Wednesday, September 21, 2011

Sloppiness Does Not Equal Vexatiousness or Bad Faith

Dealing with mortgage servicers can be frustrating. Sometimes it is difficult or impossible to get a clean chain of title or a good accounting. In a new opinion by Judge Stacey Jernigan, the Court was faced with a request for fees incurred by a chapter 13 debtor's counsel in dealing with two motions for relief from stay over a three year period, one of which was withdrawn and the other one of which was denied for failure to prove standing. Counsel sought to recover fees based on 28 U.S.C. Sec. 1927 and the court's inherent authority. In a well-reasoned opinion, Judge Jernigan concluded that Rule 9011 was the proper vehicle for seeking fees based on deficient pleadings and that the present case did not rise to the high standard necessary to award fees under Sec. 1927 or the Court's inherent authority. In re Pastran, No. 06-34728 (Bankr. N.D. Tex. 9/20/11). You can find the opinion here.

While the twenty-two page opinion is worth reading in its entirety, I will leave you with the conclusion:

The court is certainly cognizant of the fact that the mortgage servicing industry does not always show itself to be the perfect, well-oiled machine that one would hope it to be. As more and more individuals have gone into default on their home mortgages and resorted to seeking bankruptcy protection, bankruptcy courts have seen certain problems that exist in the home mortgage servicing industry, particularly issues when it comes to chain of title and other documentation. Some of these cases may require bankruptcy courts to take action and issue appropriate orders to ensure that such practices do not continue; however, in this case, the court does not believe it to be a good exercise of discretion to do so.

The court would conclude by stating that Rule 11 seems to be the more appropriate tool to use when requesting sanctions or fee shifting, not only because it allows a party an opportunity to remedy any mistakes it may have made, but also because it seems to make parties engage in a dialogue which could ultimately facilitate settlement. The court found it very enlightening to read Debtor’s Exhibit G, which was a myriad of emails that were exchanged between Debtor’s Counsel and HWALLP over the approximately 3-year period that this matter was pending. From the court’s review of these emails, there was certainly no evidence of inappropriate behavior by HWALLP, AHMSI, or Citi. In fact, the overall tone of the emails was quite professional and courteous. If anything, this case appeared to be one primed for settlement, as there were significant discussions about a possible loan modification. However, settlement and/or a loan modification never happened. Instead, HWALLP filed the Citi Stay Lift Motion and the AHMSI Stay Lift Motions with certain chain of-custody gaps and documentation errors (first no indorsement; then ultimately an indorsement-in-blank supplied but not offered into evidence). While this was sloppy and bad form (which justified denying stay relief), this, in and of itself, did not rise to the level of bad faith or vexatious litigation that would legitimize fee shifting. (emphasis added).
Opinion, pp. 20-22.

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