1st Circuit: Lower Court Erred In Setting Up Procedure For Forcing Banks, Borrowers Together To Work Out Home Loans In Default; Successful R.I. Foreclosure Mediation Program May Now Be In Jeopardy; Appeals Panel Nixes Outright Reversal & "Chaos," Instead Opts To Boot Case Back To Trial Judge To Fix Problem

In Providence, Rhode Island, The Associated Press reports:

• A federal appeals court threw more than 700 Rhode Island foreclosure cases into uncertainty by concluding that there are problems with how a judge set up a program designed to force homeowners and banks into mediation.
  
  The 1st U.S. Circuit Court of Appeals said U.S. District Judge John McConnell did not follow the proper procedures when he instituted his unique order governing foreclosures. A lawyer who represents hundreds of families suing to stop from being foreclosed upon says he fears the appeals court is jeopardizing a program that is helping people.
  
  McConnell signed an order on Aug. 16, 2011, in which he took over all mortgage foreclosure cases in federal court in Rhode Island. The order halted the cases, suspended all deadlines and required homeowners and financial institutions to engage in ‘‘directed and serious settlement discussions’’ before he would allow any individual case to proceed. He placed no time limits on the discussions.
  
  The following January, he appointed former bank CEO Merrill Sherman to serve as a special master to help oversee the process and reach settlements, saying that the cases were problematic for both sides.
  
  ‘‘Plaintiff homeowners are confronted with the emotional and economic devastation of losing their homes to foreclosure. Defendant financial institutions are confronted with countless mortgages on which homeowners have stopped paying,’’ McConnell wrote. ‘‘The problem is exacerbated by a significant downturn in real estate values that has placed many of these properties ‘under water.'’’
  
  He said it was in the interest of everyone involved to find a system to ‘‘explore all possibilities for the potential settlement of these claims.’’
  
  About 130 cases had been settled or otherwise dismissed under the program as of April 30, according to a report Sherman filed last month.
  
  The June 14 appeals court decision is written by retired U.S. Supreme Court Justice David Souter, who was sitting in on the case. He wrote that McConnell’s order violated court procedures because he should have given the banks a hearing on whether the lawsuits were likely to succeed before he ordered mediation. He also said McConnell would have to establish limits on the amount of time and cost spent on mediation.
  
  McConnell on Wednesday set a July 8 hearing on some of the issues raised in the decision.
  
  Three lawyers who represented financial institutions before the 1st Circuit declined to comment or did not return phone messages seeking comment on the potential impact of the decision. Sherman also declined to comment.
  
  George Babcock, a Rhode Island attorney who represents more than 500 families fighting foreclosures, said many of homeowners have reached settlements with the help of the program.
  
  ‘‘I find it all very unfortunate that a plan that was designed to help people and is really helping people is going to be scuttled,’’ he said. ‘‘I hate to say that the banks are the bad guys, but the banks are the bad guys,’’
  
  Steven Fischbach of Rhode Island Legal Services, who filed an amicus brief in the case, said the program was devised by the court to deal with a flood of cases, which reflects the severity of the foreclosure crisis.
  
  ‘‘The program is very important because it provides a certain avenue to speaking with a lender to get a modification of a mortgage,’’ he said. ‘‘It is very hard to get someone on the phone who has authority to respond to and evaluate mortgage modifications.’’
  
  He said it was too soon to say whether the decision was a death knell, but said it was important to note that the appeals court could have struck it down. Instead, it gave the district court a chance to fix the problem.(1)
  
  ‘‘I think the court recognized that the court in Rhode Island was faced with an onslaught,’’ he said.
  
  He called for a state law that would force financial institutions into mediation before foreclosing.

Source: Ruling throws into uncertainty RI foreclosures.

For the ruling, see In re: Mortgage Foreclosure Cases, (1st Cir. June 14, 2013).

(1) From the court's ruling:

• Although it would be open to this court simply to vacate the injunction and mediation orders, we fear that the practical effect of requiring such immediate action on a docket currently the size of this one would be chaos.
  
  If the issues resolved here had been addressed by the district court when the volume of cases was at the trickle stage, correction of the errors would have been fairly simple. As the docket now stands, however, nearly 150 cases are consolidated in this appeal, and we are told that at the time of briefing another 550 or so were governed by the orders reviewed here and subject to being affected by this court's action and by the district court's ensuing proceedings on remand.
  
  We therefore think the prudent course is to tolerate the status quo long enough to give the parties time to plan for contingencies.
  
  Accordingly, we remand with instructions to take steps expeditiously to correct the errors.