Tonight! Foreclosure Mills— Are They Accountable For Prosecuting Unlawful Claims?

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In the Case of OBDUSKEY v. MCCARTHY & HOLTHUS LLP, decided yesterday, March 20, 2019, a unanimous but ambivalent Supreme Court of the United States decided that lawyers are not debt collectors in non judicial states. In doing so, they undermined the due diligence requirement in the bar rules of every jurisdiction that require a lawyer to perform enough investigation to assure that the client is real and has at least an arguable claim.

Several justices opined that Congress should clear up the ambiguity that they perceived in the law. The case was seen as fundamental challenge to the non judicial statutory scheme adopted in 32 states in which property subject to a Deed of Trust could be sold privately without judicial process. We have called out the problem as a substantive and procedural one.

Substantively, most such sales are based upon false premises, i.e., that the claimant is a beneficiary which in simple language means that it is the owner of the debt.

Procedurally, the flaw in the nonjudicial scheme is that a challenge to the foreclosure puts the burden of proof on the borrower who has no direct knowledge of the foundation and can only interpret what is available.

This is different from the burden in judicial states that conform with due process — the claimant must establish it possesses a claim for relief that is founded on ownership of the debt, and that the proceeds of sale would go to pay the debt. While judicial states are still struggling with the fact that the sale proceeds are not going to pay the debt, in nonjudicial environments the question can hardly even come up.

Combined with litigation privilege the decision yesterday insulates lawyers from any liability for pursuing claims that they knew or should have known were legally corrupt.

What is more important and least understood is that the virtual immunity granted to lawyers provides banks with an impenetrable vehicle through which they continue to commit widespread fraud — to the detriment of borrowers, investors, taxpayers, the financial system and society at large.

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