Sue your bank in California over a wrongful foreclosure, and the best you're likely to get - if you have ironclad evidence that it broke the law - is a loan modification. That is, a "win" for the borrower usually means the bank keeps another customer and collects interest payments that are thousands of basis points above the level at which the bank is able to borrow from the Fed. Very often, however, homeowner lawsuits against the banks end in dismissal. In the parlance of the courts, the defendant's demurrer is sustained. Judges in California's superior courts often rule in favor of the banks, and the few lawsuits that filter up to the appeals courts and Supreme Court don't fare any better.
Why do the banks keep winning in court against borrowers alleging wrongful foreclosure, fraud and other abuses? Many borrowers and their lawyers say there's a judicial bias favoring the banks over homeowners, and that this bias is revealed by the economic position of the judges themselves. Most California judges are wealthy, and many of them hold significant investments in financial corporations and bonds, oftentimes even in the very same banks and mortgage lenders that have been sued by thousands of Californians over alleged fraud, deception and wrongful foreclosure.
Case in point: Baldwin v. Bank of America, a borrower lawsuit alleging wrongful foreclosure that battled all the way to the steps of California's Supreme Court. In 2007, Marvin Baldwin borrowed half a million dollars from J&R Lending to purchase a small three-unit apartment building in Long Beach, California. It was the height of the real estate bubble. Things quickly fell apart, and Baldwin ran into financial troubles.
In 2009, Bank of America, which by this point had acquired Baldwin's loan, notified him that he qualified for a federally sponsored HomeSaver Forbearance Program, a temporary bridge toward a permanent loan modification. Baldwin assumed that this was how the taxpayer-funded bank bailouts were translating into assistance for small landlords, so he cooperated with Bank of America and made payments under the program. But late in 2010, Bank of America recorded a notice of default against Baldwin's loan. Things looked dire.
Then in October, two months after filing the notice of default, Bank of America spun around again and appeared to be offering Baldwin a rescue plan. Bank of America announced a national moratorium on foreclosures due to the bank's acknowledgement of "irregularities" in its own internal processes. But then Bank of America reversed course yet again. In spite of announcing a moratorium on foreclosures - a moratorium stemming from the robo-signing scandal in which it was revealed Bank of America was routinely breaking the law - Marvin Baldwin's home was suddenly sold at auction on December 8, 2010.
He filed a lawsuit alleging breach of contract and fraud and sought injunctive relief to save his property. Baldwin alleged in his lawsuit that Bank of America violated California's Unfair Competition Law, which states, among other things, that a company cannot act in ways that would be likely to deceive a reasonable customer. The foreclosure "moratorium" Bank of America announced was one such deceptive practice because the bank lulled its borrowers into inaction, but then in fact continued to foreclose on properties and sell them, argued Baldwin and his lawyer. A year later, a trial court in Los Angeles sided with Bank of America, ruling the foreclosure and auction were perfectly legal, and that the bank's actions weren't deceptive.
Marvin Baldwin and his lawyer Lenore Albert appealed and argued their case before California's 2nd District Appellate Court. They lost again. The court's reasoning waded deep into gray areas, interpreting California's business laws, fraud laws, and real estate laws liberally in the Bank of America's favor.
Broad Pattern of Bias Seen
Plaintiffs' attorneys see a broad pattern in California in which the judiciary has routinely sided with the banks, even when the law could be interpreted to prevent or reverse a foreclosure.
"They don't want to be the judge that allows 40 million mortgages to go back to the borrowers," said Patricia Rodriguez, a lawyer who has filed homeowner lawsuits against banks and mortgage servicers in multiple California superior courts. "They don't want to possibly set a precedent." A single ruling against Bank of America that reverses a foreclosure sale because the bank didn't follow the letter of the law, for example, could spill over into thousands of other cases and potentially impact the profitability of the entire banking and loan servicing industry in Calfiornia, said Rodriguez.
"It was very clear that there is one form of justice for the small borrower and another form of justice for the moneyed interests," said Donald Adams, a retired California attorney. "It pains me to say that, but having seen the real estate debacle and the judiciary's protection of these fraudulent practices, I have reluctantly come to that conclusion."
As to why the banks so often come out winners, some point to the economic interests of the judges. The average superior court judge in California is paid a salary of about $150,000, but many of the judges are appointed to the bench after years of lucrative private practice where they earned many times this amount of money. Most judges worked as lawyers at large law firms and boutique offices whose clients include major corporations, real estate companies, banks, and others that can pay top dollar. By the time they become judges, most of these lawyers have amassed considerable financial wealth, and like other members of the top 1% of income earners and wealth holders, most judges invest their fortunes in stocks and bonds. And after years of working for corporate clients, many judges have also been steeped in legal and social philosophies that favor the interests of the wealthy above those of consumers and debtors.
