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Judge Rules Against Countrywide on BK Examination

U.S. Trustee wins right to conduct examination

April 4, 2008


Countrywide Home Loans Inc. failed in its efforts to block an examination by the U.S. Trustee to determine whether the company inflated expenses and other costs in bankruptcy claims.

U.S. Bankruptcy Judge Thomas P. Agresti has authorized the U.S. Trustee to proceed with the examination.

A Chapter 13 bankruptcy trustee filed a motion requesting loan histories from Countrywide for 293 cases. Ten cases were identified where Countrywide engaged in questionable actions or raised issues about the bankruptcy system integrity. These findings prompted the U.S. Trustee to file a Notice of Examination that would require a Countrywide authorized representative to be examined.

The Trustee is seeking documents relating to Countrywide's policies and procedures and to the individual accounts being examined.

In a motion filed in the Pennsylvania consolidated case that seeks loan histories from Countrywide and sanctions against the lender, the U.S. trustee alleged that, in the 293 cases, Countrywide "lost, destroyed or misplaced" more than $515,000 in checks that were to be posted to debtors' accounts. Countrywide also, according to the trustee, "attached impermissible charges, including late fees and attorneys' fees for its unconscionable delay" in posting checks.

In another Pennsylvania bankruptcy case, Countrywide was ordered to pay the U.S. trustee $2,000 as a sanction for its conduct. And in a Florida bankruptcy case, Countrywide was ordered to pay $74,271.33 to the debtors' trust account, representing insurance proceeds received by the lender for repairs to the debtors' home.

The Calabasas, Calif.-based company objected to the Notice of Examination on the grounds that the U.S. Trustee lacked standing to conduct the examination or compel production of the requested documents.

"The mere pendency of a bankruptcy case does not open the door for the [U.S. Trustee] to hale a creditor into an examination room to give sworn testimony and produce documents relating to its general corporate affairs," Countrywide stated in its objection. "The [U.S. Trustee's] powers are not without limit, and Rule 2004 has its bounds. Both would be exceeded exponentially if the Notices of Examination and Subpoenas are not quashed."

But the U.S. Trustee, which handles administrative issues for the bankruptcy courts, shot back with a claim that she has broad legal authority to conduct the examination at issue in the case. She denied being on a fishing expedition and pointed to the identification of inaccurate proofs of claim, unwarranted motions for relief from stay and unfounded demands for payment after bankruptcy discharge.

At issue is the accuracy of escrow account calculations, payment receipts and mortgage arrearages.

The court sided with the U.S. Trustee.

"Therefore, based upon the statutory language, as well as the relevant case law, the court concludes that it is within the power of the [U.S. Trustee] to seek the production of documents and the examination of witnesses pursuant to Rule 2004," the ruling stated. "However, this authority is not unfettered. The court agrees with Countrywide's position that there must be some limitation on this power to prevent it from being abusively exercised. As such, consideration of the appropriate limitations to place on the [U.S. Trustee's] power in the context of this case is necessary for the purpose of determining the extent to which the document production and examination may proceeds."

A recent 48-page report by University of Iowa Associate Professor of Law Katherine Porter alleged mortgage servicers frequently disregard bankruptcy law and submit inadequate or erroneous claims.


Countrywide BK Claims Probed by U.S. Trustee
Countrywide Financial Corp. is being investigated by a U.S. trustee to determine, among other things, whether it inflated the amount it is owed on bankruptcy claims. Counsel for Countrywide said the actions by the trustee, who has entered more than 16 cases involving lenders in at least five states, are random instances of prosecution without cause.

Servicers Accused of Overstating Loan Balances
Mortgage servicers frequently disregard bankruptcy law and submit inadequate or erroneous claims, a university law professor alleged in a recent 48-page report that indicated lenders and borrowers disagreed on the balance owing in most cases. She suggested illegal fees regularly tacked on to balances without sufficiently identifying the nature of the fees are symptomatic of servicing in general.

Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of MortgageDaily.com.

e-mail: [email protected]

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