UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF LOUISIANA

Transcription

1 UNITED STATES BANKRUPTCY COURT EASTERN DISTRICT OF LOUISIANA In re: RON WILSON, LaRHONDA WILSON, Debtors. CASE NO Section A CHAPTER 13 MEMORANDUM OF LAW IN SUPPORT OF UNITED STATES TRUSTEE S MOTION FOR SANCTIONS AGAINST LENDER PROCESSING SERVICES, INC. AND THE BOLES LAW FIRM TO THE HONORABLE ELIZABETH W. MAGNER: The United States Trustee for Region 5 ( United States Trustee ) files is memorandum of law ( Memorandum ) in support of his motion for sanctions under e Court s inherent power to sanction bad fai conduct and 11 U.S.C. 105(a) ( Motion ). The Motion seeks sanctions against e respondents, Lender Processing Services, Inc., f/k/a Fidelity National Information Services, Inc. ( Fidelity ) and The Boles Law Firm ( Boles ). I. SUMMARY OF ARGUMENT 1 During e course of e Court s sua sponte show-cause proceedings in is case 2 3 Fidelity and Boles materially misled is Court as to eir knowledge of post-petition mortgage 1 The show cause proceedings ( OSC proceeding ) have been conducted pursuant to is Court s show cause Orders of May 9, 2008; July 11, 2008; and July 18, Fidelity appeared in e OSC proceeding and at e August 21, 2008 hearing rough its counsel of record and its auorized representative, Dory Goebel. 3 Boles made statements rough D. Clay Wirtz, an attorney at e firm. The bankruptcy rules contemplate at absent extraordinary circumstances, a law firm shall be held jointly 1

2 payments made by e debtors, Ron and LaRhonda Wilson. Boles misrepresented why ose payments came to be in its possession. Fidelity made materially untruful statements to is Court concerning its knowledge of and its role in communicating about e posting of ose payments. Additionally, Fidelity materially misrepresented its role, denying at it functioned as a go between in is case, between Boles and e mortgage servicer. This conduct must be sanctioned to ensure e efficient administration of justice and to protect e bankruptcy system. Untruful statements made in bankruptcy proceedings undermine e integrity of e bankruptcy process. The bankruptcy system relies on e candor and accuracy of information presented by all parties, creditors and debtors alike. To ensure candor before is Court and to protect e integrity of e bankruptcy system, is Court should impose on Fidelity and Boles monetary sanctions and oer non-monetary relief as is Court deems appropriate pursuant to its inherent auority to sanction abusive litigants coming before e Court, and pursuant to 11 U.S.C. 105(a). II. JURISDICTION This Court has jurisdiction over is matter pursuant to 28 U.S.C. 157 and 1334; 11 U.S.C. 105 (a); Fed.R.Bankr.P. 9014; and is Court s inherent auority. This is a core proceeding pursuant to 28 U.S.C. 157(b)(2)(A). Venue is proper and consistent wi 28 U.S.C because e instant case is being administered in is District. responsible for violations committed by its partners, associates, and employees. See Fed.R.Bankr.P. 9011(c)(1)(A) (concerning written representations). This standard is particularly appropriate in is case, where Boles employees, oer an its attorneys appearing in Court, had relevant communications and possessed knowledge which was not revealed to e Court during e OSC proceeding. 2

3 III. STANDING OF THE UNITED STATES TRUSTEE The United States Trustee has standing to raise issues and be heard in is matter pursuant to 11 U.S.C. 307 and 28 U.S.C The Bankruptcy Code provides at e United States Trustee may raise and may be heard on any issue in any case or proceeding under [title 11] U.S.C Section 586 of Title 28 contains an additional grant of auority auorizing e United States Trustee to, inter alia, supervise e administration of cases and trustees in cases under chapter 7, 11, 12, 13, or 15 of title 11 by, whenever e United States Trustee considers it to be appropriate... monitoring e progress of cases under title 11 and taking such actions as e United States trustee deems to be appropriate to prevent undue delay in such progress. 28 U.S.C. 528(3)(G). The United States Trustee assists in protecting e public interest and ensuring at bankruptcy cases are conducted according to law. In re Revco, Inc., 898 F.2d 498, 499 (6 Cir. 1990). United States Trustees also supervise e administration of chapter 13 bankruptcy cases. 28 U.S.C. 586 (a)(3)(a)-(h). When Congress granted e United States Trustee broad statutory standing under 11 U.S.C. 307 and 28 U.S.C. 586, it intended to create an enforcer[] of e bankruptcy laws [who would bring] proceedings in e bankruptcy courts in particular cases in which particular action taken or proposed to be taken deviate[d] from e standards established by e... bankruptcy code. In re: A-1 Trash Pickup, Inc., 802 F.2d 774, 775 (4 Cir. 1986) quoting, H.Rep.No. 989, 95 Cong., 2d Sess. at 88 (brackets in original). Hence, Congress expects e United States Trustee to actively oversee e administration of bankruptcy cases and to intervene whenever particular actions reaten[] an abuse of e bankruptcy system or its procedures. A-1 Trash, 802 F.2d at The standing conferred by 307 of e 3

