ETHICAL CONSIDERATIONS FOR FORECLOSURE PRACTITIONERS Annual Meeting American College of Mortgage Attorneys

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1 ETHICAL CONSIDERATIONS FOR FORECLOSURE PRACTITIONERS 2012 Annual Meeting American College of Mortgage Attorneys Louis S. Pettey, Esquire Heise Jorgensen and Stefanelli P.A Montgomery Village Avenue Suite 400 Gaithersburg, Maryland

2 ETHICAL CONSIDERATIONS FOR FORECLOSURE PRACTITIONERS The increase in foreclosures nationwide in recent years has created a new set of ethical dilemmas for the foreclosure practitioner, meaning for the purposes of this Article, an attorney hired to conduct the foreclosure by a lender. While there may be a sense that the boom has subsided since its start in 2008, according to RealtyTrac.com, 1 in every 666 housing units received notice of a foreclosure filing in June with the states of California and Florida leading the way. Since the financial crisis began in September 2008, there have been approximately 3.7 million completed foreclosures across the country 2. I. WHO IS THE CLIENT? Whether the foreclosure case involves a home loan or commercial property, the initial contact from the Lender starts the due diligence process for the foreclosure lawyer. In today's environment, determining the identity of the client, not typically thought to be an issue, has turned into a potential ethical quagmire. The American Bar Association Model Rules of Professional Conduct ("ABA Model Rules") Rule 1.1 Competence at least implicitly requires a level of due diligence to identify the true holder of the indebtedness and the role of the party engaging the lawyer. The ease of transfer of the indebtedness on loans into securitized pools has greatly complicated the determination of the identity of the true noteholder in some cases, and the client is most often not the actual noteholder, but a servicer of the loans. While it may seem unlikely that the servicer is not actually the servicer, and that the purported noteholder is not actually the noteholder, and while it may seem as if you are causing everyone more work by requiring that each party provide evidence of their respective roles, it is difficult to predict when a borrower or its counsel, or even the court, in a judicial foreclosure state, will raise those issues. Although it is sometimes time-consuming for the servicers to track down the original documents evidencing the chain of assignments and endorsements, the failure to have those documents in us/news/corelogic- reports- 60,000- completed- foreclosures- in- june.aspx 2

3 advance could adversely affect the lawyer's ability to process what should be an otherwise routine and legal foreclosure. II. ROBO-SIGNING BY LENDER Another sticky issue for the foreclosure practitioner is the "robo-signing" by the lender's agents and employees. For example, on August 2, 2012, Missouri Attorney General Chris Koster issued a press release announcing the settlement of claims involving DOCX, a subsidiary of Lender Processing Services, a major servicer of residential loans. Koster had obtained indictments against DOCX and others alleging that DOCX directed employees of the company to falsely sign mortgage documents in the names of various bank officers without proper authorization. Furthermore, the indictments alleged that such forged signatures were then falsely notarized by notaries employed by DOCX as though the bank officers had actually signed the documents. Finally, the forged documents were then filed in courthouses across Missouri. 3 Any lawyer who participates in the foreclosure process in loans involving the forgeries and filing of false foreclosure documents by such lenders runs the risk of being accused of violations of ABA Model Rule 3.3 Candor Toward The Tribunal in judicial foreclosure states. While Rule 3.3 only prohibits the lawyer from "knowingly" presenting false evidence to the tribunal, the comments explain that "a lawyer's knowledge that evidence is false can be inferred from the circumstances. Thus, although a lawyer should resolve doubts about the veracity of testimony or other evidence in favor of the client, the lawyer cannot ignore an obvious falsehood." ABA Model Rule 3.3, Comment [9]. Even in non-judicial foreclosure states, the lawyer must be concerned with the prohibitions against making false statements and failing to disclose material facts involving fraud set forth in ABA Model Rule 4.1 Truthfulness In Statements To Others since the lawyer will be making representations to the borrower, to those other persons required by due process to receive notice, and to the general public in advertising the sale based upon the information supplied by the lender or servicer. The level of due diligence required of the lawyer in such a circumstance is difficult to quantify. Experience tells us, however, that hindsight is and when the client is 3 y/ 3

