2008-03-05 Case of Borrower William Parsley (05-90374), Dkt #248: Judge Jeff Bohm's Memorandum Opinion, rebuking Countrywide's litigation practices, Countrywide's false outside counsel

8/14/2019 2008-03-05 Case of Borrower William Parsley (05-90374), Dkt #248: Judge Jeff Bohm's Memorandum Opinion, reb

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oseph Zernik DMD PhDax: (801) 998-0917 Email: [email protected]

eading 048.3

8-03-05 Memorandum Opinion, Hon Jeff Bohm, US Judge, TX

Conduct of Countrywide, and now BAC/Countrywide, which started in 2004, andcontinues even today, in part since July 3, 2007, has been an exact repeat ofconduct described in detail in the Memorandum Opinion referenced above.

In that Memorandum Opinion, Countrywide is quoted as making promises to avoidsuch conduct in the future, and the court stated its determination to verify that itstrust in such promises was well placed.

The scheme involving Todd Boock, Bryan Cave, LLP, Sandor Samuels, Angelo Mozilo,

Tim Mayopoulos, and eventually Ken Lewis, where at the end nobody is purportedlyaccountable for racketeering in the court in LA, was exact copy of the abuse of OutsideCounsel procedures noted in the Texas decision.

The Opinion was described in media as rebuke of Countrywides litigation practices.Indeed, the Hon Jeff Bohm does not mince words:

During several hearings over the past year, the Courtreceived evidence on a wide range of misconduct beyond thisinitial misrepresentation.The parties are a mortgage loan servicer and its two law fIrms: (I)Countrywide Home Loans, Inc. (Countrywide), the loan servicer forFannie Mae, the mortgagee of the Debtor's home loan; Theircollective conduct caused this Court to issue two Show Cause

Orders. This Memorandum Opinion discusses how their actionsin the case at bar have shown a disregard for the professionaland ethical obligations of the legal profession and judicialsystem. (pp 1-2)

'7. Policy changes made by the parties as a result of theshow cause hearingMore than nine months passed between the issuance of the FirstShow Cause Order and the closing arguments in this matter.During this time, each of the parties attempted to respond to theissues raised by the Court and the UST. Although a multitude ofissues remain unresolved, the Court is pleased that some stepshave been taken in the right direction. After the parties read thisMemorandum Opinion, the Court hopes they will continue these

improvements.' (p 52)

'Changes made by CountrywideCountrywide has made two changes as a result of the ShowCause Orders.27 First, Countrywide no longer refers Fannie Maeloans to a single national counsel. [Aug. 8, 2007 Hr'g Tr.157:10-21.] Insofar as this change means that Countrywide willbe directly communicating with attorneys who file pleadings onbehalf of Countrywide, the Court believes that this is a positivechange. Second, Countrywide will require that internal affidavitsbe executed prior to the filing of a motion to lift stay, and will bediligent about communicating with outside counsel to ensure thatCountrywide provides accurate information. [Aug. 8, 2007 Hr'g Tr.158:25-159:7.]' (p53)

Digitally sig

by Joseph Z

DN: cn=Jose

Zernik,

email=jz123

arthlink.net

Date: 2009.0

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Case 2:08-cv-01550-VAP-CW Document 31 Filed 04/02/2008 Page 11 of 59

Case 05-90374 Document 248 Filed in TXSB on 03/05/2008

IN THE UNITED STATESBANKRUPTCY COURTFORTHE SOUTHERNDISTRICT OF TEXASHOUSTONDMSION ENTERED

03/05/2008

In re:WILLIAM ALLEN PARSLEY,

Debtor

Case No. 05-90374

Chapter 13

MEMORANDUMOPINION ON SHOW CAUSE ORDERS OFFEBRUARY 12. 2007 AND MAY 18. 2007I. Introduction

The matterbefore this Court began with a routinemotion to lift stay, but has spiraled into alengthy ordeal which has cost theparties substantial time, attorneys' fees, and costs. Over one yearago, on February6,2007, theCourt sought asimple answer to a simplequestion-whywas amotionto lift stay being withdrawn? The movant's attorney, rather than answer the question truthfully byadmitting that the motion was based upon an incorrect payment history, attempted to conceal thetruth from the Court-that the motion should have never been filed. This rather narrow issueprecipitatedan expansiveproceeding. Duringseveral hearings overthepast year, the Court receivedevidence on a wide range ofmisconduct beyond this initial misrepresentation.

The parties are amortgage loan servicer and its two law fIrms: (I) CountrywideHome Loans,Inc. (Countrywide), the loan servicer for FannieMae, the mortgagee of the Debtor's home loan; (2)McCalla, Raymer, Patrick,Cobb,Nichols& Clark (McCallaRaymer), the national law firm to whichCountrywide referred the file after deciding to seek relief from the automatic stay; and (3) Barrett,Burke,Wilson, Castle, Daffin& Frappier, L.L.P. (BarrettBurke), the Texas law finn which McCallaRaymer chose to draft, file, and prosecute the motion to lift stay. Their collective conduct caused

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Case 05-90374 Document 248 Filed in TXSB on 03/05/2008 Page 2 of 40

this Court to issue two Show CauseOrders. ThisMemorandum Opinion discusses how their actionsin the case at bar have shown a disregard for the professional and ethical obligations of the legalprofession and judicial system:II. Background of the events preceding the First ShowCauseOrder

A. The importance of homesteads in TexasIn Texas, homesteads are sacrosanct. In re McDaniel, 70 F.3d 841,843 (5th Cir. 1995).

Indeed, when it first took effect, the Texas State Constitution expressly forbade forced foreclosuresales on homesteads except for thosecreditorswho held purchasemoney liens, mechanics' liens, ortax liens. Magallanez v. Maga/lanez, 911 S.W. 2d 91, 94 (Tex. App.-San Antonio 1995) (citingTex. CaNST. art. XVI, 50; TEX. PROP. CODE ANN. 41.002 (Vernon 2006.2 The public policyofTexas' liberal protectionofhomesteads is "toprotectcitizens and theirfamilies from the miseriesand dangers ofdestitution." In re Bradley, 960 F.2d 502,505 (5th Cir. 1992) (quotingFrank/in v.Coffee, 18 Tex. 413, 415-16 (1857; In re Sorrell, 292 B.R. 276, 280 (Bankr. E.D. Tex. 2002).

B. The Court's concern over withdrawn motions to lift stay on homesteads ofdebtors

Given this important, long-standingpolicyprotectinghomesteads inTexas, thisCourtmakesevery effort to ensure thatmotions to lift stay seeking to foreclose on homesteads contain accurateinformation regarding paymentsmade by the debtor. When a debtor's homestead is the subject ofa withdrawnmotion to liftstay, this Court typically inquires why the movant wants to withdraw the

I See In reMaisel, 378 B.R. 19,20.21 (Bankr. D. Mass. 2007) ("Unfortunately, concomitantwith the increasein foreclosures is an increase in lenders who, in their rush to foreclose, haphazardly fail to comply with even the mostbasic legal requirements of the bankruptcy system.")

2 In 1997, the Texas Constitution was amended to allow for forced sales where the lien was created through aqualifying home equity loan. TEX. CONST. art. XVI, SO(a)(6)(A); seea/so Box v. First StateBank, 340 B.R. 782, 784(S.D. Tex. 2006).2

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motion. In some cases, thereisan entirelyreasonable explanation. Forexample, if,between thedateof the filingof themotion and the date ofthe hearing onthemotion, the debtor has cured the defaultsthat were the basis of the motion, it makes sense for the movant to withdraw the motion.Conversely, the reason for withdrawal is suspect if, after the date of the filing of the motion, themovant discovers that themotion contains inaccurate factual allegations about the debtor's default.It is also reasonable to withdraw the motion under these circumstances, but it is neither fair norequitable for themovant to charge the debtor for the attorney's fees and costs incurred in connectiona motion that was deficientwhen filed.

Unfortunately, such fee and cost shifting sometimes occurs without themovant informingthe Court or the debtor. See Sanchez v. Ameriquest Mortgage Co. (In re Sanchez), 372 B.R. 289(Bankr. S.D. Tex. 2007); Katherine Porter, Misbehavior and Mistake in Bankruptcy MortgageClaims, U. of Iowa Legal Studies Research Paper No. 07-29, Nov. 6, 2007, available athttp://papers.ssm.com/so13/papers.cfm?abstractjd=1027961. The dehtor only discovers theadditional obligation months oryears laterwhen, believing he has paid all ofthe monthlypaymentson the note, he learns that the debt is notentirelyretired because theseunfamiliar fees and costs, plusinterest that has accrued thereon, remain unpaid. It is just sucha scenario which this Court seeks toprevent by inquiringwhy a movant is withdrawing its motion to lift stay on a debtor's homestead.

I f counsel for the movant concedes that the motion should not have been filed because itcontained inaccurateallegations aboutpayments and further represents that themovantwill not shiftthe fees and costs to the debtor, this Court will typically sign the order allowingwithdrawal of themotion and take no further action. However, if counsel for the movant does not concede that the

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motion contained inaccurate factual allegations, then thisCourtwill inquire about the original basisfor filing the motion to lift stay and why themovant is seeking to withdraw the motion.