4 Bankruptcy Code is broad, and is intended to allow e United States Trustee to protect e public interest by aiding bankruptcy judges and monitoring certain aspects of bankruptcy proceedings. In re Countrywide Home Loans, Inc. 384 B.R. 373, 389 (Bankr. W.D. Pa. 2008) rd (quoting United Artists Theatre Co. v. Walton, 315 F.3d 217, 225 (3 Cir. 2003)); see also Walton v. Countrywide Home Loans, Inc., 2009 WL (S.D. Fla. 2009) (reversing bankruptcy court and holding United States Trustee had standing to bring action for sanctions for abusive bankruptcy practices by mortgage servicer). Therefore, e United States Trustee has standing to seek sanctions for e alleged abusive conduct in is case. IV. BACKGROUND LEADING UP TO THE COURT S ORDER TO SHOW CAUSE PROCEEDING The OSC proceedings centered on e March 10, 2008 Motion to Lift Stay ( 2d MFR ) filed by Boles on behalf of Option One Mortgage Corporation, n/k/a Sand Canyon Corporation 4 ( Option ). Dkt. # 20. Boles supported e 2d MFR wi an Affidavit of Debt signed by Dory Goebel (e Goebel Affidavit ), a Fidelity officer and employee, claiming to act as an officer of Option. Id. Boles attorney Wirtz signed e 2d MFR. The 2d MFR alleged at e debtors had failed to make four post-petition payments. 5 On March 31, 2008, e debtors filed a Response to e 2d MFR, asserting at ey were completely current and had made each and every payment owed to Option. Dkt. # 24. The 4 st Option filed its first Motion to Lift Stay ( 1 MFR ) in Wilson on January 7, The st st Court, however, summarily denied e 1 MFR because e 1 MFR did not comply wi local procedures requiring submission of an affidavit. See Order entered February 8, 2008, Dkt. # The 2d MFR itself indicated at e debtors had not made e required payments for December 1, 2007 rough March 1, The Goebel Affidavit, which e Court found to be false, was internally contradictory in indicating at e account was past-due for e November 1, 2007 payment ( 6) and e December 1, 2007 payment (spreadsheet). 4

5 debtors submitted documentation at a hearing on April 8, 2008 concerning all payments at ey had made. Dkt. # 25. The Court ordered Option and e debtors to exchange payment records, 6 and reset e hearing for April 22, Option did not provide sufficient payment records by at date. April 22, 2008 Tr. 8: The Court entered an Order to show cause requiring Wirtz; a representative of Option; and Goebel to appear in person before e Court on June 26, Dkt. # 30; and April 22, 2008 Tr. 5: At e June 26, 2008 show cause hearing, Wirtz appeared, but neier Goebel nor a representative of Option appeared. The Court determined based on e record at e debtors had made every payment due to Option and deemed e debtors to be current on eir postpetition obligations. June 26, 2008 Tr. 46: The Court furer found e Goebel Affidavit to be false. Id. at 35:16-36:5. The Court jointly sanctioned Goebel and Option $5,000 for filing e false Goebel Affidavit, and e Court additionally jointly sanctioned Goebel and Option $5,000 for failing to appear or timely seek a continuance of e hearing. July 11, 2008 Order, Dkt. # 46; and see June 26, 2008 Tr. 45:16-47:1 (discussing untimely continuance request). The Court furer ordered Goebel and a representative of Option to appear on August 21, 2008 to provide furer explanation about e amount due on e debtors mortgage. Id. Finally, e 6 Dkt. # 26; and Transcript of April 8, 2008 hearing, 5: The Court conducted oer hearings wi respect to e 2d MFR (on April 22, 2008) and OSC proceeding (on June 26, 2008; August 21, 2008; and November 21, 2008). Hereinafter, ose transcripts are referred to respectively as April 8, 2008 Tr. Page:Line; April 22, 2008 Tr. Page:Line; June 26, 2008 Tr. Page:Line; August 21, 2008 Tr. Page:Line; and November 21, 2008 Tr. Page:Line. 7 That same day, June 26, 2008, Goebel was present in an Ohio bankruptcy court on two OSC s issued by e Ohio court concerning affidavits signed by Goebel. 5

