Federal Judge Amy Totenberg Cautiously Finds Against Bank On Foreclosure Advertisement

In the never ending cycle of allegations of “produce the note,” and “who owns the Note,” in wrongful foreclosure cases, Federal Judge Amy Totenberg has cautiously sided (initially) with a Plaintiff in a wrongful foreclosure case.  Stubbs v Bank of America, United States District Court for the Northern District of Georgia, Case No. 1:11–CV–1367–AT.

While a denial of a Motion to Dismiss is an early stage Order that carries little weight in the life the case, Totenberg’s finding that a Bank/Servicer’s Notice and Advertisement (Bank of America/BAC) may be defective, since the actual debt and Note were owned by another entity(Fannie Mae). 

While this author thinks wrongful foreclosure has turned the corner and we will see fewer claims in the future, this Order (if ever affirmed in the 11^th Circuit) stands as problematic to any advertisement run in the name of only the mortgage servicer.  [Totenberg acknowledges that few other Federal Judges in Georgia agree with her on this legal reasoning associated with OCGA § 44–14–162.2.]

Until the Georgia Supreme Court (which seems to avoid this issue like the plague) or the 11^th Circuit predicting the meaning of Georgia Substantive law provide us with a definitive ruling on this issue, Totenberg’s Order may stand as lone sentinel in Georgia on this particular issue.

Hugh Wood

Atlanta, GA

Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084www.woodandmeredith.com
hwood@woodandmeredith.com
www.hughwood.blogspot.com
twitter: USALawyer_
Phone: 404-633-4100
Fax: 404-633-0068

&&&&&&&&&&&

Stubbs v. Bank of America, --- F.Supp.2d ---- (2012)

2012 WL 516972

United States District Court,

N.D. Georgia,

Atlanta Division.

Gary STUBBS, Plaintiff,

v.

BANK OF AMERICA, BAC Home Loans Servicing, LP, and Federal National Mortgage Association, Defendants.

No. 1:11–CV–1367–AT. | Feb. 16, 2012.

Attorneys and Law Firms

Jamie Scaringi–Cherry, Law Office of Jamie Scaringi–Cherry, for Plaintiffs.

Andrew G. Phillips, McGuire Woods LLP–GA, for Defendant.

Opinion

ORDER

AMY TOTENBER, District Judge.

*1 This matter is before the Court on Defendants’ Motion to Dismiss Plaintiff’s Amended Complaint [Doc. 9].

I.       Procedural Background

On March 21, 2011, Plaintiff Gary Stubbs filed his complaint in the Superior Court of Fulton County, Georgia, seeking cancellation of a foreclosure sale and damages based on his wrongful foreclosure claim. Defendants Bank of America, BAC Home Loans Servicing, LP (“BAC”), and Federal National Mortgage Association (“Fannie Mae”) removed the action to the Northern District of Georgia based on diversity jurisdiction on April 27, 2011.

Defendants filed a motion to dismiss the complaint on May 3, 2011. Plaintiff filed a motion for leave to file amended complaint on May 6, 2011. Recognizing that Plaintiff could amend his complaint as of right under Rule 15(a)(1), Defendants filed a motion to dismiss the amended complaint on May 19, 2011. The Court granted Plaintiff leave to file the amended complaint, and the parties have now briefed the motion to dismiss Plaintiff’s amended complaint.

Plaintiff filed his response to the motion to dismiss amended complaint outside of time. Under this Court’s Local Rules, “[a]ny party opposing a motion shall serve the party’s response ... not later than fourteen (14) days after service of the motion,” and “[f]ailure to file a response shall indicate that there is no opposition to the motion.” LR 7.1(B), NDGa; see Welch v. Delta Airlines, Inc., 978 F.Supp. 1133, 1148 (N.D.Ga.1997). The Eleventh Circuit has noted that a district court may dismiss a case when a party, represented by counsel (as in the instant case), fails to file a response to a motion to dismiss. See Magluta v. Samples, 162 F.3d 662, 664–65 (11th Cir.1998) (citing LR 7.1(B), NDGa). Such a dismissal is, however, within the discretion of the district court. Id.; Edwards v. Shalala, 846 F.Supp. 997, 998 n. 2 (N.D.Ga.1994) (“[T]he court, in its discretion, may waive a Local Rule.”); see also Sampson v. Fulton County Jail, 157 F. App’x 242, 243 (11th Cir.2005). In the Eleventh Circuit, “there is a strong policy of determining cases on their merits.” In re Worldwide Web Sys., Inc., 328 F.3d 1291, 1295 (11th Cir.2003). Therefore, because this Court’s Order of May 26, 2011, might have caused confusion regarding Plaintiff’s deadline to respond, and because of the strong policy in favor of deciding cases on their merits, the Court proceeds to evaluate Defendants’ motion on the merits rather than granting it as unopposed. However, the Court CAUTIONS Plaintiff to be more attentive to deadlines imposed by the federal and local rules, as failing to comply with these rules may materially impact his rights.

II.     Motion to Dismiss Standard

In determining whether a complaint states a claim upon which relief can be granted, courts accept the factual allegations in the complaint as true and construe them in the light most favorable to the plaintiff. Hill v. White, 321 F.3d 1334, 1335 (11th Cir.2003). To survive a motion to dismiss, a complaint must allege facts that, if true, “state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949 (2009) (quotation marks omitted). A claim is plausible where the plaintiff alleges factual content that “allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. The plausibility standard requires that a plaintiff allege sufficient facts “to raise a reasonable expectation that discovery will reveal evidence” that supports the plaintiff’s claim. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007).

III.    Factual Background

*2 Plaintiff Stubbs brings this action to set aside an alleged wrongful foreclosure. He alleges that on or about December 2009, a representative of Bank of America informed Plaintiff that the bank would not consider modifying his mortgage loan unless he was in default on the loan payments. (Am.Compl.¶ 6.) After he fell behind on his payments, he was “immediately denied a loan modification” in March 2010. (Id.)

In a letter dated July 20, 2010, McCurdy & Candler, L.L.C., informed Plaintiff that the property was scheduled for public foreclosure sale on September 7, 2010, before the courthouse door in Fulton County, Georgia. (Id. at Ex. B.) The letter identified BAC Home Loans Servicing as the creditor and stated that the entity with the full authority to discuss, negotiate, or change all terms of the mortgage was Bank of America. (Id.) The foreclosure occurred, and Fannie Mae is now representing to Plaintiff that it owns his home pursuant to the foreclosure sale and demanding that he vacate the property. (Id. ¶ 8.)

In his amended complaint Plaintiff specifically asserts that Fannie Mae owned his loan at the time of the foreclosure and BAC was merely the servicer. (Id. at ¶ 11.) He attaches to the complaint letters from Bank of America and its counsel, dated June 28 and October 13, 2010, which state that Fannie Mae (or in the second letter “FNMA AA MST/SUB CW Bank REO”) is the owner of his mortgage loan and Bank of America/BAC is the servicer. (Id. at Exs. D and E.) These letters identifying Fannie Mae as the secured creditor considered alongside the foreclosure notice letter identifying BAC as the secured creditor created confusion about the identity of the holder of the loan. Plaintiff alleges that no assignment to Fannie Mae was recorded in the county deed records prior to the foreclosure sale. (Id. at 12.)

