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Third Circuit Upholds Sanctions on Mortgage Lender and Law Firm for 'Rubber-Stamping' Documents - In re: Taylor et al.

August 30, 2011

As Rancho Cucamonga foreclosure defense attorneys, we write here nearly every week about sloppy paperwork by mortgage lenders and their attorneys, and the consequences for all parties involved. One consequence we haven't seen much, however, is the imposition of sanctions against a mortgage lender's legal team for misconduct in court. Sanctions are at the center of In re: Taylor et al., a Third U.S. Circuit Court of Appeals ruling upholding penalties for mortgage lender HSBC, its outside law firm and one of the attorneys for that firm. In the case, the court criticized counsel for failing to ascertain whether the documents it took from its database were true before submitting them to a bankruptcy court and swearing to their truth.

The underlying case is the Chapter 13 bankruptcy of Niles and Angela Taylor. They listed HSBC as the holder of their mortgage, and HSBC filed for relief from the automatic stay in order to foreclose. That filing is one of the objectionable filings; the other is HSBC's answer to the Taylor's objection to their proof of claim. The proof of claim requires supporting documentation showing ownership and the amount owed. However, in this case, it was incorrect as to the Taylors' monthly payment, the value of the home and had the wrong note attached. This was filed by a law firm not involved in the appeal. The motion for relief from stay used the Udren Law Firm, one of the sanctioned parties. Like all HSBC law firms, it received its assignment through a computerized system. The Udren Firm and its attorney, Lorraine Doyle, were not able to check the veracity of the documents except by calling HSBC, which was actively discouraged. The papers were also prepared by non-attorneys.

As a result, the motion for relief from stay failed to mention the existence of a dispute as to whether the Taylors were making the correct payments. The firm requested that the Taylors admit that they had made no mortgage payments since filing for bankruptcy, which the Taylors proved was untrue. In HSBC's response to the Taylors' objection, Doyle reiterated that everything contained in the motion for relief was accurate, which it was incorrect. In later hearings, an attorney for the Udren Firm appeared to ask for known falsehoods to be admitted as evidence. The bankruptcy court denied this and ordered the firm to get the correct information from HSBC. The firm failed to do so, and the bankruptcy court ultimately sanctioned Doyle, the Udren Firm, founder Mark Udren and HSBC for making false representations to the court. They appealed it to the district court, which overturned the sanctions, finding that Taylor's counsel bore some responsibility, the court was improperly trying to "send a message" and Udren himself was not guilty of the sanctioned conduct. The trustee appealed.

The Third Circuit reinstated the sanctions against everyone but Udren as an individual. Statements made by Doyle and an Udren Firm associate who escaped the sanctions contained falsehoods, the court said. And even if "literally true," the Third said they were misleading, which is enough to violate Rule 9011. Furthermore, Doyle's behavior was not reasonable under Rule 9011, it said. Although attorneys are not required to investigate the veracity of all information their clients provide, they must make a reasonable effort to seek out the facts independently. In this case, Doyle should have known she had inadequate information through the automated system she relied on; she pleaded the truth of facts not even available to her through that system. Furthermore, her own filings were self-contradictory and she failed to investigate the Taylors' claims. The court agreed with the district court that Mark Udren was not personally culpable, but ruled that the Udren Firm was appropriately sanctioned because its high-volume, high-pressure system led to the false representations. It also upheld sanctions against HSBC, noting that the bank had not appealed the original sanctions and the district court need not overturn HSBC's sanctions just because it overturned those of the attorneys.

Our Orange County foreclosure defense lawyers are very pleased to a court recognize the negative effects of sloppy litigation. In this case, HSBC and its attorneys were attempting to foreclose on borrowers using information that was outright false in one case and disputed in another. That is, they could have taken away the Taylors' property and denied them the protections of bankruptcy based on a lie. Allowing this kind of behavior would subvert the fact-finding purpose of the courts and could encourage more judicially approved theft. We also noticed that the bankruptcy court in this case believes the problem to be widespread, noting that the vendor running the automated data system and the non-sanctioned law firm have both been widely criticized for breaking court rules. As Whittier foreclosure defense attorneys, we hope this case causes other courts and attorneys to take notice of the problem and fix it before more penalties are necessary.

If you're trying to hold on to a home that's in default or foreclosure and your loan servicer refuses to provide real help, call Howard Law, P.C., to discuss your legal options. For a free consultation, send us a message through our website or call toll-free at 1-800-872-5925.

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