclosures erupted last month. But the legal strategy behind it traces to a lawyer's gambit in 2006 that has helped keep one couple in their home six years beyond their last mortgage payment.
Lillian and Robert Jackson stopped paying on their home in Jacksonville, Fla., in 2004 when business dropped off at their cleaning company. Eviction might have seemed inevitable when they faced a foreclosure hearing two years later.

But their lawyer, James Kowalksi, had the idea of taking a deposition from the signer of the mortgage papers. When a document processor for GMAC Mortgage admitted she routinely signed such papers without being familiar with details of the loans, she was tagged as one of a species now known as robo-signers.
It was a first step in the growth of a legal sub-specialty called foreclosure defense that has sown confusion and turmoil in the housing market. Lawyers in the field now commonly use a technique more identified with corporate litigation: probing depositions, designed to uncover any lapses in judgment, flaws in a process or wrongdoing. In the 23 states where foreclosures entail a court hearing, the bank may be ordered to pay the homeowner's legal bill if a lawyer can convince a judge that the bank has submitted false documents, such as affidavits saying employees personally reviewed the details of loans when they didn't.
The housing-market uncertainty stemming from the foreclosure fracas is unabated, despite moves by Bank of America Corp. and GMAC to resume some suspended foreclosure sales. In Florida, with over half a million foreclosure cases, banks that are reviewing their documentation have canceled hundreds of court hearings in recent weeks. Big banks that have said they are finding few or no flaws in the foreclosure process have encountered skepticism from some of the state attorneys general probing the mess, and those authorities are pushing ahead.
The great majority of delinquent borrowers don't hire lawyers but leave the home right before getting evicted. Some lawyers who represent financial institutions take a dim view of the growing ranks of lawyers pushing for a different outcome.

