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Lender Processing Services Has a Very Bad Day: Federal Bankruptcy Trustee Joins Litigation Against LPS on Behalf of All Chapter 13 Trustees in the US

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Lender Processing Services, which provides “technology” services to servicers and foreclosure mills, is under an escalating legal assault. Although media attention has focused on its role as a generator of fabricated documents for servicers and mortgage trusts, it can probably shift the liability for those documents onto the parties that used them as part of foreclosure proceedings.

The more serious legal assault is a pair of related lawsuits which we discussed earlier, which strike at the core of LPS’ business model on its largest unit, its Default Services group, which contributes nearly 50% of revenues. Both cases allege that LPS’ arrangements with the foreclosure mills that are part of its network amount to illegal sharing of legal fees. The typical remedy is disgorgement.

LPS and its defenders dismissed these cases, since a superficially similar case in Texas had been filed in the past and withdrawn. We indicated that we had reviewed the claims and spoken with the attorneys regarding the caliber of their evidence, and they seemed to have more than support for their argument to get past summary judgment.

Today, a new court filing on one of the two cases, the proceeding in Federal bankruptcy court in Mississippi, has dramatically expanded LPS’ potential liability and increased the odds of an unfavorable outcome for the company.

The standing Chapter 13 Trustee for the Northern District of Mississippi, Locke Barkley, has joined the case on behalf of herself and of all Chapter 13 Trustees in the US.

By way of background, the Chapter 13 Trustee is called a “standing trustee.” Her role is to administer all of the bankruptcy estates for all of the Chapter 13 debtors in her district. She (and all other Chapter 13 Trustees) are interested parties because to the extent that illegal fees were included in proofs of claim and illegal fees were assessed to debtors to be paid through Chapter 13 plans, then all of that money should have gone to these estates to pay towards unsecured creditors. Needless to say, this is a large additional potential liability to LPS. The presence of the Federal bankruptcy trustee as a plaintiff should give the plaintiffs considerable credibility with the judge.

Another important milestone was passed on this case last week. One reader, a former Federal bankruptcy court litigator who was generally positve about the action based on his reading of both of the initial lawsuits claims did point out the obvious shortcoming, the absence of attorneys with class action experienced (and as important, infrastructure) involved in the cases. As he wrote:

I admire the strategy being used by the homeowners’ counsel. One case in federal court, the other in state court. One case destined for the old 5th Circuit, the other destined for a state court of last resort in a different circuit. Not exactly a circuit-conflict strategy, but carefully planned to improve chances of review by the Supreme Court of the United States if necessary.

It appears a motion for relief from stay was filed by the putative note-holder in both cases, which was granted but then set aside in the KY case (not clear what action was taken on that motion in the MS case). But the class definitions are slightly different (with a subclass averment in the KY case). A previous decision on point against an entity similar to LPS in one jurisdiction (MS) is icing on the cake.

No insult to homeowners’ counsel, but their pleading of “adequacy of counsel” appears a little thin based on class-action complaints I have seen. Filing counsel appear to be sole practitioners and/or small law firms, with no affiliation with large national firms experienced in class actions who can point to a track record of success in representing class members.

The filings were amended to add counsel with class action expertise. On the Federal case, in Mississippi, CaseyGerry has joined the case. The head of the firm, David Casey, is a former president of the Association of Trial Lawyers of America. Cases his firm has handled include Exxon Valdez and the California tobacco case. In other words, this is a heavyweight player. On the Kentucky case, McGowan & Hood, a firm which has won major class actions lawsuits, including medical device cases, has signed up.

LPS’ stock was up over 1% today, even though the amended complaint was filed at 2:30 PM EDT. Clearly Mr. Market didn’t get the memo.

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45 comments

  1. TC

    Don’t worry, he got the memo. Today’s lift in LPS likely was just the pause that refreshes in preparation for a whole lot more pain … as similarly has been the case for the broad market since March ’09. Surely, there are no shortage of well-heeled suckers who must believe (because there is no other choice!) that, the damage can be contained. Yet last week’s LPS breakdown, and this on huge volume, suggests a whole lot of [former] interest believes there’s merit in the case you raise.

