Saturday, August 27, 2011

Interesting Rule 11 Case Involving Lawyer’s Reliance on Computerized “Client’s” Representations

            In re Taylor provides a fascinating look into a high-volume foreclosure firm’s relationship with its client, HSBC, and its implications for Rule 11 sanctions.  2011 WL 3692440 (3d Cir. Aug. 24, 2011).  I quote extensively from the case:

The Taylors filed for a Chapter 13 bankruptcy in September 2007.  They listed the bank HSBC, which held the mortgage on their house, as a creditor. In turn, HSBC filed a proof of claim with the bankruptcy court.

At the time of the bankruptcy proceeding, the Taylors were also involved in a payment dispute with HSBC [over a $180/month flood insurance cost for the property]. The Taylors disputed HSBC's position [that additional insurance was necessary] and continued to pay their regular mortgage payment, without the additional insurance costs.

Because of the Taylors' withheld insurance payments, HSBC's records indicated that they were delinquent. Thus, in January 2008, HSBC retained the Udren Firm [of which Mr. Udren was the only partner] to seek relief from the [bankruptcy] stay.

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. 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.

. . . .

[Ms.] 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. . . . It stated that the Taylors had “inconsequential or no equity” in the property. 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.”

The Taylors filed responses indicating that they had paid the amount of the mortgage minus the disputed insurance portion.  Nonetheless, HSBC went forward with a hearing on its motion for relief from stay and its claim. 

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 2007, [despite pleadings filed by HSBC that] stated otherwise. Despite this, Fitzgibbon urged the court to grant the relief from stay [because of the Taylors’ failure to answer Requests For Admission].  . . . It appears from the record that Fitzgibbon initially sought to have the RFAs admitted as evidence even though he knew they contained falsehoods.

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 HSBC—his firm's client—directly to verify information which his firm had already represented to the court that it believed to be true.

[After what amounted to a show-cause order,] [t]he 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 [the bankruptcy rules equivalent of FRCP 11]: 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.

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 the requirements of Rule 9011 and procedures for esca-lating 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 HSBC's case was permissible.

The district court reversed the bankruptcy court’s decision in its entirety, including the sanctions on HSBC, which had not even been appealed.

The Third Circuit reversed the district court in part, upholding the bankruptcy court’s imposition of sanctions on Ms. Doyle and the Udren firm, and holding that the district court lacked jurisdiction to reverse the sanctions against HSBC because HSBC had not appealed.

In so holding, the Third Circuit stated:

As an initial matter, the appellees' insistence that Doyle's and Fitzgibbon's statements were “literally true” 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 of the form pleading,” and “acknowledged having no knowledge of the value of the property and having made no inquiry on this subject.”  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's representations to the bankruptcy court was to mislead the court, they cannot be said to have complied with Rule 9011. . . .

. . . [T]he [bankruptcy] court was told only that the Taylors had “failed to make regular mortgage payments” from November 1, 2007 to January 15, 2008 . . . 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 a $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'] house.”  Therefore, Doyle's and Fitzgibbon's statements in question were either false or misleading. . . .

We must, therefore, determine the reasonableness of the appellees' inquiry before they made their false representations. . . .  

Central to this case . . .  is the degree to which an attorney may reasonably rely on representations from her client. An attorney certainly “is not always foreclosed from relying on information from other persons.” 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's 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 and empty head’ defense,” 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 plausible and the client provides its own records which appear to confirm the information.

However, Doyle'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 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 advance—by means of an automated system, no less—that she should be provided with.

Yet that is precisely what happened here. “[I]t appears,” the bankruptcy court observed, “that Doyle, the manager of the Udren Firm bankruptcy department, had no relationship with the client, HSBC.” 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 define—perilously narrowly—the information she had about the Taylors' matter. . . .

. . . .

With respect to the Taylors' case in particular, Doyle 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 her relationship with HSBC, Doyle essentially abdicated her professional judgment to a black box.

. . . This was not a 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, we find that Doyle's inquiry 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. . . . 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 who have certified to the court that the representations they are making are “well-grounded in law and fact.”

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.  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 [Mr.] Udren, whose involvement in this matter was limited to his role as sole shareholder of the firm.

--Patricia Hatamyar Moore

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