Lawyer intensifies fee-splitting battle against mortgage servicing providers
by KERRI PANCHUK
Friday, April 22nd, 2011, 3:06 pm
The alleged splitting of attorney fees between foreclosure law firms and third-party mortgage servicing providers is the subject of another lawsuit, bringing the number of cases filed on this issue to five within the past seven months, said Nick Wooten, an Alabama-based plaintiff's attorney involved in all of the cases.
By mid-May, Wooten said he expects to file 10 to 12 additional cases, making similar allegations about what he claims are illegal, split-attorney fee arrangements between mortgage servicing outsourcers and law firms. The cases are concentrated in the Northern District of Mississippi, the Southern District of Alabama and the Northern District of Florida-Pensacola division.
The latest case involves plaintiff, Susan Marie Harris of Florida, against Lender Processing Services (LPS: 28.41+0.11%), its subsidiary LPS Default Solutions Inc., and the Ben-Ezra & Katz law firm.
Harris, who is seeking class-action status of her lawsuit, claims the defendants violated bankruptcy code by creating contractual agreements that allowed them to "illegally split attorney's fees" with law firms that signed up to join LPS Default Solutions' attorney network.
Harris alleges the defendants set up a contractual arrangement in which attorneys in the LPS network compensated LPS Default Solutions by splitting attorney's fees with the outsourcer. Because of this compensation model, the plaintiff contends LPS was able to offer its clients — namely large mortgage servicers – some services free of charge, expanding its competitive positioning in the default servicing marketplace.
Harris filed her complaint in the U.S. Bankruptcy Court for the Northern District of Florida — Pensacola division.
A spokesperson for LPS said Friday the company does not comment on specific ongoing litigation matters, but "has been successful in disposing of similar allegations in the past and is confident it will do so in the future."
Ben-Ezra also is named as a defendant in the case as the law firm under contract by LPS in this case. A spokesperson for the Fort Lauderdale, Fla.-based firm was not immediately available for comment.
When asked if every in-network law firm working with LPS Default could face litigation, Wooten said "at some level, it is likely that each of those law firms will have to address their relationship with LPS." He estimates that more than 200 firms have contracts with the mortgage servicing outsourcer.
Harris contends in her suit that "LPS Default and the network (law) firms attempt to disguise what are in fact attorneys’ fee sharing and referral agreements by characterizing the fees paid by the attorneys to LPS Default as administrative fees." Harris alleges that when a bankruptcy court is wrapping up one of the cases handled by LPS and one of its in-network law firms, the law firm applies for attorney's fees and does "not disclose to the courts that a substantial portion of the fees requested will be paid to LPS Default."
The result, Harris claims, is a situation where LPS Default and its network law firms "fraudulently mislead the bankruptcy courts, the bankruptcies and their attorneys as well as the bankruptcy trustee as to the actual amount of attorneys' fees incurred by the creditors," the complaint states. The complaint accuses LPS, LPS Default and Ben-Ezra with abuse of the bankruptcy process, fraud on the court, contempt of bankruptcy code, contempt of federal rules of bankruptcy procedure, breach of the uniform mortgage covenant, unauthorized practice of law and civil conspiracy.
The Harris case filed in Florida this week resembles existing cases filed by Nick Wooten, where large mortgage servicing outsourcers are facing the same claims.
The issue of fee-splitting isn't new. It arose in a 2008 Houston bankruptcy case involving Ernest and Mattie Harris. The couple said its loan servicer, Saxon Mortgage Services, never told the court it had hired Fidelity National Information Services as its agent. (LPS was spun off from Fidelity in 2008.) The borrowers claimed that Fidelity's involvement resulted in higher legal fees. Fidelity steadfastly denied wrongdoing in that case, arguing that its business model created efficiencies that lowered costs for all. HousingWire Magazine wrote about the case in its inaugural issue, in September 2008.
Wooten's first bankruptcy-related case, filed last year in the Northern District of Mississippi, makes similar allegationsagainst Prommis Solutions Holding Corp., its majority owner Great Hill Partners, and the law firm of Johnson & Freedman. The suit also names Lender Processing Services, and its subsidiary, LPS Default Services, as defendants.
Another case filed in the Bourbon Circuit Court in Kentucky involves a homeowner who counter sued Wells Fargo(WFC: 28.54 -1.01%) last year in a foreclosure action. The plaintiff alleged the company did not own his mortgage by assignment. In addition, the plaintiff accused the Manley, Deas, Kochalski law firm, LPS and LPS Default Solutions of illegally splitting attorney's fees as part of their contractual arrangement.
Wooten filed two other cases this month. In the U.S. Bankruptcy Court for the Southern District of Alabama, a plaintiff named Katrinn Bowden Meeker accused LPS, LPS Default Solutions and the firm of Sirote & Permutt of reaching "an arrangement to illegally split attorney's fees."
In yet another case, plaintiffs in the Northern District of Mississippi made similar allegations against LPS, LPS Default and the firm of Morris and Associates.
Write to Kerri Panchuk.