IV.     Analysis

A.  Wrongful Foreclosure

Traditional real property principles and the careful consideration required in cases involving title to land guide the Court’s analysis. Georgia courts have long recognized that harm to an interest in land is irreparable due to the “unique character of the property interest.” Focus Entm’t Int’l v. Partridge Green, 558 S.E.2d 440, 446 (Ga.Ct.App.2001). The real property interest holds a special place in our legal system as in our society, especially in cases involving the potential loss of that most important, tangible piece of emotional and physical stability—the home.

Georgia law allows for a number of different means of foreclosing on a debt secured by real property, including nonjudicial foreclosure by power of sale. See Frank S. Alexander, GEORGIA REAL ESTATE FINANCE AND FORECLOSURE LAW, § 1:5 (2011–12 ed.). In authorizing this manner of foreclosure, the state provides creditors with the flexibility and efficiency of a nonjudicial procedure upon a debtor’s default. However, given the significant power that such a procedure vests in the foreclosing party, the law requires that powers of sale “shall be strictly construed and shall be fairly exercised.” O.C.G.A. § 23–2–114.1 Moreover, for loans secured by residential property, O.C.G.A. § 44–14–162.2 specifies the required elements of the notice letter that a creditor must send prior to the nonjudicial foreclosure sale. This statutory section requires that the creditor advise the homeowner of the “individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.” O.C.G.A. § 44–14–162.2. The creditor must send the statutory notice by “registered or certified mail or statutory overnight delivery, return receipt requested.” Id. The statute expressly requires a higher level of notice for residential loans than nonresidential loans.

Whether or not all sections of the foreclosure statute are in derogation of the common law (as Defendants question, see Reply at 5), this independent statute requires powers of sale to be strictly construed and fairly exercised.

*3 Georgia’s nonjudicial foreclosure statute authorizes the secured creditor to foreclose in conformity with O.C.G.A. §§ 44–14–162 et seq.2 “Secured creditor” is not defined in the statute and is therefore to be given its ordinary meaning. See O’Neal v. State, 288 Ga. 219, 220–21 (Ga.2010) (“we apply the fundamental rules of statutory construction that require us to construe the statute according to its terms, to give words their plain and ordinary meaning, and to avoid a construction that makes some language mere surplusage”). Merriam–Webster’s Dictionary defines creditor as “one to whom a debt is owed; a person to whom money or goods are due.” Black’s Law Dictionary (9th ed.) defines creditor as “one to whom a debt is owed; one who gives credit for money or goods,” and secured creditor as “a creditor who has the right, on the debtor’s default, to proceed against collateral and apply it to the payment of the debt.” Thus, according to the plain language of the statute, the secured creditor—the entity to whom the debt is owed—is authorized to foreclose pursuant to Georgia’s nonjudicial foreclosure statute.

2

“Notice of the initiation of proceedings to exercise a power of sale in a mortgage, security deed, or other lien contract shall be given to the debtor by the secured creditor no later than 30 days before the date of the proposed foreclosure.” O.C.G.A. § 44–14–162.2(a) (emphasis added).

The sequence of legislative enactments, specifically the recent amendment of the statute in 2008, bolsters this understanding of the language of O.C.G.A. § 44–14–162 et seq. At that time, the Georgia General Assembly added the following clause to section 162: “The security instrument or assignment thereof vesting the secured creditor with title to the security instrument shall be filed prior to the time of sale in the office of the clerk of the superior court in the county in which the real property is located.” O.C.G.A. § 44–14–162(b). This addition to the statute clearly demonstrates the legislature’s intent to require the identity of the secured creditor to be of public record prior to the foreclosure sale. At the same time, the legislature amended section 162.2(a) to require the secured creditor to send the pre-foreclosure notice 30 days prior to sale (rather than 15) and to require that this notice “shall include the name, address, and telephone number of the individual or entity who shall have full authority to negotiate, amend, and modify all terms of the mortgage with the debtor.” O.C.G.A. § 162.2(a).

The legislature enacted the 2008 amendments of the foreclosure statute with the goal of making transparent both the identity of the secured creditor with authority to foreclose and the identity (and contact information) of the party with authority to agree to a loan modification. Often, the secured creditor and the entity with full authority to modify the loan will be one and the same. At times a servicing agent may have full authority to modify the loan, but the fact that it is merely a servicer acting on behalf of a loan holder, and the identity of that holder, is relevant to that factual question. In any event, these two sections were amended simultaneously with a clear purpose—to increase transparency and clarity in what can otherwise be a quite bewildering process, both in order to avert any avoidable foreclosures through loan modifications and to protect the integrity of Georgia’s real property records. This is evidenced by the title of the 2008 bill amending the statute, which describes its purpose as follows:

*4 AN ACT to amend Article 7 of Chapter 14 of Title 44 of the Official Code of Georgia Annotated, relating to foreclosure on mortgages, conveyances to secure debt, and liens, so as to require a foreclosure to be conducted by the current owner or holder of the mortgage, as reflected by public records; to provide for the identity of the secured creditor to be included in the advertisement and in court records; to change the requirement for mailing or delivery of notice to debtor for sales made under the power of sale in a mortgage, security deed, or other lien contract; to provide for the content of such notice; to provide for related matters; to provide an effective date; to repeal conflicting laws; and for other purposes.

2008 Georgia Laws Act 576 (S.B.531).

The goal of the amendment is bolstered by other related sections of the Georgia Code. Section 162.3 states that the borrower cannot waive the statutory notice at the time the security interest is created. See O.C.G.A. § 44–(“[n]o waiver or release of the notice requirement of Code Section 44–14–162.2 shall be valid when made in or contemporaneously with the security instrument containing the power of nonjudicial foreclosure sale”). The fact that the notice requirement is nonwaivable demonstrates the consumer protection purpose of these interrelated sections. Moreover, section 162.4 provides:

All deeds under power shall contain recitals setting forth the giving of notice in compliance with Code Section 44–14–162.2 or a statement of the facts which render the same inapplicable thereto, which facts may include, without limitation, the nonresidential character of the property. The effect of such recitals shall be to protect the validity of the title of any subsequent purchaser in good faith other than the lender.

O.C.G.A. § 44–14–162.4. Requiring the recitals of actions taken in compliance with the statute to be incorporated into the foreclosure deed (the “deed under power” of sale) emphasizes the legislative purpose of protecting the integrity of Georgia’s real property title records. All of these interrelated code sections show that the statute requires clear disclosure of the secured creditor and the entity with authority to modify the loan and does not permit obfuscation and subterfuge on these material points.

Under the facts alleged here, if presumed true, the actual “secured creditor” did not provide notice of the foreclosure sale as required by O.C.G.A. § 44–14–162.2. Nor did the servicer, acting as agent for the secured creditor, send a foreclosure notice that properly identified the secured creditor. Rather, the loan servicer sent a notice of foreclosure identifying itself as the secured creditor when it was not. (Am.Compl.Exs.B, D, E.)

Other judges of this district have grappled with the issue of whether a servicer can send the notice required under O.C.G.A. § 44–14–162.2. See, e.g., LaCosta v. McCalla Raymer, No. 1:10–CV–1171–RWS, 2011 WL 166902 (N.D.Ga. Jan. 18, 2011). In LaCosta, Judge Story explained that under agency law, “a principal has the power to appoint someone to act on his behalf,” and therefore a secured creditor should be able to direct its servicer to send the statutory notice. Id. at *4. Judge Story further explained, “The goal of Section 162 is to give the debtor notice of the foreclosure sale. Whether that notice is provided by the secured creditor directly, or by its agent, is of no consequence .” Id.