6 Court sanctioned Wirtz $1,000 for failing to amend or widraw e 2d MFR once he became aware of e debtors payments at Option had received but not disclosed. Id. The United States Trustee participated in e August 21, 2008 OSC hearing. At e hearing, Goebel and Option representative Arur Simmons ( Simmons ) testified. Due to conflicting and insufficient information, e Court continued e OSC proceeding to permit e United States Trustee to pursue discovery. August 21, 2008 Tr. 264:13-267:15. V. BOTH FIDELITY AND BOLES, WHO HAD KNOWLEDGE OF THE DEBTORS MORTGAGE PAYMENTS THAT OPTION DID NOT POST, MISREPRESENTED TO THE COURT INFORMATION KNOWN TO THEM ABOUT THE STATUS OF PAYMENTS The payments addressed by is Motion were made after December 20, 2007 (date of MFR referral) and before April 22, 2008 (date e Court determined to enter a rule to show cause). During at time frame, Option received four monly payments from e debtors. Option, ough, did not post or credit ree of ose payments to e debtors account. The dates of ose payments received but not posted by Option are: January 2, 2008; January 31, 2008; and March 3, 2008, hereinafter, e Unposted Payments. 8 8 The dates referenced are e dates upon which Option received each of e Unposted Payments. Upon information and belief, Option received: on January 2, 2008, personal check # 1151, in e amount of $1,546.84; on January 31, 2008, cashier s check # in e amount of $1, and simultaneously received personal check # 1180 in e amount of $ (and personal check # 1181 in e amount of $312.00, apparently payment of late fees); and on March 3, 2008, cashier s check # in e amount of $1, (and personal check # 1207 in e amount of $77.33, apparently payment of late fees). 6

7 A. What Boles told e Court about its knowledge of e debtors post-petition mortgage payments At e June 26, 2008 hearing, e Court queried about e failure of e 2d MFR to reference e Unposted Payments. During e hearing, e Court explored potential causes (such as Option s standard operating procedure or, alternatively, Option s inadvertence) for Option s failure to advise Boles about its receipt of post-petition payments. Wirtz responded for Boles: In is particular case e way - - e only way at we found out, my law firm found out at ere were additional payments made is when we received em in e mail wi a letter which was from Option One [interjection by court] - - stating at, you know, e funds [were] insufficient to bring [e] plan current or bring.... June 26, 2008 Tr. 31:22-32:3. Later in e hearing, e Court summarized its understanding: Now, granted ey didn t tell you a lot of oer facts at made it [e Affidavit] also incorrect.... Id. at 37:3-5. [T]he affidavit didn t disclose at ose funds existed and now all of a sudden ey ve popped into your office. Id. at 39:24-40:1. In each exchange wi e Court, Wirtz did not indicate at Boles knew about e Unposted Payments prior to eir receipt. Raer, Wirtz left e impression at e Unposted Payments arrived at Boles office via unanticipated correspondence from Option at some point. B. What Fidelity told e Court about its knowledge of payments Goebel, an employee and officer of Fidelity, testified on August 21, 2008 at e OSC hearing. She testified concerning e procedures at she used for confirming e contents of an affidavit prior to signing. She indicated she would review ree screens of information: e post- 7

