HSBC FORECLOSURES AND THE NEWTRAK SYSTEM
OF LENDER PROCESSING SERVICES

By Lynn E. Szymoniak, Esq., Ed. Fraud Digest,
August 26, 2011

On August 24, 2011, Circuit Judge Fuentes of the United States Third Circuit Court of Appeals, issued an opinion in a case appealing the reversal by the District Court of sanctions originally imposed in the bankruptcy court on attorneys Mark J. Urden and Lorraine Doyle, the Udren Law Firm, and HSBC for violations of Federal Rule of Bankruptcy Procedure 9011. Highlights from that opinion, particularly regarding Lender Processing Services and HSBC, are set forth below. In this decision, the Third Circuit reversed the District Court and affirmed the bankruptcy court’s imposition of sanctions with respect to Lorraine Doyle, the Udren Law Firm, and HSBC. The District Court’s decision reversing the bankruptcy court’s sanctions against attorney Mark Udren was affirmed. The appeal was taken by Acting United States Trustee Roberta A. DeAngelis, In re Nile C. Taylor, et al., Case No. 10- 2154, 3d Cir. 2011. Ultimately, the Taylors lost their home. The sanctions imposed by the Bankruptcy Court, reversed by the District Court and finally affirmed by the Circuit Court, were minimal. Doyle  was ordered to take 3 CLE credits in professional responsibility; Udren himself to be trained in the use of NewTrak and to spend a day observing his employees handling NewTrak; and both Doyle and Udren to conduct a training session for the firm’s relevant lawyers in the requirements of Rule 9011 and procedures for escalating inquiries on NewTrak. The court also required HSBC to send a copy of its opinion to
all the law firms it uses in bankruptcy proceedings, along with a letter explaining that direct contact with HSBC concerning matters relating to HSBC’s case was permissible.

The Court made the following findings:

• • HSBC does not deign to communicate directly with the firms it
  employs in its high-volume foreclosure work; rather, it uses a
  computerized system called NewTrak (provided by a third party, LPS)
  to assign individual firms discrete assignments and provide the limited
  data the system deems relevant to each assignment. The firms are
  selected and the instructions generated without any direct human
  involvement. The firms so chosen generally do not have the capacity
  to check the data (such as the amount of mortgage payment or time
  in arrears) provided to them by NewTrak and are not expected to
  communicate with other firms that may have done related work on the
  matter. Although it is technically possible for a firm hired through
  NewTrak to contact HSBC to discuss the matter on which it has been
  retained, it is clear from the record that this was discouraged and that
  some attorneys, including at least one Udren Firm attorney, did not
  believe it to be permitted. [The Udren Firm represented HSBC in this
  bankruptcy foreclosure.](Page 6-7)
  

• • LPS is also not involved in the present appeal, as the bankruptcy
  court found that it had not engaged in wrongdoing in this case.
  However, both the accuracy of its data and the ethics of its practices
  have been repeatedly called into question elsewhere. See, e.g., In re
  Wilson, 2011 WL 1337240 at 9 (Bankr. E.D.La. Apr. 7, 2011)
  (imposing sanctions after finding that LPS had issued “sham” affidavits
  and perpetrated fraud on the court); In re Thorne, 2011 WL 2470114
  (Bankr. N.D. Miss. June 16, 2011); In re Doble, 2011 WL 1465559
  (Bankr. S.D. Cal. Apr. 14, 2011). (Footnote 5, Page 6)
  

• • Doyle [the attorney from the Udren Firm representing HSBC] did
  nothing to verify the information in the motion for relief from stay
  besides check it against “screen prints” of the NewTrak information.
  She did not even access NewTrak herself. In effect, she simply
  proofread the document. It does not appear that NewTrak provided
  the Udren Firm with any information concerning the Taylors’ equity in
  their home, so Doyle could not have verified her statement in the
  motion concerning the lack of equity in any way, even against a
  “screen print.” (Page 8 )
  

• • In May 2008, the bankruptcy court held a hearing on both the motion
  for relief and the claim objection. HSBC was represented at the
  hearing by a junior associate at the Udren Firm, Mr. Fitzgibbon. At that
  hearing, Fitzgibbon ultimately admitted that, at the time the motion
  for relief from the stay was filed, HSBC had received a mortgage
  payment for November 2007, even though both the motion for stay
  and the response to the Taylors’ objection to the proof of claim stated
  otherwise.8 Despite this, Fitzgibbon urged the court to grant the relief
  from stay, because the Taylors had not responded to HSBC’s RFAs
  (which included the “admission” that the Taylors had not made
  payments from November 2007 to January 2008). It appears from the
  record that Fitzgibbon initially sought to have the RFAs admitted as
  evidence even though he knew they contained falsehoods. (Page 10)
  

• • The bankruptcy court denied the request to enter the RFAs as
  evidence, noting that the firm “closed their eyes to the fact that there
  was evidence that . . . conflicted with the very admissions that they
  asked me [to deem admitted]. They . . . had that evidence [that the
  assertions in its motion were not accurate] in [their] possession and
  [they] went ahead like [they] never saw it.” (App. 108-109.) (Page
  11)
  

• • At the next hearing, in June 2008, Fitzgibbon stated that he could
  not obtain an accounting from HSBC, though he had repeatedly placed
  requests via NewTrak. He told the court that he was literally unable to
  contact HSBC—his firm’s client—directly to verify information which
  his firm had already represented to the court that it believed to be
  true. (Page 11)
  

• • The bankruptcy court held four hearings over several days, making
  in-depth inquiries into the communications between HSBC and its
  lawyers in this case, as well as the general capabilities and limitations
  of a system like NewTrak. Ultimately, it found that the following had
  violated Rule 9011: Fitzgibbon, for pressing the motion for relief based
  on claims he knew to be untrue; Doyle, for failing to make reasonable
  inquiry concerning the representations she made in the motion for
  relief from stay and the response to the claim objection; Udren and
  the Udren Firm itself, for the conduct of its attorneys; and HSBC, for
  practices which caused the failure to adhere to Rule 9011.
  

• • Rule 9011 of the Federal Rules of Bankruptcy Procedure, the
  equivalent of Rule 11 of the Federal Rules of Civil Procedure, requires
  that parties making representations to the court certify that “the
  allegations and other factual contentions have evidentiary support or,
  if specifically so identified, are likely to have evidentiary support.” Fed.
  R. Bank. P. 9011(b)(3). A party must reach this conclusion based on
  “inquiry reasonable under the circumstances.” Fed. R. Bank. P.
  9011(b). The concern of Rule 9011 is not the truth or falsity of the
  representation in itself, but rather whether the party making the
  representation reasonably believed it at the time to have evidentiary
  support.
  

• • As an initial matter, the appellees’ insistence that Doyle’s and
  Fitzgibbon’s statements were “literally true” should not exculpate
  them from Rule 9011 sanctions. First, it should be noted that several of
  these claims were not, in fact, accurate. There was no literal truth to
  the statement in the request for relief from stay that the Taylors had
  no equity in their home. Doyle admitted that she made that statement
  simply as “part of the form pleading,” and “acknowledged having no
  knowledge of the value of the property and having made no inquiry on
  this subject.” (App. 215.) Similarly, the statement in the claim
  objection response that the figures in the original proof of claim were
  correct was false. (Page 16)
  

• • In particular, even assuming that Doyle’s and Fitzgibbon’s
  statements as to the payments made by the Taylors were literally
  accurate, they were misleading. In attempting to evaluate whether
  HSBC was justified in seeking a relief from the stay on foreclosure, the
  court needed to know that at least partial payments had been made
  and that the failure to make some of the rest of the payments was due
  to a bona fide dispute over the amount due, not simple default.
  Instead, the court was told only that the Taylors had “failed to make
  regular mortgage payments” from November 1, 2007 to January 15,
  2008, with a mysterious notation concerning a “suspense balance”
  following. (App. 214-15.) A court could only reasonably interpret this
  to mean that the Taylors simply had not made payments for the period
  specified. As the bankruptcy court found, “[f]or at best a $540 dispute,
  the Udren Firm mechanically prosecuted a motion averring a $4,367
  post-petition obligation, the aim of which was to allow HSBC to
  foreclose on [the Taylors] “house.” (App. 215.) Therefore, Doyle’s and
  Fitzgibbon’s statements in question were either false or misleading.
  (Pages 16-17)
  