C. The January 23,2007 preliminary hearing onCountrywide'smotion to liftstayIn the case at bar, the Court was faced with a motion to lift staywhich the Debtor claimed

contained factually inaccurate allegations about his payment history. Countrywide, the servicer ofthe Debtor's mortgage, retained McCallaRaymer, whose offices are in Roswell, Georgia. McCallaRaymer then sent the Debtor's file to Barrett Burke's Houston office with a request that BarrettBurke file a motion to lift stay, which Barrett Burke did on December 29, 2006 (the Motion).[DocketNo. 26.]

At the preliminaryhearingonJanuary 23, 2007, Warren Lee (Lee) appearedon behalfof theDebtorand announced that, based upon payment informationprovidedbytheDebtoron the previousday, the Debtor's counselofrecord, ChristopherMorrison (Morrison), had filed aresponse opposingthe Motion (the Response). [Docket No. 27.J According to Lee, the Response was based oninformation which the Debtor himself had received from Countrywide the previous day. TheResponse states:

"Themortgage paymenthistory, which is attached to theMovant'sMotion for Relief,reflects that the Movant inaccurately applie[d] the first post-petition mortgagepayment (received 11109/2005) to the pre-petition arrears, rather than theNovember2005 payment (see attached pay history). Furthermore, the attached mortgagepayment history does not reflect the payment receivedbyMovant on May5,2006 asshown on the Movant's own year-end 'transaction history for 2006. ",One ofBarrettBurke's attorneys,YvonneKnesek(Knesek), also appeared at the preliminary

hearing and informed this Court that she had just seen the Response a few minutes prior to thehearing. She stated that she would need to verify the payment history provided by the Debtor, but

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desp ite the misapplication of the Debto r' s month ly payments, he was "still del inqu ent." [January

23,2007 Hr'g Tr. 2:4-10.] Lee and Knesek represented that the part ies wante d more time to

ascertain the exact amount o fthe Debto r' s arrearage ; acco rdingly, the y request ed that the preliminary

hear ing be pass ed to a final hearing . The Court granted this request and se t a fina l hearing for

February 6, 2007.D. The February 6, 2007 fmal hearingAt the final hearing on February 6, 2007, a diffe rent Barrett Burke attorney, Walter

Thu rmond (Thurmond), appeare d fo r Countryw ide and announced that Count rywide wished to

withd raw the Motion.) This Court, mindful that the Debto r' s respon se set forth that the payment

history was inaccura te , inquired whether the Motio n cont ained alle gat ions about the Debtor's

paymen t his to ry that were flat-ou t wrong. " [Feb. 6, 2007 Hr'g Tr. 4:2-7 .] Thunno nd

responded by saying that , "From what I have read in our system this morn ing and what I could tell

from this, the answer is it was a good motio n." [Feb. 6, 2007 Hr'g Tr. 4:8 -10 (em phas is added).]

When this Court inform ed Thurmond that it had concern s th at th e Motion contained factual

inaccurac ies, Thurmond then repr esented to the Court that he would "ch eck when I go back and see

what the dea l was with it ." [Feb. 6, 2007 Hr'g Tr. 4:20 -21.] Thurmond never in formed the Cou rt

of the resu lts of his research on the Motion. The Court was there fore left with two distinc t

impressions: (1) the Motio n co nta in ed inaccu ra te allegations abou t the Debtor 's paymen t history;

3 At the final hearing, neither Morrison nor Lee appeared for the Debtor because, according to Thunnond,Morrison knew that Barrett Burke was going to inform the Court that Countrywide wished to withdraw the Motion. [Feb.6, 2007 Hr'g Tr. 3:5-11.] Presumably, Morrison saw no need to attend this hearing because he knew there would be notestimony and therefore his services would not be needed.

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and (2)Thunnonddid notwant to own up to these false allegations, and hoped that this Courtwouldforget the whole matter.Uf. The First Show CauseOrder

Basedupon the suspectcommentsmade byThurmond, this Court issued a show cause orderon February 12, 2007 requiring Countrywide and its counsel to appear and show cause why theyshould not be sanctioned for their conduct relating to the Motion (the First Show Cause Order).[Docket No. 29.] Specifically, the First Show Cause Order stated:

This Court is concernedthatCountrywide and/or its counsel have causedtheDebtorto incur unnecessary legal fees and expenses by filing the [Motion] and thenwithdrawing it at the eleventh hour because it contained factual inaccuracies thatCountrywideand itscounsel should have discovered prior to the filingof the Motionif proper attention [had] been given to the Debtor's mortgage payment history andappropriate procedures.[Docket No. 29.]The hearing on the First Show Cause Order was scheduled for March 5, 2007. The Court

requireda representative from Countrywide and three individuals from BarrettBurke to appear. At

this point, the Court had not beenmade aware of the existence ofMcCalla Raymer and its role inthis matter. As indicated by the language in the First Show Cause Order, the Court was focused on(l ) whethermisrepresentationswere made to the Court that the Motion was factually accurate; and(2) ensuring that the Debtor was not being charged attorney's fees for a motion that should havenever been filed. But for the extremely thorough investigation by the Office of the United StatesTrustee (UST), the Court may never have become aware of the numerous other issues discussed

herein.

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A. The role of the United States Trustee in this matterPrior to addressing the events oftheMarch 5, 2007 hearing on the FirstShow Cause Order,

the Court believes it is necessary to discuss the role ofthe UST-in this case, specifically, and in thebankruptcy system, generally-due to complaints by Barrett Burke, McCalla Raymer, andCountrywidethat theUSTwas overstepping its authoritybybeing so activelyinvolved in this matter.

When thisCourt issued the First Show CauseOrdersetting ahearing for March 5, 2007, theCourt had no knowledge of the UST's intention to appear and be heard in this matter. The Courtassumed thatonlyCountrywide and BarrettBurke would appear at the hearing. Three days prior tothe hearing, on its own volition, the UST filed a pleading entitled "Statement of the United StatesTrustee regarding this Court's Order requiring Countrywide Home Loans, Inc. [and Barrett BurkeWilson Castle Daffm & Frappier L.L.P. attorneys and personnel] to appear and show cause why[they] should not be sanctioned for filing amotion for relief from stay containing inaccurate debtfigures and inaccurateallegationsconcerningpayments received from thedebtor." [DocketNo. 40.]In this statement, theUST encouraged the Court to issue sanctions against Countrywide and BarrettBurke based on a bad faith failure to investigate the factual basis for the Motion. TheUST furtherrequested this Court to conduct an examination to determine whether Barrett Burke and/orCountrywide had engaged in similar past behavior. [Id.J

On the day of the March 5, 2007 hearing, Barrett Burke filed a Motion to Strike or, in theAlternative, Limit Issues and/orContinue Show Cause Hearing. [Docket No. 43.J In this motion,Barrett Burke asserted that the UST had no standing to participate in the show cause hearing. ThisCourt disagreed and issued a ruling that the UST did have standing. [Docket No. 48.J

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Notwithstanding this ruling, Barrett Burke, McCallaRaymer, and Countrywide, from timeto time during the show cause hearings, questioned the UST's motives. Indeed, in closingarguments, Barrett Burke's counsel noted that in the caseat bar, the Debtorhimselfhad not lodgedany complaint against Countrywide and its counsel-thereby insinuating that the UST had nobusiness involving itself in the show cause hearing. [Dec. 12,2007 Tr. 13:5-14:5 and 17:20-25.]The level of vituperation towards the UST merits some discussion of the UST's role in thebankruptcy system.

The USTfrequentlyparticipates in matters such as objectingto fee applications, prosecutingmotions to dismiss cases, prosecutingmotions against bankruptcypetition preparers for violationsof 11 U.S.C. 110, objecting to disclosure statements and plans in Chapter 11 cases when thesepleadingsare legallydeficient, andprosecutingobjections todischarge in Chapter7cases. Althoughit is uncommon, and possiblyunprecedented until recently, for the UST to focus on the conduct ofamortgagee, a servicer, or its counsel in aChapter 13 case, it does notfollow that theUST is outsideof its Congressional mandate as suggested by Barrett Burke, McCalla Raymer, andCountrywide.

Statutory law, case law, and legislative history indicate theUSThas an extremelybroad rolein thebankruptcyprocess. 11 U.S.C. 307 states that: "TheUnitedStates trusteemayraiseandmayappearand be heard on any issue in any case or proceeding under this title but may not file a planpursuant to section 1121(c) of this title." (emphasis added). The language in this statute isunambiguous: the UST, on its own, has the right to raise and be heard on any issue of its choosing.See, e.g., In reRevco, Inc., 898 F.2d 498, 499 (6th Cir. 1990) (reversing district court's holdingthatthe UST lacked standing because it had no pecuniary interest at stake, theSixthCircuit held that theUST had standing to appeal because its role is "protecting the public interest and ensuring that

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bankruptcycases are conducted according to law."); In re Clark, 927 F.2d 793, 794 (4th Cir. 1991)(holding that the UST has standing to appeal based on Revco's reasoning that the UST's duty is toensure thatbankruptcycases are conducted according to law); In reDow Corning Corp., 194 B.R.147 (Bankr. E.D. Mich. 1996)("OneoftheUnitedStates trustee's principal raisons d'etre is to guardand protect the bankruptcy system . . . TheUnited States trustee now monitors such activities andobjects not because parties in interest may be harmed by the action, but merely to protect theintegrity of the system.") (emphasis added).

