Randomly Distributed Trial Court Justice: A Case Study and Siren from the Consumer Bankruptcy World

83 Pages Posted: 26 Jan 2016 Last revised: 26 Jul 2016

See all articles by Gary Neustadter

Gary Neustadter

Santa Clara University - School of Law

Date Written: January 25, 2016

Abstract

Between February 24, 2010 and April 23, 2012, Heritage Pacific Financial, L.L.C. (“Heritage”), a debt buyer, mass produced and filed 218 essentially identical adversary proceedings in California bankruptcy courts against makers of promissory notes who had filed Chapter 7 or Chapter 13 bankruptcy petitions. Each complaint alleged Heritage’s acquisition of the notes in the secondary market and alleged the outstanding obligations on the notes to be nondischargeable under the Bankruptcy Code’s fraud exception to the bankruptcy discharge. The notes evidenced loans to California residents, made in 2005 and 2006, which helped finance the purchase, refinancing, or improvement of California residential real property. When issued, the notes were secured by junior consensual liens on the real property, but subsequent foreclosure of senior consensual liens, precipitated by the mid-decade burst of the housing bubble, left the notes unsecured.

This article reports an empirical study of these bankruptcy adversary proceedings. Because the proceedings were essentially identical, they offer a rare laboratory for testing the extent to which our entry-level justice system measures up to our aspirations for “Equal Justice Under Law.” We are unlikely to find many conditions better suited to empirical exploration of that question: (1) civil litigation filed during a relatively brief time span by one plaintiff against 266 defendants (including co-defendant spouses); (2) some defendants defaulting, some defendants appearing pro se, and some represented by an attorney; (3) dispersal of the litigation among forty-seven different bankruptcy court judges, all sitting in one state (and thus, where applicable, required to apply the relevant substantive law of a single state); and (4) legal claims and factual allegations by the plaintiff so nearly identical that each dispute is resolvable on the basis of one obvious and straightforward factual question (reliance by an originating lender on a borrower’s misrepresentations) or on the basis of three less obvious and more complex legal rules (a California statutory limitation on fraud claims and two alternative varieties of a standing defense).

The results in the Heritage adversary proceedings evidence a stunning and unacceptable level of randomly distributed justice at the trial court level, generated as much by the idiosyncratic behaviors of judges, lawyers, and parties as by even handed application of law. We anticipate some randomly distributed justice as the inevitable byproduct of disparities in economic and other resources of the parties and disparities in the knowledge, capabilities, and attitudes of even well-meaning attorneys and judges acting reasonably in an imperfect system. We aspire, nonetheless, to equal justice under law. The findings of this study reflect a departure from that ideal on a scale both larger than we may have expected and larger than we should tolerate.

Keywords: consumer bankruptcy, debt buyers, adversary proceedings, random justice, liar loans, law and courts, civil procedure

Suggested Citation

Neustadter, Gary, Randomly Distributed Trial Court Justice: A Case Study and Siren from the Consumer Bankruptcy World (January 25, 2016). 24 Amer. Bankr. Inst. L. Rev. 351 (Summer 2016); Santa Clara Univ. Legal Studies Research Paper No. 1-16. Available at SSRN: https://ssrn.com/abstract=2722054

Gary Neustadter (Contact Author)

Santa Clara University - School of Law ( email )

500 El Camino Real
Santa Clara, CA 95053
United States

HOME PAGE: http://www.scu.edu/law/FacWebPage/Neustadter/

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