To our knowledge, the suit filed by Ernest Michael Bakenie against JP Morgan is the first to accuse a major bank of widespread, systematic residential mortgage documentation and fraud. I don’t have a copy of the filing and am relying on the summary in Courtroom News Service (hat tip Jesse via reader Scott) but it is a doozy. (The case is described as a class action, but has yet to obtain class certification by the court).
We’ve reported repeatedly of widespread evidence of grotesque procedural abuses as servicers and foreclosure mill lawyers try to cover up for the fact that in many cases, mortgage notes were not transferred properly to securitization trusts, and the rigid way these deals were structured makes it impossible to remedy those failures at this juncture. Absent creating a time machine, the only fix is to fabricate documents that make it appear than things were done correctly. We’ve seen (as in in person) obvious forgeries submitted to the court (signatures obviously Photoshop shrunk to fit) and servicer personnel caught perjuring themselves, yet judges are remarkably unwilling to issue a ruling that hinges on finding that the plaintiff filed phony documents.
If this case moves forward, that reticence may change. Note that this case, which covers only the Central District of California, alleges that Chase engaged in over 7000 filings of motions of relief of stay in bankruptcy court using fabricated documents. Remember that filing for bankruptcy puts a “stay” or hold, on all creditor claims. They all go wait while the court determines which creditors get what from the under water borrower. A “motion for relief of stay” by a mortgage lender is tantamount to saying, “Judge, let me grab the house.” Motions for relief of stay are typically a costly nuisance for bankruptcy lawyers. It wastes the borrower’s scarce money to shoo them away (and some plaintiffs’ lawyers will take advantage of inexperienced bankruptcy lawyers by getting them to sign a waiver in return for dropping the motion for relief of stay that looks innocuous but has a paragraph in it changes the burden of proof from the bank to the borrower, which almost always puts them at a fatal disadvantage and results in the loss of the home).
The other critical document discussed in this case is a “proof of claim”. Bankruptcy court is all about establishing whether the parties that want a pound of flesh from the borrower are really entitled to it. They are required to submit a “proof of claim” to substantiate their demand. Bankruptcy judges spend a considerable amount of time assessing the validity of these claims.
The case asserts that fabricating documents was very helpful to JP Morgan, enabling it to file successful proofs of claim and motions for relief of stay 95% of the time.
And why did JP Morgan do this? The case asserts that it needed to do so to pretend that borrower promissory notes really had been transferred to mortgage securitizations, otherwise, JP Morgan would be stuck with liability. Here are the gory details:
“Rather than incur the cost of ‘proving up’ its own standing or the standing of its principal Mortgage Backed Security Trust, Chase systemically misrepresents Chase or a designated MBST to be a creditor in tens of thousands of bankruptcy cases by utilizing manufactured documents,” the complaint states.
Bakenie claims: “That said practice is utilized for all mortgage loans originated by Chase, and other loan originators, including insolvent Washington Mutual Bank, whose assets were purchased by Chase.
“That said manufactured documents are fabrications intended to create the illusion of a valid transfers MLNs and support the assertion of standing in tens of thousands of bankruptcy cases. …
“That the aforementioned fabricated evidence is ‘photo-shopped’ and is highly persuasive and authentic in appearance so as to ensure legal victory in the bankruptcy courts.
“That said manufactured evidence is systemically utilized to deceive bankruptcy players and increase the profits of Chase, its agents and its principals through massive cost savings and the imposition of attorney fees upon class borrowers.
“As a direct result of this practice, over 95 percent of Chase’s motions for relief of stay and proofs of claim are granted without objection.
“That the use of the fabricated evidence has a chilling effect on class debtors and their attorneys. Said business practices discourages bankruptcy players from offering objections or from questioning the validity of Chase’s false claims based on standing.”
Bakenie adds: “That said practice allows Chase to dump defaulted loans that were never properly securitized by WAMU and other originators acquired by Chase into private mortgage backed security trusts by creating the illusion of a valid transfer.
“Said practice shifts the liability of defaulted loans not properly securitized by WAMU, from Chase to private mortgage backed security trusts. The practice allows Chase to effectively mitigate the millions of dollars in liability of the WAMU acquisition, where WAMU failed to transfer MLNs of its portfolio before its demise. Said practice shifts losses from WAMU to MBST bond investors.
“That after a non-judicial foreclosure sale, class members remain indebted to the true beneficiary for the unsecured note but without credit for the loss of the collateral to Chase’s designated assignee.
“Most egregiously, the network attorneys utilize the inducing documents to obtain attorney fees awards from by the bankruptcy judges ranging from $600-$1,000 for each successful motion for relief of stay.”
As gratifying as it is to read of this case, JP Morgan has a well established pattern of paying up smartly to make anything that might grow into a serious problem go away. Bankruptcy courts are courts of equity, and if JP Morgan is proven to have behaved badly, it could have wider ramifications (if a party does not have “clean hands,” a bankruptcy judge will hold it against them in evaluating their claim). But the flip side is this action covers only one bankruptcy court. Even if it settles this one, JP Morgan is exposed to similar actions in other courts.
This could be interesting, and in a good way, for a change.