|Credit: Reuters/Carlos Barria|
(Reuters) - The Florida Supreme Court is set to hear oral arguments Thursday in a lawsuit that could undo hundreds of thousands of foreclosures and open up banks to severe financial liabilities in the state where they face the bulk of their foreclosure-fraud litigation.
The court is deciding whether banks who used fraudulent documents to file foreclosure lawsuits can dismiss the cases and refile them later with different paperwork.
The decision, which may take up to eight months to render, could affect hundreds of thousands of homeowners in Florida, and could also influence judges in the other 26 states that require lawsuits in foreclosures.
Of all the foreclosure filings in those states, sixty three percent, a total of 138,288, are concentrated in five states, according to RealtyTrac, an online foreclosure marketplace. Of those, nearly half are in Florida. In Congressional testimony last year, Bank of America, the U.S.'s largest mortgage servicer, said that 70 percent of its foreclosure-related lawsuits were in Florida.
"This was a case of an intentionally fraudulent document fabricated to use in a court proceeding," says former U.S. Attorney Kendall Coffey, author of the book Foreclosures in Florida.
If the Supreme Court rules against the banks, "a broad universe of mortgages could be rendered unenforceable," Coffey says. "The cost to the financial industry is difficult to estimate, but it could be substantial."
For comparison, some legal experts point to the Massachusetts Supreme Court's decision in January 2011 that ruled a foreclosure invalid because at the time of the foreclosure the bank couldn't prove it had a valid assignment of mortgage - a similar issue to the one in the Pino case.
In the wake of the decision, hundreds of house titles in Massachusetts became void, says foreclosure attorney Tom Cox, who brought what was one of the first foreclosure fraud suits in the country.
"If the Florida court takes a strong stand, it sends a strong signal to the mortgage servicing industry in the rest of the country," says Cox. Judges in other states could start penalizing banks with sanctions and overturning foreclosure suits, he says.
The Florida case provides a startling example of abuses that allegedly take place in the foreclosure process - and the strategies lenders use to overcome them.
Roman Pino, a shy, 35-year-old drywall hanger, bought his home in 2006 during the housing boom. He put 20 percent down on half of a two-bedroom duplex near Palm Beach, Fla., and financed the rest with a $162,400 loan from Countrywide Financial, now owned by Bank of America.
In 2008, when Florida's economy weakened, Pino couldn't find construction jobs and fell behind on his mortgage payments. In October, Bank of New York Mellon, the trustee for the security that owns Pino's loan, filed a suit to foreclose.
Bank of America was Pino's mortgage servicer. It didn't respond to a request for comment.
To help him hang on to his home, Pino sought the help of Thomas Ice, a homeowner-defense attorney. Ice quickly discovered that the documents in the bank's foreclosure lawsuit were fudged.
Pino's mortgage assignment — the document that legally binds a loan to a lender - had been executed by Cheryl Samons, an alleged robo-signer who signed as many as 1,000 foreclosure affidavits a day, according to court depositions.
According to court documents, Samons worked for one of the banking industry's biggest foreclosure mills, the law firm of David Stern. The firm consistently created false documents, according to a report by investigators in the Florida Attorney General's office.
Ice dug up depositions where a Stern employee testified that Samons's hand got so cramped that she told three underlings to forge her signature. Two Stern workers also testified that they forged signatures, backdated documents, swapped Social Security numbers, inflated billings and passed around notary stamps as casually as if they were salt, according to court papers.
Samons, who could not be located for comment, denied the robo signing allegations in an April 2011 deposition. She also testified that Stern lied to her and ignored her concerns.
Stern's firm is now shuttered and under investigation by the Florida Attorney General. Stern's lawyer, Jeffrey Tew, said, "No one ever testified that David ever knew of any misconduct by any of his employees."
To Ice, it was immediately obvious that the Stern firm had backdated Pino's mortgage assignment because the notarization stamp was not valid at the time denoted on the document.
He filed a motion to dismiss, arguing that since the bank's documents were illegal, so was the foreclosure.
Then, in May 2009, the day before Ice was about to take his first deposition of one of Stern's employees, Bank of New York Mellon voluntarily dismissed the case.
Three months later, Stern's firm filed a second foreclosure lawsuit against Pino - this time with different documents.
The same month, Ice filed a motion to vacate the voluntary dismissal, asking the judge both for his attorney's fees, since Pino wasn't paying him, and for a hearing.
Ice argued that a bank shouldn't be allowed to use a voluntary dismissal to dispose of a case in which it filed fraudulent documents, only to turn around and refile the same case with different paperwork later on.
Last summer, Pino's case was headed to the Florida Supreme Court, which said it was of "great public importance" because "many mortgage foreclosure cases appear to be tainted with suspect documents."
But on July 22, just before the case was scheduled for oral argument, Bank of New York Mellon struck a confidential settlement with Pino.
The same day, Bank of New York Mellon, which declined comment for the story, filed a "satisfaction of mortgage" document with the Palm Beach County property recorder's office.
Pino now owned the house, free and clear.
Even though Pino and the bank have settled, the Supreme Court decided to rule on the issue of voluntary dismissal anyway, settling a question that has vexed Florida's lower courts for nearly five years. Its decision won't affect Pino's case.
Voluntary dismissal is the banks' main strategy in judicial states for dealing with homeowners who challenge foreclosures, says Georgetown University consumer and housing finance professor Adam Levitin, who has served as special counsel to the Congressional Oversight Panel.
After a dismissal, the banks can then refile their case using different documents.
"If that fails, strategy number two is to buy them off," says Levitin.
If the court rules against voluntary dismissal, the banks face the costly specter of not being able to simply refile cases and expect homeowners to not challenge the suits.
In Florida, that's a lot of cases. In the year ending July 11, 2011, for example, more than 104,000 foreclosure cases were voluntarily dismissed from Florida's courts, according to the Office of the State Courts Administrator.
Attorneys who work in the foreclosure field say that such dismissals usually occur because of the banks' legal document issues.
To represent it before the Florida Supreme Court, Bank of New York Mellon has hired Bruce Rogow, an attorney who has argued civil rights cases and defended American Nazi Party members and Ku Klux Klan Grand Wizard David O. Duke. He also has represented consumers in the class action against banks for overdraft fees.
Rogow says the case is not about foreclosures or mortgage assignments or robo signing but about the sanctity of a plaintiff's unfettered right to dismiss a case.
"Nobody is saying the bank did anything wrong, and if it was the law firm, there are alternative remedies for that that are far less disturbing than setting aside a law such as voluntary dismissal," says Rogow.
Advocates say upholding the use of voluntary dismissal could empower the banks to do nothing to change their questionable foreclosure practices.
"The banks have a bully business model. You pick on the weak consumer, you demand his lunch money and he runs away," says Levitin.
"But what if he pushes back -- what if he's Roman Pino?"
(Reporting By Michelle Conlin; Editing by Alwyn Scott)