• • With respect to the Taylors case in particular, Doyle ignored clear
  warning signs as to the accuracy of the data that she did receive. In
  responding to the motion for relief from stay, the Taylors submitted
  documentation indicating that they had already made at least partial
  payments for some of the months in question. In objecting to the
  proof of claim, the Taylors pointed out the inaccuracy of the mortgage
  payment listed and explained the circumstances surrounding the flood
  insurance dispute. Although Doyle certainly was not obliged to accept
  the Taylors’ claims at face value, they indisputably put her on notice
  that the matter was not as simple as it might have appeared from the
  NewTrak file. At that point, any reasonable attorney would have
  sought clarification and further documentation from her client, in order
  to correct any prior inadvertent misstatements to the court and to
  avoid any further errors. Instead, Doyle mechanically affirmed facts
  (the monthly mortgage payment) that her own prior filing with the
  court had already contradicted. (Page 20)
  

• • Doyle’s reliance on HSBC was particularly problematic because she
  was not, in fact, relying directly on HSBC. Instead, she relied on a
  computer system run by a third-party vendor. She did not know where
  the data provided by NewTrak came from. She had no capacity to
  check the data against the original documents if any of it seemed
  implausible. (Page 20)
  

• • Although the initial data the Udren Firm received was not, in itself,
  wildly implausible, it was facially inadequate. In short, then, we find
  that Doyle’s inquiry before making her representations to the
  bankruptcy court was unreasonable.
  In making this finding, we, of course, do not mean to suggest that the
  use of computerized databases is inherently inappropriate. However,
  the NewTrak system, as it was being used at the time of this case,
  permits parties at every level of the filing process to disclaim
  responsibility for inaccuracies. HSBC has handed off responsibility to a
  third- party maintainer, LPS, which, judging from the results in this
  case, has not generated particularly accurate records. LPS apparently
  regards itself as a mere conduit of information. Appellees, the
  attorneys and final link in the chain of transmission of this information
  to the court, claim reliance on NewTrak’s records. Who, precisely, can
  be held accountable if HSBC’s records are inadequately maintained,
  LPS transfers those records inaccurately into NewTrak, or a law firm
  relies on the NewTrak data without further investigation, thus leading
  to material misrepresentations to the court? It cannot be that all the
  parties involved can insulate themselves from responsibility by the use
  of such a system. (Page 21)
  

• • We also find that it was appropriate to extend sanctions to the Udren
  Firm itself. Rule 11 explicitly allows the imposition of sanctions against
  law firms…In this instance, the bankruptcy court found that the
  misrepresentations in the case arose not simply from the
  irresponsibility of individual attorneys, but from the system put in
  place at the Udren Firm, which emphasized high-volume, high-speed
  processing of foreclosures to such an extent that it led to violations of
  Rule 9011. (citations omitted)(Page 24)
  

• • We appreciate that the use of technology can save both litigants and
  attorneys time and money, and we do not, of course, mean to suggest
  that the use of databases or even certain automated communications
  between counsel and client are presumptively unreasonable. However,
  Rule 11 requires more than a rubber-stamping of the results of an
  automated process by a person who happens to be a lawyer. Where a
  lawyer systematically fails to take any responsibility for seeking
  adequate information from her client, makes representations without
  any factual basis because they are included in a “form pleading” she
  has been trained to fill out, and ignores obvious indications that her
  information may be incorrect, she cannot be said to have made
  reasonable inquiry. (Page 26)

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PRECEDENTIAL

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_____________

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In re: THOMAS L. DeSHETLER, CHERYL A. DeSHETLER, Chapter 13, Debtors.

Case No. 10-36557.

United States Bankruptcy Court, S.D. Ohio, Western Division, Dayton.

July 12, 2011.

Scott A. King, Jennifer L. Maffett, 2000 Courthouse Plaza, N.E., Dayton, Ohio, Counsel for Wells Fargo Bank, N.A.

Pamela Arndt, Office of the United States Trustee, Columbus, Ohio, Counsel for the United States Trustee.

DECISION GRANTING IN PART AND DENYING IN PART THE UNITED STATES TRUSTEE’S MOTION FOR ENTRY OF AN ORDER AUTHORIZING THE EXAMINATION OF AND REQUIRING THE PRODUCTION OF DOCUMENTS BY WELLS FARGO HOME MORTGAGE

GUY R. HUMPHREY, Bankruptcy Judge.

I. Introduction

This contested matter is before the court on the motion filed by the United States trustee^[1] seeking an order authorizing him to conduct an examination of Wells Fargo Home Mortgage, one of the nation’s largest residential mortgage lenders, pursuant to Federal Rules of Bankruptcy Procedure 2004 and 9016. Wells Fargo objects to this request.

As a backdrop to understanding this contested matter, the UST’s motion seeking to conduct a 2004 examination comes in the wake of the mortgage crisis that has gripped this nation for the last several years, highlighted by an unprecedented number of foreclosures and litigation in the bankruptcy courts concerning issues of standing and documentation.^[2] The volume of foreclosure proceedings has caused strain on mortgage servicers’ ability to process the large volume of delinquent loans encountered in the last several years. Compounding the challenges arising out of the sheer volume of the foreclosure filings is that most of these loans are syndicated, having been originated at a local level, bundled with other mortgage loans, and then sold to private investors, resulting in at least one and usually multiple transfers of the loan.^[3] Thus, the state and federal courts, particularly the bankruptcy courts, have been engulfed by the “perfect storm” arising out of the mass syndication of mortgage loans and the ensuing financial crisis.

The UST’s motion raises several issues. The threshold issue is whether the UST has the authority to conduct an examination and to compel the production of documents pursuant to Federal Rule of Bankruptcy Procedure 2004. If the UST possesses such authority, two additional issues must be addressed: 1) whether the UST has demonstrated “good cause” under Rule 2004 for this request; and 2) whether the scope of the requested examination is appropriate.

For the reasons to be discussed, the court finds that the UST has the authority to conduct an examination under Rule 2004, including the ability to compel the production of documents. The court further finds that the UST has established good cause. However, the court limits the scope of the examination to the documents related to Wells Fargo’s claim that it is the holder, or other person entitled to enforce, the promissory note that is the subject of this inquiry. Any oral examination, as limited by this decision, shall only proceed in the event that the UST determines that Wells Fargo has not produced sufficient documentation to establish that it is entitled to enforce the note and when that occurred.

II. Factual and Procedural Background

Thomas L. DeShetler and Cheryl A. DeShetler (the “Debtors”) filed a joint chapter 13 petition on October 11, 2010 (doc. 1). Wells Fargo Home Mortgage filed a proof of claim (claim 9-1) on November 19, 2010 on behalf of Well Fargo Bank, N.A.^[4] Attached to Wells Fargo’s proof of claim are copies of a mortgage granted to Washington Mutual Bank, FA (the “Mortgage”) and a promissory note payable to Washington Mutual Bank, FA endorsed in blank (the “Note”). On December 8, 2010 the court entered an order confirming the Debtors’ plan (doc. 21).

The UST filed a motion seeking to conduct a 2004 examination on December 8, 2010 (doc. 19) (the “2004 Motion”); on January 7, 2011 Wells Fargo filed an objection to the 2004 Motion (doc. 27) on February 22, 2011 the UST filed a reply (doc. 37) and on March 15, 2011 Wells Fargo filed a supplemental brief (Doc. 43) and a Request for Hearing (doc. 44), which the court granted (doc. 45). The court heard oral argument on April 13, 2011.

III. Positions of the Parties

The UST argues that he may conduct a 2004 examination because Wells Fargo’s proof of claim fails to attach documentation that Wells Fargo had standing to file its claim. In particular, the UST asserts that the Mortgage and Note attached to the proof of claim reference only Washington Mutual Bank, FA and that it is unknown whether the Note and Mortgage were ever properly assigned to Wells Fargo. To assist in determining the validity of Wells Fargo’s claim, the UST requests that Wells Fargo produce the “transactional mortgage loan history on the Debtors’ mortgage loan, along with payments for escrow advances made by Wells Fargo.” 2004 Motion, Exhibit A. The UST also requests that Wells Fargo provide evidence of the chain of assignment of the Mortgage and endorsement of the Note. Finally, the UST seeks to examine a representative of Wells Fargo regarding those documents.

In response, Wells Fargo asserts that the statutory powers granted to the UST do not include the authority to investigate and determine validity of claims based on state law rights and unilaterally increase the documentation necessary to file a valid proof of claim under Federal Rule of Bankruptcy Procedure (“BR”) 3001.^[5] Wells Fargo further argues that, assuming that the UST has the statutory powers to conduct a 2004 examination, the UST lacks good cause to request a 2004 examination because the proof of claim establishes that Wells Fargo holds the Note since a copy is attached to its proof of claim and because, under Ohio law, security follows the debt, it need not provide a copy of the assignment of the Mortgage. Finally, Wells Fargo challenges the UST’s request for a “complete loan history” as unnecessary. If the court allows the 2004 examination, Wells Fargo concludes that the scope of the document requests must be narrowed and any examination conducted at the place of employment of the individual representative who is examined.

