By Keith Coffman
DENVER (Reuters) - Colorado's attorney general has sued the state's two largest foreclosure law firms, accusing them of defrauding homeowners, investors and taxpayers by padding costs and expenses, court documents made public on Wednesday show.
The civil lawsuits filed against the Castle Law Group and the Aronowitz & Mecklenburg law firm was the result of a two-year investigation that accuses them of making "tens of millions of dollars in unlawful proceeds," according to the complaints filed in Denver District Court.
The firms are alleged to have performed routine foreclosures for a flat fee, but then run up costs by tacking on unauthorized expenses including the posting of notices, title searches, court filings, and the preparation of documents at "grossly inflated" levels, the suits said.
"These inflated costs were passed on to homeowners trying to save their homes from foreclosure, successful bidders for properties at foreclosure sales, and to investors and taxpayers," Colorado's Attorney General John Suthers said in a statement.
"The facts uncovered by our investigation are very disturbing and, frankly, reflect poorly on the legal profession."
Aronowitz agreed to pay $10 million in penalties and to have no direct or indirect ownership in any business engaged in foreclosure-related work in the state for nine years in order to settle the case, according to a consent judgment filed with the court.
An additional $3 million in fines will be waived if the firm complies with the terms of the consent decree, which still must be approved by the judge overseeing the case.
Richard Benenson, an attorney representing Aronowitz, said his clients made no admission of wrongdoing in agreeing to settle the case.
"We wish we were in a position to challenge some of the novel consumer protection theories asserted by the attorney general, but we thought it was in our client's best interest to get this resolved," he said.
Attorneys for Castle Law Group did not immediately respond to a request for comment, but a spokeswoman for Suthers said the lawsuit will proceed against the firm.
Foreclosures tend to cost between $1,000 and $3,000, depending on the state and type of foreclosure, with legal fees making up most of that. Other expenses add to the total bill.
In one case investigated by Suthers' office, a Colorado law firm charged $150 for posting a notice on the door of a property in foreclosure, even though the market rate for that service was about $25, according to court filings.
The focus on foreclosure expenses by the Colorado attorney general's investigation mirrored a separate federal probe by Manhattan U.S. Attorney Preet Bharara's office.
This month, HSBC Holdings Plc agreed to pay $10 million to settle U.S. government charges that it defrauded taxpayers by submitting inflated bills to process residential foreclosures. Five other banks have disclosed receiving subpoenas as part of the federal probe. [ID:nL2N0PC0X1]
(Reporting by Keith Coffman; Editing by Daniel Wallis and Eric Walsh)