We’ve been following litigation against Lender Processing Services, which among other things is the leading provider of default management services to mortgage services in the US, handling over 50% of foreclosures. The complaint that is moving forward the fastest (and fast in litigation land is not all that fast) is the Mississippi Northern District Bankruptcy court and alleges that Lender Processing Services along with another service provider in the default services space, Prommis Solutions both engaged in impermissible sharing of legal fees (only law firms are permitted to do legal work; even referral fees are consider not-kosher fee splitting). This case is seeking class action certification, and the Chapter 13 Trustee for the Northern District has joined the plaintiffs on her own behalf and for all Chapter 13 Trustees as a class.
Lender Processing Services continues to give investors the impression that there is nothing to see here. In a conference call last week, its only mention of this case was that its motion for summary judgment was “outstanding” which is technically accurate but more than a bit misleading. Consider: while LPS has tried to depict this case as a mere “fishing expedition”, its general counsel attended a procedural hearing in late January. How often do general counsels of public companies sit in on unimportant litigation in geographically disadvantaged location?
And the hearing did not go well for the defendants. LPS tried to argue that the plaintiffs were mistaken and it had nothing to do with the case. The judge authorized limited discovery so that the plaintiffs could connect the dots. More important, the judge also advised plaintiffs’ counsel that if they couldn’t tie this particular bankruptcy to Lender Processing Services, they should file another case. Um, sound like he’d like to see this matter tried.
Prommis Solutions argued that it was a holding company and wasn’t engaged in trade or business. The plaintiffs said that 100% of Prommis Solutions revenues came from subsidiaries that were engaged in impermissible legal fee sharing. The judge said “Add that to the complaint,” and the result is a doozy, once you get past the boilerplate at the beginning.
I do encourage you to read it; it provides considerable detail about the contracts between LPS and network law firms. Some key extracts:
In its own sworn testimony LPS Default acknowledges that it does not charge the mortgage servicer clients of its parent, LPS, any fee of any type for the services LPS Default provides to them through its contract with the mortgage servicers called a “Default Services Agreement” or DSA…..
In Schedule B to the DSA there is a document titled “The servicer Addendum to the Fidelity Network Agreement” and states in pertinent part that “Fidelity (LPS) and the Network Firm have entered into a network agreement” and “Fidelity has entered into an agreement (the “agreement”) with the servicer whereby Fidelity (LPS) has agreed to perform various legal services (emphasis supplied) for the servicer that include mortgage foreclosures, bankruptcies and other loan default
services (the “services”).
Section 3.3 of the DSA states that both the servicer and LPS Default agree not to disclose the DSA outside of their respective organizations without the prior, written permission of the other party….
LPS Default has previously given sworn testimony to the effect that there is a DSA between each mortgage servicer and LPS Default for whom LPS Default provides services….
Under a typical LPS Default “Network Agreement” there is an express fee splitting arrangement such as the following (the actual fees in a particular Network Agreement depend on factors such as the fees permitted by such quasi-governmental entities such as Fannie Mae at any particular time in addition to the fees negotiated in the DSA by LPS Default for the Network Firms which become “exhibits” to the Network Agreements [click to enlarge]).
However, the relationship created by Great Hill’s founding and funding of Prommis Holding and Prommis Solutions skews this picture further and creates another level of fee splitting and undisclosed sharing of compensation that while modeled after LPS Default’s relationship is even
more blatant and brazen.
The scenario created by Prommis’ interjection into the equation is now further slanted as follows:
LPS –> (referral of legal matter) –> Prommis Solutions–> (referral to Prommis Solutions firm which is also a network firm) –> Johnson & Freedman –>(Payment of Referral Fees by Johnson & Freedman) –>Prommis Solutions –> (Payment of Referral fees to LPS Default by Prommis Solutions) Prommis Solutions –> (Payment of Referral fees to LPS Default by Prommis Solutions)…
It is believed and therefore contended and alleged by the Plaintiffs that with the introduction of the Prommis entity into this transaction that the lawyers in the network firms now actually retain less
than 1/3 of the fees which they seek approval for from the Court without disclosing these sharing arrangements to the Court.
The plaintiffs believe and allege that under the present relationship the fees of the defendants in this litigation the $450 MFR [Motion for Relief of Stay] fee approved in the Thorne’s motion for relief from stay is split with $150 to LPS Default, at least $150 to Prommis Solutions and no more than $150 to Johnson and Freedman…
Furthermore, the attorneys represent to the Court that the fees sought are “reasonable and necessary” which also indicates that the fees are sought for time spent on the work by the attorney.
Both the representation that the fees are reasonable and necessary and that the fees are being paid for the attorneys work on the case are untrue.
The actual structure of the arrangements in these transactions is such that with the advent of electronic filings and “e-signatures” most of the filings made in the cases are from documents produced by non-lawyers and filed by non-lawyers without the actual involvement of the attorneys in the filings until such time as a matter is contested or a hearing is needed.
Depending upon how much time the Court wishes the parties to spend “mining” the electronic data of the transactions between the parties, the plaintiffs expect to demonstrate that a substantial majority of the law firm filings are undertaken in such a compressed timeframe from referral by LPS Default to Prommis Solutions to the law firms that meaningful review or involvement by the attorneys who have electronically signed the filings is either clearly absent or highly suspect.
This is because the business model created by the defendants stresses two things and two things only, speed of processing and volume of processing.
The law firm defendants Johnson & Freedman, and every other network firm who has executed such an agreement, owe this Court and the profession an apology.
I rather like the indignation. There as been far too little given the magnitude of conduct in bad faith.
Now this looks a tad grim for the defendants, given that the remedy for payment of impermissible legal fees is disgorgement and there appears to be no limit on the lookback period. Since Default Services is nearly half of LPS’s revenue, a finding in favor of the plaintiffs means LPS is toast. In addition, bankruptcy courts require that every disbursement by law firms be reported, even as small as reimbursing buying a cup of coffee. The idea that fees have been paid to LPS and not reported to the court is another potential gaping wound.