March 11, 2011
By Diana Henriques
The Justice Department is investigating allegations that a mortgage subsidiary of Morgan Stanley foreclosed on almost two dozen military families from 2006 to 2008 in violation of a longstanding law aimed at preventing such action.
A department spokeswoman confirmed on Friday that the Morgan Stanley unit, Saxon Mortgage Services, is one of several mortgage and lending companies being investigated by its civil rights division. The inquiry is focused on possible violations of a federal law that bars lenders from foreclosing on active-duty service members without a court hearing.
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Mark Lake, a Morgan Stanley spokesman, declined on Friday to comment on the investigation. However, in the fine print of a recent regulatory filing, Morgan Stanley disclosed that it was “responding to subpoenas and requests for information” from various government and regulatory agencies concerning, among other issues, its “compliance with the Servicemembers Civil Relief Act,” the law that governs the actions creditors can take against service members on active duty.
The investigation came to light in a document that Saxon’s lawyers filed on Tuesday in federal court in Grand Rapids, Mich., during a trial to assess damages against Saxon and two co-defendants after a federal judge ruled late last year that they had illegally seized and sold the home of Sgt. James B. Hurley, a Michigan National Guard member who lost his home while he was serving in Iraq in 2005. That case was ultimately settled on Thursday.
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In the document filed on Tuesday, one of Saxon’s lawyers characterized the investigation as “merely a preliminary investigation based on unproven allegations, for which no liability or wrongdoing has been found.”
The filing also suggested that Saxon was negotiating a settlement, but neither Morgan Stanley nor the Justice Department would comment on any talks.
According to people present in the courtroom, the discussions of the Saxon filing indicated that as many as 23 military foreclosures were under scrutiny in the Justice Department investigation.
Under the civil relief act, a judge must hold a hearing at which the service member is represented before granting a lender the right to foreclose on the service member’s home, even in states where a court order is not required for civilian foreclosures. As early as 2005, advocates for military families were complaining that banks and other lenders were frequently violating the law.
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Sergeant Hurley was one of the service members affected by a violation of the act. He returned from duty as a power generator mechanic in Iraq in December 2005 to find that Saxon had foreclosed on his riverside home outside Hartford, Mich., and sold it to someone else. He sued Saxon and two co-defendants, Orlans Associates, the law firm in Troy, Mich., that handled the foreclosure paperwork, and Deutsche Bank Trust Company Americas, the trustee for the mortgage involved in the foreclosure.
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The case dragged on until late last year, when Judge Gordon J. Quist of United States District Court ruled that the foreclosure and sale of the Hurley home had violated the civil relief act and ordered a jury trial to determine damages.
On Thursday, the fifth day of that trial, Sergeant Hurley settled with all the defendants in the case for an undisclosed sum, according to Col. John S. Odom, a retired Air Force lawyer who represented the Hurley family. The terms of the settlement are confidential, Colonel Odom said. “But the Hurleys are well pleased,” he added.
Mr. Lake of Morgan Stanley said: “We are very pleased to have settled this matter with Sergeant Hurley. As we have said previously, Saxon is always willing to make reasonable accommodations to amicably resolve a matter, especially for our service men and women.”
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John T. Gallagher, a spokesman for Deutsche Bank, declined to comment on the settlement itself. “As Deutsche Bank has repeatedly informed The New York Times, loan servicers, and not trustees, initiate and manage all foreclosures,” Mr. Gallagher said.
He emphasized that Saxon, as the servicer on the Hurley mortgage, “had the sole interaction with Mr. Hurley’s representatives regarding the loan. No employee of Deutsche Bank had any involvement in the underlying facts.”
The settlement came two days after the brief courtroom drama on Tuesday that led to the disclosure of the Justice Department investigation.
It began when Colonel Odom unexpectedly served a subpoena on Saxon’s general counsel, Gregory Smallwood, who was present in the courtroom.
Saxon’s trial lawyers immediately filed a motion arguing that the subpoena should be quashed because “the court has ruled inadmissible any reference to the D.O.J. investigation for which plaintiffs have suggested Mr. Smallwood’s testimony would be probative.”
The motion also argued that “the fact that Saxon may be negotiating a settlement of the investigation is also inadmissible” and that “any reference to the investigation, the negotiation of a consent decree, or the allegations that are the basis for that investigation, would also be unfairly prejudicial to Saxon.” Bio and other articles by Diana Henriques