Opinion
Case No. 99-30279
February 13, 2004.
ORDER FOR SANCTIONS AGAINST ATTORNEYS AND SANCTIONS AGAINST PARTY WELLS FARGO HOME MORTGAGE
On November 25, 2003, debtors moved for sanctions under F.R.Bankr.P. 9011 against the law firm of Cooper Christensen ("CC") of Las Vegas, Nevada, seeking attorneys' fees in an amount to deter repetition of the alleged unlawful conduct and expenses. During the first hearing on debtors' motion on December 4, 2003, debtors sought to charge the client of the law firm, Wells Fargo Home Mortgage, Inc. ("WFHM") as also culpable under the rule and the court's inherent power under 11 U.S.C. § 105. The matter was continued to allow WFHM to respond. No objection was made to the enlargement of the scope of issues and bringing in the client for the purpose of determining sanctions, not only under F.R.Bankr.P. 9011, but also under 11 U.S.C. § 105. CC, as counsel for WFHM, asked for a continuance and stated that a representative of WFHM would be used to defend against sanctions. The matter came on for hearing under both the rule and the enlarged powers on February 5, 2004.
I. FACTS
(a) The Motion for Relief from the Automatic Stay.
This chapter 13 case was filed January 2, 1999. Debtors owned real property in Sparks, Nevada, on which there was a residential loan secured by a first deed of trust held by Weyerhauser Mortgage which was first assigned to Norwest Mortgage and thereafter to WFHM. The plan was confirmed requiring payment to WFHM outside the plan.
On November 11, 2000, CC filed a motion for relief from the stay on behalf of WFHM. Debtors opposed the motion in writing November 28, 2000, alleging they were current on all payments. The motion was withdrawn on December 5, 2000, before the hearing date.
A second motion to lift the stay was filed July 11, 2003, by CC alleging that debtors were in default three monthly payments "May through July 2003" plus claims for late charges, attorneys' fees and expenses. The motion was set for hearing August 5, 2003. The matter was continued to September 16, 2003, and on the latter date continued to October 14, 2003, for an evidentiary hearing.
While the second motion was pending correspondence between Geoffrey Giles, attorney for debtors, and Michael Chen of the firm of CC representing WFHM, showed that the delinquency claim was not for May-July 2003, but rather for two other months (September 2001 and December 2002). Chen asked for proof of payment stating in a letter of August 4, 2003:
Please find enclosed a post-petition payment summary for the above loan. As you can see, your client missed the September 2001 and December 2002 regular monthly mortgage payments. The arrears has never been cured, and your client has been 2 months in arrears since December 2002. Since the subsequent payments have been applied to the earliest due dates your client is currently in arrears for the months of July and August 2003. Please make arrangements to cure these arrears including the attorney's fees (in full or over a standard six month period), or contact me if you have proof of unaccounted for payments.
On September 17, 2003, debtors provided copies of the two requested checks which establish payment for the claimed months of delinquency. Chen wrote on September 8, 2003, requiring proof that one of the checks "was negotiated" and evidence that "my client indeed cashed the check."
Debtors thereafter on September 19, 2003, submitted proof of front and back of the questioned check and the motion to lift the stay was withdrawn October 13, 2003, by notice to the clerk of this court. Chen testified that he had advised Giles' office of the withdrawal by leaving a message on "voice mail" on the previous Friday, October 10th, but Giles denied that his office received such message. Giles was in court with both debtors on October 14, 2003, and was then told that the WFHM motion had been withdrawn.
CC wrote a fax notifying Giles of the withdrawal on October 10th, but failed to sent it until October 14th.
Debtors had made all payments; many were made late but always included late payment charges.
(b) Overcharging by WFHM.
Debtors make their payments by check at the Reno office of WFHM. On each occasion debtors receive a receipt. Making the November, 2002, payment on November 25 (payment due on first of each month), the wife debtor tendered a check for $1,550, which included a late charge and received a receipt for $1,500. Complaining to WFHM the next day after returning home and finding the receipt incorrect, debtors were required to pay another $50 to receive a corrected receipt. Debtors then paid $50 and received another receipt for the additional $50.
This prior improper conduct of WFHM is not considered a ground for the present motion for sanctions.
(c) Statements from WFHM.
After withdrawing the motion to lift the stay and conceding debtors were current, WFHM sent an "Information" statement to debtors dated November 12, 2003, showing late charges due of $2,089.23, with payment due totally of $5,163.37. WFHM's records show that it was holding payments in a "suspense account" and computed a late charge each time before transferring to credit the payment.
(d) Debtors' Rule 9011 Motion.
On September 17, 2003, debtors had proceeded under F.R.Bankr.P. 9011 requesting counsel for WFHM to vacate the lift stay motion in light of the fact they were not delinquent as alleged in the motion as well as evidence of payment of September 2001 and December 2002, which proof was requested in Chen's letter of August 4, 2003. There was no response until an October 13, 2003 call to the clerk, about 25 days later. On October 14, 2003, the date of the hearing, the court gave leave to debtors to file the motion.
(e) Attorneys' Fees and Expenses.