*5 While it may be of no consequence who actually sends the notice, and that task may properly be delegated to a servicing agent (or, as is often the case, an attorney), the amendments of sections 162 and 162.2 in 2008 make clear that the identity of the secured creditor conducting the sale is a material element of that notice. The identity of the secured creditor is material because of its bearing on the entity with authority to modify the loan. Misidentifying the secured creditor creates confusion and doubt regarding the identification of the entity with authority to modify. Moreover, disclosing that Bank of America has full authority to modify and is the creditor for the loan is materially different from disclosing that Bank of America has full authority to modify on behalf of a creditor, Fannie Mae, within whatever guidelines that creditor may have imposed. See Adam Ashcraft and Til Schuermann, Understanding the Securitization of Subprime Mortgage Credit, 318 FEDERAL RESERVE BANK OF NEW YORK STAFF REPORT at 9 (2008) (investors “can put hard rules into the pooling and servicing agreement limiting loan modifications”); Loan Workout Hierarchy for Fannie Mae Conventional Loans (2012), available at www.efanniemae.com/sf/servicing/pdf/ loanworkoutfactsheet.pdf; Pasillas v. HSBC Bank, 255 P.3d 1281, 1283 (Nev.2011) (servicer violated Nevada mediation program rules by failing to bring to the mediation a person with authority to modify the loan, as it “needed additional authority from investors to agree to a loan modification”).

This reasoning is not inconsistent with the Eleventh Circuit’s recent approval of a grant of summary judgment for the defendants in a wrongful foreclosure suit where the servicer sent the foreclosure notice, but the notice identified the true secured creditor. See Smith v. Saxon Mortgage, No. 11–11762, 2011 WL 5375063 (11th Cir.2011), summarily aff’g No. 1:09–CV–3375, at 6–7 (N.D.Ga. March 16, 2011) (granting summary judgment for defendants where foreclosure notice was sent by the servicer but “clearly identified the creditor and the loan servicer and was in no way misleading”). Sending a foreclosure notice that misidentifies the secured creditor violates the spirit and intent of O.C.G.A. § 44–14–162.2.

Defendants concede in their reply brief that Fannie Mae was the secured creditor, and simply argue that Bank of America could send the foreclosure notice as Fannie Mae’s agent. (Reply at 4–5.) While troubling for the reasons set forth above, this concession bolsters Plaintiff’s other basis for his wrongful foreclosure claim—that the assignment of the security deed to the secured creditor, Fannie Mae, was not filed prior to the time of sale. Defendants argued in their original brief that there was no need to record an assignment to Fannie Mae because the assignment to Bank of America was sufficient to comply with section 162(b). That argument assumes a definition of “secured creditor” that is equivalent to “beneficiary or assignee of the security deed.” However, such a definition would render the 2008 amendment of section 162 meaningless, for whatever entity is the grantee of record of the security deed would have authority to foreclose, just as it did prior to the amendment. Secured creditor must have a fixed definition in order for the amendment to have meaning, and this Court is bound to apply the presumption that the legislature did not intend to “enact meaningless language.” Osborne Bonding & Surety Co. v. Georgia, 481 S.E.2d 578, 579 (Ga.1997).

*6 Plaintiff has alleged facts making it plausible that Fannie Mae was in fact the secured creditor at the time of the foreclosure and has alleged that no assignment to Fannie Mae was filed prior to the time of sale as required by O.C.G.A. § 44–14–162(b). Therefore, based on the allegations in the amended complaint, BAC evaded the most substantive requirements of Georgia’s foreclosure statute in that (1) it was not the secured creditor entitled to foreclose despite providing a notice letter affirmatively representing it was the creditor; and (2) it failed to file the assignment of the security deed to the secured creditor in the county deed records prior to the foreclosure. See O.C.G.A. § 162(b); Weems v. Coker, 70 Ga. 746, 749 (Ga.1883); Cummings v. Anderson, 173 B.R. 959, 963 (Bankr.N.D.Ga.1994).3 The Court accordingly DENIES the motion to dismiss Plaintiff’s claim for wrongful foreclosure based on failure to comply with Georgia foreclosure law.

3

While other respected members of this court have declined to hold that Georgia law requires an entity to possess both the security deed and promissory note in order to foreclose, they have done so in the context of counsel’s apparent failure to draw the court’s attention to relevant precedent. See LaCosta, 2011 WL 166902, at *5; Nicholson v. OneWest Bank, 1: 10–CV–795–JECAJB, 2010 WL 2732325, at *4 (N.D. Ga. April 20, 2010). Based on this Court’s review of applicable Georgia law, as discussed previously in Morgan v. Ocwen Loan Servicing, LLC, 795 F.Supp.2d 1370, 1376 (N.D.Ga.2011), the Court concludes that Georgia statutes and case law require the holder of the loan to carry out the foreclosure and to identify itself as the secured creditor of public record prior to the foreclosure sale.

B.  BAC Not Registered to Do Business in Georgia

Plaintiff also seeks to set aside the foreclosure of his home based on the fact that BAC is a foreign limited partnership and failed to register to do business in Georgia prior to carrying out the foreclosure. (Am.Compl.¶¶ 3–5.) This allegation does not state a claim for relief, as the statute requiring foreign limited partnerships to register with the Secretary of State prior to transacting business in Georgia specifically exempts “making loans or creating or acquiring evidences of debt” and “securing or collecting debts or enforcing any rights in property securing the same” from the definition of “transacting business.” See O.C .G.A. § 14–9–902. Therefore, Plaintiff’s claim for wrongful foreclosure on the basis of BAC not having registered to do business in Georgia is DISMISSED.

C.  Fraud Claim

Plaintiff Stubbs asserts a fraud claim, alleging that the foreclosure resulted from Bank of America’s fraudulent misrepresentations that it would evaluate him for a loan modification. (Am.Compl.¶¶ 5–6.) However, Plaintiff alleges that Bank of America said he could be “considered” for a loan modification only if he was in default on his payments; he does not allege that Bank of America guaranteed that he would be approved for a modification if he defaulted.  (Id. ¶ 6.) His allegation that Bank of America later denied his request for a loan modification is not equivalent to an allegation that Bank of America did not consider him for a modification. Therefore, Plaintiff has not alleged a misrepresentation of fact. See American Dental Ass’n v. Cigna Corp., 605 F.2d 1283, 1291 (11th Cir.2010) (under the heightened pleading standard for fraud imposed by Fed.R.Civ.P. 9(b), a plaintiff must allege the precise statements or misrepresentations made and the manner in which these statements misled the plaintiff). Plaintiff has failed to properly plead a misrepresentation of fact despite the Court’s prior Order addressing this issue. (Order, Doc. 6, May 5, 2011.) Therefore, the Court DISMISSES Plaintiff Stubbs’ fraud claim.

V.       Conclusion

*7 For the foregoing reasons, the Court GRANTS IN PART and DENIES IN PART Defendants’ motion to dismiss the amended complaint [Doc. 9]. The Court DISMISSES Plaintiff’s fraud claim and his claim based on BAC’s failure to register to do business in Georgia. The motion to dismiss is DENIED as to Plaintiff’s wrongful foreclosure claim. The Court will hold a telephone status conference with the parties on February 23, 2012, at 11:30 a.m.

IT IS SO ORDERED.