8 petition date due; any payment amount changes; and total amount due. August 21, 2008 Tr. 61:13-15; 64:1-3; and 66:6-13. She was questioned concerning Fidelity s role wi respect to post-referral payments, i.e., received after e MFR referral had been made to Boles. In response to questioning by e Court, Goebel testified at Option would not apprise Fidelity, on a daily or real-time basis, of Option s receipt of funds. August 21, 2008 Tr. 78:16-79:17. Goebel offered, No, we don t [interjection by e court] work wi Option One on eir postings. Id., 79:8-11. Goebel furer testified on e specific issue of wheer Fidelity communicated wi counsel concerning post-referral payments from borrowers. Goebel testified at Fidelity would not have communicated wi e Boles law firm regarding post-referral payments; raer, Option was responsible for notifying its counsel directly about such payments. Goebel furer testified at she reviewed e Wilson file, and at were no communications between Fidelity and Boles regarding e Unposted Payments because [n]o, at is not e responsibility of Fidelity. We would not know of additional payments, Option One would. August 21, 2008 Tr. 110:18-111:5. Goebel s testimony us portrayed at Fidelity would not even know at a borrower s post-referral payment had been received unless Option posted e payment on Option s accounting system; and at Fidelity would not communicate wi Option s counsel about payments received. However, Goebel s testimony simply does not comport wi e evidence e United States Trustee has obtained from Option, Fidelity, and Boles rough discovery. 8

9 C. Bo Fidelity and Boles had knowledge about e Unposted Payments which ey misrepresented to is Court As demonstrated below, e evidence establishes at bo Boles and Fidelity had knowledge about e Unposted Payments which ey misrepresented to e Court. Upon information and belief, Fidelity and Boles played an integral role in communicating about ose very payments, participating in queries about how to handle e Unposted Payments. Wirtz s statements to is Court materially distorted e true picture of Boles knowledge about e Unposted Payments. Upon information and belief, e evidence will show e following: at Boles knew about e first two Unposted Payments before Goebel signed e Affidavit; at Boles knew of all ree Unposted Payments before filing e 2d MFR; at Boles knew about e Unposted Payments because posting instructions had been sought from it wi respect to each payment; at Boles instructed at each Unposted Payment be sent to it; and at Option had sent all ree of e Unposted Payments to Boles prior to Boles having filed e 2d MFR. Boles, us, received e Unposted Payments because Boles instructed at e Unposted Payments should be sent to it. Boles receipt of e Unposted Payment, us, was not unanticipated or inexplicable, per e impression left by Wirtz. The Court should impute Wirtz s misrepresentation to Boles. See November 21, 2008 Tr. 78:15-16 (Boles counsel accepting at Wirtz s actions are imputed to our law firm ). Furer, e evidence obtained rough e United States Trustee s discovery contradicts Fidelity s assertions at it had no knowledge of and did not communicate wi Boles regarding e Unposted Payments. Upon information and belief, a formal policy and procedure existed, involving Option, Fidelity, and Option s attorney, concerning e processing of post-referral 9

10 payments. Upon information and belief, pursuant to at procedure, Option would alert at it had received funds post-mfr referral. In turn, Fidelity was to notify Option s attorney at funds had been received. Option s representative, Arur Simmons, testified at e August 21, 2008 OSC hearing concerning Boles and Fidelity s roles regarding e Unposted Payments. Simmons testimony corroborated e existence of an applicable policy and procedure for processing such payments. Simmons referred to Option s policy concerning e processing of payments at came in after e loan had been referred out for a Motion for Relief. August 21, 2008 Tr. 135:9-17. Simmons concisely described e policy and procedure is way: We send an to Fidelity [after a mortgage payment comes in to Option]. Fidelity in turn contacts our attorney, and our attorney makes a decision on wheer we should post a payment or not post a payment. Id. at 136:2-13. The testimony from Simmons, us, corroborates e referenced policy and procedure. Additionally, documentary evidence of Fidelity s communications wi Boles about each of e Unposted Payments corroborates Simmons basic explanation: a payment would be received by Option; Option would ask Fidelity what it should do wi e payment; Fidelity would in turn ask Boles what to do; and Boles would respond wi instructions which were 9 ultimately received by Option. 9 The United States Trustee has been unable to verify, rough discovery during e OSC proceeding, at Fidelity relayed to Option e advice from Boles. As e documentary evidence shows, Fidelity posed queries to Boles as to what should be done wi each Unposted Payment, and Boles responded to Fidelity s query. Option en acted in conformance wi e advice Boles rendered. By some means, Option had access to Boles instructions in response to Fidelity s queries, wheer directly from Fidelity or oerwise. 10

