In Re Taylor

Rule of Law:

Attorneys and law firms have a non-delegable duty under Federal Rule of Bankruptcy Procedure 9011 (analogous to Federal Rule of Civil Procedure 11) to conduct a reasonable inquiry into the factual basis of pleadings, and cannot rely blindly on automated client data, especially when red flags appear, to avoid sanctions for false or misleading representations.

Facts:

• Niles C. and Angela J. Taylor filed for Chapter 13 bankruptcy in September 2007, listing HSBC, their mortgage holder, as a creditor.
• HSBC filed a proof of claim in October 2007 through the Moss Codilis law firm, which contained errors regarding the monthly payment amount, the attached mortgage note, and the home's value, based on HSBC's computerized mortgage servicing database without human review.
• The Taylors were in a payment dispute with HSBC over "forced insurance" costs, which HSBC unilaterally added to their mortgage; HSBC treated the Taylors' regular mortgage payments (without the added insurance cost) as partial payments, causing its records to show increasing delinquency.
• In January 2008, HSBC retained the Udren Firm, specifically attorney Lorraine Doyle, to seek relief from the automatic stay based on the Taylors' supposed payment delinquency, using a computerized system called NewTrak that provided limited data and discouraged direct client contact.
• Doyle filed a motion for relief from stay, prepared by non-attorney staff relying exclusively on NewTrak information, asserting the Taylors failed to make payments from November 2007 to January 2008 and had inconsequential equity in their home, without verifying the information or addressing the flood insurance dispute.
• The Taylors responded to the motion for relief from stay, denying payment failures and attaching copies of checks tendered to HSBC, and also filed an objection to HSBC's proof of claim, citing the misstated payment and the dispute over flood insurance.
• Doyle then filed a response to the claim objection, stating that all figures in the proof of claim were accurate, despite knowing the listed monthly mortgage payment was inaccurate and differed from the figure in her own earlier motion, and without discussing the flood insurance issue.
• At a May 2008 hearing, Mr. Fitzgibbon, a junior associate from the Udren Firm, initially attempted to have requests for admission (RFAs) concerning the Taylors' alleged lack of payments deemed admitted, despite having learned that HSBC had received payments contrary to the RFAs.

Procedural Posture:

• Niles C. and Angela J. Taylor filed for Chapter 13 bankruptcy in the United States Bankruptcy Court for the Eastern District of Pennsylvania.
• HSBC, a creditor, filed a proof of claim and subsequently filed a motion for relief from the automatic stay.
• The Taylors filed an objection to HSBC's proof of claim.
• Following hearings in May and June 2008, the bankruptcy court, on its own initiative (sua sponte), entered an order directing Mr. Fitzgibbon, Lorraine Doyle, Mark J. Udren, and others to appear and give testimony concerning potential sanctions under Federal Rule of Bankruptcy Procedure 9011.
• After conducting four days of sanctions hearings, the bankruptcy court found Fitzgibbon, Doyle, Mark J. Udren, the Udren Law Firm, and HSBC had violated Rule 9011 and imposed various non-monetary sanctions.
• Mark J. Udren, Lorraine Doyle, and the Udren Law Firm (but not HSBC) appealed the bankruptcy court's sanctions order to the United States District Court for the Eastern District of Pennsylvania.
• The District Court reversed the bankruptcy court's sanctions order in its entirety, overturning sanctions against Doyle, Udren, the Udren Firm, and, sua sponte, HSBC.
• The United States Trustee, Region 3, appealed the District Court's decision to the United States Court of Appeals for the Third Circuit.