  2. Francois T

    Mr. Market read a different memo, stating that Obummer Team will protect the financial industry against those pesky claimants and plaintiffs.

    Me think they shall regret to have believe this BS.

  3. i on the ball patriot

    Everyone is looking for a smoking gun … its here …

    The smoking gun here is that it takes a big ass large national firm experienced in class actions with a track record of success and the infrastructure, and I would add VERY deep pockets, to get even a small sniff of ‘justice’ out of this over the top corrupt particular mess and the piece of crap corrupt system that it has blossomed from.

    Yes, now the big ‘legal’ savior pigs line up at the trough, with dollar signs in their eye balls — just like in the BP spill — and start their oinking for the ‘little guy’ who will end up homeless under the bridge before any resolution even thinks about taking place. Forgive me if I don’t get dewey eyed about their riding in to the rescue.

    What a horrible parasitic tax on ALL of us.

    Fuck the scam ‘rule of law’!

    Deception is the strongest political force on the planet.

  4. Leonard Patrino

    It really is unclear what the remedy to this is going to be? What can Obama possibly do? Siding with the financial industry literally means completely disregarding hundreds of years of common property law. His hands are blatantly tied, since if they lost the docs in the first place NO ONE CAN LEGALLY MANUFACTURE THEM.

    I don’t see why someone doesn’t manufacture documents with forged signatures and forged affidavits and electronic notaries and claim a lien on Bank of America’s headquarters. Someone could arbitrarily and fraudulently foreclose on B of A; even just to make a political point. It doesn’t matter if Bank of America illegally forecloses on me or vice versa. The point is that you simply can’t manufacture documents.

    I am very uncomfortable with the prospects. There simply is no good solution here.

    1. john bougearel

      Leonard,

      Your notion to fraudulently manufacture a lien on BAC just to make the point that you can’t manufacture documents and claim to have legal standing.

      The Obama admin is [falsely] claiming the hasty need to foreclose to remedy a failing economy is greater than the need for due process.

      Since when did the concerns, needs of the economy trump due process and rule of the law? I guess it truly has been quite some time, just now getting round to acknowledging thus

      1. Paul Tioxon

        http://citypaper.net/articles/2010/10/07/grand-theft-rowhome

        Grand Theft Rowhome
        Stealing a house is easier than you think.

        by Isaiah Thompson
        Philadelphia City Paper
        Oct 6, 2010

        Here is the exciting, relevant excerpt inre PA State law regarding filing deeds.

        City Councilman Bill Greenlee, whose office had fielded numerous complaints of such stolen houses, had already zeroed in on one major issue: As long as an individual deed included a signature, a notary’s stamp and a recording fee, the city’s Department of Records processed it — no matter what. Deeds with the signatures of dead people and deeds signed with the names of people who had no ownership claim to the houses were treated as perfectly valid. By the time frauds were uncovered, homeowners had to take it up not with a city clerk, but with a judge.
        FURTHERMORE:

        …a hearing two weeks ago in City Hall on new legislation, introduced by Council members Greenlee and Maria Quinones-Sanchez, that would require Records not to rubberstamp deeds that raise certain, and rather obvious, red flags — such as being signed by someone other than the owner of the property. Surprisingly, perhaps — certainly Grosik thought so — the Nutter administration appeared to oppose the legislation. At the hearing, backed by an opinion from city lawyers, Records Commissioner Joan Decker testified that state law prohibited her office from stopping, or even slowing down, a deed like the one that nabbed Grosik’s backyard. As long as a deed meets the state’s minimum criteria (a notary stamp, a signature and a fee), “The law requires us to record everything that’s presented,” Decker said.

        NOTE THE STATE OF PA’S MINIMUM STANDARD:

        NOTARY STAMP
        A SIGNATURE
        A FEE

        NO WONDER ROBO SIGNING AND E COMMERCE SOLUTIONS WORK SO WELL WITH REAL ESTATE TRANSACTIONS!

    2. Sid

      As I recall, the one of the tactics which was employed by the “patriot movement” was to slap bogus liens on the properties of individuals who interfered or disagreed with the “patriots.”