11 In connection wi each of e ree Unposted Payments, us, Boles and Fidelity misrepresented material information about eir knowledge. Boles receipt of each Unposted Payment was not a surprise or unanticipated; raer, Boles instructed at each be sent to it. Boles gave instructions as to e first two Unposted Payments before e Goebel Affidavit was signed; and as to all ree before e 2d MFR was filed. Contrary to Goebel s testimony before is Court, Fidelity had actual knowledge of each Unposted Payment shortly after each was received by Option. Indeed, Fidelity knew of e first two before Goebel signed her Affidavit; and Fidelity knew of all ree before e 2d MFR was filed. Fidelity furer sought direction from Boles on behalf of Option as to what should be done wi each Unposted Payment. VI. FIDELITY MISREPRESENTED ITS ROLE IN THIS CASE AS A GO BETWEEN Fidelity voluntarily appeared and requested to be heard at e August 21, 2008 show cause proceedings before is Court to clarify Fidelity s limited role and limited actions relating to e Debtors in is case. See Dkt. # 43 at para. 1. At e August 21, 2008 hearing, Fidelity took e affirmative position at its basic role in is case was as a conduit and storage of information between Option and Boles, and as a library of information. August 21, 2008 Tr. 14:5-24; and 41:7-9 (Goebel adopting counsel s description at Fidelity houses information and functions as kind of a storage library ). Fidelity also disclosed at in is case it provided an employee (Dory Goebel) to execute Option s affidavit of debt and at it also provided some oer services among Boles, Fidelity and Option, including time-monitoring, billing, and communication services. 11

12 As noted supra, Goebel, Fidelity s representative, testified at Fidelity would not have ordinarily communicated wi Boles and Option regarding payments at had not posted; and at per her review before testifying, e file indicated no such communications had occurred. August 21, 2008 Tr. at 110:18-111:5. Goebel, when questioned by Fidelity s counsel to clarify Fidelity s role, testified on re-direct as follows: Q. [by Mr. Cash]. And I ink ere was a question asked, and I don t remember who asked it, but it was: And if Option One got a payment and ey notified you, en would you notify e lawyer to stop? Fidelity isn t a go between, are ey? A. No. Q. Option One uses our system, like e Verizon network, e guy wi ose friends in e helicopter, ey use our network to communicate directly wi eir lawyer, is at correct? A. Correct. August 21, 2008 Tr. at 112:2-10 Goebel s testimony, at Fidelity did not function as a go between, was wiout factual basis. To e contrary, documentary evidence demonstrates at Fidelity indeed functioned as a go between for Option and Boles concerning e posting of payments. Fidelity s contractual obligations to Option as contained in e parties default services agreement dated January 23, 2006 (e DS Agreement ), required Fidelity to substantially manage e services provided by local counsel to Option, including litigation services in 10 standard proceedings. Read in context, e DS Agreement makes clear at Fidelity, not 10 The default services agreement states at Option itself is required to manage litigation matters outside e normal scope of standard proceedings. DS Agreement, Appendix A, Pt. II. Presumably, erefore, Fidelity is tasked wi managing litigation matters inside e normal scope of standard proceedings. Such a reading of e agreement is consistent 12

