In re Taylor

In re Taylor, No. 10-2154 (3d Cir. Aug. 24, 2011)
The United States Court of Appeals for the Third Circuit reverses the District Court with respect to sanctions imposed under Rule 9011 against a law firm representing a mortgagee, affirming the bankruptcy court’s imposition of sanctions. With respect to the mortgagee, the Third Circuit holds that the District Court lacked jurisdiction to reverse the sanctions imposed against the mortgagee; therefore, the District Court’s order with respect to that party is reversed, leaving the sanctions imposed by the Bankruptcy Court in place. The Third Circuit affirms the District Court with respect to the managing partner of the firm, who had no involvement with the representation, reversing the Bankruptcy Court's imposition of sanctions.
Procedural context:
The United States Trustee for Region 3 appealed an order of the United States District Court for the Eastern District of Pennsylvania reversing an order of the United States Bankruptcy Court for the Eastern District of Pennsylvania imposing sanctions on mortgagee HSBC and HSBC's attorneys, Mark J. Udren and Lorraine Doyle of the Udren Law Firm for violations of Rule 9011 of the Federal Rules of Bankruptcy Procedure.
In September 2007, the debtors filed a petition under chapter 13 of the Bankruptcy Code. In the bankruptcy petition, the debtors listed the bank HSBC, which held the mortgage on their house, as a creditor. In October 2007, HSBC filed a proof of claim. HSBC thereafter filed a motion for relief from the automatic stay to foreclose on their collateral. Using the Moss Codilis law firm, HSBC filed a proof of claim that contained incorrect information. 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. HSBC did not deal directly with its attorneys, instead using a computer-based program called NewTrak to provide information to attorneys about mortgage-related matters. NewTrak provided the Udren Firm with only the loan number, the debtors' name and address, payment amounts, late fees, and amounts past due. It did not provide any information about a pending dispute between the debtors and HSBC over HSBC's requirement that the debtors pay for flood insurance. Without verifying any information obtained in NewTrak, attorney Doyle filed a motion for relief from the automatic stay, alleging that the debtors' were not current in their mortgage payments and lacked equity in the real property. This information proved to be incorrect. At the same time, acting for HSBC, attorney Doyle served requests for admission on the debtors seeking admissions that they made no mortgage payments from November 2007 to January 2008 and that they had no equity in their home. The debtors did not respond to the requests for admission. Even though HSBC's counsel knew that the debtors had in fact made payments, HSBC's counsel sought to have the requests for admission entered into evidence as deemed admissions. After the hearing, the bankruptcy court directed the Udren Firm to obtain an accounting from HSBC of the debtors’ prepetition payments so that the arrearage on the mortgage could be determined correctly. At the next hearing, in June 2008, HSBC counsel 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 HSBC directly to verify information which his firm had already represented to the court that it believed to be true. Following the June 2008 hearing, the Bankruptcy Court ordered HSBC and its counsel to appear and give testimony at a subsequent hearing about the possibility of the imposition of sanctions.
Fuentes, Smith and Van Antwerpen

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