4 accused of forgery and making blatantly false statements in order to foreclose, the lawyer's files had better contain enough background due diligence to provide the lawyer with plausible deniability of knowledge of the fraud. III. ROBO-SIGNING BY LAWYERS AND STAFF Another pitfall for the foreclosure lawyer has been the incidence of robo-signing in the lawyer's office itself. In the state of Maryland, at least eight lawyers have been investigated and/or subjected to disciplinary charges for various forms of improper execution of foreclosure documents, including sworn or notarized affidavits and deeds. The publicity from these accusations has resulted in several federal class action suits, based upon new torts such as improper or illegal foreclosure, and while at least one such suit has been dismissed, others are still pending, or have been dismissed and are on appeal. 4 The actions of the lawyers in these cases varied somewhat, but were all of a similar nature. In some cases, the lawyer would review the file, make changes and corrections on the computer screen and then instruct a staff member to sign the documents for the foreclosure, and, where required, that person or another would notarize the signature. In other cases, a deed would have the names of two or three trustees and the lawyer trustee would sign his name and then sign the names of the others, have a staff member notarize the deed and record it. In the latter example, the deed appointing the substitute trustee required only one to sign, the explanation being that the lawyer signed the names of the other trustees knowing the deed to still be valid since it actually required only the signature of one of the trustees. The behavior of the lawyers in these grievance cases was a result of several factors, the first being the sheer volume of foreclosures. The flood of new cases required the lawyers to increase staff, work longer hours and find more streamlined means to keep the paperwork flowing through their offices. If one of the trustees was spending a great deal of time in state 4 Md. 'robo- signing' case thrown out of federal court Baltimore Sun, January 28, bz- robo- signing- case- dismissed ,0, story; See also False signatures cloud Maryland foreclosure cases Baltimore Sun, October 12, estate/bs- bz- foreclosure- attorneys ,0,52982.story 4

5 court litigating borrower disputes or arguing lift stay motions in bankruptcy court, the trustee was consequently frequently unavailable to sign the documents in a timely manner to keep the paper moving. In some cases, the solutions were fashioned by staff rather than the lawyers, which lawyers may not even have been aware of some of the signing practices. The second factor was a misguided reliance on the case of Habib v. Mitchell, 261 A.2d 744 (1970). In Habib, a trustee who was foreclosing on a deed of trust fell ill and was unable to make it to the office and, therefore, asked another person to sign a foreclosure bond on his behalf. The borrower discovered that the signature on the bond was a forgery and challenged the validity of the foreclosure sale. The Court held, based upon trust law, that since the party signing for the trustee was not exercising any discretion in the performance of the act he was given authority to perform, in other words, he was merely doing the ministerial act of signing the name of the trustee to a document at the trustee's express direction, the foreclosure bond was valid. Reliance on Habib was misguided because the ultimate validity of the foreclosure sale should not be the only consideration for the lawyer. The lawyer must also consider his ethical obligations under the applicable Rules of Professional Conduct. In addition to violations of ABA Model Rules 3.3 and 4.1 cited above, the failure to properly supervise staff, permitting or encouraging subordinate lawyers and staff to execute documents and notarize improperly executed documents violates ABA Model Rules 5.1 Responsibilities of Partners, Manager, and Supervisory Lawyers and 5.3. Responsibilities Regarding Nonlawyer Assistants. The lessons learned from these grievance cases can be extended to any other circumstance where a lawyer is burdened with an overwhelming weight of business, has inadequate or untrained staff and/or inadequate time to do the job. Any shortcuts considered must also take into account the lawyer's duties under the Rules. IV. THE UNREPRESENTED OR UNDER-REPRESENTED BORROWER AND/OR GUARANTOR Borrower parties are sometimes unrepresented by counsel, sometimes represented only in for limited purposes (such as bankruptcy) and sometimes are represented by counsel for only a short time before the borrower or counsel terminate the representation. The foreclosure practitioner can encounter several ethical problems when dealing with such a borrower. When the lawyer must deal with an unrepresented borrower, ABA Model Rule 4.3 Dealing with 5

6 Unrepresented Person requires that the lawyer make reasonable efforts to make certain that the borrower does not misunderstand the lawyer's role. An unsophisticated borrower may look upon the lender's lawyer as if the lawyer is a mediator rather than an advocate. The lawyer must correct any such misimpression. When the previously represented borrower suddenly claims to be unrepresented, the lawyer must consider how the lawyer can confirm that fact and not violate ABA Model Rule 4.2 Communication With Person Represented By Counsel when communicating with the borrower. Even in commercial foreclosures, the foreclosure practitioner must be wary of how to deal with some "outside" loan guarantors who may not be represented by the counsel for borrower. The foreclosure practitioner must obtain a clear understanding from the start as to the scope of opposing counsel's representation of the various borrower/guarantor parties. V. CONCLUSION The continuing financial crisis has created new ethical considerations for the foreclosure practitioner. ABA Model Rule 1.3 Diligence requires that the lawyer act with reasonable diligence and promptness in representing a client. Somehow the foreclosure practitioner must balance the requirement of that Rule against the probable delays resulting from the due diligence required to initiate his representation. In addition, the lawyer must be careful not to allow the increased influx of cases to result in shortcut solutions which violate the Rules. Finally, the lawyer must always take care to abide by the Rules when dealing directly with the borrower or guarantor. Louis S. Pettey Heise Jorgensen and Stefanelli P.A Montgomery Village Avenue Suite 400 Gaithersburg, Maryland