Sanctions: Bad Faith Irrelevant to Rule 11 Liability but Relevant to Type and Quantum of Sanction

From Ameriquest Mortgage Co. v. Nosek, 2010 U.S. App. LEXIS 12068 (1st Cir. June 14, 2010):

On January 25, 2008, the bankruptcy court ordered Ameriquest to show cause why sanctions should not be imposed under Federal Rule of Bankruptcy Procedure 9011 [substantively identical to Fed.R.Civ.P. 11] for misrepresenting during the Nosek bankruptcy proceedings that Ameriquest was the holder of the mortgage. Ameriquest conceded that it had not accurately described its status but argued that Nosek had been aware of the sale of her mortgage to Norwest [i.e., the misrepresentation], that Ameriquest had the authority to act under its own name, that it had not intended to mislead or conceal anything, and that Nosek had not been prejudiced.

In April 2008, the bankruptcy court rejected these arguments and imposed a total of $650,000 in Rule 9011 sanctions against Ameriquest, Norwest and Ameriquest's counsel. Of that amount, $250,000 was assessed against Ameriquest itself. The district court upheld the sanctions against Ameriquest on May 26, 2009, finding that "[a]lthough [Ameriquest's] misrepresentation did not affect the outcome of this case, the Bankruptcy Court did not abuse its discretion in sanctioning Ameriquest." Ameriquest now appeals from the sanction order against it. ***

Ameriquest more or less admits that it violated Rule 9011***.

Both Rule 9011 of the bankruptcy court and its district court Rule 11 counterpart say that sanctions must be limited to what is sufficient to deter repetition of the offending conduct or comparable conduct by others. Fed. R. Bankr. P. 9011(c)(2); Fed. R. Civ. P. 11(c)(4). The 1993 Advisory Committee notes to Rule 11, helpful in construing Rule 9011, see Featherson v. Goldman (In re D.C. Sullivan Co.), 843 F.2d 596, 598 (1st Cir. 1988), offer a non-exhaustive list of factors helpful in making this determination:

Whether the improper conduct was willful, or negligent; whether it was part of a pattern of activity, or an isolated event; whether it infected the entire pleading, or only one particular count or defense; whether the person has engaged in similar conduct in other litigation; whether it was intended to injure; what effect it had on the litigation process in time or expense; whether the responsible person is trained in the law; what amount, given the financial resources of the responsible person, is needed to deter that person from repetition in the same case; [and] what amount is needed to deter similar activity by other litigants.

As the bankruptcy court noted, "the parties' confusion and lack of knowledge, or perhaps sloppiness, as to their roles is not unique in the residential mortgage industry." Studies have shown that mortgage holders and servicers routinely file inaccurate claims, some of which may not be lawful. See Porter, Misbehavior and Mistake in Bankruptcy Mortgage Claims, 87 Tex. L. Rev. 121, 123-24 (2008). Bankruptcy courts have a legitimate interest in policing the filings submitted, and sanctions can sometimes serve a useful function in this endeavor. Steep sanctions might be appropriate were a lender shown to have routinely misrepresented its role in bankruptcy cases, caused unnecessary litigation, or prejudiced another party.

But even with these concerns in mind, the sanction in this case is excessive when considering factors like those listed in the advisory committee's notes to Federal Rule of Civil Procedure 11. First, nothing indicates that Ameriquest's claim that it was the holder of the mortgage was a deliberate falsehood or intended in any way to mislead the court or Nosek or achieve anything for Ameriquest. Arguably, Ameriquest was entitled to file a claim in Nosek's bankruptcy and seek relief in its own name — we need not resolve this issue — and so could sue "as if" it were the mortgage holder, but, in the event that its authority for this had been challenged and the challenge upheld, the trustee could readily have been substituted or begun its own suit.

The bankruptcy court said that "[i]ntent is irrelevant" because "the [Rule 9011] standard to be applied is an objective one." Accuracy of representations is an objective matter, as is the reasonableness of any inquiry actually made. But subjective intent can bear on whether to impose a sanction and what amount to fix. Lieb v. Topstone Indus., 788 F.2d 151, 157-58 (3d Cir. 1986); Joseph, Sanctions: The Federal Law of Litigation Abuse § 16(D)(2) at 2-280 (4th ed. 2008). Even a dog, said Holmes, distinguishes between being kicked and being stumbled over. O.W. Holmes, The Common Law 3 (1881).

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