The main obstacle to the timely and cost-efficient resolution of bankruptcy cases is a lack of effective communication among counterparties, panelists told attendees at the American Legal & Financial Network's 8th Annual Conference, held last month in Washington, D.C. The panel session, which brought together bankruptcy judges and servicers, as well as counsel representing debtors and creditors, highlighted the ways in which miscommunication often leads to unnecessary and costly courtroom battles.
Eric Clark, a managing partner at Borowitz & Clark LLP, a California-based firm specializing in debtors' rights, suggested that the largest challenge for borrowers' counsel is simply establishing contact with decision-makers at servicing shops.
‘The number-one problem is just trying to get somebody on the phone who understands what you're trying to say and what you're trying to resolve,’ he said, noting that it is not uncommon for borrowers who are nearing foreclosure sales but not yet in bankruptcy to seek his firm's assistance in connecting with servicers. In such instances, borrowers usually have evidence of payments in hand, Clark said, explaining that the bankruptcy filings could be avoided altogether if servicer representatives with delegated authority were readily available.
But even once loan files fall into the realm of bankruptcy, communication between servicers and debtors' representation remains tenuous at best, panelists said. Ronald G. Pearson, a U.S. bankruptcy judge in the southern district of West Virginia, said that bankruptcy judges consider servicers to be the most sophisticated parties at the table. As such, servicers are expected to make all relevant loan information available to debtors' attorneys.
Pearson portrayed the level of cooperation among servicers as uneven. While judges are inclined to allow parties extra time to return to court with all the necessary documents, servicers often take upwards of six months to produce payment histories, Pearson said. Moreover, when payment histories are furnished, they are too often in unreadable formats, he added.
‘Communication is one thing, but communicating garbage is another,’ Pearson said.
Clark echoed that sentiment, explaining that documents produced by servicers and their counsel sometimes include codes that borrowers' attorneys cannot decipher. Making matters more difficult is that servicers are often less than forthcoming in providing translations. Such procedural delays prolong the eventual resolution of cases, Pearson commented.
‘When we get the right information, oftentimes, we can get the right resolution with the minimal time invested by the lawyer on either side,’ Pearson said. ‘And it does not always mean the debtor is going to win. Judges can deal with realities, and if you have payment histories that clearly show the game is really up [and] that the requests for modification have been rejected for valid reasonsâ�¦you're going to be able to take the property and do what needs to be done.’
Many of the difficulties observed in the bankruptcy arena stem from servicers' internal decisions on how they coordinate with their counsel and the degree to which they empower their attorneys. Pearson noted that one benefit of using local counsel, from the judiciary's perspective, is that lawyers who appear before the same judge on a regular basis are unlikely to misrepresent facts.
Annette Rizzo, a judge in Philadelphia's Court of Common Pleas and creator of the city's highly touted conciliation conference program, added that because attorneys are the ones who ultimately have to answer to the standards set by the court, servicers must vest in their counsel as much information and authority as possible.
Local counsel for creditors also usually translates into smoother negotiations with the debtor's counsel, Clark said.
‘The most frustrating cases I have are when the other side isn't represented by local counsel, because we have to deal with somebody in the servicing house directly or somebody in another jurisdiction who's used to battling over things constantly,’ he said.
To improve coordination among the many different moving parts of its default servicing operation, PHH Mortgage has taken the approach of embedding in-house counsel within its various lines of business, explained Jim Scott, a manager at the company. The in-house attorneys act as advocates for their particular lines of business as well as liaisons, communicating local, state and federal legislation to interested parties. Scott agreed that a lack of communication is the servicing industry's biggest challenge. He estimates that PHH Mortgage has 13,000 loans in its foreclosure pipeline and another 6,000 files in bankruptcy.
‘It's difficult to give the individualized attention that you'd like to give each of the borrowers out there, and everybody has a different story,’ Scott said. ‘I think what we try to do, as issues arise, is try to deal with them as best we can. But unfortunately, I think we, as servicers, were very much caught off guard with the volumes, as far as how they've increased.’
Also plaguing the bankruptcy process is a lack of standardization – an affliction shared by creditors, debtors and the judiciary, panelists said. Michael McKeever, managing partner at Philadelphia-based Goldbeck, McCafferty & McKeever, noted the high costs that his firm's servicer clients must absorb to handle the myriad of varying court requirements.
‘It's difficult, at times, to get consensus from your clients as to how they weigh in on a piece of legislation or a court rule or proceeding,’ McKeever said, adding later, ‘I know servicers have spent a lot of resources before we get that file to work that loan out, or to resolve it or to make contact. It's not perfect – we know that. It's not perfect either wayâ�¦.[N]o one's talking as well or as effectively as they should be.’
Pearson pressed attendees to compile a set of standards that dictates how servicers identify and communicate to the judiciary specific charges and fees that are passed on to borrowers, including tax advances, appraisal costs and attorney fees. Clark offered his support for the suggestion.
‘If there was an industry-wide system that we knew, a lot of this stuff would never be in the courts,’ Clark added.
(John Clapp is the editor of Servicing Management.)