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Yves Smith Reports on Federal Bankruptcy Trustee Joining Litigation Agaisnt LPS

11 Oct

Oh – Lender Processing Services had a bad day! Oh, Jeeez. We’re really feeling bad about that. NOT!

Lender Processing Services Has a Very Bad Day: Federal Bankruptcy Trustee Joins Litigation Against LPS on Behalf of All

from naked capitalism by Yves Smith

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LPS and its defenders dismissed these cases, since a superficially similar case in Texas had been filed in the past and withdrawn.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.

 

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