When the Colorado attorney general's office began investigating two Denver law firms for overbilling practices related to foreclosures, the office also uncovered alleged collusion, nepotism and very successful lobbying.
According to articles in the Denver Post in July and August, two law firms, Castle Law Group and Aronowitz & Mecklenburg, are accused of overcharging for the posting of notices telling borrowers of their rights during the foreclosure process. The firms have reportedly charged hundreds of dollars for each posting, which consists of a two-page document that must be affixed to the homeowner's door.
The newspaper also reported that in 2009, one of the firms successfully lobbied the Colorado Legislature to pass H.B.1276, which made the postings mandatory, and that the two law firms own, or have interest in, the process server companies that do the postings.
No lawsuits have been filed, and the attorney general's investigation is ongoing. Industry observers say that while attorney general offices in other states have filed lawsuits against law firms for various improprieties related to foreclosures, the Colorado case is unusual.
John Campbell, a professor at the Sturm College of Law at the University of Denver, says the issue goes beyond overcharging for service. In Colorado, he explains, during the foreclosure process, two notices must be posted. The first one informs borrowers that they can defer the foreclosure sale for up to 90 days and provides a list of websites and a hotline they can call to contact a housing counselor. The second notice informs borrowers of the Rule 120 hearing, in which the court finds whether they are delinquent on mortgage payments and whether they are members of the military. The judge signs off before a foreclosure auction can occur.
‘Everybody thought these were consumer-friendly measures, so the homeowner was not thrown out of the home without a chance to talk to somebody,’ Campbell says. ‘Then it was revealed that Castle might have been involved in pushing for the notices and had the idea for the notice provision.’
The law firms are hired by banks, Campbell says, so it seems counterintuitive for the firms to push for these provisions that allow the homeowner to stay in the home. ‘But then we find out every time there is a foreclosure at $300 a posting, and you are paying someone minimum wage to drive out and slap it on the door. There is a significant profit to be made by generating these postings,’ he says. ‘It is somewhat clever, if the allegations are true.’
One allegation, according to the Denver Post, was that Castle Law Group relies on Absolute Posting & Process, which is 40% owned by principals at the law firm. The other law firm, run by Robert Aronowitz, his daughter Stacey and his son-in-law Joel Mecklenburg, owns Xceleron, which does all of Aronowitz's posting. Also, according to the Post, the firms earned nearly $20 million in revenue over four years just for having the notices posted.
‘In the gross totals, it is sort of eye-popping,’ says Fred Skillern, an attorney with Montgomery Little & Soran PC near Denver. ‘You do have instances where entrepreneurial law firms have made an awful lot of money finding a niche that makes them unique. The inference here is that these firms perhaps made more money charging expenses than with the practice of law.’
Skillern points out that in the Colorado Rules of Professional Conduct, Rule 1.5, Fees, notes that, ‘A lawyer shall not make an agreement for, charge or collect an unreasonable fee or an unreasonable amount for expenses.’ Skillern says the two law firms seem to have bypassed that rule by setting up the process server companies as subsidiaries. Another allegation is that the two firms emailed each other about what to charge for posting.
Campbell says forming subsidiaries reflects a bigger trend. ‘There has been a move towards vertical integration,’ he says. ‘There are one-stop shops where attorneys act as debt collector, as the title company, then to throw people from the home. The trend is of capturing all that business and making money from all the steps.’
The attorney general's office will not comment on the investigation and has not said what it plans to do. Other state attorneys general have filed lawsuits against law firms regarding overbilling and other issues, and some have settled for millions of dollars.
‘It will be interesting to see how it plays out,’ Campbell says. ‘Sometimes the AG will file a lawsuit, and sometimes they will go to the parties and say, 'We got you – do you want to strike a deal?'’
Nora Caley is a Denver-based freelance writer.