In re Taylor

• Decision Date: 24 August 2011
• Docket Number: No. 10–2154.,10–2154.
• Citation: 655 F.3d 274,66 Collier Bankr.Cas.2d 147
• Parties: In re Niles C. TAYLOR; Angela J. Taylor, Debtors.Roberta A. Deangelis, Acting United States Trustee, Appellant.
• Court: U.S. Court of Appeals — Third Circuit

655 F.3d 274

66 Collier Bankr.Cas.2d 147

In re Niles C. TAYLOR; Angela J. Taylor, Debtors.Roberta A. Deangelis, Acting United States Trustee, Appellant.

No. 10–2154.

United States Court of Appeals, Third Circuit.

Argued March 22, 2011.Opinion Filed: Aug. 24, 2011.

Frederic J. Baker, Esq., Robert J. Schneider, Esq., George M. Conway, Esq., United States Department of Justice, Office of the United States Trustee, Philadelphia, PA, Ramona Elliott, Esq., P. Matthew Sutko, Esq., John P. Sheahan, Esq. (argued), United States Department of Justice, Executive Office for United States Trustees, Washington, DC, for Appellant.Jonathan J. Bart, Esq. (argued), Wilentz Goldman & Spitzer, P.A., Philadelphia, PA, for Appellees.Before: FUENTES, SMITH and VAN ANTWERPEN, Circuit Judges.

OPINION

FUENTES, Circuit Judge.

The United States Trustee, Region 3 (“Trustee”), appeals the reversal by the District Court of sanctions originally imposed in the bankruptcy court on attorneys Mark J. Udren and Lorraine Doyle, the Udren Law Firm, and HSBC for violations of Federal Rule of Bankruptcy Procedure 9011. For the reasons given below, we will reverse the District Court and affirm the bankruptcy court's imposition of sanctions with respect to Lorraine Doyle, the Udren Law Firm, and HSBC.¹ However, we will affirm the District Court's reversal of the bankruptcy court's sanctions with respect to Mark J. Udren.

I.

A. Background

This case is an unfortunate example of the ways in which overreliance on computerized processes in a high-volume practice, as well as a failure on the part of clients and lawyers alike to take responsibility for accurate knowledge of a case, can lead to attorney misconduct before a court. It arises from the bankruptcy proceeding of Mr. and Ms. Niles C. and Angela J. Taylor. The Taylors filed for a Chapter 13 bankruptcy in September 2007. In the Taylors' bankruptcy petition, they listed the bank HSBC, which held the mortgage on their house, as a creditor. In turn, HSBC filed a proof of claim in October 2007 with the bankruptcy court.

We are primarily concerned with two pleadings that HSBC's attorneys filed in the bankruptcy court—(1) the request for relief from the automatic stay which would have permitted HSBC to pursue foreclosure proceedings despite the Taylors' bankruptcy filing and (2) the response to the Taylors' objection to HSBC's proof of claim. We are also concerned with the attorneys' conduct in court in connection with those pleadings. We draw our facts from the findings of the bankruptcy court.

1. The proof of claim (Moss Codilis law firm)

To preserve its interest in a debtor's estate in a personal bankruptcy case, a creditor must file with the court a proof of claim, which includes a statement of the claim and of its amount and supporting documentation. Tennessee Student Assistance Corp. v. Hood, 541 U.S. 440, 447, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004); Fed. R. Bank. P. 3001; Official Bankruptcy Form 10. In October 2007, HSBC filed such a proof of claim with respect to the Taylors' mortgage. To do so, it used the law firm Moss Codilis.² Moss retrieved the information on which the claim was based from HSBC's computerized mortgage servicing database. No employee of HSBC reviewed the claim before filing.

This proof of claim contained several errors: the amount of the Taylors' monthly payment was incorrectly stated, the wrong mortgage note was attached, and the value of the home was understated by about $100,000. It is not clear whether the errors originated in HSBC's database or whether they were introduced in Moss Codilis's filing.³

2. The motion for relief from stay

At the time of the bankruptcy proceeding, the Taylors were also involved in a payment dispute with HSBC. HSBC believed the Taylors' home to be in a flood zone and had obtained “forced insurance” for the property, the cost of which (approximately $180/month) it passed on to the Taylors. The Taylors disputed HSBC's position and continued to pay their regular mortgage payment, without the additional insurance costs.⁴ HSBC failed to acknowledge that the Taylors were making their regular payments and instead treated each payment as a partial payment, so that, in its records, the Taylors were becoming more delinquent each month.

