A few days ago the First Circuit issued a decision in a Massachusetts bankruptcy case that has some generically useful thoughts on sanctions: In re Nosek, Docket No. 09-1806,
Ameriquest lend Nosek $90,000, taking back a mortage in that amount on her home. It then assigned the mortgage to a securitization trust for which Norwest Bank was the trustee. Under the terms of the assignment, Ameriquest remained obligated to service the loan.
Nosek stopped paying, and Norwest began a foreclosure action on the mortgage "given … to Ameriquest … and now held by the plaintiff [Norwest] by assignment." Nosekfiled forbankruptcy,and Ameriquest filed a proof of claim in its own name and for relief from the automatic stay, saying that it was "the holder of a first mortgage" on the debtor's property. Under the service agreement with Norwest, Ameriquest arguably had the power to file the proof of claim and seek the stay in its own name, but technically it did not hold the mortgage and didn't say in its motion that the source of its authority was as acting as agent for Norwest. Nosek had been told about and acknowledged the assignment.
So Ameriquest should have said it was acting as an agent. As the Court said "Mistakes in records and memory do occur, and there has been no proof of bad faith on either side."
Nosek filed an adversary proceeding claiming that Ameriquest had mishandled the mortgage payments, the bankruptcy court awarded her $250,000 in damages for emotional distress and was flipped by the district court. On remand the bankruptcy court awarded the same damages on another theory, throwing another $500,000 into the kitty for punitives. The district court upheld the judgment and it was reversed by the First Circuit. (I guess the only thing worse than being a mortgage lender these days is an oil company drilling in the Gulf).
Before the First Circuit reversed that judgment, Nosek filed a separate lawsuit seeking to collect the $750,000. In response, Ameriquest filed an affidavit saying that it didn't hold the mortgage. The bankruptcy court impose a $650,000 sanction under Federal Rule of Bankruptcy Procedure 9011 for misrepresentation again Ameriquest, Norwest and Ameriquest's counsel, with $250,000 against Ameriquest itself.
The First Circuit said yes it was technically a misrepresentation and a violation of the rule, but come on. Yes, the bankruptcy court has broad discretion in awarding sanctions, but deference "is not be confused with automatic acquiesence." The parties were sloppy, not unusual in the residential mortgage industry. While steep sanctions might be appropriate were a lender shown to routinely misrepresent, causing prejudice, here nothing showed that Ameriquest's mistake was deliberate or intended to mislead anyone, and arguably it could file the claim in its own name. The bankruptcy court said intent is irrelevant because the standard under 9011 is objective. The First Circuit said subjective intent can be relevant on the issue of whether to impose a sanction and if so, how much. "Even a dog, said Holmes, distinguishes between being kicked and being stumbled over." There was no prejudice from the booboo – Nosek eventually amended her complaint to include Norwest, so there was no risk the funds could escape capture, and the damages judgment ws vacated so Ameriquest's delays revelation "had no ultimate consequence."
So yes, while Ameriquest's conduct might have not been exemplary in other respects (apparently it was not a stellar company and eventually closed shop after paying a large settlement to investigating authorities) the sanction was not purportedly based on these other respects, only this misstatement. The FIrst Circuit said, "if a modest sanction had been imposed to vindicate Rule 9011 and 'pour encourager les autres,' no appellate court would fuss, but $250,000 is not reasonable under the present facts." Because the bankruptcy judge was no long on the bench, precluding a remand, the Court of Appeals itself modified the sanction to $5000, "taking account of legal fees now incurred on two appeals."