Wednesday, June 23, 2010

In Re Noesk

In the now infamous In re Nosek action, the U.S. Court of Appeals for the First Circuit recently held that a sanction imposed under Bankruptcy Rule 9011 against the mortgage loan servicer in the amount of $250,000 was unreasonable where the mortgage loan servicer incorrectly stated in a filing that it was the holder of the note.

Ameriquest originated a loan to the borrower in this action, which it then assigned to an asset securitization trust for which Norwest Bank acted as trustee. When the borrower defaulted, Norwest filed a foreclosure action that was eventually stayed by the borrower’s bankruptcy. In the bankruptcy action, Ameriquest filed a proof of claim in its own name and moved for relief from the stay. Ameriquest’s motion incorrectly stated that it was the “holder of the first mortgage” on the debtor’s property when, in fact, Norwest was the holder.

When the mistake was revealed by a later filing, the bankruptcy court, sua sponte, imposed a fine of $650,000 in Rule 9011 sanctions against Ameriquest, Norwest and Ameriquest’s counsel. Ameriquest appealed to challenge the $250,000 in sanctions that were assessed against Ameriquest individually.

Ameriquest admitted that it violated Rule 9011 but contended that the sanctions were unreasonable. The First Circuit agreed with Ameriquest, finding the sanctions excessive.

First, the appellate court held that, “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.”

In addition to being neither intentional nor self-serving, the First Circuit also held that, “the bankruptcy court has not identified any actual prejudice from the inaccurate claim.” The First Circuit determined that while the mistake by Ameriquest could have been consequential in some cases, in this matter the false statement had no effect in this case.

The First Circuit therefore reduced the $250,000 sanction to $5,000 after taking into account legal fees incurred on appeal.