JPMorgan Chase Charged with Faking Documents in Bankruptcy Cases
A federal class action lawsuit alleging massive and systemic fraud on the part of JPMorgan Chase has the potential to send the entire nation’s bankruptcy system into a tailspin, according to legal experts. The lawsuit, filed in January, claims that the banking giant knowingly produced falsified documents during consumer bankruptcy proceedings to collect on debts that it otherwise should not have been able to collect. According to the complaint, the documents often represent that JPMorgan Chase is the rightful lender, even when the actual lender is unknown.
“I can’t say who is manufacturing the documents, but the issue is it starts with the principal, which in this case is JPMorgan Chase,” says J. Arthur Roberts, the attorney who is representing the class of California debtors. “We’re planning on filing similar suits against other lenders.”
The case comes at a time when the financial industry is under exceptional scrutiny for a series of questionable and downright illegal practices. For instance, some of the country’s largest banks are working with a number of states’ attorneys general to come to a settlement over robo-signing foreclosure documents. Robo-signing occurs when the bank signs off on foreclosure documents without thoroughly reviewing the content for accuracy. There have also been recent allegations that errors in JPMorgan Chase’s computer system have resulted in wrongful foreclosures.
The allegations in the California class action are some of the most serious yet. The plaintiffs are accusing the bank of deceiving tens of thousands of consumers as well as bankruptcy judges, Chapter 7 trustees, Chapter 11 trustees, Chapter 13 trustees, the Office of the United States Trustee, creditors, creditor attorneys and debtors attorneys.
“If JPMorgan is wrongfully filing proof of claims in these bankruptcies and is receiving payments from the bankruptcy court, I don’t even know what that does to the system,” says Scott Dillon, a lawyer at Tully & Rinckey. “It is a total circumvention of the whole intent of bankruptcy. It is craziness to me.”
Falsifying Proof of Claims
At issue in the case is the filing of a document known as a proof of claim. The proof of claim is filed by creditors that are owed in a bankruptcy to prove their entitlement to payment and the debt amount.
“When a person files for bankruptcy, you have to list all of your creditors, but those creditors listed on the bankruptcy petition have the burden of proving that they are actually owed and what is actually owed to them,” Dillon says.
Evidence used to prove a claim varies, but it can include the original lending agreement as well as any assignment records. Assignment records are paperwork that serves to establish a chain-of-custody as to what entities transferred the loan and to whom.
The suit alleges that JPMorgan did not have the proper records to establish proof of claim. Instead, the bank relied on vendors to fabricate evidence that allowed the bank to falsely assert its rights to the debt. Other times, such as in bankruptcies involving Washington Mutual loans, JPMorgan simply showed that it had absorbed the lender rather than providing evidence that ownership of the loan had transferred.
“The reason they use these tactics is because they don’t want to pay the cost of doing the full legal work to prove each claim.,” Roberts says. “It’s almost arrogant.”
Lift of Stay
Besides cutting corners to reduce legal costs, the reason JPMorgan allegedly falsified proofs of claim is because it allowed the bank to file a motion to lift the bankruptcy stay. When you file for Chapter 13 bankruptcy, a stay, or hold, is put on all your outstanding debts. This means that creditors are barred from making attempts to collect on that debt.
- “When someone files for bankruptcy, they may do a plan of reorganization in Chapter 13,” Dillon says. “For instance, you are six months behind on your mortgage payments. You might strike an agreement to take five years to pay off the arrears while promising to stay current on your payments going forward.”
If the consumer defaults on their payment agreement after the reorganization plan is implemented, the creditor may file a motion to lift the stay. This means that they can once again pursue the consumer for what they are owed in state court, which typically results in a foreclosure.
A Chapter 7 case is usually much simpler. The consumer files for Chapter 7 bankruptcy and, if approved, is released from his or her debt obligation. The lender can file for a lift of stay immediately after the bankruptcy filing in order to seize any property.
Roberts is seeking a reversal of the wrongful lifts of stay among the class of consumers he represents. If he wins, the ramifications for consumers could be monumental.
“In the case, the plaintiffs are asking the court to throw out every bankruptcy that could be related to JPMorgan,” Dillon says. “What’s going to happen? Will everything that occurred after the lift of stay be moot? Does that mean that some foreclosures may be reversed?”
Challenging the Banks
Although bankruptcy often leaves people feeling powerless, debtors are not helpless against giant creditors and mortgage lenders. First, consumers who are going through the bankruptcy process should seek out a knowledgeable bankruptcy attorney who will take a proactive approach with your bankruptcy case.
“In this day and age with the economy being what it is, a lot of general practitioners are trying to do bankruptcy work,” Dillon says. “But I’d recommend you hire someone whose primary focus is bankruptcy. And if you can a lawyer who also works as a bankruptcy trustee, that’s even better.”
Next, if a creditor does file a motion to lift the stay, consumers and their attorneys have 21 days to file an answer to the motion. In this answer, consumers can request documentary evidence that proves the lender has the right to file the motion. You can also file a claim objection, which forces the lending entity to prove it is the legal lender.
“Bankruptcy is really emotional because it deals with houses and families,” Dillon says. “You have a lot of tools to use in the fight, but you have to use them. If you don’t, you’ve waived your rights.”