B of A Disowns Its Own Lawyer's Argument in Fumbled Mortgage Case

To quell doubts about its mortgage unit's handling of documents, Bank of America Corp. is distancing itself from … itself.

B of A now says that a senior litigation manager — who had 10 years' experience working at Countrywide Home Loans Servicing LP — was out of her depth when she testified in a New Jersey courtroom about the unit's document practices. The Charlotte company also says the local lawyer that represented it essentially fumbled the routine personal bankruptcy case.

There is no doubt that Kemp vs. Countrywide Home Loans was a spectacularly bungled defense — and its implications have caused an uproar in the world of mortgage securitizations.

In a series of unforced admissions, the B of A manager, Linda DeMartini, and Harold Kaplan, the company's outside attorney, described how Countrywide had failed to adhere to the most rudimentary of securitization procedures, such as transferring the original promissory note to the trusts that had purchased the loans, as required under the pooling and servicing agreement.

Both DeMartini and Kaplan said it was standard practice for Countrywide to hold onto the original mortgage notes, which were stored in Simi Valley, Calif., despite securitization contracts that require the notes be physically transferred to sponsors, trustees or custodians.

"I mean, there's no way I'm going to argue that there was a physical transfer," Kaplan told Chief Judge Judith Wizmur of the U.S. Bankruptcy Court in New Jersey, in an August 2009 hearing. "They had the documents."

Wizmur rejected Countrywide's claim that it had standing to foreclose on the borrower, John T. Kemp, and in a Nov. 17 ruling excoriated Bank of America for its handling of the case.

At the heart of B of A's bungled courtroom performance is a critical issue plaguing mortgage servicers and bond investors: whether Countrywide may still be holding onto a massive trove of untransferred mortgages and if so, what that means for the trusts that never received them.

For virtually everyone in the mortgage securitization business, the admissions in court (including DeMartini's sworn testimony) have opened the door to further litigation by borrowers questioning every trust's legal standing to foreclose.

"I don't think anyone wants the trusts to be in essence incapable of performing their needed functions," said Talcott Franklin, a Dallas attorney who represents a consortium of investors in mortgage-backed securities. "That's not good for anyone."

Jerry Dubrowski, a B of A spokesman, said it was Countrywide's "policy and practice" to comply with its contracts, including forwarding any necessary documents to trustees. (B of A acquired Countrywide, the largest servicer of home mortgages, in 2008.)

But, he added, in the New Jersey case "I don't think we can say these notes were delivered at this point. We're not sure because we don't know all of the facts of the case."

Dubrowski later said he believed the loan documents were delivered to the trustee but at some point they were lost or misplaced.

B of A was still evaluating whether to appeal even though the deadline to do so was Tuesday.

Larry Platt, a partner at the law firm K&L Gates in Washington and an external counsel for B of A, has disowned the DeMartini testimony and Kaplan's courtroom statements.

Neither of them had personal knowledge of how documents were handled, Platt said. DeMartini, he said, "talked about things outside her job responsibilities."

"The employee's job had nothing to do with executing loan documents," Platt said. "Her testimony as to whether it was the common practice not to deliver the documents was not accurate."

Platt said no one should "try to extrapolate how trillions of dollars of loans are being handled based on one badly defended bankruptcy case.

"What we keep telling people, and it's a hard statement to make and a harder one to hear, is that if the company had it to do over again, we would have defended it differently," Platt said of the case. "The company was not well served by its own lawyer and employee."

Attempts to reach DeMartini for comment were unsuccessful. Kaplan, B of A's lawyer in the case, did not return calls.

He said in court that he was unable to track down an original signed pooling and servicing agreement (to the consternation of the judge), and had no certificate from the trustee, Bank of New York Mellon, about any transfers of loan documents. Kevin Heine, a BNY spokesman, said the company fulfilled its contractual obligations as the trustee "including returning the file to the servicer, as we did upon request."

Bruce Levitt, the plaintiff's attorney with Levitt & Slafkes P.C. in South Orange, N.J., said the case had "a multitude of problems," besides the testimony of B of A's own employee.

"It's hard for B of A to back-pedal because she was their witness," Levitt said. "This case was refreshing because the witness wasn't told how to spin things and actually told the truth. They can't dispute the fact that the note was never transferred because she was testifying proudly that Countrywide always retained the note and would never let it out of their sight. It was unscripted. That's why you won't find other testimony like this; this one slipped through."

There is little doubt that Countrywide was supposed to provide the physical note for Kemp's loan to the trust that purchased it, known as CWABS-2006-8.

In the Securities and Exchange Commission filing for that specific securitization, Countrywide and Bank of New York Mellon both attested that at the time of the trust's formation in 2006, "the Trustee has received … the original Mortgage Note … or, if the original Mortgage Note has been lost or destroyed and not replaced, an original lost note affidavit."

According to the testimony in the Kemp case, Countrywide never transferred the note and instead recreated documents weeks before the date of the hearing in an effort to prove its standing in the case.

Judge Wizmur noted in an exchange with Kaplan that the bank could salvage its position by demonstrating that the transfer of the documents was not legally necessary.

"I'm raising the possibility that the Pooling and Servicing Agreement might contain provisions that would serve to offer Countrywide an out," Wizmur said, suggesting that B of A should comb the 270-page agreement for language suggesting that it was entitled to retain the notes as the trustee's proxy or that transfer at the time of sale was immaterial.

Industry lawyers argue that trustees do not have to take physical possession of the notes if there are contracts and other documents showing proof of transfer.

"As a matter of law, the note doesn't have to be delivered to the trust, it can be delivered to an agent," said Platt, who nevertheless acknowledged that the pooling and servicing agreement in this case did not allow for such delivery.