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Systemic Indifference

At the Huffington Post, Karen Weise has collected a series of criticisms of mortgage company collection practices. The concern is a legitimate one for bankruptcy purists: whether by design or "systemic indifference", the methods used by some mortgage companies and servicers to track and calculate the debts they are owed often lead to the filing of unwarranted or inflated claims. In one case, for example, bankruptcy Judge Marilyn Shea-Stonum blasted the mortgage company's "reckless" system that appeared to be "designed to allow each actor in the process to act with indifference to the truth, and to rely solely on the limited information made available at each step. ... [The errors in this case] evidence Countrywide's disregard for diligence and accuracy."

This problem, however, is not limited to mortgage companies and service providers. In my former life as a corporate debtor attorney, I was frequently stunned by the cavalier attitudes that some organizations appear to have with respect to maintaining accurate debt collection records. They would usually take whatever figure their records spit out and file a claim; the debtors would go to their own records and often come back with very different numbers. True, we usually managed to reconstruct everything to reach numbers we were all comfortable with, but at a fairly high cost. If time and money are not huge obstacles, the bankruptcy process allows the adversarial truth-seeking process to run its course. In many bankruptcies, however, time and money are not in sufficient supply to make this possible. Thus, it should come as no surprise that some creditors may be willing to roll the dice by filing unwarranted or inflated claims. The transparency of the bankruptcy process, together with properly functioning judicial and trustee oversight, allow us to identify patterns such as these and take corrective action.

Of all of the horrific claiming practices that I saw in private practice, none were more pervasive and egregious than in asbestos personal injury claim filing. Some issues - filing new claims years or even decades after the statute of limitations had run, alleging wholly inconsistent work histories from one case to the next, etc. - may be just poor record keeping or a "reckless" system intended to provide those involved with deniability. Unlike other claims, however, asbestos claims are typically allowed without the filing of a proof of claim or other documentation that will open them to system-wide review. After a bankruptcy trust is established by a confirmed plan, access to claims filed is even less likely due to confidentiality restrictions. The net result - it is virtually impossible to conduct an extensive review of trust claiming and administration practices.

Courts and officials are right to criticize "systemic indifference" that leads to abusive filing practices. At the same time, however, some judges and trustees offices are at least as guilty of "systemic indifference" to the signs of fraud and abuse in asbestos bankruptcies; placing far too much emphasis on the false efficiencies of looking the other way and obstructing efforts to evaluate system-wide recklessness. And until these processes become at least as transparent as other claim processes in bankruptcy, we can hardly expect advocates to become more vigilant in their claim filings.

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Rafael Mangual
Project Manager,
Legal Policy

Manhattan Institute


Published by the Manhattan Institute

The Manhattan Insitute's Center for Legal Policy.