BKR: Get the Federal Trustee Interested in Your Case

Lender Processing Services Has a Very Bad Day: Federal Bankruptcy Trustee Joins Litigation Against LPS on Behalf of All Chapter 13 Trustees in the US

Lender Processing Services, which provides “technology” services to servicers and foreclosure mills, is under an escalating legal assault. Although media attention has focused on its role as a generator of fabricated documents for servicers and mortgage trusts, it can probably shift the liability for those documents onto the parties that used them as part of foreclosure proceedings.

The more serious legal assault is a pair of related lawsuits which we discussed earlier, which strike at the core of LPS’ business model on its largest unit, its Default Services group, which contributes nearly 50% of revenues. Both cases allege that LPS’ arrangements with the foreclosure mills that are part of its network amount to illegal sharing of legal fees. The typical remedy is disgorgement.

LPS and its defenders dismissed these cases, since a superficially similar case in Texas had been filed in the past and withdrawn. We indicated that we had reviewed the claims and spoken with the attorneys regarding the caliber of their evidence, and they seemed to have more than support for their argument to get past summary judgment.

Today, a new court filing on one of the two cases, the proceeding in Federal bankruptcy court in Mississippi, has dramatically expanded LPS’ potential liability and increased the odds of an unfavorable outcome for the company.

The standing Chapter 13 Trustee for the Northern District of Mississippi, Locke Barkley, has joined the case on behalf of herself and of all Chapter 13 Trustees in the US.

By way of background, the Chapter 13 Trustee is called a “standing trustee.” Her role is to administer all of the bankruptcy estates for all of the Chapter 13 debtors in her district. She (and all other Chapter 13 Trustees) are interested parties because to the extent that illegal fees were included in proofs of claim and illegal fees were assessed to debtors to be paid through Chapter 13 plans, then all of that money should have gone to these estates to pay towards unsecured creditors. Needless to say, this is a large additional potential liability to LPS. The presence of the Federal bankruptcy trustee as a plaintiff should give the plaintiffs considerable credibility with the judge.

Another important milestone was passed on this case last week. One reader, a former Federal bankruptcy court litigator who was generally positve about the action based on his reading of both of the initial lawsuits claims did point out the obvious shortcoming, the absence of attorneys with class action experienced (and as important, infrastructure) involved in the cases. As he wrote:

I admire the strategy being used by the homeowners’ counsel. One case in federal court, the other in state court. One case destined for the old 5th Circuit, the other destined for a state court of last resort in a different circuit. Not exactly a circuit-conflict strategy, but carefully planned to improve chances of review by the Supreme Court of the United States if necessary.

It appears a motion for relief from stay was filed by the putative note-holder in both cases, which was granted but then set aside in the KY case (not clear what action was taken on that motion in the MS case). But the class definitions are slightly different (with a subclass averment in the KY case). A previous decision on point against an entity similar to LPS in one jurisdiction (MS) is icing on the cake.

No insult to homeowners’ counsel, but their pleading of “adequacy of counsel” appears a little thin based on class-action complaints I have seen. Filing counsel appear to be sole practitioners and/or small law firms, with no affiliation with large national firms experienced in class actions who can point to a track record of success in representing class members.

The filings were amended to add counsel with class action expertise. On the Federal case, in Mississippi, CaseyGerry has joined the case. The head of the firm, David Casey, is a former president of the Association of Trial Lawyers of America. Cases his firm has handled include Exxon Valdez and the California tobacco case. In other words, this is a heavyweight player. On the Kentucky case, McGowan & Hood, a firm which has won major class actions lawsuits, including medical device cases, has signed up.

LPS’ stock was up over 1% today, even though the amended complaint was filed at 2:30 PM EDT. Clearly Mr. Market didn’t get the memo.

2 Responses

  1. I do not see LPS staying in business too much longer. You can’t have a business model that depends on breaking the law. Splitting fees may be one thing, but providing illegal forged documents to law firms and pretender/lenders is quite another. My opinion, they should be closed down and charged by the Attorney General of whatever states they operate in. What protection are they receiving from the federal government that we don’t know about? How can the stock be going up when they have been sued? It does not make sense. Are we also looking at manipulation of the stock market? I sent another E-mail to the White House about the inequality of the wealthiest Americans and us, poor slobs losing our homes. http://www.challengingforeclosure.com Sirak@challengingforeclosure.com

  2. With all these fresh legal moves and cases, I see a few years of pure deadlock/appeal/deadlock before decisions come down. That gives rise to perhaps the best strategy that exists out there – – waiting out your state’s statute of limitations for unpaid debts. That is, of course, if you are not embroiled in litigation yourself.

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