United States Court of Appeals
For the First Circuit
No. 09-1806
IN RE: JACALYN S. NOSEK
Debtor.
__________
AMERIQUEST MORTGAGE COMPANY,
Appellant,
v.
JACALYN S. NOSEK,
Nominal Appellee.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. William G. Young, U.S. District Judge]
Before
Boudin, Circuit Judge,
Souter,* Associate Justice,
and Howard, Circuit Judge.
William F. Sheehan with whom Daniel M. Glosband, Richard A.
Oetheimer and Goodwin Procter LLP were on brief for appellant.
June 14, 2010
*
The Hon. David H. Souter, Associate Justice (Ret.) of the
Supreme Court of the United States, sitting by designation.
BOUDIN, Circuit Judge. This case is an appeal from a
$250,000 sanction issued sua sponte by a bankruptcy judge against
Ameriquest Mortgage Co. In late 1997, Ameriquest provided a loan
to Jacalyn Nosek in the amount of $90,000, and it took back a
mortgage in that amount on her home in Massachusetts. Ameriquest
subsequently assigned the mortgage to a securitization trust for
which Norwest Bank, Minnesota, N.A., acted as trustee. Under the
assignment's terms, Ameriquest remained obligated to service the
loan and continued to deal with Nosek in this capacity until it
assigned that task to another entity in March 2005.1
During 2000, Nosek began to fall behind in her payments.
Norwest began a foreclosure action against her in Massachusetts
Land Court, identifying her as the subject of the mortgage "given
. . . to Ameriquest . . . and now held by the plaintiff [Norwest]
by assignment." Nosek then petitioned for bankruptcy, but this
petition was dismissed, as was a second petition filed in early
2002. A third was filed in October 2002 and served on both Norwest
1
Ameriquest's practices appear to have been less than
exemplary. Eventually it agreed to pay a very large settlement to
dispose of state investigations into its practices and announced it
would be closing its retail offices. See Mortgage Lender to
Consolidate, Associated Press, May 3, 2006, available at
http://www.nytimes.com/2006/05/03/business/03quest.html (last
visited June 2, 2010); Ameriquest to Pay $325 Million in a
Settlement Over Lending, N.Y. Times, Jan. 21, 2006, available at
http://www.nytimes.com/2006/01/21/business/21lend.html (last
visited June 2, 2010).
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(listed as holding the mortgage) and Ameriquest (listed beneath as
"Representing: Norwest Bank Minnesota").
Ameriquest filed a proof of claim in its own name and, in
February 2003, moved for relief from automatic stay, 11 U.S.C. §
362(a) (2006), stating in its motion that it was "the holder of a
first mortgage" on the debtor's property. Under its service
agreement with Norwest, Ameriquest arguably had power to file the
proof of claim and to seek relief from the stay in its own name;2
but Ameriquest did not then hold the mortgage and did not identify
in its motion the source of its authority to act for Norwest. Of
course, Ameriquest's records should have led it to reveal that it
was now merely an agent; but so, too, Nosek had been told of and
acknowledged the assignment. Mistakes in records and memory do
occur, and there has been no proof of bad faith on either side.
In December 2004, Nosek countered with an adversary
proceeding in the bankruptcy court alleging, among other things,
that Ameriquest had mishandled accounting for her mortgage payments
during her bankruptcy. The bankruptcy court awarded her $250,000
in damages for emotional distress, was reversed on appeal by the
2
Suits by servicers acting on behalf of holders are
commonplace. See, e.g., Reusser v. Wachovia Bank, N.A., 525 F.3d
855, 857, 861 (9th Cir. 2008); Bankers Trust (Del.) v. 236 Beltway
Inv., 865 F. Supp. 1186, 1191 (E.D. Va. 1994); In re Woodberry, 383
B.R. 373, 379 (Bankr. D.S.C. 2008); Greer v. O'Dell (In re O'Dell),
268 B.R. 607, 610-11, 618 (N.D. Ala. 2001), aff'd, 305 F.3d 1297,
1302-03 (11th Cir. 2002); Twomey, Deciphering Mortgage Proofs of
Claim, 27 Am. Bankr. Inst. J. 1, 52 (Nov. 2008).
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district court, Ameriquest Mortgage Co. v. Nosek (In re Nosek), 354
B.R. 331, 334, 340 (D. Mass. 2006), and on remand awarded the same
damages on another theory, adding $500,000 in punitive damages,
Ameriquest Mortgage Co. v. Nosek (In re Nosek), 363 B.R. 643, 648-
49 (Bankr. D. Mass. 2007). The district court upheld this judgment
and was later reversed. Ameriquest Mortgage Co. v. Nosek (In re
Nosek), 544 F.3d 34, 42, 49-50 (1st Cir. 2008).