    3. ZADOOFKA FLORIDA

      Go to Wikinvest. Search: “Fidelity National Information Services”. One of Fidelity’s major business lines is: FRAUD DETECTION for banking. Fidelity spun off Lender Processing Servies in 2008. LPS perpetrates the biggest fraud ever! Tell me this wasn’t planned?

      Both companies face each other on the same street in Jacksonville, FL, on the St. Johns River. As I cross the bridge over the St. Johns, I used to wonder “What goest on in those buildings? They look like CIA fronts”

  5. Chris Pasco

    I really admire the way Yves is digging up this info. I want to know who her sources are.

    This is incredible what’s going down.

  6. jdnm.esq.

    Her sources are her own of course but I’ve been reading about this fiasco, MERS/LPS/Disregard hundreds of years of property law etc. since at least early to mid 2009. This has been a slow motion trainwreck that lots of folks saw coming but no one has had the chutzpah to do anything about.

  7. Jim in MN

    I love it. The nation’s savior may be Locke Barkley. What an awesome name.

    Ms. Barkley, I salute you and wish you the best of luck in your endeavors.

    Coupled with the news that Ireland may be looking to senior bondholders to ‘assist’ with the asset unwinds (read: come in for a haircut), I’ll call this a good night for the white hats. Not great, but good.

  8. Dan

    Great article

    I’ll believe the disgorgement when I see it.

    It’s usually solo attorneys that get hit with fee sharing penalties. after all it’s morally wrong to do it to the big boys….

  9. Darby Shaw

    It is incredible isn’t it? Everyone is missing the immediate danger. Consider:

    Tomorrow morning, no bank in the country will fund a loan, nor will any title company issue a policy. With all of this title confusion, that’s a foregone conclusion. So what does that mean?

    It means millions of closings not happening in the next few weeks. It means homeowner living in motels waiting on a closing that’s not going to happen. It means millions of realtors, mortgage brokers, title companies etc. are unemployed overnight. If there is no exchange of services or goods, we will effectively have no housing market by the end of the week. Believe it.

    The amount of litigation about to be unleashed in the coming days will be simply overwhelming. Isn’t it a little suspicious that BOA shut down their wholesale division last week?

    How will investors react? Imagine how many traders are going to short the market tomorrow. If BOA’s stock dives? And the rest follow? How do you think China will feel considering the are holding trillions of dollars in US Treasury notes?

    Tomorrow will be every interesting to say the least…

    1. Glen

      Honestly, this has to be taken as excellent news in he short run and the long run. And we had to predict this day HAD TO COME. Just like the hue and cry for people to move their money out of the TBTF banks, we’re going to see people realize they need to quit getting home loans, car loans, credit cards, ANYTHING from the TBTF banks.

      Who gets rewarded –

      Small banks that have stuck to the traditional model of handling loans and didn’t over bloat on crap loans

      Credit unions

      Home buyers looking for a fair shake and a banker they can deal with on a personal basis.

      Who starts to see benefits -

      SAVERS at those small banks and credit unions

      And it leads up to the next big shoe to drop. We’re going to start seeing the sellers of securitized loans taken to court for fraud. Pension funds, mutual funds, all the buyers that got suckered with AAA rated crap are going to go get their money back.

      1. Doug Terpstra

        Great insight, Glen

        Recently, Bill Moyers reminisced about Common Cause founder John Gardner

        http://www.commonblog.com/2010/10/08/bill-moyers%25E2%2580%2599-remarks-on-40th-anniversary-of-common-cause/

        Moyers implores us to take back our country from the special interests that shower politicians with cash. Quoting Gardner: “We are all faced with a series of great opportunities – brilliantly disguised as insoluble problems.”

        This is clearly one of those times.

  10. Rex

    Blowin’ and burnin’, blinded by thirst
    They didn’t see the stop sign, took a turn for the worst.

    Life in the fast lane, Surely makes you lose your mind
    Life in the fast lane, Huh
    Life in the fast lane, Everything all the time
    Life in the fast lane, Huh

  11. Jackrabbit

    Prosecutions and taking a few TBTF banks through Dodd-Frank Resolution is a small price to pay to restore accountability and good governance.

