By PEG BRICKLEY
February 29, 2008 5:25 p.m.

In a move that escalates the level of legal trouble faced by Countrywide Financial Corp., federal watchdogs Friday asked courts to sanction the big mortgage lender for alleged abuses of the bankruptcy system.

U.S. trustees in Georgia, Ohio and Florida are asking courts to enjoin "Countrywide's sustained bad faith conduct" in its treatment of distressed consumers trying to save their homes in bankruptcy court, according to a complaint filed by U.S. Trustee Donald F. Walton.

"Countrywide's failure to ensure the accuracy of its claims and pleadings has resulted in an abuse of the bankruptcy process," Mr. Walton, the U.S. trustee for the region that includes Atlanta, wrote in papers filed Friday in the U.S. Bankruptcy Court for the Northern District of Georgia.

An official from Countrywide was not immediately able to comment on the cases.

The action by an arm of the U.S. Department of Justice marks a rare concerted effort by the government to rein in Countrywide for behavior that has exasperated consumer attorneys for years: Misapplied mortgage payments, false court filings and unexplained extra fees.

"This is the first case that I know of where the U.S. trustee has actually filed an adversary proceeding in bankruptcy court against a creditor of this type," said O. Max Gardner III, a North Carolina consumer bankruptcy attorney. "The relief that it is asking for is based on a long pattern and practice of behavior that is all too familiar."

In "nine out of 10" Chapter 13 bankruptcy cases, wage-earner bankruptcies where people try to catch up on their bills, Countrywide complicates court proceedings with erroneous legal filings, mishandled payments and fees that are not explained, he said.

"The thing that's different now is that we're finally getting people who should be interested, the U.S. trustee, involved in it," Mr. Gardner said. Mr. Walton, the U.S. trustee for Georgia, Florida, Puerto Rico and the U.S. Virgin Islands, is seeking sanctions against Countrywide for its behavior in the bankruptcy case of a Georgia couple who filed for Chapter 13 bankruptcy. Mr. Walton says Countrywide falsely accused John and Robin Atchley of defaulting on their mortgage, assessed $2,793 in unexplained fees and kept taking money after the home was paid off.

Countrywide returned the extra payments and dropped threats of foreclosure. However, Mr. Walton said Countrywide added "unnecessary delay and expense" to the bankruptcy process and should not go unpunished.

"Countrywide has acted in bad faith in the conduct of litigation before the court in this case for which the rules are not up to the task of adequately sanctioning," Mr. Walton wrote.

Courts in Pennsylvania, Texas and North Carolina have sanctioned Countrywide and imposed punitive damages for "aggravated and egregious" misconduct in bankruptcy cases that caused problems for courts and consumers.

Countrywide, based in Calabasas, Calif., also faces an inquiry into the suspected mishandling of payments sent by court officials in nearly 300 Pittsburgh bankruptcy cases. In one such case, Countrywide is suspected of fabricating documents in an effort to foreclose on a woman and of breaking into confidential e-mails sent by Mr. Gardner.

Write to Peg Brickley at peg.brickley@dowjones.com