Ameriquest Mortgage Co. v. United States Bankruptcy Court for District

Citations: 406 B.R. 434; 2009 U.S. Dist. LEXIS 44835Docket: Civil Action No. 08-40095-WGY

Court: District Court, D. Massachusetts; May 26, 2009; Federal District Court

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The court memorandum outlines the misconduct of Ameriquest Mortgage Company and its legal representatives, who engaged in significant misrepresentations regarding their status in a bankruptcy case involving debtor Ja-calyn Nosek. After being sanctioned for these actions, the parties attempted to shift blame. The Bankruptcy Court had previously imposed sanctions totaling $625,000 against Ameriquest, its legal counsel Ablitt, Charlton, P.C., national counsel Buchalter Nemer, P.C., and Wells Fargo Bank, N.A. These sanctions stemmed from Ameriquest's failure to disclose its lack of involvement with the loan since 1997, despite making claims and representations to the contrary during the bankruptcy proceedings. The court highlighted that Ameriquest filed multiple proofs of claim and pleadings, misleading the Bankruptcy Court about its role and status as a creditor. The case has a history of prior rulings, with the Bankruptcy Court's April 25, 2008, sanctions order remaining intact despite appeals from the sanctioned parties.

Ameriquest’s true role in a bankruptcy case was revealed after the Bankruptcy Court awarded Nosek $750,000 in emotional distress and punitive damages. Following this, Nosek initiated a trustee process action to collect the awarded funds, during which Ameriquest claimed in an affidavit that it merely collected funds for their owners and did not own them. This disclosure marked the first instance the Bankruptcy Court learned that Ameriquest was not the loan holder, contradicting its earlier claims. Consequently, the trustee process complaint was amended to include Wells Fargo, leading to the dismissal of Ameriquest from the case. The Bankruptcy Court then issued an Order to Show Cause regarding potential sanctions for these misrepresentations, reviewed relevant briefs, and held a hearing.

The Court noted that parties not holding the mortgage note or servicing the mortgage lack standing to pursue related actions, leading to the application of Federal Rule of Bankruptcy Procedure 9011 for sanctions. This rule aims to deter baseless filings and imposes sanctions on those violating it, with attorneys certifying the factual support of their filings under an objective standard of reasonableness. The Bankruptcy Court can issue sanctions sua sponte after a show cause order, and any imposed sanctions should be sufficient to deter similar future conduct. The standard for violations under Rule 9011 parallels that of Rule 11 of the Federal Rules of Civil Procedure, and the imposition of sanctions is subject to abuse of discretion review. The substantive standards for violations remain consistent regardless of the invoking party.

Ameriquest's arguments in the Bankruptcy Court were systematically addressed in the Court's Order. The Court determined that Ameriquest's claim of lack of bad faith was irrelevant, as the applicable standard is objective and intent does not factor in. Additionally, the debtor's awareness of the assignment, as shown in her 2002 schedules, was deemed irrelevant; it is the creditor's duty to inform both the borrower and the Court about the ownership of the note and mortgage. Ameriquest's assertion that sanctions would not deter future behavior, given that it is no longer in the loan servicing business, was also rejected, with the Court emphasizing the potential for future reentry into the market and the purpose of sanctions as deterrents for similar conduct by others.

Moreover, the Court refuted Ameriquest's argument regarding the Pooling and Servicing Agreement, stating that the failure to file a power of attorney with the proof of claim constituted a violation of Federal Rule of Bankruptcy Procedure 3001. The Court warned lenders and servicers that private agreements do not exempt them from adhering to Bankruptcy Rules.

On appeal, Ameriquest continued to contest the violation of Rule 3001, arguing that its proof of claim substantially conformed to the Official Form, despite not attaching the power of attorney. Ameriquest pointed out that local bankruptcy rules require movants to identify the original holder and subsequent transferees, suggesting redundancy if non-compliance with Rule 3001 were grounds for violation. Additionally, Ameriquest raised new points on appeal, challenging the Bankruptcy Court's rationale for the specific sanction amount and alleging that the sanctions constituted a criminal punishment without due process. It referenced the case Vollmer v. Selden to argue that sanctions should generally be limited to several thousand dollars unless extraordinary circumstances exist. The Court acknowledged that the bankruptcy judge's judgment on deterrent measures should be respected, despite the inherent uncertainties in determining appropriate sanction amounts.

Ameriquest's assertion that the sanctions imposed are criminal penalties lacks legal support. It references F.J. Hanshaw Enterprises, Inc. v. Emerald River Development, Inc., a case focused on inherent powers rather than Rule 11, to argue that a payment order without a purge opportunity constitutes a criminal sanction. The Ninth Circuit's application of Supreme Court distinctions between civil and criminal contempt does not extend to Rule 11 or Bankruptcy Rule 9011 contexts. The Bankruptcy Court provided due process through adequate notice and an opportunity to be heard, aligning with American Airlines, Inc. v. Allied Pilots Ass’n, which mandates due process in imposing Rule 11 sanctions. Consequently, the sanctions against Ameriquest are upheld due to its lack of candor.