13 Option, was tasked wi managing e motions for relief filed in e Wilson case once Option referred e case to Fidelity for set-up of e Bankruptcy Work Station. Furer, communications obtained rough discovery establish Fidelity s role as a go between and manager. For example, e debtors contentions (described supra, at ey had made all post-petition payments owed to Option) came to e attention of a Boles paralegal, Terrie Jones. Upon information and belief, on February 6, 2008, Jones raised a BK Payment Research/Dispute Issue (e Payment Dispute ). Jones apparently sought a reconciliation of e payments at Option had received. On February 15, 2008, a Fidelity employee responded to Jones. Over e next irteen days, Fidelity and Boles exchanged communications about e status of payments. On February 28, 2008, Fidelity, not Option, closed Boles Payment Dispute issue. Fidelity instructed Jones to refer to PAYMENT RESEARCH dated 2/28/08. Option s communication notes log for e Wilson file indicates at Fidelity employees made a number of entries indicating communications wi Boles regarding e Unposted Payments. Indeed, documents produced in discovery indicate at Fidelity, not Option, initiated contact wi Boles concerning every one of e Unposted Payments; and at e only wi e intent at Option One desires to enhance its overall servicing capabilities by capitalizing on Fidelity s expertise in managing defaulted and bankrupt loans as well as e cost efficiencies Fidelity delivers rough its management expertise... DS Agreement at pg. 1, The Payment Dispute was closed by Fidelity on e same day at Goebel executed e Affidavit of Debt accompanying e 2d MFR. 12 It is unknown what e PAYMENT RESEARCH document is. Possibly, it is e spreadsheet dated 2/28/08, attached to Goebel s Affidavit. If so, at PAYMENT RESEARCH document may accurately summarize which payments were posted to Option s bankruptcy accounting software. Documents produced in discovery, ough, do not indicate at Option or Fidelity Boles ever answered Jones ultimate query from February 6, 2008, concerning wheer payments had been received at had not posted. 13

14 communication at Option initiated wi Boles concerning em was creating cover letters to accompany e Unposted Payments when delivered to Boles. The evidence shows at, contrary 13 to its representations to is Court, Fidelity was in fact a go between for Option and Boles. VII. FIDELITY AND BOLES SHOULD BE SANCTIONED PURSUANT TO THIS COURT S INHERENT POWERS TO PREVENT MISCONDUCT AND UNDER 11 U.S.C. 105 TO PREVENT ABUSE OF PROCESS A. The Court s Auority to Sanction It is well established at e federal courts, including bankruptcy courts, possess e inherent powers necessary to sanction litigants for misconduct occurring before e Court. Chambers v. NASCO, Inc., 501 U.S. 32, 45-48; see also In re Evergreen Security, Ltd. 570 F.3d 1257, 1263 (11 Cir. 2009)(noting at bankruptcy courts are federal courts at have e inherent power to sanction); In re Yorkshire, LLC, 540 F.3d 328, 332 (5 Cir. 2008) (affirming sanctions under bankruptcy court s inherent powers). Furer, e fact at conduct may arguably fall afoul of, or be governed by, oer rules and statutes does deprive a court of its inherent power to sanction bad fai conduct. Chambers, 501 U.S. at To invoke its inherent powers, a court must find at e party being sanctioned acted in bad fai. Yorkshire, 540 F.3d at 332 (citing Elliot v. Tilton, 64 F.3d 213, 217 (5 Cir. 1995)); see also Fink v. Gomez, 239 F.3d 989, (9 Cir. 2001) (reckless statements made to e court coupled wi an improper purpose, such as e manipulation of proceedings, was tantamount to bad fai and sufficient to impose sanctions under court s inherent auority). The Fif Circuit has affirmed a bankruptcy court s 13 At least one oer court has found at Fidelity s involvement goes beyond passing data rough eir automated system. In re Taylor, 407 B.R. 618, 650 (Bankr. E.D. Pa. 2009) rev d on oer grounds by In re Taylor, No. 09-CV-2479-JF, 2010 WL (E.D. Pa. 2010) rd appeal docketed No (3 Cir. April 24, 2010). 14

