Bankruptcy Judge Christopher M. Klein must have been fed up. After a spate of 17 frivolous bankruptcy filings by ineligible estates of dead people, he started handing out sanctions. He said the filings were designed to “hijack the automatic stay” and halt foreclosure.
In his May 31 opinion, Judge Klein, of Sacramento, Calif., socked the lawyer for $10,000 and hit the decedent estate’s special administrator for $4,000.
Notably, the 16 prior cases were dismissed before the debtors paid the filing fees.
Imagine the rock that Judge Klein will drop on someone who tries the same strategy in the future.
The Petition
A man died intestate in 2020. He owned a home. An attorney went to probate court in California with an application to appoint the decedent’s mother as a special administrator. The man’s heir was his son, but the son was imprisoned at the time.
In the application for a special administrator, the lawyer said that the purpose was to file a chapter 11 petition to halt foreclosure of the home owned by the decedent. The order appointing the special administrator said nothing about filing bankruptcy.
The mother and the lawyer signed the chapter 11 petition, naming the decedent’s estate as the debtor. To be eligible for chapter 11, the petition stated that the estate was a corporation. The lender and the lender’s foreclosure agent were listed as the only creditors.
Smelling a rat, Judge Klein issued an order to show cause, directing the lawyer and the mother to explain why the estate was eligible for chapter 11 and why the filing of the petition did not violate Bankruptcy Rule 9011.
Rather than address the question of eligibility, the mother and the lawyer responded by contending that the appointment of the special administrator was the state court’s implicit authorization to file in chapter 11.
The pair also filed an amended petition, which Judge Klein called “facially (and farcically) incorrect” in two respects. First, the amended petition claimed that the estate was a small business debtor, even though it had no business activities. Second, the amended petition claimed that the estate was a reporting company with the Securities and Exchange Commission.
At the hearing, the lawyer said he did not inquire into whether a decedent’s estate was eligible for chapter 11. The lawyer offered no theory explaining why a decedent’s estate could file. Judge Klein noted that the lawyer was no neophyte, having filed more than 2,000 bankruptcy cases.
At the hearing, Judge Klein dismissed the petition and reserved decision on sanctions for violating Rule 9011.
Eligibility
Judge Klein explained why a decedent’s estate is ineligible to be a debtor.
Section 109(a) says that a “person” may be a debtor. In Section 101(41), a “‘person’ includes an individual, a partnership and a corporation, but not a governmental unit.”
A “person” is a subset of the broader category of an “entity” in Section 101(15) that “includes” a person, estate, trust, governmental unit and the U.S. Trustee. Judge Klein reasoned that an estate, which is neither an individual nor a partnership, could be a debtor only if it were a corporation.
To claim that “corporation” includes a decedent’s estate “would stretch the concept beyond the breaking point,” Judge Klein said. He reasoned that an estate could not be a person “without contradicting Section 101(15).”
To buttress his conclusion that a decedent’s estate is ineligible, he cited the Collier treatise, caselaw and legislative history saying that the definition of a “person” does not include an “estate.”
To counter the argument that the probate court authorized the filing, Judge Klein pointed to the Supremacy and Bankruptcy Clauses of the U.S. Constitution. He said that state law “cannot change bankruptcy eligibility rules prescribed by Congress.”
Further to the point that a decedent’s estate cannot be a debtor, Judge Klein alluded to the so-called probate exception to federal jurisdiction, based on the idea that two courts cannot simultaneously have in rem jurisdiction over the same res.
Judge Klein said that the Bankruptcy Code “honors” the probate exception by making decedents’ estates ineligible to file.
Having ruled that the estate was ineligible for chapter 11, Judge Klein turned to sanctions.
Sanctions Under Rule 9011(b)
Judge Klein’s 32-page opinion goes through every step required to impose sanctions under Bankruptcy Rule 9011(b). We recommend that our readers use the opinion as a template when pursuing sanctions for frivolous conduct.
In the case before him, Judge Klein found that the filing was for an “improper purpose” of delaying foreclosure. He said that the explanations for the filing were “so untenable as to have been frivolous in violation of Rule 9011(b)(2).” Given that the lawyer had filed over 2,000 petitions, he said that the lawyer “cannot plausibly plead ignorance of basic bankruptcy law.”
Judge Klein found that the amended petition was a second violation of Rule 9011. Thus, he found a total of three violations of the rule: (1) the initial, frivolous petition; (2) the equally frivolous amended petition; and (3) the filing for an improper purpose of forestalling foreclosure.
Turning to sanctions, Judge Klein said they are intended to “deter rather than to compensate” and must be limited to an amount sufficient to deter repetition. To deter the “recent popularity” of estate filings to stop foreclosure, he imposed $10,000 in sanctions on the lawyer and $4,000 on the special administrator.
For his fee, the lawyer had been paid $4,000. The $10,000 in sanctions included disgorging the fee. Judge Klein directed that the disgorged fee and the other sanctions be paid to the clerk of the court.
As further deterrence, Judge Klein directed the clerk to serve his opinion on the bankruptcy and nonbankruptcy lawyers who had filed bankruptcy petitions for estates or had gained the appointment of special administrators to file petitions.
Bankruptcy Judge Christopher M. Klein must have been fed up. After a spate of 17 frivolous bankruptcy filings by ineligible estates of dead people, he started handing out sanctions. He said the filings were designed to “hijack the automatic stay” and halt foreclosure.
In his May 31 opinion, Judge Klein, of Sacramento, Calif., socked the lawyer for $10,000 and hit the decedent estate’s special administrator for $4,000.
Notably, the 16 prior cases were dismissed before the debtors paid the filing fees.
Imagine the rock that Judge Klein will drop on someone who tries the same strategy in the future.