Congressional history supports wide-ranging authority for the UST. In discussing the roleand duties of the UST, the legislative history of the BankruptcyReform Act of 1978 stated that:

They [i.e., the UST] will serve as enforcers of the bankruptcy laws by bringingproceedings in the bankruptcycourts in particular cases inwhich a particular actiontaken orproposed to be takendeviates from the standards establishedbytheproposedbankruptcy code . . . The United States Trustee will conduct investigations inappropriate circumstances to ensure that participants in bankruptcy cases are notavoiding the requirements of the bankruptcy code.H.Rep. No. 595, 95th Cong., 1st Sess. 109-10 (1977).In the case at bar, the UST read this Court's First Show Cause Order and decided to appear

and be heard on the issues raised therein. In so doing, the UST was well within its authority toinvestigate the activities ofCountrywide, Barrett Burke, and McCalla Raymer to detennine if theiractivities undermined the integrity of the bankruptcy system. The Court would also note that thediscovery conducted by theUST, and its examination ofwitnesses at the show cause hearings, hasbeen very thorough and skillful.

In sum, merelybecause the UST has not previously focused on the practices ofmortgageesin consumer bankruptcy cases does not mean that the UST is prohibited from doing so now. 11

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Case 05-90374 Document 248 Filed in TXSB on 03 /05 /2008 Page 10 of 40

U.S.C. 307 grants th e UST ex tremely broad standing . The Court grea tly respects the UST 's work

in th is case and anticipates that the UST will part ic ipate in future hear in gs in th is Court.

B. The March 5, 2007 hearing on the First Show Cause OrderThree witn esses te stif ied at the March 5, 2007 hearing on the Fir st Show Cause Order: (I)

Felic ia Sanoy (Sanov), the ass ociate attorney at Barrett Burke who signed th e Motio n; (2) Lois Ortiz

(Ort iz ), the manager of th e bankruptcy department at Countrywide; and (3) John Sch lotter

(Schlotte r) , an associa te attorney at McCalla Raymer who had knowled ge about th e Debtor's file.4

1. Felicia Sanoy's testimonySanoy worked as an atto rn ey at Bar re tt Burke for over four years and has been licensed to

pra ctic e law in Texas since 1987.s [March 5, 2007 Hr'g Tr. 18 :6-21.] Sanoy stated that McCalla

Raymer had been referring files to Barr ett Burke for approxim ate ly 15 years and that the volume

ranged from 100-150 files per month ; indeed, she te st if ied unequiv ocally that McCalla Raymer is

"a major client of the fi rm." [March 5, 2007 Hr'g Tr. 20:15-24; 21:5-6 .] She also stat ed that

McCalla Raymer referred the Debto r's file to Barrett Burke on December 11, 2006 for the purpose

of fil ing a motio n to lift stay. [Mar ch 5,2007 Hr'g Tr. 20:2-8 ; 21:21-25.]

On December 29,2006, Sanoy signed the Motion, att ac hed the Debtor 's loan history, andfiled this pleading with the C le rk 's office. The Motion alleged th at the Debtor had: (1) es timated

4 The Court heard testimony from many witnesses during the numerous hearings on the Second Show CauseOrder. In order to assist the reader with following the names of the witnesses referenced in this Memorandum Opinion,the Court has attached an addendum which identifies the witnesses who testified in the case at bar.

'OnMarch 5, 2007, Sanov was still employed at Barrett Burke. However, at the hearing on August 10, 2007,Sanov testified that Barret t Burke had fired her onMarch 20, 2007 due to her conduct in In re Allen, 2007 Bankr. LEXIS2063 (Bankr. S.D. Tex. June 18,2007 ). [Aug. 10 ,2007 Hr' g Tr. (afternoon session) 116:13-22.]10

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equity in his homestead of$8,653.21; (2) total post-petition arrearages of$2,255.07; and (3) totalarrearages (both and pre- and post-petition) of $6,969.92. [DocketNo. 26.]

Sanoy testified thatprior to the preliminaryhearingscheduled for January23,2007, counselof record for the Debtor, Chris Morrison (Morrison), leftamessage for SanoY's colleagueatBarrettBurke, Chris Reilly (Reilly), to the effect that the Debtor had in fact made the November 2005payment which Barrett Burke alleged was part of the post-petition defaults. [March 5, 2007 Hr'gTr.31:7-16.] Sanoy admitted that this payment was in fact made by the Debtor but mistakenlyapplied as apre-petition rather than apost-petition payment. (March 5, 2007 Hr'g Tr. 36:22-37:25.]Sanoy also testified that contrary to the loan repayment history, the Debtor did in fact make a fullpayment inMay 2006. Sheconceded thatshe had made amistake in reviewing the loan historypriorto filing the Motion. (March 5, 2007 Hr'g Tr. 38:1-14.]

Finally, SanoytestifiedthatwheneverMcCalla RaymerreferredaCountrywide file to BarrettBurke, the attorneys at Barrett Burke never dealt directly with Countrywide and, indeed, had noability to contactCountrywide directlywith regard to the accuracyofa loan history. Rather, BarrettBurke dealt solely with McCalla Raymer. [March 5, 2007 Hr'g Tr. 23:11-18.] The Court wasconcerned that a law firm would contractually obligate itself to be precluded from any and allcommunication with its actual client.6 This issue is one of the new issues which this Court raisedin the Second Show Cause Order.

6 The written agreement that McCalla Raymer has with its local counsel throughout the country, includingBarrett Burke. states that: "All communications must be made through your McCalla contact at ouroffice. We requireresponses to your inquirieswithin 24 hours and will hold your office to the same standard." [BarrettBurke Exhibit No.4A.]11



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2. Lois Ortiz's testimonyOrtiz has been the managerofCountrywide's bankruptcydepartment forover two and a half

years and has over twenty years of experience in the mortgage lending industry. [March 5, 2007Hr'g Tr. 51: 18-52:5.] Ortiz testified that no Countrywide employee reviews pleadings before theyare filed; rather, Countrywide relies entirelyon its attorneys to ensure that thepleadings being filedon its behalfare accurate based upon information provided by Countrywide. [March 5, 2007 Hr'gTr. 69:9-70:13.] Additionally, she stated that no one at Countrywide reviewed the loan historyattached to the Motion prior to its filing. [March 5, 2007 Hr'g Tr. 68:12-24.]

Ortiz also conceded that Countrywide did not give credit to the Debtor for the post-petitionpayment that he made on November 9,2005 because Countrywide believed the filing date wasNovember 15, 200S-inOrtiz's own words, "Wedid notknow about the bankruptcyuntil November15th. And during that process, itwas not acknowledged that the November paymentwas receivedas a post-petition payment." [March 5, 2007 Tr. 58:9-12.] She also conceded that the paymenthistory attached to the Motion failed to reflect that the Debtormade a complete monthly paymenton May 5, 2006. [March 5, 2007 Hr'g Tr. 71:9-19.]

Finally, Ortiz testified that Countrywide's policy is that if it withdraws a pleading,Countrywide does not assess to the borrower any attorney's fees incurred by Countrywide in thedrafting and prosecution of the pleading prior to its withdrawal. [March 5, 2007 Hr'g Tr. 71:20-72:20.] Despite Ortiz's testimonyon this issue, the Courtwas concerned thatCountrywide did nothave an actual writtenpolicyagainst chargingdebtors for withdrawnmotions. This is another issuewhich the Court raised in the Second Show Cause Order.

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3. John Schlotter's testimonySchlotter has been an associate attorney at McCalla Raymer for 10 years and has been

licensed to practice law for 28 years. [March 5, 2007 Hr'g Tr. 75:24-76:10.] He testified that oneof his duties is to ensure that referrals such as the one in the case at bar are sent to the appropriatelocal counsel in the state where the bankruptcy is filed. [March 5, 2007 Hr'g Tr. 76:11-21.] TheCourt was surprised by Schlotter's testimony that he was the attorney-in-charge of the Debtor's file.[March 5, 2007 Hr'g Tr. 90:25-91:6.] Although he testified that he was the attorney-ill-charge,Schlotter also testified that he had not filed a notice of appearance, had never read the Local Rulesfor the SouthernDistrict ofTexas, and had not reviewed the Motion before it was filed. [March 5,2007 Hr'g Tr. 91:7-92: 14; 95:4-22.] The Court was further surprised by Schlotter's testimony thatBarrett Burke's client in the case at barwas McCalla Raymer, not Countrywide, and that McCallaRaymer directs Barrett Burke on how any file, including the file in the case atbar, is to be handled.[March 5, 2007 Hr'g Tr. 78:6-14; 93:8-94:6.]