It's impossible to really know why California's judges have decided so many mortgage fraud and wrongful foreclosure cases in favor of the banks. Certainly it's a mix of factors, including ideology, but also the existing structure of the legal system that favors wealthy defendants like the banks over isolated and indebted plaintiffs; the banks can afford the best lawyers to represent them, and the biggest banks spend several billion each year lobbying the legislatures of all 50 states and the federal government to shape laws and regulations in their favor. It's an uneven playing field from the very start. But one possible way to gauge the possibility of bias in the legal system is to look at the economic interests of California's judges. Unlike ideology, the material interests of the judiciary can be observed and measured. Through their ownership of bonds in financial and mortgage lending companies, many judges own senior claims on debt, debt that is directly tied to the loans of homeowners. Judges also own equity stakes in corporations, the value of which hinges very much on residential mortgage loans and loan-servicing activities.
For example, 42 of California's 105 appeals court judges own stocks or bonds in financial companies. Seventeen of California's appeals court judges own stock in Bank of America, while 10 own stock in Citibank, 6 in US Bank, 5 in JPMorgan Chase, and 4 in Wells Fargo. These judges own significant numbers of shares, on average amounting to about $10,000, but some California appeals court judges have revealed in their financial disclosure reports that they own perhaps as much as $1 million in stock in these banks.
The implication here is that many of California's judges have a financial stake in the profitability of the largest mortgage servicers in the state, the same banks that have been brought before the courts in thousands of cases alleging wrongful foreclosure.
For example, in the Baldwin case, one of the appeals court judges who ruled in favor of Bank of America, Steven Suzukawa, owned as much as $100,000 in Bank of America stock, according to public records. Another of the judges on the three-judge appellate panel that heard the Baldwin case, Norman Epstein, owned as much as $10,000 in Bank of America stock. This was not disclosed, according to parties involved in the case. Under California's judicial ethics standards, a judge owning more than $1,500 in stock of a company that is party to a lawsuit should recuse themselves from the case.
Baldwin fought on after the setback in the appeals court which was decided in February of this year, petitioning the Supreme Court of California to hear the case. California's highest court refused to consider the lawsuit, dismissing the petition on May 21.
"I am a bit shocked at the failure to review such a new issue that affects thousands," wrote Lenore Albert, Baldwin's counsel, in an email.
One of the Supreme Court judges who was set to decide whether or not Baldwin would be heard had to recuse himself from even making that preliminary decision. Ming Chin, appointed to the California Supreme Court by former Governor Pete Wilson in 1996, disclosed as much as $100,000 worth of stock in Bank of America. Judge Chin also owns stock in Morgan Stanley, the investment bank that sold billions in mortgage-backed securities during the real estate bubble of the 2000s.
Majority of Justices Major Stakeholders in Banks
A majority of California's Supreme Court justices own major stakes in the banks that service the majority of mortgage loans in the state. Justice Marvin Baxter owns shares of Wells Fargo Bank and Citibank. Justice Carol Corrigan owns shares of Citigroup and part of a business called Redwood Mortgage Investors, a private investment company that owns tens of millions of dollars worth of residential mortgage loans in California. Justice Joyce Kennard owns stock in JPMorgan Chase and Citibank. Justice Kathryn Werdegar owns as much as $1 million in Wells Fargo stock. That makes five of California's seven Supreme Court justices major investors in the mortgage lending and loan servicing industries.
"I'm so frustrated," said one lawyer, speaking on the condition of anonymity, about decisions of California's judges. "I have my team putting together the wall of shame for the judges, how they're not enforcing the law."
The state courts, many of them, were individually biased against the consumers," said retired attorney Don Adams. "The courts were not going to let individual borrowers escape mortgage payments, and were less concerned with stopping the fraudulent and predatory activities that got us into the mess in the first place."
In 2009, Adams sued Countrywide on behalf of a client who sought to quiet title to their home after a tangled deal of loans involving Countrywide, Citibank, and Bank of America led Countrywide to wrongfully foreclose. Countrywide admitted to foreclosing "in error," but a trial court found in favor of the bank, forcing the borrowers to sign a new loan agreement with Countrywide. Adams and his clients appealed the decision, but then lost before a panel of three judges in California's Second Appellate District court. One of the judges, Arthur Gilbert, owned stock in Bank of America and Citibank. Another one of the judges, Kenneth Yegan, disclosed two loans for over $1 million he had taken from Countrywide.
According to Adams, the bias of the courts in favor of the banks existed long before the foreclosure crisis. "Had courts enforced the law against the lenders, the great recession did not have to occur," he said. "Many of us were after the New Centurys, the Ameriquests, and Countrywides well before the collapse. Even after the economy imploded, most judges did their best to protect the business interests of the predatory lenders by cynically not wanting to let the consumers 'off the hook' without recognizing that borrowers would still have to pay a mortgage, but the lenders would have to unwind the loans and do it again. The courts felt that was too much for the fraudsters - and accordingly protected them."