Despite Bad Behavior By Wells Fargo, Court Finds That Broad Remedial...

Despite clear cut abuse by a mortgage lender, the Fifth Circuit has found that a bankruptcy court lacked authority to enter a broad remedial injunction requiring Wells Fargo to conduct an extensive audit of claims filed in the Eastern District of Louisiana. Matter of Stewart, No. 09-30832 (5th Cir. 7/22/11). You can find the opinion here.

Lack of Cooperation, Evasion and Inflated Claims

The Fifth Circuit succinctly stated the facts of the case as follows:

When elderly widow Dorothy Chase Stewart filed for bankruptcy in 2007, Wells Fargo Bank filed a proof of claim with the bankruptcy court reciting debts owed from an outstanding mortgage on Ms. Stewart’s house. From her limited funds, Ms. Stewart hired a lawyer to request a full accounting of Wells Fargo’s charges.

Wells Fargo did not cooperate. It provided a list of charges by type, but without the amount, date, or payee for each charge, and without invoices or proofs of payment for the third-party fees it charged to Ms. Stewart. At a hearing convened by the bankruptcy court, Wells Fargo sent lawyers unfamiliar with her case and unable to provide further information or documentation. As the hearing went on, “errors in billing became evident.”

Two further hearings and four months of research passed before the bankruptcy court was able to unravel Wells Fargo’s accounting. After Ms. Stewart’s attorney “painstakingly identified the additional information needed, or explanations required” to review the claim, Wells Fargo finally produced a full reconciliation of Ms. Stewart’s mortgage account. Inspecting those records, the bankruptcy court concluded Wells Fargo’s proof of claim was rife with errors, including:

* Calculations that were “wholly incorrect” under the terms of the mortgage contract;

* Late fees generated through questionable accounting and imposed without notice to the debtor;

* Charges for drive-by inspection reports that were plainly erroneous, with some reports describing a wood-frame house and others describing a house with a brick exterior;

* Charges for broker price opinions (BPOs) that Wells Fargo was unable to document, several with duplicative charges, and charges for a BPO that could not have been generated on its stated date because Ms. Stewart’s parish was then under a mandatory evacuation order for Hurricane Katrina;

* Attorneys’ fees and cost invoices that were invalid or inadequately documented.

The bankruptcy court found that these errors caused Wells Fargo to overstate its claim by more than $10,000.

Opinion, pp. 2-3.

The Court also referred to another case involving Wells Fargo in which the Court described a proof of claim as:
such a tangled mess that neither Debtor, who is a certified public accountant, nor Wells Fargo's own representative could fully understand or explain the accounting offered.

Opinion, p. 2, n. 2.

Of these violations, my personal favorite is charging for a Broker's Price Opinion at a time when the Parish was under a mandatory evacuation order. Those brokers must have been awfully brave.

The Court's Response

Cheating widows is not looked upon favorably in most quarters. The Bible says:
Cursed be anyone who perverts the justice due to the sojourner, the fatherless, and the widow.Deut. 27:19.

Judge Elizabeth Magner was not very happy either. She found Wells Fargo to have been "duplicitous and misleading." In re Stewart, 391 B.R. 327 (Bankr. E.D. La. 2008). Judge Magner awarded damages in the amount of $10,000.00 and attorney's fees in the amount of $12,350.00. She further sanctioned Wells Fargo $2,500.00 for presenting a consent order which did not reflect the agreement of the parties and an additional $2,500.00 for filing "significantly erroneous proofs of claim."

She also granted broad injunctive relief.

In order to rectify this problem in the future, the Court orders Wells Fargo to audit every proof of claim it has filed in this District in any case pending on or filed after April 13, 2007, and to provide a complete loan history on every account. For every debtor with a case still pending in the District, the loan histories shall be filed into the claims register and Wells Fargo is ordered to amend, where necessary, the proofs of claim already on file to comply with the principles established in this case and Jones. For closed cases, Wells Fargo is ordered to deliver to Debtor, Debtor’s counsel and Trustee a copy of the accounting. The Court will enter an administrative order for the review of these accountings and proofs of claim. The Court reserves the right, if warranted after an initial review of the accountings, proofs of claim and any amended claims filed of record, to appoint experts, at Wells Fargo’s expense, to review each accounting and submit recommendations to the Court for further adjustments based on the principles set forth in this Memorandum Opinion and Jones.

In re Stewart, supra.

The Fifth Circuit Ruling

The Fifth Circuit found that the Court lacked jurisdiction to grant the injunction. Relying on Supreme Court precedent, the Fifth Circuit found that past injury is not sufficient to grant an injunction unless there is a "real and immediate threat" that the person will suffer injury in the future. Because there was "no demonstrated likelihood that Ms. Stewart will ever again be subject to an incorrect proof of claim filed by Wells Fargo," she lacked standing to pursue an injunction (and indeed, she had not requested one).

The Court also found that the injunction could not be justified based on "the inherent power of the court to protect its jurisdiction and judgments and to control its docket."
While the deficiencies found in Wells Fargo's claim here do cast a shadow on its other claims, misdeeds in other cases can be addressed by the judges in those cases. If the case-by-case process, with the discipline of developed jurisprudence, is thought to be inadequate, there remains the rulemaking authorityOpinion, p. 7.

In conclusion, the Court stated:

We need not here undertake to draw bright boundaries to the well established power of a court to correct abuses of its process. We say only this: the injunction here was outside that boundary. The issued injunction ranges far beyond the dimensions of this case to police a range of cases untested here by the adversary process. Its specific commands are not for the benefit of Ms. Stewart, whose injuries are fully remedied without the injunction. Rather, the injunction is aimed at other cases in which Wells Fargo has appeared or might appear before the bankruptcy courts. While justification for the bankruptcy court’s frustration is plentiful, its injunction lacks jurisdictional legs. We must therefore vacate the injunction as exceeding the reach of the bankruptcy court in this case. (emphasis added).

Opinion, p. 7.

What It Means

The problem of mortgage accounting in bankruptcy is a national scandal. Judge Magner recognized the seriousness of the issue and tried to do something about it. Unfortunately, her creative remedy "lack(ed) jurisdictional legs." This does not mean that there are not any remedies. The Debtor in this case got her mortgage cleaned up. The Fifth Circuit tacitly encouraged other debtors to challenge their mortgage accountings. The Court's reference to "the discipline of developed jurisprudence" appears to this author to be a warning to Wells Fargo that it has developed a record of negligence and will be subject to further scrutiny. However, that scrutiny will need to come in individual cases, class actions or the rule making process.

While Judge Magner's order was reversed, thanks to Harrington & Myers, who represented the Debtor, Wells Fargo has received a polite but public scolding from the Fifth Circuit. That should count for something.

This case also illustrates the need for the Consumer Financial Protection Bureau. Most debtor's attorneys will not have the tenacity of Harrington & Myers. Similarly, the U.S. Trustee's office does not have the resources to handle systemic problems such as this one. While I am generally not a fan of government regulation, this may a case where it is firmly warranted.

Coming Attractions:

Judge Magner will be speaking on the topic of Mortgage Accounting at the State Bar of Texas Advanced Consumer Bankruptcy Course in Houston, Texas on September 8-9, 2011. She is just one of the many excellent speakers we have lined up.