 Hugh Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084www.woodandmeredith.com
hwood@woodandmeredith.com
www.hughwood.blogspot.com
twitter: USALawyer_
Phone: 404-633-4100
Fax: 404-633-0068

Federal Appellate Court Sanctions Lender's Attorney for Inaccurate Foreclosure Information

The United States Court of Appeals for the 3^rd Circuit upheld a Bankruptcy Court’s imposition of Rule 11 [actually R. Bank. P. 9011] sanctions against high-volume lenders attorneys who filed pleadings in Bankruptcy Court with no review of the accuracy of the information listed in the pleadings.  It sanctions the attorneys, in part, because the attorneys had no real ability to determine the accuracy of the information in the pleadings.

The law firm sanctioned and it signatory managing attorney represented lender HSBC.  Lender forwarded all data to the law firm via a third party vendor LPS.  The information conduit owned and run by vendor LPS was known as NewTrak. The computer system (NewTrak) funneled information on borrowers, in this case debtors in bankruptcy, concerning their arrearages and their default – which would lead to a Lift the Stay Motion and Foreclosure by the HSBC. 

When the Bankruptcy Court became concerned that the lender’s filings were significantly inaccurate (and in fairness, the debtor’s information was inaccurate) the bankruptcy court scheduled a hearing requiring the lender law firm to show how it arrived at the information in the HSBC pleadings.   The associate for the law firm appeared and indicated the he could not even reach a human being at HSBC despite numerous attempts and he had no further information other than the NewTrak data.

When the lender firm could not substantiate the HSBC information, the bankruptcy court scheduled a Rule 9011 [similar to Rule 11] hearing to determine whether to sanction the firm and the attorneys.  When the attorneys presented no further information from HSBC at the sanctions hearing, other than the information received from NewTrak which was inaccurate, the Court sanctioned the law firm and attorneys for failing to conduct even a minimal investigation prior to filing factual pleadings with the Court.  The Court was particularly concerned with the fact that once HSBC loaded inaccurate information into the computer pipeline there became no easy way for anyone (actually there was no way) to confirm or deny the accuracy of the information.  Thereafter, the Court found that each level beyond the loading of the information – including the attorneys – either denied actual knowledge of the factual basis of the information or simply blamed the inaccuracies on the technology of the information pipeline.  The Court was particularly concerning that no human being at the law firm interfaced with the lender, HSBC.

The District Court reversed the Bankruptcy Court; however, the 3^rd Circuit reversed the District Court and reinstated the Rule 11 sanctions against the law firm and managing attorney.  HSBC was sanctioned and failed to appeal.

The Scribd to the case is listed below and the text of the opinion is listed in the footnotes.

Scribd:

http://www.scribd.com/doc/63633990/Taylor-v-Deangelis-United-States-Court-of-Appeals-for-the-3rd-Circuit-No-10-2154-March-22-2011

Hugh Wood

Atlanta, GA

Wood & Meredith, LLP
3756 LaVista Road
Suite 250
Atlanta (Tucker), GA 30084

www.woodandmeredith.com

hwood@woodandmeredith.com
www.hughwood.blogspot.com
twitter: USALawyer_
Phone: 404-633-4100
Fax: 404-633-0068

EndNotes

PRECEDENTIAL

UNITED STATES COURT OF APPEALS

FOR THE THIRD CIRCUIT

No. 10-2154

In re: NILES C. TAYLOR; ANGELA J. TAYLOR,

Debtors

ROBERTA A. DEANGELIS, Acting United States Trustee,

Appellant

On Appeal from the District Court

for the Eastern District of Pennsylvania

(No. 09-cv-02479, 07-cv-15385 (bankruptcy))

District Judge: Honorable John P. Fullam

Argued March 22, 2011

Before: FUENTES, SMITH and VAN ANTWERPEN,

Circuit Judges

(Opinion Filed: August 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 833 Chestnut St., Suite 500

Philadelphia, PA 19107

Ramona Elliott, Esq.

P. Matthew Sutko, Es.q

John P. Sheahan, Esq. (argued)

United States Department of Justice

Executive Office for United States Trustees

20 Massachusetts Ave. NW, Suite 8100

Washington, DC 20530

Attorneys for Appellant

Jonathan J. Bart, Esq. (argued)

Wilentz Goldman & Spitzer, P.A.

Two Penn Center Plaza, Suite 910

Philadelphia, PA 19102

Attorney for Appellees

OPINION

Fuentes, Circuit Judge

The United States Trustee, Region 3 (“Trustee”),5HJLRQ ^ ^ ^ ^ 37UXVW1= appeals the reversal by the District Court of sanctions

originally imposed in the bankruptcy court on attorneys Mark

2

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¶V ^ 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 court²(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

1 Although HSBC was sanctioned by the bankruptcy court, it did not participate in this appeal.

3

Taylors^ objection to HSBC^ s  proof  of+ claim. W e ar e also1 ^ FODLP concerned with the attorneys^ conduct in court in connection FRXUW ^ LQ ^ FR 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 aDWH ^ LQ ^ D

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 (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 PRUWJDJH ^ VHUYLFLQ 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

2 Moss Codilis is not involved in the present appeal. However, it is worth noting that the firm has come under serious judicial criticism for its lax practices in bankruptcy

proceedings. “In total, 3[th e court knows] of 23 instances in ^ NQRZV@ ^ RI ^ ^ ^ ^ L which [Moss Codilis] has violated [court rules] in this District alone.” Ini re Greco, 405 B.R. 393, 394 (Bankr. S.D. Fla. 2009); see also In re Waring, 401 B.R. 906 (Bankr. N.D. Ohio 2009).

4

of the home was understated by about $100,000. It is not

clear whether the errors originated in HSBC^s database or LQ ^ +6%&¶V ^ GDWDE whether they were introduced in Moss Codilis^s filing.3LQJ

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^ SURSHUW\^ ^ WKH ^ 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, 106P/oDQN^ IRUWK

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

3 HSBC ultimately corrected these errors in an amended court filing.

4 This dispute has now been resolved in favor of the Taylors. (App. 199.)

5

of the Taylors^ withheld insurance payments, HSBC^s records ^ ^ +6%&¶V ^ UHFRUGV 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

5 LPS is also not involved in the present appeal, as the bankruptcy court found that it had not engaged in wrongdoing in this case. However, both the accuracy of its data and the ethics of its practices have been repeatedly called into question elsewhere. See, e.g., In re Wilson, 2011 WL 1337240 at *9 (Bankr. E.D.La. Apr. 7, 2011) (imposing

sanctions after finding that LPS had issued “sham”/ affidavits ^ LVVXHG ^ 3VKDP' ^ DI and perpetrated fraud on the court); In re Thorne, 2011 WL 2470114 (Bankr. N.D. Miss. June 16, 2011); In re Doble, 2011 WL 1465559 (Bankr. S.D. Cal. Apr. 14, 2011).

6

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 T aylors^ 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 theI bankruptcy petition. (App.XSWF\^ SHWLWLRQ C 65. ) I t identified “the failure t o3 make  . . . post-petition ^ PDNH monthly payments” as stretching  from November 1,f  2007 to1 January 15, 2008, with an “amount per month”  of $1455 (a RI F] ^ ^ ^ ^ ^ 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 “suspenseHQVH^ balance” of $1 040, 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” inU ^ QR ^ HTXLW\' ^ LQ ^ the property.6 Id. The motion never mentioned the flood insurance dispute.