With respect to the payment historyattached to the Motion, Schlottertestified that his firm'sparalegal staffpreparedthis history"[a]nd the reason they're prepared this way is becausewe'vehaddifferentcourts require legiblepayment histories. And when we submitted screens,we've got courtsthat have rejected them. Andothercourts have said, 'Wecan't read these. We want something that'slegible, that shows exactly how the payments are applied, that somebody who doesn't have anaccounting background canread it. '" [March 5, 2007 Hr'gTr. 80=25-81:7.] Schlotter testified thatno attorney at McCalla Raymer reviews the loan histories prepared by the paralegals. [March 5,2007 Hr'g Tr. 96:1-97:5.]

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Schlotter also testified that he became aware of the errors in the Debtor's payment historywhen he receiveda call from Thurmond, who told him that theDebtorhad filed a responseopposingthe Motion and that therewere somediscrepancies in the payment history. [MarchS, 2007 Hr'gTr.90: 15.19.] Baseduponthis information from Thurmond, Schlotterpersonally authorizedThunnondto withdraw the Motion. [March 5, 2007 Hr'g Tr. 88:19-21.]

Finally, Schlottertestified-justas Sanov had-that any communications from BarrettBurkemust be directed to McCallaRaymer, not Countrywide. [March 5, 2007Hr'gTr. 79:11-20; 99:18-100:6.] Indeed, he stated that ifBarrett Burke were to contact Countrywidedirectly withoutgoingthrough McCalla Raymer, it would be a problem: "I t can be [a problem]. It usually is . . . Because,pursuant to agreement with local counsel, the reason thatCountrywidewould hire us is because itwants to deal withone firm. It doesn'twant to have 50 firms calling iton every case that ithandlesin the country. So it asks that all communication goes through our office." [March 5, 2007 Tr.94:2195:3.] The Court was concerned that Countrywide has insufficient lines of communicationwith those attorneys throughout the country who are representing Countrywide in the courtroom.

C. The Court's concerns arising from the March 5, 2007 hearingBased upon the testimonyof these threewitnesses, the Court had further concerns about the

activities ofBarrettBurke,McCalla Raymer, and Countrywide in connectionwith the filing of theMotion. Two of these concerns have alreadybeendiscussed above: (I) BarrettBurke's contractualobligation to refrain from anyand all communicationwithCountrywide; and (2) Countrywide's lackofa written policyagainst chargingdebtors for withdrawnmotions. Third, theCourtwas concernedas to why Schlotter testified that he was the attorney-in-charge when Sanov signed the Motion and

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Schlotter did not file anoticeof appearance or review the Motion prior to its filing.7 Fourth, Sanovand Schlotter both testified that McCallaRaymer was the client ofBarrett Burke; yet, the Motionrepresented that Barrett Burke was the attorney for Countrywide, not McCalla Raymer. Finally,Sanov,Ortiz, andSchlotterall testifiedthat the loan payment historycontained several inaccuracies,and SeWotter testified that itwas Thurmond who informed him of these errors. Yet, when thisCourt had asked Thurmond on February6, 2007 if the Motion contained inaccurate allegations, herepresented to this Court that "from what I read in our system this morning, and from what I couldtell from this, the answer is it was a good motion." [Feb. 6,2007 Tr. 5:8-10.] Accordingly, thisCourt decided to issue the Second Show CauseOrder to obtain clarificationof these various issues.IV. The Second Show Cause Order

After reviewing the transcript of theMarch 5, 2007 hearing, theCourt issueda second showcause order (the SecondShow Cause Order). [Docket No. 57.] The Second Show Cause Order setforth that the Court was concerned about the following issues: (1) why Thurmond expresslyrepresented to this Court that the Motion was "good"when Sanov, Ortiz, and Schlotter all testifiedthat the pay history attached to the Motion failed to account for the Debtor'sNovember9, 2005 andMay 6, 2006 payments, andwhen Schlotterhimselftestified thathe learnedabout these errors fromThurmond; (2) the language in paragraph 16 ofMcCalla Raymer's referral guidelines prohibitingBarrett Burke-or any firm retained by McCalla Raymer-from communicating directly withCountrywide; (3) Schlotter's confusing testimony that Barrett Burke's clientwas McCalla Raymer,notCountrywide, and that he was the attorney-in-chargedespite neithersigning the Motion nor filing

7 Local Rule 11.1 of the United States District Court of the Southern District of Texas states: "On fU"Stappearance throughcounsel,each partyshalldesignate an attomey-in-charge. Signing thepleadingeffects designation."The District Local Rules are made applicable to all bankruptcy court proceedings by Bankruptcy Local Rule IOOI(b).15



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a notice of appearance; and (4) whether Countrywide really did have a written policy not to assessa borrower any attorney's fees incurred in the drafting and filing of a motion to lift stay when thatmotion is later withdrawn due to inaccurate allegations. [Id.]

Based upon a motionof the UST, the Court continued the scheduled June 26, 2007 hearinguntil July 27, 2007. [Docket No. 105.] The number of witnesses and scope of examination inconnection with the Second Show Cause Order far exceeded the Court's original expectation. Inaddition to the July 27,2007 hearing, the Court held four more days of hearings in August on theShow Cause Orders. 8 There were too many witnesses and too much testimony to address thehearings chronologically in this Memorandum Opinion. Instead., the balance of thisMemorandumOpinion is organizedby issue: first, the specific issues raised in the Second Show Cause Order; andsecond, the miscellaneous issues that came to light during the hearings within the context of theparties' general conduct related to the Motion as raised in the First Show Cause Order.

A. Why did Thurmond represent to the Court that the Motionwas a "gOOdmotion?"On direct examination byBarrett Burke's attorney, Thurmondconceded thatwhen he went

to the courthouse on February 6, 2007, he knew that the payment historyattached to the Motion wasincorrect with respect to the November 9,2005 and May 6,2006 payments.9 [July 27,2007 Tr.350: 15-19.] Thurmond was askedwhy, when this Court asked him at the February 6, 2007 hearing

8 The Court also held a hearing on October 29,2007 and beard closing arguments on December 12,2007.9On cross-examination, Thurmond stated that he was unaware that the payment made on December 13, 2006was not reflected in the payment historyattached to the Motion. [July 27,2007 Tr. 365:3-8.] The Court is skeptical ofthis testimony in view of the fact that Thurmond bad an attorneyworksheet with himwhen he appeared at the February6, 2007 hearing. This worksheet expressly stated that the Motion needed to be withdrawn because the Debtor had, infact, made payments onNovember 9, 2005, May 5, 2006, and December 13, 2006. [BarrettBurke Exhibit No. 31.]

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whether therewere anyallegations in theMotion that were factually inaccurate, he represented thatthe Motion was a "goodmotion." Thurmond responded:

"In the contextof all the workthat I have everdone going back to 1984 . . . if there'sa default and there's minimal equity, that's grounds for a motion for relief.In this case, I looked in the systemnotes thatwerepart of the database and saw thatthe payoffwas in excess of$59,000. I fyou use the value that the Debtorhad put onhis schedules, the $65,000, and you look to the net realizable net equityafter takingout hypothetical closing costs, they probably had no equity. I f you looked at theHarris Countywebsite appraisal, I think it was only, like, $48,000 or $49,000 so thatif I was going to try that one, I wouldwant to try to reconcile the two valuations. Ifyou went with the Harris CountyAppraisal District value and theywere clearly in aposition of no equity, theywere, I believe, undisputedly behindby a month and thenon February 6th, they're behind two more months. And probably every place thatI've everworked, that would be a good motion. It would have been one that I feltlike I could prosecute and win . . .My frame of referencewhen Iwas looking through all this information was whetherornot it complied withRule I l -o r 90 I I . Was it based on facts that supported theargument that was being presented in the Motion? It was a valid, prosecutablemotion . . . "[July 27,2007 Tr. 353:1-21, 353:25-354:4.]Thurmond's answeris disingenuous. This Courtdidnot ask Thurmondwhether the Motion

was a "valid, prosecutablemotion." Rather, this Court expresslyasked him the following question:"Okay. I guess what I' d like to know Mr. Thurmond, is when the motion was filed, are theallegations in the motionjust flat-out wrong?" [Feb. 6, 2007 Hr'g Tr. 4:2-7.] Thurmond's answeron February6,2007 that it was "a goodmotion," and his subsequent explanationof that answeratthe July 27,2007 hearing, artfully dodges the subject of the Court's inquiry-whether the Motioncontained factual inaccuracies. Thurmondknew full well that the payment history attached to theMotion did not account for the November 9, 2005 payment or the May 6, 2006 payment, and thattherefore the allegations in the Motion concerning the defaults and post-petition arrearage were, in

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fact, "flat-out wrong." Indeed, under cro ss examination by the UST, Thurmond conceded that he

knew about the errors in the Debtor 's payment his to ry when he came to court on February 6, 2007.

[Aug. 10,2007 Hr'g Tr. (afternoon session) 46:11-47:9 .]