IV. Legal Analysis

A. Jurisdiction

This court has jurisdiction pursuant to 28 U.S.C. § 1334 and General Order No. 05-02 of the United States District Court for the Southern District of Ohio, which is the general order of reference referring all bankruptcy proceedings and matters to this bankruptcy court. This is a core proceeding pursuant to 28 U.S.C. §§ 157(b)(2)(A) and (O).

B. The Role of the United States Trustee’s Program

Because Wells Fargo challenges the UST’s authority to conduct 2004 examinations, an examination of the role of the UST, including the relevant statutes, is in order.

The UST was created by the Bankruptcy Reform Act of 1978 (the “1978 Act”) as a pilot effort in select federal judicial districts of the United States to remedy the perceived institutional bias arising out of bankruptcy judges’ handling of both the judicial and administrative aspects of the bankruptcy system. H.R. Rep. No. 595, 95th Cong., 1st Sess. 100, reprinted in 1978 U.S.C.C.A.N. 5963, 6061. Under the program, the UST was appointed to take over the administrative functions previously assumed by bankruptcy judges. Id.

To implement the newly created program, the 1978 Act added a new chapter to Title 28 of the United States Code, chapter 39, which addresses, among other things, the appointment, role, and salaries of United States trustees. See 28 U.S.C. §§ 581-586(a). Section 586 sets forth a list of the duties of the UST and defines the United States Attorney General’s supervision to be exercised over these trustees. 28 U.S.C. § 586; In re Countrywide Home Loans, Inc., 384 B.R. 373, 380 (Bankr. W.D. Pa. 2008). It provides in relevant part that:

(a) Each United States trustee, within the region for which such United States trustee is appointed, shall—

(3) supervise the administration of cases and trustees in cases under chapter 7, 11, 12, 13, or 15 of title 11 by, whenever the United States trustee considers it to be appropriate—

[…]

(C) monitoring plans filed under chapters 12 and 13 of title 11 and filing with the court, in connection with hearings under sections 1224, 1229, 1324, and 1329 of such title, comments with respect to such plans;

[…]

(F) notifying the appropriate United States attorney of matters which relate to the occurrence of any action which may constitute a crime under the laws of the United States and, on the request of the United States attorney, assisting the United States attorney in carrying out prosecutions based on such action;

(G) monitoring the progress of cases under title 11 and taking such actions as the United States trustee deems to be appropriate to prevent undue delay in such progress…

28 U.S.C. § 586(a). The legislative history explains:

The Trustee in each case will be responsible for the administration of the case. The bill gives him adequate powers to accomplish what must be done, and relieves him of the necessity for applying to the court and receiving court approval for every action he proposes to take. The bill introduces the concept that the trustee may take any action necessary to the administration of the case if he notifies those parties in interest to whom notice would be appropriate under the particular circumstances . . . and provide an opportunity for a party in interest to object.

H.R. Rep. No. 595, 95th Cong., 1st Sess. 107-108, reprinted in 1978 U.S.C.C.A.N. 5963, 6069. Based on the pilot program’s success, Congress expanded the program and made it permanent through the enactment of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986 (the “1986 Act”), P.L. 99-554. See also U.S. Trustee v. Columbia Gas Sys., Inc. (In re Columbia Gas Sys. Inc.), 33 F.3d 294, 296 (3rd Cir. 1994).

As part of the 1986 Act, Congress added a new provision to the Code — 11 U.S.C. § 307. That section provides that “[t]he United States trustee may raise and may appear and be heard on any issue in any case or proceeding under this title but may not file a plan pursuant to section 1121(c) of this title” (emphasis added). The House Report explains:

The U.S. Trustee is given standing to raise, appear, and be heard on any issue in any case or proceeding under Title 11, U.S. Code-except that the U.S. Trustee may not file a plan in a Chapter 11 case. In this manner, the U.S. Trustee is given the same right to be heard as a party in interest, but retains the discretion to decide when a matter of concern to the proper administration of the bankruptcy laws should be raised.

H.R. Rep. No. 764, 99th Cong., 2d Sess. 27, reprinted in 1986 U.S.C.C.A.N. 5227, 5240.

Wells Fargo advocates a view that restricts the powers granted to the UST to those specifically enumerated in § 586 and posits that § 307 is merely an enabling provision granting the UST the standing necessary to perform his duties under § 586. The UST argues that, pursuant to his congressionally mandated role as a “watchdog” of the bankruptcy system, § 586 and § 307 confer upon him broad authority to seek and conduct 2004 examinations.

C. Rule 2004 Examinations

The UST seeks to conduct an examination of Wells Fargo pursuant to BR 2004. It provides in pertinent part as follows:

(a) Examination on motion. On motion of any party in interest, the court may order the examination of any entity.

(b) Scope of examination. The examination of an entity under this rule or of the debtor under § 343 of the Code may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge. In . . . an individual’s debt adjustment case under chapter 13 . . ., the examination may also relate to the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.

(c) Compelling attendance and production of documents. The attendance of an entity for examination and for the production of documents, whether the examination is to be conducted within or without the district in which the case is pending, may be compelled as provided in Rule 9016 for the attendance of a witness at a hearing or trial. As an officer of the court, an attorney may issue and sign a subpoena on behalf of the court for the district in which the examination is to be held if the attorney is admitted to practice in that court or in the court in which the case is pending.

* * * *

(e) Mileage. An entity other than a debtor shall not be required to attend as a witness unless lawful mileage and witness fee for one day’s attendance shall be first tendered . . . .

BR 2004.

The purpose of 2004 is to provide a tool to parties to a bankruptcy, particularly trustees, to obtain information concerning “the acts, conduct, or property” of the debtor, “the liabilities and financial condition of the debtor,” “any matter which may affect the administration of the debtor’s estate, or to the debtor’s right to a discharge,” and in a Chapter 11, 12, or 13 case, “the operation of any business and the desirability of its continuance, the source of any money or property acquired or to be acquired by the debtor for purposes of consummating a plan and the consideration given or offered therefor, and any other matter relevant to the case or to the formulation of a plan.” SeeIn re GHR Energy Corp., 35 B.R. 534, 536-38 (Bankr. Mass. 1983). See also In re Express One Int’l, Inc., 217 B.R. 215, 216 (Bankr. E.D. Tex. 1998) (The general purpose of a BR 2004 examination is to review the estate’s condition for the benefit of the rights of creditors.). BR 2004(b);

Bankruptcy courts have broad discretion in determining whether to order a 2004 examination. Bank One, Columbus NA v. Hammond (In re Hammond), 140 B.R. 197, 201 (S.D. Ohio 1992); In re Drexel Burnham Lambert Group, Inc., 123 B.R. 702, 708-09 (Bankr. S.D.N.Y. 1991); and In re Fearn, 96 B.R. 135 (Bankr. S.D. Ohio 1989). As Judge Cole noted, a 2004 examination’s scope is very broad:

It is well-established that the scope of a Rule 2004 examination is very broad and great latitude of inquiry is ordinarily permitted. The scope of examination permitted pursuant to Rule 2004 is wider than that allowed under Federal Rules of Civil Procedure and can legitimately be in the nature of a “fishing expedition”. Although the primary purpose of a Rule 2004 examination is to permit a party in interest to quickly ascertain the extent and location of the estate’s assets, such examination is not limited to the debtor or his agents, but may properly extend to creditors and third parties who have had dealings with the debtor.

Id. at 137-38 (citations omitted). However, Judge Cole also noted that, while broad, the scope of Rule 2004 examinations is not “limitless.” Id. at 138. “The examination should not be so broad as to be more disruptive and costly to the party sought to be examined than beneficial to the party seeking discovery.” Id. Moreover, an examination cannot be used for purposes of abuse or harassment. Fearn, 96 B.R. at 138; In re Mittco, Inc., 44 B.R. 35, 36 (Bankr. E.D. Wisc. 1984).

