“Robo-Signing” Gets Sanctioned: Mortgage Foreclosure Law Firm’s Reliance on Third-Party Computer Records Does Not Amount to Reasonable Inquiry Required by Rule 11

Michael Trainor

In In Re: Niles C. Taylor, 2011 U.S. App. Lexis 17651 (March 22, 2011), the U.S. Court of Appeals for the Third Circuit considered whether two lawyers, their law firm, the managing partner of the law firm, and their client could be sanctioned for the lawyers’ decision to rely on information provided by a client’s third party computer system in pursuing creditor claims in a bankruptcy matter.

Niles and Angela Taylor filed for a Chapter 13 Bankruptcy in 2007 wherein they listed, among other things, a mortgage on their home.  The bank on the mortgage filed a proof of claim and retained counsel to seek relief from the automatic stay.   Counsel for the bank was retained through a third party computer service which assigned cases to firms who handled high-volume foreclosure work.  Relying solely on the information provided by the third party computer system and failing to take any steps to verify the accuracy of the information provided by the third party computer system with its client, the bank’s counsel filed a motion for relief so that the bank could pursue foreclosure.  The bank’s attorney also filed a response to the debtors’ objection to the bank’s proof of claim.

The proof of claim contained several errors, including a misstatement of the debtors’ monthly mortgage payment and a misstatement of the value of the debtors’ home.  Debtors subsequently provided written evidence to support the fact that the monthly payment on the proof of claim was incorrect.  Yet, despite clear evidence to the contrary, the bank’s counsel maintained in its response to the debtors’ objections that the bank’s proof of claim was accurate.  The bank’s counsel also moved for the admission into evidence of requests for admissions due to the debtors’ failure to submit timely responses.

The bankruptcy court held a hearing on the motion for relief and claim objection, during which counsel for the bank urged the court to grant relief and to admit the requests for admissions.  Counsel made these requests even though counsel had been given information to show that the motion and admissions contained falsehoods.  It was only upon probing by the court that counsel acknowledged that the debtors had made every payment on the underlying mortgage and that, therefore, the proof of claim and motion for relief were inaccurate.  The court denied counsel’s motion for the admissions to be entered into evidence, remarking that the firm and its attorneys “closed their eyes” to the fact that there was evidence that conflicted with the admissions and to evidence that proved that the assertions in the motion for relief were inaccurate.

The bankruptcy court then issued an order to show cause upon the bank and its attorneys as to why the motion, the response to the claim objection, and the requests for admissions were submitted without investigation into the proper and correct facts surrounding the debtors’ mortgage loan.  After four hearings held over several days, the bankruptcy court issued sanctions on the bank, the law firm, the managing partner of the law firm, and two individual attorneys at the firm based, in large part, on the fact that representations were made to the court without first making a reasonable inquiry as to their validity.

The law firm and its attorneys appealed the sanctions order to the District Court, which ultimately overturned the order.[1] The United States Trustee then appealed the District Court’s decision to the Third Circuit Court of Appeals, which upheld the sanctions as to the bank, the law firm and its attorneys but overturned the ruling as to the managing partner of the firm.  In maintaining its imposition of sanctions against the individual attorneys and the law firm, the court stated, in part, as follows: “We appreciate that the use of technology can save both litigants and attorneys time and money, and we do not, of course, mean to suggest that the use of a data base or even certain automated communications between counsel and client are presumptively unreasonable. However, Rule 11 requires more than a rubber-stamping of the results of an automated process by a person who happens to be a lawyer.  Where a lawyer systematically fails to take any responsibility for seeking adequate information from her client, makes representations without any factual basis because they are included in a “form pleading” she has been trained to fill out, and ignores oblivious indications that her information may be incorrect, she cannot be said to have made reasonable inquiry.”  The sanctions against the managing partner of the firm were overruled, in part, because the managing partner did not have hands on contact with the subject case or any of the incorrect filings submitted to the bankruptcy court.  The sanctions against the bank were upheld because the bank did not appeal the bankruptcy court’s original order of sanctions.

[1] Appellant United States trustee appealed an order of the District Court for the Eastern District of Pennsylvania that reversed sanctions originally imposed in a bankruptcy court on the law firm.