Ordinarily, the filing of a bankruptcy petition imposes an automatic stay on all debt collection activities, including foreclosures. McCartney v. Integra Nat'l Bank North, 106 F.3d 506, 509 (3d Cir.1997). However, pursuant to 11 U.S.C. § 362(d)(1), a secured creditor may file for relief from the stay “for cause, including the lack of adequate protection of an interest in property” of the creditor, in order to permit it to commence or continue foreclosure proceedings. Because of the Taylors' withheld insurance payments, HSBC's records indicated that they were delinquent. Thus, in January 2008, HSBC retained the Udren Firm to seek relief from the stay.

Mr. Udren is the only partner of the Udren Firm; Ms. Doyle, who appeared for the Udren Firm in the Taylors' case, is a managing attorney at the firm, with twenty-seven years of experience. HSBC does not deign to communicate directly with the firms it employs in its high-volume foreclosure work; rather, it uses a computerized system called NewTrak (provided by a third party, LPS) to assign individual firms discrete assignments and provide the limited data the system deems relevant to each assignment.⁵ The firms are selected and the instructions generated without any direct human involvement. The firms so chosen generally do not have the capacity to check the data (such as the amount of mortgage payment or time in arrears) provided to them by NewTrak and are not expected to communicate with other firms that may have done related work on the matter. Although it is technically possible for a firm hired through NewTrak to contact HSBC to discuss the matter on which it has been retained, it is clear from the record that this was discouraged and that some attorneys, including at least one Udren Firm attorney, did not believe it to be permitted.

In the Taylors' case, NewTrak provided the Udren Firm with only the loan number, the Taylors' name and address, payment amounts, late fees, and amounts past due. It did not provide any correspondence with the Taylors concerning the flood insurance dispute.

In January 2008, Doyle filed the motion for relief from the stay. This motion was prepared by non-attorney employees of the Udren Firm, relying exclusively on the information provided by NewTrak. The motion said that the debtor “has failed to discharge arrearages on said mortgage or has failed to make the current monthly payments on said mortgage since” the filing of the bankruptcy petition. (App. 65.) It identified “the failure to make ... post-petition monthly payments” as stretching from November 1, 2007 to January 15, 2008, with an “amount per month” of $1455 (a monthly payment higher than that identified on the proof of claim filed earlier in the case by the Moss firm) and a total in arrears of $4367. (App. 66.) (It did note a “suspense balance” of $1040, which it subtracted from the ultimate total sought from the Taylors, but with no further explanation.) It stated that the Taylors had “inconsequential or no equity” in the property.⁶ Id. The motion never mentioned the flood insurance dispute.

Doyle did nothing to verify the information in the motion for relief from stay besides check it against “screen prints” of the NewTrak information. She did not even access NewTrak herself. In effect, she simply proofread the document. It does not appear that NewTrak provided the Udren Firm with any information concerning the Taylors' equity in their home, so Doyle could not have verified her statement in the motion concerning the lack of equity in any way, even against a “screen print.”

At the same time as it filed for relief from the stay, the Udren Firm also served the Taylors with a set of requests for admission (pursuant to Federal Rule of Bankruptcy Procedure 7036, incorporating Federal Rule of Civil Procedure 36) (“RFAs”). The RFAs sought formal and binding admissions that the Taylors had made no mortgage payments from November 2007 to January 2008 and that they had no equity in their home.

In February 2008, the Taylors filed a response to the motion for relief from stay, denying that they had failed to make payments and attaching copies of six checks tendered to HSBC during the relevant period. Four of them had already been cashed by HSBC.⁷

3. The claim objection and the response to the claim objection

In March 2008, the Taylors also filed an objection to HSBC's proof of claim. The objection stated that HSBC had misstated the payment due on the mortgage and pointed out the dispute over the flood insurance. However, the Taylors did not respond to HSBC's RFAs. Unless a party responds properly to a request for admission within 30 days, the “matter is [deemed] admitted.” Fed.R.Civ.P. 36(a)(3).

In the same month, Doyle filed a response to the objection to the proof of claim. The response did not discuss the flood insurance issue at all. However, it stated that “[a]ll figures contained in the proof of claim accurately reflect actual sums expended ... by Mortgagee ... and/or charges to which Mortgagee is contractually entitled and which the Debtors are contractually obligated to pay.” (App. 91.) This was indisputably incorrect, because the proof of claim listed an inaccurate monthly mortgage payment (which was also a different figure from the payment listed in Doyle's own motion for relief from stay).

4. The claim hearings

In May 2008, the bankruptcy court held a hearing on both the motion for relief and the claim objection. HSBC was represented at the hearing by a junior associate at the Udren Firm, Mr. Fitzgibbon. At that hearing, Fitzgibbon ultimately admitted that, at the time the motion for relief from the stay was filed, HSBC had received a mortgage payment for November...