Will Florida Finally Punish Banks and Lawyers for Foreclosure Document Fraud?


Foreclosure proceedings in courts nationwide have exposed a swamp of fraudulent documents, and in some cases -- though perhaps far too few -- those bad docs have sunk attempts by banks to take people's homes.

Some of Florida's courts, however, -- particularly courts in Lee County -- have come under fire for compounding the documentation problems by ignoring the rule of law in order to rush through foreclosures. And a new rule put in place by the Florida Supreme Court to ensure that documents being used in foreclosures are properly certified hasn't worked well, thanks to a new type of robo-signing that has sprung up to get around it.

In a reflection of how bad things have gotten, lenders are asking judges to "ratify" foreclosures done with robo-signed documents, the Palm Beach Post reported on Saturday. While such "ratification" would not, as a matter of law, mean much, the Post says, it might discourage people from challenging the foreclosures.

With luck, two recent developments may help really clean up the fraud in the Sunshine State. First, an appeals court has asked the Florida Supreme Court to clarify judges' power to address the fraud, and second, the Florida Bar Association is finally taking a stand.

Asking for Power to Punish Foreclosure Fraud

A Florida appeals court has asked the state Supreme Court to decide how much freedom trial judges have to punish banks that submit false foreclosure documents. Specifically, if fraudulent documents have been submitted, but nothing much has happened yet -- that is, if the documents haven't been used to get the court to do anything -- can courts prevent banks from using voluntary dismissals to avoid being punished for attempting to foreclose on homes using bad documents?

The situation plays out like this: Bank submits obviously false documents when it starts the foreclosure action. The homeowner's attorney points out the problems and seeks to investigate the documents by deposing people, but rather than let that discovery go forward -- at least according to the dissenting appellate judge -- the bank takes the papers back and voluntarily dismisses the case for awhile. Then some days, weeks or months later, the bank restarts the foreclosure proceedings with different documents that are not as obviously false -- though not necessarily genuine or accurate either.

The question is this: Regardless of whether the second set of documents is true, should the courts be able to punish the bank for starting the proceedings fraudulently in the first place? Or can the banks seal off the bad documents -- and avoid being held accountable for the fraud against the court they represent -- by dropping that case and starting fresh later? The question isn't theoretical: Not only are fraudulent documents rampant in Florida, voluntary dismissals by the banks are happening by the thousands each month.

Indeed, in certifying the question to the Florida Supreme Court, the appeals court noted: "We conclude that this is a question of great public importance, as many, many mortgage foreclosures appear tainted with suspect documents. . .[if the courts can give] sanction[s] after a voluntary dismissal, it may dramatically affect the mortgage foreclosure crisis in this State."

Lawyers Must Discipline Lawyers

On the other side of the coin are the attorneys. One of the shocking aspects of the foreclosure mess has been that attorneys have participated in the document fraud without any reaction from state bar associations. Attorneys are officers of the court, and we consider ourselves professionals bound by a code of ethics -- lawyer jokes notwithstanding. We're not supposed to help our clients use fraudulent documents in court cases. Bar associations investigate our character before admitting us, and they're supposed to discipline us for our misdeeds, up to and including disbarring us -- taking away our livelihood -- if our actions warrant it.

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But despite widespread evidence of attorney robo-signing, and the fact that all those fraudulent bank documents were submitted by banks' counsels, the state bars haven't taken significant action. It's not like the frauds are particularly hard to spot, either: Consider the 21 notarized assignments of mortgage that were dated before the notary stamp was issued that Ice Legal of Florida mentioned at oral argument in the case that led to the certified question above. Ice Legal's attorney noted that the 21 false documents were easy to find, and that it didn't find more simply because it stopped looking at that point. It's impossible to believe that the banks' attorneys never knew their document submissions were false.

The lack of action by the bars has created accountability problems because of the way the legal profession is structured. One of the Florida attorney general's investigations of a foreclosure law firm was partly thwarted because a judge quashed the AG's subpoena of the firm. The judge ruled that the state bar association and the Florida Supreme Court, not the attorney general, had the power to regulate the attorneys in the firm. Although not every judge agreed with that analysis, the bottom line is that the Florida bar association's failure to get involved represented a large gap in the efforts against foreclosure fraud.

