The Taylor case involved debtors in a chapter 13 case who got behind on their mortgage payments because of a disputed charge for flood insurance. The creditor firm filed an inaccurate motion which alleged that the debtors had not been making their post-petition payments. The debtor's attorney filed an untimely and inaccurate response indicating that the debtors were making the payments but that they had been refused by the creditor. Upon being presented with proof of payments, the young associate representing the mortgage company insisted on going forward with the motion based upon deemed admissions.
The Bankruptcy Court denied the motion for relief from stay, while noting its displeasure. The following exchange took place.
The Court: I understand the position of local counsel to, you know--I understand. But you can pass it up the line that I was not pleased with this motion for relief.
Mr. Fitzgibbon: Thank you, your Honor.
The Court: And--and--and so that they'd better act in good faith because I'm cutting them a break this time. Because I really find this motion to be in questionable good faith.
District Court Opinion, p. 3, n. 1.
However, at the next hearing, which was on the Debtor's Objection to Claim, the young associate told the court that he had requested a payment history by opening an inquiry with the NewTrak system, but that he had not received a response from his client. He also indicated that he was not permitted to contact the client directly.
As a result of this hearing, the Bankruptcy Court issued an order for the creditor and its attorneys to appear for a hearing the purpose of which is "twofold: (1) to address the Objection to HSBC's claim and (2) to investigate the practices employed in this case by HSBC and its attorneys and agents and consider whether sanctions should issue against HSBC, its attorneys and agents."
After conducting several days of hearings, the Bankruptcy Court made the following rulings:
1. The young associate was not sanctioned despite pressing a motion based on deemed admissions which he knew were incorrect because "I suspect that he has learned all that he needs to learn without protracting this unfortunate time in his nascent career."
2. The head of the bankruptcy section of the firm was sanctioned because "she failed to observe her duty to make reasonable inquiry of the two documents she signed." She was ordered to take additional continuing legal education courses in ethics.
3. The head of the firm (who had not signed any pleadings or appeared at any of the hearings in question) was sanctioned because he "sets the tone and establishes [the firm's] culture." He was ordered to obtain training in how the NewTrak system worked and conduct a training session for all firm members.
4. HSBC, the creditor, was ordered to send a copy of the Bankruptcy Court's opinion to all of its attorneys.
While the actual sanctions assessed were mild, the rebuke from the Bankruptcy Court carried quite a sting. The Udren firm and its two sanctioned attorneys brought an appeal to the U.S. District Court. The U.S. Trustee's Office defended the appeal.
The District Court's Ruling
The District Court reversed the sanctions award.
The Bankruptcy Court imposed sanctions pursuant to Federal Rule of Bankruptcy Procedure 9011, the counterpart of Federal Rule of Civil Procedure 11. The decision is reviewed under the abuse of discretion standard. (citation omitted). After a careful review of the record, I am constrained to hold that it was an abuse of discretion for the Bankruptcy Court to impose sanctions on the appellants here.
The frustrations of the Bankruptcy Court are understandable; delays caused by a lack of accurate information are unfair to debtors, to creditors, and to the courts. However,I am persuaded that the sanctions were inappropriate in this case, for two reasons: First, because the conduct of the debtors’ counsel was at least equally responsible for the difficulties in resolving the status of the mortgage payments, and second, because the record leaves the indelible impression that the appellants were sanctioned less for their specific failings than for the Bankruptcy Court’s desire to “send a message” regarding systemic problems in the litigation of bankruptcy cases and the reliance on computer databases in mortgage disputes.
The actions of the debtors’ counsel materially contributed to the difficulties in resolving the status of the Taylors’ mortgage. In an order relating to counsel fees, the Bankruptcy Court held that the debtors’ counsel provided legal services that “were below the level of competency required to handle this Chapter 13 case effectively.” Order of April 15, 2009 (Document No. 195). Although the errors of the debtors’ counsel do not relieve the appellants of their duty to comply with Rule 9011, they are relevant to a finding of sanctionable conduct. Had the debtors’ counsel responded to the requests for admissions, or submitted a timely request for a complete accounting, the appellants would have been on notice of the payment disputes and the delays may have been minimized or avoided.