Attorney Giles was required to spend time in defense of the motion, appear in court and proceed with sanctions. Debtors have incurred loss of time from work (wife debtor working for herself $125 per day for two days to attend court and husband debtor, a bakery delivery man, $150 per day for one day to attend to the motion and court). Debtor wife suffers from various ailments which were exacerbated by the distress of the motions to vacate the stay, the refusal to correct the receipt for $50 and the billing of obligation over $5,000 after the debtors showed they were current and the motion withdrawn.
II. ISSUES
The issues now before the court are:
1. Are attorneys' fees in order for debtors' attorney by reason of the conduct of CC in failing to withdraw the motion to lift the stay within 21 days of notice under F.R.Bankr.P. 9011 where the moving attorneys concede that debtors had furnished proof of being current on their payments and the client so advised the attorney on October 8, 2003.
2. Are the debtors entitled to damages for loss of time and stress because of (a) failure to withdraw the motion to lift the stay; (b) required to pay $1,600 for a receipt for $1,550; and (c) told that after the motion to lift the stay was withdrawn that they still owed more than $5,000.
3. Should WFHM be sanctioned for (a) responsibility of the incorrect allegation in the motion to lift the stay that the delinquency was for "May through July" (b) failure to credit the debtors with payments which it received; (c) assessing late charges against debtors for in house delays in transferring payments from "suspense" to credit; and (d) informing debtors that they owed $5,163.37 for various items including late charges after the motion to lift the stay was withdrawn.
III. AS TO SANCTIONS AGAINST ATTORNEYS
The pertinent part of Rule 9011 provides:
(b) Representations to the court. By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person's knowledge, information, and belief, formed after an inquiry reasonable under the circumstances, —
(3) 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;
The motion to vacate the stay made the allegation that "May through July" payments were delinquent. Without amending the motion it was subsequently contended that two months, September 2001 and December 2002, were delinquent. It seems clear that the allegations of the motion had no evidentiary support. A mixup or accounting which was incorrect was evidently discovered after the motion was filed. But even though it was conceded the debtors were current on September 17, 2003, it is stated in the WFHM brief (pp. 1 1):
Thereafter on September 17, 2003, the debtor provided a front and back copy of a substantial amount of proof of payments to counsel for secured creditor. Immediately thereafter, local counsel submitted the proofs to immediate counsel for secured creditor (a law firm in Texas) for research. Prior to the last scheduled hearing with the research as yet uncompleted, and upon authorization to withdraw the motion for relief in the meantime, the motion was withdrawn on or about October 13, 2003.
The foregoing statement in CC's brief tells the court that there was no evidentiary support for the precise allegations in the motion; it was a client error; that when the claims of delinquency for other months surfaced the motion was not amended; that when proof of current payments was produced in September by debtors, CC did not, within the 21 days notice of intention to move for sanctions, withdraw the motion.
There is no question that fees and costs may be allowed as a sanction when a motion is made and served giving the opposing attorneys 21 days to withdraw a pleading and it is not withdrawn. F.R.Bankr.P. 9011(c). On September 17, 2003, debtors' attorney furnished unequivocal proof that his clients did not owe WFHM any money and followed the rules advising that if the motion to lift the stay was not withdrawn in 21 days he would file the motion. The motion to lift the stay was withdrawn after the elapse of 25 days. The moving attorneys were advised by WFHM on October 8, 2003, that the account was current. There was no merit to their motion to lift the stay because they had reviewed proof of payment September 17, 2003, and the one check they questioned, after unreasonable delay, was cleared up on October 8, 2003. Yet they failed to notify the withdrawal until a later date beyond 21 days without specific notification so as to as to save debtors and their attorney from attending court on the date set for hearing.
Moving attorneys must accept blame for not amending the motion when they learned their client had given them the wrong information and for not properly acting in response to the proposed motion for sanctions. In argument, it was conceded that debtors' attorney had been put to services and time that could have been avoided by CC's attention to the facts and the notice. Debtors' attorney argues that he spent $10,000 in time and costs; there is no exhibit record of the time and costs, but it appears from the correspondence, the pleadings and court appearances that a reasonable fee can be determined on the record.
CC argues that the notice of withdrawal was made albeit a few days after lapse of the 21 days under the rule. The rule is very forgiving, but when there is no evidentiary support for a motion to lift the stay and that was ascertained after reasonable inquiry, it is not excusable to pursue a debtor by failing to promptly and within the reasonable time provided in the rule, withdraw the offending pleading.
CC cites In re Sheret d/b/a Twin Pines Sport Shop, 76 B.R. 935 (D.Ct. W.D.N.Y. 1987). In that case the motion to lift stay alleged three delinquent payments. One had been paid before the motion was filed. The bankruptcy court sanctioned the secured creditor, but the district court reversed upon ground that "the pleading as a whole was well grounded" and "there is no indication in the record the Reliance's motion was interposed for vexatious or improper purposes."
Here, the allegation of the motion to lift the stay was incorrect; never amended, and, even after proof of payment, the attorneys kept debtors on tenterhooks.
From the record it is clear that attorneys' fees are in order for time taken for correspondence, client review, pleading for withdrawal and court appearances. Debtors' counsel has also appeared and briefed for the hearings on sanctions. A sanction of fee of $4,500 attorneys' fees should be awarded against CC.
