A federal judge has granted the U.S. Department of Justice wide authority to probe whether
Countrywide Financial abuses the bankruptcy process, rejecting the largest U.S. mortgage lender's claim that the ruling could cause havoc for the lending industry.
Judge Thomas Agresti of the U.S. bankruptcy court in Pittsburgh said the Office of the U.S. Trustee, an arm of the Justice Department that oversees bankruptcy cases, has the authority to conduct examinations and demand documents, so long as it exercises "good cause" and doesn't overreach.
While Tuesday's decision does not bind other bankruptcy courts, it could influence judges in other courts as the Justice Department pursues alleged abuses by Calabasas, California-based Countrywide. U.S. trustees have also filed lawsuits in courts in Florida, Georgia and Ohio.
"The U.S. Trustee has made a showing of a common thread of potential wrongdoing," Agresti wrote in his 50-page opinion.
"The apparent point of Countrywide's argument is that recognizing the authority of the U.S. Trustee to conduct these examinations could have the unintended consequence of leading to an unregulated 'free-for-all,"' he continued. "The court find's Countrywide's argument ... to be without merit."
Countrywide did not immediately return a call seeking comment, but has said it does not discuss pending litigation.
In January, the lender agreed to be acquired by Bank of America , the second-largest U.S. bank, in a transaction now valued at about $4.2 billion. Bank of America also did not immediately return a call seeking comment.
The Justice Department has scheduled public hearings on the merger for later this month in Chicago and Los Angeles.
According to Agresti's opinion, the regional trustee had alleged misconduct by Countrywide in 293 separate cases.
The trustee cited allegations that Countrywide was making inaccurate claims, filing court papers unnecessarily and demanding improper fees and charges.
She sought information on whether the lender properly handled mortgage payments, and correctly calculated both escrow balances and how far borrowers had fallen behind on payments.
Countrywide objected, saying the trustee was exceeding her powers and was not a "watchdog" for the bankruptcy process.
"The U.S. Trustee's attempt is ... a device to launch into a wholesale investigation of a non-debtor's private business affairs," Thomas Connop, a partner at Locke Lord Bissell & Liddell who represents Countrywide, said at a Feb. 28 hearing.
"There are 5,000 cases where Coutnrywide is involved," he added. "Who can guess how many are involving other mortgage lenders, how many involve credit card companies (and) how many
involve automobile financing companies?"
The judge disagreed, and added that he was unaware of "any clamor" for trustees to investigate other lenders.
"The decision in this matter should not be based on a scenario that will likely never occur," he wrote.