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Broker, Lenders Fight Court Battles

Mortgage law update

August 6, 2007

By LISA D. BURDEN
WASHINGTON correspondent for MortgageDaily.com


Two mortgage companies continue to defend themselves against employment-related lawsuits while a mortgage broker won a legal victory over alleged unauthorized faxes. Three former Countrywide executives have pleaded guilty to charges of insider trading and the Securities and Exchange Commission is currently conducting a dozen subprime lending investigations.

Charter Oak Lending Group and CTX Mortgage are still wrangling in court over allegations the Texas-based lender cajoled 10 employees to leave Charter Oak within days of each other. The employees, who went to work for CTX, resigned within 38 days of each other in 2004.

Connecticut's Attorney General's Office also filed a lawsuit against CTX claiming violation of state law and public policy against corporate raiding.

Charter Oak's case has not yet gone to trial, but damage calculations have been submitted, according to Debra Killian, the co-owner of Charter Oak -- which does business in Connecticut as Danbury Mortgage. She estimated the financial damage to her company from the mass resignations as being in the seven figures. She said CTX at one time had an office staffed entirely with her former employees, although eight of them have since left CTX.

After the lawsuits became widely known, Killian was asked to co-chair a taskforce on the subprime mortgage market.

"It's been a hard experience; but it's been an education," she said.

Charter Oak Lending Group v. CTX Mortgage, Janet August, et al., was filed in Connecticut's Superior Court.

Another case, McBride v. Market Street Mortgage, was filed by a mortgage executive suing his former employer.

Robert McBride sued the mortgage broker for breach of contract after the Clearwater, Fla.-based company wrote a letter informing him that his salary would be reduced by two-thirds then, in an apparent change of mind, writing to tell him it was a mistake. The U.S. District Court for the District of Wyoming awarded McBride $894,000.

Market Street appealed the jury's decision, as it had promised. Patrick Hacker, McBride's attorney, said the company's request to the court to set the verdict aside and reduce the jury's financial award have been denied. But, not willing to let the jury's judgment stand, Market Street has filed a notice of appeal.

Hacker said there is a similar case going through the courts in Dallas where the company is alleged to have sent similar letters to another employee.

Colorado mortgage broker Shelley Piaggio was recently handed down good news from the courts.

Riverside Mortgage Corp. was sued after she contacted prospective customers through faxes. The U.S. Fax Law Center, a company that locates senders of "junk faxes" and takes them to court, demanding damages for alleged violations of state and federal law, sued her in district court for Boulder County, after one of the recipients of her faxes assigned the center his right to sue.

The legal claim against Riverside for "fax header" violation was dismissed by the Colorado Court of Appeals after it determined that there is no such thing. However, there is a question as to whether a significant quirk exists in the way Colorado and federal law applies to header violations.

The court also ruled that claims under the Telephone Consumer Protection Act of 1991 are non-assignable in Colorado because it's an invasion of privacy and invasion of privacy claims are not assignable in that state.

Federal and state laws prohibit unsolicited faxes and allow recipients to sue and collect damages. Fax advertisements sent to individuals and businesses without their permission became illegal in the 1990s. Junk faxes became illegal under federal law with the enactment of the TCPA. Colorado came up with its own junk fax law in 1999 called the Colorado Consumer Protection Act.

The court also ruled that faxes under the CCPA, the state law claim, are not assignable because you have to be a consumer of the good or service to sue. However, as Piaggio's attorney Douglas Turner cautioned, Colorado consumers can sue on their own behalf, they can't assign their claim to companies such as the U.S. Fax Law Center.

But brokers who fax aren't out of the woods.

Turner said the U.S. Fax Law Center, or some similar type of company, can still attempt a class action lawsuit in the state. And, he cautioned that the law on marketing by fax varies from state to state. He said he has been told by plaintiffs' attorneys in the junk fax cases he is defending, that if he doesn't settle, the attorneys will file a class action or find fax recipients in other states and sue in places where violation of junk fax laws are assignable. "Attorneys make good money doing this," he said. "It's not going to go away."

"It is still extremely dangerous to do marketing by fax. It's risky to market by anything other than direct mail," he said.

NovaStar Home Mortgage Inc., which has been embroiled in litigation, continues to get pummeled by the courts.

The Missouri-based lender and two other lenders accused of engaging in bait-and-switch tactics on Bankrate.com and then conspiring to get American Interbanc kicked off the site when it complained about the alleged tactics have been hit with a $46 million verdict.

The latest court decision triples an earlier jury verdict against NovaStar, Amerimax Realty Financial Inc. of Newport Beach, Calif., and Business Mortgage Inc. of Clearwater, Fla.

NovaStar said it will appeal the verdict.

Three former Countrywide Financial Corp. executives have agreed to plead guilty to charges they conducted insider trading of the mortgage lender's shares. The court pleas come on the heels of civil allegations of insider trading from the SEC.

Alan Cao, Quan Zhu and Jun Shi admitted to using confidential negative information about the California company's stock in 2004 to make a profit.

Without admitting or denying the allegations, they agreed to repay their profit and a penalty. Cao paid $100,000 and Shi paid $40,000.

According to the U.S. Attorney for the Central District of California, the former executives also pleaded guilty to one count of securities fraud which carries a maximum 20-year prison sentence.

Finally, the SEC is also taking a look at subprime lending. The federal regulator recently formed a subprime working group that has about 12 examinations currently underway.

An SEC spokesman said the agency's subprime group is working with federal banking regulators. He declined to provide any other details except to say that while many news reports have indicated the group is only looking at collateralized-debt obligations, the working group is going beyond that and looking at troubled servicers, the secondary markets and problems with securitization.

Collateralized-mortgage obligations, a kind of mortgage-backed security, in which mortgages are bundled together and then sliced by investment banks into pieces that bear different levels of risk, are receiving more scrutiny as investors, claiming they were not informed about the risks of investing in the mortgage-backed securities, are going to court after returns have shrunk or disappeared.


Lisa D. Burden is a legal analyst for MortgageDaily.com and holds a law degree from the University of Maryland. She is currently a freelance journalist who previously wrote for Institutional Investor publications and the Baltimore Daily Record.

e-mail Lisa at: [email protected]


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