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Alarming details charged in the collapse of Butler & Hosch

Lawsuits allege millions in fake accounts receivables

It’s been almost two months since mortgage banking industry law firm Butler & Hosch filed an Assignment for the Benefit of Creditors to Florida law firm Michael E. Moecker & Associates, an action analogous to Chapter 7 bankruptcy.

In doing so, Butler & Hosch closed their doors and laid off 700 employees nationwide.

While creditors are lining up and controversy swirls around the abrupt virtual bankruptcy, little has been revealed about what happened behind the scenes.

Until now.

Details are emerging in a slew of lawsuits filed by employees and creditors that claim to show various pieces of the puzzle, revealing some about what allegedly led up to the firm’s collapse.

Indeed, the entire foreclosure industry is slowing down, by some measures. There were 41,000 completed foreclosures nationwide in March 2015, down from 48,000 in March 2014, representing a decrease of 65.2% from the peak of completed foreclosures in September 2010, according to CoreLogic data.

As foreclosures dwindle so does, naturally, the demand for related services.

According to a class-action lawsuit filed in U.S. District Court for the Southern District of Florida by former high-level employees, principal and partner Robert Hosch created false billing and invoices to mask the firm’s financial distress.

“False client invoices were intended to create the appearance to the firm’s lenders, and prospective lenders, that the firm’s accounts receivables were millions of dollars more than the actual amount,” the lawsuit alleges. 

The current plaintiffs, Stephen Regal and Gianna Hills, filed the lawsuit, charging that Hosch personally directed the fraudulent financial actions.

“Hosch orchestrated or, at a minimum, had knowledge of each of the four fraudulent billing schemes,” the lawsuit says.

The lawsuit also alleges that the firm created more than $7 million in bogus receivables using false invoices that were never delivered to clients to better position the firm before creditors.

The lawsuit also alleges that Hosch had the firm bill clients a phony $350 fee to transfer each file when it absorbed other firms.

According to the lawsuit filed by Regal and Hills, there were almost 22,000 phony invoices, which totaled more than $7.5 million, relating to the acquisition the default assets of Morris Schneider Wittstadt.

The Atlanta-based law firm agreed to sell its default assets to Butler & Hosch in January, and the deal was completed later that month.

At the time, details of the sale were scarce, but MSW revealed more about the deal when it filed for bankruptcy earlier this week.

In the bankruptcy filing, Morris Schneider Wittstadt’s managing partner, Mark Wittstadt, said that it agreed to sell its foreclosure, bankruptcy and eviction operations to Butler & Hosch, including the assumption of MSW’s lease obligations, in exchange for an unsecured promissory note of $2,072,167.24.

As part of the merger, client files were turned over to B&H, and the majority of the attorneys who formerly worked for MSW became employees of B&H.

But, soon after the agreement was finalized, Wittstadt said that he learned of serious issues at B&H.

“Unfortunately, almost immediately after the agreement was signed, but before the transition period had ended, I learned that B&H had created false invoices for reviewing each file to be transitioned from MSW to B&H, which B&H surreptitiously used for the purposes of factoring through its secured lender to obtain loans,” Wittstadt told the court in the bankruptcy filing.

The MSW situation is complicated even further by a lawsuit filed against MSW by Amegy Bank, relating to the sale of assets to B&H.

In the lawsuit, filed in the United States District Court for the District Of Maryland – Northern Division, Amegy claims MSW, via B&H, owes the bank $17 million.

Amegy’s lawsuit states that it entered into a purchase and sale/security agreement with B&H in 2011.

Under the terms of the agreement, Amegy Bank would “purchase certain of the sellers’ existing and future accounts receivable and other rights,” Amegy said in its lawsuit.

The agreement also allowed for B&H to “periodically provide schedules of their accounts to Amegy Bank.” Amegy Bank then purchased certain of the scheduled accounts from B&H.

According to Amegy’s lawsuit, the bank purchased “millions of dollars” of B&H accounts during the term of the agreement.

When B&H purchased the default assets from MSW, the two firms entered into a shared services and transition agreement, according to Amegy’s lawsuit.

That agreement stated that B&H contracted MSW to bill and collect for work performed in connection with the MSW’s foreclosure business, and to remit the same to B&H.

According to Amegy’s lawsuit, B&H sold all of its accounts, including those generated in connection with the MSW foreclosure business, continuing through April 22.

Amegy said that after B&H filed for its assignment for the benefit of creditors, MSW is in possession of “proceeds which it has received and continues to receive from accounts related to B&H, including the MSW foreclosure business, and arising between January 31, 2015 and April 22, 2015, which accounts were sold to Amegy Bank.”

Amegy also states that MSW is also in possession of “proceeds which it has received and continues to receive from accounts generated in connection with B&H, including the MSW foreclosure business, and arising after April 22, 2015, which accounts were not purchased by Amegy Bank, but in which Amegy Bank has a first priority perfected security interest.”

Amegy said that it demanded MSW hand over the funds, total $17 million, but MSW refused, leading to Amegy filing its lawsuit.

Butler & Hosch had been quickly expanding its presence across the country over the last few years, buying up default assets in a number of markets. At the time the doors closed, the firm handled 60,000 foreclose cases nationwide and it’s not known how many will end up being dismissed.

Many of those cases came from a slew of acquisitions of both default assets and smaller law firms as Butler & Hosch looked to grow its presence.

In February 2014, the firm acquired Seattle, Wash.-based Regional Trustee Services Corporation. Before that in 2013 the firm also acquired Cal-Western Reconveyance LLC, once one of the largest trustee companies in the nation, after the trustee company's then-parent Prommis Solutions had filed for Chapter 11 bankruptcy protection earlier in the year.

A full list of HousingWire’s coverage of the firm’s history and acquisitions can be found here.

But according to the lawsuits and legal claims, Butler & Hosch’s foundation was little more than a house of cards. Time will tell if the claims in in those lawsuits prove to be true.

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