I know we make it look like it, but practicing law is never that easy. And you may also not believe that lawyers are held to ethical standards (you know the whole lawyers are sharks joke), but we are. Lawyers can be sanctioned for violating ethical rules and rules of professional conduct. A recent bankruptcy case out of the United States Court of Appeals for the Third Circuit finds creditor’s attorneys being sanctioned under Federal Rule of Bankruptcy Procedure 9011. This rule requires bankruptcy lawyers, when making representations to a court, to certify that “the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support.” Lawyers must comply with this by making a reasonable inquiry. Basically, what this means is that we, as lawyers, have a duty to make sure we investigate what we allege to the Court and do our best to reasonably conclude and certify that our assertions are supported.
In the Third Circuit case, In re Taylor, the issue revolved around a Motion for Relief filed by the Debtors’ mortgage company, HSBC. What happens when a bankruptcy is filed is that an automatic stay of protection goes into place. This prevents any creditor from purusing collection of its debt, including through a foreclosure. However, a creditor can request that the Court relieve them of the automatic stay to allow them to proceed with collection actions. This happens with secured creditors (i.e. mortgage and vehicle lenders) when a debtor falls into deafult on his/her loan. Essentially, it is giving the secured creditor the ability to protect its collateral. In Taylor, attorneys for HSBC filed a Motion for Relief and alleged nearly one year of missed mortgage payments. The Motion also stated that there was no equity in the property and that the home was of inconsequential value to the bankruptcy estate.
I have seen many of these motions, and I will let you know that this is standard boilerplate language used in every one of them. Usually, I never question these statements. I generally assume the attorneys at the big firms know what they are doing. Taylor tells us that sometimes they do not, and that Debtors attorneys should pay close attention to the documentation provided to support these Motions for Relief. Here, the Debtors were making payments, but there was a dispute over flood insurance that HSBC was adding to their monthly payment. The Debtors were simply omitting this from their payment because it was in dispute. The attorneys for HSBC in this case were using an automated system that generated certain “facts” to be used when filing a Motion for Relief. The Motion was typically then written by a non-lawyer, and as the Third Circuit Judge put it, “proofread” by the attorney. None of the “facts” were questioned or discussed with the client, HSBC. Total reliance was placed on the automated system. When discrepencies between the facts stated in the Motion for Relief and the actual circumstances began to come to light, the Court strongly questioned whether the attorneys for HSBC had followed their Rule 9011 duties. The attorneys never determined that the Debtors had made payments, nor did they disclose the existence of any partial payments. They also did not investigate the value of the property to determine if it actually had any equity.
The end result was sanctions for the attorneys invovled and a lesson for all attorneys, but particularly bankruptcy attorneys. This case made me particularly aware that I have a duty to question the Motions for Relief I see come across my desk. In order to adequatelty represent clients, we need to question the assertions made in the Motions for Relief and the supporting documents provided. It is important that we have our clients provide documentation that would refute the assertion of default, even if it is proof of only partial payments. We cannot rely on other attorneys to be doing their job adequately.