In Nosek v. Ameriquest Mortgage Company, the United States Bankruptcy Court for the District of Massachusetts imposed $650,000 in sanctions under Federal Rule of Bankruptcy Procedure 9011 on Ameriquest Mortgage Company, Ameriquest's local law firm, one of the firm's partners, Ameriquest's national law firm and Norwest Bank, Minnesota, N.A. (now known as Wells Fargo Bank, N.A.), on the basis that these parties misrepresented and/or failed to clarify the role Ameriquest played with respect to a mortgage and mortgage note. In brief, from the inception of this case, these parties consistently referred to Ameriquest as the holder of the relevant mortgage and mortgage note when, in fact, Ameriquest was only the servicer of these mortgage documents. The court found this purportedly unintentional misrepresentation to be unreasonable and worthy of sanctions, pointing out that a holder of a negotiable instrument is the entity to which the instrument is payable, and that the parties owe a duty to keep the borrower and the court informed as to the identity of the holder and the servicer of the note and mortgage.

Factual Background

On Nov. 25, 1997, the debtor, Jacalyn Nosek, executed a promissory note in favor of Ameriquest and provided Ameriquest with a mortgage on her personal residence in order to secure her obligations under the note. Five days later, Ameriquest assigned the note and mortgage to Norwest. This assignment was recorded May 22, 2000. Meanwhile, at all times before March 31, 2005, Ameriquest acted as servicer of the note and mortgage pursuant to a pooling and servicing agreement dated June 1, 1998.

On Oct. 2, 2002, Nosek filed for bankruptcy relief pursuant to Chapter 13 of the Bankruptcy Code. On Nov. 1, 2002, the debtor filed her schedules and, in Schedule D listed a secured, disputed debt to "Norwest Bank Minnesota, NA, Tr. c/o Ablitt & Caruolo, P.C." Schedule D also listed "Ameriquest Mortgage Company Representing: Norwest Bank Minnesota, N.A., Tr." and "Buchalter, Nemer, Fields, et. al. Representing Norwest Bank Minnesota, NA. Tr."

Throughout the course of the bankruptcy case and first adversary proceeding, Ameriquest and its attorneys represented that Ameriquest was the holder of the note and mortgage. For example, on Feb. 13, 2003, Ameriquest filed a proof of claim, which did not reflect that the note or mortgage had been assigned to Norwest. On Feb. 17, 2003, in response to the debtor's objection to Ameriquest's proof of claim, Ameriquest's local counsel signed a pleading that stated: "Ameriquest is the holder of the first mortgage on [the debtor's residential] property recorded in the Worcester County . . . registry of Deeds in Book 19404, Page 164." In a letter dated Oct. 26, 2002 that Ameriquest's customer service department sent to the debtor, Ameriquest stated, "Ameriquest Mortgage Company . . . holds an Adjustable Rate Note against the residential real property . . . ." On Feb. 24, 2003, Ameriquest's local counsel signed and filed a motion for relief from the automatic stay on behalf of Ameriquest which provided that "[Ameriquest] is the holder of the first mortgage . . . ." Moreover, on Jan. 23, 2005, in response to the complaint filed in the first adversary proceeding, Ameriquest averred that it was the holder of the first mortgage.

However, on Sept. 27, 2007, in response to the complaint filed in the second adversary proceeding, Ameriquest informed the court for the first time that it was the servicer of the note and mortgage and not the holder. More specifically, Ameriquest's response provided that Ameriquest did not own the funds the debtor sought to attach in the second adversary proceeding. Instead, Ameriquest asserted for the first time that it merely collected the funds on behalf of the true owner of the note. This representation, which would have afforded Ameriquest a solid defense in the second adversary proceeding, sparked the court's interest and precipitated an order to show cause requiring Ameriquest, Ameriquest's law firms, the individual attorneys employed by the law firms involved in the case and Norwest, among others, to show cause why they should not all be sanctioned for the apparent misrepresentation. In the court's view, the parties' various responses to the order to show cause contained the following common themes: (i) no one intended to mislead the court; (ii) the debtor and her attorney knew that Ameriquest was not the holder of the note or the mortgage, as evidenced by the debtor's own Schedule D; (iii) because notes and mortgages are bought and sold so frequently, it is difficult to know at any given moment who holds them; and the pooling and servicing agreement which named Ameriquest as servicer authorized Ameriquest to undertake certain actions in its own name.

The Court's Analysis

The court began its discussion by noting that the word holder has a specific definition when used in connection with a negotiable instrument (i.e., a note). It then noted that the parties' "confusion," "lack of knowledge" and/or "sloppiness" as to their roles is not uncommon in the residential mortgage industry, and reminded the parties that if they did not hold the note and/or mortgage or service the mortgage, then they did not have standing to pursue motions for relief or other actions arising from the mortgage obligation.

