Evidently intending to halt over-the-top allegations in response to inadvertent violations of the automatic stay, Bankruptcy Judge John E. Waites of Columbia, S.C., slapped debtor’s counsel with $10,000 in sanctions under Rule 9011 for filing a Section 362(k) complaint asking for $50,000 in actual and punitive damages.
The debtor owed about $900 to his doctor but did not list the debt in his chapter 13 papers. Six weeks after filing, the doctor’s office sent the debtor a letter asking him to call while saying that the debt was in default and might be sent to a collection agency.
The debtor’s counsel called and informed the doctor’s office about the bankruptcy filing. According to Judge Waites’ September 27 opinion, the office staff marked the file as being in bankruptcy but failed to save the change electronically.
The debtor then scheduled the debt and sent notices to the doctor.
Two months later, the doctor’s computer system automatically sent the same letter again asking for payment.
Without contacting the doctor’s office again, debtor’s counsel initiated an adversary proceeding prominently asking for $50,000 in actual and punitive damages adjacent to the caption on the first page of the complaint.
The complaint contained several strident allegations: It alleged that the stay violation was flagrant, willful, intentional, wanton, aggressive, devious, deceptive, manipulative, oppressive and abusive. Coupled with the request for $50,000 in actual and punitive damages, the complaint went on to say that the debtor “would show” that the second collection letter was sent “with the express intent to annoy, threaten, cause harm, abuse, intimidate or harass.”
The doctor admitted violating the automatic stay but contended it was in error.
Required by the so-called safe harbor in Rule 9011(c)(1)(A), the doctor’s lawyer sent the debtor’s counsel a draft of a motion for sanctions for violation of Rule 9011(b). The debtor’s counsel did not withdraw the complaint or accept an offer of settlement, so the doctor’s lawyer filed the sanctions motion.
Following Rule 9011(b), the sanctions motion pointed to the strident claims in the complaint and alleged that it was filed without an investigation reasonable in the circumstances and for an improper purpose, namely, to seek a settlement or payment rather than to stop a stay violation.
Judge Waites agreed and concluded that a $10,000 sanction on debtor’s counsel was appropriate.
Judge Waites said that the test for a reasonable investigation is objective. In the case at bar, the debtor’s counsel performed a “negligible” investigation, “if at all,” after the debtor received the second collection letter. He said that “readily available” avenues of inquiry must be explored and concluded that the investigation was not “objectively reasonable” to support the allegations in the complaint.
Judge Waites said that nothing in the “mildly worded” collection letter contained any indication that it was intended to annoy, threaten, abuse or intimidate. He added that counsel “may not use discovery to support outrageous and frivolous claims for which there is no factual support.”
Sanctions under Rule 9011(b)(3) were warranted, Judge Waites said.
With regard to the quantum of sanctions, Judge Waites cited the Fourth Circuit for saying they must be the least severe to serve the purposes of Rule 9011.
The request for $50,000 in damages caused the doctor’s lawyer to run up some $37,000 in fees, including about $14,000 on the motion for sanctions.
In addition to striking the disputed allegations from the complaint, Judge Waites awarded $10,000 in sanctions against the debtor’s counsel. The amount, he said, “is reasonable to deter Debtor’s Counsel from future similar misconduct.”
Observation
The shrill complaint wasn’t the debtor’s counsel’s first rodeo.
Judge Waites said that the number of similar cases begun by offending counsel “far exceed” filings by similarly situated debtors’ counsel. In the last three years, he said that the debtor’s attorney had filed “several” other complaints seeking $25,000 to $75,000 in damages based on “similar allegations of egregious conduct” arising from collection letters.
One doubts that Judge Waites would have imposed similar sanctions had it been counsel’s first offense.
Evidently intending to halt over-the-top allegations in response to inadvertent violations of the automatic stay, Bankruptcy Judge John E. Waites of Columbia, S.C., slapped debtor’s counsel with $10,000 in sanctions under Rule 9011 for filing a Section 362(k) complaint asking for $50,000 in actual and punitive damages.
The debtor owed about $900 to his doctor but did not list the debt in his chapter 13 papers. Six weeks after filing, the doctor’s office sent the debtor a letter asking him to call while saying that the debt was in default and might be sent to a collection agency.
The debtor’s counsel called and informed the doctor’s office about the bankruptcy filing. According to Judge Waites’ September 27 opinion, the office staff marked the file as being in bankruptcy but failed to save the change electronically.
The debtor then scheduled the debt and sent notices to the doctor.
Two months later, the doctor’s computer system automatically sent the same letter again asking for payment.