"There is a movement afoot by [state attorneys general] and private lawyers to use technical problems to avoid foreclosures where the borrower is in default and the foreclosure is in all respects substantively appropriate. These are lawyers where the best job they can do for their clients is to keep them in their houses without paying the mortgage," said Andrew L. Sandler, a Washington securities lawyer who represents banks and firms that service mortgages.
Mr. Sandler added: "The class-action lawyers are swarming around this issue right now, because they perceive that it can result in significant fees for them. But they're not well-founded cases, and the banks will vigorously contest any class action around these issues."
The big risk to banks and the housing market, indeed, is that more homeowners and lawyers come to see such cases as attractive to fight.
Mr. Kowalksi in Jacksonville has already filed a suit seeking class-action status, in circuit court in St. Johns County, Fla., naming Deutsche Bank AG and Citigroup Inc. mortgage unit Citi Residential Lending, accusing them of violating Florida laws and seeking nonmonetary relief. On Tuesday, a New Jersey law firm filed a damage suit in federal court in New Jersey accusing Bank of America of breaching contracts with borrowers at settlement.
A spokesman for Citi called the suit "without merit." B of A declined to comment. Deutsche Bank didn't have any immediate comment.
It isn't clear how significant the suits ultimately will be. Lenders say paperwork problems can easily be fixed, and foreclosures can proceed. "The homeowner might get to live in the house for a few more months free. But these people do not have a right to a free house," said Laurence E. Platt, an attorney who represents mortgage lenders.
The suits, probes and foreclosure freezes are the culmination of a legal drama that has been unfolding, largely unnoticed by the public, since the case against the Jacksons was thrown out in 2006 by Florida state-court Judge Bernard Nachman.
He ordered GMAC Mortgage, a unit of Ally Financial Inc., to pay the $8,000 fee of the Jacksons' attorney after finding GMAC had filed false testimony, an affidavit in which a document signer, Margie Kwiatanowski, said she had personal knowledge of the details of loans such as the Jacksons'. GMAC declined to make Ms. Kwiatanowski available for an interview.
The judge also ordered GMAC to confirm that it had changed its policies to make sure anyone signing a document on its behalf read and fully understood the instrument. "Do not sign unless you have that comfort level," a GMAC memo then advised employees. "Do not sign verifications on court pleading documents unless you have independently checked the facts."
GMAC, which serviced the Jacksons' loan but didn't hold the mortgage, said: "As a servicer we try to avoid foreclosure whenever possible and work with the borrower on forbearance and home-preservation options before pursuing foreclosure." The firm wouldn't comment on cases still to be litigated.
GMAC also said it is reviewing all mortgages it services to make sure documents are properly prepared. It has never re-filed the case involving the Jacksons' house.
The Jacksons, still living there, are seeking a settlement. "What we want to do is to take the foreclosure off the credit report and dissolve it completely, so we can refinance the home and start over," said Ms. Jackson, 57.
In 2009, three years after the Jackson ruling, other Florida lawyers got into the act. Unaware of that case, a small law firm called Ice Legal took a deposition from another GMAC employee, who also testified to routinely signing foreclosure documents without reviewing the loans.
That testimony came about because the small law firm's founder, Thomas Ice, was searching for a way to help his bankruptcy clients.
Mr. Ice founded his firm in 2008 to focus on consumer bankruptcy, after a career at big law firms defending companies against plane-crash and SUV-rollover suits. With his wife, Ariane, a paralegal, he set up Ice Legal in a strip mall in Royal Palm Beach, Fla., next to a dentist.
As the economy frayed, bankruptcy clients appeared. Mr. Ice would help them with Chapter 13 filings that enable individuals, with a judge's blessing, to get rid of credit-card, car-payment and other debt. But the law doesn't let judges reduce someone's mortgage.
Searching for a way to defend clients facing foreclosure, Mr. Ice began researching English case law and the history of property rights. He ran across Sheldon v. Hently, a 1680 case that said an indebted merchant owed his debt to the person who had lent him the money, not to a debt collector who came around bearing a note.
While the English case didn't bear specifically on his work, it got Mr. Ice thinking about the concept of ownership of a debt, he says. A little more than a year after opening his firm, in the case of Boca Raton woman facing foreclosure, he decided to depose the GMAC employee who had actually signed documents concerning her indebtedness.
It was while grilling that employee, Jeffrey Stephan, that the firm discovered faulty documentation was more common than people had realized. Mr. Stephan testified he regularly signed more than 10,000 court affidavits a month without doing the required review of loan files.
Mr. Stephen also mentioned the name of his boss: Ms. Kwiatanowski, the woman whose failure to review loans before signing off had enabled the Jackson family in Florida to escape foreclosure for years.
Mr. Ice mentioned the deposition testimony to a fellow lawyer, Matthew Weidner. "Tom and I were talking, and it was, 'Jesus, they're like robots!'" Mr. Weidner says.
Mr. Weidner is also a blogger, and on Jan. 8 he wrote a blog post with an appellation for the routine signers. "We know from depositions taken of these 'robo signers,'" he wrote, "that they don't even read the documents placed in front of them and the notaries and witnesses that are supposed watch them as they sign are not present."
A GMAC spokeswoman, asked how Mr. Stephan could have submitted such affidavits years after a company memo had admonished employees to check the facts, said: "Obviously the policy wasn't being followed, and we discovered this procedural error. We became aware of the breakdown recently." Mr. Stephan couldn't be reached for comment. The woman in the Boca Raton case remains in her home.
Mr. Ice, recounting the suit and the legal steps he took, said it shows "the need for the complex litigation that is required to win these foreclosure cases."
Mr. Stephan re-emerged in June, in a case that helped spark the current foreclosure turmoil. A pro bono lawyer in Maine, Thomas Cox, took another deposition from Mr. Stephan, who again acknowledged routinely signing documents without reviewing the loans.
GMAC tried to sanction the lawyer on grounds he had embarrassed its employees, a maneuver that could have kept him from using the Stephan deposition as evidence. The motion was denied by Maine's Ninth District state court, which also ruled, late last month, that GMAC had submitted the Stephan affidavits "in bad faith." The court ordered GMAC to pay Mr. Cox $27,000, a sum it said he might have earned for his legal work if he hadn't been working pro bono.
GMAC suspended its foreclosure sales in 23 states in September and widened the freeze in October, before saying on Monday that it would again push forward with some of them. It has been replacing court affidavits that Mr. Stephan signed with documents signed by others.
At Ice Legal in Royal Palm Beach, attorneys are working through a load of several hundred foreclosure cases. Mr. Ice has hired three new lawyers and says he's so busy he has stopped playing golf and spends most of his time at the office. The firm has deposed alleged robo-signers at three other lenders or mortgage-serving companies besides GMAC.
Michael Gaier, an attorney in Philadelphia, switched to foreclosure defense last year after years of representing patients in malpractice suits and consumers who said they had purchased faulty products. His new legal practice "is academically challenging, and I'm hoping it'll be financially rewarding. I'm hoping the banks rewrite the mortgages, cover my fees. That's my end game," said Mr. Gaier.
Mr. Kowalski, the lawyer who in 2006 unearthed a robo-signer before that term was common, said, "I don't think the [mortgage] servicers ever thought that their process was going to see the light of day. It's just that so many of us have taken so many of these so far, that now, in 2010, we finally have some traction."By ROBBIE WHELAN

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