6 The U. S. Trustee now points out that the motion also claimed that the Taylors were not making payments to other creditors under their bankruptcy plan and argues that this claim was false as well. Since the bankruptcy court did not

7

Doyle did nothing to verify the information in the

motion for relief from stay besides check it against “screenJDLQVW ^ 3VFUHHQ ^ prints” of the  NewTrak information. She did not even access^ 6KH ^ GLG ^ QRW ^ HYJ 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^RUV¶ ^ 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.”3VFUHHQ^SULQW

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

make any findings with respect to this issue, we will not consider it.

7 It is not clear from the briefing whether the last two checks, for February and March 2008, had actually been submitted to HSBC at the time the motion was filed; appellees deny that they were. However, appellees do not dispute that checks for

8

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 ^ VWDWHG ^ WKDW ^ + 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, i t  stated that “[a]l l^ +RZHYHU ^ ^ LW ^ VW 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 WR^ SD\^ ' ^ ^

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  ownZQ 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

October and November 2007 and January 2008 had been cashed.

9

admitted that, at the time the motion for relief from the stay was filed, HSBC had received a mortgage payment for November 2007, even though both the motion for stay and the

response to th e Taylo rs^ objection to the proof of claim statedVR ^ WKH ^ SUR otherwise.8 Despite this, Fitzgibbon urged the court to grant the relief from stay, because the Taylors had not responded to

HSBC^s  RFAs (which included the “admission” that 3th erPLVVLRQ' ^ WKDW ^ Taylors had not made payments from November 2007 to January 2008). It appears from the record that Fitzgibbon initially sought to have the RFAs admitted as evidence even though he knew they contained falsehoods. (App. 101-102.)9

8 Appellees concede that, by the time the May hearing was held, HSBC had received all of the relevant checks.

9 Appellees now  claim that  “[i]t is clear from th e record, that Mr. Fitzgibbon honestly disclosed to the Court that these checks had just been received by [the] Udren [Firm] and that

the only issue was that o f flood insurance.” (App^ee Br. 16.)VXUDQF1HIH M ^ However, this disclosure did not occur until after Fitzgibbon had attempted to enter the RFAs, which made contrary

claims, as evidence, lan d debto r^s counsel raised the issue. AsDLVHG ^ WKH ^ LVVXH the bankruptcy court described it, “[Fitzgibbon] first argued that I should rule in HSBC^s favor . . . On probing b y the court, he acknowledged that as of the date of the continued hearing, he had learned that [the Taylors] had made every payment.” (App. 196, emphasis added.) In a Rule 9011/11 proceeding such as the present one, one would expect the challenged parties to be scrupulously careful in their representations to the court.

10

The bankruptcy court denied the request to enter the

RFAs as evidence, noting that the  firm “closed their eyes to ^ WKHLU ^ H\HV ^ WR the fact that there was evidence that . . . conflicted with the very admissions that they asked me [to deem admitted]. They . . . had that evidence [that the assertions in its motion were not accurate] in [their] possession and [they] went ahead like [they] never saw it.” (App. 108-109.) The court noted:

Maybe they have somebody there churning out

these motions that doesn^t talk to  the peopleW ^ WDON ^ WR ^ WKH ^ SHR that²you know, you never see the records, do you? Somebody sends it to you that sent it from somebody else.

(App. 109. )^ “ I really find this  motion to be in questionable7 W good faith,” the court concluded. (App. 112.)

After the hearing, the bankruptcy court directed the Udren Firm to obtain an accounting from HSBC of the Taylors^ prepetition payments so that the arrearage on the mortgage could be determined correctly. At the next hearing, in June 2008, Fitzgibbon stated that he could not obtain an accounting from HSBC, though he had repeatedly placed requests via NewTrak. He told the court that he was literally unable to contact HSBC²his firm^s client²directly to verify information which his firm had already represented to the court that it believed to be true.

At the end of the June 2008 hearing, the court told Fitzgibbon: “I^m 3issuing an order to show cause on your firm, too, for filing these things . . . without having any knowledge.

And  filing answers . . . without any^  knowledge.” (App. 1 19.)\^ NQRZOHGJH ^ ' ^ ^ ^ $ Thereafter, the court entered an order sua sponte dated June

11

9, 2008, directing Fitzgibbon, Doyle, Udren, and others to appear and give testimony concerning the possibility of sanctions.

5.             The sanctions hearings

The order stated that the purpose of the hearing

included “to investigate the practices employed in  this case byLFHV ^ HPSOR\HG ^ LQ ^ V HSBC and its attorneys and agents and consider whether sanctions should issue against HSBC, its attorneys and agents.” (App 96-98.) Among those practices were “pressingZHUH ^ 3SUHVVLQJ ^

a relief motion on admissions that were known to be untrue, and signing and filing pleadings without knowledge or

inquiry regarding the matters pled therein.” Id. The order WKHUHLQ ^ ' ^ ^

noted that  “[t]he details are identified on the record of theHQWLILHG ^ RQ ^ WKH [ hearings which are incorporated  herein.” Id. In orderingJHLQ ^ ' ^ ^ Doyle to appear, the order noted that “the motion for relief,KDW^ 3WKH^ PRWLRQ the admissions and the reply to the objection were prepared over D oyle^s name  and signature.”  Id. However, this order was no t formally identified as “an order to show cause.” ^ RUGHU ^ WR^ VKRZ ^ FDX'

The bankruptcy court held four hearings over several days, making in-depth inquiries into the communications between HSBC and its lawyers in this case, as well as the general capabilities and limitations of a system like NewTrak. Ultimately, it found that the following had violated Rule 9011: Fitzgibbon, for pressing the motion for relief based on claims he knew to be untrue; Doyle, for failing to make reasonable inquiry concerning the representations she made in the motion for relief from stay and the response to the claim objection; Udren and the Udren Firm itself, for the conduct of its attorneys; and HSBC, for practices which caused the failure to adhere to Rule 9011.

12

Because of his inexperience, the court did not sanction Fitzgibbon. However, it required Doyle to take 3 CLE credits in professional responsibility; Udren himself to be trained in the use of NewTrak and to spend a day observing his employees handling NewTrak; and both Doyle and Udren to

conduct a training session for the firm^s relevant lawyers in^ ILUPTV ^ UHOHYDQW [ the requirements of Rule 9011 and procedures for escalating inquiries on NewTrak. The court also required HSBC to send a copy of its opinion to all the law firms it uses in bankruptcy proceedings, along with a letter explaining that direct contact with HSBC concerning matters relating to H SBC^s case wasWR^ +6%&¶V ^ FDVH ^ permissible.10

B.            The District Court’s DecisionW¶V ^'HFLVLRQ

Udren, Doyle, and the Udren Firm (but not HSBC) appealed the sanctions order to the District Court, which

ultimately overturned the order. The District Court^s decisionHFLVLRQ ^ was based on three considerations: that the confusion in the case was attributable at least as much to the actions of

10 Taylor^s counsel was also Zultimately sanctioned andWHO\^ VDQFWLRQH removed from the case.   Counsel did not perform competently, as is evidenced by the Taylors^ failure to contest HSBC^s  RFAs. Sh e also made a number of inaccurate statements in her representations to the court. However, it is clear that her conduct did not induce the misrepresentations by HSBC or its attorneys. As the bankruptcy court correctly noted, “the process  employed by  a  mortgagee and its counselWJDJHH must be fair and transparent without regard to the quality of

debtor^s counsel since many debtors are unrepresented and ^ DUH ^ XQUHSUHVHQ cannot rely on counsel to protect them.”  (App. 214.)HFW ^ WKHP ^ ' ^ ^ ^

13

Taylor^s counsel as to Doyle, Udren, and the Udren Firm; thatDQG ^ WKH ^ 8GUHQ ^ )L the bankruptcy court seemed more concerned with “sending aGLQJ ^ D ^ message” 'to the bar concerning the use of computerized systems than with the conduct in the particular case; and that, since Udren himself did not sign any of the filings containing misrepresentations, he could not be sanctioned under Rule 9011. Although HSBC had not appealed, the District Court overturned the order with respect to HSBC, as well.