Moreover, th is Court has no doubt that Thurmond knew about th ese problems with the

payment history because Schlotte r convincingly testifi ed that "I got involved in th is case either a day

or tw o before th e final hearing on the motion for relief in February of2007, when I got a call from

Walter Thurmond at Barrett Burke telling me that there were some discrepancies with the payment

his to ry , and it didn't appear that the debtor was now more than 60 days delinquent in his

recommendation. And he asked fo r my consultation on it and an agreement that wewould withdraw

that motion."10 [Aug. 8,2007 Hr'g Tr. 13:16-23.J Indeed, Schlott er had a distinct and credible

recollection of a conversation with Thunnond the day before th e February 6, 2007 hearing:

The Court: A ll right. Le t 's go through that. Did you call Mr. Thurm ond or did Mr.Thurmond call you?

Schlotter: H e call ed me.

The Court: All right. Morn ing or afternoon, if you remember?

Schlotter: I'm trying to remember, but I think-I don't know for sure , but it seems likeit was sometim e clo se to lunch.

The Court: And do you recoll ect what Mr. Thurm ond told you? Tell me everyth ing heto ld you.

Schlotte r: H e said, 'J ohn, I th in k this one, there 's a problem wit h the loan history, andthe debtor is saying th at they made more payments, and 1 got a his tory fromthe client showing that there were payments that weren 't re flected, and ifhe'scorrect, then the loan isn 't as far delinquent as we said in the motion. So, you

10 Schlotter's testimony that the Debtor was notmore than 60 days delinquent refers to a Fannie Mae guidelinesetting forth that no motion to lift stay should be filed unless the debtor is at least 60 days delinquent (i.e. has failed tomake two monthly payments). See Sec. N.E .S infra.18

March 31, 2008; REQUEST FOR JUDICIAL NOTICE.Exhib it Page #24


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know, it's a FannieMae loan, but it's not 60 days delinquent. Assuming thedebtoris correct in hisassertions, I think we shouldwithdraw this, andl 'dliketo do that.'

The Court: Okay. And what did you say?Schlotter: I said, you know, I talked to him. I asked him whatwere the problems on thehistory, and he told me basically that there was misapplied pre- or postpetition payment, and that therewas an annual statement that went out to thedebtor that showed receipt of a payment. No, that was after the fact. Therewas one, I think aMay payment or somethinghadnot beenapplied properly,so that would have been two payments, which meant that at that point, then,thedebtorwas probablyonlyonemonth behind. And I agreedwith him thatit was a good idea we should withdraw it instead of pursuing it.The Court: So, are you tellingme thatMr. Thurmondwasknowledgeable about paymentproblems?Schlotter: When he spoke to me, he was, yes.[Aug. 8,2007 Hr'g Tr. 70:2-71 :l1JIIThurmondalso acknowledged that he had the attorneyworksheet for the Debtor's file in his

possession when hecametocourt on February6, 2007, and thatheread this attorneyworksheetpriorto attending that hearing.12 [Aug. 10,2007 Hr'g Tr. (afternoon session) 31:3-7; 46:1-4.] Theattorney worksheet contained the following paragraph:

Pleasesubmit the [agreed orderwithdrawing theMotion]. This is the secondhearing on this matter and a response has been filed in opposition. We had a signed[agreed order] on this file and then right before the first hearing the [Debtor'sattorney] provided proofs of payments and informed us that the first payment thedebtormade post petition was applied as a pre petition payment. This payment was

11 Schlotter's recollection of his telephone conversation with Thurmond was vivid and very credible eventhough. as is subsequently discussed herein,Schlotter's testimony on avariety ofother issues was muddled and, in someinstances, simply incorrect.12 The attorney worksheet is a document internally generated within Barrett Burke. This document containsa summary of information relevant to a certain hearing, including basic information such as the time, location, and name

ofopposing counsel as well as instructions for the attorney making the appearance. The entire instruction portion oftheattorney worksheet is comprised of the above-quoted paragraph. [Barrett Burke Exhibit No. 31]19



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applied on 11109/2005 in the amount of$684.62 and has now been reversed from prepetition and reapplied to the 11/0112005 post petition payment. Also the debtorprovided a copy ofa transactional history that they received from Countrywidewhichshowed that they made a payment [in the amount of] $751.69 on 51512006 that wasnot listed on Countrywide post petition history as well as a payment [ in the amountof] $751.69 on 12/13/2006. These payments have now been applied correctly and wehave found that the loan was post petition due for 12/0112006 with money insuspense when we filed the [Motion] on 12/29/2006 and this is why we arewithdrawing [the Motion]. The loan is still past due for 12/0112006. Yvonne Knesekand Chris Reilly approved the withdraw and the [Debtor's attorney] is aware we arewithdrawing.[Barrett Burke Exhibit No. 31.]Because Thurmond admitted reviewing these notes prior to the February 6, 2007 hearing, he

knew that the Motion contained allegations that were factually inaccurate and that, therefore, theMotion needed to be withdrawn. 13

Aside from the attorney worksheet, Barrett Burke also created a document known as the"Bankruptcy Case Comments." [Barrett Burke Exhibit No.3 .] This document contained severalcomments indicating that the Debtor had provided proof ofpayments that the Motion alleged hadnot been made. Most important ofthes e comments was the one made on February 5,2007 (i.e., theday before the final hearing) by a legal assistant named Sabrina LaPell, the same legal assistantwhoprepared the attorney worksheet: "[talked to] Chris R. [i.e., Chris Reilly] and YK. [i.e. YvonneKnesek], perYK. we need to get approval to [withdraw] this MFR blc after confirming a [payment]was [received] on 12/13 this would mean that the loan was post [sic] due for 12/1106 when we filed

13 It is also worth noting that the Debtor was not in sufficient default for the Motion to have been fLIed underthe Fannie Mae guideline which requires two missed monthly payments before filing a motion to lift the stay. [Aug. 10,2007 Hr'g Tr. (afternoon session) 21:14-22:19.] Thurmond was well aware of this Fannie Mae guideline at the time herepresented to this Court the Motion was a "good motion." Moreover, John Smith, the Countrywide representative,testified that ifh e had been asked whether he would authorize the filing of the Motion, he would have said, "withoutquestion, don't file it ... because it did [not] meet the guidelines that we have set forth to file a Motion for Relief in thatinstance." [Aug. 9, 2007 Hr' g Tr. 260:20-24.]

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the MFR on 12/29." [Barrett Burke Exhibit No.3, pg. 2.J These comments leave no doubt thatKnesek knew of the errors in the Motion. Therefore, Thunnond, who testified that he spoke withKnesekprior to going to court on February6,2007 [Aug. 10,2007Hr'gTr. (afternoon session) 34:2-35:13J, had to have known that the Motion contained inaccurate factual allegations.

As a final note on the issue ofThunnond's misrepresentation that "it was a good motion,"the Court asked several witnesses what would have been their response had they been standing inThurmond's place at the February 6, 2007 hearing when the Court inquired about the factualinaccuracies in theMotion. Although hindsight is 20/20, their answers are telling.

Mary Daffin, the Barrett Burke partner in charge of the bankruptcy department, respondedto this hypothetical as follows: "I fyou had asked me ifit contained inaccurate factual allegations,I would have told you, yes, sir, it does contain inaccurate factual allegations." [July 27, 2007 Hr'gTr.336:15-17.]

Thefollowing exchangebetweenthisCourtand Sanovoccurred at theJuly27,2007hearing:The Court: Let 's assume you had come [to the February 6,2007 hearing].Sanov: Okay.The Court: And you had gone up to the podium and said [just like Thunnond did]

"Judge, we want to withdraw the Motion." And let's assume I said to you,"why?" What would you have said?

Sanov: I would have said that a mistake was made on the pay history and that theloan was not sufficiently delinquent when the Motion was filed.

The Court: And if I had said to you, "You mean you're telling me that the Motion toLift Stay contains factual allegations that are not true," what would youranswer have been?

Sanov: I would have said that I now know that they arenot true.[July 27,2007 Hr'g Tr. 221:21-222:10.]

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Finally, the following exchangebetween this Court and Schlotter occurred at the August 8,2007 hearing:

The Court: If ! had said, ' Are there allegations in the motion that are incorrect?', whatwould you have said to me?Schlotter: I would have said, 'I t appears that there are, yes. '[Aug. 8, 2007Hr'g Tr. 72:25-73:4.]In addition to the "goodmotion" misrepresentation, the Court had a second concern about

Thurmond's otherstatements at the February6,2007 hearing. After Thurmond told this Court thatthe Motion was a "goodmotion," the undersigned judge stated that "what I'm going to do is take alookat the motionmyself." [Feb. 6, 2007 Hr'gTr. 4: 14-15.] Thurmond then replied that he would"checkwhen I go back and see what the deal was with it." [Feb. 6, 2007 Hr'g Tr. 4:20-21.] Thisstatement led the Court to believe that Thurmond would return to his office, check with hiscolleagues to determinewhether theMotion contained inaccurate factual allegations, and, ifhewasincorrect, file a noticewith the Court correcting his priormisstatement that theMotionwas a"goodmotion."