IV. AS TO DEBTORS' EXPENSES
The record is clear that debtors have lost time from work and suffered stress from the way CC and WFHM handled the motion to lift the stay. Not only the foot dragging of time from September 17, 2003, until the morning of October 14, 2003, but the unmitigated temerity of thereafter notifying them that the debt was still unpaid. Such "information" was stressful and together with the total disregard of the motion for sanctions after inquiry showed payments current debtors are entitled to attorneys' fees and expenses. Debtors' expenses consist of lost time from work, two days for debtor wife and one day for debtor husband, making a total of $400.00 to be paid by CC.
Rule 9011(1)(A) provides in part:
If warranted, the court may award to the party prevailing on the motion the reasonable expenses and attorneys' fees in presenting or opposing the motion.
By reason of the severe limitations of the rule no stress damages for debtors may be allowed but would be certainly justified.
V. AS TO SANCTIONS AGAINST WFHM
In re Rainbow Magazine, 77 F.3d 278 (9th Cir. 1996) the court authorized sanctions under Section 105(a) against an individual who was not a party. Hence it follows that a bankruptcy court may sanction a party. The Ninth Circuit held that there is not only the right to sanction under Rule 9011, but that there is inherent authority to sanction under 11 U.S.C. § 105 for egregious conduct. Under the facts of this case, the conduct of WFHM was egregious. Courts cannot manage their affairs with incorrect allegations and debtors do not deserve to be treated with total disregard for their rights and feelings.
The broad range of the Rainbow case has been undermined by the case of In re Dyer, 322 F.3d 1178 (9th Cir. 2003). There it is held that punitive damages may not be awarded in a bankruptcy case except under 11 U.S.C. § 362(h) and there is no power to award punitive damages under Rule 9011 or Section 105(a). "The imposition of a sanction under Section 105 dovetails with the threshold standard for awarding damages under Section 362(h)." There must be a finding of willfulness to violate the Code; the conduct must be intentional. The conduct of WFHM was not a willful and intentional violation of the automatic stay so as to require a punitive award, but it was conduct that reflects bad faith and total disregard of accuracy, proper accounting, alertness to the rules and disregard of affirmative duties. An award against WFHM is not in order under Section 105(a) as a civil contempt for disobeying an order of the court but it is eminently clear that a sanction is in order under Rule 9011 to deter repetition of the conduct of WFHM. That conduct consists of making a representation in the motion to lift the stay that the allegations of deficiency (May-July) had evidentiary support, continuing the claim of deficiency for other months after proof of payment and relentlessly pursuing debtors by stressful information that the account was delinquent based upon in house manipulation of their account. Beginning with the unsupported allegation in the motion to lift the stay there is a continuing effort to hold debtors' feet to the fire by unwarranted refusal to amend, to act properly and pursuit even after withdrawal.
Rule 9011 also provides in part that the allegations of pleading has evidentiary support "or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery." There was no evidentiary support for the identified months of delinquency alleged in the motion; nor for the two substituted months claimed thereafter; nor basis for the subsequent notice of "Information" of late charges and delinquency.
This national mortgage company has shown complete disregard for their duty to borrowers. Their records did not support the allegations of the motion to lift the stay. The records showed that they arbitrarily kept payments in a suspense account and accumulated late charges which were not justified. Their attorneys did not produce any defense saying only WFHM was willing to waive all late charges shown on their books. They had no excuse whatsoever for the audacity of the "Information" that debtors still owed over $5,000 after the motion had been withdrawn. There is no justification for any of these things: wrong records, failing to respond after three weeks notice and proof of payment, continuing to harass by "Information" notice and then "waiving" their own manipulation of payments. A sanction of $25,000 to be paid to the clerk's office is in order against WFHM. It is hoped that this sanction will be sufficient to deter repetition of such conduct.
Let judgment be entered accordingly.
JUDGMENT AWARDING ATTORNEYS' FEES AND COST AS A SANCTION AGAINST COOPER-CHRISTENSEN LAW FIRM AND SANCTION AGAINST WELLS FARGO HOME MORTGAGE
Debtors having moved pursuant to F.R.Bankr.P. 9011 for sanctions and the court having held hearings on December 4, 2003 and February 5, 2004, and having considered all of the evidence both oral and written and having made findings of fact and concluded that sanctions should be awarded against Cooper Christensen law firm of Las Vegas and its client, Wells Fargo Home Mortgage, and rendered opinion for violation of said rule in this case, and good cause appearing, IT IS ORDERED THAT:
1. Paul Willard and Julie Willard, the debtors herein, be awarded $4,500 in attorneys' fees for their attorney, Geoffrey Giles, Esq., and $400 costs against the Cooper-Christensen law firm of Las Vegas, Nevada; and
2. Wells Fargo Home Mortgage is hereby sanctioned for its conduct in the motion to vacate the automatic stay and ordered to pay $25,000 as a penalty to the clerk of the court pursuant to F.R.Bankr.P. 9011 to deter repetition of such conduct as comparable conduct for others similarly situated.