    1. Rex

      T’would be nice but seems the banksters are buddies with or have strings on all those who might reign them in or (better) punish them.

      [I should make this a rubber stamp for future use.]

  12. Ignorance Is Bliss

    Funny how these bloggers are taken having actual knowledge of anything. Yves, since you know so much, why don’t you put in your wonderful blog what you think LPS is guilty of? Do you think LPS is adding illegal fees to the proof of claims and other docs and then taking those fees…We both know that isn’t true. I could try to explain the business model but that would take the fun out of you filling us in with your infinite wisdom.

      1. ohmyheck

        Yes, Kirk, but that would assume that Ignorance is Bliss would actually read the link you offered, or anything else Yves has written.

        I love this-”Why don’t you re-write everything you have already written and explain it all to me personally, right here, because I’m not going to read it all, and if you don’t then I say you are an idiot.”-attitude.

        Ya, works every time….not.

        The username fits perfectly, don’t you think?

    1. Charlie

      It appears what these people are guilty of is collecting revenue streams without having a ligitimate title, and forging documents to continue those revenue streams. Or am I misunderstanding this situation?

    2. Stupendous Man - Defender of Liberty - Foe of Tyranny

      Ignorance,

      It is doubtful anyone is persuaded by your “They’re wrong, I know the truth but I’m not gonna tell you” attitude. That just undermines your credibility.

  13. Esohbe

    The real crisis is still ahead. What is going to happen when people realize that when they buy a new home or refinance their loan is going to go into the same system that is currently dysfunctional?
    The current mess highlights the need for a complete rebuild of the mortgage system in this country. It is not as simple as making sure a few documents are corrected.

  14. Dan

    Ad hominem alert!!!

    Ignorance, funny how this blogger commented on allegations as any journalist is permitted to do, based on public records and all. Try reading the article before you make personal attacks. It usually helps

  15. f247

    Does anyone have a link to the legal filings from the “Harris case” in TX, which LPS sez is most similar to the current fee-sharing allegations?

    I’ll keep looking and post what I find, but thanks if you already have, please post. Thanks!

  16. Darby Shaw

    Hey guys,

    I dont have anything on the TX case, but if anyone is serious and wants to truly know what the big picture issues are, you simply must read the complaint filed in Kentucky. Start around part 56 and take some time to get through. read to about 125 at least:

    125. Many of the MBS/Trusts were covered by an insurance policy, commonly referred to as a Derivative or Collateral Contract.These Derivative Contracts are not recorded or regulated by the SEC.Upon information and belief, the Defendants have attempted to receive distribution, feesor proceeds or have received distributions from the liquidation of the Plaintiffs or the putative class members homes, when the actual beneficiaries under the homeowners’ loans, the shareholder/investors have been made whole by a Derivative Contract.In other instances, the MBS has been “closed” months or years prior.Funds collected from the loans allegedly within the MBS, ar no longer being paid to the investors, but are an unearned windfall to the servicer.

    That alone is an explosive allegation, and its is all legally factual.

    Take 10 minutes and read some of the brief and you will understand why virtually behind the scenes are crapping biscuits.

    BTW, this complaint was a year and a half in the making.

    We are all whistling past the graveyard at this point.

    1. Fractal

      That Scribd link shows the complaint was filed in U.S. District Court for the Western District of Kentucky (WDKY) in Louisville. But it’s missing its civil action number. Could you dig out the case number so we can download PDFs from the PACER database?

  17. f247

    Ha, found it. Forgot the case was filed prior to the LPS spin.

    http://www.scribd.com/Fidelity-s-LPS-Secret-Deals-With-Mortgage-Companies-and-Law-Firms/d/27821907

    Can anyone really explain what the salient differences between the Harris case and the suit that was filed yesterday? The filing yesterday was much more helpful and clear, and I realize it now has the Chapter 13 Trustee’s name attached to it. Is there a difference between filing the suit in MS, vs. the previous suit in TX?

