In re Morgan

• Citation: 225 BR 290
• Decision Date: 30 September 1998
• Docket Number: 195-17996-352.,Bankruptcy No. 197-12429-352
• Parties: In re Gordon MORGAN, Debtor. In re Alcibiades NUNEZ and Irma Nunez, Debtor.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Eastern District of New York

225 B.R. 290 (1998)

In re Gordon MORGAN, Debtor.

In re Alcibiades NUNEZ and Irma Nunez, Debtor.

Bankruptcy Nos. 197-12429-352, 195-17996-352.

United States Bankruptcy Court, E.D. New York.

September 30, 1998.

"Firm A" for Litton Loan Servicing, Inc., State Street Bank & Trust Company.

"Firm B" for Great Financial as servicing agent for Federal Home Loan Mortgage Corporation.

MEMORANDUM DECISION

MARVIN A. HOLLAND, Bankruptcy Judge.

The following version of the Court's September 30, 1997 decision has been redacted solely for the purposes of publication. As this decision concludes with referrals to the Second Department's Grievance Committee, the names of the law firms and the attorneys involved herein have been removed in an effort to maintain the confidentiality provided by New York State Law for matters relating to the conduct or discipline of an attorney. (N.Y.Jud.Law § 90(10) (McKinney 1998); N.Y.Comp.Codes R. & Regs. tit. 22, § 691.4(j) (1998))

This decision questions and addresses the propriety of proceedings commenced by mortgage servicing agents that have no pecuniary interest in either the outcome of the proceeding or in the underlying mortgage. In each of these two separate and unrelated cases a servicing agent for a mortgagee, identified as such in the moving papers and represented by its own counsel, purported to act on behalf of its principal pursuant to either a power of attorney or other contract. Neither servicing agent possesses any beneficial interest in the subject mortgage. This court, sua sponte, raised the issue of whether such conduct constituted the unauthorized practice of law.¹ Several adjournments were provided in each case to allow counsel to address this issue.

We now conclude not only that a servicing agent has no standing to represent the interests of a secured creditor in a legal proceeding but also that motions made by servicing agents on behalf of and for the sole benefit of the mortgagee necessitates the exercise of legal judgment in a manner proscribed by the laws of the State of New York, the state in which the services were rendered.

BACKGROUND

In the Morgan case, a notice of appearance was filed by the law offices of "Firm A" as attorneys for Litton Loan Servicing, Inc. ("Litton") on May 27, 1997. This was followed, on July 28, 1997, by their filing an objection to confirmation of plan on behalf of Litton Loan Servicing, Inc. — a document which was signed by "Attorney A" on behalf of Firm A as "Attorneys for secured creditor Litton Loan Servicing, Inc." On August 18, 1997 a motion seeking to preclude revesting of title to the debtor's residence, dismissal of the case, and for relief from the automatic stay was filed by Firm A for "Green Point Savings Bank its successors and/or assigns" ("Green Point").

After this court raised the unauthorized practice of law issue, Firm A submitted affidavits asserting for the first time that the Firm A had not been retained by either Litton or Green Point, but rather a third entity: State Street Bank & Trust Company ("State Street"). Firm A asserted that the debtor's mortgage had been assigned by Green Point to State Street prior to the filing of the bankruptcy petition, (11/21/97 Affidavit of Paul T. Bavis, an officer of State Street Bank & Trust Company, (the "Bavis Aff.") at ¶¶ 1-3), and that Litton functioned as a servicing agent for State Street pursuant to a "Limited Power of Attorney." (11/22/97 Affirmation of Attorney A (the "Attorney A Affirm.") at ¶ 1; Bavis Aff. at ¶¶ 2, 5.) This undated document provides for Litton to discharge the following "obligations":

6. Appearing, litigating and compromising any matter in any court either as plaintiff or defendant: provided, however, Servicer shall not be authorized to commence any proceedings (other than foreclosure, sequestration, replevin, bankruptcy and eviction or to recover payments due under any agreement) without the written consent of Principle (Ex. A to Firm A\'s Mem. of Law dated 9/15/97) (emphasis in the original).

