A federal bankruptcy imposed sanctions against two mortgage companies and their attorneys for making misrepresentations as to which party was the true holder of the mortgage and note. Decisions such as the one in In re Nosek resonate with particular significance as the mortgage crisis continues to have widespread ramifications.  

On Nov. 25, 1995, the debtor executed a note (the “Note”) and mortgage (“Mortgage”) on her principal residence in favor of Ameriquest Mortgage Company (“Ameriquest”). On Nov. 30, 1997, Ameriquest assigned the Note and Mortgage to Norwest Bank Minnesota, NA (“Norwest”). On May 22, 2000, the Note and Mortgage were recorded. On March 31, 2005, Ameriquest assigned the majority of the servicing rights on the Note and Mortgage, and retained certain limited servicing rights on behalf of Norwest.  

On Oct. 2, 2002 (the “Petition Date”), the debtor filed a petition under chapter 13 of the Bankruptcy Code. Following the Petition Date, Ameriquest represented to the court on numerous occasions, both orally and in written filings, that it was the holder of the Note and Mortgage. Specifically, Ameriquest filed a proof of claim, a motion for relief from stay, defended an adversary proceeding, and at all times maintained that it was the holder of the Note and Mortgage.  

It was only on Jan. 9, 2008, and in a response in opposition to a filing in a pending adversary proceeding, that Ameriquest first informed the bankruptcy court that it was not the holder of the Note and Mortgage.  

Following this disclosure, the bankruptcy court issued an Order to Show Cause to show why sanctions should not be imposed against Ameriquest, Norwest, and the attorneys and law firms that represented them for misrepresenting to the court that Ameriquest was the holder of the Note and Mortgage.  

Intention Irrelevant

The parties named in the Order to Show Cause each filed written responses in which all stated that sanctions were not appropriate because (i) no party intended to mislead the bankruptcy court; (ii) the debtor and her attorney knew that Ameriquest did not hold the Note and, therefore, she was not harmed; (iii) notes and mortgages frequently are sold and it is difficult to know which party actually holds a particular note and mortgage at any point in time; and (iv) a Pooling and Servicing Agreement entered in conjunction with the Note and Mortgage allowed Ameriquest to take certain actions in its own name.  

In determining whether sanctions were appropriate in this instance, the bankruptcy court noted that Fed.R.Bankr.P. Rule 9011(b) (“Rule 9011”) requires that an attorney who signs a pleading or other filing with the court is, among other things, certifying that the allegations set forth therein have evidentiary support or are likely to have evidentiary support after a reasonable opportunity for further discovery. The purpose of Rule 9011 is to deter baseless filings and avoid unnecessary expenditure of resources.  

Rule 9011 does not require the signer to aver an absolute guaranty of accuracy, and permits representations to be based on the signer’s best knowledge, information and belief after a reasonable inquiry. Whether a party performed a reasonable inquiry is an objective standard, and a court should determine if a reasonable attorney in like circumstances could believe his actions to be factually and legally justified. If a court finds that Rule 9011 has been violated, sanctions may be imposed.  

Based on the above applicable standard, the court found that sanctions were appropriate. Because the standard to be applied is objective, the parties’ contention that they did not intend to mislead the court was irrelevant. Similarly, the court found the argument that the debtor knew or should have known that the identity of the holder of the Note and Mortgage was disingenuous since the parties simultaneously argued that they had no way of knowing about the assignment.  

Creditor’s Responsibility

Further, the court found the argument that the lender should be excused because notes and mortgages frequently change hands multiple times similarly was unpersuasive. Such reasoning seemed to place a higher standard on a debtor to be aware of which party holds the mortgage than either the creditors or their counsel. The court concluded it is the creditor’s responsibility to keep a borrower and the court informed as to which party owns a note and mortgage and is servicing the loan, not the borrower’s or court’s responsibility to ferret out the truth.

The bankruptcy court also held that mortgage holders that utilize servicers have a responsibility to oversee and review actions taken by their servicers. Norwest failed to properly monitor the actions of Ameriquest and, as such, the court found that sanctions against both Ameriquest and Norwest and their respective counsel were justified.  

The case is a precautionary tale for creditors, to ensure they closely track their transactions and represent their status accurately to the courts.