The use of a 2004 examination is not permitted for matters not related to the financial condition of a debtor or a debtor’s estate. Upon a creditor objection, the examiner must establish “good cause,” taking into consideration the totality of the circumstances, including the importance of the information to the examiner and the costs and burdens on the creditor. See Countrywide Home Loans, 384 B.R. at 393. The level of good cause required to be established varies depending on the potential intrusiveness. Id., citing Fearn, 96 B.R. at 138. See also Official Cmte. Of Unsecured Creditors v. Eagle-Pitcher Indus., Inc. (In re Eagle-Pitcher Indus., Inc.), 169 B.R. 130, 134 (Bankr. S.D. Ohio 1994)Hammond, 140 B.R. at 201 (similar). (examination should not be so broad as to be more disruptive and costly to the party to be examined than beneficial to the party seeking discovery);

D. The UST Has Authority to Monitor the Bankruptcy Claims Process

Wells Fargo argues that the UST lacks the authority under § 586 to investigate the proof of claim that it filed and, therefore, no basis exists for the UST to conduct a 2004 examination. Wells Fargo argues that § 586 sets forth the specific and limited tasks which the UST may undertake and that § 307 merely provides the UST with standing to take actions related to those specific tasks. Wells Fargo asserts that investigation of proofs of claim is not one of those specific tasks.

28 U.S.C. § 586(a)(3) grants the UST broad authority to “supervise the administration of cases and trustees in cases under chapter 7, 11, 12, 13, or 15 of title 11 by, whenever the United States trustee considers it to be appropriate . . . [.]” This authority includes “monitoring the progress of cases under title 11 and taking such actions as the United States trustee deems to be appropriate to prevent undue delay in such progress[.]” 28 U.S.C. § 586(a)(3)(G). As such, the UST is charged by statute with the duty to oversee and supervise the administration of bankruptcy cases. 28 U.S.C. § 586(a). Congress has summarized the role of the UST as protector of the public interest with the responsibility to ensure that bankruptcy cases are conducted in accordance with the law. Morgenstern v. Revco D.S., Inc. (In re Revco D.S., Inc.), 898 F.2d 498, 500 (6th Cir. 1990), citing H. Rep. No. 595 at 109, reprinted in 1978 U.S.C.C.A.N. at 6070; United Artists Theatre Co. v. Walton, 315 F.3d 217, 225 (3rd Cir. 2003); U.S. Trustee v. Clark (In re Clark), 927 F.2d 793, 795 (4th Cir. 1990); In re Plaza de Diego Shopping Center, 911 F.2d 820, 824 (1st Cir. 1990); Adams v. Zarnel (In re Zarnel), 619 F.3d 156, 162 (2nd Cir. 2010).

Further, Congress has expressly given the UST standing under § 307 to raise and be heard on any issue under title 11, except that the UST may not file a chapter 11 plan. 11 U.S.C. § 307; Revco, 898 F.2d at 500; United States Trustee v. Price Waterhouse, 19 F.3d 138, 141 (3rd Cir. 1994); U.S. Trustee v. FIshback (In re Glados, Inc.), 83 F.3d 1360, 1361, n.1 (11th Cir. 1996); In re Donovan Corp., 215 F.3d 929, 930 (9th Cir. 2000); Clark, 927 F.2d at 796; Plaza de Diego Shopping Center, 911 F.2d at 824.^[6] Because of his role as representative of the public interest, the UST is not required to demonstrate any concrete pecuniary injury to exercise his standing under § 307 of the Code. Revco, 898 F.2d at 500. For example, the Sixth Circuit has held that a United States trustee had standing to appeal a bankruptcy court decision not to appoint an examiner under 1104(b)(2) because the public interest is a sufficient stake to confer standing upon the UST.^[7] Id.

Wells Fargo’s argument that § 586 circumscribes the UST’s authority under § 307 contradicts the express language of § 307. Section 307 specifically provides that “[t]he United States trustee may raise and appear and be heard on any issue in any case or proceeding under this title . . . .” 11 U.S.C. § 307 (emphasis added). In enacting § 307, Congress did not limit the issues which the United States trustees may raise to those specifically enumerated in § 586. Rather, Congress used very broad, all-inclusive language to authorize the United States trustees to raise any issue in any case or proceeding. In Countrywide, after an extensive review of the history of the UST, including the legislative history behind §§ 586 and 307, case law interpreting the powers granted to the United States trustees under those provisions, and a thorough application of traditional canons of statutory interpretation, the court concluded that:

Section 307 is written in extremely broad language. Indeed it is difficult to conceive of how section 307 could have been written in any broader language. The court has thus no difficulty concluding that the plain meaning of the power to “raise” and to “appear and be heard” as to any issue in any bankruptcy case or proceeding includes the ability to conduct examinations pursuant to Rule 2004 in the right circumstances.

Countrywide, 384 B.R. at 384. The court adopts the thorough analysis performed by the Countrywide court in concluding that the UST’s authority is not limited to the specific tasks expressly mentioned in § 586 and that the UST may conduct the requested 2004 examination in this case.

The claims process, including the filing and allowance of claims, constitutes a significant part of the bankruptcy process. Sections 501 through 511 of the Code directly address the claims process in bankruptcy cases. Other Code provisions cover varying issues relating to the determination, allowance, and treatment of claims.^[8] In addition to these Code provisions, Rules 3001 through 3014 address the claims process and claims issues in bankruptcy cases. Additional Rules cover the diverse issues relating to the determination, allowance, and treatment of claims.^[9] Section 586 is broad enough to allow the UST to monitor the claims process, including through the investigation of proofs of claim filed by creditors, to assist in his duty of monitoring the progress of cases. Issues, with proofs of claims filed by mortgage lenders, affect the administration of cases. Accordingly, monitoring the claims process falls well within the UST’s duty to monitor the progress of bankruptcy cases.

Other courts have recognized the UST’s ability to monitor the claims process in bankruptcy cases and under the broad standing accorded by § 307, to object to proofs of claim. In re Borrows, 2011 WL 721842 (Bankr. W.D. Wash. Feb. 22, 2011). In Borrows, the United States trustee filed an objection to a mortgage lender’s proof of claim. The lender, rather than responding to the substance of the objection, challenged the United States trustee’s standing to object to claims. Id. at *1. The court determined that § 307 provided standing to the United States trustee to object to a proof of claim. In so deciding, it found that § 586(3)(G) provided “specific authority for the UST to bring an objection to claim under the circumstances of this case.” Id. at *2.^[10]

Similarly, in Countrywide, the court concluded that the UST had sufficient interest to conduct a 2004 examination in connection with the UST’s challenge to Countrywide’s manner of calculating proofs of claim because “she has been charged to act as a watchdog to protect the integrity of the bankruptcy system.” Countrywide, 384 B.R. at 391, citingRevco, 898 F.2d at 500 and Eagle-Pitcher Holdings, 2005 WL 4030131, at *4 (Bankr. S.D. Ohio Aug. 26, 2005). The UST filed notices of 2004 examinations to obtain information from Countrywide in various bankruptcy cases alleging that the lender had engaged in questionable actions when filing proofs of claims. The UST sought to examine a corporate representative of Countrywide regarding “[its] bankruptcy procedures as they related to the Debtors’ financial affairs, the administration of their estate and the impact of Countrywide’s bankruptcy procedures on the integrity of the bankruptcy process in the Western District of Pennsylvania.” Countrywide, 384 B.R. at 400. The subpoena part of the request asked Countrywide to produce a variety of documents. The court rejected many of the same arguments made by Wells Fargo in this case in finding that the UST had the authority to conduct 2004 examinations relating to claims filed by Countrywide.

In addition, In re Wilson is instructive because it dealt with the UST’s on-going investigation into mortgage lenders’ filings in bankruptcy cases. 413 B.R. 330 (Bankr. E.D. La. 2009). In that case, the UST did not move for a 2004 examination but merely issued subpoenas to the mortgage lender. The court, finding “no reason to differ from the vast majority of courts on this issue” specifically adopted the reasoning in Countrywide, and allowed the UST to propound discovery on a mortgage lender in connection with allegations of improper filings by the lender pursuant to 11 U.S.C. §307 and § 105(a). Id. at 335-36. Noting that even though the UST had not sought discovery pursuant to 2004, “the preferable method for the UST to obtain the information it seeks from the [m]ovants,” the court concluded that its decision would have been the same. Id. at 336.

Perhaps most apposite to this case is the decision in In re Michalski, 449 B.R. 273 (Bankr. N.D. Ohio 2011). Wells Fargo filed a motion to quash a subpoena issued by the UST and requesting the court to reconsider an order granting a 2004 examination. The UST sought to examine records and documentation pertaining to the proof of claim which Wells Fargo filed in the debtors’ Chapter 13 case. While limiting the scope of the examination and documents to be produced, the court otherwise enforced the subpoena and denied the request to reconsider the granting of the 2004 examination. The court relied in large part on the rationale provided by Countrywide and Wilson and held that the UST had the authority “under Sections 307 and/or 586” to conduct the 2004 examination and to subpoena the documents underlying Wells Fargo’s proof of claim. Id. at 280.

