Wednesday, July 8, 2015

Foreclosure Firm Pins Pending Demise on Non-Paying Clients

David Gialanella, New Jersey Law Journal
July 2, 2015

Even as foreclosure filings surge in New Jersey and elsewhere, Zucker Goldberg & Ackerman, arguably the state's bellwether foreclosure firm, finds itself in debt to the tune of $20 million and facing bankruptcy after 92 years in the business. 

But, after posting $30 million in gross revenue in 2014, the Mountainside firm's expected shuttering is not for lack of business; it is instead due to changes in the nature of the business, according to its bankruptcy counsel.

"The clients have driven Zucker Goldberg to this point," said Daniel Stolz of Wasserman, Jurista & Stolz in Basking Ridge. "The regulations and compensation structure that the large banks have imposed on firms like Zucker Goldberg do not allow them to make a profit.
"Management of Zucker Goldberg over the years has overcome a lot of these types of issues," Stolz added. "You don't want to just walk away, but if it's a downward spiral ... at a certain point you say, this is crazy."

Just walking away appears to be one of a few possible outcomes, but one for which the firm is prepared.
Zucker Goldberg made headlines last month when it filed a notice with the New Jersey Department of Labor on June 23 stating that it anticipated shuttering as of Aug. 24—news that surprised attorneys familiar with the well-established firm. 

"As far as I can remember ... that was always the pre-eminent foreclosure firm in the state of New Jersey," said Barry Levine, a Morris Plains solo who has litigated against Zucker Goldberg. 
Levine said he was "very shocked" to hear the news.

Woodbury solo Lewis Adler, who also has litigated against Zucker Goldberg numerous times, said the firm operates in "a highly competitive market."

"Busy and profitable don't necessarily follow [one another]," but "certainly I thought their practice was fairly honed after all these years," he said. 

The notice was required by the federal Worker Adjustment and Retraining Notification (WARN) Act because the planned closure affects at least 100 workers. With the law's 60-day notice requirement, Aug. 24 represented the earliest date Zucker Goldberg could close and still be in compliance with the statute. 
The notice, filed shortly after the firm retained Stolz, pinned the number of potential layoffs at 289.
Zucker Goldberg has an attorney head count of only 12, but employs ranks of paralegals and staff to support the labor-intensive practice. 

The notice's only explanation was, "Current and anticipated profitability insufficient to sustain current operations."

There's a lengthier explanation, but it all boils down to the rate and timing of compensation, according to Stolz.

The clients—who continue to service mortgages even after selling off the actual debt on the secondary market—pay little or nothing up front to the firm, and don't necessarily pay monthly bills, as clients of firms in other practices do, he said.

Through a process called "curtailment," investors who buy the bundled debt may impose penalties on the seller-originators when returns are not realized within a certain time frame, according to Stolz. When that occurs, clients pass the penalty off to Zucker Goldberg, he said. 

Private banks also voluntarily adopted payment structures formulated by Fannie Mae and other government-backed loan originators that dictate how much—and at which point during the foreclosure process—law firms may be paid, according to Stolz. 

Some of those strictures are "draconian," he said: servicers require documentation of every disbursement, down to mailings. which creates the need for more staff and puts an entire fee at risk if a client takes issue with a specific expenditure.

And as courts in New Jersey and elsewhere addressed widespread "robo-signing"—the process of rubber-stamping foreclosure paperwork with little or no verification—Zucker Goldberg was affected. During that process, which culminated in 2011 with emergent changes to New Jersey court rules, clients directed Zucker Goldberg to continue preparing foreclosure complaints even as they were unable to process them, according to Stolz. 

Zucker Goldberg's typical flat fee for handling a foreclosure to sale is $1,300, but the per-file cost to the firm has become "several times that amount," according to Stolz.
The effects were gradual and for years were staved off because vendors were extended lines of credit, Stolz said, noting that Zucker Goldberg also had to obtain a loan from Chase to meet day-to-day expenses. 

All told, Zucker Goldberg has about $20 million in unsecured debt, payable mostly to title and abstract companies, he said. 

Stolz said Wells Fargo NA is the firm's primary client. 

Wells Fargo spokesman Tom Goyda said in a statement: "While I won't comment specifically about the situation at Goldberg, Zucker & Ackerman, protracted foreclosure time lines in the states where they did work for us have created challenges for every party involved in the foreclosure process. We have a strong oversight program that closely monitors all vendor activity, including our attorneys, and are actively working to ensure a smooth transfer of the work that Goldberg, Zucker & Ackerman has in process for us."

Glenn Reiser of LoFaro & Reiser in Hackensack, who both prosecutes and defends foreclosures, said of Zucker Goldberg: "They seem to have a monopoly on the foreclosure practice," but, "when a lender is referring high-volume work ... they do it on an flat-fee basis." 

"Every two weeks, they've got to pay people," he added. "It's just cash flow."

Over the past decade, Zucker Goldberg has faced litigation over alleged foreclosure overcharges and alleged obstructionist motion practice in a bankruptcy matter. 

The bulk of litigation faced by the firm, however, has been filed by disgruntled borrowers, most of which was dismissed at an early stage, Stolz said. 

The firm "has been very careful to comply with the law, but the suits cost money to defend and raised insurance costs, even though they were largely found to be frivolous," he added.

Zucker Goldberg has about 30,000 active files that would have to be transferred in the event of a closure.
The firm, which continues to pay its staff, is likely to file a Chapter 11 reorganization petition in the coming weeks, Stolz said.

The future of the firm, as well as its lawyers and staff, is "an evolving situation that is largely beyond our control," according to Stolz.

"It could be more gradual than" a complete termination on Aug. 24, he said. 

"If we survive in some smaller form or different form, we really can't tell." •

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