Thurmond never reported back to the Court. Indeed, his silencewas deafening. At the July27,2007 hearing, Thurmond could offer no explanation as to why he did not report back to theCourt:

The Court: Did you check?Thurmond: Yes, I did.The Court: Did you get backwith the Court?Thurmond: I did not.[July27,2007Tr. 374:10-13; see also Aug. 10,2007 Hr'g Tr. (afternoon session) 62:4-23.]

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Thunnond's concession that he did not report back to the Court underscores his less thancommendable view regarding the professional duty that an attorneyhas to becandidwith theCourt. 14

B. The policy prohibiting Barrett Burke from communicating directly withCountrywideSanov and Schlotterboth testified at theMarch 5, 2007 hearing thatBarrettBurke attorneys

were not allowed to contact Countrywide, and that all communications must be filtered throughMcCalla Raymer. TheCourtwas trOUbled by such an arrangementbecause it precluded the attorneyfiling the motion from speakingwith the actual client. This issuewas included in the Second ShowCause Order and addressed by several witnesses during the later hearings.

Sanov returned to court for a second roundoftestimonyon July 27, 2007. She reiterated herprevious testimony that all Barrett Burke communications went throughMcCallaRaymer. [July 27,2007 Hr'gTr. 204:5-15.] She further acknowledged that BarrettBurke had to askpermission fromMcCalla Raymer to withdraw any pleadings. [July 27, 2007 Hr'g Tr. 191:18-24.]

Reilly also testified on July 27, 2007 about the "no communication clause." Reilly was anattorney at Barrett Burke who handled files involving Fannie Mae loans, including files whereMcCallaRaymerwasnational counsel and retainedBarrettBurke as local counsel. He was steadfastin his testimony that he was not permitted to communicate directly with Fannie Mae and that hecould only communicate with McCallaRaymer. [July27,2007Tr. 47: 18-48: 14.] He also testified

14 In contrast to Thurmond's nonchalant attitude towards his obligation to correct false statements he made tothe Court, BarrettBurke's outside cOWJSeI for the show cause hearings, William Greendyke, exhibited the appropriatebehavior in such circumstances. Greendykemade an argument in closingbased on statements thatwere objected to andexcluded at a previous hearing. During a break in the closing arguments, Greendyke reviewed the record, realized hismistake, and informed the Court of his error. [Dec. 12,2007 Hr'gTr. 137:12-22.] Barrett Burke should train its ownassociates to conduct themselves in the same manner as their outside counsel.23



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that McCalla Raymer had to give its approval before he could withdraw a motion or enter into anagreed order:s [July 27,2 007 Tr. 48:25-49:8; see also 104:15-19.]

Regina Thomas (Thomas) is the managing attorney for McCalla Raymer's bankruptcydepartment. Thomas confirmed McCalla Raymer's policy prohibiting local counsel such as BarrettBurke from communicating directly with Countrywide and testified that the purpose of the policyis to ensure that McCalla Raymer keeps apprised of the status of any matter in litigation for whichMcCalla Raymer is national counsel. [Aug. 7,2007 Hr'g Tr. 37:15-25.] She further testified thatCountrywide has never complained to McCalla Raymer about this restriction. [Aug. 7, 2007 Hr'gTr. 38:11-13.] According to Thomas, Countrywide desires this restriction because it does not wantthe various local firms throughout the country contacting Countrywide for information. [Aug. 7,2007 Hr'g Tr. 38:14-39:1.] Thomas also testified that, pursuant to McCalla Raymer's terms of

engagement with Countrywide, McCalla Raymer is not required to monitor post-petition paymentsmade by debtors. [Aug. 7, 2007 Hr'gTr. 21:11-19.]

Given that Barrett Burke must communicate only with McCalla Raymer, and that McCallaRaymer is not required to monitor post-petition payments made by debtors, this Court is at a loss tounderstand how Barrett Burke can possibly comply with Bankruptcy Rule 9011 before filing amotion to lift stay. This arrangement truly creates a situation where the blind (McCalla Raymer) isleading the blind (Barrett Burke).

In the wake of this Court 's Show Cause Orders, McCalla Raymer changed the language ofits engagement letters with local counsel so that they now do not expressly prohibit direct

IS This testimony tracks with Schlotter's testimony insofar as Schlotter testified that he personaIly authorizedThurmond to withdraw the Motion. [March 5, 2007 Hr'g Tr. 88:19-21.]24



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communication with the client. Thomas testified that communication through McCalla Raymer isnow just the "preferred method of communication . . . because again, the foundation of this is thatwe're representing the client in the context of the entire case, versus a specific litigated matter. Butits [sicJ basically a language change reflects [sic) that in the event that counsel needs to contact theclient, theyare pennitted to do so. And then we ask them to notifyus what thatcommunicationwas,so that we can maintain our records for all communication." [Aug. 7, 2007 Hr'g Tr. 40:8-16; seea/so 75:14-76:1.J The Court recognizes that this is an improvement upon the previous outrightbanon communication with the client. However, the Court remains concerned that local counsel willstill be hesitant to directlycontact the client out of the fear that McCalla Raymerwill cease sendingfiles to that local counsel.

c. Who was Barrett Burke's client and who was the attorney-In-charge?1. Who was Barrett Burke's cUent?

At the March 5, 2007 hearing, Schlotter testified that Barrett Burke's clientwas McCallaRaymer, as opposed to Countrywide. [March 5, 2007 Hr'g Tr. 78:6-14.J However, Schlotterrecanted that testimony at the August 8, 2007 hearing:

UST: Mr. Schlotter, [Countrywide's counselJ asked you [at the March 5, 2007hearing], 'Who is the client for Barrett Burke?' on page 78, line 8. Let meknow when you get there.(Witness complies)UST:

Schlotter:UST:Schlotter:

Sheasked you, 'Who is the client for Barrett Burke?' And your answerwas,'Well, we would be the client.' Thatwas your testimony?Yes.Did you feel rushed in giving that answer?Yes.

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UST:Schlotter:UST:Schlotter:

UST:

You did?Yes.Why?BecauseI hadn'thad time to think it through; because I knewwhatwas goingon. I knew thatwe had sent the referral for Countrywide, but,as I said, andI'n sayit again, ourofficeretainedBarrettBurke. Countrywidedid notretainBarrett Burke. Our office retained Barrett Burkeon behalfofCountrywide,and we were the contact with Barrett Burke. We would paythem for theirservices. So, in my mind, they represented Countrywide to file the motion.That's what we asked them to do. But Countrywide did not hire them;McCalla Raymer did.Well, sir, when the Court then followed up on thatparticularanswer, and I'lldirect your attention to page 93 of your testimony that day. Let me knowwhen you get there.

(Witness complies)UST:

Schlotter:

UST:

Schlotter:

UST:

Okay. The Court followed up at line 8 on page 93; 'I thought Iheard youtestifywhenMs. Madan [Countrywide's counsel]was asking you questions,that you said your firm was the client of Barrett Burke. Is that correct?'Answer: 'That's correct.' Didyou not have enoughtime the secondtime youwere asked that question?Apparently not, becausemy mind was still based on the same thoughts thatour office hired BarrettBurke, and we paid Barrett Burke.Well, theCourtthenfollowedup again. The third timeyou'vebeen asked thisquestion, at line 13: 'And that's your understanding?' Answer: 'That's myunderstanding.' Three times you were asked the question, 'Whowas theclient,' and three times you said, 'McCalla Raymer.' Is that correct?That's correct. And ifyou'll go on, and the Court asks more questionsaboutthat, and I think that'swhere I confused it more.So, it was only becauseof the Court's persistence that you answered-youkept answering differently insteadof telling the truth the first time? Is thatwhat you're saying?

(Witness reviews the transcript)

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Schlotter:UST:

Schlotter:

Well, that's what I said.How many times do you have to be asked the same question to give youenough time to tell the truth?That's a question I can 't answer. I guess it depends on what I understand ofthe question. I certainly didn't intend to mislead the Court, and I don't at thispoint intend to mislead the Court, but I certainly want to clarify whathappened.

[March 5, 2007 Hr'g Tr. 43:2-45: 14.]After all was said and done, this Court has no doubt now that everyone understands that

Barrett Burke's client is Countrywide. It is disconcerting that Schlotter, an attorney with 28 yearsof experience, would think: otherwise. His initial testimony underscores the need for McCallaRaymer to properly train its attorneys.

2. Who was the attorney-in-charge?District Court Local Rule 11.1 of the Southern District o f Texas requires each party to

designate an attorney-in-charge, and signing the first pleading for that party is effective designation.Local Rule 11.2 states: "The attorney-in-charge is responsible in that action for the party. Thatindividual attorney shall attend all court proceedings or send a fully informed attorneywith authorityto bind the client."

On July 27, 2007 , Sanov testified that she was definitively the attorney-in-charge o f theDebtor's file under Local Rule 11.2. [July 27,2007 Hr'g Tr. 201:2-1 I.J This testimony directlycontradicts Schlotter's testimony at the March 5, 2007 hearing that he was the attomey-in-eharge o fthe Parsley file. [March 5, 2007 Hr'g Tr. 90:25-91:3.] However, when Schlotter took the standagain on August 8, 2007, he recanted this testimony:

MR's Attorney: At the time you answered [the UST's] questions [on March 5,2007J and the Court's follow up question, were you aware that the27



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phr ase 'at to rn ey -in-charg e' had spec ial significance under theLocal Rules in the Southe rn Dist rict ofTexa s?