Finally, another bankruptcy court rejected similar arguments made by BAC Home Loans Servicing, adopting the rationale of Countrywide, Wilson, and Michalski. The court stated: “The UST is charged to serve as a watchdog to protect the integrity of the bankruptcy system. That status compels the conclusion that Congress intended the UST to have the tools, including the ability to conduct Rule 2004 examinations and issue subpoenas, to carry out that duty. Without such authority, the UST’s role as a watchdog would be circumscribed and toothless.” In re Youk-See, ___ B.R. ___, 2011 WL 2458106, at *9 (Bankr. D. Mass. June 16, 2011).

The cases upon which Wells Fargo relies to argue that the UST’s authority under § 586 is very narrow do not alter this court’s conclusions. First, Wells Fargo cites In re Washington Mfg. Co., but that decision addressed the issue of whether a UST could intervene in an adversary proceeding under BR 7014, not the power of the UST to move for a 2004 examination. Citicorp North Amer., Inc. v. Finley (In re Washington Mfg. Co.) 123 B.R. 272, 275-76 (Bankr. M.D. Tenn. 1991). Of even greater significance, Washington Mfg. was decided prior to the Sixth Circuit’s decision in Revco.^[11]

Accordingly, the court concludes that the UST may be involved in the claims process by virtue of his duty to monitor the progress of bankruptcy cases in his role as the “public watchdog” of the system.

E. A 2004 Examination is a Tool Which the UST May Use in Exercising His Authority to Monitor the Progress of Bankruptcy Cases, Including the Claims Process

As noted, the UST has the authority under § 586 to monitor the progress of bankruptcy cases and to investigate conduct to determine if a crime has been conducted. Through § 307 Congress made the UST a party in interest to all bankruptcy cases and authorized the UST to appear in any case or proceeding and to raise any issue in any case or proceeding. The 2004 examination is a tool which Congress has given to parties in interest in bankruptcy cases to investigate matters relating to debtors’ financial condition, including to determine whether to proceed with litigation. A 2004 examination may be used by the UST to investigate proofs of claim filed in bankruptcy cases provided that the examination is otherwise appropriate under Rule 2004. Accordingly, the court will now address whether the UST’s requests in this case meet the requirements of Rule 2004.

F. The Requirements and Limits of Rule 2004 Examinations Applied to the UST’s Request

1. Standing: The UST Has Standing To Pursue a Rule 2004 Examination

For the reasons discussed, the UST has standing pursuant to 28 U.S.C. § 586 and § 307 to pursue a 2004 examination.

2. Good Cause: The UST Has Established Good Cause for Conducting a 2004 Examination

Wells Fargo argues that the UST does not have the necessary good cause to conduct a 2004 examination. Wells Fargo explains that “[a] UST is not vested with the power to independently investigate and determine the validity of claims based on state law rights and, in the process, unilaterally increase the required documentation necessary for the filing of a valid proof of claim under Fed. R. Bankr. 3001.” doc. 27, p. 3. Wells Fargo further argues that “the documents attached to the Wells Fargo claim already establish its standing.” doc. 27, p. 8. The court disagrees.^[12]

Essentially, Wells Fargo’s argument is premised upon an erroneous conclusion — that attaching a copy of a promissory note asserted to be the Note executed by the Debtors conclusively establishes that it is the holder of the Note and, therefore, is entitled to enforce the rights under the Note and Mortgage. See Objection, pp. 8-11. The court does not disagree with, and the UST has conceded, the propositions that under Ohio law the holder of a promissory note may enforce the note and that the rights under a mortgage are incidental to the rights under the promissory note which it secures.^[13] However, Wells Fargo’s argument that attachment of a copy of a promissory note to a proof of claim conclusively establishes Wells Fargo’s standing to file the proof of claim is not well taken.

A properly filed proof of claim is only prima facie evidence of the validity of a claim, and the UST is entitled to verify that eligibility by requiring that original documents or other evidence of the claimant’s entitlement to file and enforce the claim be produced. 11 U.S.C. § 502(a). Wells Fargo’s argument that the UST’s request amounts to an attempt to rewrite the rules governing the documentation of proofs of claim misses the point. In seeking to verify Wells Fargo’s standing to file a proof of claim, the UST is seeking to ensure that Wells Fargo complies with the Code and the Rules and to verify that Wells Fargo is a creditor entitled to file a proof of claim under § 501 of the Code. While the UST has not yet challenged the validly of Wells Fargo’s claim by objecting to it, he is entitled to make preliminary inquiries before determining if an objection is warranted. That inquiry is exactly the purpose of a 2004 examination. As noted, the UST seeks production of the Note based on the fact that the copy of the Note affixed to Wells Fargo’s proof of claim, which Note is endorsed in blank, fails to show Wells Fargo as the holder of the Note. Wells Fargo’s ability to provide a copy of the Note does not necessarily equate to it being in possession of the original Note, much less being in its possession at the time it filed its proof of claim. Under these circumstances, the UST may seek to verify Wells Fargo’s entitlement to file the proof of claim, including review of the original Note or such other appropriate documentation to convince the UST that Wells Fargo is in possession of the original Note or otherwise was entitled to file the proof of claim.^[14] In this regard, the court notes that the Debtors’ case is an open Chapter 13 case continuing to be administered by the Chapter 13 Trustee and an objection to the claim could still be made. After conducting its 2004 examination, the UST can decide if it is appropriate to object to Wells Fargo’s proof of claim or to take other appropriate action.

Under the standards described, the UST has established good cause to conduct a 2004 examination. The Debtors’ case is open and being administered. The UST has questioned the status of Wells Fargo as the legitimate holder of the Note and Mortgage attached to Wells Fargo’s proof of claim based on the fact that neither of those documents shows Wells Fargo as the holder. Because the Note was endorsed in blank, the UST seeks production of the original Note by Wells Fargo to evidence Wells Fargo’s possession of that Note. As the recognized “watchdog” of the bankruptcy system, charged with the duties to protect its integrity and to ensure that bankruptcy cases are conducted in accordance with the law, the UST is a party in interest entitled to seek to verify the standing of claimants and their entitlement to payment. Those matters relate to the Debtors’ liabilities and financial condition and may affect the administration of their estate and the dividend paid to unsecured creditors in particular. See BR 2004(b).

Wells Fargo also suggests that a 2004 examination is inappropriate because no objection to Wells Fargo’s proof of claim has been filed, but a contested matter is not required. See Hammond, 140 B.R. at 204 (A 2004 examination is appropriate to determine whether a potential plaintiff has grounds under 11 U.S.C. § 523(d) and BR 9011 for filing an action); In re Johnson, 2007 Bankr. LEXIS 3022 (Bankr. S.D. Ohio July 23, 2007) (2004 examination is normally a pre-litigation device); In re Michalski, 449 B.R. at 281 (“[A] Rule 2004 examination is frequently used as a pre-litigation tool . . . .”); Collier on Bankruptcy, ¶ 2004.01[1]. See also In re Robinson, 2011 Bankr. LEXIS 1667 (Bankr. W.D. Tenn. April 6, 2011) (United States trustee has standing to examine the representative of the holder of an allowed secured claim when no objection has been filed with respect to the claim by the Chapter 13 Trustee or anyone else.).

Having decided that good cause exists for the UST to conduct a 2004 examination, the last issue is whether the scope of the UST’s request is appropriate.

3. The Scope of the Examination

The UST seeks to examine a Wells Fargo representative at the UST’s office in Columbus, Ohio and requests that Wells Fargo produce the following documents:

1. The actual, contemporaneously-kept transactional mortgage loan history on the Debtors’ mortgage loan, along with payments for escrow advances made by Wells Fargo Home Mortgage.

2. Evidence of the chain of assignment of the mortgage and chain of endorsement of the note which would tend to support claimant’s right to make the within claim in Debtor’s bankruptcy case.

Motion, Exhibit A, p. 9.

Wells Fargo argues that the scope of the production of documents is too broad. It explains that it should not have to produce a complete loan history as it is irrelevant to Wells Fargo’s standing to file its proof of claim, the only basis asserted by the UST for his request. In that same vein, Wells Fargo adds that an in-person examination is superfluous as the standing issue can be addressed through the production of documents.

Rule 2004(c) provides with respect to examinations that:

Compelling attendance and production of documents. The attendance of an entity for examination and for the production of documents, whether the examination is to be conducted within or without the district in which the case is pending, may be compelled as provided in Rule 9016 for the attendance of a witness at a hearing or trial. As an officer of the court, an attorney may issue and sign a subpoena on behalf of the court for the district in which the examination is to be held if the attorney is admitted to practice in that court or in the court in which the case is pending.

BR 2004(c).