15 power to issue monetary sanctions if e sanction is what is sufficient to deter repetition of such 14 conduct by oers similarly situated. Yorkshire, 540 F.3d at Under e circumstances presented here, a monetary sanction cannot be considered 15 criminal contempt. At least one circuit has recognized at ere is a difference between e exercise of contempt auority, and e exercise of inherent auority. In re Dyer, 322 F.3d 1178, 1196 (9 Cir. 2003) ( The inherent sanction auority allows a bankruptcy court to deter and provide compensation for a broad range of improper litigation tactics. ). Had Fidelity and Boles made representations to e Court which were lacking in factual support in written papers, ere is no question at sanctions would be appropriate and auorized by Fed.R. Bankr. P. 9011(b)(3). A monetary penalty is specifically auorized by Fed. R. Bankr. P. 9011(c)(2). The key difference in is case is at Fidelity and Boles made eir representations in open court, raer an in written pleadings. The sanction for making representations about factual matters 14 The bankruptcy court in Yorkshire specifically looked to Rule 9011(c) for guidance on imposing sanctions under e court s inherent powers and rejected e notion at an award of attorneys fees was e sole remedy available. In re TAGT, L.P., 393 B.R. 143, 154 (Bankr. S.D. Tex. 2006) aff d sub nom. In re Yorkshire LLC, 540 F.3d 328 (5 Cir. 2008). Rule 9011(c)(2) permits e imposition of monetary sanctions limited to what is sufficient to deter repetition of such conduct or comparable conduct by oers similarly situated. 15 Furer, e United States Trustee notes at offending conduct occurred in e presence of e Court. The Supreme Court has recognized at e traditional criminal/civil contempt distinction does not apply when e offending conduct occurs in e presence of e court. International Union, United Mine Workers of America v. Bagwell 512 U.S. 821, 827 n.2 (1994). While a bankruptcy court does not have e power to issue criminal contempt sanctions for indirect contempt, e Fif Circuit has not addressed wheer bankruptcy courts retain e power to sanction for direct contempt. Matter of Hipp, Inc., 895 F.2d 1503, 1509 (5 Cir. 1990). ( We conclude e bankruptcy court lacks such power [of criminal contempt], at least as to contempts not committed in (or near) its presence.... )(emphasis added). Additionally, e Second Circuit has held at a serious criminal contempt requiring a trial by jury occurs upon e imposition of fine on a corporation exceeding $100,000. U.S. v. Twentie Century Fox Film nd Corp. 882 F.2d 656 (2 Cir. 1989). 15

16 which tend to mislead e Court should be no different if e misrepresentations were made in a written pleading, or in open court. In fact, e harm is actually greater if such false representations are made in open court, as ere is less opportunity for e parties and e Court to ensure at a miscarriage of justice does not occur based on ose false representations. 16 Furer, pursuant to section 105(a), is court may issue any order, process, or judgment at is necessary or appropriate to carry out e provisions of is title... or mak[e] any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process. 11 U.S.C. 105(a). Section 105(a) has granted broad auority to bankruptcy courts. Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365, 375 (2007). This Court is entitled to exercise at auority at its discretion. In re Sadkin, 36 F.3d 473, (5 Cir. 1994) (section 105(a) provides equitable powers for e bankruptcy court to use at its discretion ). It is well established at section 105(a) may be invoked to protect e bankruptcy process from abuse. See Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348, 356 n. 1 (5 Cir. 2008) (noting at section 105 is available to discipline parties who attempt to abuse e procedural mechanisms wi e bankruptcy court ); see also Walton v. LaBarge (In re Clark), 223 F.3d 859, 864 (8 Cir. 1999); In e Matter of Volpert, 110 F.3d 494, 500 (7 Cir. 1997); Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, (9 Cir. 1996); Jones v. Bank of Sante Fe (In re Courtesy Inns, Ltd. Inc.), 40 F.3d 1084, Rule 9011 provides a 20 day safe harbor in which a party may widraw e challenged written representations, unless ey are contained in e bankruptcy petition. If e challenged paper is widrawn, it would not be considered by e court in its decision making process. However, ere can be no safe harbor for untruful statements made in open court, because e harm at results is likely to be immediate. 16

