A federal bankruptcy judge has ruled that Countrywide Financial Corp. must cooperate with a Justice Department investigation into allegations that the lender failed to properly credit mortgage payments received from bankrupt borrowers, overestimated what they owed, and made unfounded demands for payment.
Although it "has certainly not been proven that Countrywide did anything wrong" in nearly 300 bankruptcy cases pending before the U.S. Bankruptcy Court for the Western District of Pennsylvania, U.S. Trustee Kelly Beaudin Stapleton has "made a showing of a common thread of potential wrongdoing," Judge Thomas Agresti ruled in dismissing Countrywide’s motion to block the investigation.
Stapleton identified 10 cases in which she claimed Countrywide acted questionably, or which raised issues regarding the integrity of the bankruptcy system, Agresti said. U.S. trustees have filed similar lawsuits in Florida, Georgia and Ohio, Reuters reported.
Countrywide argued that allowing the Office of the U.S. Trustee — the division of the Justice Department that oversees bankruptcy cases — to conduct such an investigation would open up the door for other parties in bankruptcy cases to seek the legal authority to conduct their own probes of other creditors’ practices, opening up the door to an unregulated "free-for-all" of examinations.
In his 50-page ruling, Agresti said he took "seriously" Countrywide’s "legitimate concern" that allowing the U.S. Trustee to pursue examinations of creditors could lead to full-scale investigations that would unfairly intrude into the private business affairs of creditors and "chill" their participation in the bankruptcy process.
Inquiries that seek "far-reaching information on (general) policies and procedures" will "require a correspondingly higher showing of good cause because they are inherently more intrusive and present a greater potential for abuse," Agresti ruled, saying Stapleton had met that threshold in this case.
But Agresti said many of the documents sought by the Office of the U.S. Trustee "relate very precisely to the specific debtors’ loans, the interaction between Countrywide and each debtor, and the interaction between Countrywide and this bankruptcy court."
Turning over those documents "will not subject Countrywide to an unfair intrusion into its private business affairs," Agresti ruled, so the U.S. Trustee must make only a "modest" showing of good cause.
"These are not documents that will implicate any private business affairs or strategies of Countrywide, and there is no question that they would be discoverable in traditional litigation between the debtor and Countrywide over the respective loan if the proceeding had been brought as an adversary proceeding or contested matter," Agresti wrote.
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