In contrast, the Bankruptcy Court's sanctions against Wells Fargo overstep Rule 9011's boundaries. Wells Fargo was only involved in the proceedings two months prior to the Order to Show Cause and played no role in the filings in question. The Court's assertion that Wells Fargo cannot evade responsibility by blaming servicers is deemed ultra vires, as Rule 9011 does not apply to non-parties. Thus, the sanctions against Wells Fargo must be vacated.

The conduct of the lawyers involved is criticized, highlighting a collective failure to acknowledge their misrepresentations to the Bankruptcy Court. There is an overwhelming tendency to assign blame to others, including the bankrupt homeowner, with only a brief admission of fault by Buchalter’s counsel for not identifying Ameriquest in the proofs of claim. The excerpt reflects a broader concern about the legal profession's complicity in the excesses that contributed to the economic collapse, questioning the integrity and ethical standards of attorneys involved.

By the 1980s, the legal profession shifted from generalist lawyers to specialized attorneys, narrowing their focus to transactional work. This change led to two significant outcomes: lawyers transitioned from wise counselors to skilled technocrats, and traditional fiduciary roles evolved into vendor-like relationships. Consequently, lawyers became disconnected from their clients' broader legal concerns, focusing instead on solving specific problems based on price, speed, and experience, which diminished loyalty between firms and clients. The moral clarity that once characterized legal practice eroded, as seen in 1994 when the Boston Bar Council rejected guidelines on political contributions, reflecting a new ethical standard based solely on legality.

The increasing demand for billable hours further restricted lawyers' engagement in community and personal pursuits, reinforcing the trend of specialization. Dean Kronman's study, "The Lost Lawyer," critiques this narrow focus as a threat to the "lawyer-statesman ideal," emphasizing that as lawyers' experiences narrow, so do their imaginative capacities. Throughout the 1990s, the profession increasingly prioritized financial gain, with lawyers comparing their earnings to high-profile clients rather than peers, leading to a willingness to take equity stakes in client companies. 

Despite improvements in diversity within large firms, with a wider range of law schools and increased female leadership, the profession has lost seasoned lawyers with moral clarity, raising concerns about the absence of lawyer-statesmen who once elevated the field.

The excerpt addresses the application of Rule 9011 concerning the imposition of sanctions on the Ablitt law firm for failing to conduct a reasonable inquiry before filing documents in bankruptcy proceedings. According to Rule 9011(b), the signer of documents has a nondelegable responsibility to the court, and law firms are also liable for violations committed by their staff unless exceptional circumstances exist. The Bankruptcy Court determined that Ablitt could not rely solely on information from its client, Ameriquest, especially since the firm had previously taken actions related to the same property in a foreclosure case on behalf of another entity, Wells Fargo. Ablitt argued it had no prior knowledge of the foreclosure and that its reliance on Ameriquest and its national counsel was reasonable given industry practices regarding distressed mortgages. However, the Bankruptcy Court rejected these defenses, asserting that Ablitt disregarded its institutional knowledge and internal files, which would have alerted it to the need for further inquiry. The court concluded that the firm’s reliance on Ameriquest’s statements was not "objectively reasonable" due to the previous foreclosure actions, thereby affirming the decision to impose sanctions against Ablitt.

Buchalter is contesting the Bankruptcy Court's ruling that it bears responsibility for verifying the accuracy of its client's information. The firm asserts it did not "present" any documents to the court as defined by Rule 9011, claiming it only prepared a proof of claim that was submitted by Ameriquest. Buchalter contends that even if preparing the form is seen as presenting it, the claims made had evidentiary support because Ameriquest could seek relief in its name. The firm also argues it did not violate Bankruptcy Rule 3001 by not including a power of attorney with the proof of claim, as such a claim can still conform to the Official Form standards.

Buchalter criticizes the Bankruptcy Court's decision as hindsight bias, referencing a 2005 ruling that required servicers to identify themselves as authorized agents. The firm notes it changed its filing practices in 2007 to disclose the mortgage holder. Buchalter requests judicial notice of its 2007 filings, asserting that sanctions under Rule 9011 are unwarranted since it did not file or sign any documents with the court.

Further, the court believes there is probable cause to suspect the Ablitt firm violated disciplinary rules and will forward the case to the Massachusetts Board of Bar Overseers. It will also send a copy of the order to the California Supreme Court regarding Buchalter. Although Ameriquest misrepresented its role, which did not impact the case outcome, the Bankruptcy Court's imposition of sanctions on Ameriquest was deemed appropriate. Ablitt acted unreasonably by relying on Ameriquest's claims, justifying its sanctions. In contrast, sanctions against Buchalter and Wells Fargo were vacated as they fell outside Rule 9011's scope. The court highlights the meticulous nature of the Bankruptcy Judge's decision-making amidst broader concerns about the enforcement of attorney misconduct.