The United States trustee then appealed the District Court^s decision to this court.11

II.

Rule 9011 of the Federal Rules of Bankruptcy Procedure, the equivalent of Rule 11 of the Federal Rules of Civil Procedure, requires that parties making representations

to the  court  certify that “the allegations and other factualOHJDWLRQV ^ DQG ^ contentions have evidentiary support or, if specifically so

identified, are likely to have evidentiary support.” Fed. R.HQWLDU\^ VXSSRUW Bank. P. 901 1(b)(3). 12 A party must reach this conclusion based on   “inquiry3 reasonable under the circumstances.” Fed.PVWDQFHV ^ '

R. Bank. P. 9011(b). The concern of Rule 9011 is not the truth or falsity of the representation in itself, but rather whether the party making the representation reasonably

11 The bankruptcy court had jurisdiction under 28 U.S.C. § 157(a). The District Court had jurisdiction under 28 U.S.C. § 158(a)(1), except as discussed below. We have jurisdiction under 28 U.S.C. § 158(d).

12 “[C]ases decided pursuant to [Fed. R. Civ. P. 11 ] apply to Rule 9011.” In re Gioioso, 979 F.2d 956, 960 (3d Cir. 1992).

14

believed it at the time to have evidentiary support. In determining whether a party has violated Rule 9011, the court need not find that a party who makes a false representation to

the court acted in bad faith. “ The imposition   3of Rule  11SRVLWLRQ ^ RI F] 5XOH sanctions . . . requires only a showing of objectively unreasonable conduct.” Fellheimer, Eichen & Braverman, P.C. v. Charter Tech., Inc., 57 F.3d 1215, 1225 (3d Cir. 1995). We apply an abuse of discretion standard in reviewing the decision of the bankruptcy court. See Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 405 (1990). However, we review its factual findings for clear error. Stern v. Marshall, - -- U. S. ---, 131 S. Ct. 2594, 2627 (2011) (Breyer, J., dissenting).

In this opinion, we focus on several statements by appellees: (1) in the motion for relief from stay, the statements suggesting that the Taylors had failed to make payments on their mortgage since the filing of their bankruptcy petition and the identification of the months in which and the amount by which they were supposedly delinquent; (2) in the motion for relief from stay, the statement that the Taylors had no or inconsequential equity in the property; (3) in the response to the claim objection, the statement that the figures in the proof of claim were accurate; and, (4) at the first hearing, the attempt to have the requests for admission concerning the lack of mortgage payments deemed admitted. As discussed above, all of these statements involved false or misleading representations to the court. 13

13 Appellees expend great energy in questioning the factual findings of the bankruptcy court, but we, like the District Court before us, see no error.

15

A. Alleged literal truth

As an initial matter, the appellees^ insistence thatQFH^ WKDW^

Doyle^s  and Fitzgibbon^s statements were “literally true”ZHUH ^ 3OLWHUDOOT should not exculpate them from Rule 9011 sanctions. First, it should be noted that several of these claims were not, in fact, accurate. There was no literal truth to the statement in the request for relief from stay that the Taylors had no equity in their home. Doyle admitted that she made that statement simply as “part 3of the form pleading,” and “acknowledged' ^ DQG ^ having no knowledge of the value of the property and having made no inquiry on this subject.” (App. 215.) Similarly, the statement in the claim objection response that the figures in the original proof of claim were correct was false.

Just as importantly, appellees cite no authority, and we are aware of none, which permits statements under Rule 9011 that are literally true but actually misleading.     If the

reasonably foreseeable effect of Doyle^s or Fitzgibbon^sLW]JLEERQ¶V ^ representations to the bankruptcy court was to mislead the court, they cannot be said to have complied with Rule 9011. See Williamson v. Recovery Ltd. P’ship, 542 F.3d 43, 51 (2d

Cir. 2008) ( a party violates Rule 11 “by making false,H ^ ^ ^ ^ 3E\^ PDNLQJ C misleading, improper, or frivolous representations to the court”) (emphasis added).

In particular, even assuming that Doyle^s andQG ^ Fitzgibbon^s statements as to the payments made by the Taylors were literally accurate, they were misleading. In attempting to evaluate whether HSBC was justified in seeking a relief from the stay on foreclosure, the court needed to know that at least partial payments had been made and that the failure to make some of the rest of the payments was due

16

to a bona fide dispute over the amount due, not simple default. Instead, the court was told only that the Taylors had “failed to make regular mortgage payments” from November 1, 2007 to January 15, 2008, with a mysterious notation concerning a “suspense balance” following. (App. 214-15.)ZLQJ^ ^ ^ A court could only reasonably interpret this to mean that the Taylors simply had not made payments for the period

specified. As the bankruptcy court found, “[f]or at best aG ^ ^ 3>I@RU ^ DW ^ EH' $540 dispute, the Udren Firm mechanically prosecuted a motion averring a $4,367[] post-petition obligation, the aim of which was to allow HSBC  to foreclose on [the Taylors^]^ RQ ^ >WKH ^ 7D\ORUV house.” (App. 215.) Therefore, Do yle^ s' and Fitzgibbon ^s )LW] JLEERQ¶V ^ statements in question were either false or misleading.

B.            Reasonable inquiry

We must, therefore, determine the reasonableness of the appellees^ inquiry before they made their false

representations. Reasonableness has been  defined as “an GHILQHG ^ DV F] 3 D ^ objective knowledge or belief at the time of the filing of a challenged paper that the claim was well-grounded in law and

fact.” ^Ford Motor Co. v. Summit Motor Prods., Inc., 930

F.2d 277, 289 (3d Cir. 1991) (internal quotations omitted). The requirement of reasonable inquiry protects not merely the court and adverse parties, but also the client. The client is not expected to know the technical details of the law and ought to be able to rely on his attorney to elicit from him the information necessary to handle his case in the most effective, yet legally appropriate, manner.

In determining reasonableness, we have sometimes

looked at several factors: “the amount of time available to theQWEIRIEIWLPHEI

signer for conducting the factual and legal investigation; the

17

necessity for reliance on a client for the underlying factual information; the plausibility of the legal position advocated; . . . whether the case was referred to the signer by another member of the Bar . . . [; and] the complexity of the legal and factual issues implicated.”  Mary Ann Pensiero, Inc. v. Lingle, 847 F.2d 90, 95 (3d Cir. 1988). However, it does not appear that the court must work mechanically through these factors when it considers whether to impose sanctions. Rather, it should consider the reasonableness of the inquiry under all the material circumstances. “ [T]he applicable standard is one of reasonableness under the circumstances.” Bus. Guides, Inc. v. Chromatic Commc’ns Ents., Inc.,  498 U.S. 533, 551 (1991); accord Garr v. U.S. Healthcare, Inc., 22 F.3d 1274, 1279 (3d Cir. 1994).

