By Alan Steven Wolf of The Wolf Firm (USFN Network News Spring 1994)
By Alan Steven Wolf of The Wolf Firm Recently, the mortgage banking industry won significant court
victories in the areas of chapter 13 plans. Now that these victories have been
achieved, the industry is focusing on the issue of bankruptcy fraud.
Throughout the country, but especially in the states of California, Florida, Texas and New
York, debtors are repeatedly misusing the bankruptcy system by the filing of more than one
bankruptcy case. These multiple filings result in further delays in the foreclosure
process and added costs to lenders and servicers. Indeed, industry experts estimate that
over ten percent of all bankruptcy cases are repeat filings and that the harm caused to
the mortgage banking industry by these repeat filings is in excess of two billion dollars
per year!
The United States Foreclosure Network was quick to identify this
alarming trend and approximately two years ago established a working committee, entitled
the Bankruptcy Fraud Committee, to investigate the problem and develop solutions. The
committee, comprised of attorneys and members of servicing entities, mortgage insurers and
government sponsored agencies, has met on a monthly
basis to explore this growing problem. As part of its research, the committee has invited
distinguished members of other industries, government officials and information providers
to speak to the committee.
In March 1994, the committee was honored to have Bankruptcy Judge Lynne
Riddle of the Central District of California speak to the committee. The Central District
of California has over ten percent of all the Chapter 13 cases filed in the country and
Judge Riddle's caseload alone exceeds the entire bankruptcy caseload of many states. In
short, she speaks from a depth of experience.
Judge Riddle expressed to the committee her genuine concern regarding
the problem of multiple bankruptcy filing abuse and her desire to help. From the Judge's
perspective, the abuse undermines the integrity of the courts. Unfortunately, the
Bankruptcy Code limits a Bankruptcy Judge's power, especially in the area of contempt.
Without true contempt powers, Judge Riddle felt that she was hampered in her ability to
control the parties.
Judge Riddle had several suggestions for the committee. First, she
stressed the importance of doing adequate research so that the history of the abuse is
fully disclosed to the court. Surprisingly, the courts do not currently have the ability
to cross check cases; in other words, unless a creditor advises the court of the multiple
cases, it is unlikely that the Judge would independently be made aware of the abuse. Next,
she suggested that through local rule the courts can implement without Congressional
intervention, a condition that debtors be required to submit identification with their
bankruptcy petitions. This proposal is directed toward the growing problem of fictitious
debtors, a mode of abuse where property is transferred to an entity that does not exist,
followed by a bankruptcy filed by that same nonexistent entity.
Using input from speakers such as Judge Riddle, the committee has devised a
four pronged approach aimed at eliminating the problem of multiple bankruptcy filing
abuse. Those approaches are: 1) legislative change, 2) criminal prosecution, 3) civil
prosecution and 4) education. The committee has already taken initial steps in each of
these areas.
On the legislative front, the committee has drafted proposed amendments
to the bankruptcy code intended to eliminate the automatic stay in certain repeat filings.
Specifically, the amendments would create two new exceptions to the automatic stay. First,
the filing of a new case would not trigger the automatic stay if the new case were filed
in violation of section 109(g). In other words, if a debtor were barred under Section
109(g) from filing a new case within 180 days, and a new case was nonetheless filed within
that time period (a common occurrence in the busier courts), the bankruptcy fraud
committee's proposed legislation would provide that by operation of law, no automatic stay
would be created by the filing of the new case. The lender in such a situation would be
free to proceed with its foreclosure sale. Second, the proposed legislation provides that
the filing of a new case would not result in an automatic stay if the judge in a prior
case ordered that the stay were not only terminated in that prior case, but expressly held
that it was also terminated in all future
cases. In short, the legislation empowers bankruptcy judges to make orders which would be
binding in subsequent cases.
In November 1993, committee chair Alan Wolf met in Washington,
D.C., with the staff of United States Senators Heflin and Feinstein to discuss the
proposed changes and to encourage the Senators to incorporate these changes into Senate
Bill 540, Then pending bankruptcy legislation. While the proposed changes were well
received, for political reasons the Senators refused to add the changes to the Senate bill
but recommended that the changes be incorporated into the House version of the bill. The
committee is now working to develop support in the House for the proposed changes.
The committee has also been active in the pursuit of criminal
prosecution of abusive filers. In its investigations, the committee discovered that the
U.S. Attorney's office has failed to prosecute these cases because the government lacks
adequate resources to fully investigate the fraud and develop the legal case. Accordingly,
the committee has focused on methods to help in the investigation. Starting with a
California case in which over 180 bankruptcies have been filed by related entities, the
committee has worked directly with the FBI in supplying information and other resources.
This work is leading to the development of a national standardized form for the reporting
of abusive filings.
On the civil prosecution front, the committee has surveyed attorneys
across the nation on the methods they employ to stop the multiple filing abuse. From this
research, the committee has developed a number of suggested civil approaches. For example,
the committee has been intrigued by an approach employed in Nevada where a universal order
is obtained terminating the stay as to all creditors in the case, precluding any transfer
of the property or encumbrances without prior court order, setting a date for dismissal of
the case some six months into the future, and retaining jurisdiction in the interim to
void any improper transfers or encumbrances. The committee hopes to have other
jurisdictions employ a similar approach.
The committee has also been hard at work in developing education
programs to alert both the industry and court officials on the harm caused by multiple
bankruptcy filing abuse. Part of this process has been the development of accurate
statistics referencing the number of repeat filings and quantifying the harm caused by
those filings. The committee has also invited industry leaders and government officials to
speak to the group. The speakers return to their disciplines fully aware that our industry
is very concerned about this problem. Eventually, the committee intends to provide
seminars to selected groups in order to make them aware of the harm caused by multiple
bankruptcy filing abuse. The efforts of the committee have received
national attention. When the FBI sought assistance in prosecuting a large bankruptcy fraud
case in Los Angeles, it turned to the committee for support. Recently, the committee was
contacted by a CNN reporter from Atlanta who was doing a CNN segment on bankruptcy fraud.
The Bankruptcy Fraud Committee meets on the last Thursday of every
month at 12:00 pm Pacific Standard Time. The committee is open to all members of the
mortgage banking community. If you are interested in serving on the committee, please call
Dave Nielsen, Executive Director of the USFN (800/635-6128).
For further information please contact:
The Wolf Firm, A Law Corporation, is an "AV" rated law firm which concentrates on providing superior legal services to the mortgage banking industry. The firm's national clientele includes many of the largest mortgage bankers in the country, as well as a variety of savings banks, commercial banks, commercial finance companies, credit unions, and the Resolution Trust Corporation. With a staff of approximately forty individuals, including attorneys, certified paralegals, legal secretaries, administrators, clerical personnel, and a full time computer systems analyst, the firm represents its clients on a wide range of matters including all aspects of both residential and commercial/multifamily mortgage loan origination and servicing, securitization, regulatory compliance, bankruptcy, and litigation related to the foregoing in both federal and state courts throughout California. For more routine matters, such as residential bankruptcies, evictions and receiverships, The Wolf Firm has developed extremely cost-effective and efficient programs using specially trained paralegals and computer technology to assist its attorneys in handling these matters at rates that are the most competitive in the State of California and, through its membership in the USFN, the Firm is able to arrange similar services in virtually every state in the nation.
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