    But just in terms of the allegations against LPS, they do seem remarkably similar to my untrained eye. The rule on fee-splitting (2016, I guess), appears to come up in both cases. Is there something different about LPS’s alleged violation in this case vs. the previous one?

    Thanks for any insight/opinion.

    1. Yves Smith Post author

      Remember there was no ruling in the Harris case. The plaintiff withdrew.

      The issue was likely that the plaintiff hadn’t developed enough information to persuade a judge that there were enough issues of fact for him not to squash a motion of summary judgment (normally, a defendant will file a motion for summary judgment, which is the legal equivalent of “nothing to see here, these guys don’t have a case, they are wasting the court’s time, so dismiss the lawsuit.”) You don’t get to do discovery (demand the other side produce records, depose witnesses) until you pass the motion for summary judgment.

      The issue isn’t the general nature of the claim, since no court has every ruled on this case. It’s whether there is enough meat to get past the motion for summary judgment.

      That’s why referring to Harris is a poor defense of LPS. That just means someone filed a badly thought out version of this case before. These guys have spend a lot of time developing deep knowledge of LPS operations. And they have a smoking gun in their possession (and it’s not anything the public has, I haven’t posted on it).

      So they will get past summary judgment, particularly with the Ch. 13 Trustee signing up. And they have very damaging information ALREADY in hand.

        1. Fractal

          Any chance you could find a link to a PDF version of that new Kentucky case? ScribD is useless for most purposes, since it severely limits downloads (how I still can’t figure out).

          1. Darby Shaw

            Hi Fractal,

            Commonwealth of Kentucky
            Bourbon Circuit ct.
            Division 1
            Case # 08-C1-120

            (Im pretty sure thats the number 1 to the right of the “C” but the photocopy is a little grainy, so it may be the letter “I”, but I doubt it. Hope that helps, if you need more help, post and Ill do the best I can.

      1. Fractal

        Yves, you make a very important point that the court presiding over the Harris case in Houston never ruled on the case. There was no decision, it does not exist as case law.

        Possible additional reason why the case was simply withdrawn instead of actually dismissed: homeowner received a settlement. My money is on confidential settlement, rather than inability of homeowner to discover sufficient proof.

        1. Darby Shaw

          Sorry, wrong case number!

          I defer back to Fractal:

          U.S. District Court
          Western District of Kentucky (Louisville)
          CIVIL DOCKET FOR CASE #: 3:10-cv-00611-CRS

      2. Brock Ferret

        Referring to the outcome of the Harris case,

        Yves Smith wrote:
        “The issue was likely that the plaintiff hadn’t developed enough information to persuade a judge that there were enough issues of fact for him not to squash a motion of summary judgment (normally, a defendant will file a motion for summary judgment, which is the legal equivalent of “nothing to see here, these guys don’t have a case, they are wasting the court’s time, so dismiss the lawsuit.”) You don’t get to do discovery (demand the other side produce records, depose witnesses) until you pass the motion for summary judgment.

        The issue isn’t the general nature of the claim, since no court has every ruled on this case. It’s whether there is enough meat to get past the motion for summary judgment.”

        This is not quite accurate. A motion for summary judgment does not necessarily obliterate any chances for discovery if it is deemed that limited discovery is necessary to rule on the motion. As pointed out, the claimant withdrew, meaning that the motion for summary judgment was not ruled upon. Therefore, this does not go to the claimant lacking in substantive claims; a motion for summary judgment is filed in most cases as a procedural matter and does not always mean that the case lacks merit.

        What is of more importance is the point that NO court has ruled on the matter. The longer that the defendants are able to withstand a ruling that may be against their interests, the better. Once precedence exists on the claims, other courts are more likely to follow suit.

        More to the point, Fractal wrote:

        “Possible additional reason why the case was simply withdrawn instead of actually dismissed: homeowner received a settlement. My money is on confidential settlement, rather than inability of homeowner to discover sufficient proof.”

        A quiet settlement, and no precedent, may be the stronger course of action for the defendants to push off liability.