In Countrywide, the court linked the good cause requirement with the scope of the examination. The court was legitimately concerned with the potential for abuse that could occur if parties were given essentially carte blanche to conduct broad, unlimited investigations resulting in unwarranted expensive burdens on private parties. The court stated:

Countrywide points out that a finding of an unchecked power in the UST to pursue examinations of creditors under Rule 2004 could lead to full-scale “investigations” by the UST that would unfairly intrude into the private business affairs of creditors and chill their participation in the bankruptcy process. That is a legitimate concern which the Court takes seriously. While the UST was undoubtedly intended to be a “watchdog” of the bankruptcy system, that cannot and should not be viewed as providing a license for the UST to engage in potentially invasive and expensive Rule 2004 discovery based on nothing more than her own curiosity. Such a license would be inimical to bedrock principles underlying the relationship between the federal government and the people (intended in the broad sense, including corporations such as Countrywide.)

Countrywide, 384 B.R. at 392 [footnote omitted]. In order to guard against over-reaching intrusions and examinations, the court applied a sliding scale approach to determine whether the United States trustee had sufficient cause to justify the scope of the examination she sought to conduct. The court continued:

The question of whether the UST has shown sufficient good cause to pursue a Rule 2004 examination and the type of discovery implicitly allowed by the Rule in a given matter is not suited to application of a mechanical test. Rather, a totality of circumstances approach is required, taking into account all relevant factors. Consistent with this approach it is appropriate to apply the “good cause” standard in what may be termed a “sliding scale” manner or balancing test. That is to say, the level of good cause required to be established by the UST before she can obtain certain documents or pursue a certain line of inquiry in a Rule 2004 examination involving a creditor will vary depending on the potential intrusiveness involved.

Id. at 393. While such factors may bear on whether good cause exists for a 2004 examination, these considerations are even more useful in determining the appropriate scope of the examination once a party establishes standing and good cause. The more compelling the cause, the greater latitude the court will allow for the 2004 examination.

In this case the UST’s cause for the examination is narrow — determining whether Wells Fargo was legally entitled to file the proof of claim. Accordingly, the scope of any examination granted should likewise be narrowly focused. In order to verify Wells Fargo’s entitlement to file a proof of claim in this case, the UST is entitled to review the original Note and any such documents that establish Wells Fargo is the holder of the Note under the Ohio Uniform Commercial Code and when Wells Fargo came into possession of the original Note. To the extent that the “contemporaneously-kept transactional mortgage loan history on the Debtors’ mortgage loan” is intended by the UST to capture documents in Wells Fargo’s possession relating to the transfer of the Note or interests in the Note from one entity to another until Wells Fargo became the holder of the Note, the request is granted and Wells Fargo shall produce such documents to the UST.^[15] In addition, the request for documents pertaining to “the chain of assignment of the mortgage and chain of endorsement of the note which would tend to support claimant’s right to make the within claim in Debtor’s bankruptcy case” is granted as those documents are clearly relevant to the UST’s inquiry into Wells Fargo’s legal basis and standing for filing the proof of claim. However, to the extent that the UST is seeking a loan history relating to the payments made by the Debtors, charges made by the lender on the account, and other debits and credits relating to the loan evidenced by the Note and Mortgage, or any documents other than the original Note and other documents pertaining to the chain of ownership interests in the Note, the UST’s request is denied. The UST is not challenging the amount of the claim filed by Wells Fargo or any other issue other than the legal basis for its filing the proof of claim and, therefore, any other such documents would unnecessarily burden Wells Fargo. Any production of documentations authorized in this decision shall occur within forty-five (45) days after entry of the court’s order on this decision unless otherwise agreed by the parties.

After the documents are produced by Wells Fargo, if the UST determines that the documents produced do not establish Wells Fargo as the person entitled to enforce the Note under Ohio law and that it had that status at the time the proof of claim was filed, then at the request of the UST, Wells Fargo shall appear for an oral examination through an appropriate representative designated by Wells Fargo to be examined concerning how Wells Fargo became the holder of the Note. Any such examination shall take place at the office of the UST nearest to the principal place of business of the representative designated by Wells Fargo to be orally examined or at such other location or manner as the parties may agree.^[16] To the extent such oral examination is not conducted by consent of the parties, the UST shall comply with the requirements of Rule 2004(c) and (d).

V. Conclusion

For the foregoing reasons, the court grants in part and denies in part the UST’s Motion for Entry of an Order Authorizing the Examination of and Production of Documents by Wells Fargo Home Mortgage Pursuant to Fed. R. Bankr. P. 2004 and 9016 (doc. 27). The court finds that the UST has the authority to investigate the proof of claim filed by Wells Fargo and has standing to conduct a 2004 examination for that purpose and that the UST has demonstrated good cause to conduct a 2004 examination. However, the examination shall be limited as provided by this decision, with an oral examination to occur only in the event that the documentary production is insufficient to establish Wells Fargo’s standing to file the proof of claim. In the event that the UST determines that an oral examination is necessary, the oral examination shall be conducted in accordance with BR 2004(c) and (d) and this decision, unless otherwise agreed upon by the parties.

The court is concurrently entering an order consistent with this decision.

IT IS SO ORDERED.

[1] “United States trustee” includes a designee of the United States Trustee. 11 U.S.C. § 102(9). For simplicity, the court will use the abbreviation “UST” whether referring to the movant, Daniel M. McDermott, United States Trustee for Region 9, his designee, or the United States Trustee program generally.

[2] See e.g., Harker v. Wells Fargo Bank, NA (In re Krause), 414 B.R. 243, 268, n.22 (Bankr. S.D. Ohio 2009); In re Parsley, 384 B.R. 138 (Bankr. S.D. Tex. 2008); Nosek v. Ameriquest Mortgage Co. (In re Nosek), 386 B.R. 374 (Bankr. D. Mass 2008), aff’d in part, vacated in part 406 B.R. 434 (D. Mass. 2009), aff’d as modified 609 F.3d 6 (1st Cir. 2010); In re Foreclosure Cases, 521 F. Supp. 2d 650 (N.D. Ohio 2007).

[3] See In re Saffold, 373 B.R. 39, 42 (Bankr. N.D. Ohio 2007); Chris Markus, Ron Taylor & Blake Vogt, From Main Street to Wall Street: Mortgage Loan Securitization and New Challenges Facing Foreclosure Plaintiffs in Kentucky, 36 N. Ky. L. Rev. 395 (2009).

[4] The proof of claim describes the creditor as Wells Fargo Bank, NA and the name to which notices and payments should be sent as Wells Fargo Home Mortgage. The United States Trustee, in his motion, used Wells Fargo Home Mortgage while the creditor used Wells Fargo Bank, NA in its filings. The court will simply refer to Wells Fargo Bank, N.A. and Wells Fargo Home Mortgage collectively as “Wells Fargo.”

[5] Unless otherwise noted, all references to rules of court shall be to the Federal Rules of Bankruptcy Procedure (“BR”).

[6] Some courts have discussed whether § 307 enlarges or further defines the authority granted to the UST § 586. See e.g., In re Parsley, 384 B.R. 138, 147 (Bankr. S.D. Tex. 2008) (it is well within the authority of the UST to investigate the activities of a loan servicer and its local and national counsel); In re South Beach Securities, Inc., 606 F.3d 366, 371 (7th Cir 2010) (finding, among other things, that section 307 gives the United States UST the power to object to a chapter 11 plan of reorganization in his role as guardian of the public interest in bankruptcy proceedings); In re LWD Inc., 342 B.R. 514, 519 (Bankr. W.D. Ky. 2006) (the UST is not limited to the duties set out in § 586); and Zarnel, 619 F.3d at 161-62. Wells Fargo’s argument relies in large part on this debate, wanting this court to conclude that § 586 limits the authority of the UST, while § 307 is merely a standing provision giving the UST authority to act in bankruptcy cases in those areas expressly mentioned in § 586. While the interaction between § 586 and § 307 and the reach of these statutes continues to be debated, this court only finds that under § 586 and § 307 the UST has sufficient authority to conduct a 2004 examination under these circumstances. Even if § 586 circumscribes § 307, the court finds that the UST has sufficient authority under § 586 to monitor the progress of cases, including the claims process, and that includes the ability to object to claims and to conduct 2004 examinations. See In re Borrows, 2011 WL 721842 at *2 (Bankr. W.D. Wash. Feb. 22, 2011) (“Without deciding whether Section 586 is all inclusive as to the permissible activities of the UST in bankruptcy cases, the Court concludes that subsection (a)(3)(G) of Section 586 provides specific authority for the UST to bring an objection to [a] claim under the circumstances of this case.”).

