“Wells Fargo’s conduct is clandestine. Rather than provide Jones with a complete history of his debt on an ongoing basis, Wells Fargo simply stopped communicating with Jones once it deemed him in default. At that point in time, fees and costs were assessed against his account and satisfied with postpetition payments intended for other debt without notice. Only through litigation was this practice discovered. Wells Fargo admitted to the same practices for all other loans in bankruptcy or default. As a result, it is unlikely that most debtors will be able to discern problems with their accounts without extensive discovery.”
Introduction. In understanding what happened in this case, it is important for the layman to understand the following: All bankruptcies in the U.S. are governed by federal law. The concept – though not necessarily the process – is simple: The moment one files for bankruptcy, an “automatic stay” is imposed. This means that immediately upon filing a petition in bankruptcy, no creditor may attempt to recover any monies or seek other relief against that person [called the “debtor”] without court approval. A trustee is appointed to administer the bankrupt’s estate. Creditors, such as Wells Fargo, must then file a “proof of claim” with the court, setting forth the amount the debtor owes them as of the date he or she filed their petition. A bankruptcy proceeding in which a “reorganization plan” or “plan” is filed with the court is known as a “Chapter 13” bankruptcy. If the plan is opposed by any creditors or the trustee, it must be worked out, or resolved by the Bankruptcy Judge. Once “confirmed” by the Court, the debtor and all creditors must adhere to it.
Typically, a reorganization plan will identify who, what, when and how, creditors are to be repaid by the debtor. Any variance from the plan has to first be approved by the bankruptcy court. Some actions and events in bankruptcy lingo are occasionally referred to “post-petition” in order to signify that they occurred after the debtor filed for bankruptcy. Events occurring before the debtor’s bankruptcy filing are referred to as “pre-petition.” The trustee is in charge of overseeing the operations of the final confirmed plan.
In the following case, Wells Fargo was one of the debtor’s creditors, and as such, had participated in, and was bound by, the confirmed plan. As demonstrated below, the courts jealously guard debtors who seek federal bankruptcy protection. Any deviation from a confirmed plan by the debtor’s creditors, especially intentional deviations, can result in severe sanctions.
Discussion. The Memorandum Opinion written by the Honorable Elizabeth W. Magner, U.S. Bankruptcy Judge, could have been completed in a few pages. Instead, she decided to take 21 pages, setting out in detail, the conduct of Wells Fargo, that you sensed was not going to end well for this Big Bank.
Following court confirmation of his plan, Michael L. Jones, the debtor, filed what is known as an “adversary proceeding” which was commenced in an effort to recover over-payments made to Wells Fargo on his home mortgage. The “over-payments” were not accidentally made by Mr. Jones. Rather, they were sums taken by Wells in violation of the “automatic stay” provisions of the law. In the vernacular, “that’s a No-No.” Mr. Jones’ sought a return of the over-payments, reimbursement of actual damages [e.g. costs, attorney fees, etc.] and punitive damages for the bank’s violation of the automatic stay.
The issue that sparked the current controversy began over five years ago, on April 13, 2007. At that time, the Bankruptcy Court entered a partial judgment awarding Mr. Jones $24,441.65, plus interest for the amounts overcharged by Wells Fargo on his loan. In addition, the court found Wells Fargo to be in violation of the automatic stay provisions of the federal bankruptcy law, because it had applied “post-petition payments” [i.e. those made after Mr. Jones had filed for bankruptcy – PCQ] to undisclosed fees and costs that had never been authorized by the Court and that were contrary to Mr. Jones’ approved reorganization plan. At that time, Wells Fargo’s conduct was found to have been “willful and egregious.”
Mea Culpa! On May 29, 2007, Wells Fargo offered to implement “…several remedial measures designed to correct systemic problems with its accounting of home mortgage loans.” New accounting procedures were worked out between the trustee, the debtor, the Court and Wells Fargo which were then incorporated into an Amended Judgment that awarded Mr. Jones $67,202.45 in compensatory sanctions for attorney’s fees and costs.
A Change of Mind. Being Too Big To Admit Defeat, Wells Fargo reversed direction after negotiating the Amended Judgment. It appealed to the Federal District Court.
Go Directly to Jail! On Wells’ appeal, the District Court affirmed the Bankruptcy Court’s earlier findings against the Big Bank and increased the compensatory civil award to $170,824.96. The issue of punitive damages was sent back to the Bankruptcy Court for further consideration [this process is called a “remand” – PCQ]. Wells Fargo appealed the District Court’s remand to the Fifth Circuit of Appeals. The appellate court dismissed Wells’ appeal.
Back in Bankruptcy Court. Here the Big Bank got a Big Break. The original award of $67,202.45 was reinstated and it was decided that since Wells represented it had instituted new accounting procedures designed to prevent the reoccurrence of improper charges, there would be no assessment of punitive damages.
Murphy’s Law. Later, it was learned that four months after Wells had agreed in the Jones case to clean up its act, Dorothy Stewart, who had earlier sought bankruptcy protection in the same district, filed objections to Wells Fargo’s Proof of Claim. Her objections alleged, in part, that Wells Fargo had improperly applied her payments in a manner that resulted in an incorrect amortization of her loan and had imposed unauthorized fees and cost. The improper amortization method in the Stewart case was identical to the Jones case.
Oh, oh…. Now we have two cases in the same federal bankruptcy district, involving the same accounting shenanigans by the same Big Bank. It was now apparent that Wells Fargo had not really corrected its accounting procedures as it had represented to the Court in Jones!
