In re Subpoena Duces Tecum, 461 B.R. 823 (C.D.Cal. 2011) – Investigation of Mortgage Servicers
Oftentimes debtors think of the US Trustee as someone who is monitoring them. It is easy to forget that the US Trustee’s Office role is to oversee and administer the entire bankruptcy system. This includes overseeing the conduct of creditors. When creditors abuse the provisions of the Bankruptcy Code or mislead the court, the US Trustee’s Office can step in to investigate such conduct and ask the court for sanctions against those creditors.
As the mortgage crisis progresses, it is becoming increasingly clear that many mortgage companies have engaged in unfair, inequitable, and even fraudulent conduct. In particular, facts have come forward showing that mortgage servicers were not actually reviewing foreclosure documentsr proofs of claim before signing them.
In bankruptcy a creditor is required to review its loan documents and the servicing records for the loan. In the context of mortgage lending, the servicers were required to certify under penalty of perjury that they have possession of the original promissory note.
The US Trustee’s Office began a review the proofs of claim that BAC Home Loan Servicing filed in bankruptcies nationwide. This review involved the US Trustee’s Office filing requests for Rule 2004 Examinations for the production of documents from BAC Home Loan Servicing and the appearance of a BAC representative at an oral examination.
BAC Home Loan Servicing filed motions to quash the Rule 2004 subpoenas on several grounds, but most importantly on the grounds that the US Trustee lacked standing and that the US Trustee could not show good cause.
The US Trustee’s standing derives from the grant of statutory authority for it to “raise and may appear and be heard on any issue in any case or proceeding under this title.” 11 U.S.C. § 307. This means that the US Trustee does not have to be a “party in interest” to obtain a Rule 2004 Subpoena. The US Trustee established good cause for a Rule 2004 Examination by showing that the examination was necessary to support the trustee’s claim about mortgage servicing irregularities. This demonstrates that the US Trustee’s ability to administer the bankruptcy process is broad and protective. The allegations that BAC Home Loan Servicing had submitted fraudulent declarations in support of its proofs of claim are central to the fair and equitable administration of the bankruptcy system and within the US Trustee’s oversight authority.
The court’s ruling properly allowed the US Trustee’s Office to continue its investigation. Although it may feel like the US Trustee is only looking over your shoulder, remember that their scrutiny of the bankruptcy protects the integrity of the entire bankruptcy system for all parties in interest.