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In re Taylor

February 18, 2010


The opinion of the court was delivered by: Fullam, Sr. J.

(Bankr. No. 07-15385DWS)


The appellants, two attorneys and a law firm, have appealed from an order of the Bankruptcy Court imposing sanctions upon them. After careful consideration of the appellate record and the briefs of the appellants and the Acting United States Trustee, I conclude that the sanctions determination must be reversed.

The appeal arises from the Chapter 13 bankruptcy case of Niles and Angela Taylor. The Taylors' home mortgage was held by HSBC. HSBC (through its Colorado counsel) retained The Udren Law Firm to represent the mortgagee's interest in the bankruptcy proceeding.

According to the facts set out in the Bankruptcy Court's opinion, on January 15, 2008, the appellant Lorraine Doyle, an attorney with the Udren firm, filed a motion on behalf of HSBC seeking relief from the automatic stay (the "Stay Motion"). Bankruptcy Court Opinion at 12-13. The information for the Stay Motion came from a computer program known as "NewTrak," which is used by numerous banks and mortgage companies. The Stay Motion alleged that the Taylors had failed to make required mortgage payments. Counsel for the Taylors then filed a "late, and it appears inaccurate, answer in which she contended that Debtors had tendered the payments identified and they were returned by HSBC." Id. at 13. The debtors' counsel also failed to respond to requests for admissions filed with the Stay Motion. Id. at 14.

It turned out that both submissions were incorrect: the Taylors had been making payments since filing the Chapter 13 petition, although the payments were late, and the amount was less than HSBC believed was owed, because of a dispute over the need for flood insurance. As the Taylors did not pay the flood insurance premiums, each payment they made created an arrearage that was taken out of the next month's payment, although this was not clear from the Stay Motion. Id. The confusion on both sides continued, leading to several postponed hearings as counsel for the debtors filed an answer and counsel for HSBC undertook an investigation. Id. at 15.

At a hearing on May 1, 2008, David Fitzgibbon, an attorney with the Udren firm, argued on behalf of HSBC that the Stay Motion should be granted because the debtors failed to respond to the requests for admissions; he acknowledged that he had since learned that late payments had been made and that the debtors challenged the flood insurance premium. Id. at 16. The Bankruptcy Court denied the Stay Motion, ordered the debtors to stay current on the mortgage payments and escrow the flood insurance premiums, and set a new hearing date. Counsel was also informed that although the Stay Motion was in questionable good faith the court was "cutting them a break."*fn1

At the next hearing, on June 5, 2008, the debtors' counsel stated that she had requested but had not received a loan history. Mr. Fitzgibbon represented that he had opened an inquiry on the NewTrak system to request a loan history but had not received a response from HSBC. He also informed the Bankruptcy Court that he could not simply call the client, but had to use the computer system. Id. at 16-17.

On June 9, 2008, the Bankruptcy Court issued an order finding that the hearings on May 1, 2008 and June 5, 2008 had revealed certain questionable practices engaged in by attorneys and agents of HSBC which "included pressing 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." Order of June 9, 2008 at 1 n.1. The order also determined that "during those hearings it was apparent that local counsel for HSBC had no knowledge of the matters he was charged to handle nor any ability to communicate with anyone who had such knowledge[.]" Id. (footnote omitted). The Bankruptcy Court therefore directed various representatives of HSBC 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." Id. at 3 n.5. Several days of hearings followed, for which the Udren firm had separate counsel, as did HSBC.

On April 15, 2009, the Bankruptcy Court issued its opinion, imposing sanctions upon Ms. Doyle, Mr. Udren (the principal of the Udren firm) and the Udren firm itself. Although the Bankruptcy Court found that Mr. Fitzgibbon committed a Rule 9011 violation in "advocating the Stay Motion on admissions he knew to be then untrue," Opinion at 51, he was not sanctioned, because "I believe these proceedings have been very hard on this young lawyer and while lack of experience is not a defense to a Rule 9011 violation, I suspect that he has learned all that he needs to learn without protracting this unfortunate time in his nascent career." Id. at 52. Ms. Doyle was sanctioned because she "failed to observe her duty to make reasonable inquiry of the two documents she signed." Id. at 50. Ms. Doyle was ordered to take additional continuing legal education courses in ethics.

Mr. Udren was sanctioned because he "sets the tone and establishes [the firm's] culture," including reliance on the NewTrak system and failure to acknowledge errors in this case. Id. The Bankruptcy Court ordered Mr. Udren to obtain training in NewTrak and conduct a training session for all firm members. Finally, the Bankruptcy Court sanctioned HSBC, directing it to send a copy of the opinion to all firms that represent it and advising the firms that directly contacting HSBC will not reflect adversely on the firm's performance. Id. at 55. The order was stayed pending this appeal.

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. Fellheimer, Eichen & Braverman, P.C. v. Charter Techs., Inc., 57 F.3d 1215 (3d Cir. 1995). 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.*fn2

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 ...

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