Schlot ter:M R 's Attorney:

Schlotter:M R 's Attorney:

Sch lotter :M R 's Atto rney:

Sch lotter :MR's Atto rney:

Schlotter:M R 's Attorney :

Sch lotter :

No, I was not.Have you since read the Loc al Rules of the Sou thern District ofTexas?Yes, I have.Are you, un der those Rules, the attorney -in-charg e of the Pa rsleymatte r?No.D id you sign the initial pleading , th e motion for relie f filed in theParsley matter that brin gs us down here today?No.Were you designated as the atto rney-in -charge under the Sou thernDis trict ofTexas Local Rules?No.D id you mean to answer to the Court an d to [the UST] that youwere the attorney-in-charge un der the Local Rules in the SouthernDis trict ofTexas?No, I did not. I did not comprehend the concept because I hadn'tread the Local Rules.

[Aug. 8,2007 Hr'g Tr. 17: 14-18: 10.]

Thomas te st if ied th at Barre tt Burke was the "lead counse l fo r the Motion for Relie f in the

Sou thern Distric t of Texas." [Aug. 7, 2007 Hr'g Tr. 42:16-17 .] Her tes timony con flicted with

Schlotte r' s testimony at th e March 5, 200 7 hearing when he tes tified that he was the attorney-in-

charge. That two seasoned attorneys at McCal la Raymer can have such a diffe rence ofopinion on

this impor tant point once aga in unde rscores the lack of training at McCal la Raymer.

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Daffin correctly testified that Sanov was the attorney-in-charge pursuant to District CourtLocal Rule 11.2 because Sanov signedthe Motion. [July 27, 2007Hr'gTr. 339: 12-340:19.] Daffinfurther stated that this Local Rule requires the attorney-in-charge to appear at a hearing or to sendan attorney who is fully infonned and with authority to bind the client. [Id.] She also stated that itwas therefore acceptable for Thunnond, as opposed to Sanov, to appear at the February 6,2007hearing so long as Thunnond was fully infonned and had authority to bind Countrywide. [Id.]

The Court agrees with Daffm's testimony and interpretation ofl..ocal Rule 11.2. However,her testimonyplaces her firm in an awkward position. IfThunnond was fully infonned about theParsley file, which this Court believes he was, then he knowinglymade a misrepresentation to thisCourt while an associate at Barrett Burke. The alternative explanation of his misrepresentation tothis Court- that the Motion was a "good motion"-is that he lacked full knowledge of the file,which would put him in violation of Local Rule 11.2. Under these circumstances, Sanov, theattorney-in-charge and also an associate at Barrett Burke, would have sent another attorney fromBarrettBurke, Le. Thurmond, to thehearingwithout full knowledge ofthe file. This scenario meansthat both Sanov and Thunnondwould have been in violation ofLocal Rule 11.2, and, as associatesatBarrettBurke, their actions are imputed to the finn. See Religious Tech. Ctr. v. Liebreich, 98 Fed.Appx. 979, 988 n.30 (5th Cir. 2004) (imposing sanctions under 28 U.S.C. 1927 jointly andseverallyagainst attorneys and their law finn).

D. Does Countrywide have a polley not to assess the borrower any attorney's feesand costs for filing a motion to lift staywhenCountrywide laterwithdraws themotion due to its own errors or the errors of its counsel?BothOrtiz, at the March 5, 2007 hearing, and Smith, at theAugust 8, 2007 hearing, testified

thatCountrywidedoes not charge borrowers in bankruptcy for any attorney's fees and costs incurred

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by Countrywide in connection with any motion to lift stay that is subsequently withdrawn byCountrywide; however, they also conceded that Countrywide has never committed this policy towriting. [March 5, 2007Hr'gTr. 71:24-72:20; Aug. 8,2007 Hr'gTr. 134:16-135:14.] In the caseat bar, Countrywide did not reclassify the fees and costs associated with the Motion as non-recoverable until after this Court issued the First Show Cause Order. In spite ofCountrywide'salleged unwritten policy ofnot charging debtors for fees related to motions that are withdrawn dueto Countrywide's errors, Countrywide was charging those fees to the Debtor until the Court raisedthe issue.

Ortiz testifiedas follows about Countrywide's practiceofwaitinguntil the time ofdischargeto determine whether fees are recoverable from borrowers/debtors:

BBcounsel: At some point in thebankruptcycase, is therea reconciliation ofdiscrepanciesin the accounts?

Ortiz: Yes.BB counsel: When does that happen?Ortiz: That generally happens when the loan is discharged-BB counsel: Okay.Ortiz: -and the case is completed anda thoroughreview ofall transactionsandfees

are done to determine and make sure that the POC has been paid in full, thatif there has beenany actions on the case that the fees that have been assessedare proper and that we are abiding byany either court orders or if somethingwaswithdrawn, that wehave, youknow, properly reassessed those fees. Andthen it is also then reviewed and audited bythe team leader before it gets senton to the next stage.

BB counsel: Okay. Soat the end ofa bankruptcycase, in this case, a Chapter 13 discharge,successful completion of the plan, that process is done to the file and arereconciliations or eliminations of erroneous charges made at that time?

Ortiz: They can be, yes.30



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BB counsel: Okay. Assuming there is an erron eou s charge, is that th e case-

Ortiz: Assuming, yeah.[Aug. 10,2007 Hr'g Tr. 34:10-35 :10; 36:13-37:4. ]Smith als o te st if ied that th e charges rel ated to th e Motion will be removed only when the

Deb to r rece ives his discha rge:UST: This $550 was part of the fee th at Coun trywide had as sign ed to Mr. Parsley for the

fi ling of th e withdrawn Motion for Relie f from Stay; was it not?

Smith: Tha t 's cor rect .UST : And then there 's th e $1 50, whic h was th e co urt co sts for the fil ing of that withdrawn

Motion for Reli ef from Stay, co rrect?Smith: Tha t 's correct.UST: And we se e two ent ries again on Mar ch 12th, 2007 . And the las t entr y on March 12th

af te r al l the reclas si fication has been done , what is the bala nc e on Mr. Par sley 'saccount for the fees he owes to Countryw ide ?

Smith: Twelv e th ou sand si xty or , I'm sorry, $1,260.53 would be th e ba lance . Now , but didyou say that wou ld be owed byMr. Parsley ?

UST: Isn't that what the bala nce shows?Smith: Well , no, not direc tly. That would be the balanc e that would be in the fees due.

However, ag ain, th at would not be cha rgeab le because it 's be en rec lass ified. So oncethe loan was complet ed it would ac tu ally be-it would go through a process we call"book loss" to ac tu al ly book the fees offof th e loan.

UST: Why is [sic] the re two en tries on March 12 th as de bits in th e amount of$550 and$1 50? Why do you debi t it , which increa ses th e bal an ce total back to what it wasbefo re you re -c la ss ed these fees for the withd rawn Motion for Relief from Stay?

Smith: Again, it 's - it would be an interna l acco unt ing funct ion. Again , that's pa rt of thebook loss proce ss that I sp ok e abo ut befo re . But it wou ld be reclass if ied , so Mr.Pars le y would not have been charged for that .

UST: But the runnin g balance ref lected in yo ur system has it the same am ount , correct?

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Smith: It has a runningtotalof the same amount. But, again, it's being reclassified to a nonclaimable amount. So when the loan is completed we book that item off of thesystem. It's just an accounting function.UST: Mr. Parsley's loan is a 30-year loan, correct?Smith: That's correct.UST: So in 2029 someone at Countrywide is going to remember to go back and book lossthis amount?Smith: No. Actually, this would occur-in this case in the bankruptcy contextwe wouldbook loss the loan as soon as-typically, as soon as it would come out of thebankruptcy environment.UST: Where on Countrywide's system would the balance be reflected that Mr. Parsleyowes?Smith: He would have to-and I'm not aware if you can createa report to show, to just pullout the recoverable items. But you would have to add up those items thatwere feesdue and showing as in a code that would be owed by the borrower.UST: So Mr. Parsley has to hope that five years or so from now when his Plan endssomeone from Countrywide is going to go back and do this math correctly?Smith: Well, we have a book loss department within the fmance group that actually isresponsible for doing just that.UST: ButCountrywide can't even get it right when it files an Amended ProofofClaim amonth later from reclassifying these fees as non-recoverable, correct?Smith: Again, the Amended Proof of Claim was filed without direct correspondence,communication as to what was going to be revised at that time for the AmendedProofofClaim.[Aug. 8,2007 Hr'g Tr. 256:9-260:1.]The Court cannot understand why Countrywide does not determine whether the debtor is

charged with the fees and costs at the time the motion iswithdrawn rather than at the time the debtorreceives a discharge-which can be several months, ifnotyears, after thewithdrawal ofthemotion.[Aug. 8,2007Hr'g Tr. 138:9-20.] Smithwants this Court to believe that, in the case at bar, when

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the Debtor receives a discharge two and a halfyears from now, Countrywide will ensure that the feesand expenses associated with the Motion will not be charged to him. 16 Given the myriad of errorsin the case at bar, the Court doubts Countrywide would take such action. Indeed, Smith concededthat Countrywide would not have even thought about refraining from imposing these fees and costson the Debtor ifthis Court had not issued the First Show Cause Order. [Aug. 8,2007 Hr'g Tr. 263 :9-14.] Left unanswered is the question ofwhat happens if the Debtor's Chapter 13 case is dismissed.Since those fees have not been written off and still appear on the account, there is nothing to stopCountrywide from reclassifying those fees back to the "recoverable" category and charging themto the Debtor.

