A lender and its lawyer were sanctioned under Bankruptcy Rule 9011 for filing a dischargeability complaint against a consumer based only on the allegation that it must have been fraud because the debtor filed a chapter 7 petition 43 days after taking down a $9,000 loan.
In his November 2 opinion, Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., said that the “boilerplate complaint” was “a case of sue first and ask questions later.” Learning that the law firm had filed an identical complaint in six other cases, he found a violation of Rule 9011 for not having made a “reasonable and competent inquiry” where a possible purpose was “to intimidate as part of an effort to extract an unjust settlement” from a debtor who was not represented by counsel.
The Loan and the Complaint
The debtor worked in a supermarket for less than $20 an hour. She didn’t always have 40 hours of work a week and owed $12,500 on a high-interest credit card. She went to a bank, where the lending officer advised her not to consolidate the credit card loan with another lender. She accepted the bank’s offer of a $9,000 loan to pay off some of the credit card debt.
Realizing after taking down the loan that it had not solved her financial problems, she consulted a bankruptcy lawyer. She missed the first payment and filed a chapter 7 petition 43 days after receiving the $9,000 loan.
The lender neither attended the Section 341 meeting nor listened to the recording. The lender did not take discovery under Rule 2004, nor did the lender even call the debtor’s lawyer to learn about the debtor’s circumstances.
Seven days after the creditors’ meeting and 63 days before the deadline for an objection to dischargeability, the lender filed a complaint alleging that the debt was nondischargeable under Section 523(a)(2) for money obtained by fraud.
The debtor responded pro se, because the rules did not require her lawyer to represent her in adversary proceedings. Judge Klein deemed the response to be an answer to the complaint.
Judge Klein scheduled a quick trial. Seven days later, the lender moved for dismissal, which Judge Klein granted.
It wasn’t over.
On his own, Judge Klein issued an order to show cause addressed to the lender and its counsel. The OTSC said that the circumstances “invited” an “inference” that
the Complaint was filed for the improper purpose of implementing a strategy of suing impecunious consumers on small claims on little or no pretext so as to extract payments by way of default judgment or “settlement” in lieu of trial because of the high costs to the consumers of defending litigation.
In the OTSC, Judge Klein said that the “boilerplate” complaint was based on “only two concrete facts”: The $9,000 loan was taken down, and the debtor missed the first payment about six weeks later. He said, “No surrounding circumstances were alleged that might support an inference of actual intent to defraud.”
The Rule 9011 Violations
Judge Klein said that Rule 9011(b) requires an “inquiry reasonable under the circumstances.” He went on to say:
[T]he existence of an early payment default fraud indicator may trigger an inquiry by a creditor but is not alone sufficient ground for a lawsuit in which the essential elements of fraud must be proved by preponderance of evidence.
Judge Klein criticized the lender for sending no one to the creditors’ meeting, for not taking discovery, and for making no inquiry from the debtor’s counsel.
Citing Bankruptcy Rule 9011(b)(3), Judge Klein said that the “signature on the Complaint constitutes a certification that the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.” He said that the “fatal flaw” in the complaint was the failure to identify any allegation that could have evidentiary support following discovery.
Judge Klein found that the “adversary proceeding did not have a reasonable basis in law and fact,” allowing the debtor to recover costs and fees under Section 523(d). He said that the lender was “lucky” because the debtor had not been represented by counsel.
Judge Klein assessed $350 in costs to be paid by the lender in compensation for the time the debtor spent in traveling to and from court on “multiple trips.”
The lawyer did not escape what Judge Klein called a “court-initiated sanction.” Citing Rule 9011(c)(2)(B), he was unable to assess monetary sanctions against the lawyer and the lawyer’s firm on the “court’s initiative” because he had not issued the OTSC until after voluntary dismissal.
Still, the rule authorized the issuance of non-monetary sanctions on the court’s initiative that would be “sufficient to deter repetition of the conduct or comparable conduct by others similarly situated.”
Judge Klein found “six similar complaints by the same lawyer and the same firm,” which, he said, “established [a] pattern of violations of Rule 9011(b)(2).” For 19 months, he imposed a prefiling review “by the undersigned judge” on every complaint filed in the district alleging a nondischargeable debt.
A lender and its lawyer were sanctioned under Bankruptcy Rule 9011 for filing a dischargeability complaint against a consumer based only on the allegation that it must have been fraud because the debtor filed a chapter 7 petition 43 days after taking down a $9,000 loan.
In his November 2 opinion, Bankruptcy Judge Christopher M. Klein of Sacramento, Calif., said that the “boilerplate complaint” was “a case of sue first and ask questions later.” Learning that the law firm had filed an identical complaint in six other cases, he found a violation of Rule 9011 for not having made a “reasonable and competent inquiry” where a possible purpose was “to intimidate as part of an effort to extract an unjust settlement” from a debtor who was not represented by counsel.
The debtor worked in a supermarket for less than $20 an hour. She didn’t always have 40 hours of work a week and owed $12,500 on a high-interest credit card. She went to a bank, where the lending officer advised her not to consolidate the credit card loan with another lender. She accepted the bank’s offer of a $9,000 loan to pay off some of the credit card debt.
Realizing after taking down the loan that it had not solved her financial problems, she consulted a bankruptcy lawyer. She missed the first payment and filed a chapter 7 petition 43 days after receiving the $9,000 loan.