Before Nosek's judgment against Ameriquest was undone by
this court, Nosek, on July 27, 2007, filed a separate lawsuit in
bankruptcy court against Ameriquest seeking to collect on her
$750,000 judgment. In response, Ameriquest filed an affidavit
stating that it did not hold the mortgage. Counsel for Nosek
stated at a hearing shortly thereafter that the affidavit was the
first time that Ameriquest had disclosed that it was acting as an
agent and was not in fact the holder of the mortgage. This is so
only in the literal sense that Norwest's role as the holder by
assignment had been disclosed much earlier by Norwest itself rather
than Ameriquest.
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 for misrepresenting
during the Nosek bankruptcy proceedings that Ameriquest was the
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holder of the mortgage.3 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, 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.
Federal Rule of Bankruptcy Procedure 9011(b)(3) provides
that
[b]y presenting to the court . . . a petition,
pleading, written motion, or other paper, an
attorney or unrepresented party is certifying
3
The bankruptcy court took issue with several filings,
including Ameriquest's 2003 proof of claim, which attached the note
and mortgage without any reference to the assignment and failed to
include a copy of Ameriquest's power of attorney. Pleadings filed
elsewhere in the course of litigation were similarly flawed: for
example, a pleading filed in 2003 stated that Ameriquest was "the
holder of [Nosek's] first mortgage," and an answer it filed in 2005
admitted the allegation made by Nosek that Ameriquest was the
holder of her mortgage.
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that to the best of the person's knowledge,
information, and belief, formed after an
inquiry reasonable under the circumstances, .
. . the allegations and other factual
contentions have evidentiary support or, if
specifically so identified, are likely to have
evidentiary support after a reasonable
opportunity for further investigation or
discovery . . . .
If the court determines that a violation of this provision has
occurred after issuing a show cause order, "the court may . . .
impose an appropriate sanction upon the attorneys, law firms, or
parties that have violated [it] or are responsible for its
violation." Fed. R. Bankr. P. 9011(c).
Ameriquest more or less admits that it violated Rule
9011, acknowledging in its brief "that its Proof of Claim and
Motion for Relief from Stay should have done more to describe its
representative capacity," but it argues that the $250,000 sanction
was unreasonable. Although the bankruptcy judge has broad
discretion in setting sanctions, Jamo v. Katahdin Fed. Credit Union
(In re Jamo), 283 F.3d 392, 403 (1st Cir. 2002), deference "is not
to be confused with automatic acquiescence," United States v. One
1987 BMW 325, 985 F.2d 655, 657 (1st Cir. 1993), and (among other
reasons for reversal) a reviewing court can find a sanction
unreasonable in itself or in amount.4
4
Abuse of discretion may be found when "a relevant factor
deserving of significant weight is overlooked, or when an improper
factor is accorded significant weight, or when the court considers
the appropriate mix of factors, but commits a palpable error of
judgment in calibrating the decisional scales." United States v.
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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
Roberts, 978 F.2d 17, 21 (1st Cir. 1992).
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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)
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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).
Further, the bankruptcy court has not identified any
actual prejudice from the inaccurate claim of holder status, nor
has Nosek done so. In Nosek's separate 2007 law suit seeking to
collect her (later vacated) damage award against Ameriquest, it
could well have mattered whether Ameriquest was or was not the
holder of the mortgage.5 But Nosek eventually amended her
complaint so as to include Norwest, mitigating any risk that the
funds could escape capture. And, in the end, the damages judgment
was vacated by this court so Ameriquest's delayed revelation had no
ultimate consequence.
There are indications elsewhere that Ameriquest's record
has been less than exemplary (see note 1, above) but the sanction
did not purport to rest on any overall pattern, but merely on the
claims of ownership of Nosak's mortgage, admittedly repeated but
still the same error. Ameriquest's delay in acknowledging that
Norwest was the mortgage owner could in certain scenarios have
caused prejudice to Nosek in attempting to recover damages for the
5
In that suit Nosek sought to attach mortgage payments owed to
Norwest but flowing through Ameriquest, and this request made it in
Ameriquest's interest to correct the error: as a servicer,
Ameriquest held no interest in the mortgage payments it collected
for Norwest, and those payments could not be reached to satisfy the
judgment that ran against Ameriquest.
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alleged mishandling of payments; but in fact the award was itself
vacated. In any event, the justification for a sanction here
rested on deterrence.
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. The
bankruptcy judge who imposed the sanction and was familiar with the
matter is no longer on the bench, precluding a remand to allow the
judge who actually presided to re-calibrate the sanction. We
modify the sanction award against Ameriquest to $5,000, taking
account of legal fees now incurred on two appeals, and otherwise
affirm.
It is so ordered.
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