A bankruptcy judge imposed $1,750 in sanctions on a debtor’s counsel who had filed a chapter 13 petition incorrectly listing the debtor as the owner of a home even though the lawyer knew a sheriff’s sale had taken place.
The September 25 decision by Bankruptcy Judge Jerrold N. Poslusny, Jr. of Camden, N.J., highlights the ethical rules with which a lawyer must comply when a new client arrives at the last minute hoping the lawyer can block foreclosure or eviction.
Prof. Nancy Rapoport told ABI, “That is one well-reasoned opinion.” Prof. Rapoport is the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law, where she is an expert on legal ethics and fee allowances in bankruptcy cases.
The mortgage lender obtained a foreclosure judgment and was the winning bidder at a foreclosure sale about five weeks before the owner filed a chapter 13 petition. The lender secured a writ of possession one month before the bankruptcy filing. The sheriff’s deed was recorded three days before the petition was filed.
The petition listed the debtor as the owner of the property, and the lender was shown as holding a secured claim. The chapter 13 plan proposed to cure arrears on the mortgage, but the plan only provided for payments of $200 a month, not even enough to service the mortgage were it current.
The lender objected to the plan and filed a motion for relief from the automatic stay. After the court modified the stay, the lender moved for sanctions against the debtor’s attorney under Bankruptcy Rule 9011, contending that counsel filed the petition and the plan in bad faith.
Judge Poslusny began by rejecting the Second Circuit’s edict that Rule 9011 sanctions may not be imposed for a bad faith filing unless the creditor had moved to dismiss for bad faith. Baker v. Latham Sparrowbush Assocs. (In re Cohoes Industrial Terminal Inc.), 931 F.2d 222 (2d Cir. 1991). The judge said he would have been “unlikely” to dismiss the case because there might have been a legitimate reason for filing. Anyway, Second Circuit authority is not binding on Judge Poslusny.
Next, Judge Poslusny rejected the lawyer’s argument that sanctions are prohibited because the lender had not sent a so-called safe harbor letter. Citing advisory committee notes, the judge said that Rule 9011(c) does not require a safe-harbor letter when the challenged filing is the original petition.
Turning to the merits, the lawyer admitted he was aware of the foreclosure sale before he filed the petition. However, the lawyer contended that he was unaware at the time of filing that the redemption period had lapsed.
Judge Poslusny said the lawyer could have conducted an online search to learn that the redemption period had expired.
Judge Poslusny concluded that the lawyer filed the petition “for an improper purpose,” either to delay foreclosure or eviction. The filing was inaccurate and the schedules were wrong, he said, because the debtor and counsel were both aware before filing that title had passed.
Having decided that the filing was “for an improper purpose and without legal or evidentiary support,” Judge Poslusny next turned to the question of whether the lawyer conducted a reasonable inquiry, having known there had been a sheriff’s sale.
Judge Poslusny said “there can be no dispute that reasonable inquiry under these circumstances required [the lawyer] to determine the status of the title transfer prior to” filing. He therefore concluded that sanctions were proper under Rule 9011.
Alternatively, Judge Poslusny said he would have imposed sanctions under Section 105(a). However, he would not have imposed sanctions under 28 U.S.C. § 1927 because it was the debtor’s first bankruptcy filing.
Judge Poslusny imposed $1,750 in sanctions, less than the lender’s counsel fees but enough to deter the lawyer from filing another petition without reasonable inquiry.
A bankruptcy judge imposed $1,750 in sanctions on a debtor’s counsel who had filed a chapter 13 petition incorrectly listing the debtor as the owner of a home even though the lawyer knew a sheriff’s sale had taken place.
The September 25 decision by Bankruptcy Judge Jerrold N. Poslusny, Jr. of Camden, N.J., highlights the ethical rules with which a lawyer must comply when a new client arrives at the last minute hoping the lawyer can block foreclosure or eviction.
Prof. Nancy Rapoport told ABI, “That is one well-reasoned opinion.” Prof. Rapoport is the Garman Turner Gordon Professor of Law at the Univ. of Nevada at Las Vegas William S. Boyd School of Law, where she is an expert on legal ethics and fee allowances in bankruptcy cases.
The mortgage lender obtained a foreclosure judgment and was the winning bidder at a foreclosure sale about five weeks before the owner filed a chapter 13 petition. The lender secured a writ of possession one month before the bankruptcy filing. The sheriff’s deed was recorded three days before the petition was filed.
The petition listed the debtor as the owner of the property, and the lender was shown as holding a secured claim. The chapter 13 plan proposed to cure arrears on the mortgage, but the plan only provided for payments of $200 a month, not even enough to service the mortgage were it current.
The lender objected to the plan and filed a motion for relief from the automatic stay. After the court modified the stay, the lender moved for sanctions against the debtor’s attorney under Bankruptcy Rule 9011, contending that counsel filed the petition and the plan in bad faith.