The evidence established the following:
- All of Wells’ home mortgage loans were administered by its own proprietary computer software. This resulted in borrowers’ payments being applied first to late fees and costs assessed on mortgage loans, then to outstanding principal, accrued interest, and escrowed costs. The Court found that this amortization method was “directly contrary to the terms of Jones’ note and mortgage [as well as all of its standard form notes and mortgages – PCQ] which required the application of payments first to outstanding principal, accrued interest, and escrowed charges, and then toward late fees and costs.“
- This improper method of amortization was used “…for every mortgage loan in Wells Fargo’s portfolio” – including “…every mortgage loan administered by Wells Fargo in bankruptcy *** without disclosing the assessments or requesting authority.”
Herewith are snippets from Judge Magner’s 21-page written opinion:
- “There is nothing in the record supporting Wells Fargo’s assertion that it has corrected its past errors. There is nothing in the record to assure future compliance with the terms of notes, mortgages, confirmed plans or confirmation orders.”
- “[Wells Fargo] misapplied funds *** in contravention of the note, mortgage, plan and confirmation order.”
- “Wells Fargo assessed and paid itself postpetition fees and charges without approval from the Court or notice to Jones.”
- “The net effect of Wells Fargo’s actions was an overcharge in excess of $24,000.00. When Jones questioned the amounts owed, Wells Fargo refused to explain its calculations or provide an amortization schedule.”
- “While every litigant has a right to pursue appeal, Wells Fargo’s style of litigation was particularly vexing. It has steadfastly refused to audit its pleadings or proofs of claim for errors and has refused to voluntarily correct any errors that come to light except through threat of litigation. Although its own representatives have admitted that it routinely misapplied payments on loans and improperly charged fees, they have refused to correct past errors. They stubbornly insist on limiting any change in their conduct prospectively, even as they seek to collect on loans in other cases for amounts owed in error.”
- “Unfortunately, the threat of future litigation is a poor motivator for honesty in practice. Because litigation with Wells Fargo has already cost this and other plaintiffs considerable time and expense, the Court can only assume that others who challenge Wells Fargo’s claims will meet a similar fate.”
Playing Hardball. Noting that over eighty (80%) of the chapter 13 debtors in her district have incomes of less than $40,000.00 per year, Judge Magner found Wells’ hardball litigation tactics “particularly overwhelming.”
“In this Court’s experience, it takes four (4) to six (6) months for Wells Fargo to produce a simple accounting of a loan’s history and over four (4) court hearings. Most debtors simply do not have the personal resources to demand the production of a simple accounting for their loans, much less verify its accuracy, through a litigation process. Wells Fargo has taken advantage of borrowers who rely on it to accurately apply payments and calculate the amounts owed. But perhaps more disturbing is Wells Fargo’s refusal to voluntarily correct its errors. It prefers to rely on the ignorance of borrowers or their inability to fund a challenge to its demands, rather than voluntarily relinquish gains obtained through improper accounting methods. Wells Fargo’s conduct was a breach of its contractual obligations to its borrowers. More importantly, when exposed, it revealed its true corporate character by denying any obligation to correct its past transgressions and mounting a legal assault to ensure it never had to.”
“Society requires that those in business conduct themselves with honesty and fair dealing. Thus, there is a strong societal interest in deterring such future conduct through the imposition of punitive relief.”
“Following Jones, Wells Fargo was involved in at least two (2) additional challenges to the calculation of its claims in this Court. In both cases the evidence revealed that Wells Fargo continued to improperly amortize loans by employing the same practices prohibited by Jones. In short, Wells Fargo has shown no inclination to change its conduct. Wells Fargo is the second largest loan servicer in the United States. With over 7.7 million loans under its administration at the time this matter went to trial, it possesses significant resources. Previous sanctions *** have not deterred Wells Fargo. *** (I)f previous awards do not deter sanctionable conduct, larger awards may be necessary.”
Judge Magner concluded that a punitive damage award of $3,171,154.00 was warranted “to deter Wells Fargo from similar conduct in the future. This Court hopes that the relief granted will finally motivate Wells Fargo to rectify its practices and comply with the terms of court orders, plans and the automatic stay.” [“Hope springs eternal….” – PCQ]
Conclusion. If there was something particularly astonishing to me about Wells’ conduct, I would say so. Unfortunately, this is an all too familiar story. But I do wonder what goes through the minds of Wells Fargo’s legal counsel in cases like this one.
Sleeping Nights? On a personal level, how does one sleep at night, knowing that he or she is being paid to beat up on someone who’s already been beaten down? Do dollars anesthetize the conscience?
Professional Satisfaction? The bank attorneys appearing before Judge Magner cannot feel good, having to make arguments that she later refers as “…a position as untenable as it (is) illogical.” Perhaps if the money’s right, bank counsel is willing to play the fool.
Self-respect? Fortunately, I get to choose my own clients. If I don’t respect them, or don’t trust them, I don’t represent them. It’s simple. I would find it impossible to represent a client – inside the courtroom or out – that I neither respected nor trusted. Do bank attorneys have to perform the impossible? Do dollars anesthetize self-respect too?Posted in Financial Crisis, Foreclosure, Legislation - Federal, Lenders, Market Conditions, Miscellany, Real Estate/Distressed | Tagged Bank Ethics?, Bankruptcy, Banks, Distressed Transactions, Financial Crisis, Foreclosure, Lawyers, Mortgages, Piggy-Back Loans, Promissory Notes