Given the overall posture of this case, I cannot agree that the conduct of the appellants was sanctionable in its own right. As noted above, the Bankruptcy Court had determined at the May 1, 2008 hearing that sanctions would not be imposed based
on the Stay Motion. Only Mr. Fitzgibbon (who was not sanctioned)appeared in court for the later hearing. After a close reading of the transcript of the hearings, I am persuaded that the Bankruptcy Court objected to general practices in bankruptcy
mortgage disputes, rather than the specific conduct of the appellants. By way of example, the Bankruptcy Court stated in the hearings that:
"I do not have any adverse views about Mr. Fitzgibbon. You know, this is not about Mr. Fitzgibbon. This is about when attorneys stand up in this Court and they’ve been asked to provide loan histories and they can’t get it. And it’s not just – if it was one young attorney who was having a problem that would be one thing. We wouldn’t have done all this if it was one young attorney who didn’t know that he could do this. But I have attorneys that stand here week after week and can’t get loan histories. I’ve just sat through an hour and a half of this system which is telling me that they should be able to get it not in thirty days, which is the time your attorneys always ask for, but they should be able to get it the next day."
N.T. Oct. 23, 2008 at 107-08 (emphasis added). There is nothing in the record to support a finding that any of the other attorneys referenced are from the Udren firm; to the contrary, the system used by many law firms representing many mortgage holders in bankruptcy cases appears to be at fault. As the Bankruptcy Court stated, “[t]he bottom line from my perspective is that I just want to know when a lawyer stands up in court and says, I want to continue this, I can’t get a document. I want to know why. I want to be able to move these cases.” N.T. Oct. 23, 2008 at 148.
Understandably, something needs to be done when the bankruptcy courts cannot obtain timely and accurate information. According to the Bankruptcy Court’s opinion, the problem of inaccurate mortgage payment information is less likely to arise in the United States Bankruptcy Court for the District of New Jersey because the local rules of that court require that the client certify the truth and accuracy of the averments. Opinion at n.21. Clarity in the rules would benefit all counsel and litigants.
The sanctions imposed in this case were an abuse of discretion, as the Bankruptcy Court already had determined that the Stay Motion did not merit sanctions, and Mr. Fitzgibbon’s failure to obtain the accounting (the only event after the denial of the Stay Motion) was an insufficient basis for the imposition of sanctions against the appellants.
District Court Opinion, pp. 5-9.
What It Means
The Bankruptcy Court's opinion was an example of what could be called inquisitorial justice. The Bankruptcy Court observed what it perceived to be an abuse and conducted an investigation under the guise of awarding sanctions under Rule 9011. However, as the District Court opinion points out, Rule 9011 does not provide a good vehicle for addressing systemic problems.
The Bankruptcy Court's opinion was blogworthy because it was a searching inquiry into the relationship between professionalism and technology. However, the District Court opinion points out that there are technical elements which must be met in order to proceed under Rule 9011. Rule 9011(b) requires that there be a paper which is presented to the court "whether by signing, filing, submitting or later advocating." Thus, it would never have been possible to sanction the head of the firm for setting the tone and establishing the firm culture. Rule 9011 just doesn't get there.
The reversal of the sanction against the head of the bankruptcy section is more problematic. In that case, the Bankruptcy Court granted sanctions for failure to perform an adequate pre-filing investigation. The District Court's ruling is largely non-responsive to this issue. For example, the argument that Debtor's counsel contributed to the problem, while accurate, does not address the review which took place prior to filing the pleadings. However, the District Court may have concluded that when the bankruptcy court initially announced that it was "cutting them a break" on the motion for relief from stay, that it could not go back later and award sanctions.
The important point to take away from the District Court opinion is that sanctions awards under Rule 9011 must flow from the specific conduct identified in the rule. While the Court may also award sanctions under Sec. 105 or its inherent powers, these remedies have their own requirements which must be observed.
Hat tip to Jonathan Bart who sent me the opinion.