        As to the Foster case, dladow wrote:

        “Didn’t AIG write a huge number of derivatives on mortgage backed securities taking the loss side? And didn’t the Fed/Treasury make sure those were paid in full? If so, should the UST have any claim on the foreclosure proceeds? fom mortgages in those trusts? But what if only the AAA tranch bought the derivative; does that mean the junior tranches still have a claim on the proceeds if their bonds were not retired? Or is the homeowner/borrower a third party beneficiary who had their obligation satisfied (in whole or in part) by another obligor and they get the windfall? And that’s only if you get that far, since if the notes weren’t transferred and the trusts were never funded they have no standing to foreclose in the first place.”

        These questions and analysis truly go to the heart of the matter. I’ve been working on the purchases of RMBSs for quite some time now and through researching targeted purchases came across this exact problem. Most servicers are operating on PSAs that no longer have an associated trust due to the payouts on the claims to AIG. (Remember 2008, anyone?) The title issues are predominant due to the nature that if no clear title exists, foreclosure should be stalled. However, we are at risk of these issues being treated as mere improper handling of paperwork, albeit a gross understatement.

        At that point, the issues with the illegal collection of fees due to the claim already in essence having been “paid in full” through insurance become key. Just as one can’t make a claim on a car that insurance has already paid out on, one can’t make a claim on other such payouts.

        What we are looking at here, and what is becoming more and more self-evident to aware individuals, is that there was systemic fraud from the beginning of issuing these loans all the way through to the continued collection of fees and foreclosures by servicers operating on “empty” PSAs. As Grayson so simply pointed out to Geithner in his letter last week, “What is happening is fraud to cover up fraud.”

        Even if you find it difficult to believe all involved parties weren’t operating fraudulently,it was gross negligence at best.

  18. f247

    Many thanks, Yves. I did not understand that aspect. Excellent reporting on this whole issue so far!

    It will be interesting to learn at some point what additional evidence the plaintiffs have. Is that something the plaintiffs reveal at a hearing before the motion for summary judgment?

  19. Fractal

    The Kentucky case mentioned above was filed on Sept. 28, 2010 as a RICO class action according to the PACER docket. LPS & DOCX are both defendants, along with five defendants which appear to be law firms, plus Deutsche Bank, Citimortgage and other mortgage servicers.

    PACER says the case number is as follows:

    U.S. District Court
    Western District of Kentucky (Louisville)
    CIVIL DOCKET FOR CASE #: 3:10-cv-00611-CRS

    It was a little pricey to download the entire complaint, about ten bucks including exhibits (136 pp.). Tune in later for my reactions to the PDF.

    Here are some of the other headers from PACER:

    Foster et al v. Mortgage Electronic Registration Systems, Inc. et al
    Assigned to: Judge Charles R. Simpson, III
    Cause: 18:1962 Racketeering (RICO) Act

    Date Filed: 09/28/2010
    Jury Demand: Plaintiff
    Nature of Suit: 470 Racketeer/Corrupt Organization
    Jurisdiction: Federal Question

  20. dladow

    The allegation in para 125 of the Foster case, per squeaky’s comment, states that the trust beneficaries (bondholders) had or have a derivative based “insurance” policy and may have been paid or are owed payment under the derivative contract. I wonder if the derivative has no subrogation clause, so that there is no right of recovery from the trust if the derivative beomes payable to the beneficiaries. They are further alleging that some of the trusts, presumably having been paid by the derivative, were closed — I guess that means the bonds were retired. They go on to allege that the servicer is keeping all foreclosure fees, costs and proceeds (so that if it sells the house, whatever it brings the servicer keeps).

    Didn’t AIG write a huge number of derivatives on mortgage backed securities taking the loss side? And didn’t the Fed/Treasury make sure those were paid in full? If so, should the UST have any claim on the foreclosure proceeds? fom mortgages in those trusts? But what if only the AAA tranch bought the derivative; does that mean the junior tranches still have a claim on the proceeds if their bonds were not retired? Or is the homeowner/borrower a third party beneficiary who had their obligation satisfied (in whole or in part) by another obligor and they get the windfall? And that’s only if you get that far, since if the notes weren’t transferred and the trusts were never funded they have no standing to foreclose in the first place.

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