17 17 (10 Cir. 1994). Section 105(a), for example, is an appropriate tool to sanction testimony given before a bankruptcy court at lacked candor or was at least inconsistent wi prior testimony. See In re Morgan, 573 F.3d 615, (8 Cir. 2009) (affirming bankruptcy court s termination of a Chapter 13 trustee under 105(a) in all cases pending before e court). It is unnecessary at is Court make a bad fai finding to invoke section 105(a). In re Stewart, F.Supp.2d, 2009 WL , *13 (E.D.La. 2009) ( The Fif Circuit has never so explicitly held at a bankruptcy court is required to find fraud or bad fai before exercising its auority under section 105). B. Fidelity s and Boles Conduct Warrant e Imposition of Sanctions In is case, remedial sanctions, including a monetary fine, should be ordered to deter such future conduct by similarly situated parties. Fidelity and Boles misled is Court in regard to e Unposted Payments. The bankruptcy system requires at creditors, eir agents and attorneys exercise a degree of candor wi is court necessary for e swift adjudication of claims required by e bankruptcy code and rules. The United States Trustee asserts at Boles and Fidelity should be sanctioned for eir 18 misrepresentations made in open court during e OSC proceeding. The Court made plain e 17 It is true at a bankruptcy court s equitable auority must be exercised in a manner at is consistent wi e Bankruptcy Code. In re Oxford Management, Inc., 4 F.3d 1329, 1334 (5 Cir. 1993). As one court observed, however, e scope of at restriction should not be exaggerated to e point at which bankruptcy courts feel powerless to act unless a party can present a specific textual quotation which precisely identifies e availability of a specific remedy. In re Barron, 264 B.R. 833, 844 (Bankr. E.D. Tex. 2001). 18 The United States Trustee asserts at sanctions are sought herein only as to Fidelity s and Boles misrepresentations made during e course of e OSC proceedings. The United States Trustee takes no position wi regard to wheer Fidelity and Boles should be separately sanctioned for eir respective roles in e filing of e 2d MFR supported by e false Goebel 17

18 importance of determining why e Unposted Payments were not disclosed in e 2d MFR. The Court indicated at such determination would equip e Court to understand e system or process at led to a materially inaccurate motion for relief being filed. The Court noted at it had no desire to write procedures for e parties to follow; however, e Court pointed out at it could enjoin certain actions of e parties if such was necessary to protect e integrity of e bankruptcy process. November 21, 2008 Tr Boles and Fidelity impeded e Court s inquiry. Their representatives made statements in open court tending to misrepresent vital information about eir roles. If Boles succeeded, e Court might have viewed Boles as less culpable. Boles, rough Wirtz s statements, left e impression at it played no role in e decision at it should receive and hold e Unposted Payments. In fact, just e opposite was true. Boles advised at Option should send e payments to Boles. Option acted consistent wi e advice at Boles rendered. Likewise, Fidelity s assertions at its role was limited and Goebel s testimony tended to limit or downplay Fidelity s responsibility. Goebel claimed at, in verifying affidavits, protocol was for her to access compartmentalized information (post-petition date due; payment change; and total due). Goebel furer testified at Fidelity would not know of payments not posted nor communicate about em wi Option s counsel. If Fidelity did not know about e Unposted Payments, much less communicate about em, en Fidelity would seem less responsible for e execution and filing of e false Goebel Affidavit. Just e opposite was true. Wi respect to e Unposted Payments, Fidelity communicated wi Boles to determine wheer ose payments should be posted. Fidelity functioned as more an a mere storage library ; it Affidavit. Such matter is wiin e Court s discretion in e context of e OSC proceeding. 18

19 played an integral role in communicating about e Unposted Payments. Fidelity, indeed, functioned as a go between for Boles and Option, and Fidelity had direct knowledge regarding e two Unposted Payments at had been made by e date its employee executed e false affidavit in support of e 2d MFR. Boles and Fidelity acted in bad fai in presenting positions to is Court at were not well grounded in fact. Their conduct needlessly protracted e litigation in is case, including causing mons of discovery supervised by e Court to obtain e tru. Therefore, sanctions tailored to deter such conduct in e future are clearly warranted. WHEREFORE, e United States Trustee requests at e Court: 1. Grant e Motion and enter an order imposing on e respondents sanctions or oer monetary or non-monetary relief as is Court deems appropriate. 2. Grant e United States Trustee such additional general relief to which e United States Trustee may be entitled including e award of attorney s fees and costs as may be allowed by law. Respectfully submitted, R. MICHAEL BOLEN United States Trustee Region 5, Judicial Districts of Louisiana and Mississippi by: s/ Mary Langston MARY LANGSTON (22818) Assistant U.S. Trustee 400 Poydras Street, Suite 2110 New Orleans, LA Telephone no. (504) Direct telephone no. (504) Facsimile no. (504)

20 SEAN M. HAYNES (TN # 14881) LR 11.2 Trial Attorney Admitted pro hac vice Office of United States Trustee 200 Jefferson Avenue, Suite 400 Memphis, TN Telephone no. (901) Direct telephone no. (901) Facsimile no. (901)