A New Anti-Fraud Rule for Attorneys

Finally, though, the Florida Bar is getting involved in a meaningful way. As reported by the Palm Beach Post and discussed by the blog Naked Capitalism, the Florida Bar is telling attorneys that their duty not to facilitate fraud on the court by using fraudulent papers outweighs their duty to their clients. As a result, attorneys have been instructed to tell judges about fraudulent documents in currentand past cases, including cases where the foreclosure has been completed -- even if the house has been sold to a new buyer. If attorneys follow through and report all the bad documents, the massive scale of the problem will finally be revealed.

That's because the only cases of fraudulent documents that have come to light in Florida are ones in which the homeowner has challenged the foreclosure, and most foreclosures are not contested. (The number of uncontested foreclosures may be inflated by banks' failure to properly notify homeowners of foreclosure proceedings, but that's a different issue.) But the Florida Bar's edict applies to the banks' attorneys, too, so that they now have a clear duty to tell judges their clients' documents are bad in uncontested cases.

If the rule is followed to a meaningful extent -- and that's a big if, given the way the Florida Supreme Court's verification rule was "obeyed" -- several consequences are sure to follow. First, I imagine wholesale requests for voluntary dismissals of uncontested actions that involve bad documents, as attorneys try to bypass the reporting by doing the documents over. Second, I imagine an even greater delay in getting cases filed because now the banks will have to redo even more documents. Third, I anticipate that the clouded title issue will come to a head as completed foreclosures involving bad documents are "outed." Fourth, I hope that the judges will start getting really angry at the banks.

Exposing the Banks' Business Failures

Yes, many homeowners are in default. But it's the banks' failure to perform basic business functions, such as keeping accurate records and communicating with their attorneys, that has precipitated the foreclosure document fraud. And by keeping accurate records, I mean such fundamental duties like being able to locate such crucial documents as promissory notes, and transferring assets properly by creating assignments of mortgage and endorsements of the notes at the time the asset transfers are purportedly occurring.

If banks performed those two basic functions correctly -- including, in the case of securitized mortgages, during the securitization process -- banks would have no problem foreclosing. Instead, banks outsourced these functions to companies like Nationwide Title Clearing, Lender Processing Services, and in a sense, MERS, as shortsighted cost-saving measures. They also apparently disregarded the procedures required by securitization contracts and even by the Uniform Commercial Code for who knows what reason -- perhaps cost, perhaps convenience, perhaps arrogance. In any case, the banks are now reaping the completely preventable consequences of robo-signing and other document frauds.

(These arguments entirely ignore the failures of banks to properly perform other basic business functions -- things like accurately crediting borrowers' payments to their accounts, negotiating contract amendments such as mortgage modifications in good faith, or -- during the housing bubble -- doing basic underwriting.)

Time for Judges to Lay Down the Law

I'm hoping that a clear view of the scale of the document fraud being perpetrated by the banks will enrage Florida's judges. These frauds not only disrespect the court, but they wastes judges' valuable time and the system's limited cash by making foreclosures relatively easy to contest and requiring banks' counsel to dismiss and refile so many cases. And the bad documents are clouding the title on far too many Florida properties.

I'm waiting for a judge -- in Florida, or elsewhere -- to get so fed up with the banks that she says: Look, I'm tired of seeing your fraudulent documents. Pay the court $10,000 in sanctions. If you submit another set of fraudulent documents to me in this or any other case, it'll be another $10,000. Do it enough times and it'll be $20,000 a case. Oh, and every time it's the homeowner's attorney pointing out the fraud to me, I'm going to make you pay their fees, because at least they're functioning like officers of the court and trying to defend the process. They shouldn't have to defend the system for free.

After all, the very same banks that have failed at their basic business functions and are now committing document fraud as a result are the institutions that taxpayers bailed out, are again making massive amounts of money and continue to pay princely sums to their executives. Surely they can afford to compensate court systems for the massive resource drain their actions are causing.

And they can certainly afford to pay the foreclosure defense attorneys and consumer bankruptcy attorneys who have done all the heavy lifting to expose the problems that the banks have created.