Ifa written policy actually existed stating that Countrywide would not charge debtors for feesand costs associated with its withdrawn motions, then that policy should demand that the charge bereclassified immediately after the motion is withdrawn. A Countrywide employee should not needto determine the status oftho se fees several months or years later. This reluctance, ifnot refusal, toimmediately reclassify these fees as unrecoverable has called into question whetherCountrywide hadany such unwritten policy when Ortiz and Smith testified in August of 2007; or, if such a policyexisted, whether Countrywide did anything to properly enforce it.

During closing arguments on December 12,2007, counsel for Countrywide addressed theCourt 's concern over Countrywide's failure to commit to writing a policy stating that it would notcharge debtors for motions to lift stay that are later withdrawn due to Countrywide's error. Counselinformed the Court that, as a result of the show cause hearings, Countrywide now had a policy in

16 The Debtor's Chapter 13 plan was confmned on February 27, 2006. [Docket No. 23.] Thus, because hisplan is a 54 month plan, he will receive a discharge in August of201O, i.e. two and a half years from now.33

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writing to this effect. [Dec. 12,2007 Hr'gTr. 67:21-24.] The Court requested to see a copyof thiswritten policy [Dec. 12,2007 Hr'g Tr. 74:14-23], and Countrywide submitted a document for incamera inspection on December 14, 2007. Afterreviewing the relevant language in this document,the Courtdoes not understandwhyCountrywidewould believe that this document contains apolicythatCountrywidewill notchargedebtors for fees and costs associatedwithmotions that itwithdrawsdue to inaccurate factual allegations. WhatCountrywide submitted is not an instruction or a policy;it is simply an explanation ofhow aCountrywideemployee would code fees as not chargeable to theborrower. 17 Nothing has changed. CountrywidemaY,have the ability to code fees as non-chargeable,but it has not shown this Court a commitment to write off these fees.

This Court is certainly not going to write Countrywide's policies. However, given therepresentation made by Countrywide's counsel, the Court expected a plain and simple sentencedeclaring that Countrywide will not charge borrowers any fees related to any motion to lift staywithdrawn as a result of Countrywide's own errors. Countrywide appears unwilling to take thisbasic step towards accepting responsibility for motions which are incorrectly filed based upon itsown errors and the mistakes of its counsel.

Moreover, Countrywide represented that it has not changed its practice of determiningwhether fees are recoverable at the timeof discharge. There is no justifiable reason that these typesof fees cannot be immediately written off. I fCountrywide allows up to five years to pass beforedecidingwhether to charge a debtor for these fees, it is very likely that a debtor, who may not have

17 Because this document was submitted for in camera inspection only, the Court will not directly quote thelanguage to which it refers. Further, in fairness to Countrywide, after it reads this Memorandum Opinion, if it believesthat the Court is incorrect, the Courtwill allow Countrywide to file the document with the Clerk ofCourt and the Courtwill amend thisMemorandum Opinion to include the verbatim language in the document as an addendum. Countrywideshall have ten (10) days from the entry of this Memorandum Opinion on the docket to file this document with the Court.34



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the assistance ofcounsel at that point, will be willing to pay these fees out of a desire to extricatehimself from bankruptcy and move on with his life. IS When asked why this policy had not beenchanged, and why Countrywide was still waiting until discharge to make the non-recoverabilitydetermination, its counsel responded, "YourHonor, I'm not prepared to answer that question today."[Dec. 12,2007Hr'g Tr. 80:23-24.] Countrywide's unwillingness to put into effect a straight-forwardpolicy and to reconsider when fees are deemed non-dischargeable makes this Court all the moreconcerned about Countrywide's policies.

E. The general conduc t of Barrett Burke, McCalla Raymer, and Countrywide inconnec tion witb tbe Motion

The issues discussed above were specifically enumerated in the Second Show Cause Order.Due to the UST's thorough investigation and examination, the Court heard testimony on many otherissues regarding miscellaneous conductofBarrett Burke,McCalla Raymer, and Countrywide whichrelated to the Motion specifically and to their business practices generally. The Court would beremiss ifit failed to address these other issues which in some cases are as, ifnot more, disconcertingthan the ones already discussed above. Primarily, this analysis is organized around the flow ofinformation through the system created by the parties in this case. Tracing the steps leading up tothe filing of the Motion shows that this is an assembly line process. There are attorneys involvedthroughout this process that should be catching these errors. However, the attorneys, do not dedicatesufficient time and care to ensure adequate quality control. Eventually, despite being passed through

18 The Debtor's Chapter 13 petition was flied prior to the effective date of the Bankruptcy Abuse Preventionand Consumer Protection Act of2005 (BAPCPA). Thus, his plan will last only 54 months. However, with a certainnarrow exception, all Chapter 13 cases filed after BAPCPA must last 60 months unless unsecured creditors receivepayment in full of their claims. See II U.S.C. 1325(b)(4)(A) and (B). Accordingly, in most cases, underCountrywide's present policy ofdeciding whether the fees and costs are recoverable only at the date of discharge, thisdecision will not be made until five years after the continnation of the plan.

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the hands of several paralegals and attorneys, the Court receives an erroneous motion that shouldnever have been filed.

1. Countrywide's Payment mstoryThis process begins with Countrywide and, ultimately, must end with Countrywide because

the actions ofMcCalla Raymer and Barrett Burke were done on behalf ofCountrywide. As Ortiztestified, the mistakes Countrywide made in the Debtor's payment history are the root cause of theMotion being moo. As previously stated, she conceded that Countrywide did not acknowledge theDebtor's bankruptcy filing in their electronic files until several days after he filed and Countrywidehad received notice of the filing. [March 5, 2007 Hr'g Tr. 68:12-24.] Thus, the Debtor's post-petition payment on November 9, 2005 was posted as a pre-petition payment, and Countrywide'srecords indicated that the Debtor missed his first post-petition payment. Although this was not theonly mistake in the payment history that the Court eventually received, it was the first.

Ortiz also testified that no one at Countrywide reviews pleadings before they are filed on itsbehalf, and in this case no one at Countrywide looked at the final payment history attached to theMotion. [March 5, 2007 Hr'gTr. 68:12-24; 69:9-70:13.] This hands off approach is consistent withthe no communication clause between Countrywide and its local counsel, such as Barrett Burke.Countrywide's attitude is that once it has referred the file to national counsel, it does not want to bebothered with any details about the pleadings and proceedings which follow.

Additionally, Smith testified that Countrywide has been asked by courts to clarify thepayment histories that it has submitted with motions to lift stay. [Aug. 9,2007 Hr'gTr.197:20-24.]

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Case 05 -90374 Document 248 Filed in TXSB on 03/05/2008 Page 37 of 40

Indeed, he stated that such requests have been "happening more and more frequently."19 [Aug. 9,2007 Hr'g Tr. 197:25-198:2.] The next step in the process is for Countrywide to transmit thisinscrutable pay history to McCalla Raymer.

2. Simplified payment histories prepared by McCalla Raymer legal assistantsThomas testified that, in the spring of2006, McCalla Raymer "made a business decision to

create a separate entity known as MR Default Services, which provided non-legal support servicesto the law finn." [Aug. 7, 2007 Hr'g Tr. 23: 14-20.] This new entity employs 300-350 legalassistants formerly employed directly by McCalla Raymer. [Aug. 7, 2007 Hr'g Tr. 163 :6-9.] Theselegal assistants perfonn the same functions as when they were direct employees ofMcCalla Raymer.[Aug. 7,2007 Hr'g Tr. 24: 11-18.] The attorneys atMcCalla Raymer continue to oversee and controlthe legal assistants at MR Default Services. [Aug. 7,2 007 Hr'g Tr. 24:19-21.] It is these legalassistants who, upon receipt ofCountrywide's loan history, create a simplified loan history whichthe McCalla Raymer attorney delivers to local counsel such as Barrett Burke. Yet, no attorney atMcCalla Raymer ever reviews the simplified loan history for its accuracy.20 [Aug. 7, 2007 Hr' g Tr.164: 19-165:6.J

According to Thomas, these legal assistants do-to use her words-a "cut and paste" jobusing the Countrywide loan history [Aug. 7, 2007 Hr'gTr. 63:23; see also 165:18.J, suggesting thatthere

Documents

2008-03-05 Case of Borrower William Parsley (05-90374), Dkt #248: Judge Jeff Bohm's Memorandum Opinion, rebuking Countrywide's litigation practices, Countrywide's false outside counsel