While State Street asserts that it retained Firm A, (Bavis Aff. at ¶ 4), this clearly contradicts numerous unexplained representations made by Firm A in the above mentioned documents and during the course of these proceedings by members of Firm A.²

In the Nunez case, a motion was filed on May 5, 1997, for relief from the automatic stay by "Great Financial Mortgage as servicing agent for Federal Home Loan Mortgage Corporation." Great Financial was represented by the law firm of "Firm B." Counsel admits to being retained by Great Financial. (10/28/97 Affirmation of Attorney B (the "Attorney B Affirm.") at ¶ 4.) Great Financial Mortgage is a servicing agent for Federal Home Loan Mortgage Corporation ("Freddie Mac"). Freddie Mac, as a part of what it terms its `Designated Counsel/Trustee Program,' gives its servicing agents a choice of three law firms — "designated counsel" — for retention in area bankruptcy proceedings. (Ex. A, 8/21/97 Affirmation of Attorney B2). Firm B is one of these firms. Freddie Mac and its designated attorneys agree on the attorneys fees to be charged for each matter. Great Financial pays the attorney fees, but it is reimbursed by Freddie Mac. Great Financial is not paid for referring matters to designated counsel, and Freddie Mac retains the ability to make settlement decisions. (¶ 7 Attorney B Affirm.)

DISCUSSION

At issue in these cases are the objections to confirmation of a Chapter 13 plan filed in the Morgan case and a motion to modify the automatic stay filed in the Nunez case, both of which are required by the Bankruptcy Code to be made by "a party in interest." 11 U.S.C. §§ 362(d) & 1324. Federal Rule of Civil Procedure 17(a) provides that every action shall be prosecuted in the name of the real party in interest. While the Federal Rules are not by themselves applicable in bankruptcy³ except as they may otherwise may be made so,⁴ Fed.R.Civ.P. 17(a) is merely a restatement of both the common law and of basic federal constitutional jurisdiction. See U.S. Const. art. III, § 2.⁵ Federal judicial jurisdiction is predicated on a case or controversy, see e.g. Flast v. Cohen, 392 U.S. 83, 101, 88 S.Ct. 1942, 1953, 20 L.Ed.2d 947 (1968), but in these cases the servicing agents who have no controversy with the mortgagor came into court with their own counsel and sought legal relief on behalf of their principal, the mortgagee. To the extent that a justiciable controversy exists with either of these debtors, it exists solely with the holders of the mortgages, and not the servicing agents, because it is only the holders of the mortgages and the mortgagors in these cases who have a `personal stake in the outcome' of the proceeding. See Baker v. Carr, 369 U.S. 186, 204, 82 S.Ct. 691, 703, 7 L.Ed.2d 663 (1962).

Where a servicing agent has no controversy with the mortgagor and goes into court with its own counsel to seek legal relief on behalf of its principal, that servicing agent procures legal services for the benefit of the principal mortgagee. It is this "brokering" of legal services by the servicing agent that constitutes the improper behavior addressed herein. In asserting and enforcing in their own name legal rights which do not belong to them they act as middlemen. While it may be proper in the marketplace for a merchant to purchase goods or services for the sole and express purpose of supplying them to another for a fee or other profit, when the subject of such a transaction is legal services, the transaction is prohibited because it constitutes the providing of legal services by one not properly licensed to practice law. When the prohibited aspect of the transaction is knowingly misrepresented to a court, such conduct can only be described as being so sloppy as to border on contempt.

It is axiomatic that the duty that arises out of an attorney-client relationship is one owed only to the client and to the court. Any attorney, not having been retained by the real party in interest, owes no duty of allegiance to that entity and has no authority to act for that entity. See e.g. Estate of Ginor v. Landsberg, 960 F.Supp. 661, 667 (S.D.N.Y.1996) ("It is well-settled that an attorney owes no fiduciary duty to a third party with whom the attorney is not in privity.") An attorney representing a mortgage servicing agent is in the anomalous position of owing a professional obligation only to an entity that is not the real party in interest while having no such obligation to the only entity that does have such an interest. In such a situation, the holder of the mortgage does not even enjoy the benefits of the attorney-client privilege. See Tisby v. Buffalo Gen. Hosp., 157 F.R.D. 157, 164 (W.D.N.Y. 1994) ("The duty under DR-4-101(B) to preserve client confidences and secrets generally attaches only when an attorney-client relationship exists") (citation omitted); Walsh v. Northrop Grumman Corp., 165 F.R.D. 16, 19 (E.D.N.Y.1996). Here, the package of services provided to the principal mortgagees by the servicing agents (which, at the very least included supervising counsel and, at most, the actual services provided by the agent's attorney) compromised the attorney/client relationship between counsel and the real party in interest.⁶

Litton relies on a power of attorney (and Great Financial looks to its Designated Counsel Program) for authority to represent the principal, but "a person authorized to bring suit solely on the basis of a power of attorney is not a real party in interest; courts have uniformly denied such a party the right to sue in its own name."⁷Airlines Reporting Corp. v. S and N Travel, Inc., 857 F.Supp. 1043, 1046 (E.D.N.Y.1994) (effect of assignment of claims on diversity jurisdiction). We take judicial notice that servicing agents do not perform their function gratuitously. Regardless of how the attorney/servicing agent/mortgagee relationship is structured in these cases, the servicing agent provided what amounts to...