Central to this case, then, is the degree to which an attorney may reasonably rely on representations from her

client. An attorney certainly “is not always foreclosed fromFORVHG ^ IURP ^ relying on  information from other persons.” Garr, 2 2 F.3 dRQV ^ ' ^ ^ 1278. In making statements to the court, lawyers constantly and appropriately rely on information provided by their clients, especially when the facts are contained in a client^sW¶V ^ computerized records. It is difficult to imagine how attorneys might function were they required to conduct an independent investigation of every factual representation made by a client before it could be included in a court filing. While Rule 9011

“does not  recognize a „pure heart an d gempty h ead^ defense,”G ^ HPSW\^ KHDG¶ ^ GI In re Cendant Corp. Derivative Action Litig., 96 F. Supp. 2d 403, 405 (D.N.J. 2000), a lawyer need not routinely assume the duplicity or gross incompetence of her client in order to meet the requirements of Rule 9011. It is therefore usually reasonable for a lawyer to rely on information provided by a client, especially where that information is superficially

18

plausible and the client provides its own records which appear to confirm the information.

However, Do yle^s behavior was unreasonable, both as a matter of her general practice and in ways specific to this

case. First, reasonable reliance on a  client^s representations ^ FOLHQW¶V ^ UHSUH` assumes a reasonable attempt at eliciting them by the attorney. That is, an attorney must, in her independent professional judgment, make a reasonable effort to determine what facts are likely to be relevant to a particular court filing and to seek those facts from the client. She cannot simply settle for the information her client determines in advance²2 by means of an automated system, no less²that she should be provided with.

Yet that is precisely what happened here. “[I]tW r]

appears,” the ' bankruptcy  court observed, “that Doyle,^ theOH ^ ^ WKH ^ manager of the Udren Firm bankruptcy department, had no relationship with the  client, HSBC.” (App. 202. ) By working ' ^ ^ solely with NewTrak, a system which no one at the Udren Firm seems to have understood, much less had any influence over, Doyle permitted HSBC to define²perilously

narrowly²the information she had about the  Taylors^ matter. ^ WKH ^ 7D\ORUV¶ ^ PI That HSBC was not providing her with adequate information through NewTrak should have been evident to Doyle from the face of the NewTrak file. She did not have any information concerningJ the Taylors^ equity in the home, though she madeRPH ^ ^ WKRXJK ^ VKH C a statement specifically denying that they had any.

More generally, a reasonable attorney would not file a motion for relief from stay for cause without inquiring of the client whether it had any information relevant to the alleged

cause, that is, the debtor^s failure to make payments. Had ^ SD\PHQWV ^

19

Doyle made even that most minimal of inquiries, HSBC presumably would have provided her with the information in its files concerning the flood insurance dispute, and Doyle could have included that information in her motion for relief from stay²or, perhaps, advised the client that seeking such a motion would be inappropriate under the circumstances.

With respect to the Taylors^ case in 7particular, DoyleVH ^ LQ ^ SDUWLFXODL ignored clear warning signs as to the accuracy of the data that she did receive. In responding to the motion for relief from stay, the Taylors submitted documentation indicating that they had already made at least partial payments for some of the months in question. In objecting to the proof of claim, the Taylors pointed out the inaccuracy of the mortgage payment listed and explained the circumstances surrounding the flood insurance dispute. Although Doyle certainly was not obliged to accept the Taylors^ claims at face value, they indisputably put her on notice that the matter was not as simple as it might have appeared from the NewTrak file. At that point, any reasonable attorney would have sought clarification and further documentation from her client, in order to correct any prior inadvertent misstatements to the court and to avoid any further errors. Instead, Doyle mechanically affirmed facts (the monthly mortgage payment) that her own prior filing with the court had already contradicted.

Doyle^s reliance on HSBC was particularly problematic because she was not, in fact, relying directly on HSBC. Instead, she relied on a computer system run by a third-party vendor. She did not know where the data provided by NewTrak came from. She had no capacity to check the data against the original documents if any of it seemed implausible. And she effectively could not question

20

the data with HSBC. In her relationship with HSBC, Doyle essentially abdicated her professional judgment to a black box.

None of the other factors discussed in the Mary Ann Pensiero case which are applicable here affect our analysis of

the reasonableness of appellees^ actions. This was no t a^ 7KLV ^ ZDV ^ QRW ^ matter of extreme complexity, nor of extraordinary deadline pressure. Although the initial data the Udren Firm received was not, in itself, wildly implausible, it was facially

inadequate. ,In short, then,  w e find that Doyle^s inquiryKDW ^ 'R\OH¶V ^ LQTX before making her representations to the bankruptcy court was unreasonable.

In making this finding, we, of course, do not mean to suggest that the use of computerized databases is inherently inappropriate. However, the NewTrak system, as it was being used at the time of this case, permits parties at every level of the filing process to disclaim responsibility for inaccuracies. HSBC has handed off responsibility to a third-party maintainer, LPS, which, judging from the results in this case, has not generated particularly accurate records. LPS apparently regards itself as a mere conduit of information. Appellees, the attorneys and final link in the chain of transmission of this information to the court, claim reliance

on NewTrak^s records. Who, precisely, ca n be heldVHO\^ ^ FDQ ^ EH ^ IC accountable if HSBC^s records are  inadequately maintained,DGHTXDWHO\^ PDLQ` LPS transfers those records inaccurately into NewTrak, or a law firm relies on the NewTrak data without further investigation, thus leading to material misrepresentations to the court? It cannot be that all the parties involved can insulate themselves from responsibility by the use of such a system. In the end, we must hold responsible the attorneys

21

who have certified to the court that the representations they are making are “well-grounded in law and fact.”

C.            Notice

Doyle, Udren, and the Udren Firm also argue on appeal that they had insufficient notice that they were in

danger of sanctions.14 Rule 9011 directs that a court  “[o]n itsW ^ D ^ FRXUW ^ 3>R@Q [ own initiative . . . may enter an order describing the specific conduct that appears to violate [the rule] and directing an attorney . . . to show cause why it has not violated [the rule].”H ^ UXOH@ ^ ' ^ ^

Fed. R. Bank. P. 9011(c)(1)(B). Due process in the

imposition of Rule I9011 sanctions requires “particularizedUHTXLUHV ^ 3SDUWLF. notice.” Jones v.  Pittsburgh Nat’l Corp., 899 F.2d 1350,^ 135 7  (3 d Cir.  1990). The meaning   of “particularized notice” RI ^ 3SDUWLFXODUL]H has not been rigorously defined in this circuit. In Fellheimer, we noted that this requirement was met where the sanctioned party “was 3 provided with sufficient, advance notice of exactlyDGYDQFH ^ QRWLFH ^ R which conduct was alleged to be sanctionable.” Fellheimer,FWLRQDEOH ^ ' ^ ^

57 F.3d at 1225. In Simmerman v. Corino, 27 F.3d 58, 64 (3d

Cir. 1994),1 Fwe held that “the party sought to be 3sanctioned isW\^ VRXJKW ^ WR ^ EH C entitled to particularized notice including, at a minimum, 1) the fact that Rule 11 sanctions are under consideration, 2) the reasons why sanctions are under consideration . . . .”

