In a post on February 29, 2008, I discussed the adversary complaint filed against Countrywide by the United States Trustee in the Northern District of Georgia.  Since then, others have picked up on the case, including the New York Times.

Countrywide now faces more troubles.  On Wednesday, April 2, 2008, Judge Thomas Agresti of the Bankruptcy Court for the Western District of Pennsylvania entered this Opinion and Order in the case of In re Countrywide Home Loans, Inc., Misc. No. 07-00204 TPA.  In this case, the U.S. Trustee sought, via a Rule 2004 examination and subpoena, information from Countrywide.  (See the broad list by clicking here).

Several months ago the Chapter 13 Trustee for this District filed substantially identical motions entitled Trustee’s Motion to Compel Countrywide Home Loans, Inc./ f/k/a Countrywide  Funding Corp. to Provide Loan Histories and for Sanctions in 293 separate cases in which Countrywide was a creditor. On October 18, 2007, the Court entered a consolidation order which consolidated all of these separate motions for administrative purposes at Misc. No. 07-00203. 

Subsequently, in 10 of those 293 cases the UST (“context cases”) filed substantially identical documents entitled Notice of Examination Under Fed.R.Bankr.P. 2004 and Service of Subpoena  (Duces Tecum) (“Notice of Examination”).3 In each of these 10 cases, the UST identified actions engaged in by Countrywide that she claims were questionable or raised issues going to the integrity of the bankruptcy system.  On November 2, 2007, the Court entered another consolidation order, this one  consolidating the 10 cases in which the UST had filed the Notices of Examination under Misc. No. 07-00204. Since the 10 Notices of Examination were substantially identical, the Court further  ordered the UST to file a single Notice of Examination (with an attached Subpoena Duces Tecum (“Subpoena”)) by November 7, 2007, with such single Notice of Examination to then have effect in all of the context cases….

The Notice of Examination, which the UST says was filed pursuant to Fed.R.Bankr.P.
2004(c) and 9016, indicates that the UST seeks to examine the “corporate representative” of Countrywide regarding “its bankruptcy procedures as they relate to the Debtors’ financial affairs, the administration of their estate, and the impact of Countrywide’s bankruptcy procedures on the integrity of the bankruptcy process in the Western District of Pennsylvania.” The Subpoena Duces Tecum (“Subpoena”) component of the Notice of Examination directs Countrywide to produce a variety of documents,and Countrywide is further directed to produce an authorized representative  of the company to be examined on a variety of topics.

 (bold emphasis added).

 The Court’s Opinion reviews the history of the U.S. Trustee’s office, the statutory language, and case law supporting a broad view of the US Trustee’s authority.

The Court has little difficulty concluding that the UST has met her initial burden of
sufficient “good cause” to proceed with the Countrywide Rule 2004 exam and obtain receipt of the documentation sought by her in advance of the examination in Categories 5-12. There are a number  of reasons for this conclusion. Most importantly, the UST has shown sufficient proof of a “common  thread” running throughout the context cases sufficient to at least raise the possibility of a systemic  problem worthy of the UST’s attention. That is to say, the UST has not simply randomly chosen  cases and demanded documentation from Countrywide.

As an initial matter, the documents at issue relate very precisely to the specific debtors’ loans, the interaction between Countrywide and each debtor, and the interaction between  Countrywide and this Bankruptcy Court. These are not documents that will implicate any private  business affairs or strategies of Countrywide, and there is no question that they would be discoverable  in traditional litigation between the debtor and Countrywide over the respective loan if the proceeding  had been brought as an adversary proceeding or contested matter. Thus, because turning over the documents will not subject Countrywide to an unfair intrusion into its private business affairs, the UST’s burden of demonstrating good cause to obtain them is a modest one….

More broadly and as noted, the UST has sufficiently identified a common thread among the context cases to warrant some inquiry on her part. Viewed collectively as a group, the  context cases appear to reflect a common pattern, thread, or theme that runs through them involving  the manner in which Countrywide, generally, calculates and determines the extent of its bankruptcy  claims….

Questions surely arise as to why Countrywide fails to honor the terms of the respective discharge orders or the orders approving the Trustee’s final account which, in this District, specifically state that all payments are current as of the date of the Trustee’s last distribution payment. How is notice of these particular orders handled internally by the staff person(s) receiving the notice? How are they posted on the respective accounts? It might be argued that many of these same questions will also arise in and most likely be answered in the Hill contested matter….

It has certainly not been proven that Countrywide did anything wrong in any of these cases and the Court specifically is not making any finding in that regard by this Opinion. The Court merely finds that the UST has made a showing of a common thread of potential wrongdoing in each of the cases that is sufficient to meet the general standard of good cause necessary for her to proceed under Rule 2004.