[7] The United States Supreme Court has long recognized that the pecuniary interest test may not be the only test to confer standing and that noneconomic tests may also confer standing as long as the “interest sought to be protected by the complainant is arguably within the zone of interests to be protected or regulated by the statute or constitutional guarantee in question.” Ass’n of Data Processing Servs. Orgs., Inc. v. Camp, 397 U.S. 150, 153 (1970).

[8] See e.g., § 523 (concerning dischargeability of debts); § 524 (c) & (d) (concerning reaffirmation agreements); § 552 (concerning the post-petition effect of prepetition security interests); § 553 (concerning setoffs against claims); § 1111 (deeming proofs of claim or interest in Chapter 11 cases filed for claims or interests scheduled other than as disputed, contingent, or unliquidated and allowing for the “1111(b)” election for secured creditors); and §§ 1122, 1222(a)(3), and 1322(a)(3) (concerning classification and treatment of claims and interests in Chapter 11, 12, and 13 plans).

[9] See e.g., BR 1007 (concerning the filing of the schedules and other documents at the inception of the case); 2016 (professional compensation and reimbursement of expenses); 3021 (distribution to claims under a plan); 4007 (outlining the procedure for determinations of the dischargeability of debts); and 4008 (outlining the reaffirmation process).

[10] Although the obligation to challenge the validity of filed proofs of claim generally falls upon debtors or standing trustees, the overarching duty of the UST is to ensure the proper management of debtors’ debts provides them with the requisite standing to review proofs of claims. See In re Wassenaar, 268 B.R. 477, 479 (W.D. Va. 2001). Wells Fargo argues that the UST cannot interject himself into state law issues as to the validity of proofs of claim. However, in Wassenaar, the court rejected this notion, stating: “[t]he question in this case is whether creditors’ attorney’s fees should be charged as an administrative expense to the bankruptcy estate. While this issue focuses on the state-law question of awarding attorney’s fees, the federal bankruptcy issue remains. The United States Trustee’s interest is plain: to ensure the proper management of Kurt Wassenaar’s debts. The Bankruptcy Court, therefore, properly allowed the Trustee to participate in this case.” Id. at 479. See also Borrows, 2011 WL 721842, at *3 (rejecting BAC Home Loans Servicing, L.P.’s argument that granting the UST authority to investigate proofs of claim “impermissibly encroaches on the province of the Chapter 13 trustee to object to proofs of claim.”).

[11] Wells Fargo also cites to In re Gold Standard Baking, Inc., 179 B.R. 98 (Bankr. N.D. Ill. 1995) and In re Howard Ins. Agency, Inc., 109 B.R. 445, 446 (Bankr. N.D. Okla. 1989). Both cases are distinguishable in that the former dealt with a UST’s attempt to impose a new requirement on Chapter 11 debtors-in-possession to imprint their checks with the phrase “Debtor in Possession” and the latter with the power of the UST to promulgate administrative regulations.

[12] Another court rejected essentially this same argument made by Wells Fargo in In re Michalski, 449 B.R. 273 (Bankr. N.D. Ohio 2011) (“Wells Fargo mistakenly construes the Rule 2004 examination as an attempt by the UST to `unilaterally increase the requirements for filing a valid proof of claim.'” Id. at 280 (internal citations omitted). Noting that determination of proofs of claim in bankruptcy cases frequently requires analysis of state law, the court found that “[t]his argument totally misses the mark” and that the UST could conduct a Rule 2004 examination to obtain information from Wells Fargo concerning the proof of claim it filed in that case. Id.

[13] Under Ohio law, security follows the note and therefore whoever holds the note also holds any security securing such note. See Noland v. Wells Fargo Bank, N.A. (In re Williams), 395 B.R. 33, 47 (Bankr. S.D. Ohio 2008), citing Gemini Services, Inc. v. Mortgage Electronic Registration Systems, Inc. (In re Gemini Services, Inc.), 350 B.R. 74, 82 (Bankr. S.D. Ohio 2006).

[14] The most common, but not exclusive way to establish being the “person entitled to enforce” a negotiable instrument, under the Ohio U.C.C., is to be the holder, such as a typical promissory note. See Ohio Revised Code § 1303.31 (Person entitled to enforce an instrument). If a promissory note is endorsed in blank, possession of the original note, endorsed in blank, establishes the right to enforce it as the holder and, therefore, standing to file a proof of claim. Densmore v. Litton Loan Servicing, L.P. (In re Densmore), ___ B.R. ___, 2011 WL 1181359 (Bankr. D. Ct. March 21, 2011).

[15] It appears that there may be some confusion as to what the UST meant with respect to “transactional loan history.” Wells Fargo appears to construe this request as a request for a “complete loan history,” or in other words, the history of payments made by the Debtors and charges made by the lender relating to the loan account and perhaps this construction of that request is understandable given the ending phrase of that request — “along with payments for escrow advances made by Wells Fargo Home Mortgage.” See doc. 27, pp. 8 & 11.

[16] The UST has suggested the possibility of videoconferencing.

[ipaper docId=60832852 access_key=key-jct15ono0cbshx5gztf height=600 width=600 /]

© 2010-19 FORECLOSURE FRAUD | by DinSFLA. All rights reserved.

In Re: SHARON DIANE HILL, Debtor, ROBERTA A. DeANGELIS,
Acting United States Trustee for Region 3, Movant,

v.

COUNTRYWIDE HOME LOANS, INC., GOLDBECK,
McCAFFERTY AND McKEEVER, and ATTORNEY LESLIE
PUIDA, Respondents.

Case Number 01-22574 JAD, Chapter 13

UNITED STATES BANKRUPTCY COURT FOR THE WESTERN
DISTRICT OF PENNSYLVANIA

2010 Bankr. LEXIS 3313

October 5, 2010, Decided

COUNSEL: [*1] For United States Trustee: Patrick S. Layng, Esq.
for United States Trustee: Lisa D. Tingue, Esq.
For United States Trustee: Norma Hildenbrand, Esq.
For Countrywide Home Loans, Inc: Thomas A. Connop. Esq.
For Countrywide Home Loans, Inc.: Dorothy A. Davis, Esq.
For Goldbeck, McCafferty and McKeever/Atty Leslie Puida: Francis Manning, Esq.

JUDGES: Thomas P. Agresti, Chief Judge.

OPINION BY: Thomas P. Agresti

OPINION
Related to Doc. No. 465

MEMORANDUM OPINION AND ORDER

Excerpt:

DISCUSSION

(A) The Court’s Rule to Show Cause
The Rule is directed against Countrywide, GMM, and Puida and was very deliberately limited to
seven well-defined Items of potentially sanctionable conduct related to this whole matter, four
directed to Countrywide and three to GMM and Puida. The Court’s approach to resolving the
specified matters before it is to set forth each of the Items as stated in the Rule, followed by a
discussion of whether the evidence supports the imposition of any kind of sanction against the
respective party involved. The seven Items of inquiry identified by the Court in the Rule involve the
following, allegedly inappropriate instances of conduct:

(1) Countrywide [*43] failing to properly account for chapter 13 payments made by
the Debtor during the pendency of her case.

(2) Countrywide knowingly and willfully violating the discharge injunction granted
to the Debtor through numerous and sustained attempts to collect on questionable debt
which, by appropriate review of applicable records, was current as of the time of entry
of the discharge order.

(3) Countrywide intentionally, or with reckless disregard and/or indifference to the
applicable facts, misleading the debtor’s attorneys into believing change notices had
been timely sent via the use of three “created” Payment Change Letters, when in fact
they had not, and during such time attempting to resolve a dispute pending before this
Court.

(4) Countrywide intentionally, or with reckless disregard and/or indifference to the
applicable facts, making misrepresentations to this Court in a pleading regarding the
cause of its claimed escrow arrearages account regarding the Debtor.

(5) Goldbeck McCafferty and McKeever and Leslie Puida knowingly and willfully,
or with reckless disregard and/or indifference to the applicable facts, violating the
discharge injunction granted to the debtor by making numerous and [*44] sustained
attempts to collect on debt they knew to be discharged or should have known was
discharged.

(6) Goldbeck McCafferty and McKeever and Leslie Puida intentionally, or with
reckless disregard and/or indifference to the applicable facts, failed to disclose to the
debtor’s attorney that three Payment Change Letters had never actually been sent, all
in an improper attempt to collect on questionable debt while attempting to resolve a
matter that was pending before this Court.

(7) Goldbeck McCafferty and McKeever and Leslie Puida intentionally, or with
reckless disregard and/or indifference to the applicable facts, made inaccurate oral
statements in response to the Court’s inquiry regarding when Leslie Puida told the
Debtor’s attorney that the three Payment Change Letters were not what they purported
to be, but instead were memoranda created years after the event.