The bankruptcy court^s June order ^ was clearly inHU ^ ZDV ^ FOHDUOT substance an order to show cause, even if it was not

14 Any claim regarding a due process right to notification of the form of sanctions being considered has been waived by appellees, as it was not raised in their papers, either here or in the district court. United States v. Pelullo, 399 F.3d 197, 222 (3d Cir. 2005).

22

specifically captioned as such. The more difficult question is

whether the court adequately described “the specific  conductLEHG^ 3WKH^ VSHFLIL that appear[ed] to violate” Rule 9011, so as to give sufficient^ ^ ^ ^ ^ VR^ DV ^ WR^ J notice of “exactly3 which conduct was Falleged to beDV^ DOOHJHG^ WRC sanctionable.” As mentioned  above, the court^s June order ^ WKH ^ FRXUW¶V ^ -X identified “pressing a relief motion o n admissions that were RQ ^ DGPLVVLRQV ^ -0 known to be untrue, and signing and filing pleadings without

knowledge or inquiry regarding th e matters pled therein”   asDWWHUV ^ SOHG ^ WK] the conduct the court wished to investigate. (App. 119) The

judge also  told Fitzgibbon, “I^m issuing an  order  to  showXLQJ ^ DQ ^ RUGHU ^ W cause on your firm, too, for filing these things . . . without

having any knowledge. And filing answers . . . without any

knowledge.” Id. The June order also made specific reference

to “the 3 motion  for relief, the admissions and the reply  to theVVLRQV ^ DQG ^ WKH C objection.”LRQ ^ ' ^ ^

In these particular circumstances, the notice given to appellees was sufficient to put them on notice as to which aspects of their conduct were considered sanctionable. At that point in the case, the Udren Firm lawyers had only filed three substantive papers with the court²totaling six (substantive) pages²and the court found all of them

problematic. Appe llees ^ claim that they believed  that the^ WKH\^ EHOLHYHGF only issue at the time of the hearing w as Fitzgibb on^sHDULQJ ^ ZDV ^ )LW]J: inability to contact HSBC is simply not plausible in light of the language of the June order and the bankruptcy co urt^sNUXSWF\^ FRXUW¶V C statements at the hearing, which were incorporated by reference into the June order. In a case in which more extensive docket activity had taken place, the bankruptcy court^s order might no t have been sufficient to informQEI VXIILFLHQW ^ WR [ appellees as to which of their filings were sanctionable, but, given the unusual circumstances here, it was. But see Martens v. Thomann, 273 F.3d 159, 178 (2d Cir. 2001)

23

(requiring specific identification of individual challenged statements to uphold imposition of sanctions).

D. The Udren Firm and Udren’ s individual ^ LQGLYLGXDO ^ liability

We also find that it was appropriate to extend sanctions to the Udren Firm itself. Rule 11 explicitly allows the imposition of sanctions against law firms. Fellheimer, 57 F.3d 1215 at 1223 n.5. In this instance, the bankruptcy court found that the misrepresentations in the case arose not simply from the irresponsibility of individual attorneys, but from the system put in place at the Udren Firm, which emphasized high-volume, high-speed processing of foreclosures to such an extent that it led to violations of Rule 9011.

However, we do not find that responsibility for these failures extends specifically to Udren, whose involvement in this matter was limited to his role as sole shareholder of the firm.

E.            The District Court’s reversal of sanctions against HSBC

Ordinarily, of course, a party which does not appeal a decision by a district court cannot receive relief with respect to that decision. “[T]he mere fact that a [party] may wind up with a judgment against one [party] that is not logically consistent with an unappealed judgment against another is not alone sufficient to justify taking away the unappealed

judgment in favor of a party not before the court.” Repola v.RUH ^ WKH ^ FRXUW ^ ' [ Morbark Indus., Inc., 980 F.2d 938, 942 (3d Cir. 1992). However,  “where the disposition as to one party  isV F1 WR ^ RQH ^ SDU

24

inextricably intertwined with the interests of a non-appealing

party,” it 'may be “impossible 3to grant relief to  one partyQW ^ UHOLHI ^ WR^ R without granting relief to the other.” United States v. Tabor Court Realty Corp., 943 F.2d 335, 344 (3d Cir. 1991). In Tabor Court Realty, a contract dispute, the assignee of a property had failed to appeal a decision, while the assignor had (and had ultimately prevailed). Given that the dispute was over the disposition of the property, it was impossible to grant relief to the assignor without also granting relief to the assignee.

In this instance, whether the lawyers at the Udren Firm violated Rule 9011 is a question analytically distinct from whether HSBC was responsible for any violations of Rule 9011. A court might find that HSBC was responsible for violations, whereas, say, Udren himself was not. It was entirely possible for HSBC to comply with the sanctions ordered (a letter to its firms informing them that they are permitted to consult with HSBC) without affecting the interests of the lawyers at the Udren Firm. Therefore, the interests of the lawyers at the Udren Firm and HSBC were not “ineHIicabl intertwined” and the Disthbt Qflrt lacked jurisdiction to reverse the sanctions against HSBC.

F.             Alternative basis for the District Court’s¶V ^ decision

,In reversing the bankruptcy court^s decision,^ theXUW¶V ^ GHFLVLRQ ^ District Court focused on that court^s apparent attention to theWWHQWLRQ ^ WR ^ WK broader problems of high-volume bankruptcy practice in imposing sanctions. It is true that the bankruptcy judge noted that appellees were not the first attorneys to run into these sorts of difficulties in her court. But she nonetheless made

25

individualized findings of wrong-doing after four days of hearings and issued sanctions thoughtfully chosen to prevent the recurrence of problems at the Udren Firm based on what she had learned of practices there. Insofar as she considered the effect of the sanctions on the future conduct of other attorneys appearing before her, such considerations were

permissible. After all,  “the prime  goal [of Rule 1 1  sanctions] JRDO ^ >RI ^ 5XOH ^ ^ ^ C should be deterrence of repetition o f improper conduct.”Q ^ RI E] LPSURSHU ^ FR Waltz v. County of Lycoming, 974 F.2d 387, 390 (3d Cir. 1992).

G.            Conclusion

We appreciate that the use of technology can save both litigants and attorneys time and money, and we do not, of course, mean to suggest that the use of databases or even certain automated communications between counsel and client are presumptively unreasonable. However, Rule 11 requires more than a rubber-stamping of the results of an automated process by a person who happens to be a lawyer. Where a lawyer systematically fails to take any responsibility for seeking adequate information from her client, makes representations without any factual basis because they are included in a  “form pleading” she has been trained to fill out, and ignores obvious indications that her information may be incorrect, she cannot be said to have made reasonable inquiry. Therefore, we find that the bankruptcy court did not abuse its discretion in imposing sanctions on Doyle or the Udren Firm itself. However, it did abuse its discretion in imposing sanctions on Udren individually.

III.

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For the foregoing reasons, we will reverse the District Court with respect to Doyle and the Udren Firm, affirming

the bankruptcy court^s imposition of sanctions. With respectE] VDQFWLRQV ^ ^ ^ :LVA to HSBC, as discussed previously, the District Court lacked jurisdiction to reverse the sanctions, as do we; therefore, we vacate the District Court^s order with respect to that party, leaving the sanctions imposed by the bankruptcy court in place. We will affirm the District Court with respect to Udren individually, reversing the bankruptcy^s courtRXUW ^ imposition of sanctions.

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END.