Our Moreno Valley foreclosure defense lawyers have written multiple times in past weeks about court decisions in which lenders' mistakes catch up with them. Lenders have been penalized in multiple ways for sloppiness with basics like submitting false paperwork, inflating charges and failing to prove actual ownership of the homes they try to foreclose. Sloppiness caused a major court fight in one Louisiana bankruptcy, in Wells Fargo Bank NA v. Stewart. The bankruptcy court in the bankruptcy of Dorothy Stewart believed errors in Wells Fargo's billing system were systematic, and ordered the bank to audit every proof of claim it had filed in the district after a certain date. The Fifth U.S. Circuit Court of Appeals found that this exceeded the bankruptcy court's authority and vacated it.
Stewart, a widow, hired an attorney to request a full, itemized accounting of the charges in Wells Fargo's proof of claim on her mortgage. The bank did not really cooperate, and it took three hearings and four months to discover that the proof of claim was inflated by more than $10,000 with erroneous charges. The errors included calculations that violated the mortgage contract; a charge for work dated during a Hurricane Katrina evacuation; and inspection reports that contradicted one another. Using experience from an earlier bankruptcy case, the court found that Wells Fargo's mistakes stem from its automated and computerized system. Because it felt this could threaten the bankruptcy system, it ordered Wells Fargo to audit and amend proofs of claim after a certain date, and include a complete loan history. Wells Fargo appealed the injunction as well as the new, lower claim amount in Stewart's case. The district court upheld it and Wells appealed to the Fifth Circuit.
On appeal, the bank argued that the court had no authority to issue the injunction and also issued it without due process. The Fifth Circuit found for Wells Fargo, but only reached the authority issue. The injunction came in Stewart's individual bankruptcy case, the Fifth said, but reached issues far beyond her case and having little to do with her case. In fact, it noted that she did not request it. Thus, it said the bankruptcy court may not hang its injunction on her objection to the proof of claim from Wells Fargo. The Fifth went on to rule that the court also cannot rely on its authority "to protect its jurisdiction and judgments and to control its docket," because individual judges in other cases are free to address problems in their individual cases. If this fails, the appeals court suggested, there is also the rulemaking authority. The Fifth declined to draw a boundary limiting the bankruptcy court's ability to curb abuses of the process, but found that in this case, the court overstepped its authority; an injunction was not shown sufficiently necessary. Thus, it vacated the injunction and dismissed other appeals in the case as settled.
Our Huntington Beach foreclosure defense attorneys would have preferred a stronger condemnation of Wells Fargo's apparent systematic problems. While the false charges were apparently corrected in Stewart's case, there are many other Dorothy Stewarts whose bankruptcies could easily have the same kinds of egregious mistakes in the proofs of claims. The bankruptcy court may have overstepped its authority by using Stewart's case as a launchpad for its injunction, but it's clear that some type of correction was necessary. Otherwise, as the Fifth Circuit's own opinion noted, it's highly likely that debtors will simply fail to challenge the statement of claim and end up yoked to considerably more debt than they actually owe. This is an abuse of the bankruptcy process -- even if it turns out to be accidental -- that threatens the integrity of the system. As Fallbrook foreclosure defense lawyers, we believe our clients and everyone else's deserve better.
If you're considering bankruptcy as a way to deal with overwhelming debt, call Howard Law, P.C., to discuss how we can help. For a free, confidential consultation, you can email us or call toll-free at 1-800-872-5925.