3_COUNTRYWIDE RECREATED LETTERS

<SNIP>

ORDER AND RULE TO SHOW CAUSE

AND NOW, this 5th day of October, 2010, for the reasons set forth in the accompanying
Memorandum Opinion, it is ORDERED, ADJUDGED and DECREED that,

(1) Items 1, 2 and 3 of the Rule to Show Cause (“Rule”), Document No. 435, as directed against
Countrywide Home Loans, Inc (“Countrywide”), and Item 5 of the Rule, as directed against
Goldbeck, McCafferty and McKeever (“GMM”) and Attorney Leslie Puida (“Puida”) are
VACATED.

(2) With respect to Item 4 of the Rule, as directed against Countrywide, the Court finds
sufficient cause exists to sanction Countrywide pursuant to Fed.R.Bankr.P. 9011, and that a
sufficient sanction so as to deter repetition of such conduct in the future or comparable conduct by
others similarly situated, is a “public censure” of Countrywide and a reminder of its obligations
under Fed.R.Bankr.P. 9011(b)(3) to make reasonable investigation before making factual
allegations in documents filed with the Bankruptcy Court, or any other court for that matter. The
Court’s comments in the Memorandum Opinion and in this Order constitute that censure and
[*126] reminder. Therefore, no further hearing or action is required in regard to Paragraph (4) of the
Rule.

(3) With respect to Items 6 and 7 of the Rule as directed against GMM and Puida, the Court
finds that sufficient cause exists to impose sanctions pursuant to the Court’s inherent power its
power pursuant to 11 U.S.C. §105(a) and Fed.R.Bankr.P. 7037, incorporating Fed.R.Civ.P.
37(c)(1)(C). Therefore, a hearing is scheduled for November 22, 2010 at 2:00 P.M., in the Erie
Bankruptcy Courtroom, U.S. Courthouse, 17 South Park Row, Erie, PA, for the purpose of
considering and determining appropriate sanctions, at which time Leslie M. Puida and Michael T.
McKeever, in his capacity as a representative of GMM, with authority to speak for the firm, are
directed to personally appear.

(4) With respect to the apparent misconduct of Attorney Charles Townsend (“Townsend”) as
described in the Memorandum Opinion, a Rule to Show Cause is hereby issued directing him to
personally appear on the November 22, 2010 at 2:00 P.M., in the Erie Bankruptcy Courtroom, U.S.
Courthouse, 17 South Park Row, Erie, PA, to show cause why sanctions should not be imposed
against him for providing false or misleading testimony [*127] under oath during his deposition in
this matter, which testimony was then used at the time of trial due to Townsend’s unavailability. The
Court further understands that Townsend may no longer be affiliated with Countrywide. If that is
correct, Countrywide and its Counsel of Record, Thomas P Connop, are directed to effect personal
service of a copy of this Order and Rule to Show Cause, together with the Memorandum Opinion,
on Townsend immediately after receipt of this Order and file a Certificate of Service to that effect
on or before October 12, 2010.

/s/ Thomas P. Agresti
Thomas P. Agresti, Chief Judge
United States Bankruptcy Court

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In re NILES C. TAYLOR and ANGELA J. TAYLOR, Chapter 13, Debtors.

Bankruptcy No. 07-15385-DWS.

United States Bankruptcy Court, E.D. Pennsylvania.

April 15, 2009

OPINION

DIANE WEISS SIGMUND, Bankruptcy Judge

On June 9, 20081 entered an order to show cause (the “June 9 Order”) in response to certain practices of HSBC Mortgage Corp. (HSBC“) and its attorneys and agents, the propriety of which I questioned and which ultimately became the subject of four lengthy evidentiary hearings as described below. The United States Trustee (the “UST”) was invited to participate.

In connection with this inquiry, the UST sought discovery of Lender Processing Services, Inc., f/k/a Fidelity National Information Services, Inc.^[1] (“LPS” or “Fidelity”). LPS describes itself as “a leading provider of integrated technology and outsourced services to the lending industry, with market-leading positions in mortgage processing and default management services in the U.S.”^[2] Id. In this case, it served as the intermediary between HSBC and its law firms, the Udren Law Office (the “Udren Firm”) and Moss Codilis LLP (“Moss”). The UST’s discovery requests were opposed by LPS^[3] (2) the UST’s Motion for Relief from Order Entered on October 23, 2008 (“Second Vacate Motion”) and (3) LPS‘ Objection to the Second Vacate Motion and Subpoena Issued on February 20,2008 (“Protection Motion”). Notwithstanding these contested matters, LPS had produced almost all of the Fidelity documents requested by the UST in the UST Motion but pursuant to a non-disclosure requirement memorialized in an order dated October 21, 2008 (the “Confidentiality Order“) from which the UST sought to be freed. LPS did not oppose the use of its documents in this bankruptcy case with appropriate safeguards but objected to the UST’s intention to share them with other members of the Office of the United States Trustee in other jurisdictions. on confidentiality grounds and resulted in the (1) Motion of the Acting United States Trustee for Rule 2004 Examination (the “UST Motion”) of Lender Processing Services, Inc., f/k/a Fidelity National Information Services, Inc.,

The UST Motion, Second Vacate Motion and Protection Motion have now been settled by an agreement between LPS and the UST have submitted a consent order that reflects their agreement that the Confidentiality Order be vacated and replaced with “Order Directing Filing of Documents Under Seal” (“Order Re: Protected Documents”). and the UST as further explained below.

Still remaining to be addressed is the June 9 Order which contemplated that sanctions could be issued depending on the outcome of the investigation it commenced. Regrettably I have found certain practices and procedures employed by HSBC, its agents and attorneys to implicate the integrity of these proceedings as more specifically described below. I have also found that these same practices and procedures have created an environment where Rule 9011 duties have been subordinated to efficiency and cost-savings so as to require sanctions, and sanctions are appropriately imposed.

BACKGROUND

The June 9 Order

The June 9 Order emanated from a routine Claim Objection hearing held on June 5, 2008.^[4] The hearing had previously been continued thirty days from its first listing to allow HSBC to produce documentation requested by Debtors in support of HSBC’s disputed claim. At the continued hearing, David Fitzgibbon, Esquire (“Fitzgibbon”) of the Udren Firm who represented HSBC,^[5] advised me that HSBC was unresponsive to his notice that HSBC was directed to produce a loan history. When pressed as to the details of his colloquy with HSBC, he informed me that he had no personal access to his client HSBC but rather communicated solely by means of an electronic information system known as “NewTrak,” NewTrak, I have since learned, is a technology developed by Fidelity and employed to provide foreclosure, bankruptcy and other mortgage loan-related default services to the mortgage industry. Simply stated HSBC and other mortgage lenders upload all or part of the mortgage documents and loan records of specified borrowers into the NewTrak system. Attorneys are engaged on a case by case basis through NewTrak to handle specified tasks. They get their assignments from NewTrak and report and/or seek further direction by “opening up an issue” on NewTrak. In this case, Fitzgibbon claimed to have opened up an issue (i.&. court has directed you to send a loan history immediately) and awaited an electronic response over NewTrak. He asserted that he had no recourse to the client when one was not forthcoming, specifically that he had no ability to discuss my directive about document production with either representatives of HSBC or the attorneys at Moss who had filed the claim for HSBC.^[6]

This frank but surprising admission resulted in the entry of the June 9 Order in which I ordered HSBC to “provide a full accounting to Debtors by transmitting a loan history in form that Debtors and their counsel can understand as well as an explanation about the flood insurance charges.” Doc. No. 52. I scheduled a continued hearing on the Claim Objection and directed the following persons to appear in addition to Debtors and their counsel: (1) a representative of HSBC with knowledge of Debtors’ loan; (2) a representative of HSBC with knowledge of the procedures it uses with respect to assertion of claims in bankruptcy; (3) Maria Borrensen, Esquire (“Borrensen”), authorized agent for HSBC’s bankruptcy work at Moss; (5) the partner in charge of HSBC’s bankruptcy work at the Udren Firm; (6) Lorraine Gazzara Doyle (“Doyle”), Esquire of the Udren Firm; and (7) Fitzgibbon. As noted, the United States trustee was expressly invited to attend. The purpose of the hearing, as stated in the June 9 Order, was two-fold: (1) to address the Claim Objection and (2) “to investigate the practices in this case employed by HSBC, its attorneys and agents and consider whether sanctions should issue against HSBC, its attorneys and agents.” Id.^[7] who filed the proof of claim and amended proof of claim in this case; (4) the partner in charge of

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