Next, the court turned its attention to the requirements of Federal Rule of Bankruptcy Procedure 9011, which is roughly identical to Rule 11 of the Federal Rules of Civil Procedure. Bankruptcy Rule 9011 provides that by presenting to the court, whether by signing, filing, submitting or later advocating, a petition, pleading, written motion or other paper, an attorney or unrepresented party is certifying to the best of that person's knowledge, information and belief, formed after an inquiry reasonable under the circumstances, that the allegations and other factual contentions that he or she has advanced have evidentiary support, or are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery. As with Rule 11, the purpose of Bankruptcy Rule 9011 is to deter baseless filings and avoid the expenditure of unnecessary resources by imposing sanctions on those who run afoul of their Rule 9011 obligations. The analytical standard to be applied when making a determination as to whether there has been a violation of Bankruptcy Rule 9011 is an objective standard of reasonableness under the circumstances. However, because sanctions under Bankruptcy Rule 9011 are so serious, only those actions deemed to fit squarely within the purview of the rule will result in a finding that it has been violated.

In their responses to the order to show cause, virtually all of the parties argued that any misrepresentations made to the court were unintentional. However, because the analytical standard to be applied is an objective standard, the court found that the parties' intent was irrelevant. The court also refused to give credence to the argument that the debtor knew or should have known that Norwest was the holder and Ameriquest the servicer of the note and mortgage since the assignment of the note and mortgage was recorded. In fact, the court commented that such an argument was "disingenuous," and perhaps "arrogant," since many of the parties asserting the argument had alleged that they had no way of knowing about the assignment. The court accused these parties of using the recorded assignment as a double-edged sword to bind the debtor to one standard of knowledge and themselves to another. Likewise, because of the frequency with which mortgages and notes are assigned in this day and age, the court found fault with the lawyers and law firms for relying on the representations made by their clients and arguing that such reliance was sufficient.

In addition to the reasons noted above, the court found two major flaws with Ameriquest's argument that the debtor knew Norwest was the holder of the note. First, it failed to recognize that the order to show cause was issued to deal with misrepresentations made to the court, not misrepresentations made to the debtor and her counsel. Second, because of the frequency with which mortgages and notes are assigned, there is an inherent obligation or responsibility to know and properly represent the status of the loan.

The court also accused Ameriquest of hiding behind the pooling and servicing agreement. Recognizing that the agreement may have authorized Ameriquest to act in its own name, it found that Ameriquest was still constrained by the bankruptcy code and the applicable rules of court. For example, if Ameriquest had intended to file its proof of claim on behalf of Norwest, then Ameriquest would nonetheless have been required to demonstrate that it had a power of attorney to act on Norwest's behalf. The court noted that Ameriquest's proof of claim did not contain any power of attorney or even mention Ameriquest's relationship with Norwest. As a result, the court sanctioned Ameriquest $250,000.

In addition to finding fault with Ameriquest, the court found fault with Ameriquest's local counsel, Ablitt & Caruolo. The attorneys and the law firm argued that they had no knowledge of any mistake or incomplete information and that their filings and statements were based upon and consistent with Ameriquest's proof of claim and the information they received from Ameriquest's national counsel. The firm further argued that due to the uncertainty of unrecorded transfers, it often relied on representations made — and direction provided — by its institutional clients with respect to the correct identity and standing of the party it represented. Interestingly, the firm failed to address the following facts: that prior to the debtor's current bankruptcy case, (i) it was retained to commence foreclosure proceedings against the debtor's residence on behalf of Norwest and (ii) it had sought relief from the automatic stay in the debtor's prior bankruptcy case on behalf of Norwest. Finding that the firm could not shield itself from its institutional knowledge, the court sanctioned the law firm $25,000. It leveled another $25,000 sanction against the partner who handled this matter for the law firm, concluding that he should have known about Norwest's status. The associates who worked on the matter were spared sanctions since, in the court's view, young associates are often not in a position to question the assignments give to them and because it was not clear what the associates were told when the assignment was given to them.

The court also sanctioned Ameriquest's national counsel, Buchalter Nemer Fields & Younger, in the amount of $100,000. It found that as national counsel to a mortgage lender, the Buchalter firm had a responsibility to know its client's role and to do whatever was reasonably necessary to ensure that it elicited correct information.

Lastly, the court sanctioned Norwest, even though Norwest did not appear to have made any misrepresentations directly to the court. Instead, it appeared to the court that Norwest had failed to correct misrepresentations about which Norwest should have been aware. Norwest took the position that it had turned over all its responsibilities to Ameriquest, and knew nothing about what Ameriquest was doing. The court commented that although holders are free to engage servicers, these holders cannot turn a blind eye to their servicer's actions. Accordingly, the court found that Norwest should have been able to correct the misrepresentations. Because it failed to do so, it was sanctioned to the tune of $250,000.

Conclusion

The bankruptcy court's decision in Nosek is not the least bit forgiving to those who practice in the mortgage/foreclosure industry. However, it serves as an important reminder of how critical it is to properly plead the name, status, and standing of each party. As evidenced by this opinion, failure to do so can be a costly mistake to attorney and client alike.

Rudolph J. Di Massa, Jr., a partner at Duane Morris, is a member of the business reorganization and financial restructuring practice group. He concentrates his practice in the areas of commercial litigation and creditors' rights. He is a member of the American Bankruptcy Institute, the American Bar Association and its business law section, the Commercial Law League of America, the Pennsylvania Bar Association and the business law section of the Philadelphia Bar Association.

Sommer L. Ross practices in the area of business reorganization and financial restructuring. Admitted to practice in Delaware, Pennsylvania and New Jersey, Ross is a 2004 graduate of Rutgers University School of Law, where she was a member of the Rutgers Law Journal, and a graduate of the University of Delaware.

Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.