An item from last week that I sat on still seems worthy of comment, so consider this a turn of year post.
I’ve said that the efforts to clean up mortgage abuses will not have gone far enough until we see some foreclosure mill attorneys disbarred, and better yet fined and/or put in jail. And that is harder than it ought to be.
One of the frustrating issues in trying to rein in fraud is the way that essential accessories, namely, accounting firms and law firms, are close to beyond the reach of the law. For instance, if a law firm clearly permitted perjury or engaged in document fabrication that led someone to have their house foreclosed upon when they were actually current on their mortgage, the wronged homeowner could not sue the law firm. It could only sue the party that was the plaintiff in the suit (presumably a trust). Perversely, the only parties to a transaction that can sue banks and accountants are their clients, even when those firms were integral actors in scams. As we described in ECONNED:
Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.
The net effect is that if the clients themselves don’t sue (and they have plenty of reasons not to, starting with not wanting to air dirty linen and potentially open up privileged communications), the only recourse is sanctions by bar associations or prosecution. But state bar associations typically focus their policing efforts on solo practitioners. Bigger firms are often active in the bar association, and not surprisingly, the officialdom is seldom inclined to act against social acquaintances, particularly ones at concerns that also pay a lot in the way of dues.
Florida illustrates the difficulties prosecutors have (at least in some states) in bringing down miscreant firms. (One firm, the Default Law Group, had already been under investigation when the probe was extended last August to three other firms, Shapiro & Fishman, the Law Offices of David J. Stern and the Law Offices of Marshall C. Watson; at least two other firms were added in December).
Admittedly, the state attorney general’s probes of the leading foreclosure mils in the state has already done damage to those firms as they have lost important clients. But the effort has already hit a significant procedural obstacle. A subpoena by the attorney general was successfully opposed at the lower court level, with the ruling being that any regulation of the practice of law was under the authority of the Florida bar and the Florida courts.. The state attorney general has appealed, arguing that the Florida Deceptive and Unfair Trade Practices Act allows the AG to investigate “any trade or business”and establishes the AG as the enforcement agent. Hat tip Lisa Epstein for these court filings:
The response, effectively, is that law is not a trade or business:
Now this all may seem a wee bit circular, at least if you read this as I do, that the state AG is fighting an uphill battle. How can you get lawyers to adhere to professional standards if its own enforcement body sits on its hands, the courts have not taken action, and the AG faces constitutional hurdles in stepping in? In some other states, the AG and the courts appear to work far more fist in glove in enforcement. For instance, in South Carolina, the AG loves getting lawyers disbarred over botched real estate closings (the theory being if an attorney can’t even do something as simple as a real estate closing correctly he has no business practicing law). For instance, in this South Carolina Supreme Court case, an attorney was disbarred and and the matter was brought by the state attorney general for the Office of Disciplinary Counsel, which is the arm of the court that rides herd on lawyers. I’m not clear on the procedures, but one can infer that the AG and the ODC work together actively.
No doubt how this particular conflict will play out will vary by state. I would imagine one major variable is to what degree the courts have been